25th Aug 2005 07:03
Rentokil Initial PLC25 August 2005 News Release 25th August 2005 RENTOKIL INITIAL PLC ANNOUNCES INTERIM RESULTS FOR SIX MONTHS TO 30TH JUNE 2005 AND COMPREHENSIVE BUSINESS REVIEW FINANCIAL OVERVIEW - CONTINUING OPERATIONS Underlying(*) Reported Turnover Up 2.7% to £1,164.5m Up 3.2% to £1,167.2m Operating Income Down 16.2% to £158.9m Down 33.0% to £119.2m Profit Before Tax Down 19.8% to £135.4m Down 40.3% to £93.2m Earnings Per Share Down 20.3% to 5.33p Down 41.3% to 3.66p Interim Dividend Per share Up 10.4% to 2.13p *Underlying results are at constant 2004 average exchange rates and after adding back exceptional costs, amortisation of customer lists and IFRS related 'mark to market' volatilities. (See Additional Information page 13). • Investments in service showing some improvements in contract retention • Contract portfolio increased by an annualised £63.3m • Improvements in rates of turnover growth and decline in operating income (before central items) • One-off costs impact central items • Exceptional impairment charge of £28.0m in respect of UK textiles and garments • Strong free cash flow at £94.4m, representing 103% of post cash-tax profit before exceptionals and amortisation of customer lists Comprehensive Business Review • Focus on businesses with potential to create most shareholder value and where profitable growth can be sustained • Group has solid platform for recovery based on market positions that remain strong: • A leader in European Pest Control • A leader in European washrooms & textiles • An outperformer in UK Electronic Security and Cleaning • Actions for recovery and growth identified and underway • Group being reorganised around global business divisions with clear accountability and leadership • Disposal of Initial Style Conferences initiated (page 1) Commenting on the work underway to deliver long-term sustainable growth, DougFlynn, Chief Executive, said: "When I joined the company less than five months ago I initiated a comprehensivereview of the Group. We believe we know what the issues are and the necessaryactions to achieve a turnaround have commenced. Throughout everything we havedone, we have been open minded on how to deliver shareholder value. We have agreat opportunity to revive this business and I intend to take it." Brian McGowan, Chairman, said: "The programmes we are implementing will provide real and lasting improvementsin operational and financial performance and thereby generate the value inherentin the Company which rightly and fully belongs to its current shareholders." OVERVIEW OF FIRST HALF • Performance As expected - and indicated at the preliminary results in February and 4 monthtrading update in May - the first half of 2005 has been difficult in tradingterms with profits well down on the prior year. Some of the profit reduction hasbeen as a result of the increased investment in sales and service - yet todeliver significantly improved performance - and of some one off costs arisingfrom reorganisation and review. There has, however, been modest turnover growth(up 2.7%), contract portfolio has increased by £63.3 million and someimprovement in contract retention has occurred. Free cash flow was strong in thehalf and the Group's cash conversion rate remained high at 103% of post cash taxprofit before exceptionals and amortisation of customer lists. Comprehensive Business Review A comprehensive review of all the Group's businesses was initiated at the end ofApril. The aim of the review has been to analyse the reasons for the Company'spoor performance, assess the Group's strengths and growth opportunities and thendevelop a rolling action plan to restore Rentokil Initial to sustainable,profitable growth. Throughout, an open mind has been kept on all optionsavailable to the Group to create superior shareholder value. Our emphasis hasbeen on identifying and implementing the practical actions that need to be takento revive this company. The review identified how in recent years the company has become quiteintrospective. The Company has taken the opportunity to consider its businesseswithin their proper market context, including obtaining the views of severalhundred of our customers and of competitors and industry experts. The review has shown that the issues affecting the Group are not that complexindividually but there are many of them. Management believes that the issues canbe fixed but that it will take time. Detailed action plans have been formulated,many of which are already underway. Others will be put in place as we moveforward. In total, we have a major and detailed change programme underway that is verymuch aimed at the operational level. (page 2) • Poor Performance Analysed The Company's performance has been in decline over a number of years. The "20%era" ended in 1998. Our review has shown how the pressures - both internal andexternal - to meet expectations led to management prioritisation of very shortterm goals. Prices were pushed to unsustainable levels. Costs were relentlesslytaken out - often to the detriment of growing the business. Service quality wassacrificed. Sales efforts were impeded. As budgets became ever more unrealistic,so morale dropped and the focus became even more short-term. It is fair to say that market conditions have become tougher and thatcompetitors have become increasingly agile. For example, Washrooms and Textileshave seen pressure as competitors continue to compete aggressively on price. AndPest Control has faced increasing pressure both from increasingly aggressiveinternational players and from local competition, not least as ex-Rentokiloperators set up alone. However, the Board believes that while these market pressures will not relent,the biggest opportunities for the Group are in internal operational andstrategic 'fixes', and that success in these will more than outweigh marketfactors. • Necessary Operational and Strategic Change Areas where the Company is addressing its issues through operational andstrategic change include the following: Prioritisation of strategic investment Historically, strategic investment has not been prioritised. The acquisition ofBET left the Group with a highly diversified portfolio. Since that acquisition,there has been little clarity about where the best value creation opportunitiesare and, therefore, where the Group should be prioritising and investing. Infact, BET and Rentokil were never fully integrated and there are stilloverlapping businesses in certain geographies. Addressing effects of undue cost cutting and poorly focused sales strategy Management believes that operational costs have been squeezed to an extent wherequality of service has suffered. Since quality of service is the single mostimportant matter for our customers, declining service has resulted in a highlevel of terminations. Moreover, the Group's sales focus - and related incentives - have been largelyshort-term. Businesses have ignored key drivers such as customer retention,route density and revenue per customer. Range selling has been underexploitedwith little focus on maximising our share of our customers' spending. IT spend has been well below industry averages and has produced few commonplatforms. Overall, we are deficient in customer data analysis and have failed to respondadequately to the actions taken by competitors. Necessary organisational change The Board believes that the organisation and structure has been ineffective andis a legacy of the Company's history. It has been based on a "command andcontrol" approach that has impeded rather than ensured good decision making. Ithas encouraged a "silo mentality" and has resulted in the organisation beingboth overly centralised and inward looking. For example, our washroom businessesare spread globally but to date have been run from 3 sectors with little sharingof best practices across businesses. We are already moving towards running businesses globally - and will address thelack of leadership and absence of managers feeling personally responsible oraccountable for driving change. (page 3) • Overall Direction of Recovery Plans The Board plans to focus its immediate attention on Pest Control and Washroomand Textiles, believing that these businesses have strong potential to provide aplatform for growth and the greatest opportunity to drive shareholder value. This is not to say that the Group's other businesses are not important. We willbe developing and investing in businesses where we can reinforce or buildleadership positions and where the Group can add value through the sharing ofskills and customers to generate sustained profitable growth. We have strong positions in many of our largest businesses. For example, in PestControl we are #1 in the UK and #1 or close to it in several of the largestEuropean markets, South Africa and parts of Asia Pacific. In Washroom andTextiles the Company has some market leading positions in Continental Europe andin the UK the #2 position in washrooms alone. In the UK we out-perform most ofour competitors on margin in both Electronic Security and Cleaning. Both ofthese businesses are highly rated by our clients. From this strong starting position, the Company's main focus will be onbusinesses where management believes that most value can be created. The Boardplans to strengthen the Company's positions in existing markets by improvingretention, targeting more new customers, and focusing on selling the full rangeof products. The detailed development of individual business strategic plans is ongoing. Alldivisions are or will be capable of achieving organic growth. We have a seriesof initiatives which are being or will be implemented to drive this. They willbe complemented, where appropriate, by acquisitions which will increase ourfocus and build scale and density. • Management Priorities The Group's immediate priorities are described further below. Immediate initiatives There are already a number of initiatives of varying sizes and complexity inplace. Of these, many have already started with the remainder able to commencewithin the next six months. Operationally, the plans for revitalising all ourbusinesses and driving growth have commenced, in particular those designed toaddress the effectiveness of our sales and marketing efforts and the supportthat IT can give to the implementation of these plans. Accountabilities, organisational structure and management A critical change in the Company is moving senior management from aco-ordination to leadership role, from maintenance to development, from just"reports" to being fully accountable. The Group is undergoing a re-organisation that changes from an eclectic mix ofbusinesses, geographies and functions to one structured around clear businessdivisions. Transnational divisions have been established covering Europe andNorth America for: Pest Control and Plants; Facilities Services; Washroom andTextiles; City Link; and Electronic Security. We will also establish an AsiaPacific region from 1 January 2006 with responsibility to develop and grow ourbusiness there. Since the beginning of the year, three senior executives have been appointed.Doug Flynn arrived in April as Chief Executive. Andrew Macfarlane succeeds, asCFO, Roger Payne, whose retirement in September was announced in March. MarkBoyle joined earlier in the year as Group Acquisitions Director. The Company recognises a need to re-build management talent and to developappropriate incentives at all levels. The Board intends to bring in new peoplewhere required. (page 4) Some operational priorities • In UK Washroom, addressing historic failure to target new customers effectively, moving to ensure that pricing and marketing addresses route density • In UK Pest control, implementing plan to reduce the current high levels of customer churn and therefore to improve growth • In Continental European washroom, overlapping businesses will finally be integrated • In other businesses - for example Dutch Electronic Security and French Textiles - action on specific plans is underway to increase productivity and growth • Other actions: improving the effectiveness of sales and marketing across the Group by: adjusting skills measures, targets and incentives; re-focusing sales efforts on opportunities that maximise route economics; and targeting an increasing share of high value added and large accounts. The Company will also introduce process improvements aimed at reducing admin and comprehensively improving responsiveness. Central Programme Office The Board recognises that the Group has had a poor track record of adapting tochange and therefore intends to follow a different and disciplined approach tomanage this process. The Chief Executive has created a Central Programme Officereporting directly to him with the sole task of ensuring the effective deliveryof our priorities. A senior executive from outside the business has beenrecruited to track and oversee implementation of the most important initiatives. Portfolio Management This morning we have announced that a process to dispose of Initial StyleConferences ("Style Conferences") has been initiated, subject to achievingacceptable value. Style Conferences has a different business model and itsbusiness characteristics are substantially different from other businesseswithin the Group. The Board therefore believes that there may be alternativeowners for whom Style Conferences would be a better fit. We also have a programme to dispose of peripheral businesses that are still leftin the Group's portfolio. Good progress is being made, but there is more to do. Elsewhere we have increased our focus on bolt-on acquisitions, where we have theopportunity to reinforce existing businesses and build additional scale anddensity. The Company will only make acquisitions which clearly add value to thebusiness. OUTLOOK We are not expecting an improvement in market conditions in the near future.There is, however, no slowdown in the overall long-term trend towards outsourcedservices. There are different levels of maturity in outsourcing and, parallel tothis, different stages of industry consolidation. Both of these representopportunities to develop our business. Legislation and worker and consumerexpectation regarding hygiene all point towards a positive background withinwhich to operate. Results in the second half should be more easily compared with the prior yearthan in the first half due in large part to the build up in sales and servicecosts in the second half of 2004. There has been an improving trend within thebusinesses in trading and contract retention, although to date the changes aremodest. In addition, the organisation and operational changes arising out of ourstrategic review may lead to some short-term internal disruption in certainbusinesses. Apart from the exceptional costs associated with the envisageddisposal within UK hygiene, we expect to incur further reorganisation andexecution costs arising out of the planned turnaround initiatives. In the secondhalf of 2005, these could be in the range of £10-15 million. We would expect the trend in trading in the second half to continue into 2006,although there are likely to be further one-off costs. (page 5) We have identified the issues to be addressed in our businesses. While thestrategy development to turn the Company around will be ongoing, a programme ofactions to improve the business performance is firmly underway. The timeline onCompany performance of the actions we are taking varies. Some actions will havea quick impact, others are potentially disruptive in execution and some willtake time to return clear performance improvements. By the end of 2006 we expectto be able to demonstrate the following tangible benefits for our keybusinesses: • Clearer strategic focus and investment priorities • Stronger strategic positions • Properly aligned business structure • Progressively strengthened management team • Performance improvement in priority businesses • Improvement in contract retention rates • Revenue growing at least at market growth rates The Board restates its intention, in the absence of unforeseen circumstances, torecommend an increase in the dividend for 2005 of 10% to 7.38 pence per share. This announcement contains certain statements that are or may be forward-lookingregarding the Group's financial position and results, business strategy, plansand objectives. Such statements involve risk and uncertainty because they relateto future events and circumstances, and there are accordingly a number offactors which might cause actual results and performance to differ materiallyfrom those expressed or implied by such statements. A presentation for analysts and shareholders will be held at 8:30am BST todaywhich can be accessed via a live audio webcast at www.rentokil-initial.com(click on the Investor Centre and follow the instructions from there). Anarchived version of this webcast will be available from 2:00pm. For further information, please contact: Doug Flynn, Chief Executive 01342 833022 Charles Grimaldi, Corporate Affairs Director 01342 833022 Gill Ackers, Brunswick Group LLP 020 7404 5959 Alex Mackey, Catullus Consulting 07773 787458 (page 6) REVIEW OF OPERATIONS AND FINANCE SEGMENTAL COMMENTARY - CONTINUING OPERATIONS (All at constant 2004 average exchange rates. Segmental operating income isbefore central overheads, amortisation of customer lists and exceptional items.A pro-forma segmental analysis has been provided in the Additional Informationsection on pages 15 and 16). Hygiene Total Hygiene turnover grew by 3.0% to £489.5m whilst operating income fell by10.0% to £113.6m. Hygiene Services turnover at £375.7m was 2.9% up, showing an acceleration fromthe 2.2% for the first four months. Operating income regression, at 9.8% to£78.6m, also slowed from the 11.5% reported at the four-month stage. Contractportfolio net gain was £18.6m, £11.0m of this coming from acquisitions, inparticular that in Austria. • Within the total turnover of £375.7m, washroom was flat at £141.4m, garments increased by 3.7% to £120.9m, floorcare increased by 2.4% to £21.5m, linen increased by 5.6% to £62.0m, whilst other hygiene grew by 9.9% to £29.9m. • The ongoing re-organisation in the UK, ahead of the envisaged disposal of the linen and garment activities, continued to materially impact trading with turnover falling by 0.6% to £87.0m and operating income by 27.6% to £13.4m. Progress has been slower than expected in the disaggregation of the textiles and garments business, which in turn has delayed the disposal process and the integration of the two overlapping washroom businesses. • Assisted by the Austrian acquisition, turnover in Continental Europe increased by 3.9% to £252.2m with encouraging results from Belgium, Czech Republic, Spain, Portugal and Switzerland. Operating income at £52.2m was 4.2% lower. Operating income growth in the major markets of The Netherlands and Belgium only partially compensated for declines in the large German and French businesses. Increased investments in both of these countries was compounded by senior management changes in France. • Mirroring the four-month position, the small North American business produced flat turnover and operating income at £2.8m and £0.5m respectively. • Turnover in Asia Pacific and Africa grew by 5.3% to £33.7m, up from 4.9% for the four months, all business units showing growth with the exception of the small business in Fiji. Operating income fell by 6.7% to £12.5m reflecting increased levels of investment and some challenging market conditions in the large Australian business. Pest Control turnover was up 3.1% at £113.8m whilst operating income fell by10.5% to £35.0m, this performance mirroring that for the first four months ofthe year. With only £0.8m coming from acquisitions, contract portfolio net gainwas £3.6m. • In the UK, where the new managing director is implementing plans to improve sales and reduce terminations, turnover fell by 1.2% to £34.1m, mirroring the first four months performance. Increased investment and the effects of the high operational gearing on lower turnover, caused operating income to drop by 17.1% to £13.6m. • In Continental Europe turnover grew by 2.5% to £52.9m with operating income declining by 3.0% to £16.1m despite growth in The Netherlands, Portugal, Spain and Finland. (page 7) • Helped by acquisitions in both Canada and the US, turnover grew by 19.2% to £8.7m in North America, operating income improving by 7.7% to £1.4m. • In Asia Pacific and Africa all businesses except Fiji contributed to the overall turnover growth of 6.5% to £18.1m. Operating income, however, reflecting increased investment fell by 18.8% to £3.9m. Security Total Security turnover increased by 5.6% to £298.0m, whilst operating incomefell by 10.7% to £23.3m, this representing an improvement from the four monthposition. Electronic Security turnover grew by 7.9% to £130.8m with operating incomedeclining by 8.7% to £17.9m, in part reflecting re-organisation costs associatedwith acquisitions. Contract portfolio net gain was £3.0m, of which £2.5m camefrom acquisitions. • In the UK turnover grew by 7.5% to £73.3m whilst operating income fell by 7.1% to £13.0m. • In Continental Europe, France and Belgium produced much stronger turnover growth than The Netherlands to give a total 7.4% increase to £53.7m, operating income declining by 12.5% to £4.9m. • The embryonic US business, boosted by a second quarter acquisition, grew turnover by 26.7% to £3.8m, albeit investments for growth produced the same break-even operating income performance as in the first half of 2004. Manned Guarding turnover increased by 3.9% to £167.2m with the decline inoperating income improving to 16.9% to produce £5.4m. Contract portfolio netgain was £24.7m, the contribution from acquisitions in the US contained thereinamounting to £16.0m. • UK turnover grew by 5.4% to £63.9m, although the impact of increased investment, senior management change and ongoing tough market conditions caused a 34.4% reduction in operating income to £2.1m. • Continental Europe fared better, the Belgian business growing turnover by 8.2% to £21.1m and operating income by 28.6% to £0.9m. • In North America total turnover increased by 1.7% to £82.2m with Canada growing faster than the US, this comparing to a flat performance in the first four months. Operating income, however, fell by 7.7% to £2.4m Facilities Management Total Facilities Management turnover fell by 0.4% to £319.5m, this being animprovement over the 1.3% fall for the first four months. Operating income at£29.1m was 12.3% lower than the first half of 2004 and slightly worse than the11.4% reduction for the four months. Facilities Management Services turnover at £223.3m was 2.0% lower, thisrepresenting a slight recovery from April. The 15.5% fall in operating income to£13.6m reflected extremely competitive market conditions and the effect of bothwind-down and start up costs arising from the changes in composition of thecontract portfolio, which grew organically by £9.6m to £387.2m. • In the UK turnover fell by 3.0% to £185.9m with operating income regressing by 13.3% to £13.0m. The retail sector of the cleaning business and the state schools meal service within the catering business posed particular challenges to margins. (page 8) • Continental Europe turnover increased by 3.2% to £25.8m. Difficulties in the Spanish business caused operating results to slip to a loss of £0.4m. Benelux, however, still continued to generate operating profit. • The continuing North American operations increased turnover by 1.1% to £9.4m although operating income here fell back by two-thirds to £0.1m as the company re-assess its options for this business. • Asia Pacific and Africa produced a turnover growth of 15.8% to £2.2m whilst operating income increased by 28.6% to £0.9m. Tropical Plants, assisted by acquisitions, increased turnover to £52.1m, withthe 5.7% increase representing an improvement from the 3.8% for the first fourmonths. The improved volume helped operating income, at £4.8m, show a lowersix-month regression at 7.7% than the 10.6% for the first four months. Of thecontract portfolio net gain of £4.9m, £4.0m came from acquisitions. • UK turnover growth to £6.4m improved from 1.0% at April to 1.6%, albeit with an operating income decline of 7.1% to £1.3m. • Continental Europe turnover growth also improved, from 0.8% to 2.2%, to give turnover of £13.9m. Operating income, however, fell by 10.5% to £1.7m despite Netherlands, Spain and Ireland each moving ahead. • North America acquisitions helped boost turnover to £26.8m, an increase of 8.9%. Operating income, at £1.0m, was 9.1% lower despite Canada delivering a flat performance. • Turnover growth in Asia Pacific and Africa to £5.0m was broadly unchanged at 4.2%, New Zealand growing strongly whilst Australia regressed, although operating income was unchanged at £0.8m. Conferencing improved its turnover by 0.9% to £44.1m, up from a flat performancefor the first four months with operating income, at £10.7m, showing a slightlylower regression of 10.1% compared to that for the four months to April.Contract portfolio showed a £1.1m reduction for the first half of 2005. Parcels Delivery Now restricted to the UK, following the disposal of the Zimbabwe business,turnover growth accelerated from 1.7% for the first four months to 4.4% for thefirst half to produce £57.5m. Operating income at £12.4m also improved, afour-month regression of 14.5% being pulled back to 10.1% for the first half asa whole. (page 9) OTHER INCOME STATEMENT ITEMS Central Items. Under IFRS, central costs (which cannot be specifically allocatedto business units contained within the segmental analysis) are shown separately.For the first half these costs increased from £9.6m in 2004 to £20.6m in 2005.The principal factors behind this £11.0m increase are the formation costs of thenew holding company; consultancy costs; additional sector, IT, HR, acquisitionand IFRS audit costs and a build-up of provisions in respect of self insurancerisk claims. Amortisation of Customers Lists. The income statement charge of £11.5m iscomprised of £11.0m in respect of prior year acquisitions and £0.5m in respectof acquisitions made in the first half of 2005. Exchange. The effect of foreign currency movements between 2004 full yearaverage rates and 2005 half-year average rates was to improve turnover andoperating income on continuing operations by £2.7m and £0.9m respectively, gainson the Euro more than offsetting losses on the US $. Exceptional Items. A charge of £28m has been taken to reflect an assessment ofthe likely impairment of the net book value of assets associated with theenvisaged disposal of the linen and garment activities within UK hygiene.Negotiations with interested parties for parts of this activity are ongoing.Based upon the status of these negotiations it is envisaged that, once a salehas been agreed, the transfer of the business and residual closure/discontinuance actions are likely to be phased over a period of at least sixmonths. In addition to the impairment charge of £28m further, futurere-organisation costs will be incurred, the current assessment of these being£12-17m to take the potential total exit cost to some £40-45m. This is somewhathigher than the guidance first given in November 2004 reflecting the tradingresults of that business over the past nine months and a more informed view ofthe nature and scale of the likely exit strategy which, despite the costthereof, is anticipated to be cash neutral. Interest. A reconciliation of net interest payable including isolating the majoreffects of IFRS and the early repayment of the Ashtead convertible note shows:- 2005 2004 Pre IFRS interest (24.8) (21.7)IFRS interest:-IAS19 - pensions/employee benefits (2.4) (0.5) IAS 21 - foreign currencies 0.5 (0.5)IAS39 - "mark to market" (2.2) -Ashtead equity option impairment (*) (4.6) -Ashtead amortisation credit (*) 6.2 - (27.3) (22.7) * Arising from early Ashtead note repayment The increase of £3.1m in pre IFRS interest largely reflects the net ofyear-on-year increased UK base rates, partially offset by the interest effectsof positive cash flow. Tax. The income statement tax rate on a pre-exceptional basis was 26.7% thisincreasing to 27.5% on a reported basis. Both rates are within the range of 26%to 28% which is still seen as sustainable for the foreseeable future. (page 10) OTHER ITEMS Contract Portfolio. As shown in the Additional Information section on page 14,the annualised value of the contract portfolio (based upon unaudited, pro-formamanagement information) increased by £63.3m in the first half with £34.3m ofthis coming from acquisitions. Acquisitions. In the first half of 2005 eighteen acquisitions were made at atotal cost of £35.1m including £13.4m of acquired debt. Aggregate annualisedturnover from these acquisitions in Hygiene, Pest Control, Security and TropicalPlants in the UK, Continental Europe, North America and Asia Pacific isestimated at c. £40m. Of the £12.1m spend since the last trading update, £10.6mrelated to two security businesses in the United States, one electronic and onemanned guarding. Turnover and operating income (before amortisation of customerlists) from these acquisitions contributed £8.1m and £0.7m respectively to theresults for the first half of 2005. In addition to the above, £5.2m has beenspent to buy-out a minority shareholding in the French textile servicesbusiness. Disposals. Since 1st January 2005 three businesses have been disposed of, two infacilities management (one in the UK and one in the United States) and theparcels delivery business in Zimbabwe. In 2004 these businesses (categorised asdiscontinued and excluded from the segmental analysis) produced full-yearturnover and an operating loss of £8.2m and £0.3m respectively. In addition, asmall associate in Saudi Arabia was sold during the period. Since 1st July 2005the company has disposed of a facilities management business in the US andconcluded negotiations for the sale of the northern portion of the loss makingtextiles business in Germany with annualised first half 2005 turnover of c.£0.8m. We continue to review the future of the remaining activities in thissub-segment. The status of the planned disposal of the linen and garmentactivities within UK hygiene is covered above. Free Cash Flow, at £94.4m represents some 103% of post cash tax income beforeexceptionals and amortisation of customer lists. This compares with 102% forthe, IFRS restated, first half of 2004. Net Borrowings at 30th June 2005 at £1,209.1m compares with an IAS 39 adjusted£1.189.1m at 1st January 2005 after first half outflows of £86.2m in respect ofdividends and £39.0m on acquisitions. Bank Facilities. During the first half the company successfully re-negotiatedits bank facilities to reflect the introduction of IFRS and to give extendedmaturities compared to those set out in Note 20 of the 2004 Annual Report. Thecompany continues to operate well within its covenanted levels. New Holding Company. The formation of the new holding company was successfullycompleted in June 2005, thereby boosting the distributable reserves to some£1.8bn. Ashtead. As previously announced, the early repayment of the convertible loannote by Ashtead Group plc of £129.9m was made on 3rd August 2005. International Financial Reporting Standards. The company formally announced theeffects of IFRS upon the restated first half and full-year results for 2004. Theadjustments were materially in-line with the early guidance given in the tradingstatement issued on 30th November 2004. As in the case of the first half resultsfor 2005, which represents the first set of results presented under IFRS, thecompany will take all necessary steps to clearly explain in future presentationsthe impact of the more volatile "mark to market" adjustments contained withinIAS39 (financial instruments) and IAS21 (foreign currencies). Furthermore, thecompany will ensure the market is kept aware of any possible future changesarising from either new IFRS' or changes in the interpretation of existingIFRS'. A full set of accounting policies are included in Note 2 on pages 21 to28. (page 11) Pensions. The IAS 19 retirement benefit liability increased from £272.6m at 31stDecember 2004 to £286.5m at 30th June 2005. The actuaries of the UK definedbenefit pension scheme, which was closed to new members, other than certain TUPErelated transfers, in November 2001, are currently undertaking the March 2005triennial actuarial review. Once the valuation is finalised the Trustee and thecompany will agree as to how the deficit will be funded in the short, medium andlong term. It is currently anticipated that a clearer view on the outcome of thevaluation and the potential future funding strategy will emerge by the time ofthe next scheduled trading update on 29th November 2005. ADDITIONAL INFORMATION To assist the understanding of the underlying trading performance of the Group,the following additional information has been included in this section and doesnot form part of the statutory presentation of the half-year results. Schedule 1. Reconciliation of underlying and reported results (page 13) Schedule 2. Pro-forma H1 2005 un-audited annualised value of contract portfolio of continuing businesses (page 14) Schedule 3. Pro-forma segmental analysis translated at 2004 constant exchange rates (pages 15 and 16) (page 12) Schedule 1 RECONCILIATION OF UNDERLYING AND REPORTED FIRST HALF RESULTS Operating Profit eps Turnover Income before (p)£m Tax Reported 2005 1,167.2 119.2 93.2 3.66p Exchange (2.7) (0.9) (0.9) (0.03)pAmortisation of customer lists - 11.5 11.5 0.46pExceptional items - 28.0 28.0 1.13pEffect of IFRS IAS 19 - pension interest - - 2.4 0.08p IFRS 'mark to market' - 1.1 2.8 0.10p Ashtead interest (net) - - (1.6) (0.07)p ______ ____ ____ ___Underlying 2005 1,164.5 158.9 135.4 5.33p Reported 2004 1,130.7 177.9 156.1 6.24p Exchange 2.8 0.7 0.7 0.02pAmortisation of customer lists - 11.1 11.1 0.41pEffect of IFRS IAS 19 - pension interest - - 0.5 0.01p IFRS 'mark to market' - - 0.5 0.01p ______ ____ ____ ___Underlying 2004 1,133.5 189.7 168.9 6.69p % changeReported +3.2% -33.0% -40.3% -41.3%Underlying +2.7% -16.2% -19.8% -20.3% (page 13) Schedule 2 PRO-FORMA H1 2005 UN-AUDITED ANNUALISED VALUE OF CONTRACT PORTFOLIO OF CONTINUING BUSINESSES £m at constant 2004 New Termin- Net Acquisi- ations tions 1.1.05 Business Additions/ 30.6.05 average exchange rates Reductions (note 1) Hygiene Services 702.3 38.9 (37.3) 6.0 11.0 720.9Pest Control 181.8 16.8 (17.2) 3.2 0.8 185.4 Total Hygiene 884.1 55.7 (54.5) 9.2 11.8 906.3 Electronic 90.0 3.7 (5.0) 1.8 2.5 93.0Manned Guarding 301.6 27.0 (19.6) 1.3 16.0 326.3 Total Security 391.6 30.7 (24.6) 3.1 18.5 419.3 Facilities Management Services 377.6 27.9 (25.0) 6.7 - 387.2Tropical Plants 87.0 5.4 (6.6) 2.1 4.0 91.9Conferencing 37.4 0.8 (1.0) (0.9) - 36.3 Total Facilities Management 502.0 34.1 (32.6) 7.9 4.0 515.4 TOTAL 1,777.7 120.5 (111.7) 20.2 34.3 1,841.0 Notes:- 1. This represents the net of additions to existing contracts, price increases on existing contracts and reductions to existing contracts. 2. The above include, on a consistent basis, certain estimates where there are regular, variable, elements of revenue contained within the contracts. 3. In addition to the above, a number of the contracts within the contract portfolio generate periodic, ad hoc and/or repeat job work and extras. 4. Excludes associates (page 14) Schedule 3 PRO-FORMA SEGMENTAL ANALYSIS (at 2004 full year average exchange rates) 6 months to 6 months to Year to 31st 30th June 30th June December 2005 2004 2004 Business analysis £m £m £m (unaudited) (unaudited) (unaudited) Turnover Continuing operations at 2004 average exchange rates: Hygiene Services 375.7 365.0 733.8Pest Control 113.8 110.4 224.2Hygiene 489.5 475.4 958.0 Electronic Security 130.8 121.2 249.7Manned Guarding 167.2 160.9 324.4Security 298.0 282.1 574.1 Facilities Management Services 223.3 227.9 449.7Tropical Plants 52.1 49.3 105.1Conferencing 44.1 43.7 91.1Facilities Management 319.5 320.9 645.9 Parcels Delivery 57.5 55.1 113.4 Total continuing operations at 2004 average exchange rates 1,164.5 1,133.5 2,291.4 Exchange 2.7 (2.8) - Continuing operations as reported 1,167.2 1,130.7 2,291.4 Operating Income * Continuing operations at 2004 average exchange rates: Hygiene Services 78.6 87.1 173.5Pest Control 35.0 39.1 79.1Hygiene 113.6 126.2 252.6 Electronic Security 17.9 19.6 40.4Manned Guarding 5.4 6.5 13.1Security 23.3 26.1 53.5 Facilities Management Services 13.6 16.1 32.4Tropical Plants 4.8 5.2 13.0Conferencing 10.7 11.9 26.2Facilities Management 29.1 33.2 71.6 Parcels Delivery 12.4 13.8 30.3 Central Items (20.6) (9.6) (24.1) Total continuing operations at 2004 average exchange rates * 157.8 189.7 383.9 Exchange 0.9 (0.7) - Continuing operations as reported * 158.7 189.0 383.9 * Before amortisation of customer lists and items identified as exceptional(note 6). The segmental analysis tables above are presented in a statutory format in note4. (page 15) Schedule 3 PRO-FORMA SEGMENTAL ANALYSIS (at 2004 full year average exchange rates) 6 months to 6 months to Year to 31st 30th June 30th June December 2005 2004 2004 Geographic analysis £m £m £m (unaudited) (unaudited) (unaudited) Turnover Continuing operations at 2004 average exchange rates: United Kingdom 552.2 547.6 1,101.3Continental Europe 419.6 402.5 812.5North America 133.7 127.7 264.4Asia Pacific 42.6 40.7 82.4Africa 16.4 15.0 30.8Total continuing operations at 2004 average exchange rates 1,164.5 1,133.5 2,291.4 Exchange 2.7 (2.8) - Continuing operations as reported 1,167.2 1,130.7 2,291.4 Operating Income * Continuing operations at 2004 average exchange rates: United Kingdom 79.6 94.1 188.0Continental Europe 75.3 79.5 165.3North America 5.4 6.0 15.4Asia Pacific 11.6 13.2 26.2Africa 6.5 6.5 13.1Central Items (20.6) (9.6) (24.1)Total continuing operations at 2004 average exchange rates * 157.8 189.7 383.9 Exchange 0.9 (0.7) - Continuing operations as reported * 158.7 189.0 383.9 * Before amortisation of customer lists and items identified as exceptional(note 6). The segmental analysis tables above are presented in a statutory format in note4. (page 16) Independent review report to Rentokil Initial plc Introduction We have been instructed by the Company to review the financial information forthe six months ended 30 June 2005 which comprises a consolidated interim balancesheet as at 30 June 2005 and consolidated interim statements of income, cashflows, recognised income and expense and related notes on pages 18 to 39. Wehave read the other information contained in the interim report and consideredwhether it contains any apparent misstatements or material inconsistencies withthe financial information. The previously published IFRS transition informationon 20 July 2005, as referred to in note 1 on page 21, does not form part of thisreview. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The directors areresponsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority. As disclosed in note 1, the next annual financial statements of the group willbe prepared in accordance with accounting standards adopted for use in theEuropean Union. This interim report has been prepared in accordance with thebasis set out in note 1. The accounting policies are consistent with those that the directors intend touse in the next annual financial statements. As explained in note 2, there is,however a possibility that the directors may determine that some changes arenecessary when preparing the full annual financial statements for the first timein accordance with accounting standards adopted for use in the European Union.The IFRS standards and IFRIC interpretations that will be applicable and adoptedfor use in the European Union at 31 December 2005 are not known with certaintyat the time of preparing this interim financial information. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit and therefore provides a lower level of assurance.Accordingly we do not express an audit opinion on the financial information.This report, including the conclusion, has been prepared for and only for thecompany for the purpose of the Listing Rules of the Financial Services Authorityand for no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2005. PricewaterhouseCoopers LLP Chartered Accountants London 25 August 2005 (page 17) Consolidated Income Statement 6 months to 6 months to Year to 31st 30th June 30th June December 2005 2004 2004 £m £m £m Notes (unaudited) (unaudited) (unaudited)Continuing operations:Revenue 4 1,167.2 1,130.7 2,291.4Operating expenses (1,048.0) (952.8) (1,955.4)Operating income 119.2 177.9 336.0 Analysed as:Operating income before customer lists and exceptional items 158.7 189.0 383.9Amortisation of customer lists (11.5) (11.1) (22.2)Exceptional items 6 (28.0) - (25.7)Operating income 4 119.2 177.9 336.0 Interest payable and similar charges 7 (86.7) (70.6) (149.3)Interest receivable 8 59.4 47.9 94.9Share of profit from associates (net of 1.3 0.9 1.8tax)Profit before income tax 93.2 156.1 283.4Income tax expense (25.6) (41.9) (78.5)Profit for the period from continuing operations 67.6 114.2 204.9Discontinued operations:Loss for the period from discontinued operations 5.2.3 (3.6) (2.9) (12.8) Profit for the period (including discontinued) 64.0 111.3 192.1 Attributable to:Minority interest 1.6 1.1 1.7Equity holders of the Company 62.4 110.2 190.4 64.0 111.3 192.1 Earnings per share:From continuing operations- Basic 3.66p 6.24p 11.24p- Diluted 3.66p 6.24p 11.24p From continuing and discontinuedoperations:- Basic 3.46p 6.08p 10.53p- Diluted 3.46p 6.08p 10.53p Consolidated Statement of Recognised Income and Expense 6 months to 6 months to Year to 31st 30th June 30th June December 2005 2004 2004 £m £m £m (unaudited) (unaudited) (unaudited) Profit for the period (including 64.0 111.3 192.1discontinued) Net exchange adjustments offset in reserves (4.3) (3.0) (0.8)Actuarial loss on defined benefit pension plans (15.2) - (68.3)Revaluation of available for sale investments (0.5) - -Tax on items taken directly to reserves 4.5 - 20.4Net loss not recognised in income statement (15.5) (3.0) (48.7) Total recognised income for the period 48.5 108.3 143.4 Prospective adoption of IAS 39 at 1st January 2005 9(f) (17.4) - -Prospective adoption of IFRS 4 at 1st January 2005 10 0.3 - - (17.1) - - Total recognised income since end of prior reported period 31.4 108.3 143.4 Attributable to:Minority interest 1.6 1.1 1.7Equity holders of the Company 29.8 107.2 141.7 31.4 108.3 143.4 (page 18) Consolidated Balance Sheet At At At 31st 30th June 30th June December 2005 2004 2004 £m £m £m Notes (unaudited) (unaudited) (unaudited) ASSETSNon-current assetsIntangible assets 163.9 139.9 150.1Property, plant and equipment 631.2 633.0 661.7Investments in associated undertakings 9.5 11.8 9.5Other investments 9 6.8 4.2 6.7Deferred tax assets 96.2 75.7 97.6Trade and other receivables 26.7 153.1 169.8Derivative financial instruments 9 23.3 - - 957.6 1,017.7 1,095.4 Current assetsInventory 42.2 46.4 40.4Trade and other receivables 559.4 426.6 458.9Related Shares:
Rentokil Initial