Rentokil Initial PLC (RTO) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Rentokil Initial preliminary results for 2015.

Two years ago this month we presented the group's new strategy entitled The Right Way and outlined clear medium-term targets for revenue and profit growth as well as a significant improvement in free cash flow. Today trading conditions in the majority of our markets are good and the Company has made further encouraging progress in 2015. Cash flow delivery has been particularly strong and Andy and Jeremy will give you further details on this in a few moments.

Conditions in Europe, though, notably our workwear operations in France and Benelux remain challenging. However, since implementation in the second half of 2015 of our new Workwear Quality Program, we are seeing a number of operational benefits coming through, particularly in rising levels of customer service and retention.

Andy will give you an update on progress we are making in the next phase of the Right Way plan, in particular how the Company is migrating its portfolio into faster growth markets and also the strategies we've set out for our three core businesses of pest control, hygiene and workwear. Based on our overall encouraging performance in 2015, therefore, and our expectation of further progress in 2016 the Board is pleased to recommend an increase in the final dividend for 2015 to 2.06p, resulting in total dividend growth for the year of 13.1%.

Let me now hand over to Andy and Jeremy who will talk you through the highlights of the year and describe our plans in more detail. Thank you very much.

Thank you, John. Good morning, ladies and gentlemen. Thank you all for joining us today.

In a moment, Jeremy is going to present details of our results for 2015 looking at the performance of the group and our five regions. I will then come back and provide an update firstly on how we executed our Right Way strategy in 2015 and secondly on the progress that we are making in the next phase of our plan as we accelerate growth in pest control, we focus on execution in hygiene and we drive for quality in workwear.

But first, let me just say a few words to set the scene for this morning covering the key highlights of our performance and how we executed our strategy in 2015. We delivered and encouraging overall performance during the year with ongoing revenues up 6.5% at constant exchange rates. Organic revenue growth was 1.8% which was up from 1.2% in 2014.

There were good performances in North America reflecting a series of high-quality acquisitions but also in Germany, in the Pacific, in Asia and also in the UK which achieved organic revenue growth of almost 5%. Our customer service performance also improved in 2015, resulting in an increase in customer retention of almost 1%.

Adjusted operating profit grew by 8.5% in the year, a good overall performance and reflecting our focus on growth in emerging markets and our density building activities. Clearly, though, France remains challenging. And I'll come back to that in a few minutes.

In Rentokil, we simply have the best pest control business in the world. And it's continuing to deliver accelerated growth. In 2015 revenues were up 13.1% with 4.6% organic growth and profits were up 14.2%. Our leadership in digital marketing and our strong pipeline of innovations are clearly making a significant difference to our business.

Perhaps one of the highlights of 2015 for me was the return of our hygiene business to both revenue and profit growth. Clearly there's a lot more to go for here but the benefits of our products and service investments are beginning to come through. We now have a range of products that are second to none and they are providing genuine differentiation in the market.

2015 was a standout year for our M&A activities with 23 acquisitions delivering GBP158 million of annualized revenues. 21 of the deals were in pest control, the largest of course being Steritech in North America. I'm pleased to report that the integration is going extremely well and we are making excellent progress towards our 2016 synergy targets.

Finally, in 2015 we maintained our focus on building the portfolio in the emerging and growth quadrants, up 14% and 12% respectively. All of our acquisitions were in these two high growth quadrants which now account for about 60% of our overall portfolio.

So in summary, 2015, we delivered an encouraging overall performance. And we are confident that as we continue to execute our strategy into the next phase we will make further progress in the coming year.

In a few minutes I will come back and update you on our progress by quadrant and by business line after Jeremy has taken you through the group financials and the regional financial performances.

Thank you, Andy, and good morning everyone. I will now run through the key financial highlights for 2015 in a bit more detail. Unless I state to the contrary, all numbers are at a constant rate of exchange.

Ongoing revenue in the year grew by 6.5% with organic growth of 1.8% and growth from acquired businesses of 4.7%. Growth in the second half increased to 7.7%, in part due to the Steritech acquisition early in the fourth quarter.

Adjusted operating profit before interest for the year on an ongoing basis was up GBP19.8 million or 8.5%, driven by strong profit growth in North America, Asia, UK and the rest of world and Pacific and reduced central and regional overheads but offset by lower profits in the Europe region. Profit after interest at actual exchange rates grew by GBP7.2 million or 3.8% in the year with a GBP4.3 million reductions in interest costs offset by adverse exchange rate movements of GBP17 million.

Free cash flow was strong in 2014 and stronger in 2015. Operating cash flow at GBP221 million was GBP11 million higher than the prior year and free cash flow at GBP148 million was GBP19 million higher despite adverse exchange rate movements. Adjusted EPS at constant exchange rates increased by 11.7%, reflecting the impact of a slightly higher tax rate.

Looking now at performance by region, North America delivered a strong performance in 2015 supported by acquisitions and improved organic growth. Revenue grew by 16.8% in the year of which 2.7% was organic. 13 acquisitions were completed in 2015, adding GBP149 million of annualized revenues.

Operating profit was up 28.6% leveraging the revenue growth as well as back office and property rationalization and fuel cost savings. And this drove a 1.2 percentage points improvement in net operating margins. We are pleased with the progress made to date on the Steritech acquisition and with an exit run rate of profit achieved of $20 million on an annualized basis.

In 2016, we will be focused on the integration of Steritech and based on the progress made to date we are confident that we will achieve our $25 million to $30 million profit target for the year. And this combined with a continued focus on organic revenue growth and bolt-on acquisitions will deliver further improvements in operating margins in 2016 through increased density, branch cost reduction and leverage on back-office costs.

Performance in Europe in 2015 was held back by the continued challenging economic environment across the region and France in particular. Revenues were up 0.1% in the year with growth in Germany, Southern Europe and Latin America which is managed through the Europe region offset by declines in the Benelux and France. Profit in the year was down 4.6% largely due to a GBP12.7 million reduction in France where both revenue and profits were impacted by significant pricing pressure.

The outlook for our European businesses in 2016 is mixed. Our German and Southern European businesses are experiencing positive trading environments and expect to make good progress in the year. However, the outlook for our French and Benelux operations remains challenging, especially in France where the impact of pricing pressure is anticipated to continue to impact performance. While we expect trading conditions in Europe to remain difficult, based on the actions we are taking to improve performance, we expect the level of profit decline to be considerably lower in 2016.

Revenue in the UK and the rest of the world region was up 11.5% of which 4.2% was organic. The UK delivered strong growth in both pest and hygiene and pest jobbing sales in particular. Revenue growth has been generally strong in the rest of the world region driven by the Caribbean and South Africa.

Profits increased by 12.5% in the year reflecting the strong revenue growth as well as the full-year impact of the Peter Cox property care business which was acquired in late 2014. Although Peter Cox is slightly lower margins than the rest of the region, overall operating margins increased during the year, reflecting leverage from the revenue growth and continued strong cost control. In 2016 we will be looking to deliver improvements in performance through further deployment of the successful UK operating model across the rest of the region.

The Asia region has made excellent progress in 2015. Revenues were up 11.3% in the year of which 8.6% was organic with good performance from both the pest and hygiene categories. Average growth in the less developed markets of India, China and Vietnam was up 26%.

In our more established Asian markets of Malaysia and Indonesia growth was in the high single digits. Operating profit in the region was up 27.5%, reflecting leverage from the revenue growth with a 1.2 percentage points improvement in operating margin, the same improvement that was achieved in 2014. We believe there are further opportunities for margin improvement through revenue growth, service productivity and back-office rationalization. We acquired a small business in Korea in 2015 and we expect to make further acquisitions in Asia in 2016 to build scale in this key strategic region.

The Pacific business continued to perform well in the year with revenue up 4.3% and profits up 7.3%. Organic revenue growth of 3.5% was driven by increased contract sales in pest and hygiene and improved pest jobbing sales. Operating margins improved by 0.6 percentage points, driven by leverage on the sales growth and continued tight cost control. The region will look for further improvements in performance in 2016 through acquisitions in pest and hygiene and improved service productivity.

As I've already said, for the second consecutive year, the group delivered strong operating cash flow with GBP220.7 million representing an GBP11.5 million increase on the prior year. Adverse exchange rate impacts on EBITDA were partially offset by favorable impacts on CapEx outflows. CapEx was also lower than expected due to the phasing of certain projects from 2015 into 2016.

Spend on provisions was lower in 2015 due mainly to the settlement of a legacy legal dispute. And working capital outflows were again relatively low at GBP0.7 million, reflecting our continued focus on receivables collection and inventory management.

Continuing free cash flow of GBP148 million was GBP19 million higher than last year and well in excess of our GBP100 million target, driven by the improvement in operating cash flow but also by lower cash interest and cash tax outflows. Free cash flow was used to fund GBP49 million in cash dividend payments, a 13.2% increase on 2014 and our continued investment in bolt-on acquisitions. Including our GBP272 million investment in Steritech, we spent GBP369 million on acquisitions in the year, which resulted in an increase in net debt of GBP252 million to GBP1.027 billion at the year-end.

We are pleased with the improved free cash flow delivery of the business over the last two years and the way we have been able to invest this in acquisitions focused on our core pest category and businesses in our growth and emerging quadrants. We will continue to apply our capital allocation model, looking for opportunities to invest in acquisitions that meet our target return levels.

Our dividend coverage is around three times and we will continue to maintain our progressive dividend policy. We will execute our capital allocation policy within our overall commitment to maintain a BBB investment grade credit rating using any available free cash flow to pay down net debt.

Looking at our balance sheet position at the end of the year, our net debt to EBITDA ratio has obviously increased compared to the previous year-end following the acquisition of Steritech in October. However, with our continuing strong levels of free cash flow, Standard & Poor's have maintained our BBB credit rating. Looking forward, we have increased our free cash flow target to in excess of GBP110 million in 2016 and in excess of GBP120 million in 2017, reflecting the impact of the Steritech integration as well as reduced interest cash costs in 2017.

In terms of funding capacity, we have plenty of headroom. We have recently extended our revolving credit facility to January 2020. We will be using our available capacity to refinance a GBP300 million sterling bond which matures in March 2016.

Following this refinancing the average cost of our net debt will be around 3.5%. Although the equity markets had a difficult end to 2015, our pension scheme remains effectively fully funded with one of the strongest positions in the FTSE 350.

Before I update you on guidance for 2016, just a couple of comments on our reporting framework. Restructuring costs, which used to be a major feature in our accounts, have reduced materially over the last two years. With the restructuring program now to a smaller and more predictable level, with the exception of integration costs of significant acquisitions we will report restructuring costs above the line in 2016 and I will provide you guidance on the impact of this in a moment. We will be keeping the regional and category reporting structure in tact as promised and there will be no changes made in 2016.

Execution of our differentiated strategy is based on a quadrant approach which factors in the strength of our businesses and the economic environment in which they operate. Given the dynamic nature of these factors we will continue to carry out some fine-tuning on an annual basis to reflect changes in our businesses and their markets where appropriate.

So finally, before I hand back over to Andy, some numbers for your models in relation to 2016. Following a GBP3 million reduction in central and additional overheads in 2015, we expect 2016 cost to be in line with the previous year. As noted earlier, we will report restructuring costs above the line in 2016 and these are expected to be around GBP7 million.

This guidance is for restructuring costs only and does not include one-off items which are by their nature more unpredictable. Integration costs for significant acquisitions will be recorded in one-offs and in 2016 this will include the Steritech integration costs which are estimated at GBP5 million in the year.

Although net debt has increased following the Steritech acquisition, interest costs are expected to fall further in 2016 to around GBP37 million at constant exchange rates, reflecting the impact of our recent bond refinancings. Cash interest costs, however, will be some GBP12 million higher than the P&L charge in 2016 due to the phasing of interest payments.

Cash interest costs are then expected to reduce significantly in 2017 to around 3.5% of net debt. For tax, I expect the underlying rate to be in line with 2015, that's around 24%, and for cash tax payable to be around GBP35 million.

As you will all be aware, foreign exchange rate markets continue to be extremely volatile. Following two years of strength against most of our trading currencies Sterling has weakened significantly recently with both of our main overseas trading currencies, the euro and the US dollar. This situation could reverse very quickly, of course, but if the current exchange rates were to remain for the rest of the year we estimate that the overall favorable impact on our reported profits would be in the region of GBP15 million.

For 2016, I expect free cash flow to exceed GBP110 million in the year. And this is based on my assumptions that working capital outflows will be around GBP10 million, slightly higher than last year, reflecting some new workwear contracts; net CapEx in the region of GBP200 million, reflecting the phasing of 2015 projects into 2016; the increased size of the business; and potential exchange rate differences. In terms of uses of free cash flow, we would estimate M&A spend in the region of GBP50 million and spend on cash dividends in the region of GBP55 million.

Thank you very much. I'd now like to hand back over to Andy who will cover the rest of the presentation.

Thanks, Jeremy. So let me very briefly give you a recap of our strategy, the performance of our quadrants and our main business lines and then I'm going to give you an update on the next phase of our plan.

So starting with the strategy, here's a slide you've seen from me quite a few times before. It summarizes how we are now managing the business.

We've got the five geographic regions. You've just heard their financial performance from Jeremy.

We have got the three core business lines. In a moment I will update you on their respective performances.

And we've got clear quadrant-based strategies to drive profitable growth. As we now enter of the third year of our Right Way plan, there is again no change to our operating model and no fundamental change to our strategy. We have got a consistent approach and that approach is now driving a quarter-on-quarter, half year on half year delivery against the medium-term targets that we set out two years ago.

So let me summarize our performance first by each of our quadrants and then by the business lines. On an ongoing basis the emerging quadrant delivered very good revenue growth in 2015. It was up 14% to GBP142 million.

That was fueled by organic growth in Asia which was up almost 9% and in Latin America where it was up 14%. Profit was up 24% and that reflects the density building focus and the leverage from increased revenues.

It was a step change year for our growth quadrant with a series of high-quality acquisitions in North America combined also with good progress in the UK. We delivered revenues up 12% to GBP943 million in the year and profits are almost 16%. Organic revenue growth of 4.8% in the UK was particularly notable and that was driven by good use of innovation and exploiting our digital expertise.

In the bottom left of the matrix there you can see that the manage for value quadrant is now relatively small for us. We have only got GBP63 million of revenue and GBP10.5 million of profit. In 2015, we continued to reduce the number of businesses in this quadrant where we exited our flat linen businesses in both Austria and in Northern Ireland.

In protect and enhance, we did a pretty respectable job of protecting our revenues and it was particularly good to see customer retention improve by 1.7%. And that included a 1.4% retention improvement in France. Profits, however, remained under pressure, particularly in France where challenging economic and competitive conditions persist.

Finally, we have undertaken our annual review of the businesses in each of the quadrants. And you can see on the slide they are we've made some adjustments to reflect the growth potential of each business. We're moving about GBP90 million of revenues from protect and enhance into the growth quadrant for 2016.

So perhaps it's worth highlighting, two years ago our Irish and our Italian businesses were both down in the bottom-left quadrant there, in manage for value. They took up the challenge and they moved quickly after 12 months into protect and enhance. They have moved again this year into growth given their excellent respective progress. So I think that's a good example of how we use the quadrant, the matrix strategy in action.

When I give you a quick summary of an of the three core business lines of pest control, hygiene and workwear in 2015. As you can see there, pest control now accounts for 44% of group revenues and almost 50% of group profits. Pest control had an excellent year, revenues and profits were up 13.1% and 14.2% respectively, increased organic growth of 4.6% was driven by further exposure to growth markets and again good use of our innovations and our digital expertise.

Our hygiene business accounts for 25% of group revenues and 28% of group profits. It returned to revenue and profit growth in 2015 and that was on the back of good performances. In the Pacific, they were up 3.7% and in particular in the UK and in Ireland. So clearly there's still a lot to go for in hygiene and while conditions in France and Benelux remain difficult this was an encouraging performance from our hygiene business.

Finally, European workwear, this now accounts for 21% of group revenues and about 16% of group profits. Clearly it was a challenging year for workwear with both revenues and profits down, particularly in France and the Netherlands.

The business operates in tough economic conditions and highly competitive markets but operationally the business is now performing well with improvements in safety, in service and in processing all in line with the new quality plan, and I'll update you on our progress against that plan in a few minutes. So overall a very encouraging year with good progress against our strategy, particularly so in pest control and hygiene.

So now let me move on to the next phase priorities that I outlined at the interims. These are focused firstly on the acceleration of pest control, secondly sales and operational execution in hygiene and thirdly the creation of a product and service quality champion in workwear. Underpinning all of this, I said we would exploit our digital expertise and bring to market our pipeline of innovations.

We'd remain very focused on a clear model of density building and we will drive productivity through our sales and service teams and, in particular, we would step up the sharing of best practice across the group. And, of course, we'd continue to use our excellent M&A capability to create further value, building those positions in the growth in the emerging quadrant.

Let me start then with the acceleration of pest control. Rentokil, as I've said many times, is quite simply the best pest control business in the world. We have got an unrivaled global leadership position.

Our market share in key growth countries as North America continues to strengthen. We have got a good M&A pipeline to build density on existing positions. We have got unrivaled brand strength and we've got technical expertise to match.

We are continuing to develop innovations that set us apart from the rest of the industry. All in all, we are extremely well-positioned to take advantage of the big drivers of future growth in pest control. Drivers like increasingly demanding regulatory and environmental requirements, the rising expectations of consumers for improved standards of hygiene and growth in emerging markets where today we've got many market-leading positions but where the potential for future growth in countries like India, China, Indonesia, Brazil remains very very significant.

Clearly acquisition of Steritech in the fourth quarter was a really important milestone for our pest control business. We're pleased to report the integration is going extremely well. The integration work streams got off to a fast start when we exited 2015 as you have heard from Jeremy with a profit run rate of $20 million. So in other words, we've already made good progress towards our stated objective of delivering profits of between $25 million and $30 million this year.

In particular we've identified good opportunities to build that route density. We've done a detailed overlay of every single route across the country. The combined national and regional account teams have notched up their first large joint contract win with a nationwide hotel group.

The back-office program is well underway removing duplicate roles, delivering on our planned procurement and property consolidation opportunities. This is a transformational deal for the Company in North America. It's a big part of our plan to accelerate growth in pest control, and although we are only three or four months in the business has made an excellent start.

Now given the recent spotlight on mosquito control, this chart provides I think a good example of our pest control expertise in action. Having undertaken mosquito control for many many years across the globe Rentokil has got a depth of expertise and experience that is simply unmatched.

We provide services to protect people from mosquitoes which obviously carry the Zika virus but also dengue, West Nile fever, Chikungunya, malaria, many other very very serious threats to public health. And our experts within the group are all linked together in the global technical community and they use an in-house social media platform and they are able to learn from each other and transfer up-to-date knowledge and information across the group.

So when an issue like Zika does occur we can respond very very quickly. That's exactly what we have done in Brazil with the recent launch of a new service called MIRA360 degrees and that is providing an integrated control and monitoring service against the Aedes aegypti mosquito. So I see that as a really good example of our global expertise and action.

So moving now to hygiene, delivering a return to revenue and profit growth in hygiene was probably for me one of the most pleasing performances in 2015. I said at the interims that hygiene had to execute now with a really clear focus on sales and operational execution. And it's made I think a very good start.

During the year we continued to strengthen the product range with the rollout of new no-touch and color products as well as additions to our existing signature reflection ranges. So now we've got hygiene products that are second to none, we have got sales team selling with renewed confidence and it is particularly pleasing to see that France is, in fact, leading the group in sales of our new color signature range.

Our hygiene products and services are now available in over 45 markets around the world. And in line with our focus on execute now the country teams have implemented a large number of local initiatives to drive sales and operational effectiveness.

On the screen man are just a few examples of best practice from our country operations. But what is particularly pleasing is that we have now delivered more than 35 best practice guides across our hygiene and pest businesses where we take sales and operational best practice from around the world and we ensure that everyone gets the benefit across the entire group.

If I turn now to Europe and to workwear, Jeremy has covered the performance of the Europe region earlier but just to build on one or two points. Benelux has been on the front page for us for some time but I now feel that the business is much improved. We have resolved the service issues that affected the operations back in 2013.

Revenue was only slightly behind 2015. Profit was, in fact, slightly up year on year on the back of lower service and processing costs.

Belgium, certainly more stable and actually delivered modest revenue growth on prior year. However, Netherlands workwear does remain under pressure from both market and economic forces.

Germany -- Germany continues to provide solid growth. Revenues and profits were up 4.1% and 6.7% respectively. And also good to see high levels of improved customer satisfaction leading through to retention rates up 3.8%.

France as you know remains our most challenged market where the economic environment and the market conditions remain difficult. However, operationally the business is performing pretty well. And we are focused on those things that we can control like customer satisfaction, customer retention, both of which improved during 2015.

Let me update you then on our quality plan for workwear. At the interims we said that the next phase for our workwear business was to deliver genuine differentiation through product and service quality. And I outlined seven areas of focus.

On this and the next slide, you can see that progress is underway across all seven areas. Firstly, we have established 12 new quality focused KPIs across the business and we've made a medium progress in customer satisfaction and also customer retention which was up 2.4% in workwear.

Clearly best-in-class processing is an important target for us. We have made a good start there as well with the introduction of new detergents across our 37 laundries. Those new detergents have resulted in 50% reduction in bleach used, 30% reduction in textile wear, 10% reduction in water usage and an 8.5% reduction in energy usage, all of course having positive cost benefits as well.

So while we are updating our game in terms of the quality of the workwear we provide, the number of items that we've had to re-wash to meet our own high standards has also reduced by some 14%. So we're seeing some good operational improvements coming through.

We are also beginning to make progress in the final three areas of the program: smarter selling, products and service innovation, leveraging best practice. I'll just pick out one or two examples.

We have created a new product and service innovation action group and that's begun work on European range harmonization. That's going to reduce the number of different items of workwear that each of the country operations have to manage across their respective markets.

We are the first Company in Europe to introduce an innovative CO2 washing system. That is a waterless system similar to dry cleaning and it significantly reduces energy usage.

You've heard me say before that in my experience a company or business that has got a strong safety culture is typically a well-run operational business. It's really pleasing to say we have had significant improvements in the workwear business with far fewer accidents and working days lost. And finally, just as in pest and in hygiene we are continuing to exploit our scale by the sharing and use of additional best practice but also from the development of a new customer care training program that's being rolled out across workwear.

So we've got a clear plan. We are executing the plan and as always we will keep you informed about how we are progressing against that. But I am encouraged by the start that we've made in the quality plan.

So finally then let me provide a very quick update on the underpinning activities of the next phase, particularly our digital expertise, innovation and, of course, M&A. I'm delighted with the progress that we are continuing to make in delivering high-quality digital experiences for our customers, driving sales through our websites, improving retention through our high-quality customer extranets. Our pest control web platform is now live in all major markets and in 2015 delivered an increase in visitors of 19% and an increase in inquiries of 13%.

Just to put that into perspective, in the UK, we get two-thirds of all new pest control business finds us through the web. We don't find that business, it finds us. So this is a critical area for Rentokil.

Having focused on pest control first, we've now developed our new hygiene web platform. We just launched that in the fourth quarter in Australia. We will be rolling out across other markets in the next phase.

At the same time, we are also expanding access to our new extranet platforms both for pest and for hygiene customers. And these are really industry-leading online portals that provide our customers with management information 24/7 and that's available on any device.

Turning briefly to innovation, with our new PestConnect service which we successfully launched in the Netherlands we've introduced 24/7 pest control monitoring. The service combines our most advanced RADAR mouse control units with mobile conductivity to message the technician when a trap has been activated. This is a service that lends itself particularly well to high dependency customers like food and pharmaceutical industries. We can provide a very very high level of service but it also gives us improved productivity as well.

Our newest bait station, AutoGate, was launched in Germany very successfully in 2015. It was one of the reasons why Germany had a record year for pest control last year. This new product is being developed to allow Rentokil to use chemical rodenticide baits in outdoor permanent baiting which would otherwise be restricted under new European regulations.

So when a rat enters the unit it breaks an infrared beam. The beam open a little door. Behind the door sits the poison and that satisfies the regulator that that's not permanent baiting and we are the only Company in the world that has that solution.

We demonstrated to you HygieneConnect last year. This has now been proven out in the Netherlands and in Korea where it is helping to raise handwashing compliance amongst our customers' employees and compliance is typically up by over 50%. HygieneConnect is now going to be fully launched in the UK in 2016 and other markets to follow. So overall I am delighted with the commercialization that we are beginning to see of our innovations as well as the development of a strong pipeline of new innovations yet to be launched.

So finally then to M&A. I mentioned earlier that our M&A machine delivered 23 acquisitions in 2015, annualized revenues of GBP158 million. It was a step change year for us, particularly in the growth quadrant with 20 deals, 13 of which were in North America.

We monitor the integration and performance of our acquired businesses every single month to ensure that they are continuing to meet our financial hurdles. Of the 37 acquisitions that were completed between July 2013 and the end of 2014 we only had two very small acquisitions, both in the protect and enhance quadrant that are delivering returns which are slightly lower than required for the hurdle rate of that quadrant.

Of course in that quadrant the hurdle rate is higher. Every other deal, the other 35, are all delivering returns at or above their required hurdle rate. So the performance of the program is going extremely well.

As you know, we've got a clear capital allocation model. This chart summarizes really the change in the shape of the group over the last two or three years. Since 2013 we've reduced our exposure to manage for value businesses from 35% of group revenues to just 4% whilst at the same time increasing our exposure in the growth in emerging quadrants from about one-third to two-thirds of group revenues in 2016.

Through the next phase of our strategy we are going to continue to drive that improving shape of the group. As Jeremy has mentioned we expect to spend around GBP50 million this year on very targeted acquisition cases. Indeed we have completed six bolt-on acquisitions so far this year and the pipeline remains very strong.

So finally then a quick summary before we open up for questions. We continue to make encouraging progress. We are executing the next phase of the strategy at pace.

We are accelerating in pest control. That's a world-class business, it is performing well.

Hygiene has returned to revenue and profit growth and it is focused on sales and operational execution. The quality agenda in workwear is now underway. Although we've clearly got difficult conditions in France and the Netherlands in particular, we are seeing progress in the areas that we can control such as customer satisfaction and retention.

We are underpinning our next phase priorities with strong digital expertise with industry-leading innovation. We have got a clear focus on building margins through density and through that greater sharing of best practice. Our capital allocation model continued to work well for us in 2015, facilitating our targeted M&A program and, of course, the recommended 13.1% dividend.

So all in all I'm very confident of further progress for the group in 2016. Thank you very much. We will be happy to take any questions.

It is Allen Wells from Morgan Stanley. A couple from me on France, a couple on the US if that's okay. Maybe starting with the US, could you talk a little bit about the competitive landscape and what maybe your competitors are doing following the Steritech acquisition?

Are you seeing anyone increasing their focus on the commercial side looking at that acquisition as a threat? Any update you can provide on that would be great.

And then secondly just on potential tailwinds for growth in 2016 as well, you touched on things like the Zika virus, weather conditions seem to be quite supportive as well globally but also in the US. Maybe you can talk a little bit about how you see just general market growth in pest in 2016 versus 2015.

And then in France, obviously decline in growth year on year, could you split that out by price versus volume if possible? And then finally just general conditions in France. Obviously you talk about challenging environment but are things actually getting any worse there?

Are you seeing some stabilization? And IE. the sort of declines you are thinking about in 2016, is that really contracts that have already been signed or is that further declines in deals that are being done now and moving forward? Thank you.

So start with North America. To be absolutely honest I don't think we've seen any competitive response. It's a very very big marketplace, North America.

Steritech, about $100 million of revenues all in commercial pest control. Very high reputation and a customer retention rate into the 90s, a customer satisfaction rate which is the highest in Rentokil initial group. So we have acquired a very very high-quality business that's got very strong customer relationship.

So I can't say that competitors are working hard to attack that position. What I can say is I haven't seen any evidence of success up to this point. It is a very very big market.

Steritech is particularly strong in its homeland geographies, the Charlotte area. And I would say I think they've got a very good position, quite difficult for competitors to dislodge. I'm just delighted that the integration has gone so well, to be honest, because I've done a lot of deals over my career and you plan for the best and sometimes you are disappointed. On this one so far it's been absolutely seamless.

In terms of general trends in pest control, sometimes you feel like you are sponsored by the weatherman. It does go up and down according to climate. There's no evidence at this point in time that 2016 will be an unusual year positive or negative based on the intel that we get and we do track it, particularly in the states.

Zika as I mentioned, what can I tell you? Clearly it's a very serious problem at the moment, particularly topical given the Olympics. We provide mosquito control services in probably 20 countries around the world and we're all seeing evidence in all of our markets of increased inquiries in customers who are concerned about the situation.

But honestly I wouldn't put anything into your models for that. I think it may come, it may not. I'm just pleased that we are in a position to respond to what is a very difficult problem out there at the moment.

So I don't see any big macro trends affecting the pest control growth rates. I think it's very similar to 2015 and 2014.

On France it's really about price. So we've been pretty pleased with our ability to maintain volumes. We lost some contracts but we won some contracts, won some quite big contracts, but it's really all about the pricing situation that really started with a lease and its IPO early 2015, even late 2014.

In terms of general conditions in France, we are not seeing any big improvement. I think there's been some debate about macroenvironment being slightly better but we are not particularly seeing that. But I don't think it's gotten any worse either.

In terms of the pricing situation, it's not as ferocious as it might have been late 2014, 2015 but it's still pretty intense. And you do get the impact of that pricing impact flowing through in the portfolio. So we're expecting the kind of pricing pressure to remain strong in 2015 and 2016.

This is why we are pursuing the Quality Program. It's all about retaining customers, retaining the customers we've got, improving the quality of what we are doing so that trying to take price out of the equation to the extent we can, improving and maintaining margins that way because the market remains pretty difficult.

Andy Grobler from Credit Suisse. Just a couple for me. Firstly, a much broader question.

Historically, Rentokil struggled a little because pricing and/or service levels were not at market levels and you face pressure on gross margins, you had to offset that with cost-cutting. Now the big restructuring programs are done, where do you feel you are versus the market in your bigger operations in terms of service and price?

And then secondly on the Quality Program that you talked about one of your competitors has made fairly significant improvements in margins in their workwear business over the past five or six years. What do you think the opportunity is there for margin improvement in a more normalized market? I know France at the moment makes that a bit difficult to answer but over the next three to five years.

I am not sure whether your question was just about workwear or across the group. We'll start there. The situation varies by market and it varies by business line.

In pest control we are typically the market leader. We are not the market leader in every market but we are typically the market leader in 40 of our 70 markets we are. We are certainly the brand leader.

Our service levels are the best in the industry. We can benchmark that, we do benchmark that. We hire consultants to give us customer feedback on our own business and our competitors' business.

So I'm very confident that the pest control services is outstanding. Pricing power varies by market but I would say it's not a bad place to be. Rentokil brand leader, market leader, service leader in most of our markets.

I would not suggest it's easy. But I think it's a good position.

Hygiene, a little more mixed I would say. Service level is very good. Again we've benchmarked those.

We are in 45 countries in hygiene. We are market leader in half of those.

Brand is less important in hygiene. Service is absolutely critical in hygiene. If people don't turn up and do the service you tend to get customer issues very very quickly, so we focus very much on service.

Again I would say our ability to get price increases through the portfolio is pretty good in most markets. Certain markets it's a little difficult. Asia historically has always been a difficult market to get price through and I would say Continental Western Europe, certainly France and Benelux very difficult to move much on price.

On workwear, that's the area that I've said before that I don't feel that our quality is where it needs to be. That's not saying that I think we are worse than our competition because our benchmarking tells us we are on par with competition. But what we firmly believe is that unless we become the quality champion in the marketplace, unless we can give customers reasons to pay more for that service then we are competing against other players that are offering a similar service.

So that's our thinking there. Certainly getting price increase through the workwear business is exceptionally difficult. Jeremy has given you the answer on France.

France is a tough nut to crack but sales are up in France. Our customer retention is up in France. Our operational KPI's are improving in France and our profits are down in France.

Where's the bit in the middle? It is price. It's very much a margin squeeze that's going on there.

So great service in pest, reasonably good pricing power, great service in hygiene, pricing power varies by market. Service has to improve in workwear. That's what the Quality Program is all about.

Limited pricing power, very very tough market for us. That's my let's say fast -- it wasn't very fast -- that's my summary.

And my answer to your second part where he builds on the -- if I have understood which competitor you are talking about I think they've done very well. I think they've done very well in terms of the way they have improved their margins over the last four or five years. But it's highly correlated to the markets they are operating in and they are operating in markets where that pricing opportunity has been stronger than ours.

When we look at our workwear business, our margin delivery is completely correlated to the markets, as well. So Germany, the pricing opportunities has been stronger, the margins have been stronger and the Benelux and France where the economic environment is more difficult it's been more challenging.

I think what we are pursuing in terms of a Quality Program is exactly -- is not dissimilar to the competitor you are talking about. And it will help us maintain our margin delivery in those difficult margins. And that's the biggest reason behind our guidance for Europe in 2016 in terms of that reduced level of profit decline because of us pursuing that policy.

So I think it's the right thing to do. As Andy said it's the way of protecting the margins. But in those markets I think it's the pricing environment that's the largest driver of the margin.

Emily Roberts from Deutsche Bank. A few from me, please.

First on hygiene again, within the growth rate that you had there, the organic growth, could you give us some color on the volume versus price? More specifically, are your customers willing to pay more for the new ranges that you've put out?

Secondly, on workwear, you're probably bored of talking about this, but are you more or less willing to consider a sale of your French workwear business than you might have been let's say 12 months ago given the improvements that you seen in the operations there?

And then finally, on North America, the 3% organic growth rate, are you pleased with that or do you think that there's more that you can be doing there? Thanks.

So the first one around hygiene and pricing. Generally yes to the question are customers willing to pay more for the new products. Maybe not substantially more but yes.

The key thing in hygiene is selling more than one product into a customer. And that's the key I believe that the new product range is because they all complement each other. And it's making it easier for us to convince a customer that they don't just need a feminine hygiene unit or a soap dispenser.

What they need is a suite of complementary products. I think the honest answer is yes we are getting better price but we're also getting better margin being driven by concept selling, if you like, as opposed to just selling a product.

Your second question was does the performance of France make it any more likely that we would want to sell the business? I've spent most of my life in M&A in one form or another and my view has been unchanged in all that time. You only sell a business for one of two reasons.

You sell a business if you need the money. We don't need the money. And you sell a business if someone is prepared to pay more for that business than you can generate with your plan for your shareholders.

So I haven't changed one iota. As I see it our job is to generate value for shareholders. And we will look at any proposal on any part of the portfolio if someone came in and made a proposal that genuinely demonstrably created value for our shareholders.

We are not dogmatic. There are no sacred cows in the way we think of the business. So my answer is unchanged, no, I wouldn't say any more likely or less likely, the job we see it is to create value for shareholders.

And your third question was organic growth in North America. I'm not sure how to answer that one.

On the one hand I think I am immensely pleased and proud with what the American team have done in 2015. That is a big lift to do Steritech, 13 acquisitions, improved profits by 20%-odd. So for me to say I'm disappointed they got 3% organic feels pretty harsh.

On the other hand, yes, I think they need to deliver more organic growth rate in North America and that's clearly what the plan is. We think the market grew at around about the same rate that we grew last year. It's quite difficult to pick those numbers because some of our competitors don't disclose organic versus inorganic, but we think the market probably grew at about that rate.

We grew more or less in line with market. Do I think that is good enough for Rentokil? No I don't, we need to do better.

Jane Sparrow from Barclays. One obviously on France seeing as that seems to be what everyone else is doing.

Given workwear is a portfolio business, do we see a further stepdown in profits in 2017 versus 2016? Because obviously we've had a couple of years in the Benelux following 2013 issues. Is it going to be the same in France?

That's a long way off, Jane. I think the pricing pressure in the portfolio, you're absolutely right, will continue to flow through, although it all depends on the rate of change in the market. So a lot of that depends on where pricing goes in 2016.

We are obviously doing everything we can in terms of the Quality Program, customer retention and cost savings to mitigate that. So our internal plans would be very much to make sure that isn't the case and that's where we would like to be in 2017 is to flatten out that profit trajectory. But it clearly depends on what happens in the market.

So if pricing stays flat you could deliver 2017 flat compared to 2016?

That's where we'd hope to be, obviously, yes.

And just on the general portfolio management. Obviously you exited the Austrian flat linen business and the Irish business as well.

Is there any more of that to come? When does ongoing revenue become revenue and they become the same thing?

We were looking at that last night. Yes, there's nothing really significant as you seen in the management value quadrant there. It is relatively small, so we had a good go at trying to clean that out in 2015.

There may be some small disposals in there but within the managing for value quadrant we've pretty much dealt with everything in there. On that basis subject to small amounts I wouldn't say anything else out to that quadrant going in 2016.

And then just finally on the brand standards business within Steritech, so a couple months on are you any clearer on what the scalability and potential of that business is?

Will tell you, Jane, what I've told the team. We brought the head of brand standards over to address the top 25. He's a very good salesman, I will say.

By the end of the session the whole top 25 were absolutely desperate to get into brand standards. We've said the 2016 is going to be a year of betting in the business in North America and preparing market assessments for a future internationalization of brand standards. So I don't want everyone jumping on a plane and going over to Charlotte to understand what brand standards is about.

But I have got resources working in the center and working with businesses to figure out which of our international markets are most ready for the introduction of brand standards, market assessment, competitor analysis, talking to some of the international customers based in the states to see which of them would like the service that they get in the states outside of America to put us in a position to take some decisions for 2017 depending on what that analysis shows. We love the business, it's absolutely everything we thought it was but we are focusing on bedding it down in 2016, preparing the case for 2017 and we'll keep you up to date if we decide to launch.

Good morning. It is Joel Spungin from Merrill Lynch. Just wanted to come back on the comments you made around return to generating on acquisitions, and you mentioned obviously two that are below and everything else is doing well.

Can you just remind us what sort of hurdle rates you'd look for in acquisitions and ideally over what time frame you hope to achieve and put that in some context? And related to that, obviously Steritech in terms of the price paid obviously looks normally quite high relative to the profits it was making, you obviously delivered on some of the synergies. Looking out further are you still confident there's a lot more to come so that you do actually hit a reasonable rate of return on a two- to three-year view on that business?

All I can tell you, Joel, is we have seen nothing about the Steritech business that causes us to change our view at all in terms of the quality of the business, the targets that we publicly have put out there and our ability to get a hold of those synergies in the time frame over which we will get hold of those synergies. So I said it was a brilliant business, I said it was the top of our list. We've been chasing it for years.

Absolutely no regrets in terms of business, price, the case, the synergies. Still a lot to be delivered, a lot of heavy lifting that we have to do but off to a very very fast start and no I really really like what I see. Do you want to do the returns?

The returns, Joel, actually on page 45 of the packs, we've got the quadrants and the returns within each of the quadrants. 15% in emerging, over 15% in growth, 15% to 20% typically we are looking for there. Round about 25% in protect and enhance and 30% in management value.

The two deals we talked about that were slightly below were in the protect and enhance. They were delivering high teens. So above if you like the average for the group, just not quite at the 25% we were looking for within that quadrant.

We are -- the returns are based on a typical DCF model but we do look very carefully at year three cash returns on cash capital employed to check the model. We did that with Steritech and we produced those numbers in the announcement. But for all the deals there's a kind of common sense locker in terms of payback and cash returns in year three, the cash capital employed, just to make sure we are not kidding ourselves with the modeling and that's a good way of working out where they are going.

And that's what we used. And Andy talked about the assessments we make as to where the businesses are on track. All the deals we looked at in that survey have been going for at least one year. And by the time you get to two years, to 2.5 years, you've got a pretty good feel for where those cash returns are within a pretty short time frame.

Is that pre-tax?

That is pre-tax, yes, that's right.

It's Hector Forsythe from Stifel. I think four questions. Hopefully they are quite quick. Can you give the organic growth rate for Q4?

1.4%.

1.4%

Thank you. Do you think you'll see that tick up during the course of 2016?

I don't really -- it's difficult to forecast organic growth. The targets we set a couple of years ago said we expect this business to grow total revenue mid-single digits which we said probably meant 2% to 3% organic and 2% to 3% inorganic. I haven't changed my view nor has Jeremy that those are the sorts of numbers that we should be delivering out of this business.

But for France we delivered 2.5% organic growth rate in 2015. So I would be disappointed, Hector, if we did not improve on the Q4 exit rate. But very difficult to make a prediction seven weeks in.

Okay, thanks for that. Retention numbers, you've alluded to change in retention. Can you tell us where you are overall in terms of group retention on the contract portfolio?

They are up 1% higher year on year from memory. I'll have to get back to you with the specifics, Hector but (multiple speakers)

You have given us to change, so it's --.

Jeremy Townsend

Hector is asking what the absolute number is.

84 to 85.

It's 85 to 86 I think but it's around 85, Hector. And just a cautionary word there, not every company out there calibrates retention in the same way. Our retention rate is a fully blended, everything in, so if you lose customers, gain customers, lose price, win price that all goes through that.

If you have customers go bust that also goes through that. So it's everything that's in there. If it moves on the portfolio it's in our retention rate.

That's not the way everyone does it, notably not the way that some of our competitors do it. And in workwear our retention rate -- and again, I'm sorry, this is off the top of my head, but our retention rate is about 90%.

Okay thanks for that. Can you talk about the benefit of the fuel costs across the group please?

Sure, so fuel costs did benefit 2015, particularly North America where fuel costs are much lower year on year. A little bit in the UK, less strong in Europe where the euro weakness against the dollar mitigated some of the fuel impact. And much less over in Asia where fuel is subsidized, so what happened a lot was (inaudible).

It was around GBP3 million to GBP4 million in 2016 and we were expecting some benefit in 2016 but probably about half of that given where fuel prices currently are. Obviously that can move around a bit but we are benefiting from the reduced slope. So if prices stayed where they are for the rest of the year it would be in the 1 million to 2 million level for 2016.

Okay, thanks. And then finally, just can you give us an idea of what you are spending your CapEx on?

So roughly half the CapEx goes into EFR and workwear. We are spending about GBP20 million or so on IT, about GBP10 million or so goes into innovation in terms of looking at things like the Connect tools and the AutoGate tools that Andy talked about. And the rest is broadly split between hygiene and pest in terms of CapEx for the pest and hygiene EFR.

Motor vehicles is within those two categories. Motor vehicles is a big part of the pest and hygiene.

And GBP20 million, is that kind of a good run rate, sorry GBP200 million?

Yes, GBP200 million is what I guide you to, oddly enough, for 2015. So I think it's a good run rate.

We are reasonably focused on CapEx control. That's part of the whole capital allocation within the quadrant. And like I said some of the 2015 moved into 2016 was some motor vehicle spend that's moved between the two years.

The GBP200 million is quite a good guide. There's a little bit of an increase because of Steritech and some the acquisitions but that is around the edges. But GBP200 million I'd say is a pretty good number subject to FX, but it's a good ballpark number.

Thank you very much.

Thank you very much indeed.

Thank you.