Rentokil Initial PLC (RTO) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Rentokil initial preliminary results for 2016.

I'm pleased to tell you that 2016 has been a very successful year with a strong financial performance. Throughout the year, we continued to implement an effective and consistent strategy, our RIGHT WAY plan, and it's this strategy which is continuing to deliver consistent progress against our financial targets for revenue, profit, and free cash flow, all of which we've exceeded this year.

Looking at the businesses, our pest control operations are going from strength to strength, and we are very encouraged by the momentum we are seeing in our hygiene operations across the Group. And in our workwear business, we were pleased to announce in December that we have entered into an agreement with Haniel to establish a joint venture to perform a leading provider of workwear and hygiene services in Europe, while retaining an 18% interest in the combined entity.

We are evolving our business through a combination of organic and acquisitive growth, and the composition of our revenues continues to change, with approximately 70% of Group ongoing revenue now within our growth and emerging markets.

Based, therefore, on our overall encouraging performance in 2016, and our expectation of further progress in 2017, the Board is pleased to recommend an increase in the final dividend for 2016 to 2.38 pence, resulting in a total dividend growth for the year of 15%.

Andy will now provide an update on the progress we are making in the next phase of our RIGHT WAY plan, and the strategies we've set for our businesses of pest control, hygiene, and workwear.

So let me know 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.

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

In a few moments, Jeremy is going to provide you with details of our preliminary results for 2016, looking at the overall performance of the Group and our five regions. I will then come back and provide you with an update, firstly on the progress that we're making in the next phase of our RIGHT WAY plan, as we accelerate growth in pest control, as we focus on execution in hygiene, and as we drive for quality in our workwear business. And secondly, I'll update you on how we are executing our differentiated strategy through our value-creating acquisition program.

But first, let me just say a few words to set the scene for today by covering the key highlights.

We delivered a very good overall performance during the year, with revenue from ongoing operations up 12.6% at constant exchange rates. There were good performances in North America reflecting a series of high-quality acquisitions, and also in the UK, Germany, Asia, Pacific, and in Latin America. Organic growth was at its highest level for a decade, reaching 3% for the full year, up from 1.8% in 2015, and organic growth of 3.5% was delivered in the second half.

Adjusted ongoing operating profit grew by 11.5% in the year, another good overall performance, reflecting our focus on growth and emerging markets, and our density-building activities.

In Rentokil pest control, we have an outstanding business which is continuing to deliver accelerated growth. In 2016, revenues were up around 26%, with organic revenue growth of 5.7%. And I'll come back in a few minutes to talk about the drivers of that excellent growth and the progress that we are making against our innovation agenda in particular.

2016 was also a good year for our hygiene business, with revenue and profit growth of 4.8% and 3.9% respectively. And I was particularly pleased to see organic revenue growth of over 3% in hygiene, and I'll talk about the opportunity to expand our margins in this category in a few minutes.

Turning now to acquisitions, 2016 was an exceptional year for M&A with 41 acquisitions delivering GBP124 million of combined annualized revenues. But what I really want to emphasize today is just how strong the M&A pipeline is, and because of this, we now expect our M&A spend this year to be at least GBP150 million. And we're already off to a flying start with six high-quality acquisitions already completed in the first few weeks of the year.

Our strategy remains focused on building our presence in higher-growth markets, and as this slide highlights, we continued to execute that strategy at pace in 2016, with revenues increasing by 19.7% in our growth markets, and by 18.7% in our emerging markets. These two higher-growth quadrants now account for about 70% of Group revenues.

And finally, in December, we announced the news of our joint venture with Haniel. As you will have seen from the announcement, we believe that there is a compelling logic in bringing together our respective workwear and hygiene businesses, and that this is a highly value-creating agreement for our shareholders.

Firstly, the valuation of our businesses transferring into the JV reflects very good value at a multiple of 15.2 times its profits based on the 12 months to June 30, 2016.

Secondly, it represents an excellent fit with our capital allocation model, increasing our capacity to invest in pest control and hygiene businesses in both growth and emerging markets.

And thirdly, the agreement strengthens our balance sheet significantly, and Jeremy will update you on this in a moment.

The target completion date remains mid 2017, subject, of course, to clearance from the competition authorities.

So in summary, 2016 has been a very strong year, both in terms of the underlying performance of our businesses, and through the delivery of our M&A agenda as we continued to execute our RIGHT WAY strategy.

So with that, I'm going to hand over to Jeremy. He will take you through the Group financials and the regional performances in detail.

Thank you, Andy, and good morning, everyone.

I'll now run through the key financial highlights for 2016 in a bit more detail. Unless I state to the contrary, all numbers are at a constant rate of exchange.

Organic revenue in the year grew by -- ongoing revenue in the year grew by 12.6%, with organic growth of 3%, and growth from acquired businesses of 9.6%.

Adjusted operating profit before interest for the year on an ongoing basis increased by 11.5%, driven by the strong profit growth in North America, Asia and the Pacific, offset by lower profits in France, and increased central and regional overheads due to increased long-term incentive charges, reflecting the increase in the Group's share price during the year.

Adjusted profit after interest at actual exchange rates grew by GBP62 million, or 32.5%, with a reduction in interest costs of GBP4.7 million, and net exchange rate movements favorably impacting profit by GBP30.2 million.

Free cash flow was again strong in 2016. Operating cash flow at GBP248 million was GBP27 million higher than the prior year, and free cash flow at GBP156 million was GBP9 million higher.

Adjusted EPS at constant exchange rates increased by 16.5%, reflecting the impact of a lower effective tax rate, offset by an increase in shares in issue.

The revenue, profit, and free cash flow results for 2016 demonstrate another year of delivery against the financial targets that we set for the business in 2014. The trend of increasing organic growth continued in the year, and our profit growth was ahead of our high single-digit growth target, reflecting the impact of the Steritech acquisition and the leverage from the organic revenue growth. And free cash flow continues to be strong, effectively funding our acquisitions and dividend payments in the year.

Looking now at performance by region, North America delivered a strong performance in 2016, supported by acquisitions and improved organic growth. Revenue grew by 38.5%, driven by the 2015 Steritech acquisition, a continued stream of 2016 acquisitions including Residex in July 2016, and improved organic revenue growth which was 4.4%, with pest control organic growth over 5%.

17 acquisitions were completed in the year, with annualized revenues of GBP101 million.

Operating profit was up 44.5%, reflecting the impact of Steritech, the 2016 acquisitions, and leverage from the increased organic growth.

Profits from Steritech were around $30 million in 2016, at the top end of our expectations.

And operating margins improved by 0.6 percentage points to 13.5%. This was driven by a 1.8 percentage points improvement in pest margins, excluding products, to 15.9%, offset by a change in mix in North American revenues following the Residex acquisition.

And we anticipate further opportunities for margin improvement in 2017 through leverage from organic and inorganic revenue growth, further profit increases from Steritech, and synergies from the Residex and other acquisitions.

Performance in Europe in 2016 was more resilient than it has been recently, but continued to be held back by the continuing challenging economic environment in France.

Revenues were up 1.4% in the year, with growth in Germany, Southern Europe, and Latin America which is managed through the Europe region, offset by reduced French revenues.

Profit in the year was down 2.4%, largely due to a GBP6.6 million reduction in France, where both revenue and profits continued to be impacted by significant pricing pressure.

And we expect trading conditions in France to remain difficult in 2017, and while we expect to make good progress in improving the operational strength of the business, we do anticipate further profit declines in France which will result in the profit decline in Europe being broadly the same as in 2016.

This is before taking into account any impact of the Haniel JV. As Andy has already noted, we announced a proposed JV with Haniel on December 16 last year in relation to our workwear and hygiene businesses in Germany and the Benelux. And I will talk about the financial implications of this transaction in a few moments.

Revenue in the UK and the Rest of the World region was up 4.5%, of which 4.1% was organic. The UK delivered strong revenue growth, driven by pest control and property services jobbing revenue, and portfolio growth in hygiene. Revenue growth has been similarly strong in the Rest of the World region, driven by growth in all of its regional clusters.

Profits increased by 4.6% in the year, reflecting the strong revenue growth and improved margins in pest control, offset in part by lower hygiene margins, reflecting the impact of the rollout of new ranges to our hygiene customers.

The Asia region has continued to make excellent progress in 2016. Revenues were at 12% in the year, with organic revenue growth of 8.1%, driven by good performance from both the pest and the hygiene categories.

Average growth in the less developed markets of India, China and Vietnam was 23%. And in our more established Asian markets of Malaysia and Indonesia, growth was 14.4%, driven by both strong organic growth and a small acquisition.

Operating profit in the region was up 31.1%, reflecting leverage from the revenue growth with a 1.5 percentage point improvement in operating margins, the third year in succession that margins have improved by 1 percentage point or more. And we believe there are further significant opportunities for margin improvement through inorganic and organic revenue growth, service productivity, and back-office rationalization.

Our joint venture in Japan continues to trade well, growing revenue by 6.9% and profit by 7.4%. And we received a special dividend from the investment in 2016 of GBP7.3 million.

The Pacific business continued to perform well in the year, with revenue up by 10.7% and profits up by 11.9%. Organic revenue growth of 4% was driven by increased jobbing in pest and improved retention in hygiene.

Operating margins improved by 0.2 percentage points, driven by leverage on the sales growth and productivity gains, offset by the investment in new product rollout in the hygiene category.

There were eight acquisitions in the region during the year, six in pest control and two in hygiene, with annualized revenues of GBP10 million. And the region anticipates further improvements in margin in 2017 through leverage from inorganic and organic revenue growth, as well as improved service productivity, particularly in hygiene.

For the third consecutive year, the Group delivered strong operating cash flow with GBP247.8 million, representing a GBP27.1 million increase on the prior year.

Favorable exchange impacts on EBITDA were partially offset by an adverse FX impact on CapEx outflows, and CapEx also increased in the year due to the phasing of certain projects from 2015 into 2016.

Working capital outflows were higher in 2016, in part due to phasing, with the Group continuing to make good progress in its management and receivables collection and inventory.

Continuing free cash flow of GBP156 million was GBP9 million higher than last year, and well in excess of our GBP110 million minimum target, driven by the improvement in operating cash flow.

Cash interest payments were GBP10.4 million higher in 2016, reflecting the timing of bond interest payments following our debt refinancing.

Cash tax payments were GBP7.9 million higher in 2016, reflecting the increased profitability of the Group. Our cash tax paid as a percentage of profit remains relatively low at 14.2%.

Free cash flow was used to substantially fund GBP55 million in cash dividend payments, a 13.5% increase on 2015, and a GBP119 million investment in acquisitions.

The weakening in sterling against the euro and the dollar caused an increase in the sterling value of our euro and dollar-denominated debt of $204 million, and this was the main reason for an increase in our net debt balance at the year end to GBP1,239 million.

We are pleased with the improved free cash flow delivery of the business over the last three 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.

With an accelerated performance in bolt-on acquisitions in 2016, and a particularly strong pipeline going into 2017, as Andy has already noted, we are up-weighting our guidance for our anticipated spend in M&A in 2017 to at least GBP150 million.

Our strong revenue profit and cash performance has enabled us to propose a further increase in the growth of our dividend for 2016. And our dividend cover remains relatively conservative, and we see further opportunities for dividend growth as we integrate our recent and anticipated acquisitions.

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. And the JV with Haniel is expected to complete in 2017, and the estimated proceeds of GBP420 million will initially be used to reduce net debt when received.

Looking at our balance sheet position at the end of the year, our net debt to EBITDA ratio was at the same level as the prior year end at 2.5 times. The ratio will reduce following the completion of the JV transaction in 2017.

With our continuing strong levels of free cash flow, Standard & Poor's confirmed our BBB credit rating in June 2016 and removed its negative outlook.

Our free cash flow target for 2016 was a minimum of GBP110 million, and we have previously guided to a minimum free cash flow target in 2017 of at least GBP120 million.

Since communicating these targets, there has been a significant weakening of sterling which has a net favorable effect on our free cash flow performance. As we have also announced, the JV transaction is estimated to reduce free cash flow by around GBP10 million on an ongoing basis before one-off costs.

Assuming the transaction completes at the mid-year, one-off cash costs of around GBP10 million, and current exchange rates, we would anticipate a minimum free cash flow of GBP130 million for 2017, and I'll provide more guidance on the free cash flow in a moment.

In terms of funding capacity, we have plenty of headroom, with over GBP70 million of centrally held funds, and over GBP200 million of undrawn committed facilities at the year end. Following the refinancing of our GBP300 million sterling bond in March 2016, the average cost of our net debt is around 3.5%.

And our pension scheme remains effectively fully funded, with one of the strongest positions in the FTSE 350. Following agreement of the scheme valuation at December 31, 2015, GBP9 million of cash previously held in escrow has now been returned to the Company.

So just a reminder around the financial impact of the Haniel JV. Cash proceeds from the transaction are estimated at EUR520 million, which will be funded by debt raised by the joint venture. To mitigate exchange rate risk, we have hedged 90% of the proceeds based on the exchange rate at the time of the transaction, giving estimated proceeds of around GBP420 million. The proceeds will initially to be used to reduce net debt, and based on net debt at the year end, the impact on the Group's net debt to EBITDA ratio would be to reduce it from around 2.5 times to around 2 times.

To reduce uncertainty and volatility, it has been agreed that the Group will receive an annual dividend of EUR19 million per annum for five years. And as I previously noted, the transaction will reduce underlying free cash flow by around GBP10 million per annum before one-off costs on an ongoing basis.

Taking into account the estimated cash proceeds, this reflects an effective multiple of over 40 times on the transaction, notwithstanding the fact that we will continue to have an 18% stake in the JV.

As we noted at the time of the announcement, the transaction is anticipated to have a small dilutive impact on adjusted EPS of around 0.4p per share. Assuming the transaction completes on June 30, the estimated impact in 2017 would be around 0.2p per share.

While the deal is mildly dilutive, I would note that on a pro-forma basis, organic growth, profit growth, and net profit margins, would all be higher in 2016 after removing the impact of the JV companies for the year. Based on our recent acquisitions and our strong acquisition pipeline for 2017, we are confident that this dilution will be covered by acquisition profits, and hence there is no need for you to adjust your 2017 numbers down for the impact of the transaction.

And so finally, before I hand back to Andy, some more numbers for your models in relation to 2017.

Following a GBP6 million increase in central and divisional overheads in 2016 due to the long-term incentive plans, we would expect 2017 costs to be GBP2 million higher, reflecting increased investment in our digital capability. As you know, we now report restructuring costs above the line. These are expected to be around GBP7 million in 2017, in line with the 2016 number.

The guidance is for restructuring costs only and does not include one-off items, which by their nature are more unpredictable. Integration costs for significant acquisitions and disposals will continue to be reported in one-off costs in 2017, and this will include the Haniel JV one-off costs which are estimated at GBP15 million, of which GBP10 million are estimated cash costs.

Interest costs before adjusting for the JV are expected to increase in 2017 slightly to around GBP42 million, reflecting higher debt levels and exchange rate impacts. Cash interest costs, however, are estimated to reduce by around GBP13 million with the bond interest phasing normalizing in 2017.

Sterling has continued to be weak against the euro and the dollar in 2016, and at this time, we would estimate that the impact on 2017 profits if the current rates were to exist throughout the year would be in the region of GBP15 million to GBP20 million.

We estimate that our effective tax rate will be around 22.5%, in line with 2016. Our cash tax payable is expected to increase to GBP40 million to GBP45 million, reflecting the increased profitability of the Group. As already noted for 2016, I expect free cash flow to exceed GBP130 million in the year. This is based on my assumption that working capital outflows will be around GBP10 million, in line with 2016, and net CapEx will be in the region of GBP235 million to GBP245 million, reflecting current levels of spend and current exchange rates.

I stress that the minimum cash flow target is just that; it's a minimum target. And as in the last three years, we would certainly expect to beat it. In terms of the uses of free cash flow, as previously noted, we would estimate M&A spend of at least GBP150 million.

Thank you, and I'd now like to hand back to Andy who will cover the rest of the presentation.

Thanks, Jeremy.

So let me start with our RIGHT WAY strategy. It's a slide that's pretty familiar to you now. You've seen it many times before. It summarizes how we've been managing our business over the last three and a half years.

In the interests of time, I'm not going to go through it again today other than to make one simple point, and that is on the assumption that the JV with Haniel indeed completes later this year, as we expect, then the time would seem right to review this structure in the summer. I don't think we're going to make any radical changes to the strategy, but I do want to make sure that we've got the right structures in place to drive profitable growth over the next few years. We'll update you on any changes that we do decide to make at the interims.

18 months ago, in line with our overall strategy, we outlined our next phased priorities of the RIGHT WAY plan. And in 2016, we continued to make very good progress against these priorities, as you can see from the summary on the screen.

Over the coming slides, I'll update you on the performance of each of the three main businesses, and then I'll provide a quick update on how we're using our quadrant strategy to instruct our capital allocation model and our M&A activities.

Let me start with pest control, where you can see the successful execution of our strategy is continuing to deliver accelerated growth.

We delivered a strong full-year performance, with ongoing revenues increasing by 25.9%, of which organic growth was 5.7%. And profits were up by 25.1%.

I've said many times before, this is an outstanding business, and indeed, pest control is an outstanding industry. This is our key growth engine, and it's extremely well positioned to capitalize on the increasing demand for pest control around the world. And that demand is being driven by increased economic growth, by population expansion and urbanization, by regulatory change in areas such as food safety, and by stronger legislation and the drive for international standards.

Today, Rentokil is the number 1 pest control business in almost 50 countries, and it's the largest commercial pest control company in the world. Following the acquisitions in early 2017, the business now has annualized revenues beyond the GBP1 billion mark for the first time in its history. So another strong year for pest control, and it's extremely well positioned to deliver long-term sustainable growth.

You can see evidence of that growth on the left of this slide, with revenues in our pest control business increasing consistently over the last three years, and delivering a compound annual growth rate of almost 16% over that period. As well as operating in attractive growth and emerging markets, Rentokil has a series of differentiators which support our organic growth agenda.

And those differentiators include our leading edge scientific and technical expertise, and we're going to be building further on that in 2017 with the opening of a new GBP2 million science innovation and training center in the south of England; our excellent pipeline of innovations and our new digital platforms; our strengthening global and national accounts capability; our growing footprint in the world's largest pest control market, North America; and our leading market positions in many fast-growing emerging markets. I'll cover some of these in more detail over the next few minutes.

In 2016, newspapers around the world were reporting the spread of the Zika virus, and there was particular focus on Brazil as the host to the Olympic and Paralympic Games. Recognizing Rentokil's technical expertise, we were appointed by the Games' organizing committee to deliver a complete pest control service, including mosquito control during the summer Games.

The team in Brazil had to execute a hugely complex vector control operation, and they did an outstanding job, with the World Health Organization reporting not one single case of Zika during the Games.

In 2016, we were also appointed to support the US Center for Disease Control in their operations in North America to help combat the aedes aegypti mosquito that carries the Zika virus.

And just to underline our technical expertise, as I speak, the World Health Organization is running an international expert symposium into the control of Zika, and Rentokil has been invited to participate to share its best practices with the WHO and other world experts.

It's a crucially important part of the Rentokil business model now that we deliver a pipeline of new products and services to meet our customers' needs. A really good example of this is in our UK business, where innovations launched within the last two years accounted for 8% of its 2016 revenues. I'm therefore delighted to announce today two new innovations which enhance our core pest control services.

First, we're launching Lumnia, which will be the first commercial range of electronic fly killers to use LED lighting rather than the traditional blue light fluorescent tubes. We've developed the LED lamps with a global lighting specialist specifically to target a broad range of flying insects.

Not only is Lumnia highly effective, but the LED units also deliver a significant reduction in energy consumption, around 50% to 60%. So customers like food manufacturers and food retailers have a very, very strong interest in this product. To give you an example, a typical supermarket chain in the UK would probably be using 1,000 to 2,000 of these units in its footprint.

Revenue from our current EFK range is around GBP25 million per annum. That's only a tiny percentage of the global market and, therefore, with these new units launching this year ahead of the insect seasons in the northern and southern hemispheres, this represents a really excellent opportunity to grow our share of this market.

Secondly, RapidPro is the fastest-acting commercial rodenticide for the elimination of mouse infestations. Through extensive research and testing by our scientists, we've developed a formulation that has achieved optimum palatability. So basically, if you're a mouse, you are going to absolutely love this. It's going to be great.

It's highly effective on any strain of mice, even those that may have become resistant to more traditional rodenticides, giving us a highly effective, fast acting and very humane new product.

Both of these innovations are proprietary products for Rentokil, and they're excellent examples of the new products that are emerging from our innovation pipeline.

Moving on to digital innovation, six months ago, I highlighted our digital pest control capabilities, and in particular our ability to monitor continuously for rodent infestation using our new PestConnect system. The response to PestConnect has been excellent. We've now got over 25,000 units in customer premises. To date, we've received over 20 million individual data messages from those units in the field.

The relationship with Google, Google Cloud Solutions, is working extremely well, and that large amount of data is being stored, analyzed, and it's providing us with new levels of insight into pests, and potentially to risk profile our customers' sites.

We see this as a tremendous future opportunity in pest control, and our leading-edge development in this field was recognized at the UK IT Awards where PestConnect won the best Internet of Things innovation in 2016.

So I hope that's given you a good update on pest control. Let me now pick up a few key points on hygiene, and then workwear, before I close with M&A.

I'm pleased to report that our hygiene business has delivered its third year of improved financial performance, in line with the rollout of our best-in-class product ranges. In 2016, the hygiene business delivered ongoing revenue growth of 4.8% and increased organic revenue growth of 3.1%. That compares to organic growth of 2.3% in 2015 and less than 1% in 2014. Equally, profit growth of 4% in 2016 compares very favorably to the 1% delivered in 2015 and the 6% decline in 2014.

So clearly, there's a lot more to go for here, but I am very encouraged by the performance of the hygiene business in 2016.

So with good market positions and excellent new ranges, our focus now is very much on operational execution that's designed to drive profitable growth and to increase our margins.

On the left of the screen there, you can see a summary of our operational strategy in hygiene. It's a combination of best-in-class products, high-quality customer service, our innovation and digital leadership, a really, really detailed understanding of customer and product density, and that plan is now being overlaid with a city-focused approach to M&A.

As you can see on the right of the screen there, our plan starts with high-quality products and service. Today we have three outstanding hygiene product ranges: reflection, signature and signature color. We've also begun to build a new premium scenting business, and whilst very early days, it has started extremely strongly, growing by over 40% in 2016.

And most importantly, customer satisfaction has continued to increase in hygiene, growing by a further 4 percentage points in 2016, and overall up almost 11 points since we began to introduce the new ranges three years ago.

One of the great opportunities we have in hygiene is to take the tools that have been deployed successfully in pest control and to adapt them for our washroom customers. As an example, the new V3 website infrastructure, which has been very successful in pest control, is now being used in initial.com, and in 2016, we delivered around 20% more web sessions from potential washroom customers. So that's customers actually finding us without our sales guys having to find them.

Also, our new myInitial customer portal, which again was originally developed for pest control, provides a high-quality online tool for our hygiene customers with features such as audit, reporting and e-billing.

So the operational strategy is all about best-in-class products, high quality customer service, market leading digital tools and services, but at the absolute core of the strategy is the drive for customer and product density.

You've heard me talk many times before about the importance of density building in our route based businesses, so let me give you a simple theoretical illustration about the importance of postcode density -- that's the number of customers in a particular geographic area; and product density -- that's the number of products or services taken by each customer.

So I happen to live in Sevenoaks, God's own country here. You'll see the map of Sevenoaks and the first at the top there, this is an illustration. It's not an actual example from the business. But let's assume we've got 10 customers in Sevenoaks and each customer takes three service lines. That will give us a basic gross margin -- let's just call it X% in this example.

If you go to the bottom-left of the screen, you can see that if we double the number of service lines for each of those 10 customers in the Sevenoaks area, then our gross margin will improve by about, say, 7%.

On the right then, you'll see if we could sell to an additional 10 customers in the same geographic area, with each of them taking six service lines, our gross margin for all customers in that area increases by over 10%.

So that simple illustration highlights why we are now beginning to incentivize our sales teams based on the margins that they can deliver through density selling rather than previous commission structures that were based purely on revenues, irrespective of where the customer was based or how many services they took. It's this focus on density which also explains why we're now beginning to undertake targeted city-based acquisitions in those cities where we've already got an existing customer base.

In 2016, we acquired five small hygiene businesses in order to add that customer density to existing operations, and then to up-sell to those customers from our new product ranges. And obviously, we are planning more similar acquisitions this year.

So turning now to workwear, Jeremy and I have both already talked about the JV with CWS-boco and Haniel. Let me just take a few moments to update you more generally on the performance of our workwear business in 2016, and in particular to touch on France, which as you know, sits outside of the scope of the JV.

Our workwear business has for some time now been operating in the highly competitive markets, and we have faced significant pricing pressure, particularly in France and in the Benelux. As you can see on the chart, the business remained under pressure in 2016 with revenues down 1.3%, but that was a much improved rate of decline versus the 3.2% decline in 2015. And profits were down 14.5%, with that reduction principally coming from our French business.

However, in 2016, in addition to the better revenue performance, there were other signs of progress coming through against the quality agenda. In particular, we saw the workwear business in Benelux return to both revenue and profit growth, and it was particularly encouraging to see improved customer service and customer satisfaction levels, which are the real life blood of this business. They were up by 2.2 and 4.5 percentage points respectively. So the quality agenda is now beginning to make a measureable difference.

Turning now to France, we appointed a new managing director in 2016, and he's put in place a new business improvement plan focused on cost optimization, customer retention, and margin improvement in particular.

Whilst we delivered an improved rate of revenue decline from minus 3.4% in 2015 to a decline of less than 1% in 2016, the market and economic conditions in France do remain challenging, and there is no doubt that we have got a lot more to do here.

Operational improvements in safety, improved customer service, improved customer satisfaction, very good levels of customer retention, as well as growth in pest control, growth in hygiene, which in France grew by 2% and 5% respectively last year, do provide us with a platform for improved performance over the coming years. But the immediate focus has to be on margins, and on workwear margins in particular.

So finally then, let me cover the acquisition strategy, which as you know, we deliver in line with our quadrant-based, differentiated approach, and then we'll take any questions.

In 2016, we completed those 41 acquisitions. 35 of them were in pest control. And they added total annualized revenues of GBP124 million. We also divested four small businesses, three on the bottom-left, managed-for-value quadrant; and, of course, we entered into the JV agreement with Haniel.

Let me highlight just two things. First, as you know, we constantly monitor the integration and the performance of our acquired businesses very closely to ensure that they are continuing to meet the financial targets set for those acquisitions. As you can see from the bottom of the screen there, for all acquisitions in the 18-month monitoring period, all but two very small deals are delivering the expected returns at or above their respective target levels in our quadrant capital allocation model.

Secondly, as I mentioned earlier, the pipeline of acquisitions has never been stronger, in my time here at least, and we therefore anticipate spending at least GBP150 million in 2017.

If we look back briefly over the last three years, you can see on the left how we have now successfully reshaped the Group, almost doubling the size of our revenues in our growth in emerging markets from 36% to almost 70% last year, whilst at the same time reducing significantly our exposure to lower-growth markets.

And on the right side of the screen there you can see that after completion of the JV with Haniel, our pest control and hygiene operations will account for almost 80% of Group revenues. This is our RIGHT WAY strategy in action, and obviously we're going to continue to execute that aggressively in 2017.

So in summary then, 2016 has been a very strong year for the Group. We've made excellent progress in revenue, profit, cash. We've delivered our strongest organic growth for 10 years. You've just heard the M&A machine is running smoothly, the pipeline is very strong. Our JV with Haniel will create significant value for shareholders. As John has just announced in his opening remarks, the Board has increased, or proposed an increase in the final dividend of 15.5%.

And finally, the prospects in the majority of our markets are good, and we're confident of making further progress in the coming year.

Thank you, and with that, we'll take any questions.

Rob Plant, JPMorgan.

In terms of the hygiene opportunity in a density postcode and product, have you worked out where that could potentially go to? Is there a ceiling? How much upside could that deliver?

Thanks.

Morning, Robert.

In one sense, it's an easy question to answer; in one sense it's quite difficult. I'll give you a ridiculous outlier.

A few years ago, probably a couple of decades ago, a UK hygiene business was operating at a 40% net operating margin, and it ran that way for many years. I think that's a very unlikely outcome of the strategy.

On average, we're making about a 19% plus net operating margin, but we've got lots of examples where we are running washroom businesses around the world in the 20% to 25% net operating margin profile.

So honestly, I can't tell you what you should assume and when we will get there, but I can tell you that there's plenty of opportunity to add those percentage points of margin improvement. And certainly internally, we talk about getting to 20%/25% in many of the businesses.

Do you want to comment, Jeremy?

No, I think that's absolutely right. I think what the ceiling might be hypothetically is difficult to calculate, but one of the analyses we've done is between selling one item into a premise and two items into a premise, and the difference between the margins is from minus 15% to plus 20% or so. So the incremental impact is very significant.

So I think for the short term, we see plenty of opportunity, and where that hypothetical barrier comes is not in the short term.

Jane Sparrow, Barclays. Just a couple first on the M&A pipeline.

The increase in indicated spend for 2017, is that all down to volume of opportunities, or is any of that price expectations of vendors changing?

And then as a follow-on from that, assuming the bulk of it is volume, the increase in the pipeline that you're talking about, is that coming from vendors coming to you and saying we'd like to sell to Rentokil, or is that your own local guys shaking the trees and bringing up more opportunities?

Morning, Jane. Thanks for that.

Now I think it's -- what we're seeing is the culmination of three years of hard work around the regions. We staffed up for M&A about three years ago, so we had dedicated M&A resource in every one of our regions now, and we've been working on pipeline building for three years. So I would say the vast majority of that pipeline has been developed by us.

The one exception, I would say, is North America. I make no secret about the fact I think prices have gone up in the last couple of years. That's predominantly because the assets in North America are highly attractive. It is one-half of the world's pest control market in one country alone, and there are a number of companies that are going after the same assets.

So I think there has been some price increase and price inflation in North America. I haven't really seen that in the other markets. And I would say the vast majority of our pipeline is based on work that we've been doing over the last two or three years, but it is also very common knowledge that we are a buyer of pest control businesses. So if you have one for sale, it's very unlikely that you're not going to call Rentokil. So we're going to find out about pretty much everything that's up for sale.

Hygiene, a very different story because we've not been on the acquisition trail there. We're not known within the markets as an acquirer. And our acquisition model for hygiene is very, very targeted to certain cities, the cities where we can do the most in terms of getting those margins up we were just talking to Robert about. So largely home-grown, but some of it finds us rather than we find it.

Thanks. And then just one on France on the management change that you've made there. When during the year was that change made, and what is the background of the person that's joined?

I can't remember the month. It was in the second half.

Q3.

Yes, Q3.

Yes. Background, very, very experienced; very high-energy manager. Detail oriented. Not worked in the industry before but worked in B2B services very successfully.

In my experience and coming up to nine years in the Group now, we don't talk about it as much as we talk about other things, but the people side of these businesses is absolutely fundamental. If you get the people strategy right -- I'm not talking about senior management, I'm talking about front line -- if you get the people strategy right in these businesses, good things can happen. If you don't, it's very difficult to make progress.

And I think what I see with the new GM, he's a real people person. So he's out in the business, he's meeting colleagues, he's talking to them. So high energy, new set of eyes; very experienced guy.

Thanks.

Emily Roberts, Deutsche Bank. A few from me, please. I'll take them one at a time.

So firstly on innovation, could you please give us an update on where you think you stand relative to your competitors on innovation, particularly in the US?

Thanks.

Hi, Emily. Yes, I'm acutely aware of that fact that I have competitors who listen in to these calls so I hope they're listening well.

Yes, look. My view is that Rentokil has invested more heavily in innovation than the vast majority of our competitors. We're the only global competitor that has a dedicated, bespoke -- I would call a research and development facility. We've put a lot of focus on the digital innovation ahead of the vast majority of our competitors.

So I don't want to suggest that others are doing nothing. I don't want to suggest that everything that we come up with is world beating. I do want to suggest and I strongly believe that we are ahead of our major competitors in innovation generally, and certainly in digital innovation.

And on digital innovation, could you give us your view on how that might or could impact margins over a three to five-year period, please?

Yes. Well, I think that's quite hard to predict. I think probably the best example we've got that is based on actual results is in Germany where legislation has changed the nature of the German market. What we've done to respond to that is put a product into the market whereby the poison is sealed so that it's not open to the elements. And what we've linked to that product is some connectivity so that when the trap is open, signals are sent to both us and the customer to say that the trap has been broken.

What that's enabled us to do is both reduce the number of times we're going out to check the product. It's also helped us because we're ahead of the market, sell more, and we've been able to maintain margins as well with that product in the market.

So it's a specific example, or a specific aspect to it in terms of where we are in the marketplace, but it has helped us to maintain pricing and improve margins due to improved productivity.

So it's difficult to predict, but for the moment, I think our feeling is the innovation should help us both with our customer revenues and with our productivity so it should be positive.

Just building on that. If you think about it, 50% of our costs in the business are people costs. So as Jeremy said, the first opportunity is can we deliver more productivity; can we get more activities completed by the same number of people; we can become more efficient.

The second opportunity is that these are premium services, so what we are making available to food factories, for example, or pharmaceutical companies really is effectively 24/7, 365. I call it ring of steel, if you like. You're getting the perimeter monitored 24/7, and that means if there's any activity, it's being picked up instantly. The message is coming back. Now you can have a conversation with a customer.

That doesn't come for free, that's a premium service. So it's got the two dimensions to it. But honestly, I think you're right to frame the question in the next three to five years because I think we're really just starting on this journey. But I'm confident this is going to be a very good thing for the business.

Great. And a couple more, if I may.

On North America, looking at your margins, is there any structural reason to think that it couldn't reach where the UK is on a mix-adjusted basis?

No. Keeping it really simple.

And then, the last one, if I can.

What --? Do you have an idea of what percentage of your hygiene customers currently have, let's say, three products versus six? How much low-hanging fruit is there to go for?

Yes, that's a really good question.

On average across the entire global estate, if you like, so I'm taking all 46 countries, or whatever we're in, the average is a shade under 3, which actually means we have a vast number of customers who take only one service line. And that's the opportunity, if you like.

So we're focusing on that question in two ways. Number 1, what can we do to up-sell additional service lines to existing customers; and number 2, how can we avoid going down the same track in the future and ending up with lots of customer -- new customers with one service. So we're approaching it in that way, the hunters and farmers split; one going after existing, one going after new.

Thank you very much.

Allen Wells, Exane BNP. Just a couple from me.

Just going back to the M&A area again, could you just talk a little bit about that upside to the M&A target you've put in? Is that split-wise still going to be focused very much on the pest opportunity as it has been over the past couple of years? And also, is North America still going to be the focus there? And maybe is there a volume opportunity, or is it size of these acquisitions; i.e., are you still going to be carrying on with some bolt-on type stuff, or are there some bigger opportunities that are out there that you could be looking at?

That's the first question.

And then secondly, just picking back up on your comments on Steritech and the top-end synergies that you've reached this year, could you put that in the context of where you think the total synergy opportunity could get to on that? Is there potential upside for the total there that you announced back last year?

Thank you.

Thanks, Allen. Yes. I'll cover the first and Jeremy can cover the second.

I think you should essentially expect a similar menu to the one that we've been choosing from in the last couple of years. Predominant focus will be pest control, but we are now bringing hygiene into the program. Back to our four-box matrix; really targeting on growth markets, which definitely means North America is absolutely in scope, but it also means emerging markets as well.

And big versus small. I love lots and lots of small deals because they -- back to this density example, they bolt in very close to gross margin because you don't need someone else's office and phone system and people processing bills.

So if we can get lots and lots of small deals, that's always great; a lot of work but always great. There will be some medium size deals on the slate as well. I wouldn't predict a very large deal, but I think the larger deals is very much opportunistic; depends what's around and what comes along, and we're always ready. If they do come along, we've done our work; we know what we're interested in. But I think it'd be a similar slate to what you saw in 2016, really.

On Steritech, I think in relation to the guidance we've previously given on the profits, I think in relation to those profits, I wouldn't want to take those [out]. We're obviously pleased we're on track with the run rate, but there's a limited amount of synergy you can deliver for one acquisition.

I think where we're at, and it's back to Emily's question really, is what the Steritech deal and the other acquisitions have given us is increased confidence that we're going to get to those naturalized margins, if you like, for the pest control business. We're at 15.9%. We still see plenty of opportunity to build that out. So I think it's really more about increasing confidence that we continue to deliver the acquisitions and deliver the growth there, we can continue to drive that service productivity and density.

And so I think the $50 million on the Steritech stays the same, but it does give us confidence given where we're at that we can continue to drive those margins up.

Joel Spungin, Merrill Lynch. I've just got a couple, first of all just on margins and then some things on cash.

So on the margins in pest, and I suppose also in hygiene, obviously there's a lot of noise in pest with FX and lots of M&A, and so on and so forth. Do you want to hazard a guess as to what the organic EBIT growth was? I'm just trying to get a sense of what the underlying drop-through and operating leverage in the pest control business was when you strip out all the noise from FX and M&A.

Don't look at me.

I'll -- let me come back to you on that, Joel. There's so many moving parts there.

Yes. I'm just trying to get a feel for the extent to which the [Group-based] strategy is delivering.

What I think you can say is when you look at our -- this is a way, a simple way of looking at it, when you look at our businesses that have been less affected by acquisitions, so the UK, Pacific and Asia, we've seen significant margin growth in those businesses in 2016, both in terms of margin improvement and that being driven by pest growth, so I think what you can say is there has been an improvement in organic pest growth. It's harder to call it in North America just because of what's been going on. Equally, pest margins in North America are up by 1.8 percentage points.

So if I was going to hazard a guess, I'd say it would be around 1 percentage point in terms of Asia being at 1.5 percentage points, but both the UK and Pacific improving their pest margins with some dilution from hygiene margins. And with North ,America there's been a change in mix with the Residex piece, but in the straight pest peace, they're at 1.8 percentage points.

So we're probably talking a percentage increase overall without weighting those across the board. So we are definitely seeing that pest margin coming through.

Thanks. And then just a couple of other ones, first of all on the CapEx guidance you've given.

To be clear, that is on an ongoing basis so you're not assuming six months without (multiple speakers).

No. I haven't adjusted any of that guidance for the Haniel JV, so that's assuming a full year. Clearly, there's a relatively high level of CapEx with the workwear business in the Benelux and German businesses, and we'll come back to guiding on that specifically when the deal completes.

So that CapEx would come down assuming a half-year deal. That's right. So all of that guidance was pre-JV.

Right. Okay. So you'll update us later on in the year?

Yes.

And then finally, just on the -- you mentioned the GBP7 million odd, I think it was, of JVs from Japan. Is that in your free cash flow number?

The GBP7 million is in the free cash flow number. That's right.

Right. So that's kind of a one-off benefit to free cash flow (multiple speakers).

Yes. So we had a benefit in 2015 from a legal claim. There's the GBP7 million flowing through in 2016. I think against that in terms of year-on-year movements, I have guided [about] a GBP13 million reduction in interest costs, so that helps us out in 2017 relevant to -- relative to the GBP7 million of dividend in 2016. But you're right. That's a non-recurring dividend [payment].

Okay. I'm just trying to get a feel for what the underlying growth in free cash flow, because relative to the growth in profits, obviously it's a lot lower in 2016 than it was for operating profit growth.

Yes. So you've got a quite a large number of moving parts, one of which is FX. Interest payments were higher and [cash-type] payments were higher. So some of those will level out in 2017. You also have the impact of the JV as well, and you've got the benefit of FX flowing through. So that FX guidance we've made of GBP15 million to GBP20 million should all help cash flow.

Thank you.

Andy Grobler, Credit Suisse. Just a couple, if I may.

Part of the M&A strategy in North America was about building out the density so you could focus on national accounts, and you talked about national accounts growing 55% last year. How big a part of your North American business is national accounts at the moment? Where do you think that could get to over time?

I wish I had a figure in my head for you, Andy. I'm sure we can get you one. I'm just not carrying it round.

Let me work backwards. The North American business -- the North American market is about an $8 billion market. Two-thirds of that is residential and termite. The remaining one-third is commercial. And you're still keeping up with the math, which is more than I am. I'd say about 25% of the commercial would be big ticket or national account. So don't know whether you were doing the math on that.

We grew our national account business very substantially in North America so that the whole footprint, making sure that we're in all the states that we need to be in, being organized for national accounts off the back of Steritech, has all gone really, really well for us.

We appointed some guys out of the Steritech business to run the national account piece for us because they -- we felt one of the reasons we did the deal was we thought they were really good at national account. And that's worked out very well for us.

Separate to North America, we're also seeing progress in international accounts, which is something two/three years ago didn't even exist as a concept. But now, we have quite a number of large chain companies, mainly based in North America, big hotel chains, big food manufacture/production chains, coming to us looking for an international program as well. So that's -- the pipeline on that one alone is GBP50 million/GBP60 million of revenue. We won't land all of that, of course, but I'm trying to get you a more accurate figure, Andy, in terms of the precise size of the commercial big ticket national account sector. I just don't have it in my head.

But at this point, do you feel you're underweight relative to the market?

Oh, we're underweight relative to the market. In terms of our share, our market share of national account is probably about one-half of what it should be; so relative to our share of the market, North America. So that's one of the reasons we've been targeting that area and it's been, I have to say, very successful so far.

And a slightly different topic. As you try and build up the number of products you sell into your various clients, are you seeing some of your competitors go down the same road, particularly with pest control? So FM businesses, for example, looking to sell fairly commoditized pest services and products into their client base maybe at reduced prices, are you seeing much of that across the world?

I'm not saying we're seeing much of it. FM, as an example, went into pest control about 10 years ago, and then one by one they came out of it again, with the notable exception of one company in the UK which is Mitie. But pretty much everyone else in FM has come out of pest control because it's a different business model. Pest control is about expertise and it's about routing people through multiple locations and territories, and FM is typically based about on-site delivery of services.

So I don't really see any great competitive threat. You should never be complacent, but I don't really see any competitive threat from FM. I think there is always a cheaper competitor out there; always, and there always will be. It's the nature of the business. There will always be a local person who will do it for you more cheaply. But we don't mind about that. That's not what we're trying to compete with.

Our view is that what we provide is expert, specialist, high quality, very reliable, and the people that we are trying to sell to are people whose reputation, whose brand, whose business model depends on them having great pest control. In this TripAdvisor era that we all live in, if you have one mistake, if you're running a chain of restaurants, if you have a rat dropping in your pharmaceuticals, this is huge news.

So the fact that there are cheaper competitors out there doesn't worry me. I don't think we'll see the FM guys going into self-delivery again any time soon. And we've got some very good big competitors out there as well. So I think it's a healthy competitive environment.

But I've said many times, I've gone on record that Rentokil is the best pest control business in the world. That's a statement I'm perfectly willing to back up in detail any time.

So I think it's healthy to have competitors and keeps us on our toes, but I'm not overly concerned about a big change in competitive dynamics.

And it is where -- to Emily's question around digital, this is where digital kicks in, because if you're a big commercial customer, we're providing the customers with information, portals into our technicians; we're linking up our technicians with them through the handhelds.

So that digital link to those big commercial customers is very difficult for a smaller player to do. It's actually quite difficult for a national or international player to do. So I think that whole digitalization actually helps us with that relationship and stops the FM and the lower-priced players coming in at that level because we're providing such a broad service.

Thank you.

[Gustav Cook], Jefferies. I just have a quick one on the tax rate.

As your portfolio is getting more concentrated in the US, how should we think about the tax rate in, say, two to three years' time?

A very good question. Trying to predict what's going to happen to tax rates is very difficult going forward. In the US in particular, there's some hypothesis that tax rate may come down, but equally, the levels of disallowances and the way things get treated may change.

All I can say is we're very much on top of all the changing sets of circumstances. We work a very holistic view across all of our different businesses. And I think we've pretty successful over the last five/10 years of managing that tax rate, and particularly managing the cash tax rate so that we're paying the tax we should pay appropriately in the different countries but trying to minimize the level of cash tax from a shareholder point of view.

So very difficult to call what's going to happen. I think actually, the overall hypothesis out there is actually cash tax rates, both in the UK and the US, will come down in the next three to five years, but I wouldn't want to guarantee that. And we'll just obviously -- we'll keep an eye on it and make sure we do what's right given whatever governments decide to do.

Any more? All right. Thank you very much. Appreciate it.