Rentokil Initial PLC (RTO) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you all for joining us this morning.

In a few moments, Jeremy is going to provide you with details of our results for the first half of 2018, looking at our 5 regions where we've again delivered a good overall financial performance, with revenue, profit and cash delivery once more in excess of our medium-term guidance.

I'll then come back to provide an update on the performance of our main businesses of Pest Control, Hygiene, and Protect and Enhance.

I'll also update you on the very good progress that we're making in digital and innovation and the steps that we're taking towards becoming an employer of choice.

And finally, I'll provide a short update on M&A execution, which has, again, been excellent in the first half.

Given that we delivered a very detailed investor seminar just a few weeks ago, I'll cover some of the areas only briefly today, but, of course, Jeremy and I will, obviously, be more than happy to take any questions at the end as usual.

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

We delivered another good overall performance, with revenue from ongoing operations up 14.2% at constant exchange rates.

Acquisitions performed well during the first half, contributing 11.2% to ongoing revenue, while organic revenue grew by 3%.

Organic growth was at the lower end of our medium-term target of between 3% and 4%, and this was due to a combination of factors, particularly the unseasonably cold weather in the U.S. in March and April, and the impact of the hurricane, which devastated our business in Puerto Rico last September.

Jeremy will cover this in further detail shortly, but adjusting for Puerto Rico alone, our organic growth was around the midpoint of our medium-term target at 3.4%, and we would expect organic revenue growth to improve in North America in the second half.

Ongoing operating profit grew by 13.1% in the first half, reflecting good growth in all regions.

In particular, I'm delighted to report that our business in France, after a 3-year period where first half profits declined by over GBP 5 million, has returned now to profitable growth in the first 6 months, and is now well placed to deliver our stated ambition of profitable growth for the year.

Turning now to acquisitions.

M&A execution in the first half was very strong, with 23 acquisitions delivered with annualized revenues of GBP 117.3 million, and with 20 of these acquisitions being in Pest Control.

We concluded 8 pest control acquisitions in North America, with annualized revenues of around $35 million, and we also continued to build scale and density in our emerging markets, with deals in Brazil, in Chile, the Middle East and Costa Rica.

So overall, a good first half, with revenue, profit and cash ahead of our medium-term targets and M&A right on track as well.

With that, I'll now hand over to Jeremy, who will take you through the group financials and the regional performances in more detail.

Thank you, Andy.

As Andy said, I'll now run through the key financial highlights for the first half.

All the numbers I refer to are in constant exchange rates unless I state otherwise.

So as Andy has just mentioned, revenue from ongoing businesses grew by 14.2%, driven by growth from acquisitions of 11.2% and organic revenues of 3%.

Ongoing operating profit before interest for the half was at 13.1%, and adjusted profit before tax was up 0.9%, reflecting the transfer of various hygiene and workwear businesses to our JV with Haniel in June 2017.

On an actual exchange basis, adjusted profit before tax was slightly lower than last year, reflecting a GBP 2.9 million adverse impact of exchange differences in the period.

With an adjusted tax rate in line with 2017, adjusted EPS of 5.25p was in line with the prior year.

Free cash flow was GBP 73 million in the half, with improved movements on working capital and CapEx offsetting a reduction in EBITDA.

And these all reflect the impact in 2018 versus 2017 of the Haniel JV transaction.

Based on our first half performance, we have declared an interim dividend of 1.311p per share, a 15% increase on last year's interim dividend.

The first half of the year represents another period of strong delivery in revenue, profit and cash.

Our full year compound growth level for revenue is 12% per annum, well ahead of our target of 5% to 8%, supported by compound annual organic revenue growth of 3%.

We have been able to leverage the increase in revenue, driving compound annual operating profit growth of 16%, again, well ahead of our target profit growth of around 10%.

And we continued to deliver a strong level of free cash flow, with a good level of cash conversion driving incremental increases in line with growth in operating profit.

Now looking at first half 2018 performance by region.

In North America, ongoing revenue grew by 12.8%, with growth from acquisitions of 10.3% and organic revenue growth of 2.5%.

Operating profit in North America increased by 9.4%, reflecting the impact of revenue growth and acquisitions.

The M&A pipeline has continued to be strong, and we've acquired 8 businesses in the region in the first half, with annualized revenues of around GBP 27 million.

Organic revenue growth in H1 was lower than 5.6% achieved in H1 2017, reflecting a number of factors, including the impact of Hurricane Irma on our Puerto Rico business; a cold start to the year in March and April, causing a late start to the pest season; and strong comparatives in 2017, especially in product sales.

With the Puerto Rico impact lapping in Q4, and less challenging comparables in H2 versus H1, I would expect organic revenue growth to improve in North America in the second half.

In the second half we'll continue to drive our North America plan to deliver revenues of $1.5 billion, net operating margins of 18% by the end of 2020 through improved levels of organic growth, continued execution of our M&A strategy and delivering our Best of Breed program to drive improved operating margins.

In Europe, ongoing revenue was up 12.1%, with organic revenues up 3.3%.

Strong performances in the region from Southern Europe, which benefited from the acquisition of CWS-boco's hygiene business and in Germany.

In Latin America, which is supported out of the Europe region, we continue to make good progress through both acquisitions and strong organic growth, with total revenues up 17.9%.

Profit in the region grew by 10.8%, with France growing profits in H1 and well on track with its plan to return to profitable growth for the full year.

Our Italian business has made good progress in turning the CWS-boco acquisition into a profitable business, but this has, nevertheless, slightly diluted the overall profit margins of the region in the first half.

We've continued to build an M&A pipeline in Europe, with 6 acquisitions completed in H1, 4 in Pest Control and 2 in Hygiene, with combined revenues of around GBP 8.7 million.

In the U.K. and the rest of the world, ongoing revenue in the region increased by 17.1%, with organic revenue growth of 1.7%.

Revenue growth in U.K. and Ireland of 19.3% was driven by the acquisition of Cannon Hygiene and strong performances in both the pest and Hygiene categories, which grew organically by 4.2%, offset by continued weak performance in Property Care.

Growth in the rest of the world of 13.1% was also driven by the Cannon Hygiene acquisition as well as continued strong performance in all of the region subclusters, the Nordics, Caribbean, Africa and MENAT.

Margins were 0.5 percentage points lower at 19.3%, with leverage from revenue growth offset by the diluted impact of the Cannon Hygiene acquisition and reduced profits and margins in the Property Care business.

In Asia, ongoing revenue in the first half was up 23.5%, 6.9% on an organic basis, driven by good growth in Pest and Hygiene.

The integration of our joint venture in India continues to go well, although organic growth was dampened slightly in the half, given the tough comparatives in the prior year.

Profits grew by 25.6%, reflecting the revenue growth.

The margins were slightly up in the prior year, with continued leverage from the revenue growth offset by dilutive impact of the lower-margin PCI acquisition.

And there were 3 small pest control acquisitions in the first half, with annualized revenues of around GBP 1.5 million.

Revenue in the Pacific region increased in the first half by 12.1%, with 9% from acquisitions, including the Cannon Hygiene acquisition and 3.1% organic growth.

Profit growth of 5.6% and margin decline of 1.2 percentage points reflected the dilutive impact of the Cannon Hygiene acquisition.

And in addition to the Cannon Hygiene, there were 3 small pest control acquisitions in the period.

Turning now to cash flow.

Operating cash flow in the first half of GBP 105 million was GBP 11 million higher than the prior year.

EBITDA was GBP 35 million lower, reflecting the impact of the transferred businesses to the Haniel JV.

But this was more than offset by reduced working capital outflows and lower capital expenditure, again reflecting the impact of the Haniel JV.

Continuing free cash flow in the first half of GBP 73 million was GBP 5 million higher than last year, with the improvement in operating cash flow slightly offset by higher interest and tax outflows.

Spend on acquisitions amounted to GBP 164.9 million, consistent with our guidance of -- for spend for the year of between GBP 200 million and GBP 250 million.

GBP 50.2 million of dividends were paid in the first half, a 15.4% increase on the prior year.

Sterling has again weakened against the euro and the U.S. dollar in the first half of the year, resulting in an increase in net debt of around GBP 21 million in relation to currency translation and other differences.

And taking all the above into account, our net debt stood at GBP 1.09 billion on the June 30, 2018, an increase of GBP 163 million during the half and an increase of GBP 65 million compared to the June 30, 2017.

We continue to maintain a strong balance sheet, with a net debt-to-EBITDA level of 2.4x, and with Standard & Poor's recently reaffirming our BBB credit rating.

As well as a strong balance sheet, we have plenty of funding capacity, with around GBP 250 million of centrally held funds and undrawn committed facilities.

And we are currently working with our banking group to increase our main revolving credit facility from GBP 360 million to GBP 600 million to provide more flexibility around our 2019 bond refinancing.

As well as a strong balance sheet from a liquidity perspective, we also have a very well-funded pension scheme.

The scheme is estimated to be close to a level of funding at which it would be possible to buy out the scheme without any cash being required from the company.

So before I hand over to Andy, just a couple of points on guidance for the full year.

With the exception of FX, all of our guidance that we provided at prelims remains the same as when I last spoke to you.

In terms of FX, as I noted earlier, sterling has weakened against the euro and the U.S. dollar in the first half of the year, and consequently, based on today's rates, we would estimate an overall adverse impact on profit in the range of GBP 5 million to GBP 10 million compared with my previous guidance of GBP 10 million to GBP 15 million.

This potential GBP 5 million benefit is expected to be largely offset by increased fuel costs, which were up around GBP 2 million in the first half.

I'd now like to hand you back to Andy.

Thank you, Jeremy.

So let me start with a summary of our ongoing businesses in the first half.

As you see on the left there, Pest Control, which accounts for 63% of revenues and 68% of profits, delivered a good overall performance, with ongoing revenues increasing by 13%, of which organic growth was 4%, or 4.7% adjusting for Puerto Rico.

Our Hygiene business, which accounts for 22% of group revenues and 23% of profits, delivered an increase in ongoing revenues of 30.8%, reflecting both the CWS Italy and the Cannon Hygiene acquisitions, with organic growth of 2.1%.

Finally, as you can see on the right there, our Protect and Enhance businesses, that's France Workwear, Ambius Plants and Property Care, which together account for 15% of group revenues and 9% of profits, they maintained their levels of revenues, but increased profits by almost 10%.

I'll now cover each of our 3 business areas in a little more detail.

So starting with Pest Control, let me first remind you of the bigger picture and just pick out 3 things that we said at the recent investor seminar.

Firstly, that the pest industry is a very strong and noncyclical market.

It's worth about $18 billion per annum, and it's expected to grow at a compound growth rate of around about 5% through to 2023.

Secondly, the Vector Control market is worth an additional GBP 3.1 billion each year, particularly in Asia and in Latin America, where mosquito-borne diseases, like malaria and dengue fever, pose a significant threat to human health; and where we have an opportunity to use our expertise in those countries, such as Brazil and parts of Africa, where public sector contracts are now starting to open up to the private sector.

And finally, that Rentokil is still very strongly placed as the global leader in this large and growing market where our core strengths in the higher-growth, higher-margin commercial sector and where we're increasingly differentiating our service through our innovations in our digital capability.

So all in all, Pest Control is a very compelling growth opportunity.

In North America, we operate in a growing market worth approximately GBP 9 billion per annum and with a wide range of pest pressures.

This is the world's largest pest control market, and our plan is to build local scale and density across our 300 city branches.

The opportunity to create substantial shareholder value in North America is significant.

And whilst there were a number of external factors which influenced organic performance in the first half, we remain firmly committed to our plan to deliver annualized revenues of $1.5 billion, with margins around 18% by the end of 2020.

As you can see overall, we continue to make solid progress with strong revenues from 2017 acquisitions.

We've added around $35 million of annualized revenues from acquisitions in the first 6 months, the Best of Breed program is going well, and overall, we're on track to meet our North American plan.

And uniquely to Rentokil, of course, we're also building scale across the emerging markets, where Rentokil is strongly positioned with a growing pest control business across Asia, Latin America, Africa and the Middle East.

Our position is unmatched by any competitor, and these markets will be a major platform for the medium-term growth of the company.

In Asia, where we now have over 7,000 technicians across 12 countries, we continue to make good progress, with ongoing revenues increasing by 23.5%, of which 7% approximately was organic growth.

In particular, in Asia, in India, where we became the leading pest control company in 2017 through the joint venture with PCI, revenues were up over 50%, reflecting this acquisition.

We've put in place a strong leadership team, and they're making very good progress in both integrating and modernizing the business.

Performance in Latin America remained strong, with ongoing revenue growth of 17.9%, and we continue to undertake highly targeted acquisitions to build our city density, such as the recent ISS deal, which will build our density in São Paulo.

While also in Brazil, we are continuing to prepare for the expected release of public sector vector control tenders, and I'll update you on this at the prelims.

Finally, we also took our first steps into Costa Rica, adding San Jose to the list of cities from which we're operating across the LatAm region.

So let me now update you on our innovation and our digital programs before I move on to Hygiene.

Over the last 6 months, we've made very good progress with our innovations, which are an important way in which we differentiate our core service lines, we target emerging pest threats, we drive our organic revenue growth.

And the new Lumnia range of insect light traps, for instance, have revolutionized this sector by introducing LED lighting rather than the traditional blue lamp fluorescent tubes.

So not only are these highly effective, but they also reduce energy consumption by up to 60%.

Lumnia performed very strongly in the first half, with over 17,000 units shipped, and we're now extending this range with the addition of the Ultimate unit for industrial customers and the small Compact unit for front-of-house uses.

And just to reinforce why innovation is so important to us, our U.K. Pest Control business, which had organic growth in the first half of 4.4%, that business saw innovations account for around 1 in 3 of all pest control jobs, with sales of innovations up by almost 50% year-on-year.

And finally, we were honored to receive the Queen's Award for Enterprise for Innovation in April, for our work in developing our radar rodent control unit and our Internet of Things pest control solution.

And that follows the Queen's Award for international trade in 2017.

So it's some well-deserved recognition for our innovation team.

In the first half, we also saw an increasing take-up of our digital services, driving deeper customer relationships and further differentiation.

The myRentokil portal, which allows customers to monitor their estate and our service performance and, of course, allows us to communicate with them effectively and to directly market our range of services, that has now reached 2/3 of our global commercial customer base, having added a further 63,000 customers in the first half.

Over 750,000 locations and 23 million products are now being tracked, and we've recorded around 1.5 million separate incidents of pest activity on myRentokil in the last 6 months.

Our goal is for all of our commercial customers to be using myRentokil, and over the next few months, we'll exceed the 80% mark.

Our Internet of Things connected devices, which are now in 10 countries and over 3,500 customer sites, are continuing to perform well, and we're now set to extend our range with our new multi-catch rodent units to be launched in the second half and also our unique bedbug monitor, which is now moving into a large customer trial this September.

Globally, there are estimated to be around 17.5 million hotel rooms and 75% of pest management professionals in the U.S. report treating bedbugs in hotel rooms each year.

So clearly, this is a large and it's an important market.

You only have to search bedbugs on Google to see the numerous reports of people being bitten and the reputational damage that it can cause.

But frankly, this is an area where there's been a lack of innovation across the industry for many years.

We've conducted extensive research into the biology of bedbugs to develop this new bedbug monitor.

It's a connected monitoring device which gives customers an early warning of a potential infestation.

Using a patented smart surface and our proprietary PestConnect system, the small unit is applied to the typical harborages of bedbugs where, potentially, they could congregate, and it will trigger a digital alert to Rentokil, allowing us to step in and take action before a major infestation takes hold.

And this is now set to go live in the U.S.A., with a 1,000-unit pilot across 200 hotel rooms over the next 3 months.

Just as important is the new digital services on the new digital tools that we are deploying to drive service and sales quality and productivity.

In the first half, we've made excellent progress, deploying ServiceTrak, that's our field service app, into 14 countries, which was then used in 2.3 million service visits.

And we're now adding ServiceTrak to some of the new acquisitions like Cannon in Portugal and the Pacific.

We've developed a new version of the app for our Ambius business, and we've been able to retire over 4,000 of the old-fashioned and expensive PDAs, where our technicians are now instead using their smartphones to undertake the tasks that they used to perform on PDAs, as well as saving around GBP 1,000 per PDA.

Not only is ServiceTrak adding to our quality, efficiency and productivity, but service colleagues also submitted 35,000 sales leads through to our sales team by using the app over the last 6 months.

So great progress in innovation and across our digital agenda.

So let me turn now to Pest Control's sister business, washroom hygiene.

Our recipe for hygiene in some respects, I guess, is a pretty simple one.

It's simple to describe at least, but the reality is it requires a very, very high level of operational execution.

It starts by having very highly trained and strongly motivated colleagues, equipping them with the best product ranges and a wide choice of washroom products, with those colleagues then providing a great customer service, and we target pretty much on-time info every day for every customer.

This in turn builds our brand and our reputation in each market as a trusted and reliable service provider.

We then take our digital expertise, leverage on what we've built in pest to drive differentiation and productivity.

The final ingredient there is building density, customer and product density, which is the key to delivering strong margins.

And that's through a combination of bundled product offerings through smarter selling, with our commissions now being linked to gross margins rather than to revenues, and with highly targeted city-based M&A to infill local density.

So that's our plan for hygiene.

How did we do in the first half?

Well, we made very good progress, ongoing revenues increasing by over 30%, of which organic revenues grew by 2.1%, broadly in line with GDP growth, but with profits up by almost 20%.

We're also continuing to make good progress against our plans to improve the recent lower-margin hygiene acquisitions.

In Italy, the integration of the CWS hygiene business is going well, where we've taken a loss-making business back into profitability.

And in June, we took the full board to Milan to brief them on this transaction, and they came away highly impressed by the quality of this new addition to the family.

The integration of 8 Cannon hygiene businesses in Europe, South Africa, Asia and Pacific also progressing well, although, as you know, the U.K. Cannon Hygiene acquisition remains subject to review by the Competition & Markets Authority.

We presented to the CMA panel recently, and I remain firmly of the view that the market definition used by the EU competition authorities after they thoroughly investigated our agreement with Haniel last year does define the market correctly as, indeed, the U.K. is a highly competitive marketplace.

We hope to have the final decision on this by the end of the year.

So turning now to our third business cluster, that's Protect and Enhance.

We've got the 3 main businesses in Protect and Enhance: Ambius, it's our Plants business; U.K. Property Care; and France Workwear.

These businesses typically operate in tougher market conditions, and they've got weaker growth characteristics than our Pest Control and Hygiene businesses.

Together, they account for about 9% of group profit.

I'm delighted to report that in the first 6 months both Ambius, which has operations across 15 of our markets; and our operations in France, including our workwear business, returned to profitable growth.

In Ambius, in the period between 2016 and 2017, first half profits declined from around GBP 5 million to around GBP 3.2 million.

So it really is very encouraging to see our Plants business delivering profit growth of 7.5% in the first 6 months of 2018 and that's being driven by focus on higher-margin services and the quality of our offering.

As one example earlier this year, Ambius experts from America and Europe teamed up to install a massive Central Park replica on the world's largest cruise liner, planting over 10,000 shrubs, 53 trees on board the Symphony of the Seas ocean liner.

And just a few days ago, Ambius was awarded a record-breaking 27 awards out of a total of 61 at the North American International Plantscape Awards.

Our U.K. Property Care business, which has unrivaled expertise in woodworm and damp-proofing services, however, remains significantly impacted by the slowdown in the U.K. property market.

Whilst this is only a small business, with first half revenues of GBP 11.3 million, customer inquiries and ongoing revenues both declined by more than 20% year-on-year.

And this, in fact, pulled down the organic growth rate of the U.K. ROW region by 2 percentage points and, indeed, the group organic rate by 0.3%.

We've got a good business improvement plan for the second half based on growing better revenues, by leveraging our digital expertise across from pest control and, of course, with a strong focus on cost and on efficiency measures.

I'll turn now to France.

As you can see on the chart there, in the period between 2015 and 2017, first half profits in our business in France declined by over GBP 5 million.

So I'm really very pleased to report that it has returned to profitable growth in the first 6 months of 2018, delivering a 4.9% increase in profits.

We've got an excellent management team in place.

We've got a clear plan, including a strong Employer of Choice agenda, a focus on service and product quality, on M&A, which obviously included the disposal last year of 8 textile laundries and, of course, on cost optimization.

Whilst there is still a lot more to be done in France, the team has made great progress to date, and we are well placed to achieve our goal of full year profitable growth by the end of 2018.

So finally then I'd like to briefly touch on 2 areas of great importance as enablers of sustainable profitable growth.

Firstly, that's our people agenda, and then secondly, M&A.

We identified the global war for talent as both an issue and an opportunity back in 2017, and we continue to focus on differentiating our company through the quality of our workplace.

In the first 6 months, we made good progress on this agenda, including agreeing upon short-term colleague retention targets with all of our leaders across the business, by holding regional workshops with local managers, by creating a global careers website to bring in higher-quality new recruits, and by launching our own internal talent development program to improve the quality of our line managers.

We're also now tracking a series of standard employer of choice KPIs right across the business, at group, at region, at country and at branch level on a monthly basis.

Two of these KPIs are for colleague retention in the 0- to 6-month and the 6- to 12-month periods, critical periods for our business.

And I'm pleased to say that we've started to see an encouraging improvement in the second of these with all of our regions now above the 80% retention mark in the 6- to 12-month category.

Turning now to M&A.

The execution of our M&A strategy continues to be of the highest standard.

In the first 6 months, we acquired 23 businesses in our growth and emerging markets, with combined annualized revenues of GBP 117.3 million.

Let me just pick out 3 things.

Firstly, as you know, we monitor the integration and the performance of our acquired businesses very closely to ensure that they're continuing to meet our financial hurdles.

And as you can see, with 54 acquisitions completed between October '15 and March '17, the M&A program does, indeed, continue to meet our expectations and to deliver in line with the targeted returns.

Secondly, as Jeremy has just mentioned and with the help of the illustration we've shown you before on the right-hand side, acquisitions do tend to be dilutive to begin with, as we typically are acquiring businesses that are operating on lower margins than we are.

And then you can see that effect in the first half, with the impact of Cannon Hygiene and the CWS Italy deals.

However, typically, year 2 margins will increase with the ongoing delivery of targeted synergies.

And finally, as I mentioned earlier, we're continuing to build that pipeline of acquisitions, and it is a strong pipeline.

Our target spend for 2018 remains at between GBP 200 million and GBP 250 million.

This is our right way strategy and action and, obviously, we're going to continue to execute this aggressively in the second half and into next year.

So in summary, in the first 6 months, we've delivered a good overall performance.

We're making very good progress in ongoing revenue, profit and cash, exceeding our medium-term targets and continuing to focus on building scale and on building density.

We're continuing to execute the M&A agenda at pace, with 23 acquisitions in the first 6 months, and we've got an excellent pipeline of acquisitions ahead of us.

We're building our lead in digital and innovation, and with several innovation digital launches set for later on this year and achieving the return to profitable growth for our business in France, leaving it now very well placed to achieve our goal of full year profitable growth by the end of this year.

All in all, it's been a good first half, and our guidance for the full year is unchanged.

Finally then before we take any questions, just a very brief word about a new charitable partnership that Rentokil Initial has announced today.

Cool Earth is a leading carbon mitigation organization, which in countries like Papua New Guinea creates sustainable livelihood so that the local communities no longer need to sell their rainforest to loggers.

Together, we will save around about a 1,000 acres of rainforest, and by preventing that deforestation, we will mitigate the equivalent of Rentokil Initial's entire global carbon footprint.

This is a highly engaging initiative for our colleagues and, indeed, for many of our customers around the world.

And it's a great fit with our mission to protect people and enhance lives.

And just in case you were concerned, this is not a multimillion dollar investment, and you'll be even happier to hear, I'm sure, that we're funding this program entirely from unclaimed shareholder dividends.

And so with that, Jeremy and I will now be very happy to take any questions.

This is Simona Sarli from Merrill Lynch.

I have a couple of questions, starting from North America.

In your press release, you indicated that organic growth in May improved to 4.4%.

Is this organic growth rate indicative and sustainable as we head into the second half of the year?

First question.

Second one, how much of the decline of 30 basis points in North America was from M&A?

And how much from less operating leverage benefits and higher fuel costs?

Then moving to Puerto Rico and the CDC contract, is there a chance that you can probably quantify how much was the revenue contribution from Puerto Rico and discounts?

I'll take the first one, Jeremy maybe you can take two and three.

I do understand the focus on short-term periods of organic growth.

We're just as focused on it internally.

But what we're trying to do is to execute the strategy for the medium term.

So as we look at it, we see the market in North America is just as strong as it's always been, our business in North America is just as strong as it's been.

We've highlighted 3 factors which have caused absolute and relatively weaker organic, I would call those factors out.

So we never make predictions about what's going to happen and what is normal, but we have said that the North America market grows at somewhere in the 4.5%, 5% mark.

We don't really seeing any change to that, and external studies would tend to support that.

So if I sat here this time last year, I wouldn't have known that there was a hurricane that was going to wipe out our Puerto Rican business, so I was a little bit leery about making predictions about what's going to happen in the next 6 months.

But all I can say is, we do expect organics to improve.

We've shown that absent these factors, that as you've pointed out, they're about 4.5%.

I guess, we'll see where we get to.

But I'm reluctant to give you a figure, but certainly, we don't see any structural systematic reason for calling out anything different about organics.

And last year, we grew organically in the states, from memory, above 5%.

The year before, we grew somewhere between 4% and 5%.

And I guess, what I'm saying is, over the medium term, we don't see any change to that shape.

Exactly what it will be in H2, I'll let you know in 6 months.

On the margin side, fuel costs in North America were about $1 million higher on a like-for-like basis in the first half.

It's difficult to disseminate (sic) [discern] what the different drivers were.

We did about GBP 100 million of acquisitions in the U.S. in 2017 and a further 27 in 2018, and they will dilute that, particularly in 2017 is higher than our run rate.

On Puerto Rico alone, we'd estimate that the reduction in revenue impacted margins by about 60 basis points, so they would have been higher.

And with a similar level of organic flow-through to the prior year, there would have been a significant uplift in margins.

We talked about it at the Capital Investment Day.

There's 3 key elements to margin delivery, there's the organic growth.

It's the synergies from the acquisitions.

And the Best of the Breed -- Best of Breed is well on track.

The acquisitions in the short term are having a negative impact and the organic growth wasn't where it was in the prior year.

So that's had a drag impact.

And when you look at our [patterns] in our North American business overall, we are on track to get to the 18%, but clearly in the first half, the impacts of the acquisitions last year on the organics have subdued that just in the first half.

And then in terms of Puerto Rico, it's hard to split the -- and I really wouldn't want to, for confidentiality, split the CDC.

What we can say is that Puerto Rico business is about GBP 4 million off in the first half.

That's the 40 basis points on organic growth, and a reasonable chunk of that is the CDC contract.

The CDC contract came to an end at the same time as the hurricane.

So what was hurricane and what was contract, the businesses wasn't just a weather-related issue, the whole country was devastated.

The good news is that's coming back to -- it's coming back Puerto Rico.

The 4.4% in May and June was excluding Puerto Rico, as we've said in the announcement, that lapse in Q4.

So I think that's a better indication for us as we get towards the back end of the year as Puerto Rico rebuilds and we lap that impact.

So clearly, this will support that in terms of comparatives.

If I may, just one last one.

It's on the bond refinancing that you mentioned for September 2019.

What are your current assumptions in terms of interest rate increase from the refinancing and, potentially, the impact in pounds -- millions?

Sure.

Well, the bond -- I'm looking at [Ben] -- so I think the bond -- that the bond we're refinancing is at about 3.5%.

It's difficult to crystal ball what interest rates will be in a year's time when we refinance.

The bond we did in November 2017 we refinanced at 1%.

If you look at the yield curve at the moment, that the yield curve is higher than that, and I don't see interest rates at the moment globally are increasing, [if] not in euros.

My estimate is we'll be refinancing somewhere at the 1.6% type of level.

So there should be an interest rate upside, Simona, but that's really for 2020.

So we'll obviously be able to give a bit more guidance on that when we get to the prelims.

But because we've been refinancing euros into euros, I would like to think there'll be a refinancing benefit if we get into 2020 from [that].

But we'll give you more detail when we get to February.

Erik Karlsson from Industrial Equity Partners.

The first half -- on acquisitions, the first half was above the full year trend if we double it.

And I do appreciate the acquisitions are lumpy, but nevertheless, you do quite a lot of deals.

Any particular reason why the second half would slow down on the first half?

I think you've answered your own question (inaudible) Erik.

I mean, it is lumpy.

I mean, in terms of what visibility do we have, we have really good visibility of the next 90 days and pretty good visibility of the 90 days following that.

If we were to execute on everything that's in our pipeline, we would spend over the GBP 250 million.

But it would be very unusual for us to execute on everything.

Deals fall apart because you don't like what you find in due diligence, you lose in a competitive auction, all manner of reasons, seller changes their minds.

We would, typically, only be executing probably 50% of what we can see in the pipeline.

So that's why it makes it quite difficult to really give you any stronger guidance.

I wouldn't -- I certainly wouldn't describe it as a slowdown.

The pipeline is really very good.

But it's a function of how many of those deals are we really going to close.

There's one large deal in the first half, which is the Cannon deal.

And if you exclude that one, the run rate is quite similar.

I don't want to get into specifics of how much we paid for Cannon.

But if you were to exclude Cannon out of it, to Andrew's point around the lumpiness, it's a quite similar profile half 1 to half 2, so it's not (inaudible).

Andrew Grobler from Crédit Suisse.

Just 2, if I may.

Firstly, on wage growth.

What are you seeing in your major markets?

And how are you dealing with that in terms of passing any incremental wage growth through in price increases?

And then secondly, on North American pest, again, there's a bit of a change going on with some of your competitors, ServiceMaster and Terminix being spun out.

Do you think that changes the potential M&A dynamic within the market or has any major implications for you or for the broader market in the States?

So wage growth, we tend to have a number of factors going on globally, FX differences, fuel price differences what we've called out, movements in supply cost between the countries.

Wage growth is an aspect, and we do see that in some hot spots.

As much of as issue is access to employment and high employment and I know the 2 go together.

But the kind of North American wage growth that is being called out in Q3, Q4 in some markets hasn't really impacted the business to [a certain] extent.

The bigger challenge for us is there are some cities, your New Yorks and your San Franciscos, where just you've got very high employment, but it is the same in Sydney, it's the same in Oslo and even in London, to some extent.

And our challenge, and this is why the Employer of Choice is so important, is making sure we can retain our people, we're investing in them in terms of training, and we're very clear on what our variable remuneration is so that we remain an attractive employer.

So wage inflation, I'd say, isn't the big issue, as we've called out probably fuel inflation has been the bigger impact in the first half than wage inflation.

We will look to cover those issues over time with price.

Fuel is a bit harder because it's a bit volatile, so there tends to be a bit of a lag.

But what we look to do as part of the planning cycle with each of our 70 countries is to say, look at your wage inflation, look at your cost inflation and look to cover that with price inflation.

No more, no less.

But that's the way we tend to cover it over time, and we tend to have in our core pest and hygiene contracts API opportunities factored into those agreements.

So that's the way we'll do it.

We'll get into the planning cycle.

So it's looking into 2019, making sure we cover our cost inflation with price inflation.

Just to add to that.

There's one sort of subset of that where I think we see issues, and there are some real employment hotspots around the world, specific cities where we see a bigger challenge in terms of wage inflation or, to be honest, in terms of the availability of people.

And this is not a Rentokil or even a pest control-specific comment, it's a generalized comment.

So in the Bay Area or San Francisco, Sydney, London, there are some real hot spots around the world where it's increasingly a challenge to find good quality available resources.

And again, as Jeremy said, is one of the reasons we've focused on this Employer of Choice is that it's so important to our business.

So as a general rule, entirely agree with my esteemed colleague.

Specifically, there are 1 or 2 or maybe half a dozen cities around the world where the challenge is more significant.

On your second question, look, I don't really think what's going on at ServiceMaster-Terminix is going to have a profound impact on the M&A landscape.

And the honest truth is only one company can buy what's available in each case.

And if there's more than 1 turn up for an auction, there's going to be competition.

So we've already got healthy competition for those assets.

Anticimex are keen to buy and are buying in North America.

Rollins has long been an acquirer of pest control businesses in the states.

Some of the regionals are acquiring.

Terminix has been acquiring for a long time.

So I don't really think it's going to make much of a difference.

Our view is we try to be the acquirer of choice.

We try to be the company that people would like to be acquired by.

We are patient.

We invest in long-term relationships with the pest control businesses in the States.

And we try to really get the ones that we really, really want, and tend to be a little bit less worried about the ones that we don't want.

So at the moment, we are getting, I would say, our fair share, if I can put it that way.

We're not too concerned about that.

It's -- we'd like there to be no competition for us as such, but the reality is as long as there's someone else out there bidding against you, you've got a competitive situation.

So I don't really see that changing.

And do you think now that effectively a pure-play pest control that, that might or could lead to larger-scale consolidation?

I don't know.

It's a bit too theoretical for me.

I guess, we're going to -- anything is possible.

I joined Rentokil over 10 years ago.

When I turned up, what everyone was talking about was consolidation in the workwear industry.

And that took a decade before that actually happened.

Is it possible we see larger scale consolidation in the pest industry?

It's possible.

Would I predict it?

No, not at this stage.

James Winckler from Jefferies.

Just wondering if you're able to quantify the growth in the products division within NA for the first half if that's possible.

And as well, if you're willing or able to quantify the above-the-line costs associated with the Best in Breed program that negatively impacted the margins in the first half in North America as well, because those are expected to fade into second half of 2019, like you said.

I haven't got a separate products.

Products, I think, did 15% in Q2 last year, and pest growth overall in Q2 last year was 7.5%.

So products is quite a big part of that change in Pest Control.

Pest Control did 5.6% in Q1, 7.5% in Q2.

And the predominant driver of that Q2 versus Q1 last year was the products piece, which gives you a feel for what was driving the comps and, to some extent, that's driven that phasing between Q1 and Q2 change.

But I think we'll look at the specific piece on products.

In terms of Best of Breed, I think we've got the restructuring costs in the [R&S] and a substantial part of those restructuring costs are in North America.

And I think the Best of Breed program in terms of our -- it's really around our replatforming that spend, and I would expect that spend to continue into 2019 as we finish.

But as you say, that should then start to tail off once we're through that.

But that program is still ongoing as we bring everybody onto the same IT platform.

So there'll be a bit of let off in 2019.

But we won't be through the program until 2019.

Matija Gergolet from Goldman Sachs.

Three questions from my side, starting with Latin America, especially with Brazil.

So you mentioned in the past and also today there are now big opportunities from the outsourcing of the vector control programs.

Can you give us a bit more color if you see any tangible contract that's coming up for outsourcing in Brazil, say, over the next 6 to 12 months where you are, say, participating?

Secondly, on the U.S. bedbug opportunity.

Now you illustrated there was the opportunity.

Can you give us maybe a bit of, say, I don't know, if you have any targets that you are willing to disclose about how much it could add to your organic growth next year or in 2 years' time or a revenue opportunity that you have in mind on an annualized basis?

And then lastly, just on an accounting basis, just -- so Cannon U.K., so Cannon is already in the numbers of the U.K. business, no?

Just if you can clarify that.

And perhaps also, say, if the competition authority gives you a hard time, what could you do in that case?

I'll pick up the accounting one, and the answer is yes.

Competition authority has already given us a hard time.

Let me try and pick up the other 2 and then you can address that.

I'll come back on competition.

Latin America, the opportunity in Brazil, specifically on the outsourcing the vector control, too early to say we are expecting to get the first revenues on that in 2019.

I think it will be small to start with.

And what we've been doing is building our capability in terms of people, building the relationships.

We've bought a couple of companies that bring us some expertise in Brazil.

We've hired some real expert people.

And our plan is to be ready internally in Rentokil by the end of the year to have the resources in place that we need.

We then have to be successful at, one-by-one, convincing municipalities that outsourcing to Rentokil is a better plan than continuing to do it themselves.

So that's really the crystal ball gazing, but we don't know.

But my team are very confident that we will win the first contracts in 2019.

But equally -- the very next question they get from the chief executive is how much can I put you down for in 2019 and then they get a little bit less confident.

So it's really difficult to say.

The reason we call it out is this is a big market.

It's really got no focus at the moment from the conventional pest controllers.

We're also working with at least 1 country in Africa for large-scale vector control, which, again, we've done large contracts in Africa before, and those with long memories will know that they don't always work out as planned.

So we've been a little bit cautious about that.

But I do think the opportunity's there, it's real, it's tangible.

We are making progress.

And I think in 6 months' time, ask me again, can I give you a bit more color, and I'll attempt to.

But it is a little bit uncertain at this point in time.

You'll probably be equally disappointed with my answer then on the second question in terms of how much could the bedbug monitor actually add to organic growth in America.

I've got -- my son is staying in Vietnam at the moment.

He sent me a picture online this morning.

He's just covered in bedbugs in Vietnam.

So I'm going to have to send the boys around in Vietnam.

The honest answer is, we are in pilot phase with this device.

What I can tell you is, if it works commercially in the field -- it works brilliantly in the lab.

It absolutely nails it in the lab.

We have to do this process.

Now is it going to work in live hotel rooms?

Is it going to give us that level of control, that ability to be proactive?

If it does, there is nothing else like this on the market, absolutely nothing at all.

So we would expect this to be something that hotel chains, that other places that have large number of beds in are really going to want to take a good hard look at because the cost of dealing with an infestation in a single bedroom is significant.

But if you've got bedbugs in 1 bedroom, you've probably got them in that one, that one, that one.

So -- and it'll take the bedroom offline for somewhere between 1 day and 3 days.

That's revenue.

That's serious impact to a customer.

So give us time, I would say.

Let us prove out that this works in the field.

Let us prove out that customers see the benefit of early warning of the problem.

And if all of that is proven out in the next 6 months, then I think we should be able to be a bit more confident about, okay, that's all very interesting, but do the customers want to buy it.

And that's what we don't have the data on yet.

So -- but it's -- it is very -- it's a very, very good product, and the science works.

The trial will tell us whether it works in the field.

Cannon U.K., you have the numbers...

They're wrapped up into the piece.

We're reporting them separately within the group, and we're not trying to separate them too much out while we're under the current review with the same (inaudible) they are.

Both the revenue and the profits are included within the U.K. segment within the document.

The second part of the question is, what would you do if the competition authorities give you a hard time?

As I said in my remarks, we are strongly of the view that this is a highly competitive U.K. marketplace.

And I would challenge anyone in the room, the next time they use a public washroom, just have a little look around and then the next time and then the next time and then the next time, and you will see a vast array of competition in the U.K. market.

I guess, I'll say, let's see where we get to.

We think that the arguments are very strong.

The competition authorities are doing a professional job at looking at the marketplace.

We're into Phase 2, which is a much, much more detailed analytical econometric review of the U.K. marketplace.

So I would be quietly optimistic that we will get to the right place.

But let us see and if we land in a different place, then we'll pivot on that later in the year.

But my expectation is we should come out in the right place.

On the products question, the organics are 1.6% in the second quarter and 2% for the half, so (inaudible).

Chris Bamberry.

Could you please remind me of the percentage of your costs which relate to fuel and what your hedging policy is?

And secondly, would it be possible to get an estimate of the impacts of the North American, whether on seasonality or the overall group?

Sorry, second question?

Impact of the U.S. whether on the group organic growth.

If you could give a rough estimate, I know it's not an exact science but that sort of thing roughly would be helpful.

So the fuel costs in the group are around GBP 50 million, largely petrol costs, we don't tend to hedge.

There are so many issues going on, it's a bit linked to Andy's question really around exchange rates and fuel and other commodity costs.

What we tend to do is look to cover increases and decreases through pricing year-on-year.

But where there's some volatility, that tends to be more challenging.

So as those fuel prices go up, we'll look to put API into -- as we go into second half and into 2019.

But anybody who buys petrol regularly will have seen that the pump prices in the U.K. probably have gone from GBP 115 to about GBP 130, GBP 135.

So those short-term swings, there's not a lot you can do about it until you get to the next pricing cycle.

I just want to get my head around weather impact.

I guess, the way I'd look at our first half numbers, there's about GBP 1 billion of revenue, which is our base.

So if you look at the U.K. revenues -- sorry, the U.S. revenues overall, which are about 500 million of that base, every 1% of the U.S. has about 0.5% impact on overall numbers.

So you've then got a number of things going on in the U.S. going from about 5.5% last year to 2.5% this year.

That 3% reduction has impacted the organics across the group by about 1.5%, of which, the sizable chunk of that is down to weather and Puerto Rico.

So that gives you a kind of rule of thumb as to what the overall quarter-on-quarter, and then there's some products in there as well.

So it's probably 1/3, 1/3, 1/3.

Allen Wells from Exane.

Two very quick ones.

Just on the weather side, obviously, you talked a lot about the headwind, it's been a lot warmer in June and what we've seen of July so far.

But I was just wondering what you see on that front?

Obviously, conscious of the fact that sometimes that very cold weather can deplete pest populations, and you don't get the recovery even when the warm weather -- what have you seen there?

And then maybe just secondly, on the U.K. Property Care business.

Obviously, it feels as though that's been a bit of a headwind for a while.

Can you just remind us how the comps move first half into second half?

And how close are we maybe to seeing the trough in concerns for that business?

Yes, I'll attempt the first question, Allen, and Jeremy, you can cover the second one.

Yes, look, I think, we feel like retailers sometimes, where it's too wet, it's too cold, it's too hot, it's too dry.

Honestly, I think we've seen in some of our markets, say, in the U.K., as we've all enjoyed the summer that we've enjoyed, we're seeing a significant uptick in terms of inquiries for insects, for flying insects, for ants, for wasps, and also for rodents.

I think in the U.K., inquiries were up about 50% for insects, about 20% for rodents.

How much of that is correlated to the hot weather?

Frankly, nobody really knows, and it'd be impossible to prove, but certainly, hot -- long hot weather shortens the breeding cycle of insects.

So you would expect to see more of that.

I would say over Stateside, what you see is that the climate has just returned to a normal North America climate.

You have hot, sweaty summers in -- down South, and you have hot, drier summers in West Coast.

I think the normal conditions are in place in the States.

So I wouldn't expect to see any great correlation between normal hot weather summer patterns in America.

But over here in the short term, we have seen some increase in the level of inquiries.

On the Property Care front, it's quite cyclical and it's linked to the U.K. economy.

So the first issue we had was with the Brexit bout.

We then saw another downturn following the election last year.

And the uncertainty that caused.

You'd like to think that as we head into the back end of 2018 and into 2019 that will level out.

But I think part of it depends on the type of Brexit we end up with and the level of economic uncertainty.

So if you -- if we call [it a hack in the] house market leveling out and people starting to move again, the prognosis would be good and you hope, actually, not only do we lack comparatives, you end up with the inverse.

But if there's continued uncertainty in the U.K. market, then I think it's anybody's guess as to when that comes around.

We're certainly planning on trying to improve our rate of inquiry hits, so that we're doing the best we can.

We're managing the cost base to limit the impact, but it really is very dependent on how the U.K. housing market -- particularly the secondary housing market moves over the next 12 months.

Our internal plan, Allen, calls for an improvement in revenue performance in Q3 and Q4.

Still negative, but at a lower rate of decline, and it calls for it moving back into positive into -- I can't remember whether it's Q1 or Q2 next year.

But it goes...

First half next year.

Yes.

It's positive again by the first half of next year.

But as Jeremy says, it's same as trying to pick what the fuel price is going to be in 6 months time.

Then you could tell me what the housing market's going to do, we'd be grateful.

But the plan, certainly, calls for an improvement in the second half and then picking up in the first half next year.

Jane Sparrow from Barclays.

Just one on North American margin.

At the pest seminar, you obviously gave us some detail on how you expect to get to that 18% margin target by 2020.

Just in terms of the phasing of how we get there, this year we'll, obviously, be impacted three quarters of a year by Puerto Rico, fuel cost as well, the impact of acquisitions.

Should we expect to see any progress in North American margin for the full year this year?

Or is it more likely to be (inaudible) and then 2 big steps in '19, '20.

Just wondering about the phasing of that?

Yes, so I think -- the question you asked on the Capital Markets Day, Jane, I think, is more back-end loaded.

We talked about the IT replatforming, which helps deliver a lot of the Best of Breed programs.

The M&A acquisitions, particularly the 2017 acquisitions, the synergies of those will tend to flow a year later.

So that's more of a 2019 and 2020.

And I'd like to think, with the organic growth, certainly, we'll get second half versus first half improvement.

And we'd certainly be looking for improvement in the second half.

But in terms of the journey towards the 20%, I think it's more going to be a 2019 and 2020 delivery.

That's absolutely right.

Any more questions, ladies and gentlemen?

Okay, thank you very much for coming.

Appreciate it.

Thank you.

See you in 6 months.