Rentokil Initial PLC (RTO) 2020 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you all for joining us today at our virtual results meeting.

I'm here in Gatwick, alongside Jeremy, who, as you know, after 10 successful years as CFO, will be retiring after this set of results.

I'm also joined on the telephone by Stuart Ingall-Tombs, Jeremy's successor.

He's currently enjoying his 14 days in quarantine after his recent return from the States.

In a few moments, Jeremy will provide you with details of our results for the first half of 2020 and an update on the financial initiatives undertaken during the COVID crisis phase.

I will then come back and provide an update on the performance of our 3 categories, with a more detailed look in particular at the Strategic Opportunities in Hygiene.

We'll then hold a Q&A session as usual.

And if you would like to ask a question at the end, then please use the separate conference call line, and details of the dial-in numbers can be found in the Q&A tab on the screen in front of you.

So let me just say a few words to set the scene.

Over the next 45 minutes or so, we will take you through our response to the COVID-19 pandemic, which can be summarized as follows.

Firstly, we have seen an outstanding reaction from the organization, which has resulted in a very positive performance with half 1 year-on-year revenue growth, a modest decline in profits and an excellent cash performance, demonstrating once again the resilience and robustness of our model.

Secondly, our Pest Control and Hygiene businesses have held up extremely well despite many of our customers being closed during the second quarter, and we've executed a rapid deployment of hygiene disinfection services, which added almost GBP 50 million of revenues in the second quarter.

And thirdly, in March, we set out our 3-phase response to the pandemic: the Crisis Management Phase; the Recovery Phase; and the Strategic Opportunities.

And over the last quarter, we've aggressively executed that plan with agility and with pace.

From mid-March and into April, the COVID-19 pandemic began to have a serious impact on our operations around the world.

In this complex and changing environment, we took the decision to act quickly and decisively to get ahead of the virus and critically, to protect our liquidity.

We drew down our RCF.

We successfully applied for the government's CCFF.

We withdrew our dividend.

We suspended our M&A program, and we implemented an aggressive CapEx and cost reduction program, which resulted in cost savings during the first half of GBP 87 million.

This included nearly half of our colleagues around the world making some form of sacrifice, including pay waivers, furloughs and reductions in working hours.

These measures, and the efforts of our 43,000 colleagues, have worked and we've moved successfully from the crisis management phase and now into the Recovery Phase.

We've now repaid our RCF and the CCFF.

We've restarted our M&A and capital expenditure programs.

Most importantly of all, by the end of this quarter, we were very close to our full complement of colleagues back to work and on normal terms and conditions.

And as the graph on the right-hand side shows, we returned to year-on-year revenue growth in June.

So while we've obviously still got risks of further lockdowns, second waves and of the difficult economic environments around the world, we are taking this momentum into the second half, and we would expect to make a dividend payment in relation to 2020 if trading continues in line with our expectations for the rest of this year.

After Jeremy has taken you through the financials, I'll come back and talk about the strategic hand that we have to play, which I believe is now even stronger than before.

We provide services that the world clearly needs in a COVID and post-COVID environment, with brands that people trust.

We're in the process of launching hygiene services in around 20 new markets by the end of this year.

We have the digital expertise that we will use to meet the needs of our customers in a more socially distanced world.

And we have a strong balance sheet and an M&A machine that is primed with an excellent pipeline.

Like most other organizations, our company has been significantly tested during the second quarter and we've come through that period demonstrating that we are an extremely agile and resilient organization with highly committed employees and an outstanding can-do culture.

With that, I'll now hand over to Jeremy.

Thank you, Andy, and good morning, everyone.

I'll now run through the key financial highlights for the first half of 2020.

As Andy has already noted, COVID-19 had a significant impact on the half year numbers and I will provide more detail on this, both at the group and regional level, as I go through my presentation.

Unless I state to the contrary, all numbers are at a constant rate of exchange.

Ongoing revenue in the half grew by 1%, with the first quarter grown by 7.2% but Q2 declining by 4.4% due to the impact of the virus.

Ongoing operating profit declined by 9.4% in the half, reflecting an increase in the group's bad debt provision of GBP 23 million and with strong cost control mitigating the impact of reduced revenues in Q2.

Adjusted profit after interest at actual exchange rates declined by 11.3%, reflecting reduced interest costs following our 2019 refinancing, offset by reduced profit from associates following the sale of our stake in the Haniel JV last year.

And adjusted EPS at actual exchange rate decreased by 11.5%, in line with the decline in adjusted profit before tax.

As the virus started to impact our business, we had a strong focus on cash preservation, with tight controls over cost, CapEx and working capital.

And as a result, we delivered a very good performance, with free cash flow of GBP 143 million in the half.

Before I look at performance by region, I will just make some high-level comments about the impact of the virus on revenue and profit in relation to the group.

In accordance with IFRS 15, we have calculated revenue on the basis of amounts invoiced less any credit notes provided.

It has been calculated, we believe, on a prudent basis and we would not expect any reversal of recognized revenue in the second half.

The virus impacted all of our categories in the second quarter, with Pest Control down 5.9% and Protect and Enhance down by 27.3%.

Although core Hygiene categories were adversely affected, this was offset by disinfectant sales, resulting in overall growth in Hygiene of 16.3%.

The virus had the most significant impact in April, with group revenues down by 12.1%.

The impact reduced to 7 -- to 5.7% in May and revenues actually increased by 4.2% in June.

I will talk through these trends in more detail by region in a moment.

Looking forward, we would expect core revenues to improve as the impact of the virus reduces.

However, we note at the moment, the virus continues to be impacting countries where we operate, including North America and Latin America as well as localized second wave hotspots, such as Melbourne, Australia.

As the impact of the virus diminishes, we would expect disinfection revenues to reduce accordingly.

Looking further out, we would expect our core Hygiene category to benefit from an increased level of demand.

This impact may be mitigated, however, by increased insolvencies in our portfolio due to the economic impact of the virus with, we believe, our HORECA customers most at risk.

Overall, given the impact of the virus, the group delivered a robust performance in the first half, and we think we are well placed to meet our customers' increased hygiene needs as they come out of lockdown.

First half operating profits were down by 9.4% despite revenues being slightly up in the half.

Revenue declines in Q2 were mitigated by significant cost savings against expectations of around GBP 87 million.

These were, however, partially offset by an increase in the group and debt provision in the first half of GBP 23 million.

We have been very closely focused on receivables collections during the pandemic, seeking to reduce the risk of bad debt and to ensure strong cash performance.

Collection levels reduced by around 7% at the start of Q2, but have since improved, with many regions returning to normal levels of receivable collections.

While insolvencies to date have been low, we have taken an increased bad debt provision at the half year to provide against the risk of future insolvencies in relation to amounts due as at the 30th of June.

The majority of the cost savings were delivered in the second quarter.

These were primarily people-related cost savings, driven through eliminating the first half bonus scheme, salary cuts, furloughs and redundancies.

While we will continue to tightly manage our costs, as the business recovers, we are now looking to get colleagues back to work on normal terms and conditions.

And consequently, we expect second half cost savings to reduce to around GBP 35 million.

Overall, the swift cost-saving actions that we took at the start of the crisis have largely offset the impact of lower Q2 revenues, but with an increased bad debt provision, resulting in reduced profits in the half.

Looking now at performance by region.

Of all our regions, North America was the least affected by the virus in the half, although there has been an increase in cases in some states during July.

Demand for pest control remained reasonably strong, especially in Residential, which accounts around 40% of our North American pest services revenue.

Our Ambius and Brand Standards businesses were more impacted, reflecting the discretionary nature of Ambius' services and Brand Standards' exposure to the fast food sector.

This impact was offset by strong sales of disinfection services, which were launched in the region at the start of the pandemic.

North America delivered strong ongoing revenue growth of 7.8% in the first half, with 10.4% in Q1 and 5.7% in Q2.

Revenue performance has steadily improved through Q2, from a small decline in April to 12.3% growth in June.

Revenue growth was delivered by robust performance in pest services and in the residential sector in particular as well as strong disinfection sales following their launch in March.

Operating profit growth of 15.7% reflects the revenue growth as well as tight cost control, generating an improvement in net operating margins in the half of 90 basis points.

As I have just noted, North America delivered strong revenue, profit and margin performance in the first half, albeit not necessarily in the way we had planned it at the start of the year.

Disinfectant sales helped mitigate reduced pest revenues in Q2, with short-term cost-cutting measures helping to maintain margin.

While the effects of the virus on North America remains uncertain, both in terms of business disruption and broader economic impact, the robust performance of the region in the first half means that we expect to be close to our $1.5 billion revenue target by the end of this year.

As I have already noted, margins increased by 90 basis points in the first half despite lower pest revenue and the suspension of our M&A program and systems integration.

Following the strong performance of the business in the second quarter, we are going to get back on with the plan, resuming our systems replatforming program and M&A investments in the region.

In addition, we think that lessons learned from the cost savings made during Q2 will help improve the region's net operating margins over time, when the impact of the virus has receded.

Taking all of the above into account, we remain confident of achieving our target of 18% net operating margins.

Although given the impact of the virus on key parts of our plan in the first half, the timing for achieving this may be slightly delayed.

The virus had quite a mixed impact on our Europe region.

Some countries, such as Germany, have been relatively unaffected, whilst other countries, such as France and parts of Southern Europe, were much more severely impacted.

Latin America, which is reported within Europe, was affected by the crisis later than other countries and continues to be impacted at this time.

Hygiene was the strongest performing category in the region, supported by disinfection sales, with France Workwear most affected, due mainly to the closure of businesses in the HORECA sector.

Ongoing revenue was down 3.8% in the half, driven by revenue declines in the second quarter of 10.5%.

Revenues were particularly impacted in April, down by 22.8%, recovering to growth of 2.8% in June.

Hygiene revenue benefited from disinfection sales in the second quarter, with the category posting growth of 11.3%.

Offsetting this, pest revenues declined by 8.9%, and France Workwear revenues were down by 34.3%, albeit with both categories' performance improving from April to June as customers came out of lockdown.

Country level performances reflected the impact of the virus, with Germany growing by 7.7% in the half, whereas Southern Europe and Benelux were in line with the prior year and France revenues declines driven by Workwear.

Ongoing profits declined by 27.3% in the half, again reflecting the impact of the virus on revenue, with growth in Germany offset by declines in France and Southern Europe.

The U.K. and Rest of the World region has been more impacted by the crisis, with the U.K. washrooms particularly impacted by the closure of HORECA customers.

The U.K. pest business was also impacted by customer closures, with Ambius suffering from reductions in customers' discretionary expenditure and with property care impacted by continued weak demand in the U.K. housing market.

These impacts resulted in a first half decline in ongoing revenue of 5.1%, with a 15.5% decline in Q2.

As with the group's other regions, the decline was most severe in April at 21.7%, reducing to 7.7% in June.

Ongoing profit in the region was down 17.2% in the half, reflecting the reduced revenues in Q2.

The Asia region was the first to be impacted by the virus, with China, Hong Kong and South Korea the first to emerge from lockdown.

Good performances in these countries, with strong sales of disinfection and other hygiene services, has helped offset the impact of the virus on other countries in the region, such as India and Malaysia.

Ongoing revenues grew by 3.2% in the half, despite a decline in revenues of 5.5% in the second quarter.

Again, the impact of the virus reduced during the second quarter, with a decline in revenues of 9.2% in April, reducing to a small level of growth in June.

Strong growth in Indonesia, Hong Kong and South Korea was offset by declines in India and Malaysia.

Ongoing operating profit increased by 1% in the half, with country-level performance reflecting the impact of the virus on revenue.

The virus impacted all countries in the Pacific region, and New Zealand in particular, which implemented a very tight lockdown in March, impacting both Pest and Hygiene.

Again, the pattern for ongoing revenue performance was similar to other regions, with a 5.7% decline in the half and a 14.5% decline in Q2, but a much improving trend during the quarter as both New Zealand and Australia relaxed their lockdown provisions.

Ongoing profit decline of 10.2% reflected the impact of revenue declines in the second quarter, mitigated by tight cost control in the region.

As previously noted, cash preservation has been a key focus following the global impact of the virus.

Operating cash flow of GBP 173 million was GBP 46 million higher than the prior year, despite the reduced levels of profit and EBITDA, driven by strong working capital management and reduced CapEx spend.

Free cash flow of GBP 143 million was GBP 48 million higher than last half year, reflecting the increase in operating cash flow previously noted.

Cash interest payments were GBP 4 million higher than the first half of 2019, due to the phasing of bond interest payment and the fact that we drew down our RCF in the second quarter.

Cash tax payments were GBP 6 million lower than the first half of 2019, primarily due to phasing.

At the start of the crisis, we suspended our M&A investment plans and our dividend program, meaning that cash spend on these items was GBP 130 million lower than the previous half, resulting in an underlying reduction in net debt of GBP 95 million.

This was offset by an increase in FX and other items of GBP 124 million, primarily due to the impact of a significant weakening of sterling on our euro and dollar-denominated debt as well as the noncash impact of reduced U.S. interest rates on derivatives used to fix our U.S. dollar debt.

Taking all of the above into account, our net debt increased slightly compared to the 2019 year-end by GBP 29 million in the year to GBP 1.102 billion.

Looking now at the balance sheet.

The strong cash performance of the business means that we have been able to maintain our net debt-to-EBITDA ratio at 1.9x, broadly in line with the 2019 year-end.

Having drawn down the RCF and CCFF as a precaution in Q2, we have now repaid both liabilities using cash held on the balance sheet.

Following these repayments, the business has over GBP 800 million of liquidity, taking into account our undrawn RCF facility of GBP 550 million and cash on the balance sheet.

Our credit rating has remained at BBB with a stable outlook throughout the first half and we are confident that this rating can be maintained for the rest of the year.

Given our strong balance sheet and following the strong performance in Q2, we will now reinstate our pre-COVID-19 capital allocation model.

We plan to resume investment in M&A in the second half and would expect to spend at least GBP 100 million on acquisition.

We will also increase our investment in capital expenditure to support the growth of the business, which I will outline further in a moment.

Assuming that we continue to trade in line with expectations, we would expect to propose a resumption of dividend payments at the time of our preliminary results in February 2021.

So finally, before I hand over to Andy, some comments on the outlook for performance.

We withdrew our guidance in March, given the uncertainty around the COVID-19 situation.

Whilst we have traded relatively well against expectations in the first half, some significant uncertainties remain, which means that providing specific guidance for 2020 and beyond remains difficult at this time.

Notwithstanding this, we would currently expect the outcome for the year to be moderately better than anticipated.

In relation to the outlook, I note the following in relation to profit and cash.

Assuming a continued gradual resumption in business activity, we expect to make further progress in the second half.

However, there is a risk that a second wave of the virus and/or economic pressures arising from the virus will impact revenues adversely.

Disinfection sales in the first half amounted to GBP 49 million.

These sales are directly related to the impact of the virus.

And hence, it is difficult to forecast the quantum of these sales for the second half and beyond.

Following from our expectation of a reduced impact of the virus in the second half, we are looking to return colleagues to work on normal terms and conditions.

And consequently, H2 cost savings are expected to reduce to around GBP 35 million.

As I've noted above, the impact of the virus on the global economy is difficult to forecast.

We have increased our provisions for bad debt in the first half by GBP 23 million against receivables balances at the half year.

And we estimate that we will require a further GBP 15 million increase in the provision in the second half.

Current economic uncertainty around the virus as well as Brexit arrangements has resulted in a significant weakening in sterling in the first half.

As a result, based on current exchange rates, there would be a minimal FX impact on our 2020 profit compared with the GBP 10 million to GBP 15 million adverse impact from foreign exchange previously guided to at the time of our preliminary results on the 25th of February 2020.

So that's the profit guidance.

Providing guidance on aspect of cash flow is also challenging, given the uncertainty created by COVID-19.

However, we have more control over certain items, such as investment in CapEx and M&A.

Working capital outflow for the year is expected to be in the range of GBP 10 million to GBP 20 million.

While working capital flows have been strong in the first half, we expect that there will be outflows in the second half due to phasing.

Net CapEx is estimated to amount to GBP 225 million to GBP 235 million.

As previously noted, given our strong cash performance in the first half, we are planning to increase our investment levels in H2, and therefore, our guidance on CapEx spend has now increased.

Cash interest is expected to be in the region of GBP 40 million.

This reflects the carry cost of holding the RCF and the CCFF during the second quarter, both of which are now repaid.

Cash tax payment of GBP 50 million to GBP 60 million.

Given our strong cash performance in the first half, we now restore our original guidance for cash tax payments for the year.

And again, as previously noted, we are resuming our investment in M&A and plan to spend at least GBP 100 million on acquisitions in the second half.

So to conclude, we are pleased with the robust performance of the group in the first half of 2020, and I will leave you with a slide summarizing some of our key achievements in the half.

And given that this is my last presentation for Rentokil Initial, I would just like to say what an enjoyable 10 years this has been with the group, and in particular, the last 7 years working with Andy.

While I wouldn't necessarily have chosen to spend my last 5 months working through the impact of a global pandemic, I am nevertheless very happy to leave the group in such a strong position and wish Andy and my successor, Stuart, all the best, for what I am sure will be continued success in the future.

And now I'd like to hand back over to Andy.

Thanks, Jeremy.

So then starting with our people and with safety.

Throughout the crisis phase, our focus has been, first and foremost, on the health and safety of our colleagues, as it always is.

With 43,000 colleagues in 83 countries, our own employees were, of course, directly affected by COVID-19.

As at June 30, 178 of our colleagues were confirmed to have had the virus and 1 colleague, who was on long-term sick, tragically died.

In closing most of our office locations, we moved 8,500 colleagues to home working to reduce the risk for their own safety and for their families'.

And we successfully developed a smartphone app to track their health and whereabouts.

Operationally, during the second quarter, the business has delivered its best-ever safety performance, with our Lost Time Accident rate reducing by 20% despite the launch of new services and with the associated Working Days Lost down by almost a quarter.

As you know, at Rentokil Initial, our business model is powered by a strong belief that everything flows from our investment in people and by creating a workplace culture where people can thrive and develop.

If we get this right, then we provide a high-quality customer experience, and that generates the returns that our shareholders rightly expect.

So as you can imagine, asking nearly half of our colleagues to accept some form of sacrifice, such as furlough, reduced pay and/or hours, was not something that we took lightly, as we absolutely did not want to damage the model.

Well, in fact, I would argue that the reverse has happened.

We've seen a huge level of commitment to the company from colleagues, with around 90% strongly supporting our actions.

We've seen high levels of productivity from home workers, an all-time high level of online training undertaken and the safety record performance that I've already mentioned.

And for the record, I would like to take this opportunity to pay tribute to our colleagues, their commitment, and indeed, in many cases, their bravery.

Over the last few months, this has been nothing short of outstanding.

What we've also seen very clearly is the value of our brands and our expertise.

Customers trust Rentokil Initial to do it right.

During the crisis phase, we were able to continue to serve those customers who needed our services by obtaining a license to operate, where many national and state governments deemed pest control, hygiene, medical and disinfection services as essential services, and by deploying the appropriate PPE, training and standard operating procedures across our group.

As lockdowns have begun to ease in many countries, we're now seeing a large number of our customers seeking to give their employees and their customers the reassurance that it is safe to return to the office, to the shops and onto public transport.

And what we are seeing is that a lot of our customers want very publicly to associate their return-to-work programs with brands that represent quality, science and the highest hygiene standards.

Our people, our brands and our expertise offer that reassurance, which will be an important source of differentiation in a post-COVID world.

If you'd asked me at the beginning of the year what the biggest macroeconomic themes for 2020 were likely to be, I would certainly have said that the commitment of businesses to sustainability and the environment would have been right up there.

And we believe that as the world begins to work its way through this COVID crisis, we must urgently return to this critical agenda.

As a participant in the COP26 initiative, we have set a new ambition to do everything in our power to be at carbon net zero by 2040.

We recently moved to 100% electricity from renewable sources in the U.K. We signed up to the EV100 scheme to promote the use of electric vehicles.

And we've established 7 work streams to target different aspects of sustainability, on which we will obviously provide more detail over the coming quarters.

Our mission at Rentokil Initial is to protect people and to enhance lives, and that's a mission that clearly has never been more important.

Our vision is to achieve this by caring for our colleagues, our customers and the communities in which we live and work.

A brilliant example of this took place in May, when colleagues from around the world undertook more than 250 local events, events to say thank you to health and other public sector workers by donating disinfection services to emergency workers, pest control treatments to care homes and hand sanitizer and care packages to hospital staff.

These actions show our values being put into practice even in the toughest of times.

So turning now to our categories.

Pest control is a structural growth market, and Rentokil is the #1 pest control business in over 50 countries.

This is a high-quality, resilient business.

During the crisis phase, Pest Control was somewhat less impacted because as an essential service, it was a key part of the public health agenda.

As a portfolio business, much of what we do is based on visits per year and we'll look to reschedule service visits missed due to the lockdown where we're able to.

Our call-out or jobbing work remains strong, particularly in the residential sector, and many of our Pest Control services are, in fact, external, meaning we don't actually have to access the building.

And as our affected customers are beginning to reopen, the business is also now recovering strongly.

So I'm very proud of the performance of our Pest Control category in the first half.

Despite significant disruption to our customers, the business grew ongoing revenues by 1%.

Our U.S. business performed particularly well, supported by other excellent contributions by some of our businesses across Europe and Asia.

These were offset by some markets, particularly those with the most extreme lockdown regimes, including India and New Zealand.

What seems certain in the post-COVID era is that there will be even greater focus on public health and an increasing use of digital technologies.

Over recent months, demand for our remote monitoring PestConnect system has been particularly strong, with customers wanting less physical contact and a fast response to any potential pest issue.

We added 2,200 customer sites and installed around 40,000 PestConnect units during the first half of the year, including a major retailer who saw the advantages of transparency and data-based analytics that PestConnect provides as well as the significant contribution to their own sustainability agenda.

So PestConnect means that we can target site visits through specific rodent activity and ensure that a pest control problem doesn't become an infestation drama.

The move to working from home has required all of us to learn new skills and none more so than our sales and marketing teams, who've created a series of sector-specific digital campaigns to highlight the services that we can offer to customers as part of their restart programs.

Whilst our sales teams could not physically visit our customers, it was clear that people wanted to hear from the experts.

And we sent over 900,000 targeted e-mails in the U.K., for example, achieving a very high open rate of around 60% against an average rate in the services sector of 22%.

While in the U.S., visits to our Western and JC Ehrlich websites rose by 48% and 26%, respectively.

The use of digital in sales and marketing and through industry-leading innovations like PestConnect is not new to us.

And post COVID, we anticipate an even greater degree of switching from face-to-face interaction, where we'll benefit from our trusted brands, our service expertise and our digital leadership.

So then in summary, for Pest Control, the category held up extremely well, with essential service status confirmed around the world as part of the public health agenda.

Our customers are looking for more digital and more remote monitoring solutions.

Our brands and expertise are powerful differentiators as our customers gradually reopen.

And whilst to date, there has been no discernible impact on customer retention on pricing or indeed bad debt or business failure, we need to be very much focused on the impact of the economic environment as things become clearer over the coming months.

So turning now to Hygiene.

In Hygiene, we're the global leader, with market-leading positions in 22 countries and a top 3 position in 35 markets, with a high-quality range of hand, surface and air care services.

During the crisis phase, where customer premises remained closed, for example, in the HORECA sector, which accounts for around 14% of our Hygiene revenues, we were obviously particularly impacted.

However, for those customers that remained open, demand was very strong, particularly for hand soaps and hand sanitizers.

In addition, new disinfection services provided a vital surface hygiene service for retail distribution, for supermarkets, for transportation and for those reopening their offices.

So I'm very pleased with the performance of our Hygiene category, which grew ongoing revenues by 10.5% in the first half and an excellent 16.3% in the second quarter.

Performance from our Hygiene businesses varied by geography, with good performances in our established markets, supported by disinfection sales in new Hygiene markets, particularly in the U.S., while offset to some degree by those countries with more significant lockdown regimes.

Hygiene disinfection services, which we launched across the group in response to the pandemic, generated revenues of GBP 49 million in the second quarter.

Throughout the last few months, the importance of hand hygiene is one of the clearest messages given by governments around the world, and this was reflected in customer demand for soaps, hand drying products and sanitizers reaching record levels.

Just to give you one example, we delivered revenues from hand sanitizers of around GBP 9 million in the first half, which was a GBP 6.5 million increase over the same period last year.

Now over the last few years, I've often signaled the long-term promise of the opportunity in Hygiene, but without necessarily calling out growth aspirations much beyond GDP.

The last few months have proven that Hygiene's time has indeed come, and we see 4 main opportunities for profitable growth over the coming years: inside the washroom, where one of the biggest threats to cross infection exists; the introduction of no-touch digital products, learning from our pest business; international expansion; and using our hygiene expertise outside of the washrooms.

So I'll now touch on each area, starting firstly inside the washroom.

Small, enclosed areas, smooth surfaces and high footfall make the washroom a priority in any COVID risk assessment.

Our aim here is to provide a complete, no-touch washroom experience, where we can enable washroom users to enter and exit the washroom without having touched any surface.

As part of the signature range, we already offer a full set of no-touch products, including waste disposal units, with auto-lift lids, no-touch soap and sanitizer dispensers, auto-dispensed paper towels and other hand drying options as well as air care products which provide an ongoing method of removing potentially harmful germs from the environment.

At our 2019 results in February, we announced our plan to build a digital hygiene business and to launch the range by the end of 2020 and this remains on track.

Our digital hygiene range will provide premium, no-touch services and remote monitoring as well as compliance and audit-ready reports.

Services include digital taps, soap dispensers, hand wash monitoring, air care as well as footfall monitoring, with a tablet-based traffic light system to control the number of users at any one time in the washroom, as you can see there on the right of the screen, all designed to reduce the risk of cross-contamination.

Now while we currently operate Hygiene in 46 countries, we operate Pest Control in over 80 markets.

And so as part of the strategic response to COVID, we're in the process of launching hygiene services in around 20 additional countries by the end of this year.

We've already taken our first steps in America, with the launch of first hand and air care products as well as disinfection services.

And in Europe, following our exit from the Haniel joint venture, we are now able to reengage in the hygiene services market under the Initial brand in those 10 markets that we exited.

These are markets where we already have Pest Control services, and therefore, a large existing customer base as well as brand presence and management teams already in place.

So the final part of the opportunity is outside of the washroom.

And as I've already said, Hygiene has moved from being a relatively low interest category to one of the world's most important.

Over the last few months, we've already seen hygiene services, such as hand and surface products, being used in office areas, in kitchens and in receptions as well as on transport and in retail stores.

And we expect this to continue in line with our higher consumer expectations for both hygiene standards and for access to hygiene services.

Air care is a relatively new area, but providing clean, safe air is more important than ever, with much greater consumer awareness of how viruses can be transmitted by droplets produced by coughs and sneezes.

Our product range features air purification and air sterilization as well as air scenting products.

And as an example, the InspireAir 72 features hospital-grade filters which capture harmful particulates and can clean a 36 square meter office in just 10 minutes.

So turning now to disinfection services.

For many years, we've had a fairly small specialist Hygiene business in the U.K. and in a number of European countries, with around 1,000 colleagues working in them, but with a high degree of expertise to manage the deep cleaning after industrial accidents through to crime scenes and biohazard decontaminations.

With the COVID crisis, we've been able to package up their expertise and to share it quickly across the globe, launching specialist disinfection services in more than 60 markets and training a further 7,000 colleagues.

We offer 3 services: a contingency risk acceptance survey for companies wishing to minimize potential shutdown periods; an all-purpose preventative specialist disinfection service to maintain a high level of hygiene on the premises; and a full emergency COVID-19 disinfection service, where confirmed or a suspected case of COVID-19 has been on a customer's premises.

These services target a wide range of customers, including factories, warehouses, offices, schools and supermarkets.

Our new contracts have included global distribution centers and a major public transport provider, for whom we disinfect 4,000 buses every day.

So hygiene disinfection works well with our model, focused on colleagues, customers and shareholders, and we moved quickly to roll out that service globally.

And we're now introducing new innovations, with different types of disinfection fogging machines, the use of ultraviolet light and different delivery systems, for example, the use of specialist disinfection drones in sports stadiums.

We would expect disinfection revenues to continue through the third quarter and into the fall.

And while we expect there is a role for this service post national lockdown, perhaps returning during local lockdowns and second waves and potentially ongoing for key high dependency sectors, we would expect to see the need for disinfection services declining somewhat as businesses hopefully return to more normal trading.

So in summary for Hygiene, essential service status was confirmed worldwide in its role to protect public health.

We were quick to act, launching disinfection services globally.

There are clear opportunities for growth in Hygiene, including our international expansion this year.

The Initial brand is already highly trusted and it has a clear association with the even stronger Rentokil brand.

But just as I said with Pest Control, whilst to date, we've seen no discernible impact on customer retention or pricing or bad debt or business failures.

We will, of course, remain extremely vigilant in the coming months given the economic environment.

Given the opportunity and interest in Hygiene, we plan to undertake a Capital Markets Day in the first half of next year and we'll announce details in February.

So turning finally to Protect and Enhance and then M&A before we take any questions.

We have 3 main businesses in Protect and Enhance: Ambius, our plants business; our U.K. Property Care business; and France Workwear.

These businesses have weaker growth characteristics than our Pest Control and Hygiene businesses.

And it's also fair to say that they have been significantly more impacted by the COVID crisis in the first half, with ongoing revenues down by 12.9% and profits down by 51.3%.

Ambius was impacted by the lockdown of hotels and offices and the more discretionary nature of interior plants, which will make the coming months a challenging environment for this business.

Property Care, which is mainly remediation work inside of properties, was of course affected by social distancing requirements and the continued stall of the U.K. property market, but we do hope to see conditions improving in the second half.

Our Workwear business in France is the largest part of Protect and Enhance.

And after a positive couple of years both operationally and financially, ongoing revenues, however, declined by 18.5% in the first half, with a 40% closure of customer premises starting in March driving a 40% decline in Workwear volumes over the period.

Encouragingly, though, revenue declines improved as the quarter progressed, as you can see on the slide.

And we hope to see continued improvement in the second half as businesses in the HORECA sector, in particular, continue to reopen.

Notwithstanding the COVID crisis, the business has continued to make good progress in the first half on the plan to separate the Workwear and Hygiene businesses and this remains on track to be completed by the end of the year.

Turning now to M&A.

As you know, this is an extremely important part of our growth strategy.

And after a short pause, we have restored our M&A program.

Whilst we felt it was prudent to pause our M&A activities in March given all the uncertainties, we did maintain our contacting program.

And with a strong pipeline of good potential deals in place, we're now expecting to spend at least GBP 100 million on acquisitions in the second half.

Without any doubt, the second quarter was the most challenging operating environment we have ever experienced: a global health crisis affecting every country, a significant proportion of our existing customer base being forced to lock down their businesses and a dramatic and sudden economic downturn.

But despite all of this, our people and our operating model held up extremely well, as indeed, I've summarized on this chart.

So to finish, what do I think we've demonstrated during the crisis to date?

Well, we have highly engaged colleagues.

We have a strong culture and we have a talented, established management team that showed great collaboration during the crisis.

We've demonstrated that multi-local is a competitive advantage, with insights from around the world to help us to get ahead of the virus.

That this is an agile organization, we've been able to pivot quickly, as we showed by launching disinfection services in over 60 countries in just 3 weeks.

Working from home has exceeded our expectations and we've seen high levels of productivity and the take-up of online training.

April was the floor.

And as you can see on the right-hand side there, we are now out of the crisis management phase and into recovery.

Our digital and innovation expertise will be vital in the new normal and we have brands that people trust.

This is a high-quality business with essential services in Pest and Hygiene that will protect people in a post-pandemic world.

And finally, as you heard from me today, hygiene has moved from a relatively low interest category to probably one of the most important categories in the world.

So whilst we obviously cannot predict the future developments of the COVID-19 pandemic, nor, obviously, its economic impact, ours is a high-quality and a resilient business, and we're entering the second half of 2020 with positive momentum.

So just a quick reminder, the Q&A will take place in a moment.

(Operator Instructions)

Before that, though, I would like to finish by paying a brief tribute to Jeremy.

He retires from Rentokil Initial on the 14th of August.

That's just 17 days short of achieving his 10 year-long service award.

Back at the time that Jeremy joined was the time of City Link.

It was a time of restructuring, a time of one-offs, poor cash conversion, minimal organic growth.

I'm sure many of you still remember.

10 years on, JT, as we all call him, has a personal shareholder return over the period of over 500%.

Not too many CFOs get to put that on their CVs.

JT is a calming presence.

When others are running around with their hair on fire, it's mainly me.

His wise counsel and brilliant leadership and his encyclopedic knowledge of trivia, which seems somehow to stop in the 1980s, his passion for Leeds United, recently seen in overdrive and his absolutely wicked sense of humor, will all be missed by us very much in Rentokil Initial.

I had hoped that after our usual face-to-face meeting, we would all be able to wish him well in some style.

Instead, here we are, just the 2 of us in an empty office in Gatwick, sharing a socially-distanced glass of warm champagne.

On behalf of everyone on the call, thank you, Jeremy.

It's been great innings and best of luck in your non-executive career.

With that, please let me hand over to the conference call operator to line up any questions.

Thank you.

(Operator Instructions) Your first question is from Sylvia Barker of JPMorgan.

I'll start with one for Jeremy.

First of all, thank you for all the help over the years and all the best going forward.

I've got [essentially 20] questions.

Just on the second half performance, so you've given quite a lot of pieces on guidance for profit.

So I was just kind of wondering if you can help us piece it all together.

So it seems that your top line was growing in June, probably flattish organically, and you still have a little bit of M&A benefit in the second half.

So I imagine you're hoping that you can be kind of flat to growing in the second half, which would imply that you're not going to have a material operating leverage drag impact, it should be slightly helpful.

Then you've got savings of GBP 35 million.

You've got the bad debt provisions of GBP 15 million, maybe some more additional costs.

But overall, it would seem that if trends continue as they have been kind of in June, your profit might actually be up in the second half, just your EBITDA year-on-year?

And then I've got another couple of quick ones.

Thanks, Sylvia.

Yes, it's -- as we've said in the guidance, it's very tricky to provide guidance for the second half.

We're pleased with the way the quarter has gone.

But there are a number of potential positives and negatives.

Disinfection sales were strong in the second quarter.

If hopefully, the virus recedes, those will come down.

And as they come down, we'd expect our core services to continue the momentum they've shown in the quarter.

We don't know how the economy is going to go, as Andy said in the presentation, and what impact that could have.

So revenue is quite hard to call.

We'd expect Q3 to be better than Q2 overall.

So Q2 was down 4%, I would expect Q3 to be better than that.

But as you say, M&A comes away as we head through into the rest of the year.

We expect that we can make continued progress, but there are some pluses and minuses around that.

We did a really good job, I think, on cost savings in the second quarter, delivering GBP 87 million over the half.

As we get people back to work and as our customers reopen, we're looking to get everybody back and get them back on normal paying conditions.

So those cost savings will reduce in the second half from GBP 87 million in the first half to about GBP 35 million in the second half.

We put a bad debt provision in.

So we topped up our bad debt provision by GBP 23 million.

And we would expect to make further provisions in the second half of around about GBP 15 million.

So there's quite a few moving parts.

We withdrew consensus in March.

There's a wide range of analyst numbers, but they've been in the kind of mid-260s.

And what we've said that we -- in the statement that we'd expect a moderate increase in that.

And what we've been seeing based on the call today is people ending up in the kind of 290 to 300 level, taking everything into account.

I think basing it off last year, it's quite difficult with all the moving pieces.

I guess what we're doing is just flowing through from the quarter looking ahead to what the various trends are and how it moves through.

And obviously, as we head through the half, we'll be able to provide updates as we go -- as to how that's moving and into 2021.

But I think based on this -- on the strong second quarter, we are -- we would expect that the analysts on the call to move their numbers up a bit.

But I think beyond that, it's quite difficult to be too definitive, Sylvia.

So that's probably as much as we can give you in terms of second half.

And as Andy said, predicting where the virus and the economy goes is difficult.

So I think some upward movement and we'll play it by ear as the half progresses.

Okay.

Got it.

And then just on disinfection, is that all booked within Hygiene?

Is some of it booked within Pest?

And then maybe can you just give us a split of kind of the revenue maybe by region?

How much of it is with existing customers?

And then finally, just on M&A, as a third question, I guess some of your peers have actually been active with bolt-ons throughout the period.

So it doesn't seem like the market is really shut down.

But any observations on what happened to your pipeline?

What's happened to kind of the environment out there will be helpful.

So on the -- I'll do disinfection.

So all of that has been booked in Hygiene.

We took a call to put it there.

Some of it has been provided by our Pest servicemen who we trained up in places like North America, where we don't have a Hygiene category per se, or we didn't have one.

And so they have been -- it's being provided through the Pest business and to Pest customers.

I think the majority is current customers.

There are some new customers, but it's clearly easier to have the contacts with the current customer base.

And it's pretty much spread around the business.

The -- yes, it's -- we've done $27 million in the U.S. in terms of disinfection.

So that's been very strong.

But -- all the markets have been able to deliver it, apart from those where the virus really hasn't had so much of an impact.

So I would say it's probably less impactful in places like the Pacific, where they haven't really had a big virus concern.

That may change, of course, as we've seen second waves in places like Melbourne.

But in Asia, in Europe, in the U.K. and the U.S., it's been good across all of those areas.

I'll hand Andy over to talk about the M&A.

Sylvia, yes, look, I think we're waiting to see really what the M&A market plays generally, but also specific to our industry, what that looks like in the second half.

We sat it out, as you know, for the second quarter, but we're back.

Yes, some deals got done in the second quarter, not many, a handful.

We didn't just sit down till -- as we kept talking to the people we've been talking to.

So I'll be as interested as you and everyone else as to what the market, the M&A market, looks like in the next few months.

Obviously, still a huge amount of uncertainty out there.

But I think it's -- the pest industry is a very robust one and the industry has held up pretty well, as we've always said.

So probably a reasonable M&A market in the second half and into next year, probably not wildly different from where it was immediately pre the pandemic, but we'll have to see.

But certainly, the opportunities are out there.

Pipeline's good, discussions are ongoing and we've given the confidence that we will get deals done in the second half.

Our next question comes from Edward Stanley of Morgan Stanley.

Can you hear me?

Yes.

We can hear you, Ed.

You talked about CapEx returning to sort of more normal levels in the second half.

Is that -- are you putting that anywhere into specific areas or countries where you're seeing opportunities to take growth or market share?

Or is that just a return to more normal levels that you would have expected at the beginning of the year anyway?

The second question, do you think this is a catalyst for you to push further into the residential space as a hedge against any kind of future disruptions?

Or actually, you think you're broadly happy with your mix of business as it was and is and there's no reason to sort of push further into that space and then compete more, I guess, with volumes?

And then finally, on the bad debt or the risk of bad debt rising, are there any countries where you're particularly worried?

The U.K. seems to be telling the FT, it's pushing this morning, is rising risk of bad debt there.

Or is that just across the geographic outlook and you're being a bit more cautious?

Thanks, Ed.

I'll take the first 2, and JT can cover the bad debt.

On CapEx, I think to be honest, it's a little bit of both.

I mean obviously, we throttled back significantly in the second quarter.

You can only do that for so long.

And so we've got to get the tap turned back on with a normal level of CapEx.

If we've not spent any money on vehicle CapEx for the second quarter, there's a little bit of catch-up there.

So the majority, I would say, is normal.

That said, EFR, equipment for rental, is capitalized, so the investment we're making in Hygiene, in inside the washroom and outside the washroom, the devices that purify and clean the air, the digital washroom solutions, all require an element of CapEx.

So some of it is investment for growth.

The majority is getting back to a more normal level of CapEx.

What we're quite keen to avoid is not spending CapEx in the second quarter and then having a monster CapEx bill next year.

That really isn't particularly good for business.

So there's a little bit of catch-up CapEx as well in the second half.

So its majority is business as usual, but some investment to support Hygiene.

I don't think the recent few months causes us to change our view on commercial versus resi.

I mean we're the world's biggest and strongest in commercial.

It's our sweet spot.

It's what we're most well-known for and have the brand recognition for.

Resi, if you've got density and a quality business, it's always been an attractive space.

And if you look at how we built our North American business over the last decade, the vast majority of acquisitions that we've done have come with significant residential revenues in the towns and cities that we bought those businesses in.

I haven't got the figure in front of me, but I think we're about 40% resi now in our North American pest business and that's up significantly over the last 4 or 5 years.

But I don't think a big sea change in attitude.

You're absolutely right that resi has held up marvelously well in the States in the second quarter and some competitors have a higher skew towards resi.

But I think fundamentally, our skew is predominantly commercial, but with quality resi, where we have density to support the model, is absolutely the place.

So I don't think any real change in direction there.

Ed, on bad debt, so I don't think there's any particular country area that we're concerned about.

This is a provision against insolvencies in terms of the receivables at the 30th of June.

And as I said in my presentation, we haven't really seen any big insolvencies to date, but clearly, there's a risk around that.

And where, I guess, we're most concerned is around the HORECA space and probably more potentially in the SME HORECA space.

A number of businesses have been closed in that space globally.

And they're still coming back to open in some cases.

And while they remain closed, it's very difficult to have conversations around recovering monies due and there's no certainty that everybody comes back.

So that's where I think the risk is as opposed to any particular economy.

It's more where we're exposed to HORECA and the countries we're in.

So you mentioned the U.K., and that would be no different for the U.K., but it's in terms of our HORECA exposure there, but we've got HORECA customers in pretty much all of our countries, and that's why we're taking the provision for -- I think it's a cautionary provision, but we just don't know how that is going -- we're going to land.

And that's why we flagged the potential extra GBP 15 million in the second half against second half revenues as well because of the potential concern there, but we'll obviously keep a close eye on that.

What I would say is I think the team has done a superb job of mitigating the risk around it through the real focus on cash collections in the first half.

They've taken a very risk-based approach.

And as we entered into June, we were a bit behind on collections in at the start of the virus, so we were about 9% down in April.

But as we've approached June, overall as a group, we were slightly ahead of last year in terms of collections.

We still haven't totally caught up, but we're at similar year levels as we're heading into the second half, which is a fantastic effort by the team in terms of real focus on it.

So we're obviously looking to mitigate it, but the risk is in the HORECA sector in -- particularly in SMEs, I think.

Okay.

Apologies if I missed it, but do you have at hand the proportion of revenues that are exposed to SMEs as you've defined it?

We typically -- based on the analysis that we've done, we estimate HORECA is 10% to 15% of the market.

And you can see in my presentation, we've pulled out the HORECA exposure by region.

Did you say SME?

Sorry, I don't have an SME split, sorry.

Our next question comes from Mohit Rathi from AValue (sic) [AlphaValue].

Am I audible?

Yes, you are.

Yes.

So my first question is regarding profitability.

So if I see that in H1, operating profit came in at around GBP 139 million.

But if I do some adjustment to get the underlying revenue, more normalized number, for example, if I adjust for the GBP 87 million of cost-saving benefits and the higher expenses of bad debt and PPE, the adjusted operating profit comes out to be around GBP 85 million, and which is roughly around 45%, 40% down Y-o-Y.

So what I'm trying to understand is what are the dynamics behind 1% growth in top line growth and around 40% in operating profit?

So is it like price/mix or country mix or something else?

And what kind of drop-through should we expect going forward in -- maybe in H2 or in 2021?

Yes.

So Mohit, there's a number of moving parts, as we're saying to Sylvia.

So overall, we were pretty pleased, actually, that we were able to offset the negative impact on revenues in the second quarter with the cost savings we made.

Typically, in our model, it's much harder to manage the reduction in revenues and the leverage around that.

And these are conversations we were having in March and April around reduced revenues and the challenge around managing the cost base accordingly.

But I think given that without the bad debt provision and the PPE, extra PPE costs, we actually would have grown profits in the second quarter on flat revenues -- sorry -- grown profits in the half on flat revenues in the half, I think is a pretty strong performance.

But we did book an increased bad debt provision of around GBP 23 million and we had extra PPE costs of GBP 8.8 million, and our restructuring costs increased from GBP 3 million to GBP 5 million.

So we did have some issues around COVID, which -- costs, which we booked above the line, which mitigated that.

So I think overall, pretty strong profit performance on flat revenues in the half.

In terms of drop-through going forward, as I've already outlined with Sylvia, there's a number of moving parts.

We are looking to get the business back to normal.

We do need to see where revenues come through.

We would anticipate getting back to a more normal drop-through as we work our way through into 2021.

But as I flagged, we're going to have -- we're expecting an increased bad debt provision in the second half of GBP 15 million.

There'll still be extra PPE costs relating to the virus.

So we're not going to get fully the drop-through we'd normally anticipate while we're working through the virus.

As the virus recedes, we should be getting back to normal as we head into 2021.

Okay.

So very clear.

I just have one more follow-up question.

This is basically around the Hygiene business.

So by which year do you expect this Hygiene international expansion to be as profitable as existing business -- existing businesses or these are currently equally profitable?

Yes.

It's an interesting question, Mohit, and a difficult one to answer.

I mean when we would normally enter a new market, we would have typically done a really thorough piece of market analysis.

We'd have a project plan.

We'd have financials that go out a number of years.

We'd have an execution model.

And then in this case, along comes a global pandemic that nobody anticipated, a burgeoning need for hygiene, and we haven't had the luxury of doing the work that we would normally do.

So we've moved quickly and said, "Right.

We've got wonderful Pest Control businesses in these markets.

We're going to leverage the infrastructure that we've got on the ground, the teams, the brands, the customers, the branch network, the IT network.

We're going to leverage the global supply chain of products and innovation and technology and we're going to go and hit it as hard as we can." We don't have -- on day 1, we don't have a single customer for Hygiene in those 20 markets.

So we're starting from scratch.

We have many, many, many customers in Pest Control.

So a little bit difficult to say.

Hygiene, just like Pest, is a density play.

So you need to have a level of density to get to the comparable levels of profitability.

But that said, we will be stretching our Pest Control model in a number of those markets in a way that we wouldn't normally do.

We wouldn't normally have Pest Control people doing Hygiene services.

We wouldn't normally have Pest Control salespeople selling Hygiene.

But until we get established, we will leverage that infrastructure, which is a bit of a compromise, really.

So I know I've not answered your question, but we are going to do a Capital Markets Day on Hygiene next year.

I don't know the month yet, but we will have learned a lot and the world may look quite different in a few months' time.

We will certainly have had a few months' experience of how those market entries have gone.

We haven't ruled out some of the market entries by acquisition, but the majority will be organic.

They clearly will be less profitable for the first period, but I can't really give you a meaningful figure.

I'd just be making it up, but we haven't been able to do that analysis.

But what we do know is it's an attractive space.

It's here and now.

It's live.

Many of our customers for Pest are asking for Hygiene services.

So we've moved on it.

And I think it will be very positive, but I can't really give you a figure.

But it's clearly going to be less profitable over the first few years.

Our next question comes from Simona Sarli of BAML.

Yes.

And thank you very much, Jeremy, for all your help during these years and best of luck with your new career.

I have a couple of questions from my side.

One is high level, and I appreciate that you're going to have the Capital Markets Day on Hygiene next year, but maybe some considerations on what is your view on the sustainability of hygiene demand going into 2021 and more in general in the medium term, especially considering that potentially the number of people working from home will be higher?

And also, if you expect and you have already seen that with some of your clients increasing hygiene budgets for 2021?

And also, second question is regarding the end market exposure at the group level.

So you already mentioned the exposure to HORECA.

Could you please provide also the exposure to other end markets?

Thanks, Simona.

I will definitely do the first one and let JT the second, but we'll come back to you on that.

So the sustainability of the Hygiene market is a really interesting question.

I would say if you look at previous multi-country epidemics and pandemics, if you look at H1N1 bird flu, if you look at Ebola, you look at the situations of the last 20 years, in the [main], the world has gone back to its previous behaviors reasonably quickly once those issues have receded.

I can only give you a personal view.

I do not believe that, that is going to happen on the back of COVID-19.

I genuinely don't believe that the world is going to step back.

It's obviously going to get more comfortable with the way things are, but I don't think things like hand washing, hand sanitization, probably the wearing of masks in certain situations, distancing, I think those are here to stay.

Whether they're here to stay for the next decade or more, I don't know, but I just don't think these are going away anytime soon.

Personal view, if you look at the markets, the countries that have handled the pandemic best or least worst, I would look east.

And I would say that the Asian markets that we participated in have handled the situation best.

And in those markets, you will see a commitment to hand hygiene in markets like Japan, South Korea, Hong Kong, Singapore, China.

That was there -- and the wearing of masks, that was there before this pandemic turned up.

So I think post the pandemic, the world will have a commitment to hygiene that will become just part of how we get through our daily lives.

So I think it is sustainable.

But equally, let's not forget the fact that going from a low interest category to one of the highest interest categories in the world means that other people will come into this space.

We won't sit here alone.

So I think the market is big.

I think it's growing.

I think it's here to stay for at least a few years, but it'll get a bit more competitive as other people look to come in.

Working from home.

Look, if I knew the answers to some of these questions, I'll be a genius and I'm certainly not that.

I don't know how this is going to play.

And if we look at how we are doing it in our company, we've got a gradual return-to-work with people drifting into the office, but we're also making it very easy for people to work from home.

Typically, if you have an office, and it has a washroom and the office is open, then you have a washroom service.

If you've got 100 people or 20 people in the office, you've still got a washroom and it's open, you still need services.

The throughput may be lower in terms of consumables, but the need for the service and the contracted nature of the service is the same.

So don't really know how that's going to play.

But I don't think that, that will be a potential negative, but you've got the offset, that we're all washing our hands more frequently.

I've washed my hands 5 times this morning already.

We're all using hand sanitizers more frequently, and you name it.

The sanitation standards are going beyond the washroom into the offices now as well.

So meeting rooms needing to be wiped down and all the rest that we all are beginning to get to know.

So I think it is sustainable.

I think it is real.

I think it's material, but it is a series of puts and takes.

And until we get there, I'm not sure I could tell you what the new world is exactly going to look like.

But I think it's an incontrovertible truth that the Hygiene category has just got a lot more interesting than it was 4 months ago.

JT?

So the second question, was that around the sectors we're in outside of HORECA?

I just wanted to check I heard it properly.

Yes, what is the exposure to other sectors?

So you mentioned that HORECA is 10% to 15% and I was wondering about the remaining.

Yes.

So we're quite spread out, Simona, as you might imagine, in terms of our services.

So similar sizes.

We're in manufacturing, route, retail services.

Each of those 3 sectors are similar-sized to HORECA.

As Andy said, 40% of our U.S. Pest Control business is residential.

So that's of a similar size as well.

And then we've got a whole load of smaller sectors such as facilities management, pharmaceutical, transport.

So we're quite spread out around the economy.

And I think one thing to note is 95% -- over 95% of our facilities, our customers, are now open for business now.

So across that wide group compared to where we were back in March, most of our -- the vast majority of our customers are now open for business.

Can I you ask you just, if I may, one more?

It's on Pest Control.

So you said for Pest Control clients, so there is an element of contracts being related to remote monitoring services.

I was wondering if, on the back of that, it has been easier during the lockdown for you to continue billing clients?

And also, of the overall contract portfolio in Pest Control, what is the percentage of contracts so that they have a remote monitoring service component?

Yes.

Thanks.

It's still relatively small.

And I think that's the opportunity for us.

We said in 2020 before the COVID situation turned up, 2020 was going to be the year where we aimed to make a breakthrough with PestConnect.

We've got lots and lots of individual customers for individual sites who have taken PestConnect as a solution.

But what we hadn't had until the last few months was big, mainstream customers who wanted to put PestConnect across their entire estate.

And that's where the real value comes, because once you've got data being consolidated across 100 sites, you've got real information that's helpful to you as the property manager or the estate manager, and that's what we've planned to do in 2020 despite the pandemic.

That's what we're now doing.

Our target market for that is the U.K. We've won a big account in the U.K. where they're putting pretty much the entire estate across PestConnect and we've got several others in the pipeline.

So relatively small single-digit percentage of what our portfolio is at the moment.

Probably the best example, I don't know if I'm supposed to refer to it or not, but it's never stopped me before, we put PestConnect into the Nightingale Hospital in the U.K., and that situation was obviously perhaps an extreme one, where sick people were in the hospital.

But it was quite clear that the customer wanted a solution which didn't involve people traipsing in and out of areas and bringing -- potentially bringing problems into the building or taking them out again.

So the fact that we were able to put that in very quickly, great remote monitoring solution, real visibility as what's going on in the facility, connected devices doing their job and giving us the data.

It was the perfect solution for them in that situation.

Now I'm not saying that all customers are going to look like the Nightingale Hospital.

One of the other advantages of Connect is we can achieve very effective pest control by using a much lower level of poison and bait in the field, and that's a huge opportunity from an environmental point of view.

It's not just Rentokil that's keen to make strong progress in the environmental agenda.

Our customers are as well.

One of the main motivations for the customer that I talked about was this solution will give better pest control but at a much lower level of use of chemical toxins on their facilities.

So quite a few benefits.

Yes, as we get more customers on; yes, if the world is going to be a series of lockdowns for the next few years, it will enable us to bill throughout even during lockdowns, but that really isn't our motivation.

It's better, more effective pest control.

It's preventative rather than reactive.

It's lower effect on the environment.

It's essentially about data and visibility and transparency.

So we are really pleased that we've made such strong progress in the last 3, 4 months, even though the world has been in lockdown.

So that gives us great encouragement that we're onto a winner with PestConnect.

Our next question comes from James Winckler of Jefferies.

Just 2 quick ones.

Firstly, just on the cost savings in terms of how to think about modeling them.

Is our best sort of guess in terms of by division and category on a revenue-weighted basis?

Or is there a bias towards certain divisions of where those cost savings have been taken?

And then just to reiterate on margins of the disinfection work, Andy, I think you're saying that it's actually lower margin than the group, so that Hygiene beat in terms of the margin was obviously driven by better top line, better revenue, but also cost savings rather than a positive mix to disinfection, if that's correct?

Well, let me answer the second one as it's mine, and then JT can cover the first.

James, I think to be honest, the margins in disinfection are broadly similar to Pest Control and therefore, in fact, to Hygiene.

What they do carry, though, is a much higher level of PPE cost and Jeremy has referred earlier to GBP 8.8 million spend on PPE in the first half, the majority of which is in the second quarter.

And the majority of that PPE was actually tagged into the disinfection service, because people have to be thoroughly suited and booted with the right protective gear.

So it all nets back to a broadly similar number.

And obviously, there's a lot of mix in here and the country mix is different and the customer mix is different.

But when you take it all into account and the PPE, which is more skewed towards disinfection, the margins are pretty comparable.

The going-forward piece, the thing that we also need to be clear, is disinfection at the moment is essentially onetime jobbing.

It's not yet portfolio.

So we don't have a lot of customers yet signing up to say, "I'd like a disinfection service every month for the next year." We're typically getting people saying, "I want you around here.

I want you around here now or tomorrow or next week, but I can't give you any commitment beyond that." So I think there could be some margin plays in disinfection as we try to encourage more customers to sign up for contracts and portfolio.

There's probably a bit of trade-off there between the price we charge if you sign up for a year versus the price we charge if you just want it done now or in a hurry.

So broadly similar, but it does depend, of course, on country and indeed on customer type as well.

On the cost side, James, there's no particular category bias.

Really, the cost savings were delivered on a country-by-country basis.

And what I would say is -- as I've already said, actually, it's far harder to take the proportionate level of cost out depending on where the revenue got on.

If there's a bigger revenue impact, it's harder to match that.

So it's been more challenging to manage the drop-through.

But pretty much cost savings delivered across the board, country-by-country and across the categories.

As I've said in my presentation, a very, very strong performance in Q2.

As we get people back to work, cost savings reduce somewhat into the second half and they're going to be much more around travel and discretionary cost management.

I think the really interesting piece going forward and almost reflecting on Simona's question there, but for ourselves, is given all the learnings we've had around how we've managed to work relatively efficiently in the second quarter, are there different ways of working that we could use to manage our costs going forward?

And certainly, I think we would see some opportunities around the more structural cost savings as we head into 2021 and 2022 around ways of working, given our use of technology and more efficient working there.

We do a lot of traveling in this company going around the world.

And I think the way we've responded to this by using Hangouts and remote working means that we may be able to save a reasonable chunk of travel costs, for example, through using Hangouts and more efficient working.

So there are some opportunities there, but there's no particular category bias.

It's really being delivered on a country basis.

And those -- a lot of those employee costs should start to flow back in the second half.

Jeremy, all the best moving forward.

Thanks very much, James.

Our next question comes from Allen Wells of Exane.

Most of my questions have been answered.

Just a couple maybe.

I'm not sure if I missed it, but could you maybe talk a little bit about resi versus commercial, if there's any numbers you can provide behind the growth split between the 2 or maybe even how it trended between April and into June, how much stronger resi was versus the commercial activity in North America?

Secondly, just on the launch of the Hygiene activity, maybe following up on a question from earlier.

Is my understanding right that the strategy here is that you cross-sell these assets to the service side of the Pest Control business?

And maybe you can comment if there are any sort of cost implications of that and how that maybe flows through to the margin targets that you've got for North America.

And then very quickly and finally, on the GBP 49 million disinfectant services revenues, again, listening to your comments, it sounds like the assumption here is that the guidance for the full year means that the second half activities and revenues in that business declines a little bit.

But is there not a scenario here even without a second wave, disinfection services revenues maybe stay higher?

I mean you gave the bus example with the customers there.

But it's not obvious to me why customers are really going to slow down or stop disinfection services quickly in the second half.

Maybe you can provide some contracts -- some comments on sort of contracting, you mentioned the services, how much of that (inaudible) versus rolling short-term contracts, et cetera?

Allen, yes.

So, resi, as we've said, 40% of our pest services business had a good first and second quarter.

We're not going to give the organics out, but it was pretty strong.

Commercial was held back, in line with all of our pest business around the group.

But to your point, it was improving as the quarter continued.

You'll see from the States, there's still some hotspots around the country, places like Florida, which are being impacted a little bit, but both were pretty robust.

Both improved through the quarter and resi was particularly strong, but commercial inevitably impacted by some business closures.

But as we said, overall, the U.S. of all our regions was relatively less impacted by the virus relative to the other regions.

Yes.

On resi, it's interesting, Allen, but we're not entirely sure and we had a very strong second quarter through the pandemic in resi in North America.

And there's good weather in many parts of the States.

So we are having a pest season, if I put it that way.

So that's one factor.

We kind of think that this is in part to do with a lot of people who are at home, seeing more evidence of pest problems.

And maybe because they're there, they see them and they're calling them in.

So we're not entirely sure.

We've seen similar numbers with some competitors.

So I don't think it's Rentokil special necessarily, but I think it's been a strong quarter.

If we look at markets, say, Singapore and the Singaporean government said that during lockdown, you couldn't do residential pest control.

They just said no.

It was one of the few markets that said no.

So we've seen different markets behave differently, but strong resi in the second quarter, probably partly weather, probably partly human behavior, but it was certainly good.

Cross-selling, I think the comments were specific to North America, cross-selling in Hygiene, et cetera.

Yes, I could probably [bolt] for Britain.

In my view, anyone who tells you that the answer to the question is cross-selling probably didn't understand the question or has just made it up.

Cross-selling rarely works in business services.

A lot of people will tell you about cross-selling.

We haven't found that cross-selling really works, cross-selling being, "I'm a salesman for product for service X and now I'm going to sell you product for service Y." We've seen cross introductions working, where we will introduce -- from a Pest Control customer, we will introduce you to a salesperson for the sister business.

But cross-selling, in a long time I'm looking at this, I haven't seen many examples.

In America, our approach to the hygiene sector is actually going to go in through Ambius.

Our Ambius business is increasingly about well-being.

The Hygiene category is increasingly about Hygiene and well-being.

Hygiene, as I said -- sorry, Ambius, as I said, is going to be more impacted over the next few months, more discretionary.

It's going to be a challenging marketplace for Ambius.

So we've got well-trained people, salespeople and technical people that will have less work to do.

So we're going to make them busy working on Hygiene.

I think it's too early to say what impact it would have on the margins.

And it's too early to say how big it's going to be, but I don't see us doing a lot of hygiene work on a loss-making basis.

I think this will make a contribution even in the early days, it would be -- it would certainly be our intention.

So neutral to positive, but on a margin basis, for sure, that will be negative to the 18%.

But whether it will be materially negative, way too early to say.

Disinfection, look, you might be right.

All we are saying is our crystal ball is about as good as anyone else's.

And we have seen a bit of a -- I wouldn't say a natural hedge, but we've seen a bit of a hedge here between customers.

The sweet spot, if I can put it that way, and not perhaps appropriate to talk about in a pandemic in that way, but as businesses start to reopen, that is the maximum need for disinfection services.

So getting ready to reopen, giving reassurance to people it's safe to come back, is the moment where we get our core revenues back, but we also have disinfectant revenues.

Once you're fully opened and lockdown has lifted, people are milling around the offices and shops or whatever, then we are into a much more periodic and temporary nature of disinfection.

That will be more, there's a case, we need you to come in.

So I don't know.

It's just too early to say.

If you're right, then we're going to get a return to core revenues and disinfection.

Our assumption is we're not going to bank that we're going to get both.

If the pandemic situation gets worse, we'll get more disinfection and less core.

As it gets better, we'll get more core and less disinfection.

There could be a point when those 2 wires cross, those 2 lines cross and we get core and we get disinfection.

And you can count on it, if that market is there, we will definitely take it.

But we're not banking on it, because we just don't know.

Our next question comes from Andy Grobler from Credit Suisse.

Jeremy, firstly, thank you very much for all the help over the years.

And we're going to -- things have changed a bit since the early days.

Thank you, Andy.

A couple if I may.

On savings, you alluded to this earlier, but the GBP 35 million of savings in the second half, how much of that would you expect to be sustainable through 2021 and beyond?

Secondly, in French Workwear, one of your peers reported overnight with EBITDA margins in France which were basically flat.

That doesn't seem to be the case for you guys or it's hard to disaggregate potentially why the difference?

And then lastly, just on Hygiene, I know this is a very difficult question.

But as it moves away from just a GDP growth type of business, what are the expectations over several years, and kind of, I guess, strip out disinfectant from that and the potential for that just to fade in the coming years?

On the cost piece, Andy, it is too early to say.

We'll obviously have a better idea as we head through the half and we go through our planning cycle.

I think we -- as I said, we are looking to get people back to work.

So we wouldn't want to have that to be a sustainable cost saving.

I think where we are, we're going to be hunting around a little bit, is in the property cost area, in the travel area and see what that looks like, and as we introduce technology, whether there are any further savings from that.

But I think that's one probably for the prelims and for my successor to just have a look-through how that drops out of the planning process and what we can take forward.

We're certainly challenging the operators and the guys out in the field not to flow the cost back into their models and try and manage, because we've managed so well, I think, in the second quarter, but we don't want to starve the business from investment either.

So the cost savings need to be real.

Let's have a look at it when we get to February and see how much of that is sustainable in terms of margin [improving].

Andy, on your second one about French Workwear, to be absolutely honest with you, I haven't had a chance to read anything on Elis.

I've been too busy reading all your notes on RI.

So I haven't caught up to that yet.

If they've done a better job, good luck to them.

I know how hard we've worked to control the costs.

We've taken costs all above the line.

I'm not sure my French buddies would have done that, but I haven't had a chance to look at their numbers.

All I can say is I don't know that we could have done much more in France.

The situation happened very quickly.

It was a real severe lockdown.

We had, even in March, we had 40% of our customer premises were closed.

We've been moving away from flat linen over the years in our Workwear business, but we still have a reasonable chunk of high-end linen for Paris restaurants, white tablecloths, et cetera.

That business disappeared overnight.

We do quite a bit for motor manufacturers, that disappeared.

But anything I'd really say is I think we've done a really good job to control the cost there.

If the other guys have done better, well done.

And the encouraging thing for me is that the reopening that we're seeing across France, we're seeing the revenues come back.

So I guess watch this space.

The third one, about what can we assume about long-term Hygiene growth, obviously, if I knew that, I'd love to tell you.

It's challenging enough running these businesses, knowing what it's going to be next week, let alone next month, quarter or the next few years.

All I can say is, for the last few years, I have characterized Hygiene as more or less a GDP business, more or less 2% to 3% organic growth.

We've been achieving 3% to 4% organic growth over the recent quarters and halves.

And Hygiene is a much more interesting place than it was when I was describing it as a sort of GDP business.

I think you're right to exclude disinfection from ongoing and for the reasons I gave earlier, I think probably to James' question.

But there is definitely a growth upside and it's not just in conventional markets we've been in.

So we've got a geographic upside growth in new markets and we've got a product line upside and we've got a definition of category upside as we move outside of the washroom.

So when we come to the Capital Markets Day, if I'm still giving as inadequate an answer to that question as I just did, Andy, then you can call me up on it.

But we just don't know.

It's clearly going to be positive.

When we come to the Cap Markets Day, we will give our very best view.

But for the moment, all I can tell you is it's bigger than it was 4 months ago.

I hope it could be quite material, but too early to say.

Our next question comes from James Beard of Numis Securities.

It was a question on Hygiene North America.

You sort of alluded to using Ambius as your sort of initial launch path in the territory.

Just wondering how long you can sort of do that for and what the sort of the longer term organic plan there is?

And also, whether this is a -- the extent to which this is an area that you're going to be prioritizing M&A over the course of time?

Are there sort of reasonably chunky Hygiene businesses in the U.S. that you would look at?

Are you building (inaudible)?

James, I'll take the second part of that first, knock back under the boundary.

No, I don't think M&A for North America Hygiene is particularly likely.

There aren't too many obvious players.

Rentokil used to be in that market 35 years ago and got out of it.

There aren't many players.

So I think our approach is going to be a little bit more niche, and we're going to figure out where we can play, how we can scale off of our Ambius footprint.

We're going to see how well this sells and what do our customers need, what do they want, what do they want in the washroom, what do they want outside the washroom, and we're going to play it from there.

So you can consider it a really extended pilot, if you like.

We're out there.

The sales guys are selling.

The service guys are servicing, but it's literally day 1 of a new play and we'll see how it goes.

If we're very successful, then you're right, it probably isn't sustainable to scale it off of Ambius in perpetuity.

But as I said, I think increasingly, and I've sort of dropped hints of this in the past, I think at some point, the Hygiene category probably gets broadened out into a Hygiene and well-being category.

We've talked about that a couple of times in previous results.

And were we to do that, it might be that Ambius is a more natural cousin to Hygiene in that sort of expanded model than it's previously been thought of.

So it may well be that the concept has got legs beyond just the next few months, year or 2. All to be proven.

So for me, it's a high-class problem.

If we conclude that the model is not sustainable because we're so successful, then we'll come up with a different model.

But as I say, metaphorically, we're day 1 on an extended pilot in the middle of a pandemic.

We're fortunate we've got a second business that is well-known in the American market, well-trained and with good level of experience.

So let's see how we go.

And as soon as we know, we'll share the answers in the Capital Markets Day.

Our next question comes from Jane Sparrow of Barclays.

I have one question.

It's a quick one.

So just wanted to understand the revised timing for completing the systems migration in the U.S. Is it just the case of a delay of a few months?

Or is it that you're going to resume that migration at a slightly slower pace because you've got lots going on with managing COVID and managing the launch of Hygiene and stuff?

So just trying to understand how fast to the right that margin target might be pushed and whether it becomes more of a sort of medium-term margin target without a specific time frame on it?

So it's just there at some point in the future.

Thanks, Jane.

Tempting though it might be to say it's sort of moving out into the future, that isn't how we think about it.

The target remains the target.

We are all committed to it.

We were making really good progress in the first quarter before COVID-19 turned up.

We've actually made good progress in the second quarter notwithstanding, but we can't pretend that nothing has gone on here.

We've not done any M&A for the last few months.

Our organic machine in commercial has been temporarily impacted, it's slowed to a stop the IT program up until this point.

And we've still got a raging pandemic through parts of the United States of America that nobody knows really which way it's going to go.

So it makes it very difficult for us to give hard and fast answers to a lot of questions, same as most companies.

But we're not saying this target has pushed out a number of years.

It may be that it's pushed out a little bit and that's what we've said in the statement.

I think specific to your question, you've lost a few months on the IT program.

Is it a question of a few months or is it more?

I think it's a few months.

We've stopped that project in its tracks, and we stood down the consultants.

We stood down the teams.

We couldn't get to the facilities to do any hardware.

And the project's back on as of a couple of weeks ago and the consultants are back and the teams are back up and running.

So we haven't just lost 3 to 4 months.

We've lost a bit of momentum, a little bit of steam in the machine as well, but we'll catch up some of that over the next few months.

So our view is we are as confident that we will get to the margins as we've ever been.

We're sure we're going to get there and we're confident we're going to get close on the revenues this year.

And if we don't make the margins next year, it will be a bit later than next year, but we'll still make good progress next year.

So but for the pandemic, I wouldn't have expected to be saying anything really different and I'm not going to use the pandemic as an excuse to change any of the messaging I've given.

This is an achievable target.

It's stretching, but we were making good progress and we expect to make good progress again.

As soon as normal service has been resumed, we're well on the way to resuming normal service, but we have had an impact and I'm sure we're going to still see some impact in the second half.

But directionally, no change.

We have another question from Matija Gergolet from Goldman Sachs.

Yes.

Just 2 quick questions from my side.

It's getting quite a long call.

First one.

Regarding to the government support schemes, I mean there were quite a few government support schemes, furlough schemes, in several countries.

What can you say is the benefit?

Can you just quantify the benefit that your employees got, let's say, in the first half of the year from these schemes?

And also, do you still have any people on furlough currently or at the end of the semester, whatever you can update us on?

And second question is return a little bit to the theme of working from home.

We talked a lot about -- or you talked a lot about HORECA exposure, et cetera, but what is the exposure, say, to offices?

You know, say, there seems to be a debate in the market of maybe going forward, there will be less presence in the offices.

I understand your point that not -- there might be, say, your servicing in washrooms, et cetera.

But let's say, both for Hygiene as well as for Pest Control, what kind of exposure would you have towards the traditional white collar offices overall?

Thanks for that.

I'll take the first one.

JT will take the second.

Look, on the furlough situation, back in, whenever it was now, April, we felt, as a company, we had a choice to make.

The choice was to manage costs in the business through considering significant headcount reductions and redundancies.

Or we considered could we manage our way through the crisis in a shared way with salary reductions from the top down, hours reductions, furloughs and similar government schemes, temporary redundancies, and get us through the crisis and it's largely intact and we get all our people back.

And we went down that route.

And nearly everyone is back in the business, not everyone.

We still got a few people out on furlough or furlough equivalents.

They'll be back hopefully soon and very few job losses across the organization.

And I would say, a little rare for me to compliment the government.

I think the U.K. scheme was excellent.

I think that was a brilliant scheme from the Chancellor, and we've had similar benefits from other schemes around the world.

So my view is the schemes were put in place to preserve employment.

That's how we view them.

That's what we've achieved.

We're getting nearly all of our people back.

Terms of conditions restored, which is one of the reasons why the cost savings in the second quarter, a lot of those cost savings came from salary reductions, et cetera, some contribution from furlough and similar schemes.

And in the second quarter, we are not taking much advantage of those schemes.

And -- sorry, in the second half, we're not taking much advantage of those schemes.

And pay and rations have been restored.

So -- and people returned to work.

So that's our approach.

We've nursed the business through the second quarter.

We've shared the pain across the organization.

We've preserved employment with support from government schemes, for which we are extremely grateful.

They've been effective.

In our case, we preserve those jobs.

And now we're, as much as we can, we're back to business as usual in the second half.

In terms of offices, Matija, just under 10% of our business is in facilities and property management, which is majority office work.

That is much more skewed to Pest than to Hygiene, so probably less vulnerable to working from home.

The offices, if it's all open, it's going to need Pest Control.

And on the Hygiene piece, obviously, there's a mix there between increased hygiene requirements because of the COVID and potentially lower hygiene requirements because of less footfall, and we're going to have to keep an eye on that to see how that works its way through, as we've already said on the call.

But it's much more focused on pest than on Hygiene anyway in terms of that 10%.

We have no further questions.

So ladies and gentlemen, this concludes today's call.

Thank you for joining.