Rentokil Initial PLC (RTO) 2020 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Rentokil Initial 2020 Preliminary Results Q&A with Andy Ransom and Stuart Ingall-Tombs. (Operator Instructions)

Our first question here comes from Sylvia Barker from JPMorgan.

Two questions from me, please. Firstly, obviously, you've not referred to the organic and we have tried to guesstimate the various kind of impacts from acquisitions. But just broadly speaking, could you talk around kind of the organic excluding disinfection into Q4? And what you're seeing so far into Q1? So my initial impression is that it was probably similar to -- a little bit weaker into Q4 relative to Q3. So it will be helpful just to hear your thoughts on that.

Secondly, on the 3% to 4% organic, could you clarify -- that's in the 2021 outlook section. Could you clarify, that comment on 2021 and for the medium term? And just to understand within the 3% to 4%, you expect -- we still expect that the (inaudible) the Hygiene growth has been upgraded to 4% to 6% from 2% to 3% previously. Is it -- is something else being downgraded within that? Or how should we think about it?

And then finally, in North America, obviously, a lot of moving parts. Could you maybe just remind us the kind of pound million revenue from your pest services business or data for the 2020 figure?

Sylvia, thanks for the questions. Yes. Look, we said early on, we weren't doing organics for 2020, and that's for good reason because there's so many moving pieces and so many ups and downs, countries moving up and down, regions up and down, categories moving up and down, it really is a meaningful -- a meaningless exercises, as I should say.

Broadly speaking, what you saw on organics was broadly correlated to those charts we put in the deck, which showed you that as the year progressed and the lockdowns and the suspensions improve from the second quarter, we typically saw the business follow those lines. So Q4, directionally, a little better than Q3. Pest held up reasonably well and better than Hygiene. Hygiene, better than Protect & Enhance. But really trying to get underneath it and pick it apart, I think, is not really terribly informative of the business because it is really a function of those local lockdowns.

We had businesses going from growth to negative and back to growth again. And it doesn't tell you anything about the business other than frankly, the businesses are correlated, particularly commercial businesses are correlated essentially to those suspensions, which are following lockdown.

So broadly speaking, the fourth quarter showing positive trends on the third. The third, much better than the second. The second, obviously, the worst. But again, we've seen, say, in the U.K., we're all living here, aren't we? We've seen the impact of the third national lockdown, again, impacting the U.K. Whilst in Australia and New Zealand, they're back on the beach, back -- down in the park back watching cricket. And you've seen that organic rebound. So not trying to duck the question. Just I don't think it's particularly informative really of how the business is performing.

The 3% to 4% -- I know you're a numbers woman, Sylvia, so you've asked me the numbers question. I wouldn't really read it, certainly not, but because we've upgraded the medium-term aspiration for Hygiene that somewhere else, we've downgraded somewhere else.

Just to remind, last year, 2019, organic growth in Hygiene was 3.9%, and the year before was 2.9%. So we've been saying that, that's a category that over the medium term probably grows at 2% to 3%. And what we're saying is that's a category that now we see grows at 4% to 6%, very similar to Pest Control. So does there have to be a correlation between our overall growth guidance for the group of 3% to 4%? Well, we'll come back and update that this time next year once we're through this year of transition.

The specific question of does the 4% to 6% apply to the year itself or is it the medium term. It is essentially a medium-term statement. And it's really for the same reason I gave earlier that you're going to see some very, very odd organic numbers for lots of companies this year because it's going to -- the lap on Q2, which is when the pandemic hit most, is going to look very positive for a lot of companies. So yes, it's the medium-term aspiration that we're talking about in the 4% to 6%. Underlying core Hygiene, we think, comes back nicely as businesses reopen.

And I mentioned Australia, Sylvia, but it's really a good example. As we've seen Australia and New Zealand, really the first countries, hopefully, on the other side of this pandemic and people back to work and back in the shops and going about their normal lives, we really have seen the recovery of the core businesses bouncing back very quickly.

So that's really what we're saying. Let's trade through the unusual trading conditions, I think, we all experienced in '21. But '22 onwards, we think, Hygiene is a very good medium-term play, very similar to Pest Control. That's the core message.

Stuart, did you want to pick up the third question? It's on as control revenues.

Yes. So core pest services revenue in 2020 was about $900 million, Sylvia. So constant exchange rate, it's about GBP 750 million. If you can include all the services businesses, it's about GBP 1 billion.

Our next question comes from Andy Grobler from Credit Suisse.

Three questions, if I may. The first one, just on cost savings, you called out the GBP 122 million last year. How much kind of net comes back in '21 and '22?

Secondly, around Hygiene and international expansion into those new countries. Excluding the disinfection work, what kind of scale did you achieve last year? And when you look at those markets, can you give us a kind of quantum of potential size and also whether margins and returns are similar in those new areas once you reach a certain scale than the countries you already operate in?

And then lastly, just on colleague retention, which you called out at 89%. Maybe in specific markets, U.S. Pest Control or whatever is most relevant. How would that compare to the competition? And what kind of benefits -- apart from the, obviously, social benefits, what kind of commercial benefits do you think that provides to the group?

Thanks, Andy. And, Stu, you take the first. I'll take the second and third.

Yes, sure. So the GBP 122 million, Andy, a large proportion was the onetime cost savings from the Q2 action that we took: bonuses, LTIPs, high reductions. So pretty much all that comes back. I think it's an open question for us exactly what we can harvest from the new way of working that we're seeing. So the model where people work partly from home, partly in the office, sort of hybrid way of working. So that's an open question for us. It varies market by market. So I wouldn't be writing down a big cost-saving number to carry forward into 2021. It's looking pretty modest by 2020 comparisons. But we're certainly exploring what our opportunities are there.

On the international -- sorry, did you have a follow-up there, Andy? Sorry.

Yes, sorry. I wasn't sure that there was -- I wasn't very clear what to think from that. So if the savings were GBP 122 million last year, what should we -- round about, should we assume? Do they all just disappear? Or is it kind of GBP 100 million goes back in? Or any kind of quantification would be very helpful.

Yes. I mean I'd certainly see about over GBP 100 million going back in.

Yes. International expansion. Look, it's one of the reasons that we're having Capital Markets Day or subject to conditions around the Capital Markets Day is that we're going to do a deep dive for you on the Hygiene opportunity, the geographic opportunity as well as the broadening of the category. Relatively small, don't have a number for you. We're not disclosing that at this stage, Andy. Relatively small, I think, is the answer. If you think about it, we're going into markets, in some cases, that we have no position in Hygiene; in some cases, markets that we used to be there 3, 4 years ago.

In terms of medium-term margins, yes, they will have the same -- exactly the same shape and ability to get to those, but you're quite right or implied in the question. In the early days with a lack of density, you would expect that to be margin-dilutive to the Hygiene category. But it's one of the reasons we say, look, we're going to approach this through organic and through M&A. If we're able to secure core anchor opportunities through M&A, then you've got density on day 1, and we build on that density. If we haven't, it's all done organically. What we will typically do is to try and graft those revenues to a degree onto our Pest Control cost base. So we will try and use as much of that existing Pest Control density and overheads as we can to support the business. But that won't be possible in all cases.

So early days, it's small to start with. It will build over time. It will be relatively low margin to start with. It will build over time. We will do acquisitions where we see good opportunities, and that will give us better margins. But it's a medium-term play and relatively small numbers in the first few months of trading in that way.

The colleague retention, to be quite honest, I don't know what competition's number is recently. We've been tracking and publishing our colleague retention numbers for a long time. Different companies add them up in different ways. I think what we've seen is there's 2 factors here. One, we would feel that we were as good as an employer as we possibly could be during the pandemic and we took our obligations to our colleagues very seriously, and I think that was rewarded through retention. But equally, it was a relatively difficult job market. So that was understandably, I'm sure. Colleagues more likely to stay than go in that difficult job market.

We see a very strong read across from colleague retention into customer retention. And that's really the economic play, if you like, Andy, that if we can't colleagues in row in place doing the same job for the same customers, the customers like that. They like seeing the same technician, in particular, they like seeing the same salesperson. They don't like it when we chop and change, when we have to chop and change.

So really, that's where we would hope to see the sort of lag benefit of improved colleague retention. Obviously, there's cost benefit of not having to hire new people, not having to train new people, not having to take a risk of hiring someone who's not up to standard, and they take quite a bit of time to get to standard. But overall, the main economic benefit, we've typically seen is strong colleague retention translates into good customer retention.

Our next question comes from Edward Stanley from Morgan Stanley.

I've got 3 questions, please. What activities are you seeing from your bigger commercial clients who are already returning to work? Are you seeing more call-out spec business as normal? I guess I'm trying to understand, will we see a wall of business in commercial as people get back to their desk and see wrap droppings everywhere like we have at Morgan Stanley?

Second, you had previously essentially guided that disinfection services would moderate at the end of 2020, but it's actually kind of accelerating. Now you're saying it will definitely happen in 2021. But I'm just curious why -- whether it has slowed so far in 2021 and why wouldn't you see it accelerate in Q2 as European businesses start to reopen, and whether that's just because there's more competition emerging at lower prices?

And thirdly, on digital Pest control, on PestConnect devices, you say you're now at 150,000. I think the last figure quoted in the press was around 80,000, and doubling feels a lot more than just customers wanting to keep their distance from technicians. And you also have a pipeline of more devices. So is this in response to the competition in the area of Digital Pest Control? And what operational and financial benefits are you finding those devices deliver in growth or EBIT or customer retention, please?

Thanks, Edward. Yes, in terms of what activity are we seeing as customers go back, it's probably too early to say for 2021. We did see when, in 2020, when in the summer, in the Western Hemisphere summer, there was a significant reopening. And we remember the Eat Out to Help Out Scheme in the U.K., for example. We did see that when customers were reopening and they hadn't been open for some time, there was quite a bit of cleanup, quite a bit of catch-up to be done. And it's a bit too early because we haven't yet got to the point where in markets like the U.K., you're seeing that sort of grand reopening.

Most of our -- as we've shown in the data, most of our customers have remained open and have remained open to taking our services. And so they're well-looked after. So your question is really in the context of the relatively small number or in the U.K., a larger number of customers that are currently closed. And the short answer is yes, we would expect to see -- if they haven't taken any service because they've been suspended and its Pest Control and they have food on their premises, you would expect there to be an element of catch-up. Nothing that we can't deal with.

And if you've got specific problems over at Morgan Stanley, you've got my details. Now you're about to tell me we're already doing your business. So don't tell me that if we haven't solved your problems, Edward.

(inaudible)

On disinfection, look, I think we're just trying to be as transparent as we can. We see the disinfection story having 2 or 3 dimensions, but the main dimension is it is correlated to a state of lockdown in one form or another, but business is remaining open despite the lockdown. So very much like here in the U.K., we're in a lockdown at the moment. But premises which are open have an ongoing need, and specific sectors in those -- in the lockdowns that are open have a specific need. So we've got quite a few customers who have to be open, their employees have to be in, and they need disinfection.

Where you see that the lockdown disappears, and a really good example, Australia and New Zealand, colleagues back at work, people back at work, but no ongoing need for disinfection. That's what we see. The customers are saying, "no, thank you very much. You helped us through the crisis. We'll still call you out if we have a case, if we have a COVID situation, we have an emergency. But we don't need you. Thank you because we're not going to spend money on disinfection now we're back to work." That's essentially what we see. That's what we're expecting to see.

The second dimension is how frequently you have disinfection done. We've got a lot of customers that in the height of the crisis, once you've hit -- carried out every day, and we see daily moving back to weekly. Previously, we had weekly moving up to daily. We now see daily moving back to weekly. Each customer is different. But there's a general trend, the service frequency, how often do you want us around to do disinfection. That is going back to a less frequent model.

The third, we mentioned, is price. Yes. I mean it's -- we're arguably, I think we moved fastest and first into the space and trained our people up and made a very technical service available to a lot of customers. We have cheaper alternatives available. A lot of companies have gone into it and offer as a service, and they do offer at a lower price. Our view is it's a lot lower standard. And -- but that's your choice as a customer. So I think it's a combination of lockdown unwind, service frequency rolling back to less frequent and more competitors in there.

So yes, we did indicate that before. That's because that's what we thought. But equally, we didn't see the world move as aggressively as it did in the fourth quarter back into lockdown. And that's -- it makes the point as to why the volume is correlated and the value was correlated to the lockdown conditions. We'll see. And I think Q1 disinfection will be lower than Q4. Our view is Q2 will be lower than Q1. And let us see what the world is looking like in the second half. But we do see -- I talked about this before, the hedge effect effectively.

As -- if coronavirus takes longer to abate, disinfection will be around a bit longer. But our core business, which is not back to work, will be a bit longer before it's back. I'd referred to it as a tide. But as coronavirus abates, which we would expect it to, tracking the vaccine, then we would see that disinfection tide to go out, but we would also see the core operation coming back strongly.

So that's how we think about it. We can only share with you, Edward, the best view that we've got, and that's what we've done today.

Digital, I think, is a really interesting story for us. We've had our digital offering now for a number of years. We've positioned it very much as a niche as a premium product, top manufacturing, pharmaceutical, microelectronics, clean room-type customers, and we positioned it as such.

In 2020, as we went into 2020 before we knew what was coming, we were determined that 2020 was going to be a key year for our Connect product to see if we could convert a material proportion of our commercial Pest Control customers in the United Kingdom. That was our pilot market. Could we sell the broader benefits of Connect to a wider customer base, and really take the U.K. and see if we can prove that we can do this on a large-scale in the U.K. Notwithstanding the coronavirus and maybe arguably, in part because of, we were still able to make very, very good progress in the United Kingdom in 2020 with PestConnect.

We mentioned Tesco. That's a big customer account. That accounts for quite a bit of that unit increase from '19 to '20, but we've also got a lot of other customers in the U.K., which are now taking -- commercial customers that are now taking Connect as their standard offering.

So no, we don't see this as going head-to-head with competitors. This is something we see. We've got a marked advantage and a lead. The advantages for the customer is better pest control, 24/7, 365 transparency, having a burglar alarm. You've got a pest control alarm that is effectively telling us when there is an issue, when there's an activation. It also means we can look at service frequency. We can leave devices in the field for longer. If they're not being tripped, there's not activity, that has a margin potential. But it also means we can make early intervention. So when that alarm goes off, we can deal with a problem before it becomes a crisis. So there's quite a lot of economic and pest control advantage to the customers.

Overall, when we're selling it as a niche-for-niche premium product, it's comparable to our margins and slightly above. We're now moving into less nation more mainstream. But overall, we would see, again, it's a comparable margin play to our business at this point in time.

So 150,000 devices. I'll be disappointed if we weren't 250,000 to 300,000. Not quite exponential, but doubling again in this year, but it's a strategic play. And as I say, we're focusing on seeing how much of the U.K. commercial market we can convert because it is better. Pest Control is better for the customers.

Our next question comes from Simona Sarli from Bank of America.

Yes. I have 3, if I may. So in North America and also in other regions, you benefited from the strong demand from the infection services from existing customers in Pest Control. So my question is, has your offering in these infection services helped you to get some contracts in core Hygiene? And if so, you have an idea of the conversion ratio?

And second question is a follow-up on Slide 44, you show the sequential growth improvement in core Hygiene, which seems to be back to growth in December. How does that compare to the trends observed in January and February? And similarly, if you can please comment on the exit rate in Pest Control in December. And how does that compare in January and February?

Third question is related to the operating profit margin that you achieved in 2020. And how sustainable is that in 2021, considering that disinfection services will be fading off?

Thanks, Simona. I'll take the first couple. And then Stu, you can pick up the margin. The first one was a broad question, North America, but more broadly, disinfection. Have we been able to convert that into Hygiene portfolio, into contracted customers and what's the -- if we have, what's the conversion rate. Not a lot is the honest answer. We are seeing it now. And this will be one of the interesting things for us to figure out with our customers as this tide goes out. As I said, as people move from, say, daily to weekly and less frequent.

I do think there will be an element of core disinfection lift. I think some customers will want to put the disinfection on a contract. I think they'll want maybe a monthly or a quarterly disinfection, and they'll probably want -- some of them will want a call-out for emergency disinfection, which is a business we've had for many years, which is how we got into it.

But at the moment, we're still in the crisis here. At the moment, we're not really setting people wanting to talk about converting the disinfection into a contracted disinfection, nor are we seeing a huge amount of converting the disinfection customers into hygiene customers. But we are seeing some of it. So I couldn't give you a conversion rate, it's not a number that we're tracking. I've been less than 5%. But it is a discussion that we're now beginning to have, talking to the guys in Indonesia last week, and they're having really good success with converting jobbing disinfection customers into Hygiene portfolio customers.

It's not just existing customers that we've sold disinfection to. So it's not just existing pest customers. And one of our biggest customers for disinfection is now a big customer for Pest control. So there is that cross-sell, but it's not the main driver of growth here. But I think as that tide goes out, I think that's the time for us to be having more conversations about, what about this service? And in particular, I was talking about air -- earlier, in particular, air. Why wouldn't you want air quality improve to protect your employees at work.

So ask us again in 6 months, Simona, and see we'll have a better answer as to how much of that is sort of sticking, if you like, whether it's in core Hygiene or Pest.

Look, in terms of your second question in terms of trends, we don't really comment the prelims on what's going on in the last few weeks. But overall, I would say, it's -- you've got 2 factors. One is the pandemic. I think in markets like the U.K., we got 2 things going on. One is, more lockdowns, therefore more customers suspended, therefore worse. On the other hand, the level of optimism in the U.K. within our business, more generally, is very, very high, but there's a big bounce coming on the other side of vaccination. So I don't think we're seeing anything surprising in the U.K.

Europe's a little bit the same, but not as bad as the U.K. Europe -- winter in Europe going to a little bit more lockdown than we've had in some of the European markets. But again, you're now seeing the positivity of the vaccine, a little bit behind the U.K. So real optimism coming from those markets.

U.S. really hasn't missed much of a beat, to be honest, continued strongly. Although in the U.S. as we say in Pest Control, we have had some weather. In the U.S., we've had the polar vortex and the very cold weather down in Texas and Southern states, which has a bit of a bearing in February.

But look, I don't think there's any new news really from the start to the year from the end of last year, other than a little bit more lockdown in some countries, but strong recovery in markets like Pacific, in some of the Asian markets. So it's going exactly how I would expect it to, is the honest answer, Simona. No new news from the first couple of months of trading, I would say. Stuart?

Yes. And in terms of margin, I mean, Simona, we've already talked about a couple of headwinds around onetime cost savings. Clearly, North America, we flagged is we quite achieved the margins in 2021 that it achieved in 2020. But we've also got some positive stuff, reasonably significant bad debts. We expect to be lower in 2021 and 2020, the sort of lump of PPE costs that we bought in 2020 declines.

And in a number of markets, you saw margins decline in 2020, as volumes decline. And as we recover, we fully expect those margins to improve and recover as well. So I think the net of all that is we do expect margins to at least hold up where they were in 2020. And just to make the point really around cost management in Q2, if markets don't recover at the rate we expect them to, then we'll take cost action in 2021 as well. So I think we've demonstrated that we can collect our P&L to sustain margins at least at their current level.

And if I may, just one very quick one on cash conversion in 2021. You mentioned that it will be slightly below 90%, your target, because of the working capital. But how sustainable is this target in the medium term, considering that Hygiene will be accelerating and this is a little bit more capital-intensive than Pest Control?

Well, I think it is sustainable. Just to use your words, it's a little bit more capital-intensive, So -- but it's really not capital intensive. So we think that 90% minimum is thoroughly attainable. We don't see an issue with that.

Our next question comes from James Winckler from Jefferies.

Few might have been answered. I was just wondering, again, on sanitization. Obviously, you've talked about how -- a bit of the lack of transparency is that most of this has been done in short-term work orders. Wondering if there's been any sort of progress or any traction rolling in some of this work into longer-term contracts. Or is that still not something that's happening?

And then 2, on the M&A opportunities in Hygiene. Obviously, U.K., given the concentration, it's a bit of a difficult market to add more transaction into. So is this more of a continental year up to bolt-on and supplement some of the markets you've reentered or entered? And what the sort of pipeline for M&A looks like there?

Thanks, James. Yes, on disinfection, I'd sort of touched on a little bit earlier. No, we're not seeing a lot of that sanitation, as you call it, disinfection jobbing revenue convert into portfolio. We are seeing some of it, as I mentioned, in some of the Asian markets. And it's something I think that we would anticipate seeing as that tide goes out as we do move to more normal conditions. I think that's the point at which we'll say, would you need a monthly or quarterly call-out service?

So some conversion into portfolio, but pretty small, to be honest, and I would expect it to be relatively minor. We'll see. I mean, none of us really know what the world will look like in 6 to 12 months' time. It may be that customers do want that more routinely. But for the moment, we will treat it as, effectively, a onetime jobbing service as customers need it.

M&A hygiene, yes, I think you put your finger on it, James. We will be selective and looking for good quality hygiene businesses. Continental Western Europe is a place that we would look. Obviously, we used to have businesses in markets like Germany and Holland and Belgium; Austria, Switzerland that we don't have. So these are markets we know well and in markets that we have good strong Pest Control businesses. So they're likely to be markets that from an M&A point of view, we will target.

Pipeline to hygiene, I would say, it's reasonable. I don't think it's burgeoning at the moment. Pest Control pipeline is still good. Hygiene, we're just really in that building phase. And it's a curious time. If you are a hygiene operator, it's probably arguably not the ideal time to be thinking about selling your business. You're probably going to be more likely to want to do that in 6 or 12 months' time.

So yes, you're spot on in terms of how we would think about it, a reasonable pipeline, and we'd expect that to build over the next 12 months or so.

And sorry, one more on M&A with France Workwear. Obviously, sort of 3-year turnaround, which obviously got impacted by COVID. Is the -- do you still have sort of near-term expectations of being able to sell that business? Or has that been materially delayed because of coronavirus?

Yes. Look, I don't think -- I don't think I've ever shared any near-term expectations of exit. I've simply said we are fundamental value managers. Our approach is, it is clearly not core as Pest and Hygiene is. It's the only workwear business that we have left in the group. It's a business that has required a 3-year turnaround plan, which has been going very well, and it's a business that needed to be separated from our French Hygiene business. And that project went very well as well.

So I really haven't changed my view on this one, James, which is if there is an opportunity where we can create value for shareholders and look at a potential exit down the road, then we will. If that exit does not create value for shareholders, then we won't. So we're very much focused on what's the right answer for the business. If we get the right answer for the business, we get the right answer for the shareholders. So it's not something that I'm overly concerned about.

And yes, as one would expect, it had a difficult 2020. But again, we're seeing, as customers open and reopen, their need for workwear, their need for flat linen in restaurants hasn't diminished, hasn't gone away. So we think the business should come back pretty well as the French economy reopens. But no burning concern in -- with me at the moment, James.

We now have a question from Matthew Lloyd from HSBC.

Just slightly kind of general question for me because I think so much has been covered. In terms of air and sort of disinfecting air, so to speak, what technologies are you using? Is it dry hydrogen? Is it UV? Because I think sort of that whole space is moving very, very quickly. I wondered whether you sort of placed a bet on one technology or another.

I always love getting a tangential question from you, Matthew. It always keeps me on my toes. Thank you for that. The technology -- you're speaking to that a retired lawyer here, not a scientist, so you'll have to accept my answer as I understand it. But I talked in my remarks on the initial virus killer product, which is the main event in our portfolio at the moment. And that's using 2 technologies. But it's the combination of the 2 technologies.

It's using a hospital-grade HEPA filter, and it's using UV light as well. And it's the combined dual effect of the HEPA filter and the UV which gives that log 6, 99.9999%, it's that combination. You're quite right. I mean we've looked at a number of technologies, and there's a lot of -- plenty of stuff out there at the moment. But in terms of having something that's available now at a sensible price point, which gives that really quite impressive level of protection, that virus killer unit, we think, is a very strong player in that space.

We have a question from Jane Sparrow from Barclays.

I've got one question on the IT replatforming in the U.S. and then a couple of follow-ups on other questions that were asked earlier. So just on the IT replatforming, Slide 15, where you showed the progress that you've made so far. Obviously, good progress in 2020. There's still a good chunk to come there in 2021. Just in terms of the sort of risk profile is that replatforming. When something sort of 50% complete, is it sort of more than 50% done from a risk perspective? Does the risk profile sort of stayed in that second half of the project? And is it that, that gives you your confidence in your reiteration of the 18% margin target by the end of 2022?

And then the 2 follow-ups. One was on hygiene M&A. We often spend a lot of time talking about competition for pest assets, especially in the U.S., but could you perhaps just comment on the sort of competitive environment for acquiring hygiene assets?

And then finally, on digital. I think you said there's a comparable margin on that product. And when you're offering that to more mainstream -- as a more mainstream offering, does the customer pay a higher price to reflect the investments you've made in digital? Or are the investments funded by the lower cost to serve that product? Just wanted to understand those dynamics a bit better, please?

Jane, yes. Stu will take the first one. I'll take the next 2.

Yes. So on the IT replatforming, Jane, yes, I think 50% probably reflects 50% of the risk, honestly. We know what the systems are. We're into implementation of them. We're confident in the technology. We've got very good plans. And from what we've seen so far, we've executed the plans very well. So I don't see a particular bias around risk and opportunity, depending on where we are on that curve. But nevertheless, we will get the benefits, the majority of them as I think I've said before, at the back end of the implementation in 2020. So in that sense, it's to come. We won't get the benefits until most of it's completed and those start to flow through. And that's the nature of a big system consolidation, if I'm honest.

So it's going well. We're very confident. We've got the right technology. We've got the right plans, but it's not done until it's done. Thanks, Jane.

Your second question, Jane, is about competition within M&A for hygiene assets. Yes, look, I think your comment is right. I think, typically, a good quality pest control asset in a good market, there's going to be a number of people wanting to take a look at it. That's not necessarily the case for hygiene. We haven't seen much evidence. There's 1 of 2 people out there looking in a number of markets, but I don't think in the way that we are structurally looking. It's as crowded a space at all. So I think your comment is fair.

The digital one is a little bit more difficult to answer. The answer is, it depends in terms of pricing for digital. So much depends on what regime the customer wants as a follow-up to an activation on a connected device. So if you are a pharmaceutical tablet bottling unit, and you have an activation that there is a mouse in the pharmaceutical plant, you want that dealt with immediately. You don't want us to come down 24 hours, 48 hours, like you want us to come down immediately. So if you want that sort of emergency response service, that costs more.

We've got other customers who -- they expect to have some mice running in a warehouse. They want to know where they are. They want to know what level of infestation they've got. But they are fine if we pick it up in -- within 24 hours or 48 hours, depending upon what agreement we have and when the next visit is. So it really is a function of whether you want gold, silver or bronze as a function of what price you pay. But overall, the selling proposition is, essentially, you are getting a significantly higher level of pest control. So you would expect to pay some more for the connected version because you are getting 24/7, 365 as opposed to 10 scheduled or 8 scheduled visits a year.

So it is still a premium, but that's a function of how often or how quickly you want us to respond to a triggered event.

Our next question comes from Christopher Bamberry from Peel Hunt.

Sorry, Christopher took off his question. So our next question will be from Dominic Edridge from Deutsche Bank.

Just 2 questions from myself on the U.S. Firstly, in terms of your business -- the Pest Control business in the U.S. is obviously a little bit underweight residential versus the market. Given the relative outperformance of residential over 2020, have you sort of changed your views as to where you want that mix to be at all?

And then the second question was just obviously on the acquisitions that you made in January. It looks as though there's quite a lot of overlap both in Florida and I think in a lot of few other locations as well. I think, roughly, I think about 10 to 12 on our current branches overlap geographically. Would you regard the acquisitions is so much about building density, i.e., there'll be quite a lot of consolidations in the branch network over the next few months?

Thanks, Dominic. On the mix one, I don't think we've really changed our view. I think if we look back over a very long period, decades, arguably, we would have typically said that commercial pest control is our sweet spot and where we have the expertise, the differentiators and where we frankly see the long-term growth potential in the industry. That doesn't mean to say that we're not good at residential pest control, but we have focused for a number of years on commercial, as you say.

Resi, for us, we're big in resi in the United Kingdom, in Australia and New Zealand, 1 or 2 markets in Asia. But most of our markets, we are predominantly -- very significantly, predominantly a commercial player. And for those markets now, I wouldn't really see any change in our attitude.

North America, states, in particular, as I've said many times, half of the world's pest control takes place in the United States, and that has a very, very big residential component in that market. So really, for the last 10 years, we've been building up our residential position. But not because we prefer resi to commercial or in the states, we have a different strategy. It's back to actually, your second question, which is about density. So to drive good margins across the route-based business, you've got to have a decent customer concentration within a post code or a ZIP code. And therefore, for us, we use the blended opportunity of commercial and residential in a city is the means by which we get to the margins that we're trying to get to and that we do get to.

So I wouldn't say it's been nice to see how resi has held up so well during the pandemic, and that's good. And we've built a much bigger resi business in the states in the last 5 years, but it's really a function of driving density than it is a switch out of one into the other. We're still the kings of commercial pest control, and we'll still look to build city-based density with residential and commercial acquisitions where we can.

To your second point, yes, and it really is the M&A roll-up for us has 2 components. It's got a city-based density play. And in America, we've got a color-coded heat map. So every single metropolitan statistical area in the states, every single big city in the states, we have calibrated into working out whether or not this is a red, amber or green. And that's a function of what density we've got and what density we think we can obtain in those city markets.

So when we buy a business, it's in a city that we've already previously identified that we want to move up from a red into an amber or from an amber into a green because with density comes margin. So you're absolutely right. We will see branch consolidation off the back of the EPS, but also other acquisitions as well.

The second type of deal that we do that we don't tend to talk about so much is more than flag planting types of acquisitions where we go into new cities, sometimes new countries. And these are cities, we call them the cities of the future, but these are the cities that we've identified where we see really good growth opportunities over the next few decades, frankly, not necessarily over the next 2 to 3 years. These are big cities around the world where the rate of GDP in the country is strong, but where the rate of GDP growth in the cities is even stronger. So our play is identify the cities of the future. Acquire entering platform acquisitions, build scale over time in those cities. And in the fullness of time, they will give us very, very, very strong platforms in high-growth cities of the future.

So that's the way to think about it. Some of it spent on cities of the future. Some of it is spent on building density in targeted markets based on what our current position is today and what we think the opportunity is. So yes.

We have a question from Allen Wells from Exane.

Just in the interest of time, just one from me. Obviously, the commentary around progress on digital, Pest Control, new product launches in Hygiene. I'm just kind of interested to understand if there's any kind of step-up in investment requirement for you guys. Obviously, you talked a little bit around some recovery in CapEx in 2021. But would we expect this to be a slightly higher capital intensity within the business as we move forward?

Yes, not materially, Allen, not materially. I think we already spent a bit more on the capital side of the business arguably than some of our competitors in pest control because we are investing in technology and we're investing in innovation, much of which is now connected technology. So that does cost more. And the level of capital, as answered to the earlier question, the level of capital required to support a hygiene business is a bit higher than pest control.

But I don't think that translates into a material upweighting of capital expenditure in the business. I think it's within sort of levels that you've seen consistently over the last 2 or 3 years. If there's a material kick up, it can only be if we're being very successful in driving the hygiene growth opportunities. So probably one to hold that thought for the Capital Markets Day. But I would not be signaling a material increase in CapEx based on the current strategy now.

Our next question comes from Sam Dindol from Stifel.

Two quick questions from me. Firstly, with Anticimex looking to IPO, perhaps in the summer, do you think that could impact the pricing environment for M&A investment profit onwards?

And then secondly, in digital. Obviously, you had a pilot this year to push passage in the U.K. What would you need to see sort of a similar thing in North America and perhaps back to the disruption in that market?

Yes. Look, on Anticimex, all I know is what I read in the media, if indeed, they are coming to market as an IPO. For me, all that really represents is a change in the identity of some of their shareholders. And it doesn't fundamentally change who they are. No doubt it will fundamentally change their strategy. It does mean that they'll have to do as we do and present the numbers and give the transparency and run the balance sheet in a way that public companies have to do as opposed to private equity ones do. But whether that translates into a different strategy, you have to pitch that one to Anticimex. But my view is just because they're coming to market, if indeed, they are, I wouldn't really see that as a signal of any great change in strategy or particularly, in impact.

On digital, yes, look, we certainly do believe we've got the opportunity in the states, and it's certainly on the to-do list. But more importantly, first and foremost, is the IT replatforming in the states, which Stuart has touched on in his presentation. We need to get that done, finished in and have that consistent operating platform across the business. And then we'll have a number of things that we will bring to our North American market that we've already got in play in other parts of the business. So slightly coming to the North American market in the not-too-distant future.

Disruption, it's a much used word. We see it as differentiated at this stage. We see it as markedly better pest control. And that's how we view it and we're delivering a better service for our customers than is available from the competition. Whether that constitutes disruption, we'll see in the fullness of time. But it's certainly on the plate for North America, but let us finish the IT replatform first.

So we don't have any further questions from participants at this time. So I hand back over to yourself, Andy, for any closing remarks.

Thank you. Abby, thank you very much, indeed. Thanks for joining us this morning and all the excellent questions. Have a very safe day, and we look forward to seeing you again in the future and save the date for the Capital Markets Day on September 28. Thanks for joining. Thank you very much.