Rentokil Initial PLC (RTO) 2021 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Rentokil Initial 2021 Interim Results Q&A with Andy Ransom and Stuart Ingall-Tombs.

(Operator Instructions) Our first question comes in from Simona Sarli of Bank of America.

So I have a couple of them. So first of all, if you could please provide a little bit more color on your expectation of a profit before taxes and amortization in 2021, which is only GBP 10 million to GBP 15 million higher than market expectation. So I'm just trying to better understand because it sounds potentially conservative. So if I compare that to visible alpha consensus in H1, there was already a GBP 30 million bit, then of course, you have the support from seasonality in H2 and also stronger-than-expected M&A activity. So yes, if you could a little bit detail a little bit more this GBP 10 million to GBP 15 million increase.

And secondly, on wage inflation. So we have seen, especially in North America, a very strong wage inflation. So I appreciate that it's not fully comparable to Pest Control and Hygiene, but for lower -- less sophisticated cleaning services, we are tracking at the moment a wage inflation between 6% and 8% year-over-year. So what are you seeing in North America? And what is your ability to pass it through to clients?

Right, Simona, I think -- this is Stuart here. They're both for me. On your point about expectations, I mean, we always said that there was a whole bunch of uncertainty in 2021. And whilst we were calling a number, we weren't absolutely clear on how that would eventuate.

I think the key thing for H2 that you need to build into your targets and this is why we've been very clear on this is that we're forecasting to GBP 10 million to GBP 20 million of disinfection in H2. So whilst we've got very strong and very pleasing recovery in our core categories and we are expecting organic growth across our core of I think we said mid-single digit across 2021, we're lapping disinfection in H2 of GBP 175 million in 2020. And so that's your comp.

That's the tapering of disinfection is what you're seeing -- what you would perceive as to be conservative, we're saying no, actually, that's a pretty strong recovery in our core to offset that tapering of disinfection. So that's our position, and we're pretty confident about that, and it's absolutely what we're seeing in the way the markets are trading as they open up and that disinfection falls away. So that's our view on guidance.

On wage inflation, I mean, for sure, we are seeing pockets of relatively high cost relatively low supply of talent in certain markets in North America. They're the classic ones that you'd expect, the Bay Area, New York City, just as we'd say that about London or Sydney. But we do think that this is transitional, it's frictional. And where markets are more liquid where state support, particularly has fallen away, we're not seeing quite the same pressures.

And we're certainly not seeing increases of the order of magnitude. I think our operational response to this has been highly effective in offsetting it. So our virtual recruitment, our internal referral processes and honestly, the loyalty of our colleagues to a strong long-term business and the culture that they buy into and enjoy significant mitigants to those sorts of pressures. So I think the answer, we're simply not seeing across the board orders of magnitude of those sorts of numbers that you're seeing.

Then in terms of how we're passing that on to our customers. We're being pretty effective, if I'm honest. Where markets are still closed down, locked down, we're not seeing those inflationary pressures. Where markets are opening up, inflation is getting going a little bit, again, not to the extremes you're talking about.

But customers seem to be reasonably responsive and receptive to inflationary price increases because they are hearing and seeing the same things as the rest of us, and that's in their expectations as well. So we're pretty -- the inflationary cost that we're seeing is not the order of magnitude that you described in general. And insofar as we're seeing it, we are being very effective at passing that on to our customers.

Our next question comes from Andy Grobler of Crédit Suisse.

Three from me, if I may. First one on French Workwear, which has clearly had a difficult time through 2020. Do you think there's been any structural change to that market? And I guess, in the longer term, how does that impact the potential for exit from that business when plausible?

Secondly, just on sustainability within Pest Control, it seems that you're quite a long way ahead of much of your competition in terms of sustainability and ESG. Is that resulting in client wins or more interest in Rentokil versus some of those competitors, particularly in North America?

And then thirdly, and this might have to wait until the CMD, but just in terms of M&A opportunities within Hygiene, is there enough of size out there to go and look at? And I particularly think of the 16 countries where you are second or third. Is it reasonable to look at the #1 in some of those markets as a potential acquisition target?

Yes, Andy, thank you very much for those questions. I'll run through those. Look, French Workwear, perhaps not surprisingly, our most impacted of all of our businesses. It's obvious when you think about it because we are laundering 2 things. We're laundering uniforms for hotel workers, for frame workers, for manufacturing workers, and we're laundering flat linen for nice Parisian restaurants. And those sectors have all been hit quite hard.

I don't think at this point, we would see anything structural and purely a timing issue. We were already seeing the industrial sector coming back strongly. I was reading this morning as you all have been reading. No doubt that the French vaccine situation is pretty close to the U.K. now and soon to overtake, and the feedback from my French team, talking to them a couple of days ago, is really quite positive now.

So quite an optimistic mood in our French business in Workwear. We don't think it's structural. We think it's timing. We think HoReca comes back in full. I think people go back to restaurants and fine dining in France. It would be a strange world, frankly, if they didn't. And in the other sectors, we think they're coming back. So I don't think anything to worry about on the structural side there.

And like all good companies, if you have crisis conditions, you have to look hard at the business, and (technical difficulty) the way businesses have responded and potential for exit. I can only repeat, Andy, what I've said many times, there may well come a day in the future where the ownership of that asset would create more value for our shareholders for it to be someone else other than us. But that's not something we need to do. It's not something we're currently looking at. We'll look at it, no doubt, as we do periodically, on the bounce of the recovery, and we'll take another look then.

But equally, if it creates more value to keep it, then we keep it very happy with the business. So nothing to worry about structurally there. Sustainability, I'm glad you raised it because I predicted yesterday, I said I won't get any questions on sustainability because I never do.

So I'm delighted that you asked me the question. Particularly on big ticket sales, particularly on national and international accounts on tenders, there isn't a single tender now that we see pretty much anywhere in the world that doesn't raise sustainability as part of the criteria.

Now what waiting they give it how important it is relative to price, quality, other terms, that varies tremendously. But the key thing is it's now on the list of pretty much every big buyer. And certainly, if you're dealing with governments and similar institutions totally up there.

So the good thing for us is we are committed to our sustainability goals partly because as a team, we all think it's the right thing to do. But partly for the reason you've given, Andy, there is a strong business case for leading in sustainability. And yes, we will expect to see that converting into meaningful competitive differentiation. So the answer is yes. We are beginning to see it but we will see more and more of it. This is not a fad. This is not a trend. This is permanent. This is structural. So yes, we're seeing it.

M&A and Hygiene, quite right, Capital Markets Day will fill in the blanks on that. I think the thing to think about in Hygiene business lines, typically, there are a very few global players other than us, a very few international players, there's a handful, but there's a lot of regional players in the country, a long, long list, similar to Pest Control.

There is a long list, and we've got to find the right ones that we want to buy. Timing is not great at the moment because hygiene, as an industry, clearly has been impacted in offices, in travel and leisure and in HoReca. And if you've got a business, you probably don't want to sell it right now. You're probably more likely to sell it next year. So the pipeline is filling up quite nicely, not big targets in there, lots and lots of smaller regional players. More to come on the 28th of September. Thanks, Andy.

Our next question is from Jane Sparrow of Barclays.

Three questions, please. Firstly, just on Hygiene in North America, excluding the disinfection services, it sounds very much like it's sort of currently a product-led offering just to check whether you're also providing rolling out washroom services there or just focusing on the air purification product sales at the moment?

Second question, just on group margin trends ex disinfection services and ex the impact of provisions taken last year and released this year -- can you just give a bit of color on what the year-on-year trend was in core margins, excluding those factors?

You've obviously said the organic, excluding disinfection was 8%, but just to understand the margin trend there. And then the third one was just on the Pest. And if you go back to the first half of '19 and adjusted that number for acquisitions that you've completed since then, where would 1H '21 stand on an underlying basis versus that pro forma number?

Thank you, Jane. Some detailed questions in there, which #2 and 3, I'll pass to Stu because they're difficult. So I'll pass them to Stu. You know what I mean, Jane. On the first one, Hygiene, no, you're spot on. We've been clear. We're very, very unlikely to launch traditional washroom services in the States. We'll have a look in Canada. That's a different market in Canada, but the U.S. washroom market is very, very different to a European market.

It's a janitorial market as opposed to -- it was a site-based market as opposed to a route-based market. So we will be focusing on in the States in particular, we'll be focusing on the product side, as you say, but also potentially some of the niche other hygiene services. So I wouldn't rule out dental, rule out medical waste, for example. But it's more likely to be product. And certainly, air is the one that we see the most opportunity. Let me hand over to Stu, overall margin trends in the categories is the next one?

Yes. So you'll forgive me if this is pretty high level, Jane, because there's a lot of moving parts, as you say, Q2 comparatives from 2020 were very weak. We've got a little bit of provision release in there. And the rates of recovery in the core categories are, of course, different with different levels of customer openings.

But I think overall, my judgment would be and it's no more than that is pest margins were a little bit stronger, but I think that's primarily because more of the customer base is open. I think Hygiene was probably a little bit weaker. But again, they've got something like 4% of customers sites still closed at the 30th of June. And therefore, we haven't got the density, and I only talked about 2 types of density routes and washroom density.

So I think we've got slightly lower density in Hygiene, Workwear and Protect and Enhance, no doubt about it, margin is absolutely up. But that was the most impacted in Q2 last year, and therefore, you'd be pretty disappointed if they weren't strongly recovering, which they are. So I think that's my take on category margins.

Pest 2019 versus 2021, I think we're about 20% up year over that 2-year period. We haven't done the math on what that means organically and acquisitively because we didn't publish organic numbers in 2020. But I'd expect it well. I'm not sure what I'd expect, honestly. I'm looking across at Andy.

No, I know -- I just have to carry around a number in my head, Jane, as we look back over the last 4 years in aggregate, then we've delivered over 5% of organic revenue growth in Pest Control. So like, Stu, I'm not carrying around any number of 2020 because we didn't print those numbers. But if you look over the 4 years and draw a line from 4 years ago to where we are today, it will be just above a 5% organic CAGR, which is sort of in line with what we've traditionally said. If you recall, we've said 4% to 6% organic for Pest. So even with a pandemic year in the middle of it. I think we've averaged just over 5%, which is pretty respectable. Thanks, Jane.

The next question comes from James Winckler of Jefferies.

I hope my first one isn't too similar to Jane's there. I was wondering, obviously -- Hygiene margin quite strong. Wondering if even with a sharp step-down in Q2 disinfection revenues, wondering if that sort of year-over-year improvement was materially weighted towards Q1 where you still have very strong disinfection? Or moving into second half, obviously, a very tough comp in terms of margin. What -- how we should be thinking about H2 margin in Hygiene?

And then two, in terms of the level of disinfection revenues into next year, I mean is your going -- your going sort of expectation of that being pretty negligible into past this year then if it's GBP 10 million -- and GBP 5 million to GBP 10 million over the next couple of quarters?

So I'll take the margins one, James. And as you say, it's pretty close to the response to Jane's. We had strong disinfection in Q1, less strong in Q2. But in Q2, in our core Hygiene business, we lapped Q2 last year, which was pretty weak from a margin point of view. So we've got good core underlying margin recovery in Q2 despite it not being quite where it was in 2019 because of -- we would say we've got 4% of customers still not open.

And you'll -- we would expect an improvement again in H2 in our core Hygiene, but for sure, we'll take some hit from losing that disinfection revenue, which was really a sort of job style margins. So quite how the aggregate of that plays out not absolutely clear, but they're the big moving parts, but we do expect to recover our core Hygiene margins towards the back end of H2 into 2022, I would expect as economies fully recover.

Yes. On disinfection, I think negligible is not a bad number, to be honest. GBP 10 million to GBP 20 million across H2, it won't be 0, and it could be GBP 20 million next year, but I don't know. It is absolutely correlated to what the lockdown or unlockdown and recovery and vaccination status is of the markets that are still struggling with the crisis. So if we look at markets like Indonesia, which is having a truly horrible time with the crisis at the moment, there's a market you see that disinfection is up.

So it really is a function of that. If I'm being genuinely honest, I'd like to predict it's 0 because if it's 0, it means really positive things about the recovery of the markets that are still using the service. But I think out of, what are we, GBP 3 billion -- circa GBP 3 billion revenue business, GBP 10 million to GBP 20 million is already negligible. But I wouldn't put us down for very much.

If we've got it, it means that the markets that are still struggling with COVID are still struggling with COVID into next year. Let's hope that it is negligible. But if you want to want me to guess at a number, maybe it will be GBP 20 million for the whole year, but that is a wild guess, James, nothing more.

Our next question comes from Allen Wells of Exane.

Most of mine have been asked. Just a couple of kind of additional ones for me. Can I just quickly check on the CapEx comments in the guidance, you talked about that being a bit lower due to the challenge in getting vehicles, et cetera. Is there any read across or impact from that on growth, i.e., growth have been a bit better if you were able to expand in certain areas and spend some of this that is holding us back? That's my first question.

And secondly, and -- just on the, I guess, international expansion side in Hygiene, could you maybe sort of comment a little bit around early traction. They're obviously kind of moving into the U.S. As the disinfectant activity declines, what sort of traction have you seen there and the opportunity to discuss in Europe?

And then finally, just on the third question, just in terms of -- I guess part of the recovery you've talked about kind of the premiumization and attitudes changing with the PestConnect, No-Touch, Hygiene, et cetera. Could you talk a little bit about the commercial pipeline? What sort of visibility you have on the next 12 months, what sort of incoming you have?

And maybe just as a little follow-up on that, if I can, the demand for air hygiene, you talked about the GBP 3 million of revenues from that. Is that mainly customers buying units? Or is that smaller units? Or is that a rental model on the large unit? Just interested in terms of what the main demand has been on that product offering so far as well?

Yes. Cheers, Allen. On the first one, on the CapEx and implications for growth, I think the only read across really on the implication of growth is actually on PestConnect. So PestConnect is our connected -- bait station is the key element in the portfolio. And they use printed circuit boards.

And yes, it's been a challenge to get hold of PCB components in the last few months. So if I'm honest, we could have sold quite a bit more on the PestConnect and we've had to actually put our markets on allocation because we haven't been able to get out of the PCBs. Now that is improving in the second half, and we've changed some components in the units so we can get a hold from some different PCBs.

But for this way, if the big motor manufacturers can't get PCBs to put expensive cars on the road, we're buying very small volumes of relatively inexpensive PCBs for our rodent stations. We're going to sit quite a long way down behind Ford and Land Rover Jaguar. So that's the only read across between the global PCB shortage and revenue.

We've actually done pretty well, 30-odd percent up in terms of units in the field, but we could have done even more had we had a bigger supply. So hoping that improves in the second half. And certainly, we've made some supply chain improvements that means we will get a better supply and certainly as we head into next year.

Other than that, no real obvious read across. Early traction, a bit early to say in terms of the new markets. We certainly -- we've been having a lot of interest. We've had a lot of markets like Germany, and we're selling well. you understand the difference between sales and revenues in our business. We can sell something, but until we install it and service it, it doesn't hit the P&L as revenue. So a fair bit of the sales we've made in markets like Germany are for install for 2022, for example, most of our customer targets have to give months' notice to their current supplier.

So there's a bit of a lag between sales activity turning into revenue. America, I answered the previous earlier question, we haven't really been pushing the service side. We're gearing up for the product side global business, and there's always challenges. The challenge in America is we've had to get regulatory approval, which is different in America to Europe for the VirusKiller and the air units, and we've literally only just got that.

So we have to give you a better view on the Capital Markets Day as to how we see that opportunity. But we look at markets like seeing like Hong Kong, like Indonesia, in particular, Asian markets driving the demand for the air units very strongly. Over here in the U.K., a lot of appetite.

So I don't really see why it would be any different in the States, but we've literally only just got approval for the products in the last few days. So we'll have a better view come September, albeit that's only, whatever, 6 or 8 weeks away. In terms of, well, what are customers buying, we've broadly got -- keep it simple.

We've broadly got sort of offerings at the moment. We've got -- I'm going to go into sales mode, Allen, I'm going to sell you one there. We've got relatively small desk-based units. And to be honest, you should all have one. Certainly, every reception in every premise should have one in my view, and every doctor surgery and every dentist should have one.

But those are a little unit. GBP 250 a unit and about 12 inches high, sits on your desk. Most of those are sales but a little bit like your computer, printer, you have to replace the filters, like ink cartridges. So we will be supplying the replacement filters. We sell the unit, and we replace the filters in 6 to 12 months.

Then the other main offering is sort of let's call them industrial scale units. These are big units like the ones we put into the O2, like the one we've put into banks, like the ones we've got in our head office that we're sat in here today. They are big units, and we rent those units, and then we service the unit every few weeks to the filtration change and the maintenance, et cetera. So at the moment, the demand is very high for the small units. Very easy to sell a small unit, GBP 250 a time, but also good demand.

I haven't got the split, but I would be saying it's probably 2/3 smaller units, 1/3 bigger units at the moment, but again, very, very early days. But GBP 3 million, GBP 3.2 million of revenue in 6 months from a standing start, we're actually pretty happy with. So in terms of commercial pipeline, we don't have tremendous visibility never have done in our industry. It's not like many other industries. We can really only see what's coming up in the next 6 months.

We can't really see much beyond that. We can see where our contracts are due for exploration or renewal, but in terms of other people's contracts and what's going to come to tender, what we can get out and bid against, we don't get good transparency. The industry doesn't get good transparency. In terms of what's in front of us over the next 6 months, yes, it looks pretty good. We got some really good opportunities.

And as I mentioned in the remarks, one of the nice things that we're seeing is the international accounts continuing to build, which, again, we love because we're really the only player in the world that can impact those on. So outlook over the next few months looks pretty good. It doesn't look particularly different, I would say, Allen, but beyond that, no real transparency.

Just in the interest of time, Andy and Stuart, are okay to carry on taking questions?

We are. Whether the audience wants anymore is a different question, Gemma, but Stuart and I are absolutely fine to take questions, of course.

Great. So our next question comes from Ashish Agarwal of Morgan Stanley.

This is Anvesh Agrawal. So most of my questions have been asked. Just one question really on the guidance. And then you're seeing the core business is expected to be up 6% -- or sorry, mid-single digit organically for the full year. That means sort of quite a slowdown from 1H 8% and Q2 close to 19%. I know the comps are tough, but even if you sort of adjust for that, probably it would imply a big slowdown. So maybe tele what's behind that conservatism? Or in other ways, like how do you see the business trading in second half versus 2019? Do you see this sort of sequential pickup continuing in second half?

Yes. Thanks, Rajesh. It's all in the eye of the beholder really, whether you consider it to be conservative and a big slowdown, I don't -- for what it's worth. I think we're living in times which are exceptionally difficult to predict. Australia gone back into lockdown. Malaysia is in lockdown. Indonesia is in lockdown. Other markets are coming out. We've given the very best view that we can.

And you've made the point yourself, the comps are there. The comps are real. So H2 last year was COVID impacted, but it was nowhere near as impacted as Q2. So look, all I can -- I can answer the second part of the question much more easily. We feel very good about the business. We feel that the Pest Control business has once again demonstrated just how resilient it is grown -- it's 20% bigger than it was 2 years ago, and its fundamentals are going very well.

So we feel that the pest business keeps pushing on. And the Hygiene business is almost through its recovery, but we've still got 4% of our business premises, which are closed at the end of June. We think that continues to improve. If you're right, and we're conservative, we could talk about it in 6 months' time. But all we can ever do with this is to give the very best view that we can. We feel good about the business.

We think Pest is strong. We think Hygiene is recovering nicely. We've got some challenging comps as disinfection goes away. We've got some interesting comps to H2 last year. But I don't think we're -- we are not intentionally being conservative. We're giving the best view we can, and we think the business performance is strong and in good health. But there are so much unknown ahead of us in the next 6 months that I think it would be rash indeed, grave to be overcooking it in the second half.

The next question comes from Dominic Edridge of Deutsche Bank.

Just a couple for myself. Firstly, just going back on the digital offering, can you just clarify how much of the products you are developing in-house and how much you're buying in? And then in terms of thinking about that offering and what you're doing? Would you say that you're integrating a lot of different sort of elements together for people, and that's the real value add versus maybe some of your peer group and some of the manufacturers that are obviously out there advertising a lot for these sort of devices.

I suppose the second part to that question is: You're obviously going into new territories with these products. What are the key sort of challenges of introducing products, I'm assuming there are slightly different traditional products that you -- your employees normally sell. So in terms of how you sort of train up people and get them aware, how do you do that?

And so the second question is probably a bit easier, which is on the M&A. Obviously, you've upgraded that. How much of that is just you doing more M&A? And how much is also there could be a bit of price inflation coming in? Because particularly in the U.S., it seems has turned into a pretty active market in the Pest Control area. Are you seeing much an inflation in terms of the price being paid at the moment?

Thank you, Dominic. The first question on the connected devices, how much is internally developed, sourced, manufactured versus external. Our model, we've got a big R&D team -- or R&D and science team. We've got a big internal technical team. We do -- I said the word in ideation. We come up with the concepts. We come up with the prototypes. We test the prototypes in our science center here in the U.K. Then we go to third-party manufacturers.

We will take the product, either for a unit to be manufactured completely, or more typically a series of components. And then it will be assembled by a third-party, shipped back to us. So we try and get the -- we're not manufacturing experts, but we come up with a concept and we test it, and then we'll get experts to do the final manufacturing.

Your second part of the question was about how our offering compares to something you could buy off the shelf from third parties. And you absolutely put your finger on it. The offering that we have is not plug-and-play sticker a IoT base station down and let it do its work.

Our offering is totally integrated with our service field team, but also integrated into the back office and our data analytics. So we're offering something. We don't say let's put these devices in the field and then we don't turn up until you have a problem. We put the devices in the field. We will turn up less frequently and our duration of visit may be shorter, but we still turn up to customers because that's where we do our thing.

That's where we're doing the expert pest control. So ours is very, very much an integrated technology plus human offering. And then data is the absolute key. It's data that customers want now. They want trend analysis. They want to see where their problems are being caused. They want to see what they can do to stop having the problem in the first place. So Capital Markets Day, we'll try and bring that to life for you because until you actually see it, it's quite difficult to describe it.

When you see it, it is, okay, I get it. But you're absolutely right. This is not plug and play. This is not what you can buy from third-party distributors. Very, very different, but we'll bring that to life. And challenges of new territories. I think the first challenge is a cultural one. There's a bit of fear. What does this mean for me? What does it mean for my job? Is this technology going to take away what I do? A little bit of resistance or it won't work, it won't be as good as humans. And then a little bit of customer, if they haven't heard of it, what does it do? Why do I need it? What's it going to do for me? So those key questions about what's in it for the customer and what's in it for us, again, we'll answer those in the CMD.

But I think it's a cultural barrier. Once people have got familiar with what the technology is, how it works, how you deploy it, how you reset it -- set in the field, what the information is telling us and how you can use that with your customers to create revenue and longer-lasting contracts, I think we get over those barriers.

There's a bit of technical in there as well. Not all the systems work the same way in each market. Talked earlier about regulatory differences with products, and we have to go through that. But overall, my view is it's more about culture and training and getting through that first wave of what is this and why do I want to use it.

In terms of M&A, how much is down to -- how much is down to bidding up the price, I guess, is implicit in the question versus how much is executing on the pipeline. For us, we've got 3 M&A pools to think about 3 big pools that we can go fishing in. North America Pest Control, the big pool, the one we've been fishing for a long time now. Pest Control in every other country in the world that is in our target list of city-based targets, and Hygiene.

So we've actually got 3 places we can go shopping, and they all represent good opportunities, and they've all still got good opportunities. There's no doubt that the hottest of those 3 M&A pools is North America. North America Pest Control is hot. But it's been hot now for 4 years. And I'm asked always, are prices going up?

I don't think they're going up. It's quite difficult to tell. I don't think they're going up, but they are high. And there is absolutely no evidence that they're coming down. On the other hand, there is tax changes that are contemplated by the Biden administration which would significantly increase the rate of capital gains tax.

So you see at the moment, there's a lot of family-owned companies in the states who are actively thinking maybe now is the time to go. So prices are high, but they've remained high. I don't think they're getting higher, but supply is also high, partly, I think, because there's an uncertainty. If I don't sell now, am I going to get a bigger capital gains tax bill down the road?

But I think what I would say is don't just think about us as M&A. Pest Control North America, we've been very active in Pest Control outside of the space in the last 6 months. The pipeline going forward is good for both the states. But also outside. And then we will bring the hygiene opportunity up, particularly I think as some potential sellers seeing the recovery in their own businesses, I think they're more likely to come to market next year.

So M&A is very much alive and well. We're still beating our return criteria. We're still finding deals that meet our return criteria and the pipeline is full. Otherwise, we wouldn't be upping the spend. But I can assure you, it's not because we're bidding up the prices and paying whatever. We turn our nose up a lot of deals but they don't make at returns or if the asset is not of the quality that it needs to be or indeed if it isn't one of our target cities that we're really after. So alive and well and very healthy, I would say, the M&A.

Christopher Bamberry from Peel Hunt.

A couple of questions, if I may. In the Q1 trading update, you disclosed the organic exit growth rate for Pest Control and Hygiene in March. Could you please do the same for June? And secondly, in the statement, you talked about some of the improvements you're seeing from the IT replatforming in the U.S., things like customer service and productivity. Could you please give us a flavor and perhaps a quantification of that, just to give an idea of what you're seeing?

I was scribbling down your first question, Christopher, so you might have to repeat your second in a moment. Exit, right, one of the reasons we disclosed the exit rate in Q2 2020 was because of the significant differences between April at the start of pandemic and then the recovery out into May, June, just to demonstrate that the average was actually free quite distinct different sort of levels of performance.

We're not seeing that degree of change in Pest Control in Q2 2021. And therefore, I think you can take the Q2 organic growth in pest is a reasonable indicator for any one of the 3 months. It's not that significant degree of change that we're seeing this year. And then sorry, could you repeat your question on North America for me, please?

Yes. In the statement, you mentioned about some of the improvements you're seeing from the IT replatforming, things like customer service and productivity. Just looking for a bit more flavor and quantification of some of these benefits.

Yes. Well, it's -- the quantification is we're committing to getting to 18% by the end of next year. Quite how all that flows out and where the primary benefits are remains a little bit to be seen. But just to give you a feel for -- I think we've been reasonably open that our infrastructure, our customer service delivery across different systems and also between the center and the branches, the district offices is quite a challenge for customers.

And one of the key objectives is to significantly simplify the customer experience as they interact with us as part customer service. And we're absolutely seeing that through a much more streamlined harmonized approach, and we would expect that to, in the medium term, push up customer retention as well as reduce our SG&A costs, our back office costs, cost to serve customers.

So that's one particular example. We are consistently improving service productivity, which should feed through to gross margins as we better plan the routes and the patches that technicians operate within using the new technology that's available to us.

And we significantly improved our capability on the web. And so we are constantly improving how we use the web to drive both better sales and a more effective cost of selling in the way we interact with customers either online, in person or through a call center.

Our deployment of bots is an example of that. So quite how all that sort of feeds into the margin increment we're looking to we'll see, I guess, in due time. But there are sort of a few of the areas where we're seeing significant benefit from the deployment of the new systems we're undertaking.

The next question comes from Marc Van'T Sant of Citi.

Could I ask just an additional question on the U.K. performance? You show very high margin. Is that tied to your earlier comments about disinfection? Or is there anything else that you could flag and also link it to the outlook for the second half, please?

Yes. So U.K. margin -- actually, U.K. disinfection was probably one of the lower relative to the size of its business in H1. It was because the U.K. has recovered pretty well in line with what we're seeing elsewhere as economies recover, disinfection falls away. So the U.K. has recovered pretty well. So disinfection not a significant contributor to that. Much more significant really has been the recovery of the market.

So the core business is coming back in Hygiene and in Pest. And I think in the U.K. also, we've done very well in terms of our other hygiene activities in medical and around vaccine centers and services we're supplying there. So that's been very helpful to the margin performance of our Hygiene business in the U.K. Andy, do you want to add?

Yes. The other factor, Marc, is if you recall, we did the Cannon Hygiene acquisition. That was, I don't know, merges after a while, 2 years ago. And we had a very long process before we got approval from the Competition and Markets Authority. We've now integrated that business, and we've harvested significant synergies from putting the Cannon Hygiene business together with ours, which is a great because that was a material acquisition in Hygiene, but also demonstrates that the M&A rollout model works every bit as well in the Hygiene business as it does in the Pest.

So it's, as Stu says, relatively small contribution from disinfection in the U.K. but actually a bigger contribution from specialist hygiene and also from dental. But I think the kicker is the margin improvement coming from the synergies from the Cannon deal.

Yes, sorry. The -- there is a one-off element though because the credit note and bad debt releases were largely in the U.K. So you have got to add those back to get to H2 margins, but everything else we're seeing is pretty sustainable.

Sam Dindol from Stifel.

Just one from me. On the Boecker deal, can you just let us know how long it took to secure the acquisition? And also looking outside the U.S. in terms of Pest Control M&A, is there -- can you give a sense of how many deals that would be with sort of revenue, say, GBP 20 million plus? Is there a handful? Is there more to go for there in terms of that size of the deal?

Sorry, Sam. Just on the second one, the -- that was in reference to inside North America or outside North America?

Yes. Outside North America, is there sort of similar size deals to both or just trying to get a sense of that really.

Got it. Thanks. The Boecker deal took quite a long time. And certainly, the courtship process, if I can put it that way, took a long time several years. It's been actually about the deal process took quite a long time. It took I think a full 6 or 7 months to get some regulatory approval, not because of any concern just because the regulatory system out there is relatively slow.

So I guess we started talking to them proper about a year ago, but we've been in touch with them for several years, which is often the case in these sort of building relationships. But it's a lovely business. I've been in Pest Control 14 years, and I haven't seen many businesses that are genuinely as good as this one. So I'm absolutely delighted with this one.

So it's a must-have deal for us and really gives us the region. Other deals sort of above 20, there's still a lot out there. There's still a lot of out. There's a few really quite big businesses in some of the countries, including countries we're not yet in but also some of the countries we are in.

So I would say we've been consolidating the market now for 7, 8 years may be getting on for a decade. I don't think we're running out of opportunity and good targets of the scale you talked about yet. There's a lot out there. But they often take a long time to counterweight the relationships and to bring them in. So I think there's a good list. Our pipeline is the busiest and the fullest that I've seen it doesn't mean to say we'll execute all of that and some of it, albeit very slow burn. But I think it's a good solid list, Sam. So there's still plenty out there.

And our final question comes from Oscar Val of JPMorgan.

I'll proceed with my 3 questions. First one on commercial and residential Pest Control in 2021. You've given that 4% of your Hygiene commercial is closed. How much of your residential -- sorry, how much of your commercial Pest Control sites are closed? That's the first question.

The second question is just on the provision release. You've released GBP 11 million in the first half. How should we think about the second half and you still have some provisions you took last year? Is there more provisions to come, do you think?

And then finally, the third question is more of a long-term thematic question. You're talking about the whole U.S. IT replatforming. And in the U.S., you have maybe 2 large brands, regional brands. At what point do you start rolling out more of Rentokil brands in the U.S.?

Yes. Thanks, Oscar. First question, in terms of Pest Control customers closed -- suspended, we're now less than 1% in commercial Pest Control, 4% in Hygiene. So we're really down to very, very small numbers. It bubbles about a little bit with lockdowns coming back in, in Australia, in Indonesia and Malaysia, but it's sub-1%. So it's in the roundings now. Stu, number 2, provisions?

Yes. We're not expecting further releases. As a colleague of mine said yesterday, we can only collect the ledger once that we had at the 31st of December 2020, and we've done a super job doing that pretty much around the world.

Our DSO is now largely in line with pre-pandemic levels. we've got a little bit of an increase in aging debt. So we've got to watch how that comes through. But certainly, we believe our provisions are appropriate as they stand. So we're not expecting further significant provision releases in the second half.

And the final question, Oscar, a good one to finish on North America branding, one of my favorite subjects, in fact. Over time, what you'd expect to see happening for us is increasingly when we're facing off to commercial customers, we're Rentokil North America. We're there to a degree already, but there's still a bit more to go, and there's certainly more to do with raising the prominence of that brand.

But then when we're resi, we've got some very strong regional brands. Florida Pest Control, no surprise, is a strong brand for resi pest in Florida. Western Exterminator is very strong out in California, Arizona and Nevada. JC Ehrlich is very strong up in the Eastern Seaboard and New England and Nova in Pennsylvania. When you've got very strong regional residential brands, I think it will be really dangerous to move too quickly on those. And I suspect, if I'm honest, we keep those strong resi brands probably forever.

Increasingly, they will be more and more associated with Rentokil, co-branded, but I don't see us changing those. But for commercial, you will see us more and more and more go-to-market as Rentokil North America, which we're already doing, but there's a bit more to do there. And so I still think if you look at some of our competitors, you look at Rollins Orkin, they've got a multi-brand strategy. They've had it for years. It works well for resi. And I think that's what you'd expect to see for the United States. Outside of the states, we're pretty much Rentokil in, I think, 84 out of 86 markets. Thanks for that, Oscar.

And thank you all genuinely. Some great questions. Thanks for your interest. As always, we do have a Capital Markets Day on the 28th of September. What we're saying is if we can do that in person, then we are really looking forward to that Capital Markets Day. If we cannot do it in person, I think we're likely to defer the date, I don't really want to do a virtual Capital Markets Day.

I don't think anyone gets the benefit out of it as they would up close and personal. So please hold the date. We have the venue. We've got the show ready to go. And all being well, we can do it in person and in which case, we really look forward to seeing you. But if it's not possible, government guidelines or people just simply don't want to come to a physical event, then we'll let you know near at the time. But assume it's on and look forward to seeing you then. Thanks, everyone. Have a good day.

Thank you, Andy, and thank you, Stuart. That concludes this Q&A session. A recording of the results presentation and this Q&A session will be available on the Rentokil Initial webcast platform within the next 24 hours. Thank you for joining us. You may now hang up your phone.