Rentokil Initial plc Q4 FY2023 earnings call

Management Statement and Operational Highlights

• Overall Group Performance: In 2023, revenue increased by 45.8% to GBP5.4 billion, with organic growth of 4.9%. Adjusted operating profits grew by 57% to GBP897 million, and Group margin was 16.6% (an increase of 120 basis points). Bolt-on M&A continued with 41 deals, delivering annualized revenues of around GBP106 million. Cash conversion was 89%, and net debt-to-EBITDA was 2.8 times.
• North America Focus: Second half organic revenue in North America was below expectations. The RIGHT WAY 2 growth plan was introduced, with $25 million invested in sales, marketing, and digital channels. Organic growth in North America is expected to be between 2% and 4% in 2024, with ~2% expected in Q1. Integration progress: Phase 1 completed, exceeding synergy target by $9 million. Branch co-locations: ~100 fewer branches, with 75 to exit in 2024. Gross synergy target increased by $50 million to $325 million, net synergy target to $225 million. Branch integration phase extended to 2026.
• Integration Progress: Phase 1 of integration completed, exceeding 2023 synergy target by $9 million. Branch co-locations are going well, with 100 fewer branch properties and 75 to exit in 2024. Gross synergy target increased to $325 million, net synergy to $225 million. Branch integration phase extended to 2026.
• Product Categories: Global pest control revenue was ~GBP4.3 billion in 2023, with organic growth of 4.5% and margin expansion of 70 basis points. Hygiene & Wellbeing revenue grew by 7.8%, with organic growth of 4.8%. Innovations in pest control include over 350,000 IoT units, EcoCatch, and Lumnia.

Segment Performance

• North America: Revenue grew 79.2% in 2023, with 3.1% organic growth. Adjusted operating profit was up 95.9% to GBP618 million. Organic revenue growth in pest control was 3.1% for the full year, 2% in Q4 2023, and expected to be ~2% in Q1 2024, with full-year organic growth expected to be between 2% and 4%. Adjusted operating margin was 18.7%, up 160 basis points. Bolt-on M&A in North America included 13 businesses with combined annualized revenues of around GBP46 million.
• Europe: Revenue rose by 14.6%, passing GBP1 billion, with organic revenue growth of 9.2%. Pest control revenue was up 21.8%, Hygiene and well-being grew by 5.8%, and France Workwear was up 13.2%. Adjusted operating profit rose by 12.5%.
• UK and Sub-Saharan Africa: Revenue was up 7.9% with organic growth of 3.5%. Pest control was up 8%, Hygiene and well-being increased 7.7%. Regional adjusted operating profit was down slightly by 0.5% to GBP95 million.
• Asia and MENAT: Regional revenues rose by 11.2%, of which 10.2% was organic. Adjusted operating profit in Asia increased by 4% to GBP47 million.
• Pacific: Regional revenue increased by 15%, of which 6.8% was organic. Pest Control was up 25.2%, with Hygiene & Wellbeing up 6.4%. Regional adjusted operating profit was up 19.8%.

Guidance

• Organic Growth: North America organic growth expected to be between 2% and 4% in 2024, with ~2% expected in Q1.
• Synergies: Gross synergy target increased by $50 million to $325 million, net synergy target to $225 million.
• Margin: Group margin target of >19% by 2026. North America margin expected to modestly progress in 2024, with improvement weighted towards H2.
• Technical Guidance: Terminix integration cost expected to be between $90 million and $100 million, interest expected to be in the range of GBP135 million to GBP145 million, and FX headwind between GBP25 million and GBP35 million.

Risks

• North America Organic Growth: Lower inbound sales leads due to digital marketing performance, integration activities, competitor spend, and a softer consumer market.
• Integration Risks: Delaying branch integration phase to 2026 to derisk the program, which could potentially impact short-term organic growth if not executed well.
• Competitive Risks: Increased sales and marketing spend by competitors in the North American pest control market.

Question and Answer

Q: Suhasini from Goldman Sachs asked about incremental investments in sales and marketing, the distribution business, and confidence in targeting 1.5 times pest control market growth in North America.

A: Andrew Ransom responded that sales and marketing spend is focused on both organic and paid digital channels, distribution is under review, and confidence comes from execution excellence and market position.

Q: James Rose from Barclays asked about learnings from integration pilots and confidence in increasing gross synergy target.

A: Andrew Ransom stated that pilots taught about branch nuances, and confidence in the synergy target comes from detailed planning and progress tracking.

Q: Andy Grobler from BNP Paribas Exane asked about central costs, colleague retention differences, and branch integration impact on growth.

A: Stuart Ingall-Tombs discussed central cost drivers, Andrew Ransom addressed colleague retention differences and branch integration impact on growth.

Q: Ian Zaffino from Oppenheimer asked about the competitive environment in North America and self-help plan.

A: Andrew Ransom noted the competitive landscape involves local market share battles and emphasized local marketing plans.

Q: Nicole Manion from UBS asked about the definition of organic growth.

A: Stuart Ingall-Tombs explained that organic growth definition for Terminix was adjusted for a pure like-for-like view in 2023.

Q: Dominic Edridge from Deutsche Bank asked about net debt strategy, branch manager churn, and delayed integration.

A: Stuart Ingall-Tombs discussed deleveraging comfort, Andrew Ransom addressed branch manager churn and integration delay as a business-driven decision.

Q: Allen Wells from Jefferies asked about splitting resi vs commercial growth, weather impact, pay plan, and termite provisions.

A: Andrew Ransom and Stuart Ingall-Tombs provided insights on growth splits, weather impact, pay plan considerations, and termite provision status.

Q: Chris Bamberry from Peel Hunt asked about increased sales and marketing spend by competitors.

A: Andrew Ransom stated that the company has a plan for sales and marketing spend but couldn't provide specific competitor details.

Q: Chris Bamberry from Peel Hunt asked about increased sales and marketing spend by competitors.

A: Andrew Ransom stated that the company has a plan for sales and marketing spend but couldn't provide specific competitor details.

Q: Michael Hoffman from online asked about seasonal hiring, incremental margins, and technician leads.

A: Andrew Ransom and Stuart Ingall-Tombs discussed seasonal hiring trends, margin expectations, and technician lead dynamics.

Q: Sylvia Barker from JPMorgan asked about North America growth guidance split by price and volume, and structural growth reasons.

A: Stuart Ingall-Tombs and Andrew Ransom addressed growth split by price and volume, and no structural growth advantage for competitors.