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Rentokil Initial PLC - Annual Financial Report

RNS Number : 7237H
Rentokil Initial PLC
26 March 2020

Rentokil Initial plc (the "Company")


Annual Report and Annual General Meeting


In compliance with Listing Rule 9.6.1, the Company announces that the following documents have today been submitted to the UK Listing Authority, and will shortly be available for inspection via the National Storage Mechanism at morningstar.co.uk/uk/NSM:

·    Annual Report and Financial Statements for the year ended 31 December 2019 (the Annual Report 2019);

·    Notice of 2020 Annual General Meeting; and

·    Proxy Form for the 2020 Annual General Meeting.


The documents are being posted over the course of today and tomorrow and the Annual Report 2019 and the Notice of 2020 Annual General Meeting have been published on the Company's website at rentokil-initial.com/investors.


We note the current issues surrounding COVID-19 (coronavirus) and the rapidly developing public health guidance in the UK, which includes the stringent requirements announced on 23 March 2020 that require UK nationals to stay at home except in tightly defined circumstances (which do not include attending an AGM), the social distancing and shielding guidance for those over the age of 70 or with underlying medical conditions, and the ban on all non-essential travel. The health and safety of our shareholders and colleagues is always our utmost priority. We have therefore taken the decision to hold our Annual General Meeting in our offices rather than at the Hilton Hotel at Gatwick Airport as previously announced and as stated in the 2019 Annual Report. The 2020 AGM of Rentokil Initial plc will therefore be held at the Company's offices at Compass House, Manor Royal, Crawley, RH10 9PY on Wednesday 13 May 2020 at 2.00pm.


If the public health guidance remains unchanged, we regretfully will not be running an AGM event as in previous years, but a closed meeting, and shareholders will not therefore be able to attend in person. We will continue to monitor the situation and the latest available public health guidance, and will provide updates in relation to our AGM on our website at rentokil-initial.com/investors/shareholder-centre/agm-page.


Further, in the current circumstances relating to COVID-19, and as indicated in the trading update issued on 25 March 2020, the directors will not be recommending the payment of the final dividend as announced with the Preliminary Results on 27 February 2020 and as stated in the 2019 Annual Report. Accordingly, no dividend resolution is now being proposed in the Notice of 2020 AGM and no final dividend will be paid.


The Company's preliminary results announcement on 27 February 2020 contained a condensed set of Rentokil Initial plc financial statements and information on important events that have occurred during the year ending 31 December 2019 and their impact on the financial statements. That information together with the information set out below which is extracted from the Annual Report 2019 constitute the requirements of DTR 6.3.5 which is to be communicated via an RIS in unedited full text. This announcement is not a substitute for reading the full Annual Report. Page numbers and cross references in the text below refer to page numbers and cross references in the Annual Report 2019. To view the preliminary results announcement, visit the Company's website at rentokil-initial.com/investors


Principal risks and uncertainties


The table below of the principal risks and uncertainties that the Company faces is extracted in full and unedited form from pages 55 to 59 of the Annual Report 2019.


Failure to mitigate against financial market risks

Our business is exposed to foreign exchange risk, interest rate risk, liquidity risk, counterparty risk and settlement risk.

Impact should the risk materialise

If any of the above risks materialise, this may have a negative impact on profitability, cash flow and financial statements, and may negatively impact financial ratios and credit ratings, impacting our ability to raise funds for acquisitions.

Mitigating actions

·   Treasury policy to ensure that the Company has sufficient headroom to finance operations and bolt-on acquisitions.

·   Review of Group core banks to safeguard lending commitment.

·   Target credit rating of BBB and compliance with Investment Grade covenants.

·   Treasury policy that sets parameters for foreign exchange and interest rate hedging.

·   Treasury policy limits on counterparty exposures at Group and operating company level.


Performance measures to monitor risk

·   Liquidity headroom at the year end above £700m

·   Counterparty ratings above A-

·   Monthly reporting against ratings metrics and financial covenants

·   No unhedged foreign exchange positions above £0.5m; fixed interest > 50%; and matching currency of net debt to underlying profitability

·   Monitoring of amounts outstanding against counterparty credit limits

Failure to grow our business profitably in a changing macro-economic environment

The Company's three businesses (Pest Control, Hygiene and Protect & Enhance) operate in a global macro-economic environment that is subject to uncertainty and volatility.

Impact should the risk materialise

Changes in the macro-economic environment could have a number of different impacts on the ability of the business to grow profitably, to sustain recruitment and to deliver against targets.


Examples include:

·   Recession and economic slowdown in some of our markets, e.g. Germany, Italy and Spain.

·   Trend for government increases in minimum wage to exceed inflation.

·   Low-growth economies with inherent cost inflation, where the Company has weak pricing power may make it difficult to maintain profitability.

·   Growing market presence of multinational competitors may increase the cost of acquisitions and drive down prices, impacting profitability.

·   Increased market presence by facilities management companies may drive down prices and increase compliance costs.

·   Shift to greater proportion of key accounts in some markets may drive down prices and make it difficult to maintain profitability.


Mitigating actions

·   Regular review of our capital allocation model which is differentiated by line of business to ensure that scarce resources are directed to countries and businesses with the most attractive prospects, e.g. North America, Pest and Hygiene.

·   Global Employer of Choice programme to ensure focus on the key priorities of the organisation, including recruiting and retaining critical talent and specialists in all markets.

·   Working with governments and regulators on implementation of new regulations.

·   Low-cost operating model driven by single-country management teams, back office savings programme initiated in 2019, focused IT investment to deliver efficient operations (see page 18).

·   Local teams incentivised on driving up route density which delivers greatest margin growth for least incremental investment.

·   Stock build to mitigate potential disruption from Brexit retained into 2020.

·   Group Procurement team tasked to deliver economies of scale in IT, fleet, energy and logistics, and increasingly source materials and operational equipment on a global basis.

·   Use of robotics in back office functions to automate manual administrative tasks in a cost-effective way.

·   UK Property Care plan implemented to reduce costs and restore profitable growth.


Performance measures to monitor risk

·   Group Ongoing Revenue growth

·   Group Organic Revenue growth

·   Revenue contribution from acquisitions

·   Group Ongoing Operating Profit

·   Group Net Operating Margin

·   Restructuring costs <£10m

·   Free Cash Flow conversion

·  Net capital expenditure

Failure to deliver consistently high levels of service to the satisfaction of our customers

Our business model depends on servicing the needs of our customers in line with internal high standards

and to levels agreed in contracts.

Impact should the risk materialise

If our operatives are not sufficiently qualified, or do not have the right skills, or we fail to innovate successfully, this may negatively impact our ability to acquire or retain customers, adversely impacting growth, profitability and cash flow.


Industrial action in key operations could result in diminished customer service levels; if prolonged, it could damage the Company's reputation and ability to secure or renew contracts.


In markets where overall employment rates are high, and/or our business is growing fast organically or via acquisition, we may have difficulty attracting and retaining key management of the right capability and the right calibre of operational personnel.


Mitigating actions

·   HR development processes including high-quality leadership and development training, performance management, reward and incentives, roll-out of Employer of Choice.

·   Relentless focus on safety by supervisors and frontline colleagues to maintain world-class SHE standards.

·   Regular tracking of customer satisfaction and the perception of both customers and non-customers of Rentokil Initial, benchmarked against competitors.

·   Dedicated Operational Excellence team to drive superior customer service, safety and technical standards and processes, monitoring and auditing against key metrics.

·   Incentives for Sales and Service colleagues aligned closely with strategic priorities, based on delivering improved customer service levels, greater density and margin.

·   Oversight of key industrial relations matters by Group HR Director and regular review by the Chief Executive for countries where industrial relations risk is elevated.

·   In North America, continued implementation of IT replatforming and integration of apps to help drive visibility of performance, improve customer satisfaction and operating efficiency.


Performance measures to monitor risk

·   Sales colleague retention

·   Service colleague retention

·   The number of online training courses being developed

·   U+ learning views

·   State of Service

·   Customer satisfaction (Customer Voice Counts)

·   Customer retention

Failure to develop products and services that are tailored and relevant to local markets and

market conditions

We operate across markets that are at different stages in the economic cycle, at varying stages of market development and have different levels of market attractiveness. We must be sufficiently agile to develop and deliver products and services that meet local market needs now and in the future.

Impact should the risk materialise

If we are not able to adapt to local business and consumer needs, our existing customers may choose not to renew contracts, or seek reductions in prices. This negatively impacts our ability to maintain or increase margins and cash flow.


Examples include:

·   the need to adapt to changes to the regulatory environment that may ban certain products or service models from being used, such as permanent rodent baiting;

·   the ability to respond to the expectations from customers and the wider populace for us to reduce our own environmental impact and support our customers in reducing their environmental impact; and

·   the need to develop products that are networked and capable of being monitored in real time, or react to competitor technology developments that are disruptive to the market.



Mitigating actions

·   Acquisition of targets with specific capabilities that address future changes in our markets, e.g. vector control.

·   Continued development of the Power Centre to drive innovation in products and services and provide enhanced training facilities for the Group.

·   Targeted investment in innovation to meet market and regulatory needs and defend against commoditisation, e.g. AutoGate, RapidPro and PestConnect.

·   Provision of range of products and services for different customers needs including demand for more sustainable, recycled and non-toxic products, e.g. Lumnia and Entio.

·   Category Boards oversee the roll-out of innovations at pace across our regional businesses.

·   Investment in new digital platforms to provide improved marketing channels, customer portals and insight, e.g. myRentokil, myInitial, and to generate enquiries and efficiently schedule each frontline technician's day, e.g. using Service+.


Performance measures to monitor risk

·   Sales growth for key innovations such as Lumnia, AutoGate and PestConnect

·   Percentage of job sales revenue from innovation

·   Number of patents raised

Failure to ensure business continuity in case of a material incident

The business needs to have resilience to ensure business can continue if impacted by externally induced

incidents, e.g. cyber attack, hurricane or terrorism.

Impact should the risk materialise

Failure to service our customers may affect our ability to retain those customers and damage the Company's reputation. This may negatively impact growth, profitability and cash flow.


Examples of incidents that could impact our ability to service customers include:

·   a significant cyber attack or IT failure which impacts e.g. our ability to plan efficient routing, or ability to invoice, and is not recovered quickly;

·   fire or flood impacting our laundries (in Workwear) or warehouses (in Hygiene and Pest Control), preventing goods from being available to enable our technicians to service our customers;

·   industrial action by employees;

·   travel restrictions due to public health emergencies, e.g. from infectious disease outbreaks such as COVID-19 (coronavirus) or natural disasters; and

·   restrictions on our ability to import and export goods to and from core markets due to border delays or new trade barriers.


Mitigating actions

·   All countries and units maintain business continuity plans and IT disaster recovery plans.

·   The majority of key data and applications are located in regional data centres with enhanced backup capability and resilience.

·   Global programme to ensure patching is up to date and covers all IT assets.

·   Data encryption and implementation of AirWatch (remote monitoring and security application) on laptops, tablets and mobile phones.

·   Tools deployed in three main data centres to detect malicious behaviour and help prevent malicious files from spreading.

·   Strong anti-phishing programme using phishing simulation tool to highlight risks to users.

·   Annual penetration testing on all systems to test external firewalls and address any identified weaknesses.

·   Annual inspections of key sites by insurers, on a rotating basis, to identify potential risks.

·   Review of peers' experience at Group Risk Committee to benchmark our resilience, and improve mitigation actions.

·   Advance shipments of goods from the UK to overseas businesses and holding additional stocks in border locations to mitigate any adverse impact of Brexit.


Performance measures to monitor risk

·   Number of serious IT incidents and time taken to respond

·   Actions arising from IT security self-assessments

·   External testing and benchmarking of our IT security environment

Fraud, financial crime and loss or unintended release of personal data

Collusion between individuals, both internal and external, could result in fraud if internal controls are not

in place and working effectively. The business holds personal data on employees, some customers and

suppliers: unintended loss or release of such data may result in fines or other criminal sanctions.

Impact should the risk materialise

Loss of personal data of customers, suppliers or employees could, if significant, result in regulatory intervention which may result in substantial fines and damage to the Company's reputation.


Theft of Company assets including property, customer or employee information, or misstatement of financial or other records via deliberate action by employees or third parties may constitute fraud and result in financial loss to the business, damage to the Company's reputation and/or fines by regulators.


Mitigating actions

·   Ongoing programme to ensure that all businesses are compliant with data privacy requirements including, in Europe, the EU General Data Protection Regulation (GDPR).

·   Mandatory online training by all senior employees, refreshed annually, for the Code of Conduct, preventing anticompetitive practice, preventing bribery and corruption, securing information and protecting privacy, avoiding conflicts of interest and preventing insider trading.

·   Roll-out of Corporate Criminal Offence policy and training.

·   Compliance with Code of Conduct and other key policies affirmed by annual Letter of Assurance by all senior management.

·   Standardised financial control framework operating in all locations with a focus on risk prevention and mitigation; framework defined centrally and independently assessed at all material business units every year.

·   International confidential Speak Up dedicated phone line and email address, monitored and followed up by Internal Audit.

·   Significant frauds investigated by Internal Audit and lessons learned widely shared.


Performance measures to monitor risk

·   Completion rate for mandatory U+ training modules

·   Data privacy programme (including GDPR) roll-out and implementation

·   Speak Up investigations and remediation

·   Key financial controls reviewed annually for key territories

Health, safety and the environment

The Company has an obligation to ensure that colleagues, customers and other stakeholders remain safe, that the working environment is not detrimental to health and that we are aware of and minimise any adverse impact on the environment.

Impact should the risk materialise

The Company operates in hazardous environments and situations, for example:

·   the use of poisons and fumigants in Pest Control;

·   driving to and working at customers' premises;

·   working at height; and

·   exposure to needlestick injury/ bio-hazards from medical waste.

Non-compliance with internal policies or industry regulations could lead to personal injury; substantial fines or penalties, including withdrawal of licences to operate; and reputational damage.


Environmental risks may arise from former activities at sites currently operated by the Company or acquired by the Company.


Mitigating actions

·   Robust health and safety (H&S) policies supplemented by the SHE Golden Rules and technical policies address higher risk and regulated activities, e.g. driving, working at height, fumigation or heat treatment. Policies and standards are reviewed regularly. Group technical and safety standards are often higher than local regulatory requirements.

·   H&S officers appointed in all jurisdictions, supported by dedicated central team.

·   Mandatory training of all relevant employees in safe working practices, including drivers and those working in hazardous environments, e.g. in high voltage areas or at height.

·   Focus on implementation of Group fumigation and other technical standards in all new acquisitions.

·   H&S considered as first item at every Board and senior management meetings; review of standardised H&S KPIs.

·   Formal review of accidents and circulation of lessons learned; aggregation and sharing of 'safety moments' post-incident briefings among frontline colleagues.

·   Monitoring energy-derived emissions and water usage including energy efficiency target of 20% reduction in energy intensity from 2016 baseline by end 2020.

·   Strategy to further develop environmentally friendly approaches, e.g. lower pest control chemical use, recycling of hygiene units, piloting use of electric vehicles.

·   10-year goals being developed for energy usage, emissions, chemical usage, waste to landfill and consumables from sustainable sources.


Performance measures to monitor risk

·   Lost Time Accident rate

·   Working Days Lost rate

·   Total emissions

·   Energy usage

Breaches of laws or regulations including tax, competition and anti-trust laws1

As a responsible company we aim to comply with all laws and regulations that apply to our businesses across the globe.

Impact should the risk materialise

Failure to comply with local laws covering bribery and corruption, anti-competitive practice, employment law, data privacy or financial and tax reporting requirements may result in fines or withdrawal of licence to operate, which could adversely impact growth, profitability and cash flow.


The Company operates across many different tax jurisdictions and is subject to periodic tax audits which sometimes challenge the basis on which local tax has been calculated and/or withheld. Successful challenges by local tax authorities may have an adverse impact on profitability and cash flow.


Mitigating actions

·   Group Legal involvement in all acquisitions, including advising on risk and regulatory issues.

·   Online U+ training completion rates reviewed by senior management monthly.

·   Payroll audits carried out across all countries to ensure compliance with local employment and tax laws.

·   Tax Policy reviewed and approved by the Board annually.

·   All significant tax planning opportunities have to be pre-agreed with the Group Tax Director and Chief Financial Officer, with independent tax advice taken where necessary. Regular review of tax exposures.

·   Group authority schedule in place and regularly reviewed.

·   Group and local policies in place and regularly reviewed. Supplier Code rolled out to key suppliers in 2019.

·   Requirement to report breaches in controls and/or laws to Group General Counsel and Head of Internal Audit. Follow-up by Group General Counsel of any significant regulatory breach in any country.

·   Mandatory training on Code of Conduct and other core compliance topics, with annual refreshers, to instil a highly principled culture of ethical behaviour.

·   All major business transactions or internal reorganisations are subject to a rigorous internal and external review.

·   Review of all disputes that have the potential to be material, by value and/or potential reputational impact.


Performance measures to monitor risk

·   Central monitoring of material litigation

·   Tax provisions

·   Completion rate for mandatory U+ training modules, e.g. Code of Conduct and competition law

Failure to integrate acquisitions and execute disposals from continuing business

The Company has a strategy that includes growth by acquisition, and has completed c.200 transactions in the past five years. These companies need to be integrated quickly and efficiently to minimise potential impact on the acquired business and the existing business.

Impact should the risk materialise

If the Company fails to successfully integrate acquisitions into its existing organisation structures, fails to deliver the revenue and profit targets, or fails to deliver expected synergy savings, the business may not achieve the expected financial and operational benefits which may adversely impact growth, profitability and cash flow.


Business disposals also have to be managed efficiently to minimise risk to the businesses being disposed and the residual business.


Mitigating actions

·   Integration plans considered by the Investment Committee as part of rigorous acquisition approval process. Integration activities and progress discussed during monthly performance reviews.

·   Dedicated project teams established for largest acquisitions and disposals, e.g. the disposal of our interest in the CWS-boco joint venture, with clear deliverables over three months, six months and one year. Additional resources provided to US to support integration and replatforming.

·   Tried and tested induction programme for first 100 days for all acquisitions.

·   Continuity of management/leadership in acquired companies, where possible.

·   Use of transaction structures including deferred consideration to mitigate deal risk.

·   Group departments, e.g. Health and Safety, Legal, Insurance and IT, involved with acquisitions to drive integration plans and compliance with Group standards, especially when entering new geographies.

·   Post-completion governance: formal post-acquisition review of performance of each acquisition by the Investment Committee against original business plan 12 months post-acquisition; Board post-investment review of aggregate investment in acquisitions every six months; Internal Audit review of acquisitions in new geographies within 12- 18 months.


Performance measures to monitor risk

·   Integration plans (30 days, 100 days, 1 year)

·   Reviews of integration plans for specific large acquisitions

·   Post-acquisition review completions


1. Excluding health, safety and the environment - see separate risk on page 58.


Statement of Directors' responsibilities


The Annual Report 2019 contains the following statement regarding responsibility for the financial statements and is repeated here solely for the purpose of complying with DTR 6.3.5. Responsibility is for the full Annual Report 2019 and not the extracted information presented in this announcement or the preliminary results announcement.


The Directors are responsible for preparing the Annual Report and the Group and Parent Company Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company Financial Statements for each financial year. Under that law they are required to prepare the Group Financial Statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and applicable law and have elected to prepare the Parent Company Financial Statements in accordance with UK Accounting Standards including FRS 101 Reduced Disclosure Framework.


Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company Financial Statements, the Directors are required to:

·    select suitable accounting policies and then apply them consistently;

·    make judgements and estimates that are reasonable and prudent;

·    for the Group Financial Statements, state whether they have been prepared in accordance with IFRS as adopted by the EU;

·    for the Parent Company Financial Statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Parent Company Financial Statements;

·    assess the Group and Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

·    use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.


The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its Financial Statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.


Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.


Each of the Directors, whose names and functions are set out on pages 64 and 65, confirms that, to the best of their knowledge:

·    the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

·    the Strategic Report and Directors' Report include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.


Each Director considers the Annual Report and Financial Statements, taken as a whole, to be fair, balanced and understandable and to provide the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com.

Quick facts: Rentokil Initial

Price: 490

Market: LSE
Market Cap: £9.09 billion

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