Rentokil Initial plc (RTO) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you all for joining us at Rentokil Initial's 2021 Annual General Meeting. My name is Richard Solomons, and I'm the Chair of the Board of Rentokil Initial plc. It has just gone 2 p.m., and as we have a quorum, I now declare the meeting open. I'm sorry that current restrictions mean we're not able to meet in person, but I'm pleased to be able to welcome shareholders who are participating electronically today. The Board appreciates your attendance and continued support. I'm also pleased to inform you that the meeting today is being recorded so that shareholders and other stakeholders who cannot be present can view it on the company's website in due course. Before I make some opening remarks about last year's performance and proceed with the formal business of the meeting, I'd like to introduce you to the members of the Board who are present. Joining me in person today are Andy Ransom, our Chief Executive; and Stuart Ingall-Tombs, our Chief Financial Officer. Andy, of course, needs no introduction. Stuart has been with the company for 14 years and was appointed as our Group Chief Financial Officer and a director of the Board in August last year. So this is his first AGM as a director of the company. Welcome, Stuart. I would like to thank Jeremy Townsend, Stuart's predecessor, for the critical role he played in transforming the business alongside Andy in his 10 years as CFO and for the smooth succession process he helped us achieve. Development of our people is very important to Rentokil Initial, and it's great to see this example of a talented colleague, who has undertaken a variety of roles in the company and across the world, succeed in making it to the Board after a rigorous selection process. Also joining us today virtually are John Pettigrew, who is our Senior Independent Director; Angela Seymour-Jackson, who Chairs our Remuneration Committee; Julie Southern, who chairs our Audit Committee; and Cathy Turner and Linda Yueh. Finally, I'd like to welcome Sarosh Mistry, our newest director, who joined the Board in April this year and is standing for election for the first time at this meeting. Sarosh brings a number of key attributes, which the Board is keen to add to its collective experience, including deep knowledge of North America, our biggest market, and current executive insight into multisite, frontline-focused businesses. We're delighted he's joined the Board, and we look forward to Cathy and him being able to attend a face-to-face meeting with their colleagues for the first time before too long. I'd also like to introduce the company's Secretary, Daragh Fagan, who is joining in person today. Having served as a nonexecutive director for a period of 9 years, Angela will be stepping down from the Board at the end of this meeting. So on behalf of the Board and personally, I'd like to thank her for her enormous contribution to the success of the company, most recently as Chair of the Remuneration Committee, and to wish her well for the future. We're fortunate to have somebody of Cathy Turner's experience to take over from Angela as Chair of the Remuneration Committee immediately following this meeting, assuming every election is confirmed. As is in our usual practice, all directors have participated in a formal performance evaluation process, as described in the annual report. And each continues to be effective and demonstrate commitment to the role. Turning to last year's operational performance. I'd now like to make a few comments, and then we'll hear from Andy who will talk in more detail about our group's strategy to deliver shareholder value. The world has undergone an enormous disconnect since early 2020, as you all know, and our company's purpose of protecting people and enhancing lives has never been more relevant. In crisis situations, the strengths and weaknesses of an organization are highlighted. And I'm very pleased to tell you that our Rentokil Initial colleagues have demonstrated huge resilience, agility and speed in execution, and your company has emerged in many ways even stronger than before while caring for its employees' safety even more effectively than ever. I'd like to congratulate the management team under Andy for their tireless efforts on your behalf and for the strong performance that was delivered in a uniquely challenging, volatile and uncertain environment. The company's frontline colleagues were acknowledged around the world as providing essential services that are genuinely important not only to our customers but also to protecting the safety of the wider public. This designation's key workers enabled our frontline teams, especially in Pest Control and Hygiene, to continue to operate and service customers even during the lockdown in many countries. I'd also like to thank my colleagues and the Board for their unwavering commitment, availability and wise counsel over recent months. In many ways, the Board and executive team have worked more closely and effectively in the past year than ever before despite the practical difficulties, which will benefit us going forward. I'd also like to thank you, our shareholders, for your understanding during this enormously challenging period and for sharing in the sacrifices that the Board, executive management and wider workforce implemented with the cancellation of dividends in 2020. I'm delighted that the dividend has now been reinstated 1 year on and at a higher level than before. We'll now hear a short presentation from Andy on Rentokil Initial's performance during the last year.

Good afternoon, everyone, and please let me add my welcome to that of Richard. 2020 was, of course, an extraordinary year where the toll of the COVID-19 pandemic was felt by all of our stakeholders but also where we proved our resilience, our agility and our commitment to succeed. Over the next 20 minutes or so, I'll update you on: firstly, our financial highlights of 2020 and our response to the global pandemic; secondly, on our operating model, including employer of choice, our responsible business practices and our categories of Pest Control, Hygiene and Protect & Enhance; and finally, I will conclude with a few words on M&A, on our share price and dividend performance and a summary of the trading highlights from the first quarter of this year. So let me start by recapping on the main financials for 2020 and the 3 phases that we used to manage the crisis. Revenue from ongoing operations increased by 6.3% at constant exchange rates, a very creditable performance in the face of the global pandemic, with our North America region exceeding its target of $1.5 billion in revenues and making good progress towards margins of 18%. Ongoing operating profit grew by 5.4%, reflecting these significant actions taken to mitigate COVID-related revenue reductions. And despite an increase of GBP 34 million in bad debt provisions and the additional costs associated with personal protective equipment. Free cash flow of almost GBP 337 million represented an excellent cash conversion rate of 123%. So how did we respond to the crisis? Well, as you may have seen in the annual report, our overall response to the pandemic was to manage the pandemic in 3 phases. The crisis phase required decisive action and the ability to move at pace. And this is where the strength of our culture came to the fore. Around 40% of our colleagues made some form of financial sacrifice, and we were able to act swiftly to protect our liquidity, including pay waivers and the suspension of bonuses and LTIPs. But it was not all about defense. Each week, we held 2 executive team meetings, one on managing the crisis and the other on maximizing the opportunities. And from this second meeting came the sharing of knowledge across the group to obtain essential service status with governments across the globe and led to the international rollout of our emergency disinfection services. We entered the recovery phase in the second half of the year. And clearly, the success of our disinfection services was a significant part of our recovery, generating GBP 225 million of revenues as well as significant goodwill from customers in food retail, transportation, pharmaceuticals and e-commerce. Disinfection is reflected in the overall Hygiene category numbers for the year, but the underlying Pest Control and Hygiene businesses continued to make good progress throughout the year, in line with the reducing level of customer lockdowns. Indeed, the core Hygiene business also played a significant role in protecting people from the virus with a 17-fold increase in hand soaps and sanitizers delivered to customers around the world. These were used not just inside the washroom but all around the customer premises, from their reception and throughout the office areas. The importance of hygiene: hand hygiene, air hygiene, surface hygiene, has changed and significantly so. The third phase is to explore the strategic opportunities that come from the crisis and in particular the opportunities in M&A, in digital and in the expansion of our Hygiene business. I will come back to talk about these in more detail shortly, but we see no letup in the medium-term opportunities presented by a highly fragmented market for M&A; for remote monitoring and digital services in line with the need for greater social distancing; and of course, the opportunities in Hygiene where we accelerated the international expansion of the category by launching in 20 new markets in 2020. So in the midst of a global pandemic, we showed once again the strength of our operating model, increasing revenue and profit and delivering an outstanding cash performance. Over the last few years, we've built an operating model, which we've deployed consistently across the group. And I call it our machine. In essence, this is a series of interconnected, well-oiled cogs or processes, which, if executed well, each turn positively impacting on the next one and over time creating a virtuous circle or a flywheel. In 2020, despite the obvious challenges, the machine held up really well. The launch of disinfection services was a great example of the operating model in action, demonstrating our ability to pivot at speed, sharing best practice, developing training and standard operating procedures, building sales capability, launching new innovations and deploying at scale. With regard to safety, it has been my long-held view that there is typically a strong correlation between colleague safety and the financial health of a company. And pleasingly, 2020 was our safest year ever, with world-class levels of lost time accidents, which improved by 26%, and with the associated working days lost reducing by 23%. This was all delivered despite 7,000 colleagues working in full PPE and respirators and new safety protocols being required for all employees. Throughout the pandemic and despite the obvious challenges, we've continued to be focused on delivering a world-class employer of choice experience for colleagues. To give you just 2 examples, we delivered record levels of training, some 3.2 million views of our online learning content. And we also achieved record levels of colleague retention, up 1.7% to 88.6%, our highest-ever level. After safety and employer of choice, the environment is now the third item on every internal meeting agenda. In 2020, we developed our vision and made a COP26 commitment to be at net zero emissions by the end of 2040. And we are putting in place the local plans and the specialist work streams to get us there. Just as we set out to focus on safety and then on employer of choice, not just because these were the right things to do but also because they would differentiate us and they would support our growth plans, our environment plan is exactly the same. It is all part of creating a higher-quality, more efficient and more differentiated business. Another important part of our responsible business approach is our commitment to the communities in which we operate and our long-term charity partnerships. I'm very proud to say that in 2020, our colleagues undertook over 250 local events across the world to say a massive thank you to public health workers under the banner #sharethelove. More recently, over 2,000 colleagues have joined together in virtual teams to undertake a 9,000-kilometer challenge to support the charity Malaria No More, and they've raised around GBP 200,000. So turning now to our categories and starting with Rentokil, the world's greatest pest control business, which, as you can see, was awarded the prestigious contract to support the Nightingale Hospitals as well as winning a significant national deal with Tesco last year. I'm very proud of the performance of our Pest Control category in 2020, which, despite significant disruption to our customers, still grew ongoing revenues by 1%. Our North American business performed particularly well, with Pest Control category revenues up by 3.1% to over GBP 1 billion. This was offset by some markets, particularly those with the most extreme lockdown regimes, including India and New Zealand. As you can see on the right of the chart, with a 7-year revenue growth CAGR of over 13%, Pest Control is a consistent performer operating in both attractive and noncyclical markets. Looking forward, in 2021 and beyond, we are strongly placed as we transition from the pandemic, and we see 4 medium-term growth drivers in particular. Firstly, the overall pest control market shows no sign of slowing, with most estimates for growth of around 5% per annum through to 2025. And we see no letup in the growth drivers of growing middle classes, urbanization, climate change and the increasing expectations of higher standards driven even higher, of course, by the pandemic. Secondly, our innovation pipeline remains very strong, targeting key pest groups, expanding our range of remote monitoring devices and building our range of environmentally friendly solutions. Around 80% of our innovation pipeline is now either non-tox or sustainable. Emphasizing our innovation credentials in 2020, the company was honored to receive the Queen's Award for Innovation for the development and successful deployment of our Lumnia flying insect control range. Thirdly, of course, is the importance of digital to the future growth of pest control. And this is an area where Rentokil already has a strategic advantage. And fourthly, the medium-term M&A opportunity remains significant, with 40,000 pest control companies operating around the world. Our city-based density-building strategy remains our focus, predominantly highly targeted bolt-on deals with the occasional larger deals, such as the Environmental Pest Service in Florida that we were delighted to acquire at the end of last year. So turning now to Hygiene. I'm very pleased with the performance of our Hygiene category in 2020, which grew ongoing revenues by 36.8% and with profits up by 81.4%. Disinfection services, which we started from scratch in April 2020 and launched in around 60 markets, generated revenues of GBP 225 million. And in 2021, we will continue to offer disinfection services as part of our COVID response for customers, but we do expect volumes and prices to naturally unwind as indeed and hopefully the pandemic abates. And as that tide goes out, so we would at the same time expect our core Hygiene services to increasingly return as individual countries begin to reopen. The pandemic has led to an acceleration of many aspects of our hygiene plan and has also given us the chance to really focus on 4 medium-term growth opportunities for Hygiene. The first is inside the washroom, which is a particularly high-risk area for COVID and other viruses and where we expect to see an increasing duty of care from employers towards employees as well as the potential for more regulation to ensure facilities inside the washroom meet all the hygiene requirements of a post-pandemic world. The second growth area is through our digital leadership. Here, we already have the expertise, the insight, the tools, and we now have the product line up, too, with Rapid Hygiene, providing a range of premium, no-touch services and remote monitoring as well as compliance and audit-ready reports. The third area is international expansion. And as part of our strategic response to the pandemic, in 2020, we accelerated our plan to launch hygiene services in 20 additional countries. We took our first steps in America with the launch of hand and air care products as well as relaunching into a number of European markets. The fourth opportunity is outside of the washroom, with hygiene moving from being a relatively low-interest category to one of the world's most important. Much of the obvious consumer concern over the last 12 months has been focused on the importance of clean surfaces and clean hands and the risk of cross-contamination. And we've seen this with high levels of demand for hand soaps and sanitizers as well as surface hygiene products being used around offices, on public transport and in retail stores, for example. But increasingly, we believe that the focus has expanded to include the risk of infection passing via airborne particles or aerosols. For this reason, we have launched 2 ranges of air purification products, Inspire Air and VirusKiller, which decontaminate the air and reduce the risk of cross-contamination. And we've included a case study on this in the annual report. Clearly, we believe that with these 4 clear areas of focus and a significant change in the importance of the category, the time for Hygiene has come. So turning now to Protect & Enhance. And here, we have 3 main businesses: Ambius, our global plants business, Property Care in the U.K. and Workwear in France. These businesses have weaker characteristics than our Pest Control and Hygiene businesses. And it's also fair to say that they have been significantly more impacted by the COVID crisis in 2020, with ongoing revenues down by 12% and profits by almost 30%. The main business in Protect & Enhance is French Workwear, which accounts for approximately 50% of its revenues. Here, after a positive couple of years, both operationally and financially, ongoing revenues declined by 10.4% caused by significant temporary closures of customer premises during the height of the crisis and again during the lockdowns later in the year. As you know, our value-creating acquisition program is an extremely important part of our growth strategy. And after a short pause, we restored our M&A activities in the third quarter. In 2020, we delivered 23 deals with around GBP 158 million of annualized revenues. And this includes Environment Pest Service that we acquired at the end of the year but payment being made early in 2021 and is therefore part of the GBP 400 million that we expect to spend this year. Based on our most recent annual review of M&A shared with our Board, the M&A program has once again continued to meet our expectations and to deliver in line with or indeed above our targeted return criteria. Turning now to our share price and dividend performance. As you can see from the chart, the Rentokil Initial share price outperformed the FTSE 100 during 2020 by almost 26.8%, reflecting the resilience of our operating model and our response to the pandemic. At the height of the crisis, we safeguarded our liquidity and the stability of the business by making a collective sacrifice, with over 5,000 colleagues accepting pay waivers, our managers and leaders supporting the suspension of bonus payments and the company's LTIP scheme and no dividends being paid to you, our shareholders during the year. These decisions were not taken lightly, but they were the right decisions given the crisis. Everyone played their part. So reflecting the strength of our performance in 2020 and the confidence in our outlook for 2021, the Board is recommending a dividend payment of 5.41p for 2020 and, as you can see on the chart, thereby maintaining our overall progression. In total, we have delivered a total shareholder return of 383% over the last 7 years. Turning now to the first quarter of this year. I am pleased to report that trading has started very well across the company in the first quarter, with ongoing revenues increasing by 15.4% at constant exchange rates. In line with our RIGHT WAY plan, this growth was delivered through a combination of organic revenue, which increased by 9.3% and acquisitions, which contributed a further 6.1% through the 7 high-quality businesses acquired. And so ladies and gentlemen, to summarize, in 2020, in a particularly challenging external environment, the company has performed very well. And we are now looking forward as we hopefully begin to transition out of the pandemic and into a post-COVID era of strategic opportunities. Rentokil Pest Control is in an excellent position with an operating model and market conditions that leave us strongly placed to drive continued medium-term progress. Our leadership in digital and in innovation is set to be even more important with greater focus on health and on well-being. The medium-term M&A opportunities post-COVID remain very positive. And with 4 clear growth opportunities in Hygiene from 2022 onwards, we expect to see underlying organic growth in core Hygiene operations over the medium term to be comparable with Pest Control, i.e., 4% to 6% each year. Finally, I would also like to thank Angela for her outstanding contribution to the Board over the last 9 years, and I wish her very well for the future. I'll now hand back to Richard to continue with the formal business of the meeting. Thank you.

Thank you, Andy. So given that shareholders are able to join and vote at this meeting electronically, the order of business will be slightly different from previous years. In a moment, there will be an opportunity for shareholders to put questions to the Board. [Operator Instructions] So I'll now proceed with the formal business of the day, and I refer you to the notice convening this Annual General Meeting, which is available in the document section of your portal. The formal resolutions are set out in the Notice of Meeting, which was made available on the company's website on 31st of March and were sent in parallel to those shareholders who asked to receive their annual report and Notice of Meeting by post. Accordingly, the requisite Notice of the Meeting has been given. I propose therefore that with your consent, the Notice of Meeting should be taken as read. Thank you. Each of the resolutions set out in the Notice of Meeting was accompanied by an explanatory note, so I don't propose to summarize them again before putting them to the vote. In accordance with the Articles of Association of the company, voting today will be done by way of a poll on each of the resolutions put to the meeting. This is seen as best practice as it gives all shareholders the opportunity to participate in the decision-making of the company and have their votes recorded in proportion to the number of shares they hold. Our registrar Equiniti has been appointed a scrutineer to count the votes at the end of the meeting. The Board considers that the resolutions to be put to the meeting are in the best interest of the company and its shareholders as a whole. The directors unanimously recommend that you vote in favor of the resolutions as they intend to do so in respect of their own beneficial holdings. Shareholders are able to vote electronically this year for the first time, and the voting options will appear on the screen shortly once the poll is opened. Press the option corresponding with the way you wish to vote for each resolution. Once you've selected your choice, either for, against or withheld, you will see a message on your screen below the resolution text confirming that your vote has been received and how you voted. Please note that a vote withheld is not a vote in law and will not be counted in the calculation of the proportion of the votes for or against the resolution. If you think that you've selected the wrong choice or if you wish to change your mind, simply press the correct choice prior to the poll closing. If you wish to cancel your live vote, please press cancel. The last option selected prior to the vote closing will be accepted by the system. If you've already submitted your votes by proxy, you do not need to vote again today unless you wish to change your previous instruction. I now formally propose that each of the resolutions as set out in the Notice of Meeting dated 31st March 2021 and listed on the screen is put to the meeting as a separate resolution and declare the poll open. A majority of not less than 75% of the shares voted is required to pass a special resolution, which applies to resolutions 18 to 21. For the other resolutions, a simple majority of the shares voted is required. The poll will remain open for the duration of the meeting and for 15 minutes following conclusion of the meeting to allow you sufficient time to vote. I would now like to invite questions in respect of all resolutions. At this meeting, shareholders, corporate representatives and proxies have the right to speak and have their questions answered. [Operator Instructions]

So we had a number of questions submitted already, which our Company Secretary has collated. So Daragh, do you want to please go ahead with the first question?

Thank you, Chairman. The first question is from shareholder [ Kalyani Pal ], who asks, on Page 49 of the annual report, you write, "We put in place a new plan for diversity, equality and inclusion." But I do not see any male ethnic person in the Board of Directors, and also there is no male or female ethnic person in executive leadership team. Why particularly when the U.K. has an ethnic minority finance minister, male, and a female home minister?

Thank you for that question. I think as you've seen in our annual report and you'll have heard Andy on many occasions talk about it, diversity is very important to the company and to the Board. And we made very big strides throughout the business driving diversity, whether it's gender diversity or ethnic minority diversity. And as I announced or mentioned earlier on today, we've recently appointed Sarosh Mistry to our Board, who is in American that comes from a diverse background. So I think it's important to us that we get great people in the company, and we develop and encourage right from across our organization and from across the world, people into our organization. And we've done a significant amount of that. And I think you see that represented at every level in the company, and it will grow over the future. So thank you for that question.

And second question is from [ Anthony Lee ], who says, I applaud the company for its performance prior to and during the pandemic. It has been a company transformed under the current management. Has the company rewarded the efforts of its employees by any well-deserved bonuses? Also, one must say that nobody would wish the COVID pandemic on anyone. The paramount regard now should be for containing the virus and curing the sick. However, the company has profited from the pandemic after having canceled the dividend last year. While accepting that the dividend is back and increased, is there not room for a greater generosity towards shareholders, bearing in mind the loss of the dividends last year?

Thank you, [ Mr. Lee ]. I think our approach has been that, in effect, everybody shared the pain and the uncertainty early on in the crisis. So the Board, the executive management, in fact, many of our employees throughout the company took pay cuts as well as at the same time that we postponed the dividend. And I think that's an appropriate sharing of the risk and, as I said, the uncertainty. In the second half of the year, we did reward bonuses to some of our employees, but none of the executive directors took a bonus for the year, which again, I think, was appropriate in the circumstances. And clearly, we're delighted to bring back the dividend, which we have done at a greater level than it was before. And of course, we will continue with our aggressive dividend policy. So I think that's the right way to approach this with the sharing and continue to reward the shareholders over time as the company grows again post the pandemic.

And the third question also from [ Anthony Lee ]. What, if any, other principal ways in which Rentokil has changed its corporate focus regarding its post-pandemic future? Has the pandemic changed the way it operates intrinsically beyond chasing new markets in a world of pandemic?

I think you've seen the success of this company over the years. And I think we've had a very clear strategy in terms of servicing the markets and growing our capabilities, and that's been very successful for us. Clearly, one of the things that's come out of the pandemic is an increased focus on hygiene, which is something that we've seen really across the piece. And obviously, that is an important part of our business. So as Andy talked about when we announced our preliminary results earlier this year, we are looking at that in every new way. We see more opportunities for growth. In fact, Andy talked about a 4% to 6% growth opportunity in Hygiene, which would be similar to that, which we've seen in pest. And indeed, we're going to be talking to our shareholders later in the year in September with a special day and talking more about those opportunities. But I think that is something that probably has an opportunity that we've had, but it's been enhanced through the pandemic. So I think it's a sensible route forward, and hopefully, we will all see the benefits of that over time.

That's the last question. We have no further questions received either online or on the telephone.

Okay. Thank you, Daragh. So ladies and gentlemen, thank you for those questions. And as there are no further questions, that concludes the formal business of this Annual General Meeting, and I therefore declare the meeting closed. The poll will remain open for a further 15 minutes to allow you additional time to cast your vote. The results of today's voting will be announced through a Regulatory News Service announcement and on our corporate website as soon as possible. We appreciate you attending today's meeting. Please stay safe and well. Thank you, and goodbye.