Annual Financial Report

RNS Number : 6618B

Rentokil Initial PLC

05 April 2017

 

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 2016 (the Annual Report 2016);

·      Notice of 2017 Annual General Meeting; and

·      Proxy Form for the 2017 Annual General Meeting.

The documents have today been posted or otherwise made available to shareholders and in accordance with DTR 6.3.5(3) the Annual Report 2016 and the Notice of 2017 Annual General Meeting have been published on the Company's website at rentokil-initial.com/investors.

The 2017 Annual General Meeting will be held in the Ascot Suite at the Hilton London Gatwick Airport, South Terminal Gatwick Airport, Gatwick, RH6 0LL on Wednesday 10 May 2017 at 12 noon.

The Company has also published its Corporate Responsibility report for 2016 on its website at rentokil-initial.com/corporate-responsibility.

The Company's preliminary results announcement on 23 February 2017 contained a condensed set of Rentokil Initial plc financial statements and information on important events that have occurred during the year ending 31 December 2016 and their impact on the financial statements.  That information together with the information set out below which is extracted from the Annual Report 2016 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 2016. 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 35 to 39 of the Annual Report 2016.

Principal risk	Risk description and impact	Mitigating actions
Growing our business profitably in an increasingly competitive environment	The Company's three primary businesses (Pest Control, Hygiene and Workwear) operate in competitive environments and, in the Pest Control business especially, an increasingly regulated environment.  Acquiring new customers and retaining existing customers in such competitive environments remains challenging; failure to do so may have a negative impact on growth, profitability and cash flow. Markets in the Protect & Enhance quadrant remain competitive especially in Workwear and Hygiene. We anticipate this competitive environment to continue in the short term. In the Growth & Emerging quadrants where labour markets are tighter it remains challenging to attract and retain the most capable sales and technical personnel.	•   Regular tracking of customer satisfaction and the perception of both customers and non-customers of Rentokil Initial, benchmarked against competitors. (KPI: NPS scores through Customer Voice Counts exercises.) •   Targeted investment in innovation to support value-added and innovative concepts to maintain profitability and protect against commoditisation. (KPI: Innovation sales %.) •   Investing in new digital platforms to provide improved channels of communication and marketing. •   Incentives for sales and service staff aligned closely with strategic and annual targets. •   International Key Accounts team developing business with multinational customers across geographies to take advantage of the Company as the most international player in our markets. (KPI: International Key Accounts Sales %.) •   Acquisition of targets that have a strong cultural fit with the brand and our service model whilst supporting growth. •   Employee Value Proposition developed and rolled out in 2016; new talent strategy and approach in place for 2017 to ensure focus on the key priorities of the organisation including recruiting and retaining critical talent and specialists. •   Exit from unprofitable businesses with commodity characteristics, e.g. flat linen.
Financial market risks	We operate in international markets and our local business operations are therefore exposed to foreign exchange risk, interest rate risk, liquidity risk, counterparty risk and settlement risk. If any of these risks materialise, this may have a negative impact on profitability, cash flow and financial statements, and may have a negative impact on financial ratios, credit ratings or the ability to raise funds for acquisitions. During 2015 and 2016 the net debt of the Group has increased following the completion of 64 acquisitions, most notably Steritech in the US. Any additional net debt required to fund future acquisitions may affect our investment grade credit rating. Further details of the impact of financial market risks are given in Note C1 to the Financial Statements on pages 123 and 124. See also the viability statement on page 34.	•   Financing policy in place to ensure that the Company has sufficient financial headroom to finance all but the very largest acquisitions. Target credit rating of BBB achieved in 2014 and confirmed in 2016. •   Treasury policies that limit complex financial transactions, such as use of derivatives, hedging, raising bank finance and opening bank accounts, require Chief Financial Officer approval. •   Monthly reporting of financial and liquidity ratios. (KPIs: net debt/adjusted EBITDA, funds from operations (FFO)/net debt.) •   Cash pooling and debt financing arrangement to match, as closely as possible, currency availability/demand across borders.
Delivering 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. If our operatives are not sufficiently qualified, or do not have the right technical and inter-personal skills, or we fail to deliver successful innovations, this may negatively impact our ability to acquire new customers or retain existing customers, with the consequent impact on growth, profitability and cash flow. Industrial action in one or more of our key operations could result in diminished service levels to our customers and if prolonged could damage the Company's reputation and ability to secure new contracts or renew existing contracts. In the medium to long term we risk the loss of key service personnel as labour markets tighten.	•   Expansion of the Operational Excellence team to drive superior customer service. (KPI: State of Service.) •   Targets for frontline staff and management based on delivering and improving customer service levels. •   'Customer Voice Counts' - feedback sought from a range of customers, used to track customer service quality, with improvement in CVC scores year on year targeted at all locations. •   HR development processes including leadership and development training, performance management, reward and incentives. (KPI: colleague retention monitored for technicians and salesforce.) •   Oversight of key industrial relations matters by Group HR Director and regular review by Chief Executive for countries where risk of industrial action is considered high.
Business continuity	The ability to continuously service customers without interruption is essential in a service industry. In our Workwear business, where clothing is often tailored to individual needs and specifications (e.g. cleanroom business), business could be adversely affected if access to the laundries is not possible due to issues such as fire or flood. Failure to service our customers may adversely affect our ability to retain those customers and may badly damage the Company's reputation. This may have a negative impact on growth, profitability and cash flow. A significant cyber attack or IT failure which cannot be recovered from in a short period of time could prevent normal business operations across one or more countries and have an adverse impact on revenue, profitability and cash flow.	•   All countries and units required to maintain Business Continuity plans and (for IT) Disaster Recovery Plans that are tested regularly. •   Procedures in place to ensure that potential industrial disputes are escalated quickly to Group HR Director. •   Local plans to service customers from adjacent laundries/branches where supply has been interrupted. •   Ongoing programme to transfer key data and applications from local servers to regional data centres with higher levels of backup capability and resilience. •   Security governance framework and standards established, including IT security management framework, incident management reporting, global standards for network segmentation and incident response protocols being reviewed. •   IT self-assessment exercises carried out across the Group to assess the Company's resilience to cyber attack and remedial action to improve controls where necessary. •   Penetration testing of all systems on at least an annual basis to test external firewalls with action to address any weakness identified.
Integration of acquisitions and separation of disposals from continuing business	The Company has a strategy which includes growth by acquiring existing companies to extend its geographic footprint or to improve its market share in existing geographies. If the Company fails to successfully integrate these acquisitions into its existing organisation structures, the business may not achieve the expected financial and operational benefits which may have an adverse impact on growth, profitability and cash flow. Since 2014 the Company has been successful in acquiring over 90 businesses in all regions. In 2016 the Group announced the proposed transfer of Rentokil Initial's Workwear and Hygiene businesses in Benelux, Sweden and CEE to a new joint venture (JV) with Haniel. If the transfer is not managed professionally the continuing business may lose focus and fail to deliver its operational plans.	•   Integration plans considered by Investment Committee as part of acquisition approval process. •   Dedicated project teams established for largest acquisitions and demergers, e.g. Steritech and proposed JV with Haniel, with clear deliverables over three months, six months and one year. •   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 & Safety, Legal, Insurance, and IT, involved early with new acquisitions to drive compliance with Group standards, especially when entering new geographies. •   Formal post-acquisition review (PAR) by Investment Committee of benefits delivered against original business plan within 18-24 months for the majority of acquisitions. The PAR is undertaken by the Investment Committee ahead of releasing any deferred payments. •   Internal Audit review within 18 months of businesses acquired in new geographies.
Fraud, financial crime and loss or unintended release of personal data	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 or fines by regulators.	•   Code of Conduct refreshed in 2016 and circulated to all employees. Mandatory online training by all senior employees refreshed annually for competition law, anti-bribery and corruption, information security and privacy. (KPI: % compliance with training.) •   Compliance with Code of Conduct and other key policies affirmed by annual Letter of Assurance by all senior management. •   26 key financial controls defined centrally and independently assessed at country level in all material business units every year. •   Wherever possible credit card transactions are managed by regulated third parties who have robust controls in place to prevent loss of data. •   Specific review of adequacy of controls in Group Treasury and remedial actions implemented. •   International confidential 'Speak Up' hotline and email address, monitored by Internal Audit. •   Significant frauds investigated by Internal Audit and lessons learned widely shared.
Health, safety and the environment	The Company operates in a number of hazardous environments and situations, for example: •   the use of poisons and fumigation materials in Pest Control; •   driving to customers across all our businesses; •   working at height; and •   biohazards from laundering of medical and hospital workwear and linen. Non-compliance with internal policies or industry regulations could lead to personal injury, substantial fines or penalties including withdrawal of licences to operate and damage to the Company's reputation.	•   Robust and up-to-date health and safety (H&S) policies re-issued in 2015, with increased focus given to higher risk and regulated activities, e.g. driving, working at height and fumigation. •   H&S officers appointed in all jurisdictions. •   Mandatory training of all relevant employees in safe working practices, including mandatory training for drivers and those working in hazardous environments, e.g. heat treatment or fumigation. •   H&S considered as first item on all Board and senior management meetings. •   H&S KPIs discussed at all country and regional board meetings. •   Formal review of accidents and lessons learned widely circulated. •   Monitoring of energy-derived emissions and water usage (see page 44).
Breach of laws or regulations (including tax, competition and anti-trust laws)	The Company is a multinational business that operates in many jurisdictions and is increasing its business in emerging markets, including by acquisition and new country entry. Failure to comply with local laws such as anti-bribery and corruption laws, employment legislation or financial and tax reporting requirements may result in fines or withdrawal of licence to operate, which could have an adverse impact on 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 or withheld. Successful challenges by local tax authorities may have an adverse impact on profitability and cash flow.	•   Group Legal involvement in all acquisitions, including advising on risk and regulatory issues. •   Regular compliance exercises, for example on anti-corruption and anti-bribery legislation, competition law, labour law and data protection; monitoring of online U+ training completion rates. •   All significant tax planning opportunities pre-agreed with Group Tax Director and Chief Financial Officer with independent tax advice taken where necessary. Regular review of tax exposures. •   Authority schedule in place and regularly reviewed. •   Group and local policies in place and regularly reviewed. •   Requirement to report breaches in controls or laws to Group General Counsel and Head of Internal Audit. •   Mandatory training on Code of Conduct, competition, anti-bribery and corruption, IT security and privacy. •   All major business transactions or internal reorganisations are subject to a rigorous internal and external review. •   A dedicated and experienced central tax department is involved in all tax audits. •   Group tax policy reviewed and approved by the Board. •   Tax planning is aligned with the Company's business activities and artificial transactions to avoid tax are not undertaken.
Maintaining margins during periods of weak economic growth	The global economic environment is volatile, with many economies in Europe experiencing low GDP growth and the impact of Brexit adding to economic uncertainty. There is high volatility in global commodity prices and exchange rates and wide variations in local market price and cost inflation across the globe. In Workwear there is also increasing demand from customers for more frequent product changes while maintaining competitive pricing. In the face of these economic pressures, our customers may choose not to renew contracts, or may look for reductions in prices or to delay payments, which may have a negative impact on our ability to increase margins and cash flow. In our Protect & Enhance markets, many of which have low or negative inflation, it remains difficult to maintain or improve margins due to weak pricing power. Further, failure to collect debts from customers who are facing economic headwinds could have an adverse impact on cash flow.	•   Regular review of our capital allocation model to ensure that resources are directed to countries and businesses that have the most attractive returns and future prospects. •   In 2016 the Group announced the proposed transfer of Rentokil Initial's Workwear and Hygiene businesses in Benelux, Sweden and CEE into a new JV with Haniel, which will mitigate margin risk in these markets through improved product mix and economies of scale. •   Supply strategy reviewed and adapted to ensure more urgent delivery of innovation while maintaining or improving service levels. (KPI: State of Service, On Time in Full for Workwear.) •   Regular monitoring of market pricing trends (where available) and individual customer profitability to ensure that margin erosion is minimised; sales incentives increasingly prioritise margin and customer profitability. •   Continuing focus on cost, with regular reviews of cost base and productivity programmes. (KPI: Gross Margin.) •   Group Procurement function with executive authority to deliver economies of scale in IT, fleet, energy and logistics. (KPI: Annual cost savings.) •   Group HR approval required for any significant changes to employee benefits, pensions, etc. •   Establishment of a European Supply Chain for Workwear and Hygiene. •   Investment in new, more efficient plant where cost effective. •   Roll-out of automated tools to monitor customer profitability. •   Regular monitoring of debtor days outstanding with action taken against customers with overdue debts. (KPI: Days Sales Outstanding.)

Statement of Directors' responsibilities

The Annual Report 2016 contains the following statements 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 2016 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; and

·      prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business.

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 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 complies 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 48 and 49, 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;

·      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; and

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

 

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