Annual Financial Report

RNS Number : 1849U

Rentokil Initial PLC

27 March 2019

 

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 2018 (the Annual Report 2018);

·     Notice of 2019 Annual General Meeting; and

·     Proxy Form for the 2019 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 2018 and the Notice of 2019 Annual General Meeting have been published on the Company's website at rentokil-initial.com/investors.

The 2019 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 8 May 2019 at 12 noon.

The Company has also published its Corporate Responsibility Report for 2018 on its website at rentokil-initial.com/corporate-responsibility.

The Company's preliminary results announcement on 28 February 2019 contained a condensed set of Rentokil Initial plc financial statements and information on important events that have occurred during the year ending 31 December 2018 and their impact on the financial statements. That information together with the information set out below which is extracted from the Annual Report 2018 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 2018. 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 42 to 47 of the Annual Report 2018.

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 we may have difficulty attracting and retaining key management and operational personnel.	Actions taken by management to mitigate the risk ·   HR development processes including leadership and development training, performance management, reward and incentives; introduction of Employer of Choice. ·   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, safe working practices and establish key metrics. ·   Incentives for sales and service staff aligned closely with strategic priorities, based on delivering improved customer service levels. ·   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 acceleration of IT replatforming and integration of apps to help drive visibility of performance, improve customer satisfaction and operating efficiency.	Changes in 2018 vs. 2017 ·   U+ delivered 1.2m online learning views in 2018. ·   MyRentokil platform now available in 34 countries. ·   Better retention of sales and technical staff. ·   Employer of Choice being rolled out and gaining traction. ·   Very few days lost to industrial action, in line with prior years.
KPIs used to monitor the risk ·   State of Service (pages 28 and 29) ·   Sales and service colleague retention (pages 28 and 29) ·   Customer retention (pages 28 and 29) ·  NPS through regular Customer Voice Counts (CVC) exercise (pages 28 and 29)
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: ·   Changes that impact on free movement of people such as Brexit and reduced appetite for immigration in the US may make it more difficult to attract frontline colleagues and create wage inflation. ·   Rises in commodity prices (e.g. oil) could raise the cost of delivering our services. ·   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.	Actions taken by management to mitigate the risk ·   Regular review of our capital allocation model to ensure that scarce resources are directed to countries and businesses with the most attractive prospects. ·   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. ·   Monitoring of market pricing trends (where available) and individual customer profitability to minimise margin erosion; sales incentives increasingly prioritise margin and customer profitability. ·   International Key Accounts team developing business with multinational customers (18 at the end of 2018) across geographies to take advantage of the Company's unique global capabilities. ·   Stock building to mitigate potential disruption from Brexit. ·   Regular reviews of cost base and productivity programmes. Group Procurement team tasked to deliver economies of scale in IT, fleet, energy and logistics. ·   Use of robotics in back office functions to automate manual administrative tasks in a cost effective way. ·   Regular monitoring of debtor days outstanding with action taken against customers with overdue debts.	Changes in 2018 vs. 2017 ·   Commodity prices remain volatile but no significant impact in 2018. ·   No significant regulatory changes in key markets. ·   Brexit uncertainty and weak property market in UK adversely impacted Property Care business. ·   Acquired Cannon Hygiene and Mitie Pest business in UK, being kept separate under order from the CMA. ·   North America business now accounts for 38% of Ongoing Revenue at CER. ·   France Workwear returned to profitable growth. ·   Buy-in of UK defined benefit pension scheme as pre-cursor to buy-out in 2020 to de-risk balance sheet.
KPIs used to monitor the risk ·   Restructuring costs <£10m (page 15) ·   Customer retention (pages 28 and 29) ·   Revenue contribution from acquisitions (page 15) ·   Debtor days outstanding ·   Group Net Operating Margin (page 15) ·   Service colleague retention (pages 28 and 29) ·  Online learning views (page 52) ·  Successor pipeline (page 79)
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.
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: ·   changes to the regulatory environment that may ban certain products or service models from being used, such as permanent rodent baiting; and ·   failure to develop products that are networked and capable of being monitored in real time.	Actions taken by management to mitigate the risk ·   Acquisition of targets with specific capabilities that address future changes in our markets. ·   Targeted investment in innovation to meet market and regulatory needs and defend against commoditisation. ·   Category Boards to oversee and roll out innovations across our regional businesses. ·   Establishment of the Power Centre to drive innovation in products and services and provide enhanced training facilities for the Group. ·   Investing in new digital platforms to provide improved marketing channels and opportunities for customers to order or amend services overseen by Category Boards.	Changes in 2018 vs. 2017 ·   Increased sales from innovations such as Lumnia, Agrilaser, Fruit Fly Ninja and Entotherm Compact. ·   Queen's Award for Enterprise - Innovation. ·   Roll out of digital tools accelerating across all regions. PestConnect in use in 18 countries.
KPIs used to monitor the risk ·   Group Net Operating Margin (page 15) ·   Sales from specific innovations ·   Website visitors (page 52)
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 is not recovered quickly; ·   fire or flood impacting our laundries (in Workwear) or warehouses (in Hygiene and Pest), preventing goods from being available to our customers; ·   industrial action by employees; ·   restrictions by government or police preventing access to customers' property; and ·   restrictions on our ability to import and export goods to and from the UK due to border delays arising from Brexit.	Actions taken by management to mitigate the risk ·   All countries and units maintain regularly tested business continuity plans (BCPs) and IT disaster recovery plans. ·   Ongoing programme to transfer key data and applications from local servers to regional data centres with enhanced backup capability and resilience. ·   Data encryption and implementation of AirWatch to mitigate potential loss of business data. ·   Penetration testing on all systems at least annually to test external firewalls and address any identified weaknesses. ·   Annual inspections of key sites by insurers, on a rotating basis, to identify potential risks. ·   Procedures in place to ensure that potential industrial disputes are quickly reported to Group HR Director. ·   Local plans to service customers from adjacent laundries/ branches if supply is interrupted. ·   Advancing shipments of goods from the UK to overseas businesses and holding additional stocks in border locations to mitigate any adverse impact of Brexit.	Changes in 2018 vs. 2017 ·   Security governance framework and standards continue to improve. External consultants used to identify most significant business continuity risks and put in place additional measures where necessary. ·   New IT security protocols being implemented. ·   GDPR compliance programme enhances security including extended use of encryption and business process mapping. ·   New BCP model being rolled out. ·   Brexit risks assessed and plan put in place.
KPIs used to monitor the risk ·   Number of serious IT incidents and time taken to respond ·   Actions arising from IT security self-assessments ·   Inventory levels
Breaches of laws or regulations (including tax, competition and anti-trust laws) 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 anti-bribery and corruption, competition, employment, 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.	Actions taken by management to mitigate the risk ·   Group Legal involvement in all acquisitions, including advising on risk and regulatory issues. ·   Monitoring of online U+ training completion rates. ·   Payroll audits carried out across all countries to ensure compliance with local employment and tax laws. ·   Tax Policy re-issued and approved by Board. 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. ·   Authority schedule in place and regularly reviewed. ·   Group and local policies in place and regularly reviewed. ·   Requirement to report breaches in controls and/or laws to Group General Counsel and Head of Internal Audit. ·   Mandatory training on Code of Conduct and other core compliance topics, with annual refreshers, to instil a highly principled culture of ethical behaviour. ·   New Supplier Code of Conduct developed for roll out in 2019. ·   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.	Changes in 2018 vs. 2017 ·   Significant long-standing litigations successfully resolved during 2018, reducing risk of fines or damages. ·   The level of tax provisions are considered appropriate and not materially changed from the level in prior year.
KPIs used to monitor the risk ·   Central monitoring of material litigation (page 65) ·   Tax provisions (page 131) ·  Compliance rates with key online training, e.g. Code of Conduct and competition law
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 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 or fines by regulators.	Actions taken by management to mitigate the risk ·   Ongoing programme to ensure all businesses are compliant with data privacy requirements including in Europe the General Data Protection Regulation (GDPR). ·   AirWatch and laptop encryption being implemented. ·   Mandatory online training by all senior employees for competition law, anti-bribery and corruption, information security and privacy, and conflicts of interest. ·   Compliance with Code of Conduct and other key policies affirmed by annual Letter of Assurance process. ·   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. ·   In most countries, card transactions are managed by regulated third parties to prevent data loss and ensure compliance with PCI-DSS regulations. ·   International confidential 'Speak Up' hotline and email address, monitored by Internal Audit. ·   Significant frauds investigated by Internal Audit and lessons learned shared widely.	Changes in 2018 vs. 2017 ·   GDPR compliance project included training across the Group: no significant uplift in data access requests; catalyst for linked IT security enhancements such as encryption and data loss prevention. ·   Review of key financial control framework, minor changes made. ·   No major frauds identified during 2018.
KPIs used to monitor the risk ·   Compliance percentage for online training (page 49) ·   Compliance rates with key online training, e.g. Code of Conduct and competition law ·   Completion rates for annual Letter of Assurance (page 49) ·   GDPR compliance in all key countries (page 49) ·  Monitoring of 'Speak Up' and reported control incidents by Internal Audit (page 76)
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: ·   use of poisons and fumigants in Pest Control; ·   driving to and working at customers; ·   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 or previously operated by the Company.	Actions taken by management to mitigate the risk ·   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. Group technical and safety standards often higher than 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. heat treatment or fumigation. ·   Focus on implementation of Group fumigation standards in all new acquisitions. ·   H&S considered as first item at all Board and senior management meetings; review of standardised H&S KPIs. ·   Formal review of accidents and circulation of lessons learned. ·   Monitoring energy-derived emissions and water usage including energy efficiency target of 20% reduction in energy intensity from 2016 baseline by 2020.	Changes in 2018 vs. 2017 ·   Review of hazardous process rules issued, including new rules relating to use of drones and laser pointers. ·   New electrical safety guidance developed for roll out in 2019. ·   Safety Leadership Behaviours initiative for first level management.
KPIs used to monitor the risk ·   Lost time accidents (pages 28 and 29) ·   Audits of fumigation and heat treatment processes ·  Working days lost (pages 28 and 29) ·  Total emissions (page 51)
Failure to integrate acquisitions and execute disposals from continuing business The Company has a strategy that includes growth by acquisition, and has acquired over 180 companies 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 and 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.	Actions taken by management to mitigate the risk ·   Integration plans considered by Investment Committee as part of acquisition approval process. Material integration activities managed during monthly performance reviews. ·   Dedicated project teams established for largest acquisitions and demergers, e.g. PCI in India and ex- CWS business in Italy, 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 & 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 (PAR) of every acquisition by Investment Committee against original business plan within 18-24 months; Board post-investment review of acquisitions in aggregate every six months; Internal Audit review of acquisitions in new geographies within 12 months.	Changes in 2018 vs. 2017 ·   Successful carve out of Central and Eastern Europe Hygiene and Workwear business to Haniel JV. ·   Integration of Rentokil PCI business in India is complex and running slightly behind schedule. ·   Integration of ex-CWS Italy business on track, and performing well. ·   Acquisitions of Cannon UK and the former Mitie Pest businesses under investigation by the CMA and held separate pending final outcome.
KPIs used to monitor the risk ·   Post-acquisition reviews ·   Integration plans (30 days, 100 days, 1 year)
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.	Actions taken by management to mitigate the risk ·   Financing policy in place to ensure that the Company has sufficient financial headroom to finance operations and bolt-on acquisitions. Commitment to target credit rating of BBB. ·   Treasury policies that limit the use of foreign exchange and interest rate derivatives, set limits for financial counterparty exposure, govern how financing is raised in bank and other debt capital markets and provide rules around treasury related matters at operating company level. ·   Monthly reporting and monitoring of financial covenants and rating agency metrics and compliance with treasury policies. ·   Monitoring of the impact of exchange rate movements on non-GBP profits and net debt. ·   Cash pooling and debt financing arrangement to match, as far as possible, currency availability/demand across borders. ·   Revolving credit facility (RCF) increased to £600m to provide funding headroom for refinancing of 2019 bonds.	Changes in 2018 vs. 2017 ·   Increasing interest rate environment and credit spreads, but still lower than coupons on part of the Group's debt. ·   Review of Group banks to ensure appropriate spread of risk. ·   BBB rating retained.
KPIs used to monitor the risk ·   Counterparty credit ratings ·   Credit rating metrics ·   Level of Group floating debt ·   Un-hedged foreign exchange exposures ·   Liquidity headroom ·   Matching of currency net debt to underlying profitability ·   Compliance with financial covenants

Statement of Directors' responsibilities

The Annual Report 2018 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 2018 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 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 58 and 59, 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 provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

 

END

 

 

ACSSELFFWFUSEFD