Half Yearly Report

RNS Number : 4968U

Rentokil Initial PLC

30 July 2015

 



RENTOKIL INITIAL PLC (RTO)

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2015

30 July 2015

Results				H1 2015	Growth
£m				AER	AER	CER
Revenue				855.3	0.1%	4.5%
Revenue - ongoing operations1				851.1	0.9%	5.2%
Adjusted operating profit2				99.7	(0.5%)	8.0%
Adjusted operating profit2 - ongoing operations1				99.4	(0.5%)	8.0%
Adjusted profit before tax2				82.5	6.5%	16.6%
Profit before tax				70.2	5.1%	15.9%
Free cash flow3				55.4
Adjusted EPS4				3.49p	7.1%	18.4%

·      Strong growth in revenue and profit in H1

·      Positive organic growth trend continues into H1: +1.9% year on year (FY 2014: +1.2%)

·      Pest control particularly strong: revenue growth +9.6% (+4.8% organic)

·      Free cash flow of £55.4m, on track to meet £100m+ target for the full year

·      Continued M&A execution: 14 bolt-ons (12 in pest) with combined annualised revenues of £21m  

·      Further reduction in net debt to £730m, £129m lower than H1 2014

·      Interim dividend increased by 13% to 0.87p

·      Expectations for the full year are unchanged

Commenting on the 2015 interim results Andy Ransom, CEO of Rentokil Initial plc, said:

"In February 2014 we set out our new differentiated strategy and introduced medium-term targets for mid-single digit revenue growth, high-single digit profit growth and a significant improvement in cash generation. 

"We have continued to implement our strategy at pace and made further good progress in the first half of 2015, delivering ongoing revenue growth of 5.2%, profit growth of 8.0% and free cash flow of £55m.  

"While prospects in the majority of our key markets are good, conditions in certain parts of Europe remain challenging, particularly in France and the Netherlands.  We are nonetheless on track to achieve our 2015 revenue, profit and cash expectations. 

"Overall I am encouraged by the progress that we have made over the last eighteen months and I am confident of delivering further value for shareholders as we enter the next phase in the execution of our plan."

Revenue (at CER)

Revenue from ongoing operations increased by 5.2% in H1, comprising organic growth of 1.9% and growth from acquired businesses of 3.3%. 

Revenue in the pest control category grew particularly strongly, at 9.6% in H1, 4.8% of which was organic.

Growth in H1 in the Emerging (+17.5%) and Growth (+9.2%) quadrants was strong with good performances from North America, UK, Germany, Latin America, Asia and Pacific.  This was partially offset by declines in the Protect & Enhance quadrant (-1.0%), largely driven by France and Benelux and by a small decline in the Manage for Value quadrant           (-0.7%). 

During the period we closed our Austrian and Northern Ireland flat linen businesses in Manage for Value which, together with other businesses divested in 2014, reduced revenue growth by 0.7%, resulting in total revenue growth of 4.5%.  

Profit (at CER)

Adjusted operating profit from ongoing operations increased by 8.0% in H1, reflecting growth in North America, the UK, Germany, Asia and Pacific, offset by lower profits in France and Benelux. 

Adjusted profit before tax (at AER) was negatively impacted by £6.6m due to the continued strengthening of Sterling against the Euro.  Based on current exchange rates the impact of currency movements would be around £19m for the full year (£5m higher than previous guidance).

Restructuring costs were a net charge of £2.5m and one-off items were a net credit of £0.2m. We continue to expect restructuring costs to be less than £10m for the year.  Profit before tax increased by 15.9% in H1.  After taking into account currency movements, profit before tax increased by 5.1%.

Cash (at AER)

Free cash flow from continuing operations of £55.4m in H1 was £50.7m ahead of the prior year, driven by reductions in capex and working capital outflows (in part due to foreign exchange and phasing) as well as a reduction in interest payments and the beneficial settlement of a legacy legal claim.  After taking into account the expenditure on current and prior year acquisitions (£32.7m) and the benefit of exchange rate movements, net debt reduced by £129.4m to £729.8m (30 June 2014: £859.2m).    

M&A (at AER)

In line with our strategy we have continued our M&A programme to pursue targets in higher growth markets and in areas which add local density to our existing operations.  We acquired 12 bolt-ons in pest control in H1, along with two small acquisitions in Ambius.  In North America we have continued to expand our presence with the purchase of six pest control bolt-ons.  In addition, we have acquired small businesses in the UK, Australia, Korea, South Africa and Poland.  We have also expanded our presence in Latin America with a small bolt-on acquisition in Colombia and with the acquisition of Sagrip which gives us access to the main cities in Guatemala and El Salvador. Combined annual revenues of the above businesses totalled £21m in the 12 months immediately prior to acquisition. The integration of all acquisitions is progressing well and the pipeline remains strong with opportunities to create value, particularly in pest control.  Cash spend on M&A for the full year is likely to be in excess of £50m given the level of cash spent on acquisitions in H1.

Enquiries:

Investors / Analysts:	Katharine  Rycroft	Rentokil Initial plc	01276 536585 / 07811 270734
Media:	Malcolm Padley	Rentokil Initial plc	07788 978 199
	John Sunnucks	Bell Pottinger	0203 772 2549
	Ben Woodford

A presentation for investors and analysts will be held on Thursday 30 July 2015 at 9.00am in the Sidney Suite Conference Room,        1st Floor, The Grange Tower Bridge Hotel, 45 Prescot Street, London E1 8GP.  

This will be available via a live audio web cast at www.rentokil-initial.com.

AER - actual exchange rates; CER - constant 2014 exchange rates

¹ongoing revenue and profit exclude the financial performance of disposed and closed businesses but include results from acquisitions

² before amortisation and impairment of intangibles (excluding computer software), restructuring costs and one-off items, and net interest credit from pensions

³ cash flow before acquisitions, disposals, foreign exchange adjustments and discontinued operations

⁴ earnings per share before the after tax effects of amortisation and impairment of intangibles (excluding computer software), restructuring costs and one-off items and net interest credit from pensions

This announcement contains statements that are, or may be, forward-looking regarding the group's financial position and results, business strategy, plans and objectives.  Such statements involve risk and uncertainty because they relate to future events and circumstances and there are accordingly a number of factors which might cause actual results and performance to differ materially from those expressed or implied by such statements. Forward-looking statements speak only as of the date they are made and no representation or warranty, whether expressed or implied, is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. Other than in accordance with the Company's legal or regulatory obligations (including under the Listing Rules and the Disclosure and Transparency Rules), the Company does not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise. Information contained in this announcement relating to the Company or its share price, or the yield on its shares, should not be relied upon as an indicator of future performance. Nothing in this announcement should be construed as a profit forecast.

FINANCIAL SUMMARY

£m							Half Year
							2015	2014	Change
Continuing Operations1 At 2014 constant exchange rates2
Revenue - ongoing operations3							881.5	837.6	5.2%
Revenue - disposed and closed businesses							4.6	10.6	(56.6%)
Revenue							886.1	848.2	4.5%
Adjusted operating profit4- ongoing operations3							106.5	98.6	8.0%
Adjusted operating profit4- disposed and closed businesses							0.4	0.3	33.3%
Adjusted operating profit4							106.9	98.9	8.0%
Restructuring costs and one-off items - operating5							(2.3)	(2.4)	4.2%
Amortisation and impairment of intangible assets							(13.8)	(9.7)	(42.3%)
Operating profit							90.8	86.8	4.6%
Share of profit from associates (net of tax)							2.8	2.1	33.3%
Net interest payable (excluding pensions)							(20.6)	(24.6)	16.3%
Net interest credit from pensions							3.0	1.3	130.8%
Profit before tax							76.0	65.6	15.9%
Adjusted profit before tax4							89.1	76.4	16.6%
Operating cash flow6							98.6	50.9
Basic earnings per share							3.32p	2.81p	18.1%
Basic adjusted earnings per share7							3.80p	3.21p	18.4%
Continuing Operations1 At actual exchange rates
Revenue - ongoing operations3							851.1	843.6	0.9%
Revenue - disposed and closed businesses							4.2	10.8	(61.1%)
Revenue							855.3	854.4	0.1%
Adjusted operating profit4- ongoing operations3							99.4	99.9	(0.5%)
Adjusted operating profit4- disposed and closed businesses							0.3	0.3	-
Adjusted operating profit4							99.7	100.2	(0.5%)
Restructuring costs and one-off items - operating5							(1.4)	(2.3)	39.1%
Amortisation and impairment of intangible assets							(13.9)	(9.7)	(43.3%)
Operating profit							84.4	88.2	(4.3%)
Share of profit from associates (net of tax)							2.7	2.2	22.7%
Net interest payable (excluding pensions)							(19.9)	(24.9)	20.1%
Net interest credit from pensions							3.0	1.3	130.8%
Profit before tax							70.2	66.8	5.1%
Adjusted profit before tax4							82.5	77.5	6.5%
Operating cash flow6							93.6	51.5
Basic earnings per share							3.05p	2.86p	6.6%
Basic adjusted earnings per share7							3.49p	3.26p	7.1%
Dividend per share (proposed/paid)							0.87p	0.77p	13.0%

 

¹ all figures are for continuing operations unless otherwise stated

² results at constant exchange rates have been translated at the full year average exchange rates for the year ended 31 December 2014. £/$ average rates: H1 2015 1.5321; FY 2014 1.6465, £/€ average rates: H1 2015 1.3645; FY 2014 1.2438

³ ongoing revenue and profit exclude the financial performance of disposed and closed businesses but include results from acquisitions

⁴ before amortisation and impairment of intangibles (excluding computer software), restructuring costs and one-off items, and net interest credit from pensions

⁵ see Note 4 on page 16 for further details

⁶ cash flow before interest, tax, acquisitions, disposals, foreign exchange adjustments and discontinued operations

⁷ earnings per share before the after tax effects of amortisation and impairment of intangibles (excluding computer software), restructuring costs and one-off items and net interest credit from pensions

Basis of preparation

Segmental information has been presented in accordance with IFRS 8 "Operating Segments" and reflects internal organisation changes made in 2014.  Unless otherwise stated references to 'revenue' are for ongoing businesses and references to 'profit' and 'operating profit' are for ongoing businesses before amortisation, impairment of intangible assets (excluding computer software) and restructuring costs and one-off items (totalling a net cost of £2.3m) that have had a significant impact on the results of the group. These costs have been separately identified as they are not considered to be "business as usual" expenses and have a varying impact on different businesses and reporting periods. Ongoing revenue and profit is from continuing operations excluding the results from disposed and closed businesses but includes the results from acquisitions.  All references to revenue and profit are at constant 2014 full year average exchange rates (CER) unless otherwise stated.

REGIONAL PERFORMANCE

In the North America region revenue grew by 8.3% in H1, driven by organic revenue growth (+2.7%) and the continuing acquisition programme (+5.6%).  Organic revenue growth from pest control was 2.9%.  Strong profit growth of 19.5% was driven by acquisitions, the leverage impact from higher revenues as well as further margin improvement from back office and property rationalisation and lower fuel prices.  This has improved margins by 1% point. 

In the Europe region revenue rose by 0.4% in H1, but organic revenue declined by 0.8%.  Good revenue growth in Germany (+3.0%), Southern Europe (+5.2%) and Latin America (which is managed out of the European Region and which grew by 52.8%) was offset by declines in France (-3.1%) and Benelux (-0.8%).   Profit was down 2.9% in H1, primarily driven by the revenue reductions and pricing pressure in France.  We see opportunities to support margins through service productivity and branch and back office rationalisation.

Trading conditions remain challenging in certain parts of Europe, in France and the Netherlands in particular.  Overall we expect trading performance in the region in H2 to be in line with H1.

In the UK & Rest of World region revenue increased by 13.2% in H1, reflecting organic growth of 5.5% and acquisition growth of 7.7%, largely from the Peter Cox acquisition made at the end of 2014.  The region delivered continued growth from the UK pest and hygiene categories, with pest control benefitting from increased jobbing work in particular.  The Rest of World operations delivered good revenue growth driven by the Caribbean and South Africa.  H1 profit grew by 6.8%.  Margins declined by 1.2% points in the period, partly reflecting the impact of the Peter Cox acquisition and the phasing of certain costs in the Rest of World operations. 

In the Asia Region revenue increased by 13.3% in H1 (+9.0% organic) with both the pest control and hygiene categories performing well.  Our operations in the emerging markets of India, China and Vietnam continue to grow well, delivering combined revenue growth of 28%.  High single digit revenue increase was delivered in the more mature markets of Indonesia and Malaysia.  Profit in the region grew by 51.6% in the first half, reflecting leverage from higher revenues and the ongoing benefit from back office rationalisation, with margins higher by 2.2% points on H1 2014.  Acquisitions in Asia account for 11.3% of profit growth. 

In the Pacific region revenue grew by 4.3% in H1 (+3.8% organic), reflecting increased contracts in the pest and hygiene categories and more jobbing work in pest control.  First half profit grew by 7.9%, reflecting higher revenues and also supported by a programme of procurement savings and branch administration rationalisation. 

DIVIDEND

The Board has declared an interim dividend of 0.87p per share, amounting to £15.8m, payable on 16 September 2015 to shareholders on the register at the close of business on 14 August 2015.  This is an increase of 13% on the interim dividend for 2014.   

GUIDANCE FOR 2015

Central and divisional overheads are anticipated to be in line with 2014.  Impact to the P&L of restructuring costs is expected to be no greater than £10m.  Interest costs are likely to be in the region of £42m, reflecting the impact of the Company's recent refinancings.  Our current estimate for the adjusted effective tax rate is 23.4% (in line with last year) with cash tax payable no more than £40m.  Sterling has continued to strengthen in H1 and based on current exchange rates the impact on 2015 adjusted profit before tax would be c.£19m (£5m more than our previous guidance).  Working capital outflow is unchanged and estimated to be at or below £20m, with net capex no more than £200m.  Cash spend on M&A for the full year is likely to be in excess of £50m given the level of cash spent on acquisitions in H1. 

 OUTLOOK

In February 2014 we set out our new differentiated strategy and introduced medium-term targets for mid-single digit revenue growth, high-single digit profit growth and a significant improvement in cash generation. 

We have continued to implement our strategy at pace and in the first half of 2015 we have delivered ongoing revenue growth of 5.2%, profit growth of 8.0% and free cash flow of £55m.  

While prospects in the majority of our key markets are good, conditions in certain parts of Europe remain challenging particularly in France and the Netherlands.  We are nonetheless on track to achieve our 2015 revenue, profit and cash expectations. 

Overall, we are encouraged by the progress that we have made over the last eighteen months and are confident of delivering further value for shareholders as we enter the next phase in the execution of our plan.

DELIVERING PROFITABLE GROWTH

In February 2014 we announced our RIGHT WAY plan to deliver sustainable revenue and profitable growth.  The plan is based upon a new, focused model for the Company which includes the introduction of five geographic regions with a low cost operating structure: North America, Europe, UK & Rest of World, Asia and Pacific.  Our core competencies are our colleagues as experts, our category leadership, and our lean multi-business model.  We manage the business for profitable growth by grouping our categories and geographies into a growth potential and profit contribution matrix to assist capital allocation and by utilising six operational levers to drive growth.    

We also announced the following medium-term targets:

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1.    Mid-single digit revenue growth, supported by M&A investment and divestment of non-core or poorly performing businesses;

2.    High-single digit profit growth, leveraging revenue targets; and

3.    Strong and sustainable delivery of free cash flow of £100m+ p.a. to fund M&A, implement a progressive dividend policy and reduce debt.

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Progress in phase one

The group has undergone a significant transformation over the past 18 months and is now delivering strong and sustainable free cash flow.  We called to an end the period of large-scale restructuring from 2008 to 2013 and have cut restructuring costs by some £40m compared to the levels in 2013.  Central and divisional overheads have been reduced by £12m, working capital is managed more tightly and capex is broadly in line with depreciation.  In addition, we have a fully-funded pension scheme, group net debt (at just under £730m) is at its lowest level for 15 years and we have reached our target credit rating of BBB (Stable Outlook). 

Within the categories while Pest Control and Hygiene have made solid progress, further work remains to be done in Workwear.  We update on our category progress in phase one of our Right Way plan below.

Pest Control:

·      We have an outstanding, world-leading pest control business with market leadership positions in 47 of the 60+ countries in which we operate.  Pest Control is the growth engine of the group and in H1 overall pest revenues grew by 9.6% (+4.8% organic)

·      We have established coast-to-coast coverage in the US and are the third largest market player, servicing a national customer base

·      We are accelerating our presence in high growth emerging markets with a refocused strategy for China and India and now establishing a strong position in Latin America

·      Building greater density in pest control is our primary M&A focus and we have acquired 35 businesses since January 2014, all of which are performing at or ahead of the required quadrant IRR hurdle rates

·      Our innovation pipeline and digital expertise are driving service differentiation, sales and customer engagement:   

-       Notable product innovations include 'PestConnect' (commercialised remote monitoring), 'RodentGate' (smart external traps that only open to rats) and 'myRentokil' (a risk-based extranet and App for customers)

-       Launch of a new performance-enhancing website in 20 markets to drive further digital expertise improvement across our operations

Hygiene:

·      Hygiene is a global hygiene services leader - much needed re-investment has been made with new product ranges now fully in place including 'Signature', 'Colour', 'Reflection' and 'No Touch'

-       Overall revenue growth of 2.3% in H1

-       UK & Ireland hygiene businesses now returned to growth (+3.7% in H1)

-       +1.3% revenue growth in France in H1 reflecting roll-out of the 'Signature' range

-       +3.9% revenue growth in the Pacific region

·      We are building a strong position in Emerging markets (revenue +17.5% in H1):

-       13.3% revenue growth in Asia in H1

·      Innovation is beginning to gain traction:

-       'HygieneConnect' - which uses the same technology as 'PestConnect' and which is the world's first integrated wireless monitoring and display system designed to raise hand washing compliance  

-       Launch of 'myInitial' extranet for better customer engagement.

·      Our premium scenting business is currently growing at over 30% p.a., albeit from a low base

Workwear:

·      Progress over the past 18 months includes:

-       Launch of new product ranges in main European countries

-       Steady performance from our German workwear operations

-       Continued growth in the higher-margin Cleanroom business

-       Exit of our lower-margin flat linen operations in Austria and Northern Ireland 

·      However, overall category performance continues to be held-back by France and the Netherlands

·      Acceptable service levels are in place but the opportunity for differentiation is through providing the highest product and service quality

Our capital allocation model is working well, with M&A and capex allocated in line with quadrant strategies.  We have established a high quality pipeline of acquisitions and have acquired 44 businesses over the past 18 months (36 of which have been in the Growth and Emerging markets) with combined annual revenues of £78.6m.  All are performing at or ahead of their quadrant IRR hurdle rates.  We have acquired 17 businesses in North America, building greater density in this important region and have entered new high growth markets including Chile and Colombia.  The Growth and Emerging quadrants now account for almost 60% of group revenue.  In the Manage for Value quadrant we have disposed of a number of non-core operations (notably the Initial Facilities, Spanish Medical and Austrian products businesses and more recently our flat linen operations in Austria and Northern Ireland) leaving the remaining businesses comprising just 4% of group revenue. 

Overview of the next phase  

Below we summarise our priorities for the next phase of execution of our Right Way plan:

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1.    Increasing our exposure to Growth and Emerging markets particularly in North America and Asia;

2.    Accelerating and prioritising Pest Control with upside to go for in Hygiene through "Execute Now" and Workwear's quality-focused improvement plan;

3.    Greater exploitation of our digital expertise - to drive sales and customer engagement;

4.    Further differentiation through innovation - delivery of pipeline of innovations to market;

5.    Delivering enhanced margins where possible through city density and local share (for example North America and Asia);

6.    Boosting sales and service productivity;

7.    Greater sharing of best practice - further roll-out of the 'Project Speed' programme for greater sharing of operational best practices; and

8.    Value-creating M&A programme - continuing to use our differentiated approach with clear strategies for growth and capital allocation.

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Pest Control - 'Acceleration'

Our pest control business is set to become our majority category and we plan to deliver continued acceleration for the business through:   

·      deployment of new pest products and services from innovation pipeline;

·      roll-out of our performance-enhancing web presence across the group; 

·      our leadership in the 'Internet-of-Things' for pest control, for example monitoring devices covering a range of pests and risk-based reporting through extranets/apps;

·      leverage of our North America position and growth and share growth in Emerging markets; and

·      continued M&A programme to build greater density.

Hygiene - 'Execute Now'

Within the hygiene category we will pursue an 'Execute Now' growth strategy to leverage our strengths across our 40+ markets of operations by:

·      building on the strength of our leading hygiene brand and strong market positions;

·      selling with confidence - including new product ranges such as 'Reflection', 'Signature', 'Colour' and 'No Touch' and Premium Scenting;

·      leading on innovation through 'Internet-of-Things' for hygiene, for example sensing, hand hygiene compliance, particularly in the food and health market sectors; and

·      building city density and extend our footprint through organic growth and continued M&A.

Workwear - 'Quality of Service'

Our aim is to create a workwear business that has clear market differentiation through the highest level of product and service quality, thus driving greater customer satisfaction and in turn generating improved revenue and margins.  The plan includes:

·      rigorous application of KPIs to measure quality of service;

·      improved product visibility through the entire service process;

·      best-in-class processing - highest standards in washing and repair quality; new higher quality detergents;

·      greater responsiveness to customer needs - shorter lead time between contract and deployment (for example web-based size taking pilot);

·      smarter selling - "selling a service rather than a product";

·      creation of product and service innovation action group; and

·      leveraging European scale and best practice - to create a more effective organisation through best practice sharing in supply chain, R&D, processing, sales and marketing.

FINANCIAL REVIEW

Central and regional overheads (at CER)

Central and regional overheads decreased by £2.4m in H1 to £32.3m, partly reflecting the lapping impact of the cost reduction programme in 2014 and continued cost discipline.

Restructuring costs and one-off items - operating (at CER)

Restructuring costs of £2.5m were in line with the prior year.  These consisted mainly of redundancy costs and plant and office closure costs.  One-off costs in the first half netted to a credit of £0.2m (2014: credit of £0.8m) with the costs associated with the closure of our Austrian and Northern Ireland flat linen businesses (£11.0m) offset by the income (£10.8m) from the settlement of a legacy legal claim.  

Interest (at AER)

Net interest payable was £19.9m compared to £24.9m in H1 of the prior year, a decrease of £5.0m.  The decrease is predominantly due to the reduced interest rate following the repayment of a €500m bond in March 2014. 

Tax (at AER)

The income tax expense on continuing operations for H1 was 20.5% on reported profit before tax compared with 22.2% in H1 2014.  After adjusting profit for the amortisation and impairment of intangible assets (excluding computer software), reorganisation costs and one-off items and net pension credit from pensions, the effective tax rate is 23.4%, compared with 23.6% in H1 2014.  This compares with a blended rate of tax for the countries in which the group operates of about 26% (26.5% in H1 2014).  The reduction is principally due to the offset of the group's UK profits by brought forward tax losses. 

Net debt and cash flow

£m at actual exchange rates	Year to Date
	2015 HY £m	2014 HY £m	Change £m
Adjusted operating profit1	99.7	100.2	(0.5)
Restructuring costs	(2.3)	(3.1)	0.8
One-off items - operating	0.9	0.8	0.1
Depreciation	85.4	92.1	(6.7)
Other non-cash	7.9	(2.4)	10.3
EBITDA	191.6	187.6	4.0
Working capital	(8.0)	(29.3)	21.3
Movement on provisions	(5.1)	(8.7)	3.6
Capex - additions	(88.5)	(101.2)	12.7
Capex - disposals	3.6	3.1	0.5
Operating cash flow - continuing operations	93.6	51.5	42.1
Interest	(23.5)	(34.4)	10.9
Tax	(14.7)	(12.4)	(2.3)
Free cash flow - continuing operations	55.4	4.7	50.7
Free cash flow - discontinued operations	(0.6)	(35.5)	34.9
Free cash flow	54.8	(30.8)	85.6
Acquisitions	(32.7)	(41.7)	9.0
Disposal of companies and businesses	-	253.1	(253.1)
Restricted cash disposed of with companies and businesses	-	(16.3)	16.3
Dividends	(33.1)	(29.2)	(3.9)
Foreign exchange translation and other items	56.2	40.5	15.7
(Increase) / decrease in net debt	45.2	175.6	(130.4)
Opening net debt	(775.0)	(1,034.8)	259.8
Closing net debt	(729.8)	(859.2)	129.4

¹ before amortisation and impairment of intangibles (excluding computer software), restructuring costs and one-off items

Operating cash inflow of £93.6m at AER for continuing operations was £42.1m favourable to 2014 mainly due to reductions in working capital outflows and capital expenditure in 2015 and helped by the favourable settlement of a legacy legal claim.

Interest payments (including finance lease interest) were £10.9m lower than last year at £23.5m, principally due to the re-phasing of interest payments to the second half of the year following the bond refinancing in 2014. 

Free cash inflow from continued operations of £55.4m was £50.7m favourable compared to the prior year.  The cash spent on acquisitions in H1 totalled £32.7m and the Company made a dividend payment of £33.1m in 2015.

Foreign exchange translation and other items reduced net debt by £56.2m, leaving an overall reduction in net debt of £129.4m compared to 30 June 2014 and closing net debt of £729.8m.

Capital expenditure (at AER)

Net capital expenditure from continuing operations of £84.9m was £13.2m lower than in the first half of 2014 due to exchange rate movements and phasing. We expect capital expenditure to be no more than £200m for the full year.

Pensions (at AER)

At 30 June 2015 the Company's UK defined benefit pension scheme, which is closed to new members, was valued at an accounting surplus of £203.9m on the Company's balance sheet.  The Company has recognised the pension surplus as an asset because the group has an unconditional right to a refund of the surplus at the end of the Scheme's life. 

The trustees value the scheme on a different basis.  The most recent formal actuarial valuation showed that at 31 March 2013 the Scheme was 98.7% funded with a deficit of £17.8m.  However, based on movements since 31 March 2013 the Scheme was estimated to have an actuarial surplus in excess of £20m at 30 June 2015. 

It is anticipated that the Scheme will remain in surplus but in order to mitigate the risk that it does not, annual contributions of £3.2m per annum over the six-year period will be paid into a joint escrow account by the Company.  The first payment was made in October 2014.  In the event that the deficit is not cleared by the time of the 31 March 2019 valuation, it will be funded from the escrow account.  

Funding (at AER)

At 30 June 2015 the group had net debt of £730m and a strong liquidity position, comprising over £225m of centrally held funds and £270m of available undrawn committed facilities.

During Q1 the group refinanced its £270m Revolving Credit Facility and £40m Letter of Credit Facility, both maturing December 2016 combining the two facilities into a single facility, a £315m cash and letter of credit facility maturing in January 2020, of which a maximum of £270m may be used for cash drawings. 

The group has a £300m bond maturing in March 2016. It is envisaged that the bond will be refinanced substantially through existing cash balances and facilities. However, we will continue to review our funding position and will provide an update in due course.

The Directors continue to adopt the going concern basis in preparing the interim statement on the basis that the group's strong liquidity position and ability to reduce operating capital expenditure or expenditure on bolt-on acquisitions are sufficient to meet the group's forecast funding needs, including those modelled in a downside case.

Appendix 1

 

Regional Analysis - ongoing operations

	Revenue					Adjusted operating profit
£m	6 months to 30 June 2015		Change from HY 2014			6 months to 30 June 2015		Change from HY 2014
	CER	AER	CER	AER		CER	AER	CER	AER
France	170.4	155.3	(3.1%)	(13.4%)		23.6	21.5	(16.0%)	(24.8%)
Benelux	110.1	100.4	(0.8%)	(11.3%)		16.7	15.2	(3.5%)	(14.1%)
Germany	90.4	83.5	3.0%	(6.6%)		23.3	21.6	11.0%	0.9%
Other Europe	43.9	40.2	14.0%	2.3%		6.1	5.6	13.0%	1.8%
Total Europe	414.8	379.4	0.4%	(9.9%)		69.7	63.9	(2.9%)	(12.7%)
UK & Ireland	111.0	110.3	18.0%	17.1%		20.4	19.3	14.6%	8.4%
Rest of World	58.2	54.8	5.1%	(2.5%)		12.5	11.9	(3.8%)	(9.8%)
UK & Rest of World	169.2	165.1	13.2%	9.8%		32.9	31.2	6.8%	0.6%
Asia	52.9	53.7	13.3%	16.2%		4.7	4.6	51.6%	48.4%
North America	176.9	189.3	8.3%	17.8%		17.8	19.1	19.5%	30.8%
Pacific	67.7	63.6	4.3%	(2.2%)		13.7	12.9	7.9%	1.6%
Central and regional overheads	-	-	-	-		(32.3)	(32.3)	6.9%	6.9%
Ongoing operations	881.5	851.1	5.2%	0.9%		106.5	99.4	8.0%	(0.5%)
Disposed businesses	4.6	4.2	(56.6%)	(61.1%)		0.4	0.3	33.3%	-
Continuing operations	886.1	855.3	4.5%	0.1%		106.9	99.7	8.0%	(0.5%)

 

Appendix 2

 

Category Analysis - ongoing operations

	Revenue					Adjusted operating profit
£m	6 months to 30 June 2015		Change from HY 2014			6 months to 30 June 2015		Change from HY 2014
	CER	AER	CER	AER		CER	AER	CER	AER
Pest Control	367.2	367.8	9.6%	10.0%		65.0	63.7	10.5%	7.8%
Hygiene	227.1	214.5	2.3%	(4.4%)		42.9	40.5	(0.2%)	(6.9%)
Workwear	192.6	175.8	(2.4%)	(12.6%)		24.0	21.8	(9.4%)	(19.3%)
Other	94.6	93.0	13.4%	11.2%		6.9	5.7	38.0%	14.0%
Central and regional overheads	-	-	-	-		(32.3)	(32.3)	6.9%	6.9%
Ongoing operations	881.5	851.1	5.2%	0.9%		106.5	99.4	8.0%	(0.5%)
Disposed businesses	4.6	4.2	(56.6%)	(61.1%)		0.4	0.3	33.3%	-
Continuing operations	886.1	855.3	4.5%	0.1%		106.9	99.7	8.0%	(0.5%)

 

 

Consolidated income statement
									6 months to 30 June	6 months to 30 June
									2015	2014
							Notes		£m	£m
Revenue								4	855.3	854.4
Operating expenses									(770.9)	(766.2)
Operating profit									84.4	88.2
Analysed as:
Operating profit before amortisation and impairment of intangibles1, restructuring costs and one-off items								4	99.7	100.2
Restructuring costs								4	(2.3)	(3.1)
One-off items - operating								4	0.9	0.8
Amortisation and impairment of intangible assets1								4	(13.9)	(9.7)
Operating profit									84.4	88.2
Interest payable and similar charges									(25.2)	(29.3)
Interest receivable									5.3	4.4
Net interest credit from pensions									3.0	1.3
Share of profit from associates (net of tax)									2.7	2.2
Profit before income tax									70.2	66.8
Income tax expense2									(14.4)	(14.8)
Profit for the period from continuing operations									55.8	52.0
Discontinued operations:
Profit for the period from discontinued operations								5	-	135.8
Profit for the period (including discontinued operations)									55.8	187.8
Attributable to:
Equity holders of the Company									55.5	187.7
Non-controlling interests									0.3	0.1
									55.8	187.8
The weighted average number of ordinary shares in issue is 1,819m (HY 2014: 1,817m). For the diluted calculation the adjustment for share options and LTIPs is 6.2m (HY 2014: 6.3m).
Basic earnings per share
- Continuing operations									3.05p	2.86p
- Discontinued operations									-	7.47p
- Continuing and discontinued operations									3.05p	10.33p
Diluted earnings per share
- Continuing operations									3.04p	2.85p
- Discontinued operations									-	7.45p
- Continuing and discontinued operations									3.04p	10.30p
Basic adjusted earnings per share3
- Continuing operations									3.49p	3.26p
Diluted adjusted earnings per share3
- Continuing operations									3.48p	3.25p

¹ excluding computer software

² taxation includes £13.3m (HY 2014: £11.9m) in respect of overseas taxation

³ earnings per share before the after tax effects of amortisation and impairment of intangibles (excluding computer software), restructuring costs and one-off items and net interest credit on pensions

Consolidated statement of comprehensive income
									6 months to 30 June	6 months to 30 June
									2015	2014
									£m	£m
Profit for the period (including discontinued operations)									55.8	187.8
Other comprehensive income:
Items that are not reclassified subsequently to profit or loss:
Remeasurement of net defined benefit asset/liability									8.0	21.5
Tax related to remeasurement of net defined benefit asset/liability									(1.7)	(4.3)
Items that may be reclassified subsequently to profit or loss:
Net exchange adjustments offset in reserves									11.6	8.1
Effective portion of changes in fair value of cash flow hedge									0.1	0.6
Cumulative exchange recycled to income statement on disposal of foreign operations									-	0.6
Total other comprehensive income									18.0	26.5
Total comprehensive income									73.8	214.3
Attributable to:
Equity holders of the Company									73.5	214.2
Non-controlling interests									0.3	0.1
									73.8	214.3

Consolidated balance sheet
								At 30 June 2015	At 31 December 2014
		Notes						£m	£m
Assets
Non-current assets
Intangible assets								434.0	431.3
Property, plant and equipment								460.1	505.5
Investments in associated undertakings								16.5	14.4
Other investments								0.1	0.1
Deferred tax assets								2.9	3.5
Retirement benefit assets		9						203.9	192.2
Other receivables								8.5	11.5
Derivative financial instruments		8						1.0	1.4
								1,127.0	1,159.9
Current assets
Other investments								98.5	51.4
Inventories								58.5	58.9
Trade and other receivables								312.8	314.5
Current tax assets								5.8	6.0
Derivative financial instruments		8						1.7	0.6
Cash and cash equivalents								167.9	197.1
								645.2	628.5
Liabilities
Current liabilities
Trade and other payables								(362.5)	(382.0)
Current tax liabilities								(67.5)	(71.8)
Provisions for other liabilities and charges								(22.2)	(24.5)
Bank and other short-term borrowings		7						(333.0)	(31.1)
Derivative financial instruments		8						(6.4)	(6.7)
								(791.6)	(516.1)
Net current assets / (liabilities)								(146.4)	112.4
Non-current liabilities
Other payables								(14.2)	(12.9)
Bank and other long-term borrowings		7						(650.7)	(976.1)
Deferred tax liabilities								(76.9)	(78.3)
Retirement benefit obligations								(26.0)	(25.8)
Provisions for other liabilities and charges								(55.0)	(59.8)
Derivative financial instruments		8						(16.2)	(19.4)
								(839.0)	(1,172.3)
Net assets								141.6	100.0
Equity
Capital and reserves attributable to the company's equity holders
Called up share capital								18.2	18.2
Share premium account								6.8	6.8
Other reserves								(1,760.3)	(1,772.0)
Retained profits								1,876.8	1,847.2
								141.5	100.2
Non-controlling interests								0.1	(0.2)
Total equity								141.6	100.0

Consolidated statement of changes in equity

	Called up share capital	Share premium account	Other reserves	Retained earnings	Non controlling interests	Total equity
	£m	£m	£m	£m	£m	£m
At 1 January 2014	18.2	6.8	(1,790.2)	1,533.1	0.1	(232.0)
Profit for the period	-	-	-	187.7	0.1	187.8
Other comprehensive income:
Net exchange adjustments offset in reserves	-	-	8.1	-	-	8.1
Remeasurement of net defined benefit asset/liability	-	-	-	21.5	-	21.5
Effective portion of changes in fair value of cash flow hedge	-	-	0.6	-	-	0.6
Cumulative exchange recycled to income statement on disposal of foreign operations	-	-	-	0.6	-	0.6
Tax related to remeasurement of net defined benefit asset/liability	-	-	-	(4.3)	-	(4.3)
Total comprehensive income for the period	-	-	8.7	205.5	0.1	214.3
Transactions with owners:
Dividends paid to equity shareholders	-	-	-	(29.2)	-	(29.2)
Cost of share options and long-term incentive plan	-	-	-	0.9	-	0.9
At 30 June 2014	18.2	6.8	(1,781.5)	1,710.3	0.2	(46.0)
At 1 January 2015	18.2	6.8	(1,772.0)	1,847.2	(0.2)	100.0
Profit for the period	-	-	-	55.5	0.3	55.8
Other comprehensive income:
Net exchange adjustments offset in reserves	-	-	11.6	-	-	11.6
Remeasurement of net defined benefit asset/liability	-	-	-	8.0	-	8.0
Effective portion of changes in fair value of cash flow hedge	-	-	0.1	-	-	0.1
Tax related to remeasurement of net defined benefit asset/liability	-	-	-	(1.7)	-	(1.7)
Total comprehensive income for the period	-	-	11.7	61.8	0.3	73.8
Transactions with owners:
Dividends paid to equity shareholders	-	-	-	(33.1)	-	(33.1)
Cost of share options and long-term incentive plan	-	-	-	0.9	-	0.9
At 30 June 2015	18.2	6.8	(1,760.3)	1,876.8	0.1	141.6

Treasury shares of £7.0m (HY 2014: £11.1m) have been netted against retained earnings. Treasury shares represent 3.8m (HY 2014: 6.0m) shares held by the Rentokil Initial Employee Share Trust. The market value of these shares at 30 June 2015 was £5.6m (HY 2014: £6.7m). Dividend income from, and voting rights on, the shares held by the Trust have been waived. 

Analysis of other reserves	Capital reduction reserve	Legal	Cash flow hedge reserve	Translation reserve	Total
	£m	£m	£m	£m	£m
At 1 January 2014	(1,722.7)	10.4	0.1	(78.0)	(1,790.2)
Net exchange adjustments offset in reserves	-	-	-	8.1	8.1
Effective portion of changes in fair value of cash flow hedge	-	-	0.6	-	0.6
Total comprehensive income for the period	-	-	0.6	8.1	8.7
At 30 June 2014	(1,722.7)	10.4	0.7	(69.9)	(1,781.5)
At 1 January 2015	(1,722.7)	10.4	-	(59.7)	(1,772.0)
Net exchange adjustments offset in reserves	-	-	-	11.6	11.6
Effective portion of changes in fair value of cash flow hedge	-	-	0.1	-	0.1
Total comprehensive income for the period	-	-	0.1	11.6	11.7
At 30 June 2015	(1,722.7)	10.4	0.1	(48.1)	(1,760.3)

Consolidated cash flow statement
		6 months to 30 June	6 months to 30 June
		2015	2014
	Notes	£m	£m
Profit for the period		55.8	187.8
Adjustments for:
- Profit on sale of discontinued operations excluding costs of disposal	5	-	(146.0)
- Discontinued operations tax	5	-	0.5
- Tax		14.4	14.8
- Share of profit from associates		(2.7)	(2.2)
- Net interest credit from pensions		(3.0)	(1.3)
- Interest income		(5.3)	(4.4)
- Interest expense		25.2	29.3
Reversal of non-cash items:
- Depreciation and impairment of property, plant and equipment		80.4	87.0
- Amortisation and impairment of intangible assets1		13.9	10.1
- Amortisation of computer software		5.0	5.9
- LTIP charges		0.9	0.9
- Other non-cash items		7.0	-
- Profit on sale of property, plant and equipment		(0.4)	(0.2)
- Loss on disposal / retirement of intangible assets		0.4	-
- Profit on disposal of companies and businesses (not included within discontinued operations)		-	(3.1)
Changes in working capital (excluding the effects of acquisitions and exchange differences on consolidation):
- Inventories		(2.0)	(4.2)
- Trade and other receivables		(12.0)	(38.7)
- Trade and other payables and provisions		0.3	(20.2)
Cash generated from operating activities		177.9	116.0
Interest received		5.0	5.3
Interest paid		(28.1)	(39.3)
Income tax paid		(14.7)	(12.4)
Net cash generated from operating activities		140.1	69.6
Cash flows from investing activities
Purchase of property, plant and equipment		(77.4)	(92.2)
Purchase of intangible fixed assets		(5.1)	(5.6)
Proceeds from sale of property, plant and equipment		3.6	3.1
Acquisition of companies and businesses, net of cash acquired	10	(32.7)	(41.7)
Disposal of companies and businesses		-	253.1
Disposal of restricted cash		-	(16.3)
Net cash flows from investing activities		(111.6)	100.4
Cash flows from financing activities
Dividends paid to equity shareholders		(33.1)	(29.2)
Interest element of finance lease payments		(0.4)	(0.4)
Capital element of finance lease payments		(4.5)	(4.0)
Cash outflow on settlement of debt related foreign exchange forward contracts		(0.3)	(5.4)
Proceeds from issue of debt		36.6	2.6
Net investment in term deposits		(47.1)	241.5
Net loan repayments		-	(400.1)
Net cash flows from financing activities		(48.8)	(195.0)
Net decrease in cash and cash equivalents		(20.3)	(25.0)
Cash and cash equivalents at beginning of year		194.1	143.4
Exchange losses on cash and cash equivalents		(6.5)	(4.7)
Cash and cash equivalents at end of the financial period		167.3	113.7

¹ excluding computer software

1.  General information

The Company is a limited liability company incorporated and domiciled in the UK with a listing on the London Stock Exchange. 

 

The address of its registered office is Rentokil Initial plc, Riverbank, Meadows Business Park, Blackwater, Camberley, Surrey GU17 9AB.

The consolidated half-yearly financial information for the half-year to 30 June 2015 was approved for issue on 29 July 2015.

On pages 56 to 57 of the Annual Report 2014 we set out the group's approach to risk management and on pages 36 to 37 we define the principal risks that are most relevant to the group. These risks are described in detail and have mitigating actions assigned to each of them. In our view the principal risks remain unchanged from those indicated in the Annual Report 2014 and actions continue to be taken to substantially mitigate the impact of such risks, should they materialise.

These interim financial results do not comprise statutory accounts within the meaning of Section 435 of the Companies Act 2006, and should be read in conjunction with the Annual Report 2014. The comparative figures for the year ended 31 December 2014 are not the group's statutory accounts for that financial year. Those accounts have been reported upon by the group's auditors and delivered to the registrar of companies. The report of the auditors was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

For all information relating to 2014 results please refer to the Annual Report 2014 which can be accessed here: http://www.rentokil-initial.com/investors/results-centre 

2. Basis of preparation

These interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. 

The annual financial statements of the group are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU.  As required by the Disclosure and Transparency Rules of the Financial Conduct Authority, the interim financial statements have been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated financial statements for the year ended 31 December 2014 except for the changes described in note 3.

After reviewing group cash balances, borrowing facilities and projected cash flows, the directors believe that the group has adequate resources to continue operations for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the consolidated financial statements.

3. Accounting policies 

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 December 2014, as described in those financial statements. 

The preparation of the interim financial information for the half-year ended 30 June 2015 requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities and disclosure of contingent liabilities at the date of the statement. If in the future such estimates and assumptions, which are based on management's best judgement at the date of the statement, deviate from the actual circumstances, the original estimates and assumptions will be modified as appropriate in the year in which the circumstances change.

Significant seasonal or cyclical variations in the group's total revenues are not experienced during the financial year.

 

Changes in accounting policies

The group has adopted the following amendments to standards with effect from 1 January 2015:

-       Defined benefit plans: Employee contributions - amendments to IAS 19

-       Annual improvements to IFRS: 2010-2012 cycle - amendments to IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24 and IAS 38

-       Annual improvements to IFRS: 2011-2013 cycle - amendments to IFRS 1, IFRS 3, IFRS 13 and IAS 40

These standards have had no impact on the financial position or performance of the group. Consequently, no adjustment has been made to the comparative financial information as at 31 December 2014 or 30 June 2014. The group has not early adopted any standard, interpretation or amendment that was issued but is not yet effective.

4. Segmental information

Segmental information has been presented in accordance with IFRS 8 "Operating Segments" which the group has implemented with effect from 1 January 2009.

	Revenue	Revenue	Adjusted operating profit	Adjusted operating profit
Ongoing operations	6 months to 30 June 2015 £m	6 months to 30 June 2014 £m	6 months to 30 June 2015 £m	6 months to 30 June 2014 £m
France	170.4	175.9	23.6	28.1
Benelux	110.1	111.0	16.7	17.3
Germany	90.4	87.8	23.3	21.0
Other Europe	43.9	38.5	6.1	5.4
Europe	414.8	413.2	69.7	71.8
UK & Ireland	111.0	94.1	20.4	17.8
Rest of World	58.2	55.4	12.5	13.0
UK & Rest of World	169.2	149.5	32.9	30.8
Asia	52.9	46.7	4.7	3.1
North America	176.9	163.3	17.8	14.9
Pacific	67.7	64.9	13.7	12.7
Central and regional costs	-	-	(32.3)	(34.7)
Ongoing operations at constant exchange rates	881.5	837.6	106.5	98.6
Disposed businesses1	4.6	10.6	0.4	0.3
Continuing operations at constant exchange rates	886.1	848.2	106.9	98.9
Foreign exchange	(30.8)	6.2	(7.2)	1.3
Continuing operations at actual exchange rates	855.3	854.4	99.7	100.2
Restructuring costs	-	-	(2.3)	(3.1)
One-off items - operating	-	-	0.9	0.8
Amortisation and impairment of intangible assets2	-	-	(13.9)	(9.7)
Operating profit	-	-	84.4	88.2
Interest payable and similar charges	-	-	(25.2)	(29.3)
Interest receivable	-	-	5.3	4.4
Net interest credit from pensions	-	-	3.0	1.3
Share of profit from associates (net of tax) - Asia	-	-	2.7	2.2
Profit before income tax and discontinued operations	-	-	70.2	66.8

¹ disposed businesses are those businesses that have been disposed or exited and therefore are not included as an ongoing operation

² excluding computer software

Restructuring costs, one-off items, and amortisation and impairment of intangible assets (at actual exchange rates)
	Amortisation and impairment 6 months to           30 June 2015	Amortisation and impairment 6 months to           30 June 2014	Restructuring costs 6 months to 30 June 2015	Restructuring costs 6 months  to 30 June 2014	One-off items 6 months to 30 June 2015	One-off items        6 months to 30 June 2014
	£m	£m	£m	£m	£m	£m
Europe	3.4	1.9	1.9	1.6	8.0	(2.2)
UK & Rest of World	2.6	1.5	0.2	0.3	2.0	0.5
Asia	0.8	0.5	-	0.2	0.1	-
North America	6.1	5.0	0.1	-	(0.3)	0.6
Pacific	0.2	0.1	0.1	0.3	-	-
Central and regional	0.8	0.7	-	0.7	(10.7)	0.3
	13.9	9.7	2.3	3.1	(0.9)	(0.8)

Restructuring costs and one-off items have been separately identified as they are not considered to be "business as usual" expenses and have a varying impact on different businesses and reporting periods.

One-off items includes £10.1m for the costs associated with the closure of the Austrian and Belfast flat linen businesses (Europe £8.3m, UK & ROW £1.8m), offset by £10.8m related to the net income from the settlement of a legacy legal claim (Central and regional).

5. Discontinued operations and disposals

There are no discontinued operations as at 30 June 2015.

On 18 March 2014 the group sold the Initial Facilities (IF) division. The division was not previously classified as held for sale or as a discontinued operation. Management committed to a plan to sell this division early in 2014, following a decision to concentrate on the group's core international businesses in pest control, hygiene and workwear. For details on the effects of this discontinued operation, please refer to the 2014 annual report.

6. Dividends

			6 months to 30 June 2015	6 months to 30 June 2014	Year to 31 December 2014
			£m	£m	£m
2013 final dividend paid - 1.61p per share			-	29.2		29.2
2014 interim dividend paid - 0.77p per share			-	-		14.0
2014 final dividend paid - 1.82p per share			33.1	-		-
			33.1	29.2		43.2

The directors have declared an interim dividend of 0.87p per share amounting to £15.8m payable on 16 September 2015 to shareholders on the register at 14 August 2015. The Company has a progressive dividend policy and will take a view on the level of any growth for 2015 based on the year-end results.  These interim financial statements do not reflect this dividend payable.

7. Bank and other borrowings

					At 30 June 2015	At 31 December 2014
					£m	£m
Non-current
RCF and other bank borrowings					0.1	0.2
Bond debt					635.1	960.6
Finance lease liabilities					15.5	15.3
					650.7	976.1
Current
Bank overdrafts					0.6	3.0
Bank borrowings					1.0	1.3
Bond debt					302.9	-
Bond interest accruals					19.4	18.7
Finance lease liabilities					9.1	8.1
					333.0	31.1
Total bank and other borrowings					983.7	1,007.2

Medium-term notes and bond debt comprises:

	Bond interest coupon	Effective hedged interest rate
Non-current
€500m bond due September 2019	Fixed 3.375%	Fixed 3.62%
€350m bond due October 2021	Fixed 3.25%	Fixed 3.52%
€50m bond due March 20181	Float 3M EURIBOR+0.48%	Fixed 0.68%
£1.3m debentures	Fixed 5.00%	Fixed 5.00%
£0.3m debentures	Fixed 4.50%	Fixed 4.50%
Current
£300m bond due March 2016	Fixed 5.75%	Fixed 4.48%
Average cost of bond debt at period end rates		3.76%

¹ The €50m bond due March 2018 was fixed at 0.57% payable quarterly. The effective hedge rate is higher than the annual coupon on our bonds due to discount and fees paid on issuance

On 27 January 2015 a new combined facility of £315m, maturing in 2020, was signed. This new facility replaced the previous facility which was due to expire in December 2016. Under the facility, a maximum of £270m can be drawn in cash and the remainder available for guarantees. The marginal cost of borrowing under the facility at the period end was 1.18%. During the six months to 30 June 2015 the facility was undrawn.

The group's facility, bank borrowings and bonds are held at amortised cost.

The carrying values and the fair values of the group's non-current borrowings are shown below. Fair values are based on cashflows discounted at the current market rates:

	Carrying amount	Carrying amount	Fair Value	Fair Value
	30 June 2015	31 December 2014	30 June 2015	31 December 2014
	£m	£m	£m	£m
Bank borrowings	0.1	0.2	0.1	0.2
£300m bond due March 2016	-	304.8	-	315.8
€500m bond due September 2019	353.1	386.2	389.6	431.9
€350m bond due October 2021	245.6	268.6	275.8	308.0
€50m bond due March 2018	35.4	-	35.6	-
£1.6m debentures	1.0	1.0	1.7	1.7
Finance lease liabilities	15.5	15.3	15.5	15.3
	650.7	976.1	718.3	1,072.9

The carrying values and the fair values of the group's bonds to be repaid in the next 12 months are shown below. Fair values are based on cashflows discounted at the current market rates:

	Carrying amount	Carrying amount	Fair Value	Fair Value
	30 June 2015	31 December 2014	30 June 2015	31 December 2014
	£m	£m	£m	£m
£300m bond due March 2016	302.9	-	309.4	-

8. Derivative financial instruments

For all financial instruments held by the group, those that are held at fair value are to be classified by reference to the source of inputs used to derive the fair value.  The following hierarchy is used:

Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 - inputs other than quoted prices that are observable for the asset or liability either directly as prices or indirectly through modelling based on prices;

Level 3 - inputs for the asset or liability that are not based on observable market data.

The group holds all derivatives at fair value using discounted cash flow models based on market rates which are observable.  Therefore all derivative financial instruments and available-for-sale assets held by the group fall into Level 2.  Contingent consideration payable on acquisitions by the group falls into Level 3.  No financial instruments have moved between levels in the period.

	Fair value assets	Fair value assets	Fair value liabilities	Fair Value liabilities
	30 June 2015	30 June 2014	30 June 2015	30 June 2014
	£m	£m	£m	£m
Interest rate swaps:
-       non-hedge	-	-	(7.4)	(7.9)
-       cash flow hedge	1.0	0.4	(6.1)	(3.1)
-       net investment hedge	1.2	1.0	(9.0)	(12.8)
Foreign exchange swaps:
-       non-hedge	0.5	0.6	(0.1)	(2.4)
	2.7	2.0	(22.6)	(26.2)
Analysed as follows:
Current portion	1.7	0.6	(6.4)	(6.8)
Non-current portion	1.0	1.4	(16.2)	(19.4)
	2.7	2.0	(22.6)	(26.2)

9. Retirement benefit obligations

Apart from the legally required social security state schemes, the group operates a number of pension schemes around the world covering many of its employees. The major schemes are of the defined benefit type with assets held in separate trustee administered funds.

The principal scheme in the group is the Rentokil Initial Pension Scheme in the United Kingdom ("the scheme").  It has a number of defined benefit sections which are all now closed to new members.  At 30 June 2015 the scheme was valued at an accounting surplus of £203.9m (December 2014: £192.2m) on the group's balance sheet. 

The scheme is re-appraised bi-annually by independent actuaries based upon actuarial assumptions in accordance with IAS 19 requirements. The principal assumptions used for the scheme are shown below.

			30 June 2015	31 December 2014
			£m	£m
Weighted average %
Discount rate			3.7%	3.4%
Future salary increases			N/A	N/A
Future pension increases			3.4%	3.2%
RPI Inflation			3.5%	3.3%
CPI Inflation			2.4%	2.2%

The trustees of the scheme value the scheme on a different basis and at 30 June 2015 their valuation is estimated to be a surplus in excess of £20m.  Under the terms of the agreed recovery plan, the group continues to make payments into escrow of £3.2m per year and the balance in escrow currently stands at £6.4m.  The valuations stated exclude the payments into escrow. The group continues to recognise the escrow balance as restricted cash.  Under the terms of the recovery plan in the event the scheme is in deficit at the time of the 31 March 2019 valuation it will be funded from the escrow account. 

10. Business combinations

The group purchased 100% of the share capital or the trade and assets of 14 companies and businesses in the period.  The total consideration in respect of acquisitions in the current year was £34.6m and the total cash outflow in the period from current and past period acquisitions, net of cash acquired, was £32.7m.

From the dates of acquisition to 30 June 2015, these acquisitions contributed £7.1m to revenue and £2.0m to operating profit. If the acquisitions had occurred on 1 January 2015, the revenue and operating profit of the combined entity would have amounted to £857.4m and £84.6m respectively.

Details of goodwill and the fair value of net assets acquired are as follows:

					6 months to 30 June 2015	6 months to 30 June 2014
					£m	£m
Purchase consideration:
- Cash paid					26.6	36.1
- Deferred and contingent consideration					8.0	10.0
Total purchase consideration					34.6	46.1
Fair value of net assets acquired					(12.8)	(23.4)
Goodwill from current period acquisitions					21.8	22.7

Goodwill represents the synergies, workforce and other benefits expected as a result of combining the respective businesses. None of the goodwill recognised is expected to be deductible for tax purposes.

Deferred consideration up to a maximum of £8.0m is payable over the next two years, and the group incurred acquisition-related costs of £0.5m in respect of the above acquisitions.

The provisional fair value of assets and liabilities arising from acquisitions in the period are shown below. The provisional fair values will be finalised in the 2015 financial statements. The fair values are provisional as the acquisition accounting has not yet been finalised as a result of the proximity of the acquisitions to the period end.

					6 months to 30 June 2015	6 months to 30 June 2014
					£m	£m
Non-current assets
- Intangible assets					12.8	21.3
- Property, plant and equipment					1.7	3.6
Current assets					1.3	6.0
Current liabilities					(0.5)	(4.3)
Non-current liabilities					(2.5)	(3.2)
Net assets acquired					12.8	23.4

11. Events occurring after the balance sheet date

There were no significant events occurring after the balance sheet date.

Responsibility statement of the directors in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

·     the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU

·     the interim management report includes a fair review of the information required by:

o     DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

o     DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so

By Order of the Board

Andy Ransom

Chief Executive

29 July 2015

The directors of Rentokil Initial plc are listed in the Rentokil Initial plc Annual Report for 31 December 2014.  A List of the current directors is maintained on the Rentokil Initial website: www.rentokil-initial.com

INDEPENDENT REVIEW REPORT TO RENTOKIL INITIAL PLC

Introduction

We have been engaged by the Company to review the financial statements in the half-yearly financial report for the six months ended 30 June 2015 which comprises the consolidated income statement, consolidated balance sheet,  consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated cash flow statement and the related explanatory notes.  We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the financial statements.

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA"). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the EU. The financial statements included in this half-yearly financial report have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the financial statements in the half-yearly financial report for the six months ended 30 June 2015 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA.

Paul Sawdon
for and on behalf of KPMG LLP,
Chartered Accountants
15 Canada Square
London
E14 5GL

29 July 2015

 

END

 

 

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