Interim Results
Rentokil Initial PLC
25 August 2005
News Release
25th August 2005
RENTOKIL INITIAL PLC ANNOUNCES INTERIM RESULTS FOR SIX MONTHS TO 30TH JUNE 2005
AND COMPREHENSIVE BUSINESS REVIEW
FINANCIAL OVERVIEW - CONTINUING OPERATIONS
Underlying(*) Reported
Turnover Up 2.7% to £1,164.5m Up 3.2% to £1,167.2m
Operating Income Down 16.2% to £158.9m Down 33.0% to £119.2m
Profit Before Tax Down 19.8% to £135.4m Down 40.3% to £93.2m
Earnings Per Share Down 20.3% to 5.33p Down 41.3% to 3.66p
Interim Dividend Per share Up 10.4% to 2.13p
*Underlying results are at constant 2004 average exchange rates and after adding back exceptional costs,
amortisation of customer lists and IFRS related 'mark to market' volatilities. (See Additional Information
page 13).
• Investments in service showing some improvements in contract retention
• Contract portfolio increased by an annualised £63.3m
• Improvements in rates of turnover growth and decline in operating income (before central items)
• One-off costs impact central items
• Exceptional impairment charge of £28.0m in respect of UK textiles and garments
• Strong free cash flow at £94.4m, representing 103% of post cash-tax profit before exceptionals and amortisation
of customer lists
Comprehensive Business Review
• Focus on businesses with potential to create most shareholder value and where profitable growth can be
sustained
• Group has solid platform for recovery based on market positions that remain strong:
• A leader in European Pest Control
• A leader in European washrooms & textiles
• An outperformer in UK Electronic Security and Cleaning
• Actions for recovery and growth identified and underway
• Group being reorganised around global business divisions with clear accountability and leadership
• Disposal of Initial Style Conferences initiated
(page 1)
Commenting on the work underway to deliver long-term sustainable growth, Doug
Flynn, Chief Executive, said:
'When I joined the company less than five months ago I initiated a comprehensive
review of the Group. We believe we know what the issues are and the necessary
actions to achieve a turnaround have commenced. Throughout everything we have
done, we have been open minded on how to deliver shareholder value. We have a
great opportunity to revive this business and I intend to take it.'
Brian McGowan, Chairman, said:
'The programmes we are implementing will provide real and lasting improvements
in operational and financial performance and thereby generate the value inherent
in the Company which rightly and fully belongs to its current shareholders.'
OVERVIEW OF FIRST HALF
• Performance
As expected - and indicated at the preliminary results in February and 4 month
trading update in May - the first half of 2005 has been difficult in trading
terms with profits well down on the prior year. Some of the profit reduction has
been as a result of the increased investment in sales and service - yet to
deliver significantly improved performance - and of some one off costs arising
from reorganisation and review. There has, however, been modest turnover growth
(up 2.7%), contract portfolio has increased by £63.3 million and some
improvement in contract retention has occurred. Free cash flow was strong in the
half and the Group's cash conversion rate remained high at 103% of post cash tax
profit before exceptionals and amortisation of customer lists.
Comprehensive Business Review
A comprehensive review of all the Group's businesses was initiated at the end of
April. The aim of the review has been to analyse the reasons for the Company's
poor performance, assess the Group's strengths and growth opportunities and then
develop a rolling action plan to restore Rentokil Initial to sustainable,
profitable growth. Throughout, an open mind has been kept on all options
available to the Group to create superior shareholder value. Our emphasis has
been on identifying and implementing the practical actions that need to be taken
to revive this company.
The review identified how in recent years the company has become quite
introspective. The Company has taken the opportunity to consider its businesses
within their proper market context, including obtaining the views of several
hundred of our customers and of competitors and industry experts.
The review has shown that the issues affecting the Group are not that complex
individually but there are many of them. Management believes that the issues can
be fixed but that it will take time. Detailed action plans have been formulated,
many of which are already underway. Others will be put in place as we move
forward.
In total, we have a major and detailed change programme underway that is very
much aimed at the operational level.
(page 2)
• Poor Performance Analysed
The Company's performance has been in decline over a number of years. The '20%
era' ended in 1998. Our review has shown how the pressures - both internal and
external - to meet expectations led to management prioritisation of very short
term goals. Prices were pushed to unsustainable levels. Costs were relentlessly
taken out - often to the detriment of growing the business. Service quality was
sacrificed. Sales efforts were impeded. As budgets became ever more unrealistic,
so morale dropped and the focus became even more short-term.
It is fair to say that market conditions have become tougher and that
competitors have become increasingly agile. For example, Washrooms and Textiles
have seen pressure as competitors continue to compete aggressively on price. And
Pest Control has faced increasing pressure both from increasingly aggressive
international players and from local competition, not least as ex-Rentokil
operators set up alone.
However, the Board believes that while these market pressures will not relent,
the biggest opportunities for the Group are in internal operational and
strategic 'fixes', and that success in these will more than outweigh market
factors.
• Necessary Operational and Strategic Change
Areas where the Company is addressing its issues through operational and
strategic change include the following:
Prioritisation of strategic investment
Historically, strategic investment has not been prioritised. The acquisition of
BET left the Group with a highly diversified portfolio. Since that acquisition,
there has been little clarity about where the best value creation opportunities
are and, therefore, where the Group should be prioritising and investing. In
fact, BET and Rentokil were never fully integrated and there are still
overlapping businesses in certain geographies.
Addressing effects of undue cost cutting and poorly focused sales strategy
Management believes that operational costs have been squeezed to an extent where
quality of service has suffered. Since quality of service is the single most
important matter for our customers, declining service has resulted in a high
level of terminations.
Moreover, the Group's sales focus - and related incentives - have been largely
short-term. Businesses have ignored key drivers such as customer retention,
route density and revenue per customer. Range selling has been underexploited
with little focus on maximising our share of our customers' spending.
IT spend has been well below industry averages and has produced few common
platforms.
Overall, we are deficient in customer data analysis and have failed to respond
adequately to the actions taken by competitors.
Necessary organisational change
The Board believes that the organisation and structure has been ineffective and
is a legacy of the Company's history. It has been based on a 'command and
control' approach that has impeded rather than ensured good decision making. It
has encouraged a 'silo mentality' and has resulted in the organisation being
both overly centralised and inward looking. For example, our washroom businesses
are spread globally but to date have been run from 3 sectors with little sharing
of best practices across businesses.
We are already moving towards running businesses globally - and will address the
lack of leadership and absence of managers feeling personally responsible or
accountable for driving change.
(page 3)
• Overall Direction of Recovery Plans
The Board plans to focus its immediate attention on Pest Control and Washroom
and Textiles, believing that these businesses have strong potential to provide a
platform for growth and the greatest opportunity to drive shareholder value.
This is not to say that the Group's other businesses are not important. We will
be developing and investing in businesses where we can reinforce or build
leadership positions and where the Group can add value through the sharing of
skills and customers to generate sustained profitable growth.
We have strong positions in many of our largest businesses. For example, in Pest
Control we are #1 in the UK and #1 or close to it in several of the largest
European markets, South Africa and parts of Asia Pacific. In Washroom and
Textiles the Company has some market leading positions in Continental Europe and
in the UK the #2 position in washrooms alone. In the UK we out-perform most of
our competitors on margin in both Electronic Security and Cleaning. Both of
these businesses are highly rated by our clients.
From this strong starting position, the Company's main focus will be on
businesses where management believes that most value can be created. The Board
plans to strengthen the Company's positions in existing markets by improving
retention, targeting more new customers, and focusing on selling the full range
of products.
The detailed development of individual business strategic plans is ongoing. All
divisions are or will be capable of achieving organic growth. We have a series
of initiatives which are being or will be implemented to drive this. They will
be complemented, where appropriate, by acquisitions which will increase our
focus and build scale and density.
• Management Priorities
The Group's immediate priorities are described further below.
Immediate initiatives
There are already a number of initiatives of varying sizes and complexity in
place. Of these, many have already started with the remainder able to commence
within the next six months. Operationally, the plans for revitalising all our
businesses and driving growth have commenced, in particular those designed to
address the effectiveness of our sales and marketing efforts and the support
that IT can give to the implementation of these plans.
Accountabilities, organisational structure and management
A critical change in the Company is moving senior management from a
co-ordination to leadership role, from maintenance to development, from just
'reports' to being fully accountable.
The Group is undergoing a re-organisation that changes from an eclectic mix of
businesses, geographies and functions to one structured around clear business
divisions. Transnational divisions have been established covering Europe and
North America for: Pest Control and Plants; Facilities Services; Washroom and
Textiles; City Link; and Electronic Security. We will also establish an Asia
Pacific region from 1 January 2006 with responsibility to develop and grow our
business there.
Since the beginning of the year, three senior executives have been appointed.
Doug Flynn arrived in April as Chief Executive. Andrew Macfarlane succeeds, as
CFO, Roger Payne, whose retirement in September was announced in March. Mark
Boyle joined earlier in the year as Group Acquisitions Director.
The Company recognises a need to re-build management talent and to develop
appropriate incentives at all levels. The Board intends to bring in new people
where required.
(page 4)
Some operational priorities
• In UK Washroom, addressing historic failure to target new customers
effectively, moving to ensure that pricing and marketing addresses route
density
• In UK Pest control, implementing plan to reduce the current high levels of
customer churn and therefore to improve growth
• In Continental European washroom, overlapping businesses will finally be
integrated
• In other businesses - for example Dutch Electronic Security and French
Textiles - action on specific plans is underway to increase productivity and
growth
• Other actions: improving the effectiveness of sales and marketing across
the Group by: adjusting skills measures, targets and incentives; re-focusing
sales efforts on opportunities that maximise route economics; and targeting
an increasing share of high value added and large accounts. The Company will
also introduce process improvements aimed at reducing admin and
comprehensively improving responsiveness.
Central Programme Office
The Board recognises that the Group has had a poor track record of adapting to
change and therefore intends to follow a different and disciplined approach to
manage this process. The Chief Executive has created a Central Programme Office
reporting directly to him with the sole task of ensuring the effective delivery
of our priorities. A senior executive from outside the business has been
recruited to track and oversee implementation of the most important initiatives.
Portfolio Management
This morning we have announced that a process to dispose of Initial Style
Conferences ('Style Conferences') has been initiated, subject to achieving
acceptable value. Style Conferences has a different business model and its
business characteristics are substantially different from other businesses
within the Group. The Board therefore believes that there may be alternative
owners for whom Style Conferences would be a better fit.
We also have a programme to dispose of peripheral businesses that are still left
in the Group's portfolio. Good progress is being made, but there is more to do.
Elsewhere we have increased our focus on bolt-on acquisitions, where we have the
opportunity to reinforce existing businesses and build additional scale and
density. The Company will only make acquisitions which clearly add value to the
business.
OUTLOOK
We are not expecting an improvement in market conditions in the near future.
There is, however, no slowdown in the overall long-term trend towards outsourced
services. There are different levels of maturity in outsourcing and, parallel to
this, different stages of industry consolidation. Both of these represent
opportunities to develop our business. Legislation and worker and consumer
expectation regarding hygiene all point towards a positive background within
which to operate.
Results in the second half should be more easily compared with the prior year
than in the first half due in large part to the build up in sales and service
costs in the second half of 2004. There has been an improving trend within the
businesses in trading and contract retention, although to date the changes are
modest. In addition, the organisation and operational changes arising out of our
strategic review may lead to some short-term internal disruption in certain
businesses. Apart from the exceptional costs associated with the envisaged
disposal within UK hygiene, we expect to incur further reorganisation and
execution costs arising out of the planned turnaround initiatives. In the second
half of 2005, these could be in the range of £10-15 million.
We would expect the trend in trading in the second half to continue into 2006,
although there are likely to be further one-off costs.
(page 5)
We have identified the issues to be addressed in our businesses. While the
strategy development to turn the Company around will be ongoing, a programme of
actions to improve the business performance is firmly underway. The timeline on
Company performance of the actions we are taking varies. Some actions will have
a quick impact, others are potentially disruptive in execution and some will
take time to return clear performance improvements. By the end of 2006 we expect
to be able to demonstrate the following tangible benefits for our key
businesses:
• Clearer strategic focus and investment priorities
• Stronger strategic positions
• Properly aligned business structure
• Progressively strengthened management team
• Performance improvement in priority businesses
• Improvement in contract retention rates
• Revenue growing at least at market growth rates
The Board restates its intention, in the absence of unforeseen circumstances, to
recommend an increase in the dividend for 2005 of 10% to 7.38 pence per share.
This announcement contains certain 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.
A presentation for analysts and shareholders will be held at 8:30am BST today
which can be accessed via a live audio webcast at www.rentokil-initial.com
(click on the Investor Centre and follow the instructions from there). An
archived version of this webcast will be available from 2:00pm.
For further information, please contact:
Doug Flynn, Chief Executive 01342 833022
Charles Grimaldi, Corporate Affairs Director 01342 833022
Gill Ackers, Brunswick Group LLP 020 7404 5959
Alex Mackey, Catullus Consulting 07773 787458
(page 6)
REVIEW OF OPERATIONS AND FINANCE
SEGMENTAL COMMENTARY - CONTINUING OPERATIONS
(All at constant 2004 average exchange rates. Segmental operating income is
before central overheads, amortisation of customer lists and exceptional items.
A pro-forma segmental analysis has been provided in the Additional Information
section on pages 15 and 16).
Hygiene
Total Hygiene turnover grew by 3.0% to £489.5m whilst operating income fell by
10.0% to £113.6m.
Hygiene Services turnover at £375.7m was 2.9% up, showing an acceleration from
the 2.2% for the first four months. Operating income regression, at 9.8% to
£78.6m, also slowed from the 11.5% reported at the four-month stage. Contract
portfolio net gain was £18.6m, £11.0m of this coming from acquisitions, in
particular that in Austria.
• Within the total turnover of £375.7m, washroom was flat at £141.4m,
garments increased by 3.7% to £120.9m, floorcare increased by 2.4% to
£21.5m, linen increased by 5.6% to £62.0m, whilst other hygiene grew by 9.9%
to £29.9m.
• The ongoing re-organisation in the UK, ahead of the envisaged disposal of
the linen and garment activities, continued to materially impact trading
with turnover falling by 0.6% to £87.0m and operating income by 27.6% to
£13.4m. Progress has been slower than expected in the disaggregation of the
textiles and garments business, which in turn has delayed the disposal
process and the integration of the two overlapping washroom businesses.
• Assisted by the Austrian acquisition, turnover in Continental Europe
increased by 3.9% to £252.2m with encouraging results from Belgium, Czech
Republic, Spain, Portugal and Switzerland. Operating income at £52.2m was
4.2% lower. Operating income growth in the major markets of The Netherlands
and Belgium only partially compensated for declines in the large German and
French businesses. Increased investments in both of these countries was
compounded by senior management changes in France.
• Mirroring the four-month position, the small North American business
produced flat turnover and operating income at £2.8m and £0.5m respectively.
• Turnover in Asia Pacific and Africa grew by 5.3% to £33.7m, up from 4.9%
for the four months, all business units showing growth with the exception of
the small business in Fiji. Operating income fell by 6.7% to £12.5m
reflecting increased levels of investment and some challenging market
conditions in the large Australian business.
Pest Control turnover was up 3.1% at £113.8m whilst operating income fell by
10.5% to £35.0m, this performance mirroring that for the first four months of
the year. With only £0.8m coming from acquisitions, contract portfolio net gain
was £3.6m.
• In the UK, where the new managing director is implementing plans to
improve sales and reduce terminations, turnover fell by 1.2% to £34.1m,
mirroring the first four months performance. Increased investment and the
effects of the high operational gearing on lower turnover, caused operating
income to drop by 17.1% to £13.6m.
• In Continental Europe turnover grew by 2.5% to £52.9m with operating
income declining by 3.0% to £16.1m despite growth in The Netherlands,
Portugal, Spain and Finland.
(page 7)
• Helped by acquisitions in both Canada and the US, turnover grew by 19.2%
to £8.7m in North America, operating income improving by 7.7% to £1.4m.
• In Asia Pacific and Africa all businesses except Fiji contributed to the
overall turnover growth of 6.5% to £18.1m. Operating income, however,
reflecting increased investment fell by 18.8% to £3.9m.
Security
Total Security turnover increased by 5.6% to £298.0m, whilst operating income
fell by 10.7% to £23.3m, this representing an improvement from the four month
position.
Electronic Security turnover grew by 7.9% to £130.8m with operating income
declining by 8.7% to £17.9m, in part reflecting re-organisation costs associated
with acquisitions. Contract portfolio net gain was £3.0m, of which £2.5m came
from acquisitions.
• In the UK turnover grew by 7.5% to £73.3m whilst operating income fell by
7.1% to £13.0m.
• In Continental Europe, France and Belgium produced much stronger turnover
growth than The Netherlands to give a total 7.4% increase to £53.7m,
operating income declining by 12.5% to £4.9m.
• The embryonic US business, boosted by a second quarter acquisition, grew
turnover by 26.7% to £3.8m, albeit investments for growth produced the same
break-even operating income performance as in the first half of 2004.
Manned Guarding turnover increased by 3.9% to £167.2m with the decline in
operating income improving to 16.9% to produce £5.4m. Contract portfolio net
gain was £24.7m, the contribution from acquisitions in the US contained therein
amounting to £16.0m.
• UK turnover grew by 5.4% to £63.9m, although the impact of increased
investment, senior management change and ongoing tough market conditions
caused a 34.4% reduction in operating income to £2.1m.
• Continental Europe fared better, the Belgian business growing turnover by
8.2% to £21.1m and operating income by 28.6% to £0.9m.
• In North America total turnover increased by 1.7% to £82.2m with Canada
growing faster than the US, this comparing to a flat performance in the
first four months. Operating income, however, fell by 7.7% to £2.4m
Facilities Management
Total Facilities Management turnover fell by 0.4% to £319.5m, this being an
improvement over the 1.3% fall for the first four months. Operating income at
£29.1m was 12.3% lower than the first half of 2004 and slightly worse than the
11.4% reduction for the four months.
Facilities Management Services turnover at £223.3m was 2.0% lower, this
representing a slight recovery from April. The 15.5% fall in operating income to
£13.6m reflected extremely competitive market conditions and the effect of both
wind-down and start up costs arising from the changes in composition of the
contract portfolio, which grew organically by £9.6m to £387.2m.
• In the UK turnover fell by 3.0% to £185.9m with operating income
regressing by 13.3% to £13.0m. The retail sector of the cleaning business
and the state schools meal service within the catering business posed
particular challenges to margins.
(page 8)
• Continental Europe turnover increased by 3.2% to £25.8m. Difficulties in
the Spanish business caused operating results to slip to a loss of £0.4m.
Benelux, however, still continued to generate operating profit.
• The continuing North American operations increased turnover by 1.1% to
£9.4m although operating income here fell back by two-thirds to £0.1m as the
company re-assess its options for this business.
• Asia Pacific and Africa produced a turnover growth of 15.8% to £2.2m
whilst operating income increased by 28.6% to £0.9m.
Tropical Plants, assisted by acquisitions, increased turnover to £52.1m, with
the 5.7% increase representing an improvement from the 3.8% for the first four
months. The improved volume helped operating income, at £4.8m, show a lower
six-month regression at 7.7% than the 10.6% for the first four months. Of the
contract portfolio net gain of £4.9m, £4.0m came from acquisitions.
• UK turnover growth to £6.4m improved from 1.0% at April to 1.6%, albeit
with an operating income decline of 7.1% to £1.3m.
• Continental Europe turnover growth also improved, from 0.8% to 2.2%, to
give turnover of £13.9m. Operating income, however, fell by 10.5% to £1.7m
despite Netherlands, Spain and Ireland each moving ahead.
• North America acquisitions helped boost turnover to £26.8m, an increase of
8.9%. Operating income, at £1.0m, was 9.1% lower despite Canada delivering a
flat performance.
• Turnover growth in Asia Pacific and Africa to £5.0m was broadly unchanged
at 4.2%, New Zealand growing strongly whilst Australia regressed, although
operating income was unchanged at £0.8m.
Conferencing improved its turnover by 0.9% to £44.1m, up from a flat performance
for the first four months with operating income, at £10.7m, showing a slightly
lower regression of 10.1% compared to that for the four months to April.
Contract portfolio showed a £1.1m reduction for the first half of 2005.
Parcels Delivery
Now restricted to the UK, following the disposal of the Zimbabwe business,
turnover growth accelerated from 1.7% for the first four months to 4.4% for the
first half to produce £57.5m. Operating income at £12.4m also improved, a
four-month regression of 14.5% being pulled back to 10.1% for the first half as
a whole.
(page 9)
OTHER INCOME STATEMENT ITEMS
Central Items. Under IFRS, central costs (which cannot be specifically allocated
to business units contained within the segmental analysis) are shown separately.
For the first half these costs increased from £9.6m in 2004 to £20.6m in 2005.
The principal factors behind this £11.0m increase are the formation costs of the
new holding company; consultancy costs; additional sector, IT, HR, acquisition
and IFRS audit costs and a build-up of provisions in respect of self insurance
risk claims.
Amortisation of Customers Lists. The income statement charge of £11.5m is
comprised of £11.0m in respect of prior year acquisitions and £0.5m in respect
of acquisitions made in the first half of 2005.
Exchange. The effect of foreign currency movements between 2004 full year
average rates and 2005 half-year average rates was to improve turnover and
operating income on continuing operations by £2.7m and £0.9m respectively, gains
on the Euro more than offsetting losses on the US $.
Exceptional Items. A charge of £28m has been taken to reflect an assessment of
the likely impairment of the net book value of assets associated with the
envisaged disposal of the linen and garment activities within UK hygiene.
Negotiations with interested parties for parts of this activity are ongoing.
Based upon the status of these negotiations it is envisaged that, once a sale
has been agreed, the transfer of the business and residual closure/
discontinuance actions are likely to be phased over a period of at least six
months. In addition to the impairment charge of £28m further, future
re-organisation costs will be incurred, the current assessment of these being
£12-17m to take the potential total exit cost to some £40-45m. This is somewhat
higher than the guidance first given in November 2004 reflecting the trading
results of that business over the past nine months and a more informed view of
the nature and scale of the likely exit strategy which, despite the cost
thereof, is anticipated to be cash neutral.
Interest. A reconciliation of net interest payable including isolating the major
effects of IFRS and the early repayment of the Ashtead convertible note shows:-
2005 2004
Pre IFRS interest (24.8) (21.7)
IFRS interest:-
IAS19 - pensions/employee benefits (2.4) (0.5)
IAS 21 - foreign currencies 0.5 (0.5)
IAS39 - 'mark to market' (2.2) -
Ashtead equity option impairment (*) (4.6) -
Ashtead amortisation credit (*) 6.2 -
(27.3) (22.7)
* Arising from early Ashtead note repayment
The increase of £3.1m in pre IFRS interest largely reflects the net of
year-on-year increased UK base rates, partially offset by the interest effects
of positive cash flow.
Tax. The income statement tax rate on a pre-exceptional basis was 26.7% this
increasing to 27.5% on a reported basis. Both rates are within the range of 26%
to 28% which is still seen as sustainable for the foreseeable future.
(page 10)
OTHER ITEMS
Contract Portfolio. As shown in the Additional Information section on page 14,
the annualised value of the contract portfolio (based upon unaudited, pro-forma
management information) increased by £63.3m in the first half with £34.3m of
this coming from acquisitions.
Acquisitions. In the first half of 2005 eighteen acquisitions were made at a
total cost of £35.1m including £13.4m of acquired debt. Aggregate annualised
turnover from these acquisitions in Hygiene, Pest Control, Security and Tropical
Plants in the UK, Continental Europe, North America and Asia Pacific is
estimated at c. £40m. Of the £12.1m spend since the last trading update, £10.6m
related to two security businesses in the United States, one electronic and one
manned guarding. Turnover and operating income (before amortisation of customer
lists) from these acquisitions contributed £8.1m and £0.7m respectively to the
results for the first half of 2005. In addition to the above, £5.2m has been
spent to buy-out a minority shareholding in the French textile services
business.
Disposals. Since 1st January 2005 three businesses have been disposed of, two in
facilities management (one in the UK and one in the United States) and the
parcels delivery business in Zimbabwe. In 2004 these businesses (categorised as
discontinued and excluded from the segmental analysis) produced full-year
turnover and an operating loss of £8.2m and £0.3m respectively. In addition, a
small associate in Saudi Arabia was sold during the period. Since 1st July 2005
the company has disposed of a facilities management business in the US and
concluded negotiations for the sale of the northern portion of the loss making
textiles business in Germany with annualised first half 2005 turnover of c.
£0.8m. We continue to review the future of the remaining activities in this
sub-segment. The status of the planned disposal of the linen and garment
activities within UK hygiene is covered above.
Free Cash Flow, at £94.4m represents some 103% of post cash tax income before
exceptionals and amortisation of customer lists. This compares with 102% for
the, IFRS restated, first half of 2004.
Net Borrowings at 30th June 2005 at £1,209.1m compares with an IAS 39 adjusted
£1.189.1m at 1st January 2005 after first half outflows of £86.2m in respect of
dividends and £39.0m on acquisitions.
Bank Facilities. During the first half the company successfully re-negotiated
its bank facilities to reflect the introduction of IFRS and to give extended
maturities compared to those set out in Note 20 of the 2004 Annual Report. The
company continues to operate well within its covenanted levels.
New Holding Company. The formation of the new holding company was successfully
completed in June 2005, thereby boosting the distributable reserves to some
£1.8bn.
Ashtead. As previously announced, the early repayment of the convertible loan
note by Ashtead Group plc of £129.9m was made on 3rd August 2005.
International Financial Reporting Standards. The company formally announced the
effects of IFRS upon the restated first half and full-year results for 2004. The
adjustments were materially in-line with the early guidance given in the trading
statement issued on 30th November 2004. As in the case of the first half results
for 2005, which represents the first set of results presented under IFRS, the
company will take all necessary steps to clearly explain in future presentations
the impact of the more volatile 'mark to market' adjustments contained within
IAS39 (financial instruments) and IAS21 (foreign currencies). Furthermore, the
company will ensure the market is kept aware of any possible future changes
arising from either new IFRS' or changes in the interpretation of existing
IFRS'. A full set of accounting policies are included in Note 2 on pages 21 to
28.
(page 11)
Pensions. The IAS 19 retirement benefit liability increased from £272.6m at 31st
December 2004 to £286.5m at 30th June 2005. The actuaries of the UK defined
benefit pension scheme, which was closed to new members, other than certain TUPE
related transfers, in November 2001, are currently undertaking the March 2005
triennial actuarial review. Once the valuation is finalised the Trustee and the
company will agree as to how the deficit will be funded in the short, medium and
long term. It is currently anticipated that a clearer view on the outcome of the
valuation and the potential future funding strategy will emerge by the time of
the next scheduled trading update on 29th November 2005.
ADDITIONAL INFORMATION
To assist the understanding of the underlying trading performance of the Group,
the following additional information has been included in this section and does
not form part of the statutory presentation of the half-year results.
Schedule 1. Reconciliation of underlying and reported
results (page 13)
Schedule 2. Pro-forma H1 2005 un-audited annualised value of
contract portfolio of continuing businesses (page 14)
Schedule 3. Pro-forma segmental analysis translated at 2004
constant exchange rates (pages 15 and 16)
(page 12)
Schedule 1
RECONCILIATION OF UNDERLYING AND
REPORTED FIRST HALF RESULTS
Operating Profit eps
Turnover Income before (p)
£m Tax
Reported 2005 1,167.2 119.2 93.2 3.66p
Exchange (2.7) (0.9) (0.9) (0.03)p
Amortisation of customer lists - 11.5 11.5 0.46p
Exceptional items - 28.0 28.0 1.13p
Effect of IFRS
IAS 19 - pension interest - - 2.4 0.08p
IFRS 'mark to market' - 1.1 2.8 0.10p
Ashtead interest (net) - - (1.6) (0.07)p
______ ____ ____ ___
Underlying 2005 1,164.5 158.9 135.4 5.33p
Reported 2004 1,130.7 177.9 156.1 6.24p
Exchange 2.8 0.7 0.7 0.02p
Amortisation of customer lists - 11.1 11.1 0.41p
Effect of IFRS
IAS 19 - pension interest - - 0.5 0.01p
IFRS 'mark to market' - - 0.5 0.01p
______ ____ ____ ___
Underlying 2004 1,133.5 189.7 168.9 6.69p
% change
Reported +3.2% -33.0% -40.3% -41.3%
Underlying +2.7% -16.2% -19.8% -20.3%
(page 13)
Schedule 2
PRO-FORMA H1 2005 UN-AUDITED ANNUALISED VALUE OF CONTRACT PORTFOLIO OF
CONTINUING BUSINESSES
£m at constant 2004 New Termin- Net Acquisi-
ations tions
1.1.05 Business Additions/ 30.6.05
average exchange rates Reductions
(note 1)
Hygiene Services 702.3 38.9 (37.3) 6.0 11.0 720.9
Pest Control 181.8 16.8 (17.2) 3.2 0.8 185.4
Total Hygiene 884.1 55.7 (54.5) 9.2 11.8 906.3
Electronic 90.0 3.7 (5.0) 1.8 2.5 93.0
Manned Guarding 301.6 27.0 (19.6) 1.3 16.0 326.3
Total Security 391.6 30.7 (24.6) 3.1 18.5 419.3
Facilities Management Services 377.6 27.9 (25.0) 6.7 - 387.2
Tropical Plants 87.0 5.4 (6.6) 2.1 4.0 91.9
Conferencing 37.4 0.8 (1.0) (0.9) - 36.3
Total Facilities Management 502.0 34.1 (32.6) 7.9 4.0 515.4
TOTAL 1,777.7 120.5 (111.7) 20.2 34.3 1,841.0
Notes:-
1. This represents the net of additions to existing contracts, price
increases on existing contracts and reductions to existing contracts.
2. The above include, on a consistent basis, certain estimates where
there are regular, variable, elements of revenue contained within the
contracts.
3. In addition to the above, a number of the contracts within the
contract portfolio generate periodic, ad hoc and/or repeat job work and
extras.
4. Excludes associates
(page 14)
Schedule 3
PRO-FORMA SEGMENTAL ANALYSIS
(at 2004 full year average exchange rates)
6 months to 6 months to Year to 31st
30th June 30th June December
2005 2004 2004
Business analysis £m £m £m
(unaudited) (unaudited) (unaudited)
Turnover
Continuing operations at 2004 average exchange rates:
Hygiene Services 375.7 365.0 733.8
Pest Control 113.8 110.4 224.2
Hygiene 489.5 475.4 958.0
Electronic Security 130.8 121.2 249.7
Manned Guarding 167.2 160.9 324.4
Security 298.0 282.1 574.1
Facilities Management Services 223.3 227.9 449.7
Tropical Plants 52.1 49.3 105.1
Conferencing 44.1 43.7 91.1
Facilities Management 319.5 320.9 645.9
Parcels Delivery 57.5 55.1 113.4
Total continuing operations at 2004 average exchange rates 1,164.5 1,133.5 2,291.4
Exchange 2.7 (2.8) -
Continuing operations as reported 1,167.2 1,130.7 2,291.4
Operating Income *
Continuing operations at 2004 average exchange rates:
Hygiene Services 78.6 87.1 173.5
Pest Control 35.0 39.1 79.1
Hygiene 113.6 126.2 252.6
Electronic Security 17.9 19.6 40.4
Manned Guarding 5.4 6.5 13.1
Security 23.3 26.1 53.5
Facilities Management Services 13.6 16.1 32.4
Tropical Plants 4.8 5.2 13.0
Conferencing 10.7 11.9 26.2
Facilities Management 29.1 33.2 71.6
Parcels Delivery 12.4 13.8 30.3
Central Items (20.6) (9.6) (24.1)
Total continuing operations at 2004 average exchange rates * 157.8 189.7 383.9
Exchange 0.9 (0.7) -
Continuing operations as reported * 158.7 189.0 383.9
* Before amortisation of customer lists and items identified as exceptional
(note 6).
The segmental analysis tables above are presented in a statutory format in note
4.
(page 15)
Schedule 3
PRO-FORMA SEGMENTAL ANALYSIS
(at 2004 full year average exchange rates)
6 months to 6 months to Year to 31st
30th June 30th June December
2005 2004 2004
Geographic analysis £m £m £m
(unaudited) (unaudited) (unaudited)
Turnover
Continuing operations at 2004 average exchange rates:
United Kingdom 552.2 547.6 1,101.3
Continental Europe 419.6 402.5 812.5
North America 133.7 127.7 264.4
Asia Pacific 42.6 40.7 82.4
Africa 16.4 15.0 30.8
Total continuing operations at 2004 average exchange rates 1,164.5 1,133.5 2,291.4
Exchange 2.7 (2.8) -
Continuing operations as reported 1,167.2 1,130.7 2,291.4
Operating Income *
Continuing operations at 2004 average exchange rates:
United Kingdom 79.6 94.1 188.0
Continental Europe 75.3 79.5 165.3
North America 5.4 6.0 15.4
Asia Pacific 11.6 13.2 26.2
Africa 6.5 6.5 13.1
Central Items (20.6) (9.6) (24.1)
Total continuing operations at 2004 average exchange rates * 157.8 189.7 383.9
Exchange 0.9 (0.7) -
Continuing operations as reported * 158.7 189.0 383.9
* Before amortisation of customer lists and items identified as exceptional
(note 6).
The segmental analysis tables above are presented in a statutory format in note
4.
(page 16)
Independent review report to Rentokil Initial plc
Introduction
We have been instructed by the Company to review the financial information for
the six months ended 30 June 2005 which comprises a consolidated interim balance
sheet as at 30 June 2005 and consolidated interim statements of income, cash
flows, recognised income and expense and related notes on pages 18 to 39. We
have read the other information contained in the interim report and considered
whether it contains any apparent misstatements or material inconsistencies with
the financial information. The previously published IFRS transition information
on 20 July 2005, as referred to in note 1 on page 21, does not form part of this
review.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by the directors. The directors are
responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority.
As disclosed in note 1, the next annual financial statements of the group will
be prepared in accordance with accounting standards adopted for use in the
European Union. This interim report has been prepared in accordance with the
basis set out in note 1.
The accounting policies are consistent with those that the directors intend to
use in the next annual financial statements. As explained in note 2, there is,
however a possibility that the directors may determine that some changes are
necessary when preparing the full annual financial statements for the first time
in accordance with accounting standards adopted for use in the European Union.
The IFRS standards and IFRIC interpretations that will be applicable and adopted
for use in the European Union at 31 December 2005 are not known with certainty
at the time of preparing this interim financial information.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board for use in the United Kingdom. A review
consists principally of making enquiries of group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the disclosed accounting policies have
been applied. A review excludes audit procedures such as tests of controls and
verification of assets, liabilities and transactions. It is substantially less
in scope than an audit and therefore provides a lower level of assurance.
Accordingly we do not express an audit opinion on the financial information.
This report, including the conclusion, has been prepared for and only for the
company for the purpose of the Listing Rules of the Financial Services Authority
and for no other purpose. We do not, in producing this report, accept or assume
responsibility for any other purpose or to any other person to whom this report
is shown or into whose hands it may come save where expressly agreed by our
prior consent in writing.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2005.
PricewaterhouseCoopers LLP
Chartered Accountants
London
25 August 2005
(page 17)
Consolidated Income Statement
6 months to 6 months to Year to 31st
30th June 30th June December
2005 2004 2004
£m £m £m
Notes (unaudited) (unaudited) (unaudited)
Continuing operations:
Revenue 4 1,167.2 1,130.7 2,291.4
Operating expenses (1,048.0) (952.8) (1,955.4)
Operating income 119.2 177.9 336.0
Analysed as:
Operating income before customer lists and exceptional items 158.7 189.0 383.9
Amortisation of customer lists (11.5) (11.1) (22.2)
Exceptional items 6 (28.0) - (25.7)
Operating income 4 119.2 177.9 336.0
Interest payable and similar charges 7 (86.7) (70.6) (149.3)
Interest receivable 8 59.4 47.9 94.9
Share of profit from associates (net of 1.3 0.9 1.8
tax)
Profit before income tax 93.2 156.1 283.4
Income tax expense (25.6) (41.9) (78.5)
Profit for the period from continuing operations 67.6 114.2 204.9
Discontinued operations:
Loss for the period from discontinued operations 5.2.3 (3.6) (2.9) (12.8)
Profit for the period (including discontinued) 64.0 111.3 192.1
Attributable to:
Minority interest 1.6 1.1 1.7
Equity holders of the Company 62.4 110.2 190.4
64.0 111.3 192.1
Earnings per share:
From continuing operations
- Basic 3.66p 6.24p 11.24p
- Diluted 3.66p 6.24p 11.24p
From continuing and discontinued
operations:
- Basic 3.46p 6.08p 10.53p
- Diluted 3.46p 6.08p 10.53p
Consolidated Statement of Recognised Income and Expense
6 months to 6 months to Year to 31st
30th June 30th June December
2005 2004 2004
£m £m £m
(unaudited) (unaudited) (unaudited)
Profit for the period (including 64.0 111.3 192.1
discontinued)
Net exchange adjustments offset in reserves (4.3) (3.0) (0.8)
Actuarial loss on defined benefit pension plans (15.2) - (68.3)
Revaluation of available for sale investments (0.5) - -
Tax on items taken directly to reserves 4.5 - 20.4
Net loss not recognised in income statement (15.5) (3.0) (48.7)
Total recognised income for the period 48.5 108.3 143.4
Prospective adoption of IAS 39 at 1st January 2005 9(f) (17.4) - -
Prospective adoption of IFRS 4 at 1st January 2005 10 0.3 - -
(17.1) - -
Total recognised income since end of prior reported period 31.4 108.3 143.4
Attributable to:
Minority interest 1.6 1.1 1.7
Equity holders of the Company 29.8 107.2 141.7
31.4 108.3 143.4
(page 18)
Consolidated Balance Sheet
At At At 31st
30th June 30th June December
2005 2004 2004
£m £m £m
Notes (unaudited) (unaudited) (unaudited)
ASSETS
Non-current assets
Intangible assets 163.9 139.9 150.1
Property, plant and equipment 631.2 633.0 661.7
Investments in associated undertakings 9.5 11.8 9.5
Other investments 9 6.8 4.2 6.7
Deferred tax assets 96.2 75.7 97.6
Trade and other receivables 26.7 153.1 169.8
Derivative financial instruments 9 23.3 - -
957.6 1,017.7 1,095.4
Current assets
Inventory 42.2 46.4 40.4
Trade and other receivables 559.4 426.6 458.9
Other investments - 6.7 -
Derivative financial instruments 9 0.3 - -
Cash and cash equivalents 170.8 204.5 199.5
Held-for-sale assets 5.2.2 2.6 - -
775.3 684.2 698.8
LIABILITIES
Current liabilities
Trade and other payables (518.9) (521.1) (552.7)
Current tax liabilities (128.7) (155.4) (138.4)
Provisions for other liabilities and (36.1) (24.8) (24.8)
charges
Bank and other short term borrowings (206.4) (121.8) (207.5)
Derivative financial instruments 9 (5.7) - -
Held-for-sale liabilities 5.2.2 (0.2) - -
(896.0) (823.1) (923.4)
Net current liabilities (120.7) (138.9) (224.6)
Non-current liabilities
Other payables (15.1) (14.8) (14.5)
Bank and other long term borrowings (1,173.5) (1,288.1) (1,147.1)
Deferred tax liabilities (66.7) (66.9) (77.7)
Retirement benefits (286.5) (197.8) (272.6)
Provisions for other liabilities and (111.0) (88.8) (118.1)
charges
Derivative financial instruments 9 (0.6) - -
(1,653.4) (1,656.4) (1,630.0)
Net liabilities (816.5) (777.6) (759.2)
EQUITY
Capital and reserves attributable to the Company's equity holders
Called up share capital 11 18.1 18.1 18.1
Share premium account 11 - 49.5 49.5
Capital redemption reserve 11 - 19.7 19.7
Treasury shares 11 (11.1) (11.1) (11.1)
Other reserves 11 (1,717.0) 5.4 8.4
Retained earnings 11 886.0 (866.3) (853.9)
(824.0) (784.7) (769.3)
Minority interest 11 7.5 7.1 10.1
Total equity (816.5) (777.6) (759.2)
(page 19)
Consolidated Cash Flow Statement
6 months to 6 months to Year to 31st
30th June 30th June December
2005 2004 2004
£m £m £m
Notes (unaudited) (unaudited) (unaudited)
Cash flows from operating activities
Cash generated from operating activities 252.7 278.0 566.3
Interest received 33.3 30.7 55.5
Interest paid (52.7) (49.6) (99.7)
Income tax paid (41.3) (46.5) (98.1)
Net cash flows generated from operating 192.0 212.6 424.0
activities
Cash flows from investing activities
Purchases of property, plant and equipment (91.6) (83.8) (176.1)
(PPE)
Purchase of intangible fixed assets (2.3) (2.2) (4.7)
Proceeds from sale of PPE 5.1 4.3 12.0
Acquisition of subsidiary, net of cash 5.1 (25.6) (14.8) (27.5)
acquired
Proceeds from disposal of companies and businesses 5.2.1 2.2 1.8 6.7
Dividends received from associates - 0.6 3.8
Net cash flows from investing activities (112.2) (94.1) (185.8)
Cash flows from financing activities
Issue of ordinary share capital 0.4 0.3 0.3
Purchase of own shares - (24.2) (24.2)
Dividends paid to equity shareholders (86.2) (78.7) (113.5)
Dividends paid to minority interests (0.5) (0.4) (0.7)
Interest element of finance lease (1.2) (1.2) (2.4)
payments
Capital element of finance lease payments (9.3) (9.3) (18.7)
Net loan repayments (31.5) (75.9) (197.0)
Net cash flows from financing activities (128.3) (189.4) (356.2)
Net decrease in cash and bank overdrafts 12 (48.5) (70.9) (118.0)
Cash and bank overdrafts at beginning of 145.3 247.3 247.3
year
Exchange gains on cash and bank overdrafts 7.2 4.3 16.0
Cash and bank overdrafts at end of the financial period 104.0 180.7 145.3
(page 20)
Notes to the consolidated interim financial statements for the six months ended
30th June 2005
1. Basis of preparation
These unaudited consolidated interim financial statements have been prepared for
the first time in accordance with International Financial Reporting Standards
('IFRS'). The Accounting Policies (that comply with IFRS and IAS) adopted by
Rentokil Initial plc (the 'Group') are set out below. The restatement of
previously published financial information under UK GAAP (on an IFRS basis) was
publicly disclosed on 20th July 2005. The restated results have been fully
adopted in this interim financial statement. In accordance with IFRS 5, the
restated consolidated income statements previously disclosed have been updated
to reflect the impact of current period discontinued businesses on the
comparatives. The impact of the prospective adoption of IAS 39 and IFRS 4 on the
opening balance sheet at 1st January 2005 (which was not previously publicly
disclosed on 20th July 2005) is disclosed in note 9 and 10 respectively.
The consolidated financial report of the Group has been prepared in accordance
with IFRS's in force from 1st January 2005. The consolidated financial report
has been prepared under the historical cost convention, as modified
(prospectively from 1st January 2005) by the revaluation of available for sale
investments and financial assets and liabilities (including derivative
instruments) at fair value through the income statement.
From 1st January 2004, the Group adopted the IAS's and IFRS's below, which are
relevant to its operations and has restated comparative consolidated financial
information previously published under UK Generally Accepted Accounting
Principals on an IFRS basis for the opening balance sheet as at 1st January
2004, for the six months ended 30th June 2004 and for the year ended 31st
December 2004.
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 7 Cash Flow Statements
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10 Events after the Balance Sheet Date
IAS 12 Income Taxes
IAS 14 Segment Reporting
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS 18 Revenue
IAS 19 Employee Benefits
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosures
IAS 27 Consolidated and Separate Financial Statements
IAS 28 Investments in Associates
IAS 33 Earnings per Share
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Assets
IFRS 1 First-time Adoption of International Financial Reporting Standards
IFRS 2 Share-based Payments
IFRS 3 Business Combinations
The IAS's and IFRS's below, which are relevant to the Group's operations, have
been adopted with effect from 1st January 2005.
IAS 32 Financial Instruments: Disclosure and Presentation
IAS 39 Financial Instruments: Recognition and Measurement
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
In addition, the Group has elected to adopt the amendments to IAS 19 Employee
Benefits issued in December 2004 in advance of their effective date of 1 January
2006, as endorsement of these amendments by the European Union is expected later
this year. As a result, the Group has recognised actuarial gains and losses
arising on defined benefit pension plans in the Consolidated Statement of
Recognised Income and Expense.
2 First Time Adoption and Accounting Policies
The Accounting Policies set on pages 8 to 14 are expected to be formally adopted
by the Group when it prepares its first Annual Report for the financial year
ended 31st December 2005. These standards still remain subject to further
amendments by and interpretative guidance from the International Accounting
Standards Board ('IASB') as well as the ongoing review and endorsement by the
European Union, which may lead to the need for further refinement of the
policies being adopted by the Group. Consequently, the Accounting Policies are
provisional and subject to change.
2.1 Principal accounting policies
The principal accounting policies adopted by the Group in conformity with in
force IFRS from 1st January 2005 are disclosed below. The opening IFRS balance
sheet as at the date of transition on 1st January 2004 has been prepared in
accordance with IFRS 1 (First Time Adoption of IFRS) and the most significant
optional exemptions adopted or not adopted by the Group are shown overleaf.
(page 21)
2.1.1 IFRS 1 First Time Adoption - significant exemptions adopted
(a) Employee benefits - actuarial gains and losses (IAS 19, 'Employee Benefits')
The Group has elected to recognise all cumulative actuarial gains and losses in
relation to employee benefit schemes at the date of transition.
(b) Financial Instruments (IAS 39, 'Financial Instruments: Recognition and
Measurement')
The Group has adopted this exemption and all financial instruments will comply
with IAS 39 from 1st January 2005.
(c) Cumulative translation differences
The Group has elected to adopt the 'Cumulative translation exchange difference'
exemption, which resets all cumulative translation gains and losses (on foreign
net investments) to zero at the date of transition.
2.1.2 IFRS 1 First Time Adoption - significant exemptions not adopted
(a) Business combinations that occurred before the opening IFRS balance sheet
date (IFRS 3, 'Business Combinations')
The Group has elected to adopt IFRS 3 retrospectively to business combinations
made since 1st January 1998. As a result, goodwill arising from past business
combinations from 1st January 1998 has been restated under IFRS at 1st January
2004.
(b) Fair value as deemed cost
The option to fair value or revalue Property, Plant and Equipment at the date of
transition has not been adopted and therefore, the depreciated cost as reported
under UK GAAP remains the same at 1st January 2004.
2.2 Consolidation
(a) Subsidiaries
Subsidiaries are all entities (including special purpose entities) over which
the Group has the power to govern the financial and operating policies generally
accompanying a shareholding of more than one half of the voting rights. The
existence and effect of potential voting rights that are currently exercisable
or convertible are considered when assessing whether the Group controls another
entity. Subsidiaries are fully consolidated from the date on which control is
transferred to the Group. They are de-consolidated from the date that control
ceases.
The Group uses the purchase method of accounting to account for the acquisition
of subsidiaries. The cost of an acquisition is measured as the fair value of the
assets given, equity instruments issued and liabilities incurred or assumed at
the date of exchange, plus costs directly attributable to the acquisition.
Identifiable assets acquired and liabilities and contingent liabilities assumed
in a business combination are measured initially at their fair values at the
acquisition date, irrespective of the extent of any minority interest. The
excess of the cost of acquisition over the fair value of the Group's share of
the identifiable net assets acquired is recorded as goodwill. If the cost of the
acquisition is less than the fair value of the net assets of the subsidiary
acquired, the difference is recognised directly in the income statement.
Inter-company transactions, balances and unrealised gains and losses on
transactions between group companies are eliminated.
Any change in the parent's controlling interest in a subsidiary that does not
result in a loss of control (in buying or selling shares to the minority) are
treated as a transaction with equity shareholders and is shown as a movement in
equity.
(b) Associates
Associates are all entities over which the Group has significant influence but
not control, generally accompanying a shareholding of between 20% and 50% of the
voting rights. Investments in associates are accounted for by the equity method
of accounting and are initially recognised at cost. The Group's investment in
associates includes goodwill (net of any accumulated impairment loss) identified
on acquisition.
The Group's share of its associates' post-acquisition profits or losses is
recognised in the income statement, and its share of post-acquisition movements
in reserves is recognised in reserves. The cumulative post-acquisition movements
are adjusted against the carrying amount of the investment.
Unrealised gains and losses on transactions between the Group and its associates
are eliminated to the extent of the Group's interest in the associates.
2.3 Segment reporting
A business segment is a group of assets and operations engaged in providing
products or services that are subject to risks and returns that are different
from those of other business segments. A geographical segment is engaged in
providing products or services within a particular economic environment that are
different from those of segments operating in other economic environments.
The primary segment for the Group is the business segment. Business segments
reported are; Hygiene Services, Pest Control Services, Electronic Security,
Manned Guarding, Facilities Management Services, Tropical Plants, Conferencing
and Parcels Delivery with central items reported separately as these cannot be
reliably allocated across segments. Geographic or secondary segments are UK,
Europe, North America, Asia Pacific and Africa.
(page 22)
2.4 Foreign currency translation
(a) Functional and presentation currency
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates ('the functional currency'). The consolidated financial
statements are presented in sterling, which is the Company's functional and
presentation currency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Foreign exchange
gains and losses resulting from the settlement of such transactions and from the
translation at reporting period end exchange rates of monetary assets and
liabilities denominated in foreign currencies are recognised in the income
statement except when deferred in equity as qualifying net investment hedges.
Foreign exchange differences on direct parent/subsidiary relationship for
financing of investments are considered 'quasi equity' and are reported in
reserves. Foreign exchange differences on loan relationships between fellow
subsidiary companies, even if considered as financing of investments, are
charged/credited in the income statement.
(c) Group companies
The results and financial position of all the group entities that have a
functional currency different from the presentation currency are translated into
the presentation currency as follows:
(i) assets and liabilities for each balance sheet presented are translated at
the closing rate at the date of the balance sheet;
(ii) income and expenses for each income statement are translated at average
exchange rates; and
(iii) all resulting exchange differences are recognised as a separate component
of equity.
On consolidation, exchange differences arising from the translation of the net
investment in foreign entities, and of borrowings and other currency instruments
designated as hedges of such investments, are taken to shareholders' equity.
When a foreign operation is sold, such exchange differences are recognised in
the income statement as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and
translated at period end exchange rates.
2.5 Property, plant and equipment
Land and buildings comprise mainly factories and offices. Provision for
depreciation of freehold buildings is made in equal annual instalments of 1% to
2% of cost. Leasehold land and buildings classified as finance leases are
depreciated in equal annual instalments over the shorter of the lease term or
estimated useful life of the leased asset. No depreciation is charged on
freehold land or fixed assets under construction. When properties are sold, the
difference between sales proceeds and net book value is dealt with in the income
statement.
All other property, plant and equipment is stated at historical cost less
depreciation. Historical cost includes expenditure that is directly attributable
to the acquisition of the items. Depreciation on other assets is calculated
using the straight-line method to allocate their cost to their residual values
over their estimated useful lives, as follows:
4 to 5 years - Vehicles
3 to 10 years - Plant, machinery and equipment, tropical plants and their
containers on rental
3 to 10 years - Office equipment, furniture and fittings.
Assets' residual values and useful lives are reviewed annually and amended as
necessary. Fixed assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the fixed asset may not be
recoverable. An asset's carrying amount is written down immediately to its
recoverable amount if the asset's carrying amount exceeds the higher of an
asset's fair value less cost to sell or value in use.
For the purposes of assessing value in use, assets are grouped at the lowest
levels for which there are separately identifiable cash flows (cash generating
units) and cash flow forecasts are made on the assumptions consistent with the
most up-to-date budgets and plans that have been formally approved by
management. These flows are discounted using the weighted average cost of
capital for the Group, adjusted for the particular risks of the cash generating
unit being reviewed for impairment.
2.6 Business combinations
Under the requirements of IFRS 3, all business combinations are accounted for
using the purchase method ('acquisition accounting'). The cost of a business
combination is the aggregate of the fair values, at the date of exchange, of
assets given, liabilities incurred or assumed, equity instruments issued by the
acquirer and any costs directly attributable to the business combination. The
cost of a business combination is allocated at the acquisition date by
recognising the acquiree's identifiable assets, liabilities and contingent
liabilities that satisfy the recognition criteria, at their fair values at that
date. The acquisition date is the date on which the acquirer effectively obtains
control of the acquiree. An intangible asset, such as customer relationships,
brands, patents and royalties, is recognised if it meets the definition of an
intangible asset in IAS 38 'Intangible Assets', and its fair value can be
measured reliably. The intangible assets identified in all acquisitions made
since 1st January 1998 are goodwill, customer lists and relationships or
contract portfolios.
(page 23)
2.7 Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value
of the Group's share of the net identifiable assets of the acquired subsidiary/
associate at the date of acquisition. Goodwill in respect of business
combinations made since 1st January 1998 is included in intangible assets.
Goodwill on the acquisition of associates is included in investments in
associates. Goodwill in respect of the acquisition of subsidiaries made prior to
January 1998 remains eliminated against reserves.
Goodwill is tested annually for impairment and carried at cost less accumulated
impairment losses. Goodwill is allocated to cash-generating units for the
purpose of impairment testing. Gains and losses on the disposal of an entity
include the carrying amount of goodwill relating to the entity sold.
(b) Customer lists
The fair value attributable to customer lists or portfolio at the point of
acquisition is determined by discounting the expected future cash flows to be
generated from that asset at the risk adjusted weighted average cost of capital
for the group. This amount is included in intangible assets as 'customer lists'
and amortised over the estimated useful life on a straight-line basis.
Amortisation periods are business stream dependent and vary from 5 to 10 years.
Separate values are not attributed to internally generated customer lists or
relationships.
(c) Computer software
Acquired computer software licences are capitalised on the basis of the costs
incurred to acquire and bring to use the specific software. These costs are
amortised over their estimated useful lives.
Costs associated with maintaining computer software programs are recognised as
an expense as incurred. Costs that are directly associated with the production
of identifiable and unique software products controlled by the Group, and that
will probably generate economic benefits exceeding costs beyond one year, are
recognised as intangible assets. Direct costs include the software development
employee costs and an appropriate portion of relevant overheads.
Computer software development costs recognised as assets are amortised over
their estimated useful lives.
(d) Research and Development
Research expenditure is recognised as an expense as incurred. Costs incurred on
development projects (relating to the design and testing of new or improved
products) are recognised as intangible assets when it is probable that the
project will be a success considering its commercial and technological
feasibility, and only if the cost can be measured reliably. Other development
expenditure is recognised as an expense as incurred. Development costs
previously recognised as an expense are not recognised as an asset in a
subsequent period. Development costs that have been capitalised are amortised
from the date the product is available for use on a straight-line basis over the
period of its expected benefit.
2.8 Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is
determined using the first-in, first-out (FIFO) method. The cost of finished
goods and work in progress comprises design costs, raw materials, direct labour,
other direct costs and related production overheads (based on normal operating
capacity). It excludes borrowing costs. Net realisable value is the estimated
selling price in the ordinary course of business, less applicable variable
selling expenses.
2.9 Trade receivables
Trade receivables are recognised initially at fair value and subsequently
measured at amortised cost using the effective interest method, less provision
for impairment. A provision for impairment of trade receivables is established
when there is objective evidence that the Group will not be able to collect all
amounts due according to the original terms of receivables. The amount of the
provision is recognised in the income statement.
2.10 Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with
banks, other short-term highly liquid investments with original maturities of
three months or less (and subject to insignificant changes in value). In the
cash flow statement, cash and cash equivalents are shown net of bank overdrafts.
Bank overdrafts are shown within borrowings in current liabilities on the
balance sheet.
2.11 Share capital
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new shares or options are shown in equity as a
deduction, net of tax, from the proceeds. Incremental costs directly
attributable to the issue of new shares or options, for the acquisition of a
business, are included in the cost of the acquisition as part of the purchase
consideration.
Where any Group company purchases the Company's equity share capital (Treasury
shares), the consideration paid, including any directly attributable incremental
costs (net of income taxes), is deducted from equity attributable to the
Company's equity holders until the shares are cancelled, reissued or disposed
of. Where such shares are subsequently sold or reissued, any consideration
received, net of any directly attributable incremental transaction costs and the
related income tax effects, is included in equity attributable to the Company's
equity holders.
(page 24)
2.12 Borrowings
Borrowings are recognised initially at fair value, net of transaction costs
incurred. Borrowings are subsequently stated at amortised cost (where hedge
accounting is not applied); any difference between the proceeds (net of
transaction costs) and the redemption value is recognised in the income
statement over the period of the borrowings using the effective interest method.
Where hedge accounting is applied, the borrowings are subsequently revalued at
each balance sheet date and the difference is offset against the fair value
movement of the derivative (the hedging instrument) in the income statement.
Borrowings are classified as current liabilities unless the Group has a
continuing right to defer settlement of the liability for at least 12 months
after the balance sheet date under both its committed bank credit facility or
Euro Medium Term Note programme.
2.13 Deferred income tax
Deferred income tax is provided in full, using the liability method, on
temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts in the consolidated financial statements. However, if
the deferred income tax arises from initial recognition of an asset or liability
in a transaction other than a business combination that at the time of the
transaction affects neither accounting nor taxable profit or loss, it is not
accounted for. Deferred income tax is determined using tax rates (and laws) that
have been enacted by the balance sheet date and are expected to apply when the
related deferred income tax asset is realised or the deferred income tax
liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that
future taxable profit will be available against which the temporary differences
can be utilised.
Deferred income tax is provided on temporary differences arising on investments
in subsidiaries and associates, except where the timing of the reversal of the
temporary difference is controlled by the Group, and it is probable that the
temporary difference will not reverse in the foreseeable future.
Tax is recognised in the income statement except to the extent that it relates
to items recognised directly in equity, in which case it is recognised in
equity.
2.14 Employee benefits
(a) Pension obligations
The Group operates a number of pension schemes throughout the world. The
principal scheme is the UK scheme, which has a number of defined benefit
sections, which are now closed to new entrants, and a defined contribution
section. The scheme is funded through payments to a trustee-administered fund,
determined by periodic actuarial calculations. A number of much smaller defined
benefit and defined contribution schemes operate elsewhere which are also funded
through payments to trustee-administered funds or insurance companies. A defined
benefit plan is a pension plan that defines an amount of pension benefit that an
employee will receive on retirement, usually dependent on one or more factors
such as age, years of service and compensation. A defined contribution plan is a
pension plan under which the Group pays fixed contributions into a separate
entity.
The liability recognised in the balance sheet in respect of defined benefit
pension plans is the present value of the defined benefit obligation at the
balance sheet date less the fair value of plan assets. The defined benefit
obligation is calculated annually by independent actuaries using the projected
unit credit method. The present value of the defined benefit obligation is
determined by discounting the estimated future cash outflows using interest
rates of high-quality corporate bonds that are denominated in the currency in
which the benefits will be paid, and that have terms to maturity approximating
to the terms of the related pension liability.
Current and past-service costs, to the extent they have vested, and curtailments
are recognised in operating costs in the income statement. Interest cost on plan
liabilities and the expected return on plan assets are recognised in finance
costs. Actuarial gains and losses arising from experience adjustments, changes
in actuarial assumptions and curtailments are charged or credited to the
consolidated statement of recognised income and expense.
For defined contribution plans, the Group pays contributions to publicly or
privately administered pension insurance plans on a mandatory, contractual or
voluntary basis. The Group has no further payment obligations once the
contributions have been paid. The contributions are recognised as employee
benefit expense when they are due. Prepaid contributions are recognised as an
asset to the extent that a cash refund or a reduction in the future payments is
available.
(b) Other post-employment obligations
Some Group companies provide post-employment healthcare benefits to their
retirees. The entitlement to these benefits is usually conditional on the
employee remaining in service up to retirement age and the completion of a
minimum service period. The expected costs of these benefits are accrued over
the period of employment using an accounting methodology similar to that used
for defined benefit pension plans. Actuarial gains and losses arising from
experience adjustments, and changes in actuarial assumptions, are charged or
credited to the consolidated statement of recognised income and expense.
(c) Share-based compensation
The Group operates a number of equity-settled, share-based compensation plans.
The economic cost of awarding shares and share options to employees is
recognised as an expense in the income statement equivalent to the fair value of
the benefit awarded. The fair value is determined by reference to option pricing
models, principally Monte Carlo and adjusted Black-Scholes models. The charge is
recognised in the income statement over the vesting period of the award. At each
balance sheet date, the Group revises its estimate of the number of options that
are expected to become exercisable. Any revision to the original estimates is
reflected in the income statement with a corresponding adjustment to equity
immediately to the extent it relates to past service and the remainder over the
rest of the vesting period.
(page 25)
The proceeds received net of any directly attributable transaction costs are
credited to share capital (nominal value) and share premium when the options are
exercised.
(d) Termination benefits
Termination benefits are payable when an employment is terminated before the
normal retirement date, or whenever an employee accepts voluntary redundancy in
exchange for these benefits. The Group recognises termination benefits when it
is demonstrably committed to either: terminating the employment of current
employees according to a detailed formal plan without possibility of withdrawal;
or providing termination benefits as a result of an offer made to encourage
voluntary redundancy. Benefits falling due more than 12 months after the balance
sheet date are discounted to present value.
(e) Profit-sharing and bonus plans
The Group recognises a liability and an expense for bonuses and profit-sharing,
based on a formula that takes into consideration the probability of certain
performance criteria being achieved. A provision is recognised where a
contractual obligation exists or where past practice indicates that there is a
constructive obligation to make such payments in the future.
(f) Holiday Pay
Paid holidays are regarded as an employee benefit and as such are charged to the
income statement as the benefits are earned. An accrual is made at the balance
sheet to reflect the fair value of holidays earned but not yet taken.
2.15 Provisions
Vacant property, environmental, self insurance and other provisions are
recognised when the Group has a present legal or constructive obligation as a
result of past events and it is more likely than not that an outflow of
resources will be required to settle the obligation; and if this amount is
capable of being reliably estimated. If such an obligation is not capable of
being reliably estimated it is classified as a contingent liability.
Vacant property provision is made in respect of vacant and partly sub-let
leasehold properties to the extent that future rental payments are expected to
exceed future rental income. Environmental provision is made for all known
liabilities to remediate contaminated land on the basis of management's best
estimate of the costs of these liabilities. Self insurance provision is made for
all claims incurred as at the balance sheet date based on actuarial assessments
of these liabilities. Other provisions are made for all other known liabilities
that exist at the year-end based on management's best estimate as to the cost of
settling these liabilities. Provisions are not recognised for future operating
losses.
Where there are a number of similar obligations, the likelihood that an outflow
will be required in settlement is determined by considering the class of
obligations as a whole.
When the effect of the time value of money is material, provision amounts are
calculated on the present value of the expenditures expected to be required to
settle the obligation. The present value is calculated using forward market
interest rates, as measured at the balance sheet reporting date, which have been
adjusted for risks already reflected in future cash flow estimates.
2.16 Revenue recognition
Revenue comprises the fair value for the rendering of services, net of
value-added tax and other similar sales based taxes, rebates and discounts and
after eliminated sales within the Group. Revenue is recognised as follows:
(a) Service revenue
Revenue excludes VAT and other similar sales based taxes and represents the
amounts receivable for services rendered and goods sold outside the Group.
For non-contract based business, revenue represents the value of goods delivered
or services performed. For contract based business, revenue represents the sales
value of work carried out for customers during the period. Contract income is
recognised in accounting periods on a straight-line basis over the life of the
contract. For long-term contracts involving the installation of equipment,
revenue is recognised using the percentage completion method and represents the
sales value of work executed during the period.
(b) Rental income
Rental assets such as tropical plants, washroom equipment, garments, linen,
security equipment, etc which are owned by Group entities or where at least
substantially all the risks and rewards of ownership of such equipment is
retained by Group entities are capitalised as fixed assets and depreciated over
their estimated useful lives.
All rental income received or receivable in respect of rental assets is
accounted for on an operating lease basis. Income from the rental of these
assets is credited to revenue on a strict time-apportioned basis.
(c) Interest income
Interest income is recognised on a time-apportioned basis using the effective
interest method. When a receivable is impaired, the Group reduces the carrying
amount to its recoverable amount, being the estimated future cash flow
discounted at the original effective interest rate of the instrument, and
continues unwinding the discount as interest income. Interest income on impaired
loans is recognised either as cash is collected or on a cost-recovery basis as
conditions warrant.
2.17 Leases
Leases of property, plant and equipment where the Group has substantially all
the risks and rewards of ownership are classified as finance leases. Finance
leases are capitalised at the lease's inception at the lower of the fair value
of the leased property and the present value of the minimum lease payments. Each
lease payment is allocated between the liability and finance charges so as to
achieve a constant rate on the finance balance outstanding. The corresponding
rental obligations, net of finance charges, are included in other payables. The
interest element of the finance cost is charged to the income statement over the
lease period so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period. The property, plant and
equipment acquired under finance leases are depreciated over the shorter of the
useful life of the asset or the lease term.
(page 26)
Leases in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under
operating leases (net of any incentives received from the lessor) are charged to
the income statement on a straight-line basis over the period of the lease.
2.18 Dividend distribution
Dividend distribution to the Company's shareholders is recognised as a liability
in the Group's financial statements in the period in which the dividends are
approved by the Company's shareholders.
2.19 Financial instruments
Financial assets and financial liabilities are recognised when the Group becomes
a party to the contractual provisions of the relevant instrument and
derecognised when it ceases to be a party to such provisions.
2.20 Financial assets
Non derivative financial assets are classified as available-for-sale
investments, loans and receivables or held-to-maturity. Available-for-sale
investments are marked to market and changes to market values are taken to
equity. On subsequent disposal or impairment, the accumulated gains and losses,
previously recognised in equity are recognised in the income statement. Loans
and receivables and held-to-maturity investments are measured at amortised cost
using the effective interest method, subject to impairment.
2.21 Financial liabilities
Non derivative financial liabilities are stated at amortised cost using the
effective interest rate method.
2.22 Accounting for derivative financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date a derivative
contract is entered into and are subsequently re-measured at their fair value at
the balance sheet date. The method of recognising the resulting gain or loss
depends on whether the derivative is designated as a hedging instrument, and if
so, the nature of the item being hedged. The Group designates certain
derivatives as either (1) hedges of the fair value of recognised assets or
liabilities or (2) hedges of net investments in foreign operations. The Group
does not operate any cash flow hedging activities.
The Group documents at the inception of the transaction the relationship between
hedging instruments and hedged items, as well as its risk management objective
and strategy for undertaking various hedge transactions. The Group also
documents its assessment, both at hedge inception and on an ongoing basis, of
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values of hedged items.
(a) Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair
value hedges are recorded in the income statement, together with any changes in
the fair value of the hedged asset or liability that are attributable to the
hedged risk.
(b) Net investment hedge
Any gain or loss on the hedging instrument relating to the effective portion of
the hedge is recognised in equity; the gain or loss relating to the ineffective
portion is recognised immediately in the income statement.
Gains and losses accumulated in equity are included in the income statement when
the foreign operation is disposed of.
(c) Derivatives that do not qualify for hedge accounting
Certain derivative instruments do not qualify for hedge accounting. Changes in
the fair value of any derivative instruments that do not qualify for hedge
accounting are recognised immediately in the income statement.
2.23 Fair value estimation
The fair value of any financial instruments traded in active markets is based on
quoted market prices at the balance sheet date. The quoted market price used for
financial assets held by the Group is the current bid price; the appropriate
quoted market price for financial liabilities is the current ask price.
The fair value of financial instruments that are not traded in an active market
is determined by using valuation techniques. The Group uses a variety of methods
and makes assumptions that are based on market conditions existing at each
balance sheet date. Quoted market prices or dealer quotes for similar
instruments are used for long-term debt. Other techniques, such as estimated
discounted cash flows, are used to determine fair value for the remaining
financial instruments. The fair value of interest rate and currency swaps is
calculated as the present value of the estimated future cash flows. The fair
value of forward foreign exchange contracts is determined using forward exchange
market rates at the balance sheet date.
The nominal value less estimated credit adjustments of trade receivables and
payables are assumed to approximate to their fair values. The fair value of
financial liabilities for disclosure purposes is estimated by discounting the
future contractual cash flows at the current market interest rate that is
available to the Group for similar financial instruments.
(page 27)
2.24 Critical accounting estimates and judgements
Estimates and judgements are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances.
2.25 Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning the future. The resulting
accounting estimates will, by definition, seldom equal the related actual
results. The estimates and assumptions that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within the
next financial year are discussed below.
(a) Estimated impairment of goodwill
The Group tests annually whether goodwill has suffered any impairment in
accordance with the accounting policy stated in Note 2.7(a). The recoverable
amounts of cash-generating units have been determined based on value-in-use
calculations. These calculations require the use of estimates and assumptions
consistent with the most up-to-date budgets and plans that have been formally
approved by management
(b) Income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant
judgement is required in determining the worldwide provision for income taxes.
There are many transactions and calculations for which the ultimate tax
determination is uncertain during the ordinary course of business. The Group
recognises liabilities for anticipated tax audit issues based on estimates of
whether additional taxes will be due. Where the final tax outcome of these
matters is different from the amounts that were initially recorded, such
differences will impact the income tax and deferred tax provisions in the period
in which such determination is made.
(c) Provision for vacant property and environmental restoration
Significant judgement is required in determining the worldwide provision for
vacant property and environmental restoration. Vacant property and environmental
restoration tend to be long term in nature and the required use of an
appropriate market discount rate and forecast future utilisation based upon
management's best estimate determines the level of provision required at the
balance sheet date. The phasing and actual cash spend may be different from the
original forecast utilisation spend.
2.26 Exceptional items
Exceptional items are defined as significant items (that are non recurring in
nature) that fall within the ordinary trading activities of the Group and which
individually or, if of a similar type in aggregate are shown on the face of the
Consolidated Income Statement.
3 Significant events impacting the consolidated interim financial statements
Other than the change in accounting policies resulting from the transition to
IFRS, there were no significant changes in the nature and amount of estimates
and contingent assets reported since the published Annual Report.
3.1 Material post balance sheet events
An Interim dividend of 2.13p per share (HY 2004: 1.93p) was declared after the
balance sheet date and will be paid on 28th October 2005 to shareholders on the
register on 30th September 2005.
(page 28)
4 Segmental Analysis
Continuing operations at average exchange rates:
6 months to 6 months to Year to 31st
30th June 30th June December
2005 2004 2004
By business £m £m £m
(unaudited) (unaudited) (unaudited)
Revenue
Hygiene Services 378.3 363.3 733.8
Pest Control Services 114.3 110.0 224.2
Hygiene 492.6 473.3 958.0
Electronic Security 131.2 120.9 249.7
Manned Guarding 166.7 160.6 324.4
Security 297.9 281.5 574.1
Facilities Management Services 223.3 227.8 449.7
Tropical Plants 51.8 49.3 105.1
Conferencing 44.1 43.7 91.1
Facilities Management 319.2 320.8 645.9
Parcels Delivery 57.5 55.1 113.4
Revenue from continuing operations 1,167.2 1,130.7 2,291.4
Operating Income *
Hygiene Services 45.3 80.4 161.0
Pest Control Services 34.7 38.5 78.1
Hygiene 80.0 118.9 239.1
Electronic Security 16.2 18.8 38.2
Manned Guarding 4.3 4.9 10.4
Security 20.5 23.7 48.6
Facilities Management Services 13.6 16.1 32.5
Tropical Plants 2.6 3.1 9.1
Conferencing 10.7 11.9 26.2
Facilities Management 26.9 31.1 67.8
Parcels Delivery 12.4 13.8 30.3
Central Items (20.6) (9.6) (49.8)
Operating Income from continuing operations * 119.2 177.9 336.0
By Geography
Revenue
United Kingdom 552.2 547.6 1,101.3
Continental Europe 423.1 399.7 812.5
North America 132.0 127.9 264.4
Asia Pacific 43.2 40.9 82.4
Africa 16.7 14.6 30.8
Revenue from continuing operations 1,167.2 1,130.7 2,291.4
Operating Income *
United Kingdom 50.4 93.7 186.7
Continental Europe 68.6 71.3 150.1
North America 2.6 3.1 10.1
Asia Pacific 11.7 13.1 26.0
Africa 6.5 6.3 12.9
Central Items (20.6) (9.6) (49.8)
Operating Income from continuing operations * 119.2 177.9 336.0
* After amortisation of customer lists and items identified as exceptional (note
6).
(page 29)
5 Business Combinations and Discontinued Operations
The following business combinations, business disposals and businesses treated
as held-for-sale were made during the six months to 30th June 2005:
5.1 Business combinations
The Group purchased 100% of the share capital or the trade and assets of 18 companies and businesses, as set out
below, for a total consideration of £26.9m. The cash outflow from current period acquisitions, net of cash
acquired was £24.5m.
Name of business acquired Country Business Date
Meldkamer Netherlands Electronic Security 01.01.05
Plantscape Belgium Tropical Plants 05.01.05
BAS France Electronic Security 12.01.05
Prevent-A-Pest New Zealand Pest Control 17.01.05
Maarse Netherlands Tropical Plants 25.01.05
Tapisnorest France Hygiene Services 31.01.05
Valley Crest USA Tropical Plants 01.02.05
ASA France Electronic Security 19.02.05
Stour Security United Kingdom Electronic Security 28.02.05
Safeway Canada Pest Control 01.03.05
Pointner Austria Hygiene Services 08.03.05
Group Chabaud France Electronic Security 13.04.05
The Jungle USA Tropical Plants 01.05.05
Decraplant Belgium Tropical Plants 04.05.05
Integrated Security Systems USA Electronic Security 12.05.05
Commercial Irati Spain Pest Control 01.06.05
OCS USA Manned Guarding 05.06.05
Advantage Pest Control New Zealand Pest Control 09.06.05
Details of goodwill and the fair value of net assets acquired are
as follows:
2005
£m
(unaudited)
Purchase consideration:
- Cash paid 24.1
- Direct costs relating to the acquisition 1.0
- Consideration deferred to future periods 1.8
Total purchase consideration 26.9
Fair value of net assets acquired 20.0
Goodwill 6.9
The assets and liabilities arising from acquisitions are as follows:
Fair value
2005
£m
(unaudited)
Non-current assets
- Intangible assets 20.4
- Property, plant and equipment 11.6
Current assets 5.9
Current liabilities (4.7)
Non-current liabilities (16.6)
Minority interest 3.4
Net assets acquired 20.0
The book value of net assets acquired are materially the same as the fair value of net assets acquired.
Purchase consideration (total) 26.9
Consideration payable in future periods (1.8)
Purchase consideration (paid in cash) 25.1
Cash and cash equivalents in acquired companies and businesses (0.6)
Cash outflow on current period acquisitions 24.5
Deferred consideration from prior periods 1.1
paid
Cash outflow on current and past 25.6
acquisitions
From the dates of acquisition to 30th June 2005 these acquisitions contributed £8.1m to revenue and £nil to net
profit (after amortisation of customer lists acquired of £0.5m).
5.2 Discontinued activities
IFRS 5 requires the current period financial performance (and its comparatives)
on HY 2005 business disposals and businesses classified as held-for-sale to be
disclosed below profit after taxation (see note 5.2.3). Comparative balance
sheets on HY 2005 disposals/held-for-sale businesses are not restated.
HY 2005 disposals/held-for-sale business balance sheets are collapsed into two
lines within current assets and current liabilities and are described as '
held-for-sale assets' and 'held-for-sale liabilities' respectively. The balance
sheets on held-for-sale businesses are held at fair value less costs to sell
(see note 5.2.2).
(page 30)
5.2.1 Disposals
The Group disposed of 2 businesses, as set out below, and a 49% interest in an associate undertaking, Rezayat
Sparrow Arabian Crane Hire Co Ltd, Saudi Arabia on 31st May 2005, during the 6 months to 30th June 2005 for
gross proceeds of £4.4m, £4.3m after costs paid of £0.1m but before provisions of £0.7m.
Name of business sold Country Business Date
Unifreight Zimbabwe Parcels Delivery 09.05.05
Office Solutions United Kingdom Facilities Management Services 30.06.05
Details of net assets disposed and disposal proceeds are as follows:
2005
£m
(unaudited)
Non-current assets 1.9
Current assets 2.2
Current liabilities (1.3)
Non-current liabilities (0.1)
Net assets disposed 2.7
Profit on disposal 0.9
Provisions 0.7
Consideration 4.3
Consideration deferred to future periods (1.7)
Consideration deferred from prior periods 1.0
Cash disposed (0.4)
Cash inflow from disposals 3.2
Disposal costs incurred on businesses held-for-sale (note (1.0)
5.2.2)
Cash inflow from disposals and businesses 2.2
held-for-sale
The profit on disposal above of £0.9m excludes translation exchange losses of £1.4m which are recycled to the
income statement, giving a total post-tax loss on disposal of subsidiary net assets of £0.5m as shown in note
5.2.3.
5.2.2 Businesses held-for-sale
The Group disposed of Premier Golf, based in the USA, on 15th July 2005 for gross proceeds of £0.5m. The
disposal of Germany Hospital Services (North) is scheduled for completion in the second half for gross proceeds
of £3.9m, £2.9m after costs paid of £1.0m. The proceeds relating to Germany Hospital Services were received
towards the end of last year. The book value of net assets have been written down to their recoverable amounts
as shown below:
Book value Fair value
£m £m
(unaudited) (unaudited)
Non-current assets 4.0 2.3
Current assets 0.3 0.3
Held-for-sale assets 4.3 2.6
Held-for-sale liabilities (0.2) (0.2)
Net held-for-sale assets 4.1 2.4
The asset write down of £1.7m is included within post-tax loss on disposal of discontinued operations (note
5.2.3).
5.2.3 Financial performance of discontinued operations (on Disposals and Businesses held-for-sale)
6 months to 6 months to Year to 31st
30th June 30th June December
2005 2004 2004
£m £m £m
(unaudited) (unaudited) (unaudited)
Revenue 5.5 21.2 30.8
Operating expenses (6.0) (21.6) (40.9)
Operating loss (0.5) (0.4) (10.1)
Finance costs - net (0.2) - 0.4
Share of profit from associates disposed (net of - 0.4 0.6
tax)
Pre-tax loss (0.7) - (9.1)
Taxation - - (0.4)
Post-tax results from discontinued operations (0.7) - (9.5)
Post-tax profit/(loss) on disposal of subsidiary 5.2.1 0.9 (2.9) (3.3)
net assets
Cumulative translation exchange loss * (1.4) - -
Total post-tax loss on disposal of subsidiary net (0.5) (2.9) (3.3)
assets
Asset write down in held-for-sale business 5.2.2 (1.7) - -
Cumulative translation exchange loss * (0.7) - -
Total held-for-sale businesses stated at fair value less costs to (2.4) - -
sell
Post-tax loss on disposal of discontinued operations (3.6) (2.9) (12.8)
* The cumulative translation exchange loss of £2.1m relating to discontinued activities has been recycled out of
exchange reserves to the consolidated income statement.
(page 31)
6 Exceptional items
6 months to 6 months to Year to 31st
30th June 30th June December
2005 2004 2004
£m £m £m
(unaudited) (unaudited) (unaudited)
Impairment of assets in UK Textiles business * 28.0 - -
Additional vacant property and environmental provisions - - 19.7
Potential uninsured loss on a discontinued business ** - - 6.0
28.0 - 25.7
* The linen and garments business within the UK has been written down to its recoverable amount.
** The provision for the potential uninsured loss was made in respect of product supply by a discontinued
business following further developments in 2004.
7 Interest payable and similar charges
Interest payable on bank loans and overdrafts (15.0) (13.5) (28.8)
Interest payable on Medium Term Notes issued (19.2) (19.6) (40.1)
Interest payable on swaps (16.2) (15.3) (33.0)
Interest on defined benefit plan liabilities (22.3) (20.5) (40.8)
Interest payable on finance leases (1.3) (1.2) (2.5)
Foreign exchange loss on translation of foreign denominated - (0.5) (4.1)
loans
Amortisation of discount on provisions (1.0) - -
Fair value losses arising on swaps designated as fair value (1.0) - -
hedges
Fair value losses arising from hedged debt (3.5) - -
Fair value loss on derivatives not designated in a hedge (7.2) - -
relationship *
Total interest payable and similar charges (86.7) (70.6) (149.3)
* The fair value loss on derivatives not designated in a hedge relationship includes the Ashtead
convertible option write down of £4.6m and £2.6m of fair value write downs relating to forward rate
agreements.
8 Interest receivable
Bank interest 5.4 4.9 8.0
Interest receivable on swaps 18.8 19.3 39.5
Other interest * 9.9 3.7 7.5
Return on defined benefit plan assets 19.9 20.0 39.9
Foreign exchange gain on translation of foreign denominated 0.5 - -
loans
Fair value gains arising on swaps designated as fair value 3.7 - -
hedges
Fair value gains arising from hedged debt 1.2 - -
Total interest receivable 59.4 47.9 94.9
* Other interest income represents interest income from the Ashtead loan receivable.
Finance costs - net (27.3) (22.7) (54.4)
page 32)
9 Derivatives and other financial instruments
(a) Fair values of financial assets and financial liabilities
BOOK BOOK
VALUE VALUE
30 JUN 05 1 JAN 05
(unaudited) (unaudited)
£m £m
Primary financial instruments held or issued to finance the group's operations:
Investments - government gilts (i) 6.7 6.6
- other 0.1 0.1
Current and non-current receivables
- Ashtead loan note (principal) (ii) 118.3 112.7
- South African loan note (disposal note) (iii) 16.4 17.6
- Other deferred consideration/disposal (iv) 5.1 4.5
notes
Cash and cash equivalents 170.8 199.5
Short term borrowings:
Medium term notes (fair value hedge) (v) - (9.8)
Medium term notes (non-hedge) (vi) (122.5) (125.9)
(122.5) (135.7)
Other borrowings (excluding finance leases) (vii) (69.1) (58.2)
(191.6) (193.9)
Long term borrowings:
Medium term notes (fair value hedge) (v) (636.1) (653.2)
Medium term notes (non-hedged) (vi) (5.6) (20.1)
(641.7) (673.3)
Other borrowings (excluding finance leases) (vii) (509.1) (480.5)
(1,150.8) (1,153.8)
On adopting IAS 39 prospectively from 1st January 2005, the book values of the primary financial
instruments listed above are recorded at fair values at the respective balance sheet dates.
(b) Derivative fair values:
Fair values at respective balance sheet dates ASSETS LIABILITIES ASSETS LIABILITIES
30 JUN 05 30 JUN 05 1 JAN 05 1 JAN 05
(unaudited) (unaudited) (unaudited) (unaudited)
£m £m £m £m
Interest rate swaps:
- non-hedge (vi) - - - -
- fair value hedge (v) 23.3 (0.5) 25.6 (3.6)
Forward rate agreements:
- non-hedge (vi) - (2.6) - (0.1)
Cross-currency interest rate swaps:
- non-hedge (vi) 0.1 (3.2) 2.5 (0.7)
- fair value hedge (v) - - - -
Ashtead Convertible option (viii) - - 4.6 -
Foreign exchange forward agreements 0.2 - - -
23.6 (6.3) 32.7 (4.4)
The table above provides a comparison by category of the carrying amounts and the fair values of the
group's financial assets and financial liabilities at 30th June 2005 and 1st January 2005. Fair value is
the amount at which a financial instrument could be exchanged in an arm's length transaction between
informed and willing parties (other than a forced or liquidation sale) and excludes accrued interest.
Where available, market values have been used to determine fair values. Where market values are not
available, fair values have been calculated by discounting expected cash flows at relevant interest and
exchange rates.
(i) UK and US Government gilts are designated as 'Available-For-Sale' ('AFS'). The gain on revaluation is
taken through the Statement of Recognised Income and Expense ('SORIE') for the six months to HY 2005
was £0.1m.
(ii) Current receivables include a principal balance of £118.3m (1 JAN 2005: £112.7m) in respect of a
convertible loan note issued by Ashtead Group plc ('Ashtead') in partial consideration for their
purchase of our former US plant services business. The note has been designated as a 'Loan and
Receivable' (stated at amortised cost with an effective interest rate of 11.54%), with an original
final maturity date of 31st March 2008 and interest accrues at 5.25% per annum. At 30th June 2005, the
fair value of the interest accrued on the principal was £2.3m (1 JAN 2005: £1.7m). There was also
deferred interest of £7.9m (1 JAN 2005: £7.7m). On 1st July 2005, the Group entered into an agreement
with Ashtead whereby it agreed to an early repayment of the Ashtead convertible loan note subject to
certain refinancing actions and conditions being met by 15th August 2005. On 3rd August, Ashtead
completed all these conditions and repaid £129.9m to the company in full settlement of the outstanding
loan note obligations. The total sum received comprised £119.5m loan principal and £10.4m of deferred
interest and accrued interest then outstanding. The book and fair value tables shown above, together
with notes 7 and 8 reflect the repayment of the note with effect 3rd August 2005.
(page 33)
9 Derivatives and other financial instruments (continued)
(iii) The South African loan note relating to the sale of a minority interest in our South African
subsidiary has been designated as an AFS. The loan note has been revalued at 30th June 2005 and the
revaluation loss of £0.6m has been taken directly to reserves and disclosed on the face of the SORIE.
(iv) Debtors include £19.4m (1 JAN 2005: £20.6m) of interest bearing and £2.1m (1 JAN 2005: £1.5m) of
non-interest bearing notes and deferred consideration received in respect of non-core business
disposals. The notes/deferred consideration have final maturities between 2005 and 2008, although
earlier repayments may be precipitated under the terms of the respective disposal notes/sale
agreements. Apart from the South African loan note (described in (iii) above), deferred consideration/
disposal notes are designated as originated loans and receivables.
(v), (vi) Fair Value Hedging
Fair value hedge accounting has been applied to all the notes and related derivatives (marked as 'fair
value hedge' ('FV')) in accordance with IAS 39. Where no hedge accounting has been applied, all the
notes and related derivatives have been marked as 'non-hedge' ('NH'). The related derivative and the
hedged note are both marked to market and the ineffective portion of the hedge is taken directly to
finance costs.
Net Investment Hedging
The Group has both Japanese Yen and euro denominated borrowings, which it has designated as a hedge of
the net investment in its subsidiaries in Japan and the eurozone. The fair value of Japanese Yen
borrowings at 30th June 2005 was £6.6m (1 JAN 2005: £6.7m) and the euro borrowings £356.4m (1 JAN
2005: £383.9m). The foreign exchange gain of £0.7m on translation of the borrowings into sterling has
been recognised in exchange reserves. Where Net Investment Hedging has been applied to the medium term
notes, the related note has been marked with a 'NIH'.
The Group operated the following medium term notes under its €2.5bn Euro Medium Term Note programme
for the six months ended 30th June 2005:
CURRENCY/AMOUNT IAS 39 hedging INTEREST COUPON MATURITY DATE
Y2,000m FV Fixed rate - 0.40% pa matured
€20m NH Floating rate - 3 month EURIBOR +0.20% matured
$10m NH Floating rate - 3 month USD LIBOR 16.09.05
+0.24%
€150m NH Floating rate - 3 month EURIBOR +0.35% 17.11.05
£15m NH Floating rate - 6 month GBP LIBOR 13.02.06
+0.35%
Y3,000m FV Fixed rate - 0.60% pa 13.04.07
$10m NH Floating rate - 3 month USD LIBOR 17.05.07
+0.35%
€500m FV, NIH Fixed rate - 5.75% pa 21.05.07
£250m FV Fixed rate - 6.125% pa 19.11.08
The aggregate book and fair values for these notes are reflected in the table in note 9
(a).
The effective interest rate on the €500m note is 5.90%. The effective interest rate on the £250m note
is 6.20%. For all other bonds the effective interest rate approximates to the coupon. The floating
rate bonds (and the related cross currency swaps) that are not designated as hedges in accordance with
IAS 39 and are carried on the balance sheet at amortised cost and retranslated at the period end rate.
The related swap (a derivative) is marked to market at the period end date. The exchange effect on the
bond and the movement on the swap re-valuation are both reported within finance costs and act as a
natural hedge.
(vii) Other borrowings represent bank loans and overdrafts and are held at amortised cost.
(viii) A fair value sum of £4.6m has been ascribed to the Ashtead equity conversion option using the
Trinomial option valuation model as at 1st January 2005 and booked on the balance sheet. At HY 2005,
the option value has been marked to market to £nil given the early repayment of the note on 3rd August
2005. As a result, an unfavourable movement of £4.6m has been taken to interest payable.
(c) Maturity of financial liabilities
The maturity profile of the carrying amount of the group's financial liabilities, other than short term
trade creditors, accruals and finance leases, was as follows:
OTHER OTHER
FINANCIAL TOTAL FINANCIAL TOTAL
LIABILITIES (UNAUDITED) LIABILITIES (UNAUDITED)
LOANS LOANS
HY 2005 1 JAN 05
£m £m £m £m
£m £m
Within 1 year, or on demand 191.6 4.0 195.6 193.9 4.7 198.6
Between
- 1 and 2 years 877.8 3.9 881.7 515.3 4.0 519.4
- 2 and 3 years 7.5 3.7 11.2 383.3 3.9 387.1
- 3 and 4 years 265.0 3.7 268.7 253.8 3.7 257.5
- 4 and 5 years 0.2 3.7 3.9 - 3.8 3.8
- Over 5 years 0.3 25.7 26.0 1.4 25.0 26.4
1,342.4 44.7 1,387.1 1,347.7 45.1 1,392.8
(page 34)
9 Derivatives and other financial instruments (continued)
Other financial liabilities include £44.7m (1 JAN 2005: £45.1m) in respect of vacant property provisions
related to underlying onerous lease contracts and environmental provisions.
Floating rate loans bear interest at rates, based on the relevant national borrowing rate benchmark
equivalents (e.g. - £ LIBOR), which are fixed in advance usually for periods of between one and twelve
months.
(d) Borrowing facilities
The group had the following undrawn committed borrowing facilities available at 30th June in respect of
which all continuing conditions precedent had been met at that date.
CONSOLIDATED
HY 2005 1 JAN 05
(unaudited) (unaudited)
£m £m
Expiring within
- 1 year, or on demand - -
- 1 and 2 years 688.0 753.9
- 2 and 3 years - -
- 3 and 4 years - -
- 4 and 5 years - -
- Over 5 years - -
688.0 753.9
The above table has been prepared using the actual drawings, as at 30th June 2005, made under former
committed bank facilities ('old facilities') which totaled £1,276m. The effective final repayment dates
on these old facilities were between July and October 2006. New committed bank facilities ('new
facilities') totaling £1,311m were negotiated in spring 2005 and these became fully available shortly
after the effective completion of the new holding company structure. Since the 30th June 2005, having met
their conditions precedent, these new facilities have been used to repay all liabilities under the old
facilities. The old facilities have since been cancelled in full. The new facilities have maturities of
between one and two years of £578m and between four and five years of £733m.
(e) Maturity of financial assets
The maturity profile of the carrying amount of the group's financial assets, at 30th June was as follows:
DEFERRED
CONSIDERATION/ TOTAL
LOAN NOTES
CASH DERIVATIVES INVESTMENTS (UNAUDITED)
At 30th June 2005
£m £m £m £m £m
Within 1 year, or on 170.8 130.9 0.3 - 302.0
demand
Between
- 1.5 14.8 0.2 16.5
- 1 and 2 years
- 2 and 3 years - 0.1 - 6.2 6.3
- 3 and 4 years - - 8.5 - 8.5
- 4 and 5 years - 1.1 - - 1.1
- Over 5 years - 16.4 - 0.4 16.8
170.8 150.0 23.6 6.8 351.2
The maturity profile of the carrying amount of the group's financial assets, at 1st January was as
follows:
DEFERRED
CONSIDERATION/ TOTAL
LOAN NOTES
CASH DERIVATIVES INVESTMENTS (UNAUDITED)
At 1st January 2005
£m £m £m £m £m
Within 1 year, or on 199.5 1.2 2.5 - 203.2
demand
Between
- 0.9 - - 0.9
- 1 and 2 years
- 2 and 3 years - 1.1 25.6 3.9 30.6
- 3 and 4 years - 122.3 4.6 2.5 129.4
- 4 and 5 years - 1.1 - - 1.1
- Over 5 years - 17.6 - 0.3 17.9
199.5 144.2 32.7 6.7 383.1
Floating rate cash earns interest at commercial rates in line with local market practice. Central treasury
companies invest all significant cash surpluses in major currencies (£, US$ and Euro) at money market
rates.
Fixed rate cash deposits include £6.7m (1 JAN 2005: £6.6m) invested in UK and US Government bonds which
are held by the group's insurance operations in accordance with local insurance regulations and are used
to meet insurance liabilities as they fall due. The weighted average interest rate earned is 6.44% (1 JAN
2005: 6.43%) and the weighted average rate is fixed for 2.9 years (1 JAN 2005: 3.4 years).
Short-term deposits are placed with banks usually for maturities of up to six months and earn interest at
market rates related to the currency and the sums invested.
(page 35)
9 Derivatives and other financial instruments
(f) First time adoption of IAS 39 at 1st January 2005
IAS 39
BOOK
TRANSITION
VALUE UK GAAP ADJUSTMENT
1 JAN 05 1 JAN 05 AT 1 JAN 05
(unaudited) (unaudited) (unaudited)
£m £m £m
Primary financial instruments held or issued to finance the group's
operations:
Investments - government gilts (i) 6.6 6.6 * -
- other 0.1 0.1 -
Current and non-current receivables
- Ashtead loan note (principal) (ii) 112.7 134.0 (21.3)
- South African loan note (disposal note) (iii) 17.6 17.6 -
- Other deferred consideration/disposal (iv) 4.5 4.5 -
notes
Cash and cash equivalents 199.5 199.5 * -
Short term borrowings:
Medium term notes (fair value hedge) (v) (9.8) (10.5) 0.7
Medium term notes (non-hedge) (vi) (125.9) (122.0) (3.9)
(135.7) (132.5) (3.2)
Other borrowings (excluding finance leases) (vii) (58.2) (58.2) -
(193.9) (190.7) (3.2)
Long term borrowings:
Medium term notes (fair value hedge) (v) (653.2) (619.2) (34.0)
Medium term notes (non-hedged) (vi) (20.1) (20.6) 0.5
(673.3) (639.8) (33.5)
Other borrowings (excluding finance leases) (vii) (480.5) (480.5) -
(1,153.8) (1,120.3) (33.5)
Other receivables - unamortised bond issue - 1.6 (1.6)
costs
Other payables - accrued interest on medium - (13.9) 13.9
notes
Derivatives marked to market at 1 Jan 2005 9(b) 28.3 - 28.3
Total IAS 39 transitional adjustment at 1 Jan 2005 (17.4)
* Government gilts included within cash has been reclassified to investments within the UK GAAP column for
comparability purposes.
On adopting IAS 39 prospectively from 1st January 2005, net liabilities increased by £17.4m, principally
resulting from restating financial assets and liabilities at fair value or on an amortised cost basis. The
classification of financial assets and liabilities is disclosed in the front section of note 9.
The book values of the primary financial instruments listed above are recorded at fair values at the
respective balance sheet dates.
10 First time adoption of IFRS 4 - Insurance Contracts
IFRS 4 does not permit general insurance reserves. As a result, the equalisation reserve held on the
balance sheet under UK GAAP (£0.7m) has been reversed to equity. Deferred acquisition costs (held within
other receivables) on insurance contracts totaling £0.2m were also taken to reserves. A total adjustment
of £0.3m (net of deferred taxation of £0.2m) was therefore required to restate the opening balance sheet
at 1st January 2005 in compliance with IFRS 4.
(page 36)
11 Share capital, reserves and minority interest
Attributable to equity holders of the Company
Called up
share Share Capital
capital premium redemption
account reserve Treasury Other Retained Minority Total
shares reserves earnings Interest equity
£m £m £m £m £m £m £m £m
(unaudited)
Balance at 1st January 2004 18.2 49.2 19.6 (12.0) 8.9 (874.5) 6.6 (784.0)
Total recognised income for the period - - - - (3.0) 111.3 - 108.3
Dividends paid to ordinary - - - - - (78.7) - (78.7)
shareholders
Cost of share options - - - - - 0.4 - 0.4
Own shares purchased and cancelled (0.1) - 0.1 - - (24.2) - (24.2)
Transfer to other reserves - - - - (0.5) 0.5 - -
New share capital issued - 0.3 - - - - - 0.3
Shares released under Deferred Share - - - 0.7 - - - 0.7
Award Plan
Level 2 share options issued - - - 0.2 - - - 0.2
Minority interest share of profit - - - - - (1.1) 1.1 -
Currency translation difference on - - - - - - (0.2) (0.2)
minority interest
Dividends paid to minority interests - - - - - - (0.4) (0.4)
Balance at 30th June 2004 18.1 49.5 19.7 (11.1) 5.4 (866.3) 7.1 (777.6)
Balance at 1st January 2004 18.2 49.2 19.6 (12.0) 8.9 (874.5) 6.6 (784.0)
Total recognised income for the year - - - - (0.8) 144.2 - 143.4
Gain on sale of interest in South - - - - - 15.1 - 15.1
African business
Dividends paid to ordinary - - - - - (113.5) - (113.5)
shareholders
Cost of share options - - - - - 1.0 - 1.0
Own shares purchased and cancelled (0.1) - 0.1 - - (24.2) - (24.2)
Transfer to other reserves - - - - 0.3 (0.3) - -
New share capital issued - 0.3 - - - - - 0.3
Shares released under Deferred Share - - - 0.7 - - - 0.7
Award Plan
Level 2 share options issued - - - 0.2 - - - 0.2
Minority interest share of profit - - - - - (1.7) 1.7 -
Minority adjustment in respect of part
disposal of South African business - - - - - - 2.2 2.2
Currency translation difference on - - - - - - 0.3 0.3
minority interest
Dividends paid to minority interests - - - - - - (0.7) (0.7)
Balance at 31st December 2004 18.1 49.5 19.7 (11.1) 8.4 (853.9) 10.1 (759.2)
Prospective adoption of IAS 39 and IFRS 4 - - - - - (17.1) - (17.1)
at 1 Jan 2005
Balance at 1st January 2005 18.1 49.5 19.7 (11.1) 8.4 (871.0) 10.1 (776.3)
Total recognised income for the period - - - - (4.8) 53.3 - 48.5
Dividends paid to ordinary - - - - - (86.2) - (86.2)
shareholders
Cost of share options - - - - - 0.9 - 0.9
New share capital issued - 0.4 - - - - - 0.4
Minority interest share of profit - - - - - (1.6) 1.6 -
Cumulative exchange recycled to income
statement on disposal of foreign - - - - 2.1 - - 2.1
subsidiary
Currency translation difference on - - - - - - (0.3) (0.3)
minority interest
Dividends paid to minority interests - - - - - - (0.5) (0.5)
Purchase of minority interest in French - - - - - (1.7) (3.4) (5.1)
Textiles business
Capital re-organisation * - (49.9) (19.7) - (1,722.7) 1,792.3 - -
Balance at 30th June 2005 18.1 - - (11.1) (1,717.0) 886.0 7.5 (816.5)
* On the 20th June 2005, the High Court (the 'Court') approved the scheme of arrangement (the 'Scheme') of Rentokil
Initial plc ('Old Rentokil Initial') under section 425 of the Companies Act 1985 to introduce a new listed group holding
company, Rentokil Initial 2005 plc ('New Rentokil Initial'). The Scheme became effective on the 21st June 2005 and New
Rentokil Initial changed its name to Rentokil Initial plc and Old Rentokil Initial changed its name to Rentokil Initial
1927 plc at that time. Under the terms of the Scheme, holders of Old Rentokil Initial shares received one New Rentokil
Initial share for each Old Rentokil Initial share.
On the 22nd June 2005, the Court approved the reduction of capital of Rentokil Initial plc, whereby the nominal value of
each share is reduced from 100 pence to 1 penny. The reduction of capital became effective on the 23rd June 2005. As
shown above, the effect of the scheme of arrangement and the subsequent reduction in capital has increased distributable
reserves by £1,792.3m.
(page 37)
11 Share capital, reserves and minority interest (continued)
Other reserves
Capital
reduction Translation Available
reserve reserve for sale Total
Legal
£m £m £m £m £m
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Balance at 1st January 2004 - 8.9 - - 8.9
Total recognised expense for the period - - (3.0) - (3.0)
Transfer to retained reserves - (0.5) - - (0.5)
Balance at 30th June 2004 - 8.4 (3.0) - 5.4
Balance at 1st January 2004 - 8.9 - - 8.9
-
Total recognised expense for the year - - (0.8) - (0.8)
Transfer from retained reserves - 0.3 - - 0.3
Balance at 31st December 2004 - 9.2 (0.8) - 8.4
Prospective adoption of IAS 39, IFRS 4 at 1 Jan 2005 - - - -
Balance at 1st January 2005 - 9.2 (0.8) - 8.4
Net exchange adjustments offset in reserves - - (4.3) - (4.3)
Available for sale investments marked to market - - - (0.5) (0.5)
Total recognised expense for the period - - (4.3) (0.5) (4.8)
Capital re-organisation * (1,722.7) - - - (1,722.7)
Cumulative exchange recycled on disposal of foreign - - 2.1 - 2.1
subsidiary
Balance at 30th June 2005 (1,722.7) 9.2 (3.0) (0.5) (1,717.0)
12 Reconciliation of net decrease in cash and bank overdrafts to net debt
6 months to 6 months to Year to 31st
30th June 30th June December
2005 2004 2004
£m £m £m
(unaudited) (unaudited) (unaudited)
Net decrease in cash and bank overdrafts (48.5) (70.9) (118.0)
Movement on finance leases 2.2 2.5 3.8
Movement on loan repayments 31.5 75.9 197.0
(Increase)/Decrease in debt resulting from cash (14.8) 7.5 82.8
flows
Acquisitions (13.4) 2.3 2.3
Disposals 0.2 - -
Net debt translation differences 8.0 22.4 (2.6)
Movement on net debt in the period/year (20.0) 32.2 82.5
Opening net debt (1,155.1) (1,237.6) (1,237.6)
Adoption of IAS 39 at 1st January 2005 (34.0) - -
Revised opening net debt (1,189.1) (1,237.6) (1,237.6)
Closing net debt (1,209.1) (1,205.4) (1,155.1)
Closing net debt comprises:
Cash and cash equivalents 170.8 204.5 199.5
Bank and other short term borrowings (206.4) (121.8) (207.5)
Bank and other long term borrowings (1,173.5) (1,288.1) (1,147.1)
Total net debt (1,209.1) (1,205.4) (1,155.1)
(page 38)
13 Free Cash Flow
6 months to 6 months to Year to 31st
30th June 30th June December
2005 2004 2004
£m £m £m
(unaudited) (unaudited) (unaudited)
Net cash flows generated from operating activities 192.0 212.6 424.0
Purchase of property, plant and equipment (91.6) (83.8) (176.1)
Purchase of intangible fixed assets (2.3) (2.2) (4.7)
Leased property, plant and equipment (7.1) (6.8) (14.9)
Proceeds from sale of PPE 5.1 4.3 12.0
Dividends received from associates - 0.6 3.8
Dividends paid to minority interests (0.5) (0.4) (0.7)
Interest element of finance lease payments (1.2) (1.2) (2.4)
Free cash flow 94.4 123.1 241.0
14 Tax comprises UK Corporation Tax (less double taxation relief) £3.7m (HY 2004: £11.8m) and overseas tax £21.9m (HY
2004: £30.1m).
15 The latest 2004 Annual Report published under UK GAAP has been filed with the Registrar, and
PricewaterhouseCoopers, the Group's auditor, had provided an unqualified audit opinion thereon. Copies of the 2004
Annual Report are available from the company's registered office at Felcourt, East Grinstead, West Sussex, RH19
2JY.
16 The financial information in this interim statement does not constitute statutory accounts within the meaning of
s.240 of the Companies Act 1985 (as amended).
(page 39)
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