Final Results
Rentokil Initial PLC
23 February 2006
23 February 2006
RENTOKIL INITIAL PLC
PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005
£m
Q4 05 Q4 04 % change FY 05 FY 04 % change
Continuing Operations(1)
At 2004 constant exchange rates:(2)
Revenue 616.5 570.0 8.2% 2,286.1 2,181.4 4.8%
Operating profit(3) 78.8 91.0 (13.4%) 306.1 356.4 (14.1%)
Adjusted operating profit(4) 88.9 89.3 (0.4%) 325.9 359.7 (9.4%)
Profit before income tax(3) 65.6 75.1 (12.6%) 252.9 304.6 (17.0%)
Adjusted profit before income tax(4) 75.7 73.4 3.1% 272.7 307.9 (11.4%)
Continuing Operations(1)
At actual exchange rates:
Revenue 623.3 574.6 8.5% 2,301.2 2,181.4 5.5%
Operating profit 67.9 60.8 11.7% 243.3 308.5 (21.1%)
Operating profit analysed as:
- Operating profit (before
amortisation of customer list &
exceptional items) 79.6 92.1 (13.6%) 308.5 356.4 (13.4%)
- Amortisation of customer lists (5.5) (5.6) 1.8% (23.0) (22.2) (3.6%)
- Exceptional items (6.2) (25.7) 75.9% (42.2) (25.7) (64.2%)
Share of profit from associates (net 0.5 0.5 - 2.2 1.8 22.2%
of tax)
Net interest payable (13.7) (16.3) 16.0% (55.4) (53.6) (3.4%)
Profit before income tax 54.7 45.0 21.6% 190.1 256.7 (25.9%)
Profit after income tax 138.6 186.9 (25.8%)
Free cash flow(5) 160.4 241.0 (33.4%)
Basic earnings per share (continuing) 7.52p 10.24p (26.6%)
Dividends per share (paid and proposed) 7.38p 6.71p 10.0%
(1) All figures are for continuing operations and are unaudited. Style
Conferences and seven other smaller businesses have been treated as discontinued
businesses and their results, including a profit on disposal of £171.3m, have
been excluded from the current and prior year figures above. Profit for the
year including discontinued operations was £324.4m (2004: £192.1m).
(2) Results at constant exchange rates have been translated at the full year
average exchange rates for the year ended 31 December 2004.
(3) Operating profit and profit before tax (PBTA) is before amortisation of
customer lists of £22.7m (2004: £22.2m) and exceptional items of £42.2m (2004:
£25.7m).
(4) Adjusted operating profit and adjusted profit before tax (adjusted PBTA) is
before amortisation of customer lists of £22.7m (2004: £22.2m) and exceptional
items of £42.2m (2004: £25.7m) but before items of a one-off nature of £19.8m
(2004: £3.3m). See appendix 4 for further details.
(5) See note 12 for reconciliation of net cash flows generated from operating
activities to free cash flow.
HIGHLIGHTS
• Q4 revenue up 8.2% over same period last year and up 4.8% for the full
year at constant exchange rates; revenue up in all business segments
• Operating profit (before amortisation of customer lists and
exceptional items) down 13.4% in Q4 versus last year at constant exchange rates
and 14.1% lower for the full year. Rate of profit deterioration slowing -
adjusted operating profit down 0.4% in Q4 compared with 8.3% in Q3 and 14.4% in
H1
• Portfolio up 5.1% (annualised rate) in Q4 with better revenue growth
and lower terminations than H1
• Full year profit before income tax down 25.9%
• Full year dividend per share of 7.38p, up 10.0%
• Right structure and senior team established
• Turnaround plan on track
• Active management of business portfolio
- Sale of Style conferences
- Acquisition of JC Ehrlich, fourth largest US pest control company
- Buying back City Link franchises
- Closure of loss-making UK linen and workwear activities
- Exploring possible sale of Manned Guarding
• Clarification of capital structure, steps being taken to eliminate
pension deficit
Commenting on the preliminary results, Doug Flynn, CEO of Rentokil Initial,
said:
'In 2005 we set out to determine the causes of the deep-set problems facing
Rentokil Initial and to develop a clear plan to address them. This has been
done and the plan is now being implemented. Our strategic objectives are
focused on the businesses within the group that have the potential to create
most shareholder value. We have created a clear organisational structure
aligned with these objectives and put in place a leadership team with the skills
and capabilities to deliver them.
'Whilst we anticipate the turnaround being a difficult process, there are some
clear signs of progress. We expect to see improving revenue growth and contract
retention in 2006, despite unhelpful trading conditions in our main markets.
There will be significant organic investment and one-off costs in the first half
of the year which will impact prior year comparisons. Although we do not expect
to achieve full year adjusted PBTA growth before 2007, we do expect to exit 2006
on a rising trend in the second half.'
OVERVIEW OF THE YEAR
The first half of the year focused on analysing the extent and nature of the
problems the Company faces. A comprehensive review of all the Company's
businesses was detailed at the time of the interim results in August. An
extensive programme of initiatives to address these problems was developed and
in the second half of 2005 management's focus has been on executing these
initiatives. These fall into three categories: strategy; people and structure;
and operations. The focus is on the businesses with the potential to create
most shareholder value, identified as those that enjoy or can build leadership
positions in their markets, can sustain profitable growth and add value as a
group.
Strategy
The aim is to provide clear strategic focus and investment priorities and to
build stronger strategic positions in priority businesses. Initiatives
completed in 2005 include the disposal of Style Conferences, a review of the
group's capital structure which included measures to address the deficit in the
UK defined benefit pension scheme, the announcement of the intention to cease
franchising in City Link and the merger of the two continental European washroom
businesses. Forty acquisitions were made in 2005 for a total consideration of
£49.7 million.
Since the end of the year, further progress has been made.
The acquisition of JC Ehrlich, the largest independently-owned and fourth
largest overall pest control company in the USA, was announced on 24 January
2006 for a consideration of $141.8 million (£80.1 million). Ehrlich has an
excellent reputation and a strong market position in the growing US pest control
industry and provides a platform for growth in this important market.
After extensive exploration of all options, it was decided to close the
loss-making UK linen and workwear activities on 30 April 2006. It had been
hoped that it would be possible to sell this business to one or more parties but
the serious risk of regulatory intervention and the consequent uncertainty in
terms of timing, costs and eventual exit led to the conclusion that a third
party sale was not feasible and that closure was the only viable option.
Most recently, it has been confirmed that the Company is exploring the possible
disposal of its Manned Guarding activities.
People and Structure
It is essential to have the right people and structure in place to support the
turnaround initiatives and much progress was made in this area in 2005. In
addition to the CEO, a number of key senior appointments were made including a
new CFO, MDs of the Pest Control/Plants and Asia Pacific divisions, HR Director
and Head of the Change Programme Office.
The operating structure was reorganised on 1 September 2005 into six new
divisions. This and all future results announcements will be based on this new
divisional structure.
Operations
In this area, work has focused on implementing turnarounds in some of the
group's most important operations. These are:
UK Pest Control: this business had been losing customers, principally due to
dissatisfaction with service levels as a result of underinvestment in service
personnel and processes. Customer terminations negatively affect the economics
of route-based businesses, impacting margins and profitability, as well as a
loss of market share. In 2005 additional service personnel were recruited and
new scheduling processes introduced. Ongoing work includes initiatives to
improve service consistency, customer responsiveness and staff churn.
UK Washrooms: historically, the operations of UK Washrooms had been integrated
with the loss-making Linen and Workwear business. As a precursor to exiting the
latter, a complex and lengthy process of separating the plant and delivery
mechanisms associated with the two activities had to be effected. This was
completed in December 2005 and has enabled the detailed plan to integrate the
Rentokil and former BET washroom businesses to commence.
French Textiles: this is the group's largest single business but its flawed
organisational structure has restricted development. Restructuring was
completed during 2005 and the business is now organised around core processes
rather than on a geographical basis. Recruitment of key management posts is
continuing, as is a systems integration programme.
European Washrooms: as in the UK, the Rentokil and former BET washroom
businesses had yet to be fully integrated. The majority of this work was
completed by the end of the year and full integration will be achieved by the
end of the first half of 2006.
To support these programmes and all the group's activities, improvement is being
made to IT and other business systems, replacing the myriad of customer-built
and paper-based processes which have been used historically.
OUTLOOK
Market conditions in 2006 are unlikely to be helpful in the group's major
European markets and the UK is expected to weaken.
Revenue growth and contract retention are both expected to improve in 2006 as
the operational turnarounds take effect and the investment made in sales and
service begins to bear fruit. There will be significant organic investment and
one-off costs in the first half of the year which will impact prior year
comparisons.
Although we do not expect to achieve full year adjusted PBTA growth before 2007,
we do expect to exit 2006 on a rising trend in the second half.
We are unlikely to increase the dividend in 2006. Beyond 2006, we expect to
take a cautious approach to dividend growth until a recovery is well
established.
For further information:
Shareholder/analyst enquiries:
Doug Flynn, Chief Executive Officer Rentokil Initial plc
Andrew Macfarlane, Chief Financial Officer Tel: 020 7866 3000
Lisa Williams, IR Manager
Media enquiries:
John Sunnucks Brunswick Group
Kate Miller Tel: 020 7404 5959
GROUP PERFORMANCE
Basis of Preparation
In all cases, unless otherwise stated, references to operating profit and profit
before tax are for continuing businesses before amortisation of customer lists
and exceptional items. References to adjusted operating profit and adjusted
profit before tax also exclude items of a one-off nature totalling a net cost of
£19.8m (2004: £3.3m) that, in addition to exceptional items and amortisation of
customer lists, have impacted the results for the year. These principally
relate to reorganisation and redundancy costs, other asset impairments, profit
on the sale of land and buildings and professional and other costs in the group
centre. A further analysis of these costs by division is provided in appendix
4.
The group management structure was reorganised as of 1 September 2005 and the
discussion of the results for the year has been presented in line with the new
divisional structure based upon the way the businesses are now managed. This
has principally resulted in separate Asia Pacific and South Africa (Other)
divisions. For statutory purposes the businesses within these geographic
divisions have been reallocated back to the relevant business segments in line
with the requirements of International Financial Reporting Standards (IFRS) -
see appendix 4. Central costs directly attributable to divisional management
have been included with the relevant divisions and statutory segments.
Previously these were included within central overheads. Prior reported periods
have been restated accordingly.
Please refer to appendices 1,2,3 and 4 for divisional analysis of portfolio,
revenue, operating profit and one-off items for the fourth quarter and full year
at both constant and actual exchange rates. Appendices A and B attached show
the restated analysis by quarter for 2005.
Capex is stated on an accruals basis and represents amounts capitalised in fixed
assets.
In the commentary, all comparisons, unless otherwise stated, are at constant
2004 exchange rates.
Fourth Quarter
Revenue for continuing businesses in the fourth quarter was 8.2% higher than
last year at constant exchange rates and 8.5% higher at actual exchange rates.
All divisions recorded revenue growth over the prior year. Operating profit
fell by 13.4% compared with the fourth quarter of 2004 at constant exchange
rates and by 13.6% at actual exchange rates. Pest Control, Tropical Plants,
City Link and Manned Guarding each had higher operating profit than last year
but this was offset by declines in other businesses. Profit before tax,
exceptional items and amortisation (PBTA) fell by 12.6% at constant exchange
rates and 13.0% at actual exchange rates. Adjusted operating profit, which
excludes one-off items, fell by 0.4%. Profit before tax at actual exchange
rates for the fourth quarter was £54.7 million, representing an increase of
21.6%.
Full Year
For the full year, group revenue for continuing businesses grew by 4.8% at
constant exchange rates, 2.8% of which was organic. At actual exchange rates,
revenue grew by 5.5%. Again, revenue was higher across all divisions. Despite
this, operating profit was down in all divisions, resulting in group operating
profit falling by 14.1% at constant exchange rates and 13.4% at actual exchange
rates. Profit before tax, exceptional items and amortisation fell by 17.0% at
constant exchange rates and 16.2% at actual exchange rates. Adjusted operating
profit fell by 9.4%. Profit before tax at actual exchange rates for the year
was £190.1 million, representing a fall of 25.9%.
DIVISIONAL PERFORMANCE
Textiles and Washroom Services
£m % change % change
Q4 05 Q4 04 FY 05 FY 04
At 2004 constant exchange rates:
Portfolio - net movement (3.5) 5.1 11.4 11.2
Revenue 159.8 158.5 0.8% 639.8 628.2 1.8%
Operating profit (before amortisation of
customer lists & exceptional items) 22.7 32.1 (29.3 %) 114.7 135.7 (15.5%)
Adjusted operating profit (before
amortisation of customer lists &
exceptional items) 30.4 32.4 (6.2%) 126.3 136.9 (7.7%)
Capex 122.4 122.4 0.0%
Depreciation 115.6 113.9 1.5%
The Textiles and Washroom Services division comprises the washroom, linen hire,
garment rental, floorcare and wipers activities in the UK and continental
Europe. In 2005 the division accounted for 28% of group revenue and 39% of
group adjusted operating profit.
Revenue for the year was up 1.8% at £639.8 million. Operating profit fell by
15.5% to £114.7 million. Excluding one-off items, adjusted operating profit fell
by 7.7% to £126.3 million. The portfolio grew by 1.9% during the course of the
year with new business wins broadly equivalent to terminations and a small
increase from acquisitions.
Performance of the UK business continued to be impacted by the process of
exiting the linen and workwear activities. The complex and lengthy programme to
separate linen and workwear from the washroom and dustmat activities, which are
being retained, was completed in December. This programme resulted in
operational inefficiencies, due particularly to adverse route economics, and
additional costs. The closure of linen and workwear was announced in January
2006 and an exceptional impairment charge of £31.3 million has been recognised
to write down the assets held in the business to their recoverable amount. It
is envisaged that additional cash closure costs of £13 to £18 million will be
incurred in 2006. These will be significantly offset by the sale of surplus
property during 2006 and 2007. Overall, UK revenue declined by 5.2%
year-on-year in 2005 and adjusted operating profit fell by 27.9%. Revenue for
linen and workwear was essentially unchanged but the operating loss increased to
£9 million. The revenue and operating profit of the retained activities fell
after being impacted by substantial investment in these activities to build a
future platform for growth by integrating and restructuring the Rentokil and
former BET washroom businesses.
In continental Europe, market conditions remain challenging with the dual
pressures of competition and weak economic performance in most markets
constraining growth. In spite of this background, revenue growth was achieved
and for the year as a whole increased by 4.1%. Continued investment in the sales
force is generating revenue growth in a number of businesses, notably the
textiles businesses in Germany, Spain and the Czech Republic as well as the
washroom units in Spain, Denmark, Finland and Portugal. In French textiles -
the group's largest single business unit - revenue grew by 1% for the year.
Continental European operating profit declined by 9.7% year-on-year, results
were adversely impacted by the costs of reorganising the business and an asset
impairment in Germany. The Austrian textiles business acquired during the first
half of 2005 continues to perform well.
The integration of the washroom activities in continental Europe into the
management structure of the textiles business has now been substantially
completed. The expected benefits from a greater opportunity to cross sell our
products as well as an enhanced range of products and services in most markets
should become apparent in the second half of 2006.
Pest Control
£m % change %
Q4 05 Q4 04 FY 05 FY 04 Change
At 2004 constant exchange rates:
Portfolio - net movement 1.2 0.9 3.9 2.8
Revenue 51.8 50.5 2.6% 208.2 203.8 2.2%
Operating profit (before amortisation of
customer lists & exceptional items) 17.0 14.8 14.9% 66.7 70.9 (5.9%)
Adjusted operating profit (before
amortisation of customer lists &
exceptional items) 15.3 14.8 3.4% 65.0 70.9 (8.3%)
Capex 13.3 11.3 17.7%
Depreciation 10.2 9.6 6.3%
In 2005, Pest Control accounted for 9% of group revenue and 20% of group
adjusted operating profit.
Revenue increased by 2.2% over the prior year to £208.2 million. Operating
profit fell by 5.9% year-on-year to £66.7 million. Stripping out the impact of
a one-off credit for the sale of surplus property, adjusted operating profit
fell by 8.3% to £65.0 million. The portfolio ended the year 2.4% higher than
the start, with some 25% of this due to acquisitions.
The UK business, which is the subject of one of the group's major operational
turnaround programmes as described above, saw revenue fall by 1.3%. Operating
profit declined by 15.9% due to lower revenue and, more particularly, higher
investment in both sales and service as the business addresses customer
termination levels and implements its turnaround. There was some improvement in
retention during the year, although customer terminations in the UK remain well
above the division's average. Overall, the UK portfolio fell by 0.5%.
Revenue in continental Europe was 2.2% higher than last year. Growth was
recorded in many of the European markets, including France, Belgium, Spain and
Portugal. Revenue growth was achieved in Germany for the first time in four
years. However, revenue fell year-on-year in Norway, Italy, Switzerland and
Sweden. Operating profit grew overall in Europe by 0.4% over the prior year.
Revenue growth and solid cost control resulted in operating profit growth in
Portugal, Belgium, the Netherlands, Ireland and Finland. Operating profit fell
in France and Germany, the region's largest countries of operation, despite
revenue growth. In France this was due to margin pressure arising out of
greater competitor activity and increased investment in service expenditure
aimed at reducing customer terminations and in direct selling. Although higher
investment in service in Germany impacted operating profit year-on-year, it is
having a positive effect on termination rates which fell during 2005. The
portfolio grew in the European markets as a whole during the year, with
particularly strong growth in Spain due to acquisitions.
North America performed well in 2005. Revenue was 16.5% higher than last year,
aided in part by the full year impact of a 2004 acquisition in the USA which
also helped to deliver a 24.0% increase in operating profit year-on-year. The
small Caribbean businesses grew in terms of both revenue and operating profit.
Tropical Plants
£m % change %
Q4 05 Q4 04 FY 05 FY 04 change
At 2004 constant exchange rates:
Portfolio - net movement 0.6 (0.2) 7.1 (0.1)
Revenue 30.9 28.3 9.2% 101.6 95.4 6.5%
Operating profit (before amortisation of
customer lists & exceptional items) 4.6 4.3 7.0% 9.4 9.8 (4.1%)
Adjusted operating profit (before
amortisation of customer lists &
exceptional items) 4.6 4.3 7.0% 9.4 9.8 (4.1%)
Capex 9.9 11.6 (14.7%)
Depreciation 8.5 8.2 3.7%
The smallest of the group's businesses, Tropical Plants represented 4% of group
revenue in 2005 and 3% of adjusted operating profit.
Revenue for 2005 of £101.6 million was 6.5% ahead of last year. Operating
profit fell by 4.1% to £9.4 million. Adjusted operating profit was 4.1% lower
at £9.4 million. Acquisitions helped the portfolio to grow by 9.1% during the
course of 2005.
North America is the largest region accounting for over 58% of revenue. Here,
revenue grew strongly in 2005, up 10.3% year-on-year, largely due to the impact
of acquisitions which added some £5.5 million to the contract portfolio.
Operating profit also grew with higher revenue and was 5.6% above last year.
The seasonally important fourth quarter was up on last year. Margins were
maintained, despite an increase in sales and marketing costs designed to promote
further growth. The portfolio grew due to acquisitions and a reduction in
termination levels.
In the UK, there was a marginal decline in revenue. The portfolio grew slightly
but customer terminations increased over the prior year and are now the subject
of a turnaround initiative.
Performance in continental Europe was mixed. Overall, revenue was 2.7% higher
year-on-year largely due to acquisition-led growth in Belgium and the
Netherlands. In contrast, France, Germany, Norway, Greece and Denmark reported
lower revenue. Operating profit for the region fell by 29.0% despite growth in
Belgium and the minor businesses in Ireland and Finland. This was largely a
result of declines in Sweden and, in particular, Norway where lower revenue and
a drop in margins due to competitor activity caused a 50% drop in operating
profit compared to last year. Operating profit also fell in France due to lower
revenue and increased investment in sales capacity, although this business is
showing positive signs of a turnaround; margins have improved as a result of
tight cost control and the portfolio has stabilised following a prolonged period
of decline.
Electronic Security
£m % change %
Q4 05 Q4 04 FY 05 FY 04 change
At 2004 constant exchange rates:
Portfolio - net movement 4.9 2.3 10.6 8.7
Revenue 74.3 67.8 9.6% 262.7 242.4 8.4%
Operating profit (before amortisation of
customer lists & exceptional items) 9.6 10.5 (8.6%) 35.8 38.5 (7.0%)
Adjusted operating profit (before
amortisation of customer lists &
exceptional items) 10.8 10.5 2.9% 37.2 38.5 (3.4%)
Capex 10.9 9.4 16.0%
Depreciation 7.3 6.1 19.7%
Representing 11% of both group revenue and adjusted operating profit in 2005,
Electronic Security revenue grew by 8.4% in 2005 to £262.7 million. Operating
profit fell by 7.0% to £35.8 million and adjusted operating profit, which
excludes one-off items, of £37.2 million was 3.4% lower than last year. The
portfolio grew by 11.9% over the year largely due to acquisitions.
In the UK, revenue was 6.6% higher than last year with increases recorded by
both the Fire & Security and Systems sectors. Operating profit for the Fire &
Security sector grew in line with higher revenue but for the Systems sector was
curtailed by a shift in mix towards lower margin activity which depressed
margins and by reorganisation costs. Additional investment in sales and
marketing also had a negative impact on profitability. As a result, UK
operating profit fell by 4.0%.
Revenue was up 5.7% in the Netherlands. However, downward margin pressure,
coupled with the costs of a productivity improvement programme and the
implementation of a new IT system, resulted in operating profit falling by 20.8%
compared to last year.
In France, revenue grew by 10.3% over last year. However, margins fell due to a
shift in revenue mix and competitive pressures on pricing. In addition,
infrastructure investment resulted in higher costs and as a result operating
profit fell by 9.3% year-on-year.
The USA, the division's smallest location, performed strongly with revenue up
57.6% over the prior year. Operating profit rose by 14.4% despite increased
investment in infrastructure and post-acquisition reorganisation costs.
City Link
£m % change %
Q4 05 Q4 04 FY 05 FY 04 change
At 2004 constant exchange rates:
Portfolio - net movement - - - -
Revenue 41.0 33.1 23.9% 125.5 113.4 10.7%
Operating profit (before amortisation of
customer lists & exceptional items) 10.5 10.3 1.9% 29.1 30.4 (4.3%)
Adjusted operating profit (before
amortisation of customer lists &
exceptional items) 10.9 9.3 17.2% 29.8 29.4 1.4%
Capex 4.7 4.5 4.4%
Depreciation 4.3 3.2 34.4%
City Link, the parcels delivery division, accounted for 5% of group revenue and
9% of adjusted operating profit in 2005. The division performed well in 2005.
Revenue was 10.7% higher than last year, aided by the introduction of enhanced
marketing and sales activity. In addition, changes in practices in the
distribution hub and system have secured enhanced quality and performance
capabilities. Operating profit was affected by substantial pressure on pricing
within the market and by the impact of taking back loss-making franchises and as
a result was 4.3% lower than 2004 at £29.1 million. Excluding one-off items,
however, adjusted operating profit grew by 1.4% over last year.
In October, it was announced that the division will over time cease to operate
on a franchise basis.
Facilities Services
£m % change %
Q4 05 Q4 04 FY 05 FY 04 change
At 2004 constant exchange rates:
Portfolio - net movement 19.1 (2.2) 82.7 1.5
Revenue 228.1 202.5 12.6% 829.4 785.8 5.5%
Operating profit (before amortisation of
customer lists & exceptional items) 13.2 14.6 (9.6%) 48.8 53.2 (8.3%)
Adjusted operating profit (before
amortisation of customer lists &
exceptional items) 14.0 14.8 (5.4%) 49.8 53.4 (6.7%)
Capex 21.7 17.7 22.6%
Depreciation 15.4 14.8 4.1%
The Facilities Services division is chiefly comprised of two types of activity,
manned guarding and other facilities services including cleaning, catering and
hospital services.
Manned Guarding
A steady performance in all regions resulted in an 8.5% increase in revenue over
the prior year to £359.9 million. Operating profit was flat year-on-year at
£14.0 million. Adjusted operating profit of £14.2 million was up 1.4%. In
North America, the results for the USA include two bolt-on acquisitions which
partially offset increased state unemployment insurance and healthcare costs.
Canada benefited from a significant temporary work win and the positive impact
of price increases in the Eastern region of the country. The UK gained sizeable
new business in the second half of the year and customer retention improved
following a strengthening of the management team with further investment in
sales resources and training capability. The introduction of guard licensing is
on track and price increases have been implemented to recover costs. In
Belgium, growth was accelerated by the win of a sizeable prestige new business
account. New business wins and acquisitions contributed to portfolio growth of
11.5%.
As announced on 8 February 2006, the company is exploring the possible disposal
of its Manned Guarding businesses as it is believed that there may be other
parties whose strategic focus and/or investment priorities mean they are more
able to realise the full potential of these businesses.
Other Facilities Services
Revenue for these activities as a whole was £469.5 million, an increase of 3.4%
over the prior year. Amongst the larger businesses, Cleaning in the UK and
Spain reported revenue up by 10.4% and 4.6% respectively and Hospital Services
was up by 11.6%. Revenue for UK Catering was 6.2% lower, largely due to adverse
publicity concerning the education meals sector impacting the take-up of school
meals. Managed Services recorded a 25% drop in revenue although this regression
was expected due to the termination of some difficult contracts. For the Other
Facilities Services sector as a whole, operating profit of £34.8 million fell by
11.2% compared with last year following the impact of 'Agenda for Change' - the
non-recoverable provision for wage increases within NHS contracts - and the much
reduced volume of school meals impacting on a relatively fixed cost base.
Adjusted operating profit fell by 9.6%. Over the year the portfolio grew by
12.2% due to strong new business wins, particularly in UK Cleaning.
Asia Pacific
£m % change %
Q4 05 Q4 04 FY 05 FY 04 change
At 2004 constant exchange rates:
Portfolio - net movement 1.4 1.8 5.7 4.2
Revenue 22.4 21.4 4.7% 86.8 82.3 5.5%
Operating profit (before amortisation of
customer lists & exceptional items) 6.0 6.4 (6.3%) 22.5 25.2 (10.7%)
Adjusted operating profit (before
amortisation of customer lists &
exceptional items) 6.0 6.4 (6.3%) 22.5 25.2 (10.7%)
Capex 11.6 10.0 16.0%
Depreciation 8.4 7.3 15.1%
Asia Pacific is the group's only regionally structured division. In 2005 it
accounted for 4% of group revenue and 7% of group adjusted operating profit.
The largest activity in Asia Pacific is Textiles and Washroom Services, which
represented 58% of revenue in 2005. Pest Control represented 32%, Tropical
Plants 7% and Facilities Services 3%. Australia is the largest country of
operation at 48% of revenue, followed by New Zealand at 15%, Malaysia at 10% and
Indonesia at 8%.
The division's revenue of £86.8 million rose 5.5% in 2005 over the previous year
with increases achieved in most countries of operation. Operating profit fell
by 10.7%, largely due to a drop in operating profit in the Australian washroom
business which faced strong pressure from competitors.
Other
£m % change %
Q4 05 Q4 04 FY 05 FY 04 change
At 2004 constant exchange rates:
Portfolio - net movement (0.1) - 1.0 2.4
Revenue 8.2 7.9 3.8% 32.1 30.1 6.6%
Operating profit (before amortisation of
customer lists & exceptional items) 3.3 3.2 3.1% 12.6 12.5 0.8%
Adjusted operating profit (before
amortisation of customer lists &
exceptional items) 3.6 3.2 12.5% 12.9 12.5 3.2%
Capex 4.1 3.7 10.8%
Depreciation 2.8 2.6 7.7%
This division predominantly accounts for the group's business in South Africa,
which is mostly Pest Control. Revenue increased by 6.6% in 2005 over the prior
year. Operating profit - both reported and adjusted - increased by 0.8% and
3.2% respectively.
FINANCIAL ITEMS
Central Items
Fourth quarter central costs were £2.9 million above 2004 due to professional
fees associated with the business review implemented in the first half of the
year coupled with costs associated with organisational changes. Full year
central costs were £13.7 million higher than 2004 due to the formation costs of
the new holding company, costs associated with the business review and
additional, IT, HR, acquisition and IFRS transition costs.
Interest
Net interest payable for the year at £55.4 million was £1.8 million higher than
2004 with the adverse effects of the IAS 19 pension interest increase more than
offsetting the benefit of lower average debt across the periods. The
year-on-year impact of the Ashtead Loan note was largely neutral. The £4.6
million write-off of the equity option was offset by amortisation of the
discount on the note.
Exceptional Items
As previously announced, the group incurred considerable expense in relation to
the unwelcome approach by Raphoe. Some £10.9 million defence costs relating to
the potential bid were incurred in 2005 and are shown in the income statement as
exceptional costs. These, together with the £31.3 million impairment charge
associated with the closure of the Linen and Workwear operations of UK Textiles,
announced on 25 January 2006, constitute the £42.2 million of exceptional costs
shown separately in the income statement.
Pensions
The group announced on 19 December 2005 that it was proposing to close the UK
defined benefit (DB) pension scheme and had began a period of consultation with
the active members with a view to reducing its exposure to future shortfalls.
Final decisions regarding the review will be taken once the consultation period
with active members has been completed later in 2006. It is planned to offer
existing active members a replacement defined contribution (DC) scheme. It is
not envisaged that the costs of the new DC scheme will be significantly
different to the service costs of the DB scheme.
It is too early in the consultation process to be able to reliably assess the
impact of the closure on the scheme's liabilities. It has therefore been decided
to continue to reflect the scheme's deficit on the group's balance sheet on a
continuing basis until this review has been substantially completed and the
impact of the closure more reliably assessed. However it is anticipated that any
potential curtailment benefits in the income statement will be largely offset by
the cost of switching the scheme's investments from primarily equities to
primarily bonds. It is hoped to provide further details of the likely impact of
the closure of the DB scheme in May 2006 at the time of publishing the first
trading update.
Total retirement liabilities of the group as at 31 December 2005 were £182.3
million (2004: £311.8 million). This includes £169.8 million in respect of the
main UK defined benefit pension scheme which reduced from the £302.5 million at
the end of 2004 following the payment of the £200 million special contribution
announced and paid in December 2005.
Dividend
An interim divided of 2.13p per share was paid on 28 October 2005 and the Board
is recommending the declaration of a final divided of 5.25p per share, bringing
the full year dividend to 7.38p per share. This represents a 10.0% increase over
the 2004 full year dividend. It is intended that the dividend will be increased
in line with the medium-term trend in earnings provided that cash resources are
available. However, in the short-term, a more cautious approach to dividend
growth may be taken until it is clear that the recovery in the business is well
established and broadly based
Acquisitions
The Group acquired 40 businesses in the year, together with the acquisition of a
minority interest in the French Textiles business, for a gross consideration of
£49.7 million. These acquisitions contributed £36.9 million to revenue, £3.5
million to operating profit before amortisation of customer lists and £2.3
million to profit before tax and amortisation of customer lists.
The group will continue to pursue bolt-on acquisitions actively to increase
density in existing businesses and provide a complement to organic growth.
Acquisitions will only be undertaken when the management capacity to execute a
post acquisition plan exists and it is clearly strategically and financially
attractive to do so.
Tax
The blended headline tax rate in 2005 was 31.1% (2004: 30.9%). This represents
the weighted headline tax rates appropriate to the countries in which the group
operates. It exceeds the UK rate of 30% as substantial profits are earned in
France, Belgium and Germany where tax rates range from 34% to 28%. The actual
tax charge for 2005 was 27.1% of profit before tax, down slightly from the rate
of 27.2% in 2004. The principal factor that causes the effective tax rate to
be lower than the blended rate is the release of prior year provisions.
Cash Flow
Free cash flow fell from £241.0 million in 2004 to £160.4 million in 2005 as a
result of the fall in operating cash flow. Free cash flow conversion (being
the ratio of Free Cash Flow to profit after tax adjusted for non cash
exceptional items and amortisation of customer lists) was 83%, down from 103% in
2004. This was principally due to a swing in working capital from a £19.1
million inflow in 2004 to a £11.1 million outflow in 2005 as a result of strong
fourth quarter trading in Manned Guarding and City Link as well as operational
challenges in UK Catering and UK Linen and Workwear.
The group received £129.8 million from the redemption of the Ashtead loan note
and £323.8 million from disposals, including Style conferences. These cash flows
together with the free cash flow was used to fund a special contribution to the
UK DB pension scheme, fund acquisitions and reduce net debt.
One-off Items
One-off items increased considerably in 2005 to £19.8 million (2004: £3.3
million). This excludes exceptional items which are reported separately. The
majority of one-off items relate to reorganisation and redundancy costs, asset
impairments, profits on the sale of real estate and professional and other
costs. Of the £19.8 million, the main components were £11.6 million related to
the Textiles and Washroom Services division and £6.5 million of one-off central
costs. One-off items have been separately identified because although as
individual items they are small, there is a large number of them and they have a
varying impact on different businesses and reporting periods. Although not
large enough to be classed as exceptional items, in aggregate they make it
difficult to see underlying trends in performance without excluding them.
Further details are given in appendix 4.
Discontinued Activities
Discontinued activities are principally Style, the conferencing business which
was sold in November 2005. Style had a trading profit of £22.7 million in 2005
and a profit on sale of £170.3 million. Other small discontinued activities had
an aggregate trading profit of £0.2 million and profit on sale of £1.0 million.
Including the impact of recycled foreign exchange and tax, profit from
discontinued activities were £185.8 million in 2005 (2004: £5.2 million).
Appendix 1
ANNUAL CONTRACT PORTFOLIO - CONTINUING BUSINESSES
3 Months to 31 December 2005
Net
£m at constant 2004 New Additions/
exchange rates 1.10.05 Business Terminations Reductions Acquisitions 31.12.05
Textiles & Washroom Services 604.3 13.2 (15.2) (1.5) - 600.8
Pest Control 163.0 6.9 (6.9) 1.0 0.2 164.2
Tropical Plants 83.9 2.3 (2.4) 0.7 - 84.5
Electronic Security 95.0 2.1 (2.6) 0.9 4.5 99.9
Manned Guarding 325.8 18.5 (12.5) 2.8 2.6 337.2
Other 433.2 17.0 (16.2) 6.7 0.2 440.9
Facilities Services 759.0 35.5 (28.7) 9.5 2.8 778.1
Asia Pacific 111.7 4.4 (3.9) 0.9 - 113.1
Other 29.9 1.1 (1.5) 0.3 - 29.8
TOTAL 1,846.8 65.5 (61.2) 11.8 7.5 1,870.4
12 Months to 31 December 2005
Net
£m at constant 2004 New Additions/
exchange rates 1.1.05 Business Terminations Reductions Acquisitions 31.12.05
Textiles & Washroom Services 589.4 57.4 (58.7) 1.6 11.1 600.8
Pest Control 160.3 27.0 (28.4) 4.3 1.0 164.2
Tropical Plants 77.4 9.4 (11.2) 3.3 5.6 84.5
Electronic Security 89.3 9.9 (9.7) 3.6 6.8 99.9
Manned Guarding 302.3 54.4 (43.0) 4.9 18.6 337.2
Other 393.1 83.2 (54.8) 19.2 0.2 440.9
Facilities Services 695.4 137.6 (97.8) 24.1 18.8 778.1
Asia Pacific 107.4 18.3 (16.4) 3.6 0.2 113.1
Other 28.8 4.2 (5.4) 2.2 - 29.8
TOTAL 1,748.0 263.8 (227.6) 42.7 43.5 1,870.4
Notes
Contract Portfolio Definition: Customer contracts are usually either 'fixed
price', 'as-used' (based on volume) or mixed contracts. Contract portfolio is
the measure of the annualised value of these customer contracts.
Contract Portfolio Valuation: The contract portfolio value is typically recorded
as the annual value from the customer contract. However, in some cases -
especially 'as-used' (based on volume) and mixed contracts, estimates are
required in order to derive the contract portfolio value. The key points in
respect of valuation are:
'As-used' contracts: These are more typical in Hygiene Services, where elements
of the contract are often variable and based on usage. Valuation is based on
historic data (where available) or forecast values.
Income annualisation: In some instances, where for example the underlying
contract systems cannot value portfolio, or there is a significant 'as-used'
element, the portfolio valuation is calculated using an invoice annualisation
method.
Inter-company: The contract portfolio figures include an element of
inter-company revenue.
Job Work and Extras: Many of the contracts within the contract portfolio
include ad hoc and/or repeat job work and extras. These values are excluded
from the contract portfolio.
Rebates: The contract portfolio value is gross of customer rebates. These are
considered as a normal part of trading and are therefore not removed from the
portfolio valuation.
New Business: represents new contractual arrangements in the period, which can
either be new contracts with an existing customer, or with a new customer.
Terminations: represent the cessation of either a specific existing customer
contract, or the complete cessation of business with a customer, in the period.
Net Additions / Reductions: represents net change to the value of existing
customer contracts in the period as a result of changes (either up or down) in
volume and/or pricing.
Acquisitions: represents the valuation of customer contracts obtained from
acquisitions made in the period.
Appendix 2
Divisional Analysis (at constant exchange rates)
(based upon the way businesses are managed)
3 months to 3 months to Year ended Year ended
31 Dec 31 Dec 31 Dec 31 Dec
2005 2004 2005 2004
(at 2004 constant exchange rates) £m £m £m £m
(unaudited) (unaudited) (unaudited) (unaudited)
Business Analysis
Revenue
Textiles & Washroom Services 159.8 158.5 639.8 628.2
Pest Control 51.8 50.5 208.2 203.8
Tropical Plants 30.9 28.3 101.6 95.4
Electronic Security 74.3 67.8 262.7 242.4
City Link 41.0 33.1 125.5 113.4
Manned Guarding 97.9 87.1 359.9 331.6
Other 130.2 115.4 469.5 454.2
Facilities Services 228.1 202.5 829.4 785.8
Asia Pacific 22.4 21.4 86.8 82.3
Other 8.2 7.9 32.1 30.1
Continuing operations at 2004 constant
exchange rates 616.5 570.0 2,286.1 2,181.4
Exchange 6.8 4.6 15.1 -
Continuing operations as reported 623.3 574.6 2,301.2 2,181.4
Operating Profit*
Textiles & Washroom Services 22.7 32.1 114.7 135.7
Pest Control 17.0 14.8 66.7 70.9
Tropical Plants 4.6 4.3 9.4 9.8
Electronic Security 9.6 10.5 35.8 38.5
City Link 10.5 10.3 29.1 30.4
Manned Guarding 4.9 3.8 14.0 14.0
Other 8.3 10.8 34.8 39.2
Facilities Services 13.2 14.6 48.8 53.2
Asia Pacific ** 6.0 6.4 22.5 25.2
Other 3.3 3.2 12.6 12.5
Central Items (8.1) (5.2) (33.5) (19.8)
Continuing operations at 2004 constant
exchange rates * 78.8 91.0 306.1 356.4
Exchange 0.8 1.1 2.4 -
Continuing operations as reported 79.6 92.1 308.5 356.4
Geographic Analysis
Revenue
United Kingdom 288.7 266.1 1,043.1 1,010.2
Continental Europe 219.6 207.9 851.1 813.3
North America 77.4 66.5 272.1 244.8
Asia Pacific 22.4 21.4 86.8 82.3
Africa 8.4 8.1 33.0 30.8
Continuing operations at 2004 constant
exchange rates 616.5 570.0 2,286.1 2,181.4
Exchange 6.8 4.6 15.1 -
Continuing operations as reported 623.3 574.6 2,301.2 2,181.4
Operating Profit*
United Kingdom 30.9 34.9 104.2 137.1
Continental Europe 32.1 40.2 151.2 164.2
North America 6.2 6.0 14.1 15.9
Asia Pacific 6.3 6.7 23.6 26.2
Africa 3.3 3.2 13.0 13.0
Continuing operations at 2004 constant
exchange rates * 78.8 91.0 306.1 356.4
Exchange 0.8 1.1 2.4 -
Continuing operations as reported 79.6 92.1 308.5 356.4
* Before amortisation of customer lists and items identified as exceptional
** The business analysis for Asia Pacific includes UK Sector costs which are
included in the UK in the Geographic Analysis.
Appendix 3
Divisional Analysis (at actual exchange rates)
(based upon the way businesses are managed)
3 months to 3 months to Year ended Year ended
31 Dec 31 Dec 31 Dec 31 Dec
2005 2004 2005 2004
(at actual exchange rates) £m £m £m £m
(unaudited) (unaudited) (unaudited) (unaudited)
Business Analysis
Revenue
Textiles & Washroom Services 160.1 161.4 643.0 628.2
Pest Control 52.3 51.0 209.4 203.8
Tropical Plants 31.6 28.2 102.4 95.4
Electronic Security 74.5 68.3 263.4 242.4
City Link 41.0 33.1 125.5 113.4
Manned Guarding 101.5 87.1 365.2 331.6
Other 130.3 115.8 470.0 454.2
Facilities Services 231.8 202.9 835.2 785.8
Asia Pacific 23.6 21.4 89.6 82.3
Other 8.4 8.3 32.7 30.1
Continuing operations as reported 623.3 574.6 2,301.2 2,181.4
Operating Profit*
Textiles & Washroom Services 22.8 32.8 115.4 135.7
Pest Control 17.2 15.0 67.2 70.9
Tropical Plants 4.7 4.3 9.5 9.8
Electronic Security 9.6 10.6 35.8 38.5
City Link 10.5 10.3 29.1 30.4
Manned Guarding 5.0 3.8 14.2 14.0
Other 8.3 10.8 34.8 39.2
Facilities Services 13.3 14.6 49.0 53.2
Asia Pacific ** 6.3 6.5 23.3 25.2
Other 3.3 3.2 12.7 12.5
Central Items (8.1) (5.2) (33.5) (19.8)
Continuing operations as reported 79.6 92.1 308.5 356.4
Geographic Analysis
Revenue
United Kingdom 288.7 266.1 1,043.1 1,010.2
Continental Europe 220.3 212.9 856.8 813.3
North America 82.0 65.8 277.9 244.8
Asia Pacific 23.6 21.4 89.6 82.3
Africa 8.7 8.4 33.8 30.8
Continuing operations as reported 623.3 574.6 2,301.2 2,181.4
Operating Profit*
United Kingdom 30.9 34.9 104.2 137.1
Continental Europe 32.4 41.2 152.3 164.2
North America 6.5 5.9 14.4 15.9
Asia Pacific 6.4 6.8 24.3 26.2
Africa 3.4 3.3 13.3 13.0
Continuing operations as reported 79.6 92.1 308.5 356.4
* Before amortisation of customer lists and items identified as exceptional.
** The business analysis for Asia Pacific includes UK Sector costs which are
included in the UK in the Geographic Analysis.
Appendix 4
One-Off Items
3 months to 3 months to Year ended Year ended
31 Dec 31 Dec 31 Dec 31 Dec
2005 2004 2005 2004
(at 2004 constant exchange rates) £m £m £m £m
(unaudited) (unaudited) (unaudited) (unaudited)
Textiles & Washroom Services (7.7) (0.3) (11.6) (1.2)
Pest Control 1.7 - 1.7 -
Tropical Plants - - - -
Electronic Security (1.2) - (1.4) -
City Link (0.4) 1.0 (0.7) 1.0
Manned guarding - - (0.2) -
Other facilities services (0.8) (0.2) (0.8) (0.2)
Facilities Services (0.8) (0.2) (1.0) (0.2)
Asia Pacific - - - -
Other (0.3) - (0.3) -
Central items (1.4) 1.2 (6.5) (2.9)
(10.1) 1.7 (19.8) (3.3)
Reconciliation of Divisional Analysis to Statutory Segmental Analysis
Customer Lists &
exceptional
items
Management Asia Pacific and Statutory
other
Basis Basis
(at actual exchange rates) £m £m £m £m
(unaudited) (unaudited) (unaudited) (unaudited)
Textiles & Washroom Services 115.4 21.6 (42.7) 94.3
Pest Control 67.2 8.2 (1.5) 73.9
Tropical Plants 9.5 1.8 (4.1) 7.2
Electronic Security 35.8 - (3.0) 32.8
City Link 29.1 - - 29.1
Manned Guarding 14.2 - (3.0) 11.2
Other 34.8 5.7 - 40.5
Facilities Services 49.0 5.7 (3.0) 51.7
Asia Pacific 23.3 (23.3) - -
Other 12.7 (12.7) - -
Central Items (33.5) (1.3) (10.9) (45.7)
Continuing operations as reported 308.5 - (65.2) 243.3
Consolidated Income Statement
FOR THE YEAR ENDED 31 DECEMBER
2005 2004
Notes £m £m
(unaudited) (unaudited)
Continuing operations:
Revenue 1 2,301.2 2,181.4
Operating expenses (2,057.9) (1,872.9)
Operating profit 243.3 308.5
Analysed as:
Operating profit before amortisation of customer lists and 308.5 356.4
exceptional items
Amortisation of customer lists (23.0) (22.2)
Exceptional items 2 (42.2) (25.7)
Operating profit 1 243.3 308.5
Interest payable and similar charges 3 (115.0) (109.0)
Interest receivable 4 59.6 55.4
Share of profit from associates (net 2.2 1.8
of tax)
Profit before income tax 190.1 256.7
Income tax expense 5 (51.5) (69.8)
Profit for the year from continuing 138.6 186.9
operations
Discontinued operations:
Profit for the year from discontinued 6 185.8 5.2
operations
Profit for the year (including discontinued) 324.4 192.1
Attributable to:
Minority interest 2.9 1.7
Equity holders of the Company 321.5 190.4
324.4 192.1
Basic earnings per share:
- Continuing operations 7 7.52p 10.24p
- Discontinued operations 10.30p 0.29p
- Continuing and discontinued operations 7 17.82p 10.53p
Diluted earnings per share:
- Continuing operations 7.51p 10.24p
- Discontinued operations 10.30p 0.29p
- Continuing and discontinued operations 7 17.81p 10.53p
An interim dividend of 2.13p per share was paid on 28 October 2005 (total
£38.5m) and the Board is recommending the declaration of a final dividend of
5.25p per share, bringing the full year dividend to 7.38p per share (total
£133.3m).
Statement of Recognised Income and Expense
FOR THE YEAR ENDED 31 DECEMBER
2005 2004
£m £m
(unaudited) (unaudited)
Profit for the year (including discontinued operations) 324.4 192.1
Net exchange adjustments offset in reserves (0.6) (0.8)
Actuarial loss on defined benefit pension plans (60.6) (103.8)
Revaluation of available for sale investments (0.8) -
Tax on items taken directly to reserves 1.0 31.1
Net loss not recognised in income statement (61.0) (73.5)
Total recognised profit for the year 263.4 118.6
Attributable to:
Minority interest 2.9 1.7
Equity holders of the Company 260.5 116.9
263.4 118.6
The Group took advantage of IFRS 1 transitional provisions and adopted IAS 39
(Financial Instruments: Recognition and Measurement) and IFRS 4 (Insurance
Contracts) prospectively. Accordingly, the 2004 comparatives have not been
restated in accordance with IAS 39 and IFRS 4. The opening balance sheet on 1
January 2005 has been restated for IAS 39 (£17.4m debit) and IFRS 4 (£0.3m
credit). These adjustments have been reflected within reserves.
Consolidated Balance Sheet
AT 31 DECEMBER
Notes 2005 2004
£m £m
(unaudited) (unaudited)
ASSETS
Non-current assets
Intangible assets 180.3 150.1
Property, plant and equipment 8 497.5 661.7
Investments in associated undertakings 9.2 9.5
Other investments 6.8 6.7
Deferred tax assets 74.0 74.0
Trade and other receivables* 28.3 169.8
Derivative financial instruments 16.9 -
813.0 1,071.8
Current assets
Inventory 43.8 40.4
Trade and other receivables 460.5 458.9
Derivative financial instruments 0.4 -
Cash and cash equivalents 240.3 199.5
745.0 698.8
LIABILITIES
Current liabilities
Trade and other payables (533.8) (552.7)
Current tax liabilities (115.1) (138.4)
Provisions for other liabilities and charges (31.1) (24.8)
Bank and other short term borrowings (108.5) (207.5)
Derivative financial instruments (1.0) -
(789.5) (923.4)
Net current liabilities (44.5) (224.6)
Non-current liabilities
Trade and other payables (12.0) (10.8)
Bank and other long term borrowings (1,072.1) (1,147.1)
Deferred tax liabilities (43.3) (43.4)
Retirement benefits 9 (182.3) (311.8)
Provisions for other liabilities and charges (116.9) (118.1)
Derivative financial instruments (1.5) -
(1,428.1) (1,631.2)
Net liabilities (659.6) (784.0)
EQUITY
Capital and reserves attributable to the Company's equity holders
Called up share capital 18.1 18.1
Share premium account 5.3 49.5
Capital redemption reserve - 19.7
Treasury shares (11.1) (11.1)
Other reserves ** (1,714.1) 8.4
Retained profit/(losses) ** 1,035.2 (878.7)
(666.6) (794.1)
Minority interest 7.0 10.1
Total equity (659.6) (784.0)
* Trade and other receivables reduced from the prior period primarily as a
result of the repayment of the Ashtead Loan Note.
** Reserves changed mainly following the creation of a new holding company under
a court approved scheme of arrangement. Further details are contained in the
Interim Report.
Consolidated Cash Flow Statement
FOR THE YEAR ENDED 31 DECEMBER
2005 2004
Notes £m £m
(unaudited) (unaudited)
Cash flows from operating activities
Cash generated from operating activities before
special pension contribution 476.5 566.3
Special pension contribution (200.0) -
Cash generated from operating activities 10 276.5 566.3
Interest received 19.8 15.5
Interest paid (63.4) (59.7)
Income tax paid (80.5) (98.1)
Net cash generated from operating activities 152.4 424.0
Cash flows from investing activities
Purchase of property, plant and equipment (PPE) (183.8) (176.1)
Purchase of intangible fixed assets (9.2) (4.7)
Proceeds from sale of PPE 21.9 12.0
Proceeds from sale of intangibles 0.1 -
Acquisition of companies and businesses, net of cash (42.0) (27.5)
acquired
Proceeds from disposal of companies and businesses 323.3 6.7
Dividends received from associates 1.0 3.8
Net cash flows from investing activities 111.3 (185.8)
Cash flows from financing activities
Issue of ordinary share capital 5.7 0.3
Purchase of own shares - (24.2)
Dividends paid to equity shareholders (124.7) (113.5)
Dividends paid to minority interests (2.6) (0.7)
Interest element on finance lease payments (2.5) (2.4)
Capital element of finance lease payments (19.1) (18.7)
Proceeds on disposal of Ashtead loan note 129.8 -
Net loan repayments (226.7) (197.0)
Net cash flows from financing activities (240.1) (356.2)
Net increase/(decrease) in cash and bank overdrafts 11 23.6 (118.0)
Cash and bank overdrafts at beginning 145.2 247.3
of year
Exchange gains on cash and bank overdrafts 1.9 16.0
Cash and bank overdrafts at end of the financial year 170.7 145.3
Notes to the accounts
1. Segmental Analysis
2005 2004
(at actual exchange rates) £m £m
(unaudited) (unaudited)
Business Analysis
Revenue
Textiles & Washroom Services 705.3 686.2
Pest Control 246.9 237.5
Tropical Plants 112.9 105.1
Electronic Security 263.4 242.4
City Link 125.5 113.4
Manned Guarding 365.2 331.6
Other 482.0 465.2
Facilities Services 847.2 796.8
Continuing operations as reported 2,301.2 2,181.4
Operating Profit
Textiles & Washroom Services * 94.3 145.7
Pest Control 73.9 78.8
Tropical Plants 7.2 7.9
Electronic Security 32.8 36.4
City Link 29.1 30.3
Manned Guarding 11.2 11.3
Other 40.5 44.5
Facilities Services 51.7 55.8
Central Items* (45.7) (46.4)
Continuing operations as reported 243.3 308.5
Geographic Analysis
Revenue
United Kingdom 1,043.1 1,010.2
Continental Europe 856.8 813.3
North America 277.9 244.8
Asia Pacific 89.6 82.3
Africa 33.8 30.8
Continuing operations as reported 2,301.2 2,181.4
Operating Profit
United Kingdom 59.4 114.1
Continental Europe 138.1 148.8
North America 8.4 6.8
Asia Pacific 24.2 26.0
Africa 13.2 12.8
Continuing operations as reported 243.3 308.5
* Includes exceptional items of £31.3m (2004: nil) in Textiles & Washroom
Services and £10.9m (2004:25.7m) in Central Items
Notes to the accounts
2005 2004
£m £m
(unaudited) (unaudited)
2. Exceptional items
Impairment of assets in UK Textiles business (a) 31.3 -
Bid defence costs (b) 10.9 -
Additional vacant property and environmental provisions - 19.7
(c)
Potential uninsured loss on a discontinued business (d) - 6.0
42.2 25.7
(a) The linen and workwear business within the UK has been written down to its recoverable amount.
(b) Costs incurred in defending potential take-over bid by Raphoe.
(c) Increase in vacant property and environmental provisions in the UK and the US in respect of
specific properties relating to businesses disposed of in prior years.
(d) Provision for the potential uninsured loss made in respect of product supply by a discontinued
business.
3. Interest payable and similar charges
Interest payable on bank loans and overdrafts 27.0 27.5
Interest payable on medium term notes issued 38.5 40.1
Net interest receivable on fair value hedges (6.9) (6.5)
Interest on defined benefit plan liabilities 46.8 41.3
Interest payable on finance leases 2.5 2.5
Foreign exchange (loss)/gain on translation of foreign denominated loans (0.8) 4.1
Amortisation of discount on provisions 2.0 -
Fair value loss on write off of Ashtead option 4.6 -
Net ineffectiveness of fair value hedges (0.8) -
Fair value loss on derivatives not designated in a hedge relationship 2.1 -
115.0 109.0
4. Interest receivable
Bank interest 8.6 7.4
Other interest 11.3 7.5
Return on defined benefit plan assets 39.7 40.5
59.6 55.4
5. Income tax expense
Analysis of charge in the year
UK Corporation tax at 30% (2004: 30%) 12.3 30.7
Double tax relief (5.4) (2.4)
6.9 28.3
Overseas taxation 55.7 63.9
Adjustment in respect of previous periods (13.0) (20.7)
Total current tax 49.6 71.5
Deferred tax 1.9 (1.7)
Total income tax expense 51.5 69.8
Notes to the accounts
2005 2004
£m £m
(unaudited) (unaudited)
The tax on the Group's profit before income tax differs from the
theoretical amount that would arise using the weighted average tax
rate applicable to profits of the consolidated companies as follows:
Profit before income tax (continuing operations) 190.1 256.7
Tax calculated at domestic tax rates applicable to profits in the 59.2 79.2
respective countries
Adjustment in respect of previous periods (11.5) (20.6)
Expenses not deductible for tax purposes - other 6.6 3.4
Non-deductible exceptional items 1.2 9.3
Income not subject to tax (1.8) (1.4)
Goodwill deduction for which no deferred tax asset was recognised (1.9) (0.7)
Utilisation of previously unrecognised tax losses (2.7) (2.1)
Deferred tax on unremitted profits 1.5 2.7
Other 0.9 -
Total income tax expense (continuing operations) 51.5 69.8
6. Profit for the year from discontinued operations
Style Other 2005 2004
£m £m £m £m
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 82.9 18.4 101.3 141.8
Operating expenses (59.8) (18.3) (78.1) (123.8)
Operating profit 23.1 0.1 23.2 18.0
Finance costs - net (0.4) 0.1 (0.3) (0.4)
Share of profit from associates disposed (net of tax) - - - -
Profit before income tax 22.7 0.2 22.9 17.6
Taxation (6.4) (0.4) (6.8) (9.1)
Profit / (loss) after income tax from discontinued 16.3 (0.2) 16.1 8.5
operations
Profit / (loss) on disposal of subsidiary net assets 170.3 1.0 171.3 (3.3)
Taxation - - - -
Cumulative translation exchange loss* - (1.6) (1.6) -
Total profit after income tax on disposal of
subsidiary net assets 170.3 (0.6) 169.7 (3.3)
Profit / (loss) on disposal of discontinued operations 186.6 (0.8) 185.8 5.2
* The cumulative translation exchange loss of £1.6m relating to discontinued
operations has been recycled out of exchange reserves to the consolidated income
statement.
7. Earnings per share
2005 2004
£m £m
(unaudited) (unaudited)
2005 2004
Continuing operations
Profit attributable to equity holders 135.7 185.2
Weighted average number of shares 1,803.7 1,807.8
Basic earnings per share 7.52p 10.24p
Continuing and discontinued operations
Profit attributable to equity holders 321.5 190.4
Weighted average number of shares 1,803.7 1,807.8
Basic earnings per share 17.82p 10.53p
Weighted average number of ordinary shares in issue 1,803.7 1,807.8
Adjustment for share options and deferred 1.1 -
shares
Weighted average number of ordinary shares for diluted earnings per share 1,804.8 1,807.8
Diluted earnings per share from continuing and discontinued 17.81p 10.53p
operations
Notes to the accounts
8. Property, Plant and Equipment
and and Plant and Vehicles and
Rental Office
Land & Equipment Equipment Total
Buildings
£m £m £m £m
At 1 January 2004
Cost 310.0 745.9 248.8 1,304.7
Accumulated depreciation and impairment (49.5) (461.3) (141.1) (651.9)
Net book amount 260.5 (*) 284.6 (*) 107.7 652.8
Year ended 31 December 2004
Opening net book amount 260.5 284.6 107.7 652.8
Exchange differences (0.3) 1.2 (0.3) 0.6
Additions 10.8 133.2 45.5 189.5
Disposals (1.4) (2.3) (4.5) (8.2)
Acquisition of subsidiaries 1.7 1.7 0.3 3.7
Disposal of subsidiaries (2.9) (0.4) (1.1) (4.4)
Reclassification (0.3) 0.6 (0.3) -
Impairment charge (9.3) - - (9.3)
Depreciation charge (5.2) (118.6) (39.2) (163.0)
Closing net book amount 253.6 300.0 108.1 661.7
At 31 December 2004
Cost 316.1 778.8 254.0 1,348.9
Accumulated depreciation and impairment (62.5) (478.8) (145.9) (687.2)
Net book amount 253.6 300.0 108.1 661.7
Year ended 31 December 2005
Opening net book amount 253.6 300.0 108.1 661.7
Exchange differences (1.2) (3.8) 0.3 (4.7)
Additions 14.4 127.7 54.2 196.3
Disposals (2.5) (2.1) (5.3) (9.9)
Acquisition of subsidiaries 4.1 7.0 1.8 12.9
Disposal of subsidiaries (140.9) (16.1) (2.2) (159.2)
Reclassification - 0.8 (0.8) -
Impairment charge (0.1) (30.6) (0.5) (31.2)
Depreciation charge (5.3) (122.6) (40.5) (168.4)
Closing net book amount 122.1 260.3 115.1 497.5
At 31 December 2005
Cost 166.3 739.2 263.9 1,169.4
Accumulated depreciation and impairment (44.2) (478.9) (148.8) (671.9)
Net book amount 122.1 260.3 115.1 497.5
*On transition to IFRS, some assets have been reclassified from office equipment
to plant and equipment.
Notes to the accounts
9. Retirement benefit obligations
The principal scheme in the Group is the Rentokil Initial Pension Scheme ('RIPS') in the United Kingdom, which has a
number of defined benefit sections which are now closed to new entrants. On 19 December 2005, a detailed
consultation began between the Company and the members of the RIPS on the freezing of the future accrual of benefits
for active members. The RIPS valuation was performed on the existing basis and therefore excludes the proposal to
freeze future accrual of pension benefits to active members.
These defined benefit schemes are re-appraised annually by independent actuaries based upon actuarial assumptions in
accordance with IAS 19 requirements.
The principal assumptions (based on a weighted average % of all defined benefit schemes) are shown below.
2005 2004
UK RIPS UK RIPS
Weighted average %
Discount rate 4.7% 5.3%
Expected return on plan assets 6.3% 7.0%
Future salary increases 3.6% 3.5%
Future pension increases 2.8% 2.7%
The amounts recognised in the balance sheet are determined as follows:
2005 2004
UK RIPS Other* Total UK RIPS Other Total
Present value of funded obligations (1,029.2) (20.6) (1,049.8) (872.0) (18.4) (890.4)
Fair value of plan assets 859.4 15.4 874.8 569.5 15.4 584.9
(169.8) (5.2) (175.0) (302.5) (3.0) (305.5)
Present value of unfunded obligations - (7.3) (7.3) - (6.3) (6.3)
(Liability) in the balance sheet (169.8) (12.5) (182.3) (302.5) (9.3) (311.8)
The fair value of plan assets at the balance sheet date is invested as follows:
Equity instruments 531.5 7.9 539.4 453.5 7.7 461.2
Debt instruments 129.2 6.8 136.0 116.0 7.0 123.0
Property - 0.5 0.5 - 0.5 0.5
Cash 198.7 0.2 198.9 - 0.2 0.2
Total plan assets 859.4 15.4 874.8 569.5 15.4 584.9
The amounts recognised in the income statement are as follows:
Current service cost ** 12.6 1.2 13.8 11.9 1.2 13.1
Interest cost ** 45.8 1.0 46.8 40.7 0.6 41.3
Amount charged to pension liability 58.4 2.2 60.6 52.6 1.8 54.4
Expected return on plan assets (39.1) (0.6) (39.7) (39.9) (0.6) (40.5)
Total pension cost 19.3 1.6 20.9 12.7 1.2 13.9
* Other retirement benefit plans are predominantly made up of defined benefit
plans situated in Ireland, Germany, Australia and Belgium.
** Service costs are charged to operating expenses and interest cost to interest
payable and receivable.
Notes to the accounts
2005 2004
£m £m
(unaudited) (unaudited)
10. Cash generated from operations
Profit for the year 324.4 192.1
Adjustments for:
- (Profit)/loss on disposal of companies and (169.7) 3.3
businesses
- Discontinued operation's tax and interest 7.1 9.5
- Tax 51.5 69.8
- Share of profit from associates (2.2) (1.8)
- Interest income 115.0 109.0
- Interest expense (59.6) (55.4)
- Depreciation 168.4 163.0
- Amortisation of customer lists 23.0 22.2
- Amortisation of other intangible assets 3.6 3.5
- Major non-cash items* 38.2 36.0
- Profit on sale of property, plant and equipment (12.1) (4.0)
Changes in working capital (excluding the effects of acquisitions and
exchange differences on consolidation):
- Inventories (3.6) 0.6
- Trade and other receivables (37.9) (0.4)
- Trade and other payables 30.4 18.9
Cash generated from operations before special pension 476.5 566.3
contribution
Special pension contribution (200.0) -
Cash generated from operating activities 276.5 566.3
* Major non-cash items include £31.3m asset impairment charges relating to UK
Textiles, other impairment charge of £3.8m and share option charges.
11. Reconciliation of net increase/(decrease) in cash and bank overdrafts to net debt
Net increase/ (decrease) in cash and bank 23.6 (118.0)
overdrafts
Movement on finance leases 2.3 3.8
Movement on loans 226.7 197.0
Decrease in debt resulting from cash flows 252.6 82.8
Acquisitions (13.8) (0.4)
Disposals 0.5 2.7
Revaluation of net debt 8.1 -
Net debt translation differences 1.4 (2.6)
Movement on net debt in the year 248.8 82.5
Opening net debt (1,155.1) (1,237.6)
Adoption of IAS 39 at 1 January (34.0) -
2005
Revised opening net debt (1,189.1) (1,237.6)
Closing net debt (940.3) (1,155.1)
Closing net debt comprises:
Cash and cash equivalents 240.3 199.5
Bank and other short term borrowings (108.5) (207.5)
Bank and other long term borrowings (1,072.1) (1,147.1)
Total net debt (940.3) (1,155.1)
12. Free cash flow
Net cash flows generated from operating activities 152.4 424.0
Add back: special pension contribution 200.0 -
352.4 424.0
Purchase of property, plant and equipment (PPE) (183.8) (176.1)
Purchase of intangible fixed assets (9.2) (4.7)
Leased property, plant and equipment (16.9) (14.9)
Proceeds from sale of PPE and intangible assets 22.0 12.0
Dividends received from associates 1.0 3.8
Dividends paid to minority interests (2.6) (0.7)
Interest element on finance lease payments (2.5) (2.4)
Free cash flow 160.4 241.0
Notes to the accounts
13. The financial information in this statement is not audited and does not constitute statutory accounts
within the meaning of s.240 of the Companies Act 1985 (as amended). Full accounts for Rentokil Initial
plc for the year ended 31 December 2004 have been delivered to the Register of Companies. The auditors'
report on these accounts was unqualified and did not contain a statement under Section 237(2) or Section
237(3) of the UK Companies Act 1985.
14. The financial information in this statement contains extracts from the 2005 Annual Report, which will be
issued in April 2006 and prepared in accordance with International Financial Reporting Standards ('IFRS')
as adopted for use in the European Union. The Accounting Policies (that comply with IFRS and IAS) adopted
by Rentokil Initial plc (the 'Group') are set out in the 2005 Interim Report and will be presented in our
2005 Annual Report.
Under the transitional rules of IFRS 1, most IFRS standards have been applied fully retrospectively. The
significant exemptions under IFRS 1 that have not been adopted include business combinations and fair
value as deemed costs. The Group has elected to adopt IFRS 3 retrospectively to business combinations
made since 1 January 1998. As a result, goodwill arising from past business combinations from 1 January
1998 has been restated under IFRS at 1 January 2004 ('Transition Date'). In addition, the option to fair
value Property, Plant and Equipment at Transition Date has not been adopted.
The Group has adopted the amendments to IAS 19 and elected to recognise all cumulative actuarial gains
and losses in relation to employee benefit schemes on Transition Date.
From 1 January 2005 the Group has applied IAS 32, IAS 39, IFRS 4 and IFRS 5. The impact of the
restatement of previously published financial information under UK GAAP (on an IFRS basis) was publicly
disclosed on 20 July 2005.
The restated results have been fully adopted in these financial statements, except that the UK defined
benefit pension fund deficit under IAS 19 has been restated after the Group's actuary finalised their
work on the April 2005 triennial valuation for the fund. The deficit under IAS 19 as at 31 December 2004
was £35.5m higher than what was previously reported. This change has now been reflected in the
comparative balance sheet in these financial statements.
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.
15. There will be a presentation to analysts at 9:45am today at the offices of UBS at 1 Finsbury Avenue,
London EC2M 2PP. A copy of the slides and a live webcast of the presentation will be available via the
Company's website (www.rentokil-initial.com) as well as a playback as soon as practicable after the
presentation closes.
16. Copies of the Annual Report will be dispatched to shareholders and will also be available from the
company's registered office at Belgrave House, 76 Buckingham Palace Road, London SW1W 9RF.
17. Financial Calendar
Final dividend to be paid on 2 June 2006 to shareholders on the register on 5 May 2006.
Annual Report expected to be dispatched to shareholders in April 2006.
Annual General Meeting at No. 4 Hamilton Place, London W1 on 18 May 2006 at 11.00am.
Appendix A
SUPPLEMENTARY INFORMATION
Divisional Analysis - 2005 on a quarterly basis (at constant exchange rates)
(based upon the way businesses are managed)
3 months to 3 months to 3 months to 3 months to Year to
31 Mar 30 Jun 30 Sep 31 Dec 31 Dec
2005 2005 2005 2005 2005
(at 2005 constant exchange rates) £m £m £m £m £m
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Business Analysis
Revenue
Textiles & Washroom Services 158.7 162.7 161.1 160.5 643.0
Pest Control 50.0 53.4 53.8 52.2 209.4
Tropical Plants 22.9 24.5 23.9 31.1 102.4
Electronic Security 61.2 66.1 61.7 74.4 263.4
City Link 25.4 32.1 27.0 41.0 125.5
Manned Guarding 82.8 90.7 92.3 99.4 365.2
Other 112.8 114.3 112.6 130.3 470.0
Facilities Services 195.6 205.0 204.9 229.7 835.2
Asia Pacific 21.6 22.3 22.5 23.2 89.6
Other 8.0 8.2 8.1 8.4 32.7
Continuing operations at 2005 constant
exchange rates 543.4 574.3 563.0 620.5 2,301.2
Exchange (0.5) (3.8) 1.5 2.8 -
Continuing operations as reported* 542.9 570.5 564.5 623.3 2,301.2
Operating Profit*
Textiles & Washroom Services 30.2 31.1 31.0 23.1 115.4
Pest Control 15.3 16.7 18.1 17.1 67.2
Tropical Plants 1.2 1.9 1.8 4.6 9.5
Electronic Security 7.9 9.3 9.0 9.6 35.8
City Link 5.1 7.4 6.1 10.5 29.1
Manned Guarding 2.5 3.4 3.4 4.9 14.2
Other 9.4 7.3 9.8 8.3 34.8
Facilities Services 11.9 10.7 13.2 13.2 49.0
Asia Pacific** 5.5 5.9 5.7 6.2 23.3
Other 3.1 3.2 3.1 3.3 12.7
Central Items (6.9) (11.6) (6.9) (8.1) (33.5)
Continuing operations at 2005 constant
exchange rates 73.3 74.6 81.1 79.5 308.5
Exchange 0.4 (0.6) 0.1 0.1 -
Continuing operations as reported* 73.7 74.0 81.2 79.6 308.5
Geographic Analysis
Revenue
United Kingdom 245.3 262.7 246.4 288.7 1,043.1
Continental Europe 206.5 216.1 213.1 221.1 856.8
North America 61.5 64.8 72.6 79.0 277.9
Asia Pacific 21.7 22.3 22.5 23.1 89.6
Africa 8.4 8.4 8.4 8.6 33.8
Continuing operations at 2005 constant
exchange rates 543.4 574.3 563.0 620.5 2,301.2
Exchange (0.5) (3.8) 1.5 2.8 -
Continuing operations as reported* 542.9 570.5 564.5 623.3 2,301.2
Operating Profit*
United Kingdom 26.2 23.2 23.9 30.9 104.2
Continental Europe 36.4 39.0 44.6 32.3 152.3
North America 1.8 2.8 3.4 6.4 14.4
Asia Pacific 5.7 6.2 5.9 6.5 24.3
Africa 3.2 3.4 3.3 3.4 13.3
Continuing operations at 2005 constant
exchange rates* 73.3 74.6 81.1 79.5 308.5
Exchange 0.4 (0.6) 0.1 0.1 -
Continuing operations as reported* 73.7 74.0 81.2 79.6 308.5
* Before amortisation of customer lists and items identified as exceptional
** The business analysis for Asia Pacific includes UK Sector costs which are
included in the UK in the Geographic Analysis.
Appendix B
Divisional Analysis - 2005 on a quarterly basis (at actual exchange rates)
(based upon the way businesses are managed)
3 months to 3 months to 3 months to 3 months to Year to
31 Mar 30 Jun 30 Sep 31 Dec 31 Dec
2005 2005 2005 2005 2005
(at actual exchange rates) £m £m £m £m £m
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Business Analysis
Revenue
Textiles & Washroom Services 160.1 161.7 161.1 160.1 643.0
Pest Control 50.2 53.0 53.9 52.3 209.4
Tropical Plants 22.4 24.2 24.2 31.6 102.4
Electronic Security 61.4 65.8 61.7 74.5 263.4
City Link 25.4 32.1 27.0 41.0 125.5
Manned Guarding 81.1 89.5 93.1 101.5 365.2
Other 112.9 114.2 112.6 130.3 470.0
Facilities Services 194.0 203.7 205.7 231.8 835.2
Asia Pacific 21.2 22.1 22.7 23.6 89.6
Other 8.2 7.9 8.2 8.4 32.7
Continuing operations as reported 542.9 570.5 564.5 623.3 2,301.2
Operating Profit*
Textiles & Washroom Services 30.8 30.8 31.0 22.8 115.4
Pest Control 15.2 16.6 18.2 17.2 67.2
Tropical Plants 1.1 1.9 1.8 4.7 9.5
Electronic Security 8.0 9.2 9.0 9.6 35.8
City Link 5.1 7.4 6.1 10.5 29.1
Manned Guarding 2.4 3.3 3.5 5.0 14.2
Other 9.4 7.4 9.7 8.3 34.8
Facilities Services 11.8 10.7 13.2 13.3 49.0
Asia Pacific** 5.3 5.9 5.8 6.3 23.3
Other 3.2 3.1 3.1 3.3 12.7
Central Items (6.8) (11.6) (7.0) (8.1) (33.5)
Continuing operations as reported* 73.7 74.0 81.2 79.6 308.5
Geographic Analysis
Revenue
United Kingdom 245.3 262.7 246.4 288.7 1,043.1
Continental Europe 209.0 214.2 213.3 220.3 856.8
North America 58.9 63.3 73.7 82.0 277.9
Asia Pacific 21.2 22.1 22.7 23.6 89.6
Africa 8.5 8.2 8.4 8.7 33.8
Continuing operations as reported* 542.9 570.5 564.5 623.3 2,301.2
Operating Profit*
United Kingdom 26.2 23.2 23.9 30.9 104.2
Continental Europe 36.7 38.6 44.6 32.4 152.3
North America 1.7 2.8 3.4 6.5 14.4
Asia Pacific 5.7 6.2 6.0 6.4 24.3
Africa 3.4 3.2 3.3 3.4 13.3
Continuing operations as reported* 73.7 74.0 81.2 79.6 308.5
*Before amortisation of customer lists and items identified as exceptional
** The business analysis for Asia Pacific includes UK Sector costs which are
included in the UK in the Geographic Analysis.
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