Rentokil Initial plc (LON:RTO) has today provided a COVID-19 (Coronavirus) trading update.
At the time of our Preliminary results in February we gave a brief update on the impact of the Coronavirus outbreak on our operations. We said that the main impact at the end of February was on our operations in China, which saw business closures and employees unable to service their customers, and that in other parts of the Group customer enquiries for hand hygiene services were strong and hence we were anticipating an overall strong performance in Q1. Our view was that we would expect only a small net impact on the business in the quarter from the Coronavirus but should the situation become materially worse, this would have a more negative impact during the rest of the year.
In the last 10 days the outbreak has escalated rapidly impacting businesses around the globe in an unprecedented manner. The situation remains highly uncertain and it is therefore impossible to predict with any degree of certainty the impact this will have, however, we do now expect a much more significant impact on our operations and performance in Q2 and beyond. In this period of unprecedented uncertainty we are consequently withdrawing our previous guidance for 2020. We will update the market on our Q1 trading performance and further on the potential impact of the Coronavirus on 16 April 2020.
Protecting people, customers and colleagues
The safety of our people is of paramount importance and we have implemented a series of actions to protect the health and safety of our colleagues and customers. These include restricting travel and meetings, the adoption of flexible working arrangements and the recommendation to colleagues and customers to follow specific health protection protocols. We are utilising technology to allow for greater home working such as video conferencing.
Our mission at Rentokil Initial is to Protect People and Enhance Lives. We have pest control operations in over 80 countries and hygiene services in 46. The situation is particularly complex due in part to the wide range in COVID-19 infection rates as well as differences in government action across the world. Many of the global markets in which we operate have designated Pest Control and Hygiene as critical and essential services, with other markets likely to follow in coming weeks, enabling us to play our part in fighting the spread of COVID-19. We also have an essential role to play in minimising pest risks to our customers in these challenging times.
Impact on operations, categories and market sectors
Group trading to mid-March was not materially impacted by the virus outbreak. China trading was largely suspended in early February with a gradual return to service for 56% of customers at the end of that month and is now servicing around 75% of customers. At mid-March the main country impacted within the Group was Italy where business closures and a national lockdown had reduced service levels by around 40%.
Within the last ten days, however, the impact on our global businesses has significantly increased. COVID-19 has affected the majority of the key countries in our Group with many markets in advanced stages of lockdown. The impact of the virus on our businesses to date has been varied, dependent on factors including the rate at which the virus has spread, individual government response and required levels of customer service.
Some customer sectors have been substantially closed due to government and voluntary actions taken to limit the impact of the virus. This includes the HORECA sector (Hotels, Restaurants and Catering), the airline industry, schools and some offices. Conversely demand for our services in areas such as food production, food retailing and healthcare have been strong with increased demand for specialist hygiene services, particularly hygiene disinfection services, across a number of our markets.
Balance sheet, liquidity and headroom
While significant uncertainty exists around the impact of COVID-19, we have taken immediate action to reduce costs and optimise cash flow and liquidity. We have suspended our M&A programme and have also decided to suspend dividend payments for the time being, withdrawing therefore the final dividend proposed at the Preliminary results in February, and have drawn down on our Revolving Credit Facility (RCF) meaning that the Group now has cash funds available of over £650m. This excludes any funding under the Government’s Commercial Paper (CP) scheme announced on 17 March. Our RCF has a Net Debt to EBITDA covenant of 3.5x net debt to EBITDA which can be increased to 4.0x in certain circumstances. As at 31 December 2019 our net debt to EBITDA ratio was 1.8x.
Cost reduction measures
In the immediate term, the majority of Group costs are fixed with the main variable cost being materials supplied and fuel costs incurred in servicing our customers (typically around 15% of revenues). The main cost in our business is employment costs which are c.45% of Group revenues. To mitigate the impact of revenue shortfalls, we have taken a number of cost saving measures to protect the profitability and cash generation of the business:
· Pay cuts have been made across the Board and all senior management grades, with bonus schemes cancelled and the 2020 LTIP grant postponed. Reductions in other employment costs are being evaluated;
· A freeze in hiring and significant restrictions on the use of overtime and contractors have been implemented;
· Marketing budgets have been significantly scaled back and refocused;
· Travel and entertainment, meetings and external training have been stopped; and
· Government support is being applied for where appropriate to support the costs of employees.
The above measures will reduce our costs in 2020 by c.£100m.
Cash conservation measures
We have also taken the following measures to ensure that the Group is able to make appropriate investments in products and services where demand is high, while conserving cash as far as possible where services have been disrupted:
· All discretionary capex has been suspended – we now expect capex to reduce by at least £75m in 2020 to below £200m;
· Receivables will be managed with extra vigilance in respect of credit risk;
· Inventory management has increased with a focus on high-demand products; and
· Cash tax spend for 2020 will be actively managed, with an expectation that payments can be reduced to below £35m a reduction of least £25m compared to previous guidance. We are also reviewing opportunities to defer other tax amounts such as VAT, PAYE and Social Security.
As noted above we have also suspended our M&A programme and suspended dividend payments conserving around £300m of cash for the year compared to previous guidance. This combined with the other cash and cost saving actions noted above will conserve over £500m of cash in the year.
Global leaders in Pest Control and Hygiene
As the pandemic develops we are responding to the increased global demand for hygiene services including general and specialist disinfection services (requiring specialist personal protective equipment and Coronavirus-specific training) and precautionary disinfection risk assessment surveys. We anticipate demand will increase throughout the pandemic and during the recovery phase. We are training our staff to help support this increased demand and by the end of March we expect to have at least an additional 2,500 technicians trained around the world to undertake disinfection services.
When the crisis ends we envisage that there will be a significant demand for hygiene and pest control clean up services. We also consider it likely that global standards in hygiene will increase significantly on an ongoing basis. The measures we have taken to protect our colleagues and our financial resources, and help our customers throughout this period, will best position us to come out of the pandemic ready to meet the needs of the global pest control and hygiene markets.
Commenting on today’s announcement Andy Ransom, Chief Executive, said:
“Rentokil Initial is a strong and resilient company offering critical and essential Pest Control and Hygiene services to customers. While we had made a good start to the year, the ongoing uncertainty and turmoil presented by the COVID-19 outbreak will mean we will have a difficult second quarter and potentially beyond. However, we are taking appropriate cost and cash action to protect the business and our liquidity, and to put us in the best position to support the recovery phase.
“I would like to thank my colleagues for the bravery and commitment they have shown as this crisis has unfolded and we will do everything we can to continue to protect our colleagues, customers and shareholders in these unprecedented times.”