# Rentokil Initial to play an ever bigger role through the Recovery Phase

- Link: https://www.directorstalkinterviews.com/rentokil-initial-to-play-an-ever-bigger-role-through-the-recovery-phase/412813096
- Published: 2020-04-16T07:40:32+01:00
- Author: Amilia Stone

**[Rentokil Initial plc](https://www.directorstalkinterviews.com/ftse-company/rentokil-initial/rto.l)**(
LON:RTO) has today announced its Q1 Trading and COVID-19 Update.

> **Introductory remarks from Andy Ransom, Chief Executive**
> “On behalf of everyone at Rentokil Initial, I would like to express my sincere
> thanks to all those in the public services and all essential workers – including
> many of our colleagues and customers – for the amazing work that they are carrying
> out in this crisis. They are at the front line and their commitment and sacrifice
> is incredible.
> “Our people will always be the essential driver of our success and while we are
> having to make some extremely difficult decisions to introduce furlough schemes
> and reduce salaries this is helping to protect the Company and our financial resources.
> The actions we are taking now will allow us to rebuild our business to full strength
> and to play an ever bigger role through the Recovery Phase in protecting public
> health and ensuring safe working environments around the world.
> “As we are seeing already in China, Hong Kong and South Korea, the crisis will
> subside over time and when it does, it is my strong conviction that we will have
> the best people, skills, innovations and technologies to help our customers get
> quickly and safely back to business. Our people will do what they do best – Protecting
> People and Enhancing Lives.”

**Q1 headline financials  **

| **(£m)** |   | **Q1 2020** | **Growth** | 
|   |   | **AER** | **AER** | **CER** | 
| **Ongoing Revenue****^(1)** |   | **630.5** | **5.8%** | **7.2%** | 
| Revenue |   | 634.1 | 4.4% | 5.8% |

**Overview of performance in Q1 (at CER)**

We made a good start to the year, with Group Ongoing Revenue^(1, 2) rising by 7.2%
and Ongoing Operating Profit growing slightly ahead of revenue in the three months
to 31 March 2020.  Group Net Operating Margins grew in line with expectations, including
in our key North America region.  Cash collections were broadly in line with Q1 
norms.

In the first quarter, Group Ongoing Revenue in Pest Control grew by 9.3%, Hygiene
by 4.6% and Protect and Enhance by 1.9%.  While the net impact from the Coronavirus
outbreak was not significant for the first 10 weeks of the year, we saw a marked
impact in the last two weeks of March, as the crisis deepened across the world. 
In March, overall Group Ongoing Revenue was 4.4% above the prior year, with Pest
Control up 6.6% and Hygiene up 2.6%.  Our Protect & Enhance category was more impacted,
with Ongoing Revenue declining by 2.3%, and Ongoing Revenue from our France Workwear
operations falling by 9.8%.

Pest Control has been designated an essential service in the majority of our markets(
allowing our frontline services to continue) and the impact of the virus is also
mitigated to some extent by the largely contractual nature of the portfolio and 
the fact that it is less impacted by business closures.  The main sectors affected
are HORECA (hotels, restaurants and catering) and Offices, and the impact has been
biggest in those countries with the most extreme lockdown regimes. 

Hygiene services have also typically been designated as an essential service but
are being more impacted by the crisis because of our inability to perform regular
weekly washroom services for a substantial number of customers due to business closures.
Once again, the sectors that have been most affected are HORECA and Offices.  Mitigating
this impact to some degree, however, has been strong global demand by both Hygiene
and Pest Control customers for hygiene products (such as hand sanitisers) and other
hygiene services including general and specialist biohazard disinfection and deep
clean services and precautionary disinfection risk assessment surveys.

The impact of the virus has varied significantly across our country operations depending
on the prevalence of cases of the COVID-19 virus and the extent to which the relevant
country has been placed in lockdown, for example:

·      In Italy, which has been in severe lockdown for several weeks, revenues were
down 15.3% in March, compared to a decline in the quarter of 5.7%;

·      Our operations in India saw a decline in revenues of 20.1% in March, compared
to an overall decline in the quarter of 5.4%;

·      North America, which is estimated to be around two weeks behind Europe in
the crisis, grew by 8.5% in March compared to 10.4% in the quarter;

·      Other markets, for example Australia and Indonesia, have to date been less
directly affected by the crisis with growth rates of 3.4% and 44.8% in the quarter
respectively;

·      In certain markets such as Hong Kong, where restrictions are being lifted,
performance has been strong in the quarter, with growth of 34.5% reflecting high
demand for specialist hygiene services; and

·      In China our operations are now returning to normal, with all employees able
to return to work.     

While the impact of the COVID-19 crisis remains highly uncertain, we are expecting
the impact in Q2 will be greater than in the last two weeks of March as more of 
our countries are impacted by lockdowns.

**Essential services – protecting people and enhancing lives**

The safety of our colleagues and customers is always of paramount importance and
we continue to prioritise actions to protect their health and safety throughout 
the Coronavirus crisis.  Our remote-access systems and processes are working well
and we currently have c.8,500 non-frontline colleagues working from home. 

**Mitigating actions during the COVID-19 crisis**

As noted in our announcement of 25 March, the impact from the crisis remains highly
uncertain and given the current disruption across our countries, sectors and customers,
we continue to expect it to have a significant impact on our performance in Q2 and
beyond.  We therefore withdrew our guidance for the year and are undertaking the
key actions summarised below to mitigate the impact of the crisis on the Group’s
revenue, profit and cash.

Our approach to managing through the COVID-19 crisis is to address the challenge
through three phases: 1. requirements during the **Crisis Phase**; 2. the clean-
up required in the **Recovery Phase**; and 3. strategic **opportunities in the medium-
term.**

**1. Good progress on key action areas during the Crisis Phase**

As the crisis develops, whilst we have seen significant numbers of our customers
temporarily closed for business, we are also seeing an increased global demand for
hygiene services (which we would anticipate is likely to increase over the coming
months) including general and specialist disinfection services requiring specialist
equipment and Coronavirus-specific training, and precautionary disinfection risk
assessment surveys.  We have also acted swiftly to reduce costs, conserve cash and
boost liquidity.

**We have launched specialist disinfection services globally:**

·      In addition to our existing 1,000 Specialist Hygiene expert technicians, 
we have, in just over three weeks, re-trained a further c.7,000 colleagues to perform
disinfection and deep clean services;

·      Disinfection services are now available in 60 markets, with a substantial
pipeline of new business being built;

·      We have commenced sales and marketing activities including a new COVID-19
targeted website presence; and

·      We are delivering services to a wide range of customers including offices,
schools, government buildings, food retailers, bus fleets and emergency vehicles.
Discussions are also underway with existing international customers for multi-country
contracts.

**We have taken measures to reduce costs, conserve cash and boost liquidity**

As previously announced we have identified over £100m of cost saving from:

·      Salary reductions for the Board and senior management grades, cancellation
of H1 bonus schemes and postponement of the 2020 LTIP grant;

·      Reduction of the CEO’s Q2 salary by 35%, with the remaining 65% donated to
a new employee support fund, also to be partly funded by Rentokil Initial Cares (
a programme set up in 2019 to use unclaimed shares and dividends to support charities
and other good causes);

·      Significant measures including furloughs and other government-funded job 
protection schemes, lay-offs and salary and hours reductions; and

·      Significantly scaling back and refocusing all other discretionary costs.

In addition to the above, we have also taken steps to conserve cash, delivering 
savings of over £500m for 2020, including withdrawing our dividend and suspending
our M&A programme, suspending all discretionary capex and reducing our cash tax 
spend.  We will also be managing working capital with a heightened focus in order
to optimise inventory levels and mitigate the increased risk around the delay and
non-payment of receivables.

Since our previous announcement we have drawn down funds under the government’s 
Covid Corporate Financing Facility (“CCFF”).  As a result we now have c.£1.2bn of
cash of which £550m is drawn down on our Revolving Credit Facility (“RCF”).  The
RCF has a net debt to EBITDA covenant of 3.5:1 which can be increased to 4.0x in
certain circumstances.  There are no covenants on the CCFF.

**2. Preparing for the Recovery Phase**

As businesses begin to reopen their premises, we anticipate many of our customers
will have an increased requirement for our Pest Control and Hygiene services, particularly
hand cleaning services and specialist disinfection clean up services.  Opportunities
include:

·      Pre ‘re-opening’ services including deep clean, disinfection, washroom and
pest control services for offices, food retail, schools, etc.;

·      Leveraging our large existing Pest Control customer base to cross-sell Hygiene
services;

·      Building the recently rolled out specialist disinfection services into regular
contracted services;

·      Extending Hygiene services beyond the washroom with additional hand and surface
sanitising throughout workspaces;

·      Further roll-out of connected services in Pest Control and Hygiene, enabling
24/7 remote monitoring, fewer site visits and the use of data to monitor and analyse
behaviour.  Our PestConnect service is currently being used to protect a number 
of key sites, including new hospital accounts; and

·      Launching Hygiene services in new markets and broadening our core service
offering.

**3. Strategic opportunities in the medium term**

When conditions normalise Rentokil Initial would also anticipate a new medium-term
growth phase where we will target strategic opportunities in line with expectations
for tighter regulation, higher standards and increased usage of Hygiene Services
across the globe.

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