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Edited Transcript of RTO.L earnings conference call or presentation 31-Jul-19 8:15am GMT

Half Year 2019 Rentokil Initial PLC Earnings Presentation

London Aug 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Rentokil Initial PLC earnings conference call or presentation Wednesday, July 31, 2019 at 8:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew M. Ransom

Rentokil Initial plc - CEO & Executive Director

* Jeremy Townsend

Rentokil Initial plc - CFO & Executive Director

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Conference Call Participants

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* James Peter Winckler

Jefferies LLC, Research Division - Equity Analyst

* Matija Gergolet

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Sylvia Pavlova Barker

JP Morgan Chase & Co, Research Division - Analyst

* Thomas Richard Sykes

Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research

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Presentation

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Andrew M. Ransom, Rentokil Initial plc - CEO & Executive Director [1]

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Good morning, ladies and gentlemen, and thank you all for joining us today. In a few moments, Jeremy will provide you with details of our results for the first half of 2019, looking at our 5 regions, where we've again delivered a very good overall financial performance, with revenue, profit and cash once more in excess of our medium-term targets.

I'll then come back and provide an update on the operational and financial performance of our Pest Control, Hygiene and Protect and Enhance businesses, with a particular focus on the good progress we're making on our Employer of Choice and on our digital and innovation agendas.

So let me just say a few words to set the scene for today by covering the key highlights of the first half. We delivered another strong overall performance with revenue from ongoing operations up 8.8% at constant exchange rates. Organic growth at 4.2% was above our medium-term target of between 3% and 4%, but it also equals our highest growth rate in the first half for over a decade.

There were strong performances in both Pest Control and Hygiene, which delivered organic growth of 4.8% and 4.3%, respectively.

Ongoing operating profit grew by 11.6%, reflecting good growth in all of our regions, while group operating margins were up by 0.4 percentage points and up by 0.5 percentage points in North America.

Underpinning our good performance in operating profit and in particular in organic growth was the very encouraging improvement in customer retention, which was up by 1.1% and up by 1.8% in Pest Control and which, in turn, was undoubtedly supported by an equally encouraging improvement in our colleague retention, which I'll come back to shortly.

Turning now to acquisitions. M&A execution in the first half was very strong with 17 acquisitions delivering annualized revenues of GBP 55 million and with 12 of those acquisitions being in Pest Control.

In North America, we completed 7 Pest Control acquisitions in the half with annualized revenues of around $59 million, comparing very favorably with the $53 million acquired in the whole of 2018.

I'm also pleased to announce the successful divestment of our 17.8% stake in the Haniel joint venture, taking the opportunity of an early exit and with an excellent price of EUR 430 million.

So overall, the business has performed very well in the first half, with a strong organic growth performance, with revenue, profit and cash again exceeding our medium-term target, with very good M&A execution, successful divestment of our JV holding and the declaration of an interim dividend of 1.51p per share, an increase of 15.2%. We remain confident of making further progress in the remainder of the year.

With that, let me hand over to Jeremy to take you through the group financials and the regional performances in more detail.

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Jeremy Townsend, Rentokil Initial plc - CFO & Executive Director [2]

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Thank you, Andy, and good morning, everyone. I'll now run through the key financial highlights for the first half 2019 in a bit more detail. Unless I only state to the contrary, all numbers are at a constant rate of exchange.

So ongoing revenue in the half grew by 8.8%, with organic growth of 4.2% and growth from acquired businesses of 4.6%. Adjusted operating profit before interest for the half on an ongoing basis increased by 11.6% with growth in all regions, delivering a 40 basis points increase in group net operating margins. Adjusted profit after interest at actual exchange rates grew by 13.7%, driven by the increase in ongoing profit. Free cash flow was again strong in the first half at GBP 96 million, a GBP 23 million increase on the first half in 2018. And adjusted EPS at actual exchange rates increased by 14%, in line with the growth in adjusted profit before tax.

The revenue, profit and free cash flow results in the first half have demonstrated another period of delivery against the financial targets that we set for the business 5 years ago in 2014 and which we revised upwards at the 2017 interims. Over the last 5 years, we have delivered compound annual organic growth -- revenue growth of 3.3%, well within our target range of 3% to 4%.

Compound revenue growth over the last 5 years of 11.5% is well above our target growth rate of 5% to 8%, helping to drive profit growth of 15.2% compound, again, well above our 10% target. And as you can see from the chart, free cash flow has increased considerably over the last 5 years, reflecting our medium-term target of 90% conversion.

Looking now at performance by region. North America delivered a good performance in the first half, supported by acquisitions and improved organic revenue growth despite wet weather across much of the U.S. in Q2. Revenue grew by 9.6% in the half, driven by continued strong acquisition pipeline as well as organic revenue growth, which was 3.7%.

Pest Control revenues grew by 10.3%, with organic revenue growth of 3.9%. Seven acquisitions were completed in the half with annualized revenues of over $59 million, exceeding the amount of revenue acquired in the whole of 2018.

The operating profit was up 14.7%, reflecting the revenue growth and higher net operating margins, which improved by 50 basis points to 12.1%. And I'll talk about net margins more in the next couple of slides.

At our Capital Markets Day in 2018, we set out our ambition for the North American business to become a $1.5 billion revenue, 18% net operating margin business, and we're making excellent progress towards our revenue target with an improvement in organic growth in the first half and the acquisitions that I mentioned on the previous slide. We continue to work towards our net operating margin target, and we made further progress in the first half of the year, increasing margins by 50 basis points, supported by stronger organic growth, synergies from acquisitions starting to flow through and savings in our property and procurement from our best-of-breed cost savings program, offset by a greater mix of lower-margin product sales.

Our IT transformation program is progressing well, and I'll talk about this in more detail on the following slide.

Given the progress made on revenue growth in the first half and our strong M&A pipeline in North America, we remain confident of achieving our $1.5 billion revenue target in 2020, and the progress that we've made on margin delivery in the first half means that we remain on track to deliver our 2021 margin target. As we noted at the prelims, a key dependency for delivery of the margin target is the replatforming of our IT platform. And we have continued to make good progress on this, and I thought it would be useful to share with you in more detail a bit more background on the various program streams and our expectations for when deployment will be completed.

The key first step in our IT program is creating a consistent platform across the country. In relation to this, supporting infrastructure, the chart shows that we have all the data and we will have all the data from the business into the cloud during 2019 and that the large majority of the business will be on a standard operating platform by the end of this year.

Having a consistent infrastructure delivers cost benefits in its own right through reduced back-office costs and more effective management. But it also critically allows us to deploy our group applications across the North American region in the key areas of service, sales and customer communications. As previously noted, the implementation of these applications enables the delivery of our best-of-breed margin benefits in 2020 and 2021, meaning that the journey to our 18% margin target by 2021 is weighted towards the end of this period.

In Europe, ongoing revenues were up 7.7%, driven by strong performances in Germany, Southern Europe and Latin America, which is managed through the Europe region. Organic growth continued to be very strong at 4.8%, with Pest Control growing by 7.7% and Hygiene by 2.8%. Ongoing profits grew by 8.6%, reflecting the strong revenue performance, with profit growth being achieved in all the region's key countries. And as you will have read earlier today, we completed -- we announced the sale of our 17.8% stake in the Haniel JV, and I'll discuss this in more detail in a moment.

Revenue in the U.K. and the rest of the world region was up 10%, of which 4.5% was organic. U.K. organic revenues grew by 6.5% in Pest Control and 8.4% in Hygiene, driven by strong contract wins. However, the U.K. Property Care market continues to be challenging, impacting both revenue and profit margins. Ongoing revenue growth has been strong in the rest of the world at 8.3%, driven by growth in all of its regional clusters.

Ongoing operating profits increased by 7.3% in the half, reflecting the organic growth in Pest and Hygiene. However, margins reduced by 0.5 percentage points due to the impact of the U.K. Property Care business.

Revenues in Asia increased by 11.6% with organic revenue growth of 5.5%, supported by good performance in both Pest and Hygiene and acquisitions contributing growth of 6.1%. Operating profit in the region was up 11.9%, with operating margins in line with the prior year. Four acquisitions were completed in the first half with annualized revenues of around GBP 7 million.

The Pacific business delivered ongoing revenue growth of 2.4%, of which 1.9% was organic, driven by good performance in Hygiene in Australia. Operating profit increased by 2.5%, in line with ongoing revenue growth.

Operating cash flow of GBP 127 million was up GBP 22 million, reflecting the increased profitability of the business and the timing of dividend payments from the JV, offset by the phasing of working capital movements and provision payments, which were net GBP 11 million adverse. The 2019 numbers reflect adjustments relating to IFRS 16, which has effectively increased the level of depreciation and CapEx by similar offsetting amounts.

Continuing free cash flow of GBP 96 million was GBP 23 million higher than last year, reflecting the increase in operating cash flow previously noted. Cash interest payments were $4 million higher than 2018. This is largely an IFRS 16 adjustment, with underlying cash payments some GBP 0.7 million higher, reflecting slightly higher levels of net debt. Cash tax payments were GBP 6 million lower due to phasing. Taking into account a 15.7% increase in cash dividends and GBP 121 million spent on acquisitions, underlying net debt increased by GBP 83 million in the period.

Sterling weakened on average during the half, and the impact of this overall increased the sterling value of our euro- and dollar-denominated debt by GBP 21 million.

The adoption of IFRS 16 added GBP 184 million of lease liabilities to our reported net debt figure. And taking all above into account, our net debt at the half year was GBP 1.442 billion.

As I mentioned earlier, we announced the sale of our 17.8% stake in the Haniel JV today with EUR 430 million, creating an estimated profit on disposal of around EUR 140 million. The disposal means we have generated proceeds of some EUR 979 million for the disposed businesses. And we will use these proceeds initially to pay down debt and then to support the group's M&A program.

Our net debt-to-EBITDA ratio adjusted for IFRS 16 stood at 2.6x at the 30th of June compared to an unadjusted 2.4x at the 2018 year-end. And on unadjusted basis, the ratio would have been 2.5x at the half year. Taking into account today's sale of the JV stake, our IFRS-adjusted net debt-to-EBITDA figure falls to around 1.9x.

Our balance sheet remains strong. And as the chart shows, our net debt levels are broadly in line with where they were 5 years ago before FX movements and the impact of IFRS 16. And adjusting for the impact of the JV proceeds, the group's debt levels are significantly lower than they were 5 years ago. The group's credit rating remains at BBB with a stable outlook.

In May 2019, we issued a EUR 500 million bond at a coupon of 0.875% to refinance our EUR 500 million bond, which matures in September this year. This historically low rate of interest has enabled us to reduce our expected interest costs in 2019 and more significantly in 2020, as I will discuss further on my next slide.

So finally, before I hand over to Andy, some numbers for your models in relation to 2019 and 2020. IFRS 16 is now expected to increase ongoing operating profit by GBP 3 million and the adjusted interest charge by GBP 3 million compared to our previous guidance between GBP 5 million and GBP 10 million. And this has no overall impact on adjusted profit before tax, with the 2 numbers canceling each other out.

The business is trading where we'd expect it to at this stage of the year. And therefore, our guidance for the full year for 2019 and for 2020 remains unchanged, subject to the following items. We now expect 2019 central costs to be around GBP 4 million higher than previously guided, in line with the H1 increase, reflecting our continued investment in innovation and our digital program and the impact of the increase in our share price on LTIP costs.

Underlying P&L and cash interest costs are expected to be GBP 4 million lower than previously guided, reflecting the refinancing of the EUR 500 million bond at lower interest rates and lower levels of net debt post the sale of our stake in the Haniel JV. The full year impact in 2020 is an anticipated reduction in interest costs compared to previous guidance for 2019 of around GBP 14 million.

Profit from associates in the second half is anticipated to be GBP 7 million lower than the prior year following the disposal of the JV. And the full year impact on 2020 is a reduction of GBP 17 million.

At the prelims, we guided to adverse FX of around GBP 5 million. FX has been volatile since then, with sterling weakening against the euro and the U.S. dollar. Should current rates continue for the remainder of 2019 and throughout 2020, we may estimate that this would now have a positive impact of around GBP 5 million to GBP 10 million to 2019 and GBP 10 million to GBP 15 million for 2020.

Taking all the above items into account, we anticipate expectations for 2019 to remain unchanged and expectations for 2020 to increase by around GBP 10 million.

So to conclude, we're very pleased with the performance of the group in the first half. And I'll now leave you with a slide summarizing some of our key achievements so far this year, while I hand back -- hand you back to Andy to continue our presentation.

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Andrew M. Ransom, Rentokil Initial plc - CEO & Executive Director [3]

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Thank you, Jeremy. All right then, starting as always with our RIGHT WAY strategy, here's a slide that I know you're very familiar with. Today I'd like to focus on the middle part of the bottom row there. That's our low-cost operating model. This is what internally we call the machine, as it describes all of the various COGS and components of our engine for successfully compounding our organic revenue growth and our acquisition growth and converting these into cash. We then reinvest the vast majority of that cash back into the machine in the form of investments in technology, innovation, and of course, into our M&A, into our core businesses.

Today we'll focus firstly on the primer of the machine, and that's our people and our critically important Employer of Choice agenda; and secondly, on our digital and innovation agendas.

So let me start with our people. In Rentokil Initial, every single business meeting starts with SHE or Safety, Health and the Environment, from the PLC board meeting down right through the organization to region, country and branch meetings. SHE is the first item on every agenda, and we've made it absolutely clear that there's nothing more important in our business than ensuring that every one of our 40,000 people goes home safe every day.

Now in my view, there is a clear and a direct correlation between businesses that attain the highest safety standards and businesses that deliver excellent financial performance. So it's really pleasing to see that we have made dramatic improvements over the last 5 years and that our safety performance is now at world-class standards. And this achievement has been recognized by the Royal Society for the Prevention of Accidents who've awarded Rentokil Initial its Gold Award for both 2018 and again in 2019.

At the bottom of the slide there, we've also included some of our environmental credentials. That's the E of SHE, these being recognized by the Dow Jones Sustainability Index, FTSE4Good, by Ethibel and by others. Not only are we consistently reducing our overall emissions, but we have already also achieved a carbon net 0 position through our work with the climate change charity, Cool Earth, and the Rentokil Initial Cares initiative, mitigating 100% of our annual carbon footprint through a rainforest protection program in Papua New Guinea.

Now given the success that we've enjoyed by making SHE, the first item on every agenda, 2 years ago, we decided to make our Employer of Choice Initiative the second agenda item. And here, just as for SHE, we have a consistent set of measures and KPIs, which we monitor across the entire company. You will often have heard me describe our people agenda as the most critical strategic imperative that we have in Rentokil Initial. Put quite simply, if we get our people agenda right, then we have a fantastic opportunity to execute our plan and to create value for our shareholders. If we don't get our people agenda spot on, then quite simply, it doesn't matter how good the plan is, we would not be able to execute it.

As you can see on the chart there in the war for talent and with a competitive labor market in some of our markets, we're beginning to see real and very tangible benefits coming through from our Employer of Choice agenda, where we now see externally verified world-class levels of colleague engagement and enablement, outstanding training and development programs to enhance the expertise of our people and also exceptionally high scores on Glassdoor, where we top the league table for business services. If you got 2 spare minutes today with nothing else to do, I would suggest you take a look on Glassdoor Rentokil Initial and just have a flick through the first 10 or 20 reviews. It will give you a really good insight into our company.

As you can see, this effort is translating into much improved and now really excellent levels of colleague retention, delivering a 2.8 percentage point improvement to 87%, meaning that not only do we spend less time, money, effort recruiting and training new people, but it also means that happy, engaged and well-trained colleagues deliver an even better service for our customers. This, again, you can see with our Net Promoter Scores in Pest Control improving by 1.6 points and in Hygiene by 2 points. And in turn, this is leading to the excellent 1.1 percentage point improvement in customer retention that I mentioned earlier.

So great progress in the areas of safety, sustainability, colleague retention as well as customer satisfaction and customer retention, and these have all been important drivers in achieving our excellent organic growth in the first half.

Turning now to our business lines, and let me start with Pest Control. We delivered another strong performance in the first 6 months, with ongoing revenues increasing by 11.4%, of which, organic growth was up 4.8% and profits were up by 11.5%. Pest Control now accounts for 64% of our revenues, and as I've said many times, this is an outstanding business. It is our key growth engine, and it is extremely well positioned to capitalize on the increasing demand for pest control around the world. There are many drivers of that sustainable growth, including rising consumer expectations for better hygiene standards, growing middle classes and urbanization, increasing regulatory change in areas such as food safety, climate change and increasing pest pressures. In 2019, we expect the global pest control market to exceed $20 billion and to continue growing at around 5% per annum over the coming years.

Rentokil is the #1 pest control business in over 50 countries, and it's the largest commercial pest control company in the world. Our global footprint is unrivaled by any competitor. And as you can see illustrated on this chart, in the first half, we continued to deliver strong performances right across the globe.

Facilitating our organic growth in these attractive growth in emerging markets, Rentokil enjoys a number of genuine competitive differentiators. First, of course, is our global scale, now operating in around 80 countries; our Employer of Choice program that I mentioned earlier; our genuine technical expertise; our powerful Rentokil brand, which is now one of the world's top 50 most valuable and recognizable commercial brands. We enjoy a core strength in the attractive commercial sector. We're leading the industry in digital and in innovation. We have an extremely strong digital marketing capability, which delivered record levels of traffic on to Rentokil websites in the first half, growing double digits to 9 million sessions in which enjoyed excellent conversion into online inquiries, which were up 33% in the half. And of course, we also have our high-quality M&A capabilities, building both density in our existing markets and new positions in key growth city markets of the future.

Rentokil is the undisputed leader in both digital technology and innovation in the pest control industry. And we use that to improve our productivity, to lower our costs, to establish higher barriers to excellence and to protect our core markets, to enhance our service and customer satisfaction and to differentiate our products and services, and in turn, obviously, therefore, to grow our sales.

A great example of how we differentiate our products and services is the new Lumnia range, which is the first to use LED lighting to attract flying insects. Not only are these units highly effective in comparison to others on the market, but by using LEDs rather than the traditional fluorescent tubes, they reduce energy consumption for our customers by around 60%. We launched Lumnia around 18 months ago. We now have it in 42 markets, and sales increased by 44% in the first 6 months of this year.

Over the last 12 months, we've deployed 20 robotic process automation projects in our U.K. business in sales, marketing, finance and HR to both free up capacity but also to reduce costs. This has reduced U.K. transactional process costs by around 40 basis points. And we're now looking to take the use of robotics across the group, starting with some of our larger, more established markets.

The next part of the plan is focused on the selective introduction of artificial intelligence. We've appointed 2 senior-level directors for AI, who are partnering with global technology leaders to focus on our internal operations and processes and on our customers.

One of the projects we're working on is a new AI route optimization tool, which has the potential to adapt to traffic updates by the millisecond. We're also developing a new PestID app that will identify a particular pest from a photo taken by the technician in the field on their smartphone. It will then advise on the best tools for the job as well as potentially sending a short training video or safety video to the technician.

One of our core pest control market is, of course, rodent control. That accounts for around $2 billion of the global pest control market, and it's growing around 4% per annum. Here we've launched a range of new digital products to enhance our proposition in this core market. As you can see on the screen there, a single pair of rodents, rather impressively, can produce 2,000 offspring in a year. So the speed of monitoring and our proactive action that our connected devices allows will become increasingly important in rodent control.

At Rentokil, our digital pest control platform of PestConnect, myRentokil and our online CommandCentre offers an unmatched level of monitoring, reporting and insight, and I'm pleased to report a strong performance in the first half. We've had a 17% increase in connected devices, a 29% increase in the usage of the myRentokil portal. We now have an impressive 98% of all commercial customers at Rentokil now using the system and 14 million messages from our Internet of Things units in the field was sent to our online CommandCentre. This is a proven, robust digital platform that is taking the protection of customers' facilities and the mitigation of risk to a new level.

All right, switching gears slightly. If I ask you to tell me what this is, I suspect most of you intelligent-looking people in the room would be able to correctly identify this as a mosquito. Some of you might be even know it's the Aedes aegypti mosquito. Some of you might further know that, along with its sister, the Anopheles, these are the biggest killers on the planet, responsible for transmitting viral diseases, including dengue fever, Zika, yellow fever, chikungunya and malaria, of course, and many more.

Identification of mosquitoes quickly and effectively is an essential first step in the protection of public health. That must be easy to do, I guess. But it's not, in fact, easy. Unfortunately, there are more than 3,500 separate species of mosquito around the world. We have 175 of them now in the United States alone. It's one of the reasons that we're developing that PestID app that I mentioned earlier.

On this slide here, you can see the main diseases and the scale of the impact on public health around the world. If we just take dengue fever as one example, the World Health Organization estimates there are 390 million dengue infections every year, resulting in 25,000 deaths worldwide. Before 1970, only 9 countries had experienced severe dengue epidemics. Today, the disease is endemic in more than 100 countries. Clearly, as you can see from the recent reporting, the scale of this threat is actually getting worse.

Globally, we estimate that the mosquito and vector control market is now worth around $4.4 billion per annum, and Rentokil is ideally placed to support customers in this market. It's a market that's growing by 7% per annum. We have the people and the skills where we're already operating in the key markets of Asia, Africa, North America and Latin America. We've got the proven tools to undertake fully integrated surveillance, disease monitoring and mosquito control measures from the ground and now in the air. And we have the experience. We're already undertaking local authority programs in the States, while in Asia, we've got decades of experience in providing mosquito control services. And we're building on this with even greater scale and capability.

We've established a global center for excellence in mosquito and vector control in the U.S. We've created a mosquito laboratory at The Power Centre here in the U.K. We're continuing to use our M&A capabilities following 3 key acquisitions in North America and Brazil over the last 2 years. We've just recently acquired Ecovec in Brazil. This is a high-quality university spinout business with infrastructure, an organization to scientifically monitor the presence of mosquitoes. And this latest acquisition will no doubt be very useful in our ongoing discussions with several municipalities in Brazil for the use of our experienced expertise for their large-scale vector control programs.

So it's a large and growing market, and it will remain an important medium-term opportunity for Rentokil as we continue to build our capabilities and to grow our presence in this market.

Turning briefly now to Hygiene, where we continue to make very good progress with ongoing revenues increasing by 6.5%, of which organic revenues grew by 4.3%, and that's against our typical target of around 2% to 3%. Ongoing profits were up by 8.6%. Organic growth was driven by encouraging performances from the Pacific, from the U.K. and Europe, with good contributions elsewhere from the 2018 acquisitions of Cannon and CWS Italy as well as from a range of operational initiatives. These include extending our best-in-class product range; maintaining our 5-star customer rating on Trustpilot, delivering a 2-point improvement in customer satisfaction; and continuing to target upselling to existing Hygiene customers, particularly through new e-mail marketing activities.

In Hygiene, we're also driving operational improvements to drive productivity and density. In the first half, we completed the rollout of on-site servicing for feminine hygiene units in our U.K. business, meaning that we no longer have to transport full bins back to the branch. This significantly reduces the load of the vehicle as well as increasing the number of customer visits each technician can make before returning to the branch.

We've also continued to roll out ServiceTrak Hygiene. This is now in 23 countries, and we're beginning to see the expected productivity benefits coming through. Of course, we've maintained our highly targeted M&A activity with 5 city-based deals in the first half to build on our scale and geographic density.

In Hygiene, we're continuing to provide the best washroom product ranges and a wide range of hand, air and feminine hygiene services. But in addition, we're also targeting new growth opportunities with the development of air scenting and purification products, and we're in late-stage development with a new range of Internet of Things digital hygiene products as well as a number of pilots of new services, including the provision of first aid kits, which we're piloting down in Australia.

I don't think we are quite yet ready to move our Hygiene organic growth targets up, but we can certainly begin to see the potential of this category starting to come through.

Turning now to our third business cluster, Protect and Enhance. We have 3 main businesses in Protect and Enhance: Ambius, our plants business; UK Property Care; and France Workwear. These businesses typically operate in tougher market conditions and have weaker growth characteristics than our Pest Control and Hygiene businesses. Together, they accounted for about 14% of group revenues in the first half.

As you can see there on the left-hand side, we've protected the revenues of these businesses pretty well, given their market conditions. And indeed, in the first half, revenues increased by 1.4%. Profits declined slightly by around GBP 340,000, which was essentially due to the Property Care business in the U.K. Whilst the rate of decline has started to improve, there is no doubt that the business is operating in a very challenging marketplace.

Our Workwear business in France remains the single biggest part of the Protect and Enhance segment, and the business made continued progress in the first half, with revenues increasing by 2.9% to GBP 97 million, with profits in line with last year. In the last 6 months, the business has now rolled out RFID technology so that it can track each one of its 190,000 garments from the initial collection at the customer to the arrival at the plant, through each of the different processing stages and then back out to the customer again. And this will significantly improve our quality of service and the efficiency of our garment processing.

It still remains too early to claim victory with our turnaround of France Workwear, but it has been a first half of continued and solid progress.

Turning finally to M&A. In the first half, we acquired 17 Pest Control and Hygiene companies, delivering annualized revenues of GBP 55 million. The majority of the M&A activity focused on building density in North America, where we acquired 7 businesses so far this year. We've also entered the exciting cities of Amman in Jordan and Colombo in Sri Lanka.

As you know, at Rentokil Initial, we have huge experience in acquisitions, and we maintain a very financially disciplined approach to M&A which, in turn, means that we continue to deliver excellent returns against our differentiated IRRs. It is not just acquisitions. The JV divestment announced today reinforces our all-around M&A credentials. And with an excellent pipeline of prospects, supported by a strong balance sheet, we now expect M&A spend to exceed GBP 250 million for the full year.

So in summary, in the first 6 months, we've delivered a strong overall performance. We've continued to focus on people, on technology and on innovation. And our colleague and customer retention rates have improved significantly. Our organic growth rate equaled our best for over a decade. Operating profit margins, free cash flow were all ahead of last year. We've continued to execute a strong M&A agenda. We've delivered on the opportunity to successfully divest our joint venture, hauling ahead of schedule and for a great price. And the board has declared an improved interim dividend increasing by 15.2%.

All in all, I think the business has performed very well in the first half, and we're confident of delivering further progress in the remainder of the year.

So with that, Jeremy and I will now be very happy to take your questions.

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Questions and Answers

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Unidentified Analyst, [1]

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[Erik Karlsson] from CapeView. Curious to hear what you think the increased M&A guidance means. Is it GBP 250 million to GBP 300 million? Or could it be a lot more than that, especially in context of the stronger balance sheet post the divestment?

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Andrew M. Ransom, Rentokil Initial plc - CEO & Executive Director [2]

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Yes, thanks. Look, we give guidance on M&A spend each time we chat with you, to be honest, and we can see only so far ahead in the pipeline. We can see maybe 3 to 6 months. The increase in the guidance is really reflecting the healthiness of the pipeline. It's not reflecting we've got money in our pockets, so we need to spend the money in our pockets. We don't kind of work that way. It's nice that we've got the money in our pockets. But I guess, we would have been operating our M&A spend for the second half, irrespective.

In terms of what does that mean? Does it mean GBP 251 million or does it mean GBP 300 million, it's really difficult to say. There are some interesting things in the pipeline, which means the spend could be a reasonable amount, more than GBP 250 million. But as we look at it now, I guess, what we're saying is we guided GBP 200 million to GBP 250 million. That looks too low now. It looks almost certain to be in excess of GBP 250 million.

I can't really give you much more than that. It just depends how many of the things that we're working on come through. And as I mentioned a minute ago, we are very financially disciplined. If we don't make our returns, we don't do the deal. If we don't like what we see in due diligence, we walk away. So it depends how many of the things that we're working on drop through, but the pipeline really has never been as full as it currently is today.

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James Peter Winckler, Jefferies LLC, Research Division - Equity Analyst [3]

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James Winckler from Jefferies. I just had a few quick ones. Number one, one of the commentaries from one of your competitors last week was that June and May was a little weak in terms of demand, partially driven by the wet weather, which you referenced. But July came back quite strongly. I'm just wondering if you had consistent commentary in terms of how you're seeing the market specifically in North America and the shape of it through the quarter, specifically with regard to the exit rate.

And then two, on the M&A., now that you have disposed of this JV and have a lot more room on the balance sheet, wondering if you'd be -- you think you're more willing to pursue perhaps chunkier-sized deals or if the run rate should be sort of looked at in the same way of a large volume of bolt-on transactions.

And then lastly, if I'm not mistaken, you had in the agreement until the end of 2021 to dispose in your -- in the option of the agreement to dispose of the JV -- remaining JV stake. Just wondering if you had any comment on why you chose now rather than the holdout of the rest of the agreement.

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Andrew M. Ransom, Rentokil Initial plc - CEO & Executive Director [4]

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Yes. Thanks, James. Well, I hate talking about the weather to be honest. I sound like a retailer. But May and June, reliably informed, were the second wettest months in the United States on history. So there was weather. And as we always say, we can be certain there will be weather. There was a lot of weather in America in May and June and a lot of it was wet. And we do have an element of our business which is seasonal. So the residential component of our business, if it's not good pest weather, then we're not out selling or installing pest.

All I can tell you, I haven't seen the numbers for July yet, and I'm not sure it's even finished technically. But the weather in July in America has been much warmer. The sun has come out, strong, warm, humid temperatures down south and strong sun in the north. So we certainly would expect to see a return to form, if you like, for July. I have no clue what the weather is going to be for the rest of the quarter.

Chunkier-sized deals, again, really the same answer that I gave earlier, James. We've never looked at M&A on -- through the lens of how much have we got to spend. That's not the way we think about it. We look at are there deals that fit our city-based target criteria? Do they meet our differentiated return criteria? Are they quality deals with good management, with good pricing in the market that we're going after? And the view Jeremy and I have always taken is we'll worry about how we finance it as and when we find them. So if ever we got to the point that there was a chunkier deal, we would have a look and then say, "Well, what are our options? And does it make sense? And critically, does it create value for shareholders?"

So I don't think it would be a good read across to say we've got EUR 430 million, which in fact has arrived in the bank this morning. And so we have completed. I don't think it would be a good read across to say we've got that money, so we're going to go out and spend it. But as I've just said, the pipeline is good, so you should expect us to continue to execute. Whether they are small, medium, chunkier, that's just a function of what's out there.

Why sell now as opposed to later? To be honest, I've always indicated that this was a possibility that we would exit early. When we put the transaction together with Haniel, we had an agreed business plan that said we would likely come out from year 3 onwards. Why did we say year 3? We thought the majority of the synergies from the combination would have been delivered by then. I think the Haniel team had made really good progress. They've got ahead with the project. They've moved on quickly. So the synergies have been coming through more strongly, and it suited their purposes and our purposes to agree a deal now. We could have waited. And then we could have sat and waited and wondered would we get more or would we get less? But this looks like a terrific outcome for shareholders, great return on the investment we made in the joint venture. So nothing special about it. It's something that we chatted with Haniel from time to time, and it suited their purposes as equally it did ours.

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Sylvia Pavlova Barker, JP Morgan Chase & Co, Research Division - Analyst [5]

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Sylvia Barker from JPMorgan. A few quick ones, please, on margins. Could you just give us the North American pest services margin? I think you didn't give the full year, then maybe for the half year as well.

Secondly, on the Asia margin, you have mentioned before that, that's probably the one region where price increases can be difficult just from a cultural point of view. Is that the reason behind the margin weakness in the first half? And can you maybe talk about the second half?

And then the restructuring costs that you include within underlying EBITDA, so those are a bit lower. What should we expect for the full year on that?

And then just finally, on growth. Hygiene, very strong in the U.K. How should we think about that? What drove that? And what about the second half?

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Jeremy Townsend, Rentokil Initial plc - CFO & Executive Director [6]

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Thanks, Sylvia. So Pest Services were a bit higher than the 50 basis points. So sales in Ambius from products diluted it. So it's around about 70 basis points or so. And obviously, there's lots of pluses and minuses within that, but it was around about that level. With stronger organic, it could have been higher. The M&A started to flow through. But again, M&A was slightly higher as well and some of that new M&A is dilutive. But overall, it was 70 basis points.

Asia, actually, the element that is holding margins slightly back is PCI and just the integration of PCI. So the -- we're actually starting to get better traction on price increases in Asia. Still not where we'd like it. But if you remember, in the past, Asia margins have grown with increased density. And actually if we get the pricing to flow through as well, that would then help even more. But in the first half, it's really been about the PCI integration.

In terms of restructuring costs, I think we still guide to GBP 7 million. Obviously, if we can get within that, that's where we'd like to be. And then we'll come back to it in 2020 to see if that changes. It was only slightly below the kind of GBP 3.5 million run rate, and there's still plenty of projects in terms of cost-saving initiatives around the group to go for. So unless we call that down, for the moment, if we can bring it inside, that would be great.

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Andrew M. Ransom, Rentokil Initial plc - CEO & Executive Director [7]

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On Hygiene, look, I think I've described the strategy of Hygiene a number of times. We call it execute now. Internally, we say, "Look, this is what we have to do. We just have to execute the plan." It's not as complex a business as Pest Control. And typically, if we execute the plan and win business, we tend to keep it longer. Our retention rates are high. Our ability to get price increase through is good. So what I think you've seen here in the first half is a little bit of that, which is the continued execution of the plan, the continued performance of the plan, which is good.

We've also had some really good contract wins in the U.K. in particular. And because it's a portfolio of business, there's no jobbing, there's no onetime revenues in the Hygiene business really. This means that should flow through the portfolio. So second half for the Hygiene should be a positive performance.

But what we can't guarantee is when we sat here in 12 months' time, will the big contract wins that we've enjoyed in the first period this year, will they repeat? So I'm being a little bit guarded about where do we think the Hygiene growth could go to. I've always told you all, it's GDP business. It's a 2% to 3% business. I've always told you I'm not remotely satisfied with that and we should do better.

So if we sat here in a year's time and we've continued that, we might be entitled to call it a trend and that we are proving that we can run the business at those sorts of levels. Until we've done that, I'm more cautiously saying, "Look, it's still at 2%, 2.5%, 3% sort of business." But big contract wins in the first half and continued solid execution of the plan across all of the regions, I would say, is how we've done it in the first half.

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Sylvia Pavlova Barker, JP Morgan Chase & Co, Research Division - Analyst [8]

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And sort of, Jeremy, just in terms of the absolute services margin, is that now still at 17%? Or is it (inaudible) on 18% now just in North America pest services?

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Jeremy Townsend, Rentokil Initial plc - CFO & Executive Director [9]

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The -- in terms of your -- for the first half or for the overall target? Are you talking about the target?

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Sylvia Pavlova Barker, JP Morgan Chase & Co, Research Division - Analyst [10]

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No, just the pest in North America.

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Andrew M. Ransom, Rentokil Initial plc - CEO & Executive Director [11]

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What was delivered in the first half?

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Jeremy Townsend, Rentokil Initial plc - CFO & Executive Director [12]

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The -- I haven't got the absolute number. I've only got the blended. But it would be above the 12.6%. So it'd be 12.6% for the half, and it would be in the 14%. It's much lower in the first half. So it will be around 13.5% in the first half. Well, I'll come back to you, Sylvia, on the absolute number.

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Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [13]

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Tom Sykes from Deutsche Bank. Just a few questions around the North American business again, please. I just wondered, is there any change in the nature of national accounts at all in terms of how the pricing with regards to sort of base level of revenue versus the amount of transact or jobbing business or call-outs that you have to do there? And is that price -- does that pricing affect the margin at all? I wondered if you could give a view on jobbing versus product sales versus contract, whether there's any difference in your ability to pass on prices in those different areas.

And perhaps when we look at the sort of business as it is now, how much of the improvement in margin could you get out of the current revenue base? And how much is the movement up to 18% at this point in time dependent on the extra revenues or the scale that you get out of that, please?

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Andrew M. Ransom, Rentokil Initial plc - CEO & Executive Director [14]

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Thanks, Tom. We've always had an arrangement that if it's a difficult question, Jeremy does it, and I take the easy ones. So I'll take the first one. Jeremy can do the second 2. The simple answer to the question, are we seeing a change in the nature of national accounts, are we seeing any difference between pricing, do we see any difference in the pricing of our contracts to jobbing, the answer to those is no. We are winning in national accounts. Commercial is our absolute sweet spot. National accounts is our sweet spot. And we've been growing our national accounts business in North America double-digit organic growth for the last 2 years or more. So we certainly feel that we're winning in the national accounts space.

It's always competitive in national account. You're dealing with the biggest procurement individuals. You're dealing with people that want to negotiate on price as opposed to service. It's always been competitive. I don't see any difference at all. I don't see any shift in the competitive dynamic, whether driven through economic factors or competitive factors. It feels absolutely as it has for the last few years. So it's a no on the first one. Jeremy?

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Jeremy Townsend, Rentokil Initial plc - CFO & Executive Director [15]

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Yes. So on the -- a similar answer on the jobbing and contracts. So not seeing any significant change in the pricing environment either in the U.S. or actually elsewhere in the group, and it remains a reasonably good environment for putting price increases through.

Just a little nuance. What you tend to see on the jobbing side is if it's a really busy season, the elasticity tends to get to a point where you do get some premium pricing flowing through. So that tends to be less impactful where you've got wetter weather, and it will be better where you've got hotter weather. So there's a more of a seasonal dynamic to it. But that seasonal dynamic hasn't changed, if that makes sense. So overall pricing actually environment tends to be -- has been pretty good across the group and in North America in the first half.

In terms of how the margin flows through, without making it overly complicated, in terms of what we're looking to deliver, as I've said before, part of it is due to organic growth, part is due to synergizing the M&A that we're going to do. Both of those are revenue-related to an extent. And then probably half of it is down to best-of-breed, which is really about driving benefits out of our core revenue. So we do need the organic growth, and we're looking for the M&A to come in and synergize, which is about half. And then we're looking for the best-of-breed to drive half, which is on the core. And obviously, the organic and M&A depend slightly on the timing of it and when that M&A flows through. So what we've had in the first half, for example, we're driving synergies out of some of the M&A that we've done historically, but then we've got M&A coming in that's been quite high that tends to be a bit dilutive.

So roughly, the quick answer to your question is about half of it is revenue-related and half is based on the core. If we deliver our plans on the revenue, we'd expect that revenue to flow through. So I think we're pretty confident about the revenue target. So it really is within our scope to really drive those savings off the replatforming and drive that through. So I think we're pretty confident in the revenue, and it's for us to deliver on the margin with what we get either from M&A, organic or through the core we currently do.

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Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [16]

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Okay. And just a follow-up on -- when you say that the sort of pricing environment is consistent, would you say that it's -- and you then say it's competitive in commercial. Presumably, you're able to pass on prices on jobbing to a greater extent at the moment. So are we talking sort of it's 3%, 4% on one-off jobs and it's 2% on commercial? And therefore, the gross margins are relatively static on commercial, but you're able to get some cost benefits to hopefully improve your margin? Is that the kind of dynamic that we ought to be thinking about this? For smaller customers, it's a bit stronger pricing, I guess.

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Andrew M. Ransom, Rentokil Initial plc - CEO & Executive Director [17]

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Yes. I mean, the dynamic that you described, Tom, is correct. I'm not going to comment on the numbers, but the dynamic is absolutely correct. Because jobbing will be the highest margin thing that we typically do, because the logic being if you can do additional work for customers once you're already on-site to do a scheduled visit, then you can get good operational leverage on the cost to serve that customer. So in terms of margin point, jobbing is always more healthy -- has a more healthy margin than routine work.

On the pricing for jobbing, I mean, Jeremy touched on it a little bit there. There are times, and we like these times, but there are times where we are so busy in the high season that we actually have more work than we can get done, and we hate letting customers down. But we do have dynamic pricing in those moments. So if we are really stretched and the team are fully used and we're maxing out on overtime, and that doesn't last for long, but there will be a part of the season, then we will dynamically price. We will yield manage unashamedly. We will put our prices to the point where the customers will select which jobs we do, because otherwise, we will disappoint customers if we take work that we can't actually deliver.

So there is an element of dynamic pricing yield management on the jobbing side when the high season hits. More generally, yes, we have a fixed pricing model for routine work. So we're working on an hourly cost basis, and we know what returns we'll make on that jobbing. We do have a little bit more flexibility around how we price that. So yes.

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Matija Gergolet, Goldman Sachs Group Inc., Research Division - Equity Analyst [18]

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Matija Gergolet from Goldman Sachs. Three questions from my side. Firstly is like a follow-up on the U.S. margins on your Slide 14. Just to make it clear, so based on the chart, based on the completion of the IT replatforming, we should start getting some uplift in the margins already in 2020. Is that fair? Or is everything back-end-loaded?

Second question would be on basically on vector control, which is quite a significant part of your presentation. Do you have any numbers about what are your current organic growth rates in that business? And also -- I mean, you have like a 1% market share at the moment. Do you see like kind of a tipping point just about to happen, whereby that market share could increase significantly and therefore actually make a very material contribution to your overall business?

And then thirdly, as you look about R&D, digital, can you just remind us what is your annual R&D spend or what it was in the first half of the year? And how much of that is capitalized or how much is expensed?

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Jeremy Townsend, Rentokil Initial plc - CFO & Executive Director [19]

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Yes. So it's not all 2021, absolutely. We're driving some costs -- some of the best-of-breed savings are flowing now. The benefits of being on -- on having all the digital in the cloud, for example, start to drive some elements through. Typically, you get most of the benefits when the whole country is on the same platform. So it will -- there should be some start flow through in 2020. And you can see some of the applications. We can do it without the platform. We just need it in the cloud, et cetera. So some of it with 2020. Most of it with 2021, because you get the benefits of everything being on the same platform and everything working together. So it's a little bit of an exponential curve. But certainly, we'll be looking to drive some of those best-of-breed benefits in 2020. That's systems related. That's right.

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Andrew M. Ransom, Rentokil Initial plc - CEO & Executive Director [20]

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On vector control, mosquitoes, I included all those extra slides specifically for you, because you always ask specifics about vector control. Look, the reason I put that in there is because we aren't doing a lot of work on mosquito control and vector control, it is a large market, it's a very, very complex market, but it is a large market, and the market is growing significantly and the threat to human health is very real and significant.

I also characterize the opportunity in the context of it's a medium-term opportunity. I honestly don't know whether or not it's realistic in the short term to expect a material contribution out of vector control. I do know we are working on quite a number of exciting projects, but they move very, very slowly. And it's a complex world.

If you added up all of the revenues today across the Rentokil Initial Group that we have for mosquito vector control, it's above $50 million, and in the first half, that grew more than 10% organically. But it's a small number in the context of the group today. I wouldn't have wasted all of your time with half a dozen slides on vector control if I didn't think it was a really key opportunity for the group. But the one thing I can't tell you, because I don't know, is over what time frame is it going to be material. But I clearly do think that the opportunity is material. And I don't know of many companies out there that have the capability and the skill set and the global reach as we do to address that opportunity.

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Jeremy Townsend, Rentokil Initial plc - CFO & Executive Director [21]

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In terms of the R&D spend, our budget for 2019 is in the GBP 25 million to GBP 30 million level, which is slightly higher than where we've been previously to, being the GBP 20 million to GBP 25 million. And that tends to get capitalized and amortized over a kind of 5-year period, so it hits the P&L in time.

And then what you're seeing a little bit in the P&L in the first half is some extra deployment costs. So as we're deploying with -- a lot of the deployment happens at the center initially in the first rollout. As we're deploying some of those group apps into the group, there's a slightly high deployment costs in that GBP 1 million to GBP 2 million range over the year.

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Unidentified Analyst, [22]

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(inaudible) from Deutsche Bank. I have 2 questions, the first one on M&A. At one point, in terms of how much you spend to do the deals, negotiate and then integrate it operationally, does it become an issue for you, so you don't have the bandwidth necessarily to do it?

And the second one on vector control. On the margin side, do you think on -- with the scale on the medium-term basis, is it fair to say it's higher margin than Pest Control? Its higher barriers to entry is probably something you put more value on. So how do you think about the margin more on a medium-term level?

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Andrew M. Ransom, Rentokil Initial plc - CEO & Executive Director [23]

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Thanks. M&A bandwidth. I spent 35 years of my career doing M&A, so it's a subject that's very close to my heart. We've got considerable bandwidth within the organization. We've got a dedicated M&A team, which is 7 or 8 people globally. And in doing the number of deals that we do in any 1 year, typically, these deals are not hitting the same part of the organization all at the same time. They're taking -- and we got 2,000-odd branches around the world. And for many, they will get an acquisition once every 5 years or once every 10 years. So the impact on the bandwidth for the organization, when you get an acquisition to execute and you're running a town or a city or a region, that really stretches you. But you only get to do one, and you work on it for 6 months and it's done.

When we -- the area where the stretch becomes a bit more obvious is in America, where we do 6, 7, 8, 10, 12 deals in a year. But it's a huge, huge market. It's half of the world's pest control market. So it's unusual for us to be doing acquisitions which hit -- 2 in St. Louis in the same year. So again, the same principle applies. We try not to end up doing multiple acquisitions in the same city. But we have central resource, we have regional resource and we have local resource. And we have templated and systemized our M&A process to a really sophisticated level. So if it's the first time you've ever done an acquisition and it's hitting you, we basically hold your hand all the way through from day 1 through to 6 months, so you know exactly what you need to do.

So I'm not worried about bandwidth. I mean, that's a high-class problem if I end up with more deals than I know what to do with. But again, we are experienced M&A practitioners. So if we thought we couldn't do it, if we thought we would damage breaking my machine, then we wouldn't do it.

Vector, I mean, you make a very good point, a very interesting point as to what the margins are. What we see on vector control, it's sporadic. It's not a -- it's not like the rest of our business, which is portfolio and you have nice contracts that roll over. It's an emergency situation. We're called into action. When there's an emergency, it's an emergency. And if you need us and we can help you, then we will price according to what we feel is appropriate.

So yes, it's a relatively high-margin but lumpy sort of business, because if we go 3 months with no big projects, our margins don't look so good. So when we do get a big project, we make sure that we're paid appropriately. That's particularly the case in America, where we've got a fleet, a small number of airplanes where we've got in the sky after there's been a hurricane or a major flood in a hot part of the States, water on the ground, sun, humidity, massive mosquito breeding. And then we're called into action. We will be busy for 10 days. The guys will barely sleep. They will go round the clock, deal with it. That's a project. That's a very lucrative project. But then they might be quiet again for the next 2, 3 months. So it is a little bit different to the cadence of the rest of our business, typically a bit higher margin but less predictable.

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Matija Gergolet, Goldman Sachs Group Inc., Research Division - Equity Analyst [24]

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Matija Gergolet again from Goldman Sachs. One more on guidance. You're keeping your organic growth guidance at 3% to 4%. You're clearly delivering at the top end of that. What would it take for you to, say, increase that medium term?

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Andrew M. Ransom, Rentokil Initial plc - CEO & Executive Director [25]

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More organic growth, I think.

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Matija Gergolet, Goldman Sachs Group Inc., Research Division - Equity Analyst [26]

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Pest Control clearly is a bigger part of the business. Hygiene is now also showing signs of good growth.

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Andrew M. Ransom, Rentokil Initial plc - CEO & Executive Director [27]

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The non-flippant answer is these targets that we've shared with you are our medium-term targets. I've said to you guys many times, if we have a fabulous organic quarter, you shouldn't get carried away and don't go after the sunny uplands. And if we have a weak organic quarter, the wheels have not fallen off. It just happens. So we get -- if we can consistently deliver quarter-to-quarter those sorts of numbers, then we will come back and say, "Do you know what? The shape of the organization now, the medium-term guidance needs to move." We're not quite at that point. I answered the question earlier on Hygiene.

If we can get that consistency and we can see it in the business and if we can get that consistency in pest -- I mean I've shared with many of you, I'm not satisfied that we're growing at 5%, give or take, organically in Pest Control. The industry is growing at 5%, so we should be doing much better than that. And as and when we do, then I'll come back and say, "You know what, we need to move our organic targets."

But because of the -- I won't say volatile, but there is a seasonality to the business. There is a weather element. It does go up. It does go down. We don't -- we want to be as open as we can, but we also want to be relatively conservative. These are medium-term guidance. They're not annual guidance. Medium-term guidance. So if we can see that consistency come through, then I think we would be potentially having a different messaging.

But as of today, we had a good discussion internally. As of today, we feel it's appropriate to leave it where it is for the time being. But we are very encouraged to deliver that level of growth with the poor, wet Q2. Clearly, if it hadn't been wet, it would have been better and we would have delivered a better number.

Okay. Any last question? So thank you very much, everyone.

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Jeremy Townsend, Rentokil Initial plc - CFO & Executive Director [28]

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Thank you. Thank you.

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Andrew M. Ransom, Rentokil Initial plc - CEO & Executive Director [29]

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See you all again in 6 months. Thank you.