Rentokil Initial PLC /Fi Q2 FY2024 Earnings Call

Well, good morning, ladies and gentlemen. In a few moments, Stuart is going to provide you with details of our good overall performance in the first half of 2024. I'll then come back. I'll provide a very brief update on each of our categories before we focus on North America, where we're making encouraging progress against our RIGHT WAY 2 growth plan with the core metrics now moving in the right direction and where we'll deep dive on our integration program, which is going extremely well. Brad Paulsen, our CEO for North America, will take you through a progress update on both of these important areas. So to set the scene, let me just say a few words by covering the group highlights of the first half. Revenue increased by 4% to GBP 2.8 billion with top line growth in all regions, of which organic growth was 2.8%. Our Europe, U.K., Asia and Pacific regions are all delivering organic growth in the range of 4% to 6%, and they've all performed well in the first half. In the first quarter, our North America Pest Control business delivered organic growth of 1%. And this has increased to 1.5% in the second quarter following the launch of our Terminix It marketing campaign and our RIGHT WAY 2 growth plan. We are pleased with the progress being made in colleague retention, the increase in brand awareness and branded search, inbound digital lead flow and the increase in the number of technicians submitting sales leads from existing customers. Rebuilding our growth engine will take time, but we made good progress in the second quarter, and we expect to make further progress in the second half. Group adjusted operating profit grew by 4.7% to GBP 455 million. And we delivered a group margin of 16.5%, up by 10 basis points and in line with our guidance. Statutory profit before tax at actual exchange rate was GBP 253 million, an increase of 5.6% on the prior year. Our bolt-on M&A program continues to create value with 23 acquisitions in the first half, generating annualized revenues in the year before acquisition of GBP 81 million. A leverage ratio of 2.8x puts us firmly on track towards further deleveraging towards our target range of between 2 and 2.5x as we committed at the time of the Terminix acquisition. So an encouraging overall group performance. And while we're mainly focused on North America growth and integration today, it is worth highlighting that the rest of the group continues to perform very well. Four months ago at our prelim results, we set out our detailed plan to reinvigorate organic growth in our North America Pest Control business. We explained our model, which you can see on the slide there, with opportunities for growth from both existing and from new customers. To date, we've invested around $21 million of the $25 million we committed at the prelims. And that's gone into brand marketing, lead generation and into new sales and marketing talent. I'm pleased to say that whilst it's still early days, we can see green shoots now appearing, and our key growth KPIs are showing positive improvements. We've delivered excellent continued progress on colleague retention, and it was particularly good to see an increase in sales colleague retention of almost 400 basis points since the beginning of the year. Our Terminix It brand campaign was launched in mid-March, and according to our latest data, has already been seen 685 million times and by 96 million people. This has delivered a very encouraging 29% increase in branded search for Terminix. In April, we registered our first month of 2024 year-on-year inbound sales lead growth from new potential customers, and this continued through May and June. And more of our technicians are also submitting sales leads from existing customers with an increase in participation rate from around 50% in January to over 60% in June. Our underlying progress in the second quarter gives us the confidence to extend these investments with an additional $25 million committed to growth initiatives funded from gross synergies with around $15 million of that being spent in the second half. But we'll also shift more of our focus on to the long-term need to improve the customer retention rate, particularly with our residential and termite customers. So we're confident that the investments that we are making are the right ones for growing our underlying contract portfolio to support not just the second half but also to lay the foundations for long-term growth. Touching briefly on the excellent progress we're making on the integration. In the first half, we completed Phase 2 of the integration, which included the detailed preparation of the branch integration program. The first integrations then began on schedule in June and July. Today, our end-state systems and processes are live, and they're working well in the first 9 branches that have been integrated with 160 technicians serving both commercial and residential customers and with combined annual revenues of around $37 million. When you include the Rentokil technicians who are already using our new end-state PestPac system and now the first Terminix colleagues are also using the system as part of the first branch integrations, it's now being used by over 40% of our technicians in the U.S. and will be used by over half of our U.S. techs by the end of this year. And we're firmly on track to achieve our gross cost synergy target of $325 million, having delivered an additional $58 million of gross savings in the first half. The additional H2 investments in our RIGHT WAY 2 growth strategy of $25 million takes our total planned investments over the course of the integration to around $125 million, and therefore, we now expect total net synergies to be over $200 million. So a positive overall group performance, green shoots coming through in North America as we execute the RIGHT WAY 2 growth plan and excellent progress on the integration program, which remains firmly on track. With that, let me hand over to Stuart.

Thank you, Andy, and good morning, everyone. I'll run through the financial highlights of what's been a good first half overall. I'll start with the group level numbers. And then as usual, I'll move through the regions and then look at the balance sheet. Unless I state to the contrary, all numbers are at constant rates of exchange. The business delivered a good top line performance in the first half. Revenue was up 4% to GBP 2.76 billion and statutory revenue up 1.3% to GBP 2.7 billion. Organic revenue was up 2.8%. This translates to an adjusted operating profit of GBP 455 million, a year-on-year increase of 4.7%, and margin was up 10 basis points. Free cash flow was GBP 172 million, and cash conversion was 62.2%. This half-year phenomenon was a result of timing of customer and supplier payments around the half-year, and we expect cash conversion to return to 80% to 90% for the full year. These factors, combined with the continued success of our bolt-on M&A program and the dividend payment, resulted in a net debt-to-EBITDA ratio of 2.8x on the 30th of June, on track for full-year expectations. Based on a good performance in H1 and our confidence of further progress in the remainder of the year, the Board has approved an interim dividend of 3.16p, a 14.9% rise year-on-year and in line with our progressive dividend policy. So looking now at our performance by region, starting with North America. The North American business grew by 1.1%, of which 1.3% was organic. Pest Control services also recorded organic revenue growth of 1.3% for the half year. However, in Pest Control services, we saw an encouraging 50 basis point improvement between the 2 quarters as well as positive movement in a number of key leading indicators that Andy and Brad will speak to shortly. The Pest Control category overall was up 1.1% with a drag from the products distribution business. This was affected by customer inventory loading in 2023, creating very strong prior year comparatives. Adjusted operating profit in the region was up 1.8%, and operating margin was up 10 basis points year-on-year to 18.6% with a benefit from synergy delivery partly offset by our $21 million additional investment in marketing in the half. Note that excluding the product distribution business, our margin was 20% flat. Customer retention was stable at 79.8%, and we've seen further strong progress on colleague retention. Total North America colleague retention, including Terminix, improved 2.6 percentage points to 77.8%, driven by improvement in retention of both technician and sales colleague roles. Terminix colleague retention was up strongly by more than 3 percentage points to 73.1%. Despite the attention given to the Terminix transaction, we've had another good period for bolt-on M&A, acquiring 9 businesses with estimated total annualized revenues of around GBP 22 million in the year prior to purchase. The quarter-on-quarter financial improvement in Pest Control services indicates that we're beginning to see benefit from our RIGHT WAY 2 growth plan. We're making an additional $25 million investment in customer acquisition and retention to help deliver our growth opportunities, of which $15 million will be spent in H2. The Terminix integration has also made strong progress with the first branch integrations well underway and $22 million of net cost synergies delivered in the region in H1. Turning now to the European region. Another period of strong performance across the board here, driven by both effective price increases and resilience in overall demand, revenue rose by 7%. Organic revenue growth was 5.8%. All 3 business categories posted strong numbers. Pest Control revenue was up 8%, with a strong double-digit organic revenue contribution from larger markets like Germany, Italy, and Benelux. Hygiene & Wellbeing grew revenue by 5.2%, supported by an improved performance in the specialist hygiene and clean room businesses. France Workwear revenue was up 7.5% with continued pricing progression. Adjusted operating profit rose by 9.1%, and operating margin increased by 40 basis points to 18.9%. This was underpinned by the core hygiene business and also in clean room where higher volumes at good margins led to improved overhead recovery. While inflationary pressures remain, we've been successful at protecting margins with pass-through pricing. Customer retention remained strong at 88.5%, and colleague retention rates have also continued to be excellent, up to 90.7% and touching on historical highs. Eight business acquisitions were completed in the period with estimated annualized revenues of GBP 13 million in the year prior to purchase. Turning to the U.K. and Sub-Saharan Africa. We delivered a strong trading performance. Revenue increased by 13.2% with a positive contribution from both business categories with Pest Control up 5.2% and Hygiene & Wellbeing 21.4%. Adjusted operating profit increased by 9.3%, and operating margin slightly decreased by 90 basis points to 23%, largely due to short-term dilution from bolt-on M&A activity. The main margin performance has been underpinned by the U.K.'s service performance reaching an all-time high, reflected in an excellent Net Promoter Score, which also sustained strong customer retention rate, and colleague retention in the region is at 84.4%, up 1.1 percentage points. We completed one business acquisition in the year with estimated annualized revenues of GBP 30 million in the year prior to purchase. Looking now at Asia and MENAT on the left-hand side of the slide. Regional revenues rose by 7.5%, of which 4.7% was organic, supported by good contract growth and effective pricing. Pest Control in some of our key markets such as India and Indonesia led the way. Adjusted operating profit increased by 1.7%. Additional growth investments in Singapore and Hong Kong meant that adjusted operating margin for the period was down slightly to 13%. Customer retention was strongly up, and regional operations have continued to benefit from an excellent colleague retention rate of 93.5%. We acquired 3 businesses with estimated annualized revenues in the year prior to purchase of GBP 11 million. And finally, the Pacific region. Another double-digit top line performance here with revenue increasing by 10.4%, of which 4.1% was organic. Pest Control was up 12.6% with notable strength in commercial. Hygiene & Wellbeing was up 8.1% with continued strong demand in the region for our Ambius business. Regional adjusted operating profit was up 5%. The first half operating margin was slightly impacted by phasing in rural pest control. The customer retention rate remained strong, and colleague retention improved by 1.6 percentage points. We acquired 2 businesses with estimated annualized revenues in the year prior to purchase of GBP 5 million. Group margin was up 10 basis points, underpinned by our continued execution on strategic initiatives. These include the densification of roots and products, optimization of overhead costs and leveraging technology and innovation along with active cost base management. Integration activities have positively impacted margins from completed M&A initiatives brought in at lower than group margins. Gross synergies from the Terminix integration contributed 170 basis points to group margin, and there was a 100 basis points reduction from investments, including 60 basis points from the additional marketing investment. Group cash flow. Higher trading profits came from organic and acquisitive growth, partly offset by FX. The group did have a GBP 97 million working capital outflow in the first 6 months of the year. This resulted from a slightly softer debtor performance and improved supply payment processing right at the end of H1, and these are expected to revert to previous guidance in the second half and not have an impact on the full-year cash outlook. As a consequence, full-year '24 guidance for working capital and cash generation remain unchanged. The cash interest payments increased by GBP 10 million year-on-year. Cash tax payments totaled GBP 31 million, a decrease of GBP 27 million year-on-year, also attributable to some prior year one-off tax payments and H1 2024 one-off U.S. tax refunds mainly related to the Terminix acquisition. The cash spent on acquisitions was GBP 76 million, while dividend payments were GBP 149 million. Note that for some of our bonds, we pay a full year of cash interest in H1 versus a P&L charge across the year, reducing cash conversion in the first half by about 10 percentage points. Our full-year '24 guidance, as I said, for adjusted free cash flow remains at 80% to 90%. The group's net debt-to-EBITDA ratio remains stable at 2.8x. The group maintains liquidity headroom of approximately GBP 1.5 billion, which includes an undrawn revolving credit facility of $1 billion set to mature in October 2028. Around 81% of the group's debt is at fixed interest rate. The group has a EUR 400 million bond maturing in November this year. And with the current level of headroom, we've got good optionality around the timing of the refinancing. Before looking at our technical guidance, I want to share our plans to change our presentation currency. We've used pound sterling since the inception of the group. However, the U.S. now represents about 60% of group revenue and 2/3 of group profit, which can result in significant reporting volatility from FX movements. We, therefore, plan to change our presentation currency to United States dollars for all reporting periods starting from 1st of January 2025. We commenced a project to this end in the second half of last year that would allow us to do this. We will provide U.S. dollar comparatives for key financial statements and support for modeling from the annual results reporting in 2025. Our U.S. business has never been more significant to the group, operationally and strategically. We acknowledge the market debate around listing for companies such as Rentokil. Our Board will continue to keep the group's listing under review. However, at the current time, we are strongly focused on driving up organic revenue growth through the RIGHT WAY 2 plan and successfully integrating Terminix. Moving to technical guidance. On this slide, we give estimates to help you with your models in relation to the full year. Most remain unchanged with some updates. On the P&L, we expect Terminix integration costs to come in about GBP 10 million lower than previously guided. The adjusted effective tax rate is expected to be lower in the range of 24% to 25%. Anticipated spend on M&A is revised to between GBP 200 million and GBP 250 million. Our full-year FX guidance reflects the strengthening of the pound against the dollar, and we now anticipate having a headwind of between GBP 30 million to GBP 40 million. We expect this increased FX headwind to be offset by further operational progress. We do expect a net $15 million or about GBP 12 million revision to group adjusted operating profit in the full year, which reflects, amongst other things, the additional growth investment in H2. And at that point, I will hand back to Andy.

Thank you, Stuart. I want to give the North America section here as much time as possible this morning. So in the interest of time, I'm going to turn the pages on our usual employer of choice and business category sections at pace. I'm delighted with the excellent progress that we're making and obviously happy to take detailed questions later. Our tried and tested operating model continues to perform very well. And as you can see, we've continued to make good progress in colleague safety and in sustainability. We've also made progress in colleague recruitment and in particular in colleague retention, where in the year to June, our global colleague retention rate has increased by an excellent 4.2% to almost 86% and by 1.7% year-to-date. In our Europe and Asia regions, we've achieved an outstanding retention rate for our service technicians of over 90%. And in a moment, Brad will discuss the very good progress we're now making in North America. Turning to our business categories and starting with Pest Control. In Pest Control, we operate a simple, repeatable model in a global market that is underpinned by structural growth drivers, including urbanization, growing middle classes, population growth, climate change and increased regulatory pressure, particularly in food safety. As you can see on this chart, according to the latest industry reports, since 2018, whilst North America, which by the way accounts for around 50% of today's global pest market, has increased spend per capita on pest control by an impressive 24%. Spend on pest control continues to grow significantly faster in the emerging markets of Asia and in India and China, in particular, where the equivalent per capita growth rates are 170% and 468%, respectively. And this is very much in line with our long-term M&A strategy of building our presence in those cities of the future. And indeed, in the first half, we acquired the second largest pest control company in India, securing our leading position in that very important future growth market. Looking at our global Pest Control business. In the first half, we delivered revenue growth of 2.8%, of which 2.2% was organic, with our global Pest Control business now having first half revenues of around GBP 2.2 billion and having an impressive 10-year revenue CAGR of almost 19%. Pest Control profits in the first half increased by 2.2% to GBP 421 million with margins remaining stable at 19.2%. While, of course, we added the additional investment for growth in North America, the business has delivered a 10-year profit CAGR of over 20%. Turning to Hygiene & Wellbeing. In the first half, we delivered revenue growth of 9.6%, of which 4.8% was organic growth. We acquired 7 excellent companies with annualized revenues in the year prior to purchase of GBP 45 million, exceeding our full medium-term guidance of GBP 25 million. Since 2014, this high-quality sister business to Pest Control has delivered a revenue CAGR of 6.3%. During the first half, profits in Hygiene & Wellbeing grew by 14.3% to GBP 77 million, and margins increased by 80 basis points to 17.2%. This is an attractive business category with similar route-based operating model to pest control and shared country management teams, shared functional support and other shared overheads, and over the last 10 years, has delivered a profit CAGR of 8%. In the first half, our initial Workwear business in France delivered a strong performance with revenue growth of 7.5% to GBP 116 million, all of which was organic. Adjusted operating profit grew by 9.4% and increased margins by 30 basis points to 17.2%, the highest since 2015. With the Olympic and Paralympic Games starting this week, our Workwear business will be playing its part, supplying and cleaning staff uniforms as well as flat linen and towels to many people visiting Paris this summer. Turning to our bolt-on M&A program. We operate in highly fragmented markets. And since 2018, we've acquired 284 businesses around the globe, mostly building our position in the highly attractive pest control market and with acquired revenues of around GBP 909 million. For your reference, we've broken this down into the pie charts that you can see on the right-hand side there. The opportunity in M&A remains significant. In the first half, we delivered 23 bolt-on deals with annualized revenues of GBP 81 million for a consideration of GBP 112 million. In North America, we delivered 9 small tuck-in deals, including the acquisition of Xceptional, which has a presence in 12 states. And it's our entry into the wildlife control and exclusion business, something that neither Rentokil nor Terminix has previously offered. So good continued progress. The pipeline is in good shape, and our current view of M&A spend this year is around GBP 200 million to GBP 250 million. Based on our most recent analysis, our ongoing M&A program continues to perform at or above our hurdle rates and well above our WACC. So a good overall performance from our business is around the world. So now let's move our focus to North America. I'm just going to say a few words this morning, and then I'm going to hand it over to Brad. In the first half, we spent $21 million of the additional $25 million committed at the prelims, and we spent that on digital search, on enhanced web content, the optimization of our social platforms, our brand advertising campaign and our brand partnership program as well as investing in the sales and marketing teams. With our North American business having around 75% of its revenues under customer contract, it's important to note that the investments will benefit the Terminix brand not just this year but for the years to come. I'm very encouraged by the initial progress, and as I mentioned earlier, we are now seeing the green shoots coming through with good progress against the core growth KPIs. Our RIGHT WAY 2 growth program continues in the second half with the announcement of additional investment of $25 million, $15 million of which will be spent in the second half, and which will be spent on digital marketing, extending the brand campaign and adding additional new area sales managers, and importantly, on a series of customer retention initiatives, which Brad will touch on shortly. We'll fund this investment for growth from gross synergies, and we're expecting to see continued improvements in our growth metrics over the coming quarters. So lots of focus on growth across the business, but at the same time, the business has made excellent progress on the integration. Execution of our plan in the second quarter was very successful in preparing the business for the first branch integrations and in launching those, which are now underway, and they're going well. We're building the foundations for long-term sustainable growth, and we're making good progress. Now let me hand over to Brad, who will firstly provide an update on growth and then move on to the integration program.

Thanks, Andy, and good morning, everyone. For those of you I have yet to meet, I am Brad Paulsen, the CEO of our North America business. I am pleased to represent our team today and excited to highlight the encouraging progress we delivered in the first half. I shared this past March that our U.S. pest team would use our RIGHT WAY 2 framework to help deliver a world-class customer service experience to our existing customers while also prioritizing key actions to help increase our growth from new customers. I'm happy to report that our team delivered meaningful progress across several key areas of our framework, which I believe will help deliver growth benefits for our business as we move forward. Foundational to our growth success is the ability to deliver industry-leading colleague retention. Hiring, training and retaining top talent is becoming a strength of our business as we saw continued gains in retention realized by our team in the first half. We saw material retention increases in our service technician, sales and customer care colleague populations as well as our back-office admin teams. Branch manager retention stood at an impressive 97.5%. These improvements are a reflection of our commitment to our people and the belief that a trained and happy team will deliver great service to our customers, which over time will lead to improving customer retention. I am particularly pleased with improvement delivered in our sales colleague retention, up by almost 400 basis points as that was a colleague group we previously identified as needing more focus and support. Customer experience and customer retention are key parts of our organic growth model. We want to keep the customers we have, delight them with a great experience and sell them more services through our service technicians. Each 1% of customer retention improvement represents, on a full year basis, around $27 million in organic revenue. And given our combined rate stands at just under 80% today, which we view as stable but a long way from best in class, so clearly, there's a significant opportunity here for improvement. Our plan is being developed but will include using our customer data to identify and address customer friction points, build on the new service quality control program. We will deliver targeted customer marketing to those customers that our data identifies as at risk, and we also plan to add around 40 people to our dedicated customer saves team. This past spring, we launched our new Terminix IT brand campaign aimed at increasing awareness of our Terminix brand and strengthening our top of funnel marketing execution and performance. We are very pleased with the initial results of the campaign as it's been received well and delivered a noticeable improvement in brand favorability with our targeted customer segments. Additionally, we identified new customer inbound leads as a focus area, and again, are encouraged by the improved performance in this part of our business as our team delivered year-over-year lead growth in April, May and June. This is the first time this has occurred since August of 2023. As I just mentioned, the initial results from our Terminix It brand campaign are very encouraging. Our campaign has been viewed 685 million times and by over 96 million individuals, which has generated a 29% increase in branded search and a 6% increase in visits to our Terminix website. We will continue to invest in our brands as we know it is an essential agreement to have a known and trusted brands in consistent organic search performance. Another area we have prioritized in our RIGHT WAY 2 framework is lead generation from our service technicians, a program we call trusted advisers. In the first half, through the use of end market training programs, performance dashboards and minor technology improvements, we have seen the participation rate for this program increased from approximately 50% at the start of the year to over 61% in June. We will remain focused on this opportunity and expect to deliver further improvements in participation rates and lead generation in the next 6 months. The final areas of our RIGHT WAY 2 framework I will touch on today are sales efficiency and pricing. A critical piece to delivering improved sales efficiency is increasing the retention of our sales colleagues. Our colleagues with less than 1 year of service time are especially important as our data highlights that a sales colleague with more than 1-year service is typically around 50% more effective than those with less service time. In the last quarter, we have made adjustments to the training and compensation plans for our new sales colleagues, which is already resulting in increased retention rates. Along with this, we are also adding area sales managers for our legacy Terminix sales geographies. We believe this is an important investment to ensure our local sales teams receive the training, coaching and support they need to consistently deliver above-market sales growth. We initiated the implementation of this plan in the first half and expect to complete it over the coming months. Lastly, I continue to be pleased with our pricing discipline and execution as we are successfully mitigating the impacts of inflation on our business. I am genuinely encouraged by the RIGHT WAY 2 execution progress we made in the first half of the year and expect these positive trends to continue. These areas are critical building blocks to our future organic growth and will help deliver improved growth performance moving forward. So let me now add a few comments on the progress we are making with the integration. Over the last 2 years, we have streamlined and unified the organization, invested in new talent, improved colleague retention, introduced a single payroll and benefit system, put colleagues onto a single people management platform, integrated 10 stand-alone acquisitions with $210 million of revenues onto our new PestPac platform; developed and tested our branch integration playbook; significantly improved the risk around termite warranties and delivered gross cost synergies of $162 million. In the first half of this year, we have completed Phase 2 of the integration plan to prepare and test for branch integrations in which we delivered the full legal merger, developed and tested 22 systems with 190 features to enable the integrations and harmonize multiple business processes, contracts and applications. We also undertook the important task of designing our new compensation structures, where we have rolled out harmonized pay plans for field leadership and national account sales teams, designed a fair and consistent technician pay structure, which will ensure our compensation will be competitive in the industry. And this is ready to be piloted later this year in the first integrated branches. And we've improved our contracts for new sales colleagues, moving away from 0 salary, so no more 100% commission contracts for our new hires. It's been an outstanding second quarter of progress, rounded off by the green light for the first branch integrations. To date, 9 branches have undertaken the full systems and data integration with technicians, sales, admin and leadership teams all now successfully operating on the new standard IT platform. We have delivered the integration for residential customers, for commercial customers and for national account customers, and we have migrated combined revenues of around $37 million. So how is it going? In short, very well. We have a single set of systems. Data has been migrated. Sales leads are flowing as they should. Work orders are completed. And calls from customers following the expected initial spike have returned to usual levels after a few days. If you include our Rentokil technicians in the U.S. who have already moved to the new version of PestPac, then we already have 40% of our U.S. technicians using the new end-state system. And in the second half, our plan is to migrate over 25% of heritage Terminix branches, revenue, service technicians and sales colleagues onto the new PestPac platform. Now I know there's interest in the process of branch integration. So we've included this slide for information. I won't go through in detail today, but we have a highly disciplined approach to branch mergers with each program running over 6 to 10 months. Delivering each local integration is a dedicated team of specialists who are on the ground to make sure everything happens on schedule and according to our playbook. As I've just mentioned, the first systems integrations are going very well. So we are effectively through the planning and integrate stages shown on the slide, and we are on track for the first rerouting, branding and pay plan pilots starting in October. This is a highly disciplined structured process where only by delivering the current stage effectively do we earn the right to move on to the next stage. I know that our branch strategy is also subject to some interest, so here are a couple of slides to provide you with our latest analysis. As with other parts of the integration, we are taking a data-driven approach to this. Today, our branch network has a combination of large, medium, small and a large number of subscale branches, and we have analyzed the data for each. Our main focus is on increasing the size of the 160 or so subscale branches to provide greater scale and density. Just to be clear, this is not about creating mega-sized branches but optimizing properties and creating better route density, just as we have done in the U.S. and around the world with our bolt-on program for many, many years. This data-driven approach ensures we can increase route density and reduce property overheads. There is no change in our spans of control. There is no major impact on the service technician role. Just as today, technicians start their route from home and visit the branch only 3 or 4 times a month for training and to pick up materials. And most importantly, there is no negative impact on our customers. Customers, of course, do not physically visit branches. It's the technician who owns the customer relationship. And by accurate route planning, we'll actually be putting them closer to their customers. Linked to the route integration is the brand strategy. And here again, we are using a data-driven approach to inform our evolution to a multi-brand strategy using the power of our Rentokil and Terminix national brands, supported by co-branding the Terminix brand with our strong regional brands such as Ehrlich and Florida Pest Control and leveraging many of our important local brands over an extended transition period. As a final point, I'm very pleased to share the progress made in our termite warranty claims as we delivered continued improvements, particularly a 75% reduction in filed complex litigated claims and a 20% reduction in new warranty claims in the Formosan termite heavy Mobile Bay area. This is obviously a long-term program, but we have made encouraging progress over the last few quarters. So just to wrap up, following an excellent second quarter, the integration is on track. And we now have the first branch integrations underway, and they've started well. With that, I'll hand it back to Andy.

Thank you, Brad. So in summary, before we move on to questions, good overall group performance in the first half. As you've just heard, the RIGHT WAY 2 growth plan is up and running in the U.S. We've seen many of the core growth KPIs showing improvements in the quarter. And to support that growing momentum. We will continue to invest for growth with that additional $25 million. The branch integrations are underway. They're going very well as we continue to build out the long-term foundations of our powerhouse U.S. Pest Control business. Given the encouraging overall performance, the Board declared an interim dividend of 3.16p per share, which is an increase of 14.9%. So with that, thank you very much. We're going to take questions now. We're going to start with questions in the room and then any additional questions from the audience online. Thank you very much.

Suhasini from Goldman Sachs. I have two questions. You've mentioned the improvement in leading indicators following the digital advertising spend. You also discussed rebuilding the growth engine and the additional $25 million you plan to invest over the next 12 months. Given this, why have you lowered the growth outlook in North America to the lower end of the 2% to 4% range?

I think that were 2 questions. The second one is on the customer retention. You talked about increasing the customer retention and how an incremental 1 percentage point change can drive an additional $27 million of revenue. Can you share your thoughts on where you think the retention rate can reach medium term? And of the spend that you have in the incremental $25 million that you wanted to go, maybe it's an extra 1% or 2% in the next 12 months, and then maybe beyond that takes a little bit longer? Thank you. In terms of growth, we have seen an improvement in our core U.S. pest business, moving from 1% to 1.5%, which we are satisfied with. However, we still need to make progress to reach the lower end of our target range. Essentially, this is a matter of calculations, and we anticipate improvements in the second half of the year. It’s important to understand that the journey for organic growth is not straightforward; there will be ups and downs. The positive lead flow we are experiencing for the first time since August last year is significant and is a crucial step forward. We need to keep executing our plan, and while we would like the results to come faster and be more substantial, we are seeing momentum build. Looking ahead, we expect further growth in the second half. Regarding customer retention, prior to the Terminix acquisition, Rentokil North America's pest business had a retention rate of about 82.5%, while Terminix had a rate of approximately 75% to 76%. Currently, we are at a blended average of around 79.5%. If we can return to the previous retention rate at Rentokil North America, that represents approximately a 3 percentage point increase in retention. I believe it's reasonable to aim for a combined retention rate of 82.5%. The rest of our group generally sees retention rates around 85% to 86%, but we will need to account for the fact that our residential and termite segments traditionally have lower retention rates. Thus, aiming for 86% in the near term may be overly optimistic, but I do believe we can achieve 82%, 83%, or 84% over time. I won’t commit to specific quarter-by-quarter retention targets, but we are certainly focused on improving customer retention. We've worked hard to increase lead flow, and while it's not perfect yet, it has substantially improved. Now, we must also prioritize customer retention, which is why we are adding 40 more team members to the save team. I believe we will see progress in customer retention, although it won’t be a straight path. Over time, we should aim to reach retention rates in the 82 to 84% range. Improving this retention significantly impacts our overall growth compared to our major competitors, as their better retention rates are a key factor in their organic growth advantage. Thank you for your question.

Annelies Vermeulen from Morgan Stanley. I have 2 questions as well. So firstly, on the marketing spend, you've been very clear about what's been successful and where you've seen progress. Of that initial $25 million that you've spent, is there anything that hasn't been so successful or anything that you think will shift the mix of how you spend the next $25 million? That's the first one. And then secondly, on the product distribution business, it sounds like that's been quite a drag in the second quarter. From memory, I think that recovered a bit in Q1. So perhaps you could talk about what happened in Q2. And are you still confident in the recovery of that business going forward? Or are you considering options for that business from here?

Thank you, Annelies. In terms of our successes and challenges, it’s important to remember that in business, things rarely go perfectly. There are many factors at play. The performance of our paid search improved in the latter part of the quarter, which is a result of learning from our experiences—some strategies worked while others didn’t, leading us to try different approaches. Overall, performance has improved, though it wasn't flawless throughout the quarter. I'm satisfied with our current position. However, it's worth noting that when we invest more in paid search, as we have, it tends to raise the cost per lead. Ideally, I wish the costs were lower. As we allocate funds to well-known search engines to enhance our performance, we inevitably drive up prices. To address this, we need to be smarter about our spending; if we focus only on popular cities and common search terms, we simply inflate costs. This is something we need to be more strategic about. As for our approach in the second half of the year, we plan to replicate our strategy, particularly regarding paid search and advertising. Regarding the distribution business, I appreciate your recall. Last year’s Q1 was unique, and Q2 was also notable. Our distribution business, which had been quite stable for years, became volatile, experiencing significant drops followed by a substantial rebound in Q2. I believe we saw around 20% organic growth in June of last year within that sector. The business is strong, with a great team at the helm, and I have no major concerns. Each year, we evaluate potential alternatives for our business lines. While we have no current plans for changes, we discuss this with our Board in the fourth quarter each year. Overall, the distribution business remains robust.

Allen from Jefferies. I have three questions. Firstly, regarding the additional $25 million investment, could you elaborate on the confidence to increase investment when some aspects, like search engine terms, require ongoing funding to maintain? What assurance do we have that no further investment will be needed beyond this amount? My second question pertains to the pricing environment in the U.S. pest control industry. Growth appears to be somewhat weaker compared to peers, yet pricing seems to remain stable among competitors. Are you also seeing benefits in this area? Lastly, I noticed that contracting growth in North America was at 2%, which is better than the overall group. A challenge for Terminix is shifting some jobbing activities to contracting and changing the mix. Could you provide some insights on the progress being made, the challenges in contracting, and how that may evolve throughout the year?

Thanks, Allen. I'll address the first and third questions, and Stu, you can handle pricing. I believe the number we mentioned, $25 million, is accurate based on our calculations. However, we are open to adjusting this number if needed. It's important to note that 75% of our revenues in North America are under contract, while 25% comes from jobbing. Therefore, our investments are aimed at ensuring sustainable organic revenue growth rather than just boosting numbers in a single quarter. Anyone can inflate figures for a quarter by shifting jobs, as illustrated by the differences in job values across services. While selling a contract might lead to lower immediate revenue, we are focused on maintaining a healthy balance between jobs and contracts for long-term growth. We have invested significantly in paid search, and thankfully, we are beginning to see positive lead flow from these efforts. However, we still need to refine our systems to better direct leads to the appropriate branches. Our team's commitment and focus are reflected in the results from the second quarter, which is why we plan to continue investing in this area. It’s essential that we are not only driving immediate sales, but also working to improve our contracting portfolio over time. Although the growth in contracting is currently at 2%, our goal is to increase this figure to 5%, which can lead to a corresponding organic growth. We're placing more emphasis on selling core pest control contracts, recognizing the importance of both contracts and jobs. Additionally, we must ensure that we are actively retaining our clients to build a positive net gain in our portfolio. This strategy explains our confidence moving forward, and now I'll hand it over to Stu for pricing.

Yes. On pricing, it seems quite stable to us, not only in North America but globally as well. There is some easing as inflation decreases, but they are still managing to set prices effectively, including in North America. A potential issue would be reflected in the retention rates; if we were facing challenges in maintaining pricing, we would expect to see an increase in termination rates. However, we have not observed any significant changes in our ability to maintain prices in North America or anywhere else worldwide. Overall, it feels quite strong to us.

Chris Bamberry, Peel Hunt. A couple of questions if I may. How did organic growth in North American pest services develop over the quarter? And secondly, you kind of nudged down slightly your M&A target for the year. Is that just a timing issue? Or have you been losing out on deals? And I guess, on that front, what are we seeing in terms of pricing and competition for acquisition?

I will address the M&A topic and then return to the question I won't be answering. Regarding M&A, we do what we can. At the beginning of the year, we provided our best estimate for the next 12 months and then we update that, indicating whether we will spend a bit more or a bit less. M&A is highly opportunistic and can vary significantly; it can change dramatically with a big win or a few losses. There’s no significant story between the 250 to 200 range; it’s simply a reflection of our current situation and the pipeline for execution over the next six months. Based on calculations and our probability assessments, that’s where the numbers fall. We have the flexibility to exceed 250 or come in under 200. However, at this moment, it appears we will stay within that range. There’s not much I can share regarding pricing. Over the past five years in the U.S., we witnessed prices increase and remain high. We anticipated a slight dip in prices, and while we did observe a slight decline in the last 18 months due to rising interest rates affecting private equity competitiveness, it hasn’t been substantial. If there has been any change, it’s been a slight softening overall, but nothing major. You saw our spending relative to the revenue and might think we are spending less per revenue dollar. This is largely because we focused more on the Hygiene & Wellbeing sector during the half than before. Hygiene & Wellbeing deals generally come at a lower multiple since fewer competitors pursue them. The pest control pipeline looks promising, with stable pricing, perhaps slightly lower, but it’s hard to ascertain. I won’t delve into monthly specifics as I don’t plan to provide monthly revenue figures. I don’t believe there’s a significant story for the quarter. While we learned from our paid activities throughout the quarter, I don’t see it as a major issue to report.

Nicole Manion from UBS. Just two questions, please. You've talked today a lot about the importance of colleague retention and since the deal closed, I think that's broadly speaking been increasing. Should we be expecting some volatility in those metrics, even if only temporary, as you sort of crack on with those full branch and route integrations in the kind of later phases? And then secondly, a broader question on the branch strategy. I guess there's obviously multiple ways to skin a cat, but you have a big peer who is maybe quite vocal having these smaller, but more numerous branches. I think you've touched on it today in those helpful slides, but I wonder if you could elaborate on what gives you confidence that is the right approach? Is it that you think you're doing something different through the integration process around innovation, route planning and so on? It will be somewhat better than what peers in the market have or is it something else?

Yes, colleague retention is an important topic. The honest answer is that we'll know it when we see it. Reflecting on the pilots we conducted about a year ago, we observed some fluctuations in colleague retention. This prompted us to investigate what factors led to that volatility and what might have caused dissatisfaction among our team members. Some issues were related to the pay structure, and we've learned from these experiences. That's the purpose of piloting our initiatives, and I intend to share the upcoming changes. We have labeled our fourth-quarter plans as a pilot intentionally. While we have a solid plan regarding pay and conditions, we remain flexible. If we receive substantial negative feedback when we launch these changes, we reserve the right to adjust our pay plan. Our data indicates that we expect more colleagues to respond positively than negatively. However, we are also mindful of those who may be unhappy and are focused on minimizing their discontent. Additionally, in line with delivering the synergies we are committed to, we recognize that we need to reduce our workforce. However, our strategy does not involve a large-scale redundancy program; rather, we plan to manage this through natural attrition, where we will not replace departing employees but will reorganize territories instead. This may lead to some fluctuations, but the overall trends we see are encouraging. I included a chart to dispel misconceptions regarding our branch strategy. There's been speculation about a shift to a larger branch structure; however, we're primarily consolidating smaller branches that do not meet the necessary scale. Many of these branches are not large enough to operate effectively. We already have 80 larger branches and plan to expand that number to 110. This approach is not dramatically different from our competitors, and while some may have larger branches, we believe our model is aligned with market needs. As we navigate this transition, we need to ensure all systems are fully integrated, and I am confident our end goals will be effective and sustainable. Thus, rather than focusing on differences with competitors, I encourage understanding that our model is fundamentally similar. It is also worth noting that customer habits have shifted; customers do not visit branches as frequently, and technicians are assigned territories based on their residential areas, ensuring they remain close to their clients. We believe there is room for improvement, as we are a learning organization, but our strategy is not fundamentally about moving to a model of larger branches; it’s about appropriately scaling our operations.

Sylvia Barker from JPMorgan. I have three questions. First, regarding organic growth for the second half, you'll be implementing some full integrations in Q4. Can you provide any assumptions about dis-synergies included in the organic guidance for North America? Second, is the free cash conversion different in North America compared to the rest of the business? Since you have a larger residential segment, I assume the proportion of prepayments differs. How does that play out, not only for this half but more structurally? Lastly, on Hygiene, we’ve asked about this before, so I apologize for bringing it up again, but where does that business stand in terms of its integration with pest control across different regions? We receive a lot of inquiries about this given the recent news.

Thanks. I'll address points one and three. I'm not going to provide a specific number regarding dis-synergy. I can say that while developing our program, plan, and guidance, we assumed there would be some short-term impact on organic growth during integration. I prefer not to give you a specific figure, but to clarify, we've conducted many integrations where the impact was negligible and others where it was significant. What excites me most about the second quarter is that we’ve successfully completed the systems integration. Although it may not seem significant, it's a major achievement. To fully and properly integrate this business, we need to accomplish two key tasks. First is the complete integration of our systems, which is a massive undertaking requiring meticulous execution. That part has gone exceptionally well. We have transitioned Terminix colleagues from their previous systems to our new system and have also integrated stand-alone acquisitions, as well as commercial, residential, and termite services. We encountered several day one issues, all of which have been resolved. While it's not completely finished, it's a significant milestone to have the systems integration completed. Well done to the team. We still have more to tackle. The remaining major tasks are rerouting, branding, and pay. We're confident about the pay aspect. We’ve invested considerable time and resources with third parties and consulted widely, and I believe the pay structures we've developed are solid. We'll see how it performs in the fourth quarter, and if it doesn't work, we will make adjustments. Regarding branding, we included information because there's concern that we might abruptly replace around 70 local brands with Terminix branding. That has never been our plan. Instead, large regional brands like Western Exterminator, Florida Pest Control, and Ehrlich will be co-branded, likely for many years to come. Even long after my tenure, the Western brand will still coexist with Terminix. For smaller brands, we’ll gradually phase them out. I feel positive about the pay and branding aspects. On the rerouting front, that's where we could face challenges. We need to manage this carefully to avoid frustrating customers. The pilots so far have focused on systems integration, which has gone well, while pay and branding also look promising. We've completed rerouting many times before, but it will be the critical point. The question is whether we can implement it effectively at scale over the next two years without significant disruption to our customers. We believe we can, and I'll keep you informed as we progress, starting in the fourth quarter.

Yes, regarding free cash flow. Thank you, Andy, for your patience while I consider this. Let's begin with the National Account, which is very similar, almost identical. The commercial business might differ slightly. We have a significant commercial operation in North America, and it mirrors this closely. Once again, payments are made in arrears, and this explains why commercial customers tend to take longer. You are correct, the residential and termite sectors are different primarily due to revenue recognition. This is visit-based and highly seasonal. You typically bill and collect cash on a monthly basis, but then you perform work, recognize the revenue, and allocate the cash accordingly. Consequently, as we move through the season, revenue recognition tends to be ahead of cash collection, and that situation gradually unwinds over the year. A significant percentage of new residential and termite customers are using either EasyPay or credit cards. However, there remains a large number of legacy customers who still pay by check. Therefore, we continue to face collection challenges and variability with long-standing customers. This distinction fundamentally lies in how revenue recognition operates within the residential and termite segments.

How integrated is Hygiene with pest control? It's pretty integrated. At a country level, you run a country, you don't run past or hygiene, you run both businesses. So there's only one MD, only one FD, one HR director, one IT director. So at that most senior C-suite level in any country, you're running the whole thing. So you want to separate those businesses, you're going to have to put a huge layer of overhead in one side or the other. At the branches, it's mixed. Some we run at the same physical location, some are separate. We use the same IT stack. We share procurement. So there's a significant overlay between the businesses, and we get some commercial benefits as well. We don't do a lot of cross-selling. Hold the front page, cross-selling is really, really difficult to do. Anyone who tells you it's easy has never tried it. But we do have a lot of customers who buy both; that doesn't mean to say that pest control people are selling hygiene or vice versa. But if you're a happy pest control customer, we will introduce you to hygiene and vice versa. So we do get a cross-personalization on commercial. So honestly it's a very similar business the way it works, route density. It's got an even higher level of contracting versus past control. All of the things that we talk about in pest control about the importance of colleague retention and all of that exactly the same. So the synergy of having those businesses together, I think, is material. The dis-synergy of separating those businesses, I think, is a material end off as far as I'm concerned.

It's James Rose from Barclays. Got two, please. First is on the North America growth strategy. We've clearly made good progress on leads. But when it comes to sales conversion, is that at a rate below what you typically expect and what's your thought and diagnosis for that? And then secondly, assessing the slide, you're doing a process deep dive on the Terminix pricing process. What has prompted you to do that and what would you sort of expect to find from that review?

In response to the first question, someone has asked online why the average value of leads decreased along with sales conversion. To combine that question with yours, we provided a growth model to illustrate our sources of growth. Sales conversion and average lead value did decline slightly, which can lead to a noticeable impact when large numbers are multiplied by small variances. The reality is that when we push hard to generate more leads, we shouldn’t be surprised if some of those leads are of lower quality compared to when we are not pushing as hard. It’s essentially a numbers game. We may have more leads, but not all of them are of the same quality. As we progress through the sales funnel, some leads will be weaker, which affects conversion rates. If salespeople are only ever given high-quality leads that are easy to sell, they will perform well. However, as we provide leads that are more challenging to sell, the closing rate will decrease. What excites me, and as Brad discussed, is that we have faced a challenging retention rate for new sales colleagues. One of the key reasons we are moving away from a 100% commission structure for newcomers is that it does not appeal to them. It's tough to succeed in a short period with a model based solely on commission. Our data indicates that those who stay for a year tend to see significantly better conversion rates. By improving retention, we expect to see an increase in our sales conversion rate due to the growing experience of our team, rather than just replacing experienced individuals with newly hired staff. Although the numbers showed only a marginal decline, I was hoping for improvement in conversions. It’s an area to watch, and Brad is deeply focused on enhancing it. We believe we can raise those numbers as we improve the retention of our sales colleagues.