Earnings Call
Rentokil Initial PLC /Fi (RTO)
Earnings Call Transcript - RTO Q2 2025
Operator, Operator
Good morning, everyone, and thank you for being with us today online. In a moment, Paul will share our financial and regional performance for the six months ending June 30. I will then return with a brief update on our markets and businesses, focusing on North America before we take any questions. To start, our performance for the first half met expectations, with group revenues increasing by 3.1% to $3.36 billion and organic growth of 1.6%. The International region achieved organic growth of 2.7%, while North America saw organic growth of 1.1%, improving from 0.7% in the first quarter to 1.4% in the second quarter. We reported group adjusted profit before tax of $418 million and a group operating margin of 15.2%, which is 120 basis points lower than last year due to the anticipated decline in North America. Our cash flow conversion was strong, and the divestment of our French workwear operations is on track for around the end of the third quarter. Now, Paul will provide further details shortly. Regarding North America, since our preliminary results in March, we have set priorities aimed at enhancing our inbound lead flow. We've adjusted our marketing strategies to enhance nonpaid or organic lead generation, utilizing a broader range of tactics in the second quarter. We have also improved our customer proximity and local visibility, achieving better results from local searches through the establishment of new satellite branches. We've expanded the number of these low-cost satellites from 36 at the end of the first quarter to 100 at the end of the second quarter. Our brand awareness has improved by 3 percentage points, and we achieved inbound lead growth of 6.6% in our residential and termite business in June, marking our first year-on-year lead growth this year. The door-to-door sales pilot is also showing promising early results, and I'll share more on that later. In the first half, we enhanced our data analytics and insights, allowing for a more detailed branch-level assessment to support our targeted growth initiatives and future integration planning. For the second half, our focus will be on implementing our RIGHT WAY 2 Growth plan, which emphasizes customer retention, pricing, trusted adviser leads, comprehensive marketing execution and branding, and the door-to-door pilot. This will help us continue building our lead flow and expand our customer contract portfolio through enhanced contract sales, customer retention, and pricing strategies. We aim to optimize our satellite branches and advance our new locations toward 150 by year-end. Additionally, we plan to resume integration with our commercial branches and initiate a detailed work program for process, system, and execution improvements ahead of the 2026 branch migrations. While some branches may not be fully integrated by the end of next year, our target for a $100 million cost reduction from integration and achieving an operating margin above 20% in North America after 2026 remains unchanged. Now, I will turn it over to Paul.
Paul Edgecliffe-Johnson, CFO
Thank you, Andy, and good morning, everyone. I'll run through the key financials of the first half, then move through our regional performance, then explain how our improving data analytics are helping shape our plans to improve our North American performance. Unless I state otherwise, all numbers are on a continuing operations basis, i.e., excluding our France Workwear business, which we announced the sale of at the end of May. I will talk more about that later. Any comparative performance will be on a constant currency basis. With the move to dollar reporting, we've also taken the opportunity to simplify and update our constant currency reporting to a more conventional basis. Overall, we've delivered a solid performance, in line with our expectations for the first half. Revenue was up 3.1% to $3.364 billion with organic revenue up 1.6%. North America was up 2% or 1.1% on an organic basis as pricing more than offset reduced volumes. Adjusted operating profit was $511 million, a decrease of 4.5% with the decline in North America more than offsetting higher profits in International. Our group adjusted operating margin was 15.2%. I'm pleased with our free cash flow performance, with cash conversion at 93%, ahead of our 80% guidance. This was driven principally by improved working capital performance, and this remains an absolute priority. Net debt to adjusted EBITDA stands at 2.8x, up slightly since the year-end, reflecting approximately $175 million of adverse foreign exchange impact on period-end net debt. We've maintained our half 1 dividend per share at $0.0415, payable on the 22nd of September to shareholders on the register on the 15th of August. Looking now at our performance in North America, where we saw revenue up 2.0% to $2.106 billion. Organic revenue grew 1.1% with quarter 2 at 1.4%, up from quarter 1, which was 0.7%. Adjusted operating profit was $356 million, down 7.3%, bringing the adjusted operating margin to 16.9%. This principally reflects cost inflation and lower volumes despite continued good price realization. It was pleasing to see colleague retention increased 1.4 percentage points to 80.7% and customer retention also improved to 80.5%. And as Andy will talk about more, lead flow returned to growth in June for the first time this year, up 6.6%. We acquired 8 businesses with combined revenues of approximately $18 million in the year prior to purchase. One of our team's priorities has been to improve our data analysis so we can get to the heart of our recent performance issues, and we're starting to see the benefit of the work we've been doing. We now have better data on a branch-by-branch basis, which will allow us to drive improvement in underperforming branches and also refine our integration activities as we move forward. As we analyze our branches, the sales performance differentials are characterized by wide variations in lead flow and customer retention. Pricing performance, however, is very consistent across the portfolio. We can see clearly that where our lead generation and customer retention processes are working well, we're delivering strong and sustained organic growth, well ahead of market growth. In terms of driving lead growth, we are refocusing our marketing budgets towards organic lead generation. We now have 100 satellite branches in operation, up from 32 at quarter 1, and we expect an additional 50 by year-end. And our summer door-to-door sales pilot is showing encouraging early progress. In terms of integration, in the second half, we will restart with stand-alone mainly commercial branches and complete a detailed program of work to make process system and execution improvements in previously migrated branches, where lead flow and customer retention are not yet at their required levels. Our expectations of the circa $100 million cost reduction opportunity from the integration and attaining an operating margin in North America above 20% post 2026 remain unchanged, but our refined timelines may mean not all branches are fully integrated by that time. Moving to our International business, which encompasses all regions outside North America. International revenue was $1.251 billion, a 5.1% increase year-on-year. Organic revenue grew by 2.7%. Pest Control organic growth was strong at 3.8%, while Hygiene & Wellbeing grew slightly more steady at 1.1% as the U.K. and Pacific businesses saw more challenging market conditions. We saw our strongest performance in Europe and Asia, MENAT, driven by pricing and growth in Southern Europe, India and Indonesia. In the U.K., a strong core Pest Control performance was negatively impacted by U.K. property services, which was impacted by the slowdown of the U.K. commercial property market and tightening local authority spending. Adjusted operating profit for International increased by 4.6% to $242 million. The adjusted operating margin remained broadly unchanged at 19.3%, reflecting strong pass-through pricing. Europe and Asia, MENAT delivered solid profit growth, aided by pricing and scale in India and Indonesia. The U.K. and Sub-Saharan Africa saw strong margins despite a challenging macro backdrop. We achieved excellent colleague retention rates of 90.4% and customer retention remained strong at 85.2%. We continued our bolt-on M&A program, acquiring 10 businesses with total annualized revenues of approximately $17 million. At the end of May, we announced an agreement with H.I.G. Capital for the sale of our France Workwear business. Strategically, it reinforces our focus on our core Pest Control and Hygiene & Wellbeing sectors. And financially, it increases our cash generation going forward. The transaction values French Workwear at a gross enterprise value of approximately EUR 410 million, including an earn-out mechanism of up to EUR 30 million linked to the business' performance in 2026. Total net cash proceeds are expected to be approximately EUR 370 million and completion of the sale is expected to occur late in quarter 3 or early in quarter 4. From an accounting perspective, the business has been classified as an asset for sale since the 31st of May 2025. And as you will see, it is reported as a discontinued operation in our half year '25 financials. Assets held for sale are not depreciated. So this will reduce depreciation by approximately $50 million to $60 million this year within discontinued operations, depending on when the transaction completes and by approximately $80 million annually. In the half year, there was around an $8 million depreciation benefit. The sale will add approximately 100 basis points to our cash conversion ratio and reduce capital expenditure by approximately $100 million on an annual basis. Turning now to group cash flow. It was a strong performance with free cash flow conversion of 93%, ahead of our guidance of 80%. The main driver was the working capital performance with an improvement of $64 million year-on-year as we focus on managing creditors, debtors, and inventory levels more tightly. The movement on provisions of $40 million predominantly reflects the increase in the provision for termite damages claims, which I will cover in a moment. Cash costs in relation to claims in the half year were similar to last year. Net capital expenditure was $88 million for the period, in line with last year. Lease payments amounted to $90 million, also very similar to last year. On the financing side, cash interest payments of $106 million decreased by $25 million compared to the previous year. This was driven by a change in the timing of some of our bond interest payments. Cash tax payments were $43 million, an increase of $7 million year-on-year. M&A remains an important part of our growth strategy and cash spent on current and prior year acquisitions totaled $83 million. Dividend payments amounted to $198 million. The cash impact of one-off and adjusting items was $48 million compared to $52 million in the first half of last year, largely attributable to integration costs. We issued two inaugural dollar bonds in April, raising $1.25 billion, significantly extending the tenure of our debt. We used $700 million of the proceeds to repay a corporate bond due to expire later this year. The significant movement in the euro to dollar exchange rate between the year-end and this period end added approximately $175 million to our net debt based on the rate at the end of June. As I mentioned earlier, maximizing our cash and cost efficiency is very much a priority for the team. We have made good progress in working capital through focusing on disciplined execution, and we will continue to focus on this. Full-year working capital outflow expectations continue to be in line with our previous guidance of a $75 million to $85 million outflow, albeit we will aspire to do better than this. The sale of France Workwear will mean around $100 million less annual CapEx going forward. M&A remains a key growth enabler, and we now expect to invest a total of $200 million this year. We continue to look to improve efficiency in our cost base. We have multiple programs underway, including headcount reductions, procurement initiatives, and some offshoring. We are continuing to see significantly fewer filed termite warranty claims. Our open termite claims have also reduced by 23% compared to half 1 2024. However, in the first half of this year, we saw an increase in the number of complex litigated claims outside of the Mobile, Alabama area and a 9% increase in the cost per termite warranty claim in the period as our proactive strategy to solve customer problems and reduce litigation continues and as we resolve several large legacy claims. As a result, the provision in relation to such claims has increased from $236 million at the period end to $276 million at half 1 2025. I won't go through this slide in detail, but to note, this is on a continuing operations basis for the full year compared to our previous guidance, which was for the whole group. In summary, we've delivered an in-line performance in the first half with a strong conversion of profit into cash. We continue to improve our data analytics, which will help us drive North American performance going forward. It's early days, but we are seeing encouraging recent lead flow from our growth initiatives, which Andy will talk more about shortly. We continue to make progress on our cost efficiency programs and in optimizing our working capital, while the sale of France Workwear makes us a more focused cash-generative business. As we look at the remainder of the year, we expect to perform in line with market expectations. Thank you. I'll now hand you back to Andy.
Operator, Operator
Thank you, Paul. In the next few minutes, I will discuss some key topics. First, I will highlight the strong markets we are in and examine their long-term growth rates. Following that, I will point out the significant opportunity we have in our International region, which now contributes 37% of our overall business, before focusing on North America. While about 80% of our North American operations come from pest control, the remaining 20%, which is often overlooked, includes our strong business services companies, all of which are performing well. Then, I will address our U.S. pest business, where 25% of our revenue comes from one-off jobs, but 75% is derived from our contract portfolio. Our main challenge and opportunity lies in achieving consistent growth in the contract portfolio. Therefore, I will elaborate on the three areas we need to improve in order to grow that portfolio: customer retention, pricing, and importantly, acquiring new customer contracts. Let's begin with Pest Control, which represented 83% of our group revenues in the first half. Over the last decade, the global pest control industry has nearly doubled from $14.4 billion in 2014 to an estimated $27.3 billion in 2024, reflecting a compound annual growth rate of 6.6%. In North America, market growth has paralleled that of the International region at about 6.5%. This global growth has been fueled by factors like increased regulation, urbanization, the growth of the middle class, rising consumer expectations for hygiene, and the effects of climate change. Encouragingly, the projected growth over the next decade remains robust, with forecasts indicating that market growth will approximately double again, with a CAGR around 6.2%. We anticipate the global industry value to reach about $50 billion by 2034. In Hygiene & Wellbeing, which accounted for 17% of our group revenue in the first half, we maintain a leading position in core hygiene services across 70 markets. We deliver top-tier products in hand, air, and cubicle hygiene, while increasing our emphasis on washroom dignity and services for an aging population. Additionally, this business benefits from shared efficiencies with pest control by utilizing similar technologies and combining procurement efforts, often leading to cross-selling opportunities. With future market growth anticipated at approximately 4%, this segment is poised for long-term expansion above expected GDP levels. We are thus operating in two robust global markets. Now, let’s dive deeper into our reporting regions, starting with the International segment. This region accounted for 37% of our group revenue in the first half and consists of high-quality businesses in primarily non-cyclical markets across 87 countries, including Europe, the UK, Asia, MENAT, Latin America, and the Pacific. We are a leader in pest control in key growth markets like India, China, and Indonesia, where pest control makes up about 60% of International revenues. This region features strong core markets, and we aim to drive growth through global accounts, our industry-leading innovations, the introduction of connected technologies, and an efficient M&A strategy. Our second reporting region is North America, contributing 63% of our group revenues. As noted, 81% of our $2.1 billion in revenue for the first half originated from Pest Control, while 19% came from business service operations. The North America region has robust fundamentals, including improved colleague retention, which rose by 2.9 percentage points, along with increased customer satisfaction, now at 80.3%, surpassing the 79.3% recorded in the same period last year, supported by strong national, regional, and specialized brands. Now, focusing specifically on Business Services, these independent, well-managed businesses each possess deep expertise in their respective fields, generating approximately $400 million in revenue for the first half with an organic growth rate of 5.8%, signaling strong performance and positive future prospects. Transitioning to U.S. Pest Control, approximately one-quarter of our revenues come from one-off jobs, which range from simple residential services to major commercial projects. These one-off jobs are generally easier to sell than contracts. In the first half, revenues from these jobs increased by 3.6%, with 1% attributed to organic growth. More than 40% of these revenues typically stem from upselling services to existing contracted clients, underscoring the significance of our trusted adviser technician lead program, while the remaining 60% come from new customers without contracts. We have successfully elevated technician participation in this program from around 40% in 2023 to 64% by the end of June, with all five U.S. markets now operating at or above 60%. On the marketing front, we have revamped our strategies, enhancing digital content, local web pages, and implementing direct mail and email campaigns aimed at both existing and potential customers. Although we are not yet satisfied with our job sales levels this year, we believe we have a comprehensive plan focused on improving lead generation from digital marketing and our trusted adviser program, combined with better pricing strategies. Now, let’s further analyze what I perceive as our primary challenge: growing our contract portfolio. The advantages of our subscription-style contracts are significant, as around 75% of our revenues are secured through contracts, unlike many models that start with zero revenue at the beginning of the year. This enables us to implement annual price increases and plan operational routes more effectively. In the first half, we generated around $1.3 billion in contract revenue, which saw a slight decline of 0.2% year-over-year, excluding acquisitions. Hence, contract revenue represents both our biggest challenge and opportunity, with our focus on three key drivers: customer retention, annual pricing, and new contract sales. Our Drive to 85 program aims to enhance our customer retention capabilities. In the first half, we improved retention rates by 100 basis points, now standing at 80.3%. While we are pleased with this progress, our long-term objective is to increase retention to 85%, which is closer to the group average. The Drive to 85 program emphasizes getting operational basics right, including service adherence, timely installation, customer communication, and scheduling. Our investment in the customer saves team has yielded positive results, with saves increasing from 20% in January to 26% in June. Additionally, we're developing a predictive churn model that will help us identify customer risk and manage potential churn more effectively. In summary, we are making strides in customer retention with a clear ambition and plan. Moving on to pricing, we are seeing good progress. Our strong pricing discipline has led to increases surpassing inflation for both new and existing customers. We have also appointed our first Vice President of Pricing, who is forming a team focused on a more strategic pricing approach. Recognizing that price increases are more sustainable with customers using bank autopay, we have successfully tested methods to boost autopay adoption, raising penetration from around 52% to 60%. The final area for growing our contract portfolio is winning new customers. Historically, we have leaned heavily on paid digital channels, which, although effective, have limited our lead generation capacity and added to our cost per lead. We are now shifting towards a wider array of marketing strategies. In the second quarter, we redirected our spending towards awareness channels like Meta and YouTube, aiming to enhance our marketing impact and generate more inbound leads. We have also launched a comprehensive program to strengthen our local online presence, adding about 200 new local web pages in the first half to boost our local visibility. Overall, we've executed 20 initiatives designed to diversify our channel approach and support both national and regional brands, ultimately enhancing lead flow. Additionally, we have acknowledged historical underinvestment in our branding, essential for sustainable growth. This renewed focus is already manifesting positive outcomes, with our June brand health report revealing a 4% increase in Terminix's top-of-mind awareness and a 3% rise in total unaided awareness. Now, regarding our satellite branches, these are crucial to our local market penetration strategy and are part of our paid and organic search efforts. We launched the initial pilot of these branches late last year and early this year, and while these branches take time to optimize, I’m happy to report that 25% of them are now fully operational and generating good leads while being profitable. By the end of June, we had 100 active satellite branches, with a goal of reaching about 150 by the end of the year. These branches show improved performance over time, benefiting from increased local 5-star reviews. Locations that have been operational for over 90 days are generating approximately three times more leads compared to new branches, highlighting the necessity of establishing a strong local presence and enhancing brand awareness. Furthermore, our targeted actions in the second quarter have led to a 6.6% increase in residential and termite inbound lead generation in June, marking positive growth in lead flow for the first time this year. While it’s too early to determine if this trend will persist in the upcoming quarters, we are optimistic based on our observations and ongoing actions to catalyze digital lead generation. We also initiated a door-to-door pilot in the second quarter across 23 branches, focusing on residential contract sales, particularly our pest-free 365 plans, which offer comprehensive pest protection. By June 30, this pilot generated approximately $12 million in annualized sales and contributed about $2.2 million in revenues during the period, with plans for a wider rollout next year. To summarize quickly, we are functioning in highly promising structural growth markets with optimistic long-term outlooks. We possess a unique presence in markets outside the U.S., and in the U.S., our business services operations are thriving. The long-term growth patterns in the U.S. pest control market appear strong, but we have underperformed in the last two years. We have a targeted plan to boost our one-off job performance, which constitutes around one-quarter of total revenues. However, the primary requirement is to achieve healthy long-term growth in our contract portfolio. To do so, we must succeed in three critical areas: firstly, enhancing customer retention from 80% toward 85%, where we see recent positive trends; secondly, on pricing, where we are progressing well; and, most importantly, on acquiring new customer contracts, where we observed some improvements in the second quarter but need to execute more effectively to generate leads and convert those into sales in the upcoming quarters. I will conclude with our full-year guidance, which remains unchanged. We continue to emphasize growth, and the integration process will resume shortly, starting with our more straightforward commercial branches. We are confident that our North American business will achieve a margin exceeding 20% post-2026. Thank you all. We will now open the floor to questions.
Operator, Operator
The first question comes from Suhasini Varanasi of Goldman Sachs.
Suhasini Varanasi, Analyst
I have two questions. First, regarding the increase in termite provision claims this period, could you elaborate on what influenced this change? How should we anticipate future adjustments to provisions next year? For instance, if the cost per claim rises again next year, will we see another revaluation? Secondly, how should we view claims in the second half of the year compared to the first half? Are they evenly distributed, or do you expect any acceleration or changes in the trends? My next question is about the quarterly growth rate. It's positive to observe the improvements in North America's general pest control, including Business Services. Did you notice any changes in growth near the end of June, or are there any developments in July that you could share? Any insights would be appreciated.
Paul Edgecliffe-Johnson, CFO
Thank you, Suhasini. Regarding the termite provision, we established that in the first half, and it's based on a systematic calculation. We're pleased with our progress in reducing the number of claims; however, we've noticed that for non-litigated claims, the settlement costs for some complex cases have increased by 9%. Therefore, as we look ahead, we need to raise the provision accordingly. In response to your question about the second half and next year, if there were to be a change in the cost per claim, it would depend on our latest experience. This means it could potentially decrease or increase. Our cash outflow related to the provision aligns with our expectations, and that's the key figure I focus on since we anticipate continued volatility due to various factors. For our quarterly improvements, in the first and second quarters, we had the impact of an extra trading day last year due to the leap year, which affected Q1. Normalizing between the two quarters, Q2 might be slightly better, but overall, it remains largely unchanged and below our goals. We do not provide updates on current trading, as we are not yet finished with July, but we are encouraged by the improved performance in leads, which we expect will eventually translate into better sales and revenue.
Operator, Operator
The next question comes from Oliver Davies of Rothschild & Co Redburn.
Oliver Davies, Analyst
Just a couple of questions for me. I guess in Q1, you mentioned that the paid digital search returned to positive growth in March. And then you've obviously mentioned overall lead flow growing in June for the first time this year. So I guess a couple of questions on that. Are you able to give us an indication of the split between digital and kind of organic leads within that kind of total lead data? And then secondly, can you help us understand how digital and nondigital leads progress throughout the quarter? And then my second question, I mean, in terms of one-off jobs, I think you've seen a bit of a slowdown there, I think mid-single-digit growth last year. I think you mentioned 6% in Q1. So I guess, why have you seen a slowdown in the second quarter there?
Operator, Operator
Thanks. I'm not going to provide a breakdown of our spending across the channels. This is a competitive environment, and where we invest in paid search is closely monitored by our competitors, just as we keep an eye on their spending. The data we present encompasses all leads, which means it includes paid leads, organic leads, and technician leads. Essentially, we acknowledged our over-reliance on paid search due to difficulties in getting our organic channels to function effectively. Over the past two quarters, particularly in Q2, we have been progressively reallocating funds from paid search to organic search and other broader marketing channels, including Meta and top-of-funnel advertising. While our overall spending has remained stable during this period, we are investing less in paid efforts and have also seen the cost per lead decrease in paid channels. We are becoming more effective and efficient with our paid marketing while intentionally reducing expenditure there and directing those funds to organic initiatives. This process is detailed, and Paul and I receive daily updates on lead performance, allowing us to track the contributions from paid, organic, and technician leads. In summary, we are observing a decline in paid leads, an increase in organic leads, and a rise in tech leads as well. While I can't share the specific breakdown of our spending, you should expect to see this trend continue in the future. We are not yet at our optimization target but are encouraged by recent results, and we hope this momentum carries into the second half of the year. Sorry, what was the question?
Paul Edgecliffe-Johnson, CFO
In relation to your question on one-off jobs, Oli. So it is always going to be a little bit variable quarter-by-quarter. And what we're really focusing on is driving better performance in getting our contracts signed up, and we're really focusing the sales force on to that because that's the key area of weakness that hasn't been good enough in recent times. So if we can address that, then obviously, that's recurring revenue, as Andy was talking about, is that subscription base. And so that's our biggest priority. We will see some variability in jobs quarter-by-quarter.
Operator, Operator
The next question comes from Annelies Vermeulen of Morgan Stanley.
Annelies Vermeulen, Analyst
I have 3 questions, please. So firstly, on your inbound lead flow, which you called out as very positive in June, 6.6%. Rollins also saw a very strong period in June, driven by very favorable weather. So could you comment on how confident you are that, that inbound lead flow was down to your execution on marketing relative to a very favorable market backdrop driven by sunshine? And then secondly, on this predictive churn model, could you elaborate on what do you look for in that churn model in terms of indicators that would imply a customer is at risk of leaving? Have you had any indications of accuracy yet from that pilot where it's correctly identified customers that are looking to leave? And I'd also be interested if it's given you any more detail on why customers are canceling and sort of reasons for attrition. And then thirdly, just on door-to-door, you mentioned a full-scale deployment next year. Could you clarify, does that mean you're planning to roll it out across your entire portfolio in North America from the 23 branches, I think you said today? Or will that remain more selective in certain regions?
Operator, Operator
Thanks, Annelies. Yes, when the sun is out, it definitely affects insects, including those that crawl, bite, or sting. So we will see some weather-related impacts in our numbers. It's tough to isolate those effects and quantify how much is due to weather versus our own initiatives. However, we're confident that our efforts are yielding positive results. I can't specify the exact contributions of weather and our measures, but we believe our actions can be tested for effectiveness. We wouldn't be sharing our June data so positively without observing similar results so far this month. This is further evidence that it isn't solely due to the weather. But predicting this trend's continuation into the second half of the year is still uncertain. The predictive churn model, which is powered by AI, allows us to analyze multiple databases. We assess customer happiness through metrics like NPS and satisfaction, as well as track complaints, late payments, and missed visits. From this data, the model can identify customer groups that are statistically more likely to churn. The next step is to determine how to use this information effectively, which we need to explore in the market. Once we identify customers at risk of churning, we intensify our efforts to improve their experience. For example, if someone has recurring pest issues, we address those directly. While it's early in this process, the data we're obtaining is promising. To verify the model's effectiveness, we've run last year's data through it and found it surprisingly accurate. However, like most AI applications, it requires training. The initial results are promising, and both our data scientists and IT teams are excited. Now, the challenge is to integrate this tool into our operations effectively. As for our door-to-door sales, we've initiated a pilot this year, and while I was initially skeptical, I am pleased with the results so far. This model primarily operates during the summer when it's hot and insects are prevalent. The door-to-door teams engage with customers at times when they are likely to encounter issues like mosquitoes or ants. Given the vastness of the U.S. and varied weather conditions, the door-to-door selling season in Florida lasts longer than in the Northeast. Moving forward, we plan to continue this strategy through the summer and are exploring whether parts of Florida and California could support door-to-door sales into the fall. By year-end, we will finalize our plans in collaboration with third parties for the door-to-door model, detailing the number of branches, regions, and timings involved. It's likely we will significantly scale up from the 23-branch pilot we executed this year.
Paul Edgecliffe-Johnson, CFO
And the only thing I'd add on that, Annelies, is that like we have with the satellite branches where this year, we said and we have delivered that we would cover that within our existing marketing spend by just reprioritizing that in 2026 would be my expectation again. So although, as Andy says, yes, we've got plans for full-scale deployment, we're not signaling that, that's then going to lead to a major increase in the marketing costs.
Operator, Operator
The next question comes from Nicole Manion of UBS.
Nicole Manion, Analyst
I have 2 questions, please. Firstly, you mentioned that one of the things you're still looking to address is the historic underinvestment in building some of your brands. I know there's a lot of moving parts at the moment in terms of the various investments you're making, and you're having to rebalance things a bit as you've become over-reliant on paid search, for instance. But I guess the question is, overall, are you confident that you can fund what you need to do by refunneling spend from one area to another? Or do you need to sort of still step up those investments, if that makes sense? And then secondly, just a clarificatory one really. You said you remain confident in the $100 million cost savings and 20% margin post 2026. There's a comment in there, I think, around refined timelines. Can you just explain sort of what's meant by that precisely? And apologies if I missed something obvious on that bit.
Operator, Operator
Yes. Today, I don’t have exact data in front of me, but approximately 50% of our U.S. pest revenues come from the Terminix brand, about 30% from one of our regional brands like Florida Pest Control or Western Exterminator, and around 20% from independent standalones. This indicates that those independent brands will eventually transition to either Terminix branding or one of the regional brands. We aim to support those nine brands alongside Terminix. Recently, we've focused our efforts on organic search for these brands rather than investing in TV advertisements like we have for Terminix. Most efforts to enhance regional brand performance have shifted from paid channels to organic search. Currently, we believe our investment balance is appropriate. If we begin to see significant returns on investment for additional spending in specific areas, our CFO would likely encourage us to explore increased spending. However, this isn't part of our current plan for the second half of the year or beyond. Regarding branch integrations, we previously stated we anticipate full integration by the end of next year. We have a strategy in place for achieving the $100 million savings and the 20% net operating margin we've discussed. Although we may not complete the full integration by the end of 2026 as planned, we are restarting the integration process soon, focusing first on simpler commercial-only branches that already share the same IT systems. While we will begin the larger integration initiative next year, it may take longer than expected, but we still expect to reach the $100 million target. Hopefully, that clarifies things.
Operator, Operator
The next question comes from James Rose of Barclays.
James Rosenthal, Analyst
I've got 3, please, 2 on leads and 1 on branch integrations. Firstly, on leads, could you talk about the quality of the improvement of leads you've seen so far to the conversion of ARPU? Are they better than what you've got from paid search leads last year? And then secondly, do you see that the leads you're getting are fueling contract sales more than they were previously rather than going into jobbing work? And then the final question is on the branches you've already integrated and have said are not up to standards. What are the execution improvements you've highlighted or flagged in those which you want to tweak or change going forward?
Operator, Operator
Thank you, James. These questions are quite challenging. Let me break it down. We have two funnels at play: a marketing funnel and a sales funnel. In the marketing funnel, there are activities that range from building brand awareness at the top to paid and organic search at the bottom. We're focusing our investment on the top of the funnel to enhance brand awareness. Higher brand awareness leads to higher quality leads, as when someone searches for Terminix, they are likely to purchase from us. This means that when we get calls from customers wanting to speak to Terminix, there's a good chance they want us to resolve their issues. However, at the bottom of the funnel, where technician leads come in, the conversion rate tends to be lower because technicians often need to persuade customers about problems they weren't even aware of. This complexity makes it difficult to provide a straightforward answer. Overall, the quality of leads from brand awareness is improving, while technician leads, despite increasing in number, typically convert at a lower rate. They aren’t poor quality, just less likely to convert. Regarding your question about whether these leads are turning into contracts or jobs, it's challenging to determine precisely. Most leads begin as jobs. For example, if there's a mouse in the kitchen, the customer might initially just want that issue resolved without considering a contract. However, once we handle the job, we try to convert that customer into a contract with offers for multiple services. So, while most leads start as tasks, we aim to turn them into contract customers. As for the integrated branches, the good news is we have strong technician retention and sales retention in those areas. We've adjusted the pay plans, which seem to be working well, although we might fine-tune them further. The main challenge lies in lead flow, which is expected when you've merged branches and reduced locations. Effective lead flow is critical, and we're focusing on better utilizing data analytics for smart investment in both paid and organic lead generation. Customer retention has dipped during the integration process, which was anticipated, and we are working to improve it. Overall, we plan to prioritize improving lead flow and ensuring customer satisfaction during these integrations. The colleague experience and pay plan seem solid, so we are cautious about aggressively pushing forward with more integrations until these areas are secured. We intend to integrate some of the simpler branches in the second half of the year while refining our strategy for more comprehensive integrations next year.
Operator, Operator
The next question comes from Will Kirkness of Bernstein of Societe Generale Group.
William Kirkness, Analyst
I've got three questions, please. Firstly, could you provide any metrics on the satellite stores regarding their revenue profile or EBIT ramp as they mature, or perhaps their return on investment? Secondly, concerning U.S. retention at 85%, you've mentioned this previously about the group's position, but you might feel that reaching this rate in North America would be challenging. It seems that setting 85% as a target represents a significant increase. Are you seeing positive trends in the data that provide additional confidence? Lastly, regarding Hygiene & Wellbeing, I noted that Q2 growth was 0.4% organic. Could you quantify the price component, as you mentioned being price-led?
Operator, Operator
Let me try to clarify that. I don't think you'll be surprised by my response regarding the metrics related to the satellites. Essentially, these satellites are small, typically located in business parks or high street areas, and branded as Terminix, usually with just a few staff members. These employees are already part of the organization, so the additional operational costs are mainly the lease and maintenance of the office. The technicians, salespeople, and administrative staff already come from the main branches. Therefore, the branches themselves do not incur significant costs beyond the actual location. The number of leads generated starts off gradually, and it's important to accumulate customer reviews—specifically, you need at least ten reviews for major search engines to recognize the branches. When I refer to optimizing these branches, it means attracting many customers who leave positive, five-star reviews. Once we achieve enough five-star reviews, we will start appearing in searches. In terms of return on investment, we can typically secure enough leads to more than cover the branch costs, but our goal is to significantly increase local search visibility. We have fully funded the costs for the 100 to 150 branches within our operating plan, so we haven't had to inject a large amount of extra capital into the business. Regarding U.S. retention, you're absolutely right. To clarify, both our overall group and the U.S. Pest Control business aim for a retention rate of 85%. While the current retention is around 85%, it should ideally be 87% or 88%. My goal for U.S. Pest Control is to reach 82% or 83%, which would greatly enhance organic growth. I’ve provided enough information in the slides for you to do the calculations regarding the portfolio's value—just consider the impact of an extra 3 percentage points of retention, as that segment makes up three-quarters of our business. I was careful with my wording; I didn't claim we would reach 85% but rather that we are working towards it. Everyone in our North America business understands the "Drive to 85%" initiative, and there's no reason we can't reach that target over time. However, I would be satisfied with 82% or 83% in the next few years, and I also believe the overall group retention needs to improve as well. Hygiene & Wellbeing has had mixed performance. The larger businesses have performed reasonably well, but we faced three significant issues impacting performance in this category. First, in the Wellbeing segment, our Ambius business, which focuses on plants, experienced a decline because last year we had major contracts with cruise liners that didn't repeat this year. Second, during the pandemic, there was a surge in air hygiene device sales in the Pacific region, particularly in Australia and New Zealand. Now that the pandemic concerns have lessened, we've seen a decline in demand for these devices. Lastly, the U.K. and Ireland market underperformed, partly because last year we benefitted from COVID credits that are not present this year. While some issues are merely due to comparisons, I'm not overly concerned about the Hygiene & Wellbeing segment as it is still in a decent market. However, it certainly needs to improve from its first-half performance, primarily due to those three factors.
Operator, Operator
The next question comes from James Beard of Deutsche Bank.
James Beard, Analyst
Just one question from me. On their call last week, Rollins referenced the impact of Google AI summaries on leads traffic to their websites. And I was just wondering whether you've seen the same impact during the period as they have and what you've been doing to manage and mitigate that.
Operator, Operator
Thank you, James. The master class continues, and I really appreciate it. Yes, Google has indeed launched their AI mode in Google Search, which I believe they rolled out in the US about four months ago. They've now announced its release in the UK. This development is part of the broader changes we've seen in search over the past couple of years. A statistic I came across recently stated that in the US, over the last year, 60% of searches do not result in a click. This suggests that people either aren't searching for something they want to buy or they are getting their answers from AI. I mentioned this before, but we have refreshed 200 pages of content, focusing on both our regional brands and the Terminix brand. Our current goal is to ensure that the content on our sites aligns with what the AI model is looking for. To do this, we need high-quality content that anticipates the questions searchers are likely to ask and provides the answers that AI might deliver. If our content meets these criteria, we could be featured in AI responses. While that may sound a bit complex, the key point is that we are very conscious of the changes at Google. We often refer to ourselves as a Google company and maintain a close relationship with them. We are working diligently to optimize our content in response to the latest developments in AI models. This trend isn't unique to Rentokil Terminix; it's a global phenomenon among major search engines trying to sustain their revenue from search. Therefore, we must remain agile, proactive, and strategic. Our focus is on ensuring that our content aligns with the anticipated AI-generated answers for the most common questions.
Operator, Operator
The final question comes from Suhasini Varanasi of Goldman Sachs.
Suhasini Varanasi, Analyst
I just have a couple of quick follow-ups, please. Is there an update on the appointment of the CEO in North America? Any update there? And just on the guidance for the year, when you say it's going to be in line with market expectations, if we had to mechanically just adjust for the Workwear disposal, I think your consensus on company compiled is $922 million of PBT. So we just take off $57 million from that, which was last year's Workwear profits to get to this year's number on PBT?
Operator, Operator
Thanks, Suhasini. I will certainly cover the first one. Look, CA North America, I'll say something when I've got something to say on the subject. What I will tell you is the guy that's running it, Alain, who I mentioned before, he's worked with me for 16 years and spent 16 years running pest control businesses around the group and running marketing, is doing a brilliant job. He's absolutely flying in that role. The team have responded to him really, really well. So I'm very happy that we've got Alain there on an interim basis. And when we've got something we can update, I'll gladly share it. But I'm happy with where we are. I'm happy with the process.
Paul Edgecliffe-Johnson, CFO
Suhasini, regarding your question about guidance, it's a bit more complex due to the accounting required for the discontinued operation. Our commentary about meeting expectations is based on a direct comparison. The consensus number you mentioned is essentially what we compare our internal expectations against, and we believe we are aligned with that. Once the business exits, the consensus will likely change as people will adjust for the profit loss as well as for depreciation. Both of these factors will need to be considered. However, when we look at the numbers for the France Workwear business, removing that should still indicate that we are aligned with market expectations afterwards. Thank you for your question, Suhasini. That concludes our call today.
Operator, Operator
Thanks, everyone. Thanks for joining us. Really appreciate it. And I look forward to updating you with the Q3 results in, well, just a few weeks' time. Thanks, everyone.
Paul Edgecliffe-Johnson, CFO
Thanks, everyone. Bye now.