Earnings Call Transcript - RTO Q1 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to our conference call for Rentokil Initial's First Quarter Trading Update. Let me hand it over to CEO, Andy Ransom. Please go ahead, Andy.

Andrew Ransom, CEO

Thank you, Elly, and good morning, everyone. Before we begin, as always, can I draw your attention to the usual cautionary statement contained in our trading update this morning as it also applies to this call. I'll start off with some brief opening remarks, and then Paul and I will be pleased to take any questions. As we only reported on performance and strategy just last month, today's announcement is a short update on revenue performance in the first quarter. And just to remind you, we now report in U.S. dollars. In the first 3 months of 2025, group revenue increased by 1.5% to $1.64 billion. Organic revenue growth for the group was up by 1.8%. We delivered a good performance in International, which are our businesses outside of North America, with organic revenue growth of 3.3% and 4.6% in Pest Control. In North America, as we flagged in March, the first quarter's growth was held back principally as a result of weak lead generation. Organic revenue growth was 0.7% and 0.5% in Pest Control. If we adjust for 1 fewer trading day in the quarter, that's slightly behind last year's like-for-like performance. Significant work has been underway in the first quarter with the support of our new agency and additional digital marketing expertise from our U.K. center of excellence to improve our lead generation performance. And while organic search performance remains subdued, it was encouraging to see digital inbound lead flow from paid activities return to positive growth in March following declines in February as we've transitioned to our new agency partner. We've also been making progress with other strategic initiatives in North America. Colleague retention has increased by 40 basis points to 79.8% while customer retention increased by a further 30 basis points to 80.4%. 36 satellite branches across the U.S. are now operational and our new door-to-door sales pilot program is all set to launch with participation of around 30 branches across the U.S. and our Trusted Advisor program, which generates leads and sales from existing customers, made further progress with participation rates among technicians improving by 9 percentage points in the quarter to now around 60%. So in summary, the company has continued to make progress in our international markets and with our bolt-on M&A program. In North America, we're making progress with our strategic initiatives, including the rollout of satellite branches, which we expect will allow us to return to a stronger organic performance over time. With that, let me hand back to the operator to manage the Q&A. Thank you very much. Elly?

Operator, Operator

Your first question comes from the line of Suhasini Varanasi from Goldman Sachs.

Suhasini Varanasi, Analyst

Just a couple for me, please. When you think about growth through the quarter, can you discuss how trading was in March and early April. It looks like it's improved versus February, so it should be better than the quarter's growth of minus 0.2%. And also for the second quarter, given there's Easter in the quarter, is it fair to assume a trading day impact in this quarter as well?

Paul Edgecliffe-Johnson, CFO

So as you know, we try to give as much visibility as we can into trading. And March was a little better than we'd seen in February. As we look into April, really, we've only got a few trading days to look at. If there was anything that we've seen that was a material improvement on what we were seeing in the first quarter, we would have called it out. There isn't really, so it's very much sort of steady as she goes there. But we'll continue to monitor. We talked at prelims a few weeks ago about the strategic shifts that we're putting in place around new branches. And Andy just mentioned the 36 satellites that we now have opened with more coming, and a continued focus on our broader range of brands, which will drive more inbound leads over time, but that will take time. So no change to trajectory short term, but there's a lot that we're doing that we believe will change the longer-term growth trajectory.

Suhasini Varanasi, Analyst

And on trading days for 2Q?

Paul Edgecliffe-Johnson, CFO

Trading days. Well, obviously, the thing we've pulled out is the leap year last year. And we are tracking whether there is any impact from Easter. Obviously, there is an Easter every year, and so exactly when it falls, can have an impact. But there's nothing that I can pull out right at the moment on that.

Operator, Operator

Your next question comes from the line of Annelies Vermeulen from Morgan Stanley.

Annelies Vermeulen, Analyst

I have three questions, please. So firstly, just coming back on the working day impact. Given I think 3/4 of your business in the U.S. is contracted, is that 50 bps working day impact in pest services relevant for that contracted piece? I would assume monthly billing would largely protect you from that. So can we assume that that drag is all in the jobbing part of the business? And perhaps as part of that, could you comment on how underlying contract sales develops in North America through the quarter? Secondly, just on door-to-door, those 30 locations. How were those selected? I think you said they're across the U.S., but are they all in one area, under one brand? And what was the strategy around selecting those? And then lastly, just on paid search, the transition to the new agency partner and return to positive growth in March, I think. Can you give a bit more detail on that? And what is it that you're doing differently with that new partner versus before to drive that return to positive growth?

Andrew Ransom, CEO

Thanks, Annelies. On the first one on the contracting, the working day. It's curiosity. I've explained this a few times before, but it is a curiosity. North America is on a visit-triggered invoicing as opposed to the quarterly in advance that you quoted there, which is typically how the industry works outside of North America. This is not a Rentokil phenomenon. This is how the industry works. So in America, if you have a visit, that triggers an invoice and only once the invoice goes out, does that get recognized as revenue, whereas outside of America, you're quite correct, your billing is typically in advance quarterly. So with 1 fewer working day, that means 1 less day in which you can do the work, therefore, fewer invoices going out. So it does impact both contract and jobbing. In terms of how has the contracting performance been, it remains, as I said last time and the time before, I think it remains one of our big challenges and opportunities. The jobbing side of the business is performing respectably. We've got to get our contract performance up. And you recall last time, I mentioned that we are putting some additional incentives in for salespeople in the season to try and move that contract selling higher than it's been. So no change in recent patterns there. The door-to-door, it is a pilot. We could have done it much more broadly. We could have gone to, frankly, probably hundreds of cities. We are not prepared to do that in terms of we want to see proof for us that it works. The way these door-to-door programs are often run, Annelies, is through a third party. So we've contracted with two specialist third-party door-to-door pest control outfits in different parts of the United States. And because it's a pilot, it's interesting to your question really, we've been quite specific in terms of which cities we want to go, but also what do we want to target. So we want to learn something from this pilot, which sorts of customers, which sort of suburbs, which geographic areas in the United States respond best to the door-to-door pace. So that kicks off in April, and we'll run it through the season, and we're running in 30 cities. So at the time of the interims, we will have some data. It will be relatively new, but we'll have some data to be able to share with that, does this work? Does it not work? If it's working, and it works well, as I said a few weeks ago, then you'd expect us to come back and say, right, next year, we'll probably increase the program. And at that point, we'll say more likely how many branches and where we will put that to work. Your third question was on paid search activities. Again, it's only very recently we were up talking about this. We are encouraged by some of the changes and improvements that we've seen in the month of March. But we always say in our business, unless you get it 3 months in a row, we don't call it a trend. So it's too early to say whether we're trending in the right direction. But the changes we've made have certainly resulted in a lower relative cost for acquisition of those paid leads, which is important. And we're beginning to see improvements year-on-year across the paid activity. Paid, of course, is one way of getting new leads. It's much, much, much more important that we get our organic lead performance significantly improved and we haven't yet seen the return to growth of those leads, which we clearly need to and would expect to with the actions that we're now taking across that.

Operator, Operator

Your next question comes from the line of James Beard from Deutsche Bank.

James Beard, Analyst

A couple of questions from me. Firstly, can you talk us through any direct impact from U.S. tariffs on the business and how you would seek to mitigate those? And secondly, obviously, very early days, but whether you are seeing any sort of indirect impact, i.e., greater levels of macro uncertainty within North America?

Paul Edgecliffe-Johnson, CFO

Thanks, James. So as you can imagine, it is difficult in a business with lots of variables to isolate something as specific as tariff impact and particularly given how recently these changes have come in. What I can give you is what our best sort of estimates are. We are principally a local-to-local business. We do think that if the tariffs are enacted as currently is out in the marketplace, then there could be a small increase in some of our input costs around chemicals and some of the small electrical equipment that we use in our connected pest control services, but it is small really. You're talking single-digit millions is our best expectation. The second derivative factors of higher inflation in the U.S., higher fuel costs, higher vehicle costs, that's a harder one, and that will take more time just to flow through to the numbers if it does manifest. So we will continue to monitor that. Obviously, that will be a well-observed macro trend. So we're not going to be the one that's giving you the information on that. You'll be able to see that yourself. In terms of impact on consumer sentiment and people's requirement for pest control, we're not really a discretionary item in people's shopping basket. So we are typically very cyclically resilient and economically cycle resilient. And so certainly nothing we're seeing at the moment.

Operator, Operator

Your next question comes from the line of Andy Grobler from BNP Paribas.

Andrew Grobler, Analyst

Two from me, if I may. The first one is sort of following on from the previous question. U.S. distribution was very strong in Q1. How much of that is price versus volume? And how much of that, that you distribute comes from outside of the U.S.? And then secondly, colleague and client retention keeps improving, which is great, but organic growth keeps slowing. When do you expect that better client and colleague retention to kind of actively feed through into stronger organic growth?

Andrew Ransom, CEO

The question was a bit unclear, so I'll assume some details regarding the distribution. Distribution performed strongly, reflecting a good combination of volume and price. As we know, distribution can be inconsistent, with strong months followed by weaker ones, influenced by consumer buying patterns and discounts from chemical manufacturers. I don’t believe we’re witnessing any evidence of people purchasing in anticipation of potential tariffs; it seems too early for that. The chemical industry in the U.S. is well-stocked, so the supply chains are extensive, meaning there’s likely no immediate impact from international trade barriers or tariff implications. While Paul mentioned that we might see future effects with chemicals sourced from China, currently, we’re observing stable performance in the distribution sector. Historically, the performance of the distribution business has served as a reliable indicator of the pest control industry’s overall health. Based on Paul’s earlier comments, there’s no indication that our distribution customers in the pest control industry are experiencing any slowdown. Overall, it’s a solid performance with a good mix of volume and price, unaffected by tariffs.

Paul Edgecliffe-Johnson, CFO

In terms of organic growth and when will we see the pleasing input metrics around customer retention, et cetera, flowing through into stronger organic growth. There's always a lag. And we've talked about what we're doing to drive our performance through all of our channels, making sure we have strong retention, making sure we have good sales incentive plans. We are pleased with what we're seeing coming through on our technical lead channel, which is an important channel for us, and that is well up. And we've put in place our new strategy around more satellite branches and focusing more on our brands, which will drive up the organic leads, which, as Andy was just talking about, is so critical for us here. We're doing better in terms of paid leads, but we need more organic and we have the strategy. But we will come back and tell you as soon as we're seeing some positive results there.

Andrew Ransom, CEO

As my old boss used to say, Andy, the conditions are necessary but not sufficient. The underlying colleague retention and customer retention are critical as a platform to build organic growth, but they are not enough to give us what we need. So we're pleased to see that improvement and ongoing progress. However, that alone will not get us where we need to be. We are incredibly focused on enhancing organic growth, as I'm sure you understand. While we're very happy to see those numbers moving positively, it's not sufficient to get us to our goals. There is much more to come.

Operator, Operator

Your next question comes from Paul Pierce from Bank of America.

Unknown Analyst, Analyst

On behalf of Simona Sarli. So two on North America and one on the broader business. First, about North America, on the development of the proportion of jobbing versus recurring contracts, any development? And then on the impact of favorable weather in North America, any contribution on the positive growth in the month of March? Then moving on to the broader business. How did the volume of new recurring contract sales develop year-on-year?

Andrew Ransom, CEO

Thanks, Paul. Yes. I'm not sure we've got a lot to add to what we said, and I mentioned, I think to Annelies' question, the business in North America is doing respectably well on jobbing one-time revenue. And if we look to last year, and that was also true, and we did, I think it was 6% organic growth in North America pest control on jobbing, it's the contract side of the business that we absolutely have to get up. So no change in trend, no change in the story in Q1. I don't think we saw a significant weather impact and weather is one of those things, we always have it. Sometimes it's a little bit favorable, sometimes it's a little bit unfavorable. And clearly, for the insect season, the early springs are strong and helpful for early sales and late springs are not so helpful. But in the month of March, our team has not called out anything specific, either positive or negative. We were out in the States this week, for a few days earlier in the week and the weekend and actually surprisingly chilly. But this current week to come looks really, really good. So hopefully, the season will start to be in full swing now, but we're not calling anything on weather. Apologies, Paul, the third item to your question there?

Unknown Analyst, Analyst

Yes, about the volume of new recurring contract sales development?

Andrew Ransom, CEO

Yes, it was essentially the same answer to the first question. We need to make significant improvements because, roughly speaking, in America, we're around 70% contracts and about 30% jobbing. With jobbing performance and pricing being decent, it highlights the importance of enhancing our contract performance, which is vital for a subscription business. This aspect offers multiple opportunities for improving pricing and upselling additional services over the years. We have not seen any recent change in that trend; while we are doing adequately with jobbing, we need to improve on contracts. Consequently, we have incentives launching in April and the second quarter aimed at boosting our contract sales. It's typical for pest control businesses in America to experience two seasons: an off-season and an on-season. During the off-season in fall and winter, it becomes more challenging to sell contracts due to lower pest pressure, whereas higher pest pressure typically makes it easier. Please ask us again in a quarter, and hopefully, we can report some improvements in contracts. However, it will take time and won't be resolved in just one quarter; it needs to build over the next year or two, but there's nothing more to update at this time.

Operator, Operator

Your next question comes from the line of Nicole Manion from UBS.

Nicole Manion, Analyst

Just one really, please, for me. Obviously, it's early days in terms of the satellite branches, which we think are key to fixing the organic search piece. I know there's obviously been a number opened since the start of the year. But is there anything you can point to maybe in terms of the first branches you opened, including those in Q4? Are you seeing those support better lead generation locally yet? Or is it still too early to say?

Paul Edgecliffe-Johnson, CFO

Thanks, Nicole. And clearly, as we've talked about, it is an important part of our strategy going forward because it will drive a higher level of organic growth from us having more pins in the map. And we are pleased with what we're seeing. We have done, I think, a really nice job of getting these up quickly, and we've got a lot more in the pipeline that will come in even during quarter 2. And as we have more data, it will be easier for us to talk about the specifics about what they're generating. What we're probably not going to try and do is every quarter, give you every data point and talk about strategy. I think this is just about sort of quarter 1 performance, but we will come back at the interims and talk about that in more depth. Suffice to say, we wouldn't be pushing on at the pace that we are if we weren't seeing good data coming through, showing that this is a good strategy for us. So I hope that's enough for now, and we'll talk more about it on the 31st of July.

Operator, Operator

Your final question comes from the line of Oli Davies from Redburn Atlantic. I'd now like to hand the call back to the Rentokil team. Please go ahead.

Andrew Ransom, CEO

Thank you very much, Elly, and thanks, everyone, for joining us. Appreciate you dialing in this morning, and we look forward to updating you on hopeful greater progress in the next quarter in a few months' time. For now, have a great day. Enjoy your Easter the best.

Paul Edgecliffe-Johnson, CFO

Thanks, everyone.

Operator, Operator

Thank you for attending today's call. You may now disconnect.