Annual Financial Report

RNS Number : 1788E

Rentokil Initial PLC

01 April 2011

 



1 April 2011

RENTOKIL INITIAL PLC

Annual Financial Report

Rentokil Initial plc ("the Company") has today posted or otherwise made available to shareholders the following documents:

1.   2010 Annual Report

2.   Notice of 2011 Annual General Meeting ("AGM")

3.   Form of Proxy for the 2011 AGM

In accordance with Listing Rule 9.6.1. a copy of each of these documents have been submitted to the UK Listing Authority via the National Storage Mechanism and will be available for viewing shortly at www.Hemscott.com/nsm.do.  The documents are also available on the Company's website at www.rentokil-initial.com and in hard copy upon request to the Company Secretary, Rentokil Initial plc, 2 City Place, Beehive Ring Road, Gatwick Airport, West Sussex, RH6 0HA.

The Company's AGM will be held at No. 4 Hamilton Place, London, W1J 7BQ on Wednesday 11 May 2011 at 11.00am.

The information below, which is extracted from the 2010 Annual Report, is included solely for the purpose of complying with DTR 6.3.5. It should be read in conjunction with the Company's preliminary results announcement issued on 19 February 2011 (available at www.rentokil-initial.com/investors). Together these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full 2010 Annual Report and numbers and cross-references in the extracted information below refer to page numbers in the 2010 Annual report.

For further information please contact:

Katharine Rycroft           Head of Investor Relations                       Rentokil Initial plc           [phone]

Malcolm Padley             Head of Corporate Communications         Rentokil Initial plc           [phone]

Paul Griffiths                  Company Secretary                                Rentokil Initial plc           [phone]

Kate Holgate/Wendel Verbeek                                                     Brunswick Group           [phone]

Statement of directors' responsibilities (extracted from page 23, Governance, Annual Report 2010)

(in respect of the Annual Report and the financial statements)

The following statement was prepared for the purposes of the 2010 Annual Report and accounts and is set out on page 23 of that document. As set out above, this statement is repeated here solely for the purpose of complying with DTR 6.3.5. This statement refers to and is extracted from the 2010 Annual Report and accounts

The directors are responsible for preparing the Annual Report and the group and parent company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare group and parent company financial statements for each financial year. Under that law they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to:

- select suitable accounting policies and then apply them consistently;

- make judgements and estimates that are reasonable and prudent;

- for the group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;

- for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; and

- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the directors, whose name and functions are set out on page 22 of the Annual report, confirms that, to the best of their knowledge:

(a) the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and the undertakings included in the consolidation taken as a whole; and

(b) the directors' report set out on pages 24 to 28 includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Management of Risk (extracted from page 32, Board corporate governance statement, Annual Report 2010)

The board has responsibility for evaluating and reviewing the overall level of risk that is inherent in its strategy and for the execution of that strategy and specifically owns the risks attaching to the matters reserved for its own decision. The board reviews the strategic risks facing the group as part of its annual review of strategy and operational risks are reviewed routinely. The principal external risk factor continues to be the economic and competitive environments in the territories in which the company chooses to operate which are routinely considered by the board when reviewing business performance. Collectively, the execution of change programmes and management's capability to deliver change is a key risk and is the subject of regular board review. An assessment of risk is intrinsic to individual decisions concerning investment, organisational changes and commercial issues such as entry into new markets or territories.

The board has delegated to the audit committee the role of assessing the effectiveness of the group's internal control processes as well as reviewing the risk mapping methodology used to identify generic or business specific risks and the management actions taken to mitigate specific risks. This process provides the audit committee with an analysis of the gross and net (after mitigating actions) risk taken by the group. The board makes its assessment of whether the residual risk is acceptable based on this analysis. As an additional analysis of risk, risks have been mapped against the group's five strategic thrusts.

The board also delegates to the audit committee stewardship of the internal and external assurance processes that test the effectiveness of the control and risk mitigation framework. The committee reports on these matters to the board on a regular basis but it remains the board's responsibility to be satisfied with the level of assurance gained over individual risks.

The board gains its confidence over the effectiveness of control processes through regular and transparent management reporting, through the governance processes of the group and from the external and internal assurance processes the output of which is reported to the audit committee and available to the board. As reported elsewhere in this report, failings in the control. framework in a small number of businesses have highlighted weaknesses both of capability and systems which have required corrective actions. Lessons learned in individual cases are discussed by the audit committee and reviewed by the board.

Risks and uncertainties (extracted from pages 16to 18, Business Review, Annual Report 2010)

Principal risks

The group operates through a wide range of activities across multiple geographies and therefore from a group-wide perspective the principal risks and uncertainties identified by the directors relate to the market conditions in which we operate and to management's capability to deliver the large number of change programmes and recovery strategies currently underway across the businesses.

The principal risks are:

• A weakening of the economies in which we operate; and

• The number, scope, complexity and interdependencies of many initiatives - risk of management stretch and overlapping priorities.

These are discussed in more detail below as well as in the strategy review and in the review of operational performance. Financial and other risks are set out below.

Risk of economic weakening in the economies in which we operate

The group is exposed to the economic environments in over 50 countries across the world and whilst the UK represents a large proportion of the group's businesses our international diversification means that our economic and geopolitical risks are spread widely. At the date of this report political and economic change in the North Africa and the Middle East will have some impact on the group's operations in those territories. The pest control operations in Libya have been suspended and the small number of non-Libyan colleagues involved have left the country. Some current examples of the economic impact on our divisional operations are provided in the following paragraphs.

In 2010 the group's Textiles & Hygiene division experienced difficult trading conditions in a number of territories. France, Belgium and the Netherlands were impacted particularly by competitive pricing pressure which resulted in a number of contract losses earlier in the year and which also affected the division's ability to win new contracts. A further risk to this division is an inability to cover various cost increases such as wage inflation, which within some of our countries of operation, is determined by the governments of those countries and not under our own control. Actions to mitigate these risks include passing on price increases to customers to counter cost inflation and pricing contracts appropriately to remain competitive. In those circumstances where our competitors are engaging in aggressive price discounting and where we believe that to offer similar prices would compromise service levels, our only mitigating course of action is to ensure that contract losses do not directly result from poor customer care, service or relationships. Further mitigating actions include improving the competitiveness of the business through significant restructuring programmes in Belgium and France and through extensive cost-savings programmes across all businesses.

In the Asia Pacific region our Asia Pest Control and Hygiene markets experienced a slow down in 2009 with tightening economic conditions impacting a number of countries of operation. Growth in the Australia and Pacific Pest Control and Hygiene businesses has also been impacted by weaker markets caused by a nervous economic backdrop. The division also experienced a severe decline in the fumigation business as a result of slower international trade in 2009. Further, job revenue has been impacted by reduced demand for pre-construction termite barriers as a result of a downturn in building construction. Mitigating actions include efforts to improve customer retention through focusing on high levels of service and implementing a continuing series of cost reduction measures.

In the Ambius division revenue declined in 2009 and 2010 as demand for products and services softened in the major markets, especially in the US, UK, France and Belgium and principally the result of challenging economic conditions. Mitigating actions include adjusting service head count in line with portfolio movement and the ongoing pursuit of cost savings initiatives to mitigate revenue decline.

The UK parcels market has been extremely competitive over the past two years with severe price cutting by competitors in order to drive volumes through their networks. There have been some signs of recovery in pricing in 2010 but the market is expected to remain very competitive throughout the coming year as excess capacity in the industry still remains the predominant feature.

The group's Facilities Services division has also been impacted by weakened market conditions in the UK and Spain, particularly in 2009, with severe price cutting from competitors, site closures and reductions in service frequency. Conditions eased however in 2010. Deteriorating market conditions may result in customers seeking cost reductions, fewer service lines and reductions in service frequency. In some instances, activities which are typically outsourced to FM businesses such as our own are brought in house and contracts terminated in their entirety.

While our Pest Control business is least impacted by weakening global conditions, the business is not immune to economic impact. Most countries within the Pest Control division experienced difficult market conditions in 2010.

Risk of the number, scope, complexity and interdependencies of many initiatives giving rise to management stretch and overlapping priorities

The company has been going through a period of significant change since 2005 with new chief executives being appointed in 2005 and 2008. The company's current management team is implementing a five-year recovery plan based on operational excellence which itself is built around five key strategic thrusts namely: to deliver outstanding customer service, to develop capability, to drive operational excellence, to operate at lowest cost and to generate profitable growth. Within each of these thrusts are a large number of improvement initiatives which individually are managed through a proper risk control process but the principal risk for the group is that management has

the capacity and capability to deliver the strategic thrusts.

As an illustration of the scope of change, all but one of Rentokil Initial's Executive Committee has been changed over the past 28 months, major physical restructuring programmes are underway in our Textiles & Hygiene and City Link businesses, common systems (IT, finance etc.) are being introduced across our more than 50 countries of operation and major cost savings programmes are being undertaken across most of the group. These programmes are described in the strategy update on pages 6 and 7 and collectively their delivery is the principal risk to the execution of the company's operational excellence strategy. Financial and other risks are set out below:

Financial and other risk

The group's activities expose it to capital risk, liquidity risk, market risk and credit risk.

Capital risk

The group is committed to maintaining a debt/equity structure which allows continued access to a broad range of financing sources and sufficient flexibility to pursue commercial opportunities in a timely manner as they present themselves, without onerous financing terms and conditions. The group has in issue Medium Term Notes and a £500m Revolving Credit Facility (see note 21 for details). These contain a single covenant requiring that EBITDA Interest should be at least 4.0:1.0 at each semi-annual reporting date. The group was compliant throughout the year.

The group targets an investment grade rating of BBB or above for debt issuance over the medium term. Currently the group is rated BBB- with a stable outlook.

The group's Medium Term Notes may be recalled by its investors in the event of a change of control of the group and within 120 days if:

(a) the group's debt is down-graded below investment grade or the rating is withdrawn; and

(b) the rating agency confirms in writing, either publicly or in writing to the issuer or the Trustee that the rating action occurred either wholly or in part due to the change of control.

Liquidity risk

The group is committed to ensuring it has sufficient liquidity to meet its payables as they fall due. To achieve this it aims to maintain minimum committed financing headroom of £200m, over the medium term, when measured against the latest forecast cash flows over a rolling 12-month horizon. At 31 December 2010 the group had headroom of £390m.

Market risk

The group is exposed to market risk primarily related to foreign exchange and interest rate risk. The group's objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates, foreign currency rates and the exposure of certain net investments in foreign subsidiaries. To achieve this, management actively monitors these exposures and the group enters into currency and interest rate swaps, forward rate agreements and forward foreign exchange contracts to manage the volatility relating to these.

Foreign exchange rate risk

The group is exposed to the following foreign exchange risks: pre-transaction risk, transaction risk, translation risk and economic risk.

The group's policy response is as follows:

• Pre-transaction risk - The majority of sales and purchases are local, limiting pre-transaction risk. The policy is therefore to accept the risk.

• Transaction risk - The majority of sales and purchases are local, limiting transaction risk. The policy is therefore to accept the risk, except where significant acquisitions or disposals (not internally funded) are to be undertaken, where the transaction may be hedged to give certainty of pricing.

• Translation risk - The group is exposed to translation risk as a result of its worldwide operations. The group aims to hold debt in currencies broadly matching its forecast cash flows, meaning that currency interest costs reduce the net profit retranslation exposure. This reduces the volatility of earnings affecting the group's interest cover covenant. Foreign currency debt is designated for hedge accounting as a hedge of its currency net assets, so reducing its net currency assets. Retranslation gains and losses are recognised in reserves, rather than in the income statement.

• Economic risk - Economic risk is a core risk to the business, which the business therefore accepts. The group calculates the impact on the income statement and equity of a 10% shift in foreign exchange rates. The group's principal foreign currency exposure is to Euro, and a 10% shift in GBP/EUR would result in a £8.7m (2009: £8.7m) increase/decrease in operating profit, offset by a £1.9m (2009: £1.9m) increase/ decrease in interest payable. Equity reserves would decrease/ increase by £5.9m (2009: £17.1m).

Interest rate risk

The group is exposed to cash flow interest rate risk on borrowings and cash balances held at variable rates, resulting in variable interest cash flows.

The group seeks to manage interest rate risk to ensure reasonable certainty of its interest cash flows whilst allowing an element of risk exposure consistent with the variability of the group's cash flows.

The group has a policy of fixing (or capping) a minimum of 50% of the group's estimated future interest rate exposures (excluding pensions) for a minimum of 12 months forward.

At the end of December 2010 approximately 89% of the group's debt was at a fixed rate of interest. The impact on profit and loss of a 1% shift would be a maximum increase/decrease of £0.6m (2009: £4.1m).

Credit risk

The group has no significant concentration of credit risk. Sales are typically low value, high volume, spreading the risk across a number of customers. Policies are in place to ensure that sales are only made to customers with an appropriate credit history. Derivative counterparties and cash transactions are limited to high-credit-quality financial institutions. The group operates in some territories where there is increased exposure to trade credit risks and in those cases the group seeks to put in place appropriate additional measures where possible to manage its credit exposure.

Treasury risk

The company utilises financial instruments to manage known financial exposures in line with policies agreed by the board and outlined above. The company does not enter into any speculative derivative contracts.

Other risks

The group has contingent and other exposures relating to liabilities over property, environmental and commercial matters and pension funding obligations which are properly reflected in the financial statements. The level of such exposures changes over time and is kept under review by management. Pension funding risk includes investment and counterparty risk within the pension scheme in relation to the assets held by the pension scheme. A contingent risk remains that unidentified historic risks relating to acquired entities emerge, which if material would need to be reflected in future financial statements.

Related party transactions (extracted from page 101, Note 34, Annual Report 2010)

The group's strategy and policy are managed by the executive board (executive directors and senior management as shown on pages 22 and 23). Their compensation and the compensation payable to the non-executive directors is shown below:

	2010 £m	2009 £m
Salaries and other short-term employee benefits	4.5	6.3
Post-employment benefits	0.5	0.7
Termination benefits	0.3	1.1
Share-based payments	4.2	3.7
	9.5	11.8

Initial Catering Services Ltd (75%), Rentokil Initial (Pty) Ltd (74.9%), Yu Yu Calmic Co Ltd (50%) and Rentokil Initial (B) Sdn Bhd (70%) are non-wholly owned subsidiaries of Rentokil Initial plc. All transactions between these entities and the group were transacted at arm's length during the ordinary course of business and have been eliminated on consolidation.

Nippon Calmic Ltd (49%) was an associate during 2010 and 2009 and its balances are disclosed in note 13.

There are no significant transactions between Nippon Calmic Ltd and other group companies.

The group recharges the Rentokil Initial Pension Scheme with costs of administration and independent pension advice borne by the group. The total amount of recharges in the year ended 31 December 2010 was £2.5m (2009: £2.0m).

The group has made a loan to a consortium of private investors which enabled them to purchase a 25.1% stake in the South African business. The group has a receivable from this consortium of £21.3m (2009: £17.9m) at the end of the year. The loan is due for repayment in 2014. The repayment of the loan will be dependent upon the future dividends generated by the business.

Cautionary statement regarding forward-looking statements

This announcement contains statements that are, or may be, forward-looking regarding the group's financial position and results, business strategy, plans and objectives. Such statements involve risk and uncertainty because they relate to future events and circumstances and there are accordingly a number of factors which might cause actual results and performance to differ materially from those expressed or implied by such statements. Forward-looking statements speak only as of the date they are made and no representation or warranty, whether expressed or implied, is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. Other than in accordance with the Company's legal or regulatory obligations (including under the Listing Rules and the Disclosure and Transparency Rules), the Company does not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise. Information contained in this announcement relating to the Company or its share price, or the yield on its shares, should not be relied upon as an indicator of future performance. Nothing in this announcement should be construed as a profit forecast.

ENDS

 

END

 

 

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