Rentokil Initial plc (RTO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to our conference call for Rentokil Initial's Trading Update for the First 3 Months to the 30th of September. This call is scheduled for 45 minutes. And now let me hand it over to CEO, Andy Ransom. Please go ahead, Andy.

Thank you very much. Good morning, good afternoon, everyone. I'm here with Stuart. And in a few minutes, we'll be pleased to take any questions. But first, let me just say a few words covering the third quarter, and importantly, the actions that we're taking following September's trading update. In the third quarter, the group delivered total revenue growth of 3.6%, of which, organic revenue growth was 2.6%. There was good momentum sustained in the group's international regions, which in aggregate, delivered organic growth of 4.4% in the third quarter, with Europe delivering organic growth of 4.7% and the Asia and MENAT region delivering organic growth of 6.5%. Year-to-date, our international businesses outside of North America have delivered a combined organic growth rate of 5%. Turning now to North America, where in the third quarter overall, we delivered organic revenue growth of 1.4%, with North America Pest Control also up by 1.4%. Clearly, we were very disappointed to announce in September that the business was underperforming our expectations. And since then, we've put in place focused action plans on a number of fronts. Firstly, in our operations, we've taken decisive actions to mitigate cost overruns. Given our elevated workforce costs this year, we've reduced our sales and service headcount in addition to the normal ongoing off-season headcount reductions. Over the last few weeks, we've removed around 250 roles from service, sales and back-office functions with an annualized cost saving of around $22 million. We've been tightly managing overtime and labor as we've entered the off-season. And as we said in September, material and consumable costs in the North American business have been higher than expected, partly due to inflation. So there's also an impact from our new ordering process for Terminix branches and a weaker termite season that resulted in elevated inventory. To help mitigate some of these effects, we've now implemented strict ordering controls at branch manager and regional director levels. Some additional cost is due to inflation, and that's expected to persist, and that's around $7 million on an annualized basis with around $10 million of other material and consumable costs expected to unwind during the fourth quarter and next year. Secondly, we've progressed our initiatives to increase organic growth through the RIGHT WAY 2 growth plan. Whilst we've seen a recent positive improvement in digital inbound lead flow, this is coming from our paid search activities supporting the Terminix brand in particular. In the fourth quarter, we're looking to deliver improved leads for a number of our other master brands, whilst also increasing lead generation from our organic search initiatives. In the fourth quarter, we'll also be piloting the opening of at least 10 new satellite branches. These are smaller branch offices from which colleagues can cater for the needs of customers, and in particular, potential new customers in key target cities. We'll also be assessing the value of a physical presence to the visibility and digital presence of our brands and services. In sales, we're introducing a back-to-basics approach with increased focus and accountability on executing the selling basics, such as improving the speed from lead to inspection and to proposal, and increasing the average number of sales proposals per sales rep per day. At the half year, we highlighted the need to focus on customer retention initiatives, and this program continues to build up as we aim to drive improvements to all phases of the customer experience. We're adding 3 senior leaders in this space in addition to the 40 team members that we've added to the dedicated customer sales team. Customer retention for the overall North America business improved slightly in the quarter to 79.9%. We're also pleased to see a continued improvement in our North American colleague retention, which moved up from 77.8% to 78.5%, with good improvements in both service and sales. Other actions have included the appointment of a new Chief Marketing Officer and Chief Operating Officer in North America, and the appointment of an interim CFO for North America, whilst the search is underway for the permanent replacement. You may also have noticed that we are recruiting for at least one new Board member with specific experience in U.S. network-based services on industries and/or B2C marketing. Thirdly, on the integration front, the program proceeded very much to plan in the third quarter with systems and data integration in another 28 branches with combined revenues of $136 million, taking the total number of branches where we've integrated the systems to 36 with revenues of around $172 million. Importantly, at these locations, there was minimal disruption to operations with customer retention stable and colleague retention very strong. We're now in a very busy and important fourth quarter for the integration with systems migration continuing in a further 23 branches with a total revenue of around $130 million. Importantly, we're also on track to undertake the first rerouting of our technicians in the integrated branches as well as the piloting of our new service and sales pay plans across 8 branches, affecting over 250 technicians and around 40 sales colleagues. Over the past year, our business has experienced significant change activities as we've implemented our integration and RIGHT WAY 2 growth strategies. While we remain confident that these strategies will lead to a stronger and faster-growing organization during Q1 next year, we'll be reviewing our optimum branch network footprint, which will be informed by the early results of the new satellite branches that will be opened during the fourth quarter. We'll also review the effectiveness of the new technician and sales pay plans being piloted later this year. The review will result in 2025 synergies being pushed out by approximately 2 to 3 months. And we'll update the market on this review at the full year results in March. So we're taking action on many fronts to address costs, to focus on growth, to drive the integration forward and to add talent. There's no change to our 2024 guidance. We remain convinced about the long-term attractive growth potential of the North American Pest Control market, which continues to grow at around 5% per annum, and in the significant opportunities that we have to capture this growth. Our international businesses, which account for around 40% of group revenue and profit, continue to perform well. So with that, let me hand back to the operator, and then Stuart and I will be pleased to take any questions. Thank you.

[Operator Instructions] Your first question comes from Annelies Vermeulen with Morgan Stanley.

Just one follow-up for me from this morning. So you mentioned this morning that you've had a significant improvement in 5-star Google reviews across your major brands in the last few months. Is that just that the service quality has improved so dramatically? Or are you also being more proactive in asking customers to leave those reviews? And equally, is it a KPI that you're measuring your technicians on? As in do you incentivize them to get those reviews?

Thanks, Annelies. I'd like to think it's a bit of both. Certainly, the second is true. It's been the case, I would say, for the rest of the group for quite a long time, that if technicians are complemented by customers and say, "Thank you for a fantastic job." They're trained to respond to that customer, "It would be wonderful if you'd be happy to leave us a review." And so we're no different than most companies in that regard. We don't go soliciting reviews. But where we have happy, engaged customers who tell us that they're delighted, we do ask them, "Would you mind doing that?" And I think we were not doing that systematically in the U.S. If we look at year-to-date, reviews, Terminix, just happen to have it here, Annelies. So thank you for the question. Year-to-date, in 2023, we had about 14,000 5-star reviews in Terminix. This year, we've had 38,000 5-star reviews. And similar improvements, in fact, bigger improvements on a percentage basis, for the other master brands as well. So it's definitely something we've been focused on. I mentioned on this morning's call that, look, if you want to drive up organic search, you need to do 3 things consistently well. The first is you've got to get your website and web page content responsive. Google has made some big changes to its algorithm recently using generative search. If you've been searching, you probably spotted it. The first answer you get to many questions is an AI-generated answer. And now the websites whose content most closely relates to the answer that the AI has generated will be the most responsive for organic search. So the first thing is a lot of work going on to update, upgrade, refresh web page content. The second is 5-star reviews. We all know it in our lives. We go towards 5-star customers, and we look at those reviews before we make a purchase. That's why it's important. And the third factor of driving organic search is the location of the operation, and that's in part the reason that we're piloting the satellite branches. I'd like to think customer service is part of it as well. Clearly, you have to have happy, engaged customers telling you that they love your service for you to have the opportunity to ask them to leave a review. And if we look at things like our CSAT scores and our NPS scores, they remain consistently high. I'd like to think it's both, but there's no doubt we've been more proactive.

Your next question comes from the line of Ollie Davies with Redburn Atlantic.

A couple from me. Just on the guidance of 1% growth in the second half, I guess's that implies a slowdown to about 0.5% in Q4. So just wondering how conservative that is given the sort of positive commentary on leads. Or is the slowdown basically implied from the rerouting drag from the pilot scheme you're out to complete? And then, I guess, secondly, just on the pilot scheme. I understand you've told those employees the new pay plans which kind of go into effect at the end of the month. So just wondering what the kind of early reception has been there.

Yes. Thanks, Ollie. I can do math as good as the next person, I suppose. And so not wrong to say, "Well, hang on a minute. If it's circa 1% for the second half and you've done 1.4%, does that imply something like 0.6%?" My honest answer to that is, look, 1.4% is circa 1%. I wouldn't get carried away with 1.4%. We're not putting the champagne on ice for 1.4%, and it's circa 1%. The point about the fourth quarter, it is the off-season. We go from summer into fall into winter, so it's historically the off-season. Yes, we've got further integration activity in the fourth quarter. I don't think we're calling off -- we're calling out an expected downturn from performance in the fourth quarter. But for me, 1.4% is circa 1%. I'm not saying put us down for 1.4% for Q4, but I'm equally not saying put us down to 0.6%. I don't think there's a joining the dots between the 2 events. It would be daft of us to say, "Hey, we delivered 1.4%, so now we think the new number is 1.4%." The track record of us calling organic growth when small values can move that number quite materially, has not been very good, let's face it, in the last 12 months. So I think the best guidance we can give you is it's circa 1% for the second half notwithstanding 1.4% in the quarter. On the pilot schemes for the pay, we've not launched those. I think we launch them, I think, on the 10th of November, I think it is. I think -- well, I may be wrong. Some time in November, I think it's the 10th. What we've done is some, what do you call it, some branch consultation. So we've not gone to an individual and say, "Joe or Sally, this is going to be your new pay." We have socialized the elements of the new pay plan with a number of the branches to whom this will be implemented first. And overall, and I don't have detail, the feedback that was fed back to me was really positive. People understood the scheme, understood what we were trying to do. And we didn't have a big revolution on our hands. We had positive feedback. But until you get there and people see the dollars and cents that they get in their pay at the end of the month, that will be the acid test as to whether these have landed well. We think they'll land well. But at this point, we've just really socialized the high levels of the scheme as opposed to implemented, which happens next month.

Your next question comes from the line of Allen Wells with Jefferies.

Just to kind of follow on from some of the questions from this morning. The comments you made about kind of satellite branches, this obviously marks what seems like a bit of a u-turn from the big branch strategy that you kind of were pushing initially with the acquisition. There's obviously an optimum branch footprint review as well going on, which you've also announced. I was just thinking, how do you feel about the overall total synergy target that you put out and then upgraded in light of this? Obviously, there's been lots of moving parts here as well. So I'd be interested just to see where you kind of see that sitting. I think it was originally a north of $225 million, but we've had changes now. So in terms of the branch strategy, it was obviously critical in terms of driving synergies. Maybe just a bit of an update on that as well. Second question would just be on some of the Board changes. Maybe you could just say a few words on maybe what some of the early impacts of bringing on Trian to the Board as well. And then finally, just because it really wasn't talked about much and slightly less important now, but the Hygiene growth obviously slowed a little bit in the quarter. It had been relatively strong. Is that just kind of bumping up against tough comps? Is there anything underlying that's going on in Hygiene as we just think about the second half into next year as well?