Rentokil Initial H1 2020 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2020

There are 12 speakers on the call.

Operator

Good morning, ladies and gentlemen, and thank you all for joining us today at our virtual results meeting. I'm here in Gatwick alongside Jeremy, who, as you know, after 10 successful years as CFO, will be retiring after this set of results. I'm also joined on the telephone by Stuart Engel tombs, Jeremy's successor. He's currently enjoying his 14 days in quarantine after his recent return from the base. In a few moments, Jeremy will provide you with details of our results for the first half of twenty twenty and an update on the financial initiatives undertaken during the COVID crisis phase.

Operator

I will then come back and provide an update on the performance of our 3 categories with a more detailed look in particular at the strategic opportunities in hygiene. We'll then hold a Q and A session as usual. And if you would like to ask a question at the end, then please use the separate conference call line and details of the dial in numbers can be found in the Q and A tab on the screen in front of you. Let me just say a few words to set the scene. Over the next 45 minutes or so, we will take you through our response to the COVID-nineteen pandemic, which can be summarized as follows.

Operator

Firstly, we have seen an outstanding reaction from the organization. Which has resulted in a very positive performance with half 1 year on year revenue growth, a modest decline in profits and an excellent cash performance, demonstrating once again the resilience and robustness of our model. Secondly, our pest control and hygiene businesses have held up extremely well despite many of our customers being closed during the second quarter. We've executed a rapid deployment of hygiene disinfection services, which added almost 1,000,000 of revenues in the second quarter. And thirdly, in March, we set out our 3 phase response to the pandemic.

Operator

The crisis management phase, the recovery phase, and the strategic opportunities. And over the last quarter, we've aggressively executed that plan with agility and with pace. From mid March and into April, the COVID-nineteen pandemic began to have a serious impact on our operations around the world. In this complex and changing environment, we took the decision to act quickly and decisively to get ahead of the virus and critically to protect our liquidity. We drew down our RCF.

Operator

We successfully applied for the government's CCFF We withdrew our dividend, we suspended our M and A program, and we implemented an aggressive CapEx and cost reduction program. Which resulted in cost savings during the first half of 1000000. This included nearly half of our colleagues around the world, making some form of sacrifice, including pay waivers, furloughs and reductions in working hours. These measures and the efforts of our 43,000 colleagues have worked, and we've moved successfully from the crisis management phase and now into the recovery phase. We've now repaid our RCF and the CCFS.

Operator

We've restarted our M and A and capital expenditure programs. Most importantly, of all, by the end of this quarter, we were very close to our full complement of colleagues back to work and on normal terms and conditions. And as the graph on the right hand side shows, we returned to year on year revenue growth in June. So while we've obviously still got risks of further lockdown, second waves, and of the difficult economic environments around the world, we are taking this momentum into the second half and we would expect to make a with our expectations through the rest of this year. After Jeremy is taking you through the financials, I'll come back then talk about the strategic hand that we have to play, which I believe is now even stronger than before.

Operator

We provide services that the world clearly needs in a COVID and post COVID environment with brands that people trust We're in the process of launching hygiene services in around 20 new markets by the end of this year. We have the digital expertise that we will use to meet the needs of our customers in a more socially distanced world. And we have a strong balance sheet and an M and A machine that is primed with an excellent pipeline. Like most other organizations, our company has been significantly tested during the second quarter. And we've come through that period demonstrating that we are extremely agile and resilient organization with highly committed employees and an outstanding can do culture.

Operator

With that, I'll now hand over to Jeremy.

Speaker 1

Thank you, Andy, and good morning, everyone. I'll now run through the key financial highlights for the first half of twenty twenty. As Andy has already noted, COVID 19 had a significant impact on the half year numbers, and I will provide more detail on this. Both at the group and regional level as I go through my presentation. Unless I state the contrary, All numbers are at a constant rate of exchange.

Speaker 1

Ongoing revenue in the half grew by 1%. With the first quarter growing by 7.2%, but Q2 declining by 4.4% due to the impact of the virus. Ongoing operating profit declined by 9.4% in the half, reflecting an increase in the group's bad debt provision of 1,000,000 and with strong cost control, mitigating the impact of reduced revenues in Q2. Adjusted profit after interest and actual exchange rate declined by 11.3%, reflecting reduced interest costs following our 2019 refinancing offset by reduced profit from Associates following the sale of our stake in the Hanniel JV last year. And adjusted EPS at actual exchange rate decreased by 11.5%, in line with the decline in adjusted profit before tax.

Speaker 1

As the virus started to impact our business, we had a strong focus on cash preservation with tight controls over cost, CapEx, and working capital. And as a result, we delivered a very good performance with free cash flow of 1,000,000 in the half. Before I look at performance by region, I will just make some high level comments about the impact of the virus on revenue and profit in relation to the group. In accordance with IFRS 15, we have calculated revenue on the basis of amountsinvoice less any credit notes provided. It has been calculated, we believe, on a prudent basis, and we would and quarter with pest control down 5.9% and protect and enhanced down by 27.3%.

Speaker 1

Although cork hygiene categories were adversely affected, this was offset by disinfectant sales resulting in overall growth in hygiene of 16.3%. The virus had the most significant impact in April. With group revenues down by 12.1%. The impact reduced to 7 to 5.7% in May and revenues actually increased by 4.2 percent in June. I will talk through these trends in more detail by region in a moment.

Speaker 1

Looking forward, we would expect core revenues to improve of the in countries where we operate, including North America and Latin America, as well as localized Second Way hotspot such as Melbourne Australia. As the impact of the virus diminishes, we would expect disinfection revenues to reduce accordingly. Looking further out, we would expect our core hygiene category to benefit from an increased level of demand. This impact may be mitigated, however, by increased insolvencies in our portfolio due to the economic impact of the virus, which we believe are Horica customers most at risk. Overall, given the impact of the virus, the group delivered a robust performance in the first half and we think we are well placed to meet our customers' increased hygiene needs as they come out of lockdown.

Speaker 1

First half operating profit was down by 9.4% despite revenues being slightly up in the half. Revenue declines in Q2 were mitigated by significant cost savings against expectations of around 1,000,000. These were, however, partially offset by an increase in the group and debt provision in the first half of 23,000,000. We have been very closely focused on receivables collections during the pandemic, seeking to reduce the risk of bad debts and to ensure strong cash performance. Collection levels reduced by around 7% at the start of Q2 but have since improved with many regions returning to normal levels of receivable collection.

Speaker 1

While insolvencies to date have been low, we have taken an increased bad debt provision at the half year to provide against the risk of future insolvencies in relation to amounts due as at the 30th June. The majority of the cost savings were delivered in the 2nd quarter. These were primarily people related cost savings driven through eliminating the first half bonus team, salary cuts, furloughs, and redundancies. While we will continue to tightly to work on normal terms and conditions. And consequently, we expect 2nd half cost savings to reduce to around £35,000,000.

Speaker 1

Overall, the swift cost saving actions that we took at the start of the crisis have largely offset the impact of lower Q2 revenues, but with an increased bad debt provision, resulting in reduced profits in the half. Looking now at performance by region, Of all our regions, North America was the least affected by the virus in the half, although there has been an increase in cases, in some states during July. Demand for pest control remained reasonably strong, especially in residential, which accounts around 40% of our North American pest services revenue. Our Ambeus and Brand Standards businesses were more impacted, reflecting the discretionary nature of Ambeus' services, and brand standards exposure to the fast food sector. This impact was offset by strong sales of disinfection services which were launched in the region at the start of the pandemic.

Speaker 1

North America delivered strong ongoing revenue growth up 7.8% in the first half with 10.4% in Q1 and 5.7% in Q2. Revenue performance has steadily improved through Q2 from a small decline in April to 12.3% growth in June. Revenue growth was delivered by rope delivered by robust performance in pet services, and in the residential sector in particular, as well as strong disinfection sales, following their launch in March. Operating profit growth of 15.7 percent reflects the revenue growth as well as tight cost control generating an improvement in net operating margins As I have just noted, North America delivered strong revenue, profit, and margin performance in the first half. Albeit not necessarily in the way we had planned it at the start of the year.

Speaker 1

This infection sales helped mitigate reduce test revenues in q 2 with short term cost cutting measures helping to maintain margins. While the effects of the virus on North America remains uncertain, both in terms of business disruption, and broader economic impact, the robust performance of the region in the first half means that we expect to be close to our $1,500,000,000 revenue target by the end of this year. As I have already noted, margins increased by 90 basis points in the first half despite lower pest revenue. And the suspension of our M and A program and systems integration. Following the strong performance of the business in the second quarter, We are going to get back on with the plan, reviewing our systems re platforming program and M and A investment in the region.

Speaker 1

In addition, we think that lessons learned from the cost savings made during Q2 will help improve the region's net operating margins over time when the impact of the virus has receded. Taking all of the above into account, we remain confident of achieving our target of 18% net operating margins, although given the impact of the virus on key parts of our plan in the first half, The timing for achieving this may be slightly delayed. The virus had quite a mixed impact on our Europe region. Some countries such as Germany have been relatively unaffected, while other countries such as France and parts of Southern Europe were much more severely impacted. Latin America, which is reported within Europe, was affected by the crisis later than other countries and continues to be impacted at this time.

Speaker 1

IGENE was the strongest performing category in the region, supported by disinfection sales, with France work where most affected, due mainly to the closure of businesses Ongoing revenue was down 3.8% in the half, driven by revenue declines in the 2nd quarter, up 10.5%. Revenues were particularly impacted in April, down by 22.8%, recovering to growth of 2.8% in June. Hygiene revenues benefited from disinfection sales in the 2nd quarter with the category posting growth of 11.3%. Offsetting this, pest revenues declined by 8.9% and France Workwear revenues were down by 34.3%, albeit with both categories performance improving from April to June, as customers came out of lockdown. Country level performances reflected the impact of the virus with Germany growing by 7.7% in the half, whereas Southern Europe and Benelux were in line with the prior year and France revenues declines driven by work wear.

Speaker 1

Ongoing profits declined by 27.3% in the half, again, reflecting the impact of the virus on revenue, with growth in Germany offset by declines in France and Southern euro. The UK and rest of the world region has been more impacted by the crisis. With the U. K. Washrooms, particularly impacted by the closure of HORica customers.

Speaker 1

The U. K. Pest business was also impacted by customer closures with ambiance suffering from reductions in customers' discretionary expenditure and with property care impacted by continued weak demand in the UK housing market. These impacts resulted in a 1st half decline an ongoing revenue of 5.1% with a 15.5% decline in Q2. As with the group's other regions, the decline was most severe in April at 21.7% reducing to 7.7% in June.

Speaker 1

Ongoing profit in the region was down 17.2% in the half, reflecting the reduced revenues in first to be impacted by the virus with China, Hong Kong and South Korea, the first to emerge from lockdown. Good performances in these countries with strong sales of disinfection and other hygiene services has helped offset the impact of the virus on other countries in the region such as India and Malaysia. Ongoing revenues grew by 3.2% in the half, despite the decline in revenues of 5.5 percent in the 2nd quarter. Again, the impact of the virus reduced during the second quarter with a decline in revenues of 9.2% in April, reducing to a small level of growth and South Korea was offset by declines in India and Malaysia. An ongoing operating profit increased by 1% in the half with country level performance, reflecting the impact of the virus on revenue.

Speaker 1

The virus impacted all countries in the Pacific region and New Zealand in particular, which implemented a very tight lockdown in March, impacting both pets and hygiene. Again, the pattern for ongoing revenue performance was similar to other regions with a 5.7% decline in the half and a 14.5% decline in Q2 but a much improving trend during the quarter as both New Zealand and Australia relax their lockdown provision. Ongoing profit decline of 10.2 percent reflected the impact of revenue declines in the 2nd quarter mitigated by tight cost control in the region. As previously noted, Cash preservation has been a key focus following the global impact of the virus. Operating cash flow of £173,000,000 was 1,000,000 higher than the prior year.

Speaker 1

Despite the reduced levels of profit and EBITDA, driven by strong working capital management and reduced CapEx spend. Free cash flow of 1,000,000 was 1,000,000 higher than last half year, reflecting the increase in operating cash 2019 due to the phasing of bond interest payments and the fact that we drew down our RCF in the second quarter. Cash tax payments were 1,000,000 lower than the first half of twenty nineteen, primarily due to phasing. At the start of the crisis, we suspended meaning that cash spend on these items was a £130,000,000 lower than the previous half, resulting in an underlying in net debt of 1000000. This was offset by an increase in FX and other items of 1,000,000, primarily due to the impact of a significant weakening of sterling on our euro and dollar denominated debt as well as the noncash impact of reduced U.

Speaker 1

S. Interest rates on derivatives used fit our US dollar debt. Taking all of the above into account, our net debt increased slightly compared to the 2019 year end by 1,000,000 in the year to 1.102 1,000,000,000. Looking now at the balance sheet, the strong cash performance of the business means that we have been able to maintain our net debt to EBITDA ratio at one point 9 times broadly in line with the 2019 year end. Having drawn down the RCF and CCFF as a precaution in Q2, we have now repaid both liabilities using cash held on the balance sheet.

Speaker 1

Following these repayments, the business has over £800,000,000 of liquidity taking into account our undrawn RCF facility for £550,000,000 and cash on the balance sheet. Our credit rating has remained at BBB with a stable outlook throughout the first half, and we are confident that this rating can be maintained for the rest of the We will now reinstate our pre COVID-nineteen capital allocation model. We plan to resume investment in M and A in the second half and would expect to spend at least 1,000,000 on acquisitions. We will also increase our investment in capital expenditure to support the growth of the business, which I will I will outline further in a moment. Assuming that we continue to trade in line with expectations, we would expect to propose a resumption of dividend payment at the time of our preliminary results in February 2021.

Speaker 1

So finally, before I hand over to Andy, some comments on the outlook for performance. We withdrew our guidance in March given the uncertainty around the COVID 19 situation. Whilst we have traded relatively well against expectations in the third half, some significant uncertainties remain which means that providing specific guidance for 2020 and beyond remains difficult at this time. Notwithstanding this, We would In relation to the outlook, I note the following continued gradual resumption in business activity, we expect to make further progress in the second half. However, there is a risk that a second wave of the virus and or economic pressures arising from the virus will impact revenues adversely.

Speaker 1

Disinfection sales in the first half amounted to 1,000,000. These sales are directly related to the impact of the virus. And hence, it is difficult to forecast the quantum of these sales for the second half and beyond. Following from our expectation of a reduced impact of the virus in the second half, We are looking to return colleagues to work on normal terms and conditions. And consequently, H2 cost savings are expected to reduce to around 1000000.

Speaker 1

As I've noted above, the impact of the virus on the global economy is difficult to forecast We have increased our provision for bad debts in the first half by 1,000,000 against receivable balances at the half year, and we estimate that we will acquire a 1,000,000 increase in the provision in the second half. Current economic uncertainty around the virus as well as Brexit arrangements has resulted in a significant weakening in sterling in the 3rd half. As a result, based on current exchange rates, there would be a minimal FX impact on our 2020 profit compared with the 1,000,000 to 1,000,000 adverse impact from foreign exchange previously guided to at the time of our preliminary results on the 27th February 2020. Similar to profit guidance, providing guidance on aspects of cash flow is also challenging given the uncertainty created by COVID-nineteen. However, we have more control over certain items such as investments in CapEx And M And A.

Speaker 1

Working capital outflow for the year is expected to be in the range of 1,000,000 While the working capital, flows have been strong in the first half, we expect that there will be outflows in the second half due to phasing. Net CapEx is as estimated to amount to £225,000,000 to £235,000,000 As previously noted, given our strong cash performance in the first half, we are planning to increase our investment levels in H2 and therefore, our guidance on CapEx spend has now increased. Cash interest is expected to be in the region of 1,000,000 This reflects the carry cost of holding the RCF and the CPFS during the second quarter, both of which are now repaid. Cash tax payments of GBP 50,000,000 to GBP 60,000,000. Given our strong cash performance in the first half, we now restore our original guidance for cash tax payments for the year.

Speaker 1

And again, as previously noted, we are resuming our investments in M and A and plan to spend at least 1,000,000 on acquisitions, in the second half. So to conclude, We are pleased with the robust performance of the group in the first half of twenty twenty, and I will leave you with a slide some arising some of our key achievements in the half. And given that this is my last presentation for rent to kill initial, I would just like to say what an enjoyable 10 years this has been with the group. And in particular, the last 7 years working with Andy. While I wouldn't necessarily have chosen to spend my last 5 months working through the impact of a global pandemic, I am nevertheless very happy to lead the group in such a strong position in which Andy and my successor Stewart, all the best, for what I am sure will be continued success in the future.

Speaker 1

And now I'd like to hand back over to Andy.

Operator

Thanks, Jeremy. So then starting with our people and with safety. Throughout the crisis phase, our focus has been 1st and foremost on the health and safety of our colleagues as it always is. With 43,000 colleagues in 83 countries, Our own employees were, of course, directly affected by COVID 19. As at June 30th, 178 of our colleagues were confirmed to have had the virus and one colleague who was on long term sick tragically dying.

Operator

In closing most of our office locations, we moved 8,500 colleagues to home working to reduce the risk for their own safety and their families. And we successfully developed a smartphone app to track their health and whereabouts. Operationally, During the second quarter, the business has delivered its best ever safety performance, with our lost time accident rate reducing by 20% despite the launch of new services and with the associated working days loss down by almost a quarter, As you know, at Rent A Q2 initial, our business model is powered by a strong belief that everything flows from our investment in people and by creating a workplace culture where people can thrive and develop. If we get this right, then we provide a high quality customer experience, and that generates the returns that our shareholders rightly expect. So as you can imagine, asking nearly half of our colleagues to accept some form of sacrifice, such as furlough, reduced pay and or hours was not something that we took lightly because we absolutely did not want to damage the model.

Operator

Well, in fact, I would argue that the reverse has happened. We've seen a huge level of commitment to the company from colleagues. With around 90% strongly supporting our actions. We've seen high levels of productivity from home workers, an all time high level of online training undertaken and the safety record performance that I've already mentioned. And for the record, I would like to take this opportunity to pay tribute to our colleagues, their commitment, and indeed, in many cases, their bravery.

Operator

Over the last few months, 13. Customers trust rental initial to do it right. During the crisis phase, we were able to continue to serve those customers who needed our services by obtaining a license to operate, where many national and state governments deemed pest control, hygiene, medical and disinfection services as essential services. And by deploying the appropriate PPE training and standard operating procedures across our group. As lockdowns have begun to ease in many countries, We're announcing a large number of our customers seeking to give their employees and their customers the reassurance that it is safe to return to the office.

Operator

To the shops and onto public transport. And what we are seeing is that a lot of our customers want very publicly to associate their return to work programs with brands that represent quality, science, and the highest hygiene standards. Our people, our brands, and our expertise offer that reassurance. Which will be an important source of differentiation in a post COVID world. Biggest macroeconomic themes for 2020 were likely to be, I would certainly have said that the commitment of businesses the sustainability and the environment would have been right up there.

Operator

And we believe that as the world begins to work its way through this COVID crisis, we can urgently return to this critical agenda. As a participant in the COP 26 initiative, We've set a new ambition to do everything in our path to be at CarbonNET 0 by 2040. We recently moved to 100 percent electricity from renewable sources in the U. K. We've signed up to the EV 100 scheme to promote the use of electric vehicles, and we've established 7 work streams to target different aspects of sustainability.

Operator

On which we will obviously provide more detail over the coming quarters. Our mission at Renskill initial is to protect people and to enhance lives. And that's a mission that clearly has never been more important. Our vision is to achieve this by caring for our colleagues, our customers and the communities in which we live and work. A brilliant example of this took place in May when colleagues from around the world undertook more than 250 local events.

Operator

Event to say thank you to help and other public sector workers by donating disinfection services to emergency workers, pest control treatments to care homes and hand sanitizer and care packaging the hospital staff. These actions show our values being put into practice, even in the toughest of times. So turning now to our category, pest control is a structural growth market. And rent to kill is the number one pest control business in over 50 countries. This is a high quality resilient business.

Operator

During the crisis phase pest control, was somewhat less impacted because as an essential service, it was a key part of the public health agenda. As a portfolio business, Much of what we do is based on visits per year, and we'll look to reschedule service visits missed due to the lockdown where we're able to. Our callout or job in work remains strong, particularly in the residential sector, and many of our pest control services are, in fact, external meaning we don't actually have to access the building. And as our affected customers are beginning to reopen, the business is also now recovering strongly. So I'm very proud of the performance of our pest control category in the first half.

Operator

Despite significant disruption to our customers, the business grew ongoing revenues by 1%. Our U. S. Business performs particularly well, supported by other excellent contributions by some of our businesses across Europe and Asia. These were offset by some markets, particularly those with the most extreme lockdown regimes, including India and New Zealand.

Operator

What seems certain in the post COVID era is that there will be even greater focus on public health and an increasing use of digital technologies. Over recent month, demand for our remote monitoring Pest connect system has been particularly strong with customers wanting less physical contact and a fast response to any potential pest issue. We added 2200 customer sites and installed around 40,000 Esconnect units. During the first half of the year, including a major retailer who saw the advantages of transparency and database analytics. That PetConnect provides, as well as the significant contribution to their own sustainability agenda.

Operator

So pest connect means that we can target site visits through specific rodent activity and ensure that a pest control problem doesn't become an infestation drama. The move to working from home has required all of us to learn new skills and none more sales and our sales and marketing teams have created a series of sector specific digital campaigns to highlight the services that we can offer to customers as part of their restart programs. Whilst our sales teams could not physically visit our customers, it was clear that people wanted to hear from the experts. And we send over 900,000 targeted emails in the UK, for example, achieving a very high open rate of around 60 percent against an average rate from the services sector of 22%. While in the U.

Operator

S. Visits to our Western and J. C. Ehrlich websites, rose by 48% 26%, respectively. The use of digital and sales and the marketing and through industry leading innovations like Pest Connect is not new to us.

Operator

And post COVID, we anticipate and even greater degree of switching from face to face interaction where we'll benefit from our trusted brands, service expertise and our digital leadership. So then in summary for pest control, The category held up extremely well with essential service status confirmed around the world as part of the public health agenda. Our customers are looking for more digital and more remote monitoring solutions. Our brands and expertise are powerful differentiators, as our customers gradually reopen. And whilst the date there has been no discernible impact, on customer retention on pricing or indeed bad debt or business failure, we need to be very much focused on the impacts of the economic environment as things become clearer over the coming months.

Operator

So turning now to hygiene, In hygiene, we're the global leader with market leading positions in 22 Countries and a top 3 position in 35 markets with a high quality range of hand, surface, and air care services. During the crisis phase, where customer premises remain closed, for example, in the HORica sector, which accounts for around 14% of our hygiene revenues, we were obviously particularly impacted. However, For those customers that remained open, demand was very strong, particularly for hand flirts and hand sanitizers. In addition, new disinfection services provided a bifold surface hygiene service for retail distribution for supermarkets transportation and for those reopening their offices. So I'm very pleased with the performance of our hygiene category, which grew ongoing revenues by 10.5% in the first half and an excellent 16.3% in the second quarter.

Operator

Performance from our hygiene businesses vary by geography with good performances in our established markets, supported by disinfection sales in new hygiene markets, particularly in the U. S, while offset to some degree by those countries with more significant top down regimes. HIGENE disinfection services which we launched across the group in response to the pandemic generated revenues of 1,000,000 in the 2nd quarter. Throughout the last few months, the importance of hand hygiene is one of the clearest messages given by governments around the world. And this was reflected in customer demand for soaps, hand drying products, and sanitizers reaching record levels.

Operator

Just to give you one example, we delivered revenues from hand sanitizers around GBP 9,000,000 in the first half which was a million increase over the same period last year. Now over the last few years, I've often signaled the long term promise of the opportunity in hygiene. But without necessarily calling out growth exploration much beyond GDP. The last few months have proven that hygiene time has indeed come. And we see 4 main opportunities of profitable growth over the coming years.

Operator

Inside the washroom, where one of the biggest threats to cross infection exists. The introduction of no touch digital products learning from our pet business. International expansion, and using our hygiene expertise outside of the washrooms. So I'll now touch on each area, starting firstly with inside the washrooms. Small enclosed areas, smooth surfaces, and high footfall make the washroom a priority in any COVID risk assessment.

Operator

Our aim here is to provide a complete no touch washering experience. Where we can enable washroom users to enter and exit the washroom without having touched any surface. As part of the signature range, we already offer a full set of no touch products, including waste disposal units, with auto lift lids, no touch soap and sanitizer dispensers, auto dispense paper towels, and other hand drying options. As one of Air Care products, which provide an ongoing method of removing potentially harmful germs from the environment. At our 2019 results in February, we announced our plan to build a digital hygiene business and to launch the range by the end of 2020 and this remains on track.

Operator

Our digital hygiene range will provide premium non touch services and remote monitoring as well as compliance and audit ready reports. Services include digital tax, self dispensers, hand wash monitoring, air care, as well as football monitoring. With a tablet based traffic light system to control the number of users at any one time in the washroom, as you can see there on the right of the screen. All designed to reduce the risk of cross contamination. Now while we currently operate hygiene in 46 countries, we operate pest control in over 80 markets.

Operator

And so as part of the strategic response to COVID, We're in the process of launching hygiene services in around 20 additional countries by the end of this year. We've already taken our first steps in America with the launch of its firsthand and Air care products as well as disinfection services. And in Europe, following our exit from the annual joint venture, we are now able to reengage in the hygiene services market under the initial brand in those 10 markets that we exited. These are markets where we already have Aspen Gold Services, and therefore, a large existing customer base, as well as brand presence and management teams already in place. So the final part of the opportunity is outside of the washroom.

Operator

And as I've already said, hygiene has moved from being a relatively low interest category to one of the world's most important. Over the last few months, we've already seen hygiene services, such as hand and service products, being used in office areas in kitchens and in reception as well as on transport and in retail stores. And we expect this to continue in line with far higher consumer expectations for both hygiene standards and for access to hygiene services. Aercare is a relatively new area, but providing clean, safe air is more important than ever. With much greater consumer awareness, of how viruses can be transmitted by droplets produced by costs and sneezes.

Operator

Our product range features air purification and air sterilization as well as air sensing products. And as an example, the INSPIRE air 72, features hospital grade filters, which capture harmful particulars and can clean a 36 square meter office in just 10 minutes. So turning now to disinfection services. For many years, we've had a fairly small specialist hygiene business in the UK and in a number of European countries with around 1000 colleagues working in them. But with a high degree of expertise to manage the deep cleaning after industrial accidents through to crime scenes, and biohazard decontamination.

Operator

With the COVID crisis, we've been able to package up their expertise and to share it quickly across the globe, launching specialist disinfection services in more than 60 markets and training a further 7000 colleagues. We offer 3 services, a contingency risk assessment survey for companies wishing to minimize potential shutdown periods, and all purpose preventative specialist disinfection service to maintain a high level of hygiene on the premises and a full emergency COVID-nineteen disinfection service for a confirmed or suspected case of COVID-nineteen has been on a customer's premises. These services target a wide range of customers, including factories, warehouses, offices, schools, and supermarkets. And new contracts have included global distribution centers and a major public transport provider the home we disinfect 4000 buses every day. The hygiene disinfection works well with our model, focused on colleagues, customers, and shareholders, and we move quickly to roll out that service globally.

Operator

And we're now introducing new innovations with different types of disinfection fogging machines, the use of ultraviolet light, and different delivery systems for example, revenues to continue through the third quarter and into the 4th. And while we expect there is a role for this, service post national lockdown, perhaps returning during local lockdowns and second waves and potentially ongoing for key high dependency sectors, we would expect to see the need for disinfection services declining somewhat as businesses hopefully return to more normal trading. So in summary for hygiene, essential service, status was confirmed worldwide in its role to protect public health. We were quick to act, launching disinfection services globally. There are clear opportunities for growth in hygiene, including our international expansion this year.

Operator

The initial brand is already highly trusted and it has a clear association with an even stronger rent to kill brand. But just as I said with Pest Control, whilst to date, we've seen no discernible impact on customer retention or pricing or bad debt or business failures, We will, of course, remain extremely vigilant in the coming months given the economic environment. Given the opportunity and interest in hygiene, we plan to undertake a Capital Markets Day in the first half of next year and we'll announce details in February. So turning finally to protect and enhance and then M and A before we take any questions. We have 3 main businesses in Protect And Enhance.

Operator

Ambulance, our plants business, our UK Property Care business, and France, Workwear. These businesses have weaker growth characteristics than our pest control and hygiene businesses. And it's also fair to say that they've been significantly more impacted by the COVID crisis in the first half with ongoing revenues down by 12.9% and profits down by 51.3%. Ambeas was impacted by the lockdown of hotels and offices and the more discretionary nature of interior plants, which will make the coming months a challenging environment for this business. Property Care, which is mainly remediation work inside of properties, was of course affected by social distancing requirements, and the continued stall of the U.

Operator

K. Property market, but we do hope to see conditions improving in the second half. Our Workwear business in France is the largest part of Protect And Enhance, and after a positive couple of years both operationally and financially, ongoing revenues, however, declined by 18.5% in the first half, with a 40% closure of customer premises starting in March driving a 40% decline in Workwear volumes over the period. Encouragingly low, revenue declines improved as the quarter progressed as you can see on the slide. And we hope to see continued improvement in the second half as businesses in the Horica sector in particular, continue to reopen.

Operator

Notwithstanding the COVID crisis, the business has continued to make good progress in the first half on the plan to separate the workwear and hygiene businesses, and this remains on track to be completed by theendoftheyear. Turning now to M And A. As you know, this is an extremely important part of our growth strategy, And after a short pause, we have restored our M and A program. Whilst we felt it was prudent to pause our M and A activities in March, given all the uncertainties, we did maintain our contacting program and with a strong pipeline of good potential deals in place, We're now expecting to spend at least £100,000,000 on acquisitions in the second half. Without any doubt, the second quarter was the most challenging operating environment we have ever experienced.

Operator

The global health crisis affecting every country, a significant proportion of our existing customer base being forced to lock down their businesses in a dramatic and sudden economic downturn. But despite all of this, our people and our operating model held up extremely well as indeed I've summarized on this chart. So to finish, what do I think we've demonstrated during the crisis to date? Well, we have highly engaged colleagues. We have a strong culture, and we have a talented, established management team that showed great collaboration during the crisis.

Operator

We've demonstrated that Multinational is a competitive advantage with insights from around the world to help us to get ahead of the virus. But this is an agile organization. We've been able to pivot quickly as we showed by launching disinfection services in over 60 countries in just 3 weeks, working from home has exceeded our expectations and we've seen high levels of productivity and the takeout of online training. April was the floor. And as you can see on the right hand side there, we are now out of the crisis management phase and into recovery.

Operator

Our digital and innovation expert teams will be vital in the new normal, and we have brands that people trust. This is a high quality business with essential services in pest and hygiene that will protect people in a post pandemic world. And finally, as you heard from me today, hygiene has moved from a relatively low interest category to probably one of the most important categories in the world. So whilst we obviously cannot predict the future developments of the COVID-nineteen pandemic, nor obviously, it's economic impact. Ours is a high quality and a resilient business, and we're entering the second half of twenty twenty with positive momentum.

Operator

Place in a moment. And if you would like to ask a question, please do join the conference call. Details are shown on the screen now. Before that though, I would like to finish by paying a brief tribute to Jeremy who retires From rent to kill initial on 14th August, that's just 17 days short of achieving his 10 year long service award. Back at the time that Jeremy joined was the time of CityLink.

Operator

It was a time of restructuring, a time of 1 offs, poor cash conversion, minimal organic growth. I'm sure many of you still remember it. 10 years on JT as we all call in as a personal shareholder return over the period of over 500%. Not too many CFOs get to put that on their TVs. JP is calming presence when others are running around with their hair on file, it's mainly me, his wise counsel, his brilliant leadership and his encyclopedic knowledge of trivia, which seems somehow to stop in the 1980s.

Operator

His passion for Leeds United, recently seen an overdrive and he's absolutely wicked sons of humor, we'll all be misfires very much in RENTECO initial. I had hoped that after our usual face to face meeting, we would all be able to wish him well in some style, Instead, here we are, just two of us is an empty office in Gatwick, sharing a socially distanced glass of warm champagne. On behalf of everyone on the call, thank you, Jeremy. It's been a great innings and best of luck in your non executive career. With that, please let me hand over to the conference call operator.

Speaker 2

Welcome ladies and gentlemen to today's question and Please ensure that your phone is unmuted locally when preparing to ask your question. Thank you, Mr. Hansen. Your first question is from Phil Sia Barker of JP Morgan. Sylvia, please go ahead.

Speaker 3

I'll start with one for Jeremy. So thank you all for all the help over the years and all the best going forward. Gary, I've got an especially chunky question. Just on the second half performance, so you've given quite a lot of pieces, on guidance for profits. So I was just been wondering if you can help us piece it all together, but it seems that your top line was growing in June, probably flattish organically, and you still a little bit of M and A benefit in the second half.

Speaker 3

So I imagine you're hoping that you can be kind of flat to growing, in the second half. Which would imply that you're not gonna have a, you know, material operating leverage drag. In fact, it should be slightly helpful Then you've got savings of $35,000,000. You've got the bad debt provisions of $15,000,000. Maybe some more additional costs, but overall, it would seem that if trends continue as they have been, kind of in June, you're it might actually be up in the second half, just your EBITA year on year.

Speaker 3

And then I've got another couple of quick ones.

Speaker 1

Thanks, Sylvia. Yes, it's as we've said in the guidance, it's very tricky to provide guidance for the second part. We're pleased with the way the quarter's gone, but there are a number of, potential positives and negatives disinfection sales was strong in the 2nd quarter. It's hopefully the virus received, those will come down. And as they come down, we'd expect our core services to continue the momentum they've shown in the quarter.

Speaker 1

We don't know how the economy is going to go, as Andy said, in the presentation, what impact that could have. So revenue is quite hard to call. We'd expect Q3 to be better than Q2 overall. So Q2 was down 4%. We'd expect Q3 to be better than that, but as you say, M and A comes away as we head through into that.

Speaker 1

Into the rest of the year. With inspection, we may continue progress, but there are some pluses and minuses around that. We did a really good job, I think, on cost savings in the and quarter, delivering $87,000,000 over the over the half. As we get people back to work, and our customers reopen, we're looking to get them back and get them back on normal paying conditions. So those cost savings will reduce in the second half, from 87 in the first half to about 35 in there.

Speaker 1

In the second half, We put a bad debt provision in. So we talked about bad debt provision by $23,000,000, and we would expect to make further provisions in second half of around about 15. So there's quite a few moving parts. We withdrew consensus in March, There's a wide range of analyst numbers, but they've been in the kind of mid 2 sixties. And what we've said that we in the same business, we'd expect a moderate increase in that.

Speaker 1

And what we've been seeing based on the call today is people ending up in the kind of 290 to 300 level, taking everything into account. Yeah, I think basing it off last year's quite difficult with all the moving pieces. I guess what we're doing is just flowing through from the quarter looking ahead to to what the various trends are and how it moves through. And also as we head through the half, we'll be able to provide updates as we go. As to how that's moving and into 2021.

Speaker 1

But I think based on the strong second quarter, we are we would expect the analysts, on the call to move their numbers up a bit, but I think, beyond that, it's quite difficult to be too definitive Sylvia. So that's probably as much as we can give you in terms of second half And as Andy said, predicting where the virus and the economy goes is difficult. So I think that some upward movement and we'll play it by ear as the half progresses.

Speaker 3

Okay, got it. Thank you. And then just on disinfection, is that all booked within hygiene? Is some of it booked within PES? And then maybe can you just give us a split of kind of the revenue maybe by region, how much of it is with existing customers?

Speaker 3

And then finally, just on M And A, as a third question, I guess, some of your peers have actually been active with bolt ons throughout the period. So it doesn't seem like the market is really shut down, but any observations on what's happened to your pipeline, what's happened to kind of the environment out there will be helpful. Thank you.

Speaker 1

So on the I'll do a disinfectant. So all of that has been booked in hygiene. We took a call to put it there. Some of it has been provided by our pest serviceman who we trained up and placed like North America. We don't have a hygiene category per se or we didn't have one.

Speaker 1

And so they have been it's been provided through the pest business and to pest customers. I think the majority is current customers. There are some new customers, but it's it's clearly easy to have the contacts with the current customer base. And it's pretty much spread around the business. The yes, it's a we've done $27,000,000 in the U.

Speaker 1

S. In terms of disinfectant. So that's been very strong. But all the markets have been able to deliver it. Apart from those where the virus really hasn't had so much of an impact.

Speaker 1

So it's probably less impactful in places like the Pacific where they haven't really had a big virus concern. That may change, of course, as we've seen second waves in places like Melbourne. But in Asia, in Europe, in the UK, and the U. S, it's been good across all of those areas. I'll hand Andy over to talk about the M and A.

Operator

Hi, Sylvia. Yes, look, I think, we're waiting to see really what the M and A market plays generally, but also specific to our industry, what that looks like in the second half. We've started out, as you know, for the second quarter that we're back Yeah. Some deals got done in the second quarter, not many, a handful. We didn't just, down towards we kept talking to the people we've been talking to.

Operator

So I'll be as interested as you and anyone else as to what the market, the M and A market looks like in the next few months. Obviously, feeling huge amount of uncertainty out there, but I think, it's the pest industry is a very robust one and the industry has held up pretty well, as we've always said. So probably, a reasonable M and A market in the second half and into next year, probably not wildly different from where it was immediately pre the pandemic, but we'll have to say, but certainly the opportunities are out there. Pipeline's good. Discussions are ongoing, and we've given the confidence that we will get deals done in the second half.

Speaker 3

Okay. Thank you very much.

Speaker 2

Our next question comes from Edward Stanley of Morgan Stanley. Edward, please go ahead. Edward, your line is now open. Please go ahead.

Operator

Can you hear me? Yes. We can hear you, Ed.

Speaker 4

Alright. Thank you. You talked about CapEx returning to the sort of more normal levels in the second half, is that you're putting that anywhere, into specific areas or countries where you're seeing opportunities to take growth or market share? Or is that just a return to more normal levels that you would have expected at the beginning of the year anyway. The second question, do you think this is a catalyst for you to push further into the residential space as a hedge against any kind of future disruptions or actually, you think you're broadly happy with your mix of business as it was and is, and there's no reason to sort of push further into that space and compete more, I guess, with volumes.

Speaker 4

And then finally, on the bad debt, or the risk of bad debts, rising. Is there any countries where you're particularly worried the UK seems to be something the Feet is pushing this morning is, driving risk of bad debts there? Or is that just across the geographic outlook giving a more cautious

Operator

Thanks, Ed. I'll take the first 2 and JT can come with a bad debt. On CapEx, I think be honest, it's a little bit about the Realty. We throttled back significantly in the second quarter. You can only do that for a And so we've got to get that the tap turns back on, with a normal level of CapEx.

Operator

If we've not spent any money on vehicle CapEx for the second quarter, there's a little bit of catch up there. So The majority, I would say, is normal. That said, EFR equipment for rental is capitalized. So the investment we're making in hygiene, in inside the washroom and side the washroom, the devices that purifying clean the air, the digital washroom solutions all require an element of CapEx. So some of it is investment for growth.

Operator

The majority is getting back to a more normal level of CapEx. What we're quite keen to avoid is not spending CapEx in the second quarter and then having a monster CapEx bill next year, that really isn't particularly good for business. So and there's a little bit of catch up CapEx as well in the second half. So its majority is business as usual, but some investment to support hygiene I don't think the recent few months causes us to change our view on commercial versus resi. I mean, we're the world's biggest and the strongest in commercial with sweet spot.

Operator

It's what we're, most well known for and have the brand recognition for. Resi, if you've got density and a quality business is always been an attractive space. And if you look at how we built our North American business over the last decade. The vast majority of acquisitions that we've done have come with significant residential revenues in the towns and cities that, we brought those businesses in. I haven't got a figure in front of me, but I think we're about 40% resi now in our North American pest business and that's up significantly over the last 4 or 5 years.

Operator

I don't think a big sea change in attitude. You're absolutely right that resi's held up marvelously well in the States in the second quarter. And some competitors have a higher SKU towards resi. But I think fundamentally, our SKU of predominantly commercial, but with quality resi, where we have density to support the model is absolutely the play. So I don't think any real change in the direction there.

Speaker 1

Good morning, Ed, on bad debts, So, I don't think there's any particular country area that we're concerned about. This is a provision against insolvencies in terms of the receivables at the 30th June. And as I said in my presentation, we haven't really seen any big insolvencies to date, but clearly there's a risk around that. And where I guess we're most concerned is around the HORica space and probably more potentially in the SME HORica space. A number of businesses have been closed in that space globally, and they're still coming back to, back to open in some cases.

Speaker 1

And while they remain closed, it's very difficult conversations around recovering money is due, and there's no certainty that everybody comes back. So that's where I think the risk is as opposed to any particular economy. It's more where we're exposed to Horica and the countries are in. So you mentioned the UK, and that would be no different for the UK, but in terms of our hurricane exposure there, but we've got Oracle customers in pretty much all of our countries and that's where we're taking the the provision for, I think it's a quarter provision, but we just don't know how that's good we're going to land and that's why we flagged potential extra GBP 15,000,000 in the second half against second half revenues as well because of the potential concern there, but we'll obviously keep a close eye on that I would say is I think the team has done a superb job of mitigating the risk around it through the real focus on cash collections in the first half. They've taken a very risk based approach.

Speaker 1

And as we entered into 2, we were a bit behind on collections in at the start of the Paris, so we were about 9% down in April. But as we've approached June, overall, the group, we were slightly ahead of last year in terms of collections. We still have hopefully caught up, but we're at similar year levels as we're heading into the second half, which is a fantastic effort the team in terms of real focus on it. So we're obviously looking to mitigate it, but the risk is in the whole architecture in there, particularly SMEs, I think.

Speaker 4

Because, apologies if I missed it, but do you have to hand a proportion of of revenues that have been exposed to SMEs as you define it?

Speaker 1

We typically, based on the analysis that we've done, we estimate Horlicks 10% to 15% of the of the market. And you can see in my presentation, we've pulled out the HORica exposure by region. Oh, did you say SME? Sorry, I don't have an SME split. Sorry.

Speaker 2

Our next question comes from Mohit Rafi from a value. Mohit, please go ahead.

Speaker 5

Hi. Good morning, everyone. Am I audible? Yeah. Yeah.

Speaker 5

Thank you. So my first question is regarding profitability. So if I see that in H1, operating profit came in at around 139,000,000. But if I do some adjustment to get the underlying of the more normalized number. For example, if I adjust for the $84,000,000 of fostering benefits and the higher expenses of bad debts in BP6, The adjusted operating profit comes out to be around 85,000,000,000, and which is roughly around 45, 40% down by So so what I'm trying to understand is what are the dynamics behind, 1% drop in top line growth and around 40% drop in, operating profit.

Speaker 5

So is it like a price mix or something else? And, what kind of drop through should we expect going forward in maybe in H2 or in 2021?

Speaker 1

Yes. So Mohit, there's a number of moving parts as we're saying to Sylvia. So Overall, we were pretty pleased actually that we were able to offset the negative impact on revenues in second quarter with the cost savings we made. Typically in our model, it's much harder to manage, the reduction in revenues and the leverage around that, and these are conversations we were having in March April around reduced revenues and the challenge around managing cost base accordingly. But I think, given that, without the bad debt provision and the PPE extra PPE costs, We actually would have grown profits in the 2nd quarter on flat revenues.

Speaker 1

I'm sorry, in the half on flat revenues in the half, I think is a pretty strong performance. But we did book an increase bad debt provision of around 1,000,000, and we had extra PPE costs of 1,000,000 and our restructuring costs increased from $3,000,000 to $5,000,000. So we did have some issues around COVID, which are costs which we booked above the line which mitigated that. So I think overall pretty strong profit performance on flat revenues in the half In terms of drop through going forward, as I've already outlined with Sylvia, there's a number of moving parts. We are looking to get the business back to normal.

Speaker 1

We do need to see where revenues come through. We would anticipate getting this back to a more normal drop through as we work our way through into 2021. But as I flagged, we're going to have, we're expecting an increased bad debt provision in the second half of 1,000,000 There'll still be extra PPE cost raising to the virus. So we're not going to get fully the drop through. We'd normally anticipate while we're working through the virus, as the virus recedes, we should be getting back to normal as we head into 2021.

Speaker 5

Yeah. Okay. So very clear. I just have one more follow-up question. This is basically around the the Hygiene business.

Speaker 5

So, by which year do you expect, this hygiene international expansion to be as profitable as existing business? Existing businesses or these are currently fully profitable?

Operator

Yes. It's an interesting question, Larry, and a difficult one to answer. I mean, when we would normally enter a new market, we would have typically done a really thorough piece of market analysis. We'd have a project plan. We'd have financials that go out a number of years.

Operator

We'd have an execution model. And then in this case, along comes a global pandemic that nobody anticipated a burgeoning need for hygiene. And we haven't had the luxury of doing the work we would normally do. So we've moved quickly and said, right. We've got a wonderful pest control businesses in these markets.

Operator

We're going to leverage the infrastructure that we've got on the ground, the teams, the brand, the customers, the branch network, the IT network, going to leverage the global supply chain of products and innovation and technology, and we're going to go and hit it as hard as we can. We don't have on day 1, we don't have a single customer for hygiene in those 20 markets. So we're starting from scratch with many, many, many customers, but that's control. So a little bit difficult to say. Hygiene, just like pests, is is a density play.

Operator

So you need to have a level of density get to the comparable levels of profitability. But that said, we will be stretching our pest control model in a number of those markets. In a way that we wouldn't normally do, we wouldn't normally have pest control people doing hygiene services. We wouldn't normally have pest control. Salespeople selling hygiene, but until we get established, we will leverage that that infrastructure, which is a bit of a compromise, really.

Operator

So I know I've answered your question, but, we are going to do Capital Markets Day on hygiene next year. I don't know the month yet, but we will have learned a lot. The world may look quite different in a few months' time. We will certainly have had a few months' experience of how those market entries have gone. We haven't ruled out some of the market entries by acquisition, but the majority will be organic.

Operator

They clearly will be less profitable

Speaker 6

for the

Operator

1st periods, but I can't really give you a meaningful figure. I'll just be making it up, but we haven't been able to do that analysis. But What we do know is it's an attractive space. It's here and now. It's live.

Operator

Many of our customers are prepared to asking for hygiene services So we've moved on it. And, I think it will be very positive, but I can't really give you a figure, but it's clearly going to be less profitable over the 1st few years.

Speaker 5

Okay. That's helpful. Thank you.

Speaker 2

Our next question comes from Samirna Sali of BAML. Moment. Please go ahead.

Speaker 7

Yes. Good morning, gentlemen, and thank you very much, Jeremy, for all your help. During this year's and best of luck with your new career. I have a couple of questions from my side. One is high level, and I appreciate that you're going to have the capital markets stay, on hygiene next year, but maybe some considerations on what is your view on the sustainability of hygiene demand going into 2021 and more in general in the medium term?

Speaker 7

Especially considering that potentially the number of people working from home will be higher. And Also, if you expect and you have already seen that with some of your clients increasing hygiene budgets for 2021, And also, second question is regarding the market exposure at the group level. So you already mentioned that the exposure to Erika. Could you please provide also the exposure to other hand markets? Thank you.

Operator

I will definitely do the first one, James in for the second, but we'll come back to you on that. So the sustainability of the hygiene market is a really interesting question. I would say if you look,

Speaker 1

previous,

Operator

multi country epidemics and pandemics. If you look at H1M1 bird flu, you look at Ebola, you look at the situations over the last 20 years, in the main, the world has gone back to its previous behaviors reasonably quickly once those issues have receded. I can only give you a personal view. I do not believe that that is going to happen on the back of COVID 19. I genuinely don't believe that the world is going to step back.

Operator

It's obviously going to get more comfortable with way things are. But I don't think things like hand washing, hand sanitization, probably the wearing of not in certain situations distancing. I think those are here to stay. Whether they're here to stay for the next decade or more, I don't know, but I just don't think these are going away anytime soon. Personal view, if you look at the market, the countries that have handled the pandemic best or least worst, I would look east and I would say that the Asian markets that we've participated in, have handled the situation best.

Operator

And in those markets, you will see a commitment to anti hygiene in markets like Japan, South Korea, Hong Kong, Singapore, China, that was there and the wearing of masks that was there before this pandemic turned up. So I think post the pandemic, the world will have a commitment to hygiene that will become just part of how we get through our daily lives. So I think it is sustainable. But equally, let's not forget the fact that going from a low interest category to while the highest interest categories in the world means that other people will come into this space. We won't sit here alone.

Operator

So I think the market is big. I think it's growing. I think it's here to stay for at least a few years, but it'll get a bit more competitive as other other people look to come in. Working from home, look, if I knew the answers to some of these questions, be a genius and I'm certainly not back, but I don't know how this is going to play. And if we look at how we're doing it in our company, we've got a gradual return to work with people drifting into the office.

Operator

But we're also making it very easy for people to work from home. Typically, if you have an office and it has a washroom and the office is open, then you have a washroom service. If you've got 100 people or 20 people in the office, you've still got a washroom and it's open, you still need services the throughput may be lower in terms of consumables, but the need for the service and the contracted nature of the service is the same. So don't really know how that's going to play, but I don't think that, that will be a potential negative, but you've got the offset that we're all washing our hands more currently, I've washed my own five times this morning already. We're all using hand sanitizers more frequently, And, you name it, the sanitation standards are going beyond the watch into the offices now as well.

Operator

So, meeting rooms needing to be wiped down and all the rest that we all are beginning to get to know. So think it is sustainable. I think it is real. I think it's material, but it is a series of puts and takes. And until until we get there, I'm not sure I could tell you what the new world is exactly going to look like.

Operator

And I think it's an invertible truth that the hygiene category has just got a lot more interesting than it

Speaker 1

as we're in outside of Oroco. I just wanted to check ahead it properly.

Speaker 7

Yes. What is the exposure to other factors? So you mentioned that, Horaka, it's an to 15%. And I was wondering about the remaining.

Speaker 1

Yes. So we're quite spread out, Simona, as you might imagine, in terms of our services, So, similar sizes, we're in manufacturing, retail, services, each of those 3 sectors are similar sized to Horica. Andy said, you know, 40% of our U. S. Pest control business is residential.

Speaker 1

So that's of a similar size as well. And then we've got a whole load of smaller sectors such as facilities management, pharmaceutical transport. So we're quite spread out around the economy. And I think one thing to note is, 95% over 9 5% of our facilities, our customers are now open for business now. So across that wide group, compared to where we were back in March, most of our the vast majority of our customers are now open for business.

Speaker 7

Thank you very much. Can I ask you, Justin, if I may, one more, on pest control? So you said that for pest control, clients, so there is an element of contracts being related to remote monitoring services. I was wondering if on the back of that, it can be easier during the lockdown for you to continue billing, clients And also of the overall contract, our portfolio pest control, what gives the percentage of so that they have a remote monitoring service component? Thanks.

Operator

Yes, thanks. It's still relatively small. And I think That's the opportunity for us. We said in 2020 before, The COVID situation turned up. 2020 was going to be the year where we aim to make a breakthrough with Pest Connect.

Operator

We've got lots and lots of individual customers, for individual sites who've taken Pest Connect as a solution. But what we hadn't had until the last few months was big mainstream customers who wanted to put Pest connect across their entire estate. And that's where the real value comes because once you've got data being consolidated across 100 sites, you've got real information that's helpful to you as the property manager or the estate manager. And that's what we planned to do in 2020. And despite the pandemic, that's what we're now doing.

Operator

Our target market for that was in UK. We've won a big account in the UK where they're putting pretty much the entire estate across has connect and we've got several others in the pipeline. So relatively small, small single digit percentage of what our portfolio is at the moment. Probably the best example, I don't know whether I'm supposed to refer to it or not, but never stopped me before. We put Pest Connect into the Nightingale Hospital in the UK.

Operator

And that situation was obviously perhaps an extreme one, where sick people were in a hospital, but it was quite clear that the customer wanted a solution, which didn't involve people tracing in and out of, areas and bringing potentially bringing problems into the building or taking them out again. So the fact that we were able to put that in very quickly great remote monitoring solution. Real visibility is what's going on in the facility. Connected devices, doing their job, and giving us the data. It was the perfect solution for them in that situation.

Operator

Now I'm not saying that all customers are going to look like the Nightingale Hospital. One of the other advantages of Connect is we can we can achieve very effective pest control, but by using a much lower level of poison and bait in the field. And that's a huge opportunity from environmental point of view, not just RentiCare that's, keen to make strong progress in the environmental agenda. Our customers are as well. One of the main motivations for the customer that I talked about was this solution will better pest control, but at a much lower level of use of chemical toxins on their facilities.

Operator

So quite a few benefits. Yes, as we get more customers on, yes, if the world is going to be a series of lockdowns for the next few years, it will enable us to bill throughout, even during lockdowns, but that really isn't our motivation. It's better, more effective Pest Control. It's, preventative rather than reactive. It's lower effects on the environment and it's essentially about data.

Operator

And visibility and transparency. So we are really pleased that we've made such strong progress in the last 3, 4 months, even though the world has been in lockdowns. That gives us great encouragement that we're on to where we're onto our winner with Paschenate.

Speaker 3

Our next question

Speaker 2

comes from James Winkler of Jefferies.

Speaker 8

Two quick ones. Firstly, just on the cost savings, in terms of how to think about modeling them, is our best through the gap in terms of by division and category on a revenue weighted basis? Or is there a bias towards certain divisions of where those cost savings have been taken? And then just to reiterate on margins of the disinfection work, Andy, I think you're saying that it's actually lower margin than the group. So the hygiene beat in terms of the margin was obviously driven by better top line, better revenue, but also cost savings rather than, you know, a positive mix to disinfection, if that's correct.

Speaker 6

Thanks.

Operator

Well, let me answer the second one as it was mine and then Jake can cover the first morning, Jake. I think to be honest, the margins in disinfection are broadly similar to to pest and dry and therefore, in fact, to hygiene. What they do carry though is a much higher level of PPE cost. And Jeremy's referred earlier to, £8,800,000 spent on PPE in the first half, the majority of which is in the second quarter. And the majority of that PPE was actually tagged into the disinfection service because I think it will have to be thoroughly suited and booted with the right protective gear.

Operator

So, it all nets back to a broadly similar number and there's a lot of mix in here and the country mix is different and the customer mix is different. But when you take it all into account and the PPE, which is more skewed towards this infection, The margins are pretty comparable. The going forward piece, the thing that we also need to to be clear is disinfection at the moment is essentially one time jobbing. It's not yet portfolio. So we don't have a lot of customers yet signing up to say, I'd like a disinfection service every month for the next year.

Operator

We're typically getting people saying, I want you around here, I want you around here now or tomorrow or next week, but I can't give you any commitment beyond that. So I think there could be some margin plays in this infection as we try to encourage more customers, just summing up for contract and portfolio. There's probably a bit of trade off there between the price we charge. If you sign up for a year versus the price we charge, if you just want it done now or in a hurry. So we're broadly similar, but it does depend on country and indeed on customer type as well.

Speaker 1

On the cost side, hi, James. There's no particular category bias, really, the costs saving to be delivered on a country by country basis, and what I would say is as I've already said, actually, it's far harder to take the proportionate level of cost out depending on where the revenue got on, it's a bigger revenue impact harder to match that. So it's been more challenging to manage the drop through, but pretty much cost savings delivered across the board country by country and across the categories. As I've said in my presentation, very, very strong forms in Q2, as we get people back to work, cost savings reduce somewhat into the 2nd half and they're going to be much more around travel and discretionary cost management I think it's a really interesting piece going forward and almost reflecting on Samoma's question there, but for ourselves is given all the learnings we've had around, how we've managed to work relatively efficiently in the second quarter, other different ways of working that we could use to manage our costs going forward. And certainly, I think we would see some opportunities around the more structural cost savings as we head into 2021 2022, around ways of working, given our use of technology and more efficient working.

Speaker 1

And we do a lot of traveling in this company going around the world I think the way we've responded this by using hangouts and remote working means that we may be able to save a reasonable chunk of travel costs, for example, through through using Hangouts and more efficient working. So there are some opportunities there, but there's no particular category bias. It's really been delivered on a country basis. And those that a lot of those employee costs should start to flow back in the second half.

Speaker 8

Great. Thanks very much and Jeremy all the best moving forward.

Speaker 1

Thanks very much, Ben.

Speaker 2

Our next question comes from Alan Wells of Exane. Alan, please go ahead.

Speaker 9

Hi, good morning, Jerry. Most of

Operator

my questions have been answered.

Speaker 10

Just a couple maybe. I just want to it, but could you maybe talk a little bit about, resi versus commercial? Is there any numbers you can provide behind the growth split between the 2 or maybe even how it trended between April into into June, how much stronger rate he was versus the commercial activity in in North America. Secondly, just on the launch of the hygiene activities, really following up on a question from earlier, Mine's is my understanding right that the strategy here is to, did you cross sell these assets for the service out of the pest control business? And maybe you can comment on if there are any sort of cost implications of that and how that maybe flows through to the margin targets that you've got for North America.

Speaker 10

And then then very quickly on the final on on the 49,000,000 disinfectant services revenues, again, listen to your comment. It sounds like the assumption here is that the the guidance for the full year means that the 2nd half activities and revenues in that business declined a little bit, but Is there is there not a scenario here, even without a a second wave? You know, this the disinfection services revenues maybe stay high. I mean, you gave the the the the bus example, with the customers there, but it's obvious to me why customers really gonna slow down or stop disinfecting services quickly in the second half. Maybe you may provide some contract with some comments on sort of contracting, mention the services, but how much you guys have versus rolling short term contracts, etcetera?

Speaker 10

Thanks.

Speaker 1

Hi, Alan. Yeah. So, Reggie, as we've said, 40% of our pet services business had a good, good first and second quarter. We're not kind of giving organics out, but it was pretty strong. Commercial was held back, in line with all of our pest business around the group.

Speaker 1

But to your point, you know, was improving as as the quarter continued, you'll see from the States, there's still some hotspots around around the, around the country places like Florida. Which are being impacted a little bit, but both were pretty robust, both improved through the quarter and resi was particularly strong, but commercial inevitably impacted by some business closures. But as we said, overall, the U. S. Of all our regions was relatively less impacted by the virus relative to the other regions?

Operator

Yes, on resi, it's interesting, Alan. So we're not it's hardly shown. We had a very strong second quarter through the pandemic in resi in North America. And there is a good weather in many parts of the state. So we are having a pet steaming if I put it that way.

Operator

So that's one factor. We kind of think that, this is in part to do with a lot of people who are at home seeing more evidence of past problems, and maybe because they're there, they see them and they're calling them in. So we're not entirely sure. We've seen similar numbers with competitors. So I don't think it's a rent to own special necessarily, but I think it's been a strong quarter.

Operator

If we look at markets say Singapore, the Singapore government said that, during lockdown, you couldn't do residential pest control, and they just said no. One of the few markets that said no. So we've seen different markets behave differently, but strong resi in the second quarter probably partly weather, probably partly human behavior, but it was certainly good. Cross selling, I think the comment was specific into into North America, cross selling and hygiene, etcetera. I could probably bore for Britain.

Operator

In my view, anyone intelligent that the answer to the question is cross selling didn't understand the question or I just made it up. Cross selling rarely works in business services. A lot of people will tell you about Cross selling. We haven't found that cross selling really works, cross selling being I'm a salesman for product or service x. And now I'm going to sell you product or service y.

Operator

We've seen cross introductions working, where we will introduce from a pest control customer, we will introduce you to a salesperson for the sister business, but cross selling

Speaker 9

a long time, I'm looking at this.

Operator

I haven't seen many examples. In America, our approach to, the hygiene sector is actually going to go into, through Ambeast. Our Ambeast business is increasingly about well-being, the hygiene category is increasingly about, hygiene and well-being. Hygiene, as I said, sorry, Ambeas, as I said, is going to be more impacted over the next few months. More discretionary, going to be a challenging marketplace around this.

Operator

So we've got well trained, people, salespeople, and technical people that we'll have less work to do. So we're going to make them busy working on hygiene. I don't it's too early to say what impact have on the margins. It's too early to say how big it's going to be, but I don't see us doing a lot of hygiene work on a loss making basis. I I think this will make a contribution even in the early days would be would certainly be our intention.

Operator

So neutral to positive, but, on a margin basis, for sure, that will be negative for the 18%, but whether it will be materially negative way too early to say. This infraction might be right. All we're saying is, accuracy of all is about as good as anyone else's. And so we have seen a big event, I would say, natural hedge but we've seen a bit of a hedge here between customers, the sweet spot, if I can put it that way. Not perhaps appropriate to talk about in a pandemic in that way.

Operator

But as businesses start to reopen, that is the maximum need for disinfection services. So getting ready to reopen giving reassurance to people it's safe to come back is the moment where we get our core revenues back but we also have disinfectant revenues. Once you're fully open, lockdown is lifted people are milling around the offices and shops or whatever. Then we're into a much more periodic and temporary nature of disinfection. That'll be more if there's a case we need you to come in.

Operator

So I don't know it's just too early to say. If you're right, then we're going to get a return to core revenues and its infection Our assumption is we're not going to bank that we're going to get both. If the pandemic situation gets worse, we'll get more disinfection and less core. As it gets better, we'll get more core and less disinfection. There could be a point in those two wires Cross.

Operator

Those two lines cross and we get core and we get disinfection. And we can count on us if that market is there, we will definitely take it, but we're not banking on it because we just don't know.

Speaker 11

Great, thanks guys.

Operator

Thanks, Alan.

Speaker 2

Our next question comes from Andy Grubler from Credit Suisse. Andy, please go ahead.

Speaker 11

Hi, good morning. Jeremy, firstly, thank you very much for all the help over the years. Am I going to tend to change a bit since, since the early days Thank

Speaker 10

you, Hendi.

Speaker 1

Just a

Speaker 11

couple, if I may. On savings, you alluded to this earlier, but the $35,000,000 of savings in the second half how much of that would you expect to be sustainable, through 2021 and beyond Secondly, in French workwear, one of your peers reported overnight with, EBITDA margins in France, which were basically flat. That doesn't seem to be the case for you guys, it was hard to disaggregate, essentially why the difference. And then lastly, just on Hygiene, I know this is a very difficult, difficult question, but as it moves away from GDP growth type of business, what are the expectations over several years and kind of, I guess, strip out disinfectant from that and the potential for that to fade in the coming years?

Speaker 1

On the cost piece, Sandy, it's too early to say, we'll obviously have a better idea as we head through the half and we go through our planning cycle I think we as I said, we are looking to get people back to work. So we wouldn't want to have that to be a a sustainable cost saving. I think where we are, we're going to be hunting around a little bit is in the property cost area and the travel area and see what that looks like. And as we introduce technology, whether there are any further savings from that. But I think that's one probably for the prelims and for my successor to just have a look through how that drops out of the planning process and what we can take forward.

Speaker 1

We're certainly challenging the operators and the guys out in the field, not to flow the cost back into their models and try and manage because we've managed so well, I think, in the second quarter, but we don't want to start with the business from investment either. So the cost savings need to be real let's have a look at it when we get to February and see how much of that is sustained when terms of margin

Operator

Andy, on the second one about French workwear, to be absolutely honest with you, I don't have the chance to read anything on, at least, I've been too busy reading all your notes on our eyes. So I haven't caught up with that yet. If they've done a better job and good luck to them, I know how hard we work to control the costs we've taken costs all above the line. I'm not sure my French buddies would have done that, but I have no chance to look at their numbers. All I can say is I don't know that we could have done much more in France, the situation happened very quickly.

Operator

It was a real severe lockdown. We had even in March, we had 40% of our, customer premises were closed. We've been moving away from flatlin in over the years in our Workwear business, but we still have a reasonable chunk of high end, meaning for Paris Restaurants, the nice table costs, etcetera, that business disappeared overnight. We do quite a bit for motor manufacturers, back disappeared. But anything I'm really saying is I think we've done a really good job to control the costs there.

Operator

If the other guys have done better, well done, and the encouraging thing for me is that the reopening that we're seeing across France, we're seeing the revenues come back. So I guess what's this space? The third one about what can we assume about long term hygiene growth? Obviously, if if I knew that, I'd love to tell you. It's challenging enough running these businesses knowing what It's going to be next week, let alone next month, quarter or the next few years.

Operator

All I can say is for the last few years, I have characterize hygiene as more or less a GDP business, more or less 2% to 3% organic growth. We've been achieving 3% to 4 percent organic growth over the recent quarters and halves. And hygiene is a much more interesting place than it was when I was describing it as a source of GUP business. I think you're right to exclude disinfection from ongoing and for the reasons I gave earlier from James' question. But there is definitely a growth upside and it's not just in conventional markets we've been in.

Operator

So we've got a geographic upside, growth in new markets. And we've got a product line upside and we've got a definition of category upside as we move outside of the washroom. So when we come to the Capital Markets Day, if I'm still giving an inadequate answer to that question, as I just did, Andy, then you can call you can call me up on it, but, we just don't know. It's clearly going to be positive. When we come to the cat market, by, we will give our very best view.

Operator

At the moment, all I can tell you is it's bigger than it was 4 months ago. I hope it could be quite material, but too early to say.

Speaker 2

Our next question comes from James Beard of Numis Securities. James, please go ahead.

Speaker 9

Thanks. It was a question on Hygiene North America. You you sort of alluded to using Ambeas as you sort of initial launch part, in the territory. Just wondering how long you can sort of do that for and what sort of the long term organic plan there is. And also, whether this is extent to which this is an area that you're going to be prioritizing, M and A, over the course of time, are there other sort of reasonably chunky hygiene businesses in the US that you would look at, building base from?

Operator

Hi, James. On the second part of that, first, not back onto the boundary. No, I don't think M and A for North America hygiene is particularly likely. There are too many obvious players. Rentico used to be in that market 35 years ago and got out of it.

Operator

There aren't many players. So I think our approach is going to be a little bit more niche. We're going to figure out where we can play, how we can scale off of our Ambeas footprint. We're going to see how well this sells, and what do our customers need, what do they want, what do they want in the washer and what do they want bite in the washroom. And we're going to buy it from there.

Operator

So you can consider it a really spending pilot, if you like, we're out there. The sales guys are selling. The service guys are servicing, but it's literally day 1. Of a new play. And we'll see how it goes.

Operator

If we're very that's all, then you're right. It probably isn't sustainable and scale it off of Ambeas, in perpetuity. But as I said, I think, increasingly, and I've sort of dropped hints at this in the past. I think at some point, the hygiene category probably gets broadened out into a hygiene and well-being category We've talked about that a couple of times in previous results. And where we need to do that, it might be that Amreas is a more natural cousin to hygiene in that sort of expanded model than it's previously been thought of.

Operator

So it may well be that the concept has got legs beyond just the next few months, a year or 2, all to be proven. So for me, it's a high class problem. If we conclude that the model is not sustainable because we're so successful, then we'll come up with a different model. But as I say metaphorically, we're day 1 on an extended pilot in the middle of a pandemic. We're fortunate we've got a second business, but well known in the American market, well trained, and with good level of experience.

Operator

So let's see how we go. And as soon as we know, we'll share the answers, in the Capital Markets Day. Thanks, James.

Speaker 2

Our next question comes from James Barrow of Barclays. Jane, please go ahead.

Speaker 3

Hello. I have one question. It's a quick one. So just wanted to understand the revised timing for completing the, systems migration in, in the U S. Is it just a case of a delay of a few months, or is it that you're going to resume that migration at a slightly slower pace because you've got lots going on with managing COVID and managing the launch of hygiene and stuff.

Speaker 3

So just trying to understand how far to the right that margin target might be pushed and whether it becomes more of a sort of medium term margin target without a specific time frame on it. So it's just there at some point in the future.

Operator

Thanks, James. Good morning. Pensing though, it might be to, to say it's sort of moving out into the future. That isn't how we think about it. And under the target remains the target we're all committed to it.

Operator

We were making really good progress in the first quarter before COVID nineteen. So now we've actually made good progress in the second quarter notwithstanding But we can't pretend that nothing has gone on here. We've not done any M and A for the last few months. Our organic machine in commercial has been temporarily impacted still owned to adopt the, the IT program up until this point. And we've still got a raising pandemic through parts of the United States of America that nobody knows really which way it's going to go.

Operator

So it makes it very difficult for us to give hard and fast, answers to a lot of questions, same as most companies, But we're not saying, this target is pushed out a number of years. It may be that it's pushed out a little bit and that's what we said in the statement. I think, the specific of your question, you've lost a few months on the IT program, is it a question of a few months or is it more? I think it's a few months. And we stopped that project in its tracks And we stood down the consultants.

Operator

We stood down the teams. We couldn't get to the facilities to do any hardware. And the projects back on. As of a couple of weeks ago and the consultants are back and the teams are back up and running. So we haven't just lost 3 to 4 months.

Operator

We've lost a bit of momentum and a little bit of steam in the machine as well. But we'll catch up some of that over the next few months. So our view is, we are as confident will get to the margins as we've ever been. We're sure we're going to get better, and we're confident we're going to get close on the revenues this year. And if we don't make the margins next year, it'll be a bit lighter than next year, but we'll still make good progress next year.

Operator

So But for the pandemic, I wouldn't have expected to be saying anything really different. And I'm not going to use the pandemic as an excuse to change any of the message in my field and this is an achievable target. It's stretching. We were making good progress, and we expect to make good progress. Again, as soon as normal service has been resumed, we're well on the way resuming normal service, but we have had an impact and I'm sure we're going to still see some impact in the second half, but directionally, no change.

Speaker 11

Thanks.

Operator

We have another

Speaker 2

question from my Taya Gregole from Goldman Sachs.

Speaker 10

Just

Speaker 6

two quick questions from my side. It's getting quite a long call. First, one, regarding to the government support, schemes. I mean, there were quite a few government support schemes and our furlough schemes in several countries. What kind of sales benefit?

Speaker 6

To see the benefit that your employee got, the

Operator

same in the first half of

Speaker 6

the year from these teams. And also, nor do you still have any people on furlough currently or at theendofthe semester, whatever you can update us on. And so second question is, returning a little bit to the theme of working from home. We talked a lot about, we talked a lot about horica exposure, etcetera, but What does that exposure say to offices? Now let's say there seems to be a debate in the market that maybe going forward, there will be less presence in the offices.

Speaker 6

I understand your point, but now there might be, say, you're assuming servicing, washrooms, etcetera. But if they're both for, hygiene as well as for pest control, what kind of exposure would you have towards the traditional white collar offices overall? Thank you.

Operator

Thanks, Renee. I'll take the first one, JT will take the second. Look, on the furloughed situation, back in whenever it was now, April, we felt as a company, we had a choice to make. The choice was to manage costs in the business through considering significant headcount reductions and redundancies, or we considered could we manage our way through the crisis in a shared way with, salary reductions from the top down, hours reductions furloughs and similar government schemes temporary redundancies and get us through the crisis, and it's largely intact and get all our people back. And we went down that route.

Operator

And, nearly everyone is back in the business. Not everyone, we still got a few people out on furlough or furlough equivalents. They'll be back hopefully soon. Very few job losses across the organization. And I would say, I will complement the government.

Operator

I think the UK scheme was excellent. I think that was a brilliant scheme from the chancellor, and we've had similar benefits from other schemes around the world. So My view is the schemes were put in place to preserve employment. That's how we view them. That's what we've achieved.

Operator

We getting nearly all our people back, terms and conditions restored, which is one of the reasons why the cost savings in the 2nd quarter, a lot of those cost savings quite came from salary reductions, etcetera, some contribution from furlough and similar schemes. And in the second quarter, we are not taking much advantage of those schemes. And sorry, in the second half, we're not taking much advantage of those schemes. And paying Russians have been restored. So and people return to work.

Operator

So that's our approach. We've nursed the business through the second quarter. We've shared the pain across the organization. We've preserved employment and support from government schemes for which we are extremely grateful. They've been effective.

Operator

In our case, we preserve those jobs. And now we're, as much as we can, we're back to business as usual. In the second half.

Speaker 1

In terms of offices, Haromater, just under 10% of our businesses in facilities and property management, which is the majority office work. That is much more skewed to pest than to hygiene So, probably less vulnerable to working from home. You know, if the office is is at all open, it's gonna need, is going to need pest control. And on the hygiene piece, obviously, there's a mix there between increased hygiene requirements because of the COVID and potentially lower hygiene plans because of less footfall and we're going to have to keep an eye on that to see how that works its way through as we've already said on the call. But it's much more focused on pest than on the hygiene anyway in terms of that, that 10%.

Speaker 6

Okay. Thank you very much.

Speaker 2

We have no further questions. So ladies and gentlemen, this concludes today's call. Thank you for joining

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Earnings Conference Call
Rentokil Initial H1 2020
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