Pest Control

MARKET CONDITIONS

Pest control markets are growing at around 1.5 times GDP. They are driven by increasing hygiene standards, legislation and awareness of the need to take an outsourced pest control service. Competition for large commercial customers remains keen with price as well as service quality being key. Smaller commercial and residential customers have a very wide range of choice of potential suppliers due to the large number of small, private operators who service a very local area.

2006 REVIEW

Improving the performance of the UK pest control business, which had revenue of £66 million in 2006, is an important part of the group’s overall strategy. A new management team – largely recruited from outside the group – took charge in the UK in the first half of the year and major changes to the structure of this business are now underway with a focus on creating a more customer-centric organisation. The previous 26 branch structure is being replaced by: 84 field based sales and service teams focused on the smaller, local customer base; a team of technicians dedicated to meeting the demanding service needs of the high dependency segment (such as food manufacturers and national food retailers); and new business development via sector specific sales teams. Customer service functions have moved to a new national customer contact centre in Dudley and administration support has been regionalised.

The business has been de-layered with some 25% of management and administrative posts eliminated. The restructuring will be completed by the end of 2007. The one-off costs for this programme are £4-5 million and were largely incurred in the fourth quarter. They are expected to be recovered in less than three years on cost savings alone. Revenue in the UK fell by 3.9% in 2006 versus the prior year. The portfolio declined as the high, but improving, termination rate was offset by a weaker sales performance during a year of substantial organisational change. Lower revenue impacted adjusted operating profit, which fell by £4.5 million for the year. There was good progress in customer retention rates, from 76.3% at the start of the year to 80.3% at the end.

The division’s operations in continental Europe continued to build on the progress made in 2005. Customer retention rates improved from 85.4% to 86.0% during the course of the year. Service performance increased and staff churn improved, particularly for technicians. Revenue for the European operations grew by 6.1% over the previous year with increases achieved by almost all countries. The key European markets of France, Germany and the Netherlands achieved high single digit revenue growth with Spain and Italy recording double digit growth. Adjusted operating profit was 8.8% higher than last year in continental Europe with all of the large operations coming in ahead of 2005.

In North America, 2006 was dominated by the acquisition of JC Ehrlich, which was completed at the beginning of March and established the division’s US business as the fourth largest in its market. The assimilation of Ehrlich is now complete with integration costs of £0.9 million incurred in 2006. Cost synergies of some £0.8 million a year are anticipated and these will start to come through in the first half of 2007. The scale of the Ehrlich acquisition compared to the pre-existing US business makes revenue and operating profit comparisons with the previous year meaningless. However, the North American business performed well in 2006 and in line with our expectations; Ehrlich’s 2006 revenues were 8% up on 2005.

2007 PREVIEW

In the UK, we will focus on bedding down the new structure and delivering IT systems to automate and simplify sales and service processes. Improving customer retention will continue to be very important. Staff turnover has been an issue in the past, so improving staff engagement and reducing headcount churn will have a high priority. Overall, we expect the UK business to achieve a modest increase in revenue and operating profit in 2007.

The European businesses will look to build on their good performance in 2006 with a strong focus on organic growth via improved sales performance and investment in marketing and sales capabilities. Growth will also come from bolt-on acquisitions in a number of key markets. Maintaining – and even surpassing – the high levels of customer retention achieved in 2006 will be key.

The strong organic growth performance seen in North America in 2006 is expected to continue in 2007. Bolt-on acquisitions in existing geographies will provide additional growth. We will continue to look for acquisitions to provide regional anchor positions in other geographies in order to expand our footprint in the region.