Business review
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This review of performance takes a close look at each of our business areas – Textiles and Washroom Services, Pest Control, Ambius, City Link, Facilities Services and Asia Pacific. In each case we report on market conditions, record our progress against key performance indicators and discuss the most important developments in 2008 and our expectations for 2009.
Basis of preparation
In all cases references to operating profit are for continuing businesses before amortisation and impairment of intangible assets (other than computer software and development costs). References to adjusted operating profit and adjusted profit before income tax also exclude items of a one-off nature, totalling a net cost of £19.3 million (2007: £28.4 million) that have impacted the full year results. They relate mainly to the group’s restructuring programme and consist of consultancy, redundancy and reorganisation costs net of the profit on sale of certain properties. They have been separately identified as they are not considered to be “business as usual” expenses and have a varying impact on different businesses and reporting periods. This commentary reflects the management divisional structure and not the statutory segmental information (see note 1c). Changes will be made to segmental reporting with effect from 1 January 2009 following the introduction of IFRS 8: Operating Segments. Further details are given at the end of this statement. All comparisons are at constant 2007 full year average exchange rates.
Back to topFull year financial overview
Full year revenue of £2,252.9 million was 2.2% above the same period last year, 9.4% at actual exchange rates. Organic revenue decline was 0.8% held back by City Link. All divisions with the exception of City Link reported increased revenue, with Asia Pacific and Pest Control showing 13.9% and 10.9% improvement respectively. The contract portfolio increased by 2.9% year-on-year. Although the level of terminations has remained stable quarter on quarter, new business has slowed, which we are attributing to economic slowdown. Group operating profit (before amortisation and impairment of intangible assets) declined by 50.8% to £123.6 million and adjusted operating profit (again before amortisation and impairment of intangible assets) amounted to £142.9 million, a decrease of 48.9% on prior year. Group full year adjusted profit before tax and amortisation fell 60.1% to £83.6 million. Net margin decreased to 6.3% (2007: 12.7%). Statutory profit before income tax from continuing operations was £22.8 million (2007: £142.0 million). The statutory profit reflects £65.5 million of amortisation and goodwill impairment charges (2007: £39.2 million) and is stated after charging one-off costs of £19.6 million (2007: £28.4 million).
Full details of divisional performance can be found on pages 9 to 15 of the full 2008 Annual report (PDF 2.07MB).
Back to topMeasuring achievement in 2008
Up until the end of 2008 the board has used a number of key performance indicators (KPIs) to judge progress towards strategic objectives. In a complex company such as Rentokil Initial, output measures such as portfolio development, revenue and profit growth have been a relevant way of demonstrating to internal management and to shareholders progress on important issues such as customer satisfaction, service levels, staff satisfaction and innovation. The group’s progress against these KPIs is shown in the table below. Divisional progress is tabulated in pages 9 to 15 of the full 2008 Annual report (PDF 2.07MB).
A new set of 18 KPIs under the following three categories, Colleagues, Customers and Shareholders, was identified towards the end of the year and from 2009 will replace those shown below. A full explanation of these new KPIs can be found on pages 15 and 16 of the full 2008 Annual report (PDF 2.07MB).
Back to topKey performance indicators
| £m | Change vs 2007 | |
|---|---|---|
| Revenue | 2,252.9 | +2.2% |
| Organic revenue growth | -0.8% | |
| Operating profit | 123.6 | -50.8% |
| Adjusted operating profit | 142.9 | -48.9% |
| Net adjusted margin | 6.3% | -6.4% |
| Contract portfolio gain | 44.8 | -61.5% |
| New business wins | 178.0 | +3.9% |
| Net additions/reductions | 39.4 | -18.8% |
| Acquisitions | 12.7 | -86.2% |
| Terminations | (185.7) | -5.9% |
| Retention rate | 87.8% | +0.2% |
| Operating cash flow | 129.5 | -31.2% |
| Free cash flow | 34.9 | -65.3% |
| PBTA | 64.3 | -64.5% |
| Adjusted PBTA | 83.6 | -60.1% |
Explanation of 2008 KPIs
For businesses with recurring revenue (i.e. virtually all of our companies apart from City Link) KPIs relating to the development of our contract portfolio are important, some because they are an inherent measure of the level of service we are providing to our customers and others because they are indicators of market strength. The contract portfolio represents the annualised value of our customer contracts and is a leading indicator of performance. We refer to the increase in the contract portfolio as “net gain” which is made up of a number of component KPIs. “New business wins” shows us how successful our sales activities are. “Customer retention” indicates how satisfied our customers are with the service we provide. Changes in the “as used” portion of contracts show variation in the amount of business existing customers give us under their contracts and the impact of price movements: as such they can often be an early indicator of market trends. For example, in some of the European Textiles businesses, a general decline in the “as used” portion of garment contracts (i.e. the actual number of garments we process for customers) is a reflection of the shift in manufacturing jobs to lower cost countries. For non-portfolio businesses such as City Link, the equivalent KPIs are numbers of consignments handled and Revenue Per Consignment (“RPC”).
Other business and divisional KPIs include growth in total and organic revenue and net margin, as a way to judge the success of performance and productivity and improvement initiatives; improving efficiency in a sustained way is fundamental to first stabilising and then expanding margin. Our business and divisional profit KPI is operating profit (before amortisation of intangible assets). In 2008, we reported operating profit both before and after one-off items, referring to the latter as adjusted operating profit. We believe that to look at underlying trends we need to strip out these items, as they principally relate to one time restructuring/rationalisation projects.
Our activities have the capacity to generate significant cash flow, although growth in revenues is likely to be to the detriment of working capital performance and spend on capital equipment for rental to customers. We therefore monitor divisional operating cash flow and days sales outstanding (which measures the amount of working capital tied up in trade receivables). For the overall group we look at all these KPIs plus some which are only relevant to the group as a whole – free cash flow (which measures our ability to invest in our businesses and to pay dividends) and profit before income tax and amortisation of intangible assets (PBTA). As with operating profit in 2008 we have used adjusted profit before income tax (adjusted PBTA), which also excludes one-off items.
Back to topGroup goals and KPIs for 2009
We have identified a new set of 18 KPIs under the following categories, Colleagues, Customers and Shareholders. While some previously used KPIs have been retained others are new and being further developed. We will update shareholders on progress against them from time to time during the year and in full at the end of each financial year. In some cases the operational KPI data is selective rather than representative of the whole group as we are still in the early stages of collecting this data. Baseline data will therefore change over time. With that caveat, group results for 2008 and selective targets for 2009 are shown below:
| 2008 | 2009 | |
|---|---|---|
| Colleagues | ||
| Colleague engagement | ||
| (Rentokil and Ambius) | 73.0% | |
| Sales colleague retention | 63.0% | |
| Service colleague retention | 66.0% | |
| Health and safety (H&S) lost time through accidents (LTA) |
1.8 | |
| Customers | ||
| Gross sales % of opening portfolio | 18.9% | |
| Customer retention % | 80.9% | |
| Net gain % of opening portfolio | 2.9% | |
| Job revenue % of total revenue | 26.0% | |
| State of Service | 96.0% | |
| Customer satisfaction | ||
| (Net Promoter Score) | n/a | |
| Shareholders | ||
| Organic revenue growth | (0.8%) | |
| Total revenue growth (inc. acquisitions) | 2.2% | |
| APBITA margin (%) | 6.3% | |
| Debtors (days sales outstanding – DSO) |
65.0 | 59.0 |
| Cost savings delivered in year | £50.0m | |
| Cash conversion targets as % operating profit |
85.0% | 95.0% |
| Gross capex as % of depreciation | 115.0% |
Explanation of 2009 KPIs
Colleague engagement (Rentokil and Ambius) – “Your Voice Counts” is an employee engagement survey and represents the aggregate engagement rating from these reports.
Sales colleague retention is the reciprocal of total sales heads leaving in the year as a percentage of the sales head count at the beginning of the year. Service colleague retention is the reciprocal of total service heads leaving in the year as a percentage of the service head count at the beginning of the year.
H&S lost time through accidents (LTA) is defined as a work-related injury or illness to an employee which results in them being absent from work for one day/shift or more (this excludes the day/shift in which the accident occurred).
Gross sales percentage of opening portfolio are additions to the portfolio (new business and additions to existing business but excluding price increases) expressed as a percentage of the opening portfolio. Customer retention percentage is the reciprocal of total terminations (reductions and terminations) expressed as a percentage of opening portfolio. Net gain percentage of opening portfolio is the movement in the portfolio expressed as a percentage of the opening portfolio.
Job revenue percentage is expressed as a percentage of total revenue.
State of Service is the total number of service visits performed divided by the total number of visits due. Customer satisfaction (Net Promoter Score) is measured by the average net promoter score rating across all branches in the business.
Organic revenue growth is revenue growth excluding the effect of acquisitions. Total revenue growth (inc. acquisitions) is the year-on-year increase in total revenue expressed as a percentage of the previous year revenue.
APBITA margin (%) is the adjusted profit before interest, tax and amortisation (“APBITA”) expressed as a percentage of total revenue.
Debtors (days sales outstanding – DSO) are trade debtors gross of provisions calculated on the exhaust basis (i.e. going back over the relevant number of preceding days invoicing until the debt balance is zero). The number of days this takes is the debtor days.
Cost savings delivered in year is expressed as a percentage of the total cost base (everything between revenue and APBITA gross of the identified savings) prior to the savings being achieved. Cash conversion targets as percentage operating profit is operating cash flow expressed as a percentage of APBITA.
Gross capex as percentage of depreciation means cash capital additions (net of proceeds from disposals) expressed as a percentage of depreciation.
Back to topPrincipal risks and uncertainties
The principal risks and uncertainties relating to our strategy are summarised below. While some of these risks remain just that, others are more likely to manifest themselves. The key operational risk to the company is further deterioration of the global economy. Should our markets weaken it may become difficult for our operational businesses to maintain volumes and successfully pass on price increases to customers. Cash collection could potentially prove more difficult and bad debts may arise as customers suffer from the recession.
The principal risks are:
- A continuing weakening of the economies in which we operate;
- The number, scope, complexity and interdependencies of many initiatives – risk of management stretch, overlapping priorities; and
- Resolving the systems and infrastructure issues in City Link.