Directors' report

Principal activities, business review and key performance indicators

The company is the holding company of a group which through its operating businesses in some 50 countries provides a range of, principally, business to business support services. A summary description of the group‘s principal activities is given in the business review. The principal subsidiary undertakings and joint ventures of the company are shown in the notes to the accounts. The development and performance of the business during the year, the position of the group at the end of the financial year and expected future developments are discussed in the Chairman and Chief Executive‘s statement, the strategy update, the key performance indicators and the business overview, the business review, including the principal risks and uncertainties facing the group and the financial review.

Results and dividend

The consolidated profit before income tax for 2010 was £14.5m (the tax on this was £34.8m). Net consolidated capital employed is £(125.2)m compared to £(150.1)m last year.

The company has not paid a dividend since the interim payment in respect of 2008. The board continues to keep dividends under review and is committed to their resumption when i) the company‘s cash flow is robust and ii) when the foundations of sustainable and profitable growth have been established in all of the company‘s principal businesses. Only one of these criteria has been met in the financial year to 31 December 2010.

Substantial interests in shares and share capital

The company is not directly or indirectly owned or controlled by another corporation or by an individual and there are no arrangements in operation which may at a subsequent date result in a change in control of the company. As at 14 March 2011 the shareholders shown below had indicated that they were interested in 3% or more of the company's issued share capital and were not subject to the 5% disclosure exemption under the Disclosure and Transparency Directive. There were no movements in the company's ordinary shares during the period.

Authority for the company to make purchases of its own shares of up to 181,483,101 was obtained at the annual general meeting on 14 May 2010. No purchases of its shares were made by the company during 2010. The authority is normally renewable annually and approval will be sought from shareholders at the 2011 annual general meeting to renew the authority for a further year.

The company's share capital during the year consisted of ordinary shares of 1p each. There were 1,814,831,011 shares in issue throughout the year. Each ordinary share (other than treasury shares, which have no voting rights) carries the right to vote at a general meeting of the company. At any general meeting, a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is duly demanded. On a show of hands, every member who is present in person or by proxy at a general meeting of the company shall have one vote. On a poll, every member who is present in person or by proxy shall have one vote for every share of which they are a holder.

There are no special control rights or restrictions on transfer or limitations on the holding of ordinary shares and no requirements for the prior approval of any transfers. No person holds securities in the company carrying special rights with regard to control of the company. The company is not aware of any agreements between holders of securities that may result in restrictions on the transfer of securities or on voting rights.

Electronic communications

In accordance with the Companies Act 2006, the company will distribute its printed annual report only to shareholders who have indicated to the company that they wish to receive it in that form. The company will periodically canvas new shareholders on how they wish to receive their shareholder communications and did so in April 2010. Further information on shareholder services is available in the Shareholder information section.

Directors and re-election process

Biographical information on the current directors of the company, including their ages and their dates of appointment, is shown in the Board of directors section and is also set out in the notes accompanying the notice of the annual general meeting.

Michael Murray resigned as a director and chief financial officer on 31 March 2010. Jeremy Townsend was appointed a director and chief financial officer on 31 August 2010. All of the other current directors served throughout the year.

In line with the provisions of the 2010 UK Corporate Governance Code which will apply to the company's annual report next year, the board has decided that all members of the board will submit themselves for re-election at the annual general meeting in 2011. Service contracts and letters of appointment for all directors are available for inspection at the registered office and will be available at the annual general meeting on 11 May 2011.

Corporate governance

The Corporate Governance statement forms part of the Directors‘ Report.

Statement of directors‘ responsibilities

The statement of directors‘ responsibilities in respect of the annual report and the financial statements can be found in the Governance section.

Corporate responsibility

A summary of the group‘s corporate responsibility report can be found in the Governance section.

Directors‘ interests

The interests of the directors and their families in the share capital of the company on 1 January 2010, or their date of appointment if later, and at 31 December 2010 are set out below.

Details of incentive awards to directors are shown in the remuneration report. No director has any beneficial interest in the shares of any of the company‘s subsidiaries. Any changes in the interests of the directors and their families in the company and its subsidiary companies during the year and from the end of the year to 14 March 2011 are shown in the directors‘ remuneration report.

Directors‘ indemnity and insurance

The company has granted indemnities in favour of its directors as is permitted by Section 232-235 of the Companies Act 2006. It has also purchased insurance cover for the directors against liabilities arising in relation to the company, as permitted by the Companies Act 2006. This insurance does not cover criminal activity.

Interests of directors in contracts

The board has a formal process for considering and, if appropriate, authorising potential conflicts of interest which is reviewed annually by the nomination committee. During 2010 no director had any material interest in any significant contract to which the company or any subsidiary was a party. Further information on the authorisation process is provided in the
report of the nomination committee.

Related party transactions

Other than in respect of arrangements relating to the employment of directors, details of which are provided in the remuneration report or as set out in note 34 of the Notes to the accounts, there is no material indebtedness owed to or by the company to any employee or any other person considered to be a related party.

Going concern

At 31 December 2010, the group had net debt of £953.6m. Of this, £867.5m had been issued under the group‘s debt capital market programme and the earliest maturity of any of these instruments is 2013. Of the balance, £23.9m is held as net cash and other borrowings in the businesses and £110m is drawn under the group‘s bank facility, which matures in October 2012. This facility provides the group‘s principal source of day-to-day liquidity.

The group‘s practice is to reforecast the expected full-year outcome in terms of profit and cash every month and current and prospective performance is reviewed formally with each of the group‘s divisions monthly. These forecasts, together with supplementary short-term cash forecasts, which are provided by the divisions to group treasury, allow the group‘s cash and debt position to be managed actively.

At 31 December 2010 and 14 March 2011 the group had undrawn headroom in its committed bank facilities of £390m and £385m, respectively. After reviewing group and company cash balances, borrowing facilities and projected cash flows, the directors believe that the group and company have adequate resources to continue operations for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts.

In reaching this conclusion, the directors have considered carefully the risks to the group‘s trading performance and cash flows as a result of the economic environment and the shortage of credit available in the bank finance market in particular. The directors have also had regard to the group‘s operating plan and budget for 2011 and have considered a number of risk factors. The group has a good level of headroom in its bank facilities in terms of both the amount of funds available to withdraw and the financial covenants.

The group‘s bank facilities contain a single financial ratio covenant which requires EBITDA to be no less than 4x interest payable (on the basis of the definitions and subject to the adjustments set out in the bank facility documentation). The covenant is tested on 30 June and 31 December for the previous 12 months. At 31 December 2010 the covenant ratio was 8.3x, equivalent to £219m of EBITDA headroom.

Full details of the group‘s net debt and borrowing facilities are set out in notes 21, 22 and 28 to the financial statements.

Employees

The company attaches considerable importance to communicating with colleagues. Internal communications take place at a group, divisional, business and team level in order to ensure that colleagues receive accurate information in a timely manner and a variety of structures exist for two-way communications at all levels. At a corporate level the group intranet which has been refreshed in 2010 is used to announce company news with the support of direct e-mail communication from the executive team. This is supplemented by a periodic electronic magazine called “Horizons” which features interviews with senior executives about major initiatives and performance.

In Europe, the company meets its European Forum (European Works Council) usually twice a year to communicate with colleagues‘ representatives from across the continent. The company maintains an open dialogue with the Forum at times of business change. Divisional communications use a wide range of channels such as e-mail, divisional intranets, electronic newsletters and quarterly magazines to communicate business issues including financial and economic factors affecting the operations. Great importance is placed on face-to-face team meetings.

Applications for employment by disabled persons are always fully considered, taking into account the aptitudes of the applicants. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with Rentokil Initial continues and that appropriate re-training is made available. It is the policy of Rentokil Initial that the training, career development and promotion of disabled persons should, as far as possible, be identical with those of other employees.

Auditors and auditor independence

KPMG Audit Plc replaced PricewaterhouseCoopers LLP as the company‘s auditors in September 2009. In concluding that KPMG Audit Plc should be reappointed as auditors, the board and the audit committee took into account the need to ensure that auditor independence was safeguarded.

The company considers that there are sufficient controls and processes in place to ensure that the required level of independence is maintained. The company has a formal policy on the provision of non-audit services provided by the company‘s auditors. The amount of non-audit fees earned by the auditors is routinely reported to the committee. The board does not consider that there is any material risk of the company‘s auditors withdrawing from the market.

A resolution to re-appoint KPMG Audit Plc as auditors of the company and to authorise the directors to determine their remuneration will be proposed at the annual general meeting.

Directors’ statement on the disclosure of information to auditors

Insofar as each of the directors is aware, there is no relevant audit information (as defined by section 418 of the Companies Act 2006) of which the company‘s auditors are unaware; and each of the directors has taken all of the steps that he should have taken as a director to make himself aware of any relevant audit information (as defined) and to establish that the company‘s auditors are aware of that information.

Post balance sheet events

Please refer to note 35 in the Notes to the accounts.

Policy in relation to payment of suppliers

Rentokil Initial has a variety of payment terms with its suppliers in various countries. These are either negotiated along with other contract terms or conform to standard terms applied either by the relevant group company or by the supplier. It is the company‘s policy to pay suppliers in accordance with either negotiated or standard terms, provided that the relevant invoice is properly presented in a timely manner and is not the subject of dispute. The company is a signatory to the UK “Prompt Payment Code”. At 31 December 2010 the trade creditors of the group represented 51 days of annual purchases and the UK businesses‘ trade creditors represented 35 days of purchases; UK trade debtors represented 34 days of turnover. During the year the parent company did not have any trade creditors.

Other performance areas

As a means of helping shareholders assess the success and impacts of our strategies, the company uses non-financial performance indicators, which are shown in the table under Key performance indicators and further information on these and on other performance areas is set out in the corporate responsibility section of the governance review. Further details of the company‘s corporate responsibility performance can be found in the company‘s corporate responsibility report 2010, which is available at www.rentokil-initial.com/corporate-responsibility/reports-and-policies/reports/index.html.

Communities and charitable donations

The company‘s approach to the community consists of three separate elements – charitable cash donations (mainly linked to employees‘ initiatives), community support and community investment. Community support and investment is locally rather than centrally driven. Charitable donations amounted to £130,000 (£150,000 in 2009). This amount excludes value in kind donations or colleagues‘ time.

Donations for UK charitable purposes in 2010 amounted to £47,000 and a further £83,000 was donated in other countries. There were no payments to political organisations. The company operates a matched giving scheme whereby the company matches donations raised by employee fundraising. No company donation was greater than £2,000. Payments are made to a wide range of charitable organisations both in the UK and overseas.

Key contracts

The group does not have any dominant customer or supplier relationships.

Research and development

The company invests in an active programme of research and development in support of its major international business streams. This programme includes the conception, design, testing and manufacture of new products to enhance the quality, effectiveness and safety of the company‘s services and minimise their environmental impact. Where appropriate, work may be sponsored at universities with expertise in relevant areas. The company‘s total research and development expenditure in 2010 was £1.9m (2009: £1.7m).

Financial instruments

The company‘s financial risk management objectives and policies are set out within the financial review, which includes the policy for hedging certain forecast financial transactions. The review and notes 16, 21 and 22 to the accounts also detail the company‘s exposure to price, credit and liquidity risks. The company is not materially exposed to foreign exchange risks arising from cross-border trading transactions, although it is significantly exposed to foreign exchange investment risks.

EU Takeovers Directive

Pursuant to section 992 of the Companies Act 2006, which implemented the EU Takeovers Directive, the company is required to disclose certain additional information. Those further disclosures, which are not made elsewhere in this annual report, are as follows:

• The company‘s articles of association give power to the board to appoint and replace directors, but also require directors to retire and submit themselves for re-election at the first annual general meeting following the appointment and for re-election by rotation. The articles themselves may be amended by special resolution of the shareholders.
• The board is responsible for the management of the business of the company and may exercise all the powers of the company subject to the provisions of relevant statutes and the company‘s memorandum and articles of association. For example, the articles contain specific provisions and restrictions regarding the company‘s power to borrow money.
• Powers relating to the issuing of shares are also included in the articles of association and such authorities are renewed by shareholders each year at the annual general meeting. A copy of the articles of association is available to view on the company‘s website.
• The company‘s Euro Medium Term Note Programme contains conditions that in general terms allow the notes in issue by the company to be put back to the company in the event of a change of control of the company coupled with either a credit rating downgrade below “investment grade” or where the company‘s credit rating is already below “investment grade”.
• The company‘s main central committed bank facilities require mandatory prepayment and cancellation in the event of a change of control of the company.
• There are a number of other agreements that take effect, alter or terminate upon a change of control of the company, such as some commercial agreements, financing arrangements and employee share plans. None of these are deemed to be significant in terms of their potential impact on the group as a whole. The remuneration and contractual arrangements for the executive directors and senior management do not contain any matters that are required to be disclosed under The Takeovers Directive. Copies of executive directors‘ service contracts are available for inspection by shareholders at the company‘s registered office and at the annual general meeting.

Annual general meeting

The annual general meeting of the company will be held at No. 4 Hamilton Place, London W1J 7BQ on Wednesday 11 May 2011 at 11 a.m.

In addition to the adoption of the 2010 report and accounts, resolutions dealing with re-election of all directors and the resolution dealing with the approval of the directors‘ remuneration report, there are resolutions on the following matters: the appointment and remuneration of the auditors, a routine authority to re-purchase the company‘s shares, authorities to allot shares and disapply pre-emption rights and a general authority to make donations to EU political organisations.

A separate letter to shareholders containing the notice of the annual general meeting and explanatory information on the resolutions to be proposed as special business accompanies this annual report. This annual report and the notice of the annual general meeting can be found on the company‘s website, www.rentokil-initial.com.

On behalf of the board,

Paul Griffiths
Secretary
14 March 2011

Registered office:
2 City Place
Beehive Ring Road
Gatwick Airport
West Sussex
RH6 0HA

Registered in England and Wales No. 5393279