Financial Review

Despite tough conditions in many of our markets in 2011 full year revenue of £2.54 billion grew by 1.9% on 2010 at actual exchange rates (1.2% at constant rates).

Growth of 2.7% was achieved across our key categories of Textiles, Hygiene, Pest Control and Facilities Services. Revenue from our Parcels business declined however by 8.5%, reflecting a combination of difficult market conditions and lower volumes as a result of customer losses in 2010.

Textiles & Hygiene performed well in 2011, aided by a notably robust performance from Germany and significantly improved performance from Benelux. Difficult market conditions in Italy and Eastern Europe dampened otherwise solid results. Pest Control delivered a strong performance in North America and most European markets, but overall revenue was held back by disposals and the suspension of operations in Libya in Q1. Initial Facilities performed robustly, reporting revenue growth of just under 7%, aided by the acquisitions of the Fire and Water businesses of Santia Services in early 2011. Asia Pacific revenue grew 4.1% year on year, reflecting investment in capability and traction in sales and marketing and other growth initiatives. Ambius revenue grew by 1.1%, attributable to good Christmas season sales in North America and the acquisition of Netherlands-based Westplant in Q3. In City Link, while revenue declined year on year, the business moved into positive revenue growth in Q4, the first time since Q2 2010, reflecting c.£25 million of annualised contract wins in Q3 and Q4.

Contract portfolio, which accounts for 74.9% of revenue, grew by 1.6% year on year, of which 1.4% is due to the net effect of acquisitions and disposals and the remainder to ongoing improvements in customer retention rates.

Adjusted operating profit (before amortisation and impairment of intangible assets, reorganisation costs and one-off items) amounted to £221.0 million (at CER), a decrease of 7.6% on the prior year. Adjusted profit before tax (before amortisation and impairment of intangible assets, reorganisation costs and one-off items) declined by 6.1% to £180.5 million (at CER) and adjusted earnings per share (at AER) declined by 4.2% to 7.48p. Positive divisional profit performances were recorded in Textiles & Hygiene, Pest Control, Asia Pacific and Initial Facilities, while profit from Ambius remained unchanged on the prior year. City Link's financial performance was disappointing and while good progress was made during the year on operational improvements and service levels, progress on productivity savings was much slower than anticipated.

The unadjusted group after tax loss for the year was £67.1 million, reflecting an £145.8 million impairment of intangible assets in City Link.

Operating cash flow was £68.0 million lower than 2010 due to lower EBITDA and increased net capex, with working capital outflows being relatively flat (despite an £18 million adverse impact in Q1 relating to the phasing of Initial Facilities cash flows in 2010).

Total tax payments were £44.5 million compared with £35.0 million in 2010, with the increase attributable to the phasing of payments relating to prior year liabilities. Interest payments were £0.5 million higher than 2010 and the acquisition/disposal outflow of £32.0 million largely reflects the acquisitions of Santia Services, MSS and the remaining non-controlling interest in our catering business. Foreign exchange translation and other items increased cash flow by £0.7 million, leaving an overall inflow of £34.6 million and net debt of £919.0 million.

References to adjusted operating profit and adjusted profit before tax also exclude reorganisation costs and one-off items, totalling a net cost of £38.0 million at constant exchange rates (CER), £38.2 million at actual exchange rates (AER) (2010: £25.1 million at CER and AER). £34.4 million (at CER, £34.6 million at AER) of these relate directly to the group's major reorganisation programme, including Programme Olympic, and consist mainly of redundancy costs, consultancy and plant and office closure costs net of the profit on sale of certain properties (2010: 27.9 million, at CER and AER). One-off items of £3.6 million (at CER and AER) include a provision of £4.8 million against our full financial exposure arising from the suspension of our Libyan pest control business, £4.0 million of acquisition costs, and credits of £3.9 million in respect of negative goodwill and £1.3 million relating to the release of prior year provisions. In 2010, one-off items of £2.8 million credit (at CER and AER) also included the profit or loss on the disposal of businesses, which totalled £3.0 million, a credit of £35.0 million in respect of a change in pension liabilities as a result of using CPI rather than RPI for calculating future pensions increases and a £29.2 million charge in respect of a claim under a lease guarantee given by a subsidiary following the disposal of a business some 20 years ago. These costs 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.

In accordance with the group's accounting policy, goodwill is tested for impairment annually using cash flow projections based on financial budgets and long-range plans. During the year impairment charges of £111.5 million of which £108.1 million related to City Link, have been recognised and charged to the income statement. Additionally, an impairment charge of £37.7 million has been recognised and charged to the income statement in respect of City Link customer lists and relationships.

The group generated operating cash flows of £154.7 million in 2011 (2010: £222.7 million), representing 92% conversion from profit (after adjusting for one-off cash flows of £51.6 million).

Capex in 2011 was 103% of depreciation reflecting inflationary pressures, sales growth in Textiles & Hygiene and upweighted investment in systems to support Programme Olympic and improvements in customer care.

At 31 December 2011 the group had net debt of £919.0 million. Of this, £855.0 million is represented by capital market notes issued by the group and the earliest maturity of any of these instruments is 2013. In December 2011 the group entered into a new £270 million Revolving Credit Facility maturing in December 2016. The group has good headroom in its bank facilities in terms of funds available to withdraw and in relation to its interest cover and net debt covenants.

The board proposes a final dividend in respect of 2011 of 1.33p per ordinary share, payable to shareholders on the register at the close of business on 10 April 2012, to be paid on 15 May 2012. This equates to a full year dividend of 2p per share on a one third/two thirds interim/final basis. The board intends to pursue a progressive dividend policy going forward.

Net interest payable of £44.6 million was £6.5 million lower than in 2010. Underlying interest (excluding pensions, mark to market and foreign exchange differences) was £48.6 million, compared to £51.2 million in the prior year, a reduction of £2.6 million, due to lower interest rates and net debt. Net interest payable included improvements of £3.1 million from pension income and £0.8 million resulting from mark to market and foreign exchange differences.

The income tax expense for the year was £16.6 million on the reported loss before tax of £50.5 million. The principal reason for the high tax charge (when compared with the reported loss) is that there is no tax relief due on the goodwill impairment of £111.5 million. After adjusting for the goodwill impairment and amortisation of intangible assets, reorganisation costs and one-off items, the effective tax rate for the year is 24.9% (2010: 24.9%) of APBITA. This compares with a blended rate of tax for the countries in which the group operates of 29% (2010: 29%). The principal factor that caused the effective tax rate to be lower than the blended rate is the release of prior year provisions for tax no longer considered necessary as various issues were either settled or became statute barred in the year.

Segmental information has been presented in accordance with IFRS 8 "Operating Segments" which the group has implemented with effect from 1 January 2009. This statement reflects internal organisation changes made on 1 January 2011 with our Scandinavian and Iberian Textiles & Hygiene units and some small Pest units transferring from the Textiles & Hygiene division to the Pest Control division. Prior year comparisons have been restated.

Financial risk management polices are shown in note 21.

The group acquired businesses in the year for a net consideration of £26.5 million. Details of businesses acquired and revenue and operating profit therefrom are set out in note 29 to the accounts.

In the interim report Rentokil Initial plc announced it had reached a provisional agreement with the UK pension scheme trustees in relation to the 31 March 2010 triennial valuation of the company's UK pension scheme and its funding. Final agreement has now been reached with the trustees which assumes a funding deficit of £80 million at the valuation date and a funding arrangement by the company of £12.5 million per annum over an eight-year period commencing in January 2012.

The financial statements included in this annual report have been prepared and presented under IFRS as adopted by the EU. The group's accounting policies are set out under accounting policies.