Statement by the chairman and the chief executive

Textiles & Hygiene grew revenue by 2.7% in 2011, aided by a notably robust performance from Germany and significantly improved performance from Benelux. We are pleased with the turnaround in the Benelux after several challenging years in this territory. Market conditions remain difficult in Italy and Eastern Europe but our management teams are nevertheless coping well in these environments. The agenda for our three big businesses in this division in France, Germany and Benelux is gaining traction.

Pest Control grew by 0.3% with strong growth in North America and the UK. The 11.3% growth (of which 6.7% is acquisitions) of our UK Pest business is significant, given its role as the test country for the Programme Olympic growth pilots. Overall revenue was however held back by disposals and the suspension of operations in Libya during Q1 2011. We have now re-commenced operations in Libya on a small scale and have a promising acquisition pipeline in place for bolt-on deals in North America and the Middle East.

Initial Facilities performed robustly, reporting revenue growth of 6.9%, of which 2.9% is attributable to the successful acquisition of the Fire and Water businesses of Santia Services in early 2011. 2012 has started well, with several promising wins of facilities management contracts in the UK.

Asia Pacific revenue grew 4.1% year on year, reflecting investment in capability and traction in sales and marketing and other growth initiatives. We are particularly pleased with the return to growth of our Australian Hygiene business after eight years of revenue decline.

Ambius revenue grew by 1.1%, attributable to good Christmas season sales in North America and the acquisition of Netherlands- based Westplant in Q3.

City Link’s performance continues to disappoint, with revenue declining by 8.5%, largely due to loss of customers after very difficult trading conditions in Q4 2010. The capability of the business has improved very substantially, particularly in customer service and customer care, but management of operating costs has been poor throughout 2011 at a time when Revenue Per Consignment (“RPC”) has come under pressure across the whole industry. Nevertheless revenue grew in Q4 2011 and we have recruited an excellent management team. The financial performance of the business will remain poor in H1 2012.

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.

Adjusted operating profit (before amortisation and impairment of intangible assets 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 basic adjusted earnings per share (at AER) declined by 4.2% to 7.48p.

The good progress made in Textiles & Hygiene, Pest Control, Asia Pacific and Initial Facilities was not sufficient to offset the deterioration in City Link’s financial performance, with progress on productivity savings being 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.

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) against a target of 100%. Cash flow was negatively impacted in H1 2011 by a very strong performance in Q4 2010 (attributable to the phasing of cash collections in Initial Facilities), lower profitability and higher capex levels.

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 adequate headroom in its bank facilities in terms of funds available to withdraw and in relation to its interest cover and net debt covenants.

At the 2011 interim stage we announced we 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. It is noted that the funding deficit agreed with the trustees was calculated on a different basis to the valuation of the pension scheme’s assets and liabilities on the company’s balance sheet, which were calculated using applicable accounting standards. At 31 December 2011 the UK scheme was valued at a surplus of £144 million on the company’s balance sheet.

Although the board is not satisfied with the current financial performance of City Link, good progress has been made with the turnaround of Textiles & Hygiene Benelux and the rest of the group’s businesses are performing well in difficult conditions. Further, through strong operating cash flow performance, the company has reduced significantly its debt levels over the last three years and has recently resolved its medium-term pension funding and borrowing arrangements. Taking this into consideration, the board proposes to resume the payment of dividends to shareholders and is recommending a final dividend in respect of 2011 of 1.33p per 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.

In 2011 our colleagues have faced challenges from the economic environment as well as from operational issues and on behalf of the board we would like to thank them for their continued contribution.

Angela Seymour-Jackson will be joining the board as a non-executive director on 5 March 2012. Angela has, until recently, been the Chief Executive of the RAC and we look forward to the contribution she will bring to Rentokil Initial from her extensive service industry experience.

Our Operational Excellence strategy – which focuses on capability development across all functions – is delivering increasing rates of revenue growth in the Pest Control, Hygiene, Textiles and Facilities Services categories despite tough market challenges. We are particularly pleased with the rates of growth achieved towards the end of Q4, which have continued into the early part of 2012. The investment in rollout of the Olympic sales growth initiatives is likely however to limit profit growth in these categories to mid-single digits for the time being.

City Link continues to disappoint. While Q4 volumes grew 8% and revenue by 0.5%, losses were £3.1 million greater than Q4 2010 due to low productivity, driven in part by conservative resource planning for the Christmas period. The financial performance of the business will remain poor in H1 2012, however, we remain committed to resolving the key revenue and cost control issues facing this business. We are encouraged by the immediate impact of the new City Link CEO and CFO and by the quality of the improvement plan currently being implemented.

Progress made across the rest of the group and continued strong operating cash flows have given the board sufficient confidence to recommence dividend payments with a final dividend of 1.33p per share. The board is appreciative of the continued support of shareholders as we work to turn around Rentokil Initial.

Our four key objectives for 2011 were:

1. The turnarounds of City Link and Textiles & Hygiene Benelux;
2. The delivery of immediate, effective and surprising customer care;
3. The delivery of consistent and profitable growth through excellent customer retention and greatly improved marketing, sales and innovation capability; and
4. Cost savings.

Considerable progress has been made in City Link in 2011 in the areas of sales & marketing, operations, customer care and contingency plans for key trading. As a consequence, service levels have been strong throughout the year, in contrast to Q4 2010. We have however been disappointed by the financial performance of the business with lower revenue per consignment and poor productivity resulting in increased losses.

Given the poor performance of the business in 2011 we have written off intangible assets at the 2011 year end relating to City Link. The total write down amounted to £146 million of which £108 million related to goodwill and £38 million related to customer lists.

The new City Link leadership team brings a great deal of successful UK Parcels industry experience to the business. They have begun to implement a comprehensive recovery plan which we expect to show material results by Q3 2012. The plan targets productivity savings in excess of £20 million primarily through driver productivity, supported by route and round optimisation and a move to variable pay for subcontractors. There are also initiatives to reduce trunking, warehouse operations and back office costs.

The business performed consistently in line with plan, both in revenue (up 1.2% to £179.3 million) and profit (up 16.6% to £29.0 million). Market conditions notwithstanding, we expect the business to continue to perform well in 2012.

In the Netherlands an extensive review of pricing was completed during H1 enabling the business to win a number of Government accounts. Having taken some significant price reductions in 2009 and 2010 in order to get our pricing back in line with the market, during 2011 we have been able to pass on a number of price increases to customers, reflecting significant cost inflation and a more benign pricing environment.

In Belgium the primary focus has been on improving the performance of the Hospital unit. Management has been streamlined, plant productivity has increased and cost control measures have been implemented.

The group’s focus on customer service has been extended to customer care. Our aim is to be pro-active in contacting, listening to and responding to all our customers (in City Link also our customers’ customers), not just the very large.

In City Link a Customer Care Director was appointed to lead this programme which became operational in November. The business has made significant progress in both quality and speed of response to customer and consignee enquiries, though there remains much to do. The analytic data systematically collected by the new technology will lead over time to a step change in service and care. In May the ’My City Link’ initiative was launched affording most customers real-time and detailed access on their parcel delivery. This service offers a competitive advantage over other market participants and has met with great success.

The group aims to deliver consistent and profitable organic growth through excellent customer retention, greatly improved marketing, sales and innovation capability, and through acquisition. Excluding City Link and Libya (where we had to cease our activities due to civil war) group organic growth was 0.9%, driven by Asia Pacific (up 3.7%), Pest Control (excluding Libya) up 1.7%, and Textiles & Hygiene (up 1.4%).

Despite challenges in many of our markets, retention remained stable during the year at 83.9%.

Good progress has been made in shaping the foundations and frameworks on which we will build our future growth agenda. The global sales agenda has focused on key elements of sales force capabilities, including training and development modules, operating frameworks and system tools. In addition work is underway to introduce improved recruitment criteria. Additional supply chain and innovation capability has been brought into the textiles and hygiene categories to ensure that segmented offers are supported by modernised product ranges.

Growth pilots

Programme Olympic is a programme of process-led change for our business support activities. The objective of the programme is to dramatically improve customer service and financial performance. There are seven growth initiatives within the programme which have been piloted during 2011 in the UK. The impact of the initiatives has contributed to organic growth in the UK Pest Control business of 8.3% in H2 2011.

Acquisitions

Pest Control – continues to expand its geographic footprint by acquisition. In February 2011 the business acquired the pest business of Santia Group. In July 2011 the group entered the Turkish pest control market through the acquisition of commercial pest business National Britannia Turkey (“NB Turkey”). The business operates nationally with branches in Turkey’s seven largest cities. In the same month we acquired Sydney-based pest control company Ant-Eater, which will provide further density to our Sydney operations. The company also established a first- time presence in Mexico through the acquisition of Tetengo in September. Tetengo is headquartered in Monterrey and operates from a network of 15 branches across the country.

Textiles & Hygiene – in 2011 the division acquired a business in France which designs, develops and sources workwear garments.

Initial Facilities – in May 2011 Initial Facilities acquired the 25% minority shareholding of Initial Catering Ltd from Rezayat Group (High Seas Investments (Bermuda) Ltd). More recently, in November, we announced the acquisition of building services business, MSS Facilities Management, from Managed Support Services plc. The business, which has 200 employees, operates from two principal trading sites in Manchester and London and provides excellent synergies with Initial Facilities’ existing mechanical and electrical engineering building services business. The acquisitions of Knightsbridge Guarding (acquired June 2010) and the Services Division of Santia Group (acquired February 2011) have been integrated successfully into the division and both are performing ahead of expectations.

Ambius – In September Ambius acquired Netherlands-based business Westplant, which specialises in the rental of interior and exterior plants, fresh flower delivery and Christmas displays. The acquisition cements Ambius’ market position in the Netherlands.

The group achieved £44 million of cost savings in 2011 through a combination of restructuring, procurement, service productivity and back office rationalisation. Savings were £16 million below target primarily reflecting slower than expected progress on service productivity in City Link. Cost savings are targeted at £50 million in 2012.

Textiles & Hygiene delivered £17 million savings in the year through restructuring, overheads and indirect procurement. Further opportunities exist in 2012 in direct materials procurement and service productivity.

Pest Control achieved £10 million savings in the year through service productivity and back office rationalisation. Further opportunities exist in these areas, especially in North America.

City Link delivered £7 million of savings during the year, primarily in restructuring. As noted above, progress has been slower than expected in productivity. Cost savings of £20 million are targeted in 2012 in collections and delivery productivity, as well as hub and trunking, depot and warehouse costs and back office efficiencies.

Savings in the rest of the group amounted to £10 million in the year, through a combination of restructuring, procurement and back office rationalisation initiatives. Further savings are planned in 2012, particularly in Initial Facilities through the application of LEAN cost saving initiatives to improve gross margin levels.

Over the last four years, the group has invested in the capability of its people and systems. 2012 will be focused on delivering the benefits of this investment. Our four key objectives for 2012 are:

1. To turnaround the financial performance of City Link;
2. To drive greater customer satisfaction and retention through customer care and Customer Voice Counts (“CVC”) initiatives;
3. To deliver £50 million cost savings from productivity, procurement and back office rationalisation initiatives; and
4. To achieve growth through marketing and innovation, Programme Olympic and acquisitions.

1. City Link

The new City Link leadership team brings a great deal of successful UK Parcels industry experience to the business. They have begun to implement a comprehensive recovery plan which we expect to show material results by Q3 2012. The plan targets productivity savings in excess of £20 million primarily through driver productivity, supported by route and round optimisation and a move to variable pay for subcontractors. There are also initiatives to reduce trunking, warehouse operations and back office costs.

2. Customer care

Following the successful introduction of customer care initiatives in City Link, the company will begin to roll out best practice initiatives across the group in 2012, including call centre technology and organisation. The group will also roll out proactive customer account management processes following successful trials conducted within the UK Pest and Hygiene businesses in 2011. Further, Customer Voice Counts (the group’s survey of customer satisfaction) will be bonusable across most of the organisation in order to drive competitive advantage.

3. Cost savings

Cost savings are targeted at £50 million in 2012. We aim to achieve this through direct materials procurement, back office rationalisation and efficiencies and service productivity, particularly within City Link.

4. Growth

The group anticipates further revenue growth in 2012 through organic and acquisitive actions. While progress has been made in sales capability, the coming year will be another important year of implementation.

Marketing and Innovation will be a major focus for 2012 given the progress made on delivering the essentials across the group. For Pest and Hygiene this will come under the leadership of a single management team led by Xuemei Bennink-Bei, currently MD of Asia Pacific, and now appointed Group Marketing and Innovation Director. The new initiative will involve a number of senior management changes: while Xuemei will continue to run Asia, Peter Slator, MD of THS, will assume additional responsibility for the Pacific region. Italy will report to Andy Ransom, Managing Director of the Pest Control division.

Work is also now underway to develop the Programme Olympic growth pilot initiatives as appropriate for other group categories (i.e. Textiles and Hygiene) and to deploy these initiatives in key geographies outside the UK. We anticipate these pilots will underpin our plans for organic growth in the Pest Control division in 2012 and elsewhere in the business in 2013. Finally, the group will continue to target bolt-on acquisitions, primarily in the Pest Control category, with an emphasis on North America, MENAT, Latin America and other high growth markets.