2024-03-11 08:06:30 ET
Rentokil Initial plc (RTO)
Q4 2023 Earnings Conference Call
March 07, 2024, 05:15 AM ET
Company Participants
Andrew Ransom - CEO
Stuart Ingall-Tombs - CFO
Brad Paulsen - CEO, North America
Conference Call Participants
Suhasini Varanasi - Goldman Sachs
James Rose - Barclays
Andy Grobler - BNP Paribas Exane
Ian Zaffino - Oppenheimer
Nicole Manion - UBS
Dominic Edridge - Deutsche Bank
Allen Wells - Jefferies
Chris Bamberry - Peel Hunt
Presentation
Andrew Ransom
Good morning, ladies and gentlemen. Thank you all for joining us today.
In a few moments, Stuart's going to provide you with details of our overall performance in 2023 and our technical guidance for 2024. I'll then come back to provide a very brief update on each of our categories before we focus today on North America. Here, I'll start by taking you through our organic growth model and our analysis of what happened in the second half. Brad Paulsen, our recently appointed CEO for North America, I'm delighted, joins us here in person. We'll then go through our RIGHT WAY 2 growth plan. I'll then wrap up with a brief update on the excellent progress that we're making towards integration. And then we'll take questions.
So to set the scene, let me just say a few words by covering the highlights for the year. In 2023, we delivered a good overall Group performance with revenue increasing by 45.8% to GBP5.4 billion, of which organic growth was 4.9%. Adjusted operating profits grew by 57% to GBP897 million, and we delivered a Group margin of 16.6%, which was an increase of 120 basis points. Adjusted EBITDA for the year was GBP1.2 billion.
Our bolt-on M&A continued to create value with 41 deals, delivering annualized revenues in the year before acquisition of around GBP106 million. Our cash conversion was at the higher end of our 80% to 90% target at 89%, and we reached a 2.8 times net debt-to-EBITDA ratio one year ahead of our plan. So a good overall Group performance.
As you can see, we continue to make very good progress against the vast majority of our targets. And even in the case of organic growth, where we experienced a more challenging second half in North America we nonetheless delivered organic growth of 4.9% against our medium-term target of 5% plus. The Group is performing very well overall, and we've got a plan in place to reinvigorate growth in North America.
Now as I just mentioned, our second half organic revenue performance in North America was below our expectations at 2% and at 3.5% for the full year. At the heart of this was a reduction in inbound sales leads contributed to by a range of factors, including the performance of our own digital marketing channels, the impact of our ongoing integration activities, increasing spend by a number of competitors and a softer consumer market. And I'll come on to explain this in greater detail shortly.
Having analyzed our organic growth performance in the second half, we've created a detailed plan, and we've put in place a very talented and experienced sales and marketing leadership team ahead of this year's pest season. We're calling this our RIGHT WAY 2 growth plan, and it aims to enhance our performance across all aspects of organic growth in North America from both new and existing customers and in particular, to increase our inbound lead flow.
We're investing for growth with around $25 million being put to work to support our growth ambitions with investments into the team, into sales leads from technicians and into our digital channels. And this also includes our first advertising campaign to exploit Terminix's position as the most recognized pest control brand in the United States. Whilst we've got a very clear action plan, and we're beginning to execute that now, it will take some time to get the business to the levels of organic growth that we expect. And as such, we're expecting organic growth in North America to be between 2% and 4% in 2024 with around 2% expected in the first quarter.
Touching very briefly on the excellent progress we're making on the integration, we've now completed phase 1, and we've exceeded our 2023 synergy target by $9 million. Our branch co-locations are going very well with around 100 fewer branch properties and with a further 75 also to be exited this year.
And we've announced today that we're increasing our gross synergy target by $50 million to around $325 million. We're investing $25 million of that into sales and marketing, which results in our total net synergy target increasing from $200 million to around $225 million. We are also extending the branch integration phase into 2026 to derisk the program and to deliver these greater synergies. As a reminder, our original plan was to deliver net cost synergies of $150 million by the end of 2025 and our latest plan takes us to $187 million by that point, and then on to the $225 million by the end of '26. So a good overall performance, a plan in place to reinvigorate organic growth in North America and an increase in our gross synergy target of $50 million.
So with that, let me hand over to Stu.
Stuart Ingall-Tombs
Thank you, Andy, and good morning, everyone. I'll run through the financial highlights of what has been another good year. I'll start with the Group level numbers, and then as usual, I'll move through the regions and then look at cash and the balance sheet. Unless I state to the contrary, all numbers are at constant rates of exchange....
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Rentokil Initial plc (RTO) Q4 2023 Earnings Call Transcript