Rentokil Initial (trading update)
Two businesses within my portfolio reported their Q3 trading update this past week, Rentokil Initial and Sartorius AG. Both business reported positive updates. In this brief article ill be focusing on Rentokil RTO 0.00%↑ with an update on Sartorius DIM 0.00%↑ to be posted in a few days.
Rentokil Initial
Rentokil is a fairly new addition to the portfolio. It was added after Rentokil announced in September 2024 that their largest market for pest control North America was performing below expectations with organic growth being lowered to 1% for the second half of 2024. This lowered guidance along with higher labour costs and higher material costs sent the stock down 18% on the day.
Before we look at the business performance for the quarter I have to highlight huge changes to the executive team. A new CMO, COO and an interim CFO was appointed whilst the company searches for a permanent replacement. Adding to this a new Non-Executive Director was appointed to the board, Brian Baldwin who is head of research of Trian “investment management firm” who own 57.1 million shares of Rentokil or 2.26% of the company.
This weeks release was the first financial report from the company since the September drawdown and there where definitely positives to take from it. Total Revenue came in at £1,444 with group growth of 3.6% and organic growth of 2.6%. Firstly looking outside North America, mid single digit organic growth was achieved in both Europe and Asia. Europe delivering organic growth of 4.7% and the Asia and MENA region delivering organic growth of 6.5%. YTD outside of North America the business has achieved combined organic growth of 5%.
Hygiene & Wellbeing & France Workwear, both smaller segments came in with y/y revenue growth of 9.3% and 7.4% respectively.
Turning to North America organic growth came in at 1.4% (1.3% YTD), slightly higher than guidance of 1% for the 2H 2024. Management have acted quickly to control the businesses expenses. They had this to say during their conference call,
“Over the last few weeks, we've removed around 250 roles from service sales and back office functions with an annualized cost saving of around $22,000,000 We've been tightly managing overtime and labour as we've entered the off season. And as we said in September, material and consumable costs in the North American business have been higher than expected, partly due to inflation. There was also an impact from a new ordering process for Terminix branches and a weaker termite season that resulted in elevated inventory. To help mitigate some of these effects, we've now implemented strict ordering controls at branch manager and regional director levels. Some additional costs due to inflation is expected to persist.”
Also during the call there was commentary regarding the integration of the Terminix branches. 28 branches where completed with systems and data integration success with minimal disruption to operations. Customer retention stable and colleague retention was very strong. During Q4 Rentokil are piloting new “satellite branches”. 10 are planned to open in Q4 which are going to be located in key metro areas. Management are hopeful these small branches will boost physical presence in these high density areas and will also be easier to cater for the needs of their customers.
Bolt M&A activity continued with 5 deals made with an annualised revenue contribution of £39 million. Acquisition spend still expected to be £200 million for the year.
Looking past these short term troubles and post integration of the Terminix deal the company are highly optimistic of the resilient pest control market and long term growth profile of the industry.
Guidance was unchanged for the year.
Link to trading update.
Disclaimer: I have a beneficial long position in Rentokil Initial. Stocks mentioned are not investment advice. I can’t guarantee the accuracy of the information provided in the newsletter. All statements express personal opinions and information gathered online. Any estimates or forward looking statements made are unreliable. Any information in this newsletter is for educational and entertainment use only and should not be taken as investment advice.