ii view: North America chief leaves troubled Rentokil

Fourth quarter trading update

• Group-wide organic sales up 3%
• North American organic sales up 2.3%

ii round-up:

In an unscheduled update, pest control company Rentokil Initial (LSE:RTO) today flagged full-year trading broadly matching forecasts with a new head at its core North America business appointed. 

Overall fourth-quarter sales stripped of acquisitions rose 3% year-over-year, up from 2.6% in the third quarter. Existing Group Commercial Officer Alain Moffroid is now to replace Brad Paulsen as interim head of North America, which accounts for around three-fifths of total group revenues. 

Shares in the FTSE 100 company rose 0.5% in UK trading having come into this latest news down 9% during 2024 and following a September profit warning. That’s in contrast to a gain of 5.7% for the FTSE 100 index over the year. 

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North America organic sales for the fourth quarter climbed 2.3%, up from growth of 1.4% in the prior third quarter. Within that, pest control sales rose 1.5%, up from 1.4% in Q3 and supported by increased leads from marketing initiatives.

Pest control, as well as hygiene and wellbeing services, contribute to overall sales, with Rentokil the leading player in the North American commercial pest control sector and helped by its 2022 acquisition of rival Terminix for $6.7 billion (£5.8 billion).

Rentokil flagged ongoing integration of the Terminix business, with pilots of new satellite branches and new technician sales and pay plans each on target.

Departing North America head Paulsen will remain with Rentokil until April to aid a smooth transition. 

Full-year results are scheduled for 6 March. 

ii view:

Started in 1925, the Crawley headquartered company today employs over 60,000 people. Pest control accounted for most of its sales during 2023 at 80%. Hygiene and wellbeing services made up a further 16%, with a small French work wear business accounting for the balance of 4%. Away from North America, other key markets include the UK, France, Spain, Australia and India.

For investors, third-quarter organic sales growth of 1.4% in North America was down from earlier year management hopes for as much as 4%. Large company acquisitions such as that for Terminix are not without risk and can prove problematic. Management changes for North America are ongoing, with Mr Paulsen only taking up the regional CEO role in December 2023, while costs for businesses generally, and particularly wages, are now heightened following global inflation. 

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To the upside, a high focus on improving the performance of the core North American business is being made. Pest control is a largely non-discretionary outlay and an essential service for customers such as those in hospitality. Smaller bolt-on acquisitions continue to be made including India’s second-largest pest control company in 2024, while there is a forecast dividend yield of around 2.2%.  

In all, increased exposure to the world’s largest economy, the USA, and further likely cost savings offer grounds for hope, although more cautious investors are likely to await more concrete signs of a sustainable recovery.

Positives: 

• Diversity in both business type and geographical location
• Pest Control is a largely non-discretionary and essential service

Negatives:

• The weather can influence performance
• Currency movements can impact

The average rating of stock market analysts:

Strong hold