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By Bruce Jackson (TMFGoogly@aol.com)
Baker Street, London -- Today I was kindly invited to the Rentokil Initial (LSE: RTO) 1999 interim results analysts' presentation. This was my second meeting with the Wise, having attended the similar Independent Insurance (LSE: IIG) meeting of last week. The two were very, very different.
There must have been 150 grey-suited City folks, with a few gals who added some much needed colour to the event, packed into a room to hear Chief Executive Sir Clive Thompson's presentation. This particular presentation was eagerly awaited, given that company's long-term objective of 20% profits growth was scrapped this morning.
For the record:
Sales +2.5% Profits +10.2% EPS +10.5%
What follows is my account of the presentation, the sort of "what you wouldn't know from reading the official results release" version. Remember I'm writing this from the perspective of a current shareholder. Also, at this stage, I offer very little in the way of opinion and thoughts. That will come on Friday -- watch this space.
("Profits for the first half and full year 1999 are likely to produce profits growth in the 10--15% range.")
Prior to that statement, made in May this year, Rentokil expected turnover growth of 4--6%, which in turn would produce profits growth of 13--16%. Acquisitions were expected to bring profits up towards 20% growth. The company felt it had a "fighting chance" of achieving that target, until it saw the first quarter numbers. That was the catalyst for the AGM statement. In retrospect, the 20% growth target was "too ambitious."
Sir Clive admitted that "We can be criticised for the AGM statement." It came out of the blue, and without explanation. Today was the first time the company has fully opened up to the (almost) general public, although I'm sure there's no doubt been some closed shop private briefings.
Firstly, a brief history. It started off as an internal target. The City soon caught on to this, and Rentokil amazingly found that profit forecasts from analysts consisted of last year's profit multiplied by 1.20 = this year's forecast. At some stage, Rentokil made this target an official objective, and achieved it for 16 years in a row -- a truly exceptional performance.
For the past several years, the 20% growth objective has held them a "hostage to fortune". Sir Clive recounted this amusing anecdote:
Scenario 1
Rentokil: Do you think we should drop the 20% growth objective?
Current Shareholder: Yes. But please let me know before you do so, because I don't want to be in the shares when the share price takes its inevitable tumble.
Scenario 2
Rentokil: Do you think we should drop the 20% growth objective?
Prospective Shareholder: Yes. I want to buy the shares, but pick them up much cheaper than they currently trade. When you drop the 20% objective, the share price will plummet, and that's when I'll be happy to step in.
Sound like a no-win situation? Sure does to me.
It is:
"To substantially outperform the support services sector (as measured by total shareholder return) over the next five years -- through a constant focus on our core activities and a continual drive to improve the quality of service delivery, the quality of technical leadership, the quality of culture, the quality of management and the quality of earnings."
According to Sir Clive, the objective is sharper, focused and shareholder return driven.
When questioned about what 'substantially' means, Sir Clive rather jokingly said by "more that a whisker" and by "quite a lot". The support services sector includes all Rentokil's broad competitors, but is not an objective they are going to escape because of lack of definition. Despite that, he declined to put a hard and fast definition on the benchmark.
The objective starts now, with the share price at about 239p.
Non-core businesses, including plant hire, distribution and personnel recruitment, do not have a For Sale sign hanging over them. However, Rentokil will consider offers that enhance shareholder value.
Sir Clive said "Turnover growth is dead easy". Rentokil are looking to buy good quality businesses, with commercial prudence being the overriding factor. The number of acquisitions made in the first half was "disappointing". Yet, they don't feel under pressure to make acquisitions, and refuse to pay excessive prices.
The company has an excellent record of some 300 acquisitions over 17 years. Most of its competitors do not have this experience, and Sir Clive was at pains to emphasise that acquisitions are not particularly straightforward to manage.
Sir Clive was very non-committal, saying 2000 is a "long way off" when pressed on expected profit growth in that year.
Organic growth is expected to come via a new initiative called database marketing, whereby the company's 400,000 UK clients will be collated so that all cross selling opportunities are explored.
The company could support interest cover of as low as "3, 4 or 5 times". This refers to the number of times profit before tax and interest (commonly known as PBIT) is covered by the net interest expense. In the 6 months to June 1999, PBIT was £259m and net interest expense was £6m, giving Rentokil interest cover of 43 times (£259m/£6m). That effectively means the company is prepared to go massively into debt, if need be, in order to enhance shareholder value, be that by way of acquisition, share buyback or enhanced dividend.
The business remains strongly cash generative, although first half free cash flow (defined as operating profits plus depreciation, plus or minus changes in working capital, less tax and less capital expenditure) was down on an "exceptionally good" first half in 1998. The negative cash impact on working capital was "disappointing" but they expect improvement in the full year. Capital expenditure is directed largely at the higher margin businesses.
Finance Director Chris Pearce said, in a passing comment to analysts post the formal part of the presentation, that Rentokil are not nutters about margins, but they are nutters about profits.
When pressed on his own personal bonus scheme, given the dropping of the 20% growth target, Sir Clive reminded analysts that it clicks in for him at 10% EPS growth, so in that respect, nothing really changes as far as his personal circumstances are concerned. He did say however that it will be up to the remuneration committee, made up of non-executive directors, to set incentive levels for the years ahead.
After the presentation, I spoke briefly with Charles Grimaldi, the Corporate Affairs Director, who was responsible for my Foolish invitation to this very Wise event. On the Rentokil Initial website, in Powerpoint form, you can see the exact same slides used for today's analyst presentation. I asked him if the company had any plans to either publish or broadcast the transcript for the whole presentation, and he said he'd consider it.
And that's it!
Late Tuesday, Dell Computer Corporation (NASDAQ: DELL) announced estimate-beating second quarter results. As of writing, the shares are up 8.5% today as the market has obviously reacted favourably. Again, more on these results on Friday, but for some of the numbers and facts, check out this morning's Breakfast News on our US site.
See you Friday.
Company Change Bid DELL(US)-0.30 41.00 EMA +0.02 10.25 IIG 0.00 2.93 MSY +0.01 5.44 PIZ +0.04 7.87 RTO -0.10 2.37 ULVR +0.01 5.86 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 27/10/98 755 Indep Ins 2.58 2.93 13.6% 04/11/98 245 Pizza Exp 7.93 7.87 (0.7%) 22/04/99 347 Misys 5.76 5.44 (5.6%) 19/12/97 783 Rentokil 2.55 2.37 (7.1%) 27/01/99 74 Dell (US) 44.63 41.00 (8.1%) 17/04/98 169 EMAP 11.34 10.25 (9.6%) 17/07/98 266 Unilever 7.53 5.86 (22.1%) Last Rec'd Total # Company In At Value Change 27/10/98 755 Indep Ins 1972.64 2212.15 239.51 04/11/98 245 Pizza Exp 1966.34 1928.15 (38.18) 22/04/99 347 Misys 2028.71 1887.68 (141.03) 27/01/99 74 Dell (US) 2007.42 1838.79 (168.63) 19/12/97 783 Rentokil 2046.53 1855.71 (190.82) 17/04/98 169 EMAP 2341.32 2070.50 (270.82) 17/07/98 266 Unilever 2052.00 1558.76 (493.24) Cash: £3,433.46 Current Total : £16,785.20 Total Invested: £18,184.62 Profit/(Loss) : (£1,399.42) Value Per Share Day Month Year Qualiport -0.43% -1.10% -10.75% FTSE 100 0.57% -0.48% 5.43% FTSE All Share 0.50% -0.23% 9.15%