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Rentokil Initial PLC (LSE:RTO) shares fell more than 17% on Wednesday following a warning about disappointing sales performance in North America over the past two months. The company indicated that profits are likely to be affected by higher costs and currency fluctuations.
Organic revenue growth for the company's US and Canadian operations is now projected to be around 1% for the second half of the year, a significant drop from the 2.8% achieved in the first half.
Despite previous optimism about positive momentum in North American sales at the end of the second quarter, Rentokil reported that trading in July and August was worse than anticipated. The company also noted “modest disruption” from integrating branches after last year’s major Terminix acquisition.
The full-year adjusted profit before tax is now anticipated to be approximately £700 million, a decrease from £766 million the previous year and falling short of analyst predictions that had projected either a similar or higher level of profit.
The revised profit forecast reflects lower sales expectations and about £50 million in additional costs. These extra expenses stem from over-resourcing within sales and service teams, which resulted from fewer sales leads than expected. Increased overtime spending, materials, and consumables also contributed to the higher costs. Furthermore, a £10 million adverse impact from the strengthening of the pound against the US dollar is anticipated.
Despite these challenges, Rentokil remains confident in the fundamental strength of its North American business. The company highlighted that substantial structural growth opportunities, bolstered by the benefits of the Terminix acquisition, continue to present significant value creation potential, although it may take longer to realize than initially anticipated.
The sharp decline in share value to 394.17p on Wednesday morning, with earlier drops below 390p, reflects market reaction to these developments. These levels have not been seen since the early pandemic lockdowns in 2020, underscoring the severity of the market’s response to the company’s updated outlook.
