CONSUMER CYCLICALS
- It has clarified that a guided to "modest deleveraging" this year (from net 2.8x) will instead be unch. CFO goes on "we are well within the range of our current BBB flat rating. So, we do have a medium-term target to get to 2 to 2.5 times, but we're really not that far off and that will give us a substantial headroom against a BBB flat and actually might even probably put us into a BBB+ category. So I'm not remotely concerned about the rating."
- Leverage is in upgrade threshold (S&P adj. <3x needed, adjustments are low/+0.1x) BUT we doubt S&P will move it given it saw client retention rate declining or unexpected difficulties on efficient integration of acquisitions as rating negatives.
- On the former it said today; "customer retention as we measure it and we've measured it since, I don't know, probably 60 years is a revenue-based concept. So when measured by revenue, customer retention remained stable...BUT customer retention by customer number by the volume of customers absolutely needs to improve."
- For reference 1H NA customer retention was stable just shy of 80% vs. rest of Group at 85-86% (on avg.). Pre-2022 it's smaller US presence ran 82.5% vs. Terminix 75-76% - hence blended average now.
- It also confirmed market share losses; "market growth in US pest control seems to be about its normal level that 4% to 5%, give or take. Clearly, with us growing at the 1% mark, we are growing less than the market. So that by definition means we are losing market-share." (it's referring to NA market which is 2/3rds of revenue & bottom-line).
- The $6.7b acquisition of Terminix in late '22 still seems to also be driving integration issues - equities bore the bulk of financing for that and credit has been shielded from its issues on firm cap. allocation policies (thus far).
- Front maturity is a €400m Nov '24 - it has indicated it will refi that line but also notes there is a $700m $TL due next year. It is thinking about if it will issue for both at once and is flexible on timing. Re. currency it notes most debt is swapped back into $s to match 2/3 of earnings coming from there and adds "clearly, now, with our bigger us presence, we will consider raising dollars in the US in vanilla issuance". Reduces risk of € supply given 3/4 of current gross debt in € bonds.
Other asides;
- As expected it refused to comment on both Nelson Peltz and his activist Trian fund taking a stake and/or the rumours of Phillip Jansen led PE interest. Reminder the latter was downplayed by other sources (as not being true).
3Q results come on the 17th of October and we expect it will give FY25 guidance numbers then. We already know July and August have been weak (in NA) - unless it sees a reversal over the next month be prepared for negativity to be carried over. As we said this morning equity moves look worse than the guidance cut (we see -7% to FY estimates) in part because they were holding onto +18% on hopes and rumours (Peltz/Jansen).
For credit, low cash bonds are also the only ones with 1.25% step-up (kicks in on any rater moving into HY). Including the support from that and excluding the €24s we see pricing of a PE linked CoC on HY ratings as;
- €26s; 12%
- €28s; 11%
See below for the FV's we have used. They are inside the other lines to account for the step-up. Again to emphasise we only see the 1.25% step-up on the €24/26/28s. We can sympathise with longs in both these lines, would be cautious of firming up a view on the 30s ahead of Q3 earnings in a month (is wide - now only 14bps away from rising star but potential M&A supply straddled Elis) and see alternatives with no spread give-up for the 27s (Securitas, ISS global etc).
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