Rentokil's City Link finally on the road to recovery

Is Rentokil finally set to return to the glory days of the nineties, when it used to regularly rack up rises in profits of more than twenty per cent? Investors certainly seem to think so, with shares rising sharply on the announcement of 75 per cent higher pre-tax profits for the half year.

The results revealed the company's long-time bugbear, courier service City Link, finally showed signs of a longed-for recovery having been in the red since 2007, positing a 5.3% rise in revenues in the three months to the end of June, to £76m.

That said, its troubles are by no means over yet. The division is still losing money, including £5.8m in the second quarter alone, and is still expecting to turn in a loss in the third quarter (Q3). Things are looking up after that though, with the firm targeting a return to profitability in the final three months of the year, although a full year divisional loss of between £17m and £20m is expected for the year as a whole.

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"City Link's recovery plan is progressing in line with expectations, both in terms of financial performance and underlying action plan," the group said.

"We anticipate that continued growth, coupled with further productivity improvement at City Link, will deliver year-on-year improvement in financial performance at constant exchange rates in Q3, and most notably in Q4 this year."

So what has the company been doing to bring about this turnaround? Well, for a start it implemented a comprehensive recovery plan which targets productivity savings primarily through driver productivity, supported by route and round optimisation and a move to variable pay for owner drivers. There are also initiatives to reduce trunking, warehouse operations and back office costs.

'The plan is progressing on track', seems to be the message in Friday's results, already evidenced by the 18.3% reduction in the courier firm's second quarter losses to £5.8m. That said, there was an air of caution to the company's report, in which it said revenue in the division "only" increased by 3.5% in the first half, something it blamed on a change in customer mix, which limited the benefits of a 14% increase in volume compared to the prior year.

Other steps being taken include improvements to hub and line haul efficiencies, with a full route re-design scheduled for completion in the third quarter.

Furthermore, the firm said the depot network continues to be consolidated with a reduction of three sites in the first half, while investment in improved scanning technology is being made to drive further quality.

The company also successfully introduced customer care initiatives in the business, something it is now rolling out across the company.

As a result, City Link's revenue for the half year was £149.5m, 3.5% higher compared to the same half the previous year, although adjusted operating loss for the six months was £18.5m, down 3.9% on the same period the previous year.