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Edited Transcript of BNZL.L earnings conference call or presentation 27-Aug-19 8:30am GMT

Half Year 2019 Bunzl plc Earnings Presentation

London Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Bunzl PLC earnings conference call or presentation Tuesday, August 27, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. May

Bunzl plc - Finance Director & Director

* Frank van Zanten

Bunzl plc - CEO & Executive Director

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Conference Call Participants

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* Andrew Charles Grobler

Crédit Suisse AG, Research Division - Analyst

* Edward Stanley

Morgan Stanley, Research Division - Equity Analyst

* Paul Daniel Alasdair Checketts

Barclays Bank PLC, Research Division - Director

* Rajesh Kumar

HSBC, Research Division - Analyst

* Rory Edward McKenzie

UBS Investment Bank, Research Division - European Support Services Analyst

* Sylvia Pavlova Barker

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Frank van Zanten, Bunzl plc - CEO & Executive Director [1]

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Good morning, everyone, and welcome to Bunzl's 2019 Half Year Results Presentation. After a few words from me, Brian will take you through the financial results, and I will then review our operations and talk about a consistent and proven strategy to develop the business. Again, the -- against the background of slowing macroeconomic and market conditions and as indicated in our preclose statement at the end of June, underlying revenue growth during the period was approximately 1% with a similar impact from acquisitions, net of disposals. Despite this lower-than-normal level of growth, Bunzl has again produced a resilient performance with margins holding up well. The group operating margin on a comparable constant exchange rate basis was only down 6 basis points, and operating cash flow was again strong with cash conversion at 96%. So far this year, our committed spend on acquisitions is GBP 98 million. The pipeline is active, and we expect to complete further transactions before the year-end.

Brian will now take you through the financial results.

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Brian J. May, Bunzl plc - Finance Director & Director [2]

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Thank you, Frank, and good morning, ladies and gentlemen. As in previous presentations, in the following slides, we have presented both actual and constant exchange growth percentages. In 2019, there has been a circa 2% positive impact of exchange translation, and in reviewing the income statement, as always, I will refer to growth at constant exchange rates.

Now starting with revenue. In the first half of 2019, revenue grew by 1.2% to more than GBP 4.5 billion. After adjusting for the impact of the disposal of 2 non-core businesses and approximately 1 extra trading day in 2018, underlying organic growth was 0.8%, with 1.5% contributed by acquisitions made in 2018 and 2019. Before turning to the income statement, I would like to take a few moments to share with you the impact on Bunzl of the new lease accounting standard, IFRS 16, which is effective from the 1st of January, 2019. Consistent with the guidance given in February, the impact on the income statement is that adjusted operating profits increased by GBP 10.9 million and finance expense increased by GBP 11.6 million, with a net reduction in adjusted profit before tax of GBP 0.7 million and adjusted earnings per share down by GBP 0.002. The main impact on the balance sheet at the 30th of June is that leased assets with a net book value of GBP 456.9 million have been capitalized as right-of-use assets, and corresponding lease liabilities of GBP 504.4 million have also been recognized. Despite the financial reporting changes required by IFRS 16, in substance, nothing has changed for Bunzl. We continue to lease our fixed assets. There is no impact on cash flow. There has been no impact on our existing debt covenants, and our financing headroom is unchanged.

So now turning to the income statement. Adjusted operating profit for the first half of 2019 was GBP 302.7 million with operating margin at 6.7%, up 12 basis points. However, in presenting these results and as required by IFRS, the statutory results for 2019 are presented under IFRS 16, whereas the comparative results for 2018 are presented under the old lease accounting standard, IAS 17. In order to aid comparability, we have also included pro forma results for 2019 under IAS 17, and in reviewing the income statement, I will now focus on growth rates on an IAS 17 basis. Adjusted operating profit grew by 0.3% to GBP 291.8 million with the operating margin at constant exchange rates at 6.4%. On the face of it, this appears to be a 20 basis point decline in the operating margin, however, due to rounding, the actual reduction is 12 basis points and at constant exchange rates, 6 basis points. Adjusted profit before tax increased by 0.8% to GBP 264.9 million due to the increase in adjusted operating profit and a small reduction in net finance expense.

Turning to the next slide. The effective tax rate for the period is 23.8%, the same rate as for the first half of 2018. With an increase in the weighted average number of shares, adjusted earnings per share of GBP 0.606 were the same as in 2018, although up 2% at actual exchange rates. We have declared an interim dividend of GBP 0.155 per share, an increase of 2%, continuing our long-term track record of dividend growth. Our consistent dividend growth over many years reflects our focus on long-term value creation. Looking back over the past 26 years, we are one of only a handful of FTSE 100 companies, whose dividends have increased each year. As you can see from the chart, our dividends have increased consistently every year since 1992, broadly in line with our growth in earnings. This has been possible due to the resilient nature of our business model, which has resulted in sustained growth in earnings and strong cash generation.

Now turning to the balance sheet. Intangible assets increased by GBP 45 million due to additions from acquisitions, partly offset by amortization. Our committed acquisition spend so far this year is GBP 98 million, and we are in active discussions with a number of targets, which we expect will lead to further deals during the remainder of the year. Working capital has increased by GBP 73 million, principally due to acquisitions, the impact of IFRS 16 and a small underlying increase. Net debt, excluding lease liabilities, ended the period at GBP 1.4 billion, GBP 36 million higher than December 2018. Net debt to EBITDA on a covenants basis was 2.1x, which is at the lower end of our target range of 2 to 2.5x. The return on average operating capital on an IAS 17 basis remains high at 49%, although down on the prior year due to lower returns from the underlying business.

Now turning to the cash flow statement. The first half of 2019 was another strong period of cash generation for the group with free cash flow of GBP 187 million and cash conversion at 96%.

During the period, we paid dividends of GBP 51 million and invested GBP 145 million in acquisitions, which includes payments for acquisitions completed in prior periods. The next slide highlights the consistently high level of cash conversion of the group over many years. The average rate of cash conversion, which is stated after capital expenditure, has been 97%. So broadly, each pound of operating profit has been converted into a pound of cash.

The ability to consistently deliver a high rate of cash conversion on earnings, which have compounded at over 10% per annum since 2004, is at the heart of the Bunzl business model. During this period, it has enabled us to grow dividends strongly and consistently, paying out a total of GBP 1.3 billion, while at the same time, we have been able to invest GBP 3.3 billion in self-funded acquisitions, which have compounded over multiple years to generate substantial growth. To summarize, in the first half of 2019, despite a lower-than-normal rate of underlying organic revenue growth and the impact of disposals in the prior year, Bunzl has once again delivered a resilient financial performance. Cash conversion remained strong at 96%, which has enabled us to spend approximately GBP 100 million on acquisitions in the period. Our ability to generate strong cash flow with net debt to EBITDA at the lower end of our target range should enable us to continue to grow. Well, that concludes my 28th and final results presentation. It's been my privilege to have been part of such a highly successful group as Bunzl over the past 26 years, 14 of them as CFO. I have very much enjoyed our interactions during those years, and I truly look forward to answering the good questions that I expect you will pose between now and the end of the year when I step down from the Board. I'm pleased that my successor, Richard Howes, who is at the back of the room today, has been able to join us, and I know that with Richard, Bunzl's financial future is in very safe hands.

And at this point, I would like to hand over to Frank.

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Frank van Zanten, Bunzl plc - CEO & Executive Director [3]

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Thank you, Brian. And as part of my presentation today, I will talk about the following: a review of our operations during the first half of the year; I will look forward and consider the prospects for the rest of the year; and finally, I will talk about our consistent and proven strategy to grow and develop our business.

We continue to be well diversified by customer markets with strong positions in a variety of different customer sectors, including foodservice, grocery, cleaning & hygiene and healthcare, which have proven in the past to be more resilient in difficult economic circumstances. Together, these sectors account for some 3/4 of our total revenue.

As an international business with a global footprint, we are organized by geographic business area, and you can see here the contribution to the group results of the revenue and operating profit of each one. We have a broad and diversified portfolio of businesses across 31 countries and 6 market sectors with 87% of the group's revenue generated outside the U.K. and Ireland. In reviewing the first half results, I will do so on an IAS 17 basis. In North America, revenue increased by 0.7% to GBP 2.6 billion due to slowing underlying organic growth of 0.1% and the impact of recent acquisitions. Operating profit was GBP 151.1 million, up 1.4% with the operating margin unchanged at 5.7%. A combination of positive sales mix and a focus on profitable organic growth as well as improved sourcing and transactional execution has delivered improved gross margins. This together with cost savings generated by the reorganization of our 2 largest businesses, grocery and redistribution, in the second half of 2018, have helped to mitigate inflationary pressures on operating cost. In our largest business serving the U.S. grocery sector, with the additional business won towards the end of 2016 now fully absorbed, revenue declined due to some account-specific price deflation with a large customer and a small net reduction in sales as a result of some competitive tenders. However, gross margins increased slightly. The redistribution business serving the foodservice and cleaning & hygiene sectors experienced a marginal decline in revenue as we focused on profitable organic growth within our value-added category management programs and moved away from some unprofitable business during the second quarter of the year. The more focused and streamlined organization structure implemented across our grocery and redistribution businesses is operating well. Our retail supplies business experienced some growth despite a challenging retail environment. The integration of DDS, which we acquired in 2017 has led to a reduction in operating cost as we achieved significant synergies from the acquisition, although the additional savings during the period were broadly offset by cost increases in our warehousing operations.

In our businesses serving the safety, convenience store, processor and agricultural sector, we saw strong overall growth. In particular, our safety business has grown well against the backdrop of generally favorable but more recently moderating economic conditions. During the period, we have faced product cost increases from import tariffs, the impact of which has been successfully mitigated through a combination of price increases to customers, purchase price concessions from suppliers and some resourcing of products to countries which do not attract import tariffs. We also continue to invest in the sector with the acquisition in February of Liberty Glove & Safety. Revenue in Continental Europe rose by 3.7% to GBP 960 million due to underlying organic growth of 2.6%, which was complemented by the impact of recent acquisitions, partly offset by the disposal of OPM in France in February 2018. Operating profit was GBP 89.4 million, up 3.2% with the operating margin at 9.9%, unchanged at constant exchange rates. Overall in France, revenue excluding OPM was higher as growth in cleaning & hygiene was partly offset by lower sales in personal protection equipment. In The Netherlands, there was good overall sales growth with increases in most sectors. Cool Pak was acquired in April and is integrating well. In Denmark, revenue increased with strong performances in most sectors. CM Supply, which we acquired in December 2018, is trading ahead of expectations as is Enor in Norway, which we also acquired last year. Sales have grown strongly in Spain. The cleaning & hygiene business continues to enjoy good growth. In the safety sector, however, sales declined slightly due to lower levels of industrial activity in the country. Our medical supplies business recorded another high -- another period of high growth due to new products and the enhanced use of e-marketing to increase online sales. Our industrial and disposable packaging business also delivered high levels of growth. In Turkey, sales have grown strongly due to both increased volumes and the positive impact of price rises following the devaluation of the Turkish lira. In U.K and Ireland, revenue decreased by 3.7% to GBP 603 million principally due to the impact of the disposal of the higher-than-average operating margin marketing services business in June, 2018. Underlying organic revenue was down 0.2% against the background of political and economic uncertainty and challenging market conditions.

Operating profit was GBP 35.6 million, down 10.3% with the operating margin, 5.9%, down 40 basis points. GBP 2.2 million of the decline in operating profit is as a result of the disposal last year. Our cleaning & hygiene supplies business has seen strong growth during the period. Although our safety business managed to secure a number of new customers, the continued slowdown in the industrial and the construction sectors led to a weaker performance in the first half of the year. The combination of rising food and labor cost in the catering industry, coupled with excess capacity amongst many high-street catering outlets, has resulted in tough trading conditions in our hospitality business during the first half of the year. As anticipated, the introduction of the new centrally funded NHS operating model in April this year has caused a reduction in sales to NHS hospital, trust customers in England. As a result, we have downsized this part of our healthcare business. However, we have won new business with private hospitals and nursing homes so that overall revenue for the period was unchanged, although margins have come under pressure. Our grocery business has grown with new customer wins and additional product categories with existing customers. A supermarket chain, whose business was lost in 2016, has recently confirmed their return to us, and we started supply earlier this month. Our nonfood retail supply businesses have been impacted by challenging retail sector. Our business in Ireland has continued to grow. Plans are underway to open a new distribution center in Dublin at the end of the year, which will provide further scope for expansion. In Rest of the World, revenue increased 8.2% to GBP 385 million due to underlying organic growth of 2.6% and the impact of the acquisition of Volk do Brasil at the beginning of the year. Operating profit was GBP 27.4 million, up 0.7% with the operating margin, 7.1%, down 50 basis points at constant exchange rates due to variable market conditions across the countries within the business area.

Including the impact of Volk do Brasil, overall, we saw good sales and operating profit growth in Latin America, although difficult trading conditions resulted in margin pressures in a number of businesses in the regions -- in the region, particularly in Brazil healthcare and Mexico safety. In Asia Pacific, with a high proportion of imports into Australia, profitability was impacted by a weakness in the Australian dollar.

And now turning to the prospects for the rest of the year. The group's expectations for the year ending 31st December, 2019 remain unchanged with overall trading consistent with the slowing underlying revenue growth indicated at the time of both the first quarter trading statement in April and the preclose statement in June. In North America, we expect underlying revenue to reduce slightly, principally due to lower sales to a large grocery customer caused by some account-specific product specification changes and price deflation. There will however be some benefit from improved sourcing and the cost savings generated by the reorganization of our 2 largest businesses in the second half of 2018. In Continental Europe, the combination of organic growth and acquisitions should lead to overall growth for the year. The performance of U.K. and Ireland will be impacted by the continued challenging trading environment, which has affected our business in the first half. In Rest of the World, we expect the performance seen in the first half to continue for the remainder of the year. Against the backdrop of slowing macroeconomic and market conditions, including uncertainties concerning global trade, the Board believes that our strong competitive position, diversified and resilient businesses and ability to consolidate our fragmented markets further will lead to continued progress.

I would now like to move on to discuss our consistent and proven compounding strategy to grow and develop the business which remains unchanged and is based on three key areas: profitable organic growth, improving our operating model, and growing by acquisition. Growing Bunzl organically is a fundamental part of our strategy to enhance shareholder value. Over a sustained period of time, organic revenue growth has typically exceeded the increase in the weighted average of real GDP growth across the geographies in which we operate. We see this growth as coming from 3 areas, being volume, price, and mix. Volume growth through increased sales to both existing and new customers is driven by our local field sales and customer service teams, while price is influenced by market dynamics, including the impact of foreign exchange movements. As far as the mix is concerned, growth is affected by the balance between sales of manufacturer brands and our own brands, which currently account for approximately 20% of our products sold. A key part of our strategy, which over time has accounted for approximately 3/4 of our overall growth is our ongoing program of focused and targeted acquisitions in both new and existing market sectors and geographies. Since 2004, we have made 159 acquisitions for a total committed spend of GBP 3.4 billion without the need to raise equity.

Our 2019 year-to-date committed spend is GBP 98 million with an average annual spend since 2015 of over GBP 300 million. When we look at growth opportunities in both our existing markets and potential new markets, they are significant. For example, taking our level of penetration in the U.K. and Ireland as a benchmark, if our existing geographic footprint in Continental Europe was the same relative size, our annual revenue would be about GBP 6 billion compared with GBP 1.8 billion in Continental Europe in 2018. With respect to potential markets, we see clear opportunities to expand in both existing and new sectors and by entering new countries.

It is encouraging to know that we still have many opportunities to go for.

That's the one. As a group, we have an excellent track record in making acquisitions. Our management team has a significant amount of expertise, and we are very disciplined when it comes to shortlisting businesses for acquisition and applying our criteria for acceptable financial returns.

Although we complete a number of transactions during the course of a year, we invariably say no to more opportunities than we say yes to.

As part of the acquisition process, we carry out very thorough due diligence and will, if necessary, walk away from a transaction if we find issues that we cannot adequately address. We also have a discipline that every year, we review with the Board acquisitions made 2 years previously. As part of the review, we compare the original investment case with the actual performance of the acquired company after purchase. During the last 18 months, the number of completed transactions has been somewhat lower than in recent years, but this is not because there are not now fewer opportunities, far from it. On our database, we currently have over 1,000 companies that would potentially be of interest to us. Given that many of our targets are family-run businesses, the timing of acquisitions is largely out of our control and like London buses, can be difficult to predict. You wait ages for one to come along and then 3 arrive all at once. We are currently in active discussions with a number of acquisition targets which we anticipate will result in additional deals during the remainder of the year.

In recent presentations, I have talked about our expertise in providing sustainable product solutions as part of our unique service offering and I would like to return to this today. Although we have offered environmentally friendly products for many years, we are increasingly using our expertise to work with our customers, suppliers and other stakeholders to innovate and bring more sustainable alternatives to market. In doing so, our customers look to us for trusted, practical advice and analysis, on which products can meet both their needs and future sustainability requirements. Given we are not a manufacturer, we're not tied to any specific types of materials or products, and as a result, we can provide an objective overview of the best solutions for each customer. We are currently further expanding our dedicated team of sustainability experts and are rolling out programs to help our customers understand their sustainability challenges and proactively address them. We are also using our position in the supply chain to help secure end-of-life options for our products. For example, for our supermarket customers in the U.K., we are exploring new ways to create a closed-loop solution. This will involve arranging for our customers plastic waste to be collected and transported to selected partners for recycling, following which, the recycled material will be used to manufacture new products, such as reusable shopping bags. We will subsequently deliver these recycled products to our customers. Another example of our specialist knowledge and expertise in the area of sustainable product solutions is a recently launched tool in the U.K., which is enabling our sales teams to provide agile product advice to our customers. It uses customers' product list to identify the relative sustainability of their single-use items. From this analysis, the tool drives intelligent data that is then used to create reports that inform our customers proactive decision-making on suitable product ranges. This tool takes a complex analysis of material type classification and cross-references it with current and prospective regulation to give customers an instant overview of relevant products that could be switched to alternative material types. By doing so, we can provide the best possible advice to our customers on sustainable products and work with them to shape their sustainability plans. Before I finish, I would like to share with you the details of the group's financial track record since 2004. Our resilient business model, which has typically helped us to achieve organic revenue growth above real GDP growth over a sustained period, has enabled us to deliver high rates of cash generation. This in turn gives us the ability to take advantage of market consolidation opportunities through the application of our disciplined approach to focused and targeted acquisitions over the longer term. We are very proud of what Bunzl has achieved over many years. Taken together, the strength, resilience and reliability of our consistent business model and strategy have enabled Bunzl to produce a strong long-term performance with a proven track record and should continue to serve the group well in the future.

Thank you for your attention, and we are now happy to take your questions.

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Questions and Answers

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Frank van Zanten, Bunzl plc - CEO & Executive Director [1]

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Rajesh.

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Rajesh Kumar, HSBC, Research Division - Analyst [2]

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Rajesh Kumar from HSBC. Just in terms of second half growth outlook, could you give us some color in terms of the trends you're seeing on volumes and pricing? And what sort of negotiations you're doing with your customers as well as suppliers? And the second one is on your own brand product compared to, say, 2005 to '10, it was about 8%, 9%. Now you're looking at about 20%. So clearly, you directly source these products. Is there a greater risk from tariffs to the margins or the sourcing pattern on these products which we need to consider? And finally, just in terms of M&A, have you seen any change in the price being asked by customers or reluctance to sell when economic outlook is slightly weaker?

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Frank van Zanten, Bunzl plc - CEO & Executive Director [3]

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Okay. Good. Okay, let me start with the growth outlook. Big picture, stepping back, looking at Bunzl, we are a real GDP-plus model and we've been that over a longer period of time. So that's -- I think, to picture it, and if you put information in your models, I think you need to start, obviously, with what your expectations are for the different areas. And I think in that way, we're a bit in an uncertain time because every day I wake up, I see a new Tweet and I don't know where the world is going. So it's a bit difficult to predict. Now having said that, if we look going forward where we are today and relate back to the prospect statement also, there's a couple of things. I think in North America, I think we see in terms of -- from a raw material point of view, probably relatively stable picture going forward, always a bit difficult to predict. We see a bit of a negative impact on price from this specific deflation in the second half for one of our -- from one of our larger customers. They've been respeccing products. They have been reducing prices. So that probably has an impact in the second half of about $50 million in -- and that will flow into the next year. Now on the other side, we will see some impact of tariffs coming -- kicking in. So I think there's different buckets. So negative on sort of the big customer deflation specification, pricing relatively stable in North America and obviously, tariffs having a little bit of a positive impact. If we look at own brand, it's one of our core part of our strategy to grow our own brand. And we want to do it in a balanced way because obviously, our relationship with our branded suppliers are of critical importance as well. We've been growing on average about 1% a year since 2005, you mentioned. Currently, we were around 20%. Now there is -- the increase of the 1% comes from, on the one hand, focus on growing own brands in our ongoing business. On the other hand, there's also positive mix coming from acquisitions. If you buy a safety business and that business has like 90% or 100% owned brand products, obviously, that helps your mix also. But it is certainly a key focus area for us to grow the own brand going forward. Now the risk on tariffs we have seen so far, we've been relatively successful. Let's say, the net impact so far of the tariffs has been a lot less than the gross impact. Why? I think there has been a change in currency between the Chinese currency and the dollar as a part of the increase disappears over the exchange. Part of it, our businesses went back to the Chinese suppliers and said, listen, we can't absorb these tariffs, you need to help us on the price. So suppliers made some concessions. Suppliers sometimes got a bit of a subsidy in China itself to make that happen. Also we've been looking at other sourcing countries like China. So if you source certain products that are also available in other countries, and there won't be any tariffs applied, then obviously, that helps you also going in. So, so far, we're quite pleased in terms of how we've managed the tariff increases.

On the M&A side, what I said in my speech also, M&A, it's a bit like the London buses. I'm very confident about our potential going forward. Obviously, I have a lot more visibility. We have an active pipeline. For us, the key point is buying good businesses, and I would say that a key part of the Bunzl acquisition story or a key part of the success of our acquisition story comes down to discipline. And there's a lot of potential out there. We have about 1,000 companies in the database. And it does happen that you sign people up for an LOI, and then you find things, and that's why you do this thorough due diligence or the results are not there or the fit is not great, and then we step back. So I'm always a lot more concerned about buying the wrong thing than not buying something that works out to be a problem. So -- and that's a big contributor to our successful strategy. So the potential is there in terms of acquisitions. It's like the London buses. We've seen 2 years ago, we had a huge spend of acquisitions, more than GBP 600 million. I think over -- on average, we spent about GBP 300 million. The potential is out there. We're a bit now on the lower end of our net debt-to-EBITDA level, maybe not a bad thing if you get near the end of the cycle, but we are ready to go. We got a very strong balance sheet. We deleverage very quickly. You know that if we don't buy anything, we deleverage by 0.4 of a turn and we can spend GBP 400 million a year currently and not deleverage. We can spend almost GBP 0.5 billion extra and we would go to 2.5 net debt to EBITDA. So Bunzl is a cash machine. We are delivering a lot of cash. There is potential. So longer term, we will develop the business in the right way. And I'm not losing any sleep over a half year or a year. Ultimately, we're in this business to do the right thing.

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Brian J. May, Bunzl plc - Finance Director & Director [4]

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And Rajesh, it's not a matter -- I think your question was about was it a lack of being able to reach price agreement with people or were people reluctant to sell. Very full pipeline as things came up in due diligence. One deal got right to the end and we discovered a tax situation in that deal. So we walk away or we try and get it, put right and come back to it later. So this is not a shortage of deals in the pipeline. One other thing, on the GBP 50 million impact on revenue in the second half, this is not a profit flow-through. Yes, it's -- the customer has gone to the suppliers it negotiates directly with, not us, has brought down the buying prices from those suppliers. So we then ship that product into the customer at the lower selling prices. Where we are impacted is the margin on that GBP 50 million reduction. So it's low single-digit millions in profit terms, but in revenue terms, it has a bigger impact.

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Frank van Zanten, Bunzl plc - CEO & Executive Director [5]

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So just a comment on the pricing of acquisitions. Obviously, people read articles every -- we're not stupid. People read the newspapers. They see that, let's say, on average, multiples tend to go up. Now the beauty in the Bunzl model is that we are consolidated very fragmented markets. And if you have competition in our field, that competition mainly comes from private equity if the deals are companies with more than GBP 100 million of sales or -- in euros or pounds or dollar. So it's the bigger deals that attracts attention from private equity. So what typically happens, if somebody comes to us and say, listen, I want to sell my business and I've read in the paper this kind of multiple, and I want that for my business, we say, listen, your business has a small base, so we have a lot to offer for Bunzl, within Bunzl, for the company. And that's not achievable. We are normally in this 6 to 8x range. We can sometimes stretch a little bit, but we basically tell them to go away in a nice way. And then often, 1 or 2 years later, they come back, they reflect that because ultimately they still want to sell the business and enjoy their retirement at some point.

Sylvia.

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Sylvia Pavlova Barker, JP Morgan Chase & Co, Research Division - Analyst [6]

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Sylvia Barker from JPMorgan. So the cost savings and gross margin actions in North America have obviously benefited the margins in the first half. So just wondering, are there other areas in North America or in other regions where you might see potential for more kind of root-and-branch reorganization of the business? I know that you always close down kind of warehouses where leases run out but anything more material? And then maybe just a comment on the customers emerging in foodservice in North America, maybe just talk us through kind of size and potential impact on that. And then finally, so you showed the footprint too, which obviously demonstrates that you've got quite a lot of data across the business. But I guess from the outside, it looks like you've got a lot of separate websites, and obviously, you roll up a lot of small companies with their own brands. But can you just help us maybe visualize what the data actually looks out in the back end? Do you have a huge database with all of these, essentially, catalogs by kind of vertical that you can access easily? Or is that something which is helpful to the business? Or is something that you're working on from a data point of view?

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Frank van Zanten, Bunzl plc - CEO & Executive Director [7]

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Okay. On the gross margin and cost, this is the second part of our strategy, the second pillar of our strategy, improving the, let's say, the operating model. I think a big initiative to, let's say, improve our gross margin levels is really around building the owned brand. That's -- and import. Don't forget, Bunzl is one of the -- probably only business that has a very sophisticated import organization in Shanghai where our businesses benefit from. We are growing our owned brand. Now that -- it's a bit like the treadmill, we spoke about it. It's running to stand still and protect your margin because if you make a like 7% operating margin, it is not a bad margin. In terms of improving the operations, this is a constant process. We just -- in the northern part of Ireland, we consolidated a number of warehouses into one brand-new warehouse. The same is going to happen now in Dublin. We just put 3 or 4 businesses in the Netherlands in one large warehouse, and we're going to open that in a couple of weeks' time. So we are constantly looking at areas to, let's say, consolidated warehouses but also on the back end of the business. Brian just organized a future finance conference, can we do more, across businesses, automation of payments, of booking invoices? All the things that are not customer-facing are basically in scope to make improvements.

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Brian J. May, Bunzl plc - Finance Director & Director [8]

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Just also to remind you that when you look at our cost base, 53% of our cost base is people, and we're a largely nonunionized environment, relatively easy to take people on and if necessary, if the economic circumstances prevail, then to also reduce, so quite flexible in that regard. You look at the rest of our cost base, you've got vehicles, which are leased, and they're on typically 5-year leases. So in any 1 year, about 20% of our fleet comes up for renewal. Again, a lot of flexibility on cost. Probably the least flexible area is the buildings, the warehouses. They're leased as well, typically, probably, 5- to 10-year-type leases. So not so easy to flex in the short term but certainly, the people and the vehicles are quite easy to flex up and down.

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Frank van Zanten, Bunzl plc - CEO & Executive Director [9]

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Your second question is about foodservice redistribution in the U.S. and the merger and consolidation. The -- it's difficult to say where that's going to go because you have 2 people, sometimes you deal with one company and not with the other company. Having said that, the reason why these food distributors do business with Bunzl is because we give them the ability to sell a very wide range of nonfood items to their customers, and they can't be stocking that in their warehouse because they don't have the turns, and we do have the turns. And also our sales people visit the end users and pull the business back to the redistribution company. So it's a bit early days to say where that's going because sometimes you deal with one part of the merger and not the other part. So it could open up an opportunity. It could create some risk, but it's a bit early to say where it's going. It's often not the first thing that people look at in terms of the cost items. They have bigger fish to fry. On the data, Bunzl is a very decentralized organization so we have quite a number of IT systems. We're trying to streamline that. In Europe, we are going more and more to one IT system, Microsoft Dynamics. We have more and more one e-commerce platform, same in the U.K. with Hybris. So we're trying to make more uniformity in terms of systems, and then that allows you to do more with the data, the data is mostly managed, let's say, on the local basis. Now you do -- you can create tools like the material footprint on the sustainability, which is quite powerful, which where -- we have data about the product materials and the customer often doesn't really have that insight. So they don't know where they are and they don't know where they should go to, and we are completely independent experts because we are not the manufacturer of plastic products. So we are agile in terms of our advice. So we use data there to help our customers to move into the right direction.

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Sylvia Pavlova Barker, JP Morgan Chase & Co, Research Division - Analyst [10]

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And so just in terms of the size of the foodservice customers, any indication to how material they are at the moment?

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Brian J. May, Bunzl plc - Finance Director & Director [11]

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Foodservice as a business there is just over $1 billion dollars a year.

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Sylvia Pavlova Barker, JP Morgan Chase & Co, Research Division - Analyst [12]

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Okay. But you wouldn't specify the North American...

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Frank van Zanten, Bunzl plc - CEO & Executive Director [13]

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No, we're not calling out the...

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Edward Stanley, Morgan Stanley, Research Division - Equity Analyst [14]

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It's Ed Stanley from Morgan Stanley. I know you -- I just want to come back on the tariff point. You say that the net impact has been broadly sort of stable, but can you give any more detail on the gross impact of the tariffs? Secondly, on wage inflation, can you give us a feel for what that's running at in North America in terms of drivers or warehouse [staff]? And finally, if you look country by country through Latin America, it looks like it's sort of weaker across the board. Is that general macro downturn? Or is that forcing competitors to be more aggressive than they otherwise would be on price?

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Brian J. May, Bunzl plc - Finance Director & Director [15]

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So on tariffs, first, Ed, actually, tariffs have been slightly positive for us net. The broadly -- it's broadly on the positive side. You might know that there was the first tariffs came into force in September of last year at 10% tariff, then a further 15% was applied in May '19. So back to Frank's earlier point about either renegotiating with Chinese suppliers, resourcing to different countries, getting price down because of the weakness of the Chinese currency, substitutions, all sorts of things like that, but net-net, we saw a positive impact on revenue and also on profit from tariffs. And the May tariffs, after 15%, they've largely followed that line and that will flow through into the second half. There's the latest tariffs, which is on a -- it's a smaller group for us, part of those have been delayed until the end of the year as you probably heard last week or 10 days ago, particularly ones that were consumer facing. Roughly, half of the tariff impact will kick in for us in September. So an extra 10% tariff and the other half will kick in in December. So some more hopefully net positive to come. The other 2 parts of your question, Ed? Just a reminder please.

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Edward Stanley, Morgan Stanley, Research Division - Equity Analyst [16]

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On inflationary pressure in North America.

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Brian J. May, Bunzl plc - Finance Director & Director [17]

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Well, I think, look, wage inflation has been much more moderate this year than the previous year. Still, it's been an impact we've had to row against a little, but certainly, that sort of a very, very hot labor market has softened a little. An example would be on freight -- external freight, where we've seen some rates come down year-on-year, some go up a little but broadly neutral, and freight has a large element of labor in that. The type of labor inflation we see is in sort of the normal range, sort of 2%, 3% area, close to 3% than the 2% probably, but nothing extraordinary.

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Edward Stanley, Morgan Stanley, Research Division - Equity Analyst [18]

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And Latin America?

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Brian J. May, Bunzl plc - Finance Director & Director [19]

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Latin America is not every country, I mean you're a bit blanked there. I think [particularly] we called out 2 particular areas that we've found more difficult. One is Mexico. Our safety business there has really been held back by what can only be described as a reasonably difficult political and economic backdrop there. It's been a change in government. There's quite a lot of economic uncertainty, and industry and construction, which would be the area we'd be supplying, particularly industry will have slowed or will have certainly seen some lack of confidence, which has a bit of an impact on our business, and it is a particular safety business there. When we look at our foodservice and grocery business in Mexico, it's doing fine. So is the safety area in Mexico. I mean healthcare in Brazil, we're calling out. Safety is doing well in Brazil, which is our biggest business in Brazil, but healthcare, we have a particular business where it's more of a local market positioning situation, which we're focusing on turning around. The other 2 callouts there.

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Frank van Zanten, Bunzl plc - CEO & Executive Director [20]

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Paul.

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Paul Daniel Alasdair Checketts, Barclays Bank PLC, Research Division - Director [21]

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It's Paul Checketts from Barclays Capital. I think I've got 2. Can I sort of ask you sort of bigger picture on some of the end markets? If I'm thinking medium-term growth and you look at the areas that have seen some pressure this year, grocery, food -- so grocery, general retail and perhaps foodservice. Are you worried at all that your customers in those segments are facing structural challenges and therefore, you have a growth headwind over a longer period? That's the first one. And then the second one is could you give us the split of percent of Continental Europe revenues now? Just a feel for that, how it looks.

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Frank van Zanten, Bunzl plc - CEO & Executive Director [22]

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Okay. Big picture markets. I think grocery is a tough market. It's big player, certainly, in North America big players, strong competition. Obviously, the -- everybody tries to grow online home delivery, click and collect. So there's a lot of focus on cost. I would say that there are 2 elements that sort of go in different directions. What probably goes against us is just general pressure of the sector. What probably helps us is that where there is pressure in these sectors, and that applies the same for the retail, there's a tendency towards more outsourcing. If you're a big supermarket chain and you're under pressure, you're not going to think about in-sourcing cost items into your warehouse and build warehouses, hire warehouse and stuff like that. But it's a tough sector. We've seen some store contraction also because of online. The same in retail. Retail -- bricks-and-mortar retail is an area that is under pressure. Now having said that I think we certainly in North America have quite a unique situation because we merged DDS and Schwarz, and we have a very strong national presence, very good product range suited for the retail business. So our businesses has done quite well. We actually delivered some growth in the first half in retail. But longer term, the retail sector I think will face some pressures I think, and we need to make sure we deal with that in the right way. I think foodservice is an area -- people need to eat. I think there's a trend towards eating outside. Now we see in the U.K. that the business is struggling a little bit more. We all know the high street or the restaurant chains that are under pressure, the rents are very high, food costs going up, maybe some issues with Brexit and stuff, but longer term, I think going out, food is something that should develop well. Now in certain areas, you got the topic of sustainability appearing in foodservice, and we are there sort of to advise our customers. Difficult to -- it's a bit early. When you talk about sustainability, people talk about the 3 Rs. It's about reduce, replace, and recycle. There will be a focus by certain customers on, let's say, reducing the amount of plastics. So we are very busy in terms of helping them transform into a replace situation, and we're also thinking about recycling and playing a role in towards sort of the closed-loop situation. So that's sort of the picture by sectors. Obviously, safety, very, very strong, I think, process, so we have a good position. Cleaning & hygiene, very resilient. Think about cleaning & hygiene, biggest product group, toilet paper, not particularly cyclical. So that will continue.

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Brian J. May, Bunzl plc - Finance Director & Director [23]

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And you wanted to know the answer to -- you want to know what the shape of Europe was. Circa 40% France, north of 20%, Benelux, and then the rest. That's as much you're getting from me.

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Frank van Zanten, Bunzl plc - CEO & Executive Director [24]

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Andy.

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Andrew Charles Grobler, Crédit Suisse AG, Research Division - Analyst [25]

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Andrew Grobler from Crédit Suisse. Just a couple, if I may. Both in North America, asset turns were down again in North America. Could you talk through why that's the case? And then the second, unrelated. With margins basically flat, you talked about better gross margins some savings in incremental cost. Can you just talk us through [the bridge of] what went up and went down? [So we get an idea on how much was it really?] Particularly, within gross margins, why those were better, [including something that's helped margins] (inaudible)

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Brian J. May, Bunzl plc - Finance Director & Director [26]

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Okay, asset turns. First of all acquisition of Liberty Glove & Safety, that's an owned brand safety business so the asset turn there is lower than the average by definition so there will be a bit of a mix effect from that. Our -- if you took a look at our return on average operating capital, that's a 12-month rolling, so you've got the 6 months of last year where the asset turns were lower, so there's an element of that. But there's always a little room for improvement on the working capital side, I would say, particularly in North America. And we're actively pinpointing 1 or 2 areas where we can extract a bit more working capital over time. In terms of -- what was the second part of your question, Andy?

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Frank van Zanten, Bunzl plc - CEO & Executive Director [27]

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Margin -- gross margins.

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Brian J. May, Bunzl plc - Finance Director & Director [28]

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Gross margin. To be honest, the level of granular detail there is not going to be -- I'm not going to be able to reconcile it for you. I'll give you some ideas of the things we do. Obviously, trying to increase the proportion of imports helps -- helps improve margins, negotiations with suppliers helps improve margins, product substitution helps improve margins and also trying to get some price increases through with customers helps margins. It's a combination of all those things. But we've got specialist teams obviously, in sourcing doing those things. There's also a bit of a mix effect. If you look at where we grew least strongly was in grocery and that's got the lowest gross margins. Where have we grown most strongly? In safety, where we've got the highest gross margin. So there is also a margin mix effect going on there.

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Frank van Zanten, Bunzl plc - CEO & Executive Director [29]

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Rory.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [30]

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It's Rory McKenzie from UBS. And just on the U.S. again, sorry. We've seen some of the taxi companies struggle to pass through some price increases in the U.S. And then you're also talking about moving away to essentially more effective tenders. So interested to know what segments in that particular year and deepening it with the problems from the tariffs -- and I'll carry on. Do you think it's from the tariffs? Or whether they're kind of wide issues in those sectors? Just that one first.

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Frank van Zanten, Bunzl plc - CEO & Executive Director [31]

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Okay. No the reason why we walked away from a particular piece in --of business was in the redistribution space. And we are constantly reviewing our customer profitability and this was a specific situation where it was clear that we were not making sufficient money out of the business. So we went to the customer and said, listen, it doesn't work for us, so can you take it back, which caused us some problems and they want to give us back and gave a bit better margin. So it has nothing to do with tariffs. So specific situation, let's say, there's a lot of work happening in the whole customer profitability area. These days, with the lack of drivers and warehouse people and capacity I think our available capacity is something that is worth something, especially, when you are a national player. And I think certainly, much more awareness about that -- we need to make sure that we use that capacity to make good returns. And this was an example where it fell true and we said, not for us.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [32]

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Maybe secondly, if I can. On this kind of closed-loop system you're talking about, how new or big is that? Do you have any example contracts of where you've expanded your service lines there? And do you see Bunzl as a complete end-to-end operator in that kind of a world?

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Frank van Zanten, Bunzl plc - CEO & Executive Director [33]

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Yes, it's a good question. This is really sort of dipping our toes in the water. It's very experimental. Early days, we are looking at things, customer is very interested. We are trying to find a way to sort of manage that. I wouldn't expect Bunzl to become the largest recycling company in the world, certainly not. But I'm also not saying we will never enter that area in a small way. It's something we are reviewing, but let's say, the whole closed-loop is something that is quite prominent in the whole sustainability area. So if we can support a situation where ultimately we play an important role in terms of giving used products a new life, it's something that will be a good thing and I'm particularly passionate about also.

Any more questions? No? Okay, before bringing this meeting to a close, I wanted to express my personal thanks to Brian. Brian has been with the business since 1993. And I remember meeting this young man in 1994 without a beard at the time when I sold our business to Bunzl.

Brian, it has been a real privilege and pleasure to have worked with you for almost a quarter of a century. It's amazing. And especially during the last few years, we spent more time together than probably Brian spent with his wife, Emma and I spent with my wife, Marianne. We had great business discussions. Also tough discussions, but that was always about football, and especially, last year, when Ajax did a lot better than Arsenal, that was not always an easy topic. Although Brian did his last 28th results presentation, he will still be on the Board until the end of the year and will be actively helping us early next year also on a few things. There's no question about that Brian made an enormous contribution to the success of Bunzl in the past and still is doing every day. Brian is a man of great integrity and ability, and we thank him for his dedicated service.

We have an excellent replacement in Richard Howes in the back of the room, but Brian will be sorely missed and he leaves with our best wishes.

Thank you, Brian. And thank you all for coming to the London Stock Exchange.