Earnings Transcript for BZLFY - Q2 Fiscal Year 2019

Frank van Zanten: Good morning, everyone, and welcome to Bunzl’s 2019 Half-Year Results Presentation. After few words from me, Brian will take you through the financial results and I will then review our operations and talk about our consistent and proven strategy to develop the business. Against the background of slowing macroeconomic and market conditions and as indicated in our pre-close 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 six basis points and operating cash flow was again strong with cash conversion at 96%. So far this year our committed spend on acquisitions is £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.

Brian May: 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 £4.5 billion. After adjusting the impact of the disposal of two non-core businesses and approximately one 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 £10.9 million and finance expense increased by £11.6 million with a net reduction in adjusted profit before tax of £0.7 million and adjusted earnings per share down by 0.2 Pence. The main impact on the balance sheet at the 30 of June is the leased assets with a net book value of £456.9 million have been capitalized as right of used assets and corresponding lease liabilities of £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-off 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 £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 £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 constant exchange rate is six basis points. Adjusted profit before tax increased by 0.8% to £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 60.6 P were the same as in 2018 although up 2% at actual exchange rates. We have declared an interim dividend of 15.5 P 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 £45 million due to additions from acquisitions, partly offset by amortization. Our committed acquisition spend so far this year is £98 million and we’re 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 £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 £1.4 billion, £36 million higher than December 2018. Net debt to EBITDA on a covenants basis was 2.1 times, which is at the lower end of our target range of 2 to 2.5 times. 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 £187 million and cash conversion at 96%. During the period, we paid dividends of £51 million and invested £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 profits 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 total of £1.3 billion, while at the same time we've been able to invest £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 remains strong at 96%, which has enabled us to spend approximately £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 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, he 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'd like to hand over to Frank.

Frank van Zanten: Thank you, Brian. As part of my presentation today, I will talk about the following. The 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 food service, 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 three quarters 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 six 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 £2.6 billion due to slowing underlying organic growth of 0.1% and the impact of recent acquisitions. Operating profit was £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 two largest businesses, grocery and redistribution in the second half of 2018 have helped to mitigate inflationary pressures on operating costs. In our largest business serving the U.S. grocery sector, with the additional business one 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 food service 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 the challenging retail environment. The integration of DDS, which we acquired in 2017 has led to a reduction in operating costs 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 agriculture 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 with 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 £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 £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. Coolpack 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, SS 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 £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 £35.6 million down 10.3% with the operating margin 5.9% down 40 basis points, £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 construction sectors led to a weaker performance in the first half of the year. The combination of rising food and labor costs 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 non-food 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 £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 £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 the number of businesses 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 weakness in the Australian dollar. 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 pre-closed 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 two 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

A - Frank van Zanten: Rajesh?

Rajesh Kumar: Good morning, 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 2010, 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?

Frank van Zanten: 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 over 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 being in 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, 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 bit difficult to predict, we see a bit of a negative impact on price from this specific deflation in the second half from one of our larger customers, they've been re-specking products, they have been reducing prices. So, that probably has an impact in the second half of about $50 million 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 from sort of the big customer in deflation specification, pricing relatively stable in North America and obviously tariffs having a little bit of a positive, positive impact. We look at our own brand is one of our core parts of our strategy to grow, grow our own brand. We want to do that 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 a positive mix coming from acquisitions, if you buy a safety business, and that business has like 90% or 100% own brand products. Obviously that helps you make also but it's 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's been a change in currency between the Chinese currency and the dollar. So 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 in the price. So suppliers made some concessions, suppliers sometimes got a bit of subsidy in China itself to make that happen. Also, we've been looking at other sourcing countries like China. So if you saw certain products that are also available in other countries and there won't be any tariffs applied and obviously that helps you also go 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, 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, 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 1000 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, 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, 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 two years ago, we had a huge spend of acquisitions, more than £600 million, I think over on average, we spend about £300 million. The potential is out there. We're 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’ve got very strong balance sheet, we de-leverage very quickly, you know that we don't buy anything, we de-leveraged by 0.4 of a turn, we can spend £400 million a year currently and not de-leverage we can spend almost £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's 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 year. Ultimately, we're in this business to do the right thing.

Brian May: Rajesh, 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, 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 $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 our impact is the margin on that $50 million reduction. So it's low single digit millions in profit terms, but in revenue terms, it has a bigger impact.

Frank van Zanten: Let’s say just a comment on the pricing of acquisitions. Obviously people read articles, we're not stupid people read the newspapers, they see that let's say on average multiples than 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 £100 million of sales 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 is small base, we have a lot to offer for Bunzl within Bunzl for the company. And that's not achievable. We are normally in this six to eight, eight times range. We can sometimes stretch a little bit but we basically tell them to go away in a nice way and then often one or two years later, they comeback that reflected because ultimately they still want to sell the business and enjoy their retirement at some point. Sylvia?

Sylvia Barker: Hi, good morning, Sylvia Barker from JPMorgan. So the cost savings and gross margin actions in North America have obviously benefited the margin 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 you have always closed down kind of warehouses where leases run out, but anything more material, and then maybe just comment on the customers merging in food service in North America, maybe just talk us through kind of size and potential impact on that. And then finally, so you showed the footprint through which obviously demonstrates 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 like in the back end? Do you have a huge database with all of these essentially catalogs buying kind of vertical that you can access easily? Or is that something which is helpful to the business or is it something that you’re working on from a data point of view? Thank you.

Frank van Zanten: Okay. On the gross margin and cost, this is the second part of our strategy, the second pillar of our strategy, improving I would say the operating model. I think a big initiative to let's say improve our gross margin levels is really around building the own brand. That's an 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 own brand. Now 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 like 7% operating margins 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 the number of warehouses into one brand, new warehouse. The same is going to happen now in Dublin. We just put the three or four businesses in the Netherlands in one large warehouse. I'm going to open that in a couple of weeks time. So we're constantly looking at areas to let’s say consolidate warehouses but also on the back end of the business, Brian just organized future finance conference, can we do more across businesses, automation of payments, booking invoices, all the things that are not customer facing are basically in scope to make improvements.

Brian May: Just also to remind you that when you look at our cost base, 53% of our cost base is people. And we're largely non-unionized environment, relatively easy to take people on, and if necessary, if 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 on five-year leases. So in any one year, about 20% of our fleet comes up for renewal, again a lot of flexibility and cost, probably the least flexible areas, the buildings, the warehouses, they’re leased as well typically probably five 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.

Frank van Zanten: Your second question is about Foodservice redistribution in the U.S. and the mergers and consolidation. It's difficult to say where that's going to go because you have two 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 non-food 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 through 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 is it going, it's also not the first thing that people look at in terms of the cost items that bigger fish to fry. On the data, Bunzl is -- Bunzl is very decentralized organization. So we have quite a number of IT systems. We're trying to streamline that in Europe, we’re 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 expert, because we are not a 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.

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

Brian May: Foodservice as a business, there's just over £1 billion a year.

Sylvia Barker: Okay, but you wouldn't specify?

Brian May: We’re not quoting out.

Sylvia Barker: Okay. Okay, thank you very much.

Ed Stanley: Hi 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 out in North America in terms of drivers or warehouse stuff? 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?

Brian May: On tariffs first, Ed, actually tariffs have been slightly positive for us net. Not broadly is 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 2019. 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 hit 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 December. So some more hopefully net positive to come. The other two parts of your question, Ed just a reminder, please.

Ed Stanley: On inflation refresh?

Brian May: 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 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. So 2%, 3% area, close to 3% than the 2% probably, but nothing extraordinary.

Ed Stanley: And Latin America?

Brian May: Latin America is not every country, I mean, you are bit lanky there. I think called out two 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 back drop there has been a change in government, there's quite a lot of economic uncertainty and industry and construction, which will be the area we'd be supplying particular 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, place the safety area in Mexico. And then 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. We have two call-outs there.

Frank van Zanten: Paul?

Paul Checketts: Good morning, it’s Paul Checketts from Barclays Capital. I think I've got two, can sort of ask 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, can you give us the split of percent of Continental Europe revenues now just a feel for that how it looks? Thanks.

Frank van Zanten: Okay. Big picture markets, I think groceries is a tough market, it’s big players, certainly in North America, big players, strong competition. Obviously, everybody tries to grow on online home delivery, click and collect. So there's a lot of focus on cost. I would say there are two elements that sort of go in different directions but probably goes against this 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 have -- 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, higher warehouse stuff like that. But it's a tough sector. We've seen some store contraction also because of online. The same in 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 merge the Schwarz, we have a very strong national presence. Very good product reigns 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, I think foodservice is an area people need to eat, I think there's a trend towards eating out, 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 on the pressures, the rents are very high, food costs going up maybe some issues with Brexit and staff. 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 to advise our customers. It’s difficult to say, it's a bit early, when you talk about sustainability. People talk about the three R's. 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’re very busy in terms of helping them transform into a replay 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 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.

Brian May: We want to know the answer to want to know what the shape of Europe it was circa 40%, France, north of 20%, Benelux and then the rest. That's as much we’re getting from here.

Frank van Zanten: Andy?

Andrew Grobler: Andrew Grobler from Credit Suisse. Just a couple from me, both in North America asset turns were bit down again in North America, can you talk what is case and then second unrelated with margins basically flat you talked about better gross margins and savings, could you just talk us through bridge what went up and went down (inaudible) particularly within gross margins why those percentages top line there?

Brian May: Asset turns, first one acquisition, Liberty, safety, Liberty Glove & Safety that’s own brand safety business, so the asset turn there is lower than the average by definition. So that we have bit of a mix effect from that. If you look at our return on average operating capital, that’s 12 month rolling, so you got six months of last year with asset turns were lower, so as an element of that. But there is always a little room for improvement on the working capital side, I would say particularly in North America and we’re actively pinpointing one or two areas where we can extract a bit more working capital over time. In terms of what’s the second part of your question, Andy?

Andrew Grobler: Gross margins?

Brian May: Gross margin, to be honest, the level of granular detail there is not going to be, I'm not going to reconcile if we want to 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 customers helps margins as a combination of all those things. But we've got specialist teams obviously in-sourcing, doing those things. It’s also a bit of 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’ve grown most strongly in safety, where we've got the highest gross margin. So there is also a margin mix effect going on there.

Andrew Grobler: Thank you.

Frank van Zanten: Rory?

Rory McKenzie: Good morning, it’s Rory McKenzie from UBS. Just on the U.S. again sorry. We’ve seen some packaging companies struggle in the past through some price increases in the U.S. And when you're talking about walking away in changes what segments that particularly is and do you think it’s problem in the tariffs carry on, do you think it’s from the tariffs or what issues in those sectors just I want first. Thank you.

Frank van Zanten: Okay, the reason why we walked away from a particular piece 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, we went to the customer and said, listen, it doesn't work for us. So can you take it back, which causes some problems, and they want to give us back and give a bit better margins. So it has nothing to do with tariffs, specific situation, I'd say there's a lot of work happening in the whole customer profitability area. These days with a lack of drivers and warehouse people and capacity. I think our available capacity is something that is worth something, especially when you're 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 turns. And this was an example where it felt true. And we said, not for us.

Rory McKenzie: And maybe secondly, if I can and on this kind of closed loop system you're talking about. And how when you or because that given the example of contracts, I believe 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? Thank you.

Frank van Zanten: Yes, good question. This is really sort of dipping our toes in the water with very experimental early days, we're looking at things customers very interested. We're 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, enter that area in a small way. It's something we’re 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 is something that will be a good thing. And I'm particularly passionate about also. Any more questions, no. Okay, before bringing this meeting to close. I wanted to express my personal thanks to Brian. And 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 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 Marion. And we had a great business discussions. Also tough discussions, but it was always about football. And especially last year when Ajax did lot better than Arsenal, that was not always an easy topic. Although Brian did his last 28 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 he 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 surely missed and he leaves with our best wishes. Thank you, Brian and thank you all for coming to the London Stock Exchange. Thank you.