Earnings Transcript for BZLFY - Q2 Fiscal Year 2020

Operator: Ladies and gentlemen, welcome to the Bunzl results for Half Year ended 30th of June 2020 Webcast. My name is Ruby and I will be your moderator for today's webcast. [Operator Instructions] I will now hand over to your host Frank van Zanten to begin. Frank, please go ahead.

Frank van Zanten: Good morning everyone and welcome to Bunzl's 2020 half year results presentation. In these very unusual circumstances, I'm glad that we have been able to connect virtually to discuss Bunzl's performance over the first half of the year. After a short introduction from me, Richard Howes will present the financial results. I will then review our operations in more detail, before providing some further insight into how the group has successfully navigated this challenging period. Firstly, I want to start by saying how proud I am of all our colleagues in the Bunzl family. The teams have worked tirelessly over the last few months. They have been on the frontline during the pandemic, supplying essential products to key workers and ensuring crucial businesses could continue to operate. In order to support customers throughout this period, our distribution centers have remained open and our sourcing teams have gone above and beyond to source quality products despite the challenges that the pandemic has presented. I want to thank each Bunzl colleague around the world for their outstanding efforts. Before we go to the first half performance, let me reiterate that the safety and well-being of people including our colleagues, customers, and suppliers are and remain priorities for us. Whilst operating through the pandemic, we have taken all appropriate measures you would expect to keep our colleagues safe. Together, in this very challenging context, our businesses have delivered a very strong set of results. As we've said in the past, there is a real resilience to the Bunzl business model and diversification is the key component of this. Over the period, significant weakness in the foodservice and retail sectors was more than offset by strong growth elsewhere. Another driver of our strong performance has been our position as a reliable and robust supply chain partner. Through the last few months, Bunzl has demonstrated its entrepreneurial flare, resilience, and focus on customer service. Our capabilities in sourcing have enabled us to deliver quickly large quantities of quality assured and in-demand COVID-19-related products. Given the essential products that we source, we have been designated a critical supplier. As a result, we have seen adjusted operating profit grow 13% at constant exchange rates with operating margin supported by the greater level of sales in higher margin sectors and through the penetration of own-brand products. Our balance sheet remains robust with strong cash generation resulting in net debt to EBITDA of 1.6 times down from 1.9 times at the year-end. Pleasingly, this overall performance, has allowed us to announce both the 2020 interim dividend of 15.8p, but also an additional interim dividend of 35.8p. This additional dividend is equivalent to the 2019 final dividend which we prudently decided to withdraw at the start of the pandemic when visibility was particularly low. In addition our good overall performance has further enabled the repayment of government assistance and we have also increased our charity donation. Whilst we continue to focus on short-term dynamics, we remain committed to our long-term strategy which includes continued growth through acquisition. Today, I'm pleased to announce the proposed acquisition of MCR Safety, a well-established high-quality and own brand focused PPE business in the U.S. that further strengthened our highly successful business in the region. It is a large business and generates $250 million of annual sales. The second is a smaller, but also complementary business called Abco Kovex which is a distributor of flexible packaging products in the U.K. and Ireland. These are unique circumstances, but I'm also very proud that Bunzl once again demonstrated the strength resilience and reliability of our consistent and successful strategy and business model. I will now hand you over to Richard to take you through the financial results.

Richard Howes: Thank you, Frank and good morning ladies and gentlemen. As Frank has mentioned, these have been unique circumstances and I've been incredibly impressed with how our businesses have reacted. This is reflected in the strength of our financial results including the cash generation of the business. As in previous years, in the following slides, we have presented both actual and constant exchange growth rate. Over the six months to June, foreign exchange was a 0.3% benefit to reported revenue. In reviewing the income statement, I will refer to growth at constant exchange rates. Starting with revenue, revenue grew by 6.7% to £4.8 billion. Underlying growth which is organic growth excluding trading days contributed 2.8% of this growth, with an extra 0.8% relating to the additional leap year related trading day. Underlying growth was driven by the level of COVID-19-related products that we've been able to procure and sell. The top COVID-related products contributed around £630 million of additional sales, or 13.6% underlying growth. These sales included some very large orders placed by customers looking to build up inventory of these products. On the other hand, we have seen businesses serving sectors such as retail and foodservice being very significantly impacted by the pandemic in Q2. Even businesses selling into safety and cleaning & hygiene have seen parts of their business affected. For example, we have sold considerably less paper products to contract cleaners, servicing offices around the world. Given most of the pandemic effect was felt in Q2, the positive and negative trends were more accentuated during the last quarter of the period. Acquisitions, which largely relate to our U.S. business contributed 3.1% revenue growth. Now turning to the income statement. Adjusted operating profit grew by 13% to £340.8 million. At constant exchange rates, our operating margin grew from 6.6% to 7%. This largely reflects the mix effect of selling considerably more in the higher-margin healthcare, safety and cleaning & hygiene sectors and fewer sales to the retail and foodservice end markets, which tend to have lower margin. It also reflects the increased mix of own brand products, which tend to have higher margin. Operating profit includes a net charge relating to provisions for expected credit losses on trade receivables and customer-specific inventory, predominantly relating to retail and foodservice. During the first half of 2020, the group was seeing trade receivables more than 60 days overdue almost double to £60 million. The group has also seen a number of customers either entering insolvency processes or illustrating specific credit stress indicators. This has resulted in a net charge of approximately £10 million being taken during the period to reflect the risks around recoverability. In addition, the group is concerned that going forward there is a heightened risk of further recoverability issues with customers predominantly in the foodservice and retail sectors as government support is withdrawn and the trading uncertainty continues. Consequently, the group has taken an additional net charge of approximately £20 million in the period for those customers identified as high or medium credit risk. The resultant level of receivables and inventory provisions relative to total balances at the end of June are marginally below the level seen in the global financial crisis in 2008 and 2009. Net finance expense decreased by £4.5 million as a result of a lower level of average debt as well as lower average interest rates. Adjusted profit before tax or income tax increased by 16.6% to £306.8 million. Continuing down the income statement. The effective tax rate for the period of 23.8% is unchanged from the prior year. The effective tax rate for 2020 is expected to remain around 24%. Adjusted earnings per share increased by 16.4% to £0.701. And as Frank mentioned, we'll be paying both a 2020 interim dividend of £0.158, which is 1.9% higher than the prior year, but also an additional dividend of £0.358. This additional dividend which is equivalent to the 2019 final dividend will be paid on the November 16, 2020. Whilst the 2020 interim dividend will be paid in early January 2021 as usual. Now turning to the balance sheet. Working capital has increased by £33.7 million, since the year-end, primarily from acquisitions and currency translation partly offset by a net reduction in underlying working capital at higher inventory levels were more than offset by higher payables driven by approximately £68 million of advanced payments from customers net of advanced payments to suppliers for large orders of COVID-related product. An important aspect of the current environment has been the need to prepay suppliers for COVID-related products. As an established and financially strong business partner our customers have been comfortable in making corresponding prepayments to us. Net debt excluding lease liabilities ended the half year at £1.2 billion, £70 million lower than the position in December 2019. Net debt to EBITDA on a covenant basis was 1.6 times, which is down on the 2019 year-end leverage of 1.9x and below our target range of 2 to 2.5x. This gives us substantial capacity to self-fund acquisitions such as the ones we are announcing today. The return on average operating capital which is now stated on an IFRS 16 basis is up 280 basis points from December 2019 to 39.7%. This high level of return reflects the strength of the business model and the trading performance in the first six months of 2020. On to cash flow, it was a strong period for cash generation with cash conversion of 112% and free cash flow of £268.3 million up 44% on the prior year. Cash conversion benefited from the net £68 million of favorable advanced payments that I mentioned previously. During the period we paid dividends of £51.7 million and invested £75.2 million in three acquisitions. The £2 million inflow on the employee share schemes reflects the income on exercised share options. Given the uncertain outlook no market share purchases to fund future employee share schemes were undertaken in the first half. As you know Bunzl has consistently achieved a high level of cash conversion over many years. The average rate of cash conversion since 2004 has been 98%. This half year has been exceptional. But even excluding the net advanced payments I mentioned earlier, cash conversion for the period remained above target at 91% despite the challenges we have faced with the aging of receivables in the foodservice and retail sectors in particular. This strong cash flow continues to support our consistent dividend growth over many years and reflects our focus on long-term value creation. Looking back over the past 27 years we have been able to increase our dividend consistently every year broadly in line with our growth in earnings. We are pleased that by deciding to declare additional dividend as an equivalent to the 2019 final dividend and by paying it in 2020, we've been able to maintain the track record over this long period. The compound annual growth rate of dividends since 1992 is 10%. So let me summarize the key highlights of our performance in the first half of 2020. Adjusted operating profit increased 13% with operating margin up 40 basis points at constant exchange. This strong performance was driven by the high demand of COVID-related products and Bunzl's end market step to mix and diversification. Cash conversion has been strong at 112%. Our interim dividend per share has increased by 1.9% and we will be paying the equivalent of the 2019 final dividend as an additional interim dividend in 2020. And lastly, we ended the period in a strong position with funding headroom that provides substantial capacity for self-funded acquisitions. At this point, I would like to hand over to Frank who will take you through the business review.

Frank van Zanten: Thank you, Richard. During my presentation today I will focus on the following topics

Operator: Thank you, Mr. Van Zanten [Operator Instructions] We have a question from Will Kirkness of Jefferies. Your line is now open. Please go ahead.

Will Kirkness: Thanks very much. I had two questions, please. Firstly just on your ability to source and supply customers through this pandemic. Do you think that over the medium term that puts you in a much stronger position to retain existing customers and win new customers? I think you've spoken to that but it feels like you should have potentially better visibility now and arguably protected yourself against the lower value-add peers. And the second question just around M&A conversion over the next six to 12 months. It sounds like the pipeline is pretty good. Just wondered, if we should expect any more to get over the line? Thanks very much.

Frank van Zanten: Yes. Okay. Let me take these questions. Well, you would think actually that the added value we've delivered to our customers have – has been obviously significant. And certainly Bunzl in a way is in a good position because of our diversified portfolio. So if you look longer-term, and you look for instance at our businesses active in the retail space and the foodservice space, they are sometimes competing with businesses that are 100% focused on these sectors. So think them of an easy yet that is focused on airlines only. Now if we have foodservice businesses and that have been significantly impacting the second quarter, they obviously had the benefit of being part of a very strong Bunzl business. And so I'm hoping to be able to come out of this crisis by managing these businesses in such a way that we will be able longer term to benefit from that going forward. But obviously that remains to be seen. Certainly I think the value we've provided to our customers, the sourcing we've done has been I think a real competitive advantage. In terms of the pipeline of acquisitions, I would say, we've always been very disciplined around acquisitions. I had questions about acquisition activity last year. Why you're not spending more? Your net debt to EBITDA is relatively low. Now reflecting on this we've been very pleased to go into this period, this pandemic period with a very, very strong balance sheet. We – at the end of the first half we were at 1.6 times. Now that was pre dividend and pre acquisitions. And we are starting the – or restarting discussions with acquisitions. And when we feel we have the right opportunity there, we will execute it. And certainly MCR is a good example of that. Now if I look ahead, maybe three, four, five years from now, personally – and you probably all know that I sold my business 25 years to Bunzl. So I know some of the emotions that are involved in terms of selling your business. Personally I think that a lot of our owners of businesses have experienced in the second quarter something very new where they may have thought their financial future was fully secure and now suddenly this pandemic hits and everything becomes fluid. So I expect maybe in two, three, four, five years from now, a lot of people will be very interested to become part of Bunzl. So from that sense our strong cash flow and future M&A should put us into a very good position. But having said that, the second quarter is still very uncertain and it's very difficult to look ahead in the crisis.

Will Kirkness: Sure. Thanks very much.

Operator: Thank you. Well, we have a question from Sylvia Barker of JPMorgan. Your line is now open. Please go ahead.

Sylvia Barker: Thank you. Hi, good morning, everyone. A couple of questions on growth. Maybe firstly, could you give us an idea of the pricing impact on revenue in H1 and maybe how that developed in Q1, Q2, presumably with the short supply and your ability to store some of these products? Maybe you did have a pricing benefit to some extent in Q2. To what extent is that maybe tailing off now? And then just on the incremental £600 million of revenue relating to the top eight products. Could you maybe just split it a little bit more, or give us an idea maybe firstly, how much of that was from products which I guess people buy once like signs barriers, the disinfectant kind of stand that you shown on the slide? Then secondly, if you can talk about the large orders versus small orders within that? And then finally, could you maybe just comment how that's split roughly between the customer segments? I would appreciate that. Walmart would have been buying a lot of masks. Likewise you would have made a lot of sales to your traditional safety clients as well? Thank you.

Frank van Zanten: Okay. In terms of pricing, it's very hard to give a very precise answer on the prices in the first half. I would say, the items that are more COVID related like masks, they were in extremely high demand, where demand was much higher than supply in the second quarter. Obviously, there has been inflation in these categories. And we expect that sort of price levels to be slightly lower in the second half, given the supply side has been beefed up. So, there's more supply right now. I think on the other items, it's probably a slightly deflationary picture there in terms of plastics and paper. But it's very hard to say because, it's such a [indiscernible] price period and it's more and harder than [a science] [ph] in that context. But Sylvia, I think on the COVID-related items, we would expect pricing to be slightly higher than in the second half and in the second half of last year, but I think prices will be lower than in the first half. I think on the £600 million, a couple of things. I would say let's say the category masks, sanitizers and gloves, these are the biggest items probably represent three quarters of the total amount. And I think the masks and the sanitizers certainly the refill and the gloves are -- tend to be more consumable items. So, it's not like capital goods or something like that. Maybe Richard, you want to comment on the small versus the large orders and sectors?

Richard Howes: Yes. Sure. Sylvia, I think the way to think of the -- as a split, I mean roughly, half on about 50-50 split between large and small orders. And as we've said, those large orders, there was an element of panic buying of these products in Q2 for sure, which means that into the second half, we don't expect to see the same level of large orders that we've seen in the second quarter. The smaller products, we do expect to continue to some degree. But again perhaps not to the same level we saw in the first half. As for customer segments, look we've actually managed to sell these products into all of our end markets. We have been into markets that we would never normally sell these products too. So, we sold masks and sanitizers into the grocery sector for example. So we're finding ways to sell in some cases which have been medical products into all sorts of end markets. So I wouldn't say that there's any particular customer segments which are -- have more [indiscernible] other than healthcare of course. But just think of it as a more widespread across-the-board level of these products into different end markets.

Sylvia Barker: Thank you, both. And maybe if I just follow up obviously, you've not made any comment around exit rates or what you're seeing in July and August, but -- yes I guess you have a much stronger end of June than you expected at the pre close. So, could you just comment at all in terms of -- was that driven by the large customer orders, small orders or the rest of the business maybe being a little bit better? And how that potentially carries on into the next couple of months?

Frank van Zanten: Yes. I would say sort of exit rate you've seen our prospect section. And our prospect section includes all the available information until last night effectively. I think, it's difficult to comment on July because especially in an area where you see big ups and downs with smaller orders, bigger orders. So, there's a lot of uncertainty going forward. So, we wouldn't sort of add a lot of additional color on this. I think, the prospect is the area to focus on.

Richard Howes: I just -- I'll build a little build on that. I mean, June was a month where the economies were opening up. And people were not locked in their homes any longer. Things were starting to move. We're an activity driven business. We saw activity increase in June. In our pre close in early June, we did see more activity in the last few weeks than we initially expected. I think part of that was set up. So, I think part of this is businesses getting themselves set up for reopening their businesses. But I think there's also an element of high level of activity as well. So, I mean that has continued to fit into the second half, but as Frank said, the prospects staying hold.

Sylvia Barker: Okay. Thanks very much.

Operator: Thank you, Sylvia. We have a question from Annelies Vermeulen of Morgan Stanley. Your line is now open. Please go ahead.

Annelies Vermeulen: Hi, good morning. I'm Annelies Vermeulen from Morgan Stanley. Just a couple of questions from me. Just a follow-up to that -- a question about the additional £630 million of COVID product sales for H1. How much of this was own brand products? I'm trying to get a sense of how much of the margin improvement that you reported year-on-year was related to the sales of the higher margin cleaning hygiene PPE products and how much was due to own brand products? I'm guessing it's very closely related, but any color you can give on that would be helpful. And then, I guess, a similar question to the exit rate of the 13.6% and minus 10.6% that you put for the H1 for those two segments. Can you give us the same numbers, but just for the Q2? And then lastly you've, obviously, talked about continuing to be active on the M&A side in the second half and beyond. Should we expect more deals in safety product businesses given the current environment, or are you continuing to look all across the board, across all sectors? Thank you.

Frank van Zanten: Yeah. Okay. Well, in terms of the COVID related items, I would say a very large part of that is own brand imported items, so very large. I think in terms of the growth and the decline I think the -- obviously the half year results represent two quarters. So -- and then I think we've seen the main impact in terms of pluses and minuses in the second quarter. So I think the biggest swings you can probably refer back to or calculate back towards one quarter. And in terms of M&A, we have an active pipeline. Are we planning to go very big in terms of the retail and foodservice sector? Probably not. Although, it is a challenging period, and if we can find real opportunities that are very good additions to our current businesses and we can buy it at the right price with attractive paybacks, we won't hesitate to do it. But certainly I think the strategic direction is going to be more towards the certainly the non-retail areas.

Annelies Vermeulen: Okay. Thank you.

Operator: Thank you, Annelies. We have a question from Chirag Vadhia of HSBC. Your line is now open. Please go ahead.

Chirag Vadhia: Hi, there. Thanks for taking the question. Just one, and that is what is the nature of your discussions with suppliers for the second half of the year? And does it differ meaningfully in terms of own brands versus other suppliers?

Frank van Zanten: Sorry I missed the first part of your question. Could you repeat that?

Chirag Vadhia: Sure. I was just wondering what the nature of the discussions are ongoing with supplies for the second half.

Frank van Zanten: In terms of COVID orders?

Chirag Vadhia: Yes.

Frank van Zanten: Well, we -- what we can say is that, obviously, you still see around the world, local flare ups. You also see us talking -- people talking about social distancing and you need to use masks. Having said that, you also see more reusable masks. But I think the big difference between thinking about the future in terms of these COVID items and the second quarter is the fact that we have areas where some significant stocks have been built. I saw an article in the U.K. where there's stock built. Certainly I know in the Netherlands in France and other areas where we have been very active supplying large amounts of products, we know that there's quite a bit of stock available in the system. So there was -- so in that sense, we just know that although we will sell mask and other items going forward as long as the crisis goes, it will be at different price levels and it will be significantly different volumes as we see today. But it can be different tomorrow or next week. It's very difficult currently to forecast anything. And that's why we've withdrawn guidance also.

Chirag Vadhia: Thank you.

Operator: Thank you, Chirag. We now have a question from James Rose of Barclays. Your line is now open. Please go ahead.

James Rose: Hi, good morning. Firstly, could you comment on gross margin trends year-on-year in the first half? And my second question is on some particular areas you've flagged some sectors, which have underlying weakness it's healthcare and safety. Could you talk a bit more about what you're seeing there? Any color you can give us for the second half? And then lastly on trading in FY 2021, which you mentioned it has a tough comp. But for the retail and foodservice sectors in 2021, do you have an idea of what it's trading could be versus FY 2019 value, so we expect a two-year like-for-like. Any thoughts you have there would be appreciated. Thank you.

Frank van Zanten: Yes. Let me take the first two and Richard take the last question. On gross margin trends, although we don't really comment on gross margins given the situation we're in. I'll give you a bigger picture answer on this. We've seen gross margins a little bit higher than last year, but it was mostly related to the fact that our margin in rest of the world improved. We've seen a soft week -- a weaker comp last year. So the performance in the business wasn't great compared to 2018. So, we took some sort of measures to improve profitability, it was good. And also, they are strongly linked, as I said in my speech also, to the healthcare and the safety sector. So they've seen the benefit from that going on. So, it's really a mix impact of why the gross margins were lower -- or were slightly higher. On the underlying business, well, actually, if you look at sort of the additional business we've done in the COVID area, and we've shown it in the bridge basically where you see the growth in terms of COVID and the weakness underlying, I think in most sectors it was still quite tough underlying, because of lockdown, because of less activity. And obviously, that was more than compensated by COVID products. So, that's why we're also saying on the second half, if there's going to be less favorable picture on big orders, smaller orders in the COVID side and you will have basically the continuation of the underlying weakness in different sectors that we've seen in Q2, we will also potentially see that weakness in Q3, Q4, which is two quarters. Having said, we'll see -- we expect a bit of a recovery in the hospitality sector and into the retail sector. But obviously, we still have the impact of having two quarters of underlying weakness versus one quarter of underlying weakness given. So, just the macroeconomic picture is expected to be still challenging. And Richard, can you take the last one?

Richard Howes: Sure. James, look, retail and foodservice, it's been very difficult and badly hit in the second quarter, in particular. In many respects, we see this as an acceleration of the trends or some of the trends that were already in place, particularly in retail. And we're seeing some customers that have real credit issues, some going through Chapter 11 or bankruptcy processes. We think they will come out -- those that come out, we think will come out with many fewer stores. And some may not come out at all. I think that tends to make us feel that even though there will be an improvement into the second half as the activity starts to pick up, our sense is that we won't be back at 2019 levels for some time. Now, as to when that is, it is too hard to say. But I think, certainly won't be there in the second half of 2020. I don't expect us to be there back to 2019 in 2021. Thereafter, let's see. But, I mean these are our end markets, which have been impacted most.

James Rose: Okay. Thanks very much.

Operator: Thank you, James. [Operator Instructions] Our next question is from George Gregory of Exane BNP Paribas. Your line is now open. Please go ahead.

George Gregory: Good morning. Most of my questions have been answered. I had just one outstanding please. Just focusing in on the growth in foodservice and retail, which was down 9% in the first half, I just wondered if you could perhaps unpick that between COVID-related and other items that down 9% was a bit less bad than I had expected, but obviously mindful of the COVID effect across the divisions, which are a bit difficult to model? Thanks.

Frank van Zanten: Richard, do you want to take this one? I didn't hear it very loudly. So maybe you can answer it.

Richard Howes: Yes, sure. George, look, obviously it's a -- it is the first half. It is also -- therefore, the second quarter is much worse than that. I think if you -- there are underpinning elements to both foodservice and retail. So, in our foodservice business, we have sold more takeaway packaging to those sectors than we had anticipated. That is an activity level has increased quite significantly. I think particularly in the U.S., where the sort of delivery or indeed collect services, were actually quite a decent amount of the foodservice business in the end. I think you have to then say that on top of that we've clearly sold a lot of COVID product into both end markets. That could be sanitizers, it could be masks. So, you should certainly think about when you strip those effects out and some of the mitigants that the underlying effect in both foodservice and retail is material in Q2, and that we expect to be better going into the second half, but still got an impact in the first -- in the second quarter in particular.

George Gregory: Thanks.

Operator: Thank you, George. Our next question is from Kate Somerville of UBS. Your line is now open. Please go ahead.

Kate Somerville: Yes. A lot of my questions have also been answered, but one final one. You mentioned that you're slightly concerned about the financial health of some of your customers. Is this predominantly smaller customers, or is it sort of more related to the end markets that you operate in? Thanks.

Frank van Zanten: I think, it's more related to the end markets. I think we saw -- certainly, when we talk about the slightly bigger customers, we see more risk in the retail space. We've seen some bankruptcies already. We see risk in the foodservice. But also, wider, I think, with smaller customers risks tend to go up as well, because if you think about it, I think, a lot of businesses have been a little bit on the government support oxygen. And I do expect these support packages, at some point, to tail off. And then, obviously, people need to stand on their own feet. But we try to make a proper judgment around that for the half year and also going forward. And, yes, it's a tough place, but the pressures are going to be the highest in the foodservice and the retail sector. I don't know, Richard, do you want to add anything on this?

Richard Howes: No. I think, you've captured it. As I said earlier, we've had -- these are trends we've been seeing for some time. I think plenty of retailers come into the crisis in a quite weak position. And as a consequence, this is going to -- this process could -- we think will accelerate probably what was inevitable anyway. We saw that in parts of foodservice as well, with the casual dining sector, which was probably oversaturated quite leveraged in the way it was owned. We've seen a bit of a shakeout in that over the last 12 to 18 months. So, I think, you've got a mixture of the bricks-and-mortar trends weakened -- some weakened customers coming into a very difficult crisis. And then, taking the opportunity, I think, to probably make sure that those that do come out, come out in fewer stores, lower footprint, but hopefully in a perhaps a better position than they entered the process -- they entered the crisis.

Kate Somerville: Yes. Okay. And just, one quick follow up. Are you considering expanding into any other end market to kind of offset these weaker end markets?

Frank van Zanten: Yes. I think we always stay open-minded on doing acquisitions in new sectors. Although, let's say, the sectors we are operating in are very large. A good example is the U.S. acquisition today. We've bought many, many businesses there already. And there's still another £250 million opportunity out there in terms of sales. So we like the markets we're in. But we keep open-minded. I'm particularly excited about some of these digital businesses as well. It's a high priority for us. We're moving these orders up and making their relationships more sticky. And if we can do more deals in that kind of space to support our strategy, we won't hesitate. But it's very hard to plan these things. I said it before, we're not going to say we're going to buy a business in Germany next year, or we're going to buy a business in cleaning & hygiene. The way it works is, we're building these tunnels. Our local managers are building the pipeline. And then every time every executive committee meeting we have, there's opportunities there and we look at them and we weigh them. And we know these sectors very well. So we try to focus on what are the strong strategic additions to the group like an MCR, for instance. And what do we believe is going to be a healthy payback for the business. But if we go -- we can go into new sectors with similar dynamics of our current businesses that drive the success, we'll certainly not hesitate. We got the capacity to do it.

Kate Somerville: Great. Thank you so much.

Operator: Thank you, Kate. Our next question is from Andy Grobler of Credit Suisse. Your line is now open. Please go ahead.

Andy Grobler: Hi. Good morning. Just three for me, but first two, very quick. Just to check on the provisions, the bad debt provision. Did they amount to around £30 million that you took against EBITDA in the first half? I think you said that, but just to clarify. Secondly, on the prepayment the £68 million. Would you expect that to reverse into the second half? And then thirdly, on a slightly broader -- from a fairly broader perspective, you've talked about the benefits you've seen of diversification of financial strength and digital selling. Given that and the likely challenges of some of your competitors, how does that make you feel about, kind of, longer-term growth? Historically, organic has been around 2% over the last 15 years or so. Given those advantages and assuming the world is -- goes back to some kind of normality, do you think, it could be more than that as you take share, over the next several years?

Frank van Zanten: Okay. I think your first and second question, provisions first half and prepayment. I think the answer is, yes. If I'm not wrong Richard but please, confirm.

Richard Howes: Yeah. I mean, yes to both of those.

Frank van Zanten: And the last question on diversification and digital. Yeah, the distribution businesses they have relatively light assets and low CapEx levels. And what you tend to see is, in a downturn is that, or when business is struggling or not growing is that, they are reducing their working capital a bit, which gives them a bit of cash to survive as well. And then the question is if things start to pick up again, can they fund, that kind of growth? So it's going to be -- we will have to see, if people really get into trouble. We've -- certainly in 2009 we've taken the opportunity to pick up some very good businesses and at attractive prices. But I think it's a bit early, because we only want to buy good businesses. And often good businesses don't get into trouble very easily. But if it happens, we'll do that. In terms of growth going forward, I would say organically, are we going to pick up market share? We may, but I think it's going to be around the edges probably because we are focused on, making good returns. And winning volume just for the sake of growing the business is certainly not something that I'm a great fan of. So if we can build it based on our value proposition, I think that's great. And -- but I don't think there will be a massive change. I think maybe longer term where I see maybe more of an opportunity, but this -- then we may be talking two, three, four, five years from now is the point I made earlier is that, I think, there's been a lot of people who had a bit of a shock, during the second quarter, because they thought they were financially independent. And then they realized that, all their eggs in one basket. So I think we'll see activity, in the future. And that may be a bit more of an opportunity for us, maybe not this year, but maybe the years after, to buy high-quality businesses. And the great thing is because our cash flow will grow so our capacity to acquire businesses is growing every year. So, I'm in that sense more excited about, the M&A, opportunity. But certainly, it won't work against us, if supply -- if other competitors struggle. And we are in a strong position.

Andy Grobler: Okay. Thank you very much.

Operator: Thank you, Andy. Our final question is from Samuel Dindol of Stifel. Your line is now open. Please go ahead.

Samuel Dindol: Good morning guys. A couple of quick questions from me, firstly on digital, I think you said it was up 6% year-on-year at 6%, 7%. Do you think that is a permanent change or due purely by COVID? Interested to get your views on that? And then secondly on your own brand, I think it's typically about 20% of the products you sell. Are you able to give, 2Q figure? And whether again you think, that's a potential not a permanent change. But a sort of step up that can be potentially partially maintained going forward? Thank you.

Frank van Zanten: Yeah. Well, on the digital, yeah, we were up the last 12 months with about 6% -- 61% to 67%. I would say that is a significant shift. And I think that has been boosted by the coronavirus, a little bit like, what the supermarket change we've seen. So, is it going to be staying at this level? It may fall back a little bit. And then, it will continue to go up, because it's a strategic priority for us. But certainly, we've seen it go up quite a bit in terms of the number of orders. In terms of the own brand, yeah, we were slightly above the 20%. I think, in the first half, it was more towards sort of the 24%, which was exceptional increase, given the COVID also. So I expect that part if COVID comes down. I think the own brand will probably come down, a bit again. But the way to think about it is, if I look at the last 10 to 12 years we've been growing the growth -- the own brand percentage with about 1%, a year. So -- and I can't see any reason, given our mix of business, given the priorities we set for the business, that we will -- we'll continue to grow that own brand percentage. But we are also very keen to drive relationship with our branded suppliers. So may come down a bit, but will start to come up again.

Samuel Dindol: Thanks.

Frank van Zanten: Okay. Well. Thank you very much for attending, this half year results call. And I hope you all have a nice day. Thank you very much for joining.

Operator: Ladies and gentlemen, this concludes today's webcast. Thank you for joining. You may now disconnect.