Earnings Transcript for BZLFY - Q2 Fiscal Year 2021

Operator: Good morning, everyone. And welcome to the Bunzl Results Call for the Six Months Ended 30th of June, 2021. My name is Bethany, and I will be operator today. [Operator Instructions] I will now hand the call over to Frank van Zanten, CEO of Bunzl. Frank, over to you.

Frank van Zanten: Thank you, and good morning, everyone. And welcome to Bunzl’s 2021 Half Year Results Presentation. I am glad you could join us today. Richard Howes, our CFO is also on the call this morning and after a short introduction from me, he will take you through our financial results. I will then review our performance in more detail, highlight our latest acquisition and discuss our outlook. Let me start with the main takeaways from our results today. Firstly, this set of half year results continues to demonstrate the resilience and strength of the Bunzl business model. Following an exceptionally strong performance in 2020, we have continued to deliver strong results with 6% revenue growth and 15% adjusted operating profit growth at constant exchange rate. This is a pleasing result given the second quarter last year saw strong demands for COVID-related orders, including some exceptional larger orders. Compared to the first half of 2019, our underlying revenue was 6% higher. Secondly, our diversification is a key component of Bunzl’s continued strength and success. Whilst larger COVID-related sales declined significantly over the period, as expected, this has been more than offset by the partial recovery of our base business. Smaller COVID-related sales also continue to provide some support to growth over the first half driven by the first quarter. The second quarter saw a small moderation of orders, although they remained meaningfully half of 2019 levels. Thirdly, we have to continue to achieve strong cash conversion of 100% and ended the period with a net debt-to-EBITDA of 1.4 times, which provides significant opportunity to invest. And finally, our pipeline is active and we have announced two acquisitions in Spain today making it eight in total year-to-date, with £134 million of committed spend. We have also announced continued dividend per share growth, which reflects our commitment to ensuring sustainable growth and building on our 28-year history of annual dividend increases. Before we go into the details the first half, I want to step back and reflect on the last 18 months, because this period has given me even greater confidence in Bunzl’s future. We have achieved strong compounding growth for many years and have now delivered a very resilient performance over a challenging period and continue to deliver underlying growth. The pandemic has reinforced the quality and consistency of the Bunzl model, and we have demonstrated the strength of our customer proposition, the power and flexibility of our supply chain, as well as the strength of our diversified and agile operation. As we move into the next phase of the pandemic, we see our growth benefitting from; firstly, the further recovery of the base business as the broader economies improves; secondly, growth across our business from enhanced hygiene trends; and thirdly, the positive impact of economic support on our safety-related activity. In addition, we see sustainability as a growing competitive advantage and our digital investments are also supporting the value-added proposition we provide our customers, which enhances retention levels and drives growth. Bunzl’s cash generation also continues to be a key asset, with Bunzl’s impressive dividend growth track records maintained through the pandemic and substantial balance sheet head rooms support us do an active pipeline of acquisition opportunities. We see opportunity in both our existing markets, as well as the potential to expand into new markets. Our compounding strategy is, therefore, reinforce and will continue to drive Bunzl’s growth. So, overall, a very exciting long-term outlook for Bunzl. As I have mentioned, sustainability is an essential pillar within our strategic priorities. As a significant component of global supply chain, Bunzl makes a difference every day. This is important to me, our customers, our suppliers and our employees. Our customers are increasingly setting ambitious targets and our experts and strong supply chains are there to help them achieve these goals. Our capabilities in this area are a growing competitive advantage that support our future potential. We have already made good progress over the last few years in our key focus areas including the range of sustainable solutions we are providing to our customers and the improvement in carbon efficiency we have achieved. However, we are now looking to accelerate our ambitions further and I look forward to taking you to our plans at our Capital Markets Day in October. Let me now hand over to Richard who will take you through the financial results.

Richard Howes: Thank you, Frank, and good morning, everyone. All my comments are at constant exchange rate unless otherwise specified. With well over 90% of operating profit generated outside the U.K. and due to the strength of sterling, our results were adversely impacted by currency translation of 7% on average across the income statement. Starting with revenue, revenue grew by 6.3% to £4.9 billion. Underlying growth, which is organic growth adjusted for trading day contributed 2.8% to this growth, with an adverse impact at 0.8% relating to the additional trading day in 2020 due to the leap year. Within the underlying revenue growth of 2.8%, the recovery in our base business contributed 6.7% growth, as we saw strong growth across the group in the second quarter, compared to a materially impacted second quarter last year. As expected, partially offsetting this growth was a 3.9% impact from lower COVID-related sales which were delivered to customers undertaking emergency procurement to build up inventories of critical products. In total, underlying revenue for the first half was 5.7% higher than in the first half of 2019, and over the first half, acquisitions contributed 4.3% revenue growth year-on-year. Now, turning to the income statement, adjusted operating profit growth was strong at 14.7% to £366.8 million. Our operating margin increased from 7% to 7.5%, reflecting the continued strength of higher margin sectors compared to pre-pandemic levels, inflation on certain COVID-related products over the period and a reduction in the net charge relating to inventory and credit loss provisions up from £30 million in the prior year to £10 million this year. Net finance expense decreased by £5.6 million at actual exchange due to capital market costs incurred in the prior year, lower average interest rates on the group’s debt, a lower lease interest expense, and currency movement. Adjusted profit before income tax increased by 17.5% to £338.4 million. Continuing down the income statement, the effective tax rate for the period was 23.5%, marginally lower than 23.8% in the prior year due to a reduction in expensing tax liabilities for prior periods. We expect this to be the effective tax rate for the full-year 2021. In future years, the tax rate is expected to rise up to 25%, although a more material impact could come from the proposed federal tax changes in the U.S. If fully implemented, the proposed U.S. tax changes could impact the group tax rate by a further approximately 3% and adjusted earnings per share increased by 18.1% to £0.777. We are recommending a 2.5% increase in interim dividend, which reflects the expectations for a more normalized level of growth in adjusted earnings per share for the full year and the group’s commitment to ensuring sustainable dividend growth each year, which we have delivered for the last 28 years. Now, turning to the balance sheet, working capital declined slightly since the end of 2020, with currency translation largely offsetting an increase in the underlying business and [Technical Difficulty]. The underlying increase reflects a reduction in net advance payments from customers of £26 million relating to larger COVID orders, as well as an increase in inventory. Over the first half, we announced six acquisitions and committed £111 million of spend. Despite this, net debt excluding these liabilities ended the period at only £1.2 billion, which is a further reduction compared to the year end. Net debt-to-EBITDA on a covenant basis was 1.4 times, which compares to 1.5 times at the end of 2020 and 1.9 times at the end of 2019. We therefore remain comfortably below our target range of 2 times to 2.5 times, which gives us substantial capacity to self-fund acquisitions. Importantly, return on invested capital was 16.5%, compared to 16.2% at December. This higher level of return reflects the increase in the level of organic profit growth. Onto cash flow, it was another strong period of cash generation, with cash conversion of 100%. Free cash flow was substantial at £225.2 million, although lower than the first half of 2020 due to the reduction in the net advance payments from customers, as well as an increase in income tax payment, which largely relate to the higher prior year profit. Free cash flow was still rather substantially higher compared to 2019 levels at actual exchange rate and during the first half we pay dividends of £52.8 million and invested £93 million in acquisitions. Cash conversion was 100% -- over 100% was 107% excluding the reduction in net advanced payment with both being well above our target cash conversion of 90%. So to summarize, we have seen strong revenue growth over the period, further demonstrated both resilience, continue to generate substantial cash and have ended the period with even more headroom to fund acquisition. At this point, I’d like to hand you back over to Frank, who will take you through the business review.

Frank van Zanten: Thank you, Richard. Let me start by giving you a little more insight into how our sectors have performed over the period. The numbers on this slide reflect the combination of both COVID-related sales and the base business sales. They also reflect the performance of the group as a whole. Although, as I will demonstrate shortly, we have seen different levels of recovery across business areas due to varying levels of pandemic-related restrictions. The cleaning & hygiene, safety, and health care sectors combined continue to benefit from COVID-related sales and product cost inflation in certain categories, but were impacted by the decline in larger COVID-related orders year-on-year. The base business recovery was impacted by the slow return to offices, mixed safety end markets and hospitality procedures remaining below pre-pandemic levels. Overall, underlying revenue declined 9% year-on-year. However, given the level of COVID-related sales, underlying revenue from these sectors remained 12% higher compared to the first half of 2019. Grocery grew 37% year-on-year, supported by some product inflation. Underlying revenue was also 7% ahead of 2019 levels. The foodservice and retail sectors, which have seen the most disruption since the pandemic began, saw combined growth of 13% as the base businesses partially recovered. Together, the businesses are flat against their pre-pandemic levels, although this is driven by COVID-related sales, which have offset declines in the base business. Turning now to our COVID-related sales. As a reminder, these are products that we had previously supplied to our customers, but at lower levels prior to the pandemic, as you can see by reference to 2019 sales in chart. We have seen a significant but expected decline in larger COVID-related sales over the second quarter of 2021. This has impacted our Continental Europe and U.K. and Ireland business areas in particular. We also experience a moderate decline in smaller COVID-related sales in the second quarter, although sales of these products remain meaningfully higher than pre-pandemic level. This support compared to 2019 levels is driven by continuing demand, but also by price inflation on certain products. We have started to see price deflation on these products and expect continued deflation to drive a further reduction in smaller COVID-related sales in the second half. Turning to the main part of our business, the base business excluding the top eight COVID-related products. The Group saw a very strong recovery of the base business in the second quarter of the year with this slide highlighting the relative recovery we have seen overall and within each of our business areas. The recovery has been led by North America due to the speed of reopening and more limited restrictions over the period, as well as product inflation in the region. Grocery growth in addition to foodservice and retail has supported this recovery compared to 2019. Continental Europe space foodservice and retail businesses have remained lower due to the level of restrictions over the first half. Similarly the U.K. and Ireland’s retail and foodservice -based business has been impacted by the restrictions that remain in place for much of the first half. Encouragingly, the U.K. performance have improved by the end of the second quarter as restrictions eased further as demonstrated by our indication of June’s revenue level compared to June 2019. In both Continental Europe and U.K. and Ireland, the cleaning & hygiene sector remains below pre-pandemic levels driven by the number of people still working from home and this is also the case in safety as raw material shortages have impacted the construction and industrial sectors. The evolution of margin in each business area reflects the trends between the reduction in higher margin COVID-related sales and the level of recovery in the base business and the resulting margins in those businesses. In particular, the U.K. and Ireland have seen weak margins that are reflected of a lower level of larger COVID-related sales and also the higher relative weighting towards the foodservice and retail sectors where sales have remained well below pre-pandemic levels. Within Rest of the World, Latin America is trading above 2019 levels, supported by limited restrictions, but also currency-related inflation. Australasia was impacted in the second quarter by new restrictions, which unwound some of the partial recovery evidence in the first quarter. Inflation and deflation have been key features of this period. For Bunzl, the primary influence of inflation in the first half has been to a certain COVID-related products particularly in Q1. The impact has been beneficial. However, during the second quarter, we started to see deflation on these products. We expect this to continue in the second half, which will impact revenue and margins for the remainder of the year. In the second quarter, we started to see further inflation in key categories such as paper, plastics and chemicals. With our larger customers, particularly in North America, product cost movements are usually factored into pricing agreements. Elsewhere, where we have seen more limited inflation to-date, we have historically been successful in passing through price inflation with regular pricing reviews giving the value-added service that we provide to our customers. We also experienced some operating cost inflation, although this had a moderate impact over the first half. However, it is expected to have more impact in the second half of the year. Freight cost surcharges are often factored into pricing agreements with customers, whilst wage inflation is largely offset through operating efficiencies and other organic growth. Whilst I have laid out how we deal with inflation of Bunzl, the more prominent feature of the second half will be a continuation of deflation in certain COVID-related products. This, alongside continued normalization of business mix, will impact our second half operating margin. Now turning to our business areas in turn. We saw underlying revenue growth of 10.6% in North America and operating margin increased strongly from 5.7% to 7%. The grocery sector grew strongly with continued customer demand alongside product inflation, although the availability of salad bars and other freshly-prepared foods remains below pre-pandemic levels. We also saw very strong growth in foodservice redistribution against the backdrop of pent-up demand, as well as inflation. Some operating cost inflation was more than offset by favorable product inflation and operating efficiencies. Operating margin also reflected the addition of higher margin acquisition. In Continental Europe, underlying revenue declined by 11.2%, driven by the reduction of the exceptional larger COVID related sales, excluding larger COVID-related sales, underlying revenues grew modestly. The negative impact of COVID-related lockdowns for most of the period limited the pace of basic business recovery, although smaller COVID-related sales continue to support with only a moderate decline year-on-year. Operating margin was 9.4%, down from 11.4%, reflecting the reduction of larger COVID-related sales and the impact of a partly fixed cost base. In the U.K. and Ireland, underlying revenues declined by 10.3%, driven by the reduction in exceptional larger COVID-related sales and due to the COVID restrictions throughout the period, which impacted the level of base business recoveries, excluding larger COVID-related sales, underlying revenue was broadly stable. Operating margin of 3.9%, compared to 4.7% last year reflects the reduction of larger COVID-related sales on a partially fixed cost base and the impact of the base business where margins continue to reflect below capacity activity. And lastly, with the Rest of the World, we saw very strong underlying revenue growth of 12.3% driven by Latin America. Operating margin increased from 11.7% to 14.2%, with a substantially increase in adjusted operating profit in Latin America. Price inflation in key COVID-related products in Latin America, as well as currency driven inflation continued to support growth. Our commitment to delivering growth through investment in acquisitions has been further evidenced in the first half as we completed six acquisitions with a committed spend of £111 million. Since our full year results in March, we acquired two businesses in Australasia, one focused on healthcare and one in the cleaning & hygiene sector. We also acquired the U.K. business focused on cleaning & hygiene and catering products delivering to different sectors. All three are high quality businesses with good growth opportunities. With a good pipeline of opportunities, we have been able to complete two further acquisitions since the end of the first half. Together with the six acquisitions in the first half, our committed acquisition spend totals £134 million, with annual revenues acquired of £127 million. Both Proin Pinilla and Arprosa, our Spanish safety businesses which complement and enhance our offering to Spanish safety customers, they also further support our diversification of the Spanish business. Turning to the outlook now. Our guidance for 2022 -- 2021 remains unchanged. We expect underlying revenue to be moderately higher in 2021, compared to 2019, which highlights the resilience of the Bunzl business model. In addition to this, acquisitions made over the last two years are expected to drive a strong increase in total revenue compared to 2019. Operating margin for the year is expected to be slightly ahead of historical levels. Looking forward, we expect 2022 to continue to reflect a normalization of business mix compared to 2021, which has still benefited from strong CVOID-related sales in the first half. We, therefore, expect operating margin in 2022 to be in line with historical levels. As I mentioned earlier, I would like to take the opportunity to remind you that on the 11th of October we will be holding a Capital Markets Day. We will be updating you on Bunzl’s strategic priorities, which will support our continued compounding track record of which sustainability is a key part. We envisage it will be a hybrid event. So whilst we hope to see most of you in person, we will equally look forward to your participation through the virtual setup. Before we open up for Q&A, I want to end where I began today’s call. The last 18 months have demonstrated that the strength of our compounding strategy, as well as the resilience of our business model support Bunzl in delivering consistent growth and allows us to continue to focus on the longer term. I am particularly pleased that we are supporting more and more customers with their sustainability priorities and are providing even greater value-added digital solutions for our customers. As I have explained in prior presentation, our Shanghai office has been invaluable to Bunzl and its customers over the pandemic. Ensuring at a time of great stress, their products were delivered with ethical assurance and to the right quality standards. Furthermore, this is the strongest our balance sheet has been for many years, which supports the significant acquisition opportunities we see. As you can tell, I am very enthusiastic about Bunzl’s future. So, thank you for your attention. We are now very happy to take any questions.

Operator: [Operator Instructions] The first question comes from Oscar Val of JPMorgan. Oscar, your line is open.

Oscar Val: Yes. Good morning, Frank and Richard. I have two questions please. The first one may be building on the charts on page 17. Could you comment on what you have seen in July and August in particular in the base business, how has that recovered in July and August? And then, secondly in the COVID-19 -- with COVID-19 products, how should we think about those in the second half? That’s the first question. And then, the second question maybe if you could give a bit more detail on the magnitude of price or product price inflation you are seeing? Again, in particular, how much product price inflation are we seeing in the base business? And then, how should we think about the magnitude of product price deflation in COVID products in the second half? Thank you.

Frank van Zanten: Okay. Well, let me take both questions and Richard can comment if he wants. In terms of July, August, I think, we mentioned that the -- our exit rate was in a good place in the base business at the end of the second quarter, and I would say, our prospects include what we have seen up till today. The magnitude of inflation and deflation, I think, in balance, we do see inflation started in the U.S. and follow up in other areas in broader product groups like paper and plastics and chemicals. But the deflation in certain COVID items like the gloves is significant also. So, I think, in balance, as we are looking at it today, I think, the deflation impact may weigh slightly more heavier than the product cost inflation we are experiencing.

Richard Howes: Yeah. Oscar, let me just build on the…

Oscar Val: Yeah.

Richard Howes: … last point a little bit. Product cost inflation on those COVID-related sales has significantly benefited H1 and we talk about disposable gloves being the main contributor to that. As Frank said, we are seeing deflation in Q2 and that will continue into the second half, and it will be a significant driver of the margin outlook. We have seen those inflation on paper, plastics and chemicals in Q2, particularly North America. They tend to be earlier because the cost plus arrangements in some of that business means that those prices get pushed through sooner. But we do expect to see that into the second half in Continental Europe and in the U.K. If I think about volumes, I think, it’s reasonable to assume that the volumes we are seeing in the first half are slightly lower than they were in the first half of 2020. So, clearly, our base business has been impacted by COVID for two quarters in the first half of 2021 where it was only one quarter in 2020. So, overall, I think, we are seeing a very significant benefit of inflation -- product cost inflation in the first half of 2021.

Oscar Val: Okay. That’s very clear, both. Thank you.

Operator: The next question comes from Annelies Vermeulen from Morgan Stanley. Annelies, your line is open.

Annelies Vermeulen: Hi. Good morning, both, and I thank you for the update. A couple of questions from me, so firstly on the operating cost inflation that you have talked about, could you talk a little bit more about whether that is predominantly wage inflation that you have seen in the U.S. or are you seeing material inflation in other parts of your cost base and if you could talk a little bit about some of those operating efficiencies that you are using to offset that. What are they exactly and how much runway does that still have assuming that inflation continues? And then, secondly, there’s been a lot in the press recently around, obviously, supply chain issues and product shortages and delivery problems. I am just wondering if you are seeing that across any parts of your supply chain and whether it’s impacting your ability to deliver anything in particular for any number of customers. Thank you.

Frank van Zanten: Okay. Richard, maybe you can take the first question and I will take the second.

Richard Howes: Sure. I mean, we are -- in the first half actually operating cost inflation has been quite moderate and we have mitigated that to some degree, I will give you a sense of that in a moment. But it is predominantly wage inflation driven and I would think -- you should think of it being predominantly the U.S., but also increasingly into U.K. and into Continental Europe. So we have talked about I think in the first -- the free flows around 3% wage inflation in the U.S. in the first quarter and into the second quarter. I think that is building and we should assume that and expect that in the second half of 2021, that level of inflation will be higher. And I think we should also assume probably something similar when we think about U.K. first and then, probably, Continental Europe later in H2. As to how we offset some of this inflation? I think it is worth noting to begin with just the wage rate is not necessarily the whole answer. We do give attractive benefits, 401(k) benefits and benefits in general to our employees. I think that does help retention. It doesn’t mean we are less exposed to having to attract new drivers in this case, but clearly, that we are seeing some source in that area. Look, we take a holistic view of operational efficiencies. We do and have undertaken numerous warehouse consolidations over the last 18 months and in the past and they contribute to this. But you should think of it as a game of inches. The operating efficiency in Bunzl is very much a continuous improvement initiative. And that cumulatively that you add up to quite a lot and alongside the growth that we see are very much how we mitigate as much as the OpEx inflation we can, recognizing that the OpEx inflation we are starting to see is higher than perhaps could be mitigated than maybe you need to pass this on in prices at some stage. But we do have the offsetting effect in the second half of higher product cost inflation.

Frank van Zanten: Yeah. Before -- and before I answer the second question, Annelies, what is also important to note is, if you look at Bunzl and mainly distributions, in general, over a long period. If you see operating cost inflation and at the same time you see product cost inflation, it still tends to be a good -- having a good impact on the overall performance of the business. So the good thing in a way is that if the product cost inflation would sustain for a longer period then that’s a good thing for Bunzl and for distribution, in general. In terms of product shortages, yeah, a lot of things are being written about product shortages. I would say in our business as the impact has been very limited, we have seen some supply chain issues coming from China, containers, we all read it the container prices, from harvest, we shutdown because of COVID breakouts and stuff like that. But we still source about 90% of what we buy domestically. So we have seen sort of no real issues in that area. I think where we have seen some impact probably is in our safety business and there’s not so much about us not getting the product. But the fact that if in construction the materials are not available or the staff is not available that indirectly has a bit of an impact on our business as well. But longer term I think I expect it to normalize and with all these stimulus and economic packages being launched in different countries, our safety business should be performing very well in the coming years.

Annelies Vermeulen: Okay. Thank you very much and just a quick follow-up on Richard on your comment. You talks about 3% in the U.S. in the first half when you are talking about that wage inflation and the second half will be higher. And are we talking a couple of percent higher or could it be double, any number you can put around that?

Richard Howes: No. I wouldn’t give any sense for this stage. Annelies. Let’s see how it goes in the second half. But I think it’s reasonable to assume this to be a bit higher than the 3%.

Annelies Vermeulen: Okay. Understood. Thank you, both.

Operator: The next question comes from Kate Somerville of UBS. Kate, your line is open.

Kate Somerville: Hi. Good morning, everyone. First of all thanks for the detailed breakdown of all the moving parts and the three questions from me. The first question is whether the 2021 margin guidance assumes COVID order is above the 2019 level and does that include the pandemic-related PPE in 2020, sorry, 2022 for this? Then the second question is just on the quarterly trends, so in terms of Q1 versus Q2 in terms COVID orders, have they started to slow versus 2019 and if any detail around that would be very helpful? And then, finally, just in terms of the organic growth, are you able to fit into that between volume and price? Thanks a lot.

Frank van Zanten: Okay. Just, Richard, you take the first and the third question. I will take the second on quarterly trends. Obviously, we look at the half year, you need to think about large orders and small orders. Obviously, the large orders have almost disappeared where we have essential large orders last year. I think, overall, supported by some price inflation in COVID. We have seen there’s still better sales in COVID compared to last year. Although, the second quarter was a bit lower certainly on the small order side.

Richard Howes: And, Kate, I think, on your first question about the margin guidance. I think that was a 2022 comment, was it?

Kate Somerville: It was. Yeah. Sorry. Bit of years mixed up.

Richard Howes: So 2020 -- margin for 2022 that we think it’s coming back towards more normalized levels. I think I said that in context is the consensus, I think, for next year is 7.1. And Bunzl’s always said that we can be 10 or so base points up and down around a certain level. So, I think, we are comfortable with the outlook for consensus in 2022 as it currently stands. As to COVID orders, look, we are seeing the prices and the deflation we are seeing on the COVID orders will mean that the second half is the margins are effective. And you should assume that in terms of margin on these products that we return more to a normalized level in 2022 that we have seen in 2020 and indeed 2021. We still think the level of these COVID sales will continue to be a benefit for us. It’s one of the COVID legacy benefits for us. As Frank’s called out, you know, potential for safety opportunities going forward. Cleaning & hygiene, we still see there’s an opportunity in the medium term. We need to see how the return to work happens in cleaning & hygiene. But we think once that’s normalized, it’s still a net benefit. But, yes, I do see that the margins on those products in 2022 would be back more towards what they have been historically. And your third question about can we split out organic growth between price and volume? I think I have answered this. But let me just clarify it again, there’s no doubt that the first half of this year has been significant benefit from those COVID-related product cost inflation particularly in Q1. We saw deflation in Q2 and we have started to see that product cost inflation on paper, plastics and chemicals in Q2 particularly in North America. So you have wrapped those two together and I think you should -- it’s right to assume that those are substantial, and underneath that, volumes are lower year-on-year for the reasons I gave you. So, I think, with those two together, you can get roughly your -- the shape of the answer if not exactly the numbers.

Kate Somerville: Okay. Thanks very much.

Operator: The next question comes from Karl Green of RBC. Karl, your line is open.

Karl Green: Yeah. Thank you very much. Just a couple of remaining questions from me. Just the first one, Richard, I just wanted to clarify that, I think, you said that there was a delta of £20 million in terms of the operating profit impacts in terms of inventory and receivables charge reductions. Just to double check that? And is there any material variance between regions in terms of how that £20 million has been split that we should be aware of? The second question, just on slide 15 you have given that underlying performance versus H1 2019. Did you have those percentages in terms of the organic performance rather than the underlying performance, please?

Frank van Zanten: Can you take those, Richard?

Richard Howes: Yeah. Let me -- Karl, let me take both of those. I think, yes, we -- last year we took to P&L £30 million charge relating to credit loss and customer-specific inventory predominantly in foodservice and retail. Those provisions are still there. There’s been no material reduction in net provisions in the first half compared to last year. But we have reflected an additional £10 million of net provisions in particular in inventory and that is flow moving inventory in essence our policy means that as products get to a certain age, we need to provide a certain proportion against them. Because the pandemic has gone on longer, we have top-up those provisions. I think it’s worth noting that our outlook for the second half does not take any assumption on either further provision levels increasing or indeed any releases. So we are keeping our mind open as to how things change. We will see government support coming up in the second half and I think that’s to be instructive as to the level of credit loss provisions we are holding. We hope it’s efficient, we think it is, but let’s see how that all plays out in the second half and probably into the first half of last year. As to the material varies by region, I mean, predominantly, these are -- these provisions were established in those markets, which have the highest proportion of foodservice and retail. So, think North America, U.K. and then Continental Europe in that order, and you can think -- so most of that delta will be similarly placed because the inventory levels are predominately U.S. and UK in supporting the £10 million this year. As for the underlying revenue 2021 versus 2019 on slide 15, I mean, look, there’s -- it’s a very small difference. It’s about 0.8 of 1% is the one-day effect in -- this year versus last year. But if you compare it this year versus 2019, there’s no leap year effect. So you can broadly say that this is a.

Karl Green: Okay. Great. But just to be clear, the underlying revenue number, so that is -- that excludes acquisitions already does it?

Richard Howes: Absolutely. So underlying is…

Karl Green: Yeah.

Richard Howes: …is effectively the same as organic which excludes acquisitions.

Karl Green: Great. Thanks very much.

Operator: The next question comes from Rajesh Kumar from HSBC. Rajesh, your line is open.

Rajesh Kumar: Hi. Good morning. Just following-up on Karl’s question earlier, the provisions you said last year for the [Technical Difficulty] and can you just confirm that there has been no reversal that has benefited the first half margin? Just to be absolutely clear. And the second question is on the differential inflation you alluded to earlier. When you are thinking about their price increases and you go into discussion with the customer, what are the biggest moving parts, like what role does the own brand or the carbon footprint of the landed product have towards leading to that. Would you give us some color on how your customers might be thinking about price versus product mix going forward? And even if you see -- the third question is, if you see more people switch to your own brand product, I appreciate that the revenue from that mix would be lower but the gross profit necessarily not so. So, at the gross profit level do you think inflation you can get on the topline can be sufficient to offset the distribution cost inflation you are going to see ahead?

Frank van Zanten: Okay. Richard, if you take the first. I will take the second.

Richard Howes: Rajesh, I can confirm that there’s no net releases in the first half. We have taken a net charge in the first half of £10 million.

Rajesh Kumar: Thank you very much.

Frank van Zanten: Yeah. And then how does it work in terms of product cost inflation. That’s roughly two situations. A small part but it’s with larger customers. In the U.S., we have this cost plus deal where basically the new products cost the higher cost flows through automatically, where you see in Continental Europe and Europe and U.K. and Australia. You see more of a situation where suppliers increase prices and then it’s the responsibility of the business managers to get these products increased in price. Now history tells us that Bunzl is very successful in pushing this increase through. With smaller customers is relatively easy. If larger customers it can sometimes be a little bit delayed because there’s a contract in place or a price window. So we tend to extend our price increase of suppliers and increase for our customers earlier. So there can be a bit of a timing effect. But also, normally, you benefit a bit from the stock levels at lower price. So in the mix, we are quite successful in putting prices through to our customers. Now you make a very good point in terms of mix changes. Sustainability is very, very high on the agenda for our customers. We are seeing that happening every day and we are making building a real competitive advantage. So we see when businesses are returning certainly in the sector of foodservice and retail to expect to see that sustainability range pick up. That’s also partially own brands. Your question on own brands is effectively what happens if you would have a more radical sort of change to own brands, will that sort of have a negative impact on sales and margins? Now, I think, the way to think about own brands is that, when we -- we have actually two types of own brands. We have in the safety space for instance, own brands that are being recognized like A brand, so alternatives to Ansell or Honeywell products or that can be Kishigo or Majestic and our customers are recognizing that as an A brand. But you also have a category mostly in cleaning & hygiene where we basically have own brands in toilet paper or in chemicals, which is broadly the same product as the Kimberly-Clark or the SP [ph]. But it’s priced slightly below and has higher margins, because we don’t pay for the marketing cost and all the cost that the brand of suppliers’ play for. Now if you have a period of significant price increases on products and you have a customer base, which you tend to see right now that are still suffering and have a difficult time in the futures, for instance, it is logical to expect them to say, well, we don’t like that price increase you are pushing for. Don’t you have an alternative? So it’s a great opportunity for Bunzl to go and offer own brand products. Now, the price differential isn’t that great. The margin is higher. So it could be a little bit of a sort of negative impact on the sales line, but certainly not on the pounds or the dollar or the euro gross margins. But in the mix, these are relatively small changes in the bigger context of Bunzl. But it’s a good opportunity for us to continue to expand our own brands including the sustainability own brands that we have built.

Rajesh Kumar: Understood. So basically what that would suggest as you should probably look at the gross profit growth as well not just the revenue and/or basically you think about that when we are doing our forecast?

Richard Howes: Sorry, I didn’t I didn’t hear the first part of your comment.

Rajesh Kumar: So, basically, when we are thinking about 2022, we should think in terms of gross profit growth as well, not just the topline revenue growth, because that could potentially be different impact to the revenue?

Richard Howes: Yeah. In that is yes. But also you have heard us talk about that sale in the past also. You need to run stand still. We have an operate -- we have a net margin of about 7%. So, yes, you would expect higher margins from own brands. But also once COVID is -- it has normalized, I also expect probably a bit more tender activity in our businesses than during the pandemic. So you have gained some and you lose some. But, overall, I think, it’s to be sort of neutral to slightly positive.

Rajesh Kumar: Thank you very much.

Operator: The last question comes from Gerry Hennigan from Goodbody Stockbroker. Gerry, your line is open. Gerry, is your line muted?

Gerry Hennigan: Sorry. Apologies for that technology, it doesn’t suppose to be there. And just on a follow-up in terms of the prior question with regard to own brand. What was the portion of sales from own brand in the first half of the year and it does sound based on the comments around sustainability and your Capital Markets Day focus of that in October that those -- that trend and so those issues have accelerated over the last 18 months or so. Relative to the competition, do you see yourself at an advantage in terms of those trends you can give relative to smaller players and how do you see that’s playing out from your point of view over the next two years or so?

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

Gerry Hennigan: Sorry. Just I was looking for the proportion of own brand sales during H1.

Frank van Zanten: Yes. No. Sort of the second question you had.

Gerry Hennigan: The second question was around sustainability trends.

Frank van Zanten: Okay. I got it. Yeah. Okay. All right. That’s right. Okay. Let me give a go at the first part and we still see sort of slightly inflated numbers on what I would call the inflation in combination with own brands less imported products. They are around 24%. In the past they tended to grow by 1%. But over COVID, it has jumped up. If you look at the combination of own brands and imported is something that we see as a core advantage for Bunzl that we can deliver. On sustainability, I think, it is a real competitive advantage and a building competitive advantage and we also won one business more recently just based on our sustainability credentials and that’s why that -- you need to think about our businesses competing on a local basis and we are a larger group. So we have been able to invest in sustainability experts. We have been able to invest in building own brand ranges and that offers us benefits compared to other businesses. I would like to say at this point also, our Capital Markets Day will be, for the important part, centered around sustainability. It is expected to be quite an exciting event. So, yes, it’s online, but if you can make it, because we will be showing certain things also at the event, I would really welcome and ask people to come to the event. It’s been a while ago and it’s going to be a very good event, you won’t regret. We will share a few new things as well. So, yes, it’s a competitive advantage to grow and competitive advantage is very high on the agenda. Certainly with larger customers, we are helping to really solve certain issues. We have the expertise. We are not a manufacturing. So we can be very independent in terms of what we had advise our customers and they really appreciate that in terms of what we are doing. So, again, if it adds to the stickiness of our relationship, just like what we are doing on the digital side, we are signing customers into our model and really becoming an integrated part of their whole business.

Gerry Hennigan: Okay. Thanks very much.

Operator: We have another question registered from Sam Dindol of Stifel. Sam, your line is open.

Sam Dindol: Good morning, guys. Two questions on acquisitions from me. Firstly, given how free cash flow generative you are, how quickly do you think it would turn to sort of the bottom end of your target leverage range? And then, secondly, on targeting new markets for M&A, can you give a sense of the new geographies or verticals, which I believe would be of interest to the bigger medium-term? Thanks.

Frank van Zanten: Okay. Let me give a go, capacity. So we have substantial capacity currently. We always spoke about 2 times to 2.5 times. We are now at 1.4 times. So we have a lot of capacity. There’s also a lot of sort of M&A activity going on. We have seen that in certainly in North America. Biden announced some potential tax changes which make people really think should I be selling my business this year. So we have a number of discussions on the go. Now, I think, the key part of our success, we have done 177 acquisitions and you can only do that if you are disciplined and so we continue to be disciplined. We buy good businesses. We try to buy them at fair prices. I think in the short-term, it looks good. Longer term I think it may look even better, because I know that there’s a quite a number of people who went through a real scare during the second quarter of last year, but they were financially independent, suddenly saw that business drop by 90% because of the pandemic. So I think there will be more people as soon as they move back towards the 2019 profitability levels they will knock on our doors. We have more than 1,000 people in our day-to-day. So I think M&A, I am very excited having such a strong balance sheet and also the kind of opportunity I see going forward. But discipline is the magic word as well. So doing that in the right way is important and it’s great to be in this position. In terms of new markets…

Sam Dindol: Yeah.

Frank van Zanten: Yeah. We are constantly open looking at things. We -- you have seen the slides in the past as well with the different sectors and geographies and we have areas where we are not active at all. But it goes back to our discipline. We like to buy the number one or two in the market when we enter markets like, a base business that we can anchor on a platform and that is increasing the success rate of the acquisitions significantly. So, again, it goes back to the triggers for people why do they sell their business. So we can’t focus on now we are going to do more in cleaning & hygiene or now we are going to buy more businesses in France or in Mexico, because it depends on when people become available. We are very, very busy in the holding these contacts, keeping these relationships going and when people are ready to sell then we are there and we have got a lot of firepower. So in that sense I think future looks very good.

Operator: We have no further questions registered, so I will hand the call back to you, Frank.

Frank van Zanten: Well, thank you very much for attending today and we are very much looking forward to see you all at the Capital Markets Day if it proves to be -- promises to be a very exciting event. So thank you for listening.

Operator: This concludes…