Earnings Transcript for BZLFY - Q4 Fiscal Year 2019

Frank van Zanten: Good morning, everyone. This is the 24th of February, so I would say welcome to my birthday party, but I'm going to say welcome to the Full Year's Results Presentation for 2019. After short introduction from me, Richard Howes will present the financial results and I will then review our operations in more detail and provide some further insight into the ongoing implementation of our consistent and proven strategy to grow and development the business. Against the background of mixed macroeconomic and market conditions which prevailed during the year, Bunzl has delivered a resilient performance with an increase in operating margin at constant exchange rates. Organic revenue was broadly stable despite headwinds in some of our markets and I'm particularly pleased to see our continued strong cash conversion and free cash flow growth. Although we purchased fewer businesses in 2019 than in recent years, acquisition activity has picked up recently with four deals agreed since the end of November [indiscernible] of approximately £300. The pipeline remains promising and a number of discussions are taking place. I believe that these results once again demonstrate the strength, resilience and reliability of our consistent business model. We have a proven track record of developing the group through a combination of organic and acquisition led growth and operating model improvements. I will now hand over to Richard to take you through the financial results.

Richard Howes: Thank you, Frank and Happy Birthday, and good morning everyone. My first six months in Bunzl have given me a very good overview of group. It's bred from diversity, the quality of the people, and the gross opportunity. It has been a busy and enjoyable time. I would like to thank Brian May for providing an excellent handover and wish him well in his retirement. In the following slides we have presented both actual and constant currency growth percentages. In 2019 there has been a positive impact of exchange rate translation of between 1% and 2%, principally due to the weakening of sterling against the U.S. dollar. In reviewing the income statement I will refer to growth at constant exchange rates. Starting with revenue, revenue grew by 1% to £9.3 billion after two very strong years in 2017 and 2018 organic growth in 2019 was minus 0.2%. As we have indicated previously, this includes around £45 million of low revenue from price changes with our largest grocery customer albeit with a relatively small impact on profit. Excluding this, organic growth was 0.3% and acquisitions in 2018 and 2019 contributed growth of 1.4%. Before turning to the income statement, I would like to remind you about the impact of the new lease accounting standard IFRS 16, which is effective for the first time in 2019. The main adjustments to the financial results are set out on this slide and are in line with the guidance given last year. It is important to note that despite the financial reporting changes required by IFRS 16, in substance nothing has changed for Bunzl. We continue to lease most of our fixed assets. There is no impact on cash flow. There is no impact on our existing debt covenants, and our substantial financing headroom is unchanged. Now turning to the income statement, please note the statutory results for 2019 are prepared under IFRS 16, whereas the comparative results for 2018 were prepared under the old lease accounting standard IAS 17. In order to aid comparability we have also included results for 2019 and IAS 17 and my comments will be focused on these results. Adjusted operating profit grew by 1.5% to £630.9 million. At actual exchange rates, our operating margin was unchanged, but at constant exchange rates the margin increased from 6.7% 6.8%, demonstrating the resilience of the group. Net finance expense decreased by £3.2 million and as a result of a lower level of average debt as well as a lower average interest rate. Adjusted profit before tax increased by 2.4% to £579.1 million. Continuing down the income statement, the effective tax rate for the year was 23.8% up 0.7 percentage points compared to 2018. The effective tax rate for 2020 is expected to be around 24%. Adjusted earnings per share increased by 1% to £132.4 and we are proposing a final dividend per share of £35.8 making a total of £51.3 for the full-year an increase of 2.2%. This continues 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 27 years, we've been able to increase our dividend consistently every year, broadly in line with the growth in our earnings. And this has been possible due to the resilient nature of our business model, sustained growth in earnings, and strong cash generation. The compound annual growth rate of dividends over this period has been 10%. Now turning to the balance sheet, working capital has decreased by £4.9 million as good operational control and currency translation were partially offset by the impact of acquisitions and the adoption of IFRS 16. Net debt excluding lease liabilities ended the year at £1.2 billion, £140 million lower than 2018 due to a net cash inflow of £99 million and currency translation. Net debt to EBITDA on a covenant basis was 1.9 times which is just below our target range of 2 to 2.5 times and gives us substantial capacity to self fund future acquisitions. The return on average operating capital on an IAS 17 basis remains high at 48.4%, although down on the prior year driven by an increase in the average capital employed in the underlying business. During the first half we were running with more working capital than we would have liked, principally in our U.S. retail business following the integration of DDS. But this improved significantly in the second half. Now turning to the cash flow statement, 2019 was another year of strong cash generation for Bunzl with free cash flow of £456.9 million up 10% on the prior-year and cash conversion of a 101%. During the year we paid dividends of £167.3 million and invested £162.8 million in acquisitions. Bunzl has consistently achieved a high level of cash conversion over many years. The average rate of cash conversion since 2004 has been 97% and this year we achieved 101%, so broadly each pound of operating profit has been converted into a pound of cash. The ability to consistently deliver high rates of cash conversion of operating profit which is compounded at 9% per annum since 2004 is at the heart of the Bunzl business model. During this period it has enabled us to invest $3.4 billion in self-funded acquisitions which have compounded over multiple years to generate substantial growth while maintaining a strong balance sheet and at the same time we have been able to grow dividend strongly and consistently paying out of a total of £1.5 billion. I can confirm that our approach to capital allocation remains unchanged. So let me summarize the key highlights of our performance in 2019. Operating margin at constant exchange rates has increased from 6.7% to 6.8%, demonstrating the resilience of the business model. Cash conversion has been strong at 101% with free cash flow of 10% and dividend per share has increased by 2.2% continuing our track record of unbroken dividend growth stretching back 27 years. At this point, I would like to handover 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; review of our operations during the year, I will look forward and consider the prospects for 2025, and finally I will take a deeper dive into the separate components of our consistent and proven compounding strategy. Bunzl's operations are truly international with a global footprint of businesses spread across 31 countries serving customers and six market sectors. We are organized by four geographic business areas and shown here are the respective contributions to the group's results of the revenue and operating profit. In North America revenue at constant exchange was broadly unchanged at £5.5 billion as the positive impact of recent acquisitions was offset by 1.2% decline in organic revenue. This was principally due to lower sales to our largest grocery customer as a result of account specific price and product specification changes. However, we benefited from cost savings generated by the reorganization of our grocery and redistribution businesses. Operating profit was £331 million up 0.6% with the operating margin unchanged at 6%. Our U.S. grocery business was also impacted by a net reduction in sales as additional business gains during the year were more than offset by some losses. The business has recently been enhanced by the acquisition of Joshen at the beginning of this year, which will provide a number of synergies and efficiencies going forward. Despite tough trading conditions in our customers end markets have led to a number of store closures and the failure of some retailers, our retail supplies business has held up well with revenues slightly ahead of the prior year. The integration of DDS which we acquired in 2017 with our other retail sector focused businesses has continued to yield sourcing and operational synergies ahead of our expectations although the additional savings achieved during the year were broadly offset by cost increases. In our business of serving the safety, convenience store, processor and agricultural sectors, we saw good overall growth. In particular, our safety business has grown well. During the year, we have faced product cost increases from import tariffs, the impact of which has been successfully mitigated. We also continue to invest in this sector with the acquisition in February 2019 of Liberty Glove & Safety, a supplier of PPE to smaller distributers across the U.S. Revenue in Continental Europe rose by 3% to £1.8 billion due to organic growth of 1.8% and the impact of recent acquisitions, partly offset by the disposal of OPM in France in February 2018. Operating profit was £178.8 million up 2.6% with the operating margin unchanged at 9.8%. In France, total revenue excluding OPM was marginally higher as growth in the cleaning and hygiene and food service sectors offset the decline in sales of personal protection equipment. In the Netherlands, there was good overall sales growth. We successfully consolidated three businesses in the healthcare sector into a single modern site to gain efficiencies and provide an enhanced service to our customers. We also combined three separate warehouses serving the grocery and nonfood and online retail sectors into a new larger facility. Sales have continued to grow well in Spain. The cleaning and hygiene business continues to enjoy good growth and in the safety sector after slow start sales finished ahead of last year despite lower levels of industrial activity in the country. Our online medical business had another successful year due to new product launches and the enhanced use of e-marketing tools and our industrial and disposable packaging business also delivered high levels of growth. In Turkey, sales have grown due to a combination of price inflation following the devaluation of the Turkish lira and higher volumes in the healthcare sector as numerous new tenders have been won. Our recent acquisitions of CM Supply in Denmark and Enor in Norway, both purchased in 2018 and Coolpack in the Netherlands which was acquired in 2019 have all integrated well and are trading ahead of expectations. In the UK and Ireland revenue decreased by 1.7% to £1.2 billion and was slightly down by 0.2% on an organic basis after excluding the impact of the disposal of the marketing services business in June 2018. Operating profit was £83.3 million down 4.1% and was 1.7% lower after adjusting for the disposal. The operating margin decreased from 6.9% to 6.7%. Our cleaning and hygiene supplies business has seen good growth during the year as we won several new customers. Although our safety business was at first impacted by the slowdown in the industrial and construction sectors, performance improved during the second half of the year due to the new customer and business wins. The combination of rising food and labor costs in the catering industry combined with excess capacity amongst many High Street chains has resulted in difficult trading conditions in our hospitality business. As previously reported, the introduction of the new centrally funded NHS operating model in April 2019 led to a major reduction in sales to NHS Hospital Trust customers in England. As a result we've worked hard to right size this part of our healthcare business. We have however won new business in both the private healthcare market and with nursing homes, which has partly offset this decline. Our nonfood retail specialty businesses have continued to be impacted by a challenging retail sector. However, our larger grocery business grew well as we secured new business with existing customers. I am particularly pleased to say that we have also regained a large supermarket chain customer whose business was lost in 2016. I will provide some more color on this later in my presentation. In rest of the world revenue increased 8.8% to £781.6 million due to organic growth of 2.2% and the impact of the acquisition of Volk do Brasil at the beginning of 2019. Operating profit was £59 million up 8.3% with the operating margin down from 7.6% to 7.5%. Overall in Latin America we saw good sales and operating profit growth. Organic revenue growth was particularly strong in Brazil, although elsewhere in the region difficult trading conditions resulted in margin pressures in a number of businesses, especially in our safety footwear business in Chile and in Mexico safety. In Australia, we saw good profit improvement despite a slower economy. Now turning to the prospects for the rest of the year. Although we continue to see challenging trading conditions in some markets, our strong competitive position, diversified and resilient businesses, and ability to consolidate our fragmented markets further, should lead to improved growth at constant exchange rates principally due to the impact of the good level of recent acquisition activity. In North America we expect good revenue growth due to the recent acquisition of Joshen, but will see the continued impact on revenue in the first half of 2020 from the 2019 price and product specification changes with our largest grocery customer and weakness in the grocery and retail sectors throughout the year. We will continue to focus on operating costs, productivity and order efficiency improvements. In Continental Europe, despite mixed macroeconomic conditions across the region, we expect to develop further due to the combination of some organic revenue growth and the benefit of the proposed acquisition announced today. In the UK and Ireland, growth is expected to be limited given the prevailing uncertain economic and market conditions. In rest of the world we expect to see good progress due to a combination of organic and acquisition growth. In relation to acquisition activity, the pipeline is promising with a number of discussions ongoing. I would now like to move on to provide further insight into our consistent and proven compounding strategy to grow and develop the business which is based on three key areas, profitable organic growth, improving our operating model and growing by acquisition. Our business is well diversified by customer market. As people go about their daily lives they are constantly touching and using a Bunzl product. We hold strong position in a variety of different customer sectors, including the more resilient sectors of food service, grocery, cleaning and hygiene, and healthcare. Within foodservice and cleaning and hygiene, the main growth driver is the away-from-home market as we work, travel, and eat away from home. In grocery and retail it is the trend to outsourcing that is the secular trend. As we have seen consistently over many years, customers who could otherwise self distribute their goods not for resale instead choose to outsource to Bunzl as they realize the efficiencies, cost savings, and working capital benefits available to the business of doing so. Within healthcare, the trend is in aging population with greater demand for more medical care and care homes. And finally, in safety, we see greater compliance with health and safety regulation, as companies increasingly focus on the welfare of their workers, with the cost of compliance being far less than the penalties of non-compliance. Our organic growth is underpinned by a combination of the secular market growth drivers, I have referred to and volume, price and mix drivers shown on this slide. This growth is supported by our 3,200 expert salespeople and 2,600 locally based customer service specialists, who use that deep and detailed knowledge to work with customers to ensure that they received the best possible advice on all products and service related matters. It is the theme of winning new customers that I would like to focus on today. Customers' requirements and demands have undoubtedly increased over the years and this plays to our strength as a specialist distributor. As we have talked about before, some distributors in adjacent sectors have tried to nibble around the edges of our markets, but have failed to gain traction and they are unable to meet our customers' increasing requirements. As I mentioned earlier, we have recently won back the contract to supply a large U.K. grocery chain, which we had lost in 2016 to a generalist distributor that was subsequently unable to satisfy the customer service expectations. This slide shows the attributes which the customer was looking for from its supplier when they were considering who to award their business to, and which they outlined in their tender document. In particular, these include the need to be an expert in purchasing consumables and packaging. It was our ability to demonstrate that we could match our service offering against all of the customer's requirements that enabled us to win this new business. I won't go through every element of their requirements, but I will highlight a couple of them. Firstly, the ability to deliver the highest level of service, orders must be delivered on time and in full. Our products are essential and often low value and represent a low percentage of the customer's overall spend. But without them, the customer cannot operate. Not having till rolls, for example, can close a store. A part of being able to deliver the highest levels of service was the desire to have one simple ordering platform. Through our digital platform, we are able to provide customers with significant amounts of account specific management information and offer an order to enforce process, which is simple and fast to use. Secondly, the objective to support and align on corporate responsibility and environmental challenges. Innovation in the area of sustainability is critical to a grocery chain with their own environmental objectives. To prove our credentials, we explained the unique benefits of our own Asia sourcing office with related supplier audits to ensure ethical and social compliance and showcased examples of work we have done with other customers, including the sourcing of a fully compostable carrier bag. As you have heard from the new customer win example, sustainability continues to be front and center of our business focus, it is a key driver for many of our customers and during the year we have focused on the further implementation of the group's sustainability strategy. This has included the recruitment of more experts embedded within the business areas led by Group Head of Sustainability, and the development of our sustainability framework. This brings together all of the strengths of our responsibility in this area. These include the standards we expect from our suppliers, our own environmental footprint as a business and the role we can play in both providing education about and supplying sustainable product solutions for our customers. As a non-manufacturer with extensive sourcing capabilities, we are in a unique position in the supply chain to lead the industry towards a more sustainable approach to single-use plastics and help our customers transition towards more sustainable options. The vast majority of the single-use plastics that are sold by our businesses, our primary packaging used in the grocery and food service sectors to take food from the point of purchase to the point of consumption. As such, there will always be demand for these types of products and we are extremely well placed to offer our customers more sustainable alternatives. Our sustainability team meets regularly to share our best practices and ideas and with the support of our Asia sourcing center, we’re introducing additional sustainable product ranges. The scale of Bunzl means we have the capacity to invest in our team in this ever growing and increasingly important area, and allows us to support our customers while enhancing our competitive advantage. The second limb of our strategy is continually striving to improve the quality of our operations and to make our business more efficient and sustainable, often by making small improvements every day, which lead to significant progress over time. In addition, we implement more significant changes to our operating model. For example, in the latter part of 2018, we announced the more focused and streamlined organization structure across our two largest businesses in North America, grocery and redistribution, in order to enhance our customer proposition and improve our operational efficiency. The reorganization was completed during the first half of 2019 and we've now seen the resulting efficiency and cost benefits coming through. As I mentioned earlier, during 2019, we consolidated three businesses in the healthcare sector in the Netherlands into one business, which was relocated into a state-of-the-art facility. This includes a clean room for the storage of medical products and vertical lift modules to maximize our use of the extra height in the new warehouse. The system can pick up to 55 orders at a time, which allows one warehouse operative to do the work previously done by three. In addition, in the Netherlands, we've also combined three warehouses operating in the grocery and non-food and online retail sectors into one new facility, thereby achieving cost savings and operational efficiencies to economies of scale. Throughout the business, we have also continued to invest in digital, including further development of our e-commerce sites. We have added new digital functionality in our U.K. safety business, which helps our customers allocate and subsequently manage their workforce individual PPE requirements. The system provides valuable detailed management information, including specific sizes, and personal preferences, and any regulatory requirements, ensuring their staff remain safe and compliant, which also assist in the event of an accident or claim. This is an excellent example of how we are able to offer customized service solutions which increase the added value we provide to our customers, thereby helping to build strong and lasting relationships with them. We're also constantly looking to implement other efficiency initiatives, such as installing routing and safety systems, which enable us to minimize distances traveled and encourage safe driving practices, thereby reducing fuel and other transport costs, and lowering our carbon footprint. These types of initiatives are good examples of how operating model improvements can go hand in hand with sustainability driven initiatives. The final part of our strategy over time - which over time has accounted for approximately three quarters of our overall growth is our ongoing program of focused and targeted acquisitions in both new and existing market sectors and geographies. Since 2004, we've made 163 acquisitions for a total investment of £3.4 billion without the need to raise any equity. We continue to have significant financial capacity to make acquisitions over the near-term. At the end of 2019, our ratio of net debt-to-EBITDA was 1.9 times. During the next 12 months, we could spend nearly £400 million on acquisitions and maintain our ratio at that level, which would still leave significant headroom within our target range. Our 2019 committed spend was £124 million, with an average annual spend since 2015 of approximately £300 million. While the spend in 2019 was below the average, this average, I often describe our acquisition activity as like the timings of London Buses, which as we all know can also be difficult to predict. You wait ages for one to come along and then three arrive all at once and this has certainly run through recently with four acquisitions signed or completed since the end of November. We also have a promising pipeline looking forward. The next two slides refer to our four most recent acquisitions which highlight the depth and breadth of the opportunities that exists across our various markets and geographies. Joshen is a business headquartered in Cleveland, supplying a wide range of packaging and goods not for resale into the grocery foodservice and cleaning and hygiene sectors. Revenue is expected to be approximately £225 million in 2020. Their operation spanned across 11 states with customer serviced with a strong sales force and with 95% of deliveries being on their own trucks. Joshen complements our existing business in North America and will enable us to drive a number of synergies and efficiencies. FRSA is a safety and emergency response supplies business in Australia, which we acquired at the end of November. Revenue is expected to be £20 million in 2020. The business is principally engaged in the distribution of specialist safety and personnel protection equipment focused on fire, rescue and emergency response surfaces. Today we've also announced two further acquisitions, one in Continental Europe and one in Latin America. We have recently entered into an agreement to purchase ICM, a leading distributor of PPE to both end-user and redistributors based in Odense, Denmark. Revenue in 2019 was £48 million. Completion is expected to take place at the end of March. And finally, Medcorp, a distributor of healthcare related products to leading private hospital and redistributors in Brazil, was acquired at the end of January this year. Revenue in 2019 was £11 million. Having spoken to you in some depth about our consistent and proven strategy, I would like to share with you how this has delivered significant shareholder value over a sustained period of time. Our resilient business model has enabled us to deliver high rates of cash generation. This in turn gives us the ability to take advantage of market consolidation opportunities through the application of our disciplined approach through focused and targeted acquisitions over the longer-term. Taken together, the strength, resilience and reliability of our consistent business model and strategy have enabled Bunzl to grow our key financial metrics at compound annual growth rates of between 9% and 10% since 2004. Although 2019 was a challenging year with lower than average acquisition activity, I'm confident that our tried and tested business model and strategy will continue to serve the group well into the future. Thank you for your attention. We're now happy to take your questions. Paul?

Q - Paul Checketts: Good morning. It’s Paul Checketts from Barclays Capital. The usual three if you don’t mind, the first, can I ask about, excuse me, Coronavirus and your assessment of the potential disruption? The second is on your prospects comment Frank and you referenced challenging conditions in grocery and retail in the U.S. If you look at sales year-on-year in those overall markets, they've actually rebounded quite strongly towards the end of last year. Is there a disconnect between your own experience and what the markets are doing? How should I think about that? And then the last one is around capital employed. If you look at - we had the contract with your big U.S. customer last year where they two years ago, we did extra products with them in the U.K. section today talking about broader, more extensive range of products and you referenced extra working capital putting pressure on returns. Do you think that the business is becoming more capital intensive overall, is that a requirement of extra wins? Thank you.

Frank van Zanten: Yes, okay. Corona, well probably everybody knows Bunzl is not really involved in manufacturing. So we don't have any manufacturing operations in China. We have a sourcing office in China. We have a tiny business distribution business there who actually sold some masks also part of their business is mask, but it is basically from an operational point of view it is sort of a non-event. The area that we are watching closely is the supply chain. Obviously we’re bringing products from China. Now, the timing of the Corona breakout was interesting because it happened very closely to Chinese New Year. Our businesses are all aware of the time of Chinese New Year. So this is the period where everybody is always stocking up in the business and sort of pre-ordering before Chinese New Year. So, we are currently at relatively higher levels of stock in the business. We also have some flexibility because we got our scale, we got our sourcing operation to move to other places like Bangladesh or Thailand, Malaysia, India. So we have some flexibility there for certain parts of the group. So, I would say if I compare Bunzl to other companies, I think we’re at the relatively low risk side of the equation. If this starts to take longer periods of time, let's say if it takes three, four, five months, where manufacturing companies in China really shut down, then it may have some impact on the supply chain, but I think then the world overall is in a slightly different place. If Corona starts to impact sort of GDPs around the world, then Bunzl being a GDP related business could have a bit of impact. But we all know if you go back to 2009, at the time of the recession Bunzl was actually very resilient and did very well because 75% of our portfolio is very resilient. On the prospects, retail as a sector is obviously certainly in the bricks and mortar part is a slightly more challenging business. So we have our DDS Schwarz business, the retail business was a very strong position. And here the game is really us trying to win market share in that sector in 2019, actually, the retail business overall hold up quite, quite well. Grocery, I think there were two specific things, I would say, that were impacting 2019 or maybe three. The first one was the price correction with a larger customer who had quite a bit impact on the sales not so much on the profit because a very low profit, but on the sales. The second part is because in 2017, 2018 we onboarded this $400 million of business there was a bit of digestion necessary, so we onboarded a lot of drivers, temporary labor. So 2019 was more about sort of bedding down the organization. And also at the end of 2018, we announced this restructuring where we took 50 senior hands out of the business. So I think the grocery and redistribution had to reset a bit, maybe a little bit more internal focus in the business. So and I think that led to overall losing a little bit more than winning in terms of tenders and all the activity and we are hopeful that that position will know will be better in future. On the capital employed, I think capital employed you've seen our cash conversion 101%, so very good cash flow. Capital employed a little bit under pressure was mainly around the first half, the second half was a little better. So, for instance, in our DDS Schwarz business, we put them all in one IT systems. We had a few sort of integration issues, there were many locations to be put on one system, so we hold a bit too much stock and we've been unwinding that stock into the second half of the year, I think the capital employed was looking much better. If you look at capital employed longer-term, you may have seen a little bit of impact of us acquiring two safety businesses. And obviously the safety business has higher margins, but also slightly higher capital employed.

Paul Checketts: Okay, so a follow-up on the retail grocery bit. If there's an ongoing shift from High Street to online, how do you feel the position to deal with that?

Frank van Zanten: Well I think in terms of the retail sector, I think I wouldn't expect this to be a very high growth area going forward for us. But we are a mixed, we're mixed portfolio. The kind of things we try to do is build up better positions also with the people who do the online part of it. But this is not going to be a high growth area unless we, unless we onboard big outsourcing chunks in the retail area.

George Gregory: Thank you. It's George Gregory from Exane BNP Paribas. I have three questions, please. Firstly, just in terms of some of the headwinds that you've faced in some of your markets over the course of the last couple of years, retail, grocery, hospitality, just wondered whether you had seen those impacts at all in Continental Europe, which is a region that has performed much better for you over the past couple of years or whether it was offset by mix or something like that? Secondly, thinking about the shift to sustainable alternatives, in the past you've shown us how you've been able to achieve similar to improved profits by shifting to sustainable alternatives. Just wondering over the longer-term, what enables Bunzl to sustain a higher gross profit per unit on a sustainable alternative versus say single-use plastic? And finally, I think Frank, you talked about the fact that there will always be demand for packaging products. I'm just wondering why it shouldn't in the long-term be mandated that retailers use reusable packaging, food storage, and I know that there are some pilots out there for these kinds of solutions. If that was to bed down, is that a service that you could play in please? Thanks.

Frank van Zanten: Yes, okay, some of the headwinds. I think in Continental Europe, certainly in the retail area, we've seen some of the business that operate more in the bricks and mortar area we've seen some pressure, I think in the grocery sector, I think the markets in Europe are more fragmented. So in any location, I think we deal with our customers on a local basis. So if you think about the big facility management companies or the big contract catering companies, all these businesses have local organizations in Holland, in Germany, and we deal with them in a local basis. Our North America from a grocery point of view is a much more consolidated market to deal with, you see in Continental Europe margins at 9.8%. That's really a factor of the fragmentation of the customers. In terms of hospitality, I think overall we still see the secular growth driver of people eating more out of home, more spending time in hotel, there's more travel. So we haven't seen really sort of big impact in Europe on that. In terms of the sustainable alternatives, if you look at single-use plastics, people always think about the obvious and I'll talk a little bit about the obvious. The obvious is the straw and the stirrer. Let me share with you what happened in the U.K. and the U.K. is much more advanced than Europe and certainly more advanced in the U.S., U.S. we don't really see a lot of people are talking about it, but obviously there's a President there who doesn't really believe in these kind of things. So, U.K. is very prominent and Europe is following. What we see happening is with the plastic straws, we saw a reduction of number of straws, and we've seen a big transition to paper straws. Now the paper straws are a lot more expensive. If you look at the stirrers, plastic stirrers, they moved to wood. The wooden stirrers are also more expensive. And the same with the straws also the paper are more expensive. Overall the turnover in that product is broadly similar. But the other interesting thing what's happening is, because we are positioning us increasingly as the leader in sustainability in this area, we've won some interesting pieces of business with some larger customers also that are going out and tendering paper straws. Because paper straws are more expensive than plastic straws, people try to control the cost also and because we are in a very good position there we've actually been winning some business. That's the simple stuff. If you look at the more complicated packaging that is the vast majority of what we do is this actually the packaging you see in the supermarkets. Now personally I'm pretty convinced that you will see less plastics in that area going forward. Although plastics is quite a good material to package food in, in terms of food hygiene as well, I think this will move to other categories, because you will still need to have the packaging and I think there's one very important factor that is in play here also and that is the hygiene factor of food. Just imagine that you go into a supermarket with your own Tupperware kind of packaging and you ask the butcher to put a stake in into your Tupperware, you pay it at the cash register. You go home and you get a salmonella infection, who's there to blame? It's a very difficult one. So I think, but also in terms of the reusables. We've seen our category paper cups, there's certainly not a very large growth in that area. We've seen some declines, but we also see the cups for life that everybody has in the office these days going up a lot. We've seen a similar trend like what we've seen with the single use carrier bags in the past. There's not a lot of single use carrier bags sold in the U.K. anymore. It's all the bags for life. And we are selling the bags for life. People buying bags for life. And the sales levels are broadly similar. Now, how this is all going to pan out very long-term is very difficult to say. But what we've seen with the very straightforward simple things like stirrers and straws is that we've been seeing broadly similar levels of turnover in certain categories also the margins being a bit better. And the last one was unrecyclable. Sorry, can you repeat the last question?

George Gregory: Sorry, it was, you talked, you talked there about customers bringing in their own Tupperwares. I was thinking more about the retailers providing their Tupperware effectively which they sterilize, therefore you remove the risk, the liability on the retailer rather than on the consumers.

Frank van Zanten: But certainly what we will see, we'll see more also a trend towards us selling the reusable plastic. The thing to think about is, Bunzl is not a manufacturing of single-use plastics manufacturer. We are a one-stop shop supplier of all the items that the customer needs and they want us to supply the whole range. I've given you the example. I'll do it again. We deliver a very large coffee shop chain in the U.K. We deliver more than 700 items almost every day. And so it's not about the product, it's about the service. We are the warehouse for the customer. And if we don't deliver the till rolls or if we don't deliver the paper cup in the morning to the High Street Coffee Store in Oxford Street here, they can't sell the coffee. And so not so much about the product, it's about the whole proposition.

George Gregory: Thanks. And just to clarify on your straws and stirrers example, is that a - do you see yourselves as being able to sustainably generate higher profit per unit on paper straws and stirrers or is that suppose a temporary phenomenon given that there is sort of relative illiquidity in the market for paper straw?

Frank van Zanten: I don't think that the straw and the stirrer is a very representative example for all the other packaging that is going to happen, because with straws and stirrers, you can just say, we're not going to give it. And you can't do that with packaging in the store. But I think what you will see is, if you will probably see similar margin percentages on a higher level and the quantities may be a little bit lower and overall, I think the sales will be broadly the same.

Tom Sykes: Excuse me, good morning. Tom Sykes from Deutsche Bank, you referenced the quite good growth out of safety. I was wondering if you could just talk about the drivers there and how we should think about the cyclicality. What's the end? What are the end markets that are pushing the safety growth? Is there a construction element there? And then as I understand a lot of your sourcing, direct sourcing from China is safety related and I just wondered, can you say, are you actually still taking shipments from China? And are you seeing any inflation in those products in the end-markets that would actually benefit you at the revenue level that you've obviously got inventory in certain costs that you may be seeing gross margin benefit or would you expect that to happen at all please?

Frank van Zanten: Yes. Safety, is slightly more cyclical than let's say, toilet paper in cleaning and hygiene. Everybody understands that because you're selling to industry, oil and gas, manufacturing, it is a very wide range of sectors in certainly in North America. What I would say is, in our Safety sector, we are supplying the essential items for the daily life. So, it's not like CapEx item where you can say, okay, we're going to, we're going to delay an investment into a machine or whatever into the safety sector. This is gloves and people are at risk if they start giving, not the gloves they should be giving handing out on a weekly basis or whatever, that they get claims and certainly in North America, that's a higher item. So, safety is slightly more cyclical, but within cyclical, it's certainly at the non-cyclical part of the range. In terms of sourcing, there is a lot of safety, but there's also a lot of other things, packaging products, paper products, all sorts of products come from China, but not only China. It's also increasing, increasingly coming from India, you look at sort of leather gloves and other gloves come from India. So I think I haven't heard anything that sort of shipments are still going. I did hear that Trump is trying to hold some ships from landing outside of the harbors in the U.S. for 14 days to sort of clear people and make sure they are not ill. But again, what I said, we are sitting on quite a bit of stock in that sector, so should be okay. Inflation on Corona, sort of an indirect impact. It's going to be interesting. We have seen some tariffs in North America last year and we will still see some positive flow through from that tariff from last year into 2020. But we also see in, I think it was 4B isn’t it, list, we saw the tariffs from 15% going down to 7.5%. Now these two tariff impacts, these things sort of are sort of weighing out sort of having overall no real impact on 2020. Now, if things start to become critical and really scarce, you may see product prices going up. We've certainly seen that in the area of masks, but we are not a very mask, a big mask supplier. We sell some masks and certainly say the, let's call it the alcohol based products, sanitizers and stuff like that in our cleaning and hygiene healthcare business. But I don't think that will impact a lot. In general, if you look at Bunzl, we sometimes talk about inflation and deflation, but we are talking about tiny, tiny bits on the overall business.

Sylvia Barker: Hi, good morning. Sylvia Barker from JPMorgan and three questions from me please as well. First of all on Joshen, obviously that is your potentially key competitor in U.S. grocery. So could you maybe talk about the overlaps in terms of customers geographically and obviously it comes in at a lower margin, but how quickly can that improve and how quickly can you get the synergies? And secondly, just going back on the sourcing question on brand, out of the 20% of revenue is on brand, how much is sourced from Asia? And is if given the mix, is it fair to assume that that's kind of low double-digit margin as a profit, the profit level? And then finally more long-term, so you have added a lot of grocery and retail with acquisitions with obviously the large additional work in the U.S., and are you putting more of an effort in maybe sales from a cleaning and hygiene point of view or healthcare and how easy is it to actually maybe add or win new tenders including hygiene or healthcare in places like the U.S. where the organizations might be quite small? Thank you.

Frank van Zanten: Hey do you want to say something?

Richard Howes: Sure. So on Joshen, I mean you rightly pointed out this is a business that Bunzl has been tracking for a very long time. I think this has been on our list for many years. So it's great to better bring it into the group. There is a lot of overlap. I mean, they do very similar things to what we do. So there's a lot of product and customer overlap. There is also quite a lot of footprint overlap as well. So there are some regions and markets that have a better presence than we do, but on the whole that is part of the complementarity. So that I think talks to our ability to over time retain all these customers. We've kept all of the sales force, which is important. If you keep the sales force, you tend to keep the customers. So I think that's gone very well. We will look over time to see what we can do with the footprint. And when we look at the synergy and cost efficiency opportunity, think of this coming in over a number of years because to the extent we can look at any one of the sides, you have to wait until the lease finishes. So that is linked to the length of the lease that's we're currently sitting in. But I think we guided at the time to, we should be able to get this business to the level of margins you expect from a normal grocery business, which is less than of course our overall North America margin because there's mix of other things in there as well. But if I would do that, I would do that over a number of years rather than too quickly. There are some purchasing synergies which will come sooner than that. But we do in 2020 have some costs to achieve that we also need to reflect.

Frank van Zanten: On your third question on grocery and retail, obviously we bought Joshen in grocery, but they are also in other sectors and we bought DDS retail. And you're right, there have been more pressure sectors. But we are a leader in these fields and we feel it's very important to further strengthen our position in that field. We are the consolidator on distribution level. You see customers getting bigger. You see sometimes suppliers getting bigger. So for us it's very important. It is an area that delivers very good returns for us also, very high cash flow also which is a good engine for our acquisition growth. And last but not least, they come with significant synergies also. Now some of the synergies are in the grocery business and the Joshen business will come probably during this year, some purchasing benefits, but they have 11 facilities. So every time lease comes up, we'll look and integrate that more into our network. So that will give us a good return on investment going forward. Your question on Asia?

Sylvia Barker: So that question was just, so you have about 20% of your revenues at the group level are own brand, how much of that comes from Asia? And then in terms of an EBIT margin, should we think about maybe 10% just in terms of the mix of what you're actually importing?

Frank van Zanten: Okay. Yes, it is a good question. Now, when we talk about 20% and actually, we talk about the combination of own brands and imports. So an own brand is not necessarily an imported product. If we buy, if we have pristine toilet paper here in the U.K., we won't bring it in from China because you can't ship because you are shipping air. So we're buying it from either Comfort or from people like Kimberly Clark or ST [ph], and so, but it is a way for us to strengthen our position in the supply chain. The own brand import has grown. In the last year we were, year before just under 19%. We’re now moving a little bit more towards on the 21%. So we had a good year for own brand than imports. China is, if you just look at the imports which is a part of the combination is less than 10%.

Sylvia Barker: And margins?

Frank van Zanten: We're not -- you know that our margins on brand are higher, but there's also more working capital involved. So how do you value that? But I think the way to think about it is, we got 40 people in our sourcing office in Shanghai. We've got visibility and all the suppliers delivering all the different businesses. So we are better suited than anybody else to shift to other supplier if needed.

Sylvia Barker: Thank you very much.

Frank van Zanten: Okay. Rory?

Rory McKenzie: Good morning, it’s Rory McKenzie from UBS. I have three questions on digital please. Firstly, can you say how much of your order flow comes in through the variety of e-commerce channels today and what that's done year-over-year? And secondly, you mentioned you've launched some new apps or I guess some new websites, and how many markets has that covered? And is there a rollout plan you can share with us to kind of modernize some of those channels? And then lastly, could you any kind of guide on what is the run rate for IT costs and development spends and what the outlook there is? Thank you.

Frank van Zanten: Yes, I suggest that Richard say something about the third one. Our order percentage, so a combination of Web EDI portals for the year 2019 was 62%, so it was good. I remember when I started CEO in 2016, we were around 50%. And you need to put it down in the context of a decentralized organization in 31 countries. So we're quite pleased to see how that is progressing. How we do it is by making investments in tools, investment in people, and putting a lot of focus on the business leaders to grow it, because it does help to make our business even more sticky as a specialist distributors. Where - we are running our IT and digital operation by region. We made quite a bit of progress in the U.S., we have a digital team there. We have our business in Spain [indiscernible] moving to state-of-the-art new platform. And we have constantly implemented new solutions for the businesses and that's also supporting some of that development. Now Bunzl is a very light CapEx business. I don't know if you got some numbers on IT, but?

Richard Howes: Yes, if you think about, typically in our CapEx, you have two things that we spend our money on, IT and property. And the property side is not the opposite. The lease itself is the racking. It's the equivalent inside the facility. So the majority of what we spend on CapEx is IT. And I think you can assume that gradually over time that all that proportion will maintain, but maybe we'll have to spend a little bit more. We are investing heavily as Frank has said in OpEx. On the OpEx side we've got new people, we've got obviously digital leads around the countries, increasingly community of IT team that are able to take us into the digital world. So it is an area of investment for us, both CapEx and OpEx.

Rory McKenzie: In terms of the penetration of ecommerce channels again, can you just give a range of these very local business, as you said that, are there some countries out there that are still less than 10%, are there others over 90%? How wide is it?

Richard Howes: Yes, it varies a little bit by the maturity and the type of sector you're dealing with. So in North America, the percentage is much higher than this, 62%. You're probably more around the 80s because it's EDI, it’s web, it’s the big retailers, it's the big supermarket chains, so they have sophisticated ways of transacting. If you go into a branch in North America, the first time you see evidence of an order is dispatching out in the warehouse. It's all sort of silent. And in Continental Europe the percentage is still quite a bit lower than that number. So that's where the, the real opportunity is. And also in South America, where just the adoption rate in terms of digital are lower, but again that's also where we were working on. So good rates, very good rates in U.S., Australia, U.K., continental Europe is an opportunity. So one way for us is to increase the percentages is by increasing everything, but put a little bit more emphasis on Continental Europe as well.

Unidentified Analyst: [Indiscernible] from Goldman Sachs. Three questions from my side. Firstly, on the U.S., you mentioned that 2019 was in a way a little bit more of an inward looking year. It doesn't say you are not trying to get costs out. Maybe now you lost a couple of say contracts or bids. What should we expect to say in 2020? Should we expect now you should be pushing a little bit more towards the growth? Okay, I appreciate first half of the year you have now the price renegotiation, but now should we see a bigger effort on the organic growth in the U.S. in 2020? That is the first question on the U.S. Secondly, going back to the ESG question, how much are you trying to push say more call it sustainable products, reusable products to your customer? How much you are simply basically now taking on board, whatever the customers basically ask you? Just from the perspective that now if you really want to be seen as an ESG company by investors, I think we'll probably expect it to be now tracking, how much you're selling of now sustainable usable products and let's say, we'll be interested to hear your comments about how much you’re actually pushing these type of products? And then thirdly, just a quick one on, I think numbers, I think it's on Page 11 on the cash flow, can you just remind us say on the employee share schemes? So this year is minus £28 million, last year was plus £50 million. What are the reasons for that big swing? Thank you.

Richard Howes: Yes, okay, all right. Expectation for North America, basically, the key point I want to make, I refer back to the prospects, that's one thing. There has been a bit of internal focus. But I would say one thing we know is that we will have one half-year impact from the pricing adjustments for the first half, which is probably about $50 million roughly in the first half. That doesn't fit to on the normal profit levels, so it's lower, lower margins. And we just flagged that retail is a challenging sector. And we're hoping that having reset the organization that the focus will help, it's still a slightly tougher environment. On the ESG, it's an interesting question because the whole area of sustainability and product transitioning is actually quite a complicated issue and depends on the strategy the customer has. We see level different levels of speed in which these things go. U.K. is certainly most advanced in sustainability, followed by continental Europe and then followed by Australia, and then North America. For us, we want to be very focused on being proactive in terms of helping our customers to transition to other areas. Now, if the customer decides that they don't want to do that, let's say there's North America probably more customers that are not ready to do that, then we will still discuss it with them. But ultimately, they need to decide what they need to do. Now it's also the whole sustainability issue is a matter of positioning also competitive positioning between our customers. I'll give you an example. Some people are focusing on, let's say the plastics area and try to sort of reduce, eliminate and replace plastics and go to close loop and recycling and stuff like that, which is good. But we also have customers who say listen, for us carbon emission is much more important and we rather use plastics because the carbon emission on paper is much more damaging than on plastic. So it is a bespoke situation. That's why we hired a lot of specialists in our business. They’re working with the business leaders. We got a lot of traction in the visions we have, the business that we do with our customers because a lot of them certainly if they get a bit smaller don't know where to start. It's a complicated area, recycled, recyclable, compostable, biodegradable, closed loop. Where do I start? Now suddenly, they are talking to somebody from Bunzl who's not a manufacturer. So we don't care. We sell plastic or paper or an alternative and we have a lot of credibility in terms of our advice to the customer.

Frank van Zanten: Yes, and you're right, there has been a change in the share option cash flows and there's two aspects really, one is that in 2018 we didn't buy any shares. We would normally buy shares to fulfill the option obligations, this year we did. That's the main change. On the income side because obviously when as and when an employee exercises their shares, we receive an income. Unfortunately this year we've seen fewer exercise of options because a large number of the recent options are underwater. We're hoping that changes over time.

Rajesh Kumar: Two if I may. Rajesh Kumar from HSBC. First, just on the sustainability piece, you've given a lot of color. What type of new suppliers are you engaging with, when you're thinking about your strategy over the next five or 10 years or do you have the right supplier base in place to basically work through the transition? And second, when you look at your growth rates in North America, can you give us some idea on the volume growth, underlying volume growth versus the impact of pricing?

Frank van Zanten: Yes. On sustainability, I think we will sort of list some more new suppliers, you can think of sort of bagasse sugarcane kind of products. However, we see that a lot of our existing suppliers are putting a lot of effort in terms of coming up with recyclable materials or the better paper products. So I would say a lot of the existing suppliers see a good reason to defend that business as well. So it's not a new thing. Some of them have been working on this for quite some time. But that's the beauty of Bunzl. We are so large, and we have these collaboration forums around the world. And every time we find a good supplier for something new, something innovative, we can share that. And we're bringing our top 200 managers for an event in May and sustainability is key, but also sharing best practices is a key theme there to make sure that if we find good new things, then we can share that very quickly with the rest of the business. In terms of what I'll do is, I'll share something on the volume overall, we don't like to sort of go into a lot more detail, but you've heard Richard say that our underlying turnover was down by 0.2%. We've seen this price adjustment with our largest customer, which is probably about 0.5% impact, so you get back to 0.3%. We've seen moving parts on the pricing side last year. We've seen paper prices going up. We've seen plastic prices probably deflate a bit. We've seen some other categories like tape and stuff like that go up a bit. We feel that there has been sort of outside of these specific deflation or price correction with a big customer. We've seen inflation of between 0% and 0.5%. So minus 0.2%, plus 0.5% is 0.3% and then sort of inflation of between 0% and 0.5% which should basically get you to a flat volume picture for the year.

Rajesh Kumar: And that's largely down to weakness in grocery segment or…?

Frank van Zanten: And a bit in the U.K.

Rajesh Kumar: Okay, thank you.

Frank van Zanten: Any more questions? Okay. All right, before we close off, we want to just want to say a few words. It has been the last time that our current Chairman, Philip Rogerson has been attending our results presentation and Philip has been a fantastic Chairman for Bunzl. He has been overseeing an enormous growth over his tenure of 10 years time. So I really wanted to thank Philip for his contribution to Bunzl, also welcome Peter Ventress as our new Chairman taking over in April. Please feel free to go and meet them and introduce yourself and have a chat with them. Thank you very much.