Earnings Call: Q3 2020

Oct 14, 2020

Earnings release

Morning, ladies and gentlemen, and welcome to this bundle quarter 3 trading update. Can I just remind you that this call is being recorded? During the call, all participants will be in listen only mode and afterwards there will be an opportunity for questions and answers. I'm now delighted to hand you over to Bunzl's CEO, Frank Van Zonten. Please begin your presentation. Good morning and thank you for joining us to discuss our 3rd quarter results. We do not normally hold a conference call at this point in the year, but given the circumstances, we thought it would be helpful to do so. I will therefore briefly talk through performance over the Q3 and the outlook before opening to Q and A. I'm very pleased to report that Bonso's diversified and resilient business model has driven strong growth over a challenging period. Group revenue for the Q3 was up 4% at actual exchange rates and 8.8% at constant exchange rates. The 3rd quarter had fewer trading days than the equivalent period in 2019, which reduced revenue growth at constant exchange rate by 3.2%. This will reverse in the Q4 with the full year only benefiting from the one extra day relating to the leap year. Acquisitions contributed 4% growth in the quarter at constant exchange rates, benefiting in part from the acquisition of MCR Safety, which completed at the beginning of September. Underlying revenue, which excludes acquisitions and adjusts for comparable trading days, increased strongly by 8% over the quarter at constant exchange rates. Within this, sales of the top 8 COVID-nineteen related products such as masks, gloves and hand sanitizers contributed 17.5% growth. This was partially offset by a 9.5% revenue decline from other product sales. Within the top 8 COVID-nineteen related products, larger orders contributed around 40% of the growth and whilst on an absolute basis were lower than in the second quarter, the orders were in line with our expectations. Smaller COVID-nineteen related orders, whilst lower than in the second quarter, remained strong. These COVID-nineteen related products continued to be primarily owned brands. The 9.5% decline from other product sales was less than the 2nd quarter and reflected the easing of pandemic related restrictions across our markets. Turning now to the outlook. The 2020 performance year to date has been driven by strong sales of COVID-nineteen related products from a combination of smaller orders and the more exceptional larger orders. This has more than offset the impact of weak economic activity on the group's business. Looking forward, the outlook remains uncertain, particularly considering current pandemic trends and the increasing restrictions which are now being reintroduced in some markets that may limit the continued underlying recovery. In addition, larger COVID-nineteen related orders are expected to be more limited. However, given the performance year to date and the impact of recently announced acquisitions, the company currently expects revenue in the second half of 2020 to grow strongly at constant exchange rates and anticipates a slightly higher second half operating profit margin compared to the prior year. Before we turn to Q and A, I would like to highlight the continued success we have had with our acquisition strategy. In addition to recently completing MCR Safety at the end of September, we completed the acquisition of APCO COVAX, a distributor of flexible packaging based in Ireland with revenue of €23,000,000 The acquisition pipeline remains promising and there are ongoing discussions. Richard and I are now happy to take any questions. We'll take our first question from Will Kirkness of Jefferies. Will, your line is open. Please go ahead. Thanks very much. Just a couple of questions. So firstly, in regards to M and A, I think you're more up beat at the interim stage about that. Just wondered how sort of conversations are progressing and whether the messaging is changed there. And secondly, I wonder whether you're seeing any perhaps customer growth that's new that might be more sticky kind of on an underlying basis? Thanks very much. Okay. Yes, what I indicated that for the half year, it's certainly what we see in the early stages of the sort of deal capturing sort of the pipeline management. We have seen increased interest in selling businesses. And but that is also early days. It's also not an easy period to sort of value the sustainable earnings going forward. Obviously, areas like foodservice and retail now are a bit more difficult to estimate where that's all going to land. But certainly, what I hinted at the half year, not only in the bundled sectors, but I believe in general consolidation in markets will happen. And obviously, Bansal is the real consolidator in our sector. So I expect certainly in the next couple of years to see stronger interest in selling people's businesses because it has been really a painful exercise and experience for people certainly who were running businesses that were more focused on a particular vertical like hospitality or airlines or retail. In terms of the customer growth, I would say still a large part of the additional sales is being done through our existing business. Certainly earlier in the Q2, we've seen more sort of government larger orders happening also. These we see a bit like new customers and but these have a bit more of a sort of one off exceptional effect. So mostly around new customer existing customers, but certainly we're using the opportunity also to build new relationships in areas where our competition has difficulty to get their hands on certain imported items from Asia. Great. Thanks very much. Thank you. We'll now take a question from Angie Grobler from Credit Suisse. And your line is open. Please go ahead. Hi, good morning. 2 for me as well, if I may. Could you just talk us through some of the regional variations in terms of growth rates through the quarter? And kind of on a similar theme, also end markets, is it still areas like safety that are already driving that additional growth? Thank you very much. You want to take this, Roger? Yes. Andy, good morning. Regionally, much like we had in Q2, think that the it's more to do with the end sector split regionally that's driving the performance. So those markets which have had a do have a retail and a foodservice component or a higher component relative to their size, will have seen a better performance in Q3 because we those two sectors in particular were very much locked down in Q2. They were more reopened in Q3. And that will drive most of the regional market changes. If I look at the end markets, looking at Q3 on Q2, we have seen a recovery in the base business, what we call the other product sales, that's gone from, say, low mid-20s down in Q2 to the 9.5% down in Q3. That's come from most of the sectors. So the base business improvement has come from most of the sectors, particularly foodservice and retail. But also we've seen improvements in grocery and in the underlying safety business as well. So it's been relatively broad based on an end market level. If we look at the large orders and the smaller orders, COVID orders, yes, they're predominantly coming from our sales safety and our health care businesses. Thank you. But can I ask one follow-up? At the half year, you had taken a version, I think, for €20,000,000 for potential bad debts in the second half given performance has remained or has been so strong to date. Is that still likely to be taken? Well, I think the premise for our for that provisioning at the half year was that we were expecting government support to be withdrawn in the second half in line with what governments were saying at the time. That is different, Andy. We're seeing some countries, some governments in some countries continuing support. And in other countries, like here in the U. K, for example, there is it's been not fully withdrawn, but diluted down from where it was. So we haven't seen any material bankruptcies in, I would say, August September. But we need to keep an eye on it, and we will continue to keep an eye on it as we go into through Q4 and up to the year end. The question is whether or not this is has that support being kept in place? Does that make this something for 2021 rather than 2020? We'll have to keep an eye on that as we go through the back end of this year. Lovely. Thank you. And our next question will go to the line of Annalise Vermeulen from Morgan Stanley. Annalise, your line is open. Please go ahead. Thank you and good morning. A couple of questions from me as well, please. Regarding the margin and pricing of those COVID related products, given there is arguably a better supply demand balance now of many of those products relative to Q2. Have you seen the prices begin to come down? And how does that factor into your expectation of a higher margin in the second half? And then secondly, also related to M and A, given the upcoming election in the U. S. And the potential changes to capital gains tax, are you seeing an increase in businesses approaching you who are perhaps looking to sell more rapidly than before in order to avoid potentially higher capital gains tax charges? That's it. Thank you. Yes. Let me take the first one. There's no question that the pricing of some of these total items that are now compared to the Q2 are lower. I think they're still at a good level compared to sort of previous years. And now how it links into the sort of guidance in terms of higher margin second half simply relates to mix and the fact that these COVID items are imported on brand products that come with higher margins. Maybe, Richard, you can deal with the capital gain. Yes. Ann Louise, we as Frank said earlier, we're continuing to see a lot of inbound and there's a lot of interest. And the activity that we kicked off last year that we delivered in the first half of this year and continued on at our half year statement means there is good activity on the M and A side. We, of course, did do a big acquisition in North America and announced it at half year. So that was that has been done. I mean, we wouldn't specifically say any of what we're seeing is linked directly to capital gains perhaps in the U. S. It's not something that we're it's clear that would be clear to us. But overall, the levels of activity are good. And hopefully, we've got more to come in the second half. That's very clear. Thank you. Lovely. Thank you. We'll now take a question from Rajesh Kumar of HSBC. Rajesh, your line is open. Please go ahead. Have we got Rajesh Dhar from HSBC? It might be that your line is on mute. Your end. Hi, morning. Sorry, my line was on mute. Thanks for taking the questions. 2, if I may. On the decline in the core business, could you talk us through how your discussions with the suppliers on the cost price and rebate accrual is progressing? And also second, could you give us some color on if you've seen any pattern changes in Q3 with respect to the core business in terms of geographies or sectors? Which sectors have declined more or less since Q2? Okay. In terms of discussions with suppliers, I think most of our sort of rebate schemes with suppliers are sort of like a 6 percentage. So we don't tend to have these schemes where you fall off a big cliff if you don't hit a certain level. We've done that a bit more, I think, intelligently in the past. It does mean that if you buy less this year on certain items that you may get less rebates. But obviously, our financial team around the world, they're obviously on top of it. Also know that the general managers are trying to sort of change some of these schemes where possible. But yes, in general, if you buy less, you get a bit less rebate. But all these things are being factored in our sort of monthly reporting and are in the numbers. Yes, I think in terms of the sector and geography shift, I think Richard already touched on that. You've seen basically in all sector improvements in foodservice because of the reopening in the 3rd quarter. It improved quite a lot, but still well down on last year, the same in retail. So yes, excluding the COVID orders, safety also improved quite a bit. So we've seen quite significant improvements, better than we expected at the half year. That's also the reason why we're coming out now with improved guidance and better numbers. But it still remains an uncertain period. I'm now in the Netherlands, for instance, and last night there's been sort of a mini lockdown announced where all restaurants and hotels closed and buying at night and shops is closing. So we seem to be going back to a more closed situation. I don't think it's bad as in Q2, but certainly the shift may change a bit more toward a closed economy. And that makes it so hard to predict going forward how is the mix going to be in terms of underlying business and continued COVID demand. Thank you. Lovely. Thank you. Before we go to the next We'll now take a question from Sylvia Barker of JPMorgan. Sylvia, your line is open. Please go ahead. Yes. Hi, good morning, everyone. Could I just ask a couple? So on the small orders for COVID products, so the top 8 COVID products, could I just tell kind of how much of that is linked to your Horeca clients or your foodservice and retail clients kind of reopening, I. E, as we're seeing markets reopen or close again to some extent, To what extent is that a double whammy, I guess, on the underlying business and from the small orders? And then maybe as we think into kind of next year, if we just think about the clients that you have on the COVID side on the top COVID products, I think you mentioned previously that initially you were mainly supplying kind of existing clients, obviously outside of some of the governments that we're purchasing as well. Have you been adding kind of new clients to that portfolio? Do you think that you will actually have a much wider client base in that space going into 2021, where maybe if we think about the Q1 at least when you didn't have any PPE help, perhaps will have benefits which you might not have seen kind of previously just from winning these new clients? Thank you. Yes. I think on the small orders, I think the small orders are basically something that's happening in all the sectors. And I think it's strongly related to the reopening of the economies in the Q3. So we've seen it in food service. We've seen it in retail. We help our customers to get their people safe and get ready for the reopening. So that's purely a factor of reopening and in a way a double whammy because obviously the decline is lower than in the Q2. But also we got some support from selling some additional products in this area. I think that the government, the large government orders is something you need to treat as a bit of a one off Q2 sort of feeding into Q3. Maybe we get some big orders, maybe we will, but not to the extent of the Q2. We've seen the Q3 to come down in terms of big orders. And certainly, we expect that to go down further in the 4th quarter. Does that mean that governments can't stand up again and say, listen, this looks like a real second wave and we need to talk and sort of further build our strategic stocks, it's possible. But that's we don't have indications now that people are looking to build these significant stock levels like they did in Q2 from governments. Thanks, Frank. And then just outside of governments, have you expanded your client list on the kind of safety and cleaning and hygiene side? Have you been adding a lot more corporates to your client list just off the back of COVID? We have added some, but I think the vast majority is still with existing customers because a lot of these items are relatively scarce still, not easy to get like certain gloves areas are still very tough to get. So obviously you try to help your ongoing customers first. Okay, great. Thank you. Thank you. And our next question is from Kate Somerville of UBS. Kate, your line is open. Please go ahead. Thanks. Good morning, everyone. So just firstly on the growth rates in the quarter, are you able to give any color around the run rate through the 3 months of the quarter, whether those growth rates are relatively consistent? And then also in terms of the COVID orders, have you managed to maintain the margin that you earned in Q2? And is there a difference between the larger orders and the smaller orders in terms of that margin? Thanks. I'll take that, Richard. Hello? Kate, in terms of growth rates within the quarter, I think all we would say is that the larger orders were have tailed off through the quarter, which is what we would have expected. I think generally, August September were better trading months than we had originally expected as well. But I'll leave it at that rather than going into anything more on intra quarter growth. And margins, we're not going to give any view on margins for Q3. But clearly, for within what we're saying, we're saying that there were the quarter has got more large orders than Q4 will have. And there is a degree of operational leverage, which goes with the larger orders. We are a business which order size is important for what we for our overall business and profitability. So there's more of that in Q3 than we would expect to see in Q4. And the base business in Q4, in particular, as Frank had said, we look we are cautious about the effect of these lockdowns on Q4 and there would be a corresponding margin effect. Great. Thanks a lot. Thank you. Our next question is from James Rose of Barclays. James, your line is open. Please go ahead. Hi, good morning. Just a question on Q4 and the base business. Do you think that there are many lockdowns we're seeing are enough to disrupt the sequential continuous sequential improvement from Q3 to Q4? Frank, I'll take it. Should I take some? Yes. So, Jaeme, I think it's fair to assume. I mean, we if we think about Q3, the 9.5% down, which is obviously sizable, That is an improvement on Q2. But of course, in Q3, it was a northern hemisphere summer, people coming out of lockdowns, more activity than clearly in Q2. Would we I don't think we should expect the Q4 where there are more lock albeit perhaps less than Q2, necessarily meaning that there's going to be the same level of activity as Q3. So I think it's fair to assume that it would be some way off where we are in Q3. Okay. Thanks very much. Thank you. And our next question is from Gerry Hanigan of Goodbody. Gerry, your line is open. Please go ahead. Can I just check, Jerry, would you like to ask a question? Your line is open. I don't know if you're on mute. Unfortunately, we can't hear you. Sorry, yes. Can you hear me now? Yes. Please go ahead and ask your question. Okay. Prior cautions seem to center around an inventory of wine that's co related products demand for coke related products unwound basically. What's your current expectations in terms of an unwind in terms of stock or inventory going forward here given where you currently are in the pandemic? Sorry, I couldn't hear the question. Richard, do you want to take it? Sorry, I'm just your prior caution seemed to center around an inventory unwind. What's your current expectations with regard to that unwind happening? Okay. Well, certainly, I can talk about one specific situation, which is in the Netherlands where we had a sizable order from the government. And they update their stock levels on these items and they indicate they have no issues in terms of stock going forward. So now how that's going to change if things really get in a much worse state than it is today? Obviously, more products are going to be used. But we don't have indication that people are planning to make these big new orders and heading to the stage destock. Okay. Thanks very much. Lovely. Thank you. We'll now take a question from Sam Dindal of Stifel. Sam, your line is open. Please go ahead. Good morning, guys. A couple from me. Firstly, are you able to say what the gross margin differential is between the top eight products and the rest of the product set year to date? And then secondly, would it be fair to assume the own brand percentage of products is still in the mid-20s and trending up? Thanks. I don't think we sort of give any more visibility on gross margins, but it's fair to say that if we talk about own brand imported items, then there's clearly a difference in margin and has always been. And it's also the case in and that also explains some of the mix movement and why the margins are a bit higher. And Sam, on the own brand side, we typically have been around 20%. And I think the half year, we mentioned it was higher than that. I think we should assume that, that is that continues to be high for the rest of this year. But going into a more, let's say, next year is a more normalized period, then I think we should expect to move back more towards 20%. Thanks. Lovely. That was our final question and concludes today's call. I'd like to pass the call back to Frank for any closing comments. Yes. Thank you all for joining this call this morning. I would say stay safe and have a great day. Thank you very much.