Earnings Call: H2 2018

Feb 25, 2019

Welcome everyone to Bonsa's Full Year Results Presentation for 2018. After a brief introduction from me, Brian will take you through the financial results, and I will then review the business and talk about the continued implementation of our strategy. I'm pleased to report that Bonsal has once again delivered another good set of results. Overall, organic revenue growth was strong at 4.3% with contributions from all business areas of 4% or more. Acquisition activity, which is a key part of our growth strategy, continued in 2018, albeit at a slower pace compared to the record year of 2017, resulting in a committed spend of £183,000,000 You will have seen that today we announced the acquisition of Liberty Glove and Safety, which has annualized revenue of some $90,000,000 and has further strengthened our safety business in the U. S. The combination of our strong organic growth and acquisition activity has contributed towards a 12% increase in adjusted earnings per share at constant exchange rates and a 9% increase in the dividend. I will now hand over to Brian, who will go through the financial results. Thank you, Frank, and good morning, ladies and gentlemen. As in previous presentations in the following slides, we have presented both actual and constant exchange growth percentages. In 2018, there has been a 3% negative impact of exchange translation, principally due to the strengthening of sterling against the U. S. Dollar. In reviewing the income statement as always I will refer to growth at constant exchange rates. Now starting with revenue. In 2018 revenue grew by 8.7 percent to £9,100,000,000 Of this growth, 4.3 percent was organic with all business areas contributing growth of at least 4%. Acquisitions added 5.3% and the disposals of 2 non core businesses reduced growth by 0.9%. Turning to the income statement. Adjusted operating profit grew by 7% to £614,000,000 with operating margin down 10 basis points to 6.8%. We've excluded from adjusted operating profit a non recurring charge of £3,300,000 in relation to the equalization of guaranteed minimum pensions in our U. K. Pension scheme. This follows the outcome of the recent Lloyds Bank court case, which applies to all companies in the U. K. With defined benefit pension schemes. Net finance expense increased by £8,300,000 as a result of higher levels of average net debt mainly from the funding of acquisitions made in 2017 2018 as well as higher interest rates, particularly on U. S. Dollar debt and also on additional longer dated debt. During 2018, we disposed of 2 non core businesses: OPM in France in February and our Marketing Services business in the U. K. In June, realizing a profit on disposal of £13,600,000 This profit has been excluded in calculating the adjusted profit measures. Adjusted profit before tax increased by 6% to £559,000,000 due to the increase in adjusted operating profit, partly offset by the increase in net finance expense. Continuing down the income statement. The effective tax rate for the year of 23.1% is 4.4 percentage points lower than the rate for 2017, largely due to the reduction in the U. S. Federal tax rate from the 1st January 2018. However, the effective tax rate is somewhat lower than the 18. However, the effective tax rate is somewhat lower than expected due to the positive outcome of some previous tax uncertainties in 2018, with the effective tax rate for 2019 expected to be approximately 24%. Adjusted earnings per share increased by 12% to 129.6p and we are proposing a final dividend of 35p per share making a total of 50.2p for the full year, an increase of 9% continuing our long term track record of dividend growth. Our consistent dividend growth over many years reflects our focus on long term value creation. Looking back over the past 26 years, we are one of only a handful of FTSE 100 companies whose dividends have increased each year. As you can see from the chart, our dividends have increased consistently every year since 1992, broadly in line with our growth in earnings. This has been possible due to the resilient nature of our business model, sustained growth in earnings and strong cash generation. The compound annual average rate of dividend growth over the period has been over 10%. Now turning to the balance sheet. Intangible assets increased due to £131,000,000 of additions from acquisitions and currency translation, partly offset by amortization and the disposal of businesses. Working capital has increased by £76,000,000 due to acquisitions, currency translation and an underlying increase in line with sales growth, partly offset by disposals. Net debt ended the year at approximately £1,400,000,000 £137,000,000 lower than December 2017. This decrease is principally due to a net cash inflow in the year of £185,000,000 partly offset by exchange. Net debt to EBITDA reduced by 0.3 of a turn to 2 times at the low end of our target range of 2 to 2.5 times. The return on average operating capital remains high at 50.7 percent, although down on the prior year due to lower returns from the underlying business, partly offset by a positive effect from acquisitions net of disposals. I would now like to take a few moments to share with you the estimated effect on Bunzl of the new lease accounting standard IFRS 16, which will apply in 2019. Starting with the balance sheet. Leased assets will be capitalized in tangible fixed assets as right of use assets with an estimated value at the 1st January 2019 of £430,000,000 to £450,000,000 A corresponding lease liability being the present value of future lease payments of £480,000,000 to £500,000,000 will also be recognized. Net debt to EBITDA will increase by 0.3 of a turn, but it should be noted that there will be no impact on our banking covenants as these are calculated using frozen GAAP. Return on average operating capital will reduce by 12 percentage points. Moving across to the income statement. It is estimated that for 2019, adjusted operating profit will increase by approximately £20,000,000 which will be offset by an increase in interest expense with adjusted profit before tax and earnings per share broadly unchanged. The key takeaways are that the economic effect of financing our fixed assets is unchanged as we will continue to lease. Cash flow will not be impacted. There will be no impact on our existing banking covenants and our financing headroom is unchanged. Now turning to the cash flow statement. 2018 was another strong year of cash generation for Bunzl, with free cash flow of £416,000,000 and cash conversion at 94%. During the year, we paid dividends of £152,000,000 and invested £184,000,000 in acquisitions, whilst realizing £55,000,000 from the disposal of businesses. The next slide highlights the consistently high level of cash conversion of the group over many years. The average rate of cash conversion, which is stated after capital expenditure, has been 97% and in all years it has been over our target of 90%. So broadly each pound of operating profit has been converted into a pound of cash. The ability to consistently deliver a high rate of cash conversion on earnings which have compounded at over 10% per annum since 2004 is at the heart of the Bunzl business model. During this period, it has enabled us to grow dividends strongly and consistently paying out a total of £1,300,000,000 while at the same time we have been able to invest £3,200,000,000 in self funded acquisitions, which have compounded over many years to generate substantial growth. In summarizing our performance in 2018, I would like to focus on a few areas of note. Revenue grew by 9% with the rate of organic growth at 4.3%, strong across all business areas. Cash conversion remained robust at 94%. Adjusted earnings per share were up 12% at constant exchange rates and the dividend has been increased by 9%. This continues our track record of unbroken dividend growth stretching back over 26 years. At this point, I would like to hand over to Frank, who will take you through the business review. Thank you, Brian. During my presentation today, I will address the following: a review of our operations during the year, I will look forward and consider the prospects for 2019 And finally, I will talk about our consistent and proven strategy to grow and develop our business. As a business, we are well diversified by customer markets with strong positions in a number of different customer groups, including the relatively resilient sectors of food service, grocery, cleaning and hygiene and healthcare, which together account for approximately 3 quarters of our total revenue. Bansal is an international business operating across the world. We are organized by geographic business areas across 31 countries, supplying 6 market sectors. Our broad and diversified portfolio of businesses allows us to mitigate the impact of shifts and changes in demand, which can be affected by an economic downturn in any particular country, region or sector. It is particularly interesting to note that more than 85% of our revenue is generated outside the U. K. I will now review the performance of each business area. In North America, revenue increased by 8% to £5,300,000,000 due to strong organic growth of more than 4% as well as the impact of recent acquisitions with operating profit increasing by 3% to £317,000,000 Organic revenue growth was achieved across all businesses with the largest contribution from the additional grocery business won towards the end of 2016, albeit at a below average operating margin. As anticipated, this additional business combined with inflationary pressures on our operating costs, particularly against the backdrop of historically low unemployment rates, contributed to a reduction in the operating margin of 30 basis points to 6%. During the second half of the year, we implemented a more focused and streamlined organization structure across our 2 largest businesses, grocery and redistribution, in order to enhance our customer proposition and improve our operational efficiency. Our retail supplies business has benefited from the acquisition of DDS in May 2017, which has now been successfully integrated into our existing business. DDS has significantly increased the size of our operations in this sector and provided both sourcing and operational synergies. The rebound of both the oil and gas and industrial sectors drove strong growth across our Safety business boosted by the acquisition of REFCO in January 2018. REFCO has further strengthened our offering to welding and industrial distributors and has extended our product offering with access to another quality own label range of hand protection products. In March 2018, we expanded our presence in the agricultural sector with the acquisition of Monti, a regional supplier of packaging to growers in the Central and Southeast of the U. S. Continental Europe continued to perform very strongly with revenue up 12% to £1,800,000,000 and operating profit increasing 18 percent to £177,000,000 Strong organic sales growth of more than 4% was supplemented by the impact of recent acquisitions, partly offset by the disposal of OPM in France in February 2018. The impact of higher margin acquisitions helped drive an increase in the operating margins, which was up 50 basis points at constant exchange rates to 9.8%. Overall in France, our business grew significantly. Revenue at our original cleaning and hygiene business increased, but with a lower overall gross margin, operating profit declined. Our safety business continued to grow well, particularly with national accounts and export sales were also ahead of last year. Our foodservice businesses have also enjoyed good sales and operating profit growth as additional investment in headcount and IT has borne fruit. The HADES cleaning and hygiene business that was acquired in November 2017 has integrated well and the combination with our original cleaning and hygiene business has led to significant synergy benefits. In the Netherlands, sales grew in all areas of activity with a particularly strong performance in the health care sector following a number of new customer wins and range extensions. QS, a provider of hygiene solution services, was acquired in March and is trading well. In Scandinavia, in July, we acquired Enor, which sells light catering equipment and is our first business in Norway. And towards the end of the year, we purchased Centimeters Supply in Denmark, which specializes in own brand and customized foodservice products and packaging. In Turkey, sales have grown strongly due to a combination of increased volumes and the positive impact of price rises with operating profit up significantly. And finally, sales have grown well in Spain with good performance in all businesses, and the overall operating profit was significantly higher than last year. In the U. K. And Ireland, revenue increased by 6% to £1,300,000,000 as a result of 4% organic growth and the impact of acquisitions, partly offset by the disposal of the marketing services business in June. However, operating profit was down 2% to £87,000,000 with the operating margin declining 50 basis points to 6.9% as the U. K. Market continues to be challenging due to political and economic uncertainty. Although our safety business secured some new customers in the second half of the year, many of our construction and manufacturing related customers themselves experienced a slowdown in growth. This in turn affected demand for the products that we supply resulting in lower operating profit. However, our cleaning and hygiene business performed well with a series of new customer wins within the facilities, management and government sector. All our grocery and retail businesses saw strong sales growth during the year as a result of both new customers coming on board and additional category wins with existing customers. Despite challenging conditions within the restaurant sector, our catering supplies businesses have grown sales during 2018. Agora, which was acquired in January 2018, has further enhanced our proposition by adding a valuable suite of services for our customers, including full servicing of catering equipment and asset tagging capabilities. Our healthcare businesses have benefited from the introduction of new product ranges, and we have continued to grow by gaining new customers in the private hospital, nursing home and care home markets. However, our business serving the acute sector faces some challenges as the U. K. Government works through its plans to reform the current NHS supply chain. Our businesses in Ireland continued to grow strongly during the year and profitability increased. The rest of the world revenue increased 12 percent to £741,000,000 with operating profit up 15% to 50 £6,000,000 as the operating margin increased 20 basis points at constant exchange rates to 7.6%. Of the total increase in revenue, 4% was from organic growth with acquisitions accounting for the balance. Overall, we saw a strong performance in Latin America and our position in safety in Brazil was further strengthened through the recent purchase of Vogue. In Australasia, sales and operating profit increased as business confidence continued to improve with demand for commodities in the resources sector, growth in tourism and government investment in infrastructure developments, all helping to drive the economy. Now moving to the prospects for 2019. Although we continue to face mixed macroeconomic and market conditions, including uncertainties concerning global trade, our strong competitive position, diversified and resilient businesses and ability to consolidate our fragmented markets further are expected to lead to continued growth. In North America, the combination of organic revenue growth, which returned to more normal levels during 2018 and the impact of acquisitions should lead to growth. We continue to face inflationary pressures on operating costs, but these will be mitigated by our recently implemented more focused and streamlined organization structure. In Continental Europe, we expect to develop further due to the benefit of organic growth and acquisitions. Growth in the U. K. And Ireland will be impacted by the disposal of the marketing services business in June 2018 and by future economic conditions in the U. K, which at this time are unclear. In Rest of the World, we expect to see continued growth for the year. Acquisitions are a key part of our strategy, and with an active pipeline of opportunities and ongoing discussions taking place, we expect to complete further transactions during 2019. The board believes that the prospects of the group are positive due to its strong market position and well established and successful strategy to grow the business both organically and by acquisition. Our consistent and proven compounding strategy to grow and develop the business remains unchanged and is based on 3 key areas of profitable organic growth, improving our operating model and growing by acquisition. We are continually looking to refine and develop our operations to make us more efficient. I have many examples of initiatives I could share with you as we continue to make small improvements across the group every day, which lead to meaningful progress over time. A more significant example of this is the restructuring we undertook in North America in the second half of twenty eighteen. By focusing on how best to serve our customers, who have increasingly consolidated over recent years and whose decision making process has become more centralized, we have been able to streamline our organization. This has led to a reduction of 50 managers together with a better infrastructure from which to serve our customers. In presentations over the last 18 months or so, I've spent quite a bit of time talking about Bansal's unique service offering and it is this which continues to set us apart from our competitors and helps drive our organic growth. In highlighting our competitive advantage, I have previously focused on examples of our value added services and our customized digital solutions. I've also talked to you before about our sales people and customer service offer exceptional levels of service to our customers. Today, I would like to illustrate how their expertise makes us uniquely well placed to help customers in the area sustainable product solutions and also share some insights into the benefits of global sourcing center in Asia. As we are all aware, the environmental impact of single use plastics is an increasing priority throughout society. As a leading distributor to the grocery and food service sectors, the majority of the single use plastic products we sell are food and beverage related packaging, which is essential to the transit of products from our customer side to the point of consumption in a practical, safe and hygienic way. As such, there will always be a need for these types of products, although increasingly with more sustainable characteristics, which we are actively promoting. Given our size and expertise, we have a unique position in the supply chain, which enables us to advise our customers on their sustainability strategies and at the same time benefit from our relationships with our extensive supplier base in order to bring a broad range of sustainable products to market. Since we are not a manufacturer with heavy investments in capital equipment and a distributor that turns inventory extremely fast, we are very agile when it comes to adapting our product range. As the global leader and expert in our industry, we are proactively working with customers, suppliers and other stakeholders to promote and support a sustainable approach to single use plastics. We see the increasing demand for sustainable products as an opportunity for growth. To provide some insight into our capabilities in the area of sustainability, I would like to share 2 examples with you. Plastic straws became a much talked about issue in the U. K. In early 2018. Almost overnight, customers wanted to switch from plastic to paper straws. We already had paper straws in our product range and we were therefore able to adapt quickly to this changing demand. As a result, last year in the U. K, the volume of plastic straws we sold fell significantly, but was more than made up in value terms by increased sales of paper straws resulting in a 25% increase in the total sales value of straws. This demonstrates our sourcing capabilities and expertise in sustainable products as well as the agility of our supply chain. A further competitive advantage lies in acting as a trusted partner with our customers, supporting them on their sustainability journey. A good example of this is our partnership with 1 of our contract catering customers in the U. K. This caterer services a large client at their main facility, which has 2 restaurants and 8 other food outlets serving over 2,500 meals and 3,600 hot beverages daily using some 500 Bunzl products. Their client has been focused on sustainability for a number of years. Initially, we helped them to review their entire range and introduce more sustainable products using both our sustain items, which are fully compostable and the REVIVE range, which is both recyclable and made from recycled materials. Using Bunzl's expert advice, our customer was able to consolidate all disposable products into as few material groups as possible to enhance their ability to compost and recycle these products after use. More recently, the specialist knowledge of our sales and sourcing team has enabled us to introduce further alternatives to plastic products including reusable items. These alternatives include takeout food containers, which are made from sugarcane fibers. In addition, we have partnered with a manufacturer to design and produce an entire new range of compostable products for yogurt and fruit, which will be introduced next month. With the changing landscape for the future of single use plastics, we are especially well placed to support our customers going forward. The ability to offer our customers competitively priced products is at the heart of our service offering. Given our scale global scale, we have strategically important relationship with our branded suppliers and we have also developed a substantial own brand offering. This has been accelerated by the establishment of our ACI sourcing Center more than 10 years ago. Our sourcing capabilities, together with our QAQC expertise, have supported the increase of our imports tenfold since 2004. It is an insight into this part of our unique service offering that I would now like to share with you. The sourcing team in Shanghai managed suppliers across 14 different countries. By consolidating our purchasing of products to our accredited suppliers, we can achieve purchasing synergies and also source responsibly. Our QAQC team not only oversees product quality testing and pre shipment inspections, but also performs audits on the working practices at our suppliers' factories, thereby ensuring compliance with our corporate responsibility requirements. More than 500 audits were carried out in 2018. The combination of our sourcing capabilities and QAQC expertise is highly valued by our customers and provides a huge competitive advantage since many of our competitors are buying local products at higher prices or are reliant on agents resulting in less control over both product cost and quality and a lack of corporate responsibility compliance. As you know, collaboration between our business is a passion of mine. By sharing best practice and purchasing data, this enables us to ensure that we are able to offer our customers competitively priced products. As an example, at the end of last year, we held our annual Global Safety Forum, which was hosted by our Asia Sourcing Center in Shanghai and attended by representatives from all of Bunzl's safety businesses. We focused on product tendering and supplier rationalization with the aim of reducing the product and supply chain costs. The forum also included a supplier convention with 46 suppliers from 7 Asian countries in attendance. It gave our businesses the opportunity to have face to face discussions with a large number of existing and potential new suppliers over a 2 day period, which would have taken about a year had it been necessary to travel throughout Asia to visit each one. Having looked at some examples of how we can use our competitive advantage to grow organically, I will now move to the acquisition part of our strategy. Here you can see the track record of how we have grown the group through acquisitions since 2004. During this period, we have acquired 157 businesses for a total spend of £3,300,000,000 In 2018, we agreed to acquire 6 businesses for £183,000,000 While the 2018 spend was lower than our record year in 2017, the timing of acquisitions is always difficult to predict given that many of our targets are family run businesses. We continue to have an active pipeline of potential opportunities with a number of ongoing discussions taking place. Now turning to a slide that I've shared with you previously, which helps to illustrate the significant opportunities we have to grow in our existing countries of operation. The numerous blue dots show where we do not yet have a presence. In addition, although the white spaces represent the sectors where we already operate, our highly fragmented markets mean that there are a huge number of opportunities for us to develop further through acquisition. This analysis is, of course, based on the group's existing 31 countries and 6 sectors, but provided they meet our acquisition parameters and as we have done in the past, we also have the potential to expand into new countries and additional sectors. In order to illustrate the scale of our opportunities to develop the group further, I would like to spend a few moments to focus on how we have grown our largest and most mature business area, North America. Since 2004, the group has increased its revenue outside of North America from £1,000,000,000 to £3,800,000,000 and entered an additional 19 countries. As you can see on the slide, despite this exceptional growth, the contribution to the group's revenue by North America has been maintained at 58% having increased from £1,400,000,000 in 2,004 to £5,300,000,000 in 2018. The development of North America has been achieved through a combination of the huge potential of our existing markets to grow organically and our expertise in identifying, acquiring and integrating quality businesses by consolidating our highly fragmented marketplace. Over this period, organic revenue growth in North America has averaged more than 3% per annum, which has been the highest of all the business areas. In addition, we have acquired 42 businesses, which included our entry into the safety sector in 2006. And I'm delighted that today we have announced our 12th acquisition in the safety sector with the purchase of Liberty Glove and Safety. The long term development of North America, our most mature business area, is a clear demonstration of just how large and varied our markets are, which provide us with significant opportunities to grow both organically and by acquisition. In the last few slides, I've illustrated some tangible examples of how our unique service offering gives us a competitive advantage to help develop the business organically as well as our ability to grow through acquisition, both of which are such important parts of the successful delivery of our strategy. However, the best way to demonstrate this success is to look at the group's long term financial track record. Our resilient business model, high cash generation and the ability to take advantage of market consolidation opportunities have enabled us to deliver consistent year on year increases in revenue, operating profit, earnings per share and dividends. Since 2004, these have all increased at a compound annual growth rate of approximately 10%. Thank you for your attention, and we'll now take your questions. Paul? It's Paul Checketts from Barclays Capital. I think I've got 2 or 3 questions. The first is on margins. And there's obviously been quite a lot of attention on underlying margins. You have more data than I than we do, and you often give us your assessment of underlying margins. Could you let us know how that looks from a first half and second half basis in 2018, please? And what you expect that to look like in 2019 and even beyond that in the medium term? And then the second one is on if you looked at the non food retail segment, which is one that has been under a lot of pressure from at least on the High Street, how has your business performed in that segment, please? Okay. Let me take the underlying. Maybe you can deal with the non food retail. Margins, underlying margins overall down 30 basis points, really caused by mainly North America, a little bit still sort of mix impact from or part impact from the large piece of business we took on in North America. And we've seen some operating cost inflation, mostly labor cost, a little bit of transport cost. And then as we said in the news release in the U. K, mainly caused by our safety business where effectively they were faced with some pressure their customers were faced with some pressure relating to the U. K. Situation overall. I would say the if we look at the first half and the second half, in the second half, underlying margin decline was a bit lower than in the first half. So we see a slight improvement in that situation. If we look at margins going forward without making clear forward statements, I would say, if we step back and I'll give you a few thoughts and then you can make your own assessments, Bonsal is a real GDP plus 1% business. Margins can be up or down 10 or 20 basis points in each given year. A couple of headwinds, a couple of tailwinds. Obviously, North America in terms of headwind, we still face some operating cost inflation, labor market very tight. This is really a result of the tax reform in the U. S. Trump stimulated the economy, strong economic growth, tight labor market. Obviously, our tax rate came down with overall almost 4.5%. So we've seen a big benefit from that, a little bit of an impact on operating cost obviously. So we see this market still be a bit tight. Now global trade, where is that all going to go? This morning, we saw that Trump is making some progress in terms of China, and hopefully tariffs are not happening. Now even if they were to happen, it wouldn't be a real tariff earlier the year by putting prices up, by negotiating with suppliers. In terms of tailwinds, obviously, we in the second half, we implemented a restructuring in North America. So that should sort of mitigate some of that operating cost inflation. We're still planning to take some DDS synergies in North America. And then big question obviously on the product cost, are we going to see a bit of inflation going forward? I think currently where we are, we think it's probably relatively stable. Last quarter, last year, we saw gas and oil prices coming down. So make your own assumptions on GDP by region or what do you think is going to happen with the oil price, gas prices. We have some tailwinds, some headwinds. So if you put it all in your model, you're much more clever than I am, then probably it's going to give you some answers. On the non food retail side of the business, our bigger businesses are in North America and in the UK and Ireland. In the UK and Ireland, we had some wins in that market, some notable wins, which have meant the business has performed very well, notwithstanding the fact that non food retail end markets are undoubtedly challenging, but we've performed very well. I think that's because we're the experts in the field. We know what our customers need, and we can provide those unique service offerings to the customers. In North America, our non food retail business performed well also, again, in a very challenging market. But 2018 was more of a year of integration, of inward focus, having bought the DDS business. Now Schwartz and DDS are a formidable force in the market there, serving businesses very, very well and are very well placed, again, in what is a tough market. But we have market leadership, and I think that's a strong advantage for us. Kate? Kate? Kate? Hi, good morning. Kate Somerville from RBC. Just quickly on what you were talking about with margins. You say it can go up or down 10 or 20 basis points. But the acquisitions that you make are normally double digit and you normally expect to get synergies from these. So can you explain why you don't expect margins to go up more? I think the comment that was made would be in relation to underlying margins. So add whatever an acquisition does, if it's a higher than average margin, then our margin should go up. And if they're lower than average margins, our margin would go down. So but yes, the comment was really in relation to underlying margins. Carl? Thank you. It's Carl Green from Credit Suisse. Just a couple of questions. Just digging into the North American initiatives. You talked about the 50 managers who have been exited. I mean, if we just think about your SG and A cost base in North America, that's probably employee cost base of about GBP 500,000,000 give or take. So if we look at sort of wage inflation at the rates you've talked about, those manager exits are probably not going to diffuse that level of cost inflation. Can you talk a little bit more about what else you've done in the region that is going to help to mitigate the cost inflation beyond those manager departures? And the second question, Brian, just on the balance sheet and your debt structure. You've obviously talked about effective interest rates going up in 2018. Can you just indicate roughly what sort of average increase in the cost of debt you'd expect to see for 2019, please? Thank you. Okay. Yes. So we did talk about sort of mitigating in terms of the 50 people. However, the 50 people are slightly above average cost because they are sort of senior managers. Bonsoll is about making progress every day and the same happens in North America. We are implementing a number of initiatives in the IT side of the business, so moving more transactions digital with our customers, automating more transactions with our suppliers. And altogether that should help. And your question on the finance expense, over half our finance costs are fixed. And therefore, with the lower average level of net debt moving into 2019, given we threw off net cash last year, I wouldn't expect a significantly different a much significant difference to our net interest expense for 2019 versus 2018, might be £1,000,000 or £2,000,000 And then there's IFRS 16 to add on. You can add on another £20 +1000000 there, but that's not the underlying number. That's a one off accounting difference. Will? It's Will Kirkness from Jefferies. A couple, please. Firstly, just on inventory. It increased about 14% year on year. Just wondered if there's any stocking up there, maybe U. K. And U. S. On any OpEx implications actually for carrying slightly higher inventory. And secondly, just on your acquisition related expenses. Did about half a number of deals this year, but the expense is already down about 10%. Just wondering if there's anything to read into that. Thanks. Well, let me take the first question. Stocking up, not substantial. I think we a tariff increase going into North America of 10%. We may have taken a little bit stock in advance of that, not substantial. The same for the U. K. I know the businesses are planning to take a little bit more stock, but we only import about 15% of what we buy in the U. K. So it's relatively minimal. I would say overall, we've got a bit of potential to take working capital out of the business. So we will put a bit more focus on working capital management this year. So there's a bit of potential. Then in relation to acquisition related items, if you turn to Page 32 of the press release, there's a little table at the bottom there, and it lays out the movement in acquisition related costs. You'll note that the transaction overall, acquisition related costs were £33,400,000 compared with £36,700,000 last year. That's what you're referring to. If you take the line transaction costs and expenses, they've come down from £12,100,000 to £5,500,000 reflecting the lower activity in 2018. And the line that's gone up relative to last year is adjustments to previously estimated earn outs. Now in any one year, they can go either up or down depending if the earn out is made or not made. There was a small downward adjustment in 2017 of just about £4,000,000 whereas in 2018, there was an upward adjustment because one of the businesses that we'd acquired several years ago has done extremely well and is going to max out on their earn out, and we adjusted the payout from what we thought we were going to pay. So that's, I would say, an ebb and flow of things that happened in the past. But in terms of activity wise, you would have seen the reduction that you're expecting on the transaction costs. Sylvia Barker from JPMorgan. Just a couple of more general questions, please. So first of all, on China. You've been in China now for a while, kind of on the ground. So could you just maybe give us some thoughts around kind of expanding maybe outside of the existing end markets that you're present? And then secondly, just around kind of pricing to customers. Kind of are you seeing any change in how dynamic your pricing is or kind of any approach to pricing kind of differently, maybe by end market as well? Any just qualitative comments would be great. Thank you. Okay. On China, we always spoken about dipping our toes into that market. China is never going to be very large for Bonzel in the context of the overall business. It's still very early days. We're learning things. We're getting close to the business. It's certainly if you look at our mature market North America, the level of growth we achieved there is substantial. I would say Continental Europe and North America are more sort of distribution ready. People are really valuing the one stop shop. You see that a little bit less in China. So we don't currently have a plan to sort of significantly boost activity there. We do look at other areas in China. We have a very nice business that performs strongly in Singapore. So we're looking at things. And if we can buy good business like everywhere, we will buy businesses. But it's not sort of the 1st place to allocate a lot of capital going forward. In terms of pricing, you see different pricing models. First of all, if you look at North America, because the business is more in grocery and redistribution and retail, these markets tend to be a bit more cost plus. So sort of inflation deflation flows a bit more through automatically, where in Europe, the customer fragmentation is higher. We have a bit less grocery activity there. So you see a bit less cost plus methodology. So but let's say the pricing system itself hasn't significantly changed. Rajesh Kumar from HSBC. Thanks for that color on the pricing mechanism you just gave in response to Sylvia's question. Within the three moving parts of freight, labor and product cost inflation, are there is there any type of inflation which takes longer to pass through, be it in cost plus or Continental Europe type of pricing model? Are there any differences in the phasing of that pass through, either due to a contract structure or due to the structure of the market? The second one is for Brian on IFRS 16. Thanks for the color on the EPS impact. Just when you're capitalizing the leases, can you give us some color on what proportion of that are long duration warehouses kind of leases versus vehicles? And how much of that capitalization is to end of lease life versus continued usage, whether done retro some mechanisms or the underlying? And finally, on the trade disruption piece, have you had any discussions with alternate suppliers to come up with solutions in case there are shocks like you did in the straw market in the U. K? Yes. Well, let me take the first and the last question. I thought you'd take the IFRS 16 one from me. First of all, those who have followed Bonzo know that the top 18 out of the 20 largest customers in Bonzo are all North America, very large customers. And these are mostly operating based on cost plus model, and the cost in this perspective is product cost, mostly product cost related. So really, what you do see is because the vast majority of products we source in North America are being manufactured in North America. Let's say the inflationary cost pressures on operating costs being labor and transport are also hitting the manufacturers. So at some point, if you're in an inflationary environment, our manufacturers will start to feel that and they have no alternative than increasing the prices. So there is like a logic between product cost inflation and operating cost inflation. Now sometimes it can be a bit of a lag where your operating cost inflation maybe impacts you a little bit more than the product cost inflation. But this is sort of the system where in Europe, we have a relatively low percentage of cost plus product cost deals, which means that if you're in an inflationary product cost environment and operating cost environment, it's more responsibility for the management of the businesses, for instance, Continental Europe, my old region or in the U. K. To push the prices up because the suppliers will push their prices up also. So you see a slightly different picture in the U. S. And Europe. But over a longer period of time, what we've seen is sort of product cost inflation follows sort of or goes in line with operating cost inflation because the manufacturers effectively seeing the same impact. Now in terms of trade, the beauty of the Bonzel model is we are a global business. We have an enormous amount of intelligence and relationship on sources. Our businesses are very active in sharing sources and information. And if you look, for instance, at the tariff discussion, our business is really preparing for a situation that if the tariffs would come into place in North America now this morning we saw it's likely that it may not happen, but if it were to happen then we are relatively well prepared to move our sources to different countries where the tariffs won't apply. And that's the beauty of being part of Bonzo. We have our global sourcing office in Shanghai. We have a large number of suppliers in China, but also in other regions of Asia. And we can shift relatively quickly because we're also distributor. We don't have machines. We don't have heavy assets located anywhere. We can move very quickly. Rajesh, in relation to IFRS 16, roughly we have about 5,000 leases in Bunzl very roughly. And roughly 10% of those are property leases. So they'd be slightly longer dated ones. I guess the average length of a property lease at inception would be somewhere in the region of 10 years 7 to 10 years. So now on average, we've probably got about 4 to 5 years average life on those leases when we capitalize them. And the rest of the or the vast majority of the rest of the leasing book is trucks, vans, cars. And their typical life would be no more than 5 years when you take out the initial lease. So on average, there's probably 2.5 years through that life. In terms of short life assets you were asking, we have very few leases of insignificant value. So you have the exceptions. You don't have to capitalize those. We don't have them. And we have hardly any that are less than 1 year at inception. If a lease, though, is in its last year, I started a 10 year lease in its last year, then you will have capitalized the asset and liability remaining on that. And where we've already committed to entering into a continuation of a lease that's coming to an end, we've also capitalized that. So when I look at my numbers on inception and what we're projecting for the full year based on our budgets, I'm expecting my lease asset at the beginning of 2019 and at the end of 2019 to be almost identical amounts. So what comes off in depreciation gets added back on effectively in new leases, if that makes sense. It's funny. I was planning to say the same maybe a bit shorter. Matija Gergolet from Goldman Sachs. Just a quick follow-up on IFRS 16, but very short. What is incremental depreciation? I don't think I've seen it in the presentation. The number is about EUR 130,000,000. EUR 130,000,000. Thank you. And then secondly, a bit more general question on Slide 26, where you talk about plastics, perhaps a bit more strategic question there. Actually, it has 2 parts. On the left hand side, you showed us that now when you substituted the straws with the paper straws, there was a 25% increase in revenues. So it kind of shows that you have a lot of, say, potential optionality upside as you replace single use plastics with more expensive ones. What happened in the second example with the trusted partner? You didn't give us any information about basically the increase in revenues if there was some. And then as a follow-up to that, so the third question, can you give us some numbers about what is the for 2018, what was the total amount of, say, plastics distributed? Or what was the single use plastic distributed? And elaborate a bit on that. How much actually see it as an opportunity as basically customers go for or have to go for more expensive products? Yes. Okay. I'll take that one. The reason why the sales in the total sales in the product group straws was up by 25% is because the price for paper straws is 4 times more expensive than the plastic straws, so 400%. If we look at a lot of single use plastic materials, obviously, they have certain functions, hygienic functions, they travel well. And the reason that they're being used today and in the past is that they are functionally very good products and probably also represent the best value for money. In other words, they're probably the cheapest product that does the job. So what we see is when things start to move to alternatives, we feel it will probably move certainly on the short term to more expensive items. Now it will be a bit about reduce and replace, but still so far what we've seen is that there is a net benefit. Now in the second example is where we moved products towards sustainable alternatives and then also to reusable products. I would say we have two points to make. The first point is you all remember that basically the single use carrier bags were banned a couple of years ago. And following that development, a lot of reusable bags for life were introduced. We are a big distributor of these products. Now we all know if you look in the back of your car or you look at home, you've got a number of reusable carrier bags. You go into the shop, you forget your reusable bag, you buy another one. So this is a continuing story. And if you look at the overall turnover of the product group carrier bags in the U. K, for instance, single use in combination with reusable, it's broadly the same turnover. Probably the margin is a bit better than before. So we've certainly seen where things move more to reusable items, it hasn't gone against or worked against us, which is a good thing. In terms of the trusted party, so it will first move to sort of even more sustainable products that are certainly more expensive and then more to reusable items. Now in the U. K, we have our business Lockhart that is in light catering equipment. So if really people want to eliminate plastics and certainly not everybody will do that because it provides a function. You want to you need to move items from A to B, and you're not always going to do that with crockery and porcelain plates. But in cases where it is possible, we have a number of catering light catering equipment and businesses as well. So the beauty of PONCE, we're very agile. We are a one stop shop delivering whatever is needed. And if it's a plastic cup or a paper cup or it's a porcelain cup, we have it in the range. But the thing I'd like to stress is we are very proactive because we take our responsibility. I think it's a priority for society. It's a priority for Bonso. And we are perfectly positioned given such a large sales force around the world, given our expertise to take our customers on this journey to help them transition to more sustainable alternatives. And yes, you're right, I think we have a commercial interest as well to do that. Percentages, yes. If we look at single use plastics and we had a look at it, we see very, very different situations today around the whole sustainability topic. Although there are a few very specific areas like in California, in the U. S, Our businesses are well prepared to deal with the sustainability topic to help our customers. We have in the range sort of greener and sustainable alternatives, but we see very little traction in the topic in North America. Customers are basically not ready or keen to move away from more the traditional single use plastics. Very different picture in the U. K. Certainly, it's very much on the spotlight, followed by Continental Europe. Now if we would look at our business in the U. K. And Continental Europe, where we see the discussion happening today, the percentage of our single use plastics is between 10% 15% of the business. Now as I explained, we don't see it as an issue because we are a one stop shop of a full range supplier of everything that our customer needs in the non food area, we are agile and neutral in terms what the customer buys. So despite the fact that percent is being relatively low because we have safety businesses, we have health care businesses, we are one of our biggest product groups are is toilet paper and towels, which is pretty resilient. We are in a good position to help the customers in that specific area to move towards more sustainable products. Thank you. George? George. Thanks. It's George Gregory from Exane BNP Paribas. Just two, please. Firstly, going back to the discussion around sustainable products, single use plastics, would you say you helpfully, Frank, gave some comments around the margin on plastic bags in the U. K. Probably having improved. Would you say that you would expect that to apply generally? Perhaps a comment on the straws example you gave for the U. K. Would be helpful. And secondly, just going back to North America. Could I just clarify, did you book a will there have been a restructuring charge for the 50 heads within 2018 EBIT? And could you give us a rough guide on how much that was, please? Thanks. Yes. Let me take the first one. Now given the relatively small amount of business we do in this field, I wouldn't expect significant increases into the margin. I think we do a lot of different product groups, different sectors, different countries. It's certainly not driving the margin pounds or absolute euros down on these specific products. So maybe everything else being equal, it could support the margin a bit, but I wouldn't go and plan for significant increases in margins because of this development. And in terms of restructuring in North America, it was a relatively modest charge, and it was offset by savings. So treat it as a net zero wash. The benefits we got in the last quarter were offset by the cost of doing it broadly. Thanks.