Welcome everyone to Bunzl'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 am pleased to report that Bunzl 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 GBP 183 million. You will have seen that today we announced the acquisition of Liberty Glove & Safety, which has annualized revenue of some $90 million, 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. Starting with revenue. In 2018, revenue grew by 8.7% to GBP 9.1 billion. Of this growth, 4.3% was organic, with all business areas contributing growth of at least 4%. Acquisitions added 5.3%, and the disposals of two non-core businesses reduced growth by 0.9%. Turning to the income statement. Adjusted operating profit grew by 7% to GBP 614 million, with operating margin down 10 basis points to 6.8%.
We have excluded from adjusted operating profit, a non-recurring charge of GBP 3.3 million 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 GBP 8.3 million as a result of higher levels of average net debt, mainly from the funding of acquisitions made in 2017 and 2018. As well as higher interest rates, particularly on US dollar debt, and also on additional longer dated debt. During 2018, we disposed of two 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 GBP 13.6 million. This profit has been excluded in calculating the adjusted profit measures.
Adjusted profit before tax increased by 6% to GBP 559 million 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 of January 2018. 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 GBP 1.296, and we are proposing a final dividend of GBP 0.35 per share, making a total of GBP 0.502 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 GBP 131 million of additions from acquisitions and currency translation, partly offset by amortization and the disposal of businesses.
Working capital has increased by GBP 76 million 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 GBP 1.4 billion, GBP 137 million lower than December 2017. This decrease is principally due to a net cash inflow in the year of GBP 185 million, partly offset by exchange. Net debt to EBITDA reduced by 0.3 of a turn to 2x at the low end of our target range of 2x-2.5x . The return on average operating capital remains high at 50.7%, 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 of January 2019 of GBP 430 million-GBP 450 million. A corresponding lease liability, being the present value of future lease payments of GBP 480 million-GBP 500 million will also be recognized. Net debt to EBITDA will increase by 0.3 of a turn, 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 GBP 20 million, 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. Turning to the cash flow statement. 2018 was another strong year of cash generation for Bunzl, with free cash flow of GBP 416 million and cash conversion at 94%. During the year, we paid dividends of GBP 152 million and invested GBP 184 million in acquisitions, whilst realizing GBP 55 million 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%. 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 GBP 1.3 billion, while at the same time we have been able to invest GBP 3.2 billion 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. Our 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. 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 three-quarters of our total revenue. Bunzl is an international business operating across the world. We are organized by geographic business areas across 31 countries, supplying six 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 GBP 5.3 billion due to strong organic growth of more than 4%, as well as the impact of recent acquisitions, with operating profit increasing by 3% to GBP 317 million. 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 two 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 Revco in January 2018. Revco 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 Monte, 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 GBP 1.8 billion and operating profit increasing 18% to GBP 177 million. 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 food service businesses have also enjoyed good sales and operating profit growth as additional investment in headcount and IT has borne fruit. The Hedis 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 healthcare 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. Towards the end of the year, we purchased CM Supply in Denmark, which specializes in own brand and customized food service 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. 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 GBP 1.3 billion 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 GBP 87 million, 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.
Aggora, 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. 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. Profitability increased. The rest of the world revenue increased 12% to GBP 741 million, with operating profit up 15% to GBP 56 million 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. Our position in safety in Brazil was further strengthened through the recent purchase of Volk. 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. 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. 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 three 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 2018. 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 Bunzl'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 salespeople and customer service specialists based around the world who I'm very proud of and who 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 of 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 foodservice 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 site 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 two 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. 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. It 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 one of our contract catering customers in the U.K. This caterer services a large client at their main facility, which has two restaurants and eight 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 teams 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 global scale, we have strategically important relationship with our branded suppliers. We have also developed a substantial own brand offering. This has been accelerated by the establishment of our Asia sourcing center more than 10 years ago. Our sourcing capabilities, together with our QA/QC 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 manage 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 QA/QC 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 QA/QC 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 seven 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 two-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 acquisition since 2004. During this period, we have acquired 157 businesses for a total spend of GBP 3.3 billion. In 2018, we agreed to acquire six businesses for GBP 183 million. 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 six 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 GBP 1 billion - GBP 3.8 billion 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 GBP 1.4 billion in 2004 to GBP 5.3 billion 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. I'm delighted that today we have announced our 12th acquisition in the safety sector with the purchase of Liberty Glove & 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 will now take your questions. Paul?
Morning. It's Paul Checketts from Barclays Capital. I think I've got two or three questions. The first is on margins. There's obviously been quite a lot of attention on underlying margins. You have more data 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? What you expect that to look like in 2019, and even out and beyond that in the medium term. 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? Thanks.
Okay. Let me take the underlying, maybe you can deal with the non-food retail. Margins. Underlying margins overall are down 30 basis points, really caused by mainly North America, a little bit still sort of mixed impact from, or part impact from the large piece of business we took on in North America. We've seen some operating cost inflation, mostly labor cost, a little bit of transport cost. As we said in the news release, in the U.K., mainly caused by our safety business, where effectively their customers were faced with some pressure relating to the U.K. situation overall. I would say if we look at the first half and the second half, in the second half, the underlying margin decline was a bit lower than in the first half. 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. Bunzl is a real GDP plus 1% business. Margins can be up or down 10 or 20 basis points in each of a 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%. We've seen a big benefit from that. A little bit of an impact on operating cost, obviously. We see this market still be a bit tight.
Global trade, where is that all going to go? This morning we saw that Trump is making some progress in terms of China, hopefully tariffs are not happening. Even if they were to happen, it wouldn't be a real issue for Bunzl. We dealt with a 10% tariff earlier in the year by putting prices up, by negotiating with suppliers. In terms of tailwinds, obviously in the second half, we implemented a restructuring in North America. That should sort of mitigate some of that operating cost inflation. We're still planning to take some DDS synergies in North America. The 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.
Make your own assumptions on GDP by region, or what you think is going to happen with the oil price, gas prices. We have some tailwind, some headwind. 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 U.K. and Ireland. In the U.K. 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, 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. 2018 was more of a year of integration, of inward focus, having bought the DDS business. Now Schwarz and DDS are a formidable force in the market there, serving businesses very well, and are very well-placed, again, in what is a tough market.
We have market leadership, and I think that's a strong advantage for us.
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, the acquisitions that you make are normally double-digit, and you normally expect to get synergies from these. 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. Add whatever an acquisition does. If it's a higher than average margin, then our margins should go up. If they're lower than average margins, our margin would go down. The comment was really in relation to underlying margins.
Okay.
Karl?
Thank you. It's Karl 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. If we just think about your SG&A cost base in North America, that's probably employee cost base of about half a billion GBP, give or take. 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? The second question, Brian, just on the balance sheet and your debt structure. You've obviously talked about effects of 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. Yeah. We did talk about sort of mitigating actions in terms of the 50 people. However, the 50 people are slightly above average cost because they are sort of senior managers. Bunzl is about making progress every day, and the same happens in North America. We're implementing a number of initiatives in the IT side of the business, moving more transactions digital with our customers, automating more transactions with our suppliers and altogether, that should help.
Your question on the finance expense. Over half our finance costs are fixed. 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 much significant difference to our net interest expense for 2019 versus 2018. Might be GBP 1 or GBP 2 million, then there's IFRS 16 to add on. You can add on another GBP 20+ million there, but that's not the underlying number. That's a one-off accounting difference.
Will?
Thanks. It is Will Coutts from Jefferies. A couple, please. Firstly, just on inventory. It increased about 14% year-over-year. Just wonder if there is any stocking up there, maybe U.K. and U.S., or any OpEx implications actually, for carrying slightly higher inventory. Secondly, just on your acquisition related expenses. Did about half the number of deals this year, but the expenses are only down about 10%. Just wondering if there is anything to read into that. Thanks.
Let me take the first question. Stocking up, not substantial. I think we had 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. We only import about 15% of what we buy in the U.K., so it is relatively minimal. I would say overall, we have 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. There is a bit of potential.
In relation to acquisition related items, if you turn to page 32 of the press release, there is a little table at the bottom there, and it lays out the movement in acquisition related costs. You will note that the transaction overall acquisition related costs were GBP 33.4 million compared with GBP 36.7 million last year. I think that is what you are referring to. If you take the line transaction cost and expenses, they have come down from GBP 12.1 million -GBP 5.5 million, reflecting the lower activity in 2018. The line that has gone up relative to last year is adjustments to previously estimated earn-outs. 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 GBP 4 million, whereas in 2018 there was an upward adjustment because one of the businesses that we had 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. That is, I would say, an ebb and flow of things that happened in the past. In terms of activity-wise, you would have seen the reduction that you are expecting on the transaction costs.
Thanks. Sylvia?
Hi, good morning. It's Sylvia Barker from JPMorgan. Just a couple more general questions, please. First of all, on China, you've been in China now for a while, kind of on the ground. Could you just maybe give us some thoughts around kind of expanding maybe outside of the existing end markets that you're present? Secondly, just around kind of pricing to customers. 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've always spoken about dipping our toes into that market. China is never going to be very large for Bunzl in the context of the overall business. It's still very early days. We're learning things. We're getting close to the business. If you look at our mature market, North America, the level of growth we achieve there is substantial. I would say Continental Europe and North America are more distribution ready. People are really valuing the one-stop shop. You see that a little bit less in China. We don't currently have a plan to significantly boost activity there. We do look at other areas in China. We have a very nice business that performs strongly in Singapore. We're looking at things, and if we can buy good business like everywhere, we will buy businesses.
It's not the first 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. Inflation, deflation flows a bit more automatically. Where in Europe, the customer fragmentation is higher, and we have a bit less grocery activity there. You see a bit less cost plus methodology. Let's say the pricing system itself hasn't significantly changed.
Thank you. Rajesh in the back.
Rajesh.
Morning. Rajesh Kumar from HSBC. Thanks for that color on the pricing mechanism, just gave in response to Sylvia's question. Within the three moving parts of freight, labor, and product cost inflation, 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? How much of that capitalization is to end of lease life versus continued usage, whether done retro, some mechanisms of the underlying?
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.?
Yeah. Let me take the first and the last question.
I thought you'd take the IFRS 16 one first.
First of all, those who have followed Bunzl know that the top 18 out of the 20 largest customers in Bunzl are all North America, very large customers. These are mostly operating based on cost plus model, and the cost in this perspective is product cost, mostly product cost related. 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. 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. There is a logic between product cost inflation and operating cost inflation.
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. This is 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 a responsibility for the management of the businesses. For instance, in Continental Europe, my old region, or in the U.K., to push the prices up because the suppliers will push the prices up also. You see a slightly different picture in the U.S. and Europe. Over a longer period of time, what we've seen is product cost inflation follows or goes in line with operating cost inflation because the manufacturer's effectively seeing the same impact.
In terms of trade, the beauty of the Bunzl 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. 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. 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. That's the beauty of being part of Bunzl. We have our global sourcing office in Shanghai. We have a large number of suppliers in China, but also in other regions of Asia. We can shift relatively quickly because we're also a 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. 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 7-10 years. Now, on average, we've probably got about four-five years average life on those leases when we capitalize them. The vast majority of the rest of the leasing book is trucks, vans, cars. Their typical life would be no more than five years when you take out the initial lease. On average, there's probably two and a half years through that life. In terms of short life assets you were asking, we have very few leases of insignificant value. You have the exceptions, you don't have to capitalize those.
We don't have them. We have hardly any that are less than one year at inception. If a lease, though, is in its last year, started a 10-year lease and it is in its last year, you will have capitalized the asset and liability remaining on that. Where we've already committed to entering into a continuation of a lease that's coming to an end, we've also capitalized that. 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. 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 ?
Matija Gergolet from Goldman Sachs. Just a quick follow-up on IFRS 16, very short. What is incremental depreciation? I don't think I've seen it in the presentation.
The number's about GBP 130 million.
GBP 130 million . Thank you. Secondly, a bit more general question on slide 26, where they talk about plastics, perhaps a bit more strategic question there. Actually, it has two 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. 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. As a follow-up to that will be the third question. Can you give us some numbers about for 2018, what was the total amount of, say, plastics you distributed, or what was the single-use plastics distributed?
Now elaborate a bit on that. How much actually see it as an opportunity as basically customers have to go for more expensive products?
Yeah. Okay. I'll take that one. The reason why the total sales in the product group straws was up by 25% is because the price for paper straws is four times more expensive than the plastic straws. It's 400%. If we look at a lot of single-use plastic materials, obviously they have certain functions, hygienic functions. They travel well. 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. 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.
Still so far what we've seen is that there is a net benefit. 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. Following that development, a lot of reusable bags for life were introduced. We are a big distributor of these products. 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. This is a continuing story.
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. 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 in first move to even more sustainable products that are certainly more expensive and then more to reusable items. In the U.K., we have our business, Lockhart, and that is in light catering equipment. If really people want to eliminate plastics, and certainly not everybody will do that because it provides a function. You need to move items from A to B, and you're not always going to do that with crockery and porcelain plates.
In cases where it is possible, we have a number of light catering equipment and businesses as well. The beauty of Bunzl, we're very agile. We are a one-stop shop, delivering whatever is needed. If it's a plastic cup or a paper cup or it's a porcelain cup, we have it in the range. 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 Bunzl. 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. Yes, you're right. I think we have a commercial interest as well to do that. Percentages. Percentages, yes.
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. 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% and 15% of the business.
As I explained, we don't see it as an issue because we are a one-stop shop, a full-range supplier of everything that a customer needs in the non-food area. We are agile and neutral in terms of what the customer buys. Despite the fact that percent is being relatively low because we have safety businesses, we have healthcare businesses, one of our biggest product groups 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. 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. Secondly, just going back to North America. Can I just clarify, 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. 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 group, different sectors, different countries. It's certainly not driving the margin GBP or absolute euros down on these specific products. 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.
In terms of restructuring in North America, it was a relatively modest charge, and it was offset by savings. Treat it as a net zero wash. The benefits we got in the last quarter were offset by the cost of doing it quarterly.
Thanks.
Good. Any more questions? Okay. Thank you very much.