.Hello everyone and thank you for joining the Bunzl Results for half year ended 30 June 2025. My name is Sami and I'll be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two on your telephone keypad to remove yourself from a question queue. I will now hand over to your host, Frank van Zanten, CEO, to begin. Please go ahead Frank.
Good morning and thank you for joining Bunzl's 2025 half year results presentation. After a short introduction, I will focus on updating you on our North America and Continental Europe businesses. After this, Richard Howes, our CFO, will walk through our financial performance, leverage, and outlook. We will then move to Q and A. First, I want to thank all of my Bunzl colleagues for their hard work and dedication in what has been a challenging operating environment for many. I know many of you are working tirelessly to support customers and to deliver an improved performance in the second half of the year. I will start by summarizing performance. Over the first half, Bunzl delivered revenue growth of 4.2% at constant exchange rates. Growth was driven by acquisitions, with underlying revenue broadly stable.
However, group adjusted operating profit declined by 7.6% at constant exchange rates, with our operating margin reducing by around 100 basis points to 7%. This has been driven by certain larger businesses within North America and Continental Europe, with both business areas seeing a similar level of margin decline as the group overall. I will spend much more time discussing these shortly. Our cash conversion was better than we expected at 97%, although free cash flow declined by 22% due to our operating profit decline. We ended the period with an adjusted net debt to EBITDA of 1.9 x, slightly better than guidance driven by good cash conversion. Richard will discuss leverage in more detail later, but we are now broadly in line with our target leverage range. Our capital allocation priorities remain unchanged, and within this we remain committed to sustainable annual dividend growth.
We are therefore announcing a 0.5% increase in the interim dividend today. August year-to- date, we have announced five acquisitions with a committed spend of approximately GBP £120 million. As is typically the case when there is macro uncertainty, the number of signed deals has been lower than usual, but our pipeline remains active in the first few months of the year. We also executed GBP 114 million of an announced GBP 200 million share buyback. We had paused further purchasing at the time of our Q1 announcement, aligned to capital allocation priorities and our short term leverage target. Today, given our current expectations for committed acquisition spend, we are resuming this buyback. GBP 86 million remains and will be fully completed by the end of the year. Before I go into the detail of performance, I want to highlight the main points I would like you to take away today.
Firstly, fixing the issues we see is our priority, and I am confident in the actions we are taking. While it is still early days, these actions are performing in line with our expectations. In particular, and importantly, our North America distribution business is re-energized. I remain confident in our outlook and our expectations for an improved second half performance with a moderation of operating margin decline year on year compared to the decline in the first half. While it's only the first month, and with the external operating environment remaining challenging, trading in July is demonstrating the anticipated improvement we are looking for in the second half. Secondly, I want to emphasize that we are committed to building further on Bunzl's historic success. Our performance in historic periods means that despite our earnings weakness in 2025, we have still delivered 6% compound annual profit growth since 2019.
The Bunzl business model is fundamentally strong, and we continue to have an attractive long-term compounding growth opportunity. I am confident in Bunzl's underlying resilience and consistency, and after fixing the issues, I intend for Bunzl to be associated once again with these key characteristics. Let me go straight to discussing the actions we are taking, starting with the North America business. I will dive into the specifics of recent performance shortly, but I would first like to spend a few moments giving some additional context to help you understand the evolution of this business. Our North America business area comprises around 35 operating companies, of which our distribution business is the largest. It generates around half of North America's revenue and around 30% of group revenue. It largely services grocery customers and food service redistributors and is a leading national distributor in both these markets.
Whilst we have experienced challenges in this business recently, it is important to remember that given its size, it has historically been an important contributor to the strong characteristics you typically associate with the group. Its resilience, for example, is supported by its exposure to both food service and grocery, which have complementary end market drivers. Furthermore, it has generated an attractive return on average operating capital driven by strong asset turn in line with the business area. Overall, distribution's strong customer proposition is supported by its scale and category expertise. We take these core strengths and apply them to our two main customer segments slightly differently in grocery. Given historical consolidation in this sector, our revenue is mostly attributable to national and larger regional customers.
Grocery customers are using our products directly in their businesses to operate their stores and merchandise their products, and they prefer to allocate their own working capital and network capacity to goods they can sell on. They typically buy consumables from us over a contracted period, and we are often their sole distributor for all goods not for resale. Whilst all our customers care about price and product quality, this customer set really values reliability and consistency of service. It is slightly different for foodservice redistributors because the product we sell to them are items they will sell on to their customers. They are typically focused around 90% on food and 10% on non-food items, and so they leverage the scale and depth of ranges that distributors and importers such as Bunzl provide on that non-food side.
These customers will often utilize more than one distributor in order to find the best availability and price. Speed of service is essential. Revenue in this part of the distribution business is more of a mix between local and larger customers. Overall, distribution generates around 1/3 of its revenue through local customers, with revenue weighted towards foodservice. The other 2/3 is generated via larger customers, with revenue weighted to grocery. Whilst distribution has continued to hold a strong market position for many years, as with any business, we need to keep evolving. Let me now take you to the strategic and structural changes we have been implementing in this business over the last five years.
In 2019, we were operating a branch-based model, which meant that 40 general managers across the business were each managing the entirety of their own operations locally, from sales right to all of the supporting processes. National account managers coordinated our service delivery to national customers. Via these general managers, we delivered a very strong proposition to customers. Customer needs were changing. Our grocery customers in particular have become larger. Servicing them from our highly decentralized footprint impacted consistency and local management. Inward focus on operations rather than being able to dedicate their attention outwards on sales and business development also impacted our ability to drive new business. Over the years leading to 2019, we're seeing revenue momentum slow. There were some other factors at play. For example, the low level of coordination of our overall product range had resulted in minimal development of own brand.
In 2019, we generated only 5% of revenue through our own brand. We were also being impacted by our exposure to cost plus percentage contracts with operating cost inflation and product deflation having reduced distribution's operating margin. Strategic actions were sketched out for the business. Even though the DNA of Bunzl is to decentralize and empower local teams, we recognize we would need to flex our approach if we wanted to strengthen our leadership position and enhance our service and offering to customers. This would require us to move to a sales and operations model which would separate operational activities such as ordering from suppliers, managing the warehouse infrastructure and logistics from sales processes, allowing local teams to focus their efforts on business development. Given the different nature of our core customers, the new organization will need to strike the optimal balance between centralization and local agility.
Furthermore, we saw a strong opportunity to increase own brand penetration to complement our branded product range. We have long established relationships with branded domestic suppliers and the right balance can be achieved with the correct development plan. We also needed to transition large customers from cost plus percentage margin contracts to index fee per unit contracts. This would reduce the downside risk to our margins in case of product deflation. New leadership was appointed to drive the operating model change and own brand development. In particular, this strategy was and continues to be the right one for the business to deliver a stronger platform for growth and improve margins. However, the challenges have been in the execution as we will talk about shortly. Initially, we were seeing some positive progress. By the end of 2024, a lot of these actions were underway and working successfully.
We had increased our own brand penetration to 14% with good demand supported by the product's price point and quality. We had successfully reduced our exposure to cost plus margin contracts with the revenue exposure across the Bunzl group being around mid single digit percentage today. Furthermore, whilst we have seen some gains and losses, we are starting to see good momentum with grocery wins. Over the period 2020- 2024 we delivered strong compound annual growth in profit. This was supported by our management of high levels of product cost inflation as well as our strong capabilities managing significant supply chain disruptions as well as the growth in our own brand portfolio. However, whilst we had moved to 14 regional hubs and implemented the sales and operations model in 2023, our execution of the strategy fell short in some key areas.
Centralizing decision making and processes had improved consistency for large accounts but had reduced agility for some smaller local customers. We had gone too far with centralization for our local business. Our local teams had less autonomy and became slower to respond to business inquiries in this more dynamic part of the market. This particularly impacted our local food service customers who rely on speed of service and we saw a loss of wallet share. Furthermore, own brand growth had been delivered alongside reduced engagement with preferred branded suppliers. Some of these issues were starting to become clear early in 2024 and leadership were tasked with taking corrective action, however, the impact on the business was obscured by offsetting benefits, in particular the transition to own brand and a strong holiday season at the end of 2024. The business ended 2024 with a view that performance was picking up.
Having seen volume growth with redistribution customers in the second half, in the first half of 2025, our North America distribution business went through a very challenging inflection point which became fully evident in April. The backdrop had become more challenging with continued pricing deflation and a difficult foodservice end market. Furthermore, leadership had not been fast enough to implement corrective actions and team morale had fallen. Volume growth with preferred branded suppliers and own brand conversion fell well below our expectations. We had expected to win business on the back of the organizational changes, but this did not happen over this period. This was compounded by the loss of a higher margin category of business with a major ongoing customer. This category had supported a program which is no longer available in its stores. We did not win any large business over this period to offset this specific loss.
Many of the offsetting benefits we had seen in 2024 fell away. We've seen higher operational cost with the business fixed cost base having increased with significant investments in people toward the end of 2024. Higher inventory related cost as well as operating cost inflation. All these elements combined resulted in a significant drop in distribution's profit versus the prior year. As a result, we took decisive action to improve performance during the half. Firstly, we changed the leadership of the business. Jim McCool, the head of North America who has extensive experience within this operating company, took on direct leadership. He immediately sought to address team morale and remove the barriers to our local sales teams. I am spending a lot of time in this business and we have been working closely with Jim in overseeing the change processes.
Both Jim and I are committed to and aligned on how to fix these issues. We are also very confident that the issues are fixable. Importantly, we have the right strategy and organizational model and as we see the results of actions taken, we are going to have a much stronger business at the other end. One of the most impactful steps taken so far has been to push more decision making authority back to the local level where appropriate. Instead of certain tasks being centralized, our 14 local market teams have regained control over pricing and margin for local customers as well as product availability. This has restored the agility and customer responsiveness that had eroded. We also took some cost out. At the same time, we focused on tackling the inventory position that had built up.
We are refocusing our efforts on branded domestic suppliers who are core to our supply chain and making sure that we have a good balance of growth between their ranges and our own brand ranges. As we continue to launch further products in complementary non branded categories, these swift measures are starting to pay off. The distribution team is re-energized and focused on turning the business around. Our service levels are now normalizing toward the usual high Bunzl standard. Even as we navigate some ongoing tariff related supply chain complications. Inventory levels are normalizing which eases the pressure on operational cost and improves productivity of our warehouses. We saw our own brand strategy continuing to deliver with successful launches in Q2 and further launches planned toward the end of the year.
While we saw fewer than expected business wins in the first half, the pipeline of wins is looking positive for the second half and I am pleased to say that profitability momentum through the first half was in line with our expectations despite the challenging market. Importantly, these early indicators are positive and tracking in line with our plan. In the second half, we expect a moderated operating margin decline compared to the significant decline experienced in the first half. Although the benefit of some actions are not expected until well into 2026, I am confident in the progress we are making. This is the right strategy and when executed we expect the continued market leadership, a well-functioning operating model which allows us to enhance our focus on sales and deliver an optimal service for both larger and local customers.
Continued complementary own brand growth alongside preferred branded supplier programs, the business operating once again with high product availability and strong service levels and importantly a highly motivated team. Given the importance of this business to the future success of the group and my strong confidence in these actions the team has taken, we will become an even better Bunzl. Turning to Continental Europe, where the operating environment also remains challenging, we saw Continental Europe's operating margin decline by around 100 basis points over the first half as had been expected. This follows trends already seen in the second half of last year. The decline was driven by France and certain online businesses. In France, we have seen the continued impact of deflation with prices normalizing in the cleaning and hygiene sector from the higher levels seen during the pandemic.
This has been compounded by a weak economy with revenue pressure. The impact has been amplified by a relatively high fixed cost base as well as continued operating cost inflation. Profitability of certain online businesses was also impacted by revenue softness with lower traffic and conversion of online marketing activities. Despite muted economic growth across Europe, there were brighter areas of performance. In particular, our Benelux business returned to growth following a challenging second half of 2024 and Spain has been resilient against a good performance last year. Improvement actions are well underway in Europe, having been initiated in the second half of last year. We expect the net benefits from cost actions to start to accrue and expect our heightened focus on pipeline management to support net business wins in the second half. The region is also pursuing procurement opportunities, such as consolidated own brand supply in certain regions.
Furthermore, we face easier comparatives in the second half. Together with our actions, this supports our guidance for reduced operating margin decline in the second half. Whilst we are very focused on improving performance in the second half, I wanted to reiterate that our long term compounding growth strategy remains unchanged. Many parts of our business are unaffected by our current challenges and are continuing to focus on delivery against this broad strategy. In the medium term, you can expect Bunzl to continue delivering growth organically and through value accretive acquisitions. So far in 2024, Bunzl has completed five acquisitions with a committed spend of around GBP 120 million. These acquisitions include our expansion into the attractive Chile healthcare market as well as our first acquisition in Mexico since 2013. The breadth of these acquisitions continues to demonstrate the large number of lakes we continue to fish in.
Despite a slower pace of deals this year due to macroeconomic uncertainty, the M&A pipeline remains active and historically Bunzl's M&A activity picks up quickly when conditions improve. We continue to have over 1,300 targets in our database. Andrew Mooney, our Corporate Development Director, looks forward to discussing our acquisition strategy and opportunity in more detail on the 8th of October at our next investor seminar. Let me now pass you to Richard.
Thank you, Frank, and good morning, everyone. With around 90% of adjusted operating profit generated outside the U.K., our results on average were negatively impacted by currency translation of between 3% - 4% across the income statement. Starting with revenue, group revenue grew by 4.2% at constant exchange rates to GBP £5.8 billion, driven by net acquisitions which delivered 4.9% to revenue. Underlying revenue declined 0.2%, and there was a 0.5% impact from an extra trading day in the prior year, net of a small benefit from excess growth in hyperinflation economies. Underlying revenue grew by 0.6% in the second quarter, demonstrating an improvement on the challenging first quarter where we saw a decline of 0.9% within underlying revenue. Both price and volume were broadly stable for the half. Now turning to the income statement, adjusted operating profit declined by 7.6% at constant exchange rates to GBP 404.5 million.
Operating margin reduced to 7% from 8% in the period last year at actual exchange rates. As Frank has mentioned, this margin decline was driven by the distribution business in North America and certain large businesses in Continental Europe. Adjusted net finance expense increased by GBP 12.1 million- GBP 58.9 million due to higher average net debt during the period. We continue to expect adjusted net finance expense of around GBP 120 million for the full year. The effective tax rate was 26.4% compared to 25.5% last year, reflecting the absence of one-off benefits from U.K. group relief and tax provision changes included in 2024. We continue to expect around 26% to be the effective tax rate for the full year. Adjusted earnings per share fell by 10.6% at constant rates to GBP 77.8 pence.
The higher tax rate and increased interest charge more than offset the benefit of a reduced average share count, reflective of the buybacks executed between the two periods. We have increased the interim dividend by 0.5% to GBP 20.2 pence per share. Now turning to the business area performance. As you know, our performance in North America has been driven by our distribution business. While adjusted operating profit for the business area as a whole declined by 14.7% at constant exchange rates, excluding the distribution business, North America's adjusted operating profit was more stable, albeit still impacted by the uncertainty environment. We have seen some tariff related price increases during the second quarter and expect to see further increases later this year.
Performance to date suggests tariff related price increases will provide some benefit in the second half, albeit impacted by the uncertainty we have seen and continue to see in tariff levels across Asia. Frank van Zanten has covered the drivers of Continental Europe's 9.9% declining adjusted operating profit at constant exchange rates. Let me turn to the other regions. Growth in the U.K. and Ireland has been driven by our acquisition of Nisbets, which was acquired in May last year. Over the first half, Nisbets has seen good sales momentum despite a more challenging trading environment. However, profitability was impacted by product mix with an increased weighting to heavy catering equipment such as fridges and freezers and slower than anticipated progress on maximizing the benefits of warehouse automation that the business invested in prior to acquisition.
Elsewhere, our existing food service businesses performed well over the period, helped by customer contract renewals. The declining operating margin in the U.K. and Ireland has been driven by the dilutive impact of consolidating Nisbets, which tends to have a seasonally lower margin in the first half of the year compared to the second half as well as its profit performance over the half. We have also seen some margin impact in our cleaning and hygiene business from selling price deflation. We are, however, making very good progress on synergy projects in Nisbets and expect these to largely benefit the second half. Our performance in the rest of the world has remained strong with underlying revenue growth driven by strong inflation in Latin America and moderate volume growth in Asia Pacific.
In Asia Pacific, we saw good performance in healthcare, the biggest sector in the region, and overall operating margins in the rest of the world continued to be strong. However, trading has become more challenging in the second quarter in Brazil. Although businesses have had success in passing through some currency driven product cost increases to customers, they have not been able to do so fully in a weakening market. This has impacted Latin America's operating margin. Moving to cash flow, cash conversion over the period was 97% which is better than expected, supported by improved inventory levels. Through the second quarter we generated GBP 243 million of free cash flow, a 22% decline year-on- year, reflective of the decline in our adjusted operating profit, with the change in net interest and income tax payments broadly offsetting each other during the period.
We paid out GBP 67 million in dividends and made a net payment of GBP 42 million to buy shares for our employee benefit trust, leaving total cash generation prior to acquisitions, disposals, and share buybacks of GBP 134 million, net of a GBP 17 million inflow from the disposal of R3 Safety. In the U.S., cash outflow related to acquisitions was GBP 31 million. All but one of the additional acquisitions announced year to date completed after 30 June. Turning to the balance sheet, with comparisons made to the position at the end of 2024, working capital increased by GBP 25 million as lower inventory and a benefit from currency translation were more than offset by an increase in receivables and reduction in payables, including the payment of share buyback commitments. Deferred consideration relating to acquisitions decreased by GBP 15 million to GBP 243 million, inclusive of the off balance sheet components.
Deferred and contingent consideration was GBP 336 million compared to GBP 375 million at the end of 2024. This reduction is largely driven by payments in the period. Adjusted net debt, including deferred and contingent consideration to be paid on acquisitions, was GBP 1.9 billion, down GBP 52 million versus the end of 2024, but up GBP 208 million compared to the end of June 2024. Our adjusted net debt to EBITDA was 1.9x compared to 1.8x at the end of 2024. This headline ratio continues to exclude the impact of leases, and the increase reflects our reduction in EBITDA in the first half of 2025 whilst being supported by a good second half of 2024. Returns have been impacted by our performance over the period, with a return on invested capital of 13.5% and a return on average operating capital of 38.8%.
Despite the decline, our return on invested capital remains strong and broadly in line with the level achieved in 2019. Turning to capital allocation, the strength of Bunzl's performance and high cash generation in recent years has resulted in low leverage. In the first half of 2023, our leverage was 1.3 x compared to 2.1 x in the first half of 2019 and compared to our target of 2x- 2.5x . This was despite an increase in average annual acquisition spend over recent years. As a result, last year we committed to returning to a more appropriate level at an adjusted net debt to EBITDA of 1.9x . Today we have re-levered. This has been delivered through both an acceleration of capital allocation, including share buybacks over the last 12 months, but also the weaker earnings we have delivered.
Given macro uncertainty, we continue to believe leverage around 2x is appropriate. However, our capital allocation priorities remain unchanged. Given our anticipated level of acquisition spend this year, we are resuming our previously announced GBP 200 million share buyback. We had paused the buyback alongside our first quarter trading update to provide sufficient headroom for acquisition spend in the year in line with our capital allocation priorities. Given the lower level of spend year to date as well as our expectations for additional spend over the remainder of the year, we will complete the remaining GBP 86 million of share buyback by the end of the year. With this buyback and the anticipated additional acquisition spend, we expect leverage to be towards 2 x by the end of the year.
Should we generate an annual free cash flow of GBP 500 million-GBP 600 million, this would leave GBP 200 million-GBP 300 million of excess cash after dividends and employee trust share purchases with acquisitions supporting earnings growth. This allows us to continue to fund future acquisitions whilst maintaining our leverage. As part of our capital allocation framework, we are committed to a progressive dividend policy. Further building on our 32 years of consecutive annual increases, we have announced a 0.5% increase in our interim dividend today with continual annual growth supported by our conservative dividend coverage. We expect our dividend cover to be around 2.4x in 2025. Turning to the outlook we have shared with you today, the positive indicators that we are starting to see.
These are in line with what we had expected and as such we reiterate the outlook we published in April and at the pre-close in June. We continue to expect moderate revenue growth in 2025 at constant exchange rates driven by announced acquisitions and broadly flat underlying revenue. We expect group operating margin for the year to be moderately below 8% compared to 8.3% in 2024. This guidance factors in a moderation of year-on-year operating margin decline in the second half compared to the approximately 100 basis points decline seen in the first half. This confidence is driven by the expected benefit of actions taken in North America and Continental Europe, the easier comparatives we see in Continental Europe, and the benefit of Nisbets synergies. We also note that the group's second half operating margin is seasonally higher.
And.
As Frank has already mentioned, trading in July is consistent with our expectations for the second half. I will hand you back to Frank for some final comments before we move to Q&A.
Thank you, Richard. I would like to conclude the formal part of this presentation by reiterating my two earlier points. Firstly, our priority is fixing the issues that have impacted the group. I am confident in the actions we are taking, and while it's early days, these actions are delivering as expected. Secondly, we are committed to building further on Bunzl's historic success and returning to the more consistent performance that you are used to. Thank you for your attention. We are now very happy to take any questions.
Thank you, Frank. To ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. Preparing to ask your question. Please ensure your device is unmuted locally. Our first question comes from Rory McKenzie from UBS. Your line is open. Rory, please go ahead.
Good morning all, it's Rory here. Two questions please. First, wanted to ask for more detail on the cost base plans for North America and Europe. If we assume that gross margins were pretty stable in each region, I think SG&A rose by about GBP 10 million-GBP 20 million year-over- year in local currencies. For H1, does that sound right? In terms of modeling that from here, were there any one-off costs you charged in H1 that won't recur in H2? Could you also quantify the savings you expect to make from your actions, please? Secondly, can you talk about the pricing environment? It sounds like H1 overall was still marginally deflationary. Can you quantify the price increases that you've recently put through and the potential impact on H2, and then just give a bit more background on how you're managing the U.S. in particular given the tariff volatility there?
Thank you.
Yeah. Okay. Rory. Morning. In terms of our cost base, yes, we have seen an increase in OpEx across the year. It's largely been inflation driven. I think we've done a good job actually of mitigating quite a lot of that through the actions we've taken, but also some benefits in freight that we've seen, particularly in North America. Overall, I think actually SG&A has been well managed. As to one-off costs, there have been some costs of the cost takeout exercises we've seen in North America and in Continental Europe. I think given the majority of this is in North America and given the fluid labor market there, you can assume that the costs associated with this are in the low single digit millions. Of course, they've all been taken above the line as part of our trading results. That's the cost piece.
In terms of pricing, yes, we have seen some easing of deflation across the first half. That has largely been mostly in North America, albeit we have seen some elsewhere. Part of that will be that we have put prices up with our safety customers, primarily in the second quarter. That really happens because of the delays and the uncertainty associated with tariff levels. It has taken place later in the quarter than perhaps everybody anticipated, which means actually the impact on the first half is relatively limited and there will be further benefits to come from tariffs in the second half, albeit I reiterate that the level of uncertainty remains high. Still not clear on tariff levels in China, for example. As a consequence, even though it is a tariff tailwind, I would conceptually make it clear that it's not a big tailwind.
It's a relatively modest number I would expect.
Thank you. Just coming back on the cost base, it doesn't sound like what you're saying is that there's any large absolute cost reductions you expect to make over the next 6- 12 months. It's more about repositioning the business to drive growth. Is that fair in the context of what you just said?
I think it's true in terms of actions taken. We have already taken a significant amount of action, particularly in North America, during Q1, towards the end of Q1, which we saw the benefit of in Q2. That is addressing structure, it is addressing number of people in the business, but it's also addressing disruption related costs associated with high levels of inventory. We have seen a significant reduction in the amount of storage trailers we've used and third party storage, which is expensive and it is inherently more disruptive, more disruptive to productivity. As inventory has come down, we've also seen an easing of that cost pressure. Those two together, you know, has been quite meaningful in the second half and will be additive in the second half. That's great.
Thank you.
Our next question comes from Ryan Flight from Jefferies. Ryan, your line is open. Please go ahead. Good morning.
All three from me, if I may, please. First one, you've noted reduced engagement from suppliers largely on the back of your focus on own brand. I wondered if you could update us on this engagement, engagement and your relationship with suppliers and how you strike the balance on own brand. It seems that you're still pushing the own brand penetration and just how you strike that balance. Second one, you've got your shorter term leverage target at the lower end of the previous range, so 2x . I wondered if you could build out on what you really need to see to move back to the 2x-2.5x range. The third one, just on M&A really. I know you've noted the tougher macro environment, but is there anything else for us to be aware of? Are you being a little bit more prudent?
Is there anything on valuation competition that'd be really useful? Thank you.
Let me take the first and the last one on engagement and supplier. What we've seen during that process in the business where things got a little bit too centralized, I think we got a bit too black and white in terms of introducing some of the own brands, which meant that at some points went at the expense of, let's say, the branded suppliers. Now, that's quite a nuanced situation also because in some cases, let's say the branded suppliers in the U.S. also have some older machines and purely in an international context are not always competitive. The market is driving you sometimes towards these kind of solutions.
If you look at a large business and a large product range that we have, I think the approach now, which is the right approach, is where we really look at what are product categories that are, let's say, unbrandable and, you know, unbrandable and having very little impact on the preferred branded suppliers. Then there's also a large amount of volume, let's say, sitting a little bit in the middle, where we are not selling own brands and we're also not selling products from preferred suppliers, where the aim is to move more towards preferred suppliers. We've seen this operate very successfully in other markets of Bunzl, that it's actually very well possible to grow your own brands and at the same time also grow your preferred supplier brands.
A lot of work has been going on in the last couple of months in terms of engagement on top level, on regional level, but most importantly on salesperson level, having these people talk to the salespeople from the branded suppliers making combined plans. That is really a focus now for the second half. Bunzl is a powerhouse in the U.S. market.
We are a really big company.
The branded suppliers are actually very excited that Bunzl is going to adopt a slightly more nuanced approach and they're very keen to work with us and, you know, continue to grow and pick up, you know, the right strategy. You feel good about the opportunity to grow with our preferred suppliers. At the same time, as we said, we had some good launches in the second half, we have more own brands to come in and it's slightly more in categories that are not so much part of the product range of our branded suppliers like straws, for instance. It's slightly more commodity group where already importers and people play it. We've got a great opportunity because we are so big, we have so much scale and when we bring that in, import that on our own brands, that's a real opportunity.
In terms of M&A, the pipeline is good. Obviously the situation in the world is more dynamic. That means that sometimes people's business is a little bit under pressure given all what is happening. You tend to see that some of these processes are then a little bit slower. We sometimes pause if we were not convinced about the, let's say, the sustainability of some of the profit trends we've seen in the last couple of years. Still very, very strong pipeline. A lot of conversations happening, and at uncertain times you just tend to see periods where you close a little bit less deals. I'm not worried about this at all. It can be a little bit lumpy. Sometimes you have a little lower spend and sometimes you spend like GBP 770 million so this happens and we're still very well positioned. People like bonds with 1,300 opportunities.
You'll find out even more about this all at the upcoming seminar with end of morning.
Ryan, on the short term leverage point, yes. In April, we indicated that rather than being at the moment in the two to two and a half, which is the typical Bunzl range over many, many years, we would focus on being more towards the lower end of that range, given the level of macro uncertainty that was there at the time and I think is still with us today. What will it take to get back to the more normal range? I think just a bit of evolution of time and hopefully things settling down a bit will put us back to that point. Broadly, as I said, we have re-levered, we re-levered from 1.3x up to nearly 2x already, so actually there's not much further to go. Thank you.
Our next question comes from Will Kirkness from Bernstein. Your line is open. Will, please go ahead.
Thanks very much. I've got three questions please. Firstly, just going back to Rory's question, I wondered if you could provide the gross margin movement year on year for the first half. Secondly, in the U.S., having now sort of partly centralized and going back to the old model, I wonder if you're sort of running a site sort of double cost base and whether the margin potential in the U.S. has been structurally impaired or whether you still have the same sort of aspirations for the margin there. Lastly, just on buyback, obviously you were looking at GBP 700 million for 2026 and 2027, which was also suspended at the Q1 update. I just wondered if you could give an update on [Nisbets].
Thanks very much.
Let me take the second question on the U.S., and Richard, take the other ones.
Yeah, on the U.S.
We're not moving.
Back to the old model with the general managers. We have adopted the sales and operations model but basically implemented and executed that a little bit too much in a black and white way that had impact on the local business. We are fine tuning that model and we have that model running in Australia and in Europe and in the larger businesses, very well known system. That will continue to operate in a much, much better way. Within that business we have allowed more agility and empowerment into these 14 local teams. These are all very experienced Bunzl people who can make very rational business decisions on margins, on availability, on getting suppliers in and stuff like that. We are not moving back to the old model because of the strategic reasons I mentioned. We wanted to make a change in 2019. We believe it's the right change.
We see the benefit with the larger customers. They're actually quite pleased about all these changes. We are now modifying it for the smaller customers. The reactions from the market and from our salespeople are very positive. In terms of the double cost, some has been centralized, some of the cost was not extra cost because we had slightly more local people sitting in more central teams, sometimes also virtually. It is fair to say that some of the costs moving back to some of the roles, back to the regions had some impact. That's why in the second quarter we also took cost out to rectify that kind of situation.
There is no double cost left.
On gross margins, you can assume that gross margin percentage is slightly up H1 2025 on 2024, but that's very much driven by acquisitions. Obviously, we've got Nisbets for a full six months in the first half of 2025 compared to about one month in 2024. As to the GBP 700 million commitment we made this time last year, as we laid out at the time, that was very much part of us releveraging the business into the target range of 2x-2.5x , which at that point in time we anticipated taking until 2027 to play out. Since that time, we have seen a change in our margins and we've had to. We've seen a more challenging first half than was expected. Essentially, we have relevered at least to the lower end of our range during this period.
To the point and the question that Ryan made, we will go back to the range 2x-2.5x . Essentially or largely, we have relevered within this period, which means that going forward, as I pointed out in the presentation, we think M&A is going to be the main driver of our free cash generation or the main use of our free cash generation after a dividend.
Okay, thanks very much. Our next question comes from Suhasini Varanasi from Goldman Sachs. Your line is open. Please go ahead.
Hi.
Morning. Thank you for taking my questions. Just a couple from me, please. You've mentioned in your remarks that organic growth trends in July have been in line with your expectations. Could you please clarify whether that growth in July was similar to Q2, which seems to have improved a little bit versus Q1 on an underlying basis, and maybe just one on clarification. Please, can you defer any contingent consideration on M&A? Could you just remind us how much is the expected payout for 2026 and 2027 from the free cash flow? Thank you.
Yes, Suhasini, when we say when we talked about July, we were actually talking more to not just organic revenue. More to the point that you know that obviously the second half requires a margin improvement. The bigger point that we're trying to make in giving you a sense for what July has traded to be is actually that it's in line with our profit and margin expectations as much as it is revenue. Take it as a full income statement read rather than just an organic one. As to deferred consideration and contingent consideration payout, you should assume that the majority of the payments of the GBP 300+ million that we have on the balance sheet and being accrued in contingent consideration will be paid out more in 2027 and 2028. There will be a relatively light amount in 2026, sort of mid tens of millions.
You can see that in the notes to the accounts. We do provide a timeline for when these payments will be made, but the vast majority will come out in 2027, 2028.
That's very clear. Thank you. Just to go back on the first question, is it possible to provide some color on how the underlying organic trends have evolved in July? I mean, just want to understand if there have been any implications from tariffs, pre buy, post buy, whatever, how that has affected or inflation, for example, how that has affected the underlying organic trends.
Thank you. Yeah, look, nothing around pre buying. We haven't seen that as a trend. A lot of the work we've, a lot of the price increases we've put through in our safety business in North America in particular, have been very much working with customers to make sure that we pass the right amount at the right time. As a consequence, we haven't really seen any disruption in people buying ahead in any meaningful sense. It is not that. I think it's probably better generally for us to have given you a full income statement view that both profit and margin in July are consistent with what we need for the full year. You can assume the same is true for revenue growth as well.
Thank you.
Our next question comes from David Brockton from Deutsche Numis. Your line is open. Please go ahead. Thanks.
I have three questions as well which will hopefully be relatively quick. Firstly, in terms of the Q2 underlying revenue improvement, it looks stronger than I previously anticipated. I note that you touched on some tariff pricing benefit. Can you just confirm whether you saw any volume improvement through Q2 on Q1? That's the first question. The second question is just on the North American turnaround. Clearly, rebuilding local sales team effectiveness is going to take time. Can you just give a bit more detail on where you are in terms of recruiting people to the extent that's needed and how that effectiveness is improving to date? The final one is just on Europe where you touched on revenue pressure with certain online businesses. Apologies if you mentioned it through the transcript, but could you just elaborate on what precisely you've seen there for those online businesses? Thank you.
Yes, maybe you can take the first one. I'll take local sales and online.
Yes, David, I think you can. You can take it that Q2 was a bit better than we'd expected. I think we should keep it in context because we are lapping some very, very soft comparators in 2024, and we will see tougher comparatives on the revenue line in the second half when we actually traded pretty well and saw volume growth. To your point, on your tariff point, most of the tariff went through in Q2, mid to late Q2. Therefore, in terms of impact on inflation or deflation, it's had less of an effect in Q2. There'll be more of an effect of that in H2 as long as these tariffs stick. Of course, on your point on volume, I think you can assume there has been an improvement in volume between Q2 and Q1.
Again, the point around comps is important because we very much need to see that improve in the second half. I think it's encouraging, and the positive signs we're seeing in our North America distribution business around potential wins in the second half, should they arrive, would certainly help that.
Your question on local sales.
Good question. Actually, we haven't lost a high number of salespeople. We've lost some people, but more, let's say recently, if you look at the last six to nine months, our staff turn has been normal compared to previous periods, especially in our redistribution business. That is encouraging. The problem was not so much around losing people. The issue was more around we've taken the weapons out of their hands to be able to be successful. We've given these weapons back by giving them own brand good cost prices, most of all local speed of execution, decision making. It's the same salespeople actually for these areas where we lost some people. We have a very successful sales team graduate program with more than 10 graduates in it. These people actually have been going into the markets over time also. It's not so much sort of filling the vacancies.
There haven't been a huge amount of vacancies. It's more like how do we make sure that all these experienced people we have, that we can make them effective by, you know, if they need a price, they can get it within an hour instead of in five days. They get the support from the local management. They can bring in a supplier, they can, you know, do stuff with suppliers. That was more, let's say, the.
Issue in terms of Europe online.
I think we have some very successful businesses in this area. One of the larger businesses has been adopting a strategy of implementing a marketplace, which effectively means that outside the areas where you deliver products from your own warehouse, you basically load other suppliers who, on your behalf, are selling or delivering these products directly. Basically, the business takes a commission on that. Because we've been uploading tens of thousands of products in a short period of time, that had impacted some of the speed of the tools. We have fixed that now, so that is working again in an efficient way. We expect in the second half these businesses also to improve over time.
Thank you very much. Our next question comes from Karl Green from RBC. Your line is open, Karl, please go ahead.
Yeah, thanks very much. Good morning. I've got two questions just in terms of trying to assess and track the improvement program. You've indicated that service levels and inventory levels are normalizing. Just how far off the optimal level are both service levels and inventories, please? Any quantification around that would be helpful. Ditto any kind of comments around where business wins need to get to, to be kind of back on track. The second question is really around the M&A slowdown. I think, Frank, you did indicate that part of that is Bunzl deciding to pause certain processes. The question would be, you know.
What are you seeing in the books?
there targets that are giving you that sort of second or pause for thought, making you think twice about pushing forwards? I mean, on the basis that, you know, Bunzl typically targets fairly resilient businesses, what kind of businesses are seeing a slowdown at the moment? That'll be helpful.
Yeah, just on M&A. You do see it sort of, you know, relatively broadly in different sectors, I have to say. Certainly in areas like food service, you see in the U.S. for instance, that you can see it also, you know, some of the results that Sysco and US Food Service came out with, you know, softer numbers on volume. You see that also when you look at acquisitions and in that context, actually I'm quite pleased in terms of how we are doing in our food redistribution business as well.
It's slightly broader.
I think it's an uncertain time. People are a bit more uncertain; sometimes they wait a bit longer with putting their businesses out for sale and hope for a better time. That's all relatively normal in terms of what is happening.
Karl, on inventory levels and service levels, this is a North America comment. I think the team had done a very good job actually of bringing inventory down quite significantly in the second quarter. This is in part because it was causing us cost problems and we've effectively brought a lot of new own brand inventory into North America, particularly the second half of last year. That can mean you're almost doubling up on inventory in certain areas. When you're establishing new ranges, it's never too clear exactly which markets. Of course, the U.S. is a collection of markets. Which of those will see most pickup quick. There's also a period having to settle inventory into the right part of the country, which not only costs us in terms of inventory holding, but also freight moving the product around.
I think that is increasingly getting closer to what we would feel is optimal. We've certainly seen the benefit of some of the cost reductions in the second quarter and expect to see the same in the second half. Also allowing us to service what have been actually some quite successful brand launches in Q2, which equally will help us in the second half. I think we're pretty much there. There's constant vigilance in this area.
Okay, thanks very much. Just following up on my first question, when would you say the earliest point in time would be when you can declare mission accomplished on the turnaround program?
I feel really good about the changes we are making already and the impact on our people and how effective we are in terms of winning business, launching own brands and stuff like that. I'd say the proof on the pudding is really to get to this sort of more improved point where we all started the process for in terms of becoming more effective in terms of our sales growth and our own brand development. I expect that to happen somewhere maybe in the second half of 2026 where everything runs more smoothly and that also translates into good growth and winning back business.
Very clear, thank you.
As a reminder, to ask a question, please press star followed by one on your telephone keypad. Our next question comes from Dylan Jones and KC. Your line is open. Please go ahead.
Hi, Frank. Richard, thanks for taking my question. Just a quick follow up on the statement around expecting some benefits in North America to materialize well into 2026. Can I just clarify, are we alluding to organic revenue growth here from the winning back of business following this restructuring, or are there also some benefits in the cost base that you're calling out that won't come through until late 2026? One last question from me. I suppose what gives you the confidence now that you struck that right balance between the centralized and local autonomy in the North American business? I also take the point earlier that it sounds like the operating model has been unwound from centralization towards something more similar to the model in Europe and the rest of the world.
Is there anything structurally or fundamentally different in the North American market that needs to be considered or monitored as you move towards this new operating structure?
Yeah, that's a good question. The one thing that is slightly different in the U.S. market compared to the other markets is that we are there in a redistribution market. Outside of the U.S., we are selling more direct to hotels, restaurants, catering, theme parks. Here we are in a two-tier system where we are selling to the redistribution market. Especially the local part of that market is very, very, you know, you need to be very proactive. Fast response, because they are operating on behalf of their customers.
For example, if you are a local, let's call it a small Sysco food distributor business and they're selling to a pizzeria shop and the pizzeria shop wants to have a specific pizza box or they're looking for certain, you know, Christmas articles near the end of the year which they don't, you know, sell a lot of, then that question gets to Bunzl because the food distributor can't stock all these products. There's, you know, maybe 100,000 products around the market. The food distributors, they have 90% of what they sell as food, so they focus on stocking, let's say.
The fast-moving items, maybe the napkin.
The white napkin themselves, but a lot of these other items they're relying on distributors for to fill that in because otherwise they need to have a warehouse that's five times bigger than they operate on. That's a bit different. That also dictates how fast you need to be to be able to be successful. That is what actually, you know, we put back into the business and it's largely working because, you know, most of the people that used to work in that old model and, you know, are used to that responsiveness, you know, can deliver that. The issue that was the case is they were not empowered to make that decision anymore because it was made centrally. We've now put that all back, and the indicator for me is that, let's say, our stock levels are coming down, our service levels are up, our people are happy.
I'm sitting down, I'm often in the U.S., I'm inviting the sales teams to come and see me. Every time I'm there, I'm meeting a sales group, and you just get direct feedback on, yeah, this is really operating and I want this and I want that. My customer's happy and I'm happy. I still, where, you know, we have still improvements to make and we monitor them and we, you know, we knock them off one by one. It's very clear to see if something, you know, is starting to get better and that is what I'm seeing. If you have customers, they also buy certain categories and they're not just shifting that every week, you know, when somebody comes in.
There's an element of, let's say, time, let's say one year, 18 months, that more of these categories are being reviewed again, certainly by slightly bigger customers as well. That's the time where we will be there to try to sort of win back. We have some early successes. We also get some early successes in the second half already, which is encouraging, and we are focusing on getting more done in the second half because Bunzl is still seen as the market leader in redistribution. We're still dealing with all these categories. We just lost a bit of share of wallet, but we are trying to win back supported by more own brands also coming in.
Dylan, on that, the comment about expecting benefits from certain actions well into 2026 was something we said in April. It was to make a point that we have a range of things happening here, some short-term actions that Frank van Zanten has talked about, a lot of which have happened and taken place in either late Q1 or in Q2. There are others which are likely to take longer to play out. We're mainly thinking about winning back business we've lost there. It's not a cost point. We think we've largely done the cost changes we need to make. Think of it more about winning back some of that volume we lost, being the majority of what that comment related to.
Very clean. Thank you very much.
We currently have no further questions.
I'd like to hand back to.
Frank, some closing remarks.
Thank you all for joining. I think it has been quite an unusual half year for Bunzl. Impacted strongly by some of the things that happened in our U.S. business. I'd like to remind people this business represents 30% of our business. Bunzl has always been a very resilient, predictable business. About 150, 160 portfolio businesses in different markets and regions giving us that resilience. With this large business, we had a problem that pushed us out of resilience. I am confident that we will be fixing and are fixing the issues. It's going to take a little bit of time also to win back also. I feel good about where we're going and when fixed, I expect to have a better business on the other side and the group will be the same resilient, predictable, compounding business as you're used to. Thank you all and have a good day.