Bunzl plc (BNZL) Earnings Call Transcript & Summary

Good morning, everyone. It's the 24th of February. So I would say welcome to my birthday party, but I'm going to say welcome to the full year result presentation for 2019. After a short introduction from me, Richard Howes will present the financial results, and I will then review our operations in more detail and provide some further insight into the ongoing implementation of our consistent and proven strategy to grow and develop the business. Against the background of mixed macroeconomic and market conditions which prevailed during the year, Bunzl has delivered a resilient performance with an increase in operating margin at constant exchange rates. Organic revenue was broadly stable despite headwinds in some of our markets, and I'm particularly pleased to see our continued strong cash conversion and free cash flow growth. Although we purchased fewer businesses in 2019 than in recent years, acquisition activity has picked up recently, with 4 deals agreed since the end of November with total annualized revenue of approximately GBP 300 million. The pipeline remains promising, and a number of discussions are taking place. I believe that these results once again demonstrate the strength, resilience and reliability of our consistent business model. We have a proven track record of developing the group through a combination of organic and acquisition-led growth and operating model improvements. I will now hand over to Richard to take you through the financial results.

Thank you, Frank, and happy birthday, and good morning, everyone. My first 6 months in Bunzl have given me a very good overview of the group, its breadth and diversity, the quality of the people and the growth opportunity. It has been a busy and enjoyable time. And I'd like to thank Brian May for providing an excellent handover and wish him well in his retirement. In the following slides, we have presented both actual and constant currency growth percentages. In 2019, there has been a positive impact of exchange rate translation of between 1% and 2% principally due to the weakening of sterling against the U.S. dollar. In reviewing the income statement, I will refer to growth at constant exchange rates. Starting with revenue. Revenue grew by 1% to GBP 9.3 billion. After 2 very strong years in 2017 and 2018, organic growth in 2019 was minus 0.2%. As we've indicated previously, this includes around GBP 45 million of lower revenue from price changes with our largest grocery customer, albeit with a relatively small impact on profit. Excluding this, organic growth was 0.3%, and acquisitions in 2018 and '19 contributed growth of 1.4%. Before turning to the income statement, I would like to remind you about the impact of the new lease accounting standard IFRS 16, which is effective for the first time in 2019. The main adjustments to the financial results are set out on this slide and are in line with the guidance given last year. It is important to note that despite the financial reporting changes required by IFRS 16, in substance, nothing has changed for Bunzl. We continue to lease most of our fixed assets, there is no impact on cash flow, there is no impact on our existing debt covenants, and our substantial financing headroom is unchanged. Now turning to the income statement. Please note, the statutory results for 2019 are prepared under IFRS 16, whereas the comparative results for 2018 were prepared under the old lease accounting standard IAS 17. In order to aid comparability, we have also included results for 2019 under IAS 17, and my comments will be focused on these results. Adjusted operating profit grew by 1.5% to GBP 630.9 million. At actual exchange rates, our operating margin was unchanged, but at constant exchange rates, the margin increased from 6.7% to 6.8%, demonstrating the resilience of the group. Net finance expense decreased by GBP 3.2 million as a result of a lower level of average debt as well as a lower average interest rate. Adjusted profit before tax increased by 2.4% to GBP 579.1 million. Continuing down the income statement, the effective tax rate for the year was 23.8%, up 0.7 percentage points compared to 2018. The effective tax rate for 2020 is expected to be around 24%. Adjusted earnings per share increased by 1% to 132.4p, and we are proposing a final dividend per share of 35.8p, making a total of 51.3p for the full year, an increase of 2.2%. This continues our long-term track record of dividend growth. Our consistent dividend growth over many years reflects our focus on long-term value creation. Looking back over the past 27 years, we've been able to increase our dividend consistently every year, broadly in line with the growth in our earnings. And this has been possible due to the resilient nature of our business model, sustained growth in earnings and strong cash generation. The compound annual growth rate of dividends over this period has been 10%. Now turning to the balance sheet. Working capital has decreased by GBP 4.9 million as good operational control and currency translation were partly offset by the impact of acquisitions and the adoption of IFRS 16. Net debt excluding lease liabilities ended the year at GBP 1.2 billion, GBP 140 million lower than 2018 due to a net cash inflow of GBP 99 million and currency translation. Net debt to EBITDA on a covenant basis was 1.9x, which is just below our target range of 2 to 2.5x and gives us substantial capacity to self-fund future acquisitions. The return on average operating capital on an IAS 17 basis remains high at 48.4%, although down on the prior year driven by an increase in the average capital employed in the underlying business. During the first half, we were running with more working capital than we would have liked, principally in our U.S. retail business following the integration of DDS, but this improved significantly in the second half. Now turning to the cash flow statement. 2019 was another year of strong cash generation for Bunzl with free cash flow of GBP 456.9 million, up 10% on the prior year, and cash conversion of 101%. During the year, we paid dividends of GBP 167.3 million and invested GBP 162.8 million in acquisitions. Bunzl has consistently achieved a high level of cash conversion over many years. The average rate of cash conversion since 2004 has been 97%. And this year, we achieved 101%. So broadly, each GBP 1 of operating profit has been converted into GBP 1 of cash. The ability to consistently deliver a high rate of cash conversion -- of operating profit, which is compounded at 9% per annum since 2004, is at the heart of the Bunzl business model. During this period, it has enabled us to invest GBP 3.4 billion in self-funded acquisitions, which have compounded over multiple years to generate substantial growth while maintaining a strong balance sheet. And at the same time, we have been able to grow dividends strongly and consistently, paying out a total of GBP 1.5 billion. I can confirm that our approach to capital allocation remains unchanged. So let me summarize the key highlights of our performance in 2019. Operating margin at constant exchange rates has increased from 6.7% to 6.8%, demonstrating the resilience of the business model. Cash conversion has been strong at 101% with free cash flow up 10%. And dividend per share has increased by 2.2%, continuing our track record of unbroken dividend growth stretching back 27 years. At this point, I would like to hand over to Frank, who will take you through the business review.

Thank you, Richard. During my presentation today, I will focus on the following topics: a review of our operations during the year; I will look forward and consider the prospects for 2020; and finally, I'll take a deeper dive into the separate components of our consistent and proven compounding strategy. Bunzl's operations are truly international with a global footprint of businesses spread across 31 countries serving customers in 6 market sectors. We are organized by 4 geographic business areas, and shown here are the respective contributions to the group's results of the revenue and operating profit. In North America, revenue at constant exchange was broadly unchanged at GBP 5.5 billion as the positive impact of recent acquisitions was offset by a 1.2% decline in organic revenue. This was principally due to lower sales to our largest grocery customer as a result of account-specific price and product specification changes. However, we benefited from cost savings generated by the reorganization of our grocery and redistribution businesses. Operating profit was GBP 331 million, up 0.6% with the operating margin unchanged at 6%. Our U.S. grocery business was also impacted by a net reduction in sales as additional business gains during the year were more than offset by some losses. The business has recently been enhanced by the acquisition of Joshen at the beginning of this year, which will provide a number of synergies and efficiencies going forward. Despite tough trading conditions in our customers' end markets, which have led to a number of store closures and a failure of some retailers, our retail supplies business has held up well with revenues slightly ahead of the prior year. The integration of DDS, which we acquired in 2017, with our other retail sector-focused businesses has continued to yield sourcing and operational synergies ahead of our expectations, although the additional savings achieved during the year were broadly offset by cost increases. In our businesses serving the safety, convenience store, processor and agriculture sectors, we saw good overall growth. In particular, our safety business has grown well. During the year, we have faced product cost increases from import tariffs, the impact of which has been successfully mitigated. We also continue to invest in this sector with the acquisition in February 2019 of Liberty Glove & Safety, a supplier of PPE to smaller distributors across the U.S. Revenue in Continental Europe rose by 3% to GBP 1.8 billion due to organic growth of 1.8% and the impact of recent acquisitions partly offset by the disposal of OPM in France in February 2018. Operating profit was GBP 178.8 million, up 2.6%, with the operating margin unchanged at 9.8%. In France, total revenue excluding OPM was marginally higher as growth in the cleaning & hygiene and foodservice sectors offset the decline in sales of personal protection equipment. In the Netherlands, there was good overall sales growth. We successfully consolidated 3 businesses in the health care sector into a single modern site to gain efficiencies and provide an enhanced service to our customers. We also continued -- we also combined 3 separate warehouses serving the grocery and nonfood and online retail sectors into a new larger facility. Sales have continued to grow well in Spain. The cleaning & hygiene business continues to enjoy good growth. And in the safety sector, after a slow start, sales finished ahead of last year despite lower levels of industrial activity in the country. Our online medical business had another successful year due to new product launches and the enhanced use of e-marketing tools. And our industrial and disposable packaging business also delivered high levels of growth. In Turkey, sales have grown due to a combination of price inflation following the devaluation of the Turkish lira and higher volumes in the health care sector as numerous new tenders have been won. Our recent acquisitions of CM Supply in Denmark and Enor in Norway, both purchased in 2018, and Cool Pak in the Netherlands, which was acquired in 2019, have all integrated well and are trading ahead of expectations. In the U.K. & Ireland, revenue decreased by 1.7% to GBP 1.2 billion and was slightly down by 0.2% on an organic basis after excluding the impact of the disposal of the marketing services business in June 2018. Operating profit was GBP 83.3 million, down 4.1% and was 1.7% lower after adjusting for the disposal. The operating margin decreased from 6.9% to 6.7%. Our cleaning & hygiene supplies business has seen good growth during the year as we won several new customers. Although our safety business was adversely impacted by the slowdown in the industrial and construction sectors, performance improved during the second half of the year due to the new customer and business wins. The combination of rising food and labor costs in the catering industry, combined with excess capacity amongst many high street chains, has resulted in difficult trading conditions in our hospitality business. As previously reported, the introduction of the new centrally funded NHS operating model in April 2019 led to a major reduction in sales to NHS Hospital Trust customers in England. As a result, we have worked hard to rightsize this part of our health care business. We have, however, won new business in both the private health care market and with nursing homes which has partly offset this decline. Our nonfood retail specialty businesses have continued to be impacted by a challenging retail sector. However, our larger grocery business grew well as we secured new business with existing customers. I'm particularly pleased to say that we have also regained a large supermarket chain customer, whose business was lost in 2016. I will provide some more color on this later in my presentation. In Rest of the World, revenue increased 8.8% to GBP 781.6 million due to organic growth of 2.2% and the impact of the acquisition of Volk do Brasil at the beginning of 2019. Operating profit was GBP 59 million, up 8.3%, with the operating margin down from 7.6% to 7.5%. Overall, in Latin America, we saw good sales and operating profit growth. Organic revenue growth was particularly strong in Brazil, although elsewhere in the region, difficult trading conditions resulted in margin pressures in a number of businesses especially in our safety footwear business in Chile and in Mexico safety. In Australia, we saw good profit improvement despite a slower economy. Now turning to the prospects for the rest of the year. Although we continue to see challenging trading conditions in some markets, our strong competitive position, diversified and resilient businesses and ability to consolidate our fragmented markets further should lead to improved growth at constant exchange rates principally due to the impact of the good level of recent acquisition activity. In North America, we expect good revenue growth due to the recent acquisition of Joshen, but we'll see the continued impact on revenue in the first half of 2020 from the 2019 price and product specification changes with our largest grocery customer and weakness in the grocery and retail sectors throughout the year. We will continue to focus on operating costs, productivity and other efficiency improvements. In Continental Europe, despite mixed macroeconomic conditions across the region, we expect to develop further due to the combination of some organic revenue growth and the benefit of the proposed acquisition announced today. In the U.K. & Ireland, growth is expected to be limited given the prevailing uncertain economic and market conditions. In Rest of the World, we expect to see good progress due to a combination of organic and acquisition growth. In relation to acquisition activity, the pipeline is promising with a number of discussions ongoing. I would now like to move on to provide further insight into our consistent and proven compounding strategy to grow and develop the business and which is based on 3 key areas: profitable organic growth, improving our operating model and growing by acquisition. Our business is well diversified by customer markets. As people go about their daily lives, they are constantly touching and using a Bunzl product. We hold strong position in a variety of different customer sectors, including the more resilient sectors of foodservice, grocery, cleaning & hygiene and health care. Within foodservice and cleaning & hygiene, the main growth driver is the away-from-home market as we work, travel and eat away from home. In grocery and retail, it's the trend to outsourcing that is the secular trend. As we have seen consistently over many years, customers who could otherwise sell and distribute their goods not for resale instead choose to outsource to Bunzl as they realize the efficiencies, cost savings and working capital benefits available to their business of doing so. Within health care, the trend is an aging population with greater demand for more medical care and care homes. And finally, in safety, we see greater compliance with health and safety regulation as companies increasingly focus on the welfare of their workers, with the cost of compliance being far less than the penalties of noncompliance. Our organic growth is underpinned by a combination of the secular market growth drivers I've referred to and volume, price and mix drivers shown on this slide. This growth is supported by our 3,200 expert salespeople and 2,600 locally based customer service specialists who use their deep and detailed knowledge to work with customers to ensure that they receive the best possible advice on all products and service-related matters. It is the theme of winning new customers that I would like to focus on today. Customers' requirements and demands have undoubtedly increased over the years, and this plays to our strength as a specialist distributor. As we have talked about before, some distributors in adjacent sectors have tried to nibble around the edges of our markets but have failed to gain traction, and they are unable to meet our customers' increasing requirements. As I mentioned earlier, we have recently won back the contract to supply a large U.K. grocery chain which we had lost in 2016 to a generalist distributor that was subsequently unable to satisfy the customer service expectations. This slide shows the attributes which the customer was looking for from its supplier when they were considering who to award their business to and which they outlined in the tender document. In particular, these include the need to be an expert in purchasing consumables and packaging. It was our ability to demonstrate that we could match our service offering against all of the customers' requirements that enabled us to win this new business. I won't go through every element of their requirements, but I will highlight a couple of them. Firstly, the ability to deliver the highest level of service. Orders must be delivered on time and in full. Our products are essential and often low value and represent a low percentage of the customer's overall spend. But without them, the customer cannot operate. Not having till rolls, for example, can close a store. A part of being able to deliver the highest levels of service was a desire to have one simple ordering platform. Through our digital platform, we are able to provide customers with significant amounts of account-specific management information and offer an order-to-invoice process which is simple and fast to use. Secondly, the objective to support and align on corporate responsibility and environmental challenges. Innovation in the area of sustainability is critical to a grocery chain with their own environmental objectives. To prove our credentials, we explained the unique benefits of our own Asia sourcing office with related supplier audits to ensure ethical and social compliance and showcased examples of work we have done with other customers, including the sourcing of a fully compostable carrier bag. As you have heard from the new customer win example, sustainability continues to be front and center of our business focus. It is a key driver for many of our customers. And during the year, we have focused on the further implementation of the group's sustainability strategy. This has included the recruitment of more experts embedded within the business areas led by a Group Head of Sustainability and the development of our sustainability framework. This brings together all of the strengths of our responsibility in this area. These include the standards we expect from our suppliers, our own environmental footprint as a business and the role we can play in both providing education about and supplying sustainable product solutions for our customers. As a non-manufacturer with extensive sourcing capabilities, we are in a unique position in the supply chain to lead the industry towards a more sustainable approach to single-use plastics and help our customers transition towards more sustainable options. The vast majority of the single-use plastics that are sold by our businesses are primary packaging used in the grocery and foodservice sectors to take food from the point of purchase to the point of consumption. As such, there will always be demand for these types of products, and we are extremely well placed to offer our customers more sustainable alternatives. Our sustainability team meets regularly to share best practice and ideas. And with the support of our Asia sourcing center, we are introducing additional sustainable product ranges. The scale of Bunzl means we have the capacity to invest in our team in this ever-growing and increasingly important area and allows us to support our customers while enhancing our competitive advantage. The second limb of our strategy is continually striving to improve the quality of our operations and to make our business more efficient and sustainable often by making small improvements every day which lead to significant progress over time. In addition, we implement more significant changes to our operating model. For example, in the latter part of 2018, we announced a more focused and streamlined organization structure across our 2 largest businesses in North America, grocery and redistribution, in order to enhance our customer proposition and improve our operational efficiency. The reorganization was completed during the first half of 2019, and we've now seen the resulting efficiency and cost benefits coming through. As I mentioned earlier, during 2019, we consolidated 3 businesses in the health care sector in the Netherlands into 1 business which was relocated into a state of the art facility. This includes a clean room for the storage of medical products and vertical lift modules to maximize our use of the extra height in the new warehouse. The system can pick up to 55 orders at a time, which allows 1 warehouse operative to do the work previously done by 3. In addition, in the Netherlands, we have also combined 3 warehouses operating in the grocery and nonfood and online retail sectors into 1 new facility, thereby achieving cost savings and operational efficiencies through economies of scale. Throughout the business, we have also continued to invest in digital, including further development of our e-commerce sites. We have added new digital functionality in our U.K. safety business which helps our customers allocate and subsequently manage their workforce individual PPE requirements. The system provides valuable detailed management information, including specific sizes and personal preferences and any regulatory requirements, ensuring their staff remains safe and compliant, which also assists in the event of an accident or claim. This is an excellent example of how we are able to offer customized service solutions which increased the added value provided to our customers, thereby helping to build strong and lasting relationships with them. We are also constantly looking to implement other efficiency initiatives such as installing routing and safety systems which enable us to minimize distances traveled and encourage safe driving practices, thereby reducing fuel and other transport cost and lowering our carbon footprint. These types of initiatives are good examples of how operating model improvements can go hand-in-hand with sustainability-driven initiatives. The final part of our strategy over time -- which, over time, has accounted for approximately 3/4 of our overall growth, is our ongoing program of focused and targeted acquisitions in both new and existing market sectors and geographies. Since 2004, we've made 163 acquisitions for a total investment of GBP 3.4 billion without the need to raise any equity. We continue to have significant financial capacity to make acquisitions over the near term. At the end of 2019, our ratio of net debt to EBITDA was 1.9x. During the next 12 months, we could spend nearly GBP 400 million on acquisitions and maintain our ratio at that level, which would still leave significant headroom within our target range. Our 2019 committed spend was GBP 124 million with an average annual spend since 2015 of approximately GBP 300 million. While the spend in 2019 was below the average -- this average, I often describe our acquisition activity as like the timings of London buses, which, as we all know, can also be difficult to predict. You wait ages for 1 to come along and then 3 arrive all at once, and this has certainly run through recently with 4 acquisitions signed or completed since the end of November. We also have a promising pipeline looking forward. The next 2 slides refer to our 4 most recent acquisitions, which highlight the depth and breadth of the opportunities that exist across our various markets and geographies. Joshen is a business headquartered in Cleveland supplying a wide range of packaging and goods not for resale into the grocery, foodservice and cleaning & hygiene sectors. Revenue is expected to be approximately GBP 225 million in 2020. Their operations span across 11 states with customers serviced with a strong sales force and with 95% of deliveries being on their own trucks. Joshen complements our existing business in North America and will enable us to drive a number of synergies and efficiencies. FRSA is a safety and emergency response supplies business in Australia which we acquired at the end of November. Revenue is expected to be GBP 20 million in 2020. The business is principally engaged in the distribution of specialist safety and personal protection equipment focused on fire, rescue and emergency response services. Today, we've also announced 2 further acquisitions, one in Continental Europe and one in Latin America. We have recently entered into an agreement to purchase ICM, a leading distributor of PPE to both end user and redistributors based in Odense, Denmark. Revenue in 2019 was GBP 48 million. Completion is expected to take place at the end of March. And finally, Medcorp, a distributor of the health care -- of health care-related products to leading private hospital and redistributors in Brazil, was acquired at the end of January this year. Revenue in 2019 was GBP 11 million. Having spoken to you in some depth about our consistent and proven strategy, I would like to share with you how this has delivered significant shareholder value over a sustained period of time. Our resilient business model has enabled us to deliver high rates of cash generation. This, in turn, gives us the ability to take advantage of market consolidation opportunities through the application of our disciplined approach to focused and targeted acquisitions over the longer term. Taken together, the strength, resilience and reliability of our consistent business model and strategy have enabled Bunzl to grow our key financial metrics at compound annual growth rates of between 9% and 10% since 2004. Although 2019 was a challenging year with lower-than-average acquisition activity, I'm confident that our tried and tested business model and strategy will continue to serve the group well into the future. Thank you for your attention. We're now happy to take your questions.

Paul?

It's Paul Checketts from Barclays Capital. The usual 3, if you don't mind. The first, can I ask about coronavirus and your assessment of the potential disruption? The second is on your prospects comment, Frank, and you referenced challenging conditions in grocery and retail in the U.S. If you look at sales year-on-year in those overall markets, they've actually rebounded quite strongly towards the end of last year. Is there some -- is there a disconnect between your own experience and what the markets are doing? How should I think about that? And then the last one is around capital employed. If you look at -- we had the contract with your big U.S. customer last year where they -- where you did a -- 2 years ago, we did extra products with them. In the U.K. section today, you're talking about broader, more extensive range of products, and you referenced extra working capital putting pressure on returns. Do you think that the business is becoming more capital intensive overall? Is that a requirement of extra wins?

Yes. Okay. Corona, well, probably everybody knows Bunzl is not really involved in manufacturing, so we don't have any manufacturing operations in China. We have a sourcing office in China. We have a tiny business -- distribution business there who actually sold some masks. Also part of their business is masks. But it's basically from an operational point of view, it's sort of a nonevent. The area that we're watching closely is the supply chain. Obviously, we bring in products from China. Now the timing of the corona breakout was interesting because it happened very closely to Chinese New Year. Our businesses are all aware of the time of Chinese New Year, so this is the period where everybody is always stocking up in the business and sort of pre-ordering before Chinese New Year. So we are currently at relatively higher levels of stock in the business. We also have some flexibility because we've got our scale. We've got a sourcing operation to move to other places like Bangladesh or Thailand, Malaysia, India, so we have some flexibility there for certain parts of the group. So I would say, if I compare Bunzl to other companies, I think we are at a relatively low-risk side of the equation. If this starts to take longer periods of time, let's say if it takes 3, 4, 5 months where manufacturing companies in China really shut down, then it may have some impact on the supply chain. But I think then the world overall is in a slightly different place. If corona starts to impact sort of GDPs around the world, then Bunzl, being a GDP-related business, could have a bit of impact. But we all know, if you go back to 2009, the time of the recession, Bunzl was actually very resilient and did very well because 75% of our portfolio is very resilient. On the prospects, now retail, as a sector, is obviously -- certainly in the bricks-and-mortar part is a slightly more challenging business. So we have our DDS-Schwarz business, the retail business, which has a very strong position. And here, the game is really us trying to win market share in that sector. In 2019, actually, the retail business overall hold up quite well. Grocery, I think there were 2 specific things, I would say, that were impacting 2019 -- or maybe 3. The first one was the price correction with a larger customer who had quite a bit impact on the sales, not so much on the profit because of very low profit but on the sales. The second part is because in 2017, 2018 we onboarded this $400 million of business, there was a bit of digestion necessary, so we onboarded a lot of drivers, temporary labor. So 2019 was more about sort of betting down the organization. And also at the end of '18, we announced this restructuring where we took 50 senior heads out of the business. So I think the grocery and redistribution had to reset a bit, maybe a little bit more internal focus in the business. So -- and I think that led to overall losing a little bit more than winning in terms of tenders and other activity. And we are hopeful that that position will be better in future. On the capital employed, I think capital employed -- you've seen our cash conversion, 101%, so very good cash flow. Capital employed, a little bit under pressure, was mainly around the first half. The second half was a lot better. So for instance, in our DDS-Schwarz business, we put them all on one IT system. We had a few sort of integration issues. There were many locations to be put on one system. So we hold a bit too much stock, and we've been unwinding that stock. And in the second half of the year, I think the capital employed was looking much better. If you look at capital employed longer term, you may have seen a little bit of impact of us acquiring into safety businesses. And obviously, the safety business has higher margins but also slightly higher capital employed.

A follow-up on the retail grocery bit.

Yes.

If there's an ongoing shift from high street to online, how do you feel the position to deal with that?

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

It's George Gregory from Exane BNP Paribas. I have 3 questions, please. Firstly, just in terms of some of the headwinds that you faced in some of your markets over the course of the last couple of years, retail, grocery, hospitality, just wondered whether you had seen those impact at all in Continental Europe, which is a region that has performed much better for you over the past couple of years, or whether it was offset by mix or something like that. And secondly, thinking about the shift to sustainable alternatives, in the past, you've shown how you've been able to achieve similar to improved profits by shifting to sustainable alternatives. Just wondering, over the longer term, what enables Bunzl to sustain a higher gross profit per unit on a sustainable alternative versus a -- say, a single-use plastic. And finally, I think, Frank, you talked about the fact that there'll always be demand for packaging products. Just wondering why it shouldn't in the long term be mandated that retailers use reusable packaging food storage. I know that there are some pilots out there for these kinds of solutions. If that was to bed down, is that a service that you could play in, please?

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

Yes. Sorry, it was -- you talked there about customers bringing in their own Tupperwares. I was thinking more about the retailers providing their Tupperwares, effectively, which they sterilize, therefore, you remove the risk of -- well, you put the risk, the liability on the retailer rather than on the consumer.

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

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

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

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

Yes. Safety is slightly more cyclical than, let's say, toilet paper in cleaning & hygiene. Everybody understands that. Because you're selling to industry, oil and gas, manufacturing, it's a very wide range of sectors in -- certainly in North America. What I would say is in our safety sector, we are supplying the essential items for the daily lives. So it's not a CapEx item where you can say, okay, we're going to delay an investment into a machine or whatever into the safety sector. This is gloves, and people are at risk if they start giving not the gloves they should be giving, handing out on a weekly basis or whatever, then they get claims. And certainly, in North America, that's a higher item. So safety is slightly more cyclical. But within cyclical, it's certainly at the noncyclical part of the range. In terms of sourcing, there's a lot of safety, but there's also a lot of other things. Packaging products, paper products, all sorts of products come from China. But not only China, it's also increasingly coming from India. You look at sort of leather gloves and other gloves come from India. So think I haven't heard anything that sort of shipments are still going. I did hear that Trump is trying to hold some ships from landing outside of the harbors in the U.S. for 14 days to sort of clear people and make sure they're not ill. But again, what I said, we are sitting on quite a bit of stock in that sector, so should be okay. Now inflation on corona, sort of an indirect impact, it's going to be interesting. We have seen some tariffs in North America last year, and we will still see some positive flow-through from that tariff from last year into 2020. But we also see in -- I think it was 4B, isn't it, list, we saw the tariffs from 15% going down to 7.5%. Now these 2 tariff impacts, these things sort of -- are sort of weighing out, sort of having overall no real impact on 2020. Now if things start to become critical and really scarce, you may see product prices going up. We've certainly seen that in the area of masks, but we are not a very mask -- a big mask supplier. We sell some masks and, certainly, the -- let's say, the -- what's called the alcohol-based products, sanitizers and stuff like that in our cleaning & hygiene and health care business. But I don't think that will impact a lot. In general, if you look at Bunzl, we sometimes talk about inflation and deflation, but we're talking about tiny, tiny bits on the overall business. So... Sylvia?

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

Richard, do you want the first one?