Bunzl plc (BZLFY) Earnings Call Transcript & Summary

Good morning, and thank you for joining. As we head towards the end of a challenging year and look forward to 2026, we hope you find having a call helpful. I'll make a few brief remarks regarding our preclose trading update before opening up for questions. Firstly, on 2025. Despite challenging end markets, I'm pleased to say we expect to achieve an adjusted operating profit in line with guidance we set out in April this year. Within this, we expect underlying revenue to be broadly flat. Despite the tougher comparatives, we expect to see good momentum in the final quarter, supported by the benefits of actions taken to improve our performance, including new business wins in North America. This recent performance is encouraging, and volume growth is slightly better than we had anticipated. Alongside the support of acquisitions, we expect group revenue growth over the year to be between 2% and 3% at constant exchange rates. We expect operating margin to be around 7.6% compared to 8.3% in the prior year, but expect to demonstrate a moderation in year-on-year operating margin decline in the second half as outlined in our guidance. This moderation is driven by the benefits of actions taken in North America and Continental Europe to improve performance, easier comparatives in Continental Europe and Nisbets synergy benefits. We also completed our GBP 200 million share buyback at the end of October, and continue to expect leverage to be just over 2x. While we still have to complete 2025, we present our initial view of 2026 against the backdrop of ongoing macro challenges and uncertainties. In doing so, we set our expectations for a more stable profit outlook. We expect to deliver positive organic growth in 2026, supported by the actions we are taking to improve performance across North America and Continental Europe, including our focus on new business wins. The ongoing challenging market backdrop holds back our expectations of further volume progress at this stage. And as we said in April, the benefit of some actions that are expected to extend well into 2026. In addition, although the pressure of deflation is now eased, our current expectation is for pricing to remain broadly neutral over the year. Overall, we expect some underlying revenue growth, and for this to be complemented by a slight benefit from acquisitions announced already, including the acquisition of Damito. Taken together, we expect moderate revenue growth over the year at constant exchange rates. The group operating margin is expected to be slightly down year-on-year. This slight decline is driven by the ongoing market challenges which moderate our expectations of underlying revenue growth, and therefore, our ability to fully absorb the impact on margin from operating cost growth. We expect operating cost inflation to be at more typical levels and have in place strong cost-saving initiatives, in addition to the ones made in 2025. Overall, we expect these initiatives to only partially offset operating cost growth. Furthermore, we expect the impact of new business wins, which support our volume growth expectations, to typically be margin dilutive at the start of a contract. Before I open for Q&A, I want to highlight that our acquisition pipeline remains active. In 2025, we expect to commit around GBP 140 million to acquisitions. It is not unusual for periods of high macroeconomic uncertainty to drive slower level of activity, and we are looking forward to a better year for completed acquisitions in 2026. With that, I'm happy to take any of your questions.

[Operator Instructions] Our first question is from Annelies Vermeulen from Morgan Stanley.

I have 3 questions, please. So firstly, if you could quantify your underlying revenue growth in Q4 and how that developed relative to Q3? And if there was any changes in the mix of price and volume within that? Then on -- secondly on -- you're expecting some underlying revenue growth for 2026. Could you talk a little bit more about how your expectations of your -- how your end markets will grow and your expected performance relative to those underlying markets? And then just lastly, on the M&A spend, if you could quantify your year-to-date M&A spend and what gives you that confidence in that improved spend level for next year?

Yes, Annelies. So if we look at Q4 2025, well, I think we've got some good momentum in the quarter against what have been tough comparatives last year. So actually, the print for Q4, we expect to be better than we had anticipated. Broadly flat means slight -- broadly flat to the slight -- to the positive, very slightly, which should mean a positive number for Q4 -- slightly positive in Q4, which, given how strong last year was, that I think is a positive. If we -- in terms of underlying growth for 2026 -- so yes, we're talking about some return to organic growth, which is important. And you can assume that, that is essentially volume-related growth because we are seeing a more neutral inflationary environment. I mean there is some inflation around in North America. It's tariff-driven, and it's the full year effect effectively of what we saw in 2025. But there are some pockets of deflation that lead us to a position where we think actually to start the year, it's better to be neutral in our outlook for inflation. I think that's the better place to be. So it does mean the volume growth -- what is the growth we're seeing in '26 is volume driven. It will be -- we expect at this stage that it is a bit less than a real GDP read. But I think that is mainly because we have some more challenging markets in North America, particularly foodservice and the subdued grocery market, which effectively holds that back a bit. In terms of 2025 spend, we committed GBP 140 million in 2025 to acquisitions. That clearly is a low year for us. And when we look into 2026, whilst owner-managed businesses and families may well be able to defer selling businesses for a period of time by 2025, I think generally, we expect and see that in the following year or thereafter, activity levels pick up. And the pipeline is good. So I think there's plenty of more opportunity in 2026.

The next question is from Simona Sarli of Bank of America.

Richard, could you please elaborate a little bit more on the progress that you're making with the initiatives in North America? And also elaborate a little bit more on the margin decline expected in 2026 or so? You said that it's mostly related to cost inflation, but can you please talk a little bit more about trends across the different geographies?

Yes, Simona. Look, I think we're pleased with the actions and the progress we're seeing on the improvements we're making in North America. It's obviously been a challenging year, but a lot of the actions we took earlier in the year, I think, have set us up well for 2026 and beyond. We've taken a lot of cost out. I think the own brand launches we saw in Q2, and particularly Q3 where we did -- where we had the right level of inventory to service those own brand launches. Those together, I think, have been positive. Service levels are definitely back to where they should be. And importantly, I think we're seeing an improved level of engagement and motivation from our business, particularly the sales team. So I think that what we set out to achieve in 2025, which is very much to stabilize and make significant improvements in the business, have been delivered. As we look into 2026, we have to recognize, well -- and true for '25 as well, we will have achieved '25 numbers despite the fact that the market in the U.S., in particular, has been really quite difficult. And that's particularly true for foodservice. You will have seen plenty of data points coming out of the North American foodservice scene that can support that. So we've achieved this despite that. And I think it was important we made these improvements because it has been a difficult marketplace to be, but I think that helps us as we go into next year. And your point on margin decline in '26. Look, there are a few things. A, it's a slight reduction. So keep that in mind and context. B, there are quite a few things happening here. One, we are -- largely because of the subdued markets, we -- that is holding back what we -- our ability to grow volume in this period. It's good to see we are going to get volume growth, but it is a bit lower than I think we would normally expect in part because of those headwinds in the markets. So that's one thing. The lack of inflation in our selling prices is also another. And that means that when we have OpEx inflation like we do have and will have, then we're not -- there's a lot of natural offset in our top line at this point given where those prices are sitting. It does, therefore, mean that we have to be very good at taking out cost within our operating costs to offset the increases in inflation we're seeing. And that -- increases in inflation are the sort of 2% to 3% range. So back to a level that's more typical, but still requires us to offset them. At this stage, we're not going to fully offset those cost increases. And as a result, that's part of the bridge towards a slight margin down. Alongside, of course, we are winning business typically at lower margins at the beginning of the contract, which will also play into that.

Can I just ask one more question, please? Can you elaborate a little bit more on the evolution of the competitive landscape in North America? So considering that volume remained quite weak and you have still, in some pockets of the market, there's some deflationary pressure on pricing. Do you see overall the competitive landscape having become more aggressive? And if you can differentiate it between what you see between large customers and SMEs?

Yes. I think the -- this has always been a competitive environment. I don't think we're seeing any real change in the competitive landscape. Pricing is always a factor. I mean, we add a lot of extra value and provide value-added services, which mean that ultimately, it's not just price, but clearly, it's a factor. But no real change in the environment as such. I think that the end markets being more pressured doesn't help that, and that's part of what we're showing in a slightly lower margin. But our job is to win business here. And I think we've made good progress in Q4, particularly in North America, but also in Continental Europe where we're starting to see a much better pipeline emerge. And I think that's the route to offset any potential pressures, which is to grow volume.

Our next question is from David Brockton at Deutsche Bank.

Two questions, please. One, just on the language that you used around margins for next year. Can you just confirm -- I'm trying to understand, what you're saying is slightly less than moderate? I know you guided to margins being moderately down in 2025 and then slightly down in '26. So we just basically modeling that 2% to 3% OpEx with maybe circa 1% on the top line and so a much lower level of margin degradation? And then secondly, in terms of deflation in Europe, you touched on that there are still some pockets of deflation. One, is that Europe? And two, are there any product categories that relates to?

David, yes. Look, we're guiding for 2025 to be around 7.6% and slightly down in 2026 on [ 25 ]. So I mean, you should think of that as very slight, really. So not -- it's sort of around 10 bps probably that sort of level, I mean broadly, that sort of level. So it is a slight change, and it does reflect that the bridge that I talked around, around good top line growth to some degree, but held back by a lack of inflation and OpEx growth that we can't fully offset at this stage. So the mixture of those, I think, get you there. But overall, a slight margin downgrade. In terms of pricing, yes, we're seeing -- so inflationary in North America is largely -- it's largely tariff related, particularly in our safety businesses, the full year effect of that into 2026. Yes, some pockets of deflation. We're anticipating some pockets of deflation. We're not actually seeing deflation yet in our European operations. And here, we're probably -- we're mainly talking about paper prices. And we hear a lot about it, but we're not hearing it from suppliers at the moment. I think it's reasonable to assume as we start the year, a neutral pricing level given the potential ups and downs that we see.

The next question is from Karl Green at RBC.

I've got 3, hopefully, 2 of them quite quick. Just firstly, on the new business wins and the impact of them as they ramp up on the margins. Could you just, again, just very basic terms, explain when you would expect the margins on that business to actually normalize or get to kind of target levels? And what's driving that in terms of implementation costs? The second one is just around the Nisbets synergies. Can you indicate what the net synergies were in '25 and the expectation for net synergies in '26? And then the last one, just in terms of your logistics costs and specifically driver salaries and wages, are you seeing any impact in North America from the ICE crackdown on unvetted drivers, please.

Karl, yes. So look, it is typical for us to win new business at lower margins than would be what we would expect or hope for. But it's also quite -- it's normal for us to then walk that margin up over time by substituting products, changing specs, introducing own brands, maybe changing the prices here or there. That's very much a normal course of business in the industry and for us. How long does it take? Well, you can assume we're on it straight away. So it's -- we want to make sure we -- that happens as soon as sensibly possible. I would imagine a couple of years' time would be -- over a couple of years would be a sensible runway to think about -- to getting us back to what we see as a normalized margin. As for Nisbets, we have seen -- yes, I think the second half of 2025, we'll see a step-up in the benefits of synergies in -- from the combination with Nisbets. It's not only sitting in the Nisbets business. There are synergies that flow into Lockhart and our business in Ireland and potentially in Australia as well. But there is -- but we will see that in the second half of this year. We will then get a full year effect into 2026. Now at this stage, I'll hold back on giving you the numbers. We can come back to that when we get the full year, and we have -- and we can see the full outturn. But certainly, second half weighted '25, full year effect '26. Drivers and warehouse costs in North America, we -- actually, these have normalized quite significantly in terms of the level of inflation we're seeing, which is helpful. I'm not aware of us having any issues with drivers in North America relating to the ICE crack down. Certainly, that's been an issue for some of the end markets we serve. Food service, in particular, has been affected by people not turning in for work for fear of being deported. So I think that's part of -- I can see it in that space. I'm not seeing it in our own business at this stage in our own driver community.

[Operator Instructions] We have a follow-up from Simona Sarli at Bank of America.

Richard, one more from my side. Could you talk a little bit about momentum in white label products? So in percentage terms, how much they are contributing in 2025 versus 2024? And what is your expectation for 2026?

Yes. So look, I think 2025, we'll -- I'd probably give you a better steer on that when we get to the end of the year fully, but we are expecting to be around between 28% and 30% in 2025, something in that order. Obviously, a big step-up from where we were in 2019, where it was more like around 20%. That's been across the group in terms of safety growth, but also more recently, of course, the growth of own brand in our North American distribution business. As we go into '26, look, I think you should expect a more measured approach. I don't know yet where we're going to be for '26, but you should assume that there will be some improvement, but perhaps not the same level we've seen in the last couple of years. Still an important part of what we do, but we've got to -- particularly in North America, there's a lot of absorbing of the launches we've already done that needs to take place and to happen, make sure that we properly follow through on the delivery of ones we've done before we necessarily do too many more. But there will be some more in '26, but probably a more measured pace.

But does that mean that in terms of revenue contribution, should I assume to be flat, let's say, compared to 2025, or potentially down?

I don't think down. I think -- let's say, flat to begin with, and we can see how that progresses as we go through the year.

And then apologies, one last one. It's more like a technical on the -- can you elaborate on the interest cost expectations for 2025 and 2026?

Yes. We're guiding to 2025 to GBP 120 million of net finance expense. Expect that to be about the same in 2026 as well. We will benefit a bit from lower rates. And while we're there, tax rates, about 26% in 2025 and the same for 2026.

And the similar interest charges in 2026, is that including also M&A that you had in the pipeline? Or it's based on what you have announced so far?

Yes. It's only on what we've announced so far. So you can assume that it benefits from that. We do have a slightly higher level of average net debt as we've gone through this year, which is in part of that bridge.

Our next question is from Will Kirkness at Bernstein.

I'm sorry I missed the very beginning of the call. So hopefully, I won't be repeating anything. I've got 3, please. Firstly, just -- could you quantify the tariff pricing impact you expect to see in the fourth quarter? Secondly, can you give us any comment on gross margins, where you expect them to be for FY '25? And then lastly, just conceptually, I think you've spoken before about the margin uplift since 2019 being kind of half M&A, half pricing and inflation benefits, et cetera. But it feels like we've gone beyond giving slightly more than half back now. So I just wondered if you -- how you think about that, I guess, the incremental weakness versus the 2019 position?

Will, the tariff pricing, it's part of the mix for 2025 and it is effectively the -- what the -- the level of inflation we're seeing in North America is really just inflation -- is just tariff driven. So when you think -- when we think of Q4 for 2025, where we're talking about slight positive underlying growth in the quarter, you can assume that Q4 is going to be about -- about half of that's going to be inflation and the other half will be volume. So we are seeing -- so essentially, all of the inflation we're seeing at the moment is really driven by tariffs in North America, and it's contributing half of the underlying growth in Q4, or we expect it to anyway. In gross margin terms, so yes, as we know, we've seen a significant increase in gross margin in 2019 versus 2025 -- '24 and 2025. I think in 2025, underlying, we'll see a slight decline. But in total, it will be about the same as it was in '24 because we've got the annualization of Nisbets to include. So we had a full year effect of Nisbets, which has a higher natural gross margin, which will mean that total will be about same underlying, slightly down, I'm expecting. And in the margin uplift versus 2019, so yes, if you compare it to '24, we've talked about for some time now that half of that is M&A, half of it is going to be organic, and of that half organic, a good proportion -- a bigger proportion would be inflation driven. I think in '25, when we've got the final numbers, I think we should still expect to see some level of inflation support in those 2025 margins. So -- but we will be able to give you a better sense for that when we get the full picture at the end of the year.

[Operator Instructions] Okay. We have no further questions on the call. So I'll hand the floor back to Richard for any closing comments.

Thanks for joining us today. I hope you found the call helpful. Look, we're pleased to be meeting our profit expectations for 2025 and to be providing a more stable profit outlook for 2026. And we're working very hard to drive the group's performance in challenging markets, and are encouraged by the operating -- operational improvements being made. Furthermore, we remain confident in the group's underlying resilience and ability to drive consistent compounding growth in the medium term. I wish you all a restful Christmas and a happy New Year. Thank you very much.

Thank you. This concludes today's conference call, and you may now disconnect.