Bunzl plc (BNZL) Earnings Call Transcript

Hello, everyone, and thank you for joining us for the Bunzl Results for Half Year Ending 30th of June 2026. My name is Chach, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand it over to Frank to begin. Please go ahead.

Good morning, and welcome to Bunzl's 2026 First Half Results presentation. I appreciate you joining us today. I will start by summarizing our performance over the period. Following this, Richard Howes, our Chief Financial Officer, will take you through our financial results, capital allocation and outlook for 2026. After that, I will return to provide an update on North American Distribution and Continental Europe as well as discuss why Bunzl is well positioned for continued long-term growth. I'm pleased to be presenting a good set of results today with the actions we have taken over the last 18 months, delivering a much improved performance and supported by the business ability to respond effectively in an inflationary environment. Over the first half, volume growth was particularly encouraging with growth delivered in all business areas, but led by growth in our North America Distribution business. The stabilization and recovery of the Distribution business follows from actions taken to restore responsiveness, agility and high service levels. While there is still work to do, these are having a positive effect. I'm also pleased with how our businesses globally have successfully navigated product and operating cost increases resulting from the geopolitical environment. This agility is core to Bunzl's fundamental resilience. Furthermore, Bunzl's strong and annual cash generation continues to support attractive capital allocation opportunities. While we have an active pipeline of bolt-on acquisitions, and deal momentum is building, our improved performance, alongside the level of excess cash we see allows us to announce a GBP 500 million share buyback today while maintaining headroom for acquisitions. Overall, Bunzl's performance over the first half is a testament to both the strength of the business model and the dedication of our people who have been able to deliver good growth in what remains a challenging external backdrop. I believe Bunzl can now deliver on the attributes it has long been known for, attractive compounding growth and resilience, and I expect 2026 to be the foundation for future profit growth. Turning to the financial highlights over the period. Revenue growth at constant currency was 4.1% in the first half, driven by underlying revenue growth of 3.2%. Pleasingly, we have now delivered 5 consecutive quarters of underlying revenue growth. Operating margin increased by 30 basis points to 7.3%. Whilst this is largely driven by the net impact of inflation in the second quarter, much of which is temporary in nature, we have also benefited from the annualization of initial Nisbets synergies the stabilization of our distribution business and have delivered results despite some increased variable operating costs. Adjusted operating profit growth was 8% year-on-year. Bunzl's performance in the first half has led to an upgrade of our 2026 outlook. We now expect broadly flat operating margins year-on-year and modest growth in adjusted operating profit. Free cash flow rose by 6% with cash conversion of 90% and leverage was 1.8x, which is below our target range. We have announced an interim dividend, which is 3% higher than the prior period and completed 2 acquisitions year-to-date. With deal momentum building, we continue to expect higher annual acquisition spend in 2026 compared to 2025. And lastly, as I've already mentioned, we have announced a new share buyback, in line with our capital allocation policy. Importantly, this maintains significant headroom for continued bolt-on acquisitions, which remain our priority given the strong returns they achieve. With that, I will hand over to Richard.

Thank you, Frank, and good morning, everyone. As usual, my comments are at constant exchange rates unless otherwise stated. In addition, within our results, you will see adjustments for refunds we received related to U.S. IEEPA tariffs paid in 2025. While the position will become clearer in the second half, our view is that this cash will be paid back to customers. In accordance with accounting standards, this reduced our statutory reported revenue by 1.2%, effectively offsetting an implied revenue benefit in prior periods. A corresponding reduction in cost of sales means there is no impact to adjusted operating profit. And throughout, we state operating margin and gross margins excluding this impact. Starting with revenue. Group revenue increased by 4.1% in the first half of 2026, excluding the tariff refund. We delivered underlying revenue growth of 3.2%, with approximately 2/3 of this being driven by volume growth and 1/3 from selling price increases. We saw growth in all business areas led by North America. Both volume growth and inflation accelerated in the second quarter, driving total underlying revenue growth of 4.3% in Q2 compared to 2% in Q1. Acquisitions net of disposals and the inflation impact contributed 0.9% to revenue growth. U.S. tariff refunds impacted revenue by 1.2%. Now turning to the income statement. Gross margin was 29.4% compared to 28.8% in the prior period, driven by the profit impact from turning inventory in an inflationary environment as well as currency. Much of the inventory impact is expected to be temporary in nature. Gross margin expanded in all of our business areas, except for North America, which saw a moderate decline driven by business mix. Operating cost growth over the period included the impact of fuel and freight inflation and some meaningful variable costs linked to improved profit performance, particularly in North America. Overall, the cost -- operating cost to sales ratio increased from 21.8% to 22% at actual currency. Adjusted operating profit for the year was GBP 441 million, an increase of 8% from the prior year. Operating margin was 7.3% compared to 7% in the prior period. This was largely driven by the net impact of inflation as well as the annualization of Nesbit synergies. Moving down the P&L. Adjusted net finance expense of GBP 60 million and the tax rate of 26% are both consistent with our full-year guidance. Adjusted earnings per share increased by 11% over the period, further supported by the timing of share buybacks in 2025. After a few years of deflation and market price normalizations, we thought it would be helpful to provide some color on the inflation trends we are seeing. We started to put through price increases in certain product categories like disposable gloves in the second quarter as product costs increased due to the geopolitical backlog. The impact of higher selling prices in the second quarter benefited our top line, but also our operating margin given the positive impact of selling through previously purchased inventory at lower cost. The cost of plastics, which accounts for around 30% of our purchases has increased meaningfully and drives the overall impact seen to date. However, we are already starting to see selling prices reduced from peak prices in certain categories and are expecting to see more in Q3. Paper accounts for another 25% of our purchases, but we saw a limited change in pulp and paper prices in the first half. When it comes to operating costs, wages and property cost inflation have been at more typical levels across our businesses. However, we have seen increased fuel and freight costs, some of which has been passed on through surcharges. As usual, we'll continue to look to offset operating cost inflation through ongoing efficiencies where possible. Turning now to the business areas. In North America, we saw underlying revenue growth of 4.6%, supported by both volume and inflation although the inflation benefit was partially offset by a reduction in U.S. tariff rates. Revenue growth was led by a recovery in our distribution business, which saw strong growth driven by new business wins in Q4 2025. Encouragingly, we also saw good growth in our Foodservice Redistribution business, supported by both volume and inflation. Strong growth in our safety businesses was largely supported by inflation. Operating profits were flat as the net benefits of higher inflation were offset by business mix, particularly the growth in lower-margin grocery as well as higher variable costs relating to the improved profit performance. And there were continued end market challenges in our retail, Mexico and convenience store businesses. Nonetheless, margins did increase in our Distribution business. Return on average operating capital declined with the stronger profit performance in the second half of 2024 supportive of the prior year metric and with an investment in working capital. In Continental Europe, underlying revenue growth was just over 2% and accelerated through the period, driven by improved volumes across most countries and higher selling prices, which also supported a strong increase in gross margin. Inflation was most prevalent in Turkey where we sell disposable gloves as well as in some of our online businesses and in Spain. Spain saw a very strong revenue growth, also supported by acquisitions and the performance within our online businesses continue to improve. France delivered some volume growth, which was partially offset by selling price deflation, which has been moderating. Our largest business in Cleaning & Hygiene completed its warehouse consolidations offsetting operating cost inflation to drive a strong improvement in operating profit. The increase in operating margin was driven by the positive net inflation impact. Higher working capital offset the business area's higher margin, resulting in a broadly stable return on average operating capital. The U.K. & Ireland delivered slight underlying revenue growth, mostly driven by volume with price increases only seen towards the end of the second quarter. Both gross margin and operating margins were higher in the period. Growth was part -- was driven by Food Service, Cleaning & Hygiene and our businesses in Ireland with a partial offset from a decline in safety due to the completion of some larger infrastructure projects. Adjusted operating profit increased 9%, and strong operating margin expansion was driven by the annualization of Nisbets synergies and a one-off property-related gain despite overhead inflation. The increase in operating margin also translated into a strong increase in the U.K. and Ireland's return on average operating capital. Then finally, in the Rest of the world, acquisitions were the main driver of a 5% increase in constant currency revenues, with underlying revenue also contributing almost 2%. Underlying revenue growth was driven by Asia Pacific, particularly our Health Care businesses. Although within this, our operations in New Zealand have been impacted by reduced public health care spending. While Brazil benefited from inflation in certain categories, which supported moderating deflation overall, there was more limited inflation impact in Asia Pacific. Rest of the World's operating profit grew by just over 15% as gross and operating margins increased strongly, particularly in Brazil. This offset a health care-related margin decline in Asia Pacific. The higher adjusted operating profit drove an increase in return on average operating capital. This slide provides an overview of our performance across sectors in the first half. Overall, we delivered modest organic revenue growth across Safety, Clean & Hygiene and Health Care, driven by strong growth across our Asia Pacific Healthcare businesses as well as higher inflation in North America. Growth in Foodservice and Grocery were both driven by the strong performance of our North American Distribution business. Within distribution, grocery saw strong volume growth driven by new customer wins in the second half of 2025 as well as good growth at some of its largest grocery customers. Moving on to cash flow. We generated GBP 328 million of free cash flow in the period, which includes an inflow of GBP 71 million related to tariff refunds. Excluding this inflow, cash conversion was 90%, slightly lower than usual due to the investment in working capital, but in line with our target. And free cash flow increased 5.6% year-on-year, driven by higher adjusted operating profit and lower net interest paid. Inclusive of the tariff refund, total cash generation prior to acquisitions, disposals and share buybacks was GBP 268 million. GBP 26 million was spent on net acquisitions resulting in a net cash inflow of GBP 242 million. Turning to the balance sheet at actual exchange rates with comparisons made to the position at the end of 2025. Working capital was largely unchanged overall with an increase in payables, which includes the U.S. tariff refunds, partially offset by an increase in receivables and slightly higher inventory. Deferred consideration relating to acquisitions increased by -- decreased by GBP 12 million to GBP 213 million driven by earn-out payments related to previous acquisitions. There was an increase of GBP 164 million in other net liabilities, which primarily relates to our final dividend, which was paid in July. Our adjusted net debt to EBITDA was 1.8x, excluding the cash inflow related to the tariff refund. Over the medium term, we aim on average, to manage leverage within our target range of 2 to 2.5x adjusted net debt to EBITDA. Before the pandemic, we consistently operated within this range. Returns were slightly higher in the first half, driven by a higher operating margin, with return on invested capital of 13.3% and a return on average operating capital of 38%. Our capital allocation priorities remain unchanged: to invest in the business to support organic growth and operational efficiencies, to pay a progressive dividend, to invest in value-accretive bolt-on acquisitions; and finally, to distribute excess cash. In the 21 years up to including the first half of 2026, Bunzl has returned GBP 2.7 billion through dividends, committed GBP 6.2 billion in acquisitions and returned GBP 450 million through share buybacks. When we are deciding where to deploy capital, we have a strong focus on the return on invested capital and the relative value creation of different opportunities. As a result, we have a strong preference to prioritize capital to invest in our own business and in bolt-on acquisitions. Acquisitions represent a significant opportunity for Bunzl, as we operate in large and fragmented markets, and we have a very strong track record of consolidating the market. Of the 77 announced acquisitions between 2020 and 2025, 74 were bolt-on acquisitions, where committed spend per deal averaged around GBP 25 million. Over this period, we spent an average of GBP 300 million per annum on bolt-ons. The average multiple that we have paid for these businesses has been consistently around 9x operating profit. Recent deals have demonstrated a strong 2-year return on invested capital of 13.3%, comfortably ahead of our project work. We have over 1,300 potential acquisition targets identified across countries and customer end markets, but the timing of deals can be uncertain. Periods of lower acquisition spend are not unusual, and annual spend varies. In 2019, we spent just over GBP 100 million on bolt-on acquisitions whilst in 2023, we spent nearly GBP 500 million while pipeline is active and we continue to expect committed spend to be more in 2026 and 2025. With current leverage of 1.8x and strong annual cash flow, we have significant headroom. This is supported by the fact we have spent less than GBP 150 million on acquisitions over the last 20 months compared to a typical spend of around GBP 600 million over a 2-year period. On this high-level illustration, we have headroom of 0.15 to 1x net debt to EBITDA. Every GBP 100 million allocated to bolt-on acquisitions initially impacts on average by a little under 0.1x. We, therefore, have a level of excess cash that supports a GBP 500 million share buyback over the next 12 months without compromising our pursuit of bolt-on acquisitions and the increasing acquisition momentum we are seeing. As part of our capital allocation framework, we commit to a progressive dividend policy and have delivered dividend per share CAGR of circa 9% since 1992. Today, we have announced an increase of 3% in our interim dividend. Our expected dividend cover for 2026 is 2.4x, in line with last year. Looking ahead to the full year, we upgrade our 2026 guidance. We continue to expect revenue growth at constant exchange rates, excluding U.S. tariff refunds to be driven by modest underlying growth supported by some inflation alongside a small benefit from acquisitions. We now expect group operating margin to be broadly flat year-on-year compared to the 7.6% margin reported in 2025, which excluded the GBP 8 million share-based payment credit. This is due to stronger-than-expected profitability in H1, which was driven by the net impact of inflation, much of which is expected to be temporary. Overall, we expect modest growth in adjusted operating profit. Within this, there are a few things to remember when considering our expectations for the second half, comparatives get tougher. You will remember that we had significant business wins towards the end of last year, which will annualize. We are already starting to see some selling price normalization with this expected to be a margin drag for the group. Gross margin peaked in June, with July already declining from that level and with price reductions in certain categories building since July. In addition, the second half will also continue to be impacted by an increase in variable operating costs linked to improved profit performance. Tax guidance is unchanged at 26% and while net interest is expected to be between GBP 125 million and GBP 130 million. I will now hand back to Frank to take you through our business update.

Thank you, Richard. Firstly, let me give you an update on North America. As part of this, we thought it would be helpful to provide you with some updated disclosure, including our end customer revenue split. Although, as a reminder, our operating companies operate across customer sectors, and so our businesses are not run simply in our accordance with the chart here. As you can see, distribution accounts for around 60% of North America revenues. Therefore, a now stabilized distribution business is very important for the resilience of North America and the Group. . Within Distribution, approximately half of its revenues are generated from grocery customers with another quarter coming from Food Service redistribution. The remainder is made up of customers across Retail, Food Processor and Cleaning & Hygiene. The other 40% of North America is diversified across many sectors. This diverse sector mix supports the resilience of North America and the Group. North America's largest 40 customers are mostly distribution customers and have an average partnership with Bunzl of over 20 years. Customers are very sticky in our industry, and we enjoy very high retention rates, in general, given the essential nature of our products and services. While North America is a more concentrated customer base than other parts of the group, its top 3 customers account for less than 25% of revenue with this weighted to our largest customer, and customers 4 to 10 account for less than 15% of revenue. There is then a very long tail of smaller customers. In terms of financials, margins vary across businesses, but those with lower margins tend to have higher inventory turns. And as a result, return on average operating capital is broadly similar and attractive across sectors. Focusing now specifically on our North America Distribution business, where we have continued to make strong operational progress. I've spent a lot of time in this business and the actions we have taken have significantly improved execution within our new organizational structure. The new sales and operations model, which enables a much greater focus on long-term growth opportunities, now has the right processes in place to enable effective servicing of both local and national customers. The model is working well. As part of actions taken, we have reinforced our leadership structure within local food service, and that has brought greater focus in that sector. Importantly, agility has now been restored in the local business with local teams responsible for pricing and inventory decisions for local customers as well as for local sourcing decisions. As a result, our availability and commercial responsiveness are now back at our desired levels, as are our service levels with on time in full now back to 2019 levels. Our sales teams are motivated and engaged, and collaboration between teams has noticeably improved. Staff turnover, which we believe has always been well below industry averages, but increase in 2025 has fallen meaningfully over the last 12 months. And finally, we have strengthened our relationship with customers and our engagement with third-party suppliers. This has included a more balanced approach to our own brand that also focuses on growth we can achieve with preferred branded suppliers. For example, on the bottom right is a recent promotional program we ran for hygiene products alongside multiple branded suppliers. Customers are also noticing these improvements, as highlighted by the quote in the top right of the page. The operational improvements outlined on the previous slide are now visible in Distribution's improved financial performance. Distribution delivered 8% underlying revenue growth in the first half. This was mostly driven by volume growth, including the new business wins in the fourth quarter of last year and success with established grocery partnerships. The second quarter, volumes grew by 2% in our redistribution segment with -- service customers. This is an encouraging performance given continued market challenges for customers in that particular segment. Inflation was also positive in the period for Distribution. The business saw a moderate increase in operating margin, outperforming North America as a whole. The improved performance of the business alongside the net positive impact from inflation more than offset the mix headwind from strong growth in grocery, new business wins that are typically lower margin initially and higher variable costs as a result of the improved performance. While the end markets remain challenging, we are now in a good position from which we can focus on increasing market share through new customer wins and increased wallet share. Near-term priorities for the business also include hiring a new CEO of distribution and opening 2 mixing centers on the East and West Coast, which will hold imported products for our distribution centers. This will improve product availability across the business, enhance warehouse productivity and create commercial opportunities with customers. The actions we have taken and continue to take will strengthen our distribution business and provided with a strong platform to deliver a sustainable long-term growth. Turning to Continental Europe. Significant warehouse consolidation project is now fully operational in our largest French business, where we have gone from 15 to 6 warehouses. This has been a large undertaking by the team, and it will make a big difference to our operational efficiency, improving product availability and delivery time for our customers. We are already benefiting from some tangible improvements with higher service levels, lower inventory, increased warehouse capacity as well as improved health and safety. There will be further productivity improvements as we fully roll out a number of digital tools including warehouse management systems and demand management planning. Whilst this was a bigger project, warehouse consolidations are a key lever for operating efficiencies across the group, and we are always looking for these types of incremental opportunities. We've also entered into an existing -- exciting partnership with adidas, which is a great example of the group's entrepreneurial culture and continued focus on driving organic growth. This focus achieved net new business wins worth around EUR 30 million of annualized revenue in the first half in Europe overall. The adidas partnership is a global exclusive license agreement for the design, manufacture and distribution of safety footwear. The initial launch is in a number of European countries across different businesses. The partnership is a testament to our safety expertise and global network of Safety Distribution businesses. These benefits were recognized by adidas and instrumental in them choosing to partner with Bunzl to introduce adidas workwear shoes. Looking forward, there is a significant growth potential as we look to expand the product range, the product categories and the number of geographical markets. Turning to our long-term growth model. Bunzl is fully focused on delivering against its well-established compounding growth strategy, and a good first half performance reaffirms our expectation that 2026 will be the foundation for future profit growth. I, therefore, want to take a moment to briefly remind you of its building blocks. Firstly, Bunzl's growth opportunity is supported by its underlying resilience. This resilience is driven by the geographic and sector diversification of our 150 businesses and their focus on essential products. The Group benefits further from its scale, strong cash generation and its entrepreneurial culture. These fundamentals underpin our growth strategy, which is founded on profitable organic growth and disciplined value-accretive acquisitions. We also continue to drive ongoing operational efficiencies, and where appropriate, distribute additional returns of capital. Bunzl has a strong total return model. Part of the group's resilience stems from its geographic and sector diversification. We provide you with an updated snapshot on this slide. This resilience in part reflects the fact that grocery and food service revenues are relatively similar in scale and tend to have opposing trends. When people eat out more, they eat at home less and vice versa. Furthermore, around half of Group's profit is now generated from the 3 sectors that we see the greatest growth opportunity and that had the highest operating margins, Safety, Health Care and Cleaning & Hygiene. However, it is important to remember that while these 6 sectors have different margin profiles, their return on capital employed are all attractive and broadly similar. Those with lower margins tend to have higher inventory turn, all are highly cash generative. Organic growth remains a key focus for all of our businesses. We drive volume growth through exposure to growing customers, increased share of wallet with existing customers and to winning new customers. These factors all contributed to our volume growth in the first half. Across our diversified operations, activity in our end markets is important. Therefore, on average, we expect group volume growth to be driven by real GDP in our markets. We drive price growth to offset inflation, and we have shown that we are very good in navigating volatile trading conditions while also focusing on long-term customer relationship. We also target ongoing operating efficiencies where small incremental improvements compound significantly over time and support our management of cost inflation. We completed 15 warehouse consolidations and relocations in the first half of 2026, a larger number than we would typically expect over 6 months. And in the first half, 78% of our orders were processed digitally. This compares to 76% across 2025. As we implement new systems to improve productivity, artificial intelligence is playing an ever increased growth. Our entrepreneurial and data-driven culture lends itself well to adopting new technology, and AI is becoming embedded into everyday sales, operations and support processes. On top of organic growth, Bunzl has an excellent long-term track record of delivering growth through acquisitions. In large and very fragmented markets, Bunzl is one of very few scale players and the natural consolidator. The sticky nature of customers in this industry makes bolt-on acquisitions at attractive valuations and compelling growth lever. Having done over 230 acquisitions since 2004, we have very strong acquisition capabilities and processes across the organization. Central expertise alongside local market knowledge reduces the execution risk of acquiring businesses. They're also an attractive acquirer for potential targets, long-term home for businesses with benefits from our scale, investments made for the benefit of all our businesses, knowledge-sharing opportunities and our entrepreneurial culture. And as Richard demonstrated earlier, bolt-on acquisitions are highly value accretive. Between 2021 and 2025, bolt-on acquisitions contributed on average annual revenue growth of 2.6%. We also actively recycle capital, including 4 disposals since 2022. In summary, Bunzl has delivered a good performance in the first half of 2026 with broad-based volume growth led by North America Distribution, effective management of inflation and strong profit growth. In particular, the period reflects a turning point for our distribution business. The Group has also continued to demonstrate the strength of its resilient business model in an uncertain macroeconomic and geopolitical environment. Overall, I am pleased that we can now guide to modest profit growth for 2026 and look forward to this year being the foundation for future profit growth and a return to Bunzl's successful compounding growth algorithm. Thank you for your attention. We are now happy to take your questions.

[Operator Instructions] Our first question today comes from [ Zach Alkoat UT ] from Morgan Stanley.

Richard. I have 2 questions, please. Firstly, could you please unpack the moving parts for the operating margin in the second half, i.e., what is embedded in your full year guidance? For example, how is gross margin developing so far? And how do you assume that, that will evolve over the remainder of the year? And then similarly, your assumptions around OpEx? And then the second question on M&A in the context of still a lower deal spend relative to history, how has the M&A landscape evolved? I appreciate you called out an expected acceleration in the second half. So should that signal to us that the landscape has improved recently? Or is it driven more by the timing of you getting certain deals over the line?

Well, let me take the operating margin one to begin with. So we are -- when we look at the first half, margins have improved 30 basis points, which has been largely benefited from the inflation effect via inventory gain net of fuel and freight increases. If we take those out, actually, margins are still slightly up in the first half, but the effect is largely down to the inventory gain. When we look into the second half, we are expecting margins to be lower year-on-year. The extent is essentially the same as we talked about at the pre-close statement back in June. The factors and the parts of the bridge, I mean, firstly, we do expect to see this inventory gain unwind. We have already seen gross margins peak in June and reduce in July. We're effectively also seeing selling prices reduce alongside that. We -- the first half also benefits from Nisbets synergies, which annualized in the first half, and therefore, will not repeat in H2. Obviously, we've got the new business wins, which we achieved in Q4 last year, which will annualize in the second half, and we'll continue to see ongoing higher variable costs linked to profit performance. Those together explain the reason why margins in the second half will be down year-on-year as opposed to up in the first.

Let me take the M&A question. Obviously, we are operating in large fragmented markets. We have about 1,300 targets in our database. We are the largest business in our field that consolidate these markets. Let's say, sometimes uncertainty in markets can make people wait in selling their businesses. We certainly have seen that effect in the last 18 months. I would say the magic word in an acquisition strategy that Bunzl follows is disciplined. We want to do the right things. We see an active pipeline. So we feel good about that. But I also say -- we always say champagne at the finish. I'm not getting worried if we are not able to close an acquisition in December, and it ends up to be January. We want to do the right things. We've seen years where we did GBP 100 million on acquisition bolt-ons. We've seen years of GBP 500 million. So these things can be a bit lumpy, but I'm building this group for the long term. We have a massive opportunity. Our overall market shares are still relatively low in most markets, but we are leading, and I feel good about that. So I hope that answers your question.

The next question is from Rory McKenzie from UBS.

It's Rory here. Firstly, I just wanted to clarify the modeling of the tariff refunds. Is it effectively removing GBP 70 million of revenues at a 0% operating margin? And then on what basis are you now guiding for FY or full year margins, meaning in the presentation, you through out referred to a 7.3% margin in H1, but technically, it's a 7.4% margin. So how does that accounting change fit into the changed margin guidance language, please? And then secondly, I had 2 questions about the inflation tailwinds. Just a follow-up on that point you made on the guidance, Richard, if we attribute all of the 60 bps gross margin improvement to that inventory gain, that's about a GBP 35 million gross benefit in H1. Why would that necessarily all reversed in H2? I'm just not clear why it would be symmetrical, and I don't think prices are quite fallen in the same pattern as they rose. And then finally, Frank, can you just talk about how you've seen customers respond to the inflation spike? And what your teams are doing to try and manage this new environment? It sounds like volume sensitivity has been high. But at a group level, you've kept good volume momentum through H1. So what's things been behind that?

So let me take the first 2. On the accounting for the tariff refund, so overall, what we're seeing here is we're expecting this to be this refund that we received just before the half year to be repaid over time with I would imagine quite a lot of this really being repaid in the second half. As a consequence, we are reflecting a deduction against our reported revenue -- our underlying revenue of 1.2%. And we are then making adjustments to cost of sales to effectively mean this is not -- there's no profit impact on this adjustment. We do, as you'll see throughout the statement -- in the financial statements themselves obviously includes all of the refund in all of the areas where it should be. When we're looking at the key metrics, we've sought to adjust them to try and get back to what we believe is true trading, i.e., not trying to show true revenue growth. And indeed, to your point, not to show actual operating margins, which are higher, look higher than they really are. So including the refund, you'll see that margins are at 7.4% reported. But when we take it out, actually, the real underlying margin is 7.3%. And we're forecasting fall on the same basis. So when we talk about margins around 7.6% for the full year, that would be excluding any impact of tariffs. On the inflation piece, look, our view is very much that we are already seeing both selling prices reduce, and obviously, we're increasingly selling through higher-priced inventory, as we've gone through Q2, in particular, and sold through the pre-tariff inventory -- the pre-price increase inventory. So we do expect to see prices -- same prices reduced. We are seeing that, and we're seeing gross margins decline. As to the pattern of change, we saw these prices increase quite quickly during Q2. We are seeing prices come down quite quickly as well. And I think that talks to the fact that there is a heightened sensitivity to volumes in our manufacturing base who are wanting to make sure they don't -- they want to protect volumes and don't hold prices high for too long. We're also of the same mind. We want to make sure that we bring our prices down appropriately protecting volume.

Yes. And just in terms of how our teams do. I think Bunzl, the management teams around the world are very effective in terms of managing margins. There -- it's a bit different than it was in COVID, where there were strong availability issues. This is a bit more like oil price-related. Plastics, we've seen some big increases in disposable gloves for instance, as a category. These things change also. We run what we call an overwatch group, where we have the 150 top buyers across the world, having weekly calls, monitoring the biggest product groups. Real big benefit of being part of Bunzl to navigate all these things and ultimately make sure that we're doing the right thing on the margins, but also make sure that we are very focused on retaining and growing volumes as well. .

The next question is from Will Kirkness from Bernstein.

I just wanted to, sorry, follow up on the margins, and then, I had a couple of other questions. So I think you said your margin assumptions are largely unchanged from the first half pre close. But if we look at oil pricing, which should feed into that plastics component, I mean they're up sort of 20%, 25%. So I just appreciate you probably got price coming back a bit and then we have the dynamics with your suppliers. But is there not a view that there's potentially a resurgence in pricing that happens and maybe flows through a little bit later? And I guess it's maybe a little bit early, but how would that feed into a view on '27 margins? And then linked to that, I guess, thinking about margins longer term, is flat to the right way to think about that orders mix own brand, warehouse consolidation, all stuff you talked about drive longer-term accretion? And then my final question was just on North America. I think in the presentation, Distribution saw underlying revenue growth of 8%. So does that mean the rest of the business was about flat?

Let me take the margin, the short-term margin point. The -- well, look, I hear what you're saying, well, I think we -- despite the fact that we've seen -- when we did our pre-close, oil prices dropped significantly. And on the day, I think we were back to pre-war prices at the time. Subsequent to that, we've seen price -- oil prices rise again. But actually, what we've seen on the ground is that the -- our input prices particular categories and also our selling prices are starting to reduce. So even though it's -- we still -- we do see higher levels, we're certainly not seeing it at the moment. What we're seeing is actually prices reduced. Is there a potential for resurgence? Look, we don't think so. It's not what we're seeing. And if it did happen, then yes, presumably, there will be some level of price increases, albeit it's often harder to put prices up if this is just a very volatile movement up and down short term. And this obviously been played out very publicly which would make that harder. So I think the right assumption is the assumption we're guiding to, which is the margins selling prices and margins decline. We see lower margins in H2 than the second half of last year, and that provides a sensible exit rate when looking at 2027. As to margins for the longer term, well, we don't give margin guidance in the longer term. But what we do see is that we're very focused on making sure that profit gross -- profits improve and grow, and as we've said, I think, in a number of occasions, we see 2026 as a mechanism or a base from which we think we can grow profits organically and inorganically. There are plenty of things, actions we take. You mentioned some of them to make sure that our margins in the longer term are either progressed or are protected. We need to grow volume, and we do see further potential for own brand growth. And of course, acquisitions will be -- tend to be a net positive for us on the inorganic side. So there are plenty of routes for us to protect -- to grow margins, but our focus is mainly on growing profits from a base that 2026 is establishing. And -- sorry, Frank?

Yes, I think the question on the volume growth, North America. So North America has been leading the pack, but actually, we're quite pleased that we have seen a broad-based volume growth in all the regions. Inflation was strongest in North America and in Continental Europe, especially in the second quarter. But what makes me very happy is actually in the business where we have seen some of the execution issues that we're now seeing there the strongest growth. So Bunzl Distribution is leading the pack, which is clearly what something we've been working very hard on and to see that is happening there is fantastic to see.