Final Results

RNS Number : 9179B

Bunzl PLC

28 February 2011

 



Monday 28 February 2011

ANNUAL RESULTS ANNOUNCEMENT

Bunzl plc, the international distribution and outsourcing Group, today publishes its annual results for the year ended 31 December 2010.

	2010	2009	Growth as reported	Growth at constant exchange
Revenue	£4,829.6m	£4,648.7m	4%	3%
Operating profit*	£306.7m	£295.7m	4%	3%
Profit before tax*	£276.2m	£257.8m	7%	6%
Adjusted earnings per share*	60.6p	55.9p	8%	7%
Dividend for the year	23.35p	21.55p	8%
Operating profit	£255.7m	£253.9m	1%
Profit before tax	£225.2m	£216.0m	4%
Basic earnings per share	49.1p	46.4p	6%

Other highlights include:

·      Improved underlying revenue growth in 2010

·      Acquisition spend of £126 million with nine acquisitions announced adding annualised revenue of £154 million

·      Significant expansion in Switzerland and entry into Israel

·      Continued strong cash flow with operating cash flow to operating profit* of 93%

·      Strong track record of dividend growth continues with 8% increase

* Before intangible amortisation and acquisition related costs

Commenting on today's results, Michael Roney, Chief Executive of Bunzl, said:

"Despite continuing challenging economic conditions across our international markets, the Group has once again delivered another good set of results.  Our organic growth, as we continued to gain additional business with existing customers combined with new customer wins, was bolstered by acquisition activity with nine acquisitions announced during the year.

Looking ahead, we believe that the opportunity for future development both organically and through acquisitions, combined with our market leading positions and our strong cash flow and balance sheet, should enable the Group to achieve further growth."

Enquiries:

Bunzl plc Michael Roney, Chief Executive Brian May, Finance Director Tel: [phone]

Tulchan David Allchurch Stephen Malthouse Tel: [phone]

Note:

A live webcast of today's presentation to analysts will be available on www.bunzl.com commencing at 8.30 am.

CHAIRMAN'S STATEMENT

Against the backdrop of continuing economic uncertainty across the international markets in which we operate, I am pleased to report that the Group has produced another good set of results driven both organically and by acquisition, announcing nine acquisitions during the year. 

Group revenue increased 4% to £4,829.6 million and operating profit before intangible amortisation and acquisition related costs also rose 4% to £306.7 million.  Basic earnings per share were 49.1p, an increase of 6%, and adjusted earnings per share, after eliminating intangible amortisation and acquisition related costs, were up 8% to 60.6p.  Currency translation movements increased Group growth rates by approximately 1%.

Dividend

The Board is recommending a 9% increase in the final dividend to 16.2p.  This brings the total dividend for the year to 23.35p, an 8% increase.  This year we have decided to reintroduce the dividend reinvestment plan to replace the existing scrip dividend alternative.  Further information will be included with my letter to shareholders relating to the forthcoming Annual General Meeting.

Strategy

We continue to pursue our well defined strategy of developing the business through organic growth and targeted acquisitions in both existing and new geographies, while continuously improving the efficiency of our operations. 

Our organic growth is achieved by applying our resources and expertise to enable customers, by outsourcing to Bunzl, to reduce or eliminate the hidden costs of sourcing and distributing numerous goods not for resale, thereby allowing them to focus on their core business more cost effectively and with lower working capital. 

In 2010 we saw a resumption of acquisition activity that took us further into some of our key markets in the US, Denmark, Benelux, Spain and Brazil while substantially increasing the size of our business in Switzerland and extending our operations into Israel.

Increasingly co-ordinating our procurement internationally and continually refining and deepening our commitment to our customers and markets, while looking to extend our business into new geographies, remain important elements of our strategy.  Having pursued this strategy consistently over many years, we have built leading positions in a variety of market sectors across the Americas, Europe and Australasia. 

Investment

We have over time steadily invested to support our growth strategy, thereby enhancing the infrastructure of the Group.  We are continuously improving and upgrading our IT systems and warehouse facilities as we integrate new businesses into the Group, in addition to increasing our functionality and efficiency in order to improve customer service.  By doing so we retain the competitive advantage which helps us maintain our leadership in the market place.

Corporate responsibility

As a responsible company, we realise that Bunzl is only sustainable if we maintain profitability through business practices which positively impact stakeholders, whether customers, employees or suppliers.  Much has changed in the area of Corporate Social Responsibility ('CSR') since we first developed our policies in 2004.  During 2010 we reviewed our approach to CSR issues, seeking input from both consultants and shareholders.  We confirmed that our management practices relating to business conduct, employees and health and safety, environment and community matters, as well as our approach to our customers and suppliers, remained appropriate.  Business integrity together with committed, well trained employees working in a safe environment with an emphasis on reducing our environmental impact, contributing to the communities in which we operate, encouraging our suppliers to adopt a similar ethos to us and helping our customers to meet their CSR goals, particularly those relating to sustainability, are all intrinsic to our everyday business.  We have therefore decided to adopt the term Corporate Responsibility going forward rather than CSR to reflect that these policies are part of the way Bunzl operates.  We have also modified our policies to make them more concise, clearer and better tailored to Bunzl's specific challenges. 

Employees

Many companies comment that their employees are their biggest asset but, as Bunzl is not capital intensive, this is particularly true for us.  During 2010 our people have continued to show their commitment and dedication to serve our customers.  We have had numerous examples of our employees battling against adverse weather conditions in various parts of the world to get into work and maintain customer service and deliveries.  Their efforts and dedication are, as always, greatly appreciated.

Credit facilities

The Group remains highly cash generative and we continue to have access to diverse sources of funding to achieve our strategic objectives.  In 2010 our net cash inflow was £10 million despite cash expenditure of £111 million on acquisitions and we agreed to raise a further £95 million (sterling equivalent) from the US private placement market, with maturities ranging from seven to 12 years, of which £20 million was drawn in December 2010 with the balance due to be drawn in April 2011.  We also renewed some £164 million of our banking facilities during the year.  Our undrawn committed facilities' headroom at the end of the year was £557 million.

Board

Jeff Harris retired from the Board on 28 February 2010.  A non-executive director for more than nine years, during his time with us Jeff served as Chairman of the Audit Committee, Senior Independent Director and, most recently, as Interim Chairman following Anthony Habgood's retirement in 2009.  We thank Jeff for his guidance and wise counsel over many years.  I was appointed to the Board as Chairman designate on 1 January 2010 and became Chairman on 1 March 2010 and Peter Johnson, who has been a non-executive director since January 2006, was appointed as Senior Independent Director in April 2010.

Charles Banks, who has served as a non-executive director for almost nine years, latterly as Chairman of the Remuneration Committee, will be retiring after our Annual General Meeting in April.  His independent advice and significant contribution to our success have been greatly appreciated and he leaves the Board with our thanks and best wishes.  We are currently undertaking a search for a new non-executive director and will make a further announcement in due course.

CHIEF EXECUTIVE'S REVIEW

Operating performance

Revenue and operating profit before intangible amortisation and acquisition related costs each increased 4% to £4,829.6 million and £306.7 million respectively.  The overall impact from currency translation was slightly positive with both growth rates 3% at constant exchange.  Excluding the impact from acquisitions and the previously announced sales of products related to H1N1 prevention in 2009, underlying revenue growth at constant exchange rates was 2%.  The strong cash flow of the Group continued as we converted 93% of our operating profit into cash.  In this review all references to operating profit are to operating profit before intangible amortisation and acquisition related costs.

In North America revenue and operating profit rose by 7% (4% at constant exchange rates) and 3% (1% at constant exchange rates) respectively due to strong organic revenue growth, principally as a result of increased volumes to existing customers, with profit growth held back by some mix driven margin pressure.  Although UK & Ireland saw a decline in revenue of 6% (5% at constant exchange rates) due to the persisting difficult economic conditions and weakness in some businesses, especially Ireland, Vending and Healthcare, operating profit rose 3% as operating margins increased significantly due to the positive impact of earlier cost reduction initiatives and the absence of a negative transaction impact from foreign exchange which adversely affected the results in 2009.  In Continental Europe revenue grew by 3% (7% at constant exchange rates) as a result of the impact from acquisitions made during 2010, while operating profit decreased 2% (up 2% at constant exchange rates) due to the positive impact from acquisitions being offset by the lower contribution from reduced sales volumes in France which were partly held back following exceptional sales of products related to H1N1 prevention during 2009.  The Rest of the World showed growth of 23% in revenue (4% at constant exchange rates) and 40% in operating profit (19% at constant exchange rates) principally due to strong organic growth in Brazil and a significant operating margin improvement in Australasia.

Basic earnings per share were 49.1p, up 6% (4% at constant exchange rates).  Adjusted earnings per share, after eliminating the effect of intangible amortisation and acquisition related costs, were 60.6p, an increase of 8% (7% at constant exchange rates).  Return on average operating capital continued at a consistently high level of 54.4%, similar to the return in 2009.

Our operating cash flow continued to be strong.  Despite an acquisition cash outflow of £111 million and net capital expenditure of £22 million, our year end net debt of £716.8 million was at the same level as the end of 2009.  Our net debt to EBITDA ratio improved to 2.1 times compared to 2.2 times at the previous year end.

During 2010 we continued to focus on the sustainability of our operations to minimise our impact on climate change, as well as offering environmentally friendly products and consolidated deliveries of consumables for our customers to reduce their own impact.  Although we have been measuring the carbon emissions of our operations for a number of years, reporting our performance through the Carbon Disclosure Project, we have decided this year to add our carbon emissions as a key performance indicator.  I am also pleased to report that for 2011 we have for the first time set quantitative targets at the Group level to continue to improve our health, safety and environmental performance.

The business area operations, including the relevant growth rates, are reviewed below at constant exchange rates to remove the translation impact of foreign currency movements between 2010 and the previous year.  Changes in the level of revenue and profits at constant exchange rates have been calculated by retranslating the results for 2009 at the average exchange rates for 2010.

Acquisitions

Acquisition activity picked up significantly in 2010 after a much quieter year in 2009.  During the year we announced nine acquisitions and invested £126 million.  In particular, we entered Israel for the first time, significantly increased our presence in Switzerland as we entered three new market sectors and made our second step into the promising Brazilian market.

In January we acquired Clean Care which is principally engaged in the supply of cleaning and hygiene consumable products and equipment to a variety of end users including contract cleaners and other industrial and institutional customers throughout Denmark.  Revenue in the year ended 30 September 2009 was DKK60 million.  In February we expanded further into Denmark with the purchase of Hamo, a supplier of catering disposables and light catering equipment to a variety of end users in both the public and private sectors.  Revenue in 2009 was DKK43 million.  Both these businesses are excellent additions to our existing cleaning and hygiene and catering supplies businesses in Denmark and have extended our customer base and product offering there.

During March we significantly increased the size of our operations in Switzerland.  The acquisition of Weita, a business based near Basel with revenue in 2009 of CHF71 million, expanded our business into the cleaning and safety, foodservice and healthcare consumables sectors for the first time and also increased the size of our existing retail supplies business.

In April we announced our first step into Israel when we purchased Silco, a supplier of foodservice disposables to a number of different sectors throughout the country, including restaurants, caterers and redistributors.  Revenue in 2009 was ILS64 million.  The business has a market leading position and a strong customer base and will provide the opportunity to develop further in the Israeli market.

Juba, which we acquired in May and had revenue in 2009 of €22 million, is a leading supplier of personal protection equipment, principally protective gloves and other workwear, to redistributors throughout Spain.  It has expanded our personal protection equipment business in Spain and has strengthened our position in this market which we entered in 2008 with the acquisition of Marca.

In July we announced the acquisition of Global Net based in Belgium with revenue in 2009 of €20 million.  It is principally engaged in the sale of cleaning and hygiene consumables and equipment throughout the Walloon region of Belgium to contract cleaners, local authorities and other industrial and institutional customers.  As our existing business in Belgium is focused on the Flanders region, Global Net has extended our geographic coverage across the whole of the country.

In August we announced two further acquisitions.  Cool-Pak, which had revenue of $51 million in 2009, is an exciting development for us as it has increased our presence in a specialist area of the food processor market in the US.  The acquisition of A.M. Supply in Brazil has expanded our existing personal protection equipment business in Brazil and extended our product offering into the developing oil and petrochemical sectors there.  Revenue in 2009 was R$7 million.

In October we took a further step to develop our successful business in Benelux with the acquisition of Van't Veer Verpakkingen which had revenue of €9 million in 2009.  The company is based in the Netherlands and is principally engaged in the sale of cleaning and hygiene and catering disposable products predominantly to the healthcare sector.

Prospects

Even though the outlook for economic growth remains uncertain, we believe that the opportunities for further development of the Group across our international markets are promising.  In North America we anticipate good underlying revenue growth, albeit lower than the relatively high level of 2010, and margins should be stable.  In the UK & Ireland, in spite of the continuing difficult economic conditions, especially in Ireland and in those businesses selling to the public sector, we expect an improved performance.  Continental Europe should see better underlying revenue growth and the full year impact of acquisitions made in 2010 will enhance the overall results.  The Rest of the World should also benefit from good underlying revenue growth and continued strong performance.

Acquisition growth is a key element of our strategy and we saw an improved environment for acquisitions in 2010.  The pipeline remains promising as we continue our discussions with a number of potential targets. 

Although there are a number of uncertainties in the economies of the markets where we compete, the Board believes that our market leading positions and our strong cash flow and balance sheet should enable the Group to grow further.

North America

In North America revenue increased by 4% at constant exchange rates to £2,621.0 million primarily due to further sales growth with current accounts but also as a result of some new business wins.  Mix driven impact, principally arising from the revenue growth with existing customers, placed pressure on our margins, resulting in a 1% increase in operating profit to £160.2 million.

In our largest business sector, grocery, we improved our market leading position by retaining and expanding business with our current customer base through our primary programmes; direct store delivery, cross dock and warehouse replenishment.  We also won additional business from our regional competition as we continued to promote our menu of services in the market place.

Despite market softness and the uncertain economy continuing to exert pressure on the foodservice industry during the year, our redistribution business experienced growth as we expanded our relationships with our larger customers and positioned ourselves well with major buying groups.  As an integral part of our 'one stop shop' concept for our customers, our import and private label programmes gained momentum as we expanded our product offering with custom packaging and product enhancements.  In addition we invested in warehouse systems and equipment to improve our small order quantity pick and pack operational efficiencies.

Our food processor business services a broad range of customers from fresh cut produce processors, bakeries and specialty processors to a variety of protein processors that supply the grocery and foodservice industries.  We experienced growth in this sector due to consumers continued demand for lower cost and take home solutions that are more economical than eating out.  In order to expand our programmes and sales with our current customers and win new business, we have broadened the array of personal protection equipment and maintenance, repair and operations (MRO) parts and packaging products that we provide our customers through our value added outsourcing solutions.  We also extended our presence in the market through our acquisition of Cool-Pak which supplies stock and custom designed pulp and plastic containers to fruit and vegetable growers, shippers, repackers and other food suppliers.  Cool-Pak also offers inventory management, just-in-time delivery, labelling and traceability solutions to its customers.  In support of our expansion into this sector, we entered into an exclusive agreement with TRUETRAC™ to distribute LabelTrac™, a portable labelling system that takes case level traceability out to the grower's field.

Our non-food retail business continued to grow organically by winning a major account in Canada and gaining incremental business with retailers having existing relationships with us.  We also continued to benefit from a trend among retailers to utilise our expertise in their sourcing activities.  As such, we were able to promote products and ideas that helped them meet their specific needs and attain their green initiatives through the supply of environmentally friendly products.

Our convenience store business experienced growth as consumers' spending increased as the year progressed.  Outlets in this sector still face the significant challenges of an uncertain economy, increasingly stiff competition from cross channel rivals and rising fuel prices.  We continued to take steps to grow our sales in this sector by increasing the breadth of products we offer, including imported product alternatives, and by expanding our customer base.

Our strategic sourcing initiatives included expanding our preferred supplier relationships into all channels of distribution and redistribution, utilising our purchasing strength and scale to increase our profitability.  We also expanded our private label product offering, incorporating continued product segmentation and upgrades, to provide our customers with more choices to meet a wide variety of needs.  Additionally, we continued to monitor green issues and have relevant products sourced which meet all environmental needs, including those which are biodegradable, recyclable and compostable.  Our new private label line for environmentally friendly products, Green Source, has been very successful.

During the year we reduced our operating costs as a percentage of sales despite some operating expense categories, such as healthcare, fuel costs and freight rates, increasing.  We continue to offset these escalating costs through increased productivity and by fine tuning our operational platform and consolidating stand alone facilities in select markets in order to optimise operating costs while maintaining our high level of customer service.

Although the strength of the economic recovery remains uncertain, our consistent year on year revenue growth in North America in difficult macroeconomic conditions demonstrates the resilience and strength of our value added proposition to our customers.  Our strong financial position, single IT system and extensive coast to coast operating platform continues to address the needs of our customers and we remain well positioned not only to meet our existing customers' demands but also to take advantage of new business opportunities that arise within the markets we serve.

UK & Ireland

After a very challenging year in 2009, our UK & Ireland business area has improved its performance in 2010.  Persisting difficult economic conditions continued to put pressure on sales, resulting in a 5% decrease in revenue at constant exchange rates to £1,007.1 million.  However a reduction in costs has contributed to an improvement in operating margin with operating profit up 3% at constant exchange rates to £59.5 million.

All businesses have closely scrutinised their resource levels and business processes.  This has led to a further reduction in the number of people employed and the closure of some of our warehouses to optimise the branch network of our various businesses.

We have also analysed the ranges and products that we sell and have rationalised product portfolios to suit the needs of our customers better.  This has resulted in fewer stock keeping units (SKUs) which has enabled us to build stronger relations with suppliers, improve product availability and also further develop our own brands and importing activity from Asia.

Within the hospitality sector, the market for catering disposables has continued to be very competitive whilst the demand for more durable catering equipment has been relatively strong.  We are actively developing our own brand programme of catering disposables and have reduced the operating platform by two branches.  W.K. Thomas, which we acquired in 2009, has integrated well into our existing business.  In vending, although the business has continued to operate in a very competitive and demanding environment, the implementation of a new IT system has been completed and we now have the appropriate tools to optimise operating efficiencies, giving us the platform to grow this business going forward.

Our food and non-food retail business, whilst operating under continuous competitive pressure, has been resilient.  We have made a number of operational improvements, including streamlining working processes and completing the installation of a sophisticated warehouse management system, which have allowed us to improve our performance and our service to our customers.  Assisted by a number of non-food retail customer wins, we believe that we are well positioned from a competitive standpoint and that this business should continue to develop well.

Within cleaning and safety, our business that supplies cleaning and hygiene products had a good year against the backdrop of a difficult economy.  Six of the branches have been consolidated into four facilities and the reduced operating platform and cost base have helped us to continue to be competitive and secure ongoing business with a number of our key facilities management customers.  Industrial Supplies, the acquisition we made in 2009, has been completely integrated and is performing well.  Our safety supplies business has continued to find the markets it serves in construction, industry and the public sector to be under pressure which has in turn affected volumes.  We have reacted accordingly by further developing our procurement and product category management activities and consolidating the cost base.

The healthcare business has seen a reduction in volumes with challenging trading conditions and restrictions on spending imposed by some customers as their purchasing budgets have been reduced, both affecting demand.  This was exacerbated by the non-repeat of orders related to the outbreak of the H1N1 virus in 2009.  We have reduced the number of operating locations by two and have further invested in our own brand range of disposable gloves which should help to regain business and improve our competitiveness in the coming year.

In Ireland the economy has continued to be extremely difficult.  The convenience retail market and hotel sector in particular suffered downturns and, even though we have maintained gross margins, it was necessary to implement further reductions in our cost base to realign the business with the reduced levels of activity.

Continental Europe

Revenue rose 7% at constant exchange rates to £936.4 million and operating profit rose 2% to £79.9 million.  The impact of the absence of the significant sales of H1N1 prevention products made in 2009 and gross margin pressure as customers continued to focus on cost reductions was offset by continued tight cost control, increased levels of imports and the benefit of acquisitions and the resulting synergies achieved during the year.

In France, our cleaning and hygiene business had a challenging year.  The economic environment continued to be difficult with the public sector in particular cutting back spending.  Together with the lack of sales of H1N1 prevention products during 2010, this resulted in lower sales although the gross margin percentage was stable. Costs were reduced during the year but the positive impact of these reductions will only be felt fully in the current year.  The new ERP system is now fully implemented and will provide further operational efficiencies in the future.  Our personal protection equipment business had a successful year with higher sales and profits.

In the Netherlands, sales grew significantly in our business supplying the food and non-food retail sectors following customer wins and the business servicing the horeca (hotel, restaurant and catering) sector returned to growth after a difficult year in 2009.  However, our healthcare business continued to face pressure from spending cuts imposed by our customers.  Overall gross margins and costs in the Netherlands continued to be tightly managed such that the operating margin improved.  In October we acquired Van't Veer Verpakkingen which operates in the cleaning and hygiene and catering disposable sectors.  The business is trading in line with expectations and delivering the anticipated synergy benefits.

In Belgium, sales grew as progress in the retail business offset continuing weakness in the business supplying the cleaning and hygiene sector.  Gross margins were under pressure but costs continued to be tightly controlled.  In July we acquired Global Net which sells cleaning and hygiene consumables and equipment throughout the Walloon region of Belgium.  The acquisition is delivering significant synergies with our existing operations.

In Germany, sales grew strongly in the horeca sector and revenues from guest amenities rose again as the hotel sector recovered.  Continued tight cost control could not however fully offset the impact of gross margin pressure.

In Switzerland, we acquired in March the Weita business which operates in the cleaning and safety, foodservice, retail and healthcare consumables sectors.  It is integrating well into the Group and has delivered profits ahead of our initial expectations.

In Denmark, sales were ahead in our retail business and its operating margin improved due to cost reductions.  Our horeca business also delivered good sales growth and increased its operating margin principally due to the full year benefit of its new, more efficient warehouse.  Hamo, a supplier of catering disposables and light catering equipment which was acquired in February 2010, has been fully integrated resulting in significant savings.  Clean Care, a distributor of cleaning and hygiene consumables and equipment acquired in January 2010, continues to operate from its own warehouse and is also delivering significant commercial synergies with our existing business.

In Spain, our cleaning and hygiene business saw a slight decline in sales in a continuing challenging economy.  Gross margins improved and operating costs were reduced, resulting in good growth in operating profit.  Our safety business delivered strong sales and profit growth despite ongoing weakness in the construction and industrial sectors which it serves.  The acquisition in May of Juba, a specialist in protective gloves, has complemented our existing business and is providing opportunities both in terms of increased sales and improved purchasing.

In central Europe, a return to stronger sales growth and further cost reductions led to a significant increase in profit in our cleaning and hygiene business.  Sales declined, however, in the retail business but profit was slightly ahead as a result of the positive impact of cost reduction measures.

In Israel we acquired the foodservice disposables business, Silco, in April as a first step into this new market which has exciting development prospects.  It is integrating well into the Group.

Rest of the World

In the Rest of the World revenue increased by 4% at constant exchange rates to £265.1 million.  Strong underlying growth in Brazil and a substantial improvement in operating margins in Australasia resulted in a 19% improvement in operating profit to £23.8 million. 

In Australasia our largest business, Outsourcing Services, performed strongly, benefiting from some solid second half sales gains and good gross margin improvements.  We continue to develop a strong position in our key markets, such as healthcare, contract catering and cleaning.  In addition we are developing the business in New Zealand by building momentum with regional customers there.  As a result of our continued investment in systems, some 45% of all orders in this business are now dealt with electronically.

Our food processor business had another challenging year, feeling the effects of slowdowns in some of our major customers whose own export business contracted due to the stronger Australian dollar, although sales began to recover as the year progressed.  The recently completed implementation of the main IT system throughout the business will enable us to benefit from operational improvements in freight and inventory management systems as well as facilitate electronic ordering for customers and suppliers. 

Our catering equipment business continued to be affected by the downturn in the hospitality and catering sectors, in particular in New South Wales and North Queensland.  The business benefited from some new business wins during the year and ongoing operational and service improvements implemented in 2009.  This, combined with lower operating costs, enabled us to deliver results which were again well up on last year's improved performance.  Our goal is to expand our branch coverage in this sector to capitalise on national customers in this market sector.

Operationally the business in Australasia has strengthened its position in the region by investing in establishing a consolidation warehouse in China.  This will fast track future sourcing initiatives while reducing the costs associated with double handling on freight transfers for all business units in the region.

In Brazil we saw strong growth in both revenue and operating profit as the economy there rebounded from a relatively weak 2009.  We expanded further into the markets we serve as the new branches opened during the last two years experienced profitable growth.  In August we acquired A.M. Supply which is based in the northern part of the state of Rio de Janeiro and will enable us to benefit from the ongoing significant investments being made in offshore oil and gas exploration and the petrochemical sector.

FINANCIAL REVIEW

Group performance

Revenue and operating profit before intangible amortisation and acquisition related costs increased by 4% to £4,829.6 million and £306.7 million respectively reflecting organic growth, the benefit of acquisitions made in the year and a positive impact from currency translation.  Currency translation had a 1% beneficial impact on the results for the year principally due to some strengthening of the US dollar, Australian dollar and Brazilian real largely offset by the weakening of the euro. Operating profit margin before intangible amortisation and acquisition related costs was 6.4%, the same as 2009. 

The following significant exchange rates applied during the year:

		Average rate		Closing rate
		2010	2009	2010	2009
US dollar		1.55	1.57	1.57	1.61
Euro		1.17	1.12	1.17	1.13

Following the revision of IFRS 3 'Business Combinations' with effect from 1 January 2010, the Group is now required to recognise transaction costs and expenses such as professional fees and adjustments to deferred consideration and payments which are contingent on the continued employment of former owners of businesses acquired as expenses in the income statement.  These acquisition related costs do not relate to the underlying performance of the entity acquired as they are a non-operational expense and, consistent with the treatment of intangible amortisation, we therefore present additional measures of profit excluding these items which is consistent with our internal measurement of performance.

Intangible amortisation and acquisition related costs of £51.0 million were up £9.2 million, principally due to £7.5 million of transaction costs and expenses and deferred consideration payments which are contingent on the continued employment of former owners of businesses acquired and a £1.7 million increase in intangible amortisation largely due to the charge relating to acquisitions made during 2010. 

The net interest charge decreased from £37.9 million in 2009 to £30.5 million in 2010 due to a lower cost of borrowing, a mark to market benefit on cash settled share options, a net financial return relating to pensions and a lower level of average net debt.  Interest cover improved to 10.1 times compared to 7.8 times in 2009.

Profit before income tax, intangible amortisation and acquisition related costs  was £276.2 million, up 7% on 2009 due to the 4% growth in operating profit before intangible amortisation and acquisition related costs and the benefit from the lower interest charge.

Tax

A tax charge at a rate of 29.0% (2009: 30.5%) has been provided on the profit before tax, intangible amortisation and acquisition related costs. Including the impact of intangible amortisation of £43.5 million, acquisition related costs of £7.5 million and the associated deferred and current tax of £13.9 million, the overall tax rate is 29.4% (2009: 31.1%). The tax rate of 29.0% is higher than the nominal UK rate of 28.0% for 2010 principally because many of the Group's operations are in countries with higher tax rates.

Profit for the year

Profit after tax increased 7% to £159.0 million.

Earnings

The weighted average number of shares increased to 323.7 million from 320.5 million due to shares issued for the scrip dividend and employee option exercises. Earnings per share were 49.1p, up 6% on 2009. After adjusting for intangible amortisation, acquisition related costs and the respective associated tax, earnings per share increased 8% to 60.6p. The intangible amortisation and associated tax are non-cash charges which are not taken into account by management when assessing the underlying performance of the business.  Similarly, the acquisition related costs and associated tax do not relate to the underlying performance of the entity acquired as they are a non-operational expense. 

Dividends

An analysis of dividends per share for the years to which they relate is shown below:

			2010	2009	Growth
Interim dividend (p)			7.15	6.65	8%
Final dividend (p)			16.20	14.90	9%
Total dividend (p)			23.35	21.55	8%
Dividend cover (times)*			2.6	2.6

*Based on adjusted earnings per share

Acquisitions

The principal acquisitions made in 2010 were Clean Care, Hamo, Weita, Silco, Juba, Global Net, A.M. Supply, Cool-Pak and Van't Veer Verpakkingen. Annualised revenue and operating profit before intangible amortisation and acquisition related costs of the businesses acquired were £153.6 million and £17.8 million respectively.  A summary of the effect of acquisitions is as follows:

	£m
Fair value of assets acquired	70.3
Goodwill	34.5
Consideration	104.8
Satisfied by:       cash consideration       deferred consideration	97.2 7.6
	104.8
Contingent payments to former owners	9.7
Net bank overdrafts acquired	6.2
Transaction costs and expenses	5.5
Total expected spend in respect of current year acquisitions	126.2
The net cash outflow in the year in respect of acquisitions comprised:
Cash consideration	97.2
Net bank overdrafts acquired	6.2
Deferred consideration in respect of prior year acquisitions	1.6
Net cash outflow in respect of acquisitions	105.0
Acquisition related costs	5.6
Total cash outflow in respect of acquisitions	110.6

Cash flow

Cash generated from operations was £307.6 million, a £15.2 million decrease from 2009, primarily due to a working capital outflow in 2010 of £12.7 million, compared to a £17.5 million inflow in 2009, partly offset by the increase in profit before tax, intangible amortisation and acquisition related costs of £18.4 million.  The working capital movements are partly attributable to a return to organic revenue growth in 2010 compared with a decline in 2009.  As a consequence, the Group's free cash flow of £174.6 million was down £16.9 million from 2009. After payment of dividends in respect of 2009, an acquisition cash outflow of £110.6 million and an £11.8 million inflow on employee share schemes, the net cash inflow of £9.7 million was used to reduce net debt. The summary cash flow for the year was as follows:

	£m
Cash generated from operations	307.6
Net capital expenditure	(22.1)
Operating cash flow	285.5
Operating cash flow to operating profit*	93%
Net interest	(31.2)
Tax	(79.7)
Free cash flow	174.6
Dividends	(66.1)
Acquisitions	(110.6)
Employee share schemes	11.8
Net cash inflow	9.7

*Before intangible amortisation and acquisition related costs

Balance sheet

Return on average operating capital employed before intangible amortisation and acquisition related costs of 54.4% was in line with 2009 due to the operating profit margin remaining constant at 6.4% combined with continued strong working capital management.  Intangible assets increased by £48.0 million to £1,244.6 million reflecting goodwill and customer relationships arising on acquisitions in the year of £86.0 million and a positive exchange impact of £5.5 million net of an amortisation charge of £43.5 million. At 31 December 2010 the Group's pension deficit was £52.3 million.  This represents a £7.5 million decrease compared to 2009, primarily due to cash contributions of £15.2 million partly offset by the service cost of £5.5 million and an actuarial loss of £2.5 million. The actuarial loss results from an increase in the liabilities, principally due to lower discount rates and changes in the mortality assumptions, partly offset by lower inflation rates and an increase in the value of pension scheme assets.  

The movements in shareholders' equity and net debt during the year were as follows:

Shareholders' equity	£m
At 1 January 2010	674.1
Profit for the year	159.0
Dividends	(66.1)
Share issuance	16.0
Other	13.4
At 31 December 2010	796.4

Net debt	£m
At 1 January 2010	(716.8)
Net cash inflow	9.7
Currency	(9.7)
At 31 December 2010	(716.8)

Net debt to EBITDA (times)

2.1

The Group continually monitors net debt and forecast cash flows to ensure that sufficient facilities are in place to meet the Group's requirements in the short, medium and long term and, in order to do so, arranges borrowings from a variety of sources. Additionally, compliance with debt covenants is monitored.  During 2010 all covenants have been complied with.

The Group has substantial committed borrowing facilities available to it comprising multi-currency credit facilities from the Group's banks and US dollar and sterling bonds.  As at 31 December 2010 the Group had undrawn committed facilities of £557.3 million.  During the next 12 months £245.5 million of the committed facilities mature and thereafter the facilities mature at various times over the period up to May 2019.  In addition, a further issue of fixed interest rate US dollar and sterling bonds was agreed in December 2010 of which £75.2 million (sterling equivalent) is due to be drawn by the Company in April 2011 with maturities of £42.1 million in April 2021 and £33.1 million in April 2023.

Based on the expected future profit generation, cash conversion and current facilities' headroom over the 12 months to March 2012, the 2010 financial statements have been prepared on the going concern basis.

Consolidated income statement

for the year ended 31 December 2010

					Growth
					Actual	Constant
			2010	2009	exchange	exchange
		Notes	£m	£m	rates	rates
Revenue		2	4,829.6	4,648.7	4%	3%
Operating profit before intangible amortisation and acquisition related costs		2	306.7	295.7	4%	3%
Intangible amortisation and acquisition related costs			(51.0)	(41.8)
Operating profit		2	255.7	253.9	1%	(1)%
Finance income		3	20.3	16.8
Finance cost		3	(50.8)	(54.7)
Profit before income tax			225.2	216.0	4%	3%
Profit before income tax, intangible amortisation and acquisition related costs			276.2	257.8	7%	6%
UK income tax			1.6	(12.1)
Overseas income tax			(67.8)	(55.0)
Total income tax		4	(66.2)	(67.1)
Profit for the year attributable to the Company's equity holders			159.0	148.9	7%	5%
Earnings per share attributable to the Company's equity holders
Basic		6	49.1p	46.4p	6%	4%
Diluted		6	48.8p	46.3p	5%	4%
Dividend per share		5	23.35p	21.55p	8%

Consolidated statement of comprehensive income

for the year ended 31 December 2010

		2010	2009
		£m	£m
Profit for the year		159.0	148.9
Other comprehensive income
Actuarial loss on pension schemes		(2.5)	(19.3)
Movement in pension schemes' minimum funding liabilities			5.5
Foreign currency translation differences for foreign operations		1.1	(55.4)
Gain taken to equity as a result of designated effective net investment hedges		2.3	8.9
Gain/(loss) recognised in cash flow hedge reserve		0.4	(6.3)
Movement from cash flow hedge reserve to income statement		1.4	7.5
Income tax credit on other comprehensive income		2.0	7.8
Other comprehensive income/(expense) for the year		4.7	(51.3)
Total comprehensive income for the year attributable to the Company's equity holders		163.7	97.6

Consolidated balance sheet

at 31 December 2010

			2010	2009
		Notes	£m	£m
Assets
Property, plant and equipment			118.1	102.8
Intangible assets		7	1,244.6	1,196.6
Investment in associates			0.5	0.5
Derivative assets			25.1	28.8
Deferred tax assets			5.9	6.9
Total non-current assets			1,394.2	1,335.6
Inventories			482.0	429.3
Income tax receivable			6.2	6.5
Trade and other receivables			690.8	677.9
Derivative assets			1.3	0.9
Cash and deposits		8	83.9	57.9
Total current assets			1,264.2	1,172.5
Total assets			2,658.4	2,508.1
Equity
Share capital			113.3	113.0
Share premium			133.9	131.7
Translation reserve			57.5	52.7
Other reserves			9.8	8.5
Retained earnings			481.9	368.2
Total equity attributable to the Company's equity holders			796.4	674.1
Liabilities
Interest bearing loans and borrowings		8	691.5	780.3
Retirement benefit obligations			52.3	59.8
Other payables			7.9	8.0
Derivative liabilities			2.2	2.6
Provisions			35.5	40.7
Deferred tax liabilities			115.4	104.0
Total non-current liabilities			904.8	995.4
Bank overdrafts		8	9.0	14.9
Interest bearing loans and borrowings		8	126.2	7.7
Income tax payable			46.4	59.4
Trade and other payables			766.3	744.4
Derivative liabilities			0.7	1.9
Provisions			8.6	10.3
Total current liabilities			957.2	838.6
Total liabilities			1,862.0	1,834.0
Total equity and liabilities			2,658.4	2,508.1

Consolidated statement of changes in equity

for the year ended 31 December 2010

	Share capital £m	Share premium £m	Translation reserve £m	Other reserves* £m	Retained earnings† £m	Total equity £m
At 1 January 2010	113.0	131.7	52.7	8.5	368.2	674.1
Profit for the year					159.0	159.0
Actuarial loss on pension schemes					(2.5)	(2.5)
Foreign currency translation differences for foreign operations			1.1			1.1
Gain taken to equity as a result of designated effective net investment hedges			2.3			2.3
Gain recognised in cash flow hedge reserve				0.4		0.4
Movement from cash flow hedge reserve to income statement				1.4		1.4
Income tax credit/(charge) on other comprehensive income			1.4	(0.5)	1.1	2.0
Total comprehensive income			4.8	1.3	157.6	163.7
2009 interim dividend					(20.2)	(20.2)
2009 final dividend					(45.9)	(45.9)
Issue of share capital	0.3	2.2				2.5
Employee trust shares					13.5	13.5
Share based payments					8.7	8.7
At 31 December 2010	113.3	133.9	57.5	9.8	481.9	796.4

At 1 January 2009	112.6	126.6	96.0	6.2	287.8	629.2
Profit for the year					148.9	148.9
Actuarial loss on pension schemes					(19.3)	(19.3)
Movement in pension schemes' minimum funding liabilities					5.5	5.5
Foreign currency translation differences for foreign operations			(55.4)			(55.4)
Gain taken to equity as a result of designated effective net investment hedges			8.9			8.9
Loss recognised in cash flow hedge reserve				(6.3)		(6.3)
Movement from cash flow hedge reserve to income statement				7.5		7.5
Income tax credit on other comprehensive income			3.2	1.1	3.5	7.8
Total comprehensive (expense)/income			(43.3)	2.3	138.6	97.6
2008 interim dividend					(20.6)	(20.6)
2008 final dividend					(45.3)	(45.3)
Issue of share capital	0.4	5.1				5.5
Employee trust shares					2.8	2.8
Share based payments					4.9	4.9
At 31 December 2009	113.0	131.7	52.7	8.5	368.2	674.1

* Other reserves comprise merger reserve of £2.5m (2009: £2.5m), capital redemption reserve of £8.6m

(2009: £8.6m) and cash flow hedge reserve of £(1.3)m (2009: £(2.6)m).

^† Retained earnings comprise earnings of £681.4m (2009: £581.2m) and own shares of £(199.5)m

(2009: £(213.0)m).

Consolidated cash flow statement

for the year ended 31 December 2010

			2010	2009
		Notes	£m	£m
Cash flow from operating activities
Profit before income tax			225.2	216.0
Adjustments:
depreciation			25.5	23.5
intangible amortisation and acquisition related costs			51.0	41.8
share based payments			4.7	4.6
Working capital movement			(12.7)	17.5
Finance income			(20.3)	(16.8)
Finance cost			50.8	54.7
Provisions and pensions			(19.1)	(17.4)
Other			2.5	(1.1)
Cash generated from operations			307.6	322.8
Cash outflow from acquisition related costs			(5.6)
Income tax paid			(79.7)	(75.0)
Cash inflow from operating activities			222.3	247.8
Cash flow from investing activities
Interest received			2.6	1.6
Purchase of property, plant and equipment			(23.4)	(23.9)
Sale of property, plant and equipment			1.3	3.0
Purchase of businesses		9	(105.0)	(6.4)
Cash outflow from investing activities			(124.5)	(25.7)
Cash flow from financing activities
Interest paid			(33.8)	(37.0)
Dividends paid			(66.1)	(62.3)
Increase/(decrease) in loans			15.1	(131.5)
Realised gains/(losses) on foreign exchange contracts			5.3	(7.3)
Net proceeds from employee shares			11.8	3.5
Cash outflow from financing activities			(67.7)	(234.6)
Exchange gain/(loss) on cash and cash equivalents			1.8	(2.0)
Increase/(decrease) in cash and cash equivalents			31.9	(14.5)
Cash and cash equivalents at start of year			43.0	57.5
Increase/(decrease) in cash and cash equivalents			31.9	(14.5)
Cash and cash equivalents at end of year		8	74.9	43.0

Notes

1. Basis of preparation

The consolidated financial statements for the year ended 31 December 2010 have been approved by the directors and prepared in accordance with EU endorsed International Financial Reporting Standards ('IFRS') and interpretations of the International Financial Reporting Interpretations Committee ('IFRIC').  The consolidated financial statements have been prepared on a going concern basis and under the historical cost convention with the exception of certain items which are measured at fair value.

Bunzl plc's 2010 Annual Report will be published during March 2011.  The financial information set out herein does not constitute the Company's statutory accounts for the year ended 31 December 2010 but is derived from those accounts and the accompanying directors' report.  Statutory accounts for 2010 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 20 April 2011.  The auditors have reported on those accounts; their report was unqualified and did not contain statements under Section 495 (4)(b) of the Companies Act 2006.

The comparative figures for the year ended 31 December 2009 are not the Company's statutory accounts for the financial year but are derived from those accounts which have been reported on by the Company's auditors and delivered to the Registrar of Companies.  The report of the auditors was unqualified and did not contain statements under Section 495 (4)(b) of the Companies Act 2006. 

IFRS 3 'Business Combinations' was revised with effect from 1 January 2010, the principal effect of which for the Group has been to change the accounting treatment of certain acquisition related costs.  IFRS 3 now requires that transaction costs and expenses such as professional fees are expensed and charged to the income statement and that adjustments to deferred consideration and payments which are contingent on the continued employment of former owners of businesses acquired are also recognised in the income statement.  Prior to 1 January 2010 these items were treated as part of the cost of investment and, as a result, were capitalised with any subsequent changes being accounted for as an adjustment to goodwill.  In accordance with the revised requirements of IFRS 3, the comparative figures for the year ended 31 December 2009 have not been restated.

2. Segment analysis

	North America	UK & Ireland	Continental Europe	Rest of the World	Corporate	Total
Year ended 31 December 2010	£m	£m	£m	£m	£m	£m
Revenue	2,621.0	1007.1	936.4	265.1		4,829.6
Operating profit/(loss) before intangible amortisation and acquisition related costs	160.2	59.5	79.9	23.8	(16.7)	306.7
Intangible amortisation	(7.5)	(7.8)	(24.2)	(4.0)	-	(43.5)
Acquisition related costs	(1.0)	-	(6.2)	(0.3)	-	(7.5)
Operating profit/(loss)	151.7	51.7	49.5	19.5	(16.7)	255.7
Finance income						20.3
Finance cost						(50.8)
Profit before income tax						225.2
Profit before income tax, intangible amortisation and acquisition related costs						276.2
Income tax						(66.2)
Profit for the year						159.0

	North America	UK & Ireland	Continental Europe	Rest of the World	Corporate	Total
Year ended 31 December 2009	£m	£m	£m	£m	£m	£m
Revenue	2,454.1	1,068.4	910.2	216.0		4,648.7
Operating profit/(loss) before intangible amortisation	155.3	57.8	81.7	17.0	(16.1)	295.7
Intangible amortisation	(7.3)	(7.9)	(23.2)	(3.4)	-	(41.8)
Operating profit/(loss)	148.0	49.9	58.5	13.6	(16.1)	253.9
Finance income						16.8
Finance cost						(54.7)
Profit before income tax						216.0
Profit before income tax and intangible amortisation						257.8
Income tax						(67.1)
Profit for the year						148.9

Acquisition related costs for the year ended 31 December 2010 include transaction costs and expenses of £5.5m and deferred consideration payments of £2.0m which are contingent on the continued employment of former owners of businesses acquired.

3. Finance income/(cost)

			2010	2009
			£m	£m
Interest on deposits			1.3	0.9
Interest income from foreign exchange contracts			1.1	0.8
Expected return on pension scheme assets			16.8	14.7
Other finance income			1.1	0.4
Finance income			20.3	16.8
Interest on loans and overdrafts			(31.9)	(36.1)
Interest expense from foreign exchange contracts			(2.0)	(2.4)
Interest charge on pension scheme liabilities			(16.3)	(15.2)
Fair value gain on US dollar bonds in a hedge relationship			0.8	8.7
Fair value loss on interest rate swaps in a hedge relationship			(0.8)	(8.7)
Foreign exchange gain/(loss) on intercompany funding			17.9	(31.9)
Foreign exchange (loss)/gain on external debt not in a hedge relationship			(18.0)	32.7
Other finance expense			(0.5)	(1.8)
Finance cost			(50.8)	(54.7)

The foreign exchange gain/(loss) on intercompany funding arises as a result of foreign currency intercompany loans and deposits.  This is substantially matched by external debt to minimise this foreign currency exposure in the income statement.

4. Income tax

A tax charge of 29.0% (2009: 30.5%) on the profit on underlying operations (excluding the impact of intangible amortisation of £43.5m (2009: £41.8m), acquisition related costs of £7.5m and associated deferred and current tax of £13.9m (2009: £11.6m)) has been provided.  Including the impact of intangible amortisation, acquisition related costs and the respective associated tax, the overall rate is 29.4% (2009: 31.1%).

5. Dividends

				2010	2009
				£m	£m
2008 interim					20.6
2008 final					45.3
2009 interim				21.4
2009 final				48.2
Total				69.6	65.9

Total dividends per share for the year to which they relate are:

				Per share
			2010	2009
Interim			7.15p	6.65p
Final			16.20p	14.90p
Total			23.35p	21.55p

The 2010 interim dividend of 7.15p per share was paid on 4 January 2011 and comprised £16.6m of cash and 0.9m of scrip shares.

The 2010 final dividend of 16.2p per share will be paid on 1 July 2011 to shareholders on the register at the close of business on 13 May 2011.

6. Earnings per share

			2010	2009
			£m	£m
Profit for the year			159.0	148.9
Adjustment			37.1	30.2
Adjusted profit*			196.1	179.1
Basic weighted average ordinary shares in issue (million)			323.7	320.5
Dilutive effect of employee share plans (million)			2.2	0.9
Diluted weighted average ordinary shares (million)			325.9	321.4
Basic earnings per share			49.1p	46.4p
Adjustment			11.5p	9.5p
Adjusted earnings per share*			60.6p	55.9p
Diluted basic earnings per share			48.8p	46.3p
Adjustment			11.4p	9.4p
Adjusted diluted earnings per share*			60.2p	55.7p

* Adjusted profit, adjusted earnings per share and adjusted diluted earnings per share exclude the charge for intangible amortisation, acquisition related costs and the respective associated tax.  The intangible amortisation and associated tax are non-cash charges which are not taken into account by management when assessing the underlying performance of the business.  Similarly, the acquisition related costs and associated tax do not relate to the underlying performance of the entity acquired as they are a non-operational expense.  Accordingly, such charges are removed in calculating the adjusted earnings per share on which management assess the performance of the Group.

7. Intangible assets

		2010	2009
Goodwill		£m	£m
Beginning of year		749.4	785.9
Acquisitions		34.5	0.4
Deferred consideration		-	(2.1)
Currency translation		5.1	(34.8)
End of year		789.0	749.4
		2010	2009
Customer relationships		£m	£m
Cost
Beginning of year		610.9	646.7
Acquisitions		51.5	3.3
Currency translation		(1.4)	(39.1)
End of year		661.0	610.9
Amortisation
Beginning of year		163.7	131.3
Charge in year		43.5	41.8
Currency translation		(1.8)	(9.4)
End of year		205.4	163.7
Net book value at 31 December		455.6	447.2
Total net book value of intangible assets at 31 December		1,244.6	1,196.6

Both goodwill and customer relationships have been acquired as part of business combinations.  Customer relationships are amortised over their estimated useful lives which range from 10 to 19 years.

8. Cash and cash equivalents and net debt

	2010		2009
	£m		£m
Cash at bank and in hand	57.4		47.2
Short term deposits repayable in less than three months	26.5		10.7
Cash and deposits	83.9		57.9
Bank overdrafts	(9.0)		(14.9)
Cash and cash equivalents	74.9		43.0
Current liabilities	(126.2)		(7.7)
Non-current liabilities	(691.5)		(780.3)
Derivative assets - fair value of interest rate swaps on fixed interest rate borrowings	26.0		28.2
Interest bearing loans and borrowings	(791.7)		(759.8)
Net debt	(716.8)		(716.8)
	2010		2009
Movement in net debt	£m		£m
Beginning of year	(716.8)		(870.7)
Net cash inflow	9.7		126.3
Realised gains/(losses) on foreign exchange contracts	5.3		(7.3)
Currency translation	(15.0)		34.9
End of year		(716.8)		(716.8)

9. Acquisitions

2010

The principal acquisitions made in the year ended 31 December 2010 were Clean Care, Hamo, Weita, Silco, Juba, Global Net, A.M. Supply, Cool-Pak and Van't Veer Verpakkingen.

Clean Care, a business principally engaged in the supply of cleaning and hygiene consumable products in Denmark, was acquired on 15 January 2010.  Hamo, a distributor of catering disposables and light catering equipment to customers in both the public and private sectors, was acquired on 12 February 2010.  Weita, a supplier of cleaning and hygiene, foodservice, retail, healthcare and safety consumables products to both end users and redistributors in Switzerland, was acquired on 12 March 2010.  Silco, a supplier of foodservice disposables in Israel, was acquired on 21 April 2010.  Juba, a supplier of personal protection equipment to redistributors throughout Spain, was acquired on 27 May 2010.  Global Net, which sells cleaning and hygiene consumables and equipment to contract cleaners, local authorities and other industrial customers throughout the Walloon region of Belgium, was acquired on 1 July 2010.  A.M. Supply, which supplies personal protection equipment to the oil and petrochemical sector in the state of Rio de Janeiro in Brazil, was acquired on 26 August 2010.  Cool-Pak, a leading distributor of plastic and pulp packaging to fruit and vegetable growers in the US, was acquired on 30 August 2010.  Van't Veer Verpakkingen, a business supplying cleaning and hygiene and cleaning disposable products in the Netherlands predominantly to the healthcare sector, was acquired on 1 October 2010.

Acquisitions have been accounted for under the purchase method of accounting, involving the purchase of 100% of the acquiree's share capital or, as the case may be, all of the relevant assets of the businesses acquired.  Part of the Group's strategy is to grow through acquisition.  The Group has developed a process to assist with the identification of the fair values of the assets acquired and liabilities assumed, including the separate identification of intangible assets in accordance with IFRS 3 'Business Combinations'.  This formal process is applied to each acquisition and involves an assessment of the assets acquired and liabilities assumed with assistance provided by external valuation specialists where appropriate.  Until this assessment is complete, the allocation period remains open up to a maximum of 12 months from the relevant acquisition date.  As at 31 December 2010, the allocation period for all acquisitions completed since 1 January 2010 remained open and accordingly the fair values presented are provisional.

Adjustments are made to the assets acquired and liabilities assumed during the allocation period to the extent that further information and knowledge come to light that more accurately reflect conditions at the acquisition date.  To date the adjustments made have impacted assets acquired to reflect more accurately the estimated realisable or settlement value.  Similarly adjustments have been made to acquired liabilities to record onerous commitments or other commitments existing at the acquisition date but not recognised by the acquiree.  Adjustments have also been made to reflect the associated tax effects.  The net impact from these adjustments on acquired net assets reported in the Group's 2010 statutory accounts was £nil.

The consideration paid or payable in respect of acquisitions comprises amounts paid on completion, deferred consideration and payments which are contingent on the continued employment of former owners of businesses acquired.  IFRS 3 requires that any such payments that are contingent on future employment are charged to the income statement.  All other consideration has been allocated against the identified net assets, with the balance recorded as goodwill.  Transaction costs and expenses such as professional fees are charged to the income statement.  The acquisitions provide opportunities for further development of the Group's activities and create enhanced returns.  Such opportunities and the workforces inherent in each of the acquired businesses do not translate to separately identifiable intangible assets but do represent much of the assessed value that supports the recognised goodwill.

A summary of the effect of acquisitions is detailed below:

	Book value at  acquisition £m	Provisional fair value adjustments £m	Fair value of assets acquired £m
Intangible assets		51.5	51.5
Property, plant and equipment	18.3	(0.4)	17.9
Inventories	23.3	(4.4)	18.9
Trade and other receivables	26.1	(0.7)	25.4
Trade and other payables	(16.4)	(1.6)	(18.0)
Net bank overdrafts	(6.2)		(6.2)
Provisions for liabilities and charges		(3.1)	(3.1)
Tax and deferred tax	(3.0)	(13.1)	(16.1)
	42.1	28.2	70.3
Goodwill			34.5
Consideration			104.8
Satisfied by:
cash consideration			97.2
deferred consideration			7.6
			104.8
Contingent payments to former owners			9.7
Net bank overdrafts acquired			6.2
Transaction costs and expenses			5.5
Total expected spend in respect of current year acquisitions			126.2
The net cash outflow in the year in respect of acquisitions comprised:
Cash consideration			97.2
Net bank overdrafts acquired			6.2
Deferred consideration in respect of prior year acquisitions			1.6
Net cash outflow in respect of acquisitions			105.0
Acquisition related costs			5.6
Total cash outflow in respect of acquisitions			110.6

Acquisitions made in the year ended 31 December 2010 contributed £84.4m to the Group's revenue and £9.9m to the Group's operating profit before intangible amortisation and acquisition related costs.

The estimated contributions of acquired businesses to the results of the Group, as if the acquisitions had been made at the beginning of the year, are as follows:

	£m
Revenue	153.6
Operating profit before intangible amortisation and acquisition related costs	17.8

2009

The principal acquisitions made during the year ended 31 December 2009 were Industrial Supplies, a distributor of cleaning and hygiene products throughout the east of England, and W.K. Thomas, a distributor of foodservice products to the catering and airline sectors within the UK, both acquired on 19 March 2009.  The net cash outflow in respect of acquisitions made in 2009 was £6.4m. 

10. Related party transactions

The Group has identified the directors of the Company, the Group pension schemes and its key management as related parties for the purpose of IAS 24 'Related Party Disclosures'.  There have been no transactions with those related parties during the year ended 31 December 2010 that have materially affected the financial position or performance of the Group during this period.  All transactions with subsidiaries are eliminated on consolidation.

11. Principal risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group's business, financial condition or results of operations.  The Group has specific policies and procedures which are designed to identify, evaluate, manage and mitigate business risk.  The principal risks and uncertainties faced by the Group and the steps taken by the Group to mitigate such risks and uncertainties include the following:

Economic environment - The Group's business is partially dependent on general economic conditions in the US, the UK, France and other important markets.  A significant deterioration in these conditions could have an adverse effect on the Group's business and results of operations.

The Group's operations and its customer base are diverse, with a variable and flexible cost base, and many of the sectors in which it competes are traditionally, by their nature, relatively resilient to economic downturns.

Competitive pressures - The Group operates in highly competitive markets and faces competition from international companies as well as national, regional and local companies in the countries in which it operates.  Increased competition and unanticipated actions by competitors or customers could lead to an adverse effect on results and hinder the Group's growth potential, either through pressure on margins or loss of customers.

The Group seeks to remain competitive by maintaining high service levels and close contacts with its customers to ensure that their needs and demands are being met satisfactorily, developing a national presence in the markets in which the Group operates and maintaining strong relationships with a variety of different suppliers thereby enabling the Group to offer a broad range of products to its customers.

Product price changes - The purchase price and availability of products distributed by the Group can fluctuate from time to time, thereby potentially affecting the results of operations.  Adverse economic conditions resulting in a period of commodity price deflation and increased levels of imported products may lead to reductions in the price and value of the Group's products.  If this were to occur, the Group's revenue and, as a result, its profits, could be reduced and the value of inventory held in stock may not be fully recoverable.

The Group endeavours, whenever possible, to pass on price increases from its suppliers to its customers and to source its products from a number of different suppliers so that it is not dependent on any one source of supply for any particular product.  Increased focus on the Group's own import programmes and brands, together with the reinforcement of the Group's service and product offering to customers, helps to minimise the impact of price deflation.

The Group mitigates against the risk of holding overvalued inventory in a deflationary environment by managing stock levels efficiently and ensuring they are kept to a minimum.

Foreign exchange - The majority of the Group's sales are made and income is earned in US dollars, euros and other foreign currencies.  As a result, movements in exchange rates may have a material translation impact on the Group's reported results. 

The Group believes that the benefits of its geographical spread outweigh the associated risks. 

The Group may also be subject to transaction exposures where products are purchased in one currency and sold in another and movements in exchange rates may also adversely affect the value of the Group's net assets.

The majority of the Group's transactions are carried out in the functional currency of the Group's operations.  As a result, transaction exposures are usually limited and exchange rate fluctuations have minimal effect on the quality of earnings unless there is a sudden and significant adverse movement of a foreign currency in which products are purchased which may lead to a delay in passing on to customers the resulting price increases.

Acquisitions - A significant portion of the Group's historical growth has been achieved through the acquisition of businesses and the Group's growth strategy includes additional acquisitions.  Although the Group operates in a number of fragmented markets which provide future acquisition opportunities, there can be no assurance that the Group will be able to make acquisitions in the future or that any acquisitions made will be successful.

The Group's acquisition strategy is to focus on those businesses which operate in sectors where it has or can develop competitive advantage and which have good growth opportunities.  The Group continually reviews acquisition targets and has established processes and procedures with regard to detailed pre-acquisition due diligence and post-acquisition integration.

In the longer term, if an acquisition consistently underperforms compared to its original investment case, there is a risk that this will lead to a permanent impairment in the carrying value of the intangible assets attributed to that acquisition.

The Group endeavours to maximise the performance of an acquisition through the recruitment and retention of high quality management combined with effective strategic planning, investment in resources and infrastructure and regular reviews of performance by both business area and Group management.

Financial liquidity and debt covenants - The Group needs continuous access to funding in order to meet its trading obligations, to support investment in organic growth and to make acquisitions when appropriate opportunities arise.  There is a risk that the Group may be unable to obtain the necessary funds when required or that such funds will only be available on unfavourable terms. 

The Group arranges a mixture of borrowings from different sources and continually monitors net debt and forecast cash flows to ensure that it will be able to meet its financial obligations as they fall due and that sufficient facilities are in place to meet the Group's requirements in the short, medium and long term.

The Group's borrowing facilities include a requirement to comply with certain specified covenants in relation to the level of net debt and interest cover.  A breach of these covenants could result in a significant proportion of the Group's borrowings becoming repayable immediately.

Compliance with the Group's biannual debt covenants is monitored on a monthly basis based on the management accounts.  Sensitivity analyses using various scenarios are applied to forecasts to assess their impact on covenants.

Business continuity - The Group would be affected if there was a significant failure of its major distribution facilities or information systems.

The Group seeks to reduce the impact of facilities' failure through the use of multi-site facilities with products stocked in more than one location and the impact of information systems' failure through the adoption of detailed back up plans which are periodically tested and which would be implemented in the event of any such failure.

Laws and regulations - The international nature of the Group's operations exposes it to potential claims as the Group is subject to a broad range of laws and regulations in each of the jurisdictions in which it operates. 

Although the Group does not operate in particularly litigious market sectors, it has in place processes to report, manage and mitigate against third party litigation using external advisers where necessary. 

In addition the Group faces potential claims from customers in relation to the supply of defective products or breaches of their contractual arrangements.  The sourcing of products from lower cost countries increases the risk of the Group being unable to recover any potential losses relating thereto from the relevant supplier.

The use of reputable suppliers and internal quality assurance and quality control procedures reduce the risks associated with defective products.

12. Forward-looking statements

This announcement contains certain statements about the future outlook for the Group.  Although the Company believes that the expectations are based on reasonable assumptions, any statements about future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

13. Responsibility statements

The Annual Report and financial statements comply with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority in respect of the requirement to produce an annual financial report.

We confirm on behalf of the Board that to the best of our knowledge:

·      the Group and parent company financial statements have been prepared in accordance with the applicable set of accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

·      the Annual Report and financial statements include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

On behalf of the Board

Michael Roney                         Brian May

Chief Executive                          Finance Director

28 February 2011

 

END

 

 

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