Bunzl Regulatory News (BNZL)

Monday 25 February 2019

ANNUAL RESULTS ANNOUNCEMENT

Bunzl plc, the specialist international distribution and services Group, today publishes its annual results for the year ended 31 December 2018.

Highlights include:

· Good increases in revenue, adjusted operating profit* and adjusted profit before income tax*

· Adjusted earnings per share* increased by 12% at constant exchange rates to 129.6p

· Strong organic revenue growth of 4.3% with all business areas contributing growth of 4% or more

· Group operating margin* of 6.8%, down 10 basis points principally due to decreases in North America and UK & Ireland, partly offset by increases in Continental Europe and Rest of the World

· Committed acquisition spend of £183 million, following a record year in 2017 (committed spend of £616 million), and the acquisition of Liberty Glove & Safety announced today

· Return on average operating capital of 50.7% with return on invested capital of 15.0%

· Continued strong cash conversion* of 94%

· 26 year track record of dividend growth continues with a 9% increase in the dividend for the year

* Alternative performance measure (see Note 1)

Commenting on today's results, Frank van Zanten, Chief Executive of Bunzl, said:

"Bunzl has once again delivered another good set of results with adjusted earnings per share up 12% at constant exchange rates. The strength, resilience and reliability of our consistent business model and strategy, together with the compounding effect of our ability to reinvest our strong cash flow to take advantage of market consolidation opportunities, have enabled Bunzl to produce a strong long term performance.

Looking forward, despite mixed macroeconomic conditions, with an active pipeline of acquisition opportunities we believe that the prospects of the Group are positive due to its strong market position and well established and successful strategy to grow the business both organically and by acquisition."

Business area highlights:

North America (58% of revenue and 50% of adjusted operating profit†)

· Revenue increase driven by strong organic growth and impact of acquisitions

· Reduction in margin from significant business previously won in grocery and operating cost pressures

· More focused and streamlined organisation structure implemented in grocery and redistribution

· DDS successfully integrated with synergies achieved

· Strong growth in safety from improving market conditions, boosted by acquisition of Revco

· Growth in agriculture supported by acquisition of Monte Package Company

Continental Europe (20% of revenue and 28% of adjusted operating profit†)

· Substantial increases in revenue and profit with operating margin up

· Significant growth in France due to integration of Hedis and strong performances in safety and foodservice, partly offset by weaker performance in cleaning & hygiene and disposal of OPM

· Good performance in the Netherlands from new customer wins and acquisition of QS

· Expansion in Scandinavia with entry into Norway through acquisition of Enor and purchase of CM Supply in Denmark

· Strong performances in Spain and Turkey with increased levels of profitability

UK & Ireland (14% of revenue and 13% of adjusted operating profit†)

· Strong revenue growth but operating margin impacted by challenging market conditions

· Trading in safety affected by difficult market but good performance in cleaning & hygiene

· Strong revenue growth in grocery and retail across all businesses, partly offset by sale of non-core marketing services business

· Growth in hospitality from existing customers and the acquisition of Aggora

· Growth in healthcare despite changing market in NHS acute sector

· Strong growth in Ireland

Rest of the World (8% of revenue and 9% of adjusted operating profit†)

· Strong overall sales and profit growth with operating margin up

· Strong performance in Latin America

· Position in safety in Brazil further strengthened through recent purchase of Volk do Brasil

· Improvement in performance in Australasia

* Alternative performance measure (see Note 1)

† Before corporate costs (see Note 2)

Enquiries:

Note:

A live webcast of today's presentation to analysts will be available on www.bunzl.com commencing at 9.30 am.

CHAIRMAN'S STATEMENT

Results

I am pleased to report that Bunzl has produced another good set of results for 2018 against the background of variable macroeconomic and market conditions across the countries and sectors in which we operate.

Group revenue increased by 6% to £9,079.4 million (2017: £8,580.9 million) and adjusted operating profit was up 4% to £614.0 million (2017: £589.3 million). Adjusted earnings per share were 129.6p (2017: 119.4p), an increase of 9%.

Overall currency translation movements, principally the strengthening of sterling against the US dollar, had a negative impact on the reported Group growth rates at actual exchange rates. At constant exchange rates, revenue increased by 9% and adjusted operating profit rose by 7% with the Group operating margin down 10 basis points at 6.8%. Adjusted earnings per share were up 12%.

Return on average operating capital decreased from 53.1% in 2017 to 50.7%, principally driven by a lower return in the underlying business, partly offset by the positive impact of acquisitions net of disposals and exchange rate movements. Return on invested capital of 15.0% was down from 16.0% in 2017 as a result of the impact of recent acquisitions and disposals, a lower return in the underlying business and an adverse impact from exchange rate movements.

Dividend

The Board is recommending a final dividend of 35.0p. This brings the total dividend for the year to 50.2p, up 9% compared to 2017. Shareholders will again have the opportunity to participate in our dividend reinvestment plan.

Strategy

Our consistent and proven strategy of developing the business through organic growth, consolidating the markets in which we compete through focused acquisitions and continuously improving the quality of our operations and making our businesses more efficient has delivered another successful year for Bunzl.

We seek to achieve organic growth by continually redefining and deepening our commitment to our customers. We apply our resources, knowledge and expertise to offer an efficient and cost effective one-stop-shop solution to enable our customers to reduce or eliminate the hidden costs of sourcing and distributing a broad range of goods that are essential to the successful operation of their businesses but which they do not themselves resell. By doing so, combined with the provision of a variety of value-added, innovative, sustainable and customised service solutions, our customers are able to focus on their core businesses and achieve purchasing efficiencies and savings, while at the same time free up working capital, improve their distribution capabilities, reduce carbon emissions and simplify their internal administration.

Acquisition activity continued in 2018, albeit at a slower pace compared to the record year of 2017. Excluding Aggora in the UK and Talge in Brazil, which we agreed to acquire in 2017 and completed at the beginning of January 2018, but including Volk do Brasil which we agreed to acquire in October 2018 and completed in January 2019, we made six acquisitions in 2018. The total committed spend for these businesses was £183 million which added annualised revenue of £148 million.

During the first half of the year we also completed the disposal of two non-core businesses which were no longer considered to be a strategic fit within the portfolio of the Group's businesses. OPM was involved in the sale of SodaStream products to retailers in France and the marketing services business in the UK had limited opportunities to expand overseas. The aggregate annualised revenue of both businesses was £94 million and the cash consideration received was £59 million.

Investment

We have continued to invest in the capital base of the Group through the expansion and improvement of our facilities, consolidating our warehouse footprint to make it more efficient and developing and enhancing our IT systems and digital platforms. Through this investment we are able to support our growth strategy and improve our service offering which in turn helps us to retain a competitive advantage.

Corporate responsibility

Our approach to corporate responsibility ('CR') is guided by a central framework of policies but it is our individual businesses that are empowered to identify what their CR priorities are and how to make improvements year-on-year. Our experts and champions in the business shape local practices and ensure our operations run responsibly and ethically over the long term. During 2018 we continued to make improvements in our CR approach by undertaking a quantitative analysis of material social risks in our global supply chain. In addition, the quality assurance/quality control team in Shanghai undertook a record number of audits of the working practices of our key Asian suppliers and continued to carry out audits with the assistance of third party specialists in a number of countries outside of Asia which have been identified as having medium levels of social risk.

We have continued to work with customers in our quest to be responsible suppliers of more sustainable disposable packaging and reduce their waste footprints while also expanding our range of alternative sustainable products. Our unique one-stop-shop offering also actively contributes to the sustainable footprint of our customers' businesses by consolidating and thereby reducing the number of product deliveries.

People

In 2018 we conducted our biennial global employee engagement survey which is an important tool in developing our people standards and the behaviours and attitudes we expect of ourselves. We were pleased with the overall positive results and in 2019 our businesses will implement their local action plans for further enhancing engagement with our employees. We believe that diversity across Bunzl drives better performance and a stronger business. Our revised and refreshed senior leadership development programme that brings together employees from different cultures, backgrounds and nationalities is launching in 2019 and will further help us to develop our talent pipeline for future growth. We also encourage our people to use their skills to benefit the communities within which they work. Many volunteer their time and skills to support causes and charities they feel passionate about.

I would like to thank all our employees for their contribution to the Group's success in the past year and for their unwavering dedication and commitment.

Board

Patrick Larmon, who had been an executive director of the Company and Chief Executive Officer of the North America business area since 2004, retired from the Board and the Company on 31 December 2018. Jean-Charles Pauze, who had been a non-executive director since January 2013, also retired from the Board at the end of the year. We thank Pat and Jean-Charles for their significant contribution to our success.

I myself have been a director of the Company for nine years, having joined the Board in January 2010, becoming Chairman in March of that year. In recognition of the new provisions of the recently revised Corporate Governance Code, we have started a process to identify and appoint my successor, led by Vanda Murray, our Senior Independent Director. Subject thereto, and taking into account the guidance in the revised Code, it is presently the Board's intention that I should remain as Chairman until the Annual General Meeting to be held in 2020 in order to provide sufficient time to complete this process in an orderly and considered manner and to oversee a successful handover.

Chief Executive's REVIEW

Operating performance

With 87% of the Group's revenue generated outside the UK, the strengthening of sterling against many currencies, particularly the US dollar, has had a negative translation impact of approximately 3% on the Group's reported results. As in previous years, the operations, including the relevant growth rates and changes in operating margins, are therefore reviewed below at constant exchange rates to remove the distorting impact of these currency movements. Changes in the level of revenue and profits at constant exchange rates have been calculated by retranslating the results for 2017 at the average rates used for 2018. Unless otherwise stated, all references in this review to operating profit are to adjusted operating profit while operating margin refers to adjusted operating profit as a percentage of revenue. Details of the adjustments made to operating profit are set out in Note 1.

Revenue increased 9% (6% at actual exchange rates) to £9,079.4 million due to the benefit of acquisitions, partly offset by the impact of disposals, as well as strong organic growth of 4.3% with good contributions from all business areas. Operating profit was £614.0 million, an increase of 7% (4% at actual exchange rates). Operating margin of 6.8% was down 10 basis points at both constant and actual exchange rates, principally due to decreases in North America and UK & Ireland, partly offset by increases in Continental Europe and Rest of the World.

In North America revenue rose 8% (4% at actual exchange rates) due to the impact of organic growth together with the effect of acquisitions, while operating profit increased 3% (0% at actual exchange rates) as the operating margin declined 30 basis points at both constant and actual exchange rates to 6.0%, principally due to the impact of the significant additional lower margin grocery business which was fully absorbed during the second quarter of 2018 and higher operating costs. Revenue in Continental Europe rose 12% at both constant and actual exchange rates as a result of organic growth and the impact of acquisitions, partly offset by the disposal of OPM in France in February 2018. Operating profit was up 18% (17% at actual exchange rates) as the operating margin improved 50 basis points at constant exchange rates (40 basis points at actual exchange rates) to 9.8% principally due to the impact of higher margin acquisitions. In UK & Ireland revenue was up 6% due to the impact of organic growth and acquisitions, partly offset by the disposal of the marketing services business in June 2018, but operating profit decreased 2% with the operating margin reducing by 50 basis points to 6.9% principally due to challenging market conditions in the UK. In Rest of the World revenue increased 12% (3% at actual exchange rates) and operating profit was up 15% (5% at actual exchange rates) as a result of both organic growth and acquisitions, with the business area operating margin increasing 20 basis points (10 basis points at actual exchange rates) to 7.6%.

Adjusted profit before income tax was £559.0 million, up 6% (3% at actual exchange rates) due to the growth in operating profit, partly offset by an increase in the net interest charge. Profit before income tax was £424.8 million, an increase of 7% (4% at actual exchange rates). Basic earnings per share were 8% higher (4% at actual exchange rates) at 98.4p. Adjusted earnings per share were 129.6p, an increase of 12% (9% at actual exchange rates), principally due to the increase in adjusted profit before income tax and a significantly reduced effective tax rate largely caused by the reduction in the US federal tax rate from 1 January 2018.

Operating cash flow remained strong with cash conversion (the ratio of operating cash flow to adjusted operating profit) at 94%. The ratio of net debt to EBITDA calculated at average exchange rates decreased from 2.3 times at the end of 2017 to 2.0 times.

Over the course of the year, I am delighted that we have been able to make significant progress on investment in IT and digital projects and have rolled out further digital platforms which have enhanced our customers' experience when interacting with our businesses. We have also continued to focus on collaboration and sharing of best practice around the world which has brought additional benefits for our customers. Finally, I am pleased that we have been able to work in partnership with both customers and suppliers to develop the sustainability agenda by providing specialist advice and assistance promoting alternatives to plastic products and supporting the development of innovative products to increase the compostability and recyclability of many of the items that we sell.

Acquisitions

During the year we agreed to purchase six businesses for a total committed spend of £183 million. These exclude Aggora and Talge, which we agreed to purchase in 2017 and completed in early January 2018, but include Volk do Brasil which we agreed to acquire in October 2018 and completed in January 2019.

In January 2018 we acquired Revco which supplies workplace safety and personal protection equipment to redistributors in the US. Revenue in 2017 was £28 million.

QS, a provider of hygiene solution services primarily for washrooms in the Netherlands with a focus on customers operating in the government, healthcare and foodservice sectors, was acquired in March. Revenue in 2017 was £5 million. Monte Package Company, which was also purchased in March, is engaged in the distribution of a variety of packaging products to fresh food growers and packers, principally in the Eastern US. Revenue in 2017 was £44 million.

Enor in Norway was purchased in July. The business is engaged in the supply of a broad range of catering equipment to end user customers in Norway. Enor represents our first step into the Norwegian market and means that we now have businesses operating in 31 countries globally. Revenue in 2017 was £27 million.

During October we entered into an agreement to acquire Volk do Brasil which is a leading distributor of personal protection equipment, principally gloves, to redistributors and end users in Brazil. As mentioned above, the acquisition was completed in January 2019. Revenue in 2018 was £42 million.

In early December we purchased CM Supply in Denmark. The business is engaged in the supply of own brand and customised foodservice products and packaging to customers operating in the hotel, restaurant and catering sector. Revenue in 2018 was £4 million.

Today we are announcing the acquisition of Liberty Glove & Safety, a supplier of safety products to distributors based in the US. The business supplies a full range of personal protection equipment with a focus on gloves. Revenue in 2018 was £70 million.

Disposals

During the year we sold OPM in France and our marketing services business in the UK. These were non-core businesses that were no longer considered to be a strategic fit within the Group. The aggregate revenue of these businesses in 2017 was £94 million. The total cash consideration received was £59 million with a pre-tax profit on disposal of £14 million and an associated tax charge of £3 million which have not been included in calculating adjusted profit before income tax and adjusted earnings per share.

North America

* Alternative performance measure (see Note 1)

In North America, revenue increased by 8% to £5,277.8 million due to strong organic growth of more than 4% as well as the impact of recent acquisitions, with operating profit increasing by 3% to £317.1 million.

Organic revenue growth was achieved across all businesses with the largest contribution from the significant additional grocery business won, albeit at a below average operating margin, towards the end of 2016. This new business commenced in the first half of 2017 and was fully absorbed during the second quarter of 2018. Strong organic sales growth was also delivered by our businesses serving the redistribution, safety and processor sectors. As anticipated, the additional grocery business, combined with inflationary pressures on our operating costs across all sectors, particularly against the backdrop of historically low unemployment rates, contributed to a reduction in the operating margin which declined 30 basis points to 6.0%. During the second half of the year we implemented a more focused and streamlined organisation structure across our two largest businesses, grocery and redistribution, in order to enhance our customer proposition and improve our operational efficiency.

In our largest business serving the grocery sector, as expected the underlying revenue growth returned to more normal levels during the second half of the year as the additional business previously won was fully absorbed. We continue to focus on improving operating efficiencies, particularly labour productivity and capacity, to help offset operating cost inflation and to ensure appropriate cost levels. Our national distribution footprint and owned fleet are particularly well suited to support the continuing outsourcing trend and provide our customers with the most cost-effective solution for managing their spend on goods not for resale.

Our retail supplies business has benefited from the acquisition of DDS in May 2017 which has now been successfully integrated into our existing business and which has significantly increased the size of our operations in this sector. Although revenue growth was modest, the integration of DDS and Schwarz provided both sourcing and operational synergies in line with our expectations, thereby enhancing our operating margins. Our retail customers are already benefiting from the scale, service excellence and sector expertise of our integrated retail teams.

Our redistribution business, serving the foodservice and janitorial and sanitation ('jan-san') sectors, grew well as we continued to drive growth from our category management programme for our larger national and regional customers. As a category manager for packaging and supplies, we are able to provide category assortment, sourcing and digital tools which help our redistribution customers manage their supply chain, extend their product and category offerings and reduce their inventory investment in high volume, low value products. Our sales professionals, aided by our digital and e-commerce capabilities, provide our customers category expertise as well as end user pull through. Our continued investment in the jan-san category is also driving new organic growth via expansion with our existing foodservice distributor customers as well as expanding our presence with jan-san distributors.

The rebound of both the oil and gas and industrial sectors drove strong growth across our safety business, augmented by contributions from ML Kishigo and Revco which were acquired in March 2017 and January 2018 respectively. In particular, Revco has further strengthened our offering to welding and industrial distributors and has extended our product offering with access to another quality, own label range of hand protection products. We have continued to focus on innovating and developing our own brands of personal protection equipment, which contribute higher margins, while offering a broadening range of safety equipment to our customers.

We expanded our presence in the agricultural sector with the acquisition in March of Monte Package Company, a regional supplier of packaging to growers in the central and southeast of the US, which has enhanced not only the geographies we serve, but also the range of fruit and vegetable packaging we provide. Our footprint continues to evolve providing us with the infrastructure needed to support our customers' moves to growing their produce in new geographies, particularly Mexico.

Our businesses serving the processor sector once again experienced good growth, although ongoing customer consolidation continued to put margins under pressure. A focus on own label and import item alternatives allows our processor teams to offer our customers high quality, cost-effective solutions to manage their packaging and facility management programmes effectively. While our national accounts continue to drive significant sales volume, our growing e-commerce platform provides an enhanced interactive customer experience for our local and regional customer bases. Our value lies in offering a single source solution providing both branded and own brand packaging, MRO, safety and jan-san product categories.

Our convenience store business continued its recent history of strong growth through its wholesaler partners, deploying a sales force focused on generating additional sales with end user convenience store customers. Revenue growth also came from expanding our distribution offering to new product categories, particularly those for certain nationally branded grocery items. Our value-added management of our customers' categories and inventories enables them to provide their customers with an industry-leading range while minimising their investment in doing so.

The growth of our business in Canada moderated compared to recent years, principally due to a broad restructuring and cost savings programme at our largest customer. We continued to invest in the safety and cleaning & hygiene sectors, building a national platform capable of serving customers locally, regionally and nationally in a cost-effective and consistent manner. Our industrial packaging business also continued its strong growth. The rationalisation and integration of a number of IT systems for the many acquisitions made over the last few years, which will drive sourcing and operational synergies as well as enhanced service platforms for our customers, remains a key focus for the coming year.

Continental Europe

* Alternative performance measure (see Note 1)

Continental Europe continued to perform strongly with revenue rising by 12% to £1,797.5 million and operating profit up 18% to £176.8 million. Organic revenue growth remained high at more than 4% and was complemented by the full year impact of the five acquisitions made in 2017 and the part year contribution of the three acquisitions completed in 2018, partly offset by the disposal of OPM in France in February 2018. The impact of higher margin acquisitions helped drive an increase in the operating margin which was up 50 basis points at constant exchange rates to 9.8%.

Overall in France, our business grew significantly. The Hedis cleaning & hygiene business that was acquired in November 2017 has integrated well and the combination with our original cleaning & hygiene business has led to significant synergy benefits. Revenue at our original cleaning & hygiene business increased as a significant customer win in the contract catering sector more than offset the impact of two larger account losses at the end of 2017. Sales progressed in the hotel, restaurant and catering ('horeca'), industrial and food processing sectors, offsetting more difficult trading conditions in the contract cleaning, healthcare and public sectors as the government continued to push for further national consolidation of purchasing decisions in order to benefit from its buying power. However, with a lower overall gross margin, operating profit declined. Our safety business continued to grow well, particularly with national accounts, and export sales were also ahead of last year. We won various contracts with the government's central purchasing agency towards the end of 2017 and have therefore seen strong growth with public sector customers. We have managed to improve margins with a number of key accounts and operating profit grew strongly. Our foodservice businesses have also enjoyed good sales and operating profit growth as additional investment in headcount and IT has borne fruit. In February 2018 we disposed of OPM, a non-core business which was involved in the sale of SodaStream products to retailers in France.

In the Netherlands, sales grew in all areas of activity with particularly strong performance in the healthcare sector following a major customer win in mid-2017. In light of the growth in healthcare, we will relocate three warehouses into one modern site in 2019 to gain efficiencies and provide an enhanced service to our customers. Sales in the non-food retail sector increased significantly due to growth of packaging sales for e-commerce customers and the roll-out of our full outsourcing concept for high street retailers, including several sports clothing chains. QS Nederland, a provider of hygiene solution services primarily for washrooms, was acquired in March and is trading ahead of expectations. In Belgium, revenue was ahead of the previous year as we continued to grow in the cleaning & hygiene sector, particularly with the larger accounts. Our grocery and food processor business, however, saw a decline in sales, despite some recent customer gains, as its main customers continue to seek cost reductions.

In Germany, sales were slightly lower with an increase in the horeca sector, due to winning new business with a chain of petrol stations, offset by declines in safety clothing and incontinence products due to competitive pressure in these two specific markets. In Switzerland, we have seen further growth in the medical, retail and industrial sectors although new business won is at lower than average margins. We continue to see pressure in the horeca sector where numerous customers are reducing their spend. In Austria, our business enjoyed good sales and operating profit growth.

In Denmark, revenue increased with particularly strong performances in the safety, food processor and horeca sectors. We have won additional business with a major Danish foodservice wholesaler and continue to grow with a major chain of juice bars as they expand internationally. A new area of growth has come from supplying goods to gyms and to third party transport companies. In December we acquired CM Supply which specialises in own brand and customised foodservice products and packaging for the horeca sector. In July we acquired our first business in Norway, Enor, which sells light catering equipment to the horeca sector. Both businesses are integrating well into the Group.

Sales have grown strongly in Spain. The cleaning & hygiene business has seen strong increases in revenue, in particular with contract cleaners and in the horeca sector, and has recorded higher sales with most of its larger accounts. In the safety sector, all businesses have seen sales increases as our customers benefit from the continued strength of the local economy. Our medical business recorded another year of above average growth due to new product launches and the enhanced use of e-marketing to increase online sales. Tecnopacking, which is engaged in the distribution of industrial and disposable packaging and was acquired at the end of May 2017, has also performed ahead of expectations. Operating profit in Spain as a whole was significantly higher than last year. In Italy, our safety business Neri, which was acquired at the end of March 2017, has performed well. While sales have declined slightly, the business has improved its margin such that operating profit is ahead of expectations.

In Turkey, sales have grown strongly due to both increased volumes and the positive impact of price rises following the major devaluation of the Turkish lira. Volume growth has been highest in the healthcare sector, with significant customer gains and the launch of new products. The overall operating profit increased substantially. In Israel, sales were slightly lower in both the horeca and bakery sectors but improved margins have however led to an increase in operating profit.

In central Europe, both Hungary and Romania enjoyed strong sales growth but revenue declined in the Czech Republic due to lower sales to a major cash & carry chain not being fully offset by good growth in the safety sector. In Hungary sales grew well in the grocery, industrial, horeca, food processing and contract cleaning sectors although declined in the agriculture sector. In Romania sales were down in the grocery sector but this was more than compensated by gains in the safety and cleaning & hygiene sectors. Overall the operating profit was significantly ahead of last year.

UK & Ireland

* Alternative performance measure (see Note 1)

In UK & Ireland, revenue increased by 6% to £1,263.6 million as a result of organic growth of 4% and the impact of recent acquisitions, partly offset by the disposal of our marketing services business in June 2018. Organic growth slowed during the second half of the year as some major contract wins in the third quarter of 2017 were fully absorbed. Operating profit was down 2% to £86.8 million with the operating margin declining 50 basis points to 6.9% as market conditions in the UK continue to be challenging due to political and economic uncertainty.

Although our safety business secured some new customers in the second half of the year, many of our construction and manufacturing related customers themselves experienced a slowdown in growth which in turn affected demand for the products that we supply resulting in lower operating profit. Nevertheless, we continued to invest in our core product range availability, vehicle telematics and our digital service offering together with upgrading the quality and size of two facilities during the year. Our cleaning & hygiene business performed well with a series of new customer wins within the facilities management and government sectors. Sustained development and enhancement of our digital functionality, together with innovative service solutions and greater investment in product expertise amongst our teams, have provided improved levels of operational insight for our customers helping them to run their businesses more effectively.

All of our grocery and retail businesses saw strong sales growth during the year as a result of both new customers coming on board and additional category wins with existing customers. Retail Supplies has continued to invest in both technology and automation to strengthen its 'goods not for resale' consolidation service to large retailers while our packaging specialists, Keenpac, Woodway and Lightning, have invested in sustainable solutions for customers in both traditional high street and e-commerce channels during the year. The ability to provide both in-store and online product solutions for retail customers has helped to secure extra business with existing customers. The development of sophisticated digital tools to provide our customers with valuable information concerning usage and compliance is further adding to our already strong value proposition. In June we sold our marketing services business as the opportunities to expand overseas in the short to medium term were limited and, as a result, the business was no longer considered to be a good strategic fit.

Despite challenging conditions within the restaurant sector, our catering supplies businesses have grown sales during 2018. We have continued to invest in innovation in terms of new products to provide more variety and choice in the preparation and presentation of food. In addition, by providing data driven insights we have been able to help our customers with greater clarity and visibility on both consumption, conformity and control which enables them to maximise the use of their assets. We have also further developed our comprehensive range of sustainable product alternatives to satisfy the growing need for choice in this area while at the same time providing our customers with much needed expert advice on product selection. The Aggora business, which was acquired in January 2018, has further enhanced our proposition by adding a valuable suite of services for our customers including full servicing of catering equipment and asset tagging capabilities that provide them with invaluable management information through a custom-built database. The business has integrated well and a number of cross selling opportunities, involving the delivery of an attractive bundle of products and services to existing customers, have been identified with several already actioned.

Our healthcare businesses have benefitted from the introduction of new product ranges, in particular those associated with infection prevention and control solutions. At the same time, we have continued to grow by gaining new customers in the private hospital, nursing and care home markets and we have continued to expand our product focused business to reach customers outside of the UK market improving the breadth of product offering and increasing our geographical coverage. Our business serving the acute sector faces some challenges as the UK government works through its plans to reform the current NHS supply chain, which is due to go live in April 2019. Overall, despite modest sales growth, the healthcare business saw a strong improvement in profitability.

Our businesses in Ireland continued to grow strongly during the year and profitability increased. We have launched new digital capabilities to provide our customers with more flexible ways to buy our comprehensive range of products and services that we are able to offer. Further investment in new warehouse management technologies is also creating greater efficiencies and going forward will deliver higher quality services to both our existing and new customers. In addition, our expanded range of sustainable products has allowed us to satisfy the desire for more eco-friendly options in the foodservice and retail markets.

Rest of the World

* Alternative performance measure (see Note 1)

In Rest of the World, revenue increased 12% to £740.5 million with operating profit up 15% to £56.4 million as the operating margin increased 20 basis points at constant exchange rates to 7.6%. Although trading conditions have continued to improve as the economic environments in the countries in which we operate have stabilised, market conditions remain variable across the business area. Of the total increase in revenue, 4% was from organic growth with acquisitions accounting for the balance.

Brazil's political future became clearer towards the end of the year with the election of a new president. While most of the year was characterised by uncertainty and a sharp currency devaluation, the fourth quarter saw a return to more stable conditions. Despite a year of rising unemployment and limited industrial activity, our safety businesses saw strong growth in revenue and operating profit as we capitalised on the weakness of several key competitors and maintained a high service level to the market. We also invested in further operational improvements and digital channels to prepare ourselves for the anticipated increases in industrial demand following the election. The recent acquisition of Volk do Brasil, which was announced in October 2018 and completed in January 2019, has further extended our safety business and strengthened our product offering. A strong performance was also seen in our foodservice business as our recent acquisition, Talge, integrated very smoothly into the Group and grew both revenue and operating profit well ahead of expectations. In contrast, our cleaning & hygiene business experienced difficult trading conditions such that sales were down and margins contracted. A new management team was appointed in the fourth quarter and is implementing a restructuring plan to improve operating margins and return the business to growth. Our Brazilian healthcare business saw a mixed performance. Although the medical business experienced some sales growth, significant margin pressures led to lower operating profit. Measures to grow sales and improve profitability have now been implemented. In contrast, our dental business grew both sales and operating profit as a result of improvement measures taken last year.

In the rest of Latin America, we have seen consistently good results across all our businesses despite some political uncertainty in Mexico, Colombia and Argentina. In Chile, continued growth in the mining sector has generated higher demand for our safety products such that both our safety businesses, Vicsa and Tecno Boga, grew sales and operating profit. Growth was particularly strong at Vicsa as operating margins increased significantly while further progress was achieved in its digital channels. Our catering supplies business grew sales well, while also improving operating margins.

In Colombia, trading conditions softened in the middle of the year, partly due to some political uncertainty following presidential elections, but improved towards the end of the year. Our safety business, Solmaq, saw strong sales growth and benefited from its restructuring last year. A new IT system has recently been implemented to prepare for further growth. Both sales and operating profit increased strongly at Vicsa despite some pressure on operating margins.

In our other Vicsa operations we experienced very strong sales and operating profit growth in Argentina driven by high volume and inflation-driven price increases while in Peru sales and operating profit were also up despite gross margin pressures.

In Mexico, the market was also affected by uncertainty surrounding the presidential elections but was boosted by positive developments regarding NAFTA. Our safety business traded well throughout the year and, despite experiencing a softening of demand in the second half, recorded good sales growth. More stable currency conditions allowed margins to improve such that, with good cost control, operating profit grew strongly.

In Asia Pacific, market conditions varied across the countries and business sectors in which we operate.

In Australasia, business confidence continues to improve with demand for commodities in the resources sector, growth in tourism and government investment in infrastructure projects all helping to drive the economy. Our businesses that operate in these sectors have benefitted from these developments although the results have been adversely impacted in part due to increases in the cost of imports following the weakening of the Australian dollar and raw material price increases.

Our largest business continued to grow in the healthcare, cleaning & hygiene and hospitality sectors. In particular, the business has developed well in the growing aged care market which continues to deliver good returns through the supply of medical consumables and the provision of specialist clinical support. We have also made significant progress with our continued focus on automation and digital trading platform developments. As a result, our customers are seeing the benefits of our improved online capabilities and the ease of doing business across the region.

Although our food processor business saw some sales growth as a result of customer wins, operating profit was down due to a combination of below average margins in the new business and increases in both product and operating costs. We have developed a number of specialist products that help to deliver improved outcomes for our customers and are continuing to innovate with food packaging concepts for the produce sector.

In our safety business, sales growth has been slower than expected. However, we have been able to offset this with improved margins from a better product mix and by successfully introducing an extended range of own brand products. The business experienced some disruption following the consolidation of several facilities in 2017 but this has now settled down with the reorganisation delivering the anticipated savings. Overall the business continues to make improvements by streamlining its operational platform and processes to drive productivity, enhance our competitive position and improve service levels to our customers.

Our speciality healthcare business continued to perform strongly and delivered good results. The business is a leading national distributor of laboratory and healthcare related consumables to the pathology, medical research and life science markets.

Our business in Singapore, which distributes personal protection equipment and services into the oil & gas and pharmaceutical sectors in the region, has performed well. The business has successfully leveraged the Group's global supply chain to help them fast-track the development of new product categories. This will ensure that we are able to consolidate our position within our existing customer base and create new growth opportunities in the region.

Our business in China, which also supplies personal protection equipment, has been adversely impacted by lower demand for certain product lines. The business is currently developing alternative revenue streams into the large industrial manufacturing base within China. Our export business has developed a comprehensive own brand glove range which will be launched in 2019.

Prospects

Although we continue to face mixed macroeconomic and market conditions, including uncertainties concerning global trade, our strong competitive position, diversified and resilient businesses and ability to consolidate our fragmented markets further are expected to lead to continued growth.

In North America, the combination of organic revenue growth, which returned to more normal levels during 2018, and the impact of acquisitions should lead to growth. We continue to face inflationary pressures on operating costs but these will be mitigated by our recently implemented, more focused and streamlined organisation structure. In Continental Europe, we expect to develop further due to the benefit of organic growth and acquisitions. Growth in UK & Ireland will be impacted by the disposal of the marketing services business in June 2018 and by future economic conditions in the UK, which at this time are unclear. In Rest of the World, we expect to see continued growth for the year.

Acquisitions are a key part of our strategy and, with an active pipeline of opportunities and ongoing discussions taking place, we expect to complete further transactions during 2019.

The Board believes that the prospects of the Group are positive due to its strong market position and well established and successful strategy to grow the business both organically and by acquisition.

FINANCIAL REVIEW

As in previous years this review refers to a number of alternative performance measures which management uses to assess the performance of the Group. Details of the Group's alternative performance measures are set out in Note 1.

Currency translation

Currency translation has had a negative impact on the Group's reported results, decreasing revenue, profits and earnings by approximately 3%. The adverse exchange rate impact was principally due to the strengthening of sterling against the US dollar, Canadian dollar, Australian dollar and Brazilian real, partly offset by the weakening of sterling against the euro.

Revenue

Revenue increased to £9,079.4 million (2017: £8,580.9 million), up 9% at constant exchange rates (up 6% at actual exchange rates), reflecting the benefit of acquisitions, partly offset by the impact of disposals, and organic growth of 4.3%.

Operating profit

Adjusted operating profit increased to £614.0 million (2017: £589.3 million), an increase of 7% at constant exchange rates and 4% at actual exchange rates.

At constant exchange rates the adjusted operating profit margin decreased by 10 basis points from 6.9% to 6.8% (down 10 basis points at actual exchange rates), with lower operating margins in North America (down 30 basis points) and UK & Ireland (down 50 basis points), partly offset by higher operating margins in Continental Europe (up 50 basis points) and Rest of the World (up 20 basis points).

Operating profit increased to £466.2 million (2017: £456.0 million), an increase of 5% at constant exchange rates and 2% at actual exchange rates.

The GMP equalisation charge in 2018 of £3.3 million (2017: £nil) is the non-recurring cost of the equalisation of guaranteed minimum pensions (GMP) between male and female members of the Group's UK defined benefit pension schemes following the High Court judgement during the year in the case of Lloyds Banking Group Pensions Trustees Limited vs. Lloyds Bank plc.

Customer relationships amortisation, acquisition related items and the GMP equalisation charge are excluded from the calculation of adjusted operating profit as they do not relate to the underlying operating performance and distort comparability between businesses and reporting periods. Accordingly, these items are not taken into account by management when assessing the results of the business and are removed in calculating adjusted operating profit and other alternative performance measures by which management assess the performance of the Group.

Interest

The net interest expense of £55.0 million was £8.3 million higher than in 2017 at actual exchange rates and up £8.8 million at constant exchange rates, mainly from a combination of a higher level of average net debt during the year to fund acquisitions made in 2017 and 2018 and a higher effective interest rate due to increased market interest rates, particularly for the US dollar, and additional long dated fixed rate debt.

Profit before income tax

Adjusted profit before income tax was £559.0 million (2017: £542.6 million), up 6% at constant exchange rates (up 3% at actual exchange rates), due to the growth in adjusted operating profit, partly offset by the increase in net interest expense.

Profit before income tax increased to £424.8 million (2017: £409.3 million), an increase of 7% at constant exchange rates (up 4% at actual exchange rates).

Disposal of businesses in 2018 of £13.6 million is the pre-tax profit on disposal during the year of OPM in France and the Marketing Services businesses in the UK. Disposal of businesses is a non-recurring item resulting from the disposal of two non-core businesses and does not relate to underlying operating performance and is therefore not taken into account by management when assessing the performance of the Group. Accordingly, it is removed in calculating adjusted profit before income tax and other alternative performance measures by which management assess the performance of the Group.

Taxation

The Group's tax strategy is to comply with tax laws in all of the countries in which it operates and to balance its responsibilities for controlling the tax costs with its responsibilities to pay tax where it does business. Management of taxes is therefore carried out within defined parameters. The Group's tax strategy has been approved by the Board and tax risks are regularly reviewed by the Audit Committee. In accordance with UK legislation, the strategy relating to UK taxation is published on the Bunzl plc website within the Corporate governance section.

The effective tax rate (being the tax rate on adjusted profit before income tax) for the year was 23.1% (2017: 27.5%) and has decreased from the prior year principally due to the reduction in the US federal tax rate effective from 1 January 2018 and also due to the positive outcome of some previous tax uncertainties. The effective tax rate for 2019 is expected to be approximately 24%. The reported tax rate on statutory profit before income tax also decreased in the year to 23.1% (2017: 24.1%) mainly due to the reduction in the US federal tax rate offset by the impact of a one-time deferred tax credit on intangible assets last year due to the enactment of the lower US federal tax rate before 31 December 2017.

As explained in Note 14 (Principal risks and uncertainties), the Group identifies tax as a principal risk, and notes that the future tax rate could be affected by the resolution of uncertain prior year tax liabilities. This would include the conclusion of legal arguments between the European Commission and the UK government over whether part of the UK's tax regime is contrary to European Union State Aid provisions.

Earnings per share

Profit after tax increased to £326.5 million (2017: £310.5 million), an increase of £25.3 million, up 8% at constant exchange rates (up 5% at actual exchange rates), due to a £28.3 million increase in profit before income tax, partly offset by a £3.0 million increase in the tax charge.

Adjusted profit after tax increased to £429.9 million (2017: £393.4 million), an increase of £48.1 million up 13% at constant exchange rates (up 9% at actual exchange rates), due to an increase in adjusted profit before income tax of £32.4 million and a reduction in the effective tax rate, with tax on adjusted profit before income tax decreasing by £15.7 million at constant exchange rates.

The weighted average number of shares increased to 331.7 million from 329.5 million in 2017 due to employee share option exercises, partly offset by the full year impact of shares being purchased from the market for the Group's employee benefit trust in 2017.

Earnings per share were 98.4p (2017: 94.2p), up 8% at constant exchange rates (up 4% at actual exchange rates).

Adjusted earnings per share were 129.6p, an increase of 12% at constant exchange rates (up 9% at actual exchange rates).

Dividends

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

* Based on adjusted earnings per share.

The Company's practice has been to pay a progressive dividend, delivering year-on-year increases with the dividend growing at approximately the same rate as the growth in adjusted earnings per share. The 2018 dividend is 9% higher than the 2017 dividend, which compares with the adjusted earnings per share growth of 9% at actual exchange rates and 12% at constant exchange rates.

Before approving any dividends, the Board considers the level of borrowings of the Group by reference to the ratio of net debt to EBITDA, the ability of the Group to continue to generate cash and the amount required to invest in the business, in particular into future acquisitions. The Company's long term track record of strong cash generation, coupled with the Group's substantial borrowing facilities, provides the Company with the financial flexibility to fund a growing dividend. After the further growth in 2018, Bunzl has sustained a growing dividend to shareholders over the past 26 years.

The risks and constraints to maintaining a growing dividend are principally those linked to the Group's trading performance and liquidity, as described in Note 14 (Principal risks and uncertainties). The Group has substantial distributable reserves within Bunzl plc and there is a robust process of distributing profits generated by subsidiary undertakings up through the Group to Bunzl plc. At 31 December 2018, Bunzl plc had sufficient distributable reserves to cover more than four years of dividends at the cost of the 2018 dividends, which is expected to be approximately £168 million.

Acquisitions

The Group completed seven acquisitions during the year ended 31 December 2018 with a total committed spend of £165.2 million. The estimated annualised revenue and adjusted operating profit of the acquisitions completed during the year were £162.0 million and £20.7 million respectively. Excluding the two acquisitions that had been agreed at 31 December 2017, but were completed during 2018, and including the acquisition of Volk do Brasil that was agreed during 2018 but not completed until 2 January 2019, the estimated annualised revenue of the acquisitions was £148.1 million, with committed acquisition spend of £182.7 million. Acquisition spend reflects the cash consideration paid, which in certain instances includes amounts paid for the benefit of tax deductions for amortisation of intangible assets and estimated earnout consideration for future profit growth.

A summary of the effect of acquisitions is as follows:

The net cash outflow in the year in respect of acquisitions comprised:

* Acquisition related items comprise £7.8 million of transaction costs and expenses paid and £6.1 million of payments relating to the retention of former owners.

Disposals

During the year the Group completed the disposal of two businesses which were no longer considered to be a strategic fit within the portfolio of the Group's businesses, these being OPM, which is a distributor of SodaStream products to retailers throughout France, and Marketing Services, which provides marketing services in the UK with limited opportunities to expand overseas. The disposals were completed on 2 February 2018 and 7 June 2018 respectively. As a result, the net assets of the Group increased by £10.8 million, representing the profit on disposal of £13.6 million partly offset by an associated tax charge of £2.8 million, with a net cash inflow of £55.1 million.

Cash flow

A summary of the cash flow for the year is shown below:

† Before acquisition related items.

◊ Including acquisition related items.

The Group's free cash flow of £416.2 was £4.1 million higher than in 2017, primarily due to the increase in operating cash flow of £8.8 million, partly offset by increases in the cash outflows relating to interest and tax. The Group's free cash flow was primarily used to finance dividend payments of £152.2 million in respect of 2017 (2017: £138.2 million in respect of 2016) and an acquisition cash outflow of £184.2 million (2017: £588.5 million). Cash conversion (being the ratio of operating cash flow to adjusted operating profit) was 94% (2017: 97%).

Net debt

Net debt decreased by £137.1 million during the year to £1,386.5 million (2017: £1,523.6 million), principally due to the net cash inflow of £184.9 million, partly offset by a £47.8 million increase due to currency translation.

Net debt to EBITDA calculated at average exchange rates and in accordance with the Group's external banking covenants was 2.0 times (2017: 2.3 times).

Balance sheet

Intangible assets increased by £30.8 million to £2,382.5 million due to intangible assets arising on acquisitions in the year of £130.7 million, a £32.4 million increase from exchange and software additions of £9.2 million, partly offset by an amortisation charge of £119.2 million and a decrease from disposal of businesses of £22.3 million.

Working capital increased by £76.4 million to £948.3 million primarily from acquisitions, an increase from exchange rate movements and an increase in the underlying business, broadly in line with the organic revenue growth in the year.

The Group's net pension deficit of £38.5 million at 31 December 2018 was £12.5 million lower than at 31 December 2017, principally due to an actuarial gain of £11.0 million. The actuarial gain arose as a result of the decrease in the present value of scheme liabilities from changes in assumptions, principally higher discount rates applied to the UK and US schemes, partly offset by lower than expected returns on pension scheme assets.

Shareholders' equity increased by £245.9 million during the year to £1,694.5 million.

Return on average operating capital decreased to 50.7% from 53.1% in 2017, principally driven by a lower return in the underlying business, partly offset by the positive impact of acquisitions net of disposals and exchange rate movements. Return on invested capital of 15.0% was down from 16.0% in 2017 due to a negative impact from recent acquisitions and disposals, a lower return in the underlying business and an adverse impact from exchange rate movements.

IFRS 16 Leases

IFRS 16 'Leases' is effective in the consolidated financial statements for the year ending 31 December 2019 and has been adopted with effect from 1 January 2019. The Group has used the modified retrospective approach to transition utilising certain practical expedients outlined in the standard, notably the exclusion of low value and short term leases. The new standard requires that the Group's leased assets are recorded within property, plant and equipment as right of use assets with a corresponding lease liability which is based on the present value of future payments required under each lease. As shown in Note 1, it is currently estimated that the adoption of IFRS 16 will increase the carrying value of property, plant and equipment at 1 January 2019 by between £430 million and £450 million with liabilities increasing by between £480 million and £500 million, and retained earnings decreasing by between £20 million and £50 million.

Under the new standard, the existing operating lease expense previously recorded in operating costs will be replaced by a depreciation charge, which will be lower than the previous operating lease expense, and a separate financing expense, which will be recorded in interest expense. For 2019, based on the Group's existing lease portfolio, it is currently estimated that operating costs will decrease by approximately £20 million and that finance expense will increase by approximately £20 million such that the impact of moving to the new standard on adjusted profit before income tax and adjusted earnings per share will be immaterial. There will be no net cash flow impact arising from the application of the new standard. Net debt to EBITDA is expected to increase by approximately 0.3 times compared to the ratio calculated under the previous accounting standard but performance against current banking covenants will not be affected because these continue to be based on historical accounting standards. The Group does not currently intend to alter its approach going forward as to whether assets should be leased or bought.

Capital management

The Group's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Group funds its operations through a mixture of shareholders' equity and bank and capital market borrowings. The Group's approach to the balance sheet is to maintain an investment grade credit rating and the Company's current rating with Standard & Poor's is BBB+. All of the borrowings are managed by a central treasury function and funds raised are lent onward to operating subsidiaries as required. The overall objective is to manage the funding to ensure the borrowings have a range of maturities, are competitively priced and meet the demands of the business over time. There were no changes to the Group's approach to capital management during the year and the Group is not subject to any externally imposed capital requirements.

Treasury policies and controls

The Group has a centralised treasury department to control external borrowings and manage liquidity, interest rate, foreign currency and credit risks. Treasury policies have been approved by the Board and cover the nature of the exposure to be hedged, the types of financial instruments that may be employed and the criteria for investing and borrowing cash. The Group uses derivatives to manage its foreign currency and interest rate risks arising from underlying business activities. No transactions of a speculative nature are undertaken. The treasury department is subject to periodic independent review by the internal audit department. Underlying policy assumptions and activities are periodically reviewed by the executive directors and the Board. Controls over exposure changes and transaction authenticity are in place.

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 the Group's biannual debt covenants is monitored on a monthly basis and formally tested at 30 June and 31 December. The principal covenant limits are net debt, calculated at average exchange rates, to EBITDA of no more than 3.5 times and interest cover of no less than 3.0 times. Sensitivity analyses using various scenarios are applied to forecasts to assess their impact on covenants and net debt. During 2018 all covenants were complied with and based on current forecasts it is expected that such covenants will continue to be complied with for the foreseeable future.

The Group has substantial funding available comprising multi-currency credit facilities from the Group's banks, US private placement notes and the senior bond issued during 2017. At 31 December 2018 the nominal value of US private placement notes outstanding was £1,120.6 million (2017: £1,107.6 million) with maturities ranging from 2019 to 2028. The £300 million senior bond matures in 2025 and the Group's committed bank facilities mature between 2019 and 2023. At 31 December 2018 the available committed bank facilities totalled £1,043.8 million (2017: £1,056.9 million) of which £104.3 million (2017: £224.6 million) was drawn down, providing headroom of £939.5 million (2017: £832.3 million).

Consolidated income statement

for the year ended 31 December 2018

* See Note 1 for further details of the alternative performance measures.

◊ Excluding the profit on disposal of businesses and associated tax where relevant.

Consolidated statement of comprehensive income

for the year ended 31 December 2018

Consolidated balance sheet

at 31 December 2018

Consolidated statement of changes in equity

for the year ended 31 December 2018

◊ Other reserves comprise merger reserve of £2.5m (2017: £2.5m), capital redemption reserve of £16.1m (2017: £16.1m) and a positive cash flow hedge reserve of £1.6m (2017: £1.3m negative).

† Retained earnings comprise earnings of £1,476.2m (2017: £1,292.7m), offset by own shares of £63.9m (2017: £122.9m).

Consolidated cash flow statement

for the year ended 31 December 2018

* See Note 1 for further details of the alternative performance measures.

Notes

1. Basis of preparation

The consolidated financial statements for the year ended 31 December 2018 have been approved by the Board of directors of Bunzl plc. They are prepared in accordance with (i) EU endorsed International Financial Reporting Standards ('IFRS') and interpretations of the IFRS Interpretations Committee ('IFRS IC') and those parts of the Companies Act 2006 as applicable to companies using IFRS and (ii) IFRS as issued by the International Accounting Standards Board ('IASB'). They are prepared under the historical cost convention with the exception of certain items which are measured at fair value. The directors consider that it is appropriate to adopt the going concern basis of accounting in preparing the financial statements.

Bunzl plc's 2018 Annual Report will be published in March 2019. The financial information set out herein does not constitute the Company's statutory accounts for the year ended 31 December 2018 but is derived from those accounts and the accompanying directors' report. Statutory accounts for 2018 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 17 April 2019. 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 2017 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.

There are two new standards issued by the IASB that are applicable to the Group for the year ended 31 December 2018. The Group has adopted all relevant amendments to existing standards and interpretations issued by the IASB that are effective from 1 January 2018 with no material impact on its consolidated results or financial position.

The Group has adopted IFRS 15 'Revenue from Contracts with Customers' retrospectively from 1 January 2018. IFRS 15 requires companies to apportion revenue from customer contracts to separate performance obligations and recognise revenue as these performance obligations are satisfied. The vast majority of the Group's revenue is generated from the delivery of goods to customers representing a single performance obligation which is satisfied upon delivery of the relevant goods. The Group's other revenue generating activities represent approximately 1% of total revenue. The majority of this other revenue relates to design and fit out services for foodservice customers and fulfilment services where the Group does not take title to inventory. For these and other services performed by the Group, the recognition of revenue under IFRS 15 does not differ materially from the previous accounting practices. Accordingly, the adoption of IFRS 15 has not had a material impact on the timing of revenue recognition and has not had a material impact on the Group's operating profit or financial position. Prior year comparatives have not been restated because the transition adjustment was not material.

The Group has adopted IFRS 9, 'Financial Instruments' retrospectively from 1 January 2018 except where prospective application is required as specified in the standard. The adoption of IFRS 9 resulted in a change to the Group's accounting estimates to reflect the new expected credit loss impairment model for financial assets, particularly in relation to the provision for trade receivables, but did not have a material impact on the Group's operating profit or financial position. Prior year comparatives have not been restated because the transition adjustment was not material.

During the year the Group completed the disposal of two businesses which were no longer considered to be a strategic fit within the portfolio of the Group's businesses. The profit on disposal was calculated as the difference between (i) the aggregate of the fair value of the consideration received net of any transaction costs paid and (ii) the carrying amount of the assets and liabilities of the subsidiary on the date of disposal. On the disposal of the subsidiary with assets and liabilities denominated in foreign currency, the cumulative translation difference associated with that subsidiary in the translation reserve was credited to the profit on disposal recognised in the income statement.

In September 2017 an agenda decision of the IFRS IC was issued which provided clarity over the treatment of interest and penalties related to income taxes. This confirmed that entities do not have an accounting policy choice between applying IAS 12 'Income Taxes' and IAS 37 'Provisions, Contingent Liabilities and Contingent Assets' and that the treatment should be determined on a case by case basis. As a result, the Group's finance expense now includes a charge for interest related to income tax whereas in prior years all such items were shown in income tax. The amounts involved are not material and prior year comparatives have not been restated.

There are no other new standards or amendments to existing standards that are effective that have had an impact on the Group.

IFRS 16 'Leases' is effective in the consolidated financial statements for the year ending 31 December 2019 and will have a material impact on the consolidated financial statements. The Group has adopted IFRS 16 with effect from 1 January 2019 and intends to use the modified retrospective approach to transition utilising certain practical expedients outlined in the standard, notably the exclusion of low value (less than £5,000) and short term leases (less than 12 months). Data has been collated on all of the Group's leases for which IFRS 16 is applicable, of which there are more than 5,000, and these are principally for warehouses, offices and vehicles. This data has been used in conjunction with a lease accounting tool specifically developed for the Group by third party experts to calculate the impact of transitioning to IFRS 16 as at 1 January 2019.

The new standard requires that the Group's leased assets are recorded within property, plant and equipment as 'Right of use assets' with a corresponding lease liability which is based on the present value of the future payments required under each lease discounted at the incremental borrowing rate. It is currently estimated that the adoption of IFRS 16 will increase the carrying value of property, plant and equipment at 1 January 2019 by between £430 million and £450 million with liabilities increasing by between £480 million and £500 million and retained earnings decreasing by between £20 million and £50 million. Under the new standard, the existing operating lease expense previously recorded in operating costs will be replaced by a depreciation charge, which will be lower than the previous operating lease expense by approximately £20 million, and a separate financing expense, which will be recorded in interest expense of approximately £20 million. There will be no net cash flow impact arising from the new standard. Net debt to EBITDA is expected to increase by approximately 0.3 times compared to the previous accounting standard but performance against current banking covenants will not be affected because these are based on historical accounting standards. The Group does not currently intend to alter its approach going forward as to whether assets should be leased or bought.

Apart from this standard, the Group does not anticipate that any other new or revised standards and interpretations currently issued by the IASB that will be effective from 1 January 2019 and beyond will have a material impact on its consolidated results or financial position.

Alternative performance measures

In addition to the various performance measures defined under IFRS, the Group reports a number of other measures that are designed to assist with the understanding of the underlying performance of the Group and its businesses. These measures are not defined under IFRS and, as a result, do not comply with Generally Accepted Accounting Practice and are therefore known as 'alternative performance measures'. Accordingly, these measures, which are not designed to be a substitute for any of the IFRS measures of performance, may not be directly comparable with other companies' alternative performance measures. The principal alternative performance measures used within the consolidated financial statements and the location of the reconciliations to equivalent IFRS measures are shown and defined in the table below:

These alternative performance measures exclude the charge for customer relationships amortisation, acquisition related items, the GMP equalisation charge, disposal of businesses and any associated tax, where relevant. The definitions of these measures are similar to those used in the prior year, but this year have been updated to exclude disposal of businesses and the GMP equalisation charge, these being items impacting the reported results for 2018 (no impact in 2017) which do not relate to the underlying operating performance of the business.

Acquisition related items comprise deferred consideration charges relating to the retention of former owners of businesses acquired, transaction costs and expenses and adjustments to previously estimated earn outs. Customer relationships amortisation, acquisition related items and any associated tax are considered by management to form part of the total spend on acquisitions or are non-cash items resulting from acquisitions. The GMP equalisation charge is a non-recurring cost of the equalisation of guaranteed minimum pensions between male and female members of the Group's UK defined benefit pension schemes following the High Court judgement during the year in the case of Lloyds Banking Group Pensions Trustees Limited vs Lloyds Bank plc. Disposal of businesses represents the profit or loss on disposal of non-core businesses. None of these items relate to the underlying operating performance of the business and, as a result, they distort comparability between businesses and reporting periods. Accordingly, these items are not taken into account by management when assessing the results of the business and are removed in calculating the profitability measures by which management assess the performance of the Group.

All alternative performance measures have been calculated consistently with the methods applied in the consolidated financial statements for the year ended 31 December 2017 with the exception of the amendments made to the alternative performance measures for the year ended 31 December 2018, relating to the GMP equalisation charge and disposal of businesses, which were not applicable to the prior year.

The principal profit related alternative performance measures, these being adjusted operating profit, adjusted profit before income tax, adjusted profit for the year and adjusted earnings per share are reconciled to the most directly reconcilable GAAP measures in the table below.

2. Segment analysis

3. Finance income/(expense)

The foreign exchange gain or loss on intercompany funding arises as a result of the retranslation of foreign currency intercompany loans. The gain or loss on intercompany funding is substantially matched by the foreign exchange loss or gain on external debt and foreign exchange forward contracts which minimises the foreign currency exposure in the income statement.

As explained in Note 1, as a result of an agenda decision of the IFRS IC the Group now determines on a case by case basis whether interest related to income tax is classified within finance expense or income tax. In the year ended 31 December 2018, finance expense includes £1.2m of interest related to income tax. In previous years all interest related to income tax was classified as income tax.

4. Income tax

In assessing the underlying performance of the Group, management uses adjusted profit before income tax. The tax effect of the adjusting items (see Note 1) is excluded in monitoring the effective tax rate (being the tax rate on adjusted profit before income tax) which is shown in the table below. The Group's expectations for the effective tax rate in 2019 are included in the Financial review.

The effective tax rate for 2018 has significantly decreased from 2017 principally due to the reduction in the US federal tax rate from 35% to 21% effective from 1 January 2018 and also due to the positive outcome of some previous tax uncertainties. The reported tax rate for 2018 is also lower than in 2017 due to the reduction in the US federal tax rate but to a lesser degree as a result of a one-time deferred tax credit on intangible assets in 2017 from enactment of the new rate before 31 December 2017.

5. Dividends

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

The 2018 interim dividend of 15.2p per share was paid on 2 January 2019 and comprised £50.7m of cash. The 2018 final dividend of 35.0p per share will be paid on 1 July 2019 to shareholders on the register at the close of business on 24 May 2019. The 2018 final dividend will comprise approximately £117m of cash.

6. Earnings per share