Bunzl Regulatory News (BNZL)

Monday 26 February 2018

ANNUAL RESULTS ANNOUNCEMENT

Bunzl plc, the international distribution and outsourcing Group, today publishes its annual results for the year ended 31 December 2017.

Highlights include:

· Good increases at constant exchange rates in revenue, adjusted operating profit* and adjusted earnings

per share*

· Organic revenue growth increased to 4.3%, the highest level since 2006

· Group operating margin* of 6.9%, down 20 basis points principally due to the impact of the significant additional business won in North America

· Record level of committed acquisition spend of £616 million on 15 businesses acquired

· Return on average operating capital of 53.1% with return on invested capital of 16.0%

· Continued strong cash conversion (operating cash flow† to adjusted operating profit*) of 97%

· 25 year track record of dividend growth continues with a 10% increase in the dividend for the year

* Before customer relationships amortisation, acquisition related items and associated tax where relevant (see Note 1)

† Before acquisition related items (see Consolidated cash flow statement)

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

"Bunzl has once again delivered good increases in revenue, adjusted operating profit and adjusted earnings per share due to a combination of an increased level of organic revenue growth and the impact of recently acquired businesses. 2017 was a record year for committed acquisition spend, which at £616 million significantly exceeded the previous high of £327 million achieved in 2015, and the pipeline of potential acquisitions for this year remains promising.

Looking forward, we believe that the prospects of the Group are positive due to our strong market position and our well established and successful strategy to grow both organically and by further consolidating the fragmented markets in which we compete."

Business area highlights:

North America (59% of revenue and 52% of adjusted operating profit†)

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

· Substantial revenue growth in grocery although margins lower

· Significant expansion in retail supplies through acquisition of DDS

· Redistribution growth from category management programmes

· Growth in safety from improving market conditions, boosted by acquisition of ML Kishigo

· Good progress in Canada

Continental Europe (19% of revenue and 25% of adjusted operating profit†)

· Strong increases in revenue and profit with improved operating margin

· Significant acquisition of Hedis further strengthens position in France

· Good revenue and profit growth in the Netherlands from new customer wins, particularly in healthcare and retail

· Significant growth in Spain from organic growth and acquisition of Tecnopacking

· Expansion into safety in Italy through purchase of Neri

· Strong performance in Turkey and Israel with increased levels of profitability

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

· Strong revenue growth with operating margin impacted by higher import prices from weaker sterling

· Trading in safety impacted by sluggish markets; good performance in cleaning & hygiene

· Growth in food retail; non-food retail strengthened by acquisition of Woodway and Lightning Packaging

· Growth in hospitality from contract wins and expansion of business with existing customers

· Healthcare held back by difficult market conditions

· Good growth in Ireland across all sectors

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

· Latin America

o Overall good performance, including improvement in Brazil

o Entry into foodservice sector in Brazil with acquisition of Talge

· Australasia

o Continued improvement in trading conditions

o Acquisition of Interpath has enhanced healthcare presence

· Asia

o Expansion in Asia through acquisitions in Singapore and China

* Before customer relationships amortisation and acquisition related items (see Notes 1 and 2)

† Before customer relationships amortisation, acquisition related items and 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

Against the background of variable macroeconomic and market conditions across the countries and sectors in which we operate, I am pleased to report that Bunzl produced another good set of results in 2017. Overall currency translation movements due to the weakening of sterling during 2016 had a significant positive impact on the reported Group growth rates at actual exchange rates, although the impact for the year as a whole was somewhat less than that seen during the first half of the year.

Group revenue increased 16% to £8,580.9 million (2016: £7,429.1 million) and adjusted operating profit before customer relationships amortisation and acquisition related items was up 12% to £589.3 million (2016: £525.0 million). Adjusted earnings per share were 119.4p (2016: 106.1p), an increase of 13%.

At constant exchange rates, revenue increased by 10% and adjusted operating profit rose by 6% with the Group operating margin declining from 7.1% to 6.9%. Adjusted earnings per share were up 7%.

Return on average operating capital decreased from 55.9% in 2016 to 53.1% due to a lower operating margin and higher operating capital in the underlying business and the impact of a lower return on operating capital from acquisitions. Return on invested capital of 16.0% was down from 16.7% in 2016 principally due to the effect of acquisitions.

Dividend

The Board is recommending a final dividend of 32.0p. This brings the total dividend for the year to 46.0p, up 10% compared to 2016. Shareholders will again have the opportunity to participate in our dividend reinvestment plan.

Strategy

We have continued to pursue our consistent and proven strategy of developing the business through organic growth, consolidating our markets through focused acquisitions and continuously improving the quality of our operations and making our businesses more efficient. Once again this has delivered another successful year of growth for the Group.

We seek to achieve organic growth by applying our resources 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 outsourcing these activities to Bunzl, they are able to focus on their core business and run their operations more cost-effectively by achieving purchasing efficiencies and savings, while at the same time freeing up working capital, improving their distribution capabilities, reducing carbon emissions and simplifying their internal administration. We are continually looking to enhance our service offering by providing a variety of value-added, innovative and customised solutions, thereby building long term relationships with our customers. The level of organic revenue growth in 2017 was substantially higher than the previous year, principally due to additional business won in North America towards the end of 2016.

Acquisition activity accelerated in 2017 with the Group agreeing to make 15 acquisitions during the year with a total committed spend of £616 million, thereby adding annualised revenue of £621 million. This was a record level of acquisition spend for Bunzl, significantly exceeding the previous high of £327 million achieved in 2015. The businesses purchased have helped to strengthen our position in many of the markets that we serve in both new and existing geographies. In addition, the acquisition of Revco in the US was announced and completed at the beginning of 2018. In early February 2018 we also completed the sale of OPM, a non-core business that was principally involved in the sale of SodaStream products to retailers in France.

Investment

Over time we have steadily invested in the business to support our growth strategy and to expand and enhance our asset base. During the year we continued to improve our existing facilities and opened new ones, both as a result of acquisitions and by consolidating our warehouse footprint in order to make it more efficient. Our ability to serve our customers in the most effective way is critical to our success. In striving to do so, we continuously upgrade our IT systems and digital platforms as we integrate new businesses into the Group's operations and increase the functionality of our existing systems and platforms, thereby enabling us to enhance our customer offering and retain a competitive advantage.

Corporate responsibility

We have continued to make improvements in our corporate responsibility ('CR') approach by focusing on the environmental sustainability of our operations as well as our role in assisting both our customers and suppliers to improve the sustainability of their own businesses. This year saw the expansion of the remit of the quality assurance/quality control team in Shanghai not only to undertake audits of our key Asian suppliers to assist them in meeting our stringent standards but also to work with suppliers in countries such as Mexico, Brazil, Romania and Turkey to strengthen further their already robust practices. We believe that building relationships, capacity and trust with suppliers is critical. To this end, we organised a conference during the year for our Asian suppliers to showcase examples of good practice, build CR awareness and provide a helping hand in how to identify and remedy CR issues. We also adopted a specific supplier code of conduct during the year which is in the process of being rolled out across our supplier base. As part of our policy to provide our customers with high quality and good value products, companies within the Group help their customers to achieve their sustainability goals by developing and offering environmentally friendly products and innovative solutions.

People

We recognise that the people best placed to make a decision in relation to our day to day operations are those who understand the local circumstances and our customers. Bunzl is therefore rightly proud of its decentralised organisation structure which allows each of our business areas to decide where they focus their efforts. At the same time, functional knowledge and expertise is shared across businesses to the benefit of all. I have been delighted once again by the contribution and commitment of all our employees. Whenever I visit our operations around the world I am reminded of the enthusiasm with which our people undertake their responsibilities and their individual accountability to improving performance which is key to the ongoing growth and success of Bunzl. On behalf of the Board, I would very much like to thank all our hard working and loyal employees.

Board

David Sleath, who had served as a non-executive director since 2007, retired after the Company's Annual General Meeting in April 2017. During his time with us, he also served as Chairman of the Audit Committee and Senior Independent Director. His sound advice and significant contribution to our success are greatly appreciated. Lloyd Pitchford, who is currently Chief Financial Officer of Experian plc, was appointed as a non-executive director with effect from 1 March 2017 and assumed the role of Chairman of the Audit Committee upon David's retirement when Vanda Murray also became the Senior Independent Director. Stephan Nanninga, a Dutch national who has had extensive international experience across a range of businesses operating in the distribution and service sectors, joined the Board as a non-executive director on 1 May 2017.

Chief Executive's REVIEW

Operating performance

With 87% of the Group's revenue generated outside the UK, the weakening of sterling against most currencies in 2016 had a significant positive translation impact on the Group's reported results in 2017, increasing revenue, profits and earnings by approximately 6%. 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 2016 at the average rates used for 2017. Unless otherwise stated, all references in this review to operating profit are to adjusted operating profit (being operating profit before customer relationships amortisation and acquisition related items) while operating margin refers to adjusted operating profit as a percentage of revenue.

Revenue increased 10% (16% at actual exchange rates) to £8,580.9 million due to the positive impact of acquisitions together with an improved level of organic growth. Consistent with the trends seen during the fourth quarter of 2016, organic revenue continued to increase in 2017 and was up 4.3% compared to the prior year, mainly as a result of the additional business won in North America towards the end of 2016. Operating profit was £589.3 million, an increase of 6% (12% at actual exchange rates). The percentage growth in operating profit was lower than that of revenue principally due to the impact of the business won in North America being at an operating margin below the Group average, resulting in a decline in the Group operating margin by 20 basis points at both constant and actual exchange rates to 6.9%.

In North America, revenue rose 10% (16% at actual exchange rates) due to the impact of higher organic growth together with the effect of acquisitions, while operating profit increased 4% (10% at actual exchange rates) as the operating margin declined 30 basis points at both constant and actual exchange rates to 6.3% due to the impact of the lower margin business won. Revenue in Continental Europe rose 12% (19% at actual exchange rates) as a result of the impact of acquisitions and an improved level of organic revenue growth, with operating profit up 13% (19% at actual exchange rates) and the operating margin up 10 basis points to 9.4% at both constant and actual exchange rates. In UK & Ireland, revenue was up 9% at both constant and actual exchange rates due to the impact of acquisitions and a return to organic growth and operating profit increased 5% (6% at actual exchange rates) with the operating margin decreasing by 30 basis points at both constant and actual exchange rates to 7.4%. In Rest of the World, revenue increased 5% (15% at actual exchange rates) as a result of both acquisitions and organic growth with operating profit up 5% (16% at actual exchange rates) with the operating margin unchanged at 7.5% at both constant and actual exchange rates.

Adjusted profit before income tax (being profit before income tax, customer relationships amortisation and acquisition related items) was £542.6 million, up 7% (13% at actual exchange rates) due to the growth in adjusted operating profit and a lower net interest charge. Profit before income tax was £409.3 million, an increase of 7% (13% at actual exchange rates). Basic earnings per share were 11% higher (17% at actual exchange rates) at 94.2p. Adjusted earnings per share, which excludes the effect of customer relationships amortisation, acquisition related items and the associated tax, were 119.4p, an increase of 7% (13% at actual exchange rates).

The operating cash flow, which is before acquisition related items, continued to be strong with cash conversion (the ratio of operating cash flow to adjusted operating profit) at 97%. The ratio of net debt to EBITDA calculated at average exchange rates increased from 2.0 times at the end of 2016 to 2.3 times, reflecting the higher level of acquisition spend during the year.

Whether they have been with us for a long time or are new to the Group, our dedicated, hardworking and loyal employees drive continuous improvement in everything they do. We in turn are committed to developing our people to enhance our capability and capacity across all our locations. Our success has been built on continued development and innovation to meet the changing needs of our customers and I strongly believe that everyone at Bunzl makes a key contribution to the successful growth of the business through their diverse skills and experiences.

Acquisitions

Acquisition activity, which is a key component of Bunzl's growth strategy, picked up significantly in 2017. During the year we agreed to purchase 15 businesses for a total committed acquisition spend of £616 million. These included two larger transactions, being DDS in the US and a group of businesses in France consisting of Hedis, Comptoir de Bretagne and Générale Collectivités (Groupe Hedis). The annual acquisition spend in 2017 was a record level for the Group.

In January 2017, in addition to completing the purchase of Sæbe Compagniet and Prorisk and GM Equipement, which we agreed to acquire in November 2016, we acquired two further businesses. Early in the month we purchased the business of Packaging Film Sales which distributes food packaging products, including flexible barrier films and speciality bags and pouches, to food processors in the US. Revenue in 2016 was £4 million. At the end of January we acquired LSH, a distributor of safety products, primarily to end users, which represents our first step into Singapore. Revenue in 2016 was £5 million.

At the end of March we completed two acquisitions, ML Kishigo and Neri. ML Kishigo, which is engaged in the sale of high visibility clothing and other safety related workwear to distributors throughout the US, provides customised solutions for its customers and brings additional expertise and an extended product portfolio to our existing safety business in the US. Revenue in 2016 was £26 million. Neri supplies a broad range of personal protection equipment, including gloves, footwear and workwear, to both distributors and end users throughout Italy and takes us into the important safety market there for the first time. Revenue in 2016 was £41 million.

We completed four transactions during May. DDS is a distributor of goods not-for-resale and value-added services to retailers and other general distribution customers, principally throughout North America. The business supplies a wide range of packaging, consumables and operating store supplies through a variety of distribution and outsourcing programmes and has expanded and extended our operations, particularly in relation to the retail sector. Revenue in 2016 was £242 million. Tecnopacking is engaged in the distribution of industrial and disposable packaging products to end users operating in a variety of different sectors throughout Spain as well as in Portugal. Revenue in 2016 was £33 million. This acquisition has further extended our operations in Spain which have grown significantly in recent years with total annualised revenue now approaching €200 million. We also acquired two separate businesses in Canada at the end of May. AMFAS and Western Safety are distributors of commercial and industrial first aid and safety supplies, including a full range of personal protection equipment, to end user customers throughout Western Canada. The businesses, which together had aggregated annualised revenue of £10 million in 2016, also provide safety related services including training programmes and other workplace safety solutions.

Pixel Inspiration, a marketing services business in the UK which specialises in the digital signage sector, was purchased at the end of June. Revenue in 2016 was £7 million.

At the beginning of August we acquired HSESF and its associated companies in China. Based in Shanghai with operations in four other provinces in eastern China, the businesses are principally engaged in the sale of a variety of personal protection equipment to local distributors and end users but also export to customers overseas. The aggregate revenue of the businesses acquired was £24 million in 2016.

During October we entered into an agreement to purchase Talge, which is principally engaged in the sale of a variety of foodservice related products, mainly to redistributors in the southeast region of Brazil. Revenue in 2016 was £20 million. Completion of the acquisition took place in January 2018 following clearance of the transaction by the Brazilian competition authority. At the end of October we purchased Interpath, which is principally engaged in the distribution of a variety of laboratory and healthcare related consumable products to the pathology, medical research and life science end user markets in Australia. Revenue in the year ended June 2017 was £13 million.

We acquired a group of businesses in France at the end of November. Groupe Hedis, which trades through a number of subsidiaries, is engaged in the sale and distribution of cleaning & hygiene related products to a variety of end user customers, principally in the public, healthcare, foodservice and cleaning sectors, as well as to some redistributors. Two other businesses, Comptoir de Bretagne and Générale Collectivités, distribute light catering equipment and tableware to a similarly diverse customer base in France. In 2016 the aggregate revenue of the businesses acquired was £136 million, of which £115 million related to Hedis and £21 million related to Comptoir de Bretagne and Générale Collectivités.

We completed the purchase of Lightning Packaging in the UK in November. The business is principally engaged in the distribution of industrial packaging products to a variety of end user customers throughout the UK. Revenue in the year ended March 2017 was £14 million. In December we also entered into an agreement to acquire the business of Aggora which designs, supplies, installs and maintains commercial catering equipment for end user customers in the UK. The acquisition was completed in early January 2018. Revenue in the year ended March 2017 was £27 million.

Since the year end we have acquired one further business. In early January 2018 we purchased Revco which designs and develops workplace safety and personal protection equipment for supply to redistributors in the US. Revenue in 2017 was £29 million.

Disposal

In February 2018 we sold OPM, a distributor of SodaStream products in France, which was a non-core business that was no longer considered to be a strategic fit within the Group. Revenue in 2017 was £50 million.

North America

* Before customer relationships amortisation and acquisition related items (see Notes 1 and 2)

In North America, revenue increased by 10% to £5,061.1 million, primarily due to a substantial increase in business with an existing grocery customer which helped drive organic sales growth to more than 5%, as well as the impact of recent acquisitions. The rate of organic growth was higher than in the recent past although the additional business won is at an operating margin below the average margin for the North America business area. Operating profit therefore increased by 4% to £318.3 million, with the operating margin declining to 6.3%.

Our business serving the grocery sector benefited from several new accounts although the additional business won, combined with a competitive marketplace, has led to lower margins. We are continually working to increase our efficiencies, thereby contributing to a lower cost to serve. The additional business with an existing customer referred to above has increased our capacity to handle pick and pack items which will allow us to expand our service to other customers and provide many new items and a wider range of products. This, combined with our flexible store delivery programmes, allow our customers to source large volume, low value not-for-resale items in an effective and efficient manner.

Our retail supplies business has benefited from the acquisition of DDS in May which has significantly increased the size of our operations in this sector. DDS's experience with speciality multi-channel retailers allows us to offer more products across our customer base and provide additional merchandising and delivery capabilities. By combining their expertise in this sector with our extensive distribution network and scale, we can deliver a more comprehensive market-leading service to all types of retailers.

Our redistribution business serving the foodservice and janitorial and sanitation ('jan-san') sectors has grown this year due to the success of our category management programme for our larger national and regional customers. As their category management partner, we help our redistribution customers to manage their own supply chain from their suppliers to their end users. We analyse how their businesses handle disposables using on-site surveys and proprietary digital tools. The resulting data helps them optimise the flow of high volume, low value products that are costly for them to handle, resulting in lower inventory, reduced operating costs and better cash flow. Additionally, our experienced national sales team helps our customers market specific products to specific customers using the expanded e-commerce and digital tool capabilities that we have available. Our increased focus on jan-san products is also driving new organic growth in this sector and across our other businesses. We have continued to expand our central warehouse system for jan-san items by opening two new locations to improve national availability across the US and take advantage of our scale. Together with our ongoing investment in marketing tools and the development of new product items, our jan-san initiative has contributed to our growth with foodservice distributor customers by allowing them to offer a wider range of products to their own customers.

Against the backdrop of improving market conditions in the oil and gas sector, our safety business saw improvements in sales and operating profit boosted by the purchase of ML Kishigo at the end of March. The acquisition has provided access to a broad, strong own label branded range of new and innovative high visibility clothing and other safety-related workwear. These items complement our existing range of safety products and are now available to all of our customers in this sector. Our other safety businesses have also continued to invest in the development of their own brands of personal protection equipment. These products contribute higher margins while at the same time allow us to offer our customers a value alternative to manufacturer branded products.

Although our business serving the food processor sector has experienced margin pressures due to the continuing consolidation of several large customers, we have again delivered strong sales and operating profit growth. We moved the operations from our largest facility servicing this sector into a new, modern warehouse that will drive more efficiency and provide opportunities to grow further. This facility now includes state-of-the-art automation to facilitate the handling of small, individual items. Our national accounts strategy continues to deliver new ways to expand our offering to our larger customers using additional digital and marketing tools that we have developed. Our total plant operating supplies programme offers a one-stop-shop solution encompassing jan-san and safety products as well as our own label products including vacuum pouches, shrink wrap bags and bin liners. Our national accounts sales team is continually looking to drive sales by identifying and pursuing customers who understand the benefit of a single source solution for their plant operations.

Our business that supplies the agricultural sector was negatively impacted by adverse weather conditions in California that resulted in reduced fruit and vegetable yields at harvest. Despite this, we have continued to invest in the business and have generated new business opportunities, particularly in Mexico. Having integrated our agriculture businesses onto one IT platform, we are now in the process of changing our warehouse footprint to be closer to our customers and improve efficiencies. Not only will this reduce our costs, but it will also allow us to enhance the service levels that we are able to provide.

In the convenience store sector, our business continues to generate greater revenue and operating profit by using a pull-through selling strategy with our primary wholesale customers to help them increase sales with convenience store retailers. Additionally, our ability to manage our customers' inventory enables them to have the right products at the right time with excellent fill rates and just-in-time deliveries so that they can reduce their working capital and warehouse space needs.

Finally, our business in Canada has continued to make good progress, particularly in the safety, industrial packaging and grocery sectors. We were successful in winning and implementing new business for a large grocery customer during the year. We also realised a number of operational synergies through facility consolidations, particularly in western Canada and the results were further boosted through the impact of recent acquisitions. These include the purchase of AMFAS and Western Safety during the first half of 2017. In addition to distributing commercial and industrial first aid and safety supplies, including a full range of personal protection equipment, they also provide safety related services including training programmes and other workplace safety solutions.

Continental Europe

* Before customer relationships amortisation and acquisition related items (see Notes 1 and 2)

Continental Europe has enjoyed another year of strong growth with revenue rising by 12% to £1,610.4 million and operating profit up 13% to £151.1 million. As a result, the operating margin improved to 9.4%. Organic revenue growth of 4% was higher than that achieved in 2016 and we also benefited from the full year impact of the five acquisitions made in 2016 and the part year contribution of the five acquisitions completed in 2017.

In France, sales in our cleaning & hygiene business declined as an underlying improvement in growth with regional customers, particularly in the hotel, restaurant and catering ('horeca') and food sectors, was not sufficient to offset fully the impact of the loss of two larger accounts. Cost increases were minimal but the lower sales resulted in a decrease in operating profit. Our safety business recorded strong sales growth after winning some new business, although this was at lower margins. Prorisk and GM Equipement, acquired at the end of January 2017, have been fully integrated into our main warehouse and onto our ERP system. Comatec, our foodservice business which specialises in the distribution of high-end, innovative, single-use tableware to the horeca sector, enjoyed strong sales growth after investing in additional resources to ensure its continued success. In a major development, we completed the acquisition of Groupe Hedis in November which has expanded our cleaning & hygiene activities and extended our business in France into the catering equipment sector. Integration is underway and our teams are working hard on delivering the expected synergy benefits.

In February 2018 we sold OPM, a distributor of SodaStream products in France, which was a non-core business that was no longer considered to be a strategic fit within the Group.

In the Netherlands, revenue was up significantly due to new customer wins in the healthcare and retail sectors in particular, although these gains were at lower margins. This sales growth was boosted by the continued expansion of our outsourcing programme for hospitals. Sales also increased with customers in the horeca, grocery, safety and e-fulfilment sectors, although declined in the cleaning and government sectors. Overall operating profit in the Netherlands grew well.

In Belgium, sales continued to increase in the cleaning & hygiene sector but our business serving the retail sector saw a decline in sales as its main customers sought cost reductions in the face of competition from lower cost retail chains. While gross margins improved, operating profit was impacted negatively by some one-off costs associated with an ERP implementation and warehouse relocation in the cleaning & hygiene sector. Polaris Chemicals, acquired in May 2016, has performed ahead of expectations.

In Germany, sales declined in all sectors other than the hotel sector. Although costs were lower, the sales reduction led to lower operating profit. Inkozell and Mo Ha Ge, both acquired in May 2016 and principally engaged in the distribution of incontinence products to 'at-home' end users and care homes, have integrated well into the Group.

Our business in Switzerland has seen a return to revenue growth, despite continued pressure in the tourism industry due to the strong Swiss franc, as a result of good performances in the medical, retail and industrial sectors. Margins remained under pressure from lower cost suppliers in neighbouring countries but costs have been reduced. Operating profit was slightly lower than last year.

In Austria, Meier Verpackungen has enjoyed good sales growth in the fruit and vegetable and dairy sectors which, together with improved margins, resulted in higher operating profit.

In Denmark, revenue decreased due to the loss of a major public sector customer in the latter part of 2016, despite increased sales in the horeca, redistribution, food processing and safety sectors. Costs were reduced as a consequence of the customer loss but this could not prevent a decline in operating profit. The acquisition of Sæbe Compagniet was completed in early January 2017 and has further strengthened our foodservice operations.

In Spain, sales grew strongly in the cleaning & hygiene sector, as a major contract win was rolled out, and the safety sector, due to a combination of customer wins and an extension of the product range. Our healthcare business saw substantial growth from new product launches and enhanced marketing efforts. Overall, margins improved and operating profit was significantly higher. The results also benefited from the acquisition in May of Tecnopacking, which is principally engaged in the distribution of industrial, foodservice and retail packaging products to a broad range of customers.

In Italy, Neri was acquired at the end of March 2017 and has extended our safety operations into a new country. The business has traded in line with our expectations.

In Turkey, revenue at our personal protection equipment business grew strongly due to both volume increases and price rises which had to be implemented following the devaluation of the Turkish lira. Sales also increased significantly at Bursa Pazari, the distributor of packaging and other foodservice supplies and disposable gloves acquired in March 2016, due to gains in the public sector and price rises. As a result of this revenue growth, operating profit in both businesses increased substantially.

In Israel, sales increased significantly in our businesses serving the horeca and bakery sectors due to customer wins. Margins improved and operating profit was up considerably compared to the prior year.

In Central Europe, revenue declined slightly as gains in the cleaning & hygiene sector in Hungary and strong growth in Romania and the Czech Republic were offset by lower sales to retailers and the agriculture sector in Hungary. Blyth, a specialist distributor of personal protection equipment which is based in the Czech Republic and was acquired in August 2016, and Silwell, which is based in Hungary and sells disposable foodservice items to the horeca sector and was acquired in September 2016, are both trading ahead of expectations.

We have continued to roll out our common e-commerce platform across the business area and a further four businesses went live on the system during 2017. This will be further rolled out in 2018, thereby helping to drive both sales growth and operating cost efficiencies going forward.

UK & Ireland

* Before customer relationships amortisation and acquisition related items (see Notes 1 and 2)

In UK & Ireland, revenue increased by 9% to £1,190.8 million, while operating profit was up 5% to £88.5 million. Although the organic sales growth of 1.5% for the year recovered from the decline seen in 2016, and the results were boosted by the impact of recent acquisitions, the UK market continues to be challenging due to political and economic uncertainty which has had an adverse impact on profitability. The operating margin was only down 30 basis points to 7.4% as we took active steps to mitigate the adverse consequences of the significant foreign exchange transaction impact from the weakening of sterling in 2016 which led to higher prices of imported products.

Both sales and operating profit in our safety business were down as investment in major construction and infrastructure projects slowed. As a result, we undertook steps to improve our operating efficiencies further, consolidating some of our warehouses and investing further in our digital channels. New customer wins within our cleaning & hygiene supplies business have, however, given rise to some good growth as we look to provide our customers with valuable data driven insights to help them operate their own businesses more efficiently and effectively in their respective marketplaces.

The food retail market in the UK continues to remain a very challenging environment which has impacted our business. Against this background, we have nevertheless successfully managed to grow with many of our customers by providing extra product ranges and services. In addition, we have secured two further notable customer wins during the year, including one customer that moved to another supplier two years ago but has recently returned to us, having recognised the importance of our 'best-in-class' value and service proposition that we are able to provide in contrast to many of our competitors. On the high street, we continue to encounter both opportunities and challenges in our retail packaging businesses as the market moves from a traditional 'bricks and mortar' operating model to an increasing online offering. We are continuing to invest in product design and service innovation to offer our customers clear differentiation in their marketplaces. The acquisition of Woodway in December 2016 has further expanded our offering in high quality packaging products with a particular focus on e-commerce packaging solutions and the purchase of Lightning Packaging in November 2017 has also strengthened our position in this market. Our point-of-sale fulfilment business continues to add new customers by providing both merchandising insight and added value services. The purchase of Pixel Inspiration at the end of June 2017 has also expanded this business into the provision of digital solutions.

The catering and hospitality market has been adversely impacted by inflation in food costs and the increase in the national living wage which together have put further pressure on our customers' operating margins, thereby causing them to look for cost savings in our product categories. The trading environment has also been more challenging due to the continuing uncertainty of the 2016 referendum vote for the UK to leave the European Union which has held back some investment decisions. Despite these difficult circumstances, we have managed to expand our business due to the roll-out of a major customer win, whilst enlarging our operating footprint and further improving our own brand offering and providing greater value to all our customers. Our online ordering app has also been extensively improved to accommodate more customer functionality going forward. Our catering equipment business has also continued to grow with some new customer wins in the restaurant sector, expanded product ranges and an improved online presence.

The UK government is continuing to focus on reducing costs within the NHS. As a result, we have seen margins come under pressure during the year which have been further exacerbated by the adverse foreign exchange transaction impact on the price of globally sourced products following the devaluation of sterling. Our healthcare businesses have however managed to grow sales by focusing on value-added products, both within the NHS and in the private sector, as well as by increasing export sales. Our nursing and care homes supplies business has also seen further growth with new customer wins and a more widely available online product portfolio.

Our overall business in Ireland has developed well throughout the year with strong increases in both revenue and operating profit. We are continuing to invest in our operations with the opening of our new purpose-built facility in Armagh for our catering and hospitality business which has generated further operational efficiencies with the capacity for additional growth. The winning in the final quarter of the year of a new large customer, to whom we will provide a full range of catering disposables, light and heavy catering equipment and kitchen design services, completed a good year for the business. A number of large public sector customer wins in our cleaning and safety business have been rolled out successfully during the year. Kingsbury Packaging, which was acquired in September 2016, has been fully integrated and has compensated for the loss of some redistribution business in our operations serving the retail sector. In addition, further improvements to our digital capabilities have in turn enhanced our customer offering and improved both the range and services available across our customer base.

Rest of the World

* Before customer relationships amortisation and acquisition related items (see Notes 1 and 2)

In Rest of the World, revenue increased 5% to £718.6 million with operating profit up 5% to £53.9 million and the operating margin unchanged at 7.5%. Trading conditions have improved somewhat compared to the recent past and the economic environments in the countries in which we operate have stabilised, but market conditions remain variable across the business area. Of the total increase in revenue, 2% was due to the organic growth of the underlying business, with acquisitions accounting for the balance.

Brazil saw a return to modest economic growth during the year despite continued political uncertainty. We recorded organic sales growth in all our sectors for the first time in several years which, together with improved gross margins, helped operating profit to increase. Sales through our e-commerce platforms were also up in all businesses and we believe we are well positioned to benefit from Brazil's expected continued economic growth. Despite the challenging industrial environment, our safety business showed good increases in sales and operating profit driven by a strong performance in the redistribution channel and improvements in gross margins. Despite an increase in sales, our cleaning & hygiene business saw operating profit decline. In the healthcare sector in Brazil, sales continued to grow, albeit at a lower rate than in previous years due to unexpected delays in the arrival of several key imported product lines. Operating profit was impacted, however, as gross margins came under some pressure.

We entered the foodservice sector in Brazil in January 2018 with the acquisition of Talge, which is based in Santa Catarina. The business imports and distributes a broad portfolio of private label products mainly to foodservice distributors in the southeast region of Brazil and provides us with an anchor in this important new sector.

In the rest of Latin America, we experienced mixed results against a backdrop of lower economic growth rates in most countries in which we operate. In Chile, where we experienced the continued impact of a subdued mining sector, our safety business Vicsa saw lower sales and operating profit, although further improved gross margins with a better product mix. Our other safety business, Tecno Boga, experienced lower sales with operating profit flat as reduced demand for its premium footwear lines was offset by the introduction of a number of new brands and product lines. Trading conditions were more favourable in the foodservice sector, with increased sales and operating profit at our business DPS, despite the loss of a larger account.

In Colombia, economic conditions deteriorated during the year with softening demand in the construction, industrial and public sectors, such that sales and underlying operating profit fell in our safety business, Solmaq. Restructuring and operational improvement measures were implemented during the year, leading to a much improved performance in the fourth quarter and a business which is well positioned for a future upturn in demand. Sales in Vicsa Colombia were down but good margin management led to strong operating profit growth despite the weakness in the local economy.

In our Vicsa operations in Argentina and Peru, sales and operating profit grew significantly due to favourable trading conditions.

In Mexico, our safety business achieved sales growth despite the market's current uncertainty regarding the country's commercial relationship with the US. However, unfavourable currency movements have put prices and gross margins under pressure, such that operating profit fell despite good cost control. Our business is continuing to develop its e-commerce platform and is well positioned for when market conditions improve.

In Australasia, sales and operating profit increased as trading conditions continued to improve, with GDP growth being driven by increased capital spending from government investment in infrastructure. Although the Australian dollar stabilised during the year, some raw material and product shortages have increased the cost of imported goods which will present some challenges going forward.

Our largest business, Bunzl Outsourcing Services, continued to develop within the healthcare, contract cleaning, catering and retail sectors with sales and operating profit both increasing. Healthcare, which is our largest sector, continues to grow, driven by the ageing population. Recent changes to government funding has increased demand by creating new growth opportunities in the community services sector. We are well positioned to capitalise on these opportunities and the requirements for specialist medical consumables and clinical support are met through our national distribution footprint. We have also invested in a new e-commerce platform which is in the process of being rolled out across the business. This will further enhance our existing trading platform which has automated the majority of our current orders.

Our food processor business continues to make progress with our strategy to diversify our presence across the wider food processor sector resulting in higher sales and operating profit. We have been successful in winning additional large food processor customer contracts across Australia and New Zealand. This is building momentum as we roll these out across both regions. The business has also developed an improved retail food packaging offering and we are already capitalising on several of these new, innovative product ranges.

While our safety business continues to have a strong presence in the resources sector, we made the strategic decision to develop our expertise in other areas to reduce an overreliance in one sector. As such, the business is capitalising on the increased government funding into infrastructure and has been successful in winning major new contracts in the construction and energy sectors and with the federal government.

We have also been able to realise some key benefits from our recent ERP upgrade including improved reporting capabilities across the business. A reduction in costs through the consolidation of facilities and a reorganisation of the business to fit the current market environment has enabled us to streamline our operational platform and processes and will allow us to continue to drive productivity and enhance our competitive position.

In October, we acquired Interpath which is based in Melbourne and is a leading national distributor of laboratory and healthcare related consumables to the pathology, medical research and life science markets in Australia. This expands our reach in the healthcare sector and progresses our strategy to develop our portfolio within growing and resilient market sectors.

We made our first acquisition in Asia in January 2017 with the purchase of LSH in Singapore which was followed by the addition of HSESF in China in August. Both businesses are principally engaged in the supply of personal protection equipment and are being integrated into the group.

Prospects

The combination of our strong competitive position, diversified and resilient businesses and ability to consolidate our fragmented markets further, should lead to continued growth and our expectations for 2018 at constant exchange rates remain unchanged. If exchange rates stay at their current levels, the recent weakening of the US dollar will have an adverse translation effect on the reported results in 2018.

At constant exchange rates, each of our business areas is expected to grow. In North America, we expect revenue to increase as last year's strong organic growth continues during the first quarter of this year before returning to more normal levels thereafter as the substantial additional grocery business is fully absorbed, together with the effect of acquisitions. We will continue to focus on mitigating the impact of higher operating costs, caused in particular by the additional business won as well as some inflationary pressures, through productivity improvements and other initiatives. In Continental Europe we expect to see a strong performance due to continued organic growth and the purchase of Groupe Hedis in France and other acquisitions, partly offset by the disposal of OPM in February 2018. Despite ongoing uncertainty in some of our markets, UK & Ireland should develop well as a result of improved organic growth from recent account wins and the impact of acquisitions. In Rest of the World, overall we expect to see progress due to both organic and acquisition growth.

As announced in January, we expect that the recent changes to tax legislation in the US will reduce the Group's effective tax rate for 2018 to approximately 24% from 27.5% in 2017.

The pipeline of potential acquisitions remains promising. Discussions are ongoing with a number of targets and we expect to complete further transactions as the year progresses.

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

Currency translation

Currency translation had a significant positive impact on the Group's reported results, increasing revenue, profits and earnings by approximately 6%. The favourable exchange rate impact was principally due to the weakening of sterling against the major currencies of the Group midway through 2016, leading to a 12% positive impact in the first half of 2017 and a broadly neutral impact in the second half of 2017.

Revenue

Revenue increased to £8,580.9 million (2016: £7,429.1 million), up 10% at constant exchange rates (up 16% at actual exchange rates), reflecting the benefit of acquisitions and organic growth of 4.3%.

Operating profit

Adjusted operating profit (being operating profit before customer relationships amortisation and acquisition related items) increased to £589.3 million (2016: £525.0 million), an increase of 6% at constant exchange rates and 12% at actual exchange rates.

At both constant and actual exchange rates, the adjusted operating profit margin decreased from 7.1% to 6.9%, primarily due to the impact of lower margin business won in North America.

Customer relationships amortisation and acquisition related items are items which are not taken into account by management when assessing the results of the business as they are considered by management to form part of the total spend on acquisitions or are non-cash items resulting from acquisitions and therefore do not relate to the underlying operating performance and distort comparability between businesses and reporting periods. Accordingly, these items are removed in calculating the profitability measures by which management assesses the performance of the Group. Further details on this and on other alternative performance measures are set out in Note 1.

Interest

The net interest expense of £46.7 million was £0.1 million lower than in 2016 at actual exchange rates and down £1.8 million at constant exchange rates, mainly due to a lower effective interest rate on the Group's borrowings.

Profit before income tax

Adjusted profit before income tax (being profit before income tax, customer relationships amortisation and acquisition related items) was £542.6 million (2016: £478.2 million), up 7% at constant exchange rates (up 13% at actual exchange rates), due to the growth in adjusted operating profit and the decrease in net interest expense.

Profit before income tax increased by £46.4 million to £409.3 million, up 13% at actual exchange rates, due to an increase of £64.4 million in adjusted profit before income tax, partly offset by an increase of £15.3 million in customer relationships amortisation and a £2.7 million increase in acquisition related items due to acquisitions in 2016 and 2017.

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) for the year was 27.5% (2016: 26.9%) and the reported tax rate on the statutory profit was 24.1% (2016: 26.7%). The effective tax rate has increased on the prior year principally due to changes in tax legislation that have increased the profits which are subject to tax. The reported tax rate is significantly lower than in 2016 due to the reduction in a net deferred tax liability in the US following the enactment of the Tax Cuts and Jobs Act. Other than the tax impact of this reduction on intangible assets, which is not taken into account by management when assessing the results of the business, this new legislation had no material effect on the results for 2017. However, due to the reduced rate of US federal tax that applies from 1 January 2018, the Group expects that the tax rate on the adjusted profit will decrease to approximately 24% in 2018.

As explained in Note 13 (Principal risks and uncertainties), the Group identifies tax as a principal risk, and notes that the future tax rate could be affected by changes in tax law and the resolution of uncertainties relating to 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 of £310.5 million was up £44.6 million at actual exchange rates due to a £46.4 million increase in profit before tax, partly offset by a £1.8 million increase in the tax charge.

The weighted average number of shares increased from 329.4 million in 2016 to 329.5 million due to employee share option exercises, partly offset by shares being purchased from the market for the Group's employee benefit trust. Basic earnings per share were 94.2p, up 11% at constant exchange rates and 17% at actual exchange rates.

After adjusting for customer relationships amortisation, acquisition related items and the associated tax, adjusted profit after tax increased by £43.8 million from £349.6 million in 2016 to £393.4 million in 2017 and adjusted earnings per share were 119.4p, an increase on 2016 of 7% at constant exchange rates and 13% 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 2017 dividend is 10% higher than the 2016 dividend, which compares with the adjusted earnings per share growth of 7% at constant exchange rates and 13% at actual 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 (being earnings before interest, tax, depreciation, customer relationships and software amortisation and acquisition related items), 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 2017, Bunzl has sustained a growing dividend to shareholders over the past 25 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 13 (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 2017, Bunzl plc had sufficient distributable reserves to cover more than four years of dividends at the cost of the 2017 dividends, which is expected to be approximately £152 million.

Acquisitions

The Group completed 15 acquisitions and agreed to acquire two further businesses during the year ended 31 December 2017. The estimated annualised revenue and adjusted operating profit of the acquisitions completed during the year were £587.7 million and £57.0 million respectively. Excluding the two acquisitions that had been agreed at 31 December 2016 but completed during 2017, and including the two acquisitions that were agreed during 2017 but not completed by 31 December 2017, the estimated annualised revenue of the acquisitions was £620.9 million.

The acquisitions completed during the year include the acquisition of Groupe Hedis, which is considered to be individually significant due to its impact on intangible assets, adding £131.7 million to customer relationships and £119.0 million to goodwill. The committed spend on this acquisition was £237.3 million. For further details of this acquisition see Note 9.

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 £9.2 million of transaction costs and expenses paid and £4.7 million from payments relating to the retention of former owners.

Disposal

At 31 December 2017, the Group had received a binding offer for the purchase of OPM in France, the acceptance of which was subject to completion of a consultation process with the relevant works council. The disposal was subsequently completed on 2 February 2018. Accordingly, the assets and liabilities of the business have been separately recorded on the Group balance sheet as assets and liabilities held for sale. Revenue in 2017 of the business disposed of was £50.3 million and the net assets held for disposal at 31 December 2017 were £12.4 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 £412.1 million was up £56.6 million from 2016, primarily due to the increase in operating cash flow of £47.8 million, in addition to a £10.1 million decrease in the cash outflow relating to tax. The Group's free cash flow was primarily used to finance dividend payments of £138.2 million in respect of 2016 (2016: £125.4 million in respect of 2015) and an acquisition cash outflow of £588.5 million (2016: £176.6 million).

Cash conversion (being the ratio of operating cash flow to adjusted operating profit) was 97% (2016: 99%). The Group has had a consistently high level of cash conversion over many years and cash conversion has averaged 97% since 2004.

Net debt

Net debt increased by £295.0 million during the year to £1,523.6 million (2016: £1,228.6 million), principally due to the net cash outflow of £334.0 million.

Net debt to EBITDA calculated at average exchange rates and in accordance with our external banking covenants was 2.3 times (2016: 2.0 times).

Balance sheet

Return on average operating capital decreased to 53.1% from 55.9% in 2016, driven by a lower operating margin and a higher average operating capital in the underlying business, both partly due to the additional business won in North America at lower than average margins, and also due to the impact of the lower return on operating capital from acquisitions, partly offset by a small favourable impact from exchange rate movements. Return on invested capital of 16.0% was down from 16.7% in 2016 due to lower returns on recent acquisitions and in the underlying business, partly offset by a small favourable impact from exchange rate movements.

Intangible assets increased by £404.1 million to £2,351.7 million due to intangible assets arising on acquisitions in the year of £556.6 million and software additions of £7.5 million, partly offset by an amortisation charge of £104.0 million, a decrease from exchange of £51.9 million and a transfer to assets held for sale of £4.1 million.

Working capital increased by £52.9 million to £871.9 million primarily from acquisitions and a small underlying increase, partly offset by a decrease from exchange rate movements and a transfer to assets held for sale.

The Group's net pension deficit of £51.0 million at 31 December 2017 was £33.1 million lower than at 31 December 2016, largely due to an actuarial gain of £27.0 million. The actuarial gain arose as a result of the actual return on scheme assets being £31.5 million higher than expected, partly offset by an increase in the present value of scheme liabilities from changes in assumptions, principally lower discount rates.

Shareholders' equity increased by £136.1 million during the year to £1,448.6 million.

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. 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. Following the publication of the Group's BBB+ credit rating from Standard & Poor's (stable outlook), Bunzl Finance plc successfully issued a £300 million senior unsecured bond to further diversify the funding sources of the Group. The senior bond has been listed on the London Stock Exchange. 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 2017 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 2017 the nominal value of US private placement notes outstanding was £1,107.6 million (2016: £1,251.1 million) with maturities ranging from 2018 to 2028. The £300 million senior bond matures in 2025 and the Group's committed bank facilities mature between 2018 and 2022. At 31 December 2017 the available committed bank facilities totalled £1,056.9 million (2016: £954.2million) of which £224.6 million (2016: £101.3 million) was drawn down, providing headroom of £832.3 million (2016: £852.9 million).

Consolidated income statement

for the year ended 31 December 2017

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

Consolidated statement of comprehensive income

for the year ended 31 December 2017

Consolidated balance sheet

at 31 December 2017

.Consolidated statement of changes in equity

for the year ended 31 December 2017

◊ Other reserves comprise merger reserve of £2.5m (2016: £2.5m), capital redemption reserve of £16.1m (2016: £16.1m) and a negative cash flow hedge reserve of £1.3m (2016: £2.5m positive).

† Retained earnings comprise earnings of £1,292.7m (2016: £1,120.7m) offset by own shares of £122.9m (2016: £132.4m).

Consolidated cash flow statement

for the year ended 31 December 2017

* 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 2017 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 2017 Annual Report will be published in March 2018. The financial information set out herein does not constitute the Company's statutory accounts for the year ended 31 December 2017 but is derived from those accounts and the accompanying directors' report. Statutory accounts for 2017 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 18 April 2018. 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 2016 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 no new standards issued by the IASB that are applicable to the Group for the year ended 31 December 2017. The Group has adopted all relevant amendments to existing standards and interpretations issued by the IASB that are effective from 1 January 2017 with no material impact on its consolidated results or financial position.

The Group is currently assessing the potential impact of new and revised standards and interpretations issued by the IASB that will be effective from 1 January 2018 and beyond, none of which have been adopted early. A summary of the Group's current considerations with respect to three of the new accounting standards is included below.

IFRS 15 'Revenue from Contracts with Customers' is effective in the consolidated financial statements for the year ending 31 December 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. During the year the Group carried out a detailed assessment of its other revenue streams and assessed the revenue recognition policies for these goods and services against the requirements of IFRS 15. The Group's other revenue generating activities represent circa 1% of total revenue. The majority of this revenue relates to design and fit-out services for foodservice customers and to fulfilment services where the Group does not take title to inventory. Having assessed these and other services performed, the Group has determined that the recognition of revenue under IFRS 15 does not differ materially from current accounting practice. Accordingly, based on the Group's assessment, the application of IFRS 15 is not anticipated to have a material impact on the timing of revenue recognition and is not anticipated to have a material impact on the Group's operating profit or financial position. Therefore the adoption of IFRS 15 is not expected to lead to a restatement of the 2017 consolidated income statement in the 2018 Annual Report. The Group will adopt IFRS 15 on 1 January 2018 using the retrospective approach.

IFRS 9 'Financial Instruments' will be effective in the consolidated financial statements for the year ending 31 December 2018 with a transition date of 1 January 2017. The Group has reviewed the differences between IFRS 9 and the current accounting policies which comply with IAS 39 'Financial Instruments: Recognition and Measurement' and has determined that the only notable change affecting the Group is that IFRS 9 provides a new expected credit loss impairment model for financial assets. During the year the Group carried out an assessment of the impact of adopting the expected credit loss impairment model for financial assets particularly on the provision for trade receivables and has determined that it will not have a material impact on the overall level of provisioning. Based on the Group's overall assessment, the application of IFRS 9 is not anticipated to have a material impact on the Group's consolidated results or financial position. Therefore the adoption of IFRS 9 on 1 January 2018 is not expected to lead to a restatement of the 2017 results in the 2018 Annual Report.

IFRS 16 'Leases' will be effective in the consolidated financial statements for the year ending 31 December 2019. The Group will adopt IFRS 16 on 1 January 2019 and intends to use the modified retrospective approach to transition utilising the practical expedients outlined in the standard. To prepare for the transition to this new accounting standard, data has been collated on all of the Group's leases which are principally for warehouses, offices and vehicles. Based on the Group's assessment, which is ongoing, the application of IFRS 16 will have a material impact on the consolidated financial statements.

The new standard will require 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 discounted value of the cash payments required under each lease. Whilst the actual impact will not be known until IFRS 16 is adopted on 1 January 2019, using projections based on leases in place at 31 December 2017 and assuming an adoption date of 1 January 2017, it is currently estimated that adoption of IFRS 16 would increase the carrying value of Property, plant and equipment at 31 December 2017 by between £350 million and £400 million with liabilities increasing by between £450 million and £500 million. The existing operating lease expense, currently recorded in operating costs, will be replaced by a depreciation charge, which will be lower than the current operating lease expense, and a separate financing expense, which will be recorded in interest expense. It is currently estimated that there will be a small positive impact on profit before tax but there will be no net cash flow impact arising from the new standard. Net debt to EBITDA (being earnings before interest, tax, depreciation, customer relationships and software amortisation and acquisition related items) calculated at average exchange rates will increase by approximately 0.2 times but current banking covenants will be unaffected. The Group does not currently intend to alter its approach as to whether assets should be leased or bought going forward.

Apart from these three standards, 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 2018 and beyond will have a material impact on its consolidated results or financial position.

Alternative performance measures

Further to the various performance measures defined under IFRS, the Group reports a number of alternative performance 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') and may not be directly comparable with other companies' alternative performance measures. They are not designed to be a substitute for any of the IFRS measures of performance. The principal alternative performance measures used within the consolidated financial statements and the location of the reconciliations to equivalent IFRS measures are:

· adjusted operating profit, adjusted profit before income tax and adjusted profit for the year (as reconciled on the face of the consolidated income statement);

· effective tax rate, being tax on adjusted profit as a percentage of adjusted profit before income tax (as shown in Note 4);

· adjusted earnings per share and adjusted diluted earnings per share (as reconciled in Note 6);

· cash conversion % (operating cash flow, as reconciled on the face of the consolidated cash flow statement, to adjusted operating profit);

· return on average operating capital % (the ratio of adjusted operating profit to the average of the month end operating capital employed (being property, plant and equipment and software, inventories and trade and other receivables less trade and other payables)); and

· return on invested capital % (the ratio of adjusted operating profit to the average of the month end invested capital (being equity after adding back net debt, defined benefit pension scheme liabilities, cumulative customer relationships amortisation, acquisition related items and amounts written off goodwill, net of the associated tax)).

These measures exclude the charge for customer relationships amortisation, acquisition related items and any associated tax, where relevant. 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 items which are not taken into account by management when assessing the results of the business as they are considered by management to form part of the total spend on acquisitions or are non-cash items resulting from acquisitions and therefore do not relate to the underlying operating performance and distort comparability between businesses and reporting periods. Accordingly, these items are removed in calculating the profitability measures by which management assess the performance of the Group.

Other alternative performance measures are used to monitor the performance of the Group and a number of these are based on, or derived from, the alternative performance measures noted above. All alternative performance measures have been calculated consistently with the methods applied in the consolidated financial statements for the year ended 31 December 2016. Growth rates at constant exchange rates are calculated by retranslating the results for the year ended 31 December 2016 at the average rates for the year ended 31 December 2017 so that they can be compared without the distorting impact of changes caused by foreign exchange translation.

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 not in a hedge relationship, which minimises the foreign currency exposure in the income statement.

4. Income tax

In assessing the underlying performance of the Group, management uses adjusted profit which excludes customer relationships amortisation and acquisition related items. Similarly the tax effect of these items 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 2018 are included in the Financial review.

The reported tax rate for 2017 is significantly lower than in 2016 due to the reduction in a net deferred tax liability in the US following the enactment of the Tax Cuts and Jobs Act.

5. Dividends

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

The 2017 interim dividend of 14.0p per share was paid on 2 January 2018 and comprised £46.2m of cash. The 2017 final dividend of 32.0p per share will be paid on 2 July 2018 to shareholders on the register at the close of business on 25 May 2018. The 2017 final dividend will comprise approximately £106m of cash.

6. Earnings per share