Bunzl plc (OTCPK:BZLFF) Q2 2024 Earnings Call Transcript August 27, 2024 4:30 AM ET
Company Participants
Frank van Zanten – CEO
Richard Howes – CFO
Conference Call Participants
Annelies Vermeulen – Morgan Stanley
Sylvia Barker – JPMorgan
Suhasini Varanasi – Goldman Sachs
Frank van Zanten
Good morning, and thank you for attending Bunzl’s 2024 Half Year Results Presentation. I appreciate you joining us today. Richard Howes, our CFO, is also on the call and will cover our financial performance, capital allocation, and outlook for the remainder of the year following my initial remarks. After that, I will summarize our strategic progress year to date.
Let me start with the key takeaways from today’s results. Firstly, we have achieved real success in delivering our acquisition strategy and have already surpassed our record total committed spend. August year-to-date, we have committed more than GBP650 million announcing seven acquisitions, including one more today. Our pipeline is active and I’m confident that we will have even more acquisitions to announce before the end of the year.
Despite the step change, we’ve made an increasing our level of acquisition spent in recent years, our leverage has remained well below our target range for some time. This is due to the success of our investments and our consistently strong cash generation over the last few years. Therefore, today, we are committing to measures intended to steadily return to our target leverage range by the end of 2027. To do this, we will allocate around GBP700 million per annum, primarily towards value-accretive acquisitions and if required, returns of capital to shareholders in each of the three years ending 31st December 2027. To kick this off, we are launching Bunzl’s first ever share buyback program today, returning an initial GBP250 million by the 3rd of March 2025. We expect to extend this program in 2025, with a further share buyback of around GBP200 million. Richard will take you through the details later in the call.
I’m also very pleased that our operating margin has continued to expand strongly, increasing from 7.4% in the first half of 2023 to 8% in the first half of 2024. Therefore, today, we upgrade our full year profit forecast for 2024. Encouragingly, the Group is also seeing improving revenue trends which further supports our outlook. Finally, these achievements would not be possible without the excellent work of my talented colleagues across the business and I would like to thank them all for their contributions to Bunzl’s ongoing successes.
Now moving on to the main highlights of the first half. Over the period, we achieved strong adjusted operating profit growth of 7.4% at constant exchange rates, mainly driven by continuing operating margin expansion, thanks to the exceptional efforts of our teams in managing margins, including increasing own brand penetration and the contributions from higher margin acquisitions. Revenue at constant exchange rates declined by 0.4% and was mainly impacted by deflation as well as volume softness in North America, which more than offset our acquisition growth in the first half. The Group has seen an improvement in organic revenue trends in July and August. We have achieved a 2% increase in our own brand penetration compared to the year-end and is now at 27% across the Group. We have seen a meaningful improvement in our own brand penetration in North America, which has had a visible impact on the Group’s overall numbers. We continue to collaborate with our strategic third-party branded suppliers to provide unparalleled product choice for our customers.
Our model remains highly cash-generative. Free cash flow increased by 8.4% at actual exchange rates against the first half of 2023, while cash conversion was excellent at 100%. The consistency of our cash generation means that even despite committing a record amount to acquisitions so far this year, leverage remains meaningfully below our target with adjusted net debt to EBITDA of 1.5 times. We therefore have substantial headroom for continuing to self-fund value-accretive acquisitions alongside additional returns of capital to shareholders. We are announcing a 10.4% increase in our interim dividend per share as we continue to normalize dividend cover to more historical levels. We are expecting dividend cover of 2.65 times in 2024 with further normalization in 2025.
Now I want to go to the key contributors to our model for shareholder returns and reiterate my confidence in Bunzl’s ability to achieve high quality growth in the medium term. Following several years of exceptional growth, we have seen revenue decline slightly in the first half of 2024. However, it has been encouraging to see an improvement in underlying revenue trends during the period. We expect further improvement as our businesses continue to focus on our customer value proposition and a net inflationary environment should support revenue growth in the medium term. Secondly, as we’ve seen already, our operating margin has grown substantially in the last few years. Lastly, our cash generation remains as strong as ever. Between 2019 and 2023, we generated a total of GBP2.9 billion free cash flow and spent GBP2.8 billion on both value-accretive acquisitions and dividends. Even though we have step changed our acquisition spend over recent years, our leverage remains well below our target range, hence our commitment to return to our target leverage by the end of 2027. These key contributors continue to be supported by the tailored solutions we provide, our focus on continuous innovation, including our sustainability offering, digital investments, our agile and resilient business model, and, of course, our talented people. Each of these elements will help ensure the company maintains its trajectory of high quality growth.
I will now hand over to Richard.
Richard Howes
Thank you, Frank. Good morning, everyone. With almost 90% of adjusted operating profit generated outside the UK, our results on average were negatively impacted by currency translation of between 3% and 4% across the income statement. All my comments are at constant exchange rates unless otherwise specified.
Starting with revenue. The Group has achieved strong revenue growth of 28% from the — from H1 2019 to H1 2023. Following this period of strong growth, revenue in the first half declined by 0.4% to remain at GBP5.7 billion. Acquisitions contributed 3.7% to revenue growth and revenue also benefited by 0.8% from an additional trailing day in the period. However, this was more than offset by a 4.9% decline in underlying revenues, reflecting deflation as well as volume reductions primarily in our foodservice redistribution business in North America. Overall, this resulted in an organic revenue decline of 4.1%. Encouragingly, we have seen an improvement in quarterly underlying revenue trends with Q2 being better than Q1. These trends improved further in July and August with an underlying revenue decline of only 1% to 2%, in part due to softer comparators. And this gives us confidence to reiterate our guidance for a return to organic revenue growth towards the end of the year.
Now turning to the income statement. Adjusted operating profit grew strongly by 7.4% to GBP456 million. This was driven by a strong increase in operating margin from 7.4% in H1 2023 to 8.0% in H1 2024. This increase has been driven by an improvement in underlying margins, supported by good margin management and increasing own brand penetration as well as the higher margins attributable to acquisitions.
Adjusted earnings per share increased by 6.2% to 90.8p, reflecting the strong profit performance. Adjusted net finance expenses increased by GBP4.1 million to GBP46.8 million, driven by increases in lease expense and interest rates on floating debt, partially offset by lower average debt during the period. Adjusted profit before income tax increased by 6.7% to GBP409 million. The effective tax rate for the period was 25.5% compared to 25.2% last year, reflecting the impact of the increase in the UK corporation tax rate in the first quarter. Reflecting our confidence in the outlook for the Group, we continue to normalize our dividend cover to historical levels. We are therefore increasing our interim dividend per share by 10.4%. Reported earnings were impacted by the currency translation driven loss related to the disposal of our business in Argentina in March. Additionally, we completed the disposal of a German business in which supplies incontinence products shortly following the end of the period. The disposal of this small business does not impact our half year income statement.
Moving on to cash flow. The Group’s cash generation remained strong during the first half of 2024. Cash conversion was 100%, ahead of the 93% achieved in the first half of last year. Free cash flow was strong as well with GBP310 million generated during the period, an 8.4% increase at actual exchange rates versus the first half of 2023. During the first half, we paid GBP61 million in dividends and made a net payment of GBP54 million to buy shares for our Employee Benefit Trust, leaving total cash generation prior to investment in acquisitions and disposal proceeds of GBP196 million. Cash outflow and acquisitions actions totaled GBP439 million.
Turning to the balance sheet. Working capital increased by GBP29.7 million since the end of 2023, mainly due to the impact from acquisitions and some underlying increase in receivables, partly offset by a decrease from currency translation. Our adjusted net debt to EBITDA was 1.5 times at the half year 2024 compared to 1.2 times at the end of 2023. This leverage ratio has been adjusted to include deferred and contingent consideration to be paid on acquisitions as debt, alongside the associated level of EBITDA. Adjusted net debt on this basis was GBP1.7 billion. This headline ratio continues to exclude the impact of leases. We, therefore, have substantial capacity to enhance shareholder returns with our preference being to self-fund value-accretive acquisitions. I will outline our new commitments on capital allocation shortly. Returns remain strong, with a return on invested capital of 15.3% and a return on average operating capital of 45.3%.
Before I discuss the sector performance for the period, I want to reiterate our views on the medium-term growth outlook. We see good growth opportunities in all our sectors besides brick-and-mortar and non-food retail. Safety, cleaning & hygiene and healthcare remain the sectors where we see the greatest growth opportunity both organically and through acquisitions. Overall in H1 2024, volume growth in most sectors has been offset by deflation. Combined, our safety, cleaning & hygiene and healthcare sectors declined 0.8%. Revenue in our safety businesses saw a small impact from deflation. We continue to expect our North America safety businesses to benefit from the increased infrastructure spend in the medium term. Our cleaning & hygiene businesses have seen volume growth throughout the period. However, deflation has more than offset this growth, leading to a small organic revenue decline. The same is true for our healthcare businesses, however, looking forward, the backlog of elective surgeries remains a tailwind.
Our grocery sector declined 2.9%, impacted by deflation, particularly in the US and some softer volumes in the UK and Ireland. Foodservice and retail declined by 7.6%. As previously disclosed, foodservice was impacted by deflation and volume softness in our North American foodservice redistribution business, where we continue to grow our own brands. Retail was impacted by deflation and the ongoing impact from the decision to transition ownership of customer-specific inventory in our US retail business, which is now annualized. As volumes continue to increase and deflationary pressures ease further in H2, we are confident that the business will return to organic revenue growth towards the end of this year.
Now moving on to our business area performance. The factors driving the underlying revenue decline in North America are as outlined on the previous slide. Operating margin performance, however, strong with good margin management, including meaningful expansion of own brand penetration, which also supported an increase in the return on average operating capital. Continental Europe saw good revenue growth driven by significant acquisition activity, which offset a 3.4% underlying revenue decline driven by deflation, which is expected to be temporary. Operating margins were resilient and returns were strong, increasing to 45%.
UK and Ireland saw underlying revenue decline driven by selling price deflation across most market sectors, which is expected to be temporary and softer volumes, particularly in the grocery and foodservice sectors. The continued focus on margin management including increased own brand penetration greatly benefited operating margin, which increased strongly to 7.6%, resulting in very strong underlying profit growth.
In the Rest of the World, revenue growth was very strong, driven by acquisitions, while underlying revenue increased by 2.2%, mainly driven by volume growth in Latin America and some inflationary benefits and volume growth in Asia Pacific. Rest of World’s operating margin increased very strongly to 12.2%, reflecting the positive contributions from acquisitions and good margin management.
In all business areas, our teams have managed operating cost inflation well with wage inflation remaining manageable at close to historical levels. Property cost continue to increase significantly, particularly in North America and UK and Ireland, with this being partially offset by our programme of warehouse relocations and consolidations.
Now moving on to capital allocation. As to our disciplined approach to capital allocation, our priorities remain unchanged. To invest in the businesses to support organic growth and operational efficiencies, to pay a progressive dividend, to self-fund value-accretive acquisitions, and where appropriate distribute excess cash to shareholders. Bunzl has performed exceptionally well over the last few years. Our cash generation and EBITDA growth have been very strong. And as a result of this success, the Group has structurally deleveraged. EBITDA increased by 55% between 2019 and 2023, while net debt only increased by 2%, resulting in leverage declining from 1.9 times in 2019 to 1.2 times at the end of 2023. Over the same period, the Group generated GBP2.9 billion of free cash flow and spent a total of GBP2.8 billion across value-accretive acquisitions and dividend payments. We have also seen a strong increase in return on invested capital, reflecting the success of our investments and the organic improvements we have made to the business over this period. In 2024, we have seen leverage increase to 1.5 times as a result of the acquisition of Nisbets. Even having completed our largest deal to date, the strength of our balance sheet and cash flow continues to provide us with substantial opportunities to enhance the returns we provide to shareholders.
Recognizing that we have structurally deleveraged and remained below our target leverage range of 2 times to 2.5 times in recent years, we are today committing to return to our target leverage range by the end of 2027 through increasing the amount of capital we allocate through our disciplined framework. We begin with the launch of a share buyback program today with an initial GBP250 million buyback to be completed no later than the 3rd of March 2025. We then intend to commence a further buyback program of around GBP200 million to be completed by the end of 2025. We will confirm the amount at our full year results for 2024.
In the three years ending 2027, we are committing to allocate around GBP700 million annually towards acquisitions and if required, additional capital returns. If at the end of each year if full amount has not been deployed in value-accretive acquisitions, then we will top-up the amount of committed spend achieved to around GBP700 million with a capital return in the following year. By way of example, if we spend GBP500 million in 2025 on value-accretive acquisitions, then we will announce a GBP200 million buyback at the end of February 2026, with our full year 2025 results. This would be completed by December 2026.
I want to be very clear that we are in this position to make such a commitment to additional capital allocation as a result of the success the Group has achieved in the last few years and the associated structural deleveraging. Our clear preference remains to allocate this additional spend towards value-accretive acquisitions. We operate in very large and fragmented sectors with a substantial opportunity to consolidate our existing markets. And as we have demonstrated with our recent steps into Poland and Finland, new markets also provide additional growth opportunities. Our pipeline remains active with well over 1,000 targets in our database.
Now moving on to dividends. Our track record of 31 years of consecutive annual dividend increases is a testament to the resilience of the Bunzl business model, the strength of its cash generation, and the success of its compounding growth strategy. We remain committed to continuing growth in our dividend per share. We have announced a 10.4% increase in our interim dividend as we continue to normalize dividend cover back to historical levels, leading to an expected dividend cover of 2.65 times in 2024, before a further reduction in 2025 to between 2.5 times and 2.6 times.
Turning to the outlook, we upgrade our profit guidance for the full year, driven by an increase in operating margin expectations. We now expect adjusted operating profit in 2024 to show a strong increase in comparison with 2023 at constant exchange rates, mainly driven by an increase in the operating margin due to positive contributions from acquisitions and good margin management, including increased own brand penetration. Group operating margin is now expected to be moderately above the level reported for 2023. We continue to expect to deliver robust revenue growth in 2024 at constant exchange rates, driven by acquisitions already completed in 2024 with a small decline in underlying revenue.
We are also providing the following guidance on other parts of our income statement. Please note this guidance does not account for the impact of the share buyback announced today. The Group now expects tax rate of approximately 25.5% in 2024, lower than the previous guidance of around 26%. Net finance expense in 2024 is expected to be around GBP100 million with an increase predominantly reflecting the spend on acquisitions year-to-date. As previously explained, we expect dividend cover of 2.65 times in 2024. And finally, we expect the weighted average number of shares prior to the impact of the buyback to be around 335.5 million shares.
I will now hand you over to Frank to take you through our business performance and strategy in more detail.
Frank van Zanten
Thank you, Richard. Bunzl today is a structurally more profitable and higher-margin business than it was several years ago. This is due to the success of our strategic focus on margin management, increasing own brand penetration, and acquiring businesses which provide more added value. Between 2004 and 2015, when I was Bunzl’s Managing Director for Continental Europe, we expanded the region’s operating margin from around 6.5% to 9.3%. Since taking over as CEO in 2016, I have applied the same strategies at the Group level, taking us to where the margin is today.
Operating margin increased strongly from 7.4% in the first half of 2023 to 8.0% in the first half of 2024, maintaining the record operating margin reported at the year-end. Of the 1.4 percentage point increase in operating margins from 2019, roughly half relates to an underlying margin increase, while the remaining half has been driven by acquisitions made since. Our underlying operating margin increase has been driven by good margin management with a particular focus on increasing own brand penetration, which was around 27% at the end of June. Additionally, operational efficiency remains part of our DNA with our investments in digital technology and warehouse consolidation continuing to partially offset operating cost inflation and support our underlying margin performance. Finally, a focus on value-added distribution has allowed us to materially reduce the percentage of Group revenue subject to cost-plus arrangements. Overall, we remain focused on these drivers of margin expansion and I’m pleased with the direction that we’re moving in.
Now let’s turn to an example of our strategy in action, looking at how sustainability is increasingly driving organic growth opportunities. We recently won a tender with Core Highways, a leading and fast-growing provider of temporary traffic management solutions in the UK. They are focused on sustainability, so this was a key element in our overall value proposition to them supporting this contract win.
Firstly, our carbon footprint tool helps identify ways for Core Highways to reduce their carbon footprint. This includes working with us as their sole distributor, replacing a network of independent distributors, allowing us to consolidate and reduce the carbon emissions associated with deliveries. Our product award guide also helps Core Highways to select those products that have the best environmental credentials. Additionally, our digital procurement tools give them better visibility over the delivery and ordering process, giving them better insights to optimize their decision-making. And finally, our scale and experience allows us to deliver strategic solutions tailored to their requirements, while our national footprint is able to service them across the country supporting their growth. Overall, we are committed to working with our customers on reducing their Scope 3 emissions and achieving their sustainability targets. This contract win highlights some of the exciting opportunities for organic growth driven by our value proposition that we have in the UK and across all of our markets.
Turning to acquisitions. As mentioned before, I’m immensely proud that this is already Bunzl’s record year in terms of committed spend, having step changed our acquisition spend in recent years. We have completed some fantastic deals already this year and today, we are also announcing another addition to the Bunzl family, PowerVac, a distributor of cleaning equipment in Western Australia, which complements our existing businesses. Overall, we’ve made acquisitions in five of our market sectors and across seven different countries, including our first acquisition in Finland, highlighting the breadth of our ongoing consolidation opportunity and our pipeline remains active. Finally, as has been mentioned already, we have optimized our portfolio this year through the disposal of two small businesses.
Let me now give you some further details on two of this year’s acquisitions. You will all be familiar with Nisbets, which is the largest acquisition we have made to date. What I’ve seen since the acquisition has only reinforced my belief in the quality of its people and the landscape of opportunity for the business, particularly with its own brands. So far, Nisbets has been trading in line with our expectations. The integration is proceeding well and we expect to start seeing synergies in 2025. I’m also very pleased that Andrew Nisbet and his team have already identified a few bolt-on acquisition targets that were not previously on our radar, which we have now added to our pipeline. This demonstrates the scalability of our locally sourced acquisition model. It is also worth highlighting our continued expansion into specialty healthcare in Latin America. This is a very attractive end market for us with good structural growth tailwinds and typically these businesses have higher margins as well. RCL Implantes, which we announced earlier in July, is one such higher margin business specializing in distributing surgical devices and prosthetics across Brazil, expanding our offering and product range in these markets.
Now moving on to talk about another healthcare business in Latin America, Medcorp, to demonstrate some of the benefits that we provide through our acquisitions. We acquired Medcorp, which is a distributor of specialist healthcare products in Brazil at the very beginning of 2020. Since being acquired, Medcorp’s management team has embraced the benefits of being part of Bunzl which has translated into them achieving impressive revenue growth of over 20% in the first half of this year.
Let me tell you about some of the key changes that enabled this. Medcorp now has access to our dedicated global supply chain solutions team. They worked with this team to identify key new supply partners, allowing them to expand their product offering to existing customers and grow into adjacent markets. When we acquired the business, Medcorp was typically selling only one or two key components required in a particular treatment area. For example, catheters required for kidney dialysis. We identified an opportunity to expand wallet share with Medcorp’s existing customers by selling the full range of products required for this treatment to them, including needles, filters, and cartridges as well. By leveraging our supply-chain solutions team, Medcorp identified new suppliers of these products at competitive prices. Having access to Bunzl’s knowledge and support has also helped the team to further differentiate themselves by building digital tools and customized solutions as well as becoming a sustainability leader in their local markets. All of these investments in the business have contributed to us achieving a 3 times decrease in the implied EV/EBITA multiple, we’ve paid for this business based on its 2023 earnings. This is just one example of many acquisition successes from across the Group.
Finally, before we move on to Q&A, I want to reiterate our key takeaways from today and highlight how this will build on our long term track record of success to keep driving further quality growth for the Group. Firstly, we have been immensely successful at executing our acquisition strategy over the last few years with committed spend already reaching a record level August year-to-date and our pipeline remains active. Secondly, the successes that the Group has achieved over the last few years in particular have resulted in a structural deleveraging, enabling us to commit to increasing our capital allocation to return to our leverage target range by 2027 with the intention of enhancing shareholder returns. And finally, our ongoing focus on the drivers of our operating margin have delivered a strong expansion in operating margin compared to the first half of 2023, leading to a full year profit upgrade for 2024. Overall, I’m very pleased with what we have achieved so far this year and excited by the opportunities we have for further extend — to further extend our track record of success.
Thank you for your attention. We’re now very happy to take any questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question today comes from Annelies Vermeulen from Morgan Stanley. Your line is now open. Please go ahead.
Annelies Vermeulen
Hi, good morning, Frank. Good morning, Richard. Can you hear me okay?
Frank van Zanten
Yes.
Annelies Vermeulen
Great. Thank you. So I have two questions, please. So firstly, just on the margin guidance, I think this is the second or third margin guidance increase that we’ve seen over the last few months. I know historically you’ve been a little bit unwilling to commit on margins beyond 2024. But based on what you’ve seen today and assuming all else equal, can we assume that margins will stay at this sort of higher plus — 8% plus level beyond 2024, if you can comment on that? And as part of that also, could you give an update on the progress of your own brand penetration over the first half and how that’s developed? And then secondly, on the capital allocation policy, you’ve announced today, again, historically, I think your acquisition spend has been lumpy and difficult to predict in terms of timing. I appreciate the GBP700 million may not all go towards deals as you say, but I’m just wondering if anything has changed in terms of your visibility of the pipeline or how you’re approaching those deals that gives you the confidence in that spend going forward? And similarly, should we expect similar average acquisition multiples relative to history as part of that? Sorry, that might have been two and a half, sorry.
Frank van Zanten
Okay, let me give a go and start with the last one and Richard just to jump in. Yeah, just on the acquisitions. I think our pipeline is strong. I think our total database is — in terms of acquisition, target is only sort of growing. Have you spoken about more than a thousand in a database? Every time we buy a business in a new country, a new sector, we get to know more good contacts, and we have no reason to assume that the multiples are changing, excluding Nisbets. Also, we’re in this range of 6 times to 8 times, and that’s what we expect also going forward. So nothing has really changed in the sense of how excited I am about the prospects around acquisitions. And ideally, we’d like to spend all of it on good acquisitions, because they’re value creative, and a good investment for the future. So nothing to be less excited about and getting more and more excited about Bunzl consolidating, let’s say, the distribution markets around the world. On your first question, I think the own brand has increased from 25% to 27% in the first half. A good part of that is related also to the strategy we’re implementing in our North America distribution business. So we’re excited about that. In terms of margins, margins can always be sort of a bit up and down, but as I said in my speech, let’s say the direction of travel is a positive one. It really depends also on the mix of acquisitions we’re making here. So the more safety, the more healthcare, the more higher value-added businesses we acquire. Obviously, that goes into the mix. About half of the margin increase has been organic, and we feel also reasonably good about that because partly that is related to our own brands. Anything to add, Richard?
Richard Howes
No. Annelies, the only thing to say is that we will give you another data point on margin at the pre-close in December when we’ll give you our view for 2025.
Annelies Vermeulen
Okay. Very clear. Thank you.
Operator
Our next question today comes from Sylvia Barker from JPMorgan. Your line is now open. Please go ahead.
Sylvia Barker
Hi. Good morning, everyone. I’ll just pick up on the same question that Annelies had actually around margins medium term. I suppose historically, the organic margins at the group level have been kind of stable — broadly stable, I suppose. But how do we think about those organic margins if we exclude M&A? Do you think that you can still drive these higher? And would the key kind of levers around it continue to be kind of own brand penetration, clearly you’re set on increasing that in North America. And to what extent would mix help as well? Secondly, on deflation being transitory. So we have seen obviously the raw material — kind of we’re analyzing the raw material price movements and you’ve talked about freight cost being higher. So how much have you been able to kind of negotiate prices possibly up on certain products? And what gives you that confidence, specifically on Continental Europe and the UK? And then finally, could you maybe just mention any details around the new win in the US which seems to have helped organic towards the end of the period? And how much could that contribute in the second half? Thank you.
Frank van Zanten
Richard, do you want to give it a go?
Richard Howes
Yeah, happy to, Frank. So we’ll just check on your margin question. Were you talking about margins and acquisitions specifically or more generally around margins?
Sylvia Barker
So just margins excluding acquisitions. Let’s say you didn’t make any more acquisitions, which is obviously crazy given what you just said. But just exclude the benefit from the acquisitions, what do you expect going forward?
Richard Howes
Yeah, I think — well, Frank, I think, has covered most of that in his last comment. If I look at the period H1 2023 versus H1 2019, there’s 140 basis point increase in margin, of which 50% of that it relates to the acquisitions we’ve done and the other 50% relates to the organic improvement in margins we’ve achieved. The acquisition side of that clearly is structural. And certainly, within the organic side, we see the improvements in brand that we’ve made since that time also being additive to margin. So I think there are a few things that we think about and how we look at it. And as I said to Annelies, we’ll update you at the end of the year on what we think next year will look like. On deflation, yes, we talked about this being temporary. Now, in part that’s because we’re hitting some softer comparators as we go into the second half of this year. And it is also in part because we see prices increasing in paper and in inbound freight charges. We do expect to be able to pass those on. They are more likely to benefit Q4 than Q3, I would say. And as to the new win in the US, I mean, this is encouraging that the U Steam, I think, have done a good job in being able to win new business in recent times. This is an extension to an existing customer relationship in our grocery business, where they’ve won a significant extra piece of business, significant for the region. And for us in the — the timing of it will be such that it will be tailwind in the second half, but more towards Q4 than Q3.
Frank van Zanten
And, Sylvia, let’s say on paper increases, we know that historically — we feel reasonably good, but it’s always depending how do these increases stick in the marketplace? So let’s wait and see.
Sylvia Barker
Perfect. Thank you both.
Operator
Our next question comes from Suhasini Varanasi from Goldman Sachs. Your line is now open. Please proceed with your question.
Suhasini Varanasi
Hi. Good morning, everyone. Thank you for taking my questions. Just two from me, please. You’ve indicated that the declines have eased to minus 1 to minus 2% levels in July, August. Can you maybe share some additional color by geography? Has the US returned to growth, for example? And the second question is on the revenues, where you’ve transitioned the ownership of customer-specific inventory in the US retail business. Can you maybe just remind us what was the magnitude of the revenues that got transferred? And it’s largely done. And what is the margin on that? Was it basically 0% low single digit margins got transferred? Thank you.
Frank van Zanten
Richard, you want to take them?
Richard Howes
Yeah. So, Suhasini, in relation to how we’re trading in July and August, I don’t have any data to really support the detail behind it by inflation or volume or indeed, at this stage, to give you much on regions other than to say it is pretty broad in its progress. I think that’s largely because this is, at this stage, I think, more driven by the comparator, where we did see a sequential softening in Q3 versus Q2 last year, and that was mainly more to do with more deflation than inflation in Q3 versus Q2 ’23. So I do think the past is quite instructive about what we’ll see in Q3. xIn terms of revenue at our US retail business, where we — yes, we undertook a change in our business model. We transferred — for those customers for whom we felt credit quality was such, we transferred inventory back to those customers in the first half of 2023, thereby invoicing them for the inventory. We didn’t obviously have that inventory to invoice them in the first half of ’24, so there was a drag on revenue. That was around 1% in Q3 of total — sorry in Q1 of total Group revenue decline, so — and it went on to annualize in Q2. So no effect in the third quarter of this year.
Suhasini Varanasi
That’s very clear. Thank you very much.
Operator
Moving on to our first written question today from Ryan Flight at Jefferies. Two question on M&A. Firstly, historically we have assumed a 6 times to 8 times EV/EBITA range for acquisitions. Is this still appropriate when thinking about the GBP700 million annual deployment in the next three years? Secondly, could you please update us on the Nisbets acquisitions, i.e., organic progress, synergies, and whether you still expect it to cover WACC in year three/four?
Frank van Zanten
Okay, let me take the first one. Richard, you take the Nisbets question. Yeah. In terms of the history of Bunzl, we always been in this range of 6 times to 8 times. So the average acquisition size is about GBP30 million, GBP35 million roughly. And then obviously, occasionally you have these higher or these much bigger deals, like MCR in the past or Nisbets now. So you would expect them to be at a slightly higher multiple. Obviously, if you take potential tax benefits, for instance, in the US, you take synergies, then these multiples end up to be more around, let’s say, 9 times, 10 times. But let’s say for the vast majority of the deals, we still expect to be in this 6 times to 8 times multiples before synergies.
Richard Howes
And Ryan, on Nisbets, look, we’re very pleased with what we’ve found. It’s as we expected. This is a high quality business with a very strong management team. They’re performing in line with our expectations as Frank mentioned earlier. Yes, synergy is very much on the horizon. I think that we will see synergy benefits in 2025. And I see no reason to change our view that we will — return on invested capital will meet weighted average cost of capital in either year three or year four.
Operator
Moving on to our next question from David Brockton at Deutsche Bank. How does the own brand revenue mix differ by product line and regions? Where do the greatest opportunities to increase penetration remain? And then two, will excess capital returns always be via buyback, or will you see other forms of return?
Frank van Zanten
Yeah. So let me take the first question on own brands. Traditionally, the highest penetration of own brands has always been in the safety businesses, because we are almost like on the manufacturer kind of level, in the supply chain, where we basically outsource the manufacturing. So we own the brands and we sell to distributors. So own brand and safety has always been very high. Cleaning & hygiene and foodservice, grocery are also areas where, let’s say, own brands can further be developed. And so if I look at, let’s say, the next five years, probably the largest upside in terms of further building own brands would be in our US business, the business that sells to grocery and redistribution. So that’s a very large business that is mostly around product groups that are, let’s say, not being recognized as linked to very high quality brands. So it’s a very wide range of, let’s say, cups, plates, more sustainable products going forward. And that’s important to stress also because at the moment of building these own brands, we’re also strengthening the relationship with our branded suppliers like Kimberly-Clark and Essity. And with some of these people, we are winning the customer award of the year, basically. So playing with the brands is very important, and that’s what we are doing. But let’s say, areas where the brand is less dominant, we are building more of our own brand. So, to cut a long story short, we’ve got opportunity everywhere in the business. It’s a strategic objective for, I’d say, all the businesses to go and gain own brands year on year on year. But I’m most excited about the opportunity to build further own brands in our US businesses.
Richard Howes
David, on the capital return, obviously, we’ve announced two share buybacks today for now one for 2025. For ’26 and ’27, I think it’s more likely to be a share buyback than anything else, if required, of course, because as we mentioned earlier, we’d much prefer to do all of that GBP700 million in M&A. But if it is required, I think it’s our preference for share buyback. Unless, of course, it becomes quite a small number, then maybe we’d think about something else. But you should probably assume a share buyback is the preferred route.
Operator
Our next question comes from Tineke Frikkee at Waverton. Can you please confirm if the guidance for weighted number of shares for the full year is taking into account today’s announced share buyback?
Frank van Zanten
Richard?
Richard Howes
Yes, it absolutely is. As we said in the presentation, all the numbers we gave on guidance were pre the buyback. We clearly don’t know the price at which we’re buying these shares back. So that’s — all the guidance is pre.
Operator
Our next question comes from Karl Green at RBCCM. Circling back to Slide 19, are you able to clarify the methodology from the allocations to organic versus acquisition-related margin expansion since FY ‘19? For example, would any medium term synergy benefit of acquisition completed in 2020 slip to being counted as being organic margin expansion by 2022?
Frank van Zanten
Richard?
Richard Howes
Yes, typically what we see, Karl, is that any — organic acquisition growth becomes organic growth in the future. So, yes, if synergies were delivered in years two, three or beyond, they would probably land more into organic than not. I think the key point there is, though, that most of our synergies will probably come in the first full year of acquisition. But it can change, it could go over into future years.
Operator
A follow-up from Karl Green. In relation to Slide 11, in terms of the disclosed cumulative organic growth versus three broad sector grouping. Can you break out the approximate volume/price split for each grouping, please?
Frank van Zanten
Richard?
Richard Howes
I think we give — Karl, we’ve given some qualitative steer on the breakdown of safety, cleaning & hygiene, if that’s what you’re aiming at. We’re not going to give detailed volume inflation breakdowns for each of them. But hopefully, I think you can see that we aggregate these because we see, this is where we see most of the growth — a lot of growth. And as you can see, the decline in these end markets has been less than the others.
Operator
Our next question comes from Abi Bell at UBS. Firstly, on the 60 bps EBITDA margin expansion. I understand you only formally report gross margin once a year. But are you able to say how much of that was gross margin expansion versus cost efficiencies?
Frank van Zanten
Richard?
Richard Howes
Abi, this was — this is mainly a gross margin improvement. We saw gross margins build through last year. And the rate we’ve seen in the first half of 2024 is equivalent to the exit rates we saw in 2023. But it is very much a gross margin story.
Operator
And then one further follow up from Abi Bell. The revenue outlook implies positive organic growth year-on-year in Q4. What are you assuming for price inflation and volume/mix growth? And would that be a fair run rate to assume for full year ’25?
Frank van Zanten
Richard?
Richard Howes
Yeah, I think as we come towards the last quarter of this year, we will see growth for the total part of the Group, and I would imagine there’s a contribution to growth from both inflation and volume. As to next year, we will update you at the pre-close in December.
Operator
We have no further questions in the queue at this time. So that concludes today’s Q&A. I will now hand you back over to Frank for closing remarks.
Frank van Zanten
Thank you all for attending today’s call.
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