Good morning, everyone, and welcome to the Bunzl Results Call for the six months ended 30th of June, 2021. My name is Bethany, and I'll be your operator today. If you would like to ask a question during the Q&A session, please press star followed by one on your telephone keypad, or star two if you change your mind. I will now hand the call over to Frank van Zanten, CEO of Bunzl. Frank, over to you.
Thank you, and good morning, everyone, and welcome to Bunzl's 2021 half-year results presentation. I'm glad you could join us today. Richard Howes, our CFO, is also on the call this morning, and after a short introduction from me, he will take you to our financial results. I will then review our performance in more detail, highlight our latest acquisition, and discuss our outlook. Let me start with the main takeaways from our results today. Firstly, this set of half-year results continues to demonstrate the resilience and strength of the Bunzl business model. Following an exceptionally strong performance in 2020, we have continued to deliver strong results with 6% revenue growth and 15% adjusted operating profit growth at constant exchange rates. This is a pleasing result given the second quarter last year saw strong demand for COVID-related orders, including some exceptional larger orders.
Compared to the first half of 2019, our underlying revenue was 6% higher. Secondly, our diversification is a key component of Bunzl's continued strength and success. Whilst larger COVID related sales declined significantly over the period, as expected, this has been more than offset by the partial recovery of our base business. Smaller COVID related sales also continued to provide some support to growth over the first half, driven by the first quarter. The second quarter saw a small moderation of orders, although they remained meaningfully ahead of 2019 levels. Thirdly, we have continued to achieve strong cash conversion of 100% and ended the period with a net debt to EBITDA of 1.4x , which provides significant opportunity to invest. Finally, our pipeline is active, and we have announced two acquisitions in Spain today, making it eight in total year to date, with GBP 134 million of committed spend.
We have also announced continued dividend per share growth, which reflects our commitment to ensuring sustainable growth and building on our 28-year history of annual dividend increases. Before we go into the detail of the first half, I want to step back and reflect on the last 18 months, because this period has given me even greater confidence in Bunzl's future. We have achieved strong compounding growth for many years and have now delivered a very resilient performance over a challenging period and continue to deliver underlying growth. The pandemic has reinforced the quality and consistency of the Bunzl model, and we have demonstrated the strength of our customer proposition, the power and flexibility of our supply chain, as well as the strength of our diversified and agile operations.
As we move into the next phase of the pandemic, we see our growth benefiting from, firstly, the further recovery of the base business as the broader economies improves. Secondly, growth across our business from enhanced hygiene trends, and thirdly, the positive impact of economic support on our safety-related activity. In addition, we see sustainability as a growing competitive advantage, and our digital investments are also supporting the value-added proposition we provide our customers, which enhances retention levels and drives growth. Bunzl's cash generation also continues to be a key asset, with Bunzl's impressive dividend growth track record maintained through the pandemic, and substantial balance sheet headroom supportive to an active pipeline of acquisition opportunities. We see opportunity in both our existing markets as well as the potential to expand into new markets. Our compounding strategy is therefore reinforced and will continue to drive Bunzl's growth.
Overall, a very exciting long-term outlook for Bunzl. As I've mentioned, sustainability is an essential pillar within our strategic priorities. As a significant component of global supply chain, Bunzl makes a difference every day. This is important to me, our customers, our suppliers, and our employees. Our customers are increasingly setting ambitious targets, and our experts and strong supply chains are there to help them achieve these goals. Our capabilities in this area are a growing competitive advantage that support our future potential. We have already made good progress over the last few years in our key focus areas, including the range of sustainable solutions we are providing to our customers and the improvement in carbon efficiency we have achieved. However, we are now looking to accelerate our ambitions further, and I look forward to taking you to our plans at our Capital Markets Day in October.
Let me now hand over to Richard, who will take you to the financial results.
Thank you, Frank, and good morning, everyone. All my comments are at constant exchange rates unless otherwise specified. With well over 90% of operating profit generated outside the U.K. and due to the strength of sterling, our results were adversely impacted by currency translation of 7% on average across the income statement. Starting with revenue. Revenue grew by 6.3% to GBP 4.9 billion. Underlying growth, which is organic growth adjusted for trading days, contributed 2.8% to this growth, with an adverse impact of 0.8% relating to the additional trading day in 2020 due to the leap year. Within the underlying revenue growth of 2.8%, the recovery in our base business contributed 6.7% growth as we saw strong growth across the group in the second quarter compared to a materially impacted second quarter last year.
As expected, partially offsetting this growth was a 3.9% impact from lower COVID-related sales, which were delivered to customers undertaking emergency procurement to build up inventory of critical products. In total, underlying revenue for the first half was 5.7% higher than in the first half of 2019. Over the first half, acquisitions contributed 4.3% revenue growth year on year. Now turning to the income statement. Adjusted operating profit growth was strong at 14.7% to GBP 366.8 million. Our operating margin increased from 7%-7.5%, reflecting the continued strength of higher margin sectors compared to pre-pandemic levels, inflation on certain COVID-related products over the period, and a reduction in the net charge relating to inventory and credit loss provisions from GBP 30 million in the prior year to GBP 10 million this year.
Net finance expense decreased by GBP 5.6 million at actual exchange due to capital market costs incurred in the prior year, lower average interest rates on the group's debt, and lower lease interest expense and currency movements. Adjusted profit before income tax increased by 17.5% to GBP 338.4 million. Continuing down the income statement, the effective tax rate for the period was 23.5%, marginally lower than 23.8% in the prior year due to a reduction in expected tax liabilities for prior periods. We expect this to be the effective tax rate for the full year 2021. In future years, the tax rate is expected to rise up to 25%, although a more material impact could come from the proposed federal tax changes in the U.S. If fully implemented, the proposed U.S. tax changes could impact the group tax rate by a further approximately 3%.
Adjusted earnings per share increased by 18.1% to GBP 0.777. We are recommending a 2.5% increase in interim dividend, which reflects the expectations for a more normalized level of growth in adjusted earnings per share for the full year, and the group's commitment to ensuring sustainable dividend growth each year, which we have delivered for the last 28 years. Turning to the balance sheet. Working capital has declined slightly since the end of 2020, with currency translation largely offsetting an increase in the underlying business and acquisitions. The underlying increase reflects a reduction in net advanced payments from customers of GBP 26 million relating to larger COVID orders as well as an increase in inventories. Over the first half, we announced six net acquisitions and committed GBP 111 million of spend.
Despite this, net debt, excluding lease liabilities, ends the period at only GBP 1.2 billion, which is a further reduction compared to the year-end. Net debt to EBITDA on a covenant basis was 1.4x , which compares to 1.5x at the end of 2020 and 1.9x at the end of 2019. We therefore remain comfortably below our target range of 2-2.5 times, which gives us substantial capacity to self-fund acquisitions. Importantly, return on invested capital was 16.5% compared to 16.2% at December. This higher level of return reflects the increase in the level of organic profit growth. On to cash flow.
It was another strong period of cash generation, with cash conversion of 100%. Free cash flow was substantial at GBP 225.2 million, although lower than the first half of 2020 due to the reduction in the net advance payments from customers as well as an increase in income tax payments, which largely relate to the higher prior year profits. Free cash flow was still, however, substantially higher compared to 2019 levels at actual exchange rates. During the first half, we paid dividends of GBP 52.8 million and invested GBP 93.93 million in acquisitions. Cash conversion of 100% was 107%, excluding the reduction in net advanced payments, with both being well above our target cash conversion of 90%. To summarize, we have seen strong revenue growth over the period, further demonstrating Bunzl's resilience, continue to generate substantial cash, and have ended the period with even more headroom to fund acquisitions.
At this point, I'd like to hand you back over to Frank, who will take you through the business review.
Thank you, Richard. Let me start by giving you a little more insight into how our sectors have performed over the period. The numbers on this slide reflect the combination of both COVID-related sales and the base business sales. They also reflect the performance of the group as a whole, although, as I will demonstrate shortly, we have seen different levels of recovery across business areas due to varying levels of pandemic-related restrictions. The cleaning and hygiene, safety, and healthcare sectors combined continue to benefit from COVID-related sales and product cost inflation in certain categories, but were impacted by the decline in larger COVID-related orders year-on-year. The base business recovery was impacted by the slow return to offices, mixed safety end markets, and hospitality procedures remaining below pre-pandemic levels. Overall, underlying revenue declined 9% year-on-year.
However, given the level of COVID-related sales, underlying revenue from these sectors remains 12% higher compared to the first half of 2019. Grocery grew a further 7% year-on-year, supported by some product inflation. Underlying revenue was also 7% ahead of 2019 levels. The food service and retail sectors, which have seen the most disruption since the pandemic began, saw a combined growth of 13% as the base businesses partially recovered. Together, the businesses are flat against their pre-pandemic level, although this is driven by COVID-related sales, which have offset declines in the base business. Turning now to our COVID-related sales. As a reminder, these are products that we had previously supplied to our customers, but at lower levels prior to the pandemic, as you can see by reference to 2019 sales in this chart.
We have seen a significant but expected decline in larger COVID-related sales over the second quarter of 2021. This has impacted our Continental Europe and U.K. and Ireland business areas in particular. We also experienced a moderate decline in smaller COVID-related sales in the second quarter, although sales of these products remain meaningfully higher than pre-pandemic levels. This support, compared to 2019 levels, is driven by continuing demand, but also by price inflation on certain products. We have started to see price deflation on these products and expect continued deflation to drive a further reduction in smaller COVID-related sales in the second half. Turning to the main part of our business, the base business, excluding the top eight COVID-related products.
The group saw a very strong recovery of the base business in the second quarter of the year, with this slide highlighting the relative recovery we have seen overall and within each of our business areas. Recovery has been led by North America due to the speed of reopening and more limited restrictions over the period, as well as product inflation in the region. Grocery growth, in addition to food service and retail, has supported this recovery compared to 2019. Continental Europe's base food service and retail businesses have remained lower due to the level of restrictions over the first half. Similarly, the U.K. and Ireland's retail and food service-based business has been impacted by the restrictions that remained in place for much of the first half.
Encouragingly, the U.K. performance had improved by the end of the second quarter as restrictions eased further, as demonstrated by our indication of June's revenue level compared to June 2019. In both Continental Europe and U.K. and Ireland, the cleaning and hygiene sector remains below pre-pandemic levels, driven by the number of people still working from home, and this is also the case in safety, as raw material shortages have impacted the construction and industrial sectors. The evolution of margin in each business area reflects the trends between the reduction in higher margin COVID-related sales and the level of recovery in the base business and the resulting margins in those businesses.
In particular, the U.K. and Ireland has seen weak margins that are reflective of a lower level of larger COVID-related sales, and also the higher relative weighting towards the food service and retail sectors, where sales have remained well below pre-pandemic levels. Within rest of the world, Latin America is trading above 2019 levels, supported by limited restrictions but also currency-related inflation. Australasia was impacted in the second quarter by new restrictions, which unwound some of the partial recovery evident in the first quarter. Inflation and deflation have been key features of this period. For Bunzl, the primary influence of inflation in the first half has been through certain COVID-related products, particularly in Q1. The impact has been beneficial. However, during the second quarter, we started to see deflation on these products.
We expect this to continue in the second half, which will impact revenue and margin for the remainder of the year. In the second quarter, we started to see product inflation in key categories such as paper, plastics, and chemicals. With our larger customers, particularly in North America, product cost movements are usually factored into pricing agreements. Elsewhere, where we have seen more limited inflation to date, we have historically been successful in passing through price inflation with regular pricing reviews, giving the value-added service that we provide to our customers. We are also experienced some operating cost inflation, although this had a moderate impact over the first half. However, it is expected to have more impact in the second half of the year. Freight cost surcharges are often factored into pricing agreements with customers, whilst wage inflation is largely offset through operating efficiencies and other organic growth.
Whilst I've laid out how we deal with inflation at Bunzl, the more prominent feature of the second half will be a continuation of deflation in certain COVID-related products. This, alongside continued normalization of business mix, will impact our second half operating margin. Now turning to our business areas in turn. We saw underlying revenue growth of 10.6% in North America, and operating margin increased strongly from 5.7%- 7%. The grocery sector grew strongly with continued customer demand alongside product inflation, although the availability of salad bars and other freshly prepared foods remained below pre-pandemic levels. We also saw a very strong growth in food service redistribution against the backdrop of pent-up demand as well as inflation. Some operating cost inflation was more than offset by favorable product inflation and operating efficiencies. Operating margin also reflected the addition of higher margin acquisitions.
In continental Europe, underlying revenue declined by 11.2%, driven by the reduction of the exceptional larger COVID-related sales. Excluding larger COVID-related sales, underlying revenue grew modestly. The negative impact of COVID-related lockdowns for most of the period limited the pace of base business recovery, although smaller COVID-related sales continued to support with only a moderate decline year on year. Operating margin was 9.4%, down from 11.4%, reflecting the reduction of larger COVID-related sales and the impact of a partly fixed cost base. In the U.K. and Ireland, underlying revenue declined by 10.3%, driven by the reduction in exceptional larger COVID-related sales and due to the COVID restrictions throughout the period, which impacted the level of base business recovery. Excluding larger COVID-related sales, underlying revenue was broadly stable.
Operating margin of 3.9%, compared to 4.7% last year, reflects the reduction of larger COVID-related sales on a partly fixed cost base and the impact of the base business, where margins continued to reflect below capacity activity. Lastly, with the rest of the world, we saw very strong underlying revenue growth of 12.3%, driven by Latin America. Operating margin increased from 11.7%- 14.2% with a substantial increase in adjusted operating profit in Latin America. Price inflation in key COVID-related products in Latin America, as well as currency-driven inflation, continued to support growth. Our commitment to delivering growth through investment in acquisitions has been further evidenced in the first half as we completed six acquisitions with a committed spend of GBP 111 million. Since our full year results in March, we acquired two businesses in Australasia. One focused on healthcare and one in the cleaning and hygiene sector.
We also acquired a U.K. business focused on cleaning and hygiene and catering products delivering to different sectors. All three are high-quality businesses with good growth opportunities. With a good pipeline of opportunities, we have been able to complete two further acquisitions since the end of the first half. Together with the six acquisitions in the first half, our committed acquisition spend totals GBP 134 million, with annual revenues acquired of GBP 127 million. Both Proin Pinilla and Arprosa are Spanish safety businesses which complement and enhance our offering to Spanish safety customers. They also further support our diversification of the Spanish business. Turning to the outlook now. Our guidance for 2021 remains unchanged. We expect underlying revenue to be moderately higher in 2021 compared to 2019, which highlights the resilience of the Bunzl business model.
In addition to this, acquisitions made over the last two years are expected to drive a strong increase in total revenue compared to 2019. Operating margin for the year is expected to be slightly ahead of historical levels. Looking forward, we expect 2022 to continue to reflect a normalization of business mix compared to 2021, which has still benefited from strong COVID-related sales in the first half. We therefore expect operating margin in 2022 to be in line with historical levels. As I mentioned earlier, I would like to take the opportunity to remind you that on the 11th of October, we will be holding a Capital Markets Day. We will be updating you on Bunzl's strategic priorities, which will support our continued compounding track record, of which sustainability is a key part. We envisage it will be a hybrid event.
Whilst we hope to see most of you in person, we will equally look forward to your participation through the virtual setup. Before we open up for Q&A, I want to end where I began today's call. The last 18 months have demonstrated that the strength of our compounding strategy, as well as the resilience of our business model, support Bunzl in delivering consistent growth and allows us to continue to focus on the longer term. I'm particularly pleased that we are supporting more and more customers with their sustainability priorities and are providing even greater value-added digital solutions for our customers. As I've explained in prior presentations, our Shanghai office has been invaluable to Bunzl and its customers over the pandemic, ensuring at a time of great stress that products were delivered with ethical assurance and to the right quality standards.
Furthermore, this is the strongest our balance sheet has been for many years, which supports the significant acquisition opportunities we see. As you can tell, I'm very enthusiastic about Bunzl's future. Thank you for your attention. We're now very happy to take any questions.
If you would like to ask a question, please press star followed by one on your telephone keypad. The first question comes from Oscar Val Mas of JP Morgan. Oscar, your line is open.
Yes. Good morning, Frank and Richard. I have two questions, please. The first one, maybe building on the charts on page 17. Could you comment on what you've seen in July and August? In particular, in the base business, how has that recovered in July and August? Secondly, with COVID-19 products, how should we think about those in the second half? That's the first question. The second question, maybe if you could give a bit more detail on the magnitude of price or product price inflation you are seeing. Again, in particular, how much product price inflation are we seeing in the base business? How should we think about the magnitude of product price deflation in COVID products in the second half? Thank you.
Okay. Well, let me take both questions. Richard can comment if he wants. In terms of July, August, I think we mentioned that our exit rate was in a good place in the base business at the end of the second quarter. I would say our prospects include what we've seen up till today. The magnitude of inflation and deflation, I think in balance, we do see inflation started in the U.S. and followed in other areas, in broader product groups like paper and plastics and chemicals. The deflation in certain COVID items like the gloves is significant also. I think in balance, as we are looking at it today, I think the deflation impact may weigh slightly more heavier than the product cost inflation we are experiencing.
Yeah. Oscar, let me just.
Yeah
On the last point a little bit. Product cost inflation on those COVID related sales has significantly benefited H1. We've talked about disposable gloves being the main contributor to that. As Frank said, we are seeing deflation in Q2, and that will continue into the second half, and it will be a significant driver of the margin outlook. We have seen those inflation on paper, plastics and chemicals in Q2, particularly in North America. They tend to see it earlier because the cost-plus arrangements in some of that business means that those prices get pushed through sooner. We do expect to see that into the second half in Continental Europe and in the U.K. If I think about volumes, I think it's reasonable to assume that the volumes we're seeing in the first half are slightly lower than they were in the first half of 2020.
Clearly, our base business has been impacted by COVID for two quarters in the first half of 2021, whereas it's only one quarter in 2020. Overall, think of it being a very significant benefit of product cost inflation in the first half of 2021.
Okay, that's very clear, boss. Thank you.
The next question comes from Annelies Vermeulen from Morgan Stanley. Annelies, the line is open.
Hi, good morning, both. Thank you for the update. A couple of questions from me. Firstly, on the operating cost inflation that you've talked about, could you talk a little bit more about whether that is predominantly wage inflation that you've seen in the U.S., or are you seeing material inflation in other parts of your cost base? If you could talk a little bit about some of those operating efficiencies that you're using to offset that, what are they exactly, and how much runway does that still have, assuming that inflation continues? Secondly, there's been a lot in the press recently around obviously supply chain issues and product shortages and delivery problems. I'm just wondering if you're seeing that across any parts of your supply chain and whether it's impacting your ability to deliver anything in particular for any number of your customers. Thank you.
Okay. Richard, maybe you can take the first question. I'll take the second.
Sure. In the first half, actually operating cost inflation has been quite moderate. We have mitigated that to some degree. I'll give you a sense of that in a moment. It is predominantly wage inflation driven, and you should think of it being predominantly the U.S., but also increasingly into U.K. and into Continental Europe. We've talked about, I think at the pre-close, around 3% wage inflation in the U.S. in the first quarter and into the second quarter. I think that is building. We should assume that and expect that in the second half of 2021, that level of inflation will be higher. I think we should also assume probably something similar when we think about U.K. first and then probably Continental Europe later in H2.
As to how we offset some of this inflation, I think it is worth noting to begin with that just the wage rate is not necessarily the whole answer. We do give attractive benefits, 401(k) benefits, and benefits in general to our employees, and I think that does help retention. It does mean we're less exposed to having to attract new drivers in this case. Clearly, we are seeing some shortage in that area. Look, we take a holistic view of operation efficiencies. We do and have undertaken numerous warehouse consolidations over the last 18 months and in the past, and they contribute to this. You should think of this as a game of inches. Operating efficiency in Bunzl is very much a continuous improvement initiative and that cumulatively, they do add up to quite a lot.
Alongside the growth that we see are very much how we mitigate as much of the OpEx inflation as we can, recognizing that the OpEx inflation we're starting to see is higher than perhaps could be mitigated. There may be a need to pass some of this on in prices at some stage, but we do have the offsetting effect in the second half of a higher product cost inflation.
Before I answer the second question, Annelies, what is also important to note is if you look at Bunzl and maybe distribution in general over a long period, if you see operating cost inflation and at the same time you see product cost inflation, it still tends to be having a good impact on the overall performance of the business. The good thing, in a way, is that if product cost inflation would sustain for a longer period, then that's a good thing for Bunzl and for distribution in general. In terms of product shortages, a lot of things are being written about product shortages. I would say in our businesses, the impact has been very limited. We've seen some supply chain issues coming from China, containers. We all read it, the container prices.
Some harbors have been shut down because of COVID breakouts and stuff like that. We still source about 90% of what we buy domestically, so we've seen sort of no real issues in that area. I think where we've seen some impact probably is in our safety business, and that not so much about us not getting the product, but the fact that, if in construction, the materials are not available or the staff is not available, that indirectly has a bit of an impact on our business as well. Longer term, I think expect that to normalize and with all these stimulus and economic packages being launched in different countries, our safety business should be performing very well in the coming years.
Okay. Thank you very much. Just a quick follow-up on Richard, on your comment. You talked about 3% in the U.S. in the first half, when you were talking about that wage inflation and the second half will be higher. Are we talking a couple of percent higher, or could it be double? Any number you can put around that?
No, I wouldn't give any sense for it at this stage, Annelies. Let's see how it goes in the second half. I think it's reasonable to assume that it's going to be a bit higher than 3%.
Okay. Understood. Thank you both.
The next question comes from Kate Somerville of UBS. Kate, your line is open.
Hi, good morning, everyone. First of all, thanks for the detailed breakdown of all the moving parts. There are three questions from me. The first question is whether the 2021 margin guidance assumes COVID orders above the 2019 level. Does that include pandemic related PPE in 2022? Apologies. The second question is just on the quarterly trends. In terms of Q1 versus Q2, in terms of COVID orders, have they started to slow versus 2019? Any detail around that would be very helpful. Finally, just in terms of the organic growth, are you able to split that between volume and price? Thanks a lot.
I suggest, Rich, you take the first and the third question. I'll take the second on quarterly trends. If we look at the half year, you need to think about large orders and small orders. The large orders have almost disappeared, where we had substantial large orders last year. I think overall, supported by some price inflation in COVID, we've seen still better sales in COVID compared to last year, although the second quarter was a bit lower, certainly on the small order size.
Kate, I think on your first question about the margin guidance, I think that was a 2022 comment, was it?
It was, yeah. Sorry. Getting my years mixed up.
Margin for 2022, look, we think it's coming back towards more normalized levels. I said that in context of the consensus I think for next year is 7.1%. Bunzl's always said that we can be sort of 10 or so basis points up and down around a certain level. I think we're comfortable with the outlook for consensus in 2022 as it currently stands. As to COVID orders, look, we are seeing these prices, and the deflation we're seeing on the COVID orders will mean that the second half is the margins are affected. You should assume that in terms of margin on these products, that we return more to a normalized level in 2022 than we've seen in 2020 and indeed 2021. We still think the level of these COVID sales will continue to be a benefit for us.
It's one of the COVID legacy benefits for us, and Frank called out potential for safety opportunities going forward. Clean and hygiene, we still feel there's an opportunity in the medium term. We need to see how the return to work happens in clean and hygiene, but we think once that's normalized, it's still a net benefit. Yes, I do see that the margins on COVID products in 2022 would be back more towards what they have been historically. Your third question about can we split out organic growth between price and volume. I think I've answered it, but let me just clarify it again. There's no doubt that the first half of this year has seen significant benefit from those COVID related product cost inflation, particularly in Q1. We saw deflation in Q2.
We've started to see that product cost inflation on paper, plastics, and chemicals in Q2, particularly in North America. You wrap those two together. I think it's right to assume that those are substantial and that underneath that, volumes are lower year-on-year for the reasons I gave you. I think with those two together, you can get roughly the shape of the answer, if not exactly the numbers.
Excellent. Thank you very much.
The next question comes from Karl Green of RBC. Karl, your line is open.
Yeah, thank you very much. Just a couple of remaining questions from me. The first one, Richard, I just wanted to clarify, I think you said that there was a delta of GBP 20 million in terms of operating profit impact, in terms of inventory and receivable charge reductions. Just to double-check that. Is there any material variance between regions in terms of how that GBP 20 million has been split, that we should be aware of? The second question, just on slide 15, you've given that underlying performance versus H1 2019. Do you have those percentages in terms of the organic performance rather than the underlying performance, please?
Can you take both, Richard?
Karl, let me take both of those. I think, yes, last year we took to P&L a GBP 30 million charge relating to credit loss and customer-specific inventory, predominantly in food service and retail. Those provisions are still there. There's been no material reduction in net provisions in the first half compared to last year. We have reflected an additional GBP 10 million of net provisions in particular in inventory. That is slow-moving inventory. In essence, our policy means that as products get to a certain age, we need to provide a certain proportion against them. Because the pandemic has gone on longer, we have had to top up those provisions. I think it's worth noting that our outlook for the second half does not take any assumption on either further provision levels increasing or indeed any releases.
We're keeping our mind open as to how things change. We will see government support coming off in the second half, and I think that's going to be instructive as to the level of credit loss provisions we're holding. We hope it's sufficient. We think it is, let's see how that all plays out in the second half and probably into the first half of last year. As to material variance by region, predominantly, these provisions were established in those markets which had the highest proportion of food service and retail. Think North America, U.K., and then Continental Europe, in that order. Most of that delta will be similarly placed because the inventory levels are predominantly U.S. and U.K. in supporting the GBP 10 million this year. As to the underlying revenue 2021 versus 2019 on slide 15, it's a very small difference.
It's about 0.8% of 1% is the one-day effect in this year versus last year. If you compare it this year versus 2019, there's no leap year effect, so you can broadly say they're the same.
Okay, great. Just to be clear, the underlying revenue numbers, so that excludes acquisitions already, does it?
Absolutely. Underlying is effectively the same as organic, which excludes acquisitions.
Great. Thanks very much.
The next question comes from Rajesh Kumar from HSBC. Rajesh, your line is open.
Hi, good morning. Just following up on Karl's question earlier. The provisions you said last year, GBP 30 million, this year, GBP 10 million . Can you just confirm that there have been no reversal that has benefited the first half margin, just to be absolutely clear. The second question is on the differential inflation you alluded to earlier. When you're thinking about price increases and you go into discussion with the customer, what are the various moving parts? What role does the own brand or the carbon footprint of the landed product of storage play into that? Could you give us some color on how your customers might be thinking about price versus product mix going forward? The third question is, if you see more people switch to your own brand product, I appreciate that the revenue from that mix would be lower, but the gross profit necessarily not so.
At the gross profit level, do you think the inflation you can get on the top line can be sufficient to offset the distribution cost inflation you're going to see ahead?
Okay. Richard, if you take the first, I'll take the second.
Rajesh, I can confirm that there's no net releases in the first half. We've taken a net charge in the first half of GBP 10 million.
Thank you so much.
How does it work in terms of product cost inflation? There's roughly two situations. A small part, but it's with larger customers in the U.S., we have these cost-plus deals, where basically the new product costs, the higher cost flows through automatically. Where you see in Continental Europe, in Europe, in U.K. and Australia, you see more of a situation where suppliers increase their prices, it's the responsibility of the business managers to get these products increased in price. History tells us that Bunzl was very successful in pushing these increases through. With smaller customers, it's relatively easy. With larger customers, it can sometimes be a little bit delayed because there's a contract in place or a price window. We tend to extend our price increase from suppliers and increase to our customers earlier.
There can be a bit of a time effect, but also, normally you benefit a bit from the stock levels at lower price. In the mix, we are quite successful in putting prices through to our customers. You make a very good point in terms of mix changes. Sustainability is very high on the agenda for our customers. We're seeing that happening every day, and we're building a real competitive advantage. We see when businesses are returning, certainly in the sectors of food service and retail, to expect to see that sustainability range pick up. That's also partly own brand. Your question on own brand is effectively what happens if you would have a more radical sort of change to own brand? Will that sort of have a negative impact on sales and margins?
I think the way to think about own brand is that we have actually two types of own brands. We have, in the safety space, for instance, own brands that are being recognized like A brands. Alternatives to Ansell or Honeywell products, and that can be Issigo or Majestic, and our customers are recognizing that as an A brand. You also have a category mostly in cleaning and hygiene, where we basically have own brands in toilet paper or in chemicals, which is broadly the same product as the Kimberly-Clark or the Essity, but it's priced slightly below, and has higher margins because we don't pay for the marketing costs and all the costs that the branded suppliers play for.
If you have a period of significant price increases on products, and you have a customer base, which you tend to see right now, that are still suffering, and have a difficult time in food service, for instance, it is logical to expect them to say, "Well, we don't like that price increase you're pushing forward. Don't you have an alternative?" It's a great opportunity for Bunzl to go and offer own brand products. The price differential isn't that great. The margin is higher. It could be a little bit of a sort of negative impact on the sales line, but certainly not on the pound or the dollar or the euro gross margins. In the mix, these are relatively small changes in the bigger context of Bunzl.
It's a good opportunity for us to continue to expand our own brands, including the sustainability own brands that we have built.
Understood. Basically, what that would suggest is we should probably look at the growth, profit growth as well, not just the revenue. Basically think about that when we are doing our forecast.
Sorry, I didn't hear the first part of your comment.
When we are thinking about 2022, we should think in terms of gross profit growth as well, not just the top line revenue growth. That could potentially be different impacted to the revenue.
In principle, that is yes. Also, you've heard us talk about treadmill in the past also. You need to run standstill. We have a net margin of about 7%. Yes, you would expect higher margins from own brand, but also once COVID has normalized, I also expect probably a bit more tender activity in our businesses than during the pandemic. You gain some and you lose some. Overall, I think, it should be sort of neutral to slightly positive.
Thank you very much.
The last question comes from Gerry Hennigan from Goodbody Stockbrokers. Gerry, your line is open. Gerry, is your line muted?
Sorry. Apologies for that. Technology got the best of me there. Just a follow-up in terms of the prior question with regard to own brand. What was the portion of sales from own brand in the first half of the year? It does sound, based on the comments around sustainability and your Capital Markets Day focus on that in October, that that trend and/or those issues have accelerated over the last 18 months or so. Relative to the competition, do you see yourselves at an advantage in terms of those trends, particularly given relative to smaller players, and how do you see that playing out from your point of view over the next two years or so?
Sorry, could you repeat the first part of the question? I missed that one.
Sorry. I was looking for the proportion of own brand sales during H1.
Yes. No, that was sort of the second question you had.
The second question was around sustainability trends.
Okay. Sustainability. Yeah. Okay. All right. That's fine. Okay, let me give a go at the first part. We still see sort of slightly inflated numbers on what I would call the inflation in combination with own brand/imported products. They are around 24%. In the past, they tended to grow by 1%, but over COVID, it has jumped up. If you look at the combination of own brand and imports, it's something that we see as a core advantage for Bunzl that we can deliver. On sustainability, I think it is a real competitive advantage and a building competitive advantage, and we also won business more recently just based on our sustainability credentials. Why is that? You need to think about our business as competing on a local basis. We are a larger group, so we have been able to invest in sustainability experts.
We have been able to invest in building own brand ranges. That offers us benefits compared to other businesses. I would like to say at this point also, our Capital Markets Day will be, for important part, centered around sustainability. It is expected to be quite an exciting event. Yes, it's online, but if you can make it, because we will be showing certain things also at the event, I would really welcome and ask people to come to the event. It's been a while ago, and it's going to be a very good event. You won't regret. We'll share a few new things as well. Yes, it's a competitive advantage. It's a growing competitive advantage. It's very high on the agenda. Certainly with larger customers, we are helping to really solve certain issues. We have the expertise.
We are not a manufacturing, we can be very independent in terms of what we advise our customers, and they really appreciate that in terms of what we're doing. Again, it adds to the stickiness of a relationship, just like what we're doing on the digital side, tying customers into our model and really becoming an integrated part of their whole business.
Okay. Thanks very much.
We have another question registered from Sam Dindol of Stifel. Sam, your line is open.
Morning, guys. two questions on acquisitions from me. Firstly, given how big cash flow intensive you are, how quickly do you think you could return to sort of the bottom end of your target leverage range? Secondly, on targeting new markets for M&A, can you give a sense of the new geographies or verticals which would be of interest over the medium term? Thanks.
Okay. Let me give a go. Capacity. Yeah. We have substantial capacity currently. We always spoke about 2 2.5 times. We're now at 1.4. We have a lot of capacity. There's also a lot of sort of M&A activity going on. We've seen that certainly in North America. Biden announced some potential tax changes, which made people really think, "Should I be selling my business this year?" We have a number of discussions on the go. Now, I think the key part of our success, we've done 177 acquisitions, and you can only do that if you're disciplined. We continue to be disciplined. We buy good businesses. We try to buy them at fair prices. I think in the short term, it looks good.
Longer term, I think it may look even better because I know that there's quite a number of people who went through a real scare during the second quarter of last year, thought they were financially independent, suddenly saw their business drop by 90% because of the pandemic. I think there will be more people, as soon as they move back towards the 2019 profitability levels, they will knock on our doors. We have more than 1,000 people in our database. I think M&A, I'm very excited having such a strong balance sheet and also the kind of opportunity I see going forward. Discipline is the magic word as well. Doing that in the right way is important and it's great to be in this position. In terms of new markets, yeah, we're constantly open, looking at things.
You've seen the slides, in the past as well with the different sectors and geographies. We have areas where we are not active at all. It goes back to our discipline. We like to buy the number one or two in the market when we enter a market, like a base business that we can anchor on, a platform, and that is increasing the success rate of the acquisitions significantly. Again, it goes back to the triggers for people. Why do they sell their business? We can't focus on now we're going to do more in cleaning and hygiene, or now we're going to buy more businesses in France or in Mexico, because it depends on when people become available. We are very busy in holding these contacts, keeping these relationships going.
When people are ready to sell, then we are there and we've got a lot of firepower. In that sense, I think future looks very good.
Thanks.
We have no further questions registered, so I'll hand the call back to you, Frank.
Well, thank you very much for attending today, and we're very much looking forward to see you all at the Capital Markets Day. It promises to be a very exciting event. Thank you for listening in.