Hello, everybody, and welcome to the Bunzl 2021 annual results call. My name is Bethany, and I'll be your operator today. If you would like to register to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. If you change your mind, you can press star two. I will now hand over to your host, Frank van Zanten, Chief Executive Officer of Bunzl. Frank, over to you.
Good morning, everyone, and welcome to Bunzl's 2021 full- 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 through our financial results. I will then review our performance in more detail, including business area results, provide a brief update on the strategic progress we made over the year, and we'll discuss our outlook. Let me start with the main takeaways from our results today. We achieved 7.1% revenue growth and 2.8% adjusted operating profit growth at constant exchange rates despite the strength of our performance in the prior year and the expected decline in COVID-related orders. As a result, our revenue was 17% higher and our adjusted operating profit 23% higher than in 2019.
This is a great achievement and testament to the resilience and agility of the Bunzl business model. We have continued to be highly cash generative and delivered cash conversion of 102%, ending the year with 1.6 x net debt to EBITDA despite significant acquisition investments. Today we announce a 5.4% increase in our total dividend per share, making it our 29th consecutive year of dividend growth. 2021 was the second most acquisitive year by spend in our history, with GBP 508 million of committed spend compared to an average of GBP 375 million over the last five years. This also takes us to nearly GBP 1 billion of total committed spend over the last two years, with our pipeline continuing to be active.
At our Capital Markets Day in October, we gave you more insight into our product mix and how we have already been supporting our customers to transition to more sustainable solutions. In 2021, only 2% of our revenue was generated from consumables that are facing regulation. Furthermore, our expertise and innovation in this area is becoming a real competitive advantage for us. Before we go through the detail of our results, I wanted to take a moment to reiterate our consistent focus on the longer term, which has supported our performance over the last two years. We have a clear purpose to deliver essential business solutions around the world and create long-term sustainable value for all stakeholders. Our four core values of humility, reliability, responsiveness, and transparency are key to the success of our value-added business solutions.
This, alongside our compounding strategy and sustainability focus, has driven the track record of delivering 9% operating profit CAGR since 2004. Our focus on all stakeholders has been essential to our continued success. Our customer-centric focus enabled us to supply a large amount of COVID-related products when our customers needed them. Our people have worked tirelessly to support our customers during the pandemic. Our employees have a high level of engagement, which supports retention at times like we are experiencing now. We have also reduced our carbon intensity by 60% since 2010, with our consolidation model supportive of carbon efficiency. Our strong relationships with more than 10,000 suppliers have enabled us to reliably source products despite the recent challenges in supply chains.
Over 2021, we conducted more than 700 ethical audits in Asia, which provides us and our customers with the reassurance we need around supporting workers. It is clear that our Shanghai operation has been instrumental to our performance over the last two years. Ultimately, we have delivered 10% dividend CAGR since 1992, with growth in both 2020 and 2021, despite the impact the pandemic had on our base business. I believe this consistent focus will continue to drive our success for the future. I will now hand over to Richard Howes.
Thank you, Frank, and good morning, everyone. All my comments are at constant exchange rates unless otherwise specified. With 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 by between 5% and 8% on average across the income statement. Starting with revenue. Revenue grew by 7.1% to GBP 10.3 billion. Underlying growth, which is organic growth adjusted for trading days, contributed 3.6% to this growth, with an adverse impact of 0.5% relating to the additional trading day in 2020 due to the leap year. Inflation was strongly supportive to growth over the year, with continued inflation on disposable gloves in the first half and with inflation on paper, plastics and chemicals supportive in the second half of the year.
Within underlying revenue growth of 3.6%, the recovery in our base business contributed 9.9% as we saw strong growth across the group from the second quarter, supported by inflation. As expected, partially offsetting this growth was a 6.3% negative impact from lower COVID-related sales, with limited larger orders which had strongly benefited the prior year. Underlying revenue growth for the year was 8.5% higher than in 2019, with total revenue 17.1% higher. Acquisitions contributed 4% revenue growth year-over-year. Now turning to the income statement. Adjusted operating profit grew 2.8% to GBP 752.8 million. Operating margin reduced from 7.7% to 7.3%, reflecting the partial normalization of revenue mix. This decline in margin was better than expected.
The decline was driven by lower COVID-related sales, particularly larger orders, and strong recovery of typically lower margin food service and retail sectors in the base business. Deflation in disposable glove prices also impacted margins, particularly in the second half of the year. Operating margins also benefited from a reduction in the net charge relating to inventory and credit loss provisions compared to the prior year. During the year, the group saw a further increase in the level of slow-moving inventory, with customer demand continuing to be affected and impacted by pandemic-related restrictions and supply chain disruption, resulting in higher levels of inventory. This has resulted in a net charge of approximately GBP 25 million in the year, resulting in an increase in slow-moving inventory provisions. This was partially offset by a net release of approximately GBP 5 million related to expected credit losses on trade receivables.
Net finance expense decreased by GBP 8.2 million at actual exchange, mainly due to a change in the mix of debt towards currencies with lower interest rates and higher interest income on cash deposits held by our businesses. Adjusted profit before income tax increased by 3.9% to GBP 698.2 million. The effective tax rate for the period was 22.3% compared to 23.1% for the prior year, due to a reduction in the expected tax liabilities for prior periods. For 2022, we expect the tax rate to rise to approximately 24%, reflecting the absence of provision benefits seen over recent years.
Beyond 2022, we expect our effective tax rate to rise between 24% and 25% due to an increase in The U.K. tax rate and enforcement of a minimum tax rate for corporate profits globally. Currently, we do not expect a significant impact from The U.S. federal tax proposals. Adjusted earnings per share increased by 4.9% to GBP 1.625. We are recommending a 6.5% increase in the final dividend, which drives 5.4% increase in the total 2021 dividend. The increase brings our dividend cover to 2.85 times and closer towards historical levels of around 2.6x . On to cash flow.
Strong cash generation continues to be a key feature of the Bunzl model, with cash conversion of 102% over the year, higher than our average cash conversion since 2004. Free cash flow was strong at GBP 525.4 million, albeit a reduction compared to 2020. This is primarily due to a decrease in operating cash flow driven by a significant reduction in advance payments from customers, net of upfront payments to suppliers for large orders of COVID-related products and higher income tax paid related to higher profits in previous periods. However, compared to 2019, free cash flow is 15% higher at actual exchange rates.
Over the year, we also paid GBP 180.4 million in dividends, leaving total cash generation prior to investment in acquisitions of GBP 364.5 million. This largely funded the cash outflow relating to acquisitions over the year of GBP 452.7 million. Turning to the balance sheet. Working capital ended the year broadly in line with 2020, with increases from acquisitions offset by a decrease in the underlying business and from currency translation.
With the continued strength in our cash generation, we ended the year with GBP 1.3 billion of net debt, excluding lease liabilities, despite announcing 14 acquisitions. Net debt to EBITDA on a covenant basis is 1.6x , which compares to 1.5x at the end of 2020 and 1.9x at the end of 2019. We therefore remain meaningfully below our target range of 2x-2.5x , which gives us substantial capacity to continue to self-fund acquisitions. Return on invested capital was 15.1% compared to 16.2% at the end of 2020, driven by the lower operating margin, which is more reflective of a more normal revenue mix for the group, as well as acquisitions made over the year, which temporarily dilute the metric.
However, returns remain well ahead of the 2019 level of 13.6%. The strength of our cash conversion supports our ability to deliver sustainable dividend increases, with 2021 representing our 29th consecutive year of growth. As our earnings normalize, 2021 sees transition towards more typical levels of dividend cover for the group. To summarize, we have delivered a strong double-digit profit growth compared to 2019 and demonstrated the strength and resilience of the business model throughout the pandemic. We largely funded the second most acquisitive year in our history from cash generated in the year and ended 2021 with leverage in a strong position for continued acquisition investment. We've announced another year of dividend growth with a 10% compound annual growth rate achieved since 1992.
Overall, this was another strong year that positions Bunzl for continued success. I will now hand you over to Frank to take you through our performance in more detail.
Thank you, Richard. Let me start by talking you through our sector performance 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. The cleaning and hygiene, safety, and healthcare sectors saw a combined underlying revenue decline of 12% over the year. This was driven by the expected decline in larger COVID-related orders year on year, as well as work from home trends on cleaning and hygiene and soft safety end markets, which hampered the base business recovery. However, underlying revenue from these sectors was 10% higher than in 2019 due to absolute COVID-related sales remaining elevated. Grocery grew a further 9% year on year, supported by significant product cost inflation, particularly in the second half.
Underlying revenue was 10% ahead compared to 2019. The food service and retail sectors, which saw the most disruption in 2020, saw a combined growth of 16% driven by significant inflation and a recovery in the base business. Total revenues from these sectors are now 6% higher than their pre-pandemic level with the base business close to 2019 levels and sales of COVID-related products remaining elevated. Turning to the sales of COVID-related products specifically. As a reminder, these are the top eight COVID-related products, such as masks, disposable gloves, and sanitizers that we have previously supplied to our customers, but at lower levels prior to the pandemic. We have seen a significant but expected decline in larger COVID-related sales over 2021. This has impacted our continental Europe and UK and Ireland business areas in particular.
We have also seen a moderate impact to group sales from the decline in smaller COVID-related orders, although sales of these products remain meaningfully higher than pre-pandemic levels. Inflation in gloves has been a key theme over the second half, and looking to next year, while glove prices have stabilized, the year-on-year impact of reduced prices will be a feature of trading in the first half of the year. However, overall, we still expect COVID-related orders to remain ahead of 2019 levels in 2022. With many of these products still in high demand, the strength of our global supply chain, as well as our Shanghai sourcing office and own brand products, continue to be advantageous in fulfilling demand. Turning now to the main part of our business, the base business, which excludes the top 88 COVID-related products.
Overall, our base business revenues in 2021 were broadly in line with 2019 levels. The group saw a very strong recovery of the base business from the second quarter of the year as restrictions eased and volumes began to recover and accelerated as inflation built. Recovery has been driven by the food service and retail sectors, as well as the continued growth in grocery. Our healthcare businesses also performed well compared to 2019. However, our cleaning and hygiene and safety businesses were impacted by work from home trends and soft safety end markets. We have seen good volume recovery as activity has improved in our markets, although around 2/3 of our year-on-year growth has been driven by inflation. As a result, volumes remain below 2019 levels, even in the second half of the year.
We have managed inflation well over the year, and it has been strongly supportive to revenue growth. Gloves saw strong inflation in the first half of the year, with prices then declining as expected over the second half. While glove prices have stabilized, the annualization of this pricing will have a year-on-year impact to revenues and margins in the first half of 2022. We have also experienced strong inflation on plastics, paper and chemicals, particularly over the second half of the year, and have been successful in passing these price increases on to our customers. While our largest customers, particularly in North America, often have product price movements factored into agreements, elsewhere, regular price renegotiations have been required. Although inflation remains strong to the end of the year, we did start to see a moderate tempering of plastic prices in some regions.
We also experienced greater operating cost inflation in the second half of the year, with wage inflation particularly strong in North America and The U.K. And Ireland, although more benign in continental Europe and rest of the world. Outbound freight costs have also risen, although freight cost movements can be factored into pricing agreements. We have also experienced property cost inflation linked to lease renewals. Operational efficiencies are something we always strive for, but at times like these are particularly important. We have a new finance shared service center in The U.K. and Ireland, and have implemented a range of new technologies to support this. We have also continued to execute our warehouse optimization strategy and have consolidated more than 15 warehouses over the year. Overall, we have seen operating cost inflation more than offset by the revenue growth associated with product price inflation and operational efficiency measures taken.
In total, inflation has been somewhat supportive to margins. While we remain cautious, we are starting to see some stabilization in wages in North America. Now taking our business areas in turn with performance reflective of the dynamics we've just discussed. In North America, we delivered strong revenue and profit growth despite the decline in COVID-related sales over the year and deflation in gloves, which significantly impacted operating margin in the second half of the year. This performance has been driven by substantial product inflation, particularly in grocery and food service, as well as the recovery in demand in food service and retail. The base business in the second half traded strongly ahead of 2019 levels. While operating cost inflation accelerated through the year, it was more than offset by revenue growth due to product inflation. Overall revenues in 2021 were 20% higher than in 2019.
In Continental Europe, the revenue and profit decline was driven by the reduction of larger COVID-related orders compared to 2020. Excluding these larger orders, underlying sales grew modestly, supported by inflation and recovery of the base business. Strong growth in food service and non-food retail drove the base business recovery, with cleaning and hygiene and safety end markets continuing to be soft. Profit margin decline over the year reflected the transition towards more normalized levels driven by the reduction in larger COVID-related orders. Overall, revenue in 2021 was 12% higher than in 2019. In The U.K. and Ireland, revenue decline was similarly driven by the decline in larger COVID-related orders. Excluding these larger orders, underlying sales growth was good, driven by the acceleration of base business recovery in the second half.
By the final quarter, the base business was only slightly below 2019 levels, supported by inflation. The margin impact of reduced COVID-related sales over the year was offset by recovery in the base business and a reduced net charge in relation to provisions. Overall, operating margin was meaningfully higher in the second half of the year. Revenue in 2021 in total was 1% higher than in 2019, with the second half of the year being 6% higher. Rest of the world delivered strong growth despite the strength of performance in the prior year. Growth was driven by the Latin American-based business, which traded very strongly ahead of 2019 levels and acquisitions. Latin America operating margins were, however, impacted by COVID-related product deflation in the second half of the year.
Asia-Pacific delivered a resilient revenue performance with the benefit of acquisitions and base business growth offset by a decline in COVID-related orders. Operating margin expanded with strong growth within the healthcare sector and efficiencies generated by warehouse consolidations. Overall, for Rest of the World, revenue in 2021 was 34% higher than in 2019. Acquisitions are an important component of our compounding growth strategy. We completed 14 acquisitions in 2021 and committed GBP 508 million of spend, making it our second most successful year for acquisitions. Since our half year results, we have completed a further six acquisitions, including our most recent acquisition, Tingley Rubber, another strong safety business in The U.S. One of our largest acquisitions over the year was McCue, a leading and fast-growing business in safety and asset protection solutions, with a particular strength in e-commerce warehouse protection.
This business is performing well and is positioned for continued strong growth. When we look at the last two years as a whole, we announced 22 acquisitions. With M&A activity largely driven locally, supported by execution capabilities at the center, we have been able to complete acquisitions across all of our business areas. These acquisitions were largely weighted to the safety, cleaning and hygiene, and healthcare sectors, where we continued to see very attractive long-term prospects in most markets. Within this mix of businesses, some are particularly fast-growing and larger, such as McCue, MCR Safety, and Disposable Discounter, where multiples have reflected their strong growth and margin proposition. We remain committed to executing largely within the six to eight EV/EBITDA range for the majority of our acquisitions. Acquisitions have contributed 2/3 of our growth over the last 10 years with an average of 4.6% revenue growth each year.
Organic growth has contributed an average of 2.5% each year alongside this. Momentum has been strong, and over the last two years, we have committed an average of GBP 500,000 million each year compared to our 10-year average of GBP 370 million. Looking forward, the current level of leverage and annual cash generation provide plenty of support for continued investment with our pipeline being active. Turning to our sustainability progress and our 2021 packaging mix. Firstly, it is important to highlight that 66% of our total revenue is generated through non-packaging products. However, where we are distributing packaging products, we are very well placed to support our customers transition to products which are better suited to the circular economy.
We have already made good progress in this area, and in total, combining non-packaging products and products made from alternative materials drives 84% of our total group revenue. Furthermore, our risk to regulation is very low, with only 2% of our revenue generated through consumables that are facing regulation. We first presented this data to you at our Capital Markets Day in October based on 2019 data. While growth in packaging sales has been driven by inflation, our packaging mix is similar to that in 2019. Since 2019, we have seen growth in packaging made from alternative materials due to customers choosing to transition, regulatory changes, and shortages of plastic products. However, we have also seen, in some cases, a move back to single-use plastics for hygiene reasons during the pandemic, although we expect this to be temporary.
We talked in depth about how we are helping our customers with the transition at our Capital Markets Day, but let me give you a couple of more examples. Firstly, we have talked about supporting our customers with their ambitious sustainability targets. This is exactly what we have done with Empire, Canada's second largest grocery retailer, which has Sobeys and Safeway within its portfolio. In 2020, Empire announced a plan to become the first national grocer to replace single-use plastic shopping bags with reusable and paper bags. Given the size of their business, this was a huge undertaking, but with our knowledge and depth of our supplier relationship, while working together, we were able to remove more than 800 million plastic bags from circulation annually. There was no single supplier able to provide this many bags, and so our deep relationships with multiple suppliers were crucial.
Furthermore, to ensure an impactful launch, we, with full transition desired within weeks for each of their banners, the strength of our inventory management capabilities enabled us to provide reassurance around meeting these objectives. In order to help Empire manage costs within the category, we also completed a review to identify potential savings. This resulted in us upgrading their digital one-stop-shop platform, which simplified the ordering process and provided greater control. This is a very strong example of how Bunzl works as a partner and is focused on providing complete solutions for customers which go beyond the physical products. As a second example, I refer to The U.K. plastic tax, which will be coming into effect in 2022 on certain products that have less than 30% recycled content in them.
We have been proactively analyzing our customers' product ranges to identify the potential cost impact the tax will have on them and suggesting alternatives to mitigate this cost. We have received very positive feedback to date from our customers on our approach. Again, this demonstrates our leadership in this area. Let me update you on the sustainability commitments we presented at our Capital Markets Day. I've already discussed our packaging progress, and we will continue increasing the amount of products sold that are made from alternative materials. In terms of commitments to our responsible supply chain, we completed 754 audits in Asia through our Shanghai team. While we prefer to support our suppliers in making improvements for their workers when issues are identified, if satisfactory actions are not taken, we will terminate our relationships.
In 2021, we terminated ten supplier relationships for this reason. We have now started to expand our auditing program to other high-risk regions with the target of ensuring 90% of our spend in high-risk regions is similarly sourced from assessed and compliant suppliers. Within our people strategy, our initiatives on improving diversity are continuing to support a number of senior women in the business. In The U.K., 22% of our senior leaders are now female compared to 13% in 2019. Our people strategy in general also places emphasis on making sure we have an engaged workforce. In our latest survey, 88% of employees said they had a strong commitment to Bunzl, which is a fantastic result. Our focus on people has also paid off over the last year with encouraging retention levels despite labor tightness. Lastly, moving on to climate change.
Over the year, our carbon emissions intensity compared to revenue decreased by 12%. This means that since 2010, we have reduced our carbon intensity by around 60%. However, we are committed to accelerating our reduction of carbon and have committed to the United Nations Race to Zero. We will, compared to 2019, reduce our carbon intensity by a further 50% by 2030 and will achieve net zero by 2050 at the latest, inclusive of Scope 3 emissions. Before I move on to the outlook, I want to reflect on our performance through the pandemic. I know this is a busy slide, so let me pull out some highlights. Our financial performance has been very strong, with adjusted operating profit 23% higher than in 2019.
Our strategy for ensuring a balanced portfolio in terms of sectors and geographies with exposure to a broad range of sectors and products and our strong supply chain has enabled us to achieve this result alongside the agility and entrepreneurship of our people. Our focus on cash flow also enabled us to maintain our track record of dividend growth over this period. Despite the near-term challenges over the last two years, we have also made real strategic progress, which will support the long-term success of the group. We have committed nearly GBP 1 billion to acquisitions, largely funded by cash generated over the period, and our investments have supported the acceleration to digital order or ordering, with 67% of our orders in 2021 placed digitally, which compares to 59% in 2018 and 62% in 2019.
I believe we have really strengthened our business over the last two years by helping our customers to transition to sustainable solutions, launching new sustainability commitments, including a net zero carbon target, and by focusing on diversity and inclusion in our workplace and ensuring our people are engaged. We have exited the year with leverage that provides substantial headroom for further acquisitions, and we have an active acquisition pipeline. In addition, we continue to see support from sales of COVID products through this transitionary period while being exposed to sectors with long-term attractive dynamics. Turning to our 2022 outlook, which continues to reflect our transition out of the pandemic.
While there are uncertainties around inflation and COVID-19 variants, at constant exchange rates, we upgrade our guidance and now expect moderate revenue growth in 2022, driven by the impact of acquisitions completed in the last 12 months and supported by a slight increase in organic revenue. Continued recovery of the base business is expected to be offset by the further normalization of sales of COVID-related products, although these are expected to remain ahead of 2019 levels. Inflation support in plastics, paper, and chemical products, and the year-over-year impact of deflation on disposable gloves are also expected to remain dynamics within our performance. Furthermore, we now expect group operating margin in 2022 to be slightly higher than historical levels as the mix of sector and product sales to continue to transition to more typical levels for the group.
We have a long track record of delivery with a proven strategy, a resilient portfolio, and a strong network of businesses and people. Bunzl has strengthened its value-added proposition through the pandemic, and we look to the future with confidence in our consistent compounding growth strategy. In addition, 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 continue to be very enthusiastic about Bunzl's future. Overall, a really pleasing year that has reinforced my confidence in our outlook and compounding strategy, which has delivered 10% adjusted EPS CAGR since 2004. Thank you for your attention. We are now very happy to take any questions.
Thank you, Frank. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, you can press star two. When preparing to ask your question, please ensure you are unmuted locally. The first question comes from Simona Sarli from Bank of America . Simona, please go ahead.
Yes. Good morning, gentlemen, and thanks for taking my questions. A couple of them. First of all, I was wondering if you have any update on the Walmart contract and on the renewal that is coming in 2022, and if you could just briefly remind us of the economics of this contract. Secondly, you were mentioning an underlying growth for the base business of +9.9% year-over-year. How much of that is driven from product inflation versus volume growth? Also similarly for North America, that is 20% above the 2019 level. If you could also give a little bit of a quantitative indication of how much of that is related to a volume rebound in the base business. Thank you.
Okay. Richard, I suggest you take the third question. I'll take the first two. On Walmart, discussions are ongoing. We will update all of you when we can. I can say in general, I think we had a very long-standing relationship with Walmart, more than 30 years. The last two years did a great job during the COVID period. I would say in general we see increased levels of interest also with other retail and grocery partners in The U.S. around the area of outsourcing, probably driven by the pressures in the warehouse and delivery space, very difficult to recruit warehouse people and drivers.
That puts us in a good position to continue to win in the outsourcing space. In terms of the economics of the contract, you know, the contract is between 8%-9% of group turnover, obviously far less in profitability, low single-digit margins, but obviously stock turns relatively quickly. Return on capital is still good, although well below the Bunzl averages. In terms of the second question, underlying 9% base business split, volume inflation. About 2/3 of that 9% is inflation, product cost inflation, and about one-third is real volume growth. Richard, over to you.
Just a slight build on that as well. When we see the 2/3 inflation split for the second half, if you're thinking about Q4, you can add a few percentage points onto that as well because we have seen an acceleration in inflation levels Q4 over Q3. Simona , the North America story is one of, I mean, certainly the growth that we've seen in North and the inflation we've seen at the group level has been driven by North America. We've seen significant inflation, in large part because the products that we supply in North America are a lot of packaging, which is often paper and plastics related.
In addition to the fact that we have in many cases, an automatic transmission of these prices through the cost-plus arrangements, which means that the speed of transmission has been higher, and as a result, driven results more than that. You can assume that North America is driving this inflation growth. Obviously, that growth you see in North America is not only that. We still have COVID products ahead of where they were in 2019, and we still have acquisitions which have been meaningful in the total revenue position.
Thank you very much. The next question comes from Oscar Val at JP Morgan. Oscar, please go ahead.
Yes. Good morning, Frank and Richard. I have three questions. The first one is again on price and volume. I guess just to check that 2/3 comment was for the second half, not for the full- year. Building on that, could you just talk about what the outlook assumes in terms of price inflation for the rest of the year for H1 2022 and H2 2022? That's the first question. The second question is around, I guess, the visibility you have on OpEx cost increases. So warehouse staff and drivers, are those locked in for 2022 or are they still? Could they still rise higher? That's the second question. The third question is maybe just some color on the COVID products. You talk about them continuing at high levels.
From an outside point of view, it seems like thankfully we've turned the corner on COVID. Could you explain why you think that COVID products will remain relatively or higher than they did before, for the foreseeable future?
Okay. Yeah. I suggest you take the first question, Richard. I'll take the one on, let's say cost and COVID, and please feel free to add. In terms of cost increases, you know, I think most of the cost adjustments are happening at the beginning of the year for staff. I would say mostly locked in, although, you know, if we need to make adjustments to stay in line with markets, then we will do that. In terms of COVID products, why do we expect it to be elevated?
I think there's a whole sense of, you know, cleaning to be very important, you know, offices, other areas, so more deep cleaning, continue to focus on hygiene, continue to focus on using sanitizers. You know, what is there to lose when you enter a restaurant or a hotel to use a sanitizer? I think also with gloves, there may be an element of pricing as well. Yeah, we do strongly believe, although, you know, we've seen it come down, that the consumption of these products will continue to be quite a bit higher than in 2019. Richard?
Yeah. Let me just build a little bit on that OpEx point as well. We have seen labor cost increases significantly, particularly in North America. As we said in the presentation, it's much more benign in Continental Europe, and you can think of The U.K. being somewhere in between. What I would say is that to your point about are they locked in, we have been using, where possible, temporary labor during 2021 to try and make sure that we don't completely lock in all of these increases. As the labor market sort of comes back to more normal levels, we expect to be able to replace that with more permanent staff.
Basically, we are trying to variablize our labor costs wherever we sensibly can.
Okay.
Oscar, on your point on inflation, yes, it was the 2/3 comment was a second half comment. I highlighted my sense for Q4 over Q3 as well. Looking into 2022, we will see a continuation of the levels we've seen in Q4 into Q1. We do expect to start to see a partial annualization in Q2 because it was Q2 in 2021 where we saw the start of the increases, particularly in North America. I think as we get into the second half of the year, you can expect us to have annualized these increases. Having said that, we are seeing, as we talked about at the pre-close, plastic prices in certain regions, in particular The U.S., are starting to come down.
I think when you overlay that onto the second half, you can expect to see a decline in the year-on-year effect relating to inflation in the base business.
Okay. Great. Just a quick follow-up. Do you have a number for the full- year, price benefit then just to help us understand the H1 and H2 comps?
It's broadly the same, but obviously.
Okay.
The pickup in the second half is on a higher number.
Okay. That's great. Thanks, Richard and Frank.
The next question comes from Kate Somerville at UBS. Kate, please go ahead.
Good morning, everyone. Thanks for taking the questions. Also following up on the inflation versus volume question. Given what you said in terms of the commentary, volumes are still below 2019. Are you able to give a split of that between the three different end markets that you pull out? The second question is on within your guidance, how much of PPE are you factoring in? And then my final question, you kind of answered it just now, but if, you know, oil prices, plastic prices come down, do you see a risk of the inflation benefit that you have been getting reversing? Thanks so much.
You want to take that, Richard?
Yes, happy to. Look, yes, in some of our end markets, and this is the base business I'm talking about, we are seeing volume levels lower than 2019. I think most notably in cleaning and hygiene and safety markets. The cleaning and hygiene market is one where it is at least through the facility management businesses tied to the return to work dynamics that we've seen. We're a bit cautious about how that's gonna play out in 2022. I think there's a lot of delays in people coming back to the office, so it's been not fully clear as to how that's gonna play out. I think you can assume volumes will remain below 2019 levels. Safety also.
Safety is much more tied into the supply chain disruption that's been seen globally, not just for our customers, but also for us. Again, we've not seen the progress in the base business volumes of safety that perhaps we'd have liked to see. A little bit cautious about how that plays out in 2022. I would say, however, look, medium term, that's got to be a positive for us, a tailwind for us because there's government stimulus coming. At some stage, given that we supply into redistribution, we will see a pipeline fill happening, we think, at some stage as and when the supply chains sort of release and become a bit more normalized. On COVID products and the shape of COVID products in our guidance.
Kate, I think the best way to think of it is that we did about GBP 1.6 billion in 2021, having done GBP 2.2 billion in 2020. The large chunk of that difference was those large COVID orders not really repeating. When we think forward into 2022, we've said it will be above where we were in 2019, which is about GBP 800 million. So you can pick a point somewhere between 800 and 1.6, 1.5, 1.6. We sort of feel somewhere in the middle of that range is probably not a bad place to be. It's broadly consistent with how we've exited Q4, we've seen in Q4 in 2021 as well.
As to oil prices, yes, look, I mean, gas prices actually are probably more are reflective of plastic prices in our experience. Having said that, to the extent they do come down, they will normalize, and we are seeing that. I think, don't forget, it's not just the macro that drives some of these prices. There's a point around capacity in the plastics market, which will also play into the speed within which this may reverse. Look, it might do, and we are seeing it, in particular in North America, and it is factored into our guidance for 2022.
Incredibly helpful. Thank you very much.
The next question comes from Annelies Vermeulen at Morgan Stanley. Annelies, please go ahead.
Hi, good morning. Thank you for taking my questions. I just have a couple as well. Following up on the operating cost inflation questions, Richard, I think at the H1 you said that the wage inflation part was running at about 3% in the first half, and you expected that to be higher in the second half. Could you put a number on that to what that was in the second half? Also, based on those costs that you've managed to lock in so far, what do you expect for 2022? Related, if you could comment, you commented in the presentation on employee retention being relatively okay, given the tight labor markets that you've seen. I think from memory that retention was higher than normal in 2020 because of the pandemic.
If you're able to put a number on how that's developed in 2021, that would be helpful. Lastly, I recall previously you outlined that, sort of higher cost inflation and product cost inflation, may also drive an increase in contract tenders. More of your customers putting their contracts out for tender. I know you've called out more opportunities in The U.S. I'm just wondering if you can comment on how that has developed relative to your expectations and whether you are seeing more opportunities for contracts, or equally, if you're seeing more of your existing contracts being put for tender. Thank you.
Okay. I'll take the last question. You take the first two, Richard, please.
Sure. Annelies, yes, at the half year, we're talking about 3%, but flagging that it was picking up, so it's higher towards the end of the first half than the average for the first half. I think that's true to say. In the second half, let me give you an indication of North America, given this is where the majority of the situation arises. That 3% across the whole of the year, across the whole of the workforce in North America was 5%. Albeit in the second half, you can add a few percentage points to that.
If I pull out and within that, let's say seven to eight, if we then pull out drivers and warehouse people, they were higher than that as well. So you know, you can see that we've seen a build in the level of inflation through the year. As we called out in the presentation, though, we are seeing labor costs stabilizing, starting to stabilize in North America, which I think is positive. When we look into 2022, we're effectively assuming an annualization of that rate with a more normal level of annual award, if I can call it that.
To your point on voluntary turnover, you will see it in our annual report when it comes out in a few days and weeks time. We'll be pointing to the full- year a rate of 17.3%.
Yeah. Okay. The third question around product cost inflation. Now, I've been in this industry for more than 25 years. I have not seen the levels of product cost inflation before. It's been quite significant. I know that, you know, if you have periods of, you know, more than normal price increases, ultimately people will try to tender and try to make sure they are buying in a competitive way. There where we have seen tenders, you know, we have extended, you know, the cooperation. We see opportunities mainly around two areas.
One area is what I mentioned about outsourcing, which is quite logical because if you can't employ easily warehouse people and drivers and you have a self-distribution system in retail or in supermarket business, you know, it's quite a logical thing to think about goods not for resale and try to move them out of your buildings. Now, you know, we have conversations. We always have conversations. It feels like we have conversation now also with slightly higher up people sometimes. Still very early days, so there's nothing, you know, there of any real significance in the short term, but it could develop over time.
The second area is the whole area around sustainability, where we do see that customers, especially also larger ones, start to recognize the expertise and abilities and the product ranges that Bunzl has compared to, you know, compared to others. If you look at net zero, you look at carbon, you look at Scope 3, which includes supply chains also, you do see customers, certainly larger professional organizations, you know, putting more value on these kind of things. That's exactly where Bunzl has been strengthening over the last couple of years in terms of our value proposition.
That's very clear. Thank you.
The next question comes from Suhasini Varanasi from Goldman Sachs. Suhasini, please go ahead.
Thank you. Hi, good morning. Just a couple from me, please. If you think about the 2021 margins, I think you mentioned in your remarks that they benefited from the reduction in the net charge relating to inventory and credit loss provisions versus 2020. Please can you help us quantify what was the benefit, please, at the EBIT level? Was it on the order of GBP 10 million, GBP 20 million or so? The second question is on the guidance change on the margins. If you think about what exactly has changed between December trading update and today that makes you more optimistic on margins for this year in the context of the higher wage inflation? Is it because of the fact that you're seeing higher product inflation, and that's gonna help the margins?
Is it because the COVID revenues are maybe going to remain for a little bit longer than you anticipated or because of maybe cost efficiency programs or maybe M&A? I mean, just trying to help us understand what has changed. Thank you.
Richard, these are for you.
Thank you. To ask me in terms of provisions, look, we last year we took GBP 40 million of provisions, of which within that, about GBP 15 million related to inventory provisions. This year we've seen a net GBP 20 million charge, which is GBP 10 million in the first half and a net GBP 10 million in the second half. Within that, within that GBP 20 million net, you've got up GBP 25 million on inventory provisions and a release of GBP 5 million on credit loss provisions. You've got broadly year-over-year, you've got a GBP 20 million benefit to results in 2020. The year-over-year movement is benefits from about GBP 20 million reduction in provisions across the piece.
What I would say on the inventory side is, well, firstly, it's encouraging we're seeing some of these credit loss provisions being able to be released. I still think the lion's share of what we established last year was, is necessary because of some of the issues we've seen with some customers. It's good to see that with collections, you know, significantly improved, we've able to release some of those. On inventory, most of these products are not date stamped. They're not perishable in any way. Hopefully over time, as demand levels improve and base business volume levels improve, we can start to see these provisions be released over time. Look, we'll give you visibility of that as we do so.
On your second question, what's changed in guidance between the pre-close and the report. Look, the main difference is it's really inflation driven. We have seen more inflation in Q4 than we had anticipated. I think it's also fair to say that we've been better at passing through price increases than we anticipated. Hence the comment we make about that inflation is somewhat supportive to the net of inflation and OpEx inflation is somewhat supportive to margin. It's really that that gives us the confidence as we come into the new year, that we're able to pass on some of that margin beat that we achieved in 2021.
That's very clear. Thank you so much.
Who's taking the next question?
The next question comes from Dominic Edridge at Deutsche Bank. Dominic, please go ahead.
Hello there. Thanks for taking the question. Just one for myself. Well, two connected ones. Firstly, apologies if I missed it. Is there any quantification you can give on the cost savings you got from the network rationalization at all? Secondly, is there more of that to come in terms of network rationalization? Because I'm guessing that with the shortages of labor, that you're probably looking to try and optimize space as much as possible. Connected with that, on M&A, should we be thinking there might be some more sort of synergy-based acquisitions going forward? Because I suppose from my perspective, and apologies if I'm wrong, the Joshen.
I'm guessing there's quite a lot of synergies came out of the Joshen acquisition that you did a couple of years ago. Is that the sort of thing we should be thinking about? Or is it still very much your focus is on good quality standalone businesses where you're not factoring a lot of cost synergies? Thank you very much.
Okay, well, let me try to give a go here. On the cost savings, this is really an ongoing, you know, daily bread and butter activity. People who know me also in the business know me always about talking of, you know, repairing the roof when the sun shines. We are constantly looking at our warehouse capacity. We're looking at when we're buying businesses, you know, can we streamline things? Can we improve things? This is a daily, weekly, monthly, ongoing thing. We shared with you obviously what we've done, a number of, you know, consolidations. There's more to come also on the shared service side. It's not gonna make, you know, huge step changes in cost.
It's an ongoing activity that is supporting, you know, our business and dealing with sort of inflation by, you know, getting more efficient. You heard me talk about the number of orders coming in digitally, also the number of invoices coming in digitally. It's an ongoing process of becoming more efficient. On the M&A side, you know, it's always a combination of different kinds of acquisitions. It can be an anchor acquisition in a new area. It can be a bolt-on acquisition. It could also increasingly be acquisitions in slightly newer area, like we've seen in McCue, where we found basically an area that is, you know, close to a market we're already strong in terms of safety.
Our safety business protects people at work. The McCue is one where it basically protects expensive assets from damage and things like that. You know, until you complete a deal, you never know what is happening. It will be a combination of, you know, standalone, bolt-on and slightly newer things. Like we have also done in the area of slightly more internet distribution businesses. You heard me talk about Disposable Discounter in The U.K.. We've done a few more deals where we're really trying to capture, you know, a newer part of the more prosumer kind of side of the markets.
The next question comes from James Rose at Barclays. James, please go ahead.
Hi there. Just one left for me. On plastics taxes, which, you know, coming into force in April in The U.K., and I think there's plans across Europe emerging as well. Are these regulations in which you can get market share gains, do you think, going forward? Presumably you could pass those higher product costs on, and it could be a benefit to gross profit in the future. Appreciate your thoughts there. Thanks.
Yeah. I would say, you know, it's still early days. We have seen occasions where, you know, customers really put value on our capabilities. Providing information and data, we don't talk a lot about data in Bunzl. We do use data and information to help our customers to transition. The alternative of the product is more expensive. The alternative is often also own brand, because we position ourselves in a clever way by building these ranges and then move to the right alternative within the range. Should be supportive to margin also.
You know, if you look at the, let's say, the level of products that is sort of you know at risk of regulation is only 2%, so it's a small part. You know, we are very well suited to deal with it. U.K. is a bit ahead, Europe is following. What we do is also use all their best practice within the Bunzl world, in Australia and The U.S. also to get our capabilities further up and our systems. We are effectively more proactive in terms of dealing with customers because you know, certainly larger customers are also very focused on moving to buying products that are more better suited to the circular economy.
Okay, thank you.
The next question comes from Karl Green at RBC. Karl, please go ahead.
Yeah, thank you very much. Good morning. It's just a final question from me, just a residual one for Richard. Just on the provision releases, the net GBP 20 million that benefited results. Firstly, can you indicate broadly how that was allocated out to the different regions? Then following on from that, in terms of what's left, can I just clarify what's the outstanding balance sheets provision for loan loss and inventory write downs, please? Just how should we think about that in terms of how it's tracking versus a more normal pre-COVID year, please?
Yeah, Karl. Regionally, you can think of, I'd say the majority of this was in North America in the year. Other than that, broadly spread across the rest of the group. As to how much of what we established last year is still in place, well, look, all we've released to this point is the GBP 5 million on credit loss. So all the rest, the GBP 40 million, you can take five of that 40 from last year and add on the 25 that we've increased this year. All of those are still in place at our balance sheet at the end of the year. Look, that's high. I mean, it's higher than it has been normally.
You know, this is if you look back to 2009 levels, it's sort of analogous to those levels. It is something that is reflective of having been through a pandemic where supply chains have disrupted, demand's been disrupted, you know, a fight to get product meant that in certain cases, we've got more product than we of certain lines than we really need. As a result, they're moving slowly. But as I said, these are not products that tend to go off. They're not time sensitive. And as a result, I do think over time that we can see more of these provisions coming down gradually.
Okay, thanks very much.
The next question comes from Gerry Hennigan at Goodbody. Gerry, please go ahead.
Thank you. Just to follow up on one of those questions earlier on with regard to sustainable packaging, can you comment on regional variation and drivers, whether corporate-led or government-led? Maybe just allude to, you alluded to it in terms of higher own product sales. Can you comment maybe on the proportion currently and where you see that maybe going to? Then just briefly on acquisitions, there has been a bias towards more the higher margin sectors over the last couple of years in terms of deal flow. Has that been just a function of opportunity or is there something more strategic at play there?
Okay. Yeah. In terms of sustainability moves, I would say, you know, it all started in The U.K., followed by Europe, Australia, and U.S. still a bit lagging with the exception of certain states in the West, for instance. Let's say you see the biggest moves happening where, when there's regulation in place or announced, a bit like in The U.K., and in Europe. You also see probably the most significant interest with larger customers as well. It's coming through the whole sort of customer base over time.
Own brand is developing well, although we've seen a reduction in own brand by about, you know, own brand and import by about 1% compared to last year, which was fully expected because, you know, COVID big orders were own brand as well. We see this ongoing growth of own brand in our organic business, but also we see a slightly higher percentage of own brand in acquisition businesses, purely because it's in, you know, safety is a very high percentage of own brand.
In terms of acquisitions, I think it's, it is also a strategic focus, not so much that we want to buy higher margin businesses, which we obviously like, but, you know, what we are aiming for in the vast majority is businesses that have a very strong position in the supply chain, which means, you know, not a lot of reliance on a few suppliers and often also more fragmented customer base. Which puts you in a strong position in the supply chain, especially if you also own your own brands as a real brand. If you're able to buy businesses like that, with a very strong position in the supply chain, that often delivers a higher margin.
Yeah, it is a strategic focus on buying certain types of companies, and they, as a result, come often with a higher margin as well.
Okay, thank you.
The final question today comes from Rajesh Kumar at HSBC. Rajesh, please go ahead.
Hi, morning. Just thinking through the point on provisions. I mean, last year was an exceptional spike compared to your long-term history. Is this year more of a normalization of the trend, or would you say that you're still at an elevated level and there's a bit more to go? The second question is on, you know, the own brand you definitely provided with some very interesting color there. When you are thinking of, you know, customers struggling with inflation, have you seen any preference towards own brand or, you know, demand for own brand solutions where you don't have emerging from the customers? Because often you can find, you know, own brand can be cheaper and a part of your toolkit to help customers with the solution.
Finally, on the labor cost side, you kindly provided some color on the temp costing use. Temps billing rate tends to be higher, but can potentially reduce the overall cost. If you were to switch those temps to perm, would your overall cost base go down or up?
Yeah. Okay. Let me answer the own brand question and then, Richard, maybe you can deal with the provisions and the temporary labor question. So, on own brand, spot on. When you see, you know, more than normal price increases happening from branded suppliers, we do get often requests from customers saying, you know, "I'm now buying a brand A, B or C toilet paper or towels or, you know, other paper cups or other things. You know, the price goes up by 7% or 8%. Can you help me with an alternative?" That's where our own brands come in.
Yes, I do expect that, let's say if inflation continues, and prices continue to be elevated, this is an excellent opportunity for our operating companies, the 150 operating companies to further increase own brand penetration.
Understood. Thank you.
Rajesh, on the provisioning levels. Look, I do think they're high. I do feel that they should start to come down. But if I'm honest, I thought that last year, so and I was proven wrong through 2021. But I think it's reasonable to assume that with activity levels higher as economies have reopened, that we'll sell through you know this stock over time. Therefore, I'd like to think this is the peak. I mean, one thing to note, we haven't. Our guidance doesn't assume that we are releasing any of these provisions. So to the extent that happens, it, I think, is gonna be additive. On the labor cost point, I mean, you're right.
You know, use of temps was more to do with there's a bit of labor constraint that drove us using temps, but also it does help us to variabilize and take advantage of lower. If the market becomes a little less price sensitive, then we can switch those people out and end up having a lower cost, we think. Because don't forget that there's not just a temp. The temp is not just about rate. The rates can be a bit higher initially, but you benefit from flexibility. But they can also be a little less efficient, you know, in the early days.
I think that the move from temp to perm, should we be able to do that in our markets this year, A, does help us manage this transition, but I think also could actually bring some costs down as we have a greater level of training and efficiency in the workforce.
Thank you very much.
We have no further questions today, so I'll hand back to Frank and Richard to conclude the call.
Yeah, thank you very much for attending, this call, and I wish you a great day.
This concludes today's conference call. Thank you for joining. You may now disconnect your lines.