Good morning and welcome to Bunzl's 2022 full year results presentation. It's great to see some of you here in the room today. Richard Howes, our CFO, is also here with me, and will take you to our financial results after my introduction. I will review our performance in more detail, discuss our outlook for the remainder of the year, and provide a brief update on the strategic progress we have made. Before we begin, I want to take a moment to thank all my colleagues for their contribution to Bunzl's continued success. These very pleasing results continue to demonstrate the caliber and commitment of all the people at Bunzl. They also highlight the ongoing resilience of our business model and our diversification across geographies and sectors.
I'm incredibly proud of how the group continues to respond with agility to varying external circumstances, allowing us to continue to grow the business from strength to strength. We have been able to maintain our long track record of success by continually innovating to ensure we remain the partner of choice for our customers. Let me start with the main financial highlights of our results. Over the year, revenue at constant exchange rates grew by 9.8%. This has been strongly supported by price increases, which our teams have worked hard to achieve. Revenue also benefited from acquisition growth, as well as volume recovery growth in the first half. We saw an increase in operating margin from 7.3% to 7.4%, supported by acquisitions and inflation, driving Adjusted operating profit growth of 11.1%.
Bunzl remains very cash generative, and having focused on improving our inventory position in the second half of the year, as supply chain issues eased, we enhanced our cash conversion to 107%. Our Net debt to EBITDA is currently 1.2x, providing substantial headroom for acquisitions with our pipeline remaining active. Our Return on invested capital for the year remained strong at 15%, with the strength of our return supported by our acquisition discipline. Lastly, a milestone that we are particularly proud of, today we are announcing a total dividend that is 10% higher year-over-year, which is our 30th consecutive year of annual dividend growth. We've also made excellent strategic progress during the year. We agreed 12 acquisitions with a total committed spend of GBP 322 million.
The actions we took in response to the high levels of inflation and supply chain disruption are reflected in our results. We continued to grow the percentage of orders processed digitally across the group to 69%, further enhancing our ability to retain customers and improving our efficiency. We continued to make real progress against our sustainability commitments. In 2022, we received approval from the Science Based Targets initiative for our carbon emissions reduction ambitions, and we have continued to support customers to transition to products more suited to the circular economy. We also disposed of our U.K. healthcare business in December, with this reflecting our ongoing discipline around returns-focused capital allocation and portfolio optimization.
Lastly, 2022 has been another year where Bunzl has demonstrated the strength of its business model in the face of external disruption with our focus on being the partner customers can trust for the essential products they need. I will now hand over to Richard.
Thank you Frank. Good morning everyone. All of my comments are at constant exchange rates, unless otherwise specified. With approximately 90% of Adjusted operating profit generated outside the U.K., and due to the weakness of sterling, our results were positively impacted by currency translation of between 6%-7% on average across the income statement. Starting with revenue. Revenue grew by 9.8% to GBP 12 billion. Underlying growth contributed 6.6% to this. The recovery in our base business contributed 11.6% to underlying revenue growth, driven by strong inflation across our markets and supported by volume recovery in Continental Europe and the U.K., and Ireland in the first half. As expected, this was partially offset by a 5% decline in COVID-related sales due to the continued year-on-year impact of lower disposable glove prices and volume decline.
As the business mix has normalized, going forward, we will no longer be separately disclosing COVID-related sales. Acquisitions contributed 3% to revenue growth. Turning to the income statement. Adjusted operating profit grew 11.1% to GBP 886 million. Group operating margin increased from 7.3% to 7.4%, reflecting support from inflation as well as acquisitions, and despite a reduction in higher margin COVID-related sales. Net finance costs increased by GBP 13.3 million at actual exchange to GBP 67.9 million, inclusive of a GBP 10.7 million non-cash charge relating to hyperinflation accounting, primarily in Turkey. Including a GBP 8 million impact to Adjusted operating profit, hyperinflation accounting in total has impacted operating profit before income tax by GBP 18.7 million.
The group expects net finance expense in 2023 of GBP 90 million-GBP 95 million, given the non-repeat of the financial derivative benefits seen in 2022, at a higher interest rate on the floating portion of group debt, which is around 30%, Adjusted profit before income tax increased by 10.5% to GBP 818 million. The effective tax rate for the period was 24.6% compared to 22.3% last year, reflecting the absence of benefits seen in recent years from the favorable settlement of prior year exposures. In 2023, the effective tax rate is expected to be between 25% and 25.5%, reflective of the increase in U.K. corporate tax rates. Adjusted earnings per share increased by 7% to 184.3 pence.
Given the strength of the earnings growth and the high cash conversion, we are recommending an increase of 11.3% in the final dividend, resulting in a 10% increase in total dividend. Moving on to cash flow, c ash conversion of 107% reflects a focus on improved working capital in the second half of the year, resulting in a very high level of free cash flow of GBP 706 million. With inventory levels improving significantly during the first half, supported by an easing of supply chain constraints, inventory is starting to normalize towards pre-pandemic levels.
During the year, we paid GBP 191 million in dividends and made a net payment of GBP 31.9 million to buy shares for our employee benefit trust, leaving total cash generation prior to investment in acquisitions and disposal proceeds of GBP 483 million. Cash outflow and acquisitions totaled GBP 264 million, we received cash disposal proceeds of GBP 49.9 million. Turning to the balance sheet, w orking capital increased by GBP 69 million to around GBP 1.1 billion, driven by currency and acquisitions, and partially offset by an underlying decrease of GBP 54.5 million, as well as the disposal of our U.K. healthcare business. In the second half, underlying working capital reduced by GBP 123 million.
We ended the year with GBP 1.2 billion of net debt, excluding lease liabilities. Net debt to EBITDA on a covenant basis was 1.2 x compared to 1.6 x at the end of 2021. We have substantial capacity to self-fund acquisitions or other forms of capital allocation. Early in the year, we also completed a $400 million U.S. private placement issue, extending the group's debt maturity profile. In addition to net debt, total deferred and contingent consideration relating to acquisitions is GBP 216 million. This equates to the total committed spend yet to be paid out at the end of 2022. The balance sheet includes the deferred consideration element of this liability and the accrued portion of the contingent consideration.
This totals GBP 140 million compared to GBP 108 million at the end of 2021. Return on invested capital was 15% compared to 15.1% at the end of 2021, with a higher return from the underlying business offset by the adverse impact from currency and higher invested capital related to recent acquisitions, which temporarily dilute the metric. Returns remain well ahead of the 2019 level of 13.6%. Our announcement today of a 10% increase in our total dividend marks Bunzl's 30th year of consecutive annual dividend increases. Furthermore, we have achieved this milestone with a 9.6% dividend per share CAGR over that 30-year period.
This record is a testament to the resilience of the Bunzl business model, the strength of its cash generation, and the success of its compounding growth strategy. We remain committed to continuing this track record. Thank you, and I'll hand back over to Frank, who will take you through the detail of our performance in more detail. Thank you.
Thank you Richard. Let me start by discussing underlying revenue growth over the year. A key takeaway from this slide is that despite the shifts over the last three years between our base business and COVID-related products, overall, we have delivered a 5% underlying revenue CAGR, excluding acquisitions over this period. This is strong demonstration of the agility and resilience of the Bunzl Group. Turning back to the most recent year, within our underlying revenue growth of 6.6%, the base business contributed 11.6% growth. Inflation strongly supported this performance, along with volume growth in Continental Europe and U.K., and Ireland earlier in the year due to reduced COVID restrictions compared to 2021. Overall base business revenues are well ahead of 2019 levels, driven by inflation with volumes broadly recovered.
As expected, the reduction in COVID-related sales negatively impacted underlying revenue growth by 5%. This reflects the impact of price deflation on disposable gloves and volume reduction. COVID-related product sales are approximately GBP 200 million higher than in 2019 on an underlying basis, with revenues having largely normalized since the highs of 2020, and they are not expected to have a significant impact going forward. Overall, whilst there is some variation in sector recovery and COVID-related product sales remain slightly higher than in 2019, our base business has largely returned to a more typical mix. Our diversification has enabled the business to deliver strong underlying growth over the last three years, despite meaningful shifts between products and sectors. Turning to our sector performance.
The healthcare, safety, and cleaning and hygiene sectors saw a combined underlying revenue decline of 3% over, but remained 6% higher than 2019. Within these sectors, we have seen our base healthcare business continue to perform ahead of 2019 levels, with an increasing backlog of elective surgeries supporting performance. Our base safety business saw a pickup in the second half of the year as the supply chain disruption and labor shortages, which have impacted end markets, started to ease. We expect infrastructure spend projects to be a medium-term support for this sector. Our base cleaning and hygiene business remains impacted by work from home trends, continuing to trade below 2019 levels. However, the return to office working saw some improvement towards the end of the year. Grocery grew 9% year-on-year, supported by significant product cost inflation.
Underlying revenue is, in grocery is now 20% ahead of 2019. Food service and retail saw combined growth of 13%, driven by significant inflation in food service and volume recovery in the first half for retail. Total revenues from these sectors are now 22% higher than pre-pandemic level, with most of the increase coming from food service. Let me now give you an update on inflation trends. As we have discussed, product cost inflation has been strongly supportive to growth this year and remained high to the end of the year. These price increases have been moderating over the course of the year as larger price rises began to annualize in North America. We also saw inflation in other markets starting to annualize towards the end of the year.
We continued to benefit in 2022 from a lower level of tender activity seen since the pandemic, we are expecting a higher level going forward. Turning to our operating cost inflation. Inflation in North America was high, driven by fuel and freight increases, despite some partial offsetting by fuel surcharges. Year-on-year, wage increases also moderated through the course of the year, which, with wage inflation by the end of the year only slightly ahead of typical levels. We have seen more benign wage inflation in Continental Europe, we are starting to see this pick up as expected. That said, wage inflation in Europe is not anticipated to reach the levels seen in North America and is expected to be manageable. The impact of operating cost inflation in 2022 has been more than offset by inflation-driven revenue growth and operational efficiency measures.
Inflation dynamics have been somewhat supportive to operating margin. Moving on to our business area performance, which reflects the dynamics we have already discussed. The factors driving strong underlying revenue growth in North America have mostly been covered already, with inflation being the key contributor to underlying growth and supportive to margin growth. I'm pleased that we recently concluded negotiations with our largest customer by revenue to continue to provide them with added value distribution services with improved structural contract terms. In Continental Europe, the business area's strong underlying revenue growth has been driven by both inflation and base business volume recovery earlier in the year. The hyperinflation accounting impact that Richard mentioned earlier, as well as the decline of COVID-related product sales, drove the year-on-year decline in margin.
Our businesses have taken actions in the second half of the year to limit the impact of hyperinflation as we move in 2023. Similarly, in the U.K. and Ireland, very strong underlying revenue growth was driven by both inflation and base business volume recovery earlier in the year. Importantly, the recovery in the base business drove a meaningful improvement in operating margin and return on average operating capital. In the rest of the world, strong underlying revenue growth in Asia-Pacific was offset by a decline in Latin America, resulting from a strong reduction in COVID-related sales. This decline reflects the high proportion of these COVID-related sales in Latin America in the prior year, although underlying revenue and margin in the region remained significantly higher than in 2019. Turning to our 2023 outlook, which is unchanged from the pre-close.
While we see continued uncertainty relating to the macroeconomic environment, we expect slight revenue growth in 2023, driven by both organic growth and announced acquisitions, and partially offset by small impact from the U.K. healthcare disposal. Adjusted operating profit in 2023 is expected to be resilient, with operating margins slightly higher than historical levels. Adjusted earnings per share is expected to be moderately lower year-on-year due to higher interest rates and increased effective tax rate. Turning now to our strategy update. You will be familiar with our very consistent compounding growth model. Organic growth has contributed approximately 1/3 of our revenue growth over the last 10 years. It is driven by activity in our end markets, as well as new business wins and our development of innovative products and solutions for the customers.
Acquisitions have contributed the remaining 2/3 of our growth, driven by our position as the leading operator of scale in highly fragmented markets with a strong balance sheet and proven track record. Our strength of performance and cash generation have underpinned our unbroken dividend track record. Overall, the success of our strategic focus is demonstrated by the strong total shareholder return. Let me expand on one area of organic growth, new contract wins, with this example of a meaningful contract expansion in North America. We have been working with Tyson Foods, one of the world's largest protein processing companies, for many years. In 2022, our agreement, which had previously been generating between $20 million and $30 million of revenue, was materially expanded to supply Tyson with a much greater range of products. This win highlights the value of our proposition.
We have a national footprint capable of serving each one of the over 100 major location Tysons, Tyson has across the U.S., and the resources to deliver tailored solutions to each site. On average, our processor warehouses are only 130 mi away from each of their facilities. Tyson were also reassured by our operational and financial resilience. Supply chain disruption is hugely damaging to the food processing industry, and even one day of delay in receiving key products can shut down whole production lines, spoiling large amounts of food. Tyson has been impressed by a reputation for reliable supply, particularly over the last couple of years. They're also attracted to our innovative own brand products which we have specifically developed for the food processing industry.
For instance, we have developed a boning knife, which is a high volume product for the industry that lasts 15%-20% longer and is safer to use. We are known for our own brands in this space and are constantly working to co-develop more innovative products with our customers. Finally, Tyson was also impressed by our dedication to achieving cost savings and operational efficiency. Overall, this is a fantastic demonstration of the strength of our value-added proposition and our track record in managing supply chain difficulties, especially during 2022. Supporting organic growth is our daily focus on making our business more efficient. Over the year, we consolidated 10 warehouses and relocated five others, which enables us to better utilize our space and optimize delivery routes. We also invested in new technology, automation, and sustainability features.
Nearly all of our warehouses are leased, which provides us with the flexibility to make these decisions when appropriate. Over the last four years, our average warehouse size has increased by around 11%, reflecting in part our consolidation into larger, more efficient warehouses. Our focus on improving operational efficiency is all about delivering incremental improvements on a daily basis to support the business, something that is, of course, particularly important in an inflationary environment. To bring this to life, let me detail one consolidation example that took place this year in California, where we moved one warehouse into another existing facility. The move halved our rental cost, allowing us to optimize warehouse space and avoided a large rental increase. We invested in automation technology to improve efficiency and further reduce cost.
We expect an annual saving equivalent to 17% of full-time employees at the warehouse upon completion of this automation project. Projects like these are taking place across our business every day and have supported the partial offset of cost inflation we have seen in the business. Turning to acquisitions. Over 2022, we made 12 acquisitions with a committed spend of GBP 322 million. We're also announcing two new acquisitions today, including a German business that builds on the platform we established with the acquisition of Hygi.de last year. Our acquisitions last year spanned nine countries and five customer verticals. This range demonstrates the breadth of our opportunity. With each acquisition, we are expanding our customer reach and enhancing our own capabilities. Through these acquisitions, we have developed a much stronger platform to grow in Germany.
Further consolidate the very attractive specialized healthcare market in Australia and New Zealand, enhance our digital capabilities, and expanded our product range expertise with own brand and sustainable solutions. These 12 acquisitions are high-quality businesses supportive to the group's operating profit margin. Our well-established acquisition process remains supportive to our success, with many of these acquisitions and relationships being introduced by our local teams. Over the year, we disposed of our U.K. healthcare business as part of our focus on capital allocation and an optimized portfolio. I want to take a moment to remind you of our disciplined capital allocation model. Our priorities are to reinvest our cash in the business to support organic growth and operational efficiencies, pay a progressive dividend, and self-fund value-accretive acquisitions.
Our progressive annual dividend growth policy has returned GBP 2 billion to shareholders since 2004, we are committed to extending our 30-year track record of sustainable annual growth of the dividend. As mentioned earlier, approximately two-thirds of our growth has been achieved through acquisitions. We have a Return on invested capital of 15%, which demonstrates our successful track record of consolidating our fragmented markets in a disciplined way. Our level of acquisition spend has also grown. Today, we're spending approximately GBP 400 million-GBP 450 million on average, although our actual spend in any one year is determined by the number of acquisitions that meet our disciplined criteria and which become available. This compares to an average of GBP 250 million-GBP 300 million a few years ago.
Overall, we have committed GBP 4.7 billion to acquisitions since 2004. We see significant opportunities to increase our presence in our existing markets, as well as the potential to expand into new markets. Our acquisition pipeline remains active. While our capital allocation framework favors these three methods of investment, if leverage continues to consistently fall, we would consider other mechanisms for distributing excess cash to shareholders. Turning to our evolving packaging mix, which is another example of how we are enhancing our customer proposition to drive growth. Packaging overall accounts for around 1/3 of revenue, with only 2% of our total revenue from consumables facing regulation. We continue to help transition customers to alternative packaging with evolving legislation supporting this trend. Our investments in expertise, data tools, and own brand alternatives are paying off.
Revenue from packaging products made from alternative materials is 53% of our total packaging sales. The proportion of group revenue generated through non-packaging products or packaging made from alternative materials remains high at 83%, with the group continuing to have very limited exposure to single-use plastic consumables, where some volume reduction is possible. Our ability to help customers navigate complex and changing sustainability legislation is an important part of our offering today. For example, the U.K. government recently announced a ban in England on some single-use plastic items. We have expected this change for some time and have been using our proprietary analytics tools to proactively support customers and minimize their exposure. To demonstrate this further, we turn to our largest operating company in Australia and New Zealand.
Across many of our business areas, a complex patchwork of sustainability legislation is emerging. In Australia and New Zealand, businesses have to comply with three tiers of legislation, federal, state, and local. This is a challenge for customers with Bunzl's expertise in the area, therefore increasing our competitive advantage. We have been supporting customers by ensuring they can rely on us to have up-to-date and in-depth knowledge of the changing environment, developing own brand ranges, and finally, by using analytics tools to support decision-making. We have also been marketing to and actively engaging with customers to raise their awareness of our services. For example, we've been supporting Compass Group by Australia through the various single-use plastic ban phases in Australia during 2022, managing to convert 9.5 million individual products to ones made from alternative materials and saving around 30 tons of plastic.
The result of our largest business in Australia and New Zealand have been strong. The chart shows the impact that legislation has had on our sales of food containers and cups, which account for around half of their packaging sales. It shows how single-use plastic sales have fallen in response to various bans announced over the last three years, but have been more than replaced by typically higher margin sales of the packaging made from alternative materials, a pattern which is repeating across other packaging categories. As I mentioned earlier, over 2022, we received approval for our climate change targets from SBTi. This followed an extensive mapping exercise of our supply chain emissions in order to set a new Scope 3 target alongside targets for our own emissions.
Since 2019, we have reduced our absolute carbon emissions by 15% and are on track to reach our target of 27.5% reduction by 2030. For our Scope 3 emission targets, we aim for 79% of our suppliers by spend to have their own Science Based Targets in place by 2027. This supports our long-term goal of achieving net zero emissions by 2050 at the latest, including our Scope 1, 2, and 3 emissions. Before we move to Q&A, I want to come back to Bunzl's ability to emerge from challenging periods even stronger. Between 2019 and 2022, we have grown our Adjusted earnings per share by 41% at constant exchange rate despite the external challenges. This success is firstly driven by our people who have worked incredibly hard over this period to support customers despite the challenging environment.
Our success is also driven by a range of factors that contribute to the group's resilience. Our decentralized model enables us to respond to changing situations quickly, supported by a strong culture of operational efficiency, our global scale, and the flexibility of our supply chains. Our compounding strategy is also resilient, with the advantages of joining the Bunzl Group becoming more apparent during difficult times. Furthermore, our products and services remain essential for customers, and we benefit from our portfolio diversification. Around 75% of our revenue is achieved through the more resilient cleaning and hygiene, grocery, food service, and healthcare sectors. Finally, the financial resilience of our model is evidenced through our consistently high cash conversion and strong balance sheet.
As I said earlier, I'm incredibly proud of how the Group responds to challenges while continually focusing on its customers and strengthening the business to ensure we remain the partner of choice for them. My experience over the last few years has only strengthened my confidence in Bunzl and the potential we have for future growth. Thank you for your attention. We're now very happy to take any questions.
Rory there.
Oh, sorry.
Sorry. Go on.
Okay. Yeah, it's Simona. Good morning gentlemen and thanks for taking my questions, t hat's Simona Sarli from Bank of America. I have three quick ones. I will take one by one. The first one, can you please comment on your expectations in terms of volumes growth in 2023, considering that you're also mentioning the increase in tendering activities? How should we think about the contribution between volumes from existing clients and this incremental activity? Also how much price increases you are factoring in in your guidance?
Okay, g ive it go. Well, in terms of volumes, what we do see is, obviously, we expect slightly higher sales, as we said in the outlook. What obviously helps there is the acquisitions. For the underlying business, we see still some inflation filtering through from 2022 into 2023. We think the volumes could be, you know, a little bit lower. Due to tender activity, maybe a little bit of a decline of COVID-related products, but overall positive, mainly due to inflation.
Yep, that's right.
Thank you. Also, if you could comment on the margin differential between new tendering activities and existing contracts. Lastly, you were talking about savings from automation initiatives equivalent to 17% of the FTEs. Can you comment on timing of such benefits, margin uplift and investment required? Thank you.
Well, in terms of margin tender activities, it's very difficult to give it like a general answer. What tends to happen is, on average, when we go into tenders, we come out of tenders with retaining the business. Because our business is quite sticky, and to change, you know, a broad range of products in a customer, multiple locations, is often not something that the customer wants. It's really trying to achieve certain savings for the customer. That doesn't always mean that it leads to, you know, much lower margins, because what we often do is also offer alternative products. One of the alternative products we're looking at is own brand products often. These are, these give an even higher margin but o verall, it's fair to say that when you go out and have a tender and you retain the business, the margins are slightly lower.
Because this happens normally over time, all the time, in the mix, you try to rebuild up the margin. In the mix, you don't see that too much. On the top line, it could have a bit of an impact if that starts to accelerate. In terms of automation, we've given that example. Don't expect, you know, our overall operating costs to come down by 17% t his was just an example. The best way to compare this with is like running on a treadmill. You know, you need to run hard in terms of making improvements, in terms of operational efficiency on a daily basis, deliver more sales per employee. You need to make these improvements almost to stand still because you are also facing inflation in other categories.
Certainly, you know, you see over time, rents, in certain areas of buildings go up. It's important to constantly find also operational efficiencies as well.
Morning, it's Rory McKenzie from UBS. Just following up on inflation, firstly. Understand you've got that carryover from the higher exit rate on pricing compared to the average for the year. What are you seeing in terms of the current price trends? We're obviously seeing dropping input prices like oil, but it's hard to work out how that feeds through to your products. Secondly, you entered into a new contract with your largest customer, which is a fixed price, rather than your more typical kind of cost plus structure. I'm sure that took a lot of debate internally. Can you talk about the pros and cons of that as you considered it, and whether you think it could be something you explore with other customers?
Just finally, your GBP 55.9 million acquisition-related charge included some impairments and adjustments to the earn-outs. Can you talk through what change and which acquisition is that related to? Thank you.
Okay, let me answer the second, the Walmart question. Do you wanna take the inflation and the charge?
Y eah, inflation, look, we continue to see annualization of inflation. We're not seeing, w e are seeing some deflation, but it's small. At this stage, it's in plastics mainly. Think of it, when you think about 2023, think of this as an annualization effect rather than certainly not any more inflation, and we're not seeing any deflation at this point. There will be ongoing deflation, it's small, relating to the COVID products, but we're talking sort of, you know, less than 1% probably.
In that context, also good to realize that, you know, we are on average sitting on just over three months of stock, three and a half months of stock. You see that being refreshed relatively quickly over time also. You know, the sentiment is still that our suppliers have faced quite a lot of labor cost inflation, you know, buildings, other costs. I think even if, when raw materials were to come down further, then I think they will try to hold on to business. You know, it depends on how sticky that's gonna be, how they can do that. In terms of Walmart, the largest customer, we were pretty keen to go to a different system with the customer.
You may remember, if we go to the period 2018, around 2018, we've seen some margin pressure at the time from deflation. This was following the period that Donald Trump came into office. He reduced taxes enormously. The markets, you know, the labor markets got overheated. Operating costs went up. Plastic prices came down. When you are having a pricing model that is based on a percentage of your product cost, that can be a little bit of a challenge. Over a longer period of time, we tend to be in an inflationary environment. When your operating costs go up and you have a customer, which is a large customer in volumes, they are based on a percentage and your product cost comes down.
Mm-hmm.
Obviously you get a little bit in a squeeze. We found it important that we were changing the model into a pricing structure that was more effectively mirroring our operating cost development. We've discussed that. We now not on a percentage of the product cost anymore, but we have a fee per deliveries, per the on the boxes that is unrelated to the price of the box. If deflation were to happen, it wouldn't impact our compensation for doing the work for the customer. The risk of, you know, deflation is basically being eliminated in that way. It's now a fee, and there's also an indexation on it.
It makes the whole collaboration a little bit easier because it's just being updated regularly. We have a better visibility in terms of where we are. It's very good to see also that the customer recognized, you know, all the services we provided throughout the U.S. out of all our warehouses. We're pleased that we've been able to basically take risk out and improve the structural terms of the contract.
On the acquisition-related cost, I mean, we do put a charge through the P&L out as through reported P&L relating to acquisition costs. There's things you expect to see in there. There's the acquisition spend costs that we put through transaction costs. There's also the movement on the deferred consideration provision, which I talked about earlier. There is some truing up of the earn-outs, but nothing material. Let's go to. Yeah. Suhasini.
Good morning, t hank you for taking my question. Suhasini here from Goldman Sachs. Just to go back to the outlook question, please, on organic growth that you have put into your 2023 outlook, price versus volume. You've indicated inflation is annualizing, and the volume bit is having a little bit of a drag, maybe from COVID activity. Just trying to square that off with the commentary that you've given in the press release, which says that COVID sales have returned to a more typical level and are GBP 200 million higher than 2019 levels. Also, you've indicated you've won some contracts with, you know, expansionary contracts with Tyson Foods, for example. Just trying to square off the volume bit over there.
Suhasini, it's worth just backing up and looking at 2022 as well. Volumes have been flat in the second half, which is actually we've seen some positives in Europe and in the UK, but we have seen some softness in the U.S.. Two areas, o ne the retail business, where we've managed and exited some business that wasn't as profitable as we'd like. We've also seen a what we see as a temporary softness in food service. That is probably borne out of the strength of demand in the first half and some slight softening in the second half.
When you think about 2023, firstly on your point about COVID, I think we're pretty much down to, you know, it's the big increases and decreases have happened, I think there's still some more to come. Broadly, we did about GBP 800 million in 2019, just about GBP 1 billion last year. I expect there to be probably GBP 100 million coming off that in 2023. Part of that's gonna be volume. Think of the base business for next year, for 2023 being broadly flat. Within that, you've got some of that softness in food service coming through into the first part of the year. We do have the Tyson contract, which is positive t hat's a good win for us, and I think will help soften the effect in 2023.
Thank you. My second question is on leverage, please. You've indicated that if leverage continues to consistently fall, the board could consider other mechanisms for distributing excess cash to shareholders. Is this maybe a sign that you've reached the stage where you can continue to do M&A and maybe distribute some extra cash to shareholders, or not yet?
Well, maybe just share in general how we look at capital allocation. The first thing we do is we invest in the organic existing business because it returns about 45% return on capital, so it's very, very high returns. Most of that investment goes into, you know, warehouse racking and digital and IT expansion, things that make our business more efficient or more sticky with customers. The second thing is we pay a progressive dividend, so every year a growing dividend. We make strong acquisitions. We've done 12 last year, two this year. If we get to the point where we think we can't spend the cash and we think we will continue to deleverage, basically, we won't hesitate to give money back to shareholders to, for instance, a buyback.
If I look at the markets, if I look at the opportunity, our overall market share. There's still an enormous amount of potential. Ideally, we'd like to spend it on good acquisitions. If you look at our penetration in the UK and Ireland per capita, and you compare it with Continental Europe, Continental Europe could be 5 x bigger as it is today. A lot of runway. If we continue to deleverage and we don't see good opportunity to spend it on the short term, we'll look at alternatives.
Let's go over here. Dominic?
Hi there, i t's Dominic Edridge from Deutsche Bank. Just a couple of questions from myself. In terms of your margin guidance for this year, it seems somewhat on the conservative side, given if you just look at where you were last year, you then think you've taken out the U.K. medical business, which was significantly dilutive to your margins. You've also done M&A mainly in higher margin areas, it does seem somewhat conservative. Are there sort of elements that you would be highlighting there from that perspective?
The second one, in terms of the Tyson contract, can you just give us an idea of who you are competing against there, both A, who are their existing customers and B, who are you competing against? 'Cause I'm guessing by looking at your footprints, you need other people who have got similar footprints, of which I believe they're very few. Can you just give us an idea of what was sort of the competitive dynamic was there? Thank you very much.
Okay. Let me answer the Tyson question, maybe you can do the margin.
Sure.
Basically, we were competing with a local family-owned business with, you know, less infrastructure in the U.S. was doing business with them for a long time. Over during COVID, I think our performance was very strong in terms of reliability. Also, people know that Bunzl, you know, Fortune 100, very strong balance sheet. During that process of disruption, in COVID, I think the realization has grown, not only with Tyson, but with a lot of other customers, is that Bunzl is a very reliable player, basically. We can consciously decide to increase our stock levels, which we've done also during COVID to maintain our service levels.
That's why the, you know, cash conversion was also unusually high last year because we have basically reduced our stock levels a bit. This is big Bunzl, strong Bunzl, better product range, better infrastructure throughout the U.S.. A customer realizing that they were maybe taking more risk in terms of their reliability with the existing supplier. We convinced them to move, let's say, all the business to Bunzl.
Dominic, on margin, I mean, look, the, I think the way to think of this is to remind ourselves that we've seen a very benign period for customer tenders. That's a normal course of business for a distributor and for Bunzl in any one normal year. The last three years haven't been normal, I think what tends to happen is, in that process, is we would give some margin and then expect to over time, recover that margin through offering own brand or changing products or those sorts of things. I think we should expect, and we've been expecting this for each of the last couple of years, that there will be heightened tender activity.
I think particularly because price increases have been high, they found it hard to baseline that price against which to tender. I think that's changing, I think if you add to that, look, we could well see a catch-up of this in one year. What we may have seen in one normal year, I think we might get two to three years' worth, and I think that's part of the reason why we're quite cautious on margin next year. look, it's still early days, yeah? it could be wrong, it could come later. I think it's worth noting that that is still to come. Keane?
Thanks very much. It's Kyle from RBC. Just three questions. I'll take them perhaps one by one 'cause they're quite different. Firstly, could you just give us an update on what own label constitutes as a % of your sales? Just so we're clear on what's been going on there. I think you have referred to it in terms of some of the own label, sorry, the re-tendering you were talking about before. A sub question to that, just in terms of what you've experienced on your ability to pass through price increases there versus the more classic sourcing arrangements you've got with third-party suppliers. That'll be the first question, please.
Yeah. When we talk about own label, we often combine it with own label imported products, basically, which sits at around 26% right now. It has grown again. What certainly helped is that certain brand that supplies putting these significant price increases through, which gave us the ability to offer the customer, let's say, a reduced increase or no increase by moving to the own brand, which is good because it gives us more control. Putting prices up in terms of own brands is not more or less difficult than are the, you know, the branded price developments.
Super. Okay, thank you. The second question, obviously you've not given us the numbers today, but it tends to come out in the annual report. What should we expect to see in terms of the group gross margin when that number comes out, just to get a sense as to how that's evolved? I will tack the third question on 'cause it's quite straightforward. Just in terms of the normalized monetary policy environment at the moment, and thinking about vendors of businesses who might think as they're close to retirement, they can get a better risk-free return in the bank. Are you seeing any kind of changes in behavior from vendors, perhaps more willing to have those conversations with you? If there's any implications for how you might convert that M&A pipeline in fiscal 2023. Thanks.
Last question is about M&A, you mean?
Yeah.
Yeah, it's interesting. It's what I... You know, I, you know, I sold our family business in, this is 1994, so it's a long time ago. It still means that I often think a little bit like, you know, how people think who own their business. When we went through the second quarter of 2020, when certain businesses like in the retail and the food service sector, in that quarter came down by 80%, 90% of sales, which is just unheard of, I knew that there were a lot of owners around the world thinking this, I have never imagined this could ever happen to me. You know, I've got a strong business. I've got a balance sheet.
You know, our businesses tend to, you know, maybe go down in the worst case by 3% or 5% in like in 2009. When your business goes down by 80% or 90%, it does something with you. Certainly when you have, you know, a couple of 100 people, employees on the books. I knew just from how I looked at things before when we owned the business, is that when things normalized post-COVID and people were getting back to, let's say, the 2019 profitability levels, people will be looking at sort of diversifying their wealth and not having all their money in one basket. We certainly see that kind of thing happening. I think we see, w e have an active pipeline.
We have people who are interested in having conversations that, you know, I've been in contact for 10, 15, 20 years, where I thought they will never sell because there's such a family-focused attitude they have. They're still considering now to go and sell the business when generations are changing. I do think the M&A climate is gonna be positive. Interest rates are not so relevant in terms of the big majority of the deals we're doing. We buy between the, let's say, the 6 and 8 x historical multiples. What we did see was when we look at slightly larger businesses that currently the private equity field is slightly different. There's an issue with financing.
They're maybe a little bit less active, so that could be an opportunity b ut the magic word for Bunzl in M&A is always gonna be discipline and making sure that you buy the right things, and you look at all these graphs, and you look at the development. I think the positive results you see are more from the things you never hear about, and these are the occasions where we say no to an acquisition that defines the success in terms of this, of what we are actually doing.
Klye, gross margins are up. You'll see it in the annual report, we're about go up to about 25.1%. I think the way to think of this is we've had some structural changes in the, in the end markets, and they've offset each other broadly. You've got, food service coming back, groceries being good, retail coming back a little bit, introduces more lower margin into the mix. Improvements in safety, improvements in cleaning hygiene are definitely additive to that, and a good performance in healthcare definitely additive to margin. Clearly we've put prices up, and we've needed to put prices up in a way that protects our PBIT margins. I think we've achieved that as well.
As Frank mentioned earlier, whenever we can put prices up and introduce more own label into the mix, you know, we would hope to get an improvement at the gross margin level. I think the teams have done very well in delivering that gross margin performance. We've needed it because there's OpEx inflation around as well, which you've seen.
It's also partly acquisition mix, obviously, because when you buy safety businesses, obviously they are slightly higher gross margin percent as well.
Annelies?
Thank you. Hi Annelies Vermeulen from Morgan Stanley. I just have two left. Firstly, you mentioned some softness in the U.S. retail parts of your business. I'm just wondering if you can comment on how you expect that to develop going forward, whether that weakness in retail is something we'll expect to continue to see both in the U.S. and in Europe as well, and your view on perhaps some of the more cyclical end markets of your business, given, you know, where we are in the world. Similarly, actually, on cleaning and hygiene, with your sort of ongoing working from home and more hybrid working going forward, do you think on a volume basis, actually that business won't come back fully to 2019 levels?
Secondly, just on wage inflation, what gives you the confidence that wage inflation in Europe and the U.K. won't hit North America type levels, which I think you mentioned in your comments, given a lot of that wage inflation is still coming through in parts of Eastern Europe, for example, running at 10%, 15%? Interesting to see what you're seeing there. Thank you.
Okay, maybe you can take the last question.
Sure.
In terms of, in terms of retail, I think if you look at the retail sector, especially in the U.S., I think what COVID has done is accelerated some of the trends there. We as a business have become a lot more focused and disciplined on risk in that area also. If we have to make a trade-off between, you know, risk and reward, we are more on reducing the risks in the business. What we've been doing is taking less title to stock, so moving more to charging customers fees, they need to pay the stock basically. We have less exposure there.
We still have a lot of retail businesses that are, you know, very successful retailers also, who have a good, let's say, omnichannel approach. Retail is not expected to be a fast growth area from a top-line point of view. In terms of cleaning and hygiene, it's interesting, last quarter we saw a bit of a pickup in cleaning and hygiene, so you do see more people returning to work. Let's say cleaning and hygiene is not only offices. Cleaning and hygiene is everywhere. It can be theme parks, it can be stadiums, can be hospitals. It's certainly not only work-related. In terms of turnover, obviously because we've seen inflation in products also, you compare to 2019, it still looks relatively healthy. You know, the footfall and the traffic in offices is still down on 2019, although it is improving slowly.
I think on wage inflation, I mean, we've seen different speeds of this across different economies. Certainly North America was strong, high inflation, particularly end of 2021 in through 2022 t hat's moderated, and we exit the year closer to a more normalized level. Not at a more normalized level, but closer to it. On the flip side, we've been seeing very benign wage inflation in continental Europe. We expect that to increase, and we know We are seeing pay awards that are higher than they were in 2022. I don't expect it to be anything like we saw in the U.S., which was, I think, unusually high, and in part driven by the tightness of the warehouse market in that country. Won't be that I think it will be more manageable. Think of the U.K. being somewhere in between. Sylvia?
Okay.
Sylvia Barker from JP Morgan. Hi, morning c ould I return to your margin guidance quickly, please? So 7.4%, in the full year 2022 was here drag from hyperinflation within that and the help from M&A and the disposal into 2023. It's quite a big step down towards that 7.1%-ish. If we go back to the tender activity, I mean, what is kind of the scope of, you know, how many contracts would you expect to get retendered in a normal year? I know that we've not had any, but, you know, what scope of revenue could that potentially impact, and how quickly can these tenders actually hit the P&L? Second question. We tend to think about plastics as comprising about 30% of your cost base.
It's interesting that over half of packaging is no longer plastics. What about the overall plastics exposure within the cost base? Essentially with that reduction plus, you know, having a lot less cost-plus activity, maybe your sensitivity is actually quite different than it was two, three years ago. Finally, on working capital, inventories have started to normalize, but also we had some improvements in receivables and payables in the second half. Could you maybe talk about the trajectory of working capital into 2023? Thank you.
Okay.
Yeah, indeed. Look, it's difficult to give you a sense for numbers of tenders that would normally happen, but just do take it as a very normal part of what we do. It will be—y ou know, if a contract has been, let's say, three years, clearly you'd expect it to be, you know... There'll be a range of these. There are some longer ones than that, I would guess that sort of three to five years is an average contract. The last three years have been very benign. I think it's fair to assume there will be a catch up. The extent and phasing of it, these are happening now. Don't think of this as something that is gonna be back-end loaded.
Particularly, I think it's something that could happen in the first half. In terms of plastics and our exposure to plastic, I think you're right. There is a you know, we are broadly 30% of our business is in plastics. Within that, we do include the plastics that are recyclable as well. We would when we split it out in our pie chart that you've seen, those would have sat in the green part of the pie chart. I think what does it mean about exposure to them? I mean, typically, these are higher priced products, which is good for us.
Typically, we're finding that as business moves out of plastics into alternatives, these are higher priced and higher margin products as well for us. They're typically own label. I think it's a positive for us in the medium term. We have to wait really until regulation really kicks in, and we're starting to see it more and more. Most customers probably aren't transitioning pre regulatory change. It is providing, I think, a very positive context for that shift to happen. I think over time, I mean, your point on cost plus is right. You know, that's certainly an area where we should be less affected by deflation, should it happen. As I said earlier, we have seen some in-deflation on plastics, but not much. Not much yet.
Maybe just one addition on tender. We label it as tender, but actually, Bunzl is not really a tender kind of business. People are also buying from us, but they are looking at the pricing. A lot of our customers look at, you know, restaurants, hotels, they've taken a lot of price increases over the years. Couldn't really negotiate about it because there were supply chain issues. They needed the product, it was not available, not a great circumstance to negotiate, basically. The world is stabilizing now, so it becomes more better available. There's more of an opportunity for people to say, "Listen, you know, we need to talk about price," or they organize a tender or a comparison or just have a negotiation with the salespeople.
Where it's gonna be very hard is, you know, how are these discussions comparing to our discussions that we at the same time try to have with our suppliers if things are happening. you know, margin guidance is actually quite hard to give. We know, and we already see in the different regions that there's more activity than there has been for a long time. Now, is that gonna accelerate? Is gonna come down? What's gonna happen with supplier prices? It's all big movements going up and down. Overall, we felt we, you know, we had a bit, we had to be a bit cautious given the situation.
We're on working capital trends. Look, I think we have consciously invested in working capital through the pandemic. I think it's been a definite benefit to us as we've had probably greater availability than some others because of our ability to invest in inventory th at served us, I think, very well. As things do normalize, we do need to see the inventory come down. We are running inventory days higher than 2019. It's important, I think, for us to see in the second half, this start to turn and see some meaningful reductions in inventory. That certainly has helped release a chunk of cash into the business. It was about a GBP 120 million inflow on working capital second half versus GBP 10 million last year.
We've also at the same time, maintaining the very strong focus on recovering receivables, which are also affected by inflation, don't forget. The terms of the value of these receivables is greater and we're trying to make sure we get those collected as quickly as we can. What we have seen through COVID is we've been able to achieve a higher level of creditors through this period, and we don't really want to give up on that. We are gonna try and make sure we maintain good creditor terms at the same time as seeing inventory come down. That's something I expect will continue into 2023. I think it will take longer than that to get inventory days back to 2019 levels. It's heading in the right direction, Gerry.
Gerry Heneghan, Goodbody Stockbrokers. Richard, just on your comments there around evolving legislation from an environmental point of view on alternative packaging, are there many others out there with the resources that you would have? Does that provide you with a bit of competitive advantage? As such, then, should margins not hold up better than maybe you're guiding? Then just finally, on the disposal of the U.K. healthcare business, was the rationale for that purely that you weren't able to scale it or generate the margin from it, or was it down to price?
You wanna take the healthcare? In terms of legislation, what we do see is when legislation comes in, you see an acceleration of, you know, people moving on the changes. The example, Australia is a good one, w e see the same in the U.K.. We call it a competitive advantage because we think we are well ahead of what the competition does in terms of our expertise, the people we have hired. Also what our systems are able to report, which is something we haven't seen from competitors. Also the Bunzl scale allows us to build own brand ranges also in sustainability. Now, is that gonna be fundamentally increasing the margins? You know, I don't think so. It's a little bit like the treadmill. It may be a little bit supportive, especially if we move more towards Own Brands, but it's gonna be a longer term, you know, trend.
Gerry, on healthcare, don't think of this as a scale point about our inability to scale it. It was already quite a big business. It's I think we gave you numbers of GBP 200 million in 2021. That's about GBP 30 million less in 2022. A big business that's, does have scale. It's not... the bigger point I think is that we see ourselves as a value-added distributor and expect to get so for our margins and our returns to be equivalent to the service we provide. Whereas the U.K., the NHS in particular, and the category towers, procurement teams, are making that very difficult for value-added distributors to demonstrate the services you provide. It's a price conversation rather than a service conversation.
We felt that this was the right time to make this change. The benefit, the business still benefited from some COVID benefit in the year, which I think made it a good time to do this. Think of it more of a, you know, we're not sure we're getting paid for the services we provide. Any more questions? Okay.
Yeah. Thank you very much for joining. All the best.