Bunzl plc (BNZL) Earnings Call Transcript

Hello, everybody, and welcome to the Bunzl 2021 Annual Results Call. My name is Bethany, and I will be your operator today. [Operator Instructions] 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 1.6x net debt to EBITDA despite significant acquisition investments. And today, we announced 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 5 years. This also takes us to nearly GBP 1 billion of total committed spend over the last 2 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 2 years. We have a clear purpose to deliver essential business solutions around the world and create long-term sustainable value for all stakeholders. Our 4 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've 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 orders 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 2 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.

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 impacts from lower COVID-related sales with limited larger orders, which have strongly benefited the prior year. Underlying revenue growth for the year was 8.5% higher than in 2019, with total revenue 17.1% higher. But acquisitions contributed 4% revenue growth year-on-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 foodservice 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% in 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 162.5p. And 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 2.85x 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 advanced 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 the 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 was 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 2 to 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 our 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 2020 through 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. So 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. And 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 to 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 & 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 & 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-over-year supported by significant product cost inflation, particularly in the second half. Underlying revenue was 10% ahead compared to 2019. The foodservice 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 8 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 U.K. 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. Deflation in gloves has been a key theme over the second half. And looking to next year, whilst 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 8 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 foodservice and retail sectors as well as the continued growth in grocery. Our healthcare businesses also performed well compared to 2019. However, our cleaning & 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. Whilst 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. Whilst our largest customers, particularly in North America, often have product price movements factored into agreements, elsewhere, regular price renegotiations have been required. Although inflation remained strong through 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 margin. Whilst 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 foodservice as well as the recovery in demand in foodservice and retail. The base business in the second half traded strongly ahead of 2019 levels. While operating cost inflation accelerated through the year, this 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 foodservice and nonfood retail drove the base business recovery, with cleaning & 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 health care 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 6 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 2 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 & hygiene and healthcare sectors, where we continue 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 and Disposable Discounter, where multiples have reflected their strong growth and margin proposition. We remain committed to executing largely within the 6 to 8 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 2 years, we have committed an average of GBP 0.5 billion 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 to nonpackaging 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 nonpackaging 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. Whilst 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 talk 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 ambition to 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 that 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, with full transition desire within weeks for each of their banners, the strength of our inventory management capabilities enabled us to provide reassurance around meeting this objective. 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 that is focused on providing complete solutions for customers which go beyond the physical product. 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 these costs. 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 commitment 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 orders in Asia to our Shanghai team. Whilst 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 10 supplier relationships for this reason. We've 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. And 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 2 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 through 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 2 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. Whilst there are uncertainties around inflation and COVID-19 variance, 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-on-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. So 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.

[Operator Instructions] The first question comes from Simona Sarli of Bank of America.

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 would just briefly remind us of the economics of this contract? And secondly, you were mentioning an underlying growth for the base business of plus 9.9% year-over-year. How much of that is driven from product inflation versus volume growth? And 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?

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. And I can say, in general, I think we had a very long-standing relationship with Walmart, more than 30 years. In the last 2 years, did a great job during the COVID period. And 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. So that puts us in a good position to continue to win in the outsourcing space. In terms of the economics of the contract, the contract is between 8% and 9% of group turnover. Obviously, far less in profitability. Low single-digit margins, but obviously, stock turns relatively quickly. So 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. So about 2/3 of that 9% is inflation -- product cost inflation, and about 1/3 is real volume growth. Richard, over to you.

Yes. And just a slight build on that as well. When we see the 2/3 inflation split for the second half, if you think about -- if you're thinking about Q4, you can add a few percentage points on to that as well because we have seen an acceleration in inflation levels Q4 over Q3. And 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 an -- 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. So 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 '19, and we still have acquisitions which have been meaningful in the total revenue position.

The next question comes from Oscar Val at JPMorgan.

I have 3 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. And then 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. And then the third question is maybe just some color on the COVID products. You talked 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. Yes. I suggest you take the first question, Rich. I'll take the one on, let's say, cost and COVID and please, feel free to add. In terms of cost increases, I think most of the cost adjustments are happening at the beginning of the year for staff. So I would say mostly locked in, although if we need to make adjustments to stay in line with market, 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 cleaning to be very important, offices, other areas. So more deep cleaning, continue to focus on hygiene, continued focus on using sanitizers. What is there to lose when you enter a restaurant or a hotel to use a sanitizer? And I think also with gloves, there may be an element of pricing as well. So yes, we do strongly believe, although we've seen it come down, that the consumption of these products will continue to be quite a bit higher than in '19. Richard?

Yes. So let me just -- let me just build a little bit on that OpEx point as well. So 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. And so as the labor market sort of comes back to more normal levels, we expect to be able to replace that with more permanent staff. So basically, we are trying to variabilize our labor costs wherever we sensibly can. Oscar, on your point on inflation, the -- yes, it was a -- the 2/3 comment was a second half comment. And I highlighted my -- the 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 -- 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, and particularly in the U.S., are starting to come down. And 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, the pickup in the second half is on a higher number.

The next question comes from Kate Somerville at UBS.

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 3 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, I mean you kind of answered it just now. But if the oil prices, plastic prices come down, do you see a risk of the inflation benefit that you have been getting reversing?

Do you want to take that, Richard?

Yes, happy to. So look, we are seeing -- yes, in some of our end markets, we are seeing, and this is the base business I'm talking about, we are seeing volume levels lower than 2019, I think most notably in cleaning & hygiene and safety markets. The cleaning & hygiene market is one where it is, at least through the facilities management businesses, tied to the return to work dynamics that we've seen. And we're a little bit cautious about how that's going to 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 going to play out. So I think you can assume volumes will remain below 2019 levels. Safety, also. Safety is much more tied into the supply chain disruption that we've -- that has 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 than perhaps we would have liked to see. And so a little bit cautious about how that plays out in 2022. But 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. And 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've got -- 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. But we think forward into 2022, we've said it will be above the where we were in '19, which is about GBP 800 million. So you can pick a point somewhere between GBP 800 million and 1.6 -- GBP 1.5 billion, GBP 1.6 billion. 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 -- or we've been seen in Q4 in 2021 as well. And as to oil prices, yes, look, I mean gas prices actually are probably more 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. But look, it might do, and we are seeing it particularly in North America, and it is factored into our guidance of '22-'23 too.

The next question comes from Annelies Vermeulen at Morgan Stanley.

I just have a couple as well. So following up on the operating cost inflation question. Richard, I think of 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? And also, based on those costs that you've managed to lock in so far, what do you expect for 2022? And then 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. So if you're able to put a number on how that's developed in 2021, that will be helpful. And then lastly, I recall previously, you put out that sort of higher cost inflation and product cost inflation may also drive an increase in contract terms. So 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, a, seeing more opportunities for contracts? Or equally, if you're seeing more of your existing contracts being put out for tender?

Okay. I'll take the last question. You take the first 2, Richard, please.

Sure. Annelies, the -- yes, at the half year, we were 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 half -- first half. I think that's true to say. In the second half, let me give you -- let me give you an indication of North America given this is where the majority of the situation arises. That 5% across -- that 3% across the whole of the year -- across the whole of workforce in North America was 5%, albeit in the second half, you can add a few percentage points to that. And if I pull out, and within that, let's say, 7% to 8%, if we then pull out drivers and warehouse people, they were higher than that as well. So 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 which is positive. And 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'll see it in our annual report when it comes out in a, what, kind of a few days and weeks' time, we'll be pointing to the full year rate of 17.3%.

Yes. Okay. And 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. So it's been quite significant. And I know that if you have periods of more than normal price increases, ultimately, people will try to tender and try to make sure they are buying in a competitive way. Where we have seen tenders, we have extended the cooperation. We see opportunities mainly around 2 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, it's quite a logical thing to think about goods not for resale and trying to move them out of your buildings. Now 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 there of any real significance on the short term, but it could develop over time. And 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 others. And 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, putting more value on these kind of things. And that's exactly where Bunzl has been strengthening over the last couple of years in terms of our value proposition.

The next question comes from Suhasini Varanasi from Goldman Sachs.