Bunzl plc
LSE:BNZL
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Bunzl plc
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Hello, and welcome to today's bundled 2020 Half Year Results Presentation. My name is Bailey, and I will be your moderator for today's call. [Operator Instructions] I would now like the part to pass the conference over to our host, Frank Van Zanten, Chief Executive Officer of Bunzl. Frank, please go ahead.
Good morning, and welcome to Bunzl's 2022 Half Year Results Presentation. I'm glad you could join us today. Richard Howes, our CFO, is also on the call and will take you through our financial results after my introduction. I will then review our performance in more detail, including business area results, discuss our outlook for the remainder of the year and provide a brief update on the strategic progress we have made. Let me start with the main financial highlights of our results. We achieved 12.4% revenue growth and 8.6% adjusted operating profit growth at constant exchange rates.
This is driven by strong product cost inflation and volume recovery and partially offset by some normalization of COVID-related product sales. Our adjusted operating profit is now 41% higher than the first half of 2019 and the strength of our performance across this period, despite the external challenges is a testament to the resilience of the Bunzl business model and the success of our compounding growth strategy. Bunzl continues to generate substantial levels of free cash flow, which despite the impact of inflation on working capital has enabled the group to hold higher stock levels to support customers during supply chain disruptions.
Our cash conversion has remained resilient at 86% and only slightly lower than the prior year despite this investment. Given the consistent strength of our cash generation, we are able to recommend an interim dividend that is 6.8% higher than last year. We remain committed to achieving sustainable dividend growth annually. Our balance sheet remained strong, and we ended the period with 1.6x net debt to EBITDA, providing substantial headroom for further self-funded acquisitions. Lastly, our return on invested capital was 14.9%, and we continue to focus on disciplined capital allocation to maximize the returns we deliver to our shareholders.
Now we move to our wider achievements over the half. We have announced 6 acquisitions year-to-date with a total committed spend of more than GBP 225 million, including the acquisition of Hygi, which doubles our presence in Germany and is a significant strategic milestone for the company. We remain focused on operational efficiency, which is core to our strategy and particularly important during periods of high inflation and times of macroeconomic uncertainty. In addition to the daily operational improvements, such as investing in technologies and automation, we have continued relocating and consolidating warehouses with more planned for later this year.
Fundamental to our success during the period has been our ability to navigate inflation and supply chain disruption. Our teams have worked hard to implement price increases. While the strength of our global supply chain meant we could manage product delays and shortages and we're able to support further base business recovery. Our progress towards our sustainability commitments continues. We have increased the penetration of alternative packaging materials, stepped up our supplier assessments and continue to work on our road map to achieving net 0 carbon emissions.
Our people are the key to our success, and we are focused on ensuring that we reward the valuable contributions they make to our business. We are conscious of the impact high inflation has on our people, and we are monitoring the evolving situation to ensure that we continue to appropriately support our colleagues. In addition, we remain focused on continuing to support communities more broadly. And whilst we have no operations in Ukraine, we donated GBP 200,000 to the Red Cross over the period. This is on top of the essential items such as cleaning materials, catering consumables and medical products that our businesses have donated.
As we look beyond 2022 and the increasing economic uncertainty, I remain reassured by the resilience of our performance over this period. I expect our portfolio of essential products and solutions, which are inherently resilient and our diversification across sectors and geographies to continue to support the business. Before we go through the detail of these results, I wanted to return to a slide similar to what we presented at our full year results to reiterate our consistent focus on the longer term.
We have a clear purpose, to deliver essential business solutions around the world and create long-term sustainable value for all stakeholders. This has driven strong -- our strong track record, including our 10% dividend per share CAGR since 1992. Our focus on all stakeholder groups is essential and continues to be mutually beneficial for the long term, as demonstrated over this period. 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 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 3% and 4% on average across the income statement. Starting with revenue. Revenue grew by 12.4% to GBP 5.7 billion. Underlying revenue -- underlying revenue growth, which is organic growth adjusted for trading days and a small hyperinflation impact contributed 9.3% to this. There was no trading day impact to revenue over the first half.
The recovery in our base business contributed 15.4% to underlying revenue growth driven by strong inflation across most of our markets and supported by volume recovery in Continental Europe and U.K. and Ireland. As expected, this was partially offset by a 6.1% decline in COVID-related sales due to the continued year-on-year impact of lower disposable glove prices as well as volume decline. Acquisitions contributed 3% to revenue growth. As Frank has already mentioned, our resilience is again highlighted by our performance since 2019. Underlying revenue over the first half was 16.1% higher than in the comparable period of 2019, with total revenue 27.7% higher.
Now turning to the income statement. Adjusted operating profit grew 8.6% to GBP 411.4 million. Operating margin reduced from 7.5% to 7.3%, which was better than expected. The decline was driven by falling higher-margin COVID-related sales and further recovery of typically lower-margin food service and retail sectors in the base business. The net effect of inflation was somewhat supported to margin. Net finance costs increased by GBP 2.5 million at actual exchange with an increase in the -- as a result of the application of hyperinflation accounting in Turkey for the first time, although this was partially offset by beneficial mark-to-market movements on interest rate derivatives.
The group now expects a net finance expense in 2022 of around GBP 75 million with a noncash impact of approximately GBP 10 million from hyperinflation accounting. Adjusted profit before income tax increased by 8.8% to GBP 380.5 million. The effective tax rate for the period was 24.6% compared to 23.5% last year, reflecting the absence of benefits seen in recent years from the favorable settlement of prior year exposures. We expect the full year tax rate to be in line with the half year. Adjusted earnings per share increased by 6.9% to 85.7p.
Broadly in line with this, we are recommending a 6.8% increase in the interim dividend. The group remains committed to sustainable dividend growth. On to cash flow. We continue to generate substantial free cash flow with GBP 236.2 million generated over the period, which is 5% growth year-on-year and 26% more than the first half of 2019. Cash conversion at 86% has been impacted by inflation and investment in higher inventory levels to ensure a reliable supply of products to customers despite the challenges within supply chain.
During the first half, we paid GBP 54.3 million in dividends and a net payment of GBP 59.8 million to buy shares for our employee benefit trust, leaving total cash generation prior to investment in acquisitions of GBP 122.1 million. Now turning to the balance sheet. Working capital increased by GBP 176.6 million from the end of 2021, driven by currency translation, acquisitions and an underlying increase of GBP 68.8 million, reflecting the impact of inflation and the higher inventory levels previously highlighted. We ended the period with GBP 1.4 billion of net debt, excluding lease liabilities. Net debt to EBITDA on a covenant basis was 1.6x and the same as at the end of 2021. We, therefore, have substantial capacity to continue to self-fund acquisitions.
Over the period, we also completed a $400 million U.S. private placement issue, extending the group's debt maturity profile. At the end of -- at the end of June, we held GBP 79.1 million of liability for deferred consideration compared to GBP 107.3 million at the end of 2021. This liability relates to the expected consideration resulting from transactions with earnouts and options on minorities. Return on invested capital was 14.9% compared to 15.1% at the end of 2021 with a higher return from the underlying business, offset by the impact of higher capital employed related to acquisitions, which temporarily dilute the metric. However, returns remain well ahead of the 2019 level of 13.6%.
So to summarize, we have delivered very strong growth in the first half, driven by strong base business inflation and volume recovery. Our business model resilience has been highlighted by our ability to manage inflation and navigate supply chain disruptions over the period. Despite the macroeconomic challenges over the last 3 years, we have delivered 28% revenue growth and 41% growth in adjusted operating profit since 2019, which is equivalent to a 12% CAGR ahead of the 9% CAGR we have achieved since 2004. This result highlights the consistency of Bunzl's compounding model. Our net debt remains in a strong position to support future acquisitions, and we have announced an interim dividend growth of 6.8%, continuing our long track record, which has already delivered 29 years of annual dividend growth. I will now hand you over to Frank to take you through our performance in more detail.
Thank you, Richard. Let me start by discussing performance in our base business, which excludes COVID-related products and contributed 15.4% growth through underlying group revenue. Inflation strongly supported this growth. Volume recovery in Continental Europe, and U.K. and Ireland further supported growth due to restrictions easing compared to the prior year, and given they're weighting to some of the more impacted sectors such as retail and foodservice. Overall, base business revenues are well ahead of 2019 driven by inflation. Total volumes have broadly recovered to 2019 levels, although recovery is mixed by sector and geography.
Moving on to the sales of COVID-related products. Over the period, the decline in COVID-related sales impacted underlying group revenue by 6.1%. This reflects the expected year-on-year impact of price deflation on disposable gloves and partial volume normalization, although the level of larger COVID-related order was higher than anticipated. COVID-related revenues remain ahead of 2019 levels, and we expect this to remain the case. However, the elevated larger COVID-related orders are unlikely to repeat in the second half.
Turning to our sector performance overall. The numbers on this slide reflect the combination of both COVID-related and base business sales. Cleaning & hygiene, safety and healthcare sectors saw our combined underlying revenue decline of 4% over the period due to falling COVID-related sales. Although Continental Europe, and U.K. and Ireland saw some recovery in the cleaning & hygiene based business and product cost inflation -- and product cost inflation was a benefit. Overall, the recovery of the cleaning & hygiene base business continues to be impacted by work from home trends.
Encouragingly, however, our safety-based business in North America has started to see improvements as supply and labor challenges have eased a little for customers. Elsewhere, the healthcare base business saw good growth. Overall, underlying revenue in these 3 sectors combined was 8% higher than in 2019 due to absolute COVID-related sales remaining elevated as well as a good growth in healthcare. Grocery grew 11% year-on-year, supported by significant product cost inflation. Underlying revenue is now 18% ahead of 2019. Foodservice and retail saw a combined growth of 21%, driven by significant inflation recovery, particularly in Continental Europe and the U.K. and Ireland. Total revenues from these sectors are now 21% higher than the pre-pandemic level.
With inflation a key driver of performance, let me discuss the dynamics in more detail. While some of our customers, particularly in North America, often have product cost movements factored into agreements. Elsewhere, regular price reviews are required. Our teams have worked hard to implement these price increases. While inflation remained strong to the end of the period, some of the largest product cost increases have now started to annualize in North America, although the inflation benefit lacked in other regions.
We continue to experience high levels of operating cost inflation during the first half, but overall, this has been more than offset by inflation-driven revenue growth. So inflation dynamics had been somewhat supportive to operating margin. Operating cost inflation in North America has been high, driven by fuel and freight increases, despite some partial offsetting by fuel surcharges. Wages and property cost inflation linked to lease renewals have further contributed. However, while wage rates in North America remained high, they have largely stabilized, moderating the year-on-year impact on operating cost inflation.
We expect freight and fuel inflation to similarly start to moderate, given annualization of cost increases and the potential benefit of lower fuel prices and improved freight capacity. We have seen more benign wage inflation in Continental Europe, but expect this to build in the near term. Operational efficiencies are core to our strategy and pursuing them is particularly important, as I mentioned earlier. Over the period, we have relocated a larger warehouse in North America and consolidated 2 warehouses in Latin America. The number of warehouses we operate from continues to decline on an underlying basis, whilst the average size of the warehouses themselves has increased.
In light of the recent global supply chain difficulties, I would like to explain how we go about addressing this. We start by establishing our customers' most critical product lines for which there can be no delay in delivery. These become the core focus of contingency plans. We ensure that we have multiple regional sources of supply for these products and utilize global sourcing collaborations. We also focus on securing inventory and placing more forward orders. Finally, we ensure that we have alternative products agreed as a contingency and plan for transport disruption. This gives you a flavor of how we secure the most critical product lines of our customers. Encouragingly, we are now starting to see some easing of supply chain disruption across some of our markets.
Now 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. In addition, negotiations with our largest customer by revenue are ongoing. Turning to Continental Europe. As we have mentioned, the business area strong underlying revenue growth has been driven by both strong inflation and base business volume recovery. Similarly, in the U.K. and Ireland, very strong underlying revenue growth was driven by both inflation and base business volume recovery.
Importantly, the recovery in the base business drove a meaningful improvement in operating margin. In Rest of the World, very 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. The business area's overall adjusted operating profit and operating margin decrease was expected and reflects the reduction in COVID-related sales in Latin America.
Turning to our 2022 outlook. We now expect group operating margin in 2022 to be higher than historical levels and only slightly lower than that achieved in 2021. We continue to expect very good revenue growth in 2022 driven by good organic revenue growth and the positive contribution of acquisitions announced in the last 12 months. Growth of the base business is expected to be only partially offset by further normalization of sales of COVID-related products, albeit these are expected to remain ahead of 2019 levels.
Let me now give you an update on our strategic priorities. We have a very consistent compounding growth model, which has driven our historic success. Organic growth has contributed around 1/3 of revenue growth over the last 10 years. This is driven by activity in our attractive end markets as well as new business wins and our development of innovative products and solutions. Organic growth is further supported by our daily focus on making our business more efficient. Acquisition growth has delivered the remaining 2/3 of revenue growth over the last 10 years. Our strong balance sheet and cash conversion provides an excellent basis for further consolidation of our large fragmented markets.
Our success is supported by our capital allocation and portfolio optimization discipline, ensuring we are investing in business that will drive a good return. In addition, our expertise and processes for sourcing and executing deals is well established, and our strong balance sheet affords us significant financial headroom. Additionally, we have grown our annual dividend every year for 29 consecutive years, delivering a 10% CAGR since 1992. This impressive track record is enabled by our consistent cash generation. The success of this growth model is also rooted in our consistent focus on our customers.
Our deep category knowledge, innovative solutions, scale and the ability to invest in important areas such as an ethical supply chain ensures that we provide a differentiated service. This drives our competitive advantage. Let me demonstrate to you how this focus on delivering value for our customers has resulted in a very exciting new business win in North America. We recently won the business of Sprouts, an organic growth that operates across the U.S. They are sustainability focused and have ambitious store growth plans. Sprouts has around 370 stores, and our national footprint is able to service them completely.
Previously, they have utilized a network of 4 independently-owned distributors, which had inefficiencies and limitations. Being their sole distributor, provides efficiency benefits such as allow us to target halving the number of SKUs Sprouts uses. It also allows us to provide Sprouts with consistent data analytical tools, which enable them to assess their inventory and store usage to make better decisions. Previously, they received deliveries only through third-party logistics providers, but our own driver infrastructure also provides much improved reliability and flexibility.
Lastly, our sustainability offerings aligns to their plans. We have already mapped all their product data so that they can analyze their product mix to monitor and drive that transition to alternatives. Sprouts aims to be a sustainability leader, and we are committed to helping them to achieve their targets towards this end. I am proud that we have been able to win this business. It demonstrates the exciting opportunities for growth we have in North America and across all our markets.
Turning now to Packaging Solutions as another example of organic growth drivers for the business. We continue to help transition customers to alternative packaging with evolving legislation supporting this trend. Over the first half, we've seen an increased penetration of packaging made from alternative materials compared to 2021 overall. However, with inflation and recovery in packaging focused sectors as well as the decline in COVID-related sales, we've seen a small and expected increase in total packaging as a proportion of group revenue compared to 2021. That said, the group continues to have very limited exposure to single-use plastic consumables, where some volume reduction is expected.
To give you an example of how we can help customers with alternative packaging solutions, let me share with you the work we are doing with one of our long-standing customers, Wagamama. Currently, we are working with them on a solution that make their takeaway packaging more suited to the circular economy. This includes designing new bowls made of a greater proportion of recycled material. Alongside the new product, we are implementing a scheme to pick up used product to be recycled, which we aim to have in place at all Wagamama's restaurants in the next few months. Our sustainability expertise, which helps customers hit their own targets, is a competitive advantage that we continue to build on.
And now moving on to acquisitions. This graph is a reminder that we have significant opportunity for growth in most of our markets. Germany is Bunzl's target market where our presence has so far been limited. I was, therefore, incredibly pleased with our acquisition of Hygi in that market this year. This business is a fast-growing and market-leading online distributor of cleaning & hygiene products. We believe that this acquisition will provide a good springboard for further expansion in Germany, a market we believe could still be at least 8x larger for Bunzl. Furthermore, the strong e-commerce experience within Hygi will be a great addition to Bunzl's digital capabilities. Besides Hygi, we have acquired 2 more market-leading businesses so far this year.
USL is a distributor of medical consumables in New Zealand and complements our growing presence in the country and the health care sector across the region. The business provides greater scale to our existing operations and affords us the strategic opportunity to win larger contracts in the market. Corsul is a market-leading distributor of PPE products in the south of Brazil. Acquiring Corsul will help us rapidly expand our business in the region where we've had limited presence, and it also broadens our product range. With the addition of 3 further bolt-on acquisitions, we have announced 6 acquisitions year-to-date with a total committed spend of more than GBP 225 million and annualized revenues of around GBP 220 million.
These acquisitions demonstrate the variety of Bunzl's consolidation opportunities across a range of geographies and sectors. We are very proud that our total now stands at a remarkable 189 announced acquisitions since 2004, with GBP 4.6 billion committed acquisition spend over that period. Looking forward, our pipeline remains active.
Now in the context of increased uncertainty, I would like to remind you of Bunzl's resilience. We have a strong culture of operational efficiency backed by a deep supply chain while our agile decentralized model allows us to respond to changing situations quickly. Furthermore, during times of disruptions, these characteristics support additional new business wins while the group's attractiveness to acquisition targets is also emphasized. The financial resilience of our model is also evidence to our consistently high cash conversion and strong balance sheet.
Lastly, our resilience is inherent to the essential nature of the products and service we provide and the diversification of our operations. As we have stated in the past, around 75% of our revenue is achieved to the more resilient cleaning & hygiene, grocery, foodservice and healthcare sectors. My experience over the last 3 years has only strengthened my confidence in the quality and resilience of Bunzl and the potential we have for future growth.
Before we move to Q&A, I wanted to highlight an inside event we are holding for analysts and investors on October 11. The event will be virtual and will allow you to learn more about our business in Continental Europe and see our strategy in action. The event will give you an opportunity to hear from and ask your questions to other members of our leadership team. Thank you for your attention. We are now very happy to take any questions.
[Operator Instructions]
The first question today comes from the line of Sylvia Barker from JPMorgan.
Two quick questions from me, please. Firstly, on margins. Just, if we think about the Rest of the World margins at about 8% prior to COVID, and we are seeing them normalize now. Can you just comment on, do you expect them to normalize more closer to that 8% kind of over the next couple of years? Or are they structurally higher now? Secondly, just around the comments on the large customer in North America. I guess you've removed the constructive mentioned from the statement. Maybe just give us a bit more detail. Obviously, you can't say too much. And then finally, on Sprouts. So, I guess perhaps it's quite similar to wait until maybe in terms of revenue terms. How does that compare in terms of revenue in terms to Bunzl in what they procure from you and in how the, I guess, a contract might be organized?
Okay. I suggest I'll answer the second largest customer question and maybe you can take the margin and the Sprouts, Richard.
Sure.
So let me start with your question on the large customer. Yes, as we said in our statement, discussions with Walmart are ongoing. The contract had always a provision to move beyond the fixed term length on to a rolling basis. And we are, therefore, operating normally whilst we continue to negotiate. And as always, we remain committed to our financial discipline and driving long-term returns for our shareholders. And when we have something to say, Sylvia, obviously, we will update the market.
So there's nothing to read too much into the wording change necessarily.
No. The only thing that has developed in this, we are in ongoing discussions. Our position hasn't really changed. We have a long-standing partnership and we like to continue, but we also remain committed to our financial returns.
And Sylvia, on the Rest of the World, particularly Latin America, has had a significant COVID benefit, and we're starting to see that normalize. So -- and I do -- I think that over time, Latin America will move back more towards the margins they saw in pre-COVID times. The other part of Rest of World is Australasia, which actually has seen a structural change in its margins because of the acquisitions of Obex, in particular. So I think you can expect to see a higher margin from half of the region and about the same for the other half.
Now in terms of Sprouts. I mean Sprouts is a good example of how North America has won business in the grocery end market. It's required us to have a national infrastructure, so talks to the size and scale of this business. You can think of this business being in the mid tens of millions in terms of dollar revenue. So a substantial big piece of business for us, built off the back of a full range of products, but also our sustainability credentials.
The next question today comes from the line of Matti [indiscernible] from Morgan Stanley.
I have 2, please. So just firstly, thinking about the growth outlook for the rest of the year. Assuming that inflation remains at sort of a similar level that you've seen so far, it implies some weakness in volumes for the base business. I was just wondering if there are any particular areas that you were maybe a little more cautious on, whether that be region-wise or product line-wise? And also how that might affect the mix of your volumes? And then secondly, you mentioned the supply chain and the disruption easing slightly. I was wondering if you could give a little bit more detail around the categories for that? And also if you expect -- if you have any areas where you expect to actually see destocking now.
Maybe you can take the first question. I'll take the second, Richard.
Sure. Matti, the -- when we look at the growth, the outlook for the rest of the year, I wouldn't assume that we expect to see similar levels of inflation growth because we will start to annualize the growth that we saw in the second half of last year, particularly in North America. Now we do have a lagging effect. So confidently Europe and the U.K. are seeing inflation later, but I still think we should expect to see a lower contribution for inflation growth in the second half compared to the first half.
It will still be a good growth in the second half. As to volumes, yes, look, we're a bit more cautious on volumes in the second half. We have seen recovery -- a lot of the recovery, we think, in the first half already. And we are a GDP plus business, which means that the extent to which GDP is under pressure in countries like -- in areas like Continental Europe or the U.K., I think will flow through to our results. Having said that, North America is probably going to be a bit more resilient, and obviously, that's a bigger part of the group. So I think it's right to be cautious on volume for the second half and potentially, into 2023.
Yes. Then on the supply chain disruptions, I think it's fair to say that I think the supply chain is still more disrupted than pre-pandemic. So we are, I think, coming out of this, getting better. Supply chain disruptions are more sort of a general point. And obviously, we've seen freight and fuel costs already come down a bit. The area where I think it may have been caused as a little bit more issues than in other areas, in our safety business and that not only so much the disruption in our supply chain, but also a disruption in product categories that, for instance, building workers or contractors that face. So because if you can't get your bricks and mortar on time, it means that -- and your project gets delayed, it means that you have less gloves also in use. So what I hear from our safety business is that is normalizing sort of the import side and is expected to be positive going forward also. So I'm a bit more positive. Everything else being equal on the safety sector.
The next question today comes from the line of Simona Sarli from Bank of America.
I have a couple of them. So starting from organic revenue growth. So you had 15.4% for the underlying business. Could you please split that between volume and price contribution? And also, if you could give an indication on volume growth versus 2019, and how that was split between Q1 and Q2? Secondly, if we look at margin in H1, again, was better than expected. How much of that was driven by product inflation versus efficiency initiatives? And if we look at the margin guidance for 2022, that would imply that in the second half, the margin is declining versus H1, despite the seasonality benefit. What is the reason for that? Is that because, as you said, you are a little bit more cautious on volumes and overall, is there any other elements like, for example, product inflation?
Simona, let me take both of those. So yes, we've seen 15% growth in organic revenue in the first half. And the split of those, the best way to think of that is that we've seen some volume contribution in the first half. And that's that -- really this recovery volume. It's because we're lapping a period when both Continental Europe and the U.K. were locked down. So low, low single-digit volume growth in that contribution to growth in that 15%. The rest -- and you can think of it as sort of low to mid-teens is the inflation growth that we've seen and continue to see in some areas. And you can expect that, that was pretty much similar Q2 over Q1 in terms of the inflation effect.
The volume effect, there was a greater volume effect in Q1 because it was basically the -- U.K. and Europe were more locked down and less in Q2. If you think of it against 2019 in terms of volumes, it depends how you think of it really because if I think regionally, the U.K. is still down volumes against 2019, but it's made, I think, considerable progress in the first half. I'd say, Continental Europe is also down on 2019, but closer to being at 2019 levels. North America has certainly supported volumes for the group over this period in large part because of its grocery exposure, which is clearly well ahead.
So to that point, if I think about end markets, grocery is a positive volume against '19. Healthcare equally has done well against '19. Foodservice is probably around '19 levels. It's not always completely easy to discern that, but I think, let's say, around '19 levels. Cleaning & hygiene, safety and retail are all down -- still down on '19 levels and does provide some growth opportunity for us going forward. As to margins in the first half, you're right, they were better than expected at 7.3%. I don't think it's anything particularly specific. It might be a little bit more inflation than we thought. It's probably just a bit more mix as well as we came into the half year than we expected. I wouldn't read too much into the fact of what's driving it. But I do think it set us up to think that for the full year, we could see a margin upgrade, which we've announced.
But as you rightly say, the second half is -- implies a declining margin compared to the first half and that is against the normal Bunzl seasonality. Now having said that, we've not really seen much normal Bunzl seasonality for the last 2 years. So that pattern has certainly been disrupted. But yes, I'd call out volume caution as part of it. I think that's certainly part of the reason why we'd be a little bit more cautious in the second half. We also continue to see a decline in COVID sales, which themselves, of course, higher margin, which I think would also be part of that mix in the second half. But generally, I recognize we're being quite cautious on margin. I think that's probably right for where we stand at the moment.
The next question today comes from the line of Dominic Edridge from Deutsche Bank.
Just 2 for myself. Just firstly, on -- I know you don't normally disclose gross profit margins during the course of the year, but maybe could you just give us an idea about where you feel they are the product margins are whether -- versus the past, particularly in, I suppose, both core and in the COVID product areas? And are there any major differences versus 2019, for instance, that we should be thinking about there? And what's sort of helping to boost maybe some of your current PBIT margin? And then the second question was just in a market like we're in where freights and fuel, particularly in the U.S., starting to come down. What sort of impact do you find this tends to have on you? Because obviously, you have a lot of in-house capacity in the U.S. Does this tend to mean that you -- is it more negative for you versus those you use for higher capacity? Or do you not really see much of a difference?
Dominic, let me take those. Gross margins, I think it's -- as you know, we don't disclose gross margin at the half year. You get it in the annual report, but let me just give you a little bit of color. I think, actually, we've -- our gross margins have held up well, which is encouraging given the level of inflation that we've seen go through the business. It is always our objective to try and protect gross margins when pushing prices through. It's not always possible. It's certainly not easy, but I think on the whole, we've been successful in doing so.
And that has provided at least in part the protection to PBIT margin that we talked about. If we think of it core versus say base business versus COVID, I think what I've just said is largely a base business comment because COVID itself is actually had some very high margins during the first quarter of last year, in particular, when we saw glove prices still very high. So gross margin on COVID sales will have come down. So there's a mix play within that. As to differences to 2019, I don't think there's any material difference. We have acquired businesses which tend to have a higher gross margin generally. So that will have had a bit of an effect versus '19, but on the whole, I think there wouldn't be a major difference, but that certainly held up year-on-year, which is encouraging.
Fuel and freight, yes. Look, we are seeing -- so in the U.S., we have the biggest fleet, and we do see that -- we certainly have seen in the first half an impact on OpEx for higher fuel and freight prices. They're starting to ameliorate and come down, which should be beneficial to us. But they do have to get through the -- we have surcharges in place in the U.S., which means that some of the reduction will firstly result in a loss of income on that -- on those surcharges.
But thereafter, yes, we should see an improvement in our OpEx in North America as a consequence. It's likely to take a bit of time. I think -- I don't think we should assume it happens too soon or too quickly, but I think it will be there. I think it does provide potentially a bit of an offset for OpEx inflation that we're expecting to see in the second half of the year, particularly in Continental Europe, where we've yet seen any real movement in labor costs. I think it's fair to assume that does happen in the second half and going into next year.
[Operator Instructions]
The next question today comes from the line of James Rose from Barclays.
Two, please. The first is on grocery volumes, which are definitely elevated versus pre-pandemic levels. Can you help us understand why that is? Is that a permanently higher phenomenon? Or is that something you would expect to normalize over time? And then secondly, you've mentioned sort of caution on second half volumes a couple of times now. Are you seeing anything within current trading that leads you to that conclusion within retail or catering or takeaway business? Or is it just a function of you being cautious?
I'll take the first one. I think grocery is still strong. Obviously, at higher levels than pre-pandemic, now partly maybe because foodservice has a part to further recover. But also, I think that's fair, there's also quite a bit of inflation in that increase as well. Do you want to add anything on that, Richard?
No, I think you captured it. And James, on volumes in the second half. Look, I wouldn't say we're seeing much volume effect yet, but we're really anticipating the effect of macro slowdown in the second half, particularly in Continental Europe and the U.K., driving some of that volume weakness because of -- we do service the activity of our customers. And if that activity starts to decline, we will see an effect. But no, I wouldn't say, we're seeing any meaningful reduction just yet.
The next question today comes from the line of Gerry Hennigan from Goodbody.
Just one follow-up question to the Walmart contract, if I can. I realize the [indiscernible] say here, but do you have any indication or any idea in terms of when that -- those negotiations might conclude in terms of the timeline?
Gerry, I think, no, not really. It's -- these things will take their course. And as and when they are concluded, we'll update you. But no, there's nothing more we can really say on either on timing. But as soon as we have something to say, you can rest assured that we'll update the market.
There are no additional questions waiting at this time. So I'd like to pass the conference over to Frank van Zanten for closing remarks.
Yes. Thank you all for attending this session this morning, and I wish you all a nice day. Thank you.