Legrand SA (LR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to today's Legrand 2021 Full Year Quarter Results Conference Call. [Operator Instructions] For your information, this conference is being recorded. At this time, I would like to hand the call over to CEO, Benoit Coquart; and CFO, Franck Lemery. Please go ahead, gentlemen.

Thank you very much. Good morning, everybody. Franck Lemery, Ronan Marc and myself are happy to welcome you to the Legrand 2021 results conference call and webcast. Please note, as usual, that this call is recorded. We have published today our press release, financial statements and a slide show to which we will refer. Those documents again, as usual, are available on the Legrand website. After a few opening remarks, Franck and I will comment into more details the 2021 full year results. I begin on Page 4 and 5 with the 4 key takeaways. First, Legrand reports record results in 2021. Second, extra-financial performance is solid. Third, the group is actively deploying its strategic road map. Fourth, takeaway in 2022, Legrand is aiming to grow between plus 5% and plus 11% at constant exchange rates with an adjusted operating margin of about 20%. So moving now to Page 7 and 8 with another view of sales. Legrand reported record results, reflecting once again the group's agility and resilience in a moving environment, notably with regard to the pandemic situation, but also the strong and rising pressure on supply chains that gathered strength from the third quarter on. Full year 2021 sales were up plus 14.7%, with a rise of plus 5.6% over 2 years. This performance was driven by a marked plus 13.6% organic growth i.e., plus 3.7% over 2 years. It reflects, in particular, the group's stronger competitive positions in its market as well as the success of its development initiatives. The impact of broader scope of consolidation was plus 3% based on acquisitions announced, excluding that of Emos, which is not yet closed, this impact should be around plus 2% full year in 2022. The exchange rate effect on sales was minus 2% for the year based on average exchange rates in Jan 2022, the full year exchange rate effect on sales would be around plus 2% in 2022. You will find on Page 8, the key takeaways per area. Globally, many commercial successes, notably in faster expanding segments, connected products, solutions for data centers and energy efficiency, together with a supportive residential vertical. These were the main comments on sales. Let me now pass the mic to Franck for more color on our record financial performance.

Thank you, Benoit. Good morning to all of you. I will start on Page 9 with operating margin. Adjusted operating margin before acquisitions of the year stood at 20.8%, meaning an increase of plus 1.8 points from 2020. This rise in the profitability came despite an inflation of over plus 11% on raw material and components during the year, including nearly plus 17% on the fourth quarter alone. This reflects the group's very selective and targeted management of all expenses as well as the pricing initiatives. After acquisitions, the adjusted operating margin for the year was 20.5%. Going now to Page 10 regarding the net profit attributable to the group. At EUR 904 million, it grew plus 32.8% over the year, i.e., plus 8.3% from 2019. The main driver was the strong rise recorded in the operating profit. Trend in the financial results were also favorable and group corporate income tax is therefore increasing logically despite the tax rate being down. Moving now on Page 11 with a few comments on cash and balance sheet. As a percentage of sales, cash flow comparison was up plus 0.6 points at 18.8% of sales, above EUR 1.3 billion. The free cash flow stood at a solid 13.6% of sales in 2021, including an increase in working capital requirement, notably regarding a strengthened coverage at inventory amid supply chain pressures. Last, balance sheet remained robust, with a net debt-to-EBITDA ratio of 1.5. I would like also to highlight that the group financing reflects our commitments as far as extra-financial and climate engagement are concerned. Let me now share with you our financial performance over the last 2 years on Page 12. As you can see, over 2 years, Legrand is already fully in tune with its midterm targets in terms of top line, bottom line and free cash flow. On Page 13, Legrand will propose the payment of EUR 1.65 dividend, up plus 16.2%. This would place the payout ratio at nearly 50%, also in line with the group midterm targets. This concluded key topics on Legrand 2021 financial performance. And I'm now passing the mic back to Benoit.

Thank you, Franck. Let me now present our 2021 ESG achievements on Page 15 to 22. By the way, I'll go super-fast on those slides, but I'll be happy to answer any questions you may have during the Q&A session. So Legrand launched in May 2019, its fourth CSR road map covering 2019 to 2021. It's structured around 10 key challenges that contribute to the UN sustainability development goals. Page 16, you can see that Legrand reached 131% achievement rate with strong achievements in all 3 areas, environment, people and business ecosystem. As you can see on Page 17, we are particularly proud to have reduced Scope 1 and 2 CO2 emissions by minus 28% and to have raised the share of women among the managers by plus 18% over these 3 years. On Page 18, you can see that the employees' commitment rate is of 80%, a steep increase from the last survey taken in 2017. On the next Page 19 and 20, Legrand also pursued its long-term sustainability programs. Our carbon trajectory validated by the SBTi is aligned on a 1.5-degree limitation. As you can see on Page 21, Legrand's ESG policy is well recognized in the various indexes and rankings. Now, on Page 22, Legrand is stepping up its commitment to ESG, which began in 2004. The main areas for -- of this engagement will be the focus of an online Capital Market Day next March 29. It will as well include a [indiscernible] of the group's 2022-2024 5th CSR road map. So let's move now to the third part of the presentation on Page 24, with a continued deployment of Legrand strategic road map. On Pages 25 to 27, driven by strong R&D, Legrand has built a reputation for innovative, reliable, well-designed products and is contently adding solutions, offering greater value in use to its catalogs. On Page 28 and 29, Legrand has taken a targeted approach to its faster expanding segments, data centers, connected products and energy efficiency programs. Sales on these segments rose from around 18% in 2015 and 31% in 2020 to 33% in 2021. Total growth was driven by each of the 3 segments. On Page 30 now, a key area of growth, M&A, Legrand is announcing 2 new acquisitions in Europe. Emos with sales of EUR 85 million and Geiger with sales of EUR 5 million. Together with the 2 acquisitions previously announced last July of Ensto Building Systems and Ecotap, the 4 companies represent annual sales of around EUR 250 million. Now, moving to Page 31, regarding our operational -- sorry, excellence driven approach, I would point out a very agile application of redesign to cost and supply principles, particularly suitable for extreme conditions of price inflation and pressure on supply chains as in 2021. And now, on Page 33, the last topic of this earnings release with our targets for 2022. In 2022, Legrand will pursue its strategy of profitable and responsible development laid out in its strategic road map. Taking into account current macroeconomic outlook and assuming no marked worsening in supply chains, Legrand is aiming for the following full year targets in 2022. Growth in sales at constant exchange rates of between plus 5% and plus 11%, with organic growth of between plus 3% and plus 7% and scope of consolidation effect of between plus 2% and plus 4%. An adjusted operating margin of about 20% of sales, with a margin of between 19.9% and 20.7% before acquisitions, i.e., at 2021 scope of consolidation and dilution from acquisitions of between minus 20 and minus 40 basis points. The group also aims to reach about 100% of CSR achievement for the first year of its 2022-2024 road map, testifying to its bold and exemplary approach to ESG. We are now open -- ready to open to questions with only one comment that we will have to leave you at 10:35 French time. We can have a commitment with the press. But of course, Franck Lemery and Ronan Marc will be happy to continue, should you have more questions. Thank you.

[Operator Instructions] And we have our first question from Supriya Subramanian from UBS.

Thank you for giving me the opportunity to ask a question. A couple of questions from my end. One is on the pricing action. Could you quantify what was the support that you saw in 4Q? And do you see that as a tailwind into the first half of next year? And also, have we been able to compensate at least in value for most of the cost increases? Or do you need to take more price increases in the first half into 2022? And my second question was around the electricity prices, of course, in a lot of regions and especially in Europe, we've seen electricity rates go up quite significantly. Are you all seeing that in terms of increased demand, maybe, for your energy efficiency products? Or is it too soon for that to be reflected in your demand?

Thank you for your question. So as far as pricing is concerned, let me maybe first give you the numbers. So our total pricing for the full year of 2021 was plus 3.5%, of which plus 5.9% in Q4. So obviously, there has been a sort of ramp-up pricing effect. Let me remind you the sort of sequence. It was -- our pricing was plus 1.9% in H1, plus 4.3% in Q3 and now plus 5.9% in Q4. So there has been a deliberate strategy of progressively increasing prices in order to compensate part of the impact of the cost of raw material and components. And maybe, I can give you also the numbers for the price of raw material and components. The total effect for the year was about plus 11%, but it was close to plus 17% in Q4. So close to plus 7% in H1, plus 15% in Q3 and plus 17% in Q4. So ramp up as far as the price of -- our cost of raw material and components was concerned and ramp up in terms of pricing. We have decided to be extremely cautious in terms of pricing, so we did not want to increase prices to an extent where it would have been a problem for our customers. So we did not compensate fully in value. I think we are short of about EUR 10 million. We would have needed EUR 10 million more on an annual basis in order to fully compensate the cost of raw materials and components in value. But it has been a deliberate decision not to do more pricing, again, because we were cautious in doing the right things in order to preserve and accelerate our growth. And on top of that, it was not really needed to achieve our margin commitment. It also means that, I believe, we have further margin for maneuver for 2022. Should additional pricing on top of carryover be needed in order to preserve our profitability, we have the margin for maneuver to do a bit more pricing. But once again, it will be done cautiously with in mind always the right balance between keeping our competitive position and limiting the impact on the profitability. Last number I can give you, even though I'm not sure that it is completely meaningful, is a sort of carryover of pricing and cost of raw material and components over 2022. Why isn't it so meaningful? It's because on top of carryover, many, many things can happen both in terms of price of input and in terms of pricing. But if you take the current pricing and if you take that into 2022, the carryover of pricing would be plus 2% and the carryover of purchase price would be close to 5%. But again, the final numbers for 2022 won't be those ones, because many things can happen. Cost of raw material and components could go further up or down, or pricing could be further up or down if needed. So I hope it answered the first question. As far as the second question is concerned, yes, indeed, there has been a very significant increase in price of electricity and energy as a whole in Europe, but in many countries. But of course, it does impact the profitability of Legrand, but not to a large extent because energy cost for Legrand, it's about 0.5% of our sales. So it's not such a meaningful cost, if I may say, even though the cost has increased significantly. It is true at the same time that it makes the need for energy savings higher on the agenda of people. I can give you a very simple number, take a country like France, the average annual heating expense for a French household, it's EUR 1,300 per year. So of course, if it increases, it becomes a real drain on the money for the various households. So it is a good booster potentially for all our solutions to help buildings to do savings. So it will help ourselves in thermostat. It will help our sales in load shedding. It will probably also help ourselves in electrical vehicle charging stations, in lighting controls and so on and so forth. Have we seen this impact already in 2021? Well, clearly, what we call the fastest expanding segments, so not only energy efficiency products, but also connected products and data centers have grown faster than the rest of our product offering, both in total growth and organically. So yes, we have seen probably a bit of this impact, but beyond the cost of electricity and the cost of energy, I believe there are a number of long-term trends that are at play and that will support the demand for the products. Electrification is one. You could also mention work for home, the need for additional data capacity and bandwidth, green building, the desire for more safety and security in buildings, assisted living and so on and so forth. So long answer to a short question.

So we have another question from Lucie Carrier from Morgan Stanley.

The first one I have is around your comment, I think, in the presentation in the slide show, where you are mentioning that North American nonresidential has been growing, but not back to 2019 level. Can you help us maybe understand how far below we are versus this 2019 level and more particularly, in volume, considering the sheer amount of inflation we have seen over the past 12 months? And do you think that the elements that may have hold back this recovery are now clearing up?

Yes. Lucie, so to give a bit more flavor, sales in the U.S. are obviously up over 1 year, but slightly down over 2 years. And if we cut the performance into slices, if I may say, data center -- and over 2 years, data center was up double digit and a very, very significant growth in 2021 compared to 2019. And it has been consistent all over the year. Residential grew, also, double digit in '21 compared to 2019. The end of the year was a bit weaker, but we would put that more on the back of -- the lack of components which we have lost a couple of million U.S. dollars of sales, but the underlying demand remains strong. As far as the nonresidential, excluding data center, which, as you know, represent more than half of our sales in North America, it was down double digit in H1. It was down only single digit in H2 compared to 2019. So we have seen sort of an improvement even though we are not yet back at the level of 2019. How long will it take? Well, we are not worried at all for 2022. We believe that there are a number of factors that should help the recovery of the nonresidential markets in the U.S., and that's actually what the official statistics also demonstrate. And amongst the factors that could help, it's always the same story. It's a return to the office. We are somehow highly dependent upon what happens in the big metros in the U.S. And in those big cities where you have a large financial and tech community, and a lot of people hasn't gone -- not gone back to the office for 2 years. And we believe that with the COVID-19 waves being less and less lethal, if I may say, or easier to manage, this return to the office will happen, and it will definitely help and support the rebound of the nonresidential market in the U.S. So sort of an improvement between H1 and H2. Not yet back to 2019 level. But no -- but pretty -- a good level of confidence that this will happen in the quarters to come.

And just to be absolutely clear, the number you have given, so down double digits in 1H and single digits in 2H. Those are volume based or they are value based?

No. They are value based -- but -- so of course, the pricing is somehow supportive. We've been able to do some pricing in the U.S. Now, we didn't do 8% pricing. But yes, they are value based.

Okay. The second question, just to follow on, on the price cost equation. Do you -- I mean, you've just mentioned that you've lost some sales as well a little bit on the component shortages and so on. How do you see the situation now at the start of 2022? Do you think you have passed the worst from that standpoint? And could we be moving effectively in terms of net positive price cost in the second half, considering the carryover you've mentioned considering potential new initiatives on the pricing as well that you seemingly thing you can take in 2022?

Well, there are 2 separate issues. One is the price of raw material and components and second is the availability of raw material and components. As far as the price is concerned, absolutely no clue. And as usual, we are prepared to react one way or the other, depending on the evolution. So I don't know. What I can only tell you is the sort of carryover impact that I mentioned, i.e., the plus 5%. It will not be the final number. Would it be more or less, I don't know what will the final number be? I don't know, but many things can happen. So absolutely no clue. And again, I think what matters at Legrand is our ability, should we need it to do more price increase. And we have kept the ability but not doing too much pricing in 2021. As far as the availability of components, the situation remains difficult. It did not get worse between Q3 and Q4, so no worsening of the situation. The situation remains difficult. It, of course, depends on the component. Take for -- things are getting better for steel, for example, getting better for copper, even though the inventories in the channel remain globally low. It remains difficult in aluminum due notably to the decrease in capacity in China. Remains also difficult in some plastic with very long lead time and on electronic components. And clearly, electronic components is a place where specialists expect the situation to take a bit of time before seeing some sort of improvement. So it remains pretty difficult. In total, we believe that we have lost, as I said, a couple of tens of million euros of sales. And well, it, of course, has a negative impact on our categories that embed a lot of electronic components, so a number of connected products, a number of -- that's life, and we have to manage it. I think we've managed it pretty nicely in 2021, securing a long-term commitment with our suppliers, being extremely agile in chasing the opportunity to do good purchase here and there, doing redesign to supply in order to change the design of some of our products to embed more widely available components. So we've done many things extremely positive. I don't believe that we have lost market share because of this shortage, which is faced by many people. But yes, it is -- it is, of course, difficulty we have to manage. Hope that -- and -- that it will not have too many impacts on the fastest-growing segments in 2022, which are the one embedding the most electronic components. But again, we are now a bit used in managing those, and navigating this complex situation.

And just maybe to kind of just follow up on that. I think I didn't see it in the slide show, but can you maybe update us on the progress of your connected range, Eliot? Historically, you have given the percentage of sales and also the organic growth annually for that business?

Well, rather than focusing specifically on Eliot, I would rather mention the fastest expanding segments, which we presented at the last CMD in September. So again, as a percentage of total sales, it was 29% in 2019, 31% in 2020, and 33% in 2021. And if we -- so it grew 18% over 2 years, whereas other segments, so non-fastest expanding segments, if I may say, we are flat over 2 years. As far as the like-for-like sales, it was plus 15% over 2 years. And the other segments were minus 1% over 2 years. So you have a sort of other performance of about 7%, 8% per year over the past 2 years, of those the fastest expanding segments. In all 3 segments, data center, Eliot and green grew more or less at the same pace.

So we have another question from Gael de-Bray from Deutsche Bank.

I have 2 questions, please. The first one is on the pricing dynamics. I mean given that everybody is kind of sold out, do you see gradually less people beating on the various projects than just a couple of years ago. And does it really change the pricing dynamics, making it easier for you to push up prices up? I guess the question is, can we anticipate structurally higher margins in the future when all your pricing actions become effective and once the supply chain tensions start to dissipate? And then the second question is on the orders trend. I know you usually do not comment on orders because of the short cycle nature of your operations, but this cycle is obviously very unusual. And just earlier this morning, we heard about Siemens growing 40% in electrical products in terms of orders. So could you maybe give us a bit of color on your backlog today and the kind of visibility you have compared to a year ago or compared to what it's been historically?

Okay. And Gael, so first point, I haven't seen globally significant change in the competitive landscape over the past 2 years or the past 12 months coming from the pricing dynamics. Where, of course, it has made it a bit more complicated for some, for example, Chinese players to compete in some geographies because the products were not available. But we haven't seen either new competitors coming in or all competitors coming down. So our market remains extremely competitive, of course, somehow price sensitive, and it's as difficult as before to compete on project. Now, the question is whether or not because of the pricing dynamics, we could expect higher margins than the 20% EBIT margin long term. The answer is no. And we made it clear during the last CMD back in September. Of course, when the price of raw material and components will go down, we will retain some of this pricing. And you know that we have never decreased our prices year-on-year. But if and when it happens, we will definitely reinvest part of that into growth. Our long-term guidance is not to do 21% or 22% EBIT margin, it's to do 20% EBIT margin. Once again, it's not a sort of magic number. It's because we believe that this is the best balance between value creation and growth. And if we were to do over a long period of time, 21% or 22% EBIT, I believe that it would put our ability to grow fast [ EBIT ] at risk. So yes, at some point in the cycle, we will have some help from the raw material and component, but if it happens, the strategy will be to invest it into growth in order to grow the top line faster. Well, as far as orders are concerned, well, unfortunately, we have -- so you know that we have no order book. But unfortunately, we have a backlog, which is orders to be delivered a bit higher than usual because we have difficulties to properly serve our customers because of the scarcity of resources. Well, now, we have absolutely no order book similar to the one Siemens would have. S I can hardly give you any visibility. The guidance we are shooting, i.e., the 3% to 7% organic growth for 2022. It's not based on -- it's not, sorry, based on any order book we would have. It's rather based on discussions with customers, analysis of macro numbers, feedback from our subsidiaries, feedback from market specialists. And this is the usual uncertainty when it comes to the Legrand business model.

Okay. That's very clear. Can I have a quick follow-up on the restructuring actions you took in the quarter? I think there was around EUR 20 million this quarter. So taking the total number of restructuring cost to around EUR 35 million for the full year. So it seems to be a bit higher than the EUR 20 million or EUR 25 million range you had provided in the past. So could you just explain what you're trying to achieve here?

Yes. No, clearly, well, so -- First comment, don't pay too much attention to the calendarization of restructuring. You can have 1 big [indiscernible] another. So what really counts is the annual level of restructuring. It is true that the usual Legrand run rate is EUR 20 million to EUR 30 million per year. It was EUR 76 million in 2020 because we wanted to accelerate our structuring action. It came out at EUR 34 million in 2021, it was slightly above our historical average. Well, we have about 120 industrial sites in about 30 countries. And for 3 years, we have more or less doubled the number of sites we are closing each year. We were used to close, on average, 5 sites a year, and we have moved this number from 5 to 10 a year. So the fact that the restructuring is a bit higher in 2021 than it used to be and was significantly higher in 2020, is a reflection of this strategy to accelerate a bit our footprint optimization. It'd be in 2022. And I know that it's always a sort of uncertainty for your model. We don't know. We will not stop doing restructuring if we reach EUR 30 million. So if we have good ideas, we could very much spend again 35% or 40% if needed. Now, for the sake of building your model, you can take EUR 20 million to EUR 30 million as a sort of run rate for the years to come.

So we have another question from Eric Lemarie from CIC Market Solutions.

I got 2 actually. The first one on this faster expanding segment. Could you remind us of the profitability of this line of businesses? Is it higher margin than the average, thanks to pricing, for instance? Or is it lower due to some specific R&D costs, for instance? Is my first question. And I got a second one on connected products. Do you expect to deliver some connected products this year based on the new Matter protocol?

Yes. So as far as the first question is concerned, the key driver behind profitability is not whether the product is the fastest expanding -- or part of the fastest expanding segment or more traditional product, it's really market share. So if you have a product which has a significant market share, it will have higher than 20% EBIT margin regardless of whether it is a fastest expanding segment product or a traditional one. If you have a product on which we have a lower market share, then we will have lower margin. So the key driver is really market share and we have -- if I wanted to shoot a number, you know that Legrand makes 2/3 of its sales with products that are either #1 and #2 in their markets. It means that we have in total about 200 leadership positions in close to 50 countries. Out of those 200 leadership positions, I haven't done the math yet, but a lot of them are in traditional segments. A lot of them are also in faster expanding segments. So again, the key driver is really the market share. As far as a Matter is concerned, we have -- well, you may know that we have driving seat in the cockpit for Matter because we are cheering the CSA alliance. The first product that will get out from the Legrand/Netatmo factories using the Matter protocol will be mid of 2022. So it's coming soon, and we really see Matter as a fantastic progress. The fact that products, we're not talking to each other and that customers were pushed to favor proprietary solutions was a sort of limitation to the growth of smart home and having a sort of universal protocol that will make it possible for product A and brand A to communicate with product B and brand B will enhance a lot customer experience, and it will, I believe, increase significantly the penetration rate of smart home. So we are welcoming very much this Matter protocol.

When product will be launched?

Well, it will be launched mid of next year, but -- mid of 2022, sorry. Now, in terms of product range, you'll see it in a couple of months.

Okay. Okay. And can I -- just a follow-up one. [indiscernible] is the carryover on pricing and purchase price in 2022. Could you repeat the number?

It's 2% for pricing and close to 5% for cost of raw material and components. And I insist on that. In 1-year time, when we will discuss together the pricing impact and cost of raw material and components, I can bet with you that the final numbers won't be plus 2% and plus 5%. So many things will happen.

So we have another question from Alasdair Leslie from Societe Generale.

I just wanted to get a better sense of how you're thinking, I suppose, strategically about pricing in 2022 in terms of that balance between protecting profitability and competitiveness. I appreciate your comments around sort of pricing and raw materials moving around. And obviously, there's going to be a lot of change through the course of the year. But is the aim essentially to neutralize price/cost in 2022 or except maybe only partly compensating for it as you've done in 2021? And then second question, it's kind of noticeable you perhaps haven't pushed through as high price increases as some of your peers. You mentioned stronger competitive positions in the presentation. Just wondering how much of that is perhaps in reference to pricing. Do you think some competitors perhaps have kind of maybe over-positioned themselves on pricing now? And are there kind of areas where you can maybe take advantage?

Well, as far as the first -- As far as the first question is concerned, my sort of target and the target of Legrand teams is not really to compute the fact that we would compensate x percent or y percent of the price of raw materials and components. The objective is to deliver the approximately 20% EBIT. So many levers will be put in place. Pricing, of course, leverage from volume, cost control, restructuring, mix and added value, productivity, Industry 4.0 and so on and so forth. And that's my clear horizon. It is -- we will do whatever it takes in order to deliver the 20% EBIT, while at the same time, growing as much as possible. So I have not a definitive answer to your question. We will really monitor and decide on the precise pricing level depending on what we need to do in order to deliver a profitability commitment, and we'll do it in such a way that it does not hurt our competitive position. As far as the improvement in competitive position in 2021, I think it comes from many factors. I wouldn't say that it came mainly from pricing. Legrand is considered as one of the most expensive players in this trade. And we have built that position by building brand equity and communication, quality product and so on. And we don't like really gaining market share by cutting prices because this is a game which in our market doesn't pay much. So of course, we have to remain competitive, and that's why we haven't increased pricing too much in 2021. But I would hardly say that we have significantly gained market share because we would have been a lot more conservative than others in terms of pricing. Now the gain in competitive position is coming from a couple of factors. Clearly, our positioning on faster expanding segments help a lot. The huge product renewal we have done in many geographies in the past years have also helped. Take, for example -- including on some traditional products, take, for example, wiring devices. We have renewed almost all ranges of wiring devices in France and Italy, which are 2 big markets for us, and we have significantly gained market share in both France and Italy in wiring devices. The fact that we have maintained service to customers despite what has happened in the past 2 years. Remember last year, we told you that we haven't closed our logistics centers, even in March and April 2020. We have reopened very fast our [ subsidiaries ]. This year, despite the scarcity of resources, we have tried to serve as much as possible our customers. We have kept investing on front offices. We have kept investing on digital. So for all those good reasons, we believe that in a lot of geographies, we have gained market share. I can also give you a very good example. You may have seen that our inventory to sales -- the level of inventory to sales increased last year compared to 2020. It was almost 18% last year compared to 2020, where it was close to 14%. So we have had almost a 4-point increase in the ratio of inventory to sales. Well, of course, part of that is technical. We have probably 1 point which is coming from the currency conversion, as we call it, effect. In scope, we have 1.5 points, which is coming from the just pricing, the price of raw materials, the way it is -- and the finished product, the way it is valued in the balance sheet compared to the average of the P&L. But you have probably 1.5 points of this improve of this deterioration, if I may say, in the ratio of inventory to sales, 1.5 point, which is 10% increase in inventory turn compared to last year. So -- and we have said that consistently to you in the previous calls. We have deliberately taken the decision to increase our turns, so to have more inventories because given the difficulty to find raw materials and components, improving the coverage, was absolutely must if we wanted to continue to serve our customers. So this is one example, together with pricing, with the decision we took in 2021 in order to keep our ability to grow and to grow faster than our markets.

So we have another question from Andre Kukhnin from Credit Suisse.

A couple of follow-ups first. On inventory levels, could you comment on what you're seeing in the channel versus what you would perceive as normal?

Well, we haven't seen in 2021 any significant phenomenon of strong destocking or strong restocking. I guess that our channel would have loved to be able to build some inventory back. But they couldn't just because it was difficult for them to get from suppliers, including from Legrand, the materials they needed in order to build back some inventory. So nothing material from what we can see, again, we don't have a full visibility in our customers' level of inventory. But from what you could see, no significant -- neither destocking nor restocking. And I believe that the level of inventory for channel is not that high, given what happened in the past 2 years.

Great. And on pricing, are you planning further price increases, kind of, around now? Have you done anything in January? Or do you have it?

Well, yes, we have done -- pricing at Legrand is not something we do on Jan 1, and we forget the rest of the year. It's something which happened every day. So in some countries, yes, we already made some pricing increase in Jan. Some other is planned for April or May. And if needed, we could add more price increases. If need, we could also give more discount to our customers on a daily basis. So as a result, having a negative impact on pricing. So it's really something which can change almost from one day to another. But yes, to answer your question, there are a number of countries where we did already some price increase in January.

And could you comment on what level of labor inflation you anticipate for 2022?

Well, it really depends on the countries. And there are clearly geographies in which there will be significant labor inflation. I mean, the U.S. is one of them. When you have such a low unemployment rate and so many people living in the labor market, it leads to significant inflation. So you will have some inflation in the U.S. You may also have some inflation in a number of new economies. In Europe, it should be a bit more limited given the level of unemployment. But yes, there will be probably higher than usual inflation from remuneration salary. Now in front of that, you can always do a productivity and a number of things. So it's not something that -- it's something that you can manage.

Great. So it doesn't sound like you're calling that out as something that we need to worry about for this year.

Well, it's part of the inflationary environment in which we have to play. So prices of raw material and components is going up. There is inflation in wages. Cost of energy is going up. Cost of transportation is going up and you know that it's 3.5%, a bit more than 3% of our sales. So there are a number of -- the cost of input as the whole is going up and sometimes [indiscernible] Well, fine. At the same time, we have a level of demand, which is not bad. We have some possibility to do pricing. We have a lot of productivity actions that are going on. You have restructuring. Well, that's -- it's not -- it's something that -- it's [ today's world ] in which we have to play.

Very clear. And if I may, just very final one. It's interesting what you said about the 200 leadership positions globally that you have. Could I ask what's the total of positions that you have, i.e., what is the 200 out of? And is there any sense that you can give us on how that's evolved over the last few years?

Sorry, I haven't counted. It's probably 1,000 of position that we have because if you assume that the day you start selling 2 wiring devices in a remote country, you have a position. We have 100 countries -- sorry, 100 product families in 180 countries. So it makes a lot of positions. Now those who really matter are the ones that are significant enough to be called the leadership position and those are about 200. It doesn't change much in the past 4 or 5 years. It's about 2/3 and it was about 2/3, 5 years ago. And our objective is not to take that to 80% neither to 50%. We are happy enough maintaining this 2/3 because it means that not only we have 2/3, means that we have the positions which we need in order to sustain our profitability, but it gives also 1/3 position where we can improve. So we believe that this 2/3, 1/3 is the right balance for the Legrand overall.

So next question from Simon Toennessen from Jefferies.

Yes. My first question is on your growth guidance. If I look at your U.S. competitors, they're all guiding for around sort of high single digits, one of your key competitors guide 8% to 10%. So maybe, you can comment, not necessarily obviously on their guide, but where do you expect Legrand to grow less in your parts of the business? And then secondly, on U.S. non-resi. Given you're still single digits below. I think you said in H2, I think Q3 was down 10%. So maybe you can comment on how it was down now in Q4. But would you expect your U.S. non-resi business to grow higher than what you're guiding for the group in terms of organic growth in '22? And then lastly, you might have said it and I might have missed it, but you guided, at the Q3 call for raw material inflation of 15% to 20% for Q4, we came in at minus 17%. Can you guide for Q1 now? That would be helpful.

Well, you are becoming greedy. The more we give, the more you ask. So as far as the U.S. guidance is concerned, well, I don't know if you're comparing us with companies such as Hubbell, Eaton, nVent, Vertiv, company like that. We don't really have the same exposure. We don't really have the same business, so it's always difficult to compare from one company to another. So I can hardly comment. What I can tell you is that the 3% to 7% that we are guiding at the group level because we're not guiding on a geography by geography is for us. Again, what came out from feedback from countries, including the U.S., from specialists and so on. So it seems to be for us a reasonable guidance. I can hardly comment on the guidance for other companies. As far as Q4 and Q3 in the U.S. is concerned, if your question is about the trend between Q3 and Q4 in non-resi, I told you that H2 was down single digit and H1 was down double digit compared to 2019. No significant difference between Q3 and Q4. Now be careful, don't come to the conclusion that there is no change in trend or that there is sort of plateau that things are not improving. Quarterly performance in our trade is not very relevant because many things can happen, stocking, destocking from the channel, one big project, one days more, one days less. And on top of that, the scarcity of resources and the difficulty to source some components can also have some impact. So in terms of hard numbers, no change between Q3 and Q4, but I can hardly extrapolate that into a trend. Well, as far as guidance for Q1, in raw material and components is concerned, no, we don't intend to guide on a quarterly basis. So unfortunately, I have no numbers to give you. What I can tell you, but I think it's obvious for everybody that H1 will be a demanding half year for Legrand in terms of margin. Number one, because H1 2021 was a very good semester. If I get the numbers right, the H1 adjusted EBIT number was 22%, and the H1 2019 adjusted EBIT was 20.5%. So H1 2020 was a very good semester in terms of margin; and number two, because we will have the full effect of the increase in raw material and components, and we still have some ramp-up to implement or to do in terms of pricing. So I think it's obvious for everybody, but at the start of the year, going to be demanding in terms of margin. Now what really matter for Legrand is, of course, the yearly performance. And as far as the yearly performance is concerned, we will try to achieve about 20% EBIT margin with, as usual, a good mix between leverage, pricing and so on.

In my second question, I also asked whether you think U.S. non-resi business is going to grow above your group organic growth guidance for the year. Do you think the catch-up in U.S. non-resi will accelerate and allows you to grow above the kind of -- or at least above the midpoint of your 3% to 7% guide?

Well, it would make sense to believe that. Now again, I have no clue. What I can tell you, but this is legitimate to expect that, providing a number of things happen, including the fact that we are done with this Omicron or COVID-19 wave, but it makes sense to believe that. What makes us somehow, I wouldn't say confident, but not worrying much about the non-resi in the U.S. is that including in 2021, we saw pockets of very significant growth including in non-resi. If you take, for example, audio-video products, including cameras for video conferencing, for example, they grew double digit over 2 years in the non-resi. So I believe we should have the ability to either to benefit from the market recovery or to find additional pocket of growth that should help the growth. Now at the end, what will it be -- what will the impact of scarcity of resource be? Will it grow faster than the rest of the group? This is still a question mark. But this is a scenario which is possible indeed. Yes. Just to come back to your first question. So the comparison between Legrand, its listed peers, well, always please also take into account the basis for comparison. And if you look at the guidance '22 compared to the actual 2019, well, you'll see that Legrand guidance, we shouldn't be ashamed of the Legrand guidance compared to a number of our U.S. listed peers.

So we have another question from James Moore from Redburn.

Yes. My first question, I guess, is on the core business, excluding the high-growth segments. I think you commented that organic sales were minus 1% over 2 years. And if we make the assumption, I don't know if it's the correct assumption, maybe you can help me on that. But if we make the assumption that 2 years of cumulative group price mix of 4%. If that was the same in the core, then I guess the volumes in the core are down around 5% on a 2-year basis. And when I look at our global construction output blended for your mix, we think it's maybe up 1% or 2%. I'm not really trying to get into the precision about the numbers, but more ask generally whether you feel that there are only cannibalizing factors or structurally declining factors inside the core that we should consider? That's really my first question.

Well, your numbers are correct. The -- let's say, traditional infrastructure products are down like-for-like 1% over 2 years. So they are down a little bit more than that in volume because we have done some pricing. Well, the clear -- there is no structural reason why those products should go down because together with a growing need for electrification worldwide, there will be an increasing need for traditional products. Now yes, there is some mix effect between traditional and fast expanding segment. So every time you are selling a non -- connected thermostat instead of a non-connected one or connected door entry instead of a non-connected one or connected wiring devices instead of a non-connected one. This is one more [ sales ], which we count into fastest expanding segments and one less that you count into traditional ones. So yes, there is some sort of cannibalization, but this is a healthy cannibalization that we are used to call mix effect. So it's not at all a concern for us. And again, there's no structural reason why the traditional product should go down. There will be an increasing need for circuit breaker, cable management, wiring devices, components and so on and so forth.

And the second one was on innovation. Your R&D to sales ratio seemed to drop a little bit below your 5% target in FY '21. I don't know if there was a particular reason to that. And I wondered whether specifically in FY '22, we should consider the 5% a good guide. I know it's more a through cycle guidance, but I was just trying to clarify what the year-on-year change in R&D to sales might look like this year.

Well, the only reason why the ratio went down, whether the sales were up very significantly. So the R&D expense, maybe to give you a clue about how we manage the expenses. Over 2 years, you know that our sales like-for-like was up by almost 4%. Our production and SG&A expenses like-for-like were flat over 2 years, right? But actually, this flat is a mix of increasing expenses on digital and R&D and decreasing expenses on everything else. So we have sort of safeguarded the R&D, and we have again taken the deliberate decision not to cut R&D expenses because we think that it would have been done at the expense of future growth. Now of course, when you have your sales growing in total close to 15%, the ratio decreases a little bit. Midterm, we should be at about 5%. There's no reason why we would be at 5.5%, neither why we would be on a long-term basis at 4.5%. So the sort of 5% ratio of [indiscernible] what we need to sustain our business model. I'm sorry, I have to leave you again. Deeply sorry for that, but I took a commitment with the press, and I have an interview starting in 5 minutes. I really leave you with Franck and with Ronan. Of course, we'll be able to address any more questions you may have. And I tell you thank you very much for attending this call.

Well, thank you very much. I'll leave it there and pass it on to somebody else. Thank you.

So we have another question from Christian Hinderaker from Liberum.

You mentioned earlier in response to, I think, to Lucie's question, access to supply of some of the components that impacted on revenue conversion. I'm just interested if you could perhaps elaborate on this in terms of customer acceptance to wait longer for taking those deliveries and whether there's any risk of sort of [indiscernible] peers. And additionally, keen to understand whether you think there's any effect of customer prebuying. Obviously, quite acute inflation in the market as well as those shortages?

Okay. Okay. Thank you for your question, Christian. So elaborating a little bit more about the supply chain issue. What we said during last call is that the Q3 was an increased pressure on the market. You remember that the beginning of the year or end of last year, the pressure started. We entered the 2021 year with -- [ prepared ] as far as inventories are concerned, as far also as process are concerned. Our R&D is now more and more working on what they call redesign to supply. So finally, we were pretty much immune during H1, and we start having some effect on the supply chain on H2. On H2, Q3 and Q4, I would say there is no significant material deterioration of the situation. It's more or less plateauing and Benoit already mentioned what was the components which were the most impacted. Talking about sales, it's very difficult to assess because as you said, there could be some sales missing, but there also could be some sales that we wouldn't have done because of what we call the sugar effect, when there is no sugar, people buy sugar. So there could be some early order for some suppliers. What we have assessed is that globally speaking, we are talking about a few tens of millions of potential sales, which would be missing. Missing on the year doesn't mean missing in terms of market shares. This is your question. So we don't think, first, that we have lost any market shares on behalf of that. On the contrary, we think that we did well in this climate. We anticipated, as you said, and you saw also that we have risen our inventory, our coverage to be prepared to that. But what we hear from the market, from our peers, everyone is suffering some supply chain issues. And what I read when we issued our Q3 release, everyone also agree that we did well in that environment. So I don't think that we have lost any market share. And the last part of your question was about would the customer be ready to wait longer for the delivery. We lost -- that we lost any project, nothing meaningful. And of course, today, everyone is ready to wait a little bit. We haven't seen project canceled on behalf of supply chain issue. The supply chain issue, it's for everyone. It's not only components and raw material. It can be also labor shortages. You know the story of the driver in the U.S., in the U.K. It can be also some disorganization after the -- some installers because of the COVID and the Omicron variant. So today, I think that -- it looks that the supply chain is quite patient, the customers are quite patient.

And maybe just a follow-up, are you able to just give us an indication in terms of the quantum with regard to lead times of your product deliveries and how that might have changed in time? I mean, is it significant?

It really depends on the components. But of course, if you take, for example, electronic components, the lead time may have doubled. We are, today, on some specific components, placing order or giving visibility on volume over 12 to 18 months. So it's -- yes, it's an increase on behalf of procuring and also on behalf of transportation as far as the flow between China and the U.S. is concerned. And this is also one of the reasons why our inventory coverage has increased, it's the mechanical part of the lead time increase.

So we have another question from Andreas Willi from JPMorgan.

I have questions around the volume growth. If you look at the sequential volume growth and compare that also in terms of the base effect to either 2018 or '19, then that progressively slowed during 2021. We'll be looking at your guidance, assuming some price contribution, you still expect that volume growth, I guess, to accelerate again. What are the specific drivers for why after slowing progressively, it should accelerate again? And if we look at profitability, what's the benefit in 2021 from having overproduced relative to demand to build up finished goods inventory quite substantially during the year?

Thank you for your question, Andreas. So as far as volume growth is concerned, I don't think there is any material changes during the year if we were to compare to 2019, which is the most relevant measure. So the volume growth has been quite steady and is actually quite consistent with what could be 2022. In 2022, our -- the midpoint of our guidance is plus 5%. So it embeds still a market quite positive, of course, some pricing, which have to be healthy. But there is no -- in this assumption, no material acceleration of the volume. Responding to your second question, well, there has been some -- a little help of the -- on the gross margin on the inventory buildup that we can assess of roughly 20 bps on the full year results. So it's not meaningful at all versus the full improvement of the year. So to come back on the volume, it was -- when I say not a lot of volume over 2 years, it's actually minus 4.8% over 2 years, 2021 versus 2019. So the acceleration in the inflationary environment, you can make your assumption on the top line is not that drastic.

So we have another question from William Mackie from Kepler Cheuvreux.

Good morning, Franck, Ronan, everybody. Thanks for the time. First of all, a follow-up on the inventory and working capital disclosure and questions. Can you provide a bit more detail on where you took the active choices to build inventory to provide the enhanced service levels across the group? I know you specified then the benefits from overhead recovery. And the other question relating to working capital. It's just my impression, at least, that in this current economic environment, we're hearing from many companies they're experiencing perhaps over ordering and protection of supply through ordering through the supply chain, even from some distributors. So it's, to me, counterintuitive that you're telling me that your distributors are running at normalized working capital levels or at least that you're not experiencing perhaps over ordering or inventory build from your customers. I mean can you perhaps maybe square off that circle as to what your distributors are saying about how you would like to service them? And perhaps, why you see the inventory levels at normal sort of -- at a normal state rather than an elevated state in the supply chain?

Okay. So to answer your first question about are there any specific spot of our geographies where we would have increased the turns or the decrease of turns, increase the coverage higher than the average of the group. No, it's overall -- it's an overall strategy which has been applied in all countries. And it's actually also true for almost all parts of the inventory, raw material with finished products. All those spots are increasing. As we said, in average, the coverage has grown by 10%, but it's well spread across the board as far as the geographies are concerned and the type of inventory are concerned. Talking about the inventory level of our distributors. Well, once again, it's more a question to them than for us. We don't know what is the level of inventory. We know what is the backlog. So we know that we are not able to serve them at 100%. And -- but it seems also logical that when it's possible, they [indiscernible] to build up some inventory. But every time we are able to know the selling and the [ sell house ], it may be done on a specific channel on a specific geography. We don't see any sign of inventory or material inventory buildup on the -- in our distributors. So I can now make the full equation, but when we have information, we don't see any increase.

Helpful. One follow-up, please, if I may, which -- well, 2. One relates to your plans going into 2022 on the inventory turn level. Is the intention to increase, maintain stable or decrease the level of inventory turns in '22? And then secondly, you've given some insights on demand patterns in the U.S.A. Could you share some thoughts about how you see the European picture? I know that the COVID impact in Eastern Europe at the moment seems to be having more of an impact than we see in Western Europe. And of course, in Southeast Asia as well. So any thoughts about how you see the volume development in the -- probably the Eastern European markets and some of the Southeast Asian markets.

Okay. So [indiscernible] on the inventory about 2022, there is no number that I can share with you as far as inventory to sales are concerned for 2022. What is true today will still be true in 2022 is that we will keep giving the priority on market shares. There is no need for us to decrease meaningfully the turns. We will keep the [indiscernible] because Legrand has no cash issue, no free cash flow conversion issue. So priority is still about the execution of our strategy in terms of top line. Having said that, our midterm model guidance as far as free cash flow is concerned is still valid. And you have seen that despite this inventory level at the end of 2021, free cash flow and normalized free cash flow are still at very nice level. Now giving some flavor about 2022 per market, no guidance per geography. But as far as Europe is concerned, Europe did very, very well on -- over 2 years, globally speaking, in 2020 and 2019 versus '22 -- 2021 versus 2019, very, very well on behalf of a very solid resi market. So we will keep leveraging of this nice position of the launch of Eliot product. COVID impact in Europe, so far, as you know, long structural impact, it has some impact in terms of disorganization of the supply chain of the installers. They are struggling to finish their works; they have labor shortages to finish the job. So there is some disorganization, but we don't see any meaningful impact that should jeopardize the growth in Europe in 2022. And talking about Asia and the Rest of the World. Same level of confidence about Asia, except perhaps with a question mark that we have all in mind, which is the Chinese situation. China is not a big exposure for the group. It's between 4% to 5% of group sales. But there could be a quick question mark in China now on behalf of 2 items. First one being the long developer story. Legrand is not very much exposed about that, but it's not good for the business, of course. And the second one being the zero-COVID policy in China. So we see positive perspective outlook in every geographies for 2022. China could be at stronger risk than usually.

So we have no further questions, sir. So back to you, Mr. Lemery for the conclusion.

Okay. Thank you, everyone, for attending [indiscernible] call. We appreciate the time you have dedicated to us. We know it's a busy day, of course. So may you have any additional question, Ronan or myself and Samy are totally available to answer further questions. So that's it. It concludes our call with this nice 2021 print and this positive outlook for 2022, which are fully aligned with the midterm ambition that we shared during last Capital Market Day. Bye, and talk to you soon.

Ladies and gentlemen, thank you all for your participation. You may now disconnect.