Good morning, ladies and gentlemen, and welcome to today's Legrand 2021 full year results conference call. All participants are in listener-only mode. Later, there will be a question and answer session. For your information, this conference is being recorded. At this time, I would like to hand the call over to CEO, Benoît 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 slideshow 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 in more details the 2021 full year results. I begin on page four and five with the four key takeaways. First, Legrand reports record results in 2021. Second, extra-financial performance is solid. Third, the group is actively deploying its strategic roadmap.
Fourth takeaway, in 2022, Legrand is aiming to grow between +5% and +11% at constant exchange rates with an adjusted operating margin of about 20%. Moving now to page seven and eight with an overview 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 a strong and rising pressure on supply chains that gathered strength from the Q3 on. Full-year 2021 sales were up +14.7% with a rise of +5.6% over two years. This performance was driven by a marked +13.6% organic growth, i.e., +3.7% over two years.
It reflects, in particular, the group's stronger competitive positions on its market, as well as the success of its development initiatives. The impact of a broader scope of consolidation was plus 3% based on acquisitions announced. Excluding that of Amos, 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 January 2022, the full year exchange rate effect on sales would be around plus 2% in 2022. You will find on page eight the key takeaways per area. Globally, many commercial successes, notably in fastest 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, Benoît. Good morning to all of you. I will start on page nine with operating margin. Adjusted operating margin before acquisitions of the year stood at 20.8%, meaning an increase of +1.8 points from 2020. This rise in the profitability came despite an inflation of over +11% on raw material and components during the year, including nearly +17% on the Q4 alone. This reflects the group 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 +32.8% over the year, i.e. +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 few comments on cash and balance sheet. As a percentage of sale, cash flow from operation was up +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 and 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 extrafinancial and climate engagement are concerned. Let me now share with you our financial performance over the last two years on page 12. As you can see, over two years, Legrand is already fully in tune with its mid-term targets in terms of top line, bottom line, and free cash flow. On page 13, Legrand will propose the payment of a 1.65 EUR dividend, up +16.2%. With the payout ratio at nearly 50%, also in line with the group mid-term targets. This concludes the key topics on Legrand 2021 financial performance. I'm now passing the mic back to Benoît.
Thank you. 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 the slides, but I'll be happy to answer any questions you may have during the Q&A session. Legrand launched in May 2019 its fourth CSR roadmap covering 2019 to 2021 and structured around 10 key challenges that contribute to the UN Sustainable Development Goals. Page 16, you can see that Legrand reached a 131% achievement rate with strong achievements in all three 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 -28% and to have raised the share of women among our managers by +18% over these three 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 pages, 19 and 20, Legrand also pursued its long-term sustainability programs or carbon trajectory validated by the SBTi is aligned on a 1.5-degree limitation. As you can see on page 21, Legrand 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 this engagement will be the focus of an online capital market days next March 29. It will as well include a presentation of the group's 2022/2024 fifth CSR roadmap.
Let's move now to the third part of the presentation on page 24 with a continued deployment of Legrand's strategic roadmap. On pages 25- 27, driven by strong R&D, Legrand has built a reputation for innovative, reliable, well-designed products and is constantly adding solutions offering greater value in use to its catalogs. On page 28 and 29, Legrand has taken a targeted approach to its fastest expanding segments: data centers, connectivity 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 three segments. On page 30 now, a key area of growth, M&A. Legrand is announcing two new acquisitions in Europe, EMOS with sales of EUR 85 million, and Geiger with sales of EUR 5 million.
Together with the two acquisitions previously announced last July of Insto Building Systems and Ecotap, the four companies represent annual sales of around EUR 250 million. Now moving to page 31. Regarding our operational excellence-driven approach, I would point out the very agile application of redesign to cost and supply principles, particularly suitable for extreme conditions of price inflation and pressure and supply chains as in 2021. 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 roadmap. 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 +5% and +11% with organic growth of between +3% and +7% and scope of consolidation effect of between +2% and +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 -20 and -40 basis points. The group also aims to reach about 100% of CSR achievement for the first year of its 2022/2024 roadmap, testifying to its bold and exemplary approach to ESG. We are now open, ready to open to questions with only one comment.
I will have to leave you at 10:35 French time because I have a commitment with the press. Of course, Franck Lemery and Ronan Marc will be happy to continue should you have more questions. Thank you.
We have our first question from Supriya Subramanian from UBS. Please go ahead.
Thank you. Good morning, and 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 H1 of next year. 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 H1 into 2022? My second question was around you know 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 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.
Thank you. Thank you for your question. As far as pricing is concerned, let me maybe first give you the numbers. Our total pricing for the full year of 2021 was +3.5%, of which +5.9% in Q4. Obviously there has been a sort of ramp up, you know, pricing effect. Let me remind you the sort of sequence. Our pricing was +1.9% in H1, +4.3% in Q3, and now +5.9% in Q4. 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.
Maybe I can give you also the numbers for the price of raw material and components. The total effect for the year was about +11%, but it was close to +17% in Q4. Close to +7% in H1, +15% in Q3, and +17% in Q4. Ramp up as far as the price or 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. We did not want to increase prices to an extent where it would have been a problem for our customers. 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. 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. 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. 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, you know, on top of carryover, many things can happen, both in terms of price of input and in terms of pricing.
If you take the current pricing, and if you take that into 2022, the carryover of pricing would be +2%, and the carryover of purchase price would be close to 5%. 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. 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 you know, electricity and energy as a whole in Europe, but in many countries.
Well, 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, you know, 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.
Of course, if it increases, it becomes a real drain on the, you know, on the money for the various households. It is a good booster potentially for all our solutions to help buildings to do savings. It will help our sales in thermostat. It will help our sales in load shedding. It will probably also help our sales in electric vehicle charging stations, in lighting controls, and so on and so forth. Have we seen this impact already in 2021?
Well, clearly what we have, 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 gross 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 from 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.
Long answer to a short question.
Thank you. Thank you very much. It was very helpful. Thank you.
We have another question from Lucie Carrier from Morgan Stanley. Please go ahead.
Good morning, gentlemen. Thanks for taking my question. The first one I have is around your comments, I think, in the presentation in the slideshow, where you are mentioning that North American non-residential has been growing, but not back to 2019 levels. 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? Do you think that the elements that may have held back this recovery are now clearing up?
Hello, Lucie. To give you a bit more flavor, sales in the U.S. are obviously up over one year but slightly down over two years. If we cut the performance into slices, if I may say, data center and over two years, data center were up double digit and a very significant growth in 2021 compared to 2019, and it has been consistent all over the year. Residential grew double digit in 2021 compared to 2019.
The end of the year was a bit weaker, but we put that more on the back of the lack of components, which we have lost a couple of million US dollar of sales, but the underlying demand remains strong. As far as non-residential, 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. We have seen sort of an improvement even though we are not yet back to 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 non-residential markets, in the U.S., and that's actually what the official statistics also demonstrate. 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. In those big cities where you have a large financial and tech community, and a lot of people have not gone back to the office for two years.
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 non-residential market in the U.S. So sort of an improvement between H1 and H2. Not yet back to 2019 level, but pretty well good level of confidence that this will happen in the quarters to come.
Thank you very much. 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. Of course, the pricing is somehow supportive, huh? We've been able to do some pricing in the U.S. Now, we didn't do 8% pricing. Yes, they are value-based.
Okay. Thank you very much. The second question, just to follow on the price cost equation. 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 H2 , considering the carryover you've mentioned, considering potential new initiatives on the pricing as well that you seemingly think you can take in 2022?
Well, there are two 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, I have absolutely no clue. As usual, we are prepared to react one way or the other, depending on the evolution. 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. Will it be more or less? I don't know. What will the final number be? I don't know. But many things can happen. I absolutely no clue.
I think what matters at Legrand is our ability, should we need it, to do more price increase. We have kept the ability by 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 example, 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.
It remains also difficult in some plastics with very long lead times, and on electronic components. Clearly, electronic components is a place where specialists expect the situation to take a bit of time before seeing some sort of improvement. It remains pretty difficult. In total, we believe that we have lost, as I said, a couple of tens of millions EUR of sales. Well, it of course has a negative impact on our categories that embed a lot of electronic components, so a number of connected products. 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 the suppliers, being extremely agile in chasing the opportunity to do good purchase here and there, doing a redesign to supply in order to change the design of some of our products to embed more widely available components. 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. Yes, it is, of course, a difficulty we have to manage. My hope is that it will not have a too much impact on the fastest-growing segments in 2022, which are the ones embedding the most electronic components.
We are now a bit used in managing those, and in navigating. This is a complex situation.
Just maybe to kind of just follow up on that, I think I didn't see it in the slideshow, but can you maybe update us on the progress of your connected range, Eliott? Historically, you have given the percentage of sales and also the organic growth annually for that business.
Well, rather than focusing specifically on Eliott, I would rather mention the fastest expanding segments on which we presented at the last CMD in September. Again, as a percentage of total sales, it was 29% in 2019, 31% in 2020, and 33% in 2021. It grew 18% over two years, whereas other segments, so non-fastest expanding segments, if I may say, were flat over two years. As far as the like-for-like sales, it was +15% over two years, and the other segments were -1% over two years. You have a sort of overperformance of about 7%-8% per year over the past two years of those fastest expanding segments.
All three segments, Data Center, Eliott and Green, grew more or less at the same pace.
Thank you very much.
We have another question from Gaël de Bray from Deutsche Bank. Please go ahead.
Thanks very much. Good morning, everybody. I have two questions, please. The first one is on the pricing dynamics. I mean, given that everybody's kind of sold out, do you see gradually less people bidding on the various projects than you know, just a couple of years ago? You know, does it really change the pricing dynamics, making it easier for you to push our 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? 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. This cycle is obviously very unusual.
Just earlier this morning, we heard about Siemens, you know, growing 40% in electrical products in terms of orders. Could you maybe give us a bit of color on, you know, your backlog today and the kind of visibility you have, compared to, you know, a year ago or compared to what it's been historically?
Okay. Hello, Gaël. First point, I haven't seen globally a significant change in the competitive landscape over the past two years, over 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, you know, we haven't seen neither new competitors coming in or old competitors coming down. 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.
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. You know that we have never decreased our prices year-on-year. 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, is to do 20% EBIT margin. Once again, it's not a sort of magic number. It's because we believe that it's the best balance between value creation and growth.
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 a bit at risk. Yes, at some point in the cycle, we will have some help from the raw materials and components. But if it happens, you know, the strategy will be to invest it into growth, in order to grow our top line faster. Well, as far as orders are concerned, well, unfortunately, we have...
You know that we have no order book, but unfortunately we have a backlog, which is our orders to be delivered a bit higher than usual, because we have difficulties to properly serve our customers because of the scarcity of resources. Now we have absolutely no order book similar to the one Siemens would have. I can hardly give you any visibility. The guidance we are shooting is 3%-7% organic growth for 2022 is not based on any order book we would have. It is rather based on discussion with customers, analysis of macro numbers, feedback from our subsidiaries, feedback from market specialists.
You know, it's the usual uncertainty when it comes to Legrand business model.
Okay. Thanks. Thanks very much. 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 costs to around EUR 35 million for the full year. It seems to be a bit higher than the EUR 20 million-25 million range you had provided in the past. Could you just you know explain you know what you're trying to achieve here?
No, no, clearly, well, first comment, don't pay too much attention to the calendarization of restructuring. You can have one big and one quarter, sorry, and one quarter almost zero and another. What really counts is at the annual level of restructuring. It is true that the usual Legrand run rate is EUR 20 million-EUR 30 million per year. It was EUR 76 million in 2020 because we wanted to accelerate our restructuring action. It came out at EUR 34 million in 2021. Slightly above our historical average. Well, you know, we have about 120 industrial sites in about 30 countries, and for three years, we have more or less doubled the number of sites we are closing each year.
We were used to close on average five sites a year, and we have moved this number from five to 10 a year. 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, you know, strategy to accelerate a bit our footprint optimization.
Thank you very much.
It being 2022, I know that it's always a sort of uncertainty for your model. We don't know. We'll not stop doing restructuring if we reach EUR 30 million. If we have good ideas, we could very much spend again EUR 35 million or EUR 40 million if needed. Now, for the sake of building your model, you can take EUR 20 million-EUR 30 million as a sort of run rate for the years to come.
That's great. Thanks very much.
We have another question from Eric Demarié from CIC Market Solutions. Please go ahead.
Yes. Hi, good morning. Thanks for taking my question. I got two, actually. The first one on this fastest expanding segment. Could you remind us the profitability of this line of businesses? Is it higher margins 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. I got a second one on connected product. Do you expect to deliver some connected products this year based on the new Matter protocol? Thank you.
Yeah. As far as the first question is concerned, the key driver behind profitability is not whether the product is fastest expanding or part of the fastest expanding segment or a more traditional product. It's really market share. 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. The key driver is really market share. We have you know if I wanted to shoot a number you know that Legrand makes 2/3 of its sales with products that are either number one or number two 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. Again, the key driver is really the market share. As far as Matter is concerned, we have, well, you may know that, we have a driving seat in the cockpit for Matter, because we are chairing the CSA Alliance. The first product that will get out from the Legrand/Netatmo factories using the Matter protocol will be middle of 2022. It's coming soon. We really see Matter as a fantastic progress.
You know, the fact that products were 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. 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, you know, enhance a lot customer experience, and it will, I believe, increase significantly the penetration rate of smart home. We are welcoming very much this Matter protocol.
What product will be launched?
Well, it will be launched mid of next year, but middle of 2022, sorry. In terms of product range, you'll see in a couple of months.
Okay. Thank you. Can I just follow up one? I didn't catch properly the carryover on pricing and purchase pricing in 2022. Could you repeat the number, please?
It's 2% for pricing and close to 5% for cost of raw material and components. I insist on that, in one year time, when we'll discuss together the pricing impact and cost of raw material and components, I can bet with you that the final numbers won't be +2% and +5%. Many things will happen.
Okay, thank you.
We have another question from Alistair Leslie from Societe Generale. Please go ahead.
Oh, hi. Thanks, and good morning. 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 gonna be a lot of change through the course of the year. Is the aim essentially to neutralize price cost in 2022 or accept maybe only partly compensating for it as you've done in 2021? Then a second question, you know, 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.
I'm 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? Are there kind of areas where you can maybe take advantage? Thank you.
Hello, Alistair. As far as the first question is concerned, you know, my sort of target and the target of Legrand teams is not really to compute the fact that we would compensate X% or Y% of the price of raw material and components. The objective is to deliver the approximately 20% EBIT. 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. That's my clear horizon. It is, we'll do whatever it takes in order to deliver the 20% EBIT, while at the same time growing as much as possible. 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 our profitability commitment. 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. You know, Legrand is considered as one of the most expensive players in this trade. We have built that position by building brand equity and, you know, communication, quality product, and so on. We don't like really gaining market share by cutting prices because this is a game which in our market doesn't pay much.
Of course, we have to remain competitive, and that's why we haven't increased pricing too much in 2021. 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. No, the gain in competitive position is coming from a couple of factors. Clearly our positioning on fastest expanding segments helps a lot. The huge product renewal we have done in many geographies in the past years has also helped. Take for example, including on some traditional products. Take for example, wiring devices.
We have renewed almost all our ranges of wiring devices in France and Italy, which are two 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 customer despite what has happened in the past two 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. This year, despite the scarcity of resources, we have tried to, you know, serve as much as possible our customers. We have kept investing on front offices. We have kept investing on digital.
For all those good reasons, we believe that on 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%. We have had almost a four-point increase in the ratio of inventory to sales. Well, of course, part of that is technical. We have probably one point which is coming from you know the currency conversion, as we call it, effect. We...
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. You have probably 1.5 points of this deterioration, if I may say, in the ratio of inventory to sales, 1.5 points, which is a 10% increase in inventory turn compared to last year.
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 a must if we wanted to continue to serve our customers. You know, 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 the markets.
Great. Very clear. Thank you.
We have another question from Andre Piknin from Credit Suisse. Please go ahead.
Good morning. Thank you very much for taking my questions. A couple of follow-ups first. On the 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 you know 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. I believe that the level of inventory of our channel is not that high, given what happened in the past two years.
Great. Thank you. On pricing, are you planning further price increases kind of around now, or have you done anything in January? Do you have a-
Well, yeah, we have done, you know, pricing at Legrand is not something we do on January first and we forget the rest of the year. It's something which happen every day. In some countries, yes, we already made some pricing increase in January. Some other is planned for April or May. If needed, we could add more price increases. If needed, we could also give more discount to our customers on a daily basis, as a result having a negative impact on pricing. It's really something which can change, you know, almost from one day to another. Yes, to answer your question, there are a number of countries where we did already some price increase in January.
Thank you. Could you comment on what level of labor inflation you anticipate for 2022?
Well, it really depends on the countries. 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 you know people leaving the labor market, it leads to significant inflation. You 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. 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. It's not something that. It's something that you can manage.
Great. 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. Prices of raw material and components is going up. There are 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. There are a number of the cost of input as a whole is going up, and sometimes significantly. 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 some. It's something that, it's today's world in which we have to play.
Very clear. Thank you. If I may, just very final one. It's interesting, what you know, 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's the 200 out of? 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 thousands of positions that we have. Because if you assume that the day you start selling two wiring devices in a remote country, you have a position. You know, we have 100 countries. Sorry, 100 product families and 180 countries. So it makes a lot of positions. Now, those who really matter are the ones that are significant enough to be called leadership positions, and those are about 200. It hasn't changed much in the past four or five years. It's about 2/3, and it was about 2/3 five years ago. 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, you know, the positions which we need in order to sustain our profitability, but it gives also 1/3 position where we can improve. We believe this 2/3, 1/3 is the right balance for the Legrand model.
Great. Thank you very much for your time, as always.
Next question from Simon Tennison from Jefferies. Please go ahead.
Good morning, everybody. 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 competitor guides 8%-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? 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. 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 2022?
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%-20% for Q4. You came in at -17%. Can you guide for Q1 now? That would be helpful. Thank you.
Well, you are becoming greedy. The more we give, the more you ask, huh? As far as the U.S. guidance is concerned, well, I don't know. You know, if you are 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. It's always difficult to compare from one company to another. I can hardly comment. What I can tell you is that the 3%-7% that we are guiding on a 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.
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 you know come to the conclusion that there is no change in trend or that there is sort of plateau, or that things are not improving. Quarterly performance in our trade is not very relevant because many things can happen. Stocking, de-stocking from the channel, one big project, one there's more, one there's less.
On top of that, the scarcity of resources and the difficulty to source some components can also have some impact. 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. You know, we don't intend to guide on a quarterly basis. Unfortunately, I have no numbers to give you. What I can tell you, I think it's obvious for everybody, that H1 will be a demanding half year for Legrand in terms of margin. Well, 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%. H1 2020 was a very good semester in terms of margin. Number two, because we will have the full effect of the price increase in raw material and components, and we still have some ramp up to implement or to do in terms of pricing. I think it's obvious for everybody, but the start of the year is going to be demanding in terms of margin. Now, what really matter for Legrand is, of course, the yearly performance. As far as the yearly performance is concerned, we'll try to achieve about 20% EBIT margin with, as usual, the good mix between leverage, pricing and so on.
Thanks for that. In my second question, I also asked whether you think your U.S. non-resi business is gonna 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%-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 provided a number of things happen, including the fact that we are done with this Omicron or COVID-19 wave. 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 two years in the non-resi.
I believe we should have the ability to either 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 groups? This is still a question mark, but you know, this is a scenario which is possible indeed.
Thanks very much.
Yeah. Just come back to your first question. The comparison between Legrand and its listed peers. Well, always please also take into account the basis for comparison. Well, if you look at the guidance 2022 compared to the actual 2019, you'll see that Legrand guidance. We shouldn't be ashamed of Legrand guidance compared to a number of our U.S. listed peers.
Very clear. Thanks.
We have another question from James Moore from Redburn. Please go ahead.
Yes. Good morning, everybody. Hope you're well. Thanks for taking my question. My first question, I guess, is on the core business, excluding the high-growth segments. I think you commented that organic sales was -1% over two years. If we make the assumption, I don't know if it's the correct assumption, maybe you can help me on that. If we make the assumption that two 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 two-year basis. 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 any 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 traditional infrastructure products are down like-for-like 1% over two years. They are down a bit more than that in volume because we have done some pricing. You know, there's no structural reason why those products should go down because together with the 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.
Every time you are selling a connected thermostat instead of a non-connected one, or a 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 you count into faster expanding segments, and one less that you count into traditional ones. Yes, there is some sort of cannibalization, but this is a healthy cannibalization that we are used to call mix effect. It's not at all a concern for us. 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.
Thank you. The second one was on innovation. Your R&D to sales ratio seemed to drop a little bit below your 5% target in FY 2021. I don't know if there was a particular reason for that, and I wondered whether specifically in FY 2022, 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.
The only reason why the ratio went down was that the sales was up very significantly. You know, so the R&D expense. Maybe to give you a clue about how we manage the expenses. Over two 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 two years, right? Actually, this flat is a mix of increasing expenses on digital and R&D and decreasing expenses on everything else. 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. The sort of 5% ratio of R&D to sales is 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 five minutes. I really leave you with Franck and with Ronan, who of course will be able to address any more questions you may have.
I tell you, thank you very much for attending this call.
Thank you, Benoît.
Well, thank you very much. I'll leave it there and pass it on to somebody else. Thank you.
Thank you, James.
Thank you.
We have another question from Christian Inderacker from Lebern. Please go ahead.
Yes, good morning, everyone, and thank you for taking my question. You mentioned earlier in response, I think, to Lucy's question, access to supply of some of the components had 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 or indeed loss of share to peers. Additionally, keen to understand whether you think there's any effects of customer pre-buying, given obviously quite acute inflation in the market as well as those shortages. Thank you.
Okay. Thank you for your question, Christian. Elaborating a little bit more about the supply chain issue. What we said during last call is that Q3 was an increased pressure on the market. You remember at the beginning of the year, end of last year, the pressure started. We entered the 2021 year with prepared, as far as inventory 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. 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. Benoît already mentioned what the components were 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. You know, when there is no sugar, people buy sugar. 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, if this is your question.
We don't think first that we have lost any market shares on account 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 raised our inventory, our coverage, to be prepared for that. From what we hear from the market, from our peers, everyone is suffering some supply chain issues. From what I read when we issued our Q3 release, everyone also agreed that we did well in that environment. I don't think that we have lost any market shares. The last part of your question was about whether the customer would be ready to wait longer for the delivery. Have we lost any projects?
No, nothing meaningful. Of course, today everyone is ready to wait a little bit. We haven't seen a project cancellation on behalf of supply chain issue. You know, the supply chain issue is 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 of some installers because of the COVID and the Omicron variant. Today, I think that it looks that the supply chain is quite patient, the customers are quite patient.
Thank you. Maybe just to follow up, are you able to just give us an indication in terms of the quantum with regards 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. Of course, if you take for example, electronic components, the lead time may have doubled. We are today on some specific component, placing order or giving visibility on volume over 12-18 months. 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. This is also one of the reason why our inventory coverage have increased. It's the mechanical part of the lead time increase.
Very clear. Thank you.
We have another question from Andreas Willi from JP Morgan. Please go ahead.
Yeah, good afternoon. Thanks for squeezing me in. 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 2019, then that progressively slowed during 2021. Obviously 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 very much.
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, the midpoint of our guidance is +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 on the gross margin on the inventory buildup that we can assess of roughly 20 basis points on the full year results. So it's not meaningful at all versus the full improvement of the year.
To come back on the volume, it was, when I say, not a lot of volume over two years; it actually is -0.8% over two years, 2021 versus 2019. The acceleration in the inflationary environment, you can make your assumption on the top line is not that drastic.
Thank you very much.
We have another question from William Mackie from Kepler Cheuvreux. Please go ahead.
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've specified then the benefits from overhead recovery. The other question relating to working capital, it's just my impression at least that, you know, in this current economic environment, we're hearing from many companies that, you know, they're experiencing perhaps over-ordering and protection of supply through ordering through the supply chain, even from some distributors.
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, you know, 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 a normal state rather than an elevated state in the supply chain?
Okay. To answer your first question, are there any specific spots or geographies where we would have increased the terms or decreased the terms, increased the coverage higher than the average of the group? No. It's overall strategy which has been applied in all countries. It's actually also true for almost all parts of the inventory, raw material with finished products. All those parts are increasing, as we said, on average. The coverage have 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 the level of inventory is. We know what the backlog is, so we know that we are not able to serve them at 100%. But it seems also logical that when it's possible, they may try to build up some inventory. But every time we are able to know the selling and the sellout, it may be done on a specific channel, on a specific geography, we don't see any sign of inventory or material inventory buildup in our distributors. I cannot, you know, make the full equation. When we have information, we don't see any increase.
Thank you. Helpful. One follow-up, please, if I may. Well, two. 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 2022? And then secondly, you've given some insights on demand patterns in the U.S. 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. Any thoughts about how you see the volume development in the probably the Eastern European markets and some of the Southeast Asian markets?
Finishing 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 terms. We will keep the priority because Legrand has no cash issue, no free cash flow conversion issue. 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.
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. Giving some flavor about 2022 per market, no guidance per geography. As far as Europe is concerned, Europe did very well over two years, globally speaking, 2021 versus 2019, very well. On behalf of the very solid residential market. We will keep leveraging this nice position of the launches of Eliot product. COVID impact in Europe so far has no long-term structural impact.
It has some impact in terms of disorganization of the supply chain, of the installers. They are struggling to finish their works. There are labor shortages to finish the job. There is some disorganization, but we don't see any meaningful impact that should jeopardize the growth in Europe in 2022. 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%-5% of group sales. There could be a question mark in China now on behalf of two items. First one being the land developer story.
Legrand is not very much exposed to that, but it's not good for the business, of course. The second one being the zero-COVID policy in China. We see positive prospective outlooks in every geography for 2022. China could be a stronger risk downside than usually.
Thank you very much.
We have no further questions, sir. Back to you, Mr. Lemery, for the conclusion.
Okay. Thank you, everyone, for attending our TTT call. We appreciate the time you have dedicated to us. We know it's a busy day. Of course, may you have any additional question, Ronan or myself and Sam are totally available to answer a further question. That's it. It concludes our call with this nice 2021 print and these positive outlooks for 2022, which are fully aligned with the midterm ambition that we shared during last Capital Markets Day. Bye and talk to you soon.