Good morning, and welcome to the presentation of ASSA ABLOY's 2021 year-end report. My name is Björn Tibell, and I'm heading Investor Relations. Joining me here in the studio are ASSA ABLOY CEO Nico Delvaux and our CFO, Erik Pieder. We'll stick to our normal setup today, and we'll start the conference with a summary of the report before we open up for your questions. With that, I'm ready to hand over to you, Nico.
Thanks, Björn, and also good morning from my side, and welcome to our Q4 call. A very good Q4 with very strong sales growth and good margin improvement. An organic sales growth of 10% where, with the exception of China, where market conditions remain very challenging. I would say the whole world has contributed strongly to that organic sales development. A very good performance overall and very strong sales growth, in particular in the Americas and in Entrance Systems. Good EBIT development and strong EBIT margin improvement, and that despite the higher material cost and the higher logistic costs, and also all the operational challenges that we continue to experience with shortages of components in general and shortages of semiconductor components in particular.
Also to just, also shortages on the labor force side, where in some of our factories, we have a very high percentage of our blue-collar workers at home because they have COVID or, you know, they are in quarantine because family members have COVID. Challenging situation, but yeah, strong operational execution in that environment. We also completed four acquisitions in the quarter, and we had a good operating cash flow. I would say despite the higher working capital, the higher working capital is mainly inventory related. If you look then at the numbers, the sales of SEK 25.6 billion in the quarter, 10% organic growth, a -1 net acquisitions versus divestitures.
That's mainly linked to the divestment of our CERTEGO business in Scandinavia, locksmith business, and a year ago our door residential door business in Gardesa in Italy. Helped by currency 1%, an EBITDA margin of 16.2%, and an EBIT margin of 15.7% versus 14.9% a year ago. EBIT up 15% above SEK 4 billion . If we now look a little bit at the different regions in the market, starting with North America, very strong performance, very good market conditions, an organic growth of 16%, where the residential side of the business continues to perform on a high level and where we have seen also very nice double-digit growth on the commercial side, good market conditions.
I would say commercial business definitely back on pre-pandemic levels. Very good South America with a 30% organic growth, where all countries are contributing with double-digit growth, good market conditions in that part of the world as well. Also good Europe, +8% organic growth. In general, also here, positive market conditions on the residential side and the commercial side that came back. Stronger performance in North Europe with a good Scandinavia and Finland. Africa, smaller part of our business, -2% compared to a year ago, and that's mainly linked to a bigger passport order for HID we had last year. So a more difficult comparison with a year ago. Also very good performance in Oceania, +5%.
We should take into account here that New Zealand was still in lockdown at the beginning of the quarter. Also here good momentum. I would say the more challenging part of the world, Asia, with -4%, where you see a very big different picture between the rest of Asia and China. We have very strong double-digit growth in India and in Southeast Asia, but where we have also double-digit negative growth in China. Like I mentioned earlier, market conditions in China remain challenging. Construction sector is depressed and of course the continued lockdowns because of COVID-19 are also not helping. Overall, I would say a very green picture, a very positive picture.
The market highlights also this quarter: interesting project wins a large range of sustainable industrial door solutions for a U.S.-based electric vehicle manufacturing plant. Several project wins in the marine cruise line industry, which is, yeah, good news after two years of rather depressed conditions in that part of our business. Also significant wins for Yale and Gateman smart locks in the multi-residential development in China and in South Korea. Then definitely also the largest electronic access control contract to date to secure facilities of a leading American university. Very proud of that project win. We continue to launch new products. You see here a couple of examples of HID. We also continue to be rewarded for our R&D and innovation efforts.
Yeah, HID won again several awards, but you might also have seen the announced collaboration now with Hyatt to roll out room keys with Apple Wallet. Also very interesting development. Our sales growth, you know that before COVID-19, we had 27 consecutive quarters with positive organic growth. We have, of course, the ambition now to beat that record. We are now in our fourth quarter with positive organic growth after a difficult 2020. In the quarter, of course, a strong organic growth of 10%, like I mentioned earlier. Operating margin going back into the 16%-17% bandwidth direction.
If you take into account this quarter that we booked SEK 100 million provision for doubtful accounts in China, mainly related to Evergrande key account customer in China. If you also take into account that we booked around SEK 60 million-SEK 65 million cost related to the HHI acquisition. If we would correct for that, our EBIT margin would have been at 16.3% for the quarter, so well within the bandwidth we aim for over a business cycle. Operating profit above SEK 4 billion on the same level as Q4 in 2019, so on record level. On the acquisition side, we remain very active. We had four acquisitions completed in the quarter, 13 acquisitions over the full year.
They represent an annualized sales of around SEK 1.3 billion. We are still closing two bigger acquisitions. Arran Isle in the U.K., they have sales of SEK 1.2 billion. They are expected to close now in Q1. HHI, the big acquisition in the U.S., sales of SEK 13.7 billion, where we now have delay in the closure, where we expect this acquisition to close somewhere this year. We had, of course, the divestment of CERTEGO in Q3. That was a divested sales of around SEK 1.5 billion. Couple of words on some of the acquisitions.
Małkowski-Martech in Poland, a supplier of fire-rated curtains and gates, complementing our commercial fire-rated door product portfolio in a nice way. They have sales of SEK 110 million and are accretive to EPS from the start. Very nice complementary acquisition. B&B Roadway and Security Solutions in the U.S., for our perimeter security segment in Entrance Systems. A supplier of roadway safety, traffic control, and perimeter security solutions in general. They have sales of around SEK 120 million, and they will also be accretive to EPS from the start. If we go a bit into the details of the different divisions, starting with EMEA.
Very good performance in the quarter and organic sales of + 6% with overall good performance and then very strong sales growth in Scandinavia, in Finland, in Eastern Europe and Middle East, Africa, and definitely India. A very good operating margin of 15.5% with very good operating leverage of 60 base points. Definitely, if we take into account the higher material and logistic costs, all the operating challenges around logistics, shortages, material shortages, and so on, I think very good performance. FX was dilutive 10 base points, and then we were helped by M&A in an important way because we had, of course, the capital loss a year ago on the divestment of CERTEGO.
We had also acquisition-related costs for Arran Isle around SEK 30 million-SEK 35 million . Very good quarter. I would say also very good year for EMEA overall. Definitely also very good quarter for Opening Solutions Americas with an organic sales of 17%, with very strong performance in all countries and in all different product families as well on the residential side as on the commercial side. An operating margin of 20.2%. We have a very strong operating leverage of 180 basis points. Also here, clearly same challenges on the operation side, shortages, inflation as in EMEA. Very good job, well done from our operating people. FX dilutive 30 basis points. M&A dilutive 130 basis points.
That is, like I mentioned, the SEK 60 billion acquisition-related costs to HHI. Very strong performance in the quarter. I would say also top performance of Americas throughout the full year of 2021. Opening Solutions Asia Pacific, more challenging division with an organic sales of 0%. Like I mentioned earlier, a very different picture with on one side very strong sales growth in the biggest part of Asia Pacific, and then double digit negative sales growth in China. Operating margin of 3.6% with a negative operating leverage of 530 basis points.
Big part of that is obviously the SEK 100 million provision that we took for doubtful accounts linked to the Evergrande key account in China. Obviously also the lower top line makes it more challenging to realize the right operating leverage in China in particular. FX neutral, M&A 70 basis points accretive. That's mainly the transfer of India to the EMEA division. If we then go into Global Technologies, also here good performance and organic sales of +7% with all business areas as well as HID as Global Solutions contributing to that organic growth. An operating margin of 15.7%. A good operating leverage of 30 basis points.
FX dilutive 30 basis points and M&A dilutive 70 basis points. Then last but not least, another very strong performing division, Entrance Systems. Organic sales of +14% with all segments contributing in a good way and as well equipment as service contributing to the growth. Operating margin on a high level of 16.5% with very good operating leverage of 90 basis points. FX dilutive 20 basis points and M&A neutral. Very strong quarter for Entrance Systems. I think also top performance of this division also over the full year. With that, I give the word to Erik, who will give a little more details on the financial numbers.
Thank you, Nico, and also from my side, a very good morning. The sales grew with 10%, which is related then to the organic sales growth, which was 10%. FX had a small positive effect of about 1%. Operating income was up compared to previous year with 15%, and the margin was up with 8 basis points and ended at 15.7%. As mentioned here before by Nico, if you take into account the bad debt provision as well as the acquisition cost that we have taken this quarter, we would have been well above within the range of our target EBIT that we want to have over a business cycle. Income before tax was up with 16% and earnings per share was up with 18%.
The operating cash flow is considerably lower than what it was the same quarter 2020. First of all, we should remember that 2020 we had a major release of working capital, whereas this year we have the opposite. If we sort of look into the working capital, it's related to inventory. Where, first of all, you have the sales growth, then we have taken decisions in order then to secure deliveries, in order then to support the growth, as well as we get the raw material prices into our inventory. Finally, on this slide, the return on capital employed increased with 2 points and ended at 15%. If you dissect the organic growth in two parts, it's evenly split between price of 5% or the volume component, which is also about 5%.
The organic flow-through is strong with almost 23%, despite that we have the impact of raw material components as well as what's previously mentioned, the bad debt. This is related to, of course, that we have been able to leverage quite good from the sales growth as well as operational efficiencies. Currency has a smaller effect of -10 basis points. In the acquisition column, you see, I mean, the top line is related to the divestment of CERTEGO, which has a negative effect. The bottom line is then affected by the capital loss that we took last year of Gardesa. CERTEGO is accretive to the margin. Then, as previously mentioned by Nico, we have taken quite a lot of acquisition cost for HHI as well as Arran Isle.
If you then break down into the cost, the direct material is 1.5 points higher. Out of this, roughly 90 basis points refer to mix, where we have a divisional mix with a stronger growth in Americas and a softer growth, I would say, in Global Technologies. As well as if we then go into the divisions, we see that, for instance, within Entrance Systems, perimeter security is growing stronger. We have, in the other ones, let's say, products with a higher direct material, like for instance, the smart locks, which also combined makes this 90 basis points negative impact on direct material. The raw material and component impact is 60 basis points.
If you look at the full year for 2021, it's between 40 and 50 basis points that we had as a negative impact during the full year. On the conversion side, it's positive with 1.1 points. There, we have been able to offset the higher logistic cost by operational efficiencies as well as leveraging the higher sales growth. We see the same pattern then if we look into the SG&A, where first of all, we continue to invest in R&D, but we see good efficiencies when we look into our sales and into our admin cost. Operating cash flow is lower. It ended at SEK 3.4 billion in the quarter. I still think it's strong. If you look at the full year, we have actually a cash flow versus EBT of 98%.
As I previously mentioned, the lower compared to last year is related to increased inventory. As I mentioned before, it's related to the sales, and it's related to the securing of components as well as the raw material prices. We take the next one, which is if you look on the net debt versus equity, we're down from 51% down to 39%. The net debt versus EBITDA is down from 1.9 to 1.5. We have increased the net debt in absolute terms in the quarter with roughly SEK 1.3 billion-SEK 1.4 billion . This is related to that we have paid dividend, we have made acquisitions, as well as we have a currency impact on this as well.
All in all, I think that we are able to, let's say, with this kind of good net debt ratio, to be on a strong position to acquire HHI as well as continue our acquisition strategy. The last slide from my side is the earnings per share, which I mentioned before, was up 18% and ended for the quarter at 2.74. With that, I hand back to Nico for some final conclusions.
Thanks, Erik. Good end of the year. A strong Q4 with strong profitable sales growth. Organic sales up 10%, and an operating profit up 15%. Like Erik mentioned, a good operating cash flow despite the higher working capital, despite the higher inventory in particular. Clear that we have operated in challenging operating environments. These challenges will continue now also going forward. We have higher material costs. We have higher logistics costs. We have component shortages in general, and semiconductor shortages in particular. We have, of course, the Omicron variant now impacting operating environment in an important way. Like I mentioned earlier, in some of our factories, we have 20%, 25%, even 30% of our blue-collar workers at home because of Omicron.
We have on our service side. I was talking to our people in Norway last week. We had one third of our service engineers at home because of Omicron. We have proven that we can deliver in difficult circumstances. I think we have proven that throughout the whole COVID-19 crisis. We have proven that also in Q4. I'm confident that we will be able also to manage these challenges going forward. Last but not least, the board proposed to the AGM a dividend of SEK 4.2 per share to be paid in two equal tranches. Same principle as we did last year. With that, I give the word back to Björn for Q&A.
Thank you, Nico. Before we open up for your questions, can I please ask you to limit yourself to one question each, as there are quite a few people in the line, I understand. Operator, this means that we are ready to start the Q&A session. Please go ahead.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. We have a first question from Vivek Mehta from Citi. Sir, please go ahead.
Thank you very much, everyone. Good morning. My question is around pricing. Could you maybe decompose the five percent pricing you saw into surcharges versus underlying pricing? Maybe if you're able to comment on how sticky you think that underlying pricing can be as steel prices come down. Thank you.
As I would say, the vast majority of the 5% are through price increases. We also had some more surcharge related price increases last year. We also took the opportunity of the yearly price increases to convert most of them then into, you know, let's call it list price increases, so that they also remain more sticky. I think we are quite confident if material prices and indexes stay where they are today, that we will be able to keep those price increases.
Thank you very much.
Thank you. Next question from Lars Brorson from Barclays. Sir, please go ahead.
Hi. Good morning, Nico. Maybe just a sort of bigger picture question for 2022. I wonder whether you can offer some thoughts on how you see the year play out. I look at consensus expectations implying sort of 5% organic growth in line with your long-term target. If prices are sticky, call it 3%-4% perhaps for the full year, that would imply very low single-digit volume growth. You're exiting obviously 2021 at mid-single-digit. I wonder whether you have some thoughts as to how you see the year play out. I appreciate there are different sort of parts of your business that are decelerating, some are accelerating, particularly GT. Any thoughts around how you see the sort of growth outlook for the year would be helpful.
It's a very general question, so it's very difficult to give a specific answer also because we are still very much operating in a fragile market. We are not out of the COVID-19 crisis yet. Everybody's confident now on Omicron, that Omicron will slowly fade away, but of course remains to be seen how fast and to what extent. Because I can tell you today from an operational point of view, we are still very much affected by COVID-19. That's one dimension. The other dimension is of course we see good market conditions, strong market conditions as well on the residential side as on the commercial side. On the residential side, we should of course not forget that residential side is on a high level since quite some time.
Has been on a high level, I would argue, throughout the whole COVID-19 crisis. Whereas commercial definitely came back now in recent quarters. I would say commercial in general is back on levels prior to COVID-19 on 2019 levels. Market conditions definitely are good, but obviously also the comparison with a year ago becomes more difficult. That's definitely also true for pricing. We started to increase prices in Q1 last year. We saw significant price increases Q2 and definitely the second half of the year. The price increases that will come in this year will be on top of, you know, price increases realized a year ago.
I can only say that yes, we have the ambition over a business cycle to grow organically with 5% and complement that with growth or acquisitions of 5%. When we close the HHI acquisition, clearly on the acquisition side, we will be okay for a couple of years, and then we will just, you know, do our best to get the best organic growth possible in 2022, and we will see where that ends.
Can I ask, sorry, just to clarify the earnings impact from the buildup of finished goods inventory in the quarter. Was there a more substantial impact from production levels? Maybe that's more one for Erik, and then I'll finish there. Thank you.
No. It's like Erik mentioned. I mean, why do we have an increase in inventory? I think it's three reasons. I mean, if you have a higher top line, of course you have a higher inventory to cover that top line. The second thing is if steel is up more than 200% compared to a year ago, everything that you have in stock, which is steel, has a cost, which is, you know, 200% higher than a year ago. And the same is true for copper and nickel and all the other materials. It's just the material inflation is also translated into an inventory increase.
The third one, which is perhaps more, you could say special, is that we also took conscious decisions on some parts and some components to really strategically buy and increase inventory to enable us to continue to deliver on the top line. That goes from electronic components all the way to some of the steel. That explains also why the inventory is up. The first part, higher cost, of course, you see it in finished goods and you see it in raw material. The second thing, the strategic buy you see on component side.
Thank you.
Thank you. Next question from Mattias Holmberg from DNB. Sir, please go ahead.
Thank you. Can you help us how we should think about the margin going forward as your run rate in end of 2022 obviously was very strong, especially if we add back the SEK 100 million debt provision, operating leverage closer to 27%. Essentially making the cost inflation barely noticeable. Are there any dynamics you think we should consider that could have either a positive or negative impact on this underlying strength in the near term?
Yeah, I don't know what is your definition of near term. If you think about quarters, of course, the seasonal effect is very important. We know that the beginning of the year is always lower, and then we have a stronger second half of the year. That will not be different this year as compared to previous years. Of course, we continue to see the headwind of you know, material inflation. We believe we most probably have now leveled out on price versus cost, where we, as Erik mentioned, had a dilution of 60 basis points in the quarter.
We believe that will remain more or less on that level now as in Q1, and then confidently, if material prices stay where they are, that will then gradually go down throughout the year. Then somewhere in the second half of the year, we should then see a plus price versus versus cost. I think a big important factor remains the, you know, the operational challenges. Like I mentioned earlier, component shortages, semiconductor components in particular. I hear some people say that, "Yeah, it's gonna improve now in Q1 or in Q2." We don't believe that. We believe that electronic component shortages will remain a challenge throughout the full 2022.
I think on top of that, we see, like I mentioned earlier, the labor challenge where, at least today and definitely also now at the beginning of the year, a lot of our blue collar workers are at home because they or their families are hit by the Omicron variant. We will see how fast that now fades away and that situation improved. There's a lot of moving targets, but clearly we have the ambition to come within the 60%-70% bandwidth as soon as possible, because that's the ambition over a business cycle.
It will also depend when HHI comes in, because as you mentioned, when we announced the acquisition, HHI at start will be dilutive, around 60 basis points on a 12-month moving trend.
Thank you so much.
Thank you. Next question from Lucie Carrier from Morgan Stanley. Madame, please go ahead.
Hi. Good morning, gentlemen. Thanks for taking my question. I wanted to come back to your comment on non-residential and two things around that. The first one is you said that now you feel your non-residential business has gone back to pre-COVID-19 level. Is it in volume, at volume level or is it overall in value? And obviously that would include some of the high price increase. So that's the first question. And then secondly, I was hoping you could give us a little bit more color in terms of the segment that you see being more dynamic in terms of non-residential. Is it a lot driven by renovation or you're also seeing kind of new project kind of starting up?
When we talk about levels of 2019, it's more in general levels, and it's not a statement till after the comma, I would say. It's definitely a statement for you know Europe and for the Americas. I think a good indication is our spec business where we have seen in Q4 a nice double-digit growth again of that spec business. That is for us the longest you know lead time in indicator, I would say, that we have internally available to judge. We see it a bit everywhere. We definitely see it on the aftermarket. As you know, our aftermarket part is the biggest part of our commercial business.
We don't make some such big differentiation between new build and big refurbishments because they both go into our spec business. We have seen double-digit growth of our spec business.
Thank you. I'll go back in the queue.
Thank you. Next question from Gael De Bray from Deutsche Bank. Sir, please go ahead.
Oh, thanks very much. Good morning, everybody. Hope you're all well. On the 5% price increase, could you give us some specific color on the pricing dynamics in the U.S. versus Europe? I'm just curious to see if the price rises in the Americas are, let's say, around twice as high as they are in Europe, and if Europe is simply lagging or if there are some structural differences between these two regions in terms of how you're dealing with pricing.
As a motivation to increase prices, or an argument to increase prices, in the first place is of course the material increases. I would say that those that have the biggest steel component part in their cost have the highest price increases. You should reckon that Entrance Systems in Americas are a bit higher than the 5%, and then the others are a little bit lower than the 5%. Of course, it's in some markets easier to increase prices than in others. For instance, if you take again China, it's more challenging to increase prices in China than, for instance, in Europe or in the U.S.
No real difference between Europe and the U.S., between your
Yes.
your pricing capabilities?
Yeah. The difference, like I said before, is that Entrance Systems in Americas are higher than 5% and the others are lower than 5%.
Okay, thanks. Thanks very much.
Thank you. Next question from Daniela Costa from Goldman Sachs. Madam, please go ahead.
Hi. Good morning. I only have one thing left and wanted to check. I know you've explained clearly that the bad debt in China was related to Evergrande, but was wondering if more broadly you can talk about China, I guess Asia Pacific surprise, at least consensus, given the stability there. There's a lot of data points and moving parts, especially on China, on construction. If you can give us a little bit of an overview about how you see the business going on now and then your trajectory on margin, on your past ambitions to get that to high single digits, on how is the timeframe thinking there now. Thank you.
Yeah. Again, like I said earlier, if we take Asia Pacific, we should make distinction between Greater China and the rest. Good performance in Pacific, in Australia, New Zealand, good market conditions, and we are confident that that trend also will continue now. Very high double-digit growth also in India. It's a smaller market for us, but fast growing market. It was also good to see that we had South East Asia coming back in the quarter with good double-digit growth. As South East Asia slowly starts to open up, I guess also business sentiment improves.
Let's be confident that that trend in South East Asia now also continues going forward because obviously South East Asia is for us also from a profit and from a margin perspective important region in that part of the world. Then that brings us then to China. I would say that yeah the whole financial crisis around you know construction continues. We don't see any improvement. We see our market down in an important way also in Q4. Again we don't see any improvement.
On top of that, we have, of course, the COVID related lockdowns that we experience in different provinces in Q4, and that most probably will also continue going forward unless you know China would change their policy. We don't really see any improvement on China market on the short term. That being said, we still are convinced that our strategy in China, as we explained at previous occasions, is the right strategy. We have also said at the beginning that turning around China is not a matter of quarters, but it's a matter of years. Clearly, this situation today is not helping us.
I would say it sets us back a little bit on the timing, but it doesn't change our, you know, long-term strategy and our long-term ambition to go to higher single digit margins in that part of the world.
Thank you. Next question from Andreas Willi from J.P. Morgan. Please go ahead.
Yeah, thank you very much, and good morning. I wanted to follow up on the HHI deal. Maybe you could help us a bit in terms of modeling the impact, for example, assuming half year consolidation, what's still to come on costs in terms of the M&A costs and, basically what's already been done? Maybe if you could give an update why there's such a large range, you say, during 2022, what could basically result in this being delayed to the second half of the year?
Perhaps if I start with the second part of your question. We filed in four countries, and we are going through the process. The process is taking longer than we expected. Okay. Clearly it's a big acquisition that where antitrust authorities require a lot of data and therefore also a lot of time to analyze that data. The delay is really on their side. We don't see any higher risk than when we announced the deal. We are still very confident that this deal will go through, and that this deal will go through in a clean way.
Like we mentioned at the beginning, it's just that the other side the antitrust authorities need more time, and it's difficult for us to judge, you know, when they will have enough time to come to a conclusion. Obviously, we hope as soon as possible, but you know, it's not in our hands, it's in their hands from a timing perspective. When it comes to the costs, of course, as long as we don't close, we will continue to have you know costs to you know gather the information, talk to the antitrust authorities and have our partners lawyers and so on helping us in that process.
The run rate that we explained to you now in Q4 that I think is a good indication for the run rate of cost that we will experience going forward until we close. Of course when we close, we will book also the more important costs related to the closure of the deal. We will do that and announce that when the acquisition is closed. From a dilution perspective, I can only repeat what I said before. It's 60 basis points at the beginning over a 12-month moving trend. I mean, if it comes up at the middle of the year, then it will be half of it for 2022.
If it, you know, comes early, I mean, you can make the calculation yourself.
Thank you very much.
Thank you. Next question from Andre Kukhnin from Credit Suisse. Please go ahead.
Oh, hi. Good morning. Thanks very much for taking my question. I wanted to come back to raw materials versus price and ask a broader question on firstly, could you help us quantifying the gap that you saw in 2021? The question really is your intention to fully overcompensate for that gap to fully recover it in 2022 or into early 2023 with pricing?
Yeah, of course, everything depends on where material indexes will go going forward. Under the assumption that material indexes stay where they are today, yes, we have the ambition to compensate and to overcompensate with pricing for material inflation. Like we said at earlier calls, we believe that will happen somewhere around the middle of this year, towards the second half of this year. We believe that we have now reached the top of the dilution with the 60 basis points that Erik mentioned this quarter. Most probably Q1 it will be a very similar number. Then as of Q2, we should then see the dilution going down, and then in the second half of the year, we should then get accretion from price versus cost inflation.
Under the circumstances that mix stays similar and that material indexes stay where they are today. When it comes to the biggest gaps, of course, the materials that have increased the highest have the biggest gaps, and that's in the first place, steel. Steel I think is up 230%-240% versus the lowest point in 2020. It's clear that you can't fully compensate for that through pricing for, you know, a steel door for instance. We have seen rather high increases also in copper, nickel, zinc, aluminum and so on. Often that material component is smaller, so there it's then easier to come out on a positive side faster.
What was that gap overall in 2021? That was 16 basis points in Q4.
It was around 40-50 basis points for the full year. I would say we kept our promise because we said that it would be lower than last time back in 2018, 2019, where it was around 60, 70 basis points.
Thank you.
Thank you. Next question from Rizk Maidi from Jefferies. Please go ahead.
Yes, good morning. Thanks for taking the question. The operational leverage surprised us positively in Q4. Can you perhaps talk about the savings that you were able to achieve from your different programs in Q4, and how should we think about the overall sort of saving figure for this year, please?
Of course, there is a lot of good things that we do in operations. In general, we have, you know, VA/VE activities where our engineering people look all the time on how we can make the same products, you know, at a lower overall cost. We have lean initiatives. We continue to invest in automation and in robotization. All that helps, and it's difficult to say it's here 1% and it's there 1%, but overall, that clearly helps. I think the second important bucket is obviously our MFP program, where we had a very successful MFP 8 program, where this year we saved close to SEK 700 million. This MFP 7 program had a very good return on investment.
We say that's the good news. The challenging news is, of course, that this year the savings will be below of that MFP 7 program. We estimate the savings to be only around SEK 300 million for this year. That's also the reason why we are now looking into a new MFP program, an MFP 9 program, whereas the planning looks now, we should be able to package all the information together towards the end of the year and then be able to give you some information, I guess if everything goes according to plan somewhere in the Q4 call this year.
I would say the third aspect is of course, you know, pricing, because if you increase price, it has an effect on all the lines, so it also has an effect on your operational efficiency.
Okay. Thank you.
Thank you. Next question from Guillermo Peigneux Lojo from UBS. Sir, please go ahead.
Good morning to everyone and thanks for taking my question. I wanted to ask about the working capital, in particular the inventory levels and in particular to the part, Nico, you mentioned about basically securing supplies. I guess, you know, two parts on my question. First, are we basically yet to see more of this in Q1 and Q2? Second to that is at the moment, you know, how much time is that inventory covering, i.e., are you securing a quarter ahead or are you securing even on longer terms? Thank you. That's my question.
Erik, feel free to add. First perhaps on the cash flow in general. If you see over last quarters, we had, of course, very strong cash conversion far above 100%. I would argue it's just mathematics. At a certain moment, it has to come down. That's what happened now in Q4. I think cash conversion of 98% for the full year, I think is still a very good achievement. Of course, the more you grow, the more difficult it becomes to have the good cash realization. Also there, it's mathematics.
Specifically on the inventory, in a way, we hope that the inventory will even further go up because that would mean that we are able to secure even more components. Because definitely if we can secure more electronic components, we will do so. The same is true for some other, you know, strategic families that we consider important to keep our invoicing of our backlog on a good level going forward now in the coming quarters. The challenge is more that, yeah, it's difficult to find the electronic components in particular to build in stock.
Thank you. Next question from
Yeah, please.
Next question from Andreas Koski from BNP Paribas. Sir, please go ahead.
Yes. Good morning, and yeah, thank you for taking my question as well. On price dynamics, and I know there are now four questions, but in a bigger context. What would the price impact be in 2022 if you didn't raise your selling prices further from here? And what kind of price increases are you planning for 2022? And do you think you saw some pre-buying in Q4 ahead of further price increases? And could you share with us what kind of organic growth rate you are seeing in January? Thank you.
That's a lot of questions, but if I start with the last question, the third question. We have seen you know similar organic growth levels throughout Q4 and now also at the beginning of this year. The second
question was, it was related to price in a way.
Yes.
Yeah, in a way, if you look at if we need to fully compensate at the end of the year, we needed, if we compare to average, to need to do a price increase of roughly 7%.
Yeah. No, no. You have made a lot of price increases during 2021. If you didn't make any further price increases from here, what will the price impact in 2022 be from the increases you have done in 2021?
I would argue zero, because if you don't increase prices, you have zero price component, this year. Of course, you have the-
I guess.
I guess some of the price increases came in in H2, which will have a rollover effect into 2022.
Yeah. I mean, you can calculate for yourself. I think if you put 0 in your Excel sheet for the four quarters this year, you had, I think, +1 Q1 last year. You had +2, or +3, Q2 last year. We had +4 in Q3, and we have now +5 in Q4. If you then add-
Okay
Zero to it, you can, yeah, you can see what that means. Again, if you look at dilution, I think we had around 20 basis point dilution beginning of the year. We had 60 basis point dilution now in Q4. Like we said, we believe this is now leveling out on that higher level. We had 40-50 basis point dilution over the full year. Perhaps on your third question, have you seen some pre-ordering now in Q4? Yeah, most probably we have seen, but you should of course realize that we are at price increase number 5, 6, 7, sometimes price increase 8, 9 for some of our business areas. Yes, every time when you do a price increase, you will see some pre-ordering.
I would say it's not significant, also not this price increase. It's a similar phenomenon that you see every year.
Yeah. Just, are you raising prices now in the first quarter as well?
Yes, we continue to raise prices. We have done that now also as of 1st of January, 1st of February. Because we are not where we want to be yet. Like Erik said, if you again take indexes, and again, it depends on mix, and it depends on timing. We need a price increase of around 7, perhaps even 8% to fully compensate if there would be no other operational efficiency gains coming. Obviously, we will have the operational efficiency gains, but it's clear we also need to further increase prices to fully compensate, and then get a positive.
Thank you very much.
Thank you. Next question from James Moore from Redburn. Sir, please go ahead.
Good morning, everyone, and thanks for taking the questions. Can I clarify your price comment please, Nico, and then ask a question about China? Just if you get a 7%-8% realized price in the P&L for the full year of 2022, does that just compensate for the material cost inflation in 2022, or does it also compensate for the net negative impact of 2021?
Yeah. The statement was if indexes stay where they are today, and we always said that there is a six months average delay between the indexes going up or down and us seeing it in our income statement. But if indexes stay where they were at the end of the year, you could say, then the 7%-8% price increase will fully compensate for all the inflation we have seen year to date or yeah.
Since 2020.
Since 2019 to date, you could say. What the increases we have seen in 2020 and the increases we have seen in 2021.
Just my reference was to 2020. Of course, you need to realize as well that we have done price increases during the year 2021 in order to compensate as well.
I think I understand, but just to make sure I do, if you are minus 40-50 basis points net last year, does that mean you would be plus 40-50 basis points positive this year? Zero over the two years of 2021 and 2022 combined.
No, it doesn't.
It's offset.
It's more about aiming at being zero-
Yeah
... for 2022 standalone year.
Yeah. It's also what Nico said before is also that it's also you're gonna see a year effect where we've said that, I mean, we're gonna have an impact in Q1. Because, I mean, Q4 and Q1, we believe, of course, providing that the prices stay the same, will be the two quarters that will be most impacted. We assume that it's gonna go down in Q2. We said somewhere mid this year, so then for the second half of the year, then the impact we would not have an impact and would actually sort of with the prices staying as they are today, we would actually see a positive impact of the price versus the raw material.
Thank you for clarifying that. My question was actually on China. I think you targeted to lift the China margin from 5% to 10% over the medium term, but life's gotten a lot worse, and I presume that we'll be down in 2022. I presume we're at a worse starting point. Could you say roughly where the China margin is now, excluding the Evergrande bad debt provision, and how you expect the full year 2022 China margin to land, and where you think we can go from here, and what actions you need to put in place?
Yeah. First to correct, I don't think we ever mentioned the 5% and the 10%. What we have said is that historically, China had very low single-digit EBIT margins, and that we had the ambition to bring that level to high single-digit over a longer period of time. Not talking about quarters, but talking about years. If you go back a little bit to end of 2020 and also the first quarters of 2021, we had seen a very nice improvement where we were doubling that low EBIT margin in China. We were really making progress towards that high single-digit EBIT margin.
It's clear that in the second half of the year that went again the other direction because of the construction crisis in China. We have been negative margin in Q4 in China. Now when will it turn around? Again, it's difficult to say. It's again a question of years, not a question of quarters. We don't see any improvement today. Today Chinese New Year. On the short term in the construction environment and the challenging environment in China, that will take more time to recover. Obviously the faster that will recover, the easier it will be for us to come to that high single digit. Then again, like we also said earlier, we...
We are executing on our strategy and irrespective of market conditions, we will, you know, improve because we are making initiatives on the commercial side to switch more from residential to commercial. We are making initiatives to switch more from new build to a replacement market. Both will have obviously also mid long term a positive effect on margin.
Thank you. Thank you very much.
Thank you. Next question from Denise Molina from Morningstar. Please go ahead.
Thanks. I just wanted to come back to the comment on the university contract that you had and just to ask you within Americas what you think of the opportunity of that end market versus hospitality, because it's not the first university that you've done business for. Just wondering if that's a market where you already have, you know, sort of high market share or if it's sort of a growing sector for you relative to hospitality.
Well, university and K-12 are, you know, two important verticals for us, and it's also two verticals where we see good market momentum. That being said, of course, there is no single vertical that really sticks out in our business. We are not exposed to one particular vertical in particular. If you take the hotel business in general for the group hotel business, hospitality business is around 5% of top line. Like we said earlier, we believe that hospitality business will remain more depressed for quite some time.
We believe that will be one of the verticals coming back later because we will start to see again perhaps some travel, but the business travel or business related travel will remain, we believe, on a lower level than prior to COVID-19 for quite some time. That is important, that business to come back to really see also the hospitality business coming back on pre-COVID-19 levels. Of course, the things we are doing, because I guess you're referring to that with the Apple Wallet are of course exciting, but in the bigger picture on the 5%, that would not move the needle in such an important way that it will compensate for the challenges that sector has today.
Thank you.
Thank you, Denise. I'm afraid that we have to round up the conference now. I know that there are some more questions left. If you have any outstanding questions, please feel welcome to contact us at Investor Relations. As societies now are gradually starting to open up, we look forward to, in the coming weeks, speak to and above all see more of you than we've done in the last years. In the meantime, I'd like to wish you a good day and stay safe, and we'll talk to you soon again. Thank you for today.