Legrand SA (OTCPK:LGRVF) Q4 2021 Earnings Conference Call February 10, 2022 3:30 AM ET

Benoit Coquart – Chief Executive Officer

Franck Lemery – Senior Vice President and Chief Financial Officer

Eric Lemarié – CIC Markets Solutions

Alasdair Leslie – Société Générale

Good morning, ladies and gentlemen, and welcome to today's Legrand 2021 full year Results Conference Call. All participants are in listen-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 Benoit Coquart and CFO Franck Lemery. Please go ahead, gentlemen.

Thank you very much. Good morning, everybody. Franck Lemery, [Indiscernible] Mark 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 to 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 into more details the 2021 full year results. I begin on page 4 and 5 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 road map. Fourth takeaway in 2022, Legrand is aiming to grow between plus 5% and plus 11% at constant exchange rates with an adjusted operating margin of about 20%. So, moving now to page 7 and 8 with another view of sales, Legrand reported record results reflecting once again the group's agility and resilience in a moving environment.

Notably, with regards to the pandemic situation, but also a strong and rising pressure on supply chains that gathered strength from the third quarter on. Full-year 2021 sales were up plus 14.7% with the rise of plus 5.6% over two years. This performance was driven by a market plus 13.6% organic growth, i.e., plus 3.7% over two years. It reflects in particular group's stronger competitive positions on its market as well as the success of its development initiatives. The impact of further scope of consolidation was plus 3% based on acquisitions we announced, excluding that of Emos which is not yet closed. This impact should be around plus 2% full year in 2022. The exchange rate effect on sales was minus 2% for the year. Based on average exchange rates in Jan 2022, the full-year exchange rate effect on sales would be around plus 2% in 2022. You will find on Page 8 the key takeaways per area globally, many commercial successes notably in a faster expanding segment, 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. And good morning to all of you. I will start on page 9 with operating margin. Adjusted operating margin before acquisitions of the year stood at 20.8%, meaning an increase of plus 1.8 points from 2020. This rise in the profitability can, despite an inflation of over plus 11% on the raw material and components during the year, including nearly plus 17% on the fourth quarter alone. This reflects the 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 €904 million growth +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 cooperate income tax is therefore increasing [Indiscernible], 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 plus 2.6 points at 18.8% of sales above €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 curated inventory amid supply chain pressures. Last, balance sheet remains robust with a net debt to EBITDA ratio of 1.5. I would like also to highlight that the group financing reflects our commitments as far as extra financial and climate engagement are concerned. Let me now share with you our financial performance over the last 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 a payment of $1.65 dividend up plus 16.2%. This would place the payout ratio at nearly 50%, also in line with the group mid-term targets. This concludes the key topics on the Legrand 2021 financial performance, and I'm now passing the mic back to Benoît.

Thank you, Franck. Let me now present our 2021 [Indiscernible] achievements on page 15 to 22. By the way, I'll go super-fast in the slides, but I'll be happy to answer any questions you may have during the Q&A session. session. So, Legrand launched in May 2019, its four CSR roadmap covering 2019 to 2021, and structured around 10 key challenges that contribute to the UN sustainability development goals. Page 16, you can see that Legrand reached 131% achievement rate with strong achievements in all areas environment, people and businesses ecosystem. As you can see on Page 17, we are particularly proud to have had used scope one and two CO2 emissions by minus 28%, and to have raised to share of women among the managers by plus 18% over these three years. On page 18, you can see that the employees’ commitments 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 system programs of carbon trajectory validated by the SBTi is lying on a 1.5-degree limitation. As you can see on page 21, Legrand ESG [Indiscernible] is well recognized in the values, 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 [Indiscernible] shared of the groups 2022-2024, 5th CSR roadmap. So, let's move now to the third part of the presentation on page 24 with a continued deployment of Legrand strategic roadmap. On pages 25 to 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 faster expanding segment, data centers, connecting products, and energy efficiency programs. Sales on these segments rose from around 18% in 2015 and 31% in 2020, to 33% in 2021.

Total loss 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, [Indiscernible] with sales of €85 million, and Geiger with sales of €5 million. Together with the two acquisitions previously announced last July of Ensto Building Systems and Ecotap. The four companies represent annual sales of around €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 in pressure and supply chains, as in 2021. And now on Page 33, the last year peak of this earnings release with our targets for 2022. In 2022 Legrand will push through its strategy of profitable and responsible development laid out in its strategic roadmap. Taking into account current macroeconomic outlook and assuming new market worsening in supply chains, Legrand is aiming for the following full year targets in 2022: growth in sales at constant exchange rates of between plus 5% and plus 11% with organic growth of between plus 3% and plus 7% and scope of consolidation effect of between plus 2% and plus 4%, 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 conciliation and dilution from acquisitions of between minus 20 and minus 40 basis points.

The group also aims to reach about a 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 that we have to leave you at 10:35 French time because I have a commitment with the press, but of course, Franck Lemery and [Indiscernible] will be happy to continue should you have more questions. Thank you.

Ladies and gentlemen, if you wish to ask questions [Operator Instructions]. And 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 first half of next year? And also have they been able to compensate, at least in value for most of the cost increases or do you need to take more price increases in the first half into 2022? And my second question was around the electricity prices. Of course, in a lot of regions and especially in Europe, we've seen electricity rates go up quite significantly. Are you 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 for your question. As far as pricing is concerned, let me maybe first give you the numbers. So total pricing for the full-year of 2021 was plus 3.5%, of which plus 5.9% in Q4. So obviously, there has been a sort of hump up pricing effect. Let me remind you the sort of sequence. Our pricing was plus 1.9% in H1, plus 4.3% in Q3, and now plus 5.9% in Q4. So there has been a deliberate strategy of progressively increasing prices in order to compensate part of the impact of the cost of hot metal and components, and maybe I can give you also the numbers for the price of hot metal and components. The total effect for the year was about plus 11%, but it was close to plus 17% in Q4. So close to plus 7% in H1, plus 15% in Q3, and plus 17% in Q4. So, ramp-up as far as the cost of hot metal and components was concerned and ramped up in terms of pricing. We have decided to be extremely cautious in terms of pricing. So, we did not want to increase prices to an extent where it would have been a problem for our customers. So, we did not compensate fully in value. I think we are short of about €10 million. We would have needed €10 million more on an annual basis in order to fully compensate the cost of raw materials and components in value. But it has been a deliberate decision not to do more pricing.

Again, because we were cautious in doing the right things in order to preserve and accelerate our growth. And on top of that, it was not really needed to achieve our margin commitment. It also means that, I believe, we have further margin for maneuver for 2022. Should additionally pricing on top of carryover be needed in order to preserve our profitability, we have the margin for maneuver to do a bit more pricing. But once again, it will be done cautiously with in - mind, always, the right balance between keeping our competitive position and limiting the impact on the profitability. Last number I can give you, even though I'm not sure that it is completely meaningful, is sort of carryover of pricing and cost of raw material and components over 2022. Why isn't it so meaningful? It's because on top of carryover, many, many things can happen both in terms of price of input and in terms of pricing. But if you take the current pricing, and if you take that into 2022, the carryover of pricing would be plus 2% and the carryover of purchase price would be close to 5%. But again, the final numbers for 2022 won't be those ones because many things can happen.

Cost of raw materials and components could go further up or down, or pricing could be further up or down if needed. So, I hope it answered the first question. As far as the second question is concerned, yes, indeed, there has been a very significant increase in price of electricity and energy as a whole in Europe but in many countries. Well, of course, it does impact the profitability of Legrand, but not to a large extent, because the energy cost for Legrand is about 0.5% of our sales. So, it's not such a meaningful cost if I may say, even though the cost has increased significantly. It is true at the same time that it makes the need for energy savings higher on the agenda of people. I can give you a very simple number. Take a country like France, the average annual heating expense for a French household is €1,300 per year.

So of course, if it increases, it becomes a real drain on the money values for households. So, it is good booster potentially for all our solutions to help buildings to do savings so it will

It will help our sales in thermostat. it will help our sales in load shedding. It will probably also help our sales in electrical vehicle charging stations, in lighting controls, so on and so forth. Have we seen this impact already in 2021? Well, clearly what we call the fastest expanding segments, so not only in energy efficiency products, but also connected products and data centers have gone faster than the rest of our product offering, but in total gross and organically. So yes, we have seen probably a bit of these impacts, 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 capital -- that capacity in [Indiscernible], clean building. The desire for more safety and security in buildings, assisted-living, and so on and so forth. So, a long answer to a short question.

Thank you. Thank you very much. It was very helpful. Thank you.

So, 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 this 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 in over the past 12 months? And do you think that the elements that may have hold back this recovery are now clearing up?

Yeah. Hello, Lucie. So, to give a bit more flavor, sales in the U.S. are obviously up over one year, but slightly down over two years. And if we cut the performance in two slices, if I may say, and over two years, data center were up double-digit and a very, very significant growth in 2021 compared to 2019, and it has been consistent all over the year. Residential grew also double-digit in '21 compared to 2019. The end of the year was a bit weaker, but we put that more on the back of the lack of components which we have lost a couple of million U.S. dollar of sales. But the underlying demand remains strong. As far as the 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. So, we have seen sort of an improvement even though we're not yet back the level of 2019. How long will it take? Well, we are not worried at all for 2022. We believe that there are number of factors that should help the recovery of the non-residential markets in the U.S. And that's actually, with the official statistics also demonstrate.

And amongst the factor that could help, it's always the same story, it's return to the office. We are somehow highly dependent to inform what happens in the big metros in the U.S. And in the big cities where you have large financial and tech community and a lot of people hasn't gone to -- not going back to the office for two years. And we believe that with the COVID-19 waves being less and less lethal if I may say, or easier to manage. This return to the office would 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 H2 -- H1 and H2. Not yet back to 2019 levels. But no -- but pretty good level of confidence that this will happen in the quarters to come.

[Indiscernible] Just to be clear, the number you have given, so down double-digit in 1H and single-digit in 2 H, those are volume base or they are value-based?

They are value based but of course the pricing is somehow supporting. We've been able to do some pricing in the U.S. Now, we didn't do 8% in pricing. But, yes, they're value-based.

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

There are two separate issues. One is the price of raw materials and components, and second is the availability of raw material and component. As far as the price is concerned, I have absolutely no clue. And as usual, we are prepared to react when we have the [Indiscernible] depending on the [Indiscernible]. So, I don't know. What I can only tell you is carryover impact that I mentioned is a plus 5%. It will not be the final number. Would it be more or less? I don't know what will the final number be. I don't know, but many things can happen. So, I absolutely have no clue. And again, I think what matter at Legrand is our ability should we need it to do more price increase and we have kept the ability, but not doing too much pricing in 2021. As far as the availability of components, the situation remains difficult. It did not get worse between Q3 and Q4. So, no worsening of the situation. The situation remains difficult. It, of course, depend on the component. 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 plastic, with very longer lead time, and on electronic components. And clearly, the electronic components is a place where specialist expect the situation to take a bit of time before seeing some sort of improvement. So, it remains a pretty difficult. In total, we believe that we have lost as I said, couple of tens of million euros of sales. And well, it of course, has a negative impact on categories that embed a lot of electronic components, so a number of connected products. [Indiscernible] That's life and we have to manage it. I think we've managed it pretty nicely in 2021, securing a long-term commitment with our suppliers. are being extremely [Indiscernible] in changing the opportunity to do good purchase here and there, doing -- redesign the supply than to change design of some of our products to embed more widely available components. So, we've done many things extremely positive. I don't believe that we have lost market share because we got shortage, which is faced by many people. But, yes, it is of course difficult.

We have to manage. Hope that it will not have too many impacts on the fastest growing segments in 2022, which are the one embedding the most electronic components. But again, we are now a bit used in managing those and navigating this complex situation.

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

Well, rather than focusing specifically on [Indiscernible], I would rather mention the fastest expanding segments, which we presented that the last CMD in September. So again, as a percentage of total sales, it was 29% in 2019, 31% in 2020, and 33% in 2021. So, it grew 18% over two years, whereas other segments, so none fastest expanding segments, if I may say, were flat over two years. As far as like-for-like sales, it was plus 15% over two years, and the other segments were minus 1% over two years. So, you have a sort of other performance of about 7%-8% per year, over the past two years. Although the fastest expanding segments in all three segments that I sent to [Indiscernible] grew more or less at the same pace.

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

Okay. And Gael, so for first point, I haven't seen globally significant change in the competitive landscape over the past two years or the past 12 months, coming from the pricing dynamics. Well, of course, it has made it a bit more complicated for some for example, the Chinese players to compete in some geography's because the products are -- we're not available, but we haven't seen neither new competitors coming in or old competitors coming down. So, all markets remain extremely competitive. Of course, somehow price sensitive, and it's as difficult as before to compete on a new project. Now, the question is whether or not because of the pricing dynamics we could expect higher margin than the 20% EBIT margin long-term, the answer is no. And we made it clear during the last CMD back in September. Of course, when the price of raw material and components will go down, we will retain some of these pricing, and you know that we have never decreased our prices year-on-year. But if and when it happens, we will definitely reinvest part of that into growth. Our long-term guidance is not to do 21% or 22% EBITDA margin, is to do 20% EBITDA margin.

Once again, it's not the sort of magic number. It's because we believe that it's the best balance between value creation and growth. And if we're to do over a long period of time 21% or 22% EBITDA, I believe that it will put our ability to grow fast a bit at risk. So yes, at some point in the cycle, we will have some help from the raw mat and component. But if it happens, the strategy would be to invest it to raw in order to grow it to top-line faster. Well, as far as orders are concerned, well unfortunately we have a -- you know that we have an order book, but unfortunately, we have a backlog which is orders to be delivered a bit higher than usual, because we have difficulties to properly serve our customers because of the scarcity of resources. Well, now we have actually [Indiscernible] similar to the one Siemens would have. So, I can hardly give you any visibility. The guidance we are shooting either 3% to 7% organic growth for 2022 is not based on -- is not solely 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 specialist, and the usual uncertainty when it comes to Legrand business plan.

Okay. 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 $20 million this quarter. So, taking the total number of restructuring costs to around $35 million for the full year. It seems to be a bit higher than the $20 or $25 million range you had provided in the past. So, could you just explain what you're trying to achieve here?

Yeah. Well, so first comment, don't pay too much attention to calendarization of restructuring. You can have one big in one quarter or [Indiscernible] one quarter almost zero in another. What really counts is at the annual level of restructuring. It is true that the usual Legrand rate is €20 million to €30 million per year. It was €76 million in 2020 because we wanted to accelerate our structuring action. It came out at 34 million euros in 2021, so slightly above our historical average. Well, we have about a 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 of five sites a year and we have moved this number from five to ten a year. So, the fact that restructuring is a bit higher in 2021 than it used to be, and was significantly higher in 2020, is a reflection of these strategy to accelerate a bit of footprint optimization.

Be in 2022 and I know that it's always sort of uncertainty for your model. We don't know, we're not stop doing restructuring if we reached €30 million. So, if we have good ideas, we could very much spend again, €35 million or €40 million if needed. Now for the sake of building your model, you can take €20 million to €30 million as a sort of one right for the years to come.

That's great. Thanks very much.

So, we have another question from Eric Lemarié from CIC Markets Solutions. Please go ahead.

Hi. Good morning. Thanks for taking my question. I got two actually. The first one on the faster expanding segments. Could you remind us the profitability of this line of businesses? Is it higher margins as the average, thanks to pricing from a stem cell is lower due to some specific R&D or cost for instance? Is my first question. I got the second one on connected products. Do you expect to deliver some connected products this year based on the new matter protocol? Thank you.

So as far as the first question is concerned, the key driver behind the profitability is not whether the product is the fastest expanding or part of the fastest expanding segments or more traditional product, it's really market share. So, if you have a product which has a significant market share, it will have higher than 20% EBIT margin regardless of whether it is the fastest expanding segment product or traditional one. If you have a product on which we have a lower market share, then we will have a lower margin. So, the key driver is really market share and we have -- if I wanted to shoot a number, you know that Legrand 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 segmenting segments. So, again, the key driver is really the market share.

As far as matter is concerned, we have a -- well, you may know that we have the driving sit in the cockpit for Matter because we are sharing the CSA alliance. The first product that will get out from the Legrand slash [Indiscernible] factories using the Matter protocol will be mid of 2022. It's coming soon and we really see Matter as a fantastic progress. The fact that projects were not talking to each other and that customers were pushed to favor of proprietized solutions, was the limitation to the growth of SmartHome, and having a universal protocol that will make it possible for Product A and Brand A to communicate with Product B and brand B will enhance a lot of customer experience and it will, I believe, increase significantly the penetration rate of SmartHome. So, we are welcoming very much this matter of protocol.

Our product will be launched?

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

Okay. Thank you. And can I -- just a follow-up one. I didn't catch property the carryover on pricing and purchase price in 2022? Could you repeat the number?

It's 2% for pricing and close to 5% for the cost of raw material and components. In system data, in one year's time, we'll discuss together the pricing impact in cost of raw material and components. I can bet with you that the final numbers won't be plus two and plus five. So many things will happen.

So, we have another question from Eddystone Leslie from Société Générale. Please go ahead.

Oh, yes. Thanks, and good morning. I just want to get a better sense of how you're thinking 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 that's going to be a lot of change critical here. But you see, is the aim essentially to neutralize price cost in 2022 or except maybe only partly compensating for as you've done in 2021. And then a second question is kind of noticeable. You perhaps haven't push for you -- as high price increases as some of your pays. You mentioned stronger competitive positions in the presentation. Just wondering how much of that is perhaps in reference to pricing. Do you think some competitors, perhaps of maybe over position themselves on pricing now? And all that kind of areas where you can maybe take advantage. Thank you.

Well, as far as the first -- Alasdair as far as the first question is concerned, my target and the target of Legrand teams is not really to compute the fact that we would compensate X percent or Y percent of the price of format and components. The objective is to deliver the approximately 20% EBIT. So many levers will be put in place, pricing of course, leverage from volume, cost control, restructuring, mix and added value, [Indiscernible], industry 4.0, and so on and so forth. And that's my clear reason. It is -- we will do whatever it takes in order to deliver the 20% EBIT while at the same time, growing as much as possible. So, I have not a definitive answer to your question. We will really monitor and decide on the precise pricing level depending on what we need to do in order to deliver our profitability commitment and we'll do it in such a way that it does not hurt our competitive position. As far as the improvement in competitive position in 2021, I think it comes from many factors.

I wouldn't say that it came mainly from pricing. Legrand is considered as one of the most expensive players in this trade. And we have built that position by building brand equity and communication, quality product, and so on. And we don't like really getting market share by cutting prices, because this is a game, which in our market doesn't pay much. So of course, we have to remain competitive and that's why we haven't increased pricing too much in 2021, but I would hardly say that we have significantly gained market share because we would have been a lot more conservative than others in terms of pricing. No, the gain in competitive position is coming from a couple of factors. Clearly, you’re positioning on faster expanding segments help a lot. The huge product renewal we have done in many geographies in the past years, have also helped. Take, for example, including on some patient 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 logistic centers even in March and April 2020. We have reopened very faster [Indiscernible]. This year despite the scarcity of resources, we have tried to serve as much as possible our customers. We have kept investing on front offices the, we have kept investing on digital. So, for all those good reasons, we believe that on a lot of geography's 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. It was close to 14%. So, we have had almost a four-point increase in a ratio of inventory to sales. Well, of course, part of that is technical.

We have probably one point which is coming from currency conjunction as we call it effect, we will [Indiscernible], we have 1.5 points, which is coming from the just pricing, the price of raw materials, the way it is. And if you've product the way it is valued in the balance sheet compared to the average of the P&L. But you have probably 1.5 of this improve -- of this deterioration if I may say in the ratio of inventory to sales, 1.5, which is 10% increase in inventory turn compared to last year. So, we -- and we have said that consistently to you in the previous calls we have deliberately taken the decision to increase our turns 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. So, this is one example, together with pricing with the decision we took in 2021 in order to keep our ability to grow and to grow faster than the markets.

Great, very clear. Thank you.

So, we have another question from Andre Kukhnin from Credit Suisse. Please go ahead.

Good morning. Thank you very much for taking my questions. A couple of follow-ups. First on inventory levels, could you comment on what you're seeing in the channel versus what you would perceive as normal?

Well, we haven't seen in 2021 any significant phenomenon of strong destocking or strong restocking. I guess that our channel would have loved to be able to build some inventory back. But they couldn't just because it was difficult for them to get from the suppliers, including from Legrand the materials they needed in order to get 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 we can see no significant neither destocking nor restocking. And 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. Thank you. And on pricing, are you planning further price increases kind of around now? Have you done anything in January or do you have a --

Well, we were. Yeah, we have done pricing actually, always that's something we do on Jan first and we forget the rest of the year. It's something which happen every day. So, in some countries, yes, we already made some pricing increase in in Jan some other is planned for April or May. And if needed, we could add more pricing [Indiscernible]. If needed we could also give more discount to our customers on a daily basis, so as a result, having a negative impact on pricing. So, it's really something which can change almost from one day to another. But yes, to answer your question, there are a number of countries where we did already some pricing fees, engine.

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

Well, it really depends on the countries, and there are clearly geographies in which there will be significant labor inflation. The U.S. is one of them. When you have such a low unemployment rate and so many people leaving the labor market deeds to significant inflation. So, we have some inflation in the U.S. You may also have some inflation in a number of new economies. In Europe, a bit more limited given delivered a known primarily, but yes, it will be a probably higher than usual inflation from a remuneration salary now in front of that, you can always do productivity and number of things. So is not some something -- is not something that -- it's something that you can imagine.

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

Well, it's part of the inflationary environment in which we have to play. Prices for raw material and components is going up. Inflation in wages, cost of energy is going up, cost of transportation is going up, and you know that it's 3.5% [Indiscernible]. A number of the cost of input at the whole is going up and sometimes [Indiscernible]. At the same time, you have a -- 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. We have a restructuring, well that's -- it's not something that -- it's today world in which we have to play.

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

Sorry, I haven't counted. It's probably thousands of positions that we are, because if you assume that the day you start selling to wiring devices in a remote country, you have a position. We have 100 countries -- no, 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. We sit in those about 200. It doesn't change much in the past four or five years. It's about 2/3 and it was about 2/3 five years ago. And our objective is not to take that to 80% neither to 50%. We're happy enough maintaining this 2/3 because it means that not only, we have -- 2/3 means that we have the positions which we need in order to sustain our profitability. But it gives us 1/3 position where we can improve. So, we believe this 2/3 1/3 is the right balance for Legrand.

Great. Thank you very much for your time as always.

So next question from Simon Toennessen, from Jefferies. Please go ahead.

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

Well, you're becoming greedy, the more we give the more you ask. So as far as the U.S guidance is concerned. Well, if you're comparing us with companies such as [Indiscernible], Vertiv company like that. We don't really have the same exposure. We don't really have the same business, so it's always difficult to compare from one company to another. So, I can hardly comment. What I can tell you that 3% to 7% that we are gaining on group level because we're not guiding on a geographic --geography-by-geography. As far as again, what came out from the feedback from countries including the U.S. from specialties and so on. So, it seems to be for us a reasonable guidance. I can only comment on the guidance for other companies. As far as a Q4 and Q3 in the U.S. is concerned, if your question is about the trend between Q3 and Q4 in non [Indiscernible], I told you that H2 was down single-digit and H1 was down double-digit compared to 2019. No significant difference between Q3 and Q4.

Now, be careful. Don't come to the conclusion that there is no change in trend, or that there's plateau, that things are not improving. Quarterly performance in our trade is not very [Indiscernible] because many things can happen: stocking, destocking from the channel, one big project, one -- there's more when there is less, and on top of that the scarcity of resources and the difficulty to source some companies can also have some impact. So, in terms of hard numbers, no change between Q3 and Q4, but I can hardly extrapolate that into a trend. Well, as far as guidance for Q1 [Indiscernible] concern, no, we don't intend to guide on a quarterly basis, so unfortunately, I have no numbers to give you. What I can get you, but I think it's obvious for everybody that H1 would be -- will be a demanding [Indiscernible]. going tells us margin. Number 1, because H1 2021 was a very good semester. If I get the numbers, right the H1 adjusted EBIT number was 22% and the H1 2019 adjusted EBIT was 20.5%. So H1 2020 was very good semester in terms of margin and then number two because we will have the full effect of the increase in [Indiscernible] components.

And we still have some hump up to implement or to do in terms of pricing. So, I think it's obvious for everybody, but the start of the year going to be demanding in terms of margin. Now, what really matter for the whole is, of course, the yearly performance, and as far as the yearly performance is concerned, we'll try to achieve about 20% EBIT margin with, as a result of good mix between leverage pricing into it.

Thanks for that. In my second question, I'll also ask whether you think U.S. non - resi businesses can 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, at least above the midpoint of your 3% to 7%?

Well, it will make sense to believe that. Now, again, I have no clue. Well, I can tell you -- but this is legitimate to expect that providing a number of things happen, including the fact that we are done with season or micro no, or COVID-19 way, but it makes. What makes us -- I would say confident but not worrying much about the non-res in the us. Is that including in 2021, we saw pockets of very significant growth, including in [Indiscernible]. You should take for example audio video products including cameras for video conferencing for example, they grew double-digit over two years in [Indiscernible]. So, I believe we should have the ability to either to benefit from the market recovery, or to find additional pocket of growth that should help the growth. Now, again what it will be? What will the impact of scarcity of [Indiscernible] We grow faster than the rest of the groups is still a question mark, but this is a scenario which is possible indeed.

This come back to your first question, so the comparison between Legrand and listed peers were always brief. And also, taking to accounts a basis for comparison and if you look at guidance '22 compared to the actual 2019, well you'll see that, look on guidance. We shouldn't be ashamed of Yukon guidance compared to a number of our U.S. listed peers.

So, we have another question from James Moore from Redburn. Please go ahead.

Yes. Good morning, everybody. I 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 were minus 1% over two years. And if we make the assumption I don't know if it's the correct assumption, maybe you can help me on that. But if we make the assumption that two years of cumulative group price mix of 4%, if that was the same in the call, then I guess the volumes in the call are down around 5% on a two-year basis. And when I look at our global construction outlook blended for you 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 of ask generally, whether you feel that there are only cannibalizing factors or structurally declining factors inside the core the core that we should consider? That's really my first question.

Well, your numbers are correct. The -- it's a traditional [Indiscernible] products are down for 1% over two years. [Indiscernible] a bit more than that in volume because we had done some pricing well, the clear -- there's no structural reason why those products should go down, because together with a growing need for electrification worldwide, there would need for traditional products. Now, yes, there is some mix effect between traditional and fast expanding segments. So, every time you are setting the non-connected connected thermostat instead of an unconnected one or connected during three instead of a non-connected one. It is one more sale which you accounting to faster expanding segments and one less that you accounting to traditional ones. So yes, there is some sort of cannibalization, but this is a healthy cannibalization that we are used to call mix effect. So, it's not at all a concern for us. And again, there's no structural reason why the price on products should go down, there will be an increasing need for our circuit breaker of cable management, wiring devices or components, and so on and so forth.

Thank you. And the second one was on the innovation, your R&D to sales ratio seem to drop a little bit below your 5% target in FY2021, I don't know if there was a particular reason for that? And I wondered whether specifically in FY2022, we should consider the 5% a good guide. I know it's more through cycle guidance, but I was just trying to clarify what the year-on-year change in R&D to sales might look like this year.

Well, the only reason why the ratio went down was that the sales went up very significantly. It also sorts of sources, the R&D expenses. Maybe to give you a clue, but how we manage the expenses. Over two years, you know that our like-for-like was up by almost 4%, our production and SG&A expenses like-for-like were flat over to use, right? But actually, flat user mix of increasing expenses on digital in R&D and decreasing expenses on everything else. So, we have self-guarded the R&D, and we have, again, taking the deliberate decision not to cut R&D expenses because we think that it would have been done at the expense of future goals. Now, of course, when you have your sales growing in total close to 15%, the ratio decreases a little bit mid-term we should be at about 5%. There's no reason why we would be at 5.5, reason why we wouldn't be on a long-term basis at 4.5%. So, the 5% ratio of our [Indiscernible] what we need to sustain our business model. I'm sorry, to 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 will leave you with Frank and with [Indiscernible] of course be able to address any more questions you may have. And I tell you, thank you very much for attending this call.

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

Thank you. So, we have another question from Christian Indehacker (ph) from [Indiscernible], please go ahead.

Yes, good morning, everyone. And thank you for taking my question. You mentioned earlier in response thing to Lucy's question, access to supply of some of the components that impacted on revenue conversion. I'm just interested if you could perhaps elaborate on this in terms of customer acceptance to wait longer for taking those deliveries, and whether there's any risk of sort of cut and lot of shares of peers. And 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. So, elaborating a little bit more about the supply chain issue, what we said during last call is that the Q3 that was an increased pressure on the market. You are being good at the beginning of the year or end of last year the pressure started. We entered the 2021 year with a prepared as far as inventory concerning as power so as process are concerned, our R&D is now more and more working on what they call raw design to supply. So finally, we were pretty much immune during H1 and we start having some effect on the supply chain on H2. On H2, Q3 and Q4, I would say there is no serious material deterioration of the situation. It's a more or less plateau wins and already mentioned what was the components which we 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. So, there could be some early order for some suppliers. What we have assessed is that globally speaking, we are talking about a few tens of millions of put onshore sales, which will be missing on the year. Does that mean we missing in terms of market share? It is your question.

So, we don't see think first that we lost any market shares on behalf of that. On the contrary, we think that we did well in this climate. We anticipated as you said, and you saw also that we have risen our inventory of coverage. We've prepared to that. So, what we hear from the market, from our peers, everyone is suffering some supply chain issues. And so, what I read, when we issued our Q3 release everyone also agree that we did well in that environment. So, I don't think that we have lost any market shares. And the last part of your question was about, would the customer be ready to wait longer for the delivery, do we lost -- have we lost any projects? No, nothing meaningful. And of course, today everyone is ready to wait a little bit. We haven't seen project canceled on behalf of supply chain issue. The supply chain issue is for everyone. It's not only not only components on [Indiscernible], it can be also labor shortages. You know there is a story of the arrival in the U.S and the UK. It can be also some reorganization of the -- some installers because of the COVID and the Omicron variance so together, I think that it looks that the supply chain is quite patient, the customer acquisition.

Thank you. And maybe just 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 treats really depends on the components. But of course, if you take, for example, [Indiscernible] nature electronic components, the diluted retirement maybe has doubled. We are today on some specific component, placing over or giving visibility on volume over 12 to 18 months once is. Yes, it's an increase on behalf of procuring and also in behalf of confrontation, as far as the flu between China and the U.S. is concerned. And the also one of the reason why our inventory coverage have increased is to make an equal past of the lead time increases.

So, we have another question from Andreas Willi from JPMorgan. Please go ahead.

Yes. Good afternoon. And 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. We'll be looking at your guidance, assuming some price contribution, you still expect that volume grows, 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 invent --

finished goods inventory quite substantially during the year? Thank you very much. Thank you for your question, Andreas. As far as volume growth is concerned, I don't see that there is any material changes during the year, if we were to compare to 2019, which is the most relevant measure. The volume growth has been quite steady and it's actually quite consistent with what could be 2022. Within 2022, the point of our guidance is plus 5%. So it embeds still the market are quite positive. Of course some pricing which are actually healthy. But there is no [Indiscernible] assumption, no material acceleration of the volumes. Responding to your second question, wherein there has been some a little help on the gross margin on the inventory build-up that we can assess across roughly 20 bps on the full-year results. So, it's not meaningful at all the full improvement of the year. So to come back at the volume towards what I say. Notice of volume over two years is actually it's minus 2.8% over two years on 2021 versus 2019. So, the acceleration in the efficient area environment, you can make an assumption on the [Indiscernible], is not that drastic.

We have another question from William Mackie from Kepler Cheuvreux. Please go ahead.

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

Okay, so to answer your first question about are there any specific sport of geographies where we would have increased the turns or the decrease of turns, increase the coverage, [Indiscernible] the average of the group. It's overall strategy, which has been applied in all countries. And it's actually also true for almost all parts of the inventory. How much are you all with finished products. All those spots are increasing as we said, in average, the coverage has grown by 10%, but it's well spread across the board as fast as a that concern and the type of inventory are concerned. Talking about inventory levels of our distributor as well. So once again, it's more question to them than for us. We don't know what's the level of inventory. We know what is the backlog, so we know that we are not able to serve them at 100%. But it seems also logical that when it's possible, they actually -- they try to build up some inventory. But every time we are able to know the selling and the sell out, it may be done on a specific channel, on a specific geography. We don't see any sign, both inventory or material inventory build-up on the -- in all these regions. So I cannot if you make the full equation, but when we have information, we don't see any increase.

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

Finishing under the inventory about 2022, there is no number I can share with you. You as far as inventory to sell that on sales for 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 needed for us to decrease meaningfully the terms. We will keep the higher reading because Legrand has no cash issue, no free cash flow conversion issue. So priority is still about dedication of our strategy in terms of supplier. Having say in that, our mid-term with their guidance as fast free cash flow concerned, is still valid. And you have seen that despite these inventory level at the end of 2021, free cash flow and normalized free cash flow, are still at very nice levels. Now, giving some flavor about 2022 [Indiscernible] new guidance per geography but as far as Europe is concerned, Europe did very, very well on over two years. And hlobally speaking in 2020 and 2019 versus -- 2021 versus 2019, very well.

On behalf of very solid crazy market. So, we could we'll keep leveraging of these nice supporting Sharon alternators of adventure, of LEO product products, co-bidding plus in Europe. So far has no long structured impact. It has some impact in terms of digital condition of the supply chain of the installers. They are struggling to finish their works their labor shortage is to finish the job. So, there is some [Indiscernible] of these organization, but we don't see any meaningful impact that could jeopardize the growth in Europe in 2022. I'm talking about about Asia and the rest of the world, same level of confidence about Asia, except perhaps with the question mark that we have all in mind, which is the Chinese situation. China is not a big exposure for the group, it's between 4% to 5% of group sales, but there could be quick pushing marker in China now on behalf of two items, first one being the long developer story. Legrand is not very much exposed about that [Indiscernible], not good for the business of course. And the second one being the zero COVID policy in China. So we see positive perspective outlooks in every geography for 2022. China would be a stronger risk that unusually.

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

Okay. Thank you, everyone for attending the 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 Ron (ph) or myself and Sammy (ph) are totally available to answer further questions. So that's it,that concludes our call with these nice 2021 print under these positive outlooks for 2022, which are fully aligned with the mid-term ambition that we shared during last capital market day. Bye and talk to you soon.

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