Schneider Electric Sa

Welcome to Schneider Electric's 2021 Full Year Results with Jean-Pascal Tricroix, Chairman and CEO, Hilary Maxson, Chief Financial Officer, and Amit Bhalla, Head of Investor Relations. Thank you for standing by. At this time, all participants are in a listen-only mode until the dedicated question and answer session of today's conference. At any time, you may press star 1 to poll for a question. If you need to withdraw your question, press star 2. I would like to inform all parties that today's conference is being recorded. If you have any objections you may disconnect at this time. I will now hand you over to Amit Bhalla. You may begin.

Well, hello, everyone. A very warm welcome to our full year results. We join you today from our Innovation Hub here in Paris, of course, with Jean-Pascal Tricouar and Hilary Maxson, our Chairman, CEO, and CFO. Let's get started. I want to just make a mention about the disclaimer, as usual, that you see on the slide. The slides are on our website, and we will keep enough time for Q&A. So with that, I'm going to pass it over to Jean-Pascal.

Thank you, Amit. I'm really delighted to be today in person, in COVID times, in Paris, in the Innovation Summit to speak with you. And by the way, you are all welcome to visit us and to visit this Innovation Summit when you happen to be here in Paris. I'm going to scroll through the headlines of the year and remind you first that we are a very focused company We are focused on being the digital partner of our customers for sustainability and efficiency at a time where sustainability and digitization are on the top agenda of all of our customers. If I would summarize the results we're going to present today, they are the proof that those transitions in both digitization and electrification are truly happening as we speak. And they are in full swing and in full acceleration. So let's go first through the headlines of the year 2021. On here, I'm going to describe five historical highs in the history of Schneider. 29 billion euros of sales for the first time 13%, 12.7% of organic growth for the full year and actually limited by supply. We could have done better if we would have had supply at the level of our demand. Second, historical iron. It's really important. First time we are at 5 billion euro of adjusted EBITDA on reaching the threshold of 17%, actually overshooting the threshold of 17% at 17.3% one year earlier than we had forecasted in our plan. Next high is the first time we passed the 3 billion in terms of net income and it's probably the best signature of the quality of the year plus 51% on the net income. Azure 30PS again historical high 6.13 plus 30% on an operating cash flow at 4.5 billion euro in increase of 22% and we're going to explain after that the free cash flow is in decrease and it's a very conscious choice of building the strategic stock to face the demand we have in our backlog and we have in front of us. So five historical high as a signature of this year. I would add to that, as a second signature, the adding of very important companies and capabilities to our portfolio, OSI, RIB, ETAP, IGE. In the past quarter, two early stage companies that complement our energy management portfolio. Third one is, of course, signature of the year is Our new ambition on our performance and recognition in sustainability, 2021, the most sustainable company recognized by Corporate Night in Davos. This year, we make it to number four, which is great to be belonging to that top group of companies dedicated to sustainability. And as you know, the relaunch of a new cycle around our Schneider sustainability impact that will carry us through the next five years. And then a very good year of very strong focus to the return to shareholders with the TSR at more than 50% on the proposal at the AGM of a dividend at 2.9 which would sign the 12th year in a row of a progressive dividend at Schneider. to thank you for your continuous support through our transformation and through our progress. So let's come back to the foundation of Schneider. What we do at Schneider is extremely focused and it's that combination of energy management and industry automation to support Both the energy transition and particularly decarbonization and the move to industry 4.0, the digitization of everything around us. And what you see is that software is more and more central to that transformation. And this is based on a unique operating model that we've spent time to explain to you the fact that we are one integrated company to offer one integrated solution bundle to our customers. That we are organized in multi-hub, close to our customers, close to our people, and able to react rapidly and in a very practical manner to the request of the market. That everything we do is incorporating ESG and we have the ambition to be an impact company which we defined during the CMD and finally the fact that we are the company leveraging the most partners whether it be on the supply side or the integration side around us. This, what you will see about 2021 is in perfect consistency with what we explained to you two months ago with explaining that Our growth drivers with foundational market accelerating, actually doubling their average growth with new growth drivers supported by our model. The will and the strategy to go to more recurring revenues, especially in software and services, which support long-term financial ambition and especially the aspiration to be a company of 25. Now let's go a little bit more granular about what 2021 has yielded. So 29 billion plus 13% both of our business, energy management and automation are growing double digit. Both are improving their profitability at very high level. And then the total improvement of the profitability of Schneider is that 140 BIPs to reach 17.3% and we passed the bar of 17% one year earlier than we had prospected to you a few years ago. So a very strong year of acceleration on both growth and making sure that this growth translates into profitability. Now, Hilary will go into a wealth of details on the year-over-year performance, but from the beginning of the COVID, I told you that the base of comparison we'd be using at Schneider would be the last sort of stable year that we had known, which is 2019. And even if you compare to 2019, after two very shaken years, it's still a very strong result, 7% in sales, Close to 20% improvement in adjusted EBITDA or increase in adjusted EBITDA in organic growth and a net income increasing by 33%. So very solid in both growth and improvement of financial performance. And all of this comes with a systematic and persistent implementation of our strategies that we've shared with you for now the past four years, really making sure that we sell more products, 11% organic growth, If you compare 2021 to 2019, and again here we will go into the details of the year, with particularly very strong performance in OEMs, in industrial sector, in data centers, and in residential. We have had price action throughout the whole year in front of a cost increase that we had never known at this level before. And this performance in product, in growth, could have been much higher because it has been impacted by supply chain pressures. At the same time, the second strong growth that we have is the software that we provide at Schneider. Energy management software that we've been building over the past three years is having a strong double-digit performance. Aviva is impacted by a very high base, especially in our Q4, which is their Q3, and digital services which are linked to the assets that we connect to the cloud and to analytics are really growing faster than the rest. Services growing only 5% and that would be respect to what we explained to you the percentage deployment but it can be very easily explained We were restricted access to sites by lockdowns in many places and sometimes by shortages on spare parts. But we have no doubt that the setup we have, that the people we've put in place, the thousands of people we have in place on the market will be able really to catch up and to redeploy as markets are opening when countries learn to live with COVID. And finally, a very good and very strong year for what we do in consulting on digital for sustainability with a strong double-digit growth. I'm going to scroll quite fast on these elements, but first when you take our core central historical market, A flurry of innovation this year. I just want to mention what we do in Smart Grid. I want to reiterate the big disruption on innovation that air set is in medium voltage, a totally gas free switch gear based on air and really completely compatible with the previous generation. I want to mention EcoStruxure Automation Expert which is the first generation of software-defined automation on everything we do in the field of smart home and smart building and especially the energy center. All of this supported by services and partnership with our partners. A few examples of wins with our customers, KB Homes using the Energy Center. The Energy Center is sort of your energy orchestrator for your home, taking care of your renewable source, storage source, on the utility supply. What we do with the Finnish university in the field of open automation on the pilot that we have in France with Enedis in gas-free, in gas-free medium voltage. and we don't speak a lot about it but remind you that we keep registering new patents and we have a lot of patents supporting our technological advance in both automation and energy management. If we speak about products, the biggest headwind we have had to fight against and we are still battling with over this year has been the supply chain constraints. and we have of course leveraged all the specificities of our model. The fact that our supply chain is globalized under one responsible person, one VP reporting to me. The fact that we have structured that global organization by region to be very local, to react faster. We've worked on We are centralizing and globalizing the purchasing to make sure that we had a very transparent and strong discussion with our suppliers. We have leveraged a multi-hub. We are, of course, leveraging automation and digitization of infrastructure to be better. We have put in place specific action, control towers by region to organize the best optimization between the demand and the supply, real-time coordination. We are entering really in much stronger and deeper and strategic relationship with our suppliers. We are redesigning some product lines. And while this year has been very difficult at times from that point of view, our net satisfaction score, which is improving, shows that this constant and persistent dialogue with our customers as some were paid. But face it, we started the year with an estimation of the market growing mid-single digit and we finished in a very high growth and that has had the consequences on our supply chain that we've seen. So that's about more products. Now more software. We explained to you during the capital market day all the work of convergence we are doing all over the life cycle of the installations and around the three threads that we are putting together. Industry, power building. We see already customers adopting that convergence and adopting several parts of our portfolio. All of this links into the world of OT's reconstruction. Once again, assets under management grow by 50%, so more customers Trust us to manage the performance of the asset. More customers are coming to our marketplace where people can trade software, tips, application, and establish relationships, Schneider Electric Exchange, and we see a continuous acceleration of e-commerce. Large part of it we manage with our distributors, but making the relationship with our customers more transparent and more digital. There is anyway in digitization we see an acceleration. Those supply chain issues that are happening everywhere mean that all of our customers are accelerating their digitization journey. And we leverage the experience that we accumulate in our 200 factories where we deploy the best of our technologies to put them at the disposition of our industrial customers. And you have here a few examples of customers with whom we work to provide the whole benefits of digitization, which is not only productivity, which is a more traditional way of looking at things, but safety of the operators, sustainability, traceability, quality, are really on lean ways of management, are really the collateral benefits of the digitization journey. Going on to some very practical example, example with Mars, where we work, in this case, together hand-in-hand with Aviva to supply a complete solution. Example with electrical contractor leveraging our EcoStruxure power together with IGXAO portfolio to digitize the whole journey. Cement in China, cement in India, sorry, More examples in China where we bring that digital capability to our customers. The example in India shows that we have also established bridges, productive bridges with L&T to supply our complete solution. So, we spoke about software, now let's speak about services. So, services we've been expanding our offering. Frankly, the biggest issue we've had over the past two years has been the openness of customers to their sites because of lockdowns which have happened in a recurrent manner. But again, we've been strengthening our offer, we've been reinforcing our setup, and we've been digitizing a lot what we do in services. And this digitization of services in our reporting appears in software. But those two, services and software, in many cases can't be dissociated because digital is a way for our customers to stay connected to their installation. On the third layer, if you remember, software service is sustainability, where we are advising more and more companies in understanding what they consume, what they emit, in strategizing how to consume less with energy efficiency and process efficiency, on how to consume better, that means source more decarbonized energy, and to take a company in a sector that is probably closer to yours, sign a very meaningful agreement with Equity to work on the decarbonization of their portfolio, and at the same time in the industrial sector, a recent agreement with Plastic Omnium to work on carbon neutrality on their all-industrial setup. We are today, as we keep progressing to our objective of 800 million metric tons of CO2 saved for our customers at 350 million tons since 2018. This commitment to sustainability that we have in business, remember, core business growing faster, Software Services and Sustainability is also applying to Schneider. So at the beginning of 2021, we launched a new set of targets in sustainability. And the first year shows a strong start. Again, that set of 11 objectives, of which one objective is very local. I want to mention particularly what we've started with our suppliers, with our 1,000 top suppliers to help them cut in their emissions by 50%. We've confirmed our ambitious target for Schneider in the field of sustainability, received a number of external recognition. For us, it's really important to have that external eye to confirm if we are doing right or if we are going at the right speed. And we'll keep making sure that ESG is part of everything we do at Schneider. And I want also, and really, at this end of 2021 and beginning of 2022, reiterate that all of this is possible thanks to the incredible and formidable engagement of our people in sometimes difficult conditions. Even with everything we've been facing, no trips, sometimes separation from families due to quarantines and so on, and difficult conditions of operation due to disruption of supply chains and everything. The engagement of people has grown up again by seven points this year. At Schneider, we believe that what gathers us is the fact that we work for a meaningful mission, that we are a very inclusive place of work, and that we empower people through our multi-hub on hybrid model based on trust so that everybody can make an impact. And I will finish here by saying that while we do all of this, we are convinced that performance cannot be dissociated from sustainability and we stay very committed to delivering the performance to our shareholders VC ETSR at 50%, 3 ETSR over 200%. We're going to propose to the AGM a dividend of 2.9, signing the 12th year in a row of a progressive dividend. So that's for the headline of the year. Now I'd like to hand over to you, Hilary.

Thanks, Jean-Pascal, and good morning, everyone. I'll start by going back to some key financial highlights for the full year. 2021, another signature year for us, finishing, as Jean-Pascal said, with record revenues of 29 billion euros, up 12.7% organic and record adjusted EBITDA margin of 17.3% up 140 basis points organic. We achieved and surpassed our goal of around 17% adjusted EBITDA margins one year ahead of plan, Partly driven by continued strong gross margin trends despite inflationary pressures. Our net income also particularly strong at 3.2 billion euros up 51%, driven of course by our strong operational performance and also our increased focus on managing costs that hit below adjusted EBITDA. Free cash flow is below last year, primarily as expected and tied to an increase in working capital and particularly inventory due to some choices we made for resiliency given supply chain constraints and to better serve our customers. And this all translates into a step up in our core ROCE to 13.5%. And I'll go into the details on all of these points in the next slides. Turning first to revenues, no doubt this is a year characterized by strong growth dynamics, with growth across all of our regions and positive scope impacts of 3.5 points from our acquisitions, all leading to record revenues of 29 billion euros. And I'll particularly highlight our most recent acquisitions, so L&T and OSI are both tracking well and above business plan. We were impacted by supply chain shortages in the second half in particular, and we'd estimate these adversely impacted our revenues by around two to three points for the full year. We also had a strong performance in product pricing for the year, Thank you for joining us. We would expect this to turn positive in 2022 due to strengthening of the dollar and Chinese yuan with estimated impacts of between plus 500 and 600 million top line and plus 10 basis points to adjusted EBITDA margin. Now, rates are obviously quite volatile at this moment, so as usual, we'll update you on expected impacts throughout the year. I'll also mention here that in addition to record sales, we finished the year with record backlog of €11.8 billion, up €2.8 billion, driven by continued strong demand and some supply chain constraints. Now, throughout the year, we've compared ourselves both versus 2020 as well as 2019, like Jean-Pascal showed earlier, and we continued to maintain good momentum, finishing at plus 7% revenues versus 2019 for the full year. In products, we finished plus 16% versus 2020, with around 3.5 points of that due to price, and 11% versus 2019. In systems, we finished plus 9% versus 2020, and we're now almost flat to 2019. And software and services, which now represents around 18% of our total revenues, we finished at plus 7% versus 2020 and 2019. Turning now to revenue growth by geography. We finished the year with double digit organic growth in all of our regions versus 2020 and with positive growth versus 2019. North America finished at plus 13% despite supply chain constraints impacting both businesses and with U.S., Mexico, and Canada all showing double digit growth. Western Europe finished at plus 10% with particularly strong performance in France, Italy, and Spain. Asia Pacific finished at plus 14% with double-digit growth in China and India. And rest of world finished at plus 16% with double-digit performance in all key geographies. Our top 15 countries or clusters have all turned to positive growth now versus 2019, with the exception of Australia, where we're gaining good momentum and are now close to flat. In our Capital Markets Day, we spoke about our key incremental growth drivers and introduced our updated strategic pillars of more products, more software, more services, and more sustainability. And Jean-Pascal showed these earlier versus 2019. In 2020, more products continues to progress strongly, I mentioned, plus 16%, driven by strong customer demand and continued dynamic trends in shorter cycle segments like OEM and residential, further supported by our pipeline of new product launches. Software, including digital services, is up 8% versus 2020, and up 12% versus 2019. Energy management software, including our EcoStruxure advisors, grew strong double digit in 2021, partially offset by Aviva due to an exceptionally high base of comparison there in Q4 2020, and Aviva's sales pipeline for the remainder of its financial year, so finishing March 31, 2022, remains on track. Services were up 6% for the year, impacted by shortages and coronavirus, particularly in the fourth quarter. And we continue to see strong double-digit growth in our sustainability business, with particularly strong growth in sustainability consulting, where we engage with our customers at the highest level of the company. Turning now specifically to the fourth quarter top line, we were up 7% organic to $7.9 billion in revenue. We did see an increased impact of shortages in the Q4. We'd estimate around five point impact on sales, as well as a pickup in price to almost four points of total sales. We therefore had a continued positive contribution from volume and that's across both businesses versus a strong baseline in 2020 and we entered 2022 with strong pricing carryover. Specifically on energy management, we were up 7% for the quarter, again despite supply chain constraints and against a baseline of positive Q4 growth in 2020. North America was up 6% for the quarter, with mid-single-digit growth in the U.S., driven by continued strong demand in residential and data center, as well as commercial buildings. Western Europe was up 5% for the quarter, with double-digit growth in Germany and Spain, also with strong demand dynamics in residential, data center, and commercial buildings. Asia Pacific was up 7%, with China up mid-single-digit and against a strong base of comparison, and with good growth there across all its end markets. The rest of Asia Pacific was up high single-digit, with recoveries from some more extended lockdowns in our key geographies there gaining momentum. and rest of world was up 13% with double digit growth in most key geographies, particularly Central Europe, Middle East and South America. Turning to industrial automation, sales were up 6% for the quarter despite supply chain constraints and with a high base of comparison for software in the fourth quarter of 2020. North America was up 19% with strong double-digit growth in the U.S. and Mexico, partially offset by Canada. Demand in discrete automation remained strong there, driven by OEM and our channel business. Process and hybrid demand is recovering and translated into strong sales in Mexico. Western Europe was down 7% for the quarter, impacted by the strong base of comparison for software. Adjusting for this, Western Europe would have been up mid-single digit, with France, Italy, and Spain all contributing, and with Germany around flat, all driven by strong demand in OEM and our channel business, partially offset by process and hybrid. Asia Pacific was up 10% for the quarter with China up double digit driven by continued strength in OEM. The rest of Asia Pacific was up mid single digit impacted by a strong base of comparison for software and with strong growth in discrete markets. Rest of the world was up 12% with strong growth in discrete and a return to growth in process and hybrid. Turning now to the P&L, we saw organic growth in our adjusted EBITDA of plus 23% to 5 billion euros and an expansion in our adjusted EBITDA margins of 140 basis points organic to finish the year at 17.3%. This is a record level of margin for us and was driven by both businesses despite inflationary pressures and shortages. Of course, our just detailed growth in revenues was a driver here, as well as good performance in gross margin despite inflation and in our operating leverage where our SFC to sales ratio improved by one point to 23.7%. And I'll go into some more detail in the next slides. Starting here with gross margin, we finished the year with gross margin of 41%, driven in part by positive scope with the addition of OSI and with organic impact of only minus 10 basis points despite inflationary pressures. The first factor driving our organic performance is price. We drove very strong price performance on products during the year and with an acceleration in the second half, finishing at 612 million euros and resulting in net positive price versus RMI of 41 million euros. Productivity also continued positive despite a significant increase in freight and electronic components of €161 million for the year. And as we've mentioned a number of times, we're focused on these cost headwinds and are engaging dynamic pricing strategies to ensure we're net price neutral to positive, including increased costs due to RMI freight and electronics over the cycle. Productivity before the impacts of inflation in freight and electronics finished at €325 million. And MIX elevated our gross margin by 40 basis points, driven by continued focus on pricing in our systems business, particularly in this inflationary environment. The second key driver of our adjusted EBITDA performance is our operating leverage, where we continue to focus on our structural cost savings program. As expected, we see a turnaround in our tactical savings of 220 million in 2021, part of the around 300 million in tactical savings we drove in 2020. We do expect to keep a portion of this tactical savings going forward through working differently and more digitally. More than offsetting that reversal in tactical savings is 411 million euros contribution from our structural savings program, and we're well on track to deliver cumulative savings of around a billion euros between 2020 and 2022. We also continue to make targeted investments to support our future growth. Aligned with the comments we made during our Capital Markets Day, the vast majority of the 390 million investments we show here was invested in R&D and in sales. Turning now to net income, including scope and FX, our adjusted EBITDA is up plus 27%. Below the line, our other income and expense was positively impacted by around 200 million euros in gains related to our disposals program, while M&A integration costs remained around flat. Restructuring costs were 225 million euros for the year and we're reducing our previously communicated forecast for restructuring costs tied to our structural savings program by around 300 million euros to put it now in a range of 850 to 950 million euros. Amortization of purchase price accounting intangibles stepped up as expected due to acquisitions closed in 2020 and 2021. Including all of our announced acquisitions, we'd expect this to remain at similar levels in 2022. And in financial costs, our cost of net debt decreased slightly due to lower interest rates. We also had some lower FX gains and losses due to some systems implementations to support our Treasury team. Our effective tax rate remained flat at around 23%, and we continue to assess the impacts of the upcoming U.S. tax reforms as well as recent BEPS announcements on our effective tax rate in coming years. This all results in net income of €3.2 billion, up 51%. Our adjusted net income is up 30%, and adjusted EPS is at €6.13 per share, both at record levels driven by our strong results. Our operating results translated strongly into our cash flow from operations, driving it to a record level of 4.5 billion euros. As expected, our trade working capital did increase to support demand, with days outstanding in our payables and receivables remaining about flat year over year. Our day's inventory outstanding increased by around 15 days due primarily to strategic stocking and components so we could manage upstream tensions and lead time extensions and in finished goods to best support customer demand in this supply-constrained environment. We would expect some reversal of this increase in days outstanding in 2022, although we'll continue to focus on resiliency and serving our customers. Free cash flow then finished at 2.8 billion euros at around 87% cash conversion. As I said during our capital markets day, we do expect cash conversion to continue at around 100% across the cycle. Driven by our results from operations, we have a step up in our ROCE by 1.5 points, including acquisitions closed in 2020. And I think this reflects well the strength of our strategic choices. We've also included our ROCE here, including all acquisitions in 2021, and you see the step up there to close to 12%. Regarding capital allocation, our priorities remain unchanged to what we covered during the Capital Markets Day. Two comments I'll make is we continue our progressive dividend with a proposed dividend of 290, up 12% from 2020, and we still expect to finalize our share buyback program of 1.5 to 2 billion euros in 2022. And we've proposed a buyback cap of 250 million, sorry, 250 euros to support that process. And while we didn't mention anything specifically on this call about new disposals, we do remain on track to close our $1.5 to $2 billion disposal program by end of this year. I'll finish with a quick update on our debt ratios, now at 1.2 times net debt to adjusted EBITDA, and which are quickly returning to more normal levels after the closing of the OSI acquisition through Aviva earlier this year. And with that, I'll turn back to Jean-Pascal to give an update on our 2022 full year expectations.

Thank you Hilary. So, a long list of introductions for a year which, like 2020, 2021 is integrating a lot of dimensions. We expect in 2022 to grow, as we said, both in revenues and profitability, in line with the framework we've defined in the Capital Market Day. What we see in 2022, we see a continuation of strong and dynamic market demand, which is really powered by the structural needs in the field of digitization, electrification, and sustainability. And we see a further recovery in lead cycle segments. And that's really coming in this year, where we are now. All the regions on all of our four end markets are expected to contribute to growth. We, of course, exit 2021 with a higher level of backlog, higher than we've ever known. But we have to integrate there are uncertainties still linked to the health crisis on the moving regulation between regions. We are going to be constrained by supply chain pressures which will continue to impact in the coming months. We are going to see also increased pressure on input costs, which is a collateral of the supply chain pressures on the very high demand. That will include raw materials, labor, freight, and the sourcing of electronic components. And despite this environment and these pressures, we aspire, seeing the dynamics we've created and the discipline we've installed in the company, to be net price positive for the full year, and this time including not only RMI but also FRET on electronics. So putting all of this together, we guide on an adjusted EBITDA growth between 9% to 13% organic, being the compound of a revenue growth of 7% to 9%, very consistent with what we announced actually on the upper end of what we announced in the CMD, on an adjusted EBITDA margin up of 30% to 60% organic, were all put together in a more precise manner that drives to an estimation or guidance between 17.6 to 17.9 for adjusted EBITDA 2022 and You realize that 2021 was a bit of an abnormal year in terms of profile between H1 and H2, and we expect in 2022 the progress on this performance to be more weighted to H2, like in a normal year at Schneider. So that's The view we have on the ambition we have for the year, but again, we benefit, we are positioned on strong demand markets. We've learned tons over the past two years on the way to run the company in a complex environment. And we are aligning our ambition for 2022 on what we explained to you In the CMD. With that, Amit, I think that concludes the presentation and the floor is back to you.

All right. Thank you, Hilary. Thank you, Jean-Pascal. We will make sure that we try to get at least one question in from each of the analysts, so even if we run over the hour, but just in respect for the others, keep it to one question, please. So with that, we're going to start with the Q&A and pass it to the operator to give the instructions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1. If you need to withdraw your question, press star 2. Again, this is star 1 to ask a question. It may take a few moments for the questions to come through. Our first question is from Andres Willie from J.P. Morgan. Your line is open. Please go ahead.

Thank you very much. Good morning, Hilary, Jean-Pascal and Amit. My first question is on China. Maybe you could comment a little bit what you see there in the construction market, both in terms of trends you saw in Q4 on the demand side and what you budget or expect for 2022 in potential drag there from the real estate situation. And where do you see pockets of growth within construction Thank you very much.

In a nutshell, China has been a strong contributor to our performance on growth in 2020, in 2021, and we expect China to be a strong contributor to our performance in 2022 also. Remind you, we've seen some slowdown in the residential market at the end of the year, but You have to integrate that we are in China less exposed overall to the building market than we are for the total of the company and especially to the residential market and our exposure is really much more on infrastructure, We have a strong demand for top end technologies and products as well as digitization is really making us confident in a very dynamic market. that we can position for profitable growth and growth particularly as we go into 2022. As we focus more specifically on industry, we've seen actually an acceleration of good growth at the end of the year. A lot of that is with the OEM market. A lot of that is also, and you had some examples before, on the digitization of processes where we work hand in hand with our customers to help them on their digitization journey. Unfortunately, this could have been higher because there are still some constraints on our supply chain which are significant on electronics. But as we go forward in the year, we stay oriented to growth as a strong support to our guidance coming from China.

All right. Thank you, Andreas. We'll take the next question, please.

Next, we'll go to the line of Jonathan Mounsey from Exane BMC. Airbus, open, please go ahead.

Thanks for fitting me in. A couple if I may. On Western European industrial automation, I think of the eight business lines you report, it's the only area that missed consensus in Q4. I think the two-year stack on organic growth is still negative for that business line. What's weak within that area and what's holding it back? And can it play catch-up in 2022? And then on the networking capital impacts of free cash flow conversion in H2, and indeed throughout 2021, is that drag now set to ease in 22? Can we expect better free cash flow conversion rates in 22 than we saw in 21?

Well, on automation, briefly, most of the explanation is from the high base of comparison that we have in software with Aviva on very specific contracts. Otherwise, we keep progress and constraints on the supply chain, frankly. So for the rest, the dynamic of our industrial automation is progressing very satisfactorily, and we see traction for our solutions in all aspects. Products. Machine Solutions, and Plant Automation. For the cash flow, Hilary?

Yeah, and maybe just to add that we're mid-single digit for Western Europe without that high base of comparison. Again, a couple of contracts from the software business there, so I think that's really the explanation on the consensus directly. So no real impact expected. No blip there that would mean anything for 2022. In the networking capital, we talked at the end of 2020 that, of course, in 2021, we expected a return to growth. With a return to growth, you would see some reversal in in working capital, right? We got the benefit in 2020 from the benefit from the reduction in sales and we have the reversal here. It's why importantly I like to look at the days outstanding to see what the impacts would be from a cash conversion standpoint. So as I said, receivables, payables, on track exactly with the increase in demand around flat in terms of days outstanding. We made a real choice on inventory from a strategic standpoint, both to serve customers better in the supply constrained environment, also to make sure that we have the right components on hand in the supply chain constrained environment when supplies loosen up for some of the other stuff. So both of those strategic, I said it was plus 15 days. We would expect some reversal of that in 2022. and therefore we'd expect anyways, I think we're well on track for being at around 100% cash conversion over the cycle, around 100% on average across even shorter time periods.

All right, thanks, John. Just a reminder, keep it to one question if possible and we'll get you back in the queue if time permits, right? So let's go to the next one, please.

Next, we'll go to the line of Phil Buller from Barenburg. Your line is open. Please go ahead.

Thank you. Good morning. Thanks for taking my question, which is on the organic growth guide for the year ahead. You talk about an expectation of being net price positive again for the year. So I'm wondering how much of the 7% to 9% organic growth would you attribute to volume? Is it all price or is there some volume in here in terms of the price side of that equation? Obviously, there's been some pretty unprecedented passing through of pricing already. And if we just look at the backlog expansion, I guess it would imply the theory of price elasticity has broken. But is there any feedback from your sales people on the ground that there may be some volume destruction coming through due to these price increases? Or is it still quite easy to pass through price? Thanks.

No, there is a strong contribution of volume. But Hilary, do you want to comment on that?

Yeah, so specifically what we've assumed in the ranges is more contribution from volume than price. Maybe towards the low end it's closer to 50-50, but really overall more volume than price. So that's the specifics in the range. I don't know if you want to comment on... At the moment, what I would say, and you can see it in the strong demand we talked about in the backlog... You're right that in the same way that we see price being passed through to us in a supply-constrained environment, we see our customers really interested in getting what we have to sell, whether for their sustainability plans, efficiency plans. So at the moment, I would say we don't get a lot of pushback in terms of price. I think you can see in our results that, in fact, we feel that we're in a strong pricing position. In these inflationary times.

Phil, I think everybody at the moment on the market knows as a customer or as a supplier that there are big tensions on the supply. We have over the year reacted, over last year, reacted progressively and proactively to the cost increase. That builds a carryover for next year. And as we look at next year, we have a view also of our cost increase and therefore we can be proactive in applying what we need to apply. But we stay attached to growing our volume and especially serving the strong demand out there for what we have to provide in digitization and electrification. All right.

Thank you, Phil. Next question, please.

Next, we'll go to the line of James Moore from Redburn. Your line is open. Please go ahead.

Yes. Hi, everyone. Thanks for the opportunity. I wondered if I could ask about your scopes this year. I think you've given your guidance on what has already been announced, which is helpful, and you mentioned the minus 10 basis points acquisition dilution to margin, but you also say that the billion five, two billion is on track. Could you help us with what the expected dilution might be if you include all the deals that are in the pipe, such as Eurofirm, Telemechanik, Industrial UPS? Are those assets margins similar to the group or materially above or below?

Before Hilary takes that question, I can't confirm any of the names that you mentioned. But now, Hilary.

Yeah, so we confirmed obviously on the disposal side, and we gave you a mix of scope impacts for this year. In terms of the remainder of the disposals program, plus minus I think in there you can assume around flat. We certainly have some assets that are more on the dilutive side, and then we have some assets that are, it's more of a strategic disposal, which we've talked about before where they're simply not aligned from a strategic standpoint. and more of a distraction. So I'd consider the disposal program at this point really portfolio health cleanup and not a major impact from a scope standpoint.

Yeah, and of course, you know, we will update as there's more progress made on the disposal program as we've committed to. Next question, please.

Next, we'll go to the line of Alastair Leslie from Societe Generale. Please go ahead.

Oh, Holly, thank you and good morning. So the backlog is going to play, I guess, a more important role this year. I was just wondering whether you can give us a little bit more color there, the degrees which you've kind of been able to vet for more speculative orders, I suppose. And maybe you can talk about the quality of the margins in the backlog in terms of that price-cost equation. And then, obviously, what kind of portion of that backlog could be delivered this year? I guess there's obviously a higher mix of shorter cycle business in there versus traditionally. Thank you.

Look, I don't know if we can be that differentiated in commenting on the backlog. We had a little bit more systems coming up with a recovery of longer cycle business. and also December traditionally is not December but Q4 is the place where we deliver a time where we deliver more systems and with shortage in the supply chain this is a time where you need exactly all the components at the same time which explains a better or bigger miss on our side on the sales due to shortages because this is a place where you need really to have all the pieces of jigsaw to deliver everything But otherwise, the backlog is pretty much a fair reflection of the mix of our business. So no big comment here, except that it gives us a depth on the capability to face the year, which is very high.

All right. Next question, please.

Next, we'll go to the line of André Koukoudin from Credit Suisse. Please go ahead.

Good morning. Thank you very much for taking my question. I'll stick to one. Could you please talk about inventory levels that you're seeing in the channels and your channel partners and maybe at customer levels as well? Thank you. It's ideally by region and businesses as well. Thank you.

Francky, André, I will not detail by region. My feel is that it's not very high or not of a dimension. I mean, everybody is facing a very strong demand. You could see some results expressed by our distributors to take only one example of our customers. and I think supply chains are pretty much real time and quite tight. So one thing I've really seen in the past two years, COVID on strong rebound, is that the level of transparency in the dialogue with both our suppliers and our customers has gone to a completely new level, which makes me optimistic. for the performance, the total performance of our industry because there are plenty of things that we can do better in the future with more open books. So answer to your question is I think the demand is really strong on sustain.

All right. Thank you, André. Next question.

Next question will go to Gaëlle Dubré from Deutsche Bank. Please go ahead. Your line is open.

Yeah, thanks very much. Good morning, everybody. So you indicated that you expected the price-cost spread to be positive this year on the euro basis. But could you clarify if you expect it to be a margin headwind or not? And secondly, could you also help us understand what could be the impact of the push-out of demand from last year to this year that's currently embedded in the guidance? Thank you.

Hilary?

So in terms of, I think you're talking about inflation probably coming into the equation. So you can see the overall guidance that we gave. Within that we put together all of those inflationary aspects that we see. We certainly see, you can see the raw material inflation, the electronics, the freight inflation that we saw in We don't expect any major turnaround of that, for example, in 2022. Maybe some pluses and minuses across the category, but we do expect we'll still be in an inflationary environment. And we embedded that in the guidance that we gave. In terms of the push out of the demand, I think maybe another question a bit around the backlog. We feel comfortable and we've done some mapping of that backlog into the guidance. We started pricing early in 2021, even we started pricing and I think we started talking about it at the end of the mid 2020 actually. So we feel comfortable with what we have in the backlog and how it will translate into 2022. In fact, we have, you know, as you might imagine, some buildup also in transactional backlog with quite a bit of price in it.

All right. Thank you, Gail. We try to fit in a few more questions in the time schedule. So let's go to the next one.

Next, we'll go to the line of Daniella Costa from Goldman Sachs. Your line is open. Please go ahead.

Thank you very much for taking my question. So I'll stick to one and I wanted to ask about capital allocation and M&A but more in the context of like I'm sure the pandemic and the post-pandemic have driven maybe sort of some of your smaller competitors or other people would not have good scale and positioning as you to see their positioning change. So how do you think about like inorganic growth going forward if you could give us a bit of a highlight for the next cycle? Thank you.

Hi Daniela, and thank you for your question. As we said in our capital market day, frankly, the priorities to organic growth, we've got strong market, we've got a good on complete offer, which is funded on what we do in both automation and electrical, our three more layers. of added value. So the priority is really to bolt on, especially in the field of new digital services or new digital capabilities on the top of that. But really the focus is on Organic Execution of what you have used, so some very small operations that we did in Q4, and that exactly is an example of what I was mentioning, which is more services, and especially in the field of energy management, where we started a bit later to build our software capability.

All right, I think maybe we might have time for one last question. So, operator, is there another question in the line?

There is. Our last question comes from Denise Molina from Morningstar. Your light is open. Please go ahead.

Hey, thanks, everyone. My question is on price elasticity. So, I was just wondering if you could highlight any differences regionally between in the regions being able to put through price increases If you could touch on China specifically, that would be great. Thank you.

I didn't get your first sentence. Did you say price elasticity or was it? Right. Okay, look, I won't comment in detail region by region because frankly, the situation is pretty much similar. Then at the same time, it's dissimilar because you have forex impacts, we are stronger in some markets, in some geographies and so on. But globally, I will just repeat what we said before, strong demand, people want to get access to technology because they have buildings to do, they have machines to build, they have plants to equip. They have infrastructure to realize, they have decarbonization to accomplish. So we want to be net positive in price. In China, as always, we manage the whole balance of volume, productivity, pricing and cost in a very local manner because this market is extremely fast. On moving with these very specific rules, China has been always very good in managing that balance in their own fashion.

All right.

Thanks, Denis. On the judge of peace of pricing, frankly, it's very simple for me. It's margin. What is important for us is to keep sticking to that parallel increase in growth profile of Schneider and in profitability and cash generation of our business. And this all goes together and needs to work on all the parameters of our model.

All right. I think maybe we can squeeze one last question in if there is another one in the queue, I suppose.

The last question in queue comes from Martin Wilkie from Citi. Your line is open. Please go ahead.

Thank you, it's Martin from City. Thanks for squeezing me in. Just a final question on the phasing. You've talked about a second half waiting. Some of your competitors that are reported so far have talked about the first quarter being sequentially flat with still supply chain bottlenecks and so forth preventing further growth. Is that how you see the year in terms of first half, second half? Or just some colour on the phasing would be very helpful. Thank you.

Here it is.

So in terms of the H1, H2, you know, Jean-Pascal mentioned we sort of go back to normal and not for normal reasons in some ways, but we would go back to a little bit more normal of a profile for us where certainly in the first half, you know, in the Q4, we saw shortage impacts. We also have price. We don't expect, for example, in the first half that we go to something like flat volumes. I think we still expect volume in price in the first half. But the weight of the RMI impacts, for example, are still coming through for us in the H1. We still see inflationary pressures in the H1. So in terms of margin and top line, we see it more heavily weighted towards the second half for 2022.

Hey, Martin, I find you very demanding. In December, we met and we gave you a guidance over the next three to five years. Today, we give you a guidance about the next year, and now you're asking us a guidance for the first quarter. That's really demanding.

Now, I think, look, we're coming to the end of the hour. I just want to thank all of you for your time. You know, if we have a slide, the next slide that you see on the screen, which gives the details of the conferences we're going to be on. We're going to be on roadshow very soon. And the entire IR team is available to take your questions.

So with that... And we look forward to seeing you through the year on discussing this, well, this interesting transition that the world is experiencing. So see you very soon and thank you for your support.