Legrand SA

PAR:LR

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome today to Legrand's 2022 First Quarter Results Conference Call. [Operator Instructions]. For your information, this conference is being recorded.

At this time, I would like to hand the call over to CEO, Mr. Benoît Coquart; and CFO, Mr. Franck Lemery. Please go ahead, sir.

[Benoît Coquart, executive]

Thank you. Hello, everybody. Good morning. Franck Lemery and myself are happy to welcome you to the Legrand Q1 2022 Results Conference Call and Webcast. Please note that this call is recorded as usual.

We have published today our press release, financial statements and a slide show to which we will refer. Those documents are available on Legrand website.

So I will start with a few opening remarks, and then Franck and I will comment on results into more details. I begin on Page 4 of the deck with the 3 key takeaways of this Q1. First, Legrand recorded strong sales. Second, results held firm amid strong inflationary trends. And third takeaway, we have confirmed our 2022 full year target. We will also briefly come back on our last ESG investor event and share 2 points on governance in view of our next shareholder meeting.

So moving now to Page 6 and 7 with an overview of sales on this quarter. Our sales grew by close to 18%. This includes a strong plus 11.2% organic rise that reflects our successful sales and marketing initiatives as well as an effective management of supply chain pressures.

On top of organic growth, the scope effect is up plus 3.2% based on acquisitions completed and their likely date of consolidation. This impact will be close to plus 3% for the full year in 2022. Now last component regarding sales is FX effect. It was also favorable at plus 2.6% on the first quarter and would be close to plus 3.5% on the full year 2022 based on April average exchange rates.

On Page 7 now if we focus on organic growth by area. Each of the 3 regions achieved a high level of growth. In Europe, the pace was a bit at plus 12.9% with both mature and new economies growing double digits.

A few words here regarding the conflict between Russia and Ukraine. It had a limited impact on our sales in the first quarter, and both countries represented together around 2% of group sales in 2021 on the full year.

In North and Central America, sales were up plus 11.2% with a sustained level in the United States at plus 11.1%, where business for nonresidential applications recorded a marked growth.

Finally, the Rest of the World area grew plus 7.5%, driven by strong achievements in many countries and notably in India.

I am now passing the mic to Franck to provide insights on our results that showed good resistance.

[Franck Lemery, executive]

Thank you, Benoît. Good morning to all of you. I will start on Page 9 with the adjusted operating margin. Before acquisitions, it stood at 20.6%. This is a limited retreat of minus 1 point versus the same period of 2021, which, as a reminder, was a demanding and exceptional basis for comparison.

This good resistance highlights the efficiency of the management of our expenses, sales prices and -- in a widespread inflationary environment. As an example, the rise in raw material and component was around plus 18% on the quarter compared to the same period of 2021. Including acquisitions, the adjusted operating margin for the first quarter of 2022 was 20.3%.

Now turning to Page 10 regarding the net profit attributable to the group. With EUR 258 million, this represents a growth of plus 13%. It was essentially linked to the rise in the operating profit of EUR 38 million.

I am moving now to Page 11 with a few comments on cash and balance sheet. As a percentage of sales, cash flow from operation was down minus 0.4 point at 18.4% of sales. The free cash flow stood at 2.3% of sales of the first quarter. This includes a continued strengthening of our inventory coverage. This is done order to serve our customer in this context of [ tension and strategies ] in the supply chain.

On the balance sheet structure side, net debt-to-EBITDA ratio was 1.6 at the end of March.

This is the key financial topics I wanted to share with you, and I'm now passing back the mic to Benoît.

[Benoît Coquart, executive]

Thank you, Franck. So as you can see, despite rising uncertainties, these Q1 results testify once again the effectiveness of our business model, which drives profitable and responsible value creation. On this basis, we have confirmed our target for 2022 as detailed on Page 13. So taking into account the achievements in the first quarter of 2022 and the current macroeconomic outlook, Legrand has confirmed the full year target it set for 2022, i.e., 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 the scope of consolidation effects of between plus 2% and plus 4%.

Number two, an adjusted operating margin of about 20% of sales with a margin of between 19.9% and 20.7% before acquisitions, i.e., at 2021 scope of consolidation and dilution from acquisitions of between minus 20 and minus 40 basis points.

The group also aims to reach 100% of CSR achievements for the first year of its 2022-2024 road map, testifying to its bold and exemplary approach to ESG.

I will now comment very quickly the 2 last items of today's call. I'm starting with a few words on our last investor event held in March, which was dedicated to ESG on Page 15 to 17. Starting with Page 15, a brief reminder of the strong commitment we have taken to ESG with ambitious and consistent short, mid- and long-term targets. Our 3-year fifth CSR road map is focusing on what truly matters in terms of effective impact. It is organized to 4 key domains: the promotion of diversity and inclusion, the reduction in our carbon print, the development of circular economy; and last, continued actions as a responsible player. It is structured around 15 concrete priorities. At last, our ESG policy is in keeping with our strategic road map, and of course, embedded in our medium-term financial targets.

On the following 2 pages, 16 and 17, we provide more details on targets included in the next CSR road map. I will not detail them as they were presented comprehensively during our recent CMD dedicated to ESG. But of course, we will be more than happy to answer any question you would have.

Now some final words on governance on Pages 19 and 20. First, on the proposed evolution of the Board of Directors on Page 19. The appointment of Mr. Florent Menegaux as Independent Director will be put to shareholders during the general meeting to be held on May 25. As CEO of Michelin, he is backed by a proven track record as head of a major listed industrial company. As a result, our Board would continue to be among the industry's best practices with 83% of independent members, 42% of women and 5 nationalities.

Second element on Page 20. As announced in February, the proposed dividend for 2021 is EUR 1.65, i.e., up plus 16.2%. This will also be put to the shareholder approval on May 25.

We are now ready to open to questions. Thank you very much.

[Operator]

[Operator Instructions] First question from Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

First, can you give us a little bit of color in terms of the organic growth in more detail. If you could disclose, or maybe I missed it during the speech, the pricing that you've had? And also what's in store? I guess, last year, you mentioned you had a little bit of room that you didn't use for coming forward.

Second point, distributor inventories. If you can talk about whether you think those are normalized by now or are still low?

And third point, can you talk a little bit about how do you see the balance both in resi and nonresi with like all the overall construction costs going up a lot. Is there -- do you see any point at which there would be demand destruction risks? And are they different between resi and nonresi? Those are my 3 points.

[Benoît Coquart, executive]

So a couple of elements. As far as the Q1 pricing was concerned, it was plus 7.8%, so price-wise, close to 8%; and volume was slightly above 3%. So there has been a clear ramp-up, very consistent with what we told you in February, i.e., that we would prefer a sort of a very careful step-by-step approach as far as pricing is concerned rather than the strong one shot.

So to give you the numbers, H1 2021 pricing was up 1.9%; Q3, plus 4.2%; Q4, plus 5.9%; and now Q1 2022, plus 7.8%. So you can really see the sort of phasing of the pricing.

We'll see in the coming quarters what we need to do. I don't believe that we have consumed all our margin from maneuver in terms of pricing and if needed -- and we still have the ability to do a little bit more if needed. When I'm comparing myself to what some of my competitors have publicly announced, I'm not amongst the companies that have increased the most my prices. So it still retains some margin for maneuver if needed.

As far as the distribution inventory is concerned, we haven't seen in Q1 any significant inventory buildup from our distributors. So I believe that the level of inventory at our distributors remain pretty low. The reason being that because of the supply chain constraints, it has been a problem for much of our distributors to put some inventory back. So it has not really supported one way or the other our Q1 performance, and I don't believe that the level of inventory are particularly high, the other way. I think that they remain pretty low.

As far as the split between resi and nonresi, well, of course, it depends on the countries and the areas. If you take, for example, the U.S., it is clear that our growth in nonresi, excluding data center, has been in the high teens in Q1 2022. So it has been more supportive and ready, and this was expected.

I remind you that we've been telling you for a couple of quarters that at some point the nonresidential in the U.S. will rebound. And the fact that -- I don't know if it is currently happening, but at least in Q1 performance was good, even though both resi and data center grew in Q1. So in the U.S., nonresi is in pretty good shape and growing faster than resi.

As far as Europe is concerned, it's a mixed bag of situation. But it is clear that the basis for comparison in resi was pretty high. You remember that starting mid-2020 year -- 2020, sorry, there's been a rebound in the residential market in Europe prompted by do-it-yourself, small works, blah, blah, blah. And of course, it is the demand basis for comparison, which has impacted our performance.

Now the key question is whether the pricing will ultimately have a negative impact on the market itself. I don't know. Yes, indeed the cost of goods is increasing. But at the same time, you also have significant savings made by a lot of people due to the inflow of money coming from the stimulus plan that were implemented during the COVID-19 period. You have a number of trends, which are pushing the market up including the need to renew buildings. The cost of energy is high. So even with more expensive products, it might make sense to implement better and newer electrical installation is going to do a significant energy cost -- savings on energy costs.

So yes, of course, it is a constraint, a financial constraint, for users whether in resi or in nonresi. But there are also a number of long-term trends that could make it interesting to keep building even though the prices are pretty high.

[Operator]

Next question from Gael de-Bray from Deutsche Bank.

[Gael de-Bray, analyst]

Yes. I was wondering if you could give us some details on your supply chain organization on the sourcing you have from China as well as on your manufacturing footprint. So basically, how many factories, how many distribution centers do you have in China and in Shanghai in particular.

And more broadly speaking, including sourcing, what is the share of your global COGS, which is China-related today?

[Benoît Coquart, executive]

Well, it's a difficult question to answer because, of course, we have our own factories or some suppliers in China. But what is difficult to assess is the second and third level. We might buy some components from a U.S. or European manufacturer, which is, in turn, incorporating some Chinese components, for example.

So it's difficult to have a clear vision. The only very significant flow we have from China to outside of China is between China and the U.S. Of course, we have small flows from China to Australia or China to Europe, but your meaningful flow is from China to the U.S.

And on the number of product families, including the traditional ones, the biggest industrial facility we have, by far in China is based in Huizhou, which is 1 hour from Shenzhen, which is currently not under lockdown. And then we have a couple of factories as well. We only have one factory in Shanghai, which is not the big factory. It's about, I think, 10% of what we manufacture in China. So 90% of what we manufacture in China is manufactured elsewhere.

But this being said, even though it's only 10%, it has some impact on our performance in the U.S. And the supply chain issues, not only actually the upcoming policy in China, but also the fact that supplying electronic components remain extremely difficult in Q1 had -- not to mention the custom issues to import goods in the U.S. and the transportation issues. Other issues probably had some meaningful impact on the U.S. performance in Q1. We believe at Legrand that the growth should have been higher or could have been higher in Q1 in the U.S., especially in volume, if we hadn't faced these supply chain issues.

[Gael de-Bray, analyst]

And do you think you have enough inventory on hand to cover the situation going into the second quarter?

[Benoît Coquart, executive]

Well, as you could see, our level of inventory-to-sales at the end of Q1 is 18.4%. So it's slightly above the level of inventory we had at the end of December, which, top of my mind, was 17.9%. So it remains in the 18% range. And well, you know that it is a significantly above historical ratios and we were used to operate the company with a ratio of inventory-to-sales of about 12%.

So we moved from 12% to 18%. And as we said in February when we commented our Q4 sales, this is partly coming from the rise in price of raw mats and components. Of course, it has a mechanical impact in the first inventory. And partially also coming from the coverage and the fact that we wanted to increase our leverage inventory in order to better service our customers. If we look at the end-of-March numbers, the increase of about 4 points of our level of inventory-to-sales is coming 1/3 from these raw mats impact and 2/3 from the coverage.

Now if your question is should we expect the 18% to become 19%, 20%, 21%? Well, I don't think so. I believe that 18% or 18-point something is already quite a significant level, and our midterm target is rather to decrease that back to historical level. I cannot commit to a base. I don't know how long it will take. It will depend on the availability of supplies.

What we really want is not to put at stake the service to our customers, so it might take a couple of quarters or more. But our goal is progressively to come back from 18-point something to historical levels. So no, our plan is really still not to put a lot -- more inventory into our balance sheet.

[Gael de-Bray, analyst]

Yes. Okay. Maybe a final question from me. Based on the current situation with the war in Ukraine and the lockdowns in China. So based on what you know regarding the input cost, how much more do you think you need to pass on to customers to fully cover cost inflation, including freight and wage inflation.

[Benoît Coquart, executive]

Well, what I can give you is the carryover. So the mechanical impact if we just apply to the entire year or to the remaining 9 months the price level, the cost level how much would it be, it would imply a pricing for the full year of between plus 5% to plus 6%. And it will imply rising raw mats and component between plus 12% and plus 14%. But this is a pure mechanical impact.

To answer your question, Gael, I don't know. It will really depend on what is needed to deliver our commitment. We could [ reverse ] to a couple more points if needed. Again, we are monitoring that extremely carefully because we don't want to do too much pricing. And you know that it's always a difficult exercise to balance profitability and competitiveness. And we've been very keen for the past 12 months not doing -- seeing the [indiscernible] competitiveness.

So to answer your question, beyond carryover, we still have the ability to do a bit more pricing if needed.

[Operator]

Our next question from Lars Brorson from Barclays.

[Lars Brorson, analyst]

Can I maybe follow up first on Gael's question and just ask to the impacts in the quarter from "supply chain constraints and lost sales." It sounds like it was primarily in the U.S. Are we talking a few tens of millions, so call it a couple of hundred basis points of growth impact in Q1?

And how to think about Q2, Benoît? It seems to me things are getting a lot worse in the short term. So I know you're not in the habit of giving monthly disclosure, but I wonder what the development in April and May so far on your Chinese supply chain is telling you in terms of the likely impact in Q2?

And then maybe just finally to that, what's your assumption in terms of catch-up from this lost sale in the first quarter and in Q4?

[Benoît Coquart, executive]

Well, Lars, clearly, if we look at the supply chain issues, there are areas where things are getting better. So I don't want or need to have a negative message. If you look at the plastics and metals except, of course, aluminum because of the Ukraine and Russian war, but if you look at most of the metals and plastics, it's a lot easier to source and we have a lot less difficulty to get the products.

So really, the supply chain issues are coming from 2 main issues: number one, electronic components. And it is, yes, indeed, a big fight and a big struggle for everybody to get electronic components and chips. And number two, the Chinese zero-COVID policy, which is not only having a direct impact if you have to close your factory because of that, but on top of that which is bringing a lot of mess the logistics change between China and the U.S., the ability to go quickly to custom and so on and so forth.

So those are the 2 issues. So yes, they have caused us some sales. We could have grown faster in what we call the fast-expanding segments. Even though we had good performance, for example, in energy efficiency products in Europe, I'm convinced that we could have grown faster in green products, in connected products, in data centers because most of those products do include electronic components and they were sometimes difficult to source.

And number two, we could have gone faster in the U.S. because of those issues. It's always super complicated to quantify because you have to get the net impact of, number one, the supply chain issues and the orders you have in hand that you're not able to deliver; and number two, the fact that your customers are trying to order twice what they need because they know that it's going to be difficult to source.

So the net impact is difficult to estimate. It's probably, yes, at least a couple of EUR 10 million of sales in Q1. And it has clearly had some visible impact on our backlog and [ offset ]. Yes.

Now going forward, for Q2, I have no idea. It probably depends on that well. That's the issue. As far as electronic components are concerned, nobody expects the situation to improve and you can ask specialist, but I'm hearing that things one it would get better between H1 2023, H2 2023. So there are a couple of quarters in which we're going to have to operate in such an environment, but it is difficult to source. But I don't want to stand too pessimistic. And we are working hard in order to get the chips and semiconductors we need, and we are successful getting some. Not enough, but we are successful in getting some.

As far as the Chinese issue is concerned, so far, Legrand is limited to Shanghai and potentially to Beijing and not to the areas in Huizhou. So Huizhou especially, to the areas where we have a lot of our facilities. So it will remain difficult in Q2, possibly in Q3, but so far, there's no reason to believe that the impact will be a lot tougher that in Q1. Now again, I'm putting a big question mark to this comment because I'm not living in China, of course, and nobody really knows what the policy is going to be.

So semiconductor, it remains difficult a couple of quarters. China, so far, it's difficult. It will not worsen unless, for Legrand, more strategic places such as Huizhou where we have our facilities will be touched.

As far as the potential catch-up is concerned, I don't know. The orders you cannot deliver are sometimes switched to somebody else. So even though everybody is experiencing a lot of problems to deliver, I cannot guarantee that this backlog will be recovered or will be sold in Q2, Q3, Q4. I have no idea.

[Lars Brorson, analyst]

Understood. Can I finally just ask to your 2022 guidance? I'm just trying to understand a bit better the maintained guidance just given the underlying movements versus what you told us on the tenth of February.

So if I were to summarize what you said around supply chain, I could assume there could perhaps be about 100 basis point of impact on the growth from supply chain, who knows. Am I to assume that Russia comes out, so the EUR 130 million, EUR 140 million of Russia sales comes out. And all of that adverse impact, call it, 300 basis points or so is perhaps all offset by incremental pricing from what you expected back in February 3 months ago? Or how to think about those underlying pieces within that maintained guidance, please?

[Benoît Coquart, executive]

Well, should I let you do your simulation? Well, what I can give you is mechanically the fact that we have confirmed our guidance imply that we do between 0 and plus 6% for the remaining 9 months. This is mechanical, given the plus 11.2% like-for-like growth we had in Q1, right, between 0 and plus 6%.

Where clearly, internally, we are shooting more to be close to the high end of the guidance than to the low end. The low end of the guidance would imply, given the price impact we're going to have in 2022, the low end of the guidance would imply strong growth in volume, which nobody really expects today, whereas the higher end of the guidance would imply stable volumes or slightly growing volume, given the pricing effect we can foresee. So we are currently shooting more for the high end of the guidance.

Now there are still 9 months to go. And of course, there are a lot of uncertainties ahead.

[Technical Difficulty]

[Unknown Executive]

This is the streaming line. I think it disconnected.

[Benoît Coquart, executive]

Plus 17% in Q4 and more than -- slightly above plus 18% in Q1 2022. So you can really see the trend. There's no reason to believe that the prices will go down significantly in the months to come. So we should have still a very sustained negative impact coming from the price of raw mats and components, at least in Q2 and possibly for H2.

But I cannot give you a freestyle guidance because it really depends on, let's say, the day-to-day prices of steel, plastics, copper, so on and so forth. The number I can give you is a carryover, plus 12% to plus 14%. But again, it can very much be plus 15% or plus 20% in Q2. I don't really know.

As far as the margin for the Rest of the World is concerned, it is true that it's a pretty healthy improvement in margin. If you look at the Rest of the World, the margin improvement in Q1, excluding acquisitions, is plus 440 bps. So margins are slightly increasing in Europe and in North and Central America on the back of the strong increase in raw mats and components and it is indeed increasing sharply in the Rest of the World.

Well, 2 comments. Number one, Rest of the World, it's a mixed bag of many different countries. Well, we discussed China and India, but we also have the Middle East, Australia, Latin American and so on, so it's difficult to have, let's say, a common pattern between these countries.

Number two, this being said, this is the area where the gross margin dropped the most in 2021. So in the plus 440 bps improvement, you actually have an improvement in gross margin, which is -- well, which was not obvious given the context. But again, from a very low base. And as usual, you have some leverage of SG&A, which is significant, essentially good control, of course, and as well as some support. Almost half of the increase is coming from other operating expenses. And you know that other operating expenses can be up or down in a given quarter, it's not very significant.

So the main reason, if I may say, is the fact that the gross margin was held steady and even increased a little bit, but it was mostly due to basis for comparison.

[Operator]

Our next question from James Moore from Redburn.

[James Moore, analyst]

I hope you can hear me. I've got 2. Maybe I could start with if you look across your portfolio, could you talk about which categories of products are showing the most visible premium growth above the underlying cycle due to energy efficiency and the current cost of electricity and people post Russia-Ukraine pushing incrementally to save on cost?

And is there any way you can quantify any of those premier growth rates that we're seeing for really strong categories? That's my first question. Maybe one at a time, if that's helpful.

[Benoît Coquart, executive]

Well, it's a difficult question to answer on a quarterly basis, James. We have more than 100 different product families, 300,000 SKUs. So it's super difficult to have a detailed explanation on a quarterly basis.

What I can tell you is that in Europe, the energy efficiency-related product grew faster than the rest and sometimes for some product categories while including, of course, EV charging stations, climate-control products, a number of product to optimize energy consumption in data centers. All the products grew significantly faster than the average of Europe. So they really pulled the demand.

And the other way, a number of traditional products for residential, especially in DIY, grew not as much as the rest, but this was more coming from the fact that the DIY market has been extremely supportive for 1.5 years. So the basis for comparison was [indiscernible] rather than any specific issues in [indiscernible]. This was for Europe.

As far as North America was concerned -- or most of nonresidential products grew a lot, well, they were related to energy efficiency or to something else. So it was really connected to the rebound in nonresidential market so take product such as audio/video, for example, such as underflow of trunking, such as lighting fixture -- I mean, architectural lighting features and a number of others. All those products went up in the high teens, if I may say.

Data center product and residential also grew, but less than nonresi. As far as the residential is concerned, the residential market is probably smoothening a little bit in the U.S. You know that it has been supported by a lot of incentive plans to fight against the COVID-19 with some cash given to the U.S. households, which probably positively impacted the residential market. So it's smoothening a little bit.

As far as data center market is concerned, the underlying reason the demand remained very strong. But we had such a fantastic Q1 last year growing a lot than the base from operating EBITDA.

So another sort of -- well, and then in India and China, you have, of course, a different situation. So that's what I can tell you. Getting more into the details will require a lot more time.

[James Moore, analyst]

That's very helpful. Great color. And my second question, if I could, is just to go back to the Rest of the World margin being up 400 bps or so; and Europe, North and Central America being down 200 bps. And both those Western businesses seeing double-digit growth, and Rest of the World, high single-digit growth.

When you look at your internal EBIT bridges on a sort of clean basis and you look at the pure net price cost picture across the 3 regions, are you seeing a material difference in net price cost? And is that also explaining some of the difference? And could you sort of qualify the net price cost on a regional basis?

[Benoît Coquart, executive]

Well, be careful because the margin drop, as you see in, Europe, also decreased. As you see in Europe, it also include acquisitions, which are -- which tend to be dilutive. The decrease in margin between -- in Europe between Q1 2021 and Q1 2022 was 180 bps actually [indiscernible], which is well [indiscernible]. And indeed, this is coming mostly from gross margin, whereas SG&A has a positive impact on margin as SG&A expenses are not growing as fast as supply.

But this being said, the fact that the gross margin is going down in Europe and gross margin is going up in the Rest of the World has not much to do with a difference in terms of pricing policy and soon we are as active in terms of pricing in Europe as in the Rest of the World, but it's really coming from the fact that the gross margin was held pretty steady last year in Europe, but it dropped a lot in the Rest of the World. So it's purely on the back of different margin -- price basis for comparison more than because we would have a different pricing policy.

I don't know, Franck, if you want to complement?

[Franck Lemery, executive]

Thank you, Benoît. This is exactly what Benoît said. In Europe, you should consider the acquisitions. And you know the acquisition is diluting by 30 bps at the group level and they are located in Europe. Except for that, the other operating items are negative in Europe when it's slightly beneficial for the group. Otherwise, the behavior of Europe is quite healthy with a nice management of inflation on balance sheets and inflation on prices.

And then the last item, as Benoît said, look at the dynamic over the last 2 years and you will see that Europe, as the U.S., held firmly their margin over the last 2 years when it was more difficult for Rest of the World.

[James Moore, analyst]

If I could just follow up with that. I mean to look at it a different way, if the gross price is about 8% around [indiscernible], is it broadly similar? I ask as, obviously, inflation is such a key topic right now. Is it broadly similar around the world?

[Benoît Coquart, executive]

Well, we usually don't comment the pricing per region. The only information, which is interesting is that the volume is up on each of the 3 areas for the group in Q1. And then you can do your math and see what is the pricing dynamic in each places. But everyone is increasing prices and everyone is positive in the volume, which you can make them out, which implies a little bit less pricing in the Rest of the World because Rest of the World is also positive in volume.

Now it's not a policy to do less pricing in Rest of the world and Europe. It's the result of thousands of pricing decisions that we're taking -- is taken in tens of tens or hundreds of dollars during a case-by-case approach.

[Operator]

Next question from Eric Lemarié from CIC Market Solutions.

[Eric Lemarié, analyst]

Yes. I had 3 questions, if I may. First, you mentioned you've been less aggressive regarding pricing than some of your competitors. Do you see any changes of market shares due to these various pricing policies? This is my first question.

I've got a second question on free cash flow. You mentioned this quality of yours regarding inventories. Do you see regarding the free cash flow a chance that the free cash flow could maybe catch up with normalized free cash flow before year-end? That's my second question.

And last one, when you mentioned the faster expanding segments, could you maybe tell us more and give us the revenue generated by the faster expanding segments in Q1 and maybe the organic growth as well?

[Benoît Coquart, executive]

Well, as far as market shares are concerned, this is a debate that quite often have with the financial community. When we released our Q4 numbers last year, I got the comment that our volume growth wasn't as strong as expected by many. And the conclusion was that from some of you that we were losing market share. And I said, be careful, market share cannot be appreciated on the quarterly basis.

In our trade, we are not in the automotive industry or whatever. Market shares would be evaluated, appreciated on a yearly basis, not on a quarterly basis.

So even though we've got a very good Q1 in terms of top line, both actually in value and in volume, sticking to this speech, I can hardly tell you that we have gained a lot of market share just because the evaluating market share on a quarterly basis in our trade doesn't make sense. We'll see midyear.

What I think is that we are growing probably today a bit faster than the competition. This is clear in Europe whether you take 1 year, 2 years, 3 years, we've been growing faster than anybody else.

It's more of a mixed bag in the U.S., but take into account that our Q1 2021 basis of comparison was very, very strong, number one. So our sales were up last year, they were down for most of our competitors. And number two, also take into account that we are probably doing a bit less pricing than others.

So if we -- if you include that, you come to the conclusion that our performance is also good in the U.S. but as far as Rest of the World is concerned, it's difficult to evaluate because everybody has a different positioning.

So higher than the competition in Europe, good over 2 years in the U.S. But again, I insist on the fact that I wouldn't say that it's a clear, good, winning market share because market shares are not moving much in a given quarter in our trade. You have really to look at the half year or yearly performance.

As for the free cash flow is concerned, Franck, you wanted to take this one?

[Franck Lemery, executive]

Yes. I can. So as far as free cash flow is concerned, the level of free cash flow at the end of Q1 is 2.3%. First, let's remember that traditionally, the first quarter for the group is a low level of free cash flow. Why? Because normally we are building some inventory to pass over the summer. There is also some yearly -- year-end rebates which are paid.

And if you look at 2017, 2018, 2019, free cash flow-to-sales was 3%, 4%, 5%, 6%. So normally, free cash flow on the Q1 basis is low. Here, it's a little bit lower than usually just for the reason that Benoît explained a few minutes ago. It's on behalf of our decision, conscious decision, made on inventory.

Third information is that you asked if we were -- we would catch up. Well, as of today, we are still shooting for our midterm guidance in terms of the cash flow, which is 13% to 15% of sales. And there is no reason why we don't achieve that.

[Benoît Coquart, executive]

As far as the faster-expanding segments are concerned, we are not giving any prospect on a quarterly basis. What I can tell you that I'm not super happy with the [indiscernible]. It's growing, of course, growing nicely. But I think it could have grown a lot more if we had the company. So this is a bit of a disappointment because I have a feeling that we are not fully realizing, if I may say, our cost potential in these products because it's a super complicated to get some chips. But we'll give you more precise feedback when we release the number probably on a yearly basis.

[Operator]

Next question from Andreas Willi from JPMorgan.

[Andreas Willi, analyst]

My first question is on the volume growth. If you look versus the kind of pre-COVID base, we've seen a strong acceleration in Q1 after the weaker Q4. Is there a big difference between sell-out and sell-in, between Q4 and Q1? Or is that a true underlying acceleration in demand?

And the second question I have, if we look at receivables, that seems to have been a big drag on cash flow. Is there any specific thing we should be aware of there? Or is that just temporary factors and the normal seasonality and it should normalize again?

[Benoît Coquart, executive]

Well, yes, indeed, the volume growth in Q1 is interesting, especially if you compare it with base year 2019. It's significantly above 2019 levels.

Well, again, [indiscernible] I know it doesn't give you [indiscernible], but commenting on the quarterly trend in volume is a bit misleading. I don't believe that the volume in Q4 was as weak as you thought. And we said at the time that you have to take into account that it's end of the year, that you have -- 2021 was a good year. So there may be the distributors that are pushing as much as they could, that the nonresi in the U.S. was a bit small.

And so I would have called that an acceleration. It's a good quarter in terms of growth. We'll see we have ahead of us. But again, taking into account that commenting on the volume or actually the sales and market share on a quarterly basis is a bit complicated.

Franck, you want to say a word on receivables?

[Franck Lemery, executive]

Yes. Thank you, Benoît. Yes, nothing special about the trade receivable. The ratio to sale is at 14%, which is slightly above our usual ratio at the end of Q1. It's a mixed bag of scope, FX and other items like for example, the factoring. But our DSO are really stable and well and held on hand.

Second point, you have probably noticed that this slightly higher DSO versus historical level is fully compensated by slightly higher payables versus the usual ratio.

So to sum up really on the working capital requirement, the only specific item is inventory, and this is totally monitored.

[Andreas Willi, analyst]

And if I just could follow up on Russia for Q2. What we should maybe expect here, what part of the business of the roughly 2% of group sales in the area that we should assume is gone for Q2 than in the Europe region.

[Benoît Coquart, executive]

Well, it's difficult to say. But you can assume, yes, of course, a very, very significant drop in this business over Q2. So it's indeed 2% for sales, most of it being in Russia. Actually, it's probably 0.1% in Ukraine and the rest in Russia.

So I don't have a number to give you, but yes, you should assume a very strong drop in sales, indeed. Not 100% drop, but significant.

[Operator]

Next question from Jon Mounsey from BNP Paribas Exane.

[Jonathan Mounsey, analyst]

So maybe the first one, just thinking about wages, I'm going to assume they're going to start increasing soon. I'm just wondering how you're thinking about that, your plans to deal with it when it begins. Do you have to pay yourself more? Is it going to be purely dealt with through productivity? Or are you going to have to raise prices above and beyond what you've already done and what you already will do just to [ face ] the raw material and the components inflation.

And then on the topic of Q4 versus Q1 volume, and this is just a hypothesis. But is it fair to say you said the distributors weren't pushing as hard at the end of the year last year. Was that because basically they made their rebate targets early? And really, what we've seen is then gaming the system and not buying so much from you in December last year and then obviously starting the year strongly and effectively making it easier to make this year's rebate, if you see what I mean. So yes, if you could just give some color on those.

[Benoît Coquart, executive]

Well, starting with the same question, I don't believe it has any material impact. So of course, you can have from some distributors look at a bit of tactics, saying and holding a couple of orders, that are pushing from December to January in order to make by year 2022 a little bit easier. But it can only be a couple of million euros. It cannot a significantly impact on your top line. So I don't believe it had any meaningful impact.

Again, I think the good performance in Q1 and not comment again Q4. It's been a good performance in Q1. It's coming more from the structural topics, the fact that the nonresi in the U.S. is accelerating a bit and this was expected.

And we told you that several times last year, the fact that the European business is not yet significantly impacted by the Ukraine-Russian war and that you have this energy efficiency products pulling a bit the demand. The fact that India is growing very, very, very significantly. And don't forget that in India, the COVID-19 crisis was last year in H1. So the base price in India is pretty healthy.

So no, I think the Q1 performance is coming from good performance and not from something that would be a bit artificial like significant orders pushed from December to January.

As far as wages are concerned, well, so far, it's under control inflation on personnel cost is just below mid-single digits in Q1, so below 5% [indiscernible]. So including, of course, the new economies, the U.S. and so on. Well, of course, the pressures are higher in the U.S. and in a couple of emerging countries in Europe because of the level of unemployment and the competition on labor.

I don't know what it will be for the full year 2022. But I believe that we have a way that means to keep that under control. So we have, of course, negotiations. We have productivity. So for example, I can tell you that over 1 year, the number of people is increasing by less is almost stable, increasing by less than 1% like-for-like with sales, which are up 11%.

So yes, of course, you have some inflationary pressure on wages. And again, especially in the U.S., especially in the blue collars, you have hourly workers just across the street they get $0.20 or more from somebody else. But I don't see that as a risk on our profitability for the full year. I think we have a number of leverage, not to mention of good pricing, but on top of that, productivity negotiation and so on.

[Jonathan Mounsey, analyst]

Brilliant. And maybe just a quick follow-up on M&A, the pipeline, and I suppose how rising interest rates may be changing the dynamic. Do you see any evidence of owners maybe keener to exit businesses, to sell them to you given that maybe valuations are probably going to start coming down in a higher rate environment? And perhaps I don't know how much you compete against private equity for acquisitions, but maybe less interest from them as rates start to rise. Are you seeing that? Are you anticipating it? What are your thoughts?

[Benoît Coquart, executive]

Yes. Well, even in a very low interest rate environment, we could do M&A because if you look at the past 2 or 3 years happened in the past, that you probably have an average of [indiscernible] scope effect or something like that on a yearly basis.

So even in such an environment, where you have a high valuation, very active bankers, very active fees and so on, we could do deals at a pretty reasonable price. If you look at our cash flow statements, last year, for example, you will see that we have an average in both companies at about slightly less than 2x sales. And if you look at the beginning of the year, you can see that it's even closer to 1.5x sales. So you could see that we could still buy interesting companies at reasonable price.

But to answer straight your question, we have a pretty active pipeline. We have many discussions going on. I don't believe that it is coming from the fact that your interest rates are going up. It is just the fact that we have a lot of potential targets, that the entire organization is geared to do M&A. So our country managers are incentivized with the ability to do M&A.

We have very good processes as far as negotiating, contracting, auditing and docking companies [indiscernible]. So yes, I'm very optimistic on our ability to continue to do bolt-on acquisitions in the quarters to come. And I'm sure that you will see a couple of these.

Well, again, there's little more type of this. So don't expect to see negative. There will be small- to medium-sized companies, highly targeted, good leaders and fitting well into our overall plan.

[Operator]

No more question by phone. Speakers, back to you for the conclusion.

[Benoît Coquart, executive]

Well, thank you very much. We've had a pleasure, I'm sure, to talk to you. And if you have further questions, don't hesitate to call Ronan, Sabine or myself, we'll be happy to answer. Thank you very much.

[Operator]

Thank you, ladies and gentlemen. This concludes the conference call. Thank you all for your participation. You may now disconnect.