Assa Abloy AB

STO:ASSA B

Earnings Call Transcript 2021-Q4

[Björn Tibell, Head of Investor Relations]

Good morning, and welcome to the presentation of ASSA ABLOY's 2021 Year-End Report. My name is Björn Tibell, and I'm heading Investor Relations. And joining me here in the studio are ASSA ABLOY's CEO, Nico Delvaux; and our CFO, Erik Pieder. We'll stick to our normal setup today, and we'll start the conference with a summary of the report before we open up for your questions. And with that, I'm ready to hand over to you, Nico.

[Nico Delvaux]

Thanks, Björn, and also a good morning from my side and welcome to our Q4 call. A very good Q4 with very strong sales growth and good margin improvement. An organic sales growth of 10%, where with the exception of China, where market conditions remain very challenging. I would say, the whole world has contributed strongly to that organic sales development. Very good performance overall and very strong sales growth in particular in the Americas and in Entrance Systems.Good EBIT development and strong EBIT margin improvement. And that despite the higher material cost and the higher logistic costs and also all the operational challenges that we continue to experience with shortages of components in general and shortages on semiconductor components in particular, but also shortages on the labor force side, where in some of our factories, we have a very high percentage of our blue collar workers at home because they have COVID or they are in quarantine because family members have COVID. So a challenging situation, but yes, strong operational execution in that environment. We also completed 4 acquisitions in the quarter, we had a good operating cash flow, I would say, despite the higher working capital. The higher working capital is mainly inventory related. If you look then at the numbers, sales of SEK 25.6 billion in the quarter, 10% organic growth, minus 1 net acquisitions versus divestitures, that's mainly linked to the divestment of our CERTEGO business in Scandinavia, locksmith business. And a year ago, our door -- residential door business in Gardesa in Italy. And then helped by currency 1% and EBITA margin of 16.2% and an EBIT margin of 15.7% versus 14.9% a year ago and then EBIT up 15% above SEK 4 billion.If we now look a little bit at the different regions in the market, starting with North America, very strong performance, very good market conditions, an organic growth of 16%, where the residential side of the business continues to perform on a high level and where we have seen also a very nice double-digit growth on the commercial side, good market conditions. And I would say commercial business definitely back on pre-pandemic levels. Very good South America with 30% organic growth, where all countries are contributing with double-digit growth, good market conditions in that part of the world as well. Also good Europe, plus 8% organic growth. In general, also here positive market conditions on the residential side and the commercial side that came back. Stronger performance in North Europe with a good Scandinavia and Finland. Africa, smaller part of our business, minus 2% compared to a year ago, and that's mainly linked to a bigger passport order for HID we had last year, so more difficult comparison with a year ago. Also very good performance in Australia, plus 5%. We should take into account here that New Zealand was still in lockdown at the beginning of the quarter. So also here, a good momentum. And then I would say the more challenging part of the world, Asia, with minus 4%, where you see a very different picture between the rest of Asia and China. We have a very strong double-digit growth in India and in Southeast Asia, but where we have also double-digit negative growth in China. Like I mentioned earlier, market conditions in China remain challenging. Construction sector is depressed. And of course, the continued lockdowns because of COVID-19 are also not helping. But overall, I would say, a very green picture, a very positive picture. The market highlights also this quarter, interesting project wins. A large range of sustainable industrial door solutions for a U.S.-based electric vehicle manufacturing plant. Several project wins in the marine cruise line industry, which is, yes, good news after 2 years of rather depressed conditions in that part of our business. Also significant wins for Yale and Gateman smart locks in the multi-residential development in China and in South Korea. And then definitely also the largest electronic access control contract to date to secure facilities of a leading American University, very proud of that project win.We continue to launch new products. You see here a couple of examples of HID. And we also continue to be rewarded for our R&D and innovation efforts. HID won again, several awards, but you might also have seen the announced collaboration now with Hyatt to roll out rooms keys with Apple Wallet, also very interesting development. So our sales growth, you know that before COVID-19, we had 27 consecutive quarters with positive organic growth. We have, of course, the ambition now to beat that record. We are now in our fourth quarter with positive organic growth after a difficult 2020. And in the quarter, of course, a strong organic growth of 10%, like I mentioned earlier. Operating margin going back into the 16%, 17% bandwidth direction. If you take into account this quarter that we booked SEK 100 million provision for doubtful accounts in China, mainly related to Evergrande, a key account customer in China. And if you also take into account that we booked around SEK 60 million the SEK 65 million costs related to the HHI acquisition. If you would correct for that, our EBIT margin would have been at 16.3% for the quarter, so well within the bandwidth we aim for over a business cycle. Operating profit above SEK 4 billion on the same level as Q4 in 2019. So on a record level. And then on the acquisition side, we remain very active. We had 4 acquisitions completed in the quarter, 13 acquisitions over the full year. They represent an annualized sales of around SEK 1.3 billion. And we are still closing 2 bigger acquisitions, Arran Isle in U.K. They have a sales of SEK 1.2 billion. They are expected to close now in Q1. And then HHI, the big acquisition in the U.S., sales of SEK 13.7 billion, where we now have delay in the closure and where we expect this acquisition to close somewhere this year. We had, of course, the divestment of CERTEGO in Q3 that was divested sales of around SEK 1.5 billion. A couple of words on some of the acquisitions, Malkowski Martech in Poland, a supplier of fire-rated curtains and gates, complementing our commercial fire-rated door product portfolio in a nice way. They have a sales of SEK 110 million and are accretive to EPS as of the start. Very nice complementary acquisition. And then B&B Roadway and Security Solutions in the U.S. for our perimeter security segment in Entrance Systems, a supplier of roadway safety, traffic control and perimeter security solutions in general. They have sales of around SEK 120 million, and they will also be accretive to EPS of the start. If we then go a little bit into the details of the different divisions, starting with EMEIA, very good performance in the quarter, an organic sales of plus 6% with overall good performance and then very strong sales growth in Scandinavia, in Finland, in East Europe and Middle East, Africa and definitely India, a very good operating margin of 15.5% with very good operating leverage of 60 basis points. Definitely, if we take into account the higher material and logistic costs, all the operating challenges around logistics, shortages, material shortages and so on, I think very good performance. FX was dilutive 10 basis points, and then we were helped by M&A in an important way because we had, of course, the capital loss a year ago on the divestment of CERTEGO. We had also acquisition-related cost for Arran Isle around SEK 30 million to SEK 35 million. So a very good quarter, I would say also a very good year for EMEIA overall. Definitely also a very good quarter for Opening Solutions Americas, with an organic sales of 17% with very strong performance in all countries and in all different product families as well as on the residential side as on the commercial side. An operating margin of 20.2%. We have very strong operating leverage of 180 basis points. And also here, clearly, same challenges on the operations side, shortages, inflation as in EMEIA. So we see a very good job well done from our operating people. FX dilutive 30 basis points. M&A dilutive 130 basis points it is, like I mentioned, the SEK 60 billion acquisition-related costs to HHI. So very strong performance in the quarter, I would say also top performance of Americas throughout the full year of 2021.Operating Solutions Asia and Pacific, a more challenging division with an organic sales of 0%. And like I mentioned earlier, a very different picture with from on one side, very strong sales growth in the biggest part of Asia Pacific and then double-digit negative sales growth in China. Operating margin of 3.6% with a negative operating leverage of 530 basis points. A big part of that is obviously the 10 -- the SEK 100 million provision that we took for doubtful accounts linked to the Evergrande, key account in China. But obviously, also the lower top line makes it more challenging to realize the right operating leverage in China, in particular. FX-neutral M&A, 70 basis points accretive. That's mainly the transfer of India to the EMEIA division. If we then go into Global Technologies, also here, good performance in organic sales of plus 7% with all business areas and as well HID, as Global Solutions contributing to that organic growth. Operating margin of 15.7%, a good operating leverage of 30 basis points. FX dilutive 30 basis points and M&A dilutive 70 basis points. And then last, but not least, another very strong performing division Entrance Systems, an organic sales of plus 14% with all segments contributing in a good way and as well equipment as service contributing to the growth and operating margin on a high level of 16.5% with very good operating leverage of 90 basis points. FX-dilutive 20 basis points and M&A neutral. So very strong quarter for Entrance Systems, I think also top performance of this division also over the full year. And with that, I'll give the word to Erik, who will give a little bit more details on the financial numbers.

[Erik Pieder, Executive VP & CFO]

Thank you, Nico. And also from my side, a very good morning. The sales grew with 10%, which is -- yes, related then to the organic sales growth, which was 10%. FX had a positive effect of a -- small positive effect of about 1%. Operating income was up compared to previous year with 15% and the margin was up with 8 basis points and ended at 15.7%. But as mentioned here before, by Nico, if you take into account the bad debt provision as well as the acquisition cost that we have taken this quarter, we would have been well above within the range of our target EBIT that we want to have over a business cycle. Income before tax was up with 16% and earnings per share was up with 18%. The operating cash flow is considerably lower than what it was the same quarter 2020. But first of all, we should remember that 2020, we had a major release of working capital, whereas this year, we have the opposite. And if we sort of look into the working capital, it's related to inventory. Where, first of all, you have the sales growth, then we have taken decisions in order then to secure deliveries in order then to support the growth as well as we get the raw material prices into our inventory. Finally, on this slide, the return on capital employed increased with 2 points and ended at 15%. If you dissect the organic growth in 2 parts, it's evenly split between price of 5% and the volume component, which is also about 5%. The organic flow-through is strong with almost 23% despite that we have the impact of raw material components as well as what's previously mentioned the bad debt. This is related to, of course, that we have been able to leverage quite good on -- from the sales growth as well as operational efficiencies. Currency has a smaller effect of minus 10 basis points. And in the acquisition column, you see -- I mean the top line is related to the divestment of CERTEGO which has a negative effect. And the bottom line is then affected by the capital loss that we took last year of Gardesa. CERTEGO is accretive to the margin. And then as previously mentioned by Nico, we have taken quite a lot of acquisition cost for HHI as well as Arran Isle.If you then break down into the cost, the direct material is 1.5 points higher. Out of this, roughly 90 basis points refer to mix, where we have a divisional mix with a stronger growth in Americas and a softer growth, I would say, in Global Technologies as well as if we then go into the divisions, we see that, for instance, within Entrance Systems, perimeter security is growing stronger. And then we have -- in the other ones, we have, let's say, products with a higher direct material like, for instance, the smart locks, which also combined makes this 90 basis points negative impact on direct material. The raw material and component impact is 60 basis points. If you look on to the full year for 2021, it's between 40 and 50 basis points that we had as a negative impact during the full year. On the conversion side, it's positive with 1.1 points. There, we have been able to offset the higher logistic costs by operational efficiencies as well as leveraging the higher sales growth. On -- we see the same pattern then if we look into the SG&A, where first of all, we continue to invest in R&D, but we see good efficiencies when we look into our sales and into our admin cost. Operating cash flow is lower. It ended at SEK 3.4 billion in the quarter. I still think it's strong. If you look on the full year, we have actually cash flow versus EBT of 98%. But as I previously mentioned, the increase -- let's say, the lower compared to last year is related to increased inventory. As I mentioned before, it's related to the sales, and it's related to the secure of components as well as the raw material prices. Last here -- then we take the next one, which is, if you look on the net debt versus equity, we are down from 51% down to 39%. The net debt versus EBITDA is from -- down from 1.9 to 1.5. We have increased the net debt in absolute terms in the quarter with roughly SEK 1.3 billion, SEK 1.4 billion. This is related to that we have paid dividends. We have made acquisitions as well as we have a currency impact on this as well. All in all, I think that we are able to, let's say, with this kind of good net debt ratio to be in a strong position to acquire HHI as well as to continue our acquisition strategy. The last slide from my side is the earnings per share, which I mentioned before, was up with 18% and ended for the quarter at SEK 2.74. And with that, I hand back to Nico for some final conclusions.

[Nico Delvaux]

Thanks, Erik. So yes, good end of the year, a strong Q4 with strong profitable sales growth, organic sales up 10% and then operating profit up 15%. Like Erik mentioned, a good operating cash flow despite the higher working capital despite a higher inventory, in particular. Clear that we have operated in challenging operating environments and that these challenges will continue now also going forward. We have higher material costs. We have higher logistic costs. We have component shortages, in general, and semiconductor shortages, in particular. We have, of course, the Omicron variant now impacting operating environment in an important way, like I mentioned earlier, in some of our factories, we have 20%, 25%, even 30% of our blue collar workers at home because of Omicron.We have on our service side, I was talking to our people in Norway last week, we had 1/3 of our service engineers at home because of Omicron. But we have proven that we can deliver in difficult circumstances. I think we have proven that throughout the whole COVID-19 crisis. We have proven it also in Q4. I'm confident that we will be able also to manage these challenges going forward. And then last but not least, the board proposed at AGM a dividend of SEK 4.2 per share to be paid in 2 equal tranches, same principle as we did last year.And with that, I give the word back to Björn for Q&A.

[Björn Tibell, Head of Investor Relations]

Thank you, Nico. [Operator Instructions] Operator, this means that we are ready to start the Q&A session. Please go ahead.

[Operator]

[Operator Instructions] We have a first question from Vivek Midha from Citi.

[Vivek Midha, Research Analyst]

My question is around pricing. And could you maybe decompose the 5% pricing you saw into surcharges versus underlying pricing? And maybe if you're able to comment on how sticky you think that underlying pricing can be as steel prices come down?

[Nico Delvaux]

Yes. I would say the vast majority of the 5% are through price increases. We also had some more surcharge-related price increases last year, but we also took the opportunity of the yearly price increases to convert most of them then into, let's call it, list price in case so that they also remain more sticky. So I think we are quite confident if material prices and indexes stay where they are today that we will be able to keep those pricing cases.

[Operator]

Our next question from Lars Brorson from Barclays.

[Lars Wauvert Brorson, Director]

Nico, maybe just a sort of a bigger pickup question for 2022. I wonder whether you can offer some thoughts on how you see the year play out? I look at consensus expectations implying sort of 5% organic growth in line with your long-term targets. If prices are sticky, call it, 3%, 4%, perhaps for the full year, that would imply very low single-digit volume growth. You're exiting obviously 2021 at mid-single digit. Wonder whether you have some thoughts as to how you see the year play out? I appreciate there are different sort of parts of your business that are decelerating, some are accelerating, particularly GT. But any thoughts around how you see the sort of growth outlook for the year would be helpful?

[Nico Delvaux]

It's a very general question. So it's very difficult to give a specific answer also because we are still very much operating in a fragile market. We are not out of the COVID-19 crisis yet. And yes, everybody is confident now on Omicron that Omicron will slowly fade away, but of course, it remains to be seen how fast and to what extent because I can tell you today, from an operational point of view, we are still very much affected by COVID-19. That's 1 dimension. The other dimension is, of course, yes, we see good market conditions, strong market conditions as well on the residential side as on the commercial side. On the residential side, we should, of course, not forget that residential side is on a high level since quite some time has been on a high level, I would argue throughout the whole COVID-19 crisis, whereas commercial definitely came back now in recent quarters.And where I would say commercial, in general, is back on levels prior to COVID-19 on 2019 level. So market conditions definitely are good, but obviously, also the comparison with a year ago becomes more difficult. And that's definitely also true for pricing. We started to increase prices in Q1 last year. We saw significant price increases Q2 and definitely in the second half of the year. So the price increases that will come in this year will be on top of price increases realized a year ago. I can only say that, yes, we have the ambition over a business cycle to grow organically with 5% and complement that with grow through acquisitions of 5%. When we close the HHI acquisition clearly on the acquisition side, we will be okay for a couple of years. And then we will just do our best to get the best organic growth possible in 2022, and we will see where that ends.

[Lars Wauvert Brorson, Director]

Can I ask -- sorry, just to clarify the earnings impact from the buildup of finished goods inventory in the quarter? Was there a more substantial impact from production levels? Maybe that's more one for Erik and then I will finish there.

[Nico Delvaux]

No. But it's like Erik mentioned, I mean, why do we have an increase in inventory? I think it's 3 reasons. I mean if you have a higher top line, of course, you have a higher inventory to cover that top line. The second thing is if steel is up more than 200% compared to a year ago, everything that you have in stock, which is steel has a cost, which is 200% higher than a year ago, and the same is true for copper and nickel and all the other materials. So it's just the material inflation is also translated into an inventory increase. And then the third one, which is perhaps more, you can say, special is that we also took conscious decisions on some parts and some components to really strategically buy and increase inventory enable for us to continue to be -- to deliver on the top line. That goes from electronic components all the way to some of the steel. And that explains also why the inventory is up. The first part, higher cost, of course, you see it in finished goods and you see it in raw material. The second thing, the strategic buy you see on component side.

[Operator]

Our next question from Mattias Holmberg from DNB.

[Mattias Holmberg, Analyst]

Can you help us how we should think about the margin going forward as your run rate in end of 2022, obviously, was very strong, especially if we add back the SEK 100 million debt provision, operating leverage closed at 27%, so essentially making the cost inflation barely noticeable. So are there any dynamics you think we should consider that could have either a positive or a negative impact on this underlying strength in the near term?

[Nico Delvaux]

I don't know what is your definition of near term. If you think about quarters, of course, the seasonal effect is very important. We know that at the beginning of the year is always lower, and then we have a stronger second half of the year, and that will not be different this year as compared to previous years. And of course, we continue to see the headwind of material inflation. We believe we most probably have now leveled out on price versus cost where we, as Erik mentioned, had a dilution of 60 basis points in the quarter. We believe that will remain more or less on that level now also in Q1. And then confidently, if material prices stay where they are, that will then incredibly go down throughout the year and then somewhere in the second half of the year, we should then see a plus price versus cost. I think a big important factor remains the operational challenges, like I mentioned earlier, component shortages, semiconductor components in particular. I hear some people say that, yes, it's going to improve now in Q1 or in Q2. We don't believe that. We believe that electronic component shortages will remain a challenge throughout the full 2022. And I think on top of that, we see, like I mentioned earlier, the labor challenge where, at least today, and definitely also now at the beginning of the year, a lot of our blue collar workers are at home because they or their families are hit by the Omicron variant. And we will see how fast that now fades away and that situation improves. But -- so there's a lot of moving targets. But clearly, we have the ambition to come within the 16% to 17% bandwidth as soon as possible because that's the ambition over a business cycle, then it will also depend when HHI comes in because as we mentioned, when we did -- when we announced the acquisition, HHI at start will be dilutive around 60 basis points on a 12-month moving trend.

[Operator]

Next question from Lucie Carrier from Morgan Stanley.

[Lucie Anne Lise Carrier, Executive Director]

I wanted to come back to your comment on nonresidential, and two things around that. The first one is you said that now you feel your nonresidential business has gone back to pre-COVID-19 level. Is it in a volume level or is it overall in value and obviously, that would include some of the higher price increase? So that's the first question. And then secondly, I was hoping you could give us a little bit more color in terms of the segment that you see being more dynamic in terms of nonresidential? Is it a lot driven by renovation or you're also seeing kind of new projects kind of starting up?

[Nico Delvaux]

So when we talk about levels of 2019, it's more in general levels, and it's not a statement till after the comma, I would say. But it's definitely a statement for Europe and for the Americas. I think a good indication is our spec business, where we have seen now in Q4 a nice double-digit growth again of that spec business. And that is for us the longest lead time indicator, I would say that we have internally available to judge. We see it a little bit everywhere. We definitely see it on the aftermarket. And as you know, our aftermarket part is the biggest part of our commercial business. And then we don't make such a big differentiation between new build and big refurbishments because they both go into our spec business. And again, we have seen double-digit growth of our spec business.

[Operator]

Our next question from Gael de-Bray from Deutsche Bank.

[Gael de-Bray]

On the 5% price increase, could you give us some specific color on the pricing dynamics in the U.S. versus Europe? I'm just curious to see if the price rises in the Americas are, let's say, around twice as high as they are in Europe. And if Europe is simply lagging or if there are some structural differences between these 2 regions in terms of how you're dealing with pricing?

[Nico Delvaux]

Yes. As some motivation to increase prices or an argument to increase prices, the first place is, of course, the material increases. I would say that those that have the biggest steel component part in their cost have the highest price increases. You should reckon that Entrance Systems and Americas are a bit higher than the 5% and then the others are a little bit lower than the 5%. Then, of course, it's in some markets easier to increase prices than in others. For instance, if you take again China, it's more challenging to increase prices in China than, for instance, in Europe or in the U.S.

[Gael de-Bray]

But no real difference between Europe and the U.S. between your [ multi pricing tranches ]?

[Nico Delvaux]

Yes. The difference, like I said before, is that Entrance Systems in Americas are higher than the 5% and the others are lower than the 5%.

[Operator]

Next question from Daniela Costa from Goldman Sachs.

[Daniela C. R. de Carvalho e Costa]

I only have one thing left, and I wanted to check, I know you have explained clearly the bad debt in China was related to Evergrande but was wondering if more broadly, you can talk about China, I guess, Asia Pacific surprised at least consensus given the stability there, but there's a lot of data points and moving parts, especially on China on construction. If you can give us a little bit of an overview about how you see the business going on now and then your trajectory on margin on your past ambitions to get that to high single digits on how is the time frame thinking there now?

[Nico Delvaux]

Yes, again, like I said earlier, we should -- if you take Asia Pacific, we should make distinction between yes, Greater China and the rest. Good performance in Pacific in Australia, New Zealand, good market conditions. And we are confident that, that trend also will continue now, very high double-digit growth also in India. It's a smaller market for us, but a fast-growing market. And it was also good to see that we had Southeast Asia coming back in the quarter with good double-digit growth as Southeast Asia slowly starts to open up, I guess, also business sentiment improves. And let's be confident that, that trend in Southeast Asia now also continues going forward because, obviously, Southeast Asia is for us also from a profit and from a margin perspective important region in that part of the world. And then that brings us then to China. I would say that the yes, whole financial crisis around construction continues. We don't see any improvement. We see our markets down in an important way also in Q4. And again, we don't see any improvement. And on top of that, we have, of course, the COVID-related lockdowns in -- that we experience in different provinces in Q4 and that most probably will also continue going forward unless China would change their policy. So we don't really see any improvement on China market on the short term. That being said, we still are convinced that our strategy in China, as we explained at previous occasions is the right strategy. We have also said at the beginning that turning around China is not a matter of quarters, but it's a matter of years. Clearly, this situation today is not helping us. I would say it sets us back a little bit on the timing, but it doesn't change our long-term strategy and our long-term ambition to go to a higher single-digit margins in that part of the world.

[Operator]

Our next question from Andreas Willi from JPMorgan.

[Andreas P. Willi, Head of the European Capital Goods]

I wanted to follow up on the HHI deal. Maybe you could help us a bit in terms of modeling the impact, for example, assuming half year consolidation, what's still to come on costs in terms of the M&A costs and basically what's already been done? And maybe if you could give an update why there's such a large range, you say during 2022, what could basically result in this being delayed to the second half of the year?

[Nico Delvaux]

So perhaps if I start with the second part of your question, we filed in 4 countries, and we are going through the process. The process is taking longer than we expected. Okay, clearly, it's a big acquisition that whereby antitrust authorities require a lot of data and therefore, also a lot of time to analyze that data. And the delay is really on their side. We don't see any higher risk than when we announced the deal. We are still very confident that this deal will go through and that this deal will go through in a clean way, like we mentioned at the beginning. It's just that the other side, the antitrust authorities need more time. And it's difficult for us to judge when they will have enough time to come to a conclusion. Obviously, we hope as soon as possible, but it's not in our hands, it's in their hands from a timing perspective. When it comes to the costs, of course, as long as we don't close, we will continue to have costs to gather the information, talk to the antitrust authorities and have our partners, lawyers and so on helping us in that process. So the run rate that we explained to you now in Q4 that I think is a good indication for the run rate of costs that we will experience going forward until we close. And of course, when we close then, yes, we will -- yes, then book also the more, yes, important costs related to the closure of the deal. But we will do that and announce that when the acquisition is closed. From a dilution perspective, I can only repeat what I said before, it's 60 basis points at the beginning of a 12-month moving trend. So I mean, if it comes up at the middle of the year, yes, then it will be half of it for 2022. If it comes early, I mean you can make the calculation yourself.

[Operator]

Next question from Andre Kukhnin from Crédit Suisse.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

I wanted to come back to raw materials versus price and ask a broader question on firstly, could you help us quantifying the gap that you saw in 2021? And then the question really is, is your intention to fully overcompensate for that gap to fully recover it in 2022 or into early 2023 with pricing?

[Nico Delvaux]

Yes. Of course, everything depends on where material indexes will go going forward. But under the assumption that material indexes stay where they are today, yes, we have the ambition to compensate and to overcompensate with pricing for material inflation. And like we said at earlier calls, we believe that will happen somewhere around the middle of this year towards the second half of this year. We believe that we have now reached the top of the dilution with the 60 basis points that Erik mentioned this quarter was probably Q1, it will be a very similar number. And then as of Q2, we should then see the dilution going down. And then in the second half of the year, we should then get accretion from price versus cost inflation. Again, under the circumstances that mix stay similar and that material indexes stay where they are today. When it comes to the biggest gaps, of course, the materials that have increased the highest have the biggest gaps, and that's in the first place steel. Again, steel, I think it's up 230% to 240% versus the lowest point in 2020. It's clear that you can't fully compensate for that to pricing for the steel door, for instance. But we have seen, yes, a lot of high increases also on copper, nickel, zinc, aluminum and so on. But often, that material component is smaller. So there it is then easier to come on the positive side faster.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

And what was that gap overall in 2021? That was 16 bps in Q4?

[Nico Delvaux]

It was around 40 to 50 bps for the full year. So I would say we kept our promise because we said that it would be lower than last time back in 2018-'19, where it was around 60, 70 basis points.

[Operator]

Next question from Rizk Maidi from Jefferies.

[Rizk Maidi, Equity Analyst]

So the operating leverage surprised us positively in Q4. Can you perhaps talk about the savings that you were able to achieve from your different programs in Q4? And how should we think about the overall sort of saving figure for this year, please?

[Nico Delvaux]

Of course, there is a lot of good things that we do in operations, in general. We have VA/VE activities where our engineering people look all the time on how we can make the same product at a lower overall cost. We have lean initiatives. We continue to invest in automation and in robotization. So all that helps, and it's difficult to say it's here 1% and it's there 1%. But overall, that clearly helps. Then I think the second important bucket is obviously our MFP program, where we had a very successful MFP 8 program, where this year, we saved close to SEK 700 million. This MFP 7 program had a very good return on investment. We say that's the good news. And the challenging news is, of course, that this year, the savings will be lower of the MFP 7 program. We estimate the savings to be only around SEK 300 million for this year. That's also the reason why we are now looking into a new MFP program an MFP 9 program where -- as the planning looks now, we should be able to package all the information together towards the end of the year and then be able to give you some information, I guess, in -- if everything goes according to plan somewhere in the Q4 call this year. And I would say the third aspect is, of course, pricing because if you increase price, it has an effect on all the lines, so it also has an effect on your operational efficiency.

[Operator]

Next question from Guillermo Peigneux from UBS.

[Guillermo Peigneux-Lojo]

I wanted to ask about the working capital, in particular, the inventory levels and in particular, to the part Nico you mentioned about basically security supplies. I guess 2 parts of my question. First, are you -- where we basically get to see more of this in Q1 and Q2? And then second to that is, at the moment, how much time is that inventory covering and are you securing a quarter ahead or are you securing even on longer terms? That's my question.

[Nico Delvaux]

Erik then feel free to add. But first, perhaps on the cash flow, in general, if you see over last quarters, we had, of course, a very strong cash conversion far above the 100%, and I would argue it's just mathematics at a certain moment, it has to come down. And that's what happened now in Q4. I think cash conversion of 98% for the full year, I think, is still very good achievement. And then, of course, the more you grow, the more difficult it becomes to have the good cash realization also there, it's mathematics. And specifically on the inventory, in a way, we hope that the inventory will even further go up because that would mean that we are able to secure even more components because definitely if we can secure more electronic components, we will do so. And the same is true for some other strategic families that we consider important to keep our invoicing of our backlog on a good level going forward now in the coming quarters. The challenge is more that, yes, it's difficult to find the electronic components, in particular, to put in the stock.

[Operator]

Next question from Andreas Koski from BNP Paribas.

[Andreas Juhani Koski, Research Analyst]

Yes. On price dynamics, and I know there are now 4 questions but in a bigger context. What would the price impact be in 2022, if you didn't raise your selling prices further from here? And what kind of price increases are you planning for 2022? And do you think you saw some prebuying in Q4 ahead of further price increases? And could you share with us what kind of organic growth rate you are seeing in January?

[Nico Delvaux]

That's a lot of questions. But if I start with the last question, the third question. We have seen similar organic growth levels throughout Q4 and now also at the beginning of this year. The second question was...

[Erik Pieder, Executive VP & CFO]

It was related to price. But yes in a way, if you look on if we need to fully compensate at the end of the year, we need it, if we compare to average to need to do a price increase of roughly 7%.

[Andreas Juhani Koski, Research Analyst]

Yes. No, no. But you have made a lot of price increases during 2021. If you didn't make any further price increases from here, what will the price impact in 2022 be from the increases you have done in 2021?

[Nico Delvaux]

I would argue 0% because if you don't increase prices, you have 0% price component this year. Of course...

[Andreas Juhani Koski, Research Analyst]

I guess some of the price increases came in, in H2, which will have a rollover effect into 2022?

[Nico Delvaux]

Yes. I mean you can calculate for yourself. I think if you put 0% in your excel sheet for the 4 quarters this year, you had, I think, plus 1% Q1 last year, you had plus 2% or plus 3% Q2 last year, we had plus 4% in Q3, and we have now plus 5% in Q4. And if you then add 0% to it, you can see what that means. Again, if you look at dilution, I think we had around 20 basis point dilution beginning of the year. We had 60 basis point dilution now in Q4. And like we said, we believe this is now leveling out on that higher level. we had 40 to 50 basis point dilution over the full year. And perhaps on your third question, have you seen some preordering now in Q4? Yes, most probably we have seen, but you should of course, realize that we are a price increase #5, 6, 7, sometimes price increase 8, 9 for some of our business areas. So yes, every time when you do a price increase, you will see some preordering, but I would say it's not significant also not this price increase. And it's a similar phenomenon that you see every year.

[Andreas Juhani Koski, Research Analyst]

Yes. And just are you raising prices now and in the first quarter as well?

[Nico Delvaux]

Yes. We continue to raise prices. We have done that now also as 1st of January, 1st of February. Yes. Because we are not where we want to be yet, like Erik said, if you, again, take indexes and again, it depends on mix and it depends on timing, but we need a price increase of around 7%, perhaps even 8% to fully compensate, if there would be no other operational efficiency gains coming. Obviously, we will have the operational efficiency gains, but it's clear we also need to further increase prices to fully compensate and then get a positive.

[Operator]

Next question from James Moore from Redburn.

[James Moore, Partner of Capital Goods Research]

Can I clarify your price comment, please, Nico? And then ask a question about China. Just if you get the 7% to 8% realized price in the P&L for the full year of 2022, does that just compensate for the material cost inflation in 2022 or does it also compensate for the net negative impact of 2021? And then -- maybe that one first.

[Nico Delvaux]

Yes. So the statement was if indexes stay where they are today, and we always said that there is a 6 months average delay between the indexes going up or down and us seeing it in our income statement. So -- but if indexes stay where they were at the end of the year, you could say, then the 7% to 8% price increase will fully compensate for all the inflation we have seen year-to-date or -- yes. Since 2019 to date, you could say. So what the increases we have seen in 2020 and the increases we have seen in 2021.

[Erik Pieder, Executive VP & CFO]

And then just my reference was to 2020. So of course, you need to realize as well that we have done price increases during the year 2021 in order to compensate as well.

[James Moore, Partner of Capital Goods Research]

I think I understand, but just to make sure I do, if you were minus 40, 50 basis points net last year, does that mean you would be plus 40, 50 basis points positive this year? So 0 over the 2 years of 2021 and 2022 combined?

[Erik Pieder, Executive VP & CFO]

No. It doesn't.

[James Moore, Partner of Capital Goods Research]

So it's more about aiming at being at 0 for 2022 stand-alone year?

[Erik Pieder, Executive VP & CFO]

Yes. And it's also what Nico has said before is also that it's also -- you're also going to see a year effect where we've said that, I mean, we're going to have an impact in Q1 because, I mean, Q4 and Q1, we believe, of course, providing enterprises stay the same, will be the 2 quarters that had been most impacted. Then we assume that it's going to go down in Q2. And then we said somewhere mid this year. So then for the second half of the year, then the impact we will not have an impact and when actually sort of with the prices staying as they are today, we would actually see a positive impact of the price versus the raw material.

[James Moore, Partner of Capital Goods Research]

But my question was actually on China. I think you targeted to lift the China margin from 5% to 10% over the medium term, but life has gotten a lot worse. And I presume that we'll be down in 2022. I presume we're at a worst starting point. Could you say roughly where the China margin is now excluding the Evergrande bad debt provision? And how you expect the full year 2022 China margin to land and where you think we can go from here and what actions you need to put in place?

[Nico Delvaux]

Yes. First, to correct. I don't think we ever mentioned the 5% and the 10%. What you have said is that historically, China has very low single-digit EBIT margins and that we had the ambition to bring that level to high single digits over a longer period of time, not talking about quarters, but talking about years. If you go back a little bit to end of 2020 and also the first quarter of 2021, we had seen a very nice improvement where we were doubling that low EBIT margin in China, and we were really making progress towards that high and high single-digit EBIT margin. It's clear that in the second half of the year that went again the other direction because of the construction crisis in China. And we have been negative margin in Q4 in China. Now when will it turn around? Again, it's difficult to say. It's again, a question of years, not a question of quarters. We don't see any improvement today -- okay, today, Chinese New Year. But on the short term, in the construction environment and a challenging environment in China that will take more time to recover. And obviously, the faster that will recover, the easier it will be for us to come to that high single digit. But then again, like we also said earlier, we are executing on our strategy and irrespective of market conditions, we will improve because we are making initiatives on the commercial side to switch more from residential to commercial. We are making initiatives to switch more from new builds to a replacement market, and both will have obviously also mid long term a positive effect on margin.

[Operator]

Next question from Denise Molina from Morningstar.

[Denise Molina, Equity Analyst]

I just wanted to come back to the comment on the university contract that you had. And just to ask you, within Americas, what you think of the opportunity of that end market versus hospitality because it's not the first university that you've done business for us. So just wondering if that's a market where you already have sort of high market share or if it's sort of a growing sector for you relative to hospitality?

[Nico Delvaux]

Well, university, I would say, as K-12 are 2 important verticals for us, and it's also to verticals where we see good market momentum. That being said, of course, there is no single vertical that really sticks out in our business. We are not exposed to 1 particular vertical, in particular. If you take the hotel business in general for the group hotel business, hospitality business is around 5% of top line. And like we said earlier, we believe that hospitality business will remain more depressed for quite some time. We believe that will be one of the verticals coming back late because, yes, we will start to see again perhaps some travel, but the business travel or business-related travel will remain, we believe, on a lower level than prior to COVID-19 for quite some time. And that is important that business to come back to really see also the hospitality business coming back on pre-COVID-19 levels. Of course, the things we are doing, because I guess you're referring to that with the Apple Wallet are, of course, exciting. But in the bigger picture on the 5%, yes, that would not move the needle in such an important way that it will compensate for the challenges that the sector has today.

[Björn Tibell, Head of Investor Relations]

I'm afraid that we have to round up the conference now. And I know that there are some more questions left. So if you have any outstanding questions, please feel welcome to contact us at Investor Relations. And as societies now are gradually starting to open up, we look forward to in the coming weeks, speak to you, and we've all seen more of you than we've done in the last years. And -- but in the meantime, I'd like to wish you a good day and stay safe, and we'll talk to you soon again. Thank you for today.

[Nico Delvaux]

Thank you.

[Erik Pieder, Executive VP & CFO]

Thank you.