Legrand (LR.PA), a global specialist in electrical and digital building infrastructures, has demonstrated resilience in the first half of 2024 despite a slight decrease in sales. The company reported a 0.7% sales decline in H1, with organic growth down by 2.0%. However, the second quarter saw a 1.5% rise in organic sales, largely driven by the data centers segment.
Legrand confirmed its full-year targets, including low single-digit sales growth and an adjusted operating margin before acquisitions between 20.0% and 20.8% of sales. The company also announced five acquisitions with an expected annual sales contribution of over €200 million.
Key Takeaways
- Legrand's sales fell by 0.7% in H1 2024, with organic growth at -2.0% but a positive impact from acquisitions of 1.3%.
- The company saw a 1.5% organic sales increase in Q2, driven by the data centers business.
- European market sales dropped by 3.2%, while the US market grew by 1%, and sales in other world markets declined by 3.1%.
- Legrand aims for a full-year adjusted operating margin before acquisitions of 20.0% to 20.8% and low single-digit sales growth.
- Net profit for H1 stood at €578 million, with a free cash flow of €468 million, representing 11.1% of sales.
- The company has a pipeline of 350 potential acquisition targets, with a focus on data centers.
- Wage inflation is expected to be around 5% for the full year.
Company Outlook
- Legrand is focused on innovation and will host a Capital Markets Day in September 2024.
- Full-year targets include low single-digit sales growth and an adjusted operating margin before acquisitions of 20.0% to 20.8% of sales.
- The company expects a free cash flow to sales ratio of 13% to 15% for the full year, likely towards the lower end to support the data center business.
Bearish Highlights
- Sales in Europe and other world markets have declined, reflecting challenging market conditions.
- Pricing increases have been minimal at 0.2% in H1 and are expected to remain flat in Q2, with only a slight increase anticipated in H2.
- The company noted that the European residential market has not shown signs of improvement.
Bullish Highlights
- The data centers segment is experiencing strong growth, with positive signals from incoming orders and quotes.
- The U.S. data center market shows a focus on white space, indicating room for expansion.
- Legrand's strategy includes reinforcing market share in core areas and expanding into adjacent segments.
Misses
- Despite acquisitions, sales slightly decreased by 0.7% in H1 2024.
- The company experienced a slight negative impact on margins from recent acquisitions due to incomplete consolidation.
Q&A Highlights
- CEO Benoît Coquart emphasized the importance of the data center market and the acquisition of Davenham in Ireland.
- Coquart expressed optimism about future growth in the data center segment and renovation markets, pending economic improvements.
- The company remains cautious about the Chinese market, not expecting improvement before the end of 2025.
In summary, Legrand has managed to maintain strong margins and a positive outlook for the year despite a slight dip in sales and challenging market conditions in Europe and globally.
The company's focus on the data center sector and strategic acquisitions positions it to capitalize on growth opportunities, even as it navigates headwinds such as wage inflation and a sluggish residential market in Europe. Investors and stakeholders can expect more detailed plans and outlooks to be shared at Legrand's Capital Markets Day in September 2024.
InvestingPro Insights
Legrand (LR.PA) has shown a notable ability to adapt and grow amidst market fluctuations. The InvestingPro platform offers deeper insights into the company's financial health and potential, providing valuable information for investors looking to understand the company's market position and future prospects.
InvestingPro Data highlights Legrand's market capitalization at $27.82 billion, reflecting the company's substantial presence in the electrical and digital infrastructure industry. The data indicates a P/E ratio of 22.79 as of the last twelve months leading into Q1 2024, suggesting that investors are willing to pay a higher price for earnings, possibly due to expectations of future growth. Moreover, the company's gross profit margin stands at an impressive 52.26%, which is indicative of its efficient cost management and strong pricing power.
One of the InvestingPro Tips points out that Legrand has raised its dividend for four consecutive years and has maintained dividend payments for 19 consecutive years. This consistency in rewarding shareholders is a testament to the company's financial stability and commitment to returning value to its investors. The fact that two analysts have revised their earnings upwards for the upcoming period suggests that there may be a positive sentiment building around Legrand's financial performance.
Investors interested in a comprehensive analysis of Legrand's financials and market performance can explore additional InvestingPro Tips, with a total of 10 tips available on the platform. These insights can provide a more nuanced understanding of the company's strengths and investment potential.
The company's strategic focus on the data center segment, as highlighted in the article, aligns with the positive performance metrics, such as the significant return over the last week and the analysts' prediction that the company will be profitable this year. Legrand's ability to operate with a moderate level of debt and its liquid assets exceeding short-term obligations further solidify its financial resilience and capacity for growth.
For an in-depth evaluation of Legrand's financials and market position, including all available InvestingPro Tips, visit https://www.investing.com/pro/LGRVF.
Full transcript - Legrand Sa (LGRVF) Q2 2024:
Operator: Good morning, ladies and gentlemen, and welcome to today’s Legrand 2024 First Half Results Conference Call. For your information, this conference is being recorded. [Operator Instructions] 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: Thanks a lot. Good morning, everybody. Franck, Ronan and me are happy to welcome you to the Legrand 2024 first half results conference call and webcast. As you know, this call is recorded. So we have published today our press release, financial statements and a slide show to which we will refer, those documents are, as usual, available on the Legrand website. After a few opening remarks, we will comment the results into more details. I begin on Page four with the three key takeaways of this release. First, in a building market that remains depressed in many geographies, Legrand reports good resilience in the first half including sales growth in the second quarter and very firm margins. Second, we are actively rolling out our strategy through acquisitions and innovation. Last, we confirm our full year targets. As a reminder, we will host a Capital Markets Day in September 2024 in London. So moving now to Page six and to Page seven, I will start with an overview of sales. In the first half of 2024, excluding exchange rate in Russia, our sales decreased by minus 0.7% with an organic trend of minus 2.0% and a positive scope from acquisitions of plus 1.3%. In the second quarter alone, sales were up plus 1.5% organically, driven notably by the data centers momentum. Considering the current building market environment, which remains depressed many geographies. This limited decline in revenue highlights the relevance of Legrand business model. Looking forward, based on acquisitions made and the likely date of consolidation, the impact from acquisitions should be of nearly plus 2.5% full year. Regarding the two other elements on sales. The negative scope effect from Russia was of minus 0.9% for the first half and will be minus 0.6% on the full year 2024. The exchange rate effect was a negative minus 0.4% for the first half and based on average rates of June, it would be close to minus 0.5% for the full year. You will read on Page seven the key takeaways per geographies on a like-for-like basis. On the first half of 2024, despite market conditions, the group’s revenue recorded a limited decline. European sales fell minus 3.2% in the first half of 2024 in a persistently tough building market in most countries. In the U.S., sales were up plus 1% over the period. We achieved a solid performance in the second quarter with a steep plus 7.9% rise driven by market growth in the data center segment as well as an increase in non-residential applications. Finally, in the rest of the world, we recorded a decline of minus 3.1% in H1 with a mixed picture depending on regions and countries. Sales grew notably in India, the Middle East and South America, as these failed to offset declines in China and Africa. These were the main comments I wanted to make on sales. I will now hand over to Franck for more color on our financial performance.
Franck Lemery: Thank you, Benoît, and good morning to all of you. I will start on Page eight, commenting the adjusted operating margin. Before acquisitions, we recorded a solid adjusted operating margin of 20.8% in H1. This level of profitability confirmed, once again, the ability of Legrand to hold margin high despite a decrease in sales. The impact of acquisition was minus 10 bps, meaning that H1 adjusted operating margin all-in stood at 20.7%. Going now to Page nine and 11 and highlighting two main points. First, the net profit stood at €578 million, representing 13.7% of our sales; and second, the free cash flow came to €468 million at 11.1% of sales for the first semester. On Page 11, we can see the robustness of our balance sheet with a net debt-to-EBITDA ratio of 1.8 at the end of the period, which is fully consistent with the group credit rating and this level reflects both a solid free cash flow generation and the strong pace of acquisitions that Benoît will comment shortly. This concludes the financial key topic. I’m now handing over back to Benoît.
Benoît Coquart: Thank you, Franck. Let me now move to Page 13, detailing our recent acquisitions. We are continuing and even accelerating our bolt-on acquisition strategy with five acquisitions announced this year, totaling more than €200 million acquired sales on an annual basis. I would like to highlight the fact that out of these five acquisitions, three of them are in the bouyant data center segment and represent annual sales of €140 million with Netrack in India, Davenham in Ireland and Vaas in Australia. We intend to pursue this momentum in the coming quarters with a very active pipeline. On both Pages 15 and 16, you can see a few examples highlighting the strong innovation pace for the group. We launched many new products this year, such as the new iconic Céliane range in France, for example. This shows the group’s continued robust capacity for innovation, both for core infrastructure products and in faster expanding segments. We can now move to Page 18. We stand by the full year targets announced in February with low single-digit growth for sales, meaning organically and through acquisitions, and adjusted operating margin before acquisitions of between 20.0% and 20.8% of sales, at least 100% CSR achievement rate for the third and last year of our 2022-2024 road map. Before we move to questions, I would like to remind you of our Capital Market Day scheduled on September 24 in London. This is it for the key topics of this release. I suggest we switch now to Q&A.
Operator: [Operator Instructions] We will now take your first question, and your first question comes from the line of Daniela Costa, Goldman Sachs (NYSE:GS). Please go ahead.
Daniela Costa: Hi, good morning. Thank you. I have two questions, if possible, if there’s space for it. But the first one, just looking at sort of how you grew in North America, I guess, assuming would be interested in getting your breakdown of data centers non-resi and resi. I would assume it’s not -- the data centers that has grown very strongly given construction read across as we here are yet not very buoyant. Was there any catch-up or is this from prior quarters where you were weak or is this sort of the normal growth that you see going forward for data centers?
Benoît Coquart: Daniela, well, indeed, the situation is very diverse in North America. You have to think of it as three different pieces. So you have the data center market, which indeed grew double digits in Q2. We don’t see that as a catch-up. We knew as early as last quarter, given the quote, the orders, incoming and so on that the quarter too was good and we believe this is a normal pace of the data center market. And well, nobody can say what the next quarter is going to be, but we believe that a double-digit growth rate is sustainable for the coming quarters and is in line with the growth of the data center market. So it’s clearly positive, growing and no specific catch up, but the translation of a healthy data center market. Number two, it's about, as you know, a big quarter of our sales. Then we have the non-residential market, office education and so on, which is more than 50%, slightly more than 50% of our sales, which is growing single digit. I wouldn't want you to think that the market is growing. I think that we haven't seen any significant change in trend. This nonresident market remains difficult, but we are growing notably because we have a Nisio [ph] comp. You may remember that in Q2 last year we indicated that there were some destocking in the non-resi market. So let's say the Q2 basis for comparison for non-resi was somehow a bit easier, if I may say so. No change in trend as far as the market is concerned. But the technical factor which explains why the non-resi market is our non-resi sales are slightly up. The third piece is resi, which is about 20% of our sales. Clearly the market KPI's are improving for resi. And if you look at a number of indicators such as investment in residential, new single family, reinvestment in residential and a number of others, the statistics should get better in 2024 compared to 2023. It does not really hitting yet ourselves. It does not finish hitting yet our sales. You know that you have a time lag between the time the statistics get better at the time it eats our sales. So -- but we believe it will at some point, somewhere in the later this year or beginning of 2025. So data center, very positive, and it will remain very positive. Non-residential remain difficult, but it was helped in Q2 by technical factors and resi, the market start to get better, but not yet hitting our sales.
Daniela Costa: Very clear, thank you. And maybe a comment on the free cash flow where the margin has been a little bit lower than it used to be in the past. Can you talk through the working capital build up? Is that something that we’re going to see a reversal for in the second half? Or is it part of the strong growth in areas like data centers and we won’t see a reversal? How should we see it?
Benoît Coquart: I will let Franck maybe to take this question.
Franck Lemery: Yes. Thank you. Well, you said a lot of -- two things in your question. Free cash flow at the end of H1 is quite decent, but it’s not at the level of the last 2, 3 excellent years. It’s at 11.1%, which is, by the way, the average of the last 7, 8 years, but lower than the most recent period. And it is about the working capital requirement which is exactly at the same level as last year and notably in terms of inventory to sales at 16%, which means that it’s a little bit higher than the traditional metrics of Legrand. And you remember that in the past, we said that we took the delivery decision to carry over some extra inventory to support ourselves during COVID and post COVID supply chain challenges. And this is also what is currently happening, but more on behalf of supporting the data center. It’s not about global supply chain disruption, but it’s more about supporting the data center business, which is growing strongly and which is also made of projects with some ups and downs. So to sum up and to talk about H2 and the full year, our target was to achieve free cash flow to sales between 13% to 15%. We’ll achieve a target, but it will probably more in the softer range if we were to protect the data center business, which is bouyant. So to sum up, no structural changes in our free cash flow metrics. We will respect our full year target, but probably more in the lower end of our target.
Daniela Costa: Got it. Thank you very much.
Operator: Thank you. Your next question comes from the line of Andrew Wilson, JPMorgan (NYSE:JPM). Please go ahead.
Andrew Wilson: Hi, good morning. Thanks for taking my questions. I’ve got two, please. Can I just ask on pricing development in the Q2 and also expectations for the remainder of the year? And then secondly, and it’s really a follow-up to Daniela’s question, but I don’t know if you could kind of quantify quite how strong the growth in Q2 and expectations in the second half. I’m just trying to see if we can kind of get above that double-digit rate for the full year as well. Thank you.
Benoît Coquart: Well as far as pricing is concerned for H1 the pricing was quite minimal, 0.2% which implies more or less a flat pricing for Q2. And it has to be seen in the context of purchasing price being slightly down. Purchase pricing in H1 down 0.7%. So quite a limited pricing. The reason being that we didn’t need to do more pricing, actually, in order to deliver our margin target. As far as H2 is concerned, we will do a little bit more pricing, and we expect to land as we said last February, we expect to land at maximum 1%. So you shouldn’t expect more pricing than plus 1, it will be somewhere between plus 0.5% and 1%. Of course, all that will depend on the environment as far as raw mats and components are concerned. If the price of raw mats and components was to go up more than expected, of course, we’ll do a bit more pricing. So 0.2% in H1 and for the full year, plus 1% maximum. As far as the data center growth is concerned, well, you can assume that in Q2, it’s something which is close to plus 10% with a different product mix, depending on the areas. As far as the U.S. is concerned, it’s mostly white space. Our data center exposure in the U.S. is mostly white space. As far as Europe is concerned where our exposure to data centers is, of course, much smaller. The Q2 performance is more about the gray space, switchgear, UPS and so on, which is basically coming back to the growth rate we had for the past 4 years or 5 years. For the past 4 years or 5 years, we’ve been growing about 10% organically per year. So I cannot commit to any number for Q3 and Q4, but I see no reason why we wouldn’t continue to grow in H2. We still have many incoming orders, many quotes, a very positive signal for the market. Well, now, of course, it’s difficult for us to have full visibility. But I don’t see any reason why we wouldn’t continue to grow in H2 in data centers. Again, because this growth is a structural growth, it’s not coming from one specific big project, it’s not coming from carryover of invoices from Q1 to Q2. It’s -- we believe, a structural good growth coming from the fact that, number one, the market is buoyant, and number two, we have solid positions on this market.
Andrew Wilson: Thank you. And if I can just squeeze in one quick further question. Just on the second half margin, I’m just thinking about 2023, there was a good step-up in terms of investment in the second half. Just trying to think about sort of investment plans appreciate at this stage, but your investment plans for kind of second half and whether that can actually be a tailwind in terms of second half margin development given the step-up you saw last year? Thank you.
Benoît Coquart: Well, we will, as usual, manage the H2 margin, taking into consideration all factors, raw mats, the state of the economy. So that at the end, we land where we have committed to land, i.e., for a full year margin between 20% and 20.8%. We don’t expect a specific surge in energy investment. Now if we believe it will help to do targeted investments, we will. So I cannot commit to a level of investment, but we remain extremely vigilant and should we see further growth opportunities, we’ll decide to dedicate the appropriate resources to support that.
Andrew Wilson: Very clear. Thanks very much.
Operator: Thank you. Your next question comes from the line of Andre Kukhnin from UBS. Please go ahead.
Andre Kukhnin: Hi, good morning. Thank you very much for taking my questions. I’ll just go one at a time. And can I follow up on data centers first? And that 10% growth that you cited, I think right now, we’re seeing higher growth rates in the market in terms of megawatt additions in the data centers capacity than the 10%, especially in the U.S. Could you just talk about how your exposure correlates with that? And should we expect it to catch up at any point or is there a kind of different multiple on your growth versus the megawatt additions?
Benoît Coquart: Well, maybe it’s a good opportunity for me to advise once again our CMD, which will be held in September 24, because it’s typically a sort of conversation that we should rather have at a CMD that when commenting results. Now be careful because you have to make a difference between investments in megawatts, which are announced, investments or CapEx into GPUs and stuff like that. Order books, book-to-bill and, let’s say, forward-looking potential sales and actual sales. I don’t believe that our market today is growing faster than 10%, which is already good. So of course, you can have a higher investment, higher CapEx announced we have incoming orders or order books, which are growing faster than 10%. But again, between incoming orders and actual sales, many things can happen. You can have early booking from your customer, which are afraid not to have enough goods to be supplied. Those orders can be delivered over the next 12 or 18 months and not the next 3 months. Some orders can be delayed, can be canceled. So as far as Legrand, as a supplier of technology, is concerned, what matters is how fast our underlying markets are moving, and I can confirm that for Legrand, the data center market, which is held by AI, is growing probably approximately 10%, not 20% or 25%.
Andre Kukhnin: Got it. I was looking at the absorption data, which I thought was kind of close to the build rate as but as you said, we look forward to the Capital Markets Day to learn more. And then I just have two quick follow-up questions -- further questions. One is you cited the destock effect in the U.S. non-residential market in second quarter of 2023 that created an easy comp for this quarter. How did that destock progress through the second half of 2023? Was it still there in subsequent quarters of 2023?
Benoît Coquart: No, we don’t believe there has been any significant destocking in our market in H2. Of course, in the markets which are a bit difficult, such as France or China, for example. Mechanically, there’s a bit of destocking because the distributors cannot handle the same level of inventory as when the markets are booming. But I wouldn’t quote that as significant type of level.
Andre Kukhnin: Thank you for this. I just wanted -- this is really useful, but I just wanted to check, last year in 2023, you said U.S. nonresi was destocking in the second quarter and that helped this quarter, did it still -- did it proceed to destock further in the second half of 2023 or was that just a one quarter effect?
Benoît Coquart: No, it was a one quarter effect. Nothing significant in H2 2023. So it shouldn’t have any impact on our H2 performance in non-resi neither positive nor negative.
Andre Kukhnin: That’s very clear. And lastly, just on acquisition contribution for the year 2024 from everything you’ve done so far, what should we expect for the year?
Benoît Coquart: Well, we should expect 2.5% excluding of Russia, so plus 2.5%; Russia, minus 0.6%. All that is, of course, linked or based on acquisitions, which have been announced so far, should some more acquisitions come, this effect could be slightly higher than that, of course. But so far, based on what has been announced, plus 2.5% excluding Russia.
Andre Kukhnin: Perfect. Thank you very much for your time.
Operator: Thank you. Your next question comes from the line of Max Yates from Morgan Stanley (NYSE:MS). Please go ahead.
Max Yates: Thank you, and good morning. I just want to start on your comments on U.S. nonresidential. And obviously, kind of one of the big drags for you has been your U.S. kind of commercial and office exposure. I think it’s down kind of more than 40% versus 2019 levels. I guess what I wanted to understand, the headlines, obviously, in that market are still quite challenging, but you’ve obviously had additional effects of destocking as well. So I just wanted to understand in that portion specifically, are you still seeing that being a drag to your overall Americas growth? And do you think we can start kind of talking about volumes there having bottomed or do you anticipate kind of a further drag to your North America growth from that sub segment specifically?
Benoît Coquart: Well, it’s difficult to say the volumes have indeed been down very significantly. And at some point, they can hardly be down a lot more, given the low base from which we start. So we are looking carefully at a number of KPIs, such as, for example, vacancy rates. And some of those KPIs are bottoming out, but it’s too early to say that the market will bottom out. So we believe the market at some point would get better. Not sure it will come back to a strong 5% growth per year, but it will indeed start to rebound from a small base. But we remain a bit cautious, again, because the statistics are not yet super positive and our rebound in sales in Q2, as we said, is more linked to technical factors. Simply put [ph] we have a lot more visibility than that.
Max Yates: No, that makes sense. And just a quick follow-up on your acquisitions that you’ve done in data center. I guess just maybe a kind of quick comment on the strategy and the pipeline. I mean do you see when you kind of line up future M&A, are there a lot of these kind of smaller acquisition opportunities in data center like the ones that you just did? And I guess you’re clearly finding things in, I think, what are your kind of core data center products that kind of things like the bus waves and the PDUs, so yes, is there still a lot of opportunities there for M&A? And/or do you think you’ll have to start moving out of those product categories if you want to keep doing M&A in data centers?
Benoît Coquart: No, we have a lot of interesting opportunities remaining in data centers. And out of the 350 targets we have on our pipeline, I cannot quote a precise number, but we have a lot of opportunities in data centers. Some of them on our, let’s say, traditional product families, some other new product families. So we are doing the -- in data centers as elsewhere, the traditional strategy of both reinforcing our market share in the core and expanding into adjacencies. So if you look at what we’ve done for the past couple of years, ZPE that we announced 6 months back, wasn’t a traditional Legrand product family, it’s a console, which is a new product category for Legrand. That again on the gray space is also a new product family. That is a more traditional product family because we’ve been active for quite some time on -- so no, we have many opportunities remaining in data center both in the traditional core Legrand product families and in new families for Legrand.
Max Yates: Super, that’s right. Thank you very much.
Operator: Thank you. Your next question comes from the line of Gael de-Bray from Deutsche Bank (ETR:DBKGn). Please go ahead.
Gael de-Bray: Thanks very much. Actually, I have three questions, please. So maybe I’ll take them one at a time. Can I start with the M&A activity, please? I mean, usually, you’ve been pretty prudent on the M&A side with multiples typically lower than the group’s own multiples. But in H1, you spent more than €1.2 billion. And if I’m not wrong, I think that’s equivalent to about 4.2 times, maybe 4.3 times EV sales, clearly above your own and what you’ve been used to pay in the past. I know there was something around software. But generally speaking, is there any change to the group’s M&A approach or or cautiousness or potentially any change to the competitive dynamics in the bidding processes? Has the market become perhaps more competitive on the M&A side? Thanks very much.
Benoît Coquart: Well, the numbers you quote are correct, Gael. Now the short answer to your question is, no, absolutely no change. The fact is that the companies we have both have a profitability, which is a very nice ones, sometimes higher than group average profitability. So if you look at the multiple of EBIT we paid for those companies, it is significantly lower than Legrand multiples. But since those companies are nicely profitable in terms of multiple of sales, indeed, we are closer to 4 than to the 2.5-or-so, which we did last year and two years back. But I confirm that there’s absolutely no change in the competitive dynamics. Most of the deals we’ve done were one-on-one discussions. We are still using the same valuation metrics, i.e., we want the deals to be EVA accretive within 3 to 5 years of full consolidation. All those deals are very well sketched out and correspond to a very good addition to group’s plan of action. So no, no, we not overpay the deals, and we will remain reasonable when it comes to the EVA impact of those transactions. It just happened that from time to time, you buy a company, which has 25%, 30% or so more EBIT, so in which case, of course, the price of the multiple of sales seem to be higher.
Gael de-Bray: Well, that’s great to hear. And then the second question is on the restructuring cost, which appear to be particularly high in Q2, especially in the U.S. So could you provide perhaps more details around the actions being taken there?
Benoît Coquart: Yes, Gael, you are once again right. Usually, yearly restructuring expenses for Legrand are about €30 million per year. And it is true that in H1 alone, it amounted to €40 million, of which €25 million, I think, in the U.S. So in the U.S. alone in one semester, we did almost as much restructuring as we usually do yearly at the group level. Well, the reason being that, as you know, we are always optimizing our cost base. This is a condition for us to continue to deliver solid margins. And we have identified in the U.S., a number of restructuring opportunities, which we are currently conducting. Last year, it was Europe in H1, which is also being quite high. This year, it’s the U.S. So it’s part of the Legrand, let’s say, habit of -- even when the numbers are solid to continue to look for restructuring opportunities and cost -- and opportunities to take some cost out of our P&L. So nothing specific. It is Legrand story. But you are right to say that it has a significant impact on the North American margin in H1 because, as you know, our EBIT margin is after structuring.
Gael de-Bray: Okay. Thanks very much. And maybe finally, I know you reaffirmed the revenue guidance, but could you perhaps provide a bit more details on what we should expect organically excluding acquisitions? I think the prior indication was for the organic growth to be between slightly negative and slightly positive for the full year, so how is it trending now rather positively or rather negatively after Q2 moved back into growth?
Benoît Coquart: Well, I confirm that it should be somewhere between slightly negative and slightly positive, so completely unchanged compared to what we told you in February. And Gael, the reason being that we are exactly where we thought we would be at the end of H1 in terms of top line. So indeed, from the financial community standpoint, Q1 was probably a bit softer than expected and Q2 is probably better than expected. But on the Legrand side, we expect it to be more or less at this level as in of H1. So since it is in line with our, let’s say, road map, there’s no reason to change our outlook for the full 2024. So organically, somewhere between slightly down and slightly up.
Gael de-Bray: Thank you very much.
Operator: Thank you. Your next question comes from the line of James Moore, Redburn Atlantic. Please go ahead.
James Moore: Hello everybody. I wondered if I could just follow up with a couple of technical questions and then a bigger picture one. Could you help us with the wage inflation in the first quarter and the second quarter? And was I right to say that the data centers grew 10% organically globally with 10% organically in the U.S. and 10% organically in Europe? Those are the two technical questions. Maybe I’ll come back to the other one.
Benoît Coquart: Yes. Well, the wage inflation for H1 was plus 6%, and it was more or less the same inflation in Q1 and Q2, no significant change. As far as the full year is concerned, it would may be closer to plus 5%, something like that. So we are, let’s say, in an environment which is pretty high, but not completely stupid and which is, of course, completely manageable within our guidance of margin. As far as the data center is concerned, yes, it’s about 10% everywhere, including in the U.S., minus or plus 1 or 2 points, but it’s consistent throughout our perimeter. Having in mind, of course, that more than 80% of our data center exposure is in the U.S. and the exposure we have is pretty different, it’s more white space in the U.S., gray-space elsewhere. This is it.
James Moore: Great. And if I could just ask a little about [indiscernible] I mean you’ve got 300,000 products, 100 product families, it’s a complicated company. But if you were to look at some of the big categories, I think about wiring devices, cable management, audiovisual, lighting, I’m trying to think about sort of stuff that has got a good coefficient to electrification, where you’re perhaps less present in some other players in the market. The last time I talked about circuit breaker mix was perhaps we soon 20 years ago. Could you update us to how big circuit breakers is? I know you have a strong position in Italy, France and India. But as a proportion of group sales, are we talking mid-single-digit advantage of sales? And I’m trying to get my head around where are we in the cycle versus 2019 in some of these bigger categories? Presumably, circuit breaker were up materially, wiring devices are down materially. Amongst some of your bigger categories, are there some areas that are much bigger a drag because of mix to office or other things? Just any help on that from a qualitative perspective would be great.
Benoît Coquart: Well, it’s not such an easy question to answer because as you rightly said, we will need to dig in to the 100-product families or so we have. But to make a long story short, in -- so in H1, as we said, data center was done in Q1 and nicely up in Q2. As far as the other fast expanding segments are concerned and as part of those CapEx spending, you have -- you don’t have circuit breakers, but you have green products, you have connected products and so on, they grew more or less in line with the rest of the group and the rest of the -- so you don’t have a meaningful in H1 difference in growth, let’s say, between what you would quote as being electrification product or digital product and what you would quote as being more traditional product. The reason being that both of them are impacted, except data centers, of course, both of them are impacted by the depressed construction market. When you have the number of new permits or new builds being down, where you have a pace of innovation being quite slow, not only you’re not installing a switch, but they are not installing neither panel board with circuit breaker or thermostat. So no meaningful difference in H1 between except data centers between, let’s say, electrification-related products and the other products. Now when comparing Legrand with others, but you know that you have to bear in mind that we are not at all in the same product segments, we are not active at all on the utility segment, industrial construction segment, industrial process segment that you would probably quote as being electrification also. So quite a long and it’s not very precise answer to your question, maybe we’ll try to give you a bit more granularity if it matters to you at the next CMD.
James Moore: Thanks, Benoît. Thank you very much.
Operator: Thank you. Your next question comes from the line of Martin Wilke from Citi. Please go ahead.
Martin Wilkie: Yes, thank you. Good morning. It’s Martin from Citi. My question was on acquisitions. You talked about paying higher multiples for companies with higher margins. I see that the acquisition impact to margins is still a small negative in the first half, even if it’s slightly less negative than it has been in the past. Just trying to understand, firstly, does that include transaction costs, and that’s why we still see that slight drag? And then related to that, my understanding is that for the innovation deal in assisted living, you are buying a software sort of backbone that can then help the rest of your offering in assisted living and presume that then gives you some synergies just in terms of the time scale that we should expect to see that benefit in terms of that integration of innovation into the rest of your portfolio? Thank you.
Benoît Coquart: So on your first question, the reason is very simple. Most of those companies have not yet been consolidated in our accounts. So you have the price paid in the cash flow statement, but you don’t have yet the top line and bottom line impact. The impact you have in H1 is mostly made of company or carryover of companies bought last year and companies bought at the very beginning of the year, but you don’t have yet, for example, innovation that enhances this kind of company. But I confirm that with a 2.5% payment impact we’re expecting this year, you would usually expect to have, let’s say, 25 points of dilution or 30 points of dilution. We usually have, let’s say, one point of dilution per one point of perimeter growth you should expect for this year, lower dilution because those companies are -- most of those companies are nicely profitable companies. As far as your second question is concerned, which -- remind me your second question, sorry?
Martin Wilkie: It was in terms of the benefits of the...
Benoît Coquart: In terms of the benefits. Well, synergies, as usual, take a lot of time. You don’t have synergies within 6 months. So it’s a story of the next 3 to 5 years. And indeed, we will have synergies between traditional assisted living in the software piece. And we will, for example, use our presence in other markets such as Spain, the U.K., France and so on to deploy internationally the innovation product offering. Well, but we expect to have synergies. Now will it be material at a group level? I don’t think so. Don’t forget that the assisted living piece, it’s a €100 million business; innovation, it’s between €60 million and €70 million. So in total, it’s, let’s say, €170 million. I said last time that we expect to take that to €220 million, €250 million -- €230 million midterm. So even if you do a 5% revenue synergy out of that or even a 10% revenue synergies out of that, the impact on the total Legrand numbers are not so meaningful. So yes, we expect to do synergies. Those synergies will take, as usual, a bit of time to materialize, but they will not be so visible at group level.
Martin Wilkie: Great. Thank you very much.
Operator: Thank you. Your next question comes from the line of Alexander Virgo from Bank of America (NYSE:BAC). Please go ahead.
Alexander Virgo: Yes, thanks very much. Good morning. I wondered if I could just ask you quickly to clarify your comments on guidance for the organic growth? Because obviously, since you last talked about plus/minus growth that you’ve added 100 bps of M&A. So is that simply that you’re suggesting we should be closer to slightly negative? Or did you have just a bit more wiggle room in the guidance in the first place? That’s the primary question. Thank you.
Benoît Coquart: Well, let me be very clear. Our guidance in total remain completely unchanged compared to what it was in February and what it was at the end of Q1. So we are shooting for low single-digit growth for sales when adding organic and through acquisitions, low single digit. Now when you split this low single digit between organic and perimeter, we are not guiding precisely for perimeter. We are just saying that based on what has been achieved so far, we should have a plus 2.5% growth, perimeter impact, and organically from slightly down to slightly up. But again, this is completely unchanged compared to the guidance we issued in February. Does it clarify or...
Alexander Virgo: Well, I guess, I understand you’re saying that nothing has changed. It just looks that, I guess, if you add up what you said in Q1 and add up what you’re saying now, it feels like things are maybe a little bit weaker, but I understand what you’ve clarified, so that’s super helpful. Thank you.
Benoît Coquart: No, no, no, it’s absolutely not weaker. We used exactly the same words in February. Again, our H1 is completely in line with our expectations, both actually organically and for acquisitions. So there’s -- again, slightly down would imply H2, which in terms of trend would be close to H1. Slightly up, would imply a trend, which would -- were organic sales would go in H2. And we remain, let’s say, focused on what we said 3 months back. We told you we expected Q2 to be better than Q1, and that’s what happened. And we told you that we expected that H2 to be better than H1, and we are still shooting for that. And then it would lead to slightly down to slightly up. And then to that, we would add at least plus 2.5 perimeter impact.
Alexander Virgo: Okay. Thank you very much.
Operator: Thank you. Your next question comes from the line of Alasdair Leslie from Bernstein. Please go ahead.
Alasdair Leslie: Yes, thank you and good morning. I was wondering if you could talk a little bit more about the acquisition in Ireland. It’s obviously a decent-sized acquisition by Legrand standards. So maybe just a few questions. Firstly, I guess, how significant is that in terms of your strategy overall to kind of strengthen the portfolio in Europe? You mentioned it comes in and it gives you a new product offering as well. And you also mentioned, I think, in the initial press release, they sell in the U.S. So I was just wondering if that’s something you can leverage? And the final thing, I sort of noticed it seems to work with some of your competitors as well, I was just wondering whether there’s some dis-synergies perhaps there initially from the acquisition as well?
Benoît Coquart: Well, so it’s basically an Irish company proposing a complete switchgear solutions to mostly data center players, including hyperscalers. So it’s a very important piece of our strategy. We told you many times that we were big in white space, but we were not big enough in grey space and that we intended to grow in grey space. Part of this growth is coming from organic growth, and we have UPS, transformers, switchgear that we are already selling to a number of data center operators. But in order to accelerate these gray-based road map, if I may say, we are looking for an interesting acquisition to make that would help us to accelerate and that’s what we did. Davenham is a very good complement to what we currently have. Today, they are selling in Europe and a little bit in the U.S. And of course, we could leverage Davenham on both continent. They have the know-how to sell both ICE (NYSE:ICE) type of products in Europe and elsewhere and type of products in the U.S. Now it’s a matter of timing. The main challenge for a company like Davenham is to build capacity because the demand is really growing fast. And of course, the geographical priorities will depend on our ability to build the demand at the right base. Davenham is buying -- is working with all big switchgear guys and integrates all big brands into their panels and their switchgear, including some of our competitors’ brand. Our objective is not to switch to Legrand. Our objective is to fulfill the demand from our customers. So whatever brand of our customers want us to put in the Davenham switchgear will continue to do so. It is more a game of how can we grow capacity, how can we get closer to more customers, how can we satisfy the demand of the existing customers to cope with a very fast growth rather than a story of heavy synergies, if I may say.
Alasdair Leslie: Great. Thank you. So just a follow-up there. I mean could we view Davenham then as a kind of type acquisition into the grey space in U.S.? Is that possible?
Benoît Coquart: Well, yes, it is, but -- well, Davenham still at the end has a small market share out of the grey space and you have a lot of incumbent players everywhere, actually, not only in the U.S. So of course, I cannot commit to any specific number, but I can tell you is that we would be extremely disappointed if we were not to experience a very nice growth on Davenham products in 2024 and 2025.
Alasdair Leslie: Great. Thank you, Benoît.
Operator: Thank you. Your next question comes from the line of Kulwinder Rajpal from AlphaValue. Please go ahead.
Kulwinder Rajpal: Yes. Good morning everyone. So just wanted to ask a little bit about the faster expanding segments, how did it develop in H1 versus your core products? And then what are the expectations for the full year? And my second question was on the renovation markets across the group. How do you see them developing? Are there any green shoots visible or do you think that renovation is still not where it should be?
Benoît Coquart: So as far as the fast expanding segment, not much better than the rest in H1, but clear different trends between Q1 and Q2. Q1 was down. Q2 is pretty good, but mostly helped and supported by data center. Now we are not really giving a precise number quarter-by-quarter because we think that it’s worth looking on a yearly basis. But, let’s say, you can assume that the data center is recovering and the rest remains pretty difficult in line with the rest of our product offering. As far as renovation is concerned, well, it’s very different from one zone to the other. In the U.S., the numbers are better for renovation. But again, not yet hitting ourselves. In Europe, the renovation is, of course, not as down as the new. It’s a bit less cyclical than you built, but it’s negative, especially the residential side. Again, I believe it should be better at some point because the global inflation is reducing, and it has some impact on the -- of course, the pace of renovation. Interest rates will progressively decrease. So it will increase, let’s say, the ability of households to take on a loan to make heavy innovation. Hopefully, the mood of the consumer will possibly improve. So it should improve at some point, but it remains, let’s say, difficult in Europe. As far as the rest of the world is concerned, well, nothing specific to say, renovation is not as big in India or in China or in Brazil as it is in Europe or in the U.S., so no specific comment.
Kulwinder Rajpal: Okay, thank you.
Operator: Thank you. Your next question comes from the line of William Mackie from Kepler. Please go ahead.
William Mackie: Yes, good morning everybody. Thanks for the time. A couple of questions. The first one comes back to the European markets, please, Benoît. You’ve talked in some detail about following the KPIs in relation to a discussion in North met and Central America. But -- maybe if we could just go into your thinking a little more around how you see the KPIs across the building markets in Europe developing at this stage. And with your experience, how far do you think it might be from reaching the bottom of the valley into the sort of the benefit of starting a recovery? What’s the sort of planning assumptions?
Benoît Coquart: Yes, it’s a good question, indeed. Well, the numbers are not yet really improving in the Europe residential market. The residential, the new permits should be down in 2024. The construction expenses will be down. And it is, of course, more down, if I may say, new than it is, so now I think it’s clear that no improvement will come in the KPIs, the market KPIs, if I may say, in the coming months. So now it’s more a story of 2025 than 2024. And it will depend very much on the decrease in interest rates. People tend to be more -- were a bit more positive 6 months back because they thought that the decrease in interest rate would occur in 2024, but it hasn’t so far much. So in other words, we hope that we should start to see improvement in the market KPIs, let’s say, somewhere between the very end of 2024 and in Q1 2025 or H1 2025 and then hitting our top line somewhere in 2025. But so far, no significant improvement. As far as the nonresi is concerned, no change in trend in H1 compared -- 2024 compared to H2 2023. So the nonresi remained, let’s say, flattish or slightly negative. And here again, there should be some recovery at some point, but difficult to say. And the last piece, as we said, is data center, which is doing well and positive thing on data center is that it’s a great space growing, which implies that at some point in Europe, the white space should also come. To give you more granularity, but it’s a bit, as you know, difficult to have full visibility on what will happen next.
William Mackie: And my next question is more top-down or bigger picture related. I mean you took the leadership in 2018 and then you really didn’t have much chance to gather pace until you’ve had to deal with an incredible amount of turmoil from 2020 to 2023 and dealt with it exceptionally well in terms of the group maintaining profitability and cash conversion. But now as we head into a normalization perhaps across a number of your markets, you’ve called out data centers with your capital allocation and some of the faster assisted living growth areas. But when you look maybe on a 3- or 4-year view, where do you think Legrand has to change pace or change focus from where it’s been in the past to keep the momentum in the underlying growth across the business continuing?
Benoît Coquart: Well, why don’t you save this question for September 2024 because we’re looking 3 or 4 years ahead is typically the reason why of a CMD, so let’s keep this question ahead. If your question is, are you tired? My answer is, no, I’m not. If your question is, do you see the levers to do growth and to leverage what will come on the market in the next couple of years? The answer is, yes. But we’ll give you more detail and granularity in September.
William Mackie: Thank you. I just hope for a [Indiscernible]. Anyway, super. Thank you very much.
Benoît Coquart: Thank you.
Operator: Thank you. We will now take our final question for today. And your final question comes from the line of Jonathan Day from HSBC. Please go ahead.
Jonathan Day: Hi, good morning. It’s Jon from HSBC. Thanks for taking my questions. I’ve got a couple. I was wondering if you could just talk a little bit about the fact that last year in the second half, you were making some -- we’re trying to make some internal improvements to drive growth. And I was wondering if you could sort of, first of all, just update a little bit on those and how we should also think about those for -- in terms of comps for H2 this year? That’s my first question.
Benoît Coquart: Well, indeed, we need a few SG&A investments. Now let’s make it clear. We didn’t -- well, it was a couple of million euros, but not €100 million. And as I said earlier in the call, we don’t have a similar program or structured program for H2, but if we see an opportunity and if we believe that by putting a bit more gasoline in the engine, i.e., boosting a bit of product launch spending a bit more in communication or accelerating our training program, it will help to boost our sales, we will do so. The conclusion of last year was that in a depressed market, you can spend as much as you can, it doesn’t really positively impact your top line. So we will do it wisely carefully and only if we feel that it will help our top line.
Jonathan Day: Okay, thanks. And I was also just wondering then if you could also comment a little bit on China and what you’re seeing there? I mean, you described it as a sort of sharp any signs of green shoots at all? Is it still really in the doldrums?
Benoît Coquart: No, no sign of improvement for China. We are very much building exposed and especially residentially exposed. You have seen the numbers as far as residential market is concerned. They are down 20%, 25%, let’s say. So, so far, no scene of improvement. The good thing, if I may say, is that it’s only 2% of our sales. So it doesn’t have a huge impact on our top line. But no, so far, no significant improvement. And we don’t believe we will see any sign before at best back of 2025.
Jonathan Day: Great. Thank you very much.
Operator: Thank you. I will now hand the call back to Benoît for closing remarks.
Benoît Coquart: Well, I wish to thank you a lot for your time. I know that this morning is a busy morning. So thanks a lot for your time and the interest you have in Legrand and other of you were lucky enough to take a summer break, I wish you a happy and relaxing break. And by the way, Ronan, Antonia and the team are at your disposal for further questions. Thanks a lot.
Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.
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