Earnings call: Legrand reports resilience amid market slowdown

EditorLina Guerrero
Published 05/03/2024, 07:58 PM
© Reuters.
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Legrand (LR.PA), the global specialist in electrical and digital building infrastructures, reported a decrease in sales for the first quarter of 2024, aligning with market expectations due to a slowdown in the building sector. Despite the sales dip, the company maintained good margin resilience and confirmed its full-year targets, including an adjusted operating margin before acquisitions of between 20% and 20.8%. Legrand also announced a dividend increase and remains optimistic about its data center business and acquisition strategy.

Key Takeaways

  • Legrand's sales fell by 3.7% excluding exchange rates and Russia, with an organic decline of 5.4%.
  • The company confirmed its full-year sales growth target of low-single digits and an adjusted operating margin of 20% to 20.8%.
  • Legrand announced two acquisitions and one minority stake, focusing on data centers, assisted living, and connected solutions.
  • The company's de-carbonization efforts were validated by the SBTi, with a commitment to a 90% reduction in GHG emissions by 2050.
  • A proposed dividend of €2.09 per share for 2023 represents a 10% increase from the previous year.

Company Outlook

  • Legrand expects a rebound in housing starts and investments in 2024.
  • The company plans to continue investing in growth through R&D, advertising, and launching new products.
  • Acquisitions are targeted to be value accretive within five years of full consolidation.

Bearish Highlights

  • The European residential market remains challenging, with no improvement seen in the non-residential office sector.
  • The US residential market, which represents 20% of Legrand's debt, is only starting to bottom out.
  • China has experienced a decline in the residential market.

Bullish Highlights

  • Data centers are performing well, with strong growth expected in upcoming quarters.
  • Legrand's data center sales are growing, with a high volume of quotes and orders for the white space.
  • The rest of the world, including India, is performing well.

Misses

  • Q1 sales volume decreased, impacting EBIT margin.
  • The fast expanding segments, including connective and green products, had a weak quarter but are expected to improve.

Q&A Highlights

  • High inventory levels at distributors are not seen as a major concern for full-year top-line impact.
  • Legrand is planning to expand its data center portfolio with additional capabilities and products.
  • The company is managing deliberate pricing strategies, with targeted increases based on market conditions.
  • Supply chain constraints for data center products are anticipated due to demand but are considered manageable.

In summary, Legrand is navigating a challenging market environment with strategic acquisitions and a focus on growth sectors like data centers. The company's commitment to innovation and sustainability, coupled with prudent financial management, positions it to weather the current slowdown and capitalize on future market improvements.

InvestingPro Insights

Legrand's (LR.PA) recent financial performance and market activity provide a nuanced picture for investors. With a market capitalization of $26.83 billion USD and a P/E ratio that stands at 22.1, the company is seen as a substantial player in its industry, albeit trading at a premium relative to near-term earnings growth. The adjusted P/E ratio for the last twelve months as of Q4 2023 is slightly lower at 21.5, reflecting a more favorable valuation.

An InvestingPro Tip that stands out for Legrand is the company's impressive gross profit margins, which reached 52.26% in the last twelve months as of Q4 2023. This indicates a strong ability to control costs relative to its sales, which is especially commendable given the broader industry challenges. Additionally, Legrand's commitment to shareholder returns is underscored by its history of maintaining dividend payments for 19 consecutive years, with the dividend increasing for the past 4 years. This demonstrates a reliable track record of returning value to shareholders, even in fluctuating market conditions.

While there are concerns, with two analysts having revised their earnings downwards for the upcoming period, Legrand's operational strengths are evident in its gross profit of $4856.37 million USD and an operating income margin of 19.5% for the last twelve months as of Q4 2023. The company's moderate level of debt and the fact that its liquid assets exceed short-term obligations suggest a solid financial footing that could support its strategic initiatives and dividend policy.

Investors interested in gaining further insights into Legrand's financial health and stock performance can explore more InvestingPro Tips, with additional tips available at https://www.investing.com/pro/LGRVF. Use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, which includes access to these valuable investment insights.

Full transcript - Legrand Sa (LGRVF) Q1 2024:

Operator: Good morning, ladies and gentlemen, and welcome to today's Legrand's 2024 First Quarter Results Conference Call. For your information, this conference is being recorded. All participants are in a listen-only mode. Later there will be a question-and-answer session. 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: Thank you very much. Good morning everybody. Franck Lemery and myself are happy to welcome you to the Legrand 2024 Q1 conference call and webcast. As you know, we have published today our press release, financial statements and a slideshow to which we will refer. Those documents are available on the Legrand website. After a few opening remarks, we will comment the results into more details. I begin on page four of the deck with the three key highlights of this press release. First, in a building market in retreat, as expected, Legrand reports lower sales and good margin resilience. Those results are in line with our expectations. Second, we are actively executing our strategic road map. Third, we confirm our full year targets. As a reminder, we will host a Capital Market Day in September 2024 in London. So, moving to pages six and seven, I will start with an overview of sales. In the first quarter of 2024, excluding exchange rates and Russia, our sales decreased by minus 3.7% with an organic trend of minus 5.4% and a positive scope from acquisitions of plus 1.8%. Considering that the building market, which represents 80% of our sales, is experiencing, as expected, the market slowdown across most geographies, this limited decline in revenue highlights the strength of our business model, the solidity of our market positions and the execution capabilities of our teams. Regarding the two other elements on sales, the negative scope effect from Russia was minus 1.1% on the quarter and will be minus 0.6% on the full year 2024. The exchange rate effect was negative minus 1% on the quarter and based on average rates of April, it will be close to 0% for the full year. On page seven you will find the key takeaways per geographies on a like for like basis. The quarter was overall impacted by, first, difficult building markets as expected, including in Europe, US and China, and, second, by some technical shifts including less number of days, significant basis for comparison and to a lesser extent slight destocking. We expect a sequential improvement of the like-for-like sales evolution, with Q2 being better than Q1 and H2 better than H1. In total, the like-for-like decline in sales was minus 4.7% in Europe, minus 6% in North America and minus 5.8% in the rest of the world. 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 20.6%. This level of profitability of the group once again demonstrates Legrand's ability to protect its margin in the context of declining sales, thanks to its intact pricing power and a solid cost control. The impact of acquisition was of minus 0.1 points, meaning that the Q1 2024 adjusted operating margin stood at 20.5%. Going now to page nine and ten. First, the net profit stood at €266 million, representing 13.6% of our sales and, second, the free cash flow came to €146 million at 7.2% of sales for the quarter. It's in line with group historical seasonality. On page eleven, two figures to illustrate the robustness of our balance sheet. We have a net debt-to-EBITDA ratio of 1.2 at the end of the quarter and a high cash position. Our cash generation and our balance sheet are clear enablers of the M&A development that Benoît will comment soon. This concludes the key financial topics I wanted to share with you this morning. I'm now handing over back to Benoît.

Benoît Coquart: Thank you, Franck. We can now move to page 13. We confirm the full year targets announced in February with low-single-digit growth for sales, meaning organically into acquisitions and adjusted operating margin before acquisitions of between 20% and 20.8% of sales, at least 100% CSR achievement rate for the third and last year of our 2022-2024 roadmap. Let me now move to pages 15 and 16 detailing our ongoing acquisition strategy. We just announced two acquisitions and one minority stake. This means €80 million acquired sales already announced in 2024 with MSS, Innovation and Netrack deals. First, the acquisition of Innovation, the Dutch leader in healthcare software in the market for connected health and assisted living, with annual sales of more than €60 million. Second, Netrack, an Indian specialist in rack, notably for data centers, with around €10 million of annual sales. Last, we took a minority stake in UIOT, one of the Chinese leading players in wireless IoT smart home solutions. These acquisitions in the promising areas of data centers, assisted living and connected solutions further strengthen Legrand group's leadership in its faster expanding segments, and we will keep up the strong pace of external growth in coming quarters. On page 18, a quick CSR update. We have reached an important milestone this year in our de-carbonization strategy with SBTi validating Legrand 2050 Net Zero commitment that is more ambitious than our previous 1.5 degree trajectory validated in 2021. This new commitment involves reducing the group's GHG emissions by minus 90% across our entire value chain by 2050, with more demanding 2030 intermediary targets. Now a few words on the key agenda topics for incoming general meeting of shareholders which will take place on May 29; on page 20, with the proposed nomination of Ms. Menon as Independent Director. Her vast experience, including at Accenture (NYSE:ACN) in India, would bring a key expertise to the Board in digital corporate strategy and CSR. Together with the proposed renewal of Jean-Marc Chéry, the CEO of STMicroelectronics, the Board composition would continue to be among the industry's best practices with 75% of independent members, 42% of women and seven nationalities represented. Now on page 21, as announced previously, the proposed dividend for 2023 is of €2.09 per share, up plus 10% versus last year. To conclude on page 23, we are very happy to share the success of our first international employee share purchase plan proposed to more than 63% of employees, which testifies to the full confidence of Legrand teams in the group development model. Before we move to questions, I would like to remind you of our Capital Market Day scheduled on September 24, 2024 in London. The save the date and registration link will be available on our website today. Those were the key topics of this release. I suggest we now move to Q&A. Thank you.

Operator: Thank you. [Operator Instructions] We will now take the first question coming from the line of Daniela Costa from Goldman Sachs. Please go ahead.

Daniela Costa: Hi, good morning. Thank you very much. I have two questions. The first one I wanted to ask is related to the free cash flow into the working capital buildup on the cash flow. If you could give us further details on what drove that and how do you expect that to recover or not recover throughout the year? And then I'll ask my second question after this to make it easier.

Benoît Coquart: Okay. Hello, Daniela. I will let Franck answer the question. Go ahead, Franck.

Franck Lemery: Thank you, Benoît. Good morning, Daniela. Well, as I said in my previous comment, the cash flow is very usual for Q1, for quarter one. If you take, let's say, for example, the last eight year average is 7.4%, the last two years average, it's 8.9%. So we are totally aligned with a typical quarter. So on your working -- the question on your working capital requirement, once again, it's very close to last year number. It's actually slightly below to last year numbers 11.7%. It was above 12% last year. And last year, you remember that we recorded a very high free cash flow, so no concern about the Q1 gate. There has been some inventory buildup during Q1, but it is typical to prepare for the seasonality. So in a nutshell, we are pretty confident to deliver usual a nice free cash flow of Legrand, let's say, between 13%, 14%, 15% of sales. No doubt about that. It's the Q1 seasonality.

Daniela Costa: Okay, thank you. And my second question is just more regarding the organic trends. And if you could -- I don't know if I missed in your speech, but if you could maybe disaggregate pricing and volume and then within the volume environment, help us with the big things like how much growing -- how much is data center growing, how much is office is declining, sort of like what the makeup. Thank you.

Franck Lemery: Sure. Okay, so first we had a pricing in Q1 of plus 0.5%, which is of course in line with our plan and actually in line with what we told you three months back because we told you that given the environment of the raw mats and components, we expect it to do a plus 1% maximum, so we are plus 0.5%. And to give you some context, our purchase price are slightly down. So the purchase price of raw mats and components is down minus 1.3%. When it comes to the market, so first comment, as I said during my speech, we have some technical shifts impacting Q1. I'll not comment them again, but I can if you want. When it comes to the end market themselves, we haven't seen any big shift versus H2 2023. Starting with Europe, we still face a difficult residential market in Europe, which is not a surprise given the fact that the bad statistics of 2023 are hitting us now. If you look, for example, at the residential permits, which were down 20% last year, it started to impact our top line in H2 and still impacting our top line in Q1. So, still difficult residential market and quite a flattish non-residential market in Europe and data centers are doing very well. As far as North America is concerned, as expected, residential is bottoming out. Unfortunately, it's only 20% of the debt, if I may say, but this is clearly demonstrated in the statistics where the professional organization is expecting some rebound in 2024 in housing starts, in investments, in new single family, in residential improvements and so on and so forth, so the residential bottoming out and progressively hitting our P&L. No improvement on non-residential so far, especially on the office market. As far as data centers is concerned, the white space has been for a couple of months a bit soft because a number of major guys have been redesigning their data centers to accommodate AI, have started to order quite a lot in the gray space and are starting now actually to order for the white space. So bits of Q1 in the US on the white space, but we expect now very strong growth in the coming quarters. That's what we can say. So overall, let's say a building market which remains a bit difficult, especially in residential, in the office market in the US, data centers that should grow very significantly in the quarters to come. The last word maybe of the rest of the world, China is clearly down. But again, when you look at the residential statistics in China, especially residential new, the market is down, let's say, between 20% and 30%. There is a pause in Africa, but which is not a concern and it's a temporary pause and business will come again to growth in the coming quarters and the rest of the world is okay, including India. I don't know if it answers your question, Daniela.

Daniela Costa: It does. Thank you very much.

Franck Lemery: Thank you.

Operator: Thank you. We will now take the next question from the line of Gael de-Bray from Deutsche Bank. Please go ahead.

Gael de-Bray: Well, thanks very much. Good morning everyone. I have two questions, please, so maybe one at a time. So firstly, on the margin side, I mean, ten years ago, so Legrand probably had one of the highest margins in the industry, if not the highest. And now some of your peers, including ABB (ST:ABB) Electrification, Etun [Phonetic] and a few others, have caught up and they report margins of between 20% and 25%. And we've seen improvements of up to 700 BPs for them over a few years. So is the Legrand margin pattern versus your peers purely a question of mix, you think, or is there anything else? And can you perhaps come back on the reasons why you consider a 20% margin objective and normal is appropriate for the group?

Benoît Coquart: Well, thanks Gael. I'm a bit uncomfortable commenting the other margin, especially if you take some subdivision margins, of course it's a bit difficult to compare. Well, since you are pointing the margin on ABB, of course there is a seven point improvement, but the starting base was 8%, right if I remember properly. So moving from 8 to 15 and we are more than 20. So can hardly comment my competitors margin, I can comment my own margin, telling you that 20% EBIT margin, which is what we've been able to deliver consistently for quite some time, incorporating each year 20, 30 40, 50 BPs dilution coming from acquisition, implies if we had stop acquisitions, a 22% or 23% EBIT margin, not a 20% EBIT margin. So, the reason why Legrand is at 20 plus and not moving to 22 is because to the contrary of many of the listed peers which you have in your database and which are selling assets, we are buying assets. Every year we intend to deliver 3% to 4% or more if we can payment impact acquiring companies that do have a margin level which is most of the time below group’s average, and as a result, which dilute overall margin. So it has been the story of Legrand. Organically, if I may say, we have a margin which is improving 30, 40, 50, 60 BPs a year, and this improvement is consumed, if I may say, to finance the dilution coming from acquisitions. Last comment, which I would like to make, maybe to come back to the quarter comment, delivering a 20.5% EBIT margin, which, as you know, is all in, including additional restructuring expenses, including many things in a quarter where our top line is going down organically by more than minus 5%, I think, it's quite an achievement and tends to be higher than what we were able to deliver a couple of years back. A couple of years back, with this level of evolution, we would have had 19% EBIT margin, now we have a 20.5% EBIT margin. So in a nutshell, I would not commend the margin of my competitor. Without acquisition or organic, the gross in margin is 30, 40, 50 BPs a year, which I believe is substantial. And last, we have a pretty healthier level of margin in Q1, given the drop in sales we have.

Gael de-Bray: Okay, thank you. And maybe the second question on your M&A strategy. I think that with innovation, that's probably the first time ever you make a software transaction. And I was curious to perhaps understand the sort of multiple that you're ready to pay now on these sort of companies.

Benoît Coquart: Yeah. So actually it's not the first time we do, but the first one was too small to be on your radar, Gael. So let me maybe tell you the story. So we have a business which we call Legrand Care, which is a bit too small for you to consider. It was last year, €100 billion of sales, and it is made of products that help old and disabled people to stay safely at home instead of going to a care place. So, typically, for example, personal alarm system, so that is if a person falls, it sends a signal to a monitoring center that sends somebody to take care of the person, so €100 million. And this business was built more than ten years back by a series of four small acquisitions; two in the UK, one in Spain, one in France, and it has been growing very nicely. As part of these €100 million, we already have 30% of our sales made with software with annual recurring revenue. And this 30% is actually coming mainly from a small acquisition, Gentec, we did in the UK 15 years back. And the software, which we sell, is the software used by the monitoring center to manage the pack of connected devices, as well as the course, incoming course from the person and so on and so forth. Innovation is doing exactly that on other geographies. This business for Legrand, the software piece, was concentrated in the UK. Innovation is doing that in a number of geographies in Europe, the Netherlands, Belgium and a few others. And on top of that, has developed a catalog of additional complementary software to manage the connection between the patient and the care system, as well as a portal to manage the patient engagement, if I may say. So, it's very complementary to what we are doing with Legrand Care. It's not something new in terms of -- it's an adjacent field, but it's not diversification. Of course, Legrand Care, once Innovation we have been docked, will be €160 million business. We intend to make it a €200 million, €250 million, €300 million business. We don't think, given the size of the market, which remains small, that it will ever be a €1 billion or €2 billion market. But it's a nice piece of our market, which is experiencing nice growth. As far as the price is concerned, well, as a multiple of sales, it tends to be higher than the usual two times sale that we are paying, because the profitability of this company is substantially higher than gross profitability. It's a software type of profitability. Now, when it comes to the price, we are sticking to our usual rule, i.e., this deal, as the other ones, is EVA accretive within five years of full consolidation, i.e., within five years of full consolidation, we have a return on capital employed, which is higher than the work. So, nothing specific, if I may say. We want this deal to be value accretive as for the other transactions. Now, as a matter of fact, given its level of profitability, indeed, as a multiple of sales, it's higher than the usual two times.

Gael de-Bray: So, I mean, in terms of the total amount you might have paid on this deal specifically, I mean, is it more than 300 million, something like this.

Benoît Coquart: We are not communicating on individual pricing, nor are we commenting on what is coming out in the press. So no comment on the price you will have anyway the cumulative price paid for Q2 acquisitions in the financial statement we will release end of July. But as you know, we are never commenting the individual price of transactions.

Gael de-Bray: Okay, thanks very much.

Operator: Thank you. We will now take the next question from the line of Max Yates from Morgan Stanley. Please go ahead.

Max Yates: Thank you. Good morning. I just wanted to ask on your comments on inventory destocking, could you just elaborate a little bit whether you were seeing that in any particular region? Is that a kind of new trend? Has it accelerated? And just in terms of giving us a feel of kind of where you think inventory levels are across your distributors and whether we should anticipate that continuing sort of into the second and third quarters? Thank you,

Benoît Coquart: Hello Max. Well, we mention it because it is part of those technical factors impacting a bit Q1. But frankly speaking, it's not a big impact, it is limited to a few geographies, a bit in France and a bit elsewhere, but it's not a major trend. We're not seeing that across the board and we don't believe that it is a start of a trend. Based on my discussions with distributors, even though I haven't met the thousands of distributors we have, I don't feel that they have entered into a systematic destocking approach or the more as some of them start to believe that the market will at some point rebound and then better prepare for that. So, one of very small impact, not the beginning of a trend, and I don't have the feeling that our inventory is high at our distributors level. I have the feeling that it's a pretty standard inventory. Now, of course, their inventory strategy in the quarters to come will depend on their expectation as far as the building market is concerned, but it's not a big concern for us. And of course, we don't believe that it should have a strong negative impact on our top line for the full year.

Max Yates: Okay. And just maybe a quick sort of follow up and I guess thinking more sort of strategically about your data center business, my kind of interpretation of it is you've been a bit more targeted in the kind of products and areas that you want to focus on, sort of some of the areas like, like busways. Could you just talk about kind of whether in terms of your data center portfolio, you see any kind of major white spots or any kind of areas where you think you could sort of build up the business or are you kind of fundamentally happy kind of focusing on the kind of two or three areas where you really have strong positions. Thank you.

Benoît Coquart: For the data center, you mean?

Max Yates: Yes, exactly.

Benoît Coquart: No, clearly the acquisition we have made, PDUs, busways, racks are just the start of the story. Every, let's say, two or three years we are adding some capabilities in data centers, the last one being ZPE that we acquired in January in the US. And we don't intend -- right before that PE, a year-and-a-half ago we acquired a very small -- very nice company in rear door cooling, liquid cooling called USystems. So we have a lot of ambitions to add additional capabilities, additional products to a portfolio being either white space or gray space. So I can confirm that we have a number of discussions going on and I hope that some of the discussions will come to a positive conclusion in the quarters to come. The 15% of sales in data center we did last year should continue to grow. We will add new product categories complementary to those we have. We will target both white space and gray space. And last, even though Q1 has been a bit soft in the US once again because investments started with a grey space, I confirmed that we are getting very high number of quotes, very high number of, of orders for the white space and we expect a very nice growth starting in April in this business.

Max Yates: Well, I mean, just -- sorry, just to push on. I mean, would you think about expanding into liquid cooling or would you -- is there more UPS you're looking at? Just any color would be helpful.

Benoît Coquart: Well, we are already liquid cooling because liquid cooling includes a number of different technologies. The rear door cooling I was mentioning is a type of liquid cooling because it's channeling cool liquid in the door of the rack.

Max Yates: I was thinking more direct to chip.

Benoît Coquart: We are not in the immersion cooling or direct to chip cooling. If there is an opportunity, why not, we'll see. But we don't believe it is a must to be in direct to chip or immersion cooling because it will remain within a few years still a niche market for many reasons, I would be happy to elaborate. And we believe that still 90% of the market will be made of other type of cooling such as rear door cooling. And actually USystems has been experiencing very nice growth. But again, we are looking at many interesting opportunities and if we believe there is a technology or market segment which is set to grow within data center space, we will clearly invest in it.

Max Yates: That's really helpful. Thank you very much.

Operator: Thank you. We will now take the next question from the line of Phil Buller from Bremberg. Please go ahead.

Phil Buller: Thank you. I've got a couple of questions please. Just firstly on the -- I guess the tone of messaging sounds quite upbeat and positive. I understand it was in line with your expectations in terms of the Q1 results, but I think it was a little bit noise versus market expectations. So I understand the mechanical factors are kind of tough comps, but can you talk about what you've seen specifically in the quarter? Perhaps you can talk about March versus February or April versus March. As I understand there's lots of mechanical factors, but what have you actually seen on the ground in terms of green shoots [Indiscernible] in the coming couple of quarters, please? That's question one. Thanks.

Benoît Coquart: Yeah, hello, Phil. Well, I’ll not comment March against Feb or Feb against Jan, because it doesn't say anything about the trend. This being said, two comments, as far as the technical factors are concerned, well, I can give you a bit more granularity, we have approximately one day less in the quarter, which is not a lot, but of course which is playing. And number two, as far as number two, is a slight destocking, and number three, basic comparison. I remind you that Q1 2023 was up 7.4% for a full year, which was up only plus 2.7%. So if you put the three factors together, clearly it is hitting and impacting Q1. As far as the remaining nine months are concerned, the number of days won't play anymore actually, should play the other way. The basis for comparison will become easier than it was in Q1. And as far as destocking is concerned, as I said, we don't expect what happened in Q1 to be the start of a trend. So the technical factors should either be neutral or play the other way for the remaining nine months. Second comment, which I can make, is that, as I said during my introductory speech, we are expecting a sequential improvement Q2 being better than Q1 and H2 being better than H1, and the months of April is clearly in this exact trend.

Phil Buller: Okay, thank you.

Benoît Coquart: Again, it's only one month.

Phil Buller: I understand. Just one point of clarification as well. You mentioned white space being a bit soft. Can you just help frame what that looks like? Is it flat? Is it down? Is it up mid teens?

Benoît Coquart: Yeah, sure. Well, it's a bit soft, but again, it's not a surprise because when you build or when you refurbish a data center, you start with a grey space, you start with a power input, if I may say, switchgear transformer, UPS, power busbar. And then once it is done, of course, you are sketching your white space. Data center, it is up in Europe, but it's a small number. And in Europe it's strongly up in grey space, down in white space. And in the US, it's slightly down, but with very fast and strong order buildup, which again, give us a lot of comfort. And you know that at PLO grand we are always very cautious when forecasting. But I can tell you that in data center it gives you a lot of comfort on the growth we will experience in the months to come.

Phil Buller: Thank you. And just finally, the comments about your -- I guess not wanting to comment on the competitors, I totally understand that. Some of your competitions have evolved their businesses beyond recognition. ABB actually did a 22% margin in Q1 and grew 6% organically. So I understand that there are different strategies and approaches to M&A and divestitures or whatever, but how are you thinking about benchmarking yourselves versus the competition which has evolved? And are you focusing on your portfolio in any way with a view to divest assets? I know you acquire assets, attractive multiples, and make them better, but is there anything in your portfolio that you're actually mind to review because of its lower margin or lower growth profile? Thanks.

Benoît Coquart: Well, again, it's difficult question to compare performance with a competitor. All the more you're comparing again with ABB. ABB, as far as I know, it's 20% of their business is in the building industry. 80% of our business is a building industry. So you are comparing apple to banana. I prefer to focus on Legrand. As far as Legrand is concerned, you have the main elements of our strategy. We intend to keep going even though the future is a bit soft. We've never been a conglomerate. We are a pure play, super focused. So there's no significant asset which would be so underperforming either in top line or in bottom line that it would be a good idea to sell. We have, of course, traditional businesses which are going down more than others, but which are part of the portfolio and not easy to invest. But again, we are operating on a market on 80% of our sales are on the market, which for a couple of quarters have been a bit depressed. Is it a concern to Legrand? No, it's not. Do we believe that some of those markets are bottoming out? Yes. Do we think that in the quarters to come, we should have a pretty good news and good statistics coming from the building industry that will help? Yes. And is our mission to go back to growth organically? The answer is yes. This being said, indeed, Q1 is a bit weak as expected, again, because the market is not very supportive. As far as the margin comparison with the peers, I already answered this question. Don't ask me to improve the margin by seven points, starting with a 21% EBIT margin. The improvement of one of my peers’ margin came from the fact that they started from a very low base and of course, the management should be uploaded for that. But don't compare an 8% EBIT company with a 21% EBIT company, it's not exactly the same strategy that you have to follow.

Phil Buller: Understood. Thanks very much.

Operator: Thank you. We will now take the next question from the line of Delphine Brault from ODDO BHF. Please go ahead.

Delphine Brault: Yes, hello. Good morning, everyone. So I have two questions. I will ask them one at a time. Coming back on the pricing of 0.5%, how much is coming from price increase done in 2023? So how much of carryover do you have in Q1? Because I'm a little bit surprised by this. 0.5, so did you agree on price decrease in some segments in Q1?

Benoît Coquart: Well, hello, Delphine. Well, I'm a bit surprised that you are surprised, if I may say, for two reasons, because, number one, it is exactly in line with what we said in Feb, max 1%, and number two, because this is very typical of Legrand in a context where the price of raw mats and components are going down. If you look at the past couple of years, when the price of raw mats and components going down, we are able to do 0.5%, 1%, 1.5% price increase, not 3% or 4%. And it is actually deliberate strategy from Legrand in a context where the price of raw mats and components is going down. We are very careful in keeping our competitivity and, as a result, we don't want to do too much price increase. Now, are there targeted price increase here and there? As usual, not more than usual. When we have our price going up 0.5%, 1%, 1.5%, 2%, it is usually made of an average price increase on 80%, which is slightly higher, and then targeted price decrease; when you have some metal the price going down 20% on the product, which has a high content in metal, for example. There's no reason that you don't give that part of that to the market. But again, the total of all that is that our price is up 0.5%, which is completely in line both with our past practices and with our guidance. Now, when it comes to the remaining nine months, of course, we will continue to monitor very closely the price of raw mats and component. If the price remain negative, there's no reason why we should do more pricing and we'll stick to the 0.5% or 1% maximum. Let's say, if for whatever reason, the price of raw mats and components was to go up again, which by the way, wouldn't be a bad news for the state of the underlying economy, then we would keep our ability to do more pricing and we could very much end up with a higher price effect than plus one. So again, as you know, it is something which we carefully monitor and which we adjust on a quarter-by-quarter, if not on a month-by-month basis, taking into account the price of raw mats and components, the price of other input like wages and so on, as well as our competitive position. It's a KPI which is carefully monitored, which is still -- it is not the result of any pressure on price. We are not seeing any specific pressure on price, but we have decided to be very, very careful in doing price increase, distributing price increase, again, because we are in a context where the price of raw mats and components is going down.

Delphine Brault: Okay, thank you. That's very clear. Thank you. Second question is, can you help us with your full year guidance and provide a bit more color on the assumptions behind the top line guidance. What are your assumptions on the market trends in Europe and in the US? Do you rely on any recovery in specific regions or is it purely basis of comparison that will ease going forward?

Benoît Coquart: Well, our guidance, which is you have interplay, so you have to split between organic and inorganic. As far as organic is concerned, as you know, we are shooting for something between slightly down to slightly up. And when we designed this guidance, we knew that Q1 would be of course quite soft as far as assumptions are concerned. Number one, we won't have any more most of those technical factors negative impact in Q1, as I said, with number of days reversing and with the basis for comparison helping us. Number two, we expect strong growth in data center, which, as a reminder, was last year 15% of our sales. So it's something which is somehow substantial. Number three, we don't expect a very significant recovery on our building market. Again, some of those segments should improve. Take for example the residential in the US, but it's only 20% of our US sales, i.e., 8% for our group sales. But we don't expect a major rebound in the market. We expect some statistics to improve along in 2024. Some of those good news punctually hitting our P&L end of the year, some other in 2025, but not a major rebound. This is for, let's say, the underlying market. As far as pricing is concerned, I've already confirmed maximum 5% in a context where raw mats and components are helping us, but maximum 1% but potentially more if we needed to. This is for organic growth. As far as inorganic growth is concerned, as you know, we have a carryover impact of 1.5% coming from the acquisitions made last year. And we have as a clear target to acquire, not to consolidate, but to acquire companies representing 3% to 4% offer sales, i.e., you can make the math yourself, €250 million or €350 million, let's say, that we will then consolidate depending on the date we buy them. We have already acquired close to 2% of our sales, ZPE, MSS, Netrack and Innovation. And we have a lot of discussions going on, including some of them quite advanced discussion. So I can clearly confirm that more acquisitions will be announced in the quarters to come. This is for the full year. And last element, the FX , as written in the press release, based on the application rate, it should be zero, but again, it should be more, it should be less, depending on how FX will evolve in the months to come.

Delphine Brault: Thank you.

Operator: Thank you. We will now take the next question from the line of Alasdair Leslie from Bernstein. Please go ahead.

Alasdair Leslie: Thank you and good morning. So, yeah, just firstly on data centers, we're getting quite a lot of questions on capacity additions and ability for suppliers to meet demand. I just wonder whether you saw any constraints at all on your side, whether you've got a lot of headroom in case kind of demand significantly upside surprises. You're obviously pointing to strengthening demand in the next couple of quarters and maybe just remind us of any investments you're making or might need to make to kind of support growth. And then I've got a follow up question.

Benoît Coquart: Thank you. Yes, of course we are doing. We expect to see some bottleneck or some constraint or challenges as far as supply chain is concerned, because some of those -- on some of those products, the demand can be -- and the orders we are getting and quotes we are making can be very significant. Some of those bottlenecks may not depend on us, but for example, when you are supplying a busbar system with a tap of box, within a tap of box, you may have some electrical components coming from a third party, not from Legrand. And sometimes the bottleneck is coming from the availability of some of those components. Now, this being said, we believe it is manageable. We have planned for this surge in demand for quite some time. So we have added the capacity whenever needed and we believe that it won't be a significant issue. Worth mentioning, these additional capacity won't change the group metrics, so we still expect to have a level of CapEx to sales, let's say, between 3% to 3.5% of sales. It will not move up to 4% or 4.5% because we would need additional capacity. Capacity buildup has always been part of our plan, along with additional CapEx coming from new products, CapEx for productivity, CapEx for Industry 4.0 and so on. So yes, some challenge in the supply chain, which number two, which we believe are manageable and the plans are drafted for that. And number three, no changes in the group's key KPI's.

Alasdair Leslie: Great, thank you. Maybe just to follow up there, one of your US peers, and I think this is sort of commented on by a few others as well, they're saying high density AI workloads would be deployed in data centers first in North America, then the kind of the rest of the world would follow with maybe a nine month lag. I was just wondering whether you agree with that sort of timing. Is that what you're seeing in your own businesses, obviously in Europe or perhaps you kind of see a stronger pickup in Europe already?

Benoît Coquart: Well, we are much bigger in the US than in Europe and the rest of the world in data center, so I can comment very much on the trend in the US. I'm not sure that the evolution of our sales and the rest of the world and Europe is typical of a trend. Now. It would make sense that it happens this way. There are two trends that are impacting. As I already said, number one, grey space before white space, but again, it's common sense to say that when you are building a data center, you first start with powering it before starting to manage the server. And number two, it wouldn't be completely a surprise if indeed the rest of the world was following, because a lot of those investments are coming from the big guys, the Amazon (NASDAQ:AMZN) Web Services, the Microsoft (NASDAQ:MSFT), the Google (NASDAQ:GOOGL), the Oracle (NYSE:ORCL) and so on and so forth. And of course, those are American companies, and it would make a lot of sense for them to start working on the next gen of data centers, first in the US and elsewhere. But to tell you what we are seeing at Legrand, we have, as I said, a very high level of orders, but not only in the US. We also have a lot of demand coming from Europe, coming from Asia. It's not limited to the US, but again, we are much bigger in the US than elsewhere, so I'm not sure that the orders we are getting in Europe, in Asia, for example, are indicative of any trend.

Alasdair Leslie: Very helpful. Thank you. Thank you, Benoît.

Operator: Thank you. We will now take the next question from the line of Andre Kukhnin from UBS. Please go ahead.

Andre Kukhnin: Good morning. Thank you very much for taking my question. Apologies. I had a technical difficulty, so I just wanted to follow up on data centers invariably. Was your business up, down or flat in Q1 in data centers, globally?

Benoît Coquart: Well, it was up in Europe, slightly down in the US, so globally, slightly down, because, you know that we are more exposed to US than elsewhere, but again, absolutely not a concern and very strong confidence. You know how strong those words are coming from Legrand. Very strong confidence on the growth we will experience starting in April and in the months to come.

Andre Kukhnin: Great. Thank you. And you said strong growth for the full year, which I guess strong is above 10% and probably more like in 15%, right, what we've seen from the [Indiscernible].

Benoît Coquart: Don't ask me to be that precise. I would love to be that precise. Strong means strong and yes, again, the next nine months should be strong, but again, I cannot be more specific on that.

Andre Kukhnin: Thank you. I appreciate that. I just wanted also to dig into the profit bridge a little bit. We kind of see, I think, over 50% drop through there from organic growth to EBIT. And you said that net price is a positive with a positive gross price and the raw materials actually down. So I just wanted to understand what else is in the bridge there that drove this maybe a little bit higher than I would have expected a drop through -- certainly drop through implied on volumes. Thank you.

Benoît Coquart: Yeah. Okay. I'll make broad comments and then Franck could comment in more detail. So indeed, our EBIT margin at 20.5% is down 170 BPs compared to last year, i.e, 160 BPs excluding acquisitions, but it's down compared to last year, which was a superb quarter, but it's a very good quarter above most of what we've been able to deliver over the past couple of years. It's a very good quarter. If you take, for example, the average of 2019 -- 2015 to 2019 margin, it was 19.5%. So it's a very good level of margin. Basically, you have a gross margin, which indeed is supported by a favorable inflation balance between the selling price and cost of raw mats and components and, at the same time, you have plus 3% like-for-like growth in expenses, production and SG&A. So this is -- it explained most of the reason, most of the impact, or most of the decrease in the margin. We have organic sales, which are down 5.4%, and production energy expenses, which are up 3%. It's coming mainly from the fact that on a given quarter you cannot adjust your expense as much as the drop in sales and, number two, we have also kept increasing a number of discretionary expenses and some of those disclaimer expenses are growing high single digits. So gross sort of positive coming from the difference between selling price and price of raw mats and components, which is more than compensated by the fact that production and energy and expenses are increasing 3% where sales are down. Last topic, we have restructuring expenses which amounted to €11 million in Q1. And as you know, at Legrand, restructuring expenses are part of the operating margin, not below. It is to be compared to a typical year for Legrand restructuring expenses are at about €25 million to €30 million. So with €11 million, it's quite healthy, if I may say Q1, as far as restructuring is concerned and again, it's weighting on our margin. But what I would like you to understand is again, 20.5% margin while your sales are going down by almost 6% in volume, is quite of an achievement.

Andre Kukhnin: Yes, I completely agree. I just wanted to get exactly that color on what's inside there. And if I just may, on the discretionary expenses increase. Is this aligned with what you talked about before in terms of investing in feet on the street and marketing activities to stimulate growth?

Benoît Coquart: Well, yes, we keep looking at interesting opportunities and investing into growth whenever we can. But as I said several times, you can do whatever you want in a context where the building markets are difficult. You don't expect that to lead from minus five to plus two. It is number of targeted expenses both in R&D, in advertising in order to fuel our growth. It is more -- seeing that we are expensing to make the most of the market when there will rebound. You don't manage a quarter solely to improve the KPIs of the given quarter. But we are confident in the fact that there will be some rebound in the building market because by a sense, the building markets are cyclical, so the residential market will rebound, the non-residential market will rebound, the data center market should continue to grow fast. And to make the most of this recovery, we keep investing in expenses for future growth. So, again, opening of rep offices, launch of new products. For example, we are just launching today, I mean, not today, but this month, our most iconic range in France called Celiane. We are launching the next generation of Celiane, very good news for the French status. And we have a series of launches that will come in the months to come. We have a level of R&D to sets, which is again close to 5%. So we are not cutting our R&D expenses and so on and so forth. So we are doing a number of expenses and investment to fuel growth, but it's more to make the most of the market rebound than really to boost quarter sales.

Andre Kukhnin: It’s very helpful. Thank you very much.

Operator: Thank you. We will now take the next question from the line of Eric Lemarié from CIC Market Solutions. Please go ahead.

Eric Lemarié: Hi. Good morning. Thanks for taking my question. I got two questions, actually. The first one, you mentioned data centers. But apart from data centers, what's the performance of the other faster expanding segments in Q1 in Europe and North America, connective product and green product? And a second question on software. So you mentioned this acquisition of Innovation in the software business. Would you be ready to acquire software in other segments?

Benoît Coquart: Hello, Eric. As far as fast expanding are concerned, it's down more or less as the rest of the group. But again, data center is almost half of that, so it's not accretive to growth, which shouldn't last. And again, based on the scenarios we have and the plans we have, we expect fast expanding segment to be accretive to the top line evolution in 2024, as it has been for the past couple of years. So it's a, let's say, weak quarter, but it's not relevant of any trend, and it should improve. As far as software is concerned, we are not in a business which is software intensive. It's not like in automation or stuff like that, or planning, or if you look at total [Phonetic] end market, it is not software intensive. We have niches where software matter, and connected care is one of those niches. You could say that BMS, whatever the name you put on it, is firmware intensive, but otherwise, it's not a business which is software intensive. So we are not ruling out anything. Now you are a lot more likely to see in the coming quarters acquisitions of market share or technology and product position in the areas which are field of interest to Legrand, either fast expanding or potential products in order to saturate our channel than to see some additional software acquisition. Some may come, but again, since we are not in a business which is software intensive, we are more likely to see product type of acquisitions.

Eric Lemarié: Okay. Okay. Thank you.

Benoît Coquart: Now let me do a bit of advertising for the next CMD. All those questions will be better discussed and we'll have more time to answer into the details at the end of September. So I hope you and your colleagues will have the opportunity to join at our CMD in London.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.

Benoît Coquart: Thank you very much everybody. Have a good day.

Franck Lemery: Bye.

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