Legrand SA (LGRVF) This fall 2023 Earnings Name Transcript

Legrand SA (OTCPK:LGRVF) This fall 2023 Outcomes Convention Name February 15, 2024 4:00 AM ET

Firm Contributors

Benoît Coquart – CEO

Franck Lemery – CFO

Convention Name Contributors

Daniela Costa – Goldman Sachs

Nick Amicucci – Cowen

Gael de-Bray – Deutsche Financial institution

Alasdair Leslie – Societe Generale

Aurelio Calderon – Morgan Stanley

William Mackie – Kepler Cheuvreux

Andre Kukhnin – UBS

Kulwinder Rajpal – AlphaValue

Martin Wilkie – Citi

Operator

Good morning, women and gents, and welcome to in the present day’s Legrand’s 2023 Full Yr Outcomes Convention Name. To your info, this convention is being recorded. [Operator Instructions]

At the moment, I wish to hand the decision over to our CEO, Mr. Benoît Coquart and CFO, Mr. Franck Lemery. Please go forward, sir.

Benoît Coquart

Thanks. Howdy, everyone. Good morning. Thanks for connecting. So Franck, Ronan and myself are joyful to welcome you to the Legrand 2023 Full Yr Convention Name and Webcast. As you recognize, we’ve revealed in the present day our press launch, monetary statements and a slide present to which we’ll refer. These paperwork can be found on the Legrand web site. After a couple of opening remarks, we’ll remark the outcomes into extra particulars.

I start on Web page 4 with the 4 key takeaways of this launch. First, Legrand delivered excellent 2023 outcomes amid constructing markets in retreat. Second, we’re actively executing our strategic roadmap. Third, we’ve laid out our full 12 months targets. And final, we’ll host a Capital Markets Day in September 2024.

So transferring to Web page 6 and seven. I’ll begin with an summary of gross sales. In 2023, our gross sales grew organically and thru acquisitions by plus 4.7%, pushed by an natural rise of plus 2.7% and a scope from acquisitions of plus 1.9%. With constructing markets in retreat in most geographies, these figures testify to Legrand resilience and ensure as soon as once more the relevance of our development and worth creation mannequin, pushed by sooner increasing segments, pricing energy and powerful business efficiency.

Primarily based on acquisitions introduced until now, the complete 12 months influence in 2024 ought to be round plus 1.5% in 2024. Concerning the two different parts on gross sales, the destructive scope impact from Russia was of minus 0.9% in 2023 and can be minus 0.6% in 2024 on the complete 12 months. The alternate charge impact was a destructive minus 2.7% in 2023 based mostly on common charge of Jan, it could be near minus 1% for the 2024 full 12 months.

On Web page 7, you will discover the important thing takeaways per geographies on a like-for-like foundation. Europe grew a really stable plus 6%, pushed by sturdy development in every sooner increasing phase and regardless of residential market that retreated in most geographies. Within the U.S., gross sales declined minus 2.8% full 12 months amidst strongly declining markets. The group registered because of double-digit gross sales development in datacenters. Lastly, in the remainder of the world space, gross sales marked an natural rise of plus 5.7% in 2023 with a really sturdy momentum in India and a rise in China. These have been the primary feedback I needed to make on gross sales.

I’ll now hand over to Franck for extra shade on our file excessive efficiency.

Franck Lemery

Thanks, Benoît, and good morning to all of you. I’ll begin on Web page 8, commenting the adjusted working margin. Earlier than acquisition and excluding Russia, we recorded a excessive adjusted working margin of 21.2% in 2023, representing a outstanding plus 0.8 factors enhance versus final 12 months. Whereas investing in development and spending considerably in restructuring, this very excessive profitability stage demonstrates as soon as once more the standard of Legrand enterprise mannequin, our undiminished pricing energy, our stable value management and a excessive stage of productiveness. The influence of acquisition was of minus 0.2 factors, which means that the adjusted working margin all-in stood at 21%.

Going now to Web page 9 and highlighting 3 details: First, with a web revenue of €1.1 billion, representing 13.6% of our gross sales. Earnings per share have been up plus 15.6%, displaying the group’s very sturdy worth creation. It benefited principally from the favorable developments of working revenue and monetary outcomes. Second, the free money stream got here to a file excessive stage of 18.8% of gross sales, which means a conversion charge of 138% of web revenue. Lastly, return on capital employed after tax stood at a excessive 14.7% for 2023.

On Web page 10, 3 figures as an instance the robustness of our stability sheet with a web debt-to-EBITDA ratio of 1 on the finish of the 12 months, a excessive money place and a vastly mounted charge gross debt. This concludes the important thing monetary matters I needed to share with you. I am now handing over again to Benoît.

Benoît Coquart

Thanks, Franck. We’ll proceed the presentation speaking about our 2023 dividend and share buyback program on Web page 12. So for 2023, Legrand will suggest a fee of €2.09 per share dividend, up plus 10% in comparison with final 12 months. Concerning our share buyback program for cancellation of shares, €400 million have been accomplished over 1 12 months, which implies that €100 million are left to be executed within the coming months.

Let me now transfer to our 2023 CSR achievements on Pages 14 onwards. So on Web page 14, in 2023, Legrand reached an achievement charge of 118% on the targets set for the second 12 months of its 2022-2024 CSR roadmap. We total had sturdy showings and as anticipated, some challenges concerning round economic system. As you’ll be able to see on Pages 15 and 16, we’re significantly proud to have decreased scope 1 and a pair of CO2 emissions by 39% at present perimeter over 2 years with minus 28% over 1 12 months clearly outperforming our targets whereas decreasing our vitality consumption by 17% and now utilizing 82% of renewable electrical energy. Outcomes on gender variety are additionally superb with now greater than 29% administration positions full of ladies.

On Web page 17, we introduced our first worldwide worker share buy plan to acknowledge and promote staff’ engagement. It should, in fact, not be dilutive. Now going to the second a part of this presentation with the continuing implementation of Legrand strategic roadmap in 2023 on Pages 19 and 20, pushed by sturdy R&D, Legrand was very lively when it comes to new product launches in each sooner increasing segments and core infrastructure merchandise.

On Web page 21, Legrand is saying in the present day the acquisition of MSS in New Zealand, along with the 4 acquisitions already introduced over 1 12 months, the 5 corporations symbolize annual gross sales of about €190 million.

On Web page 22, sooner increasing segments made up of vitality effectivity, datacenters and linked merchandise grew organically double digit in 2023 and accounted for 36% of Legrand gross sales.

Extra particularly, datacenters now symbolize 15% of whole group gross sales with a singular management positioning as a white room specialist with an providing effectively tailored to the rising wants of the rising synthetic intelligence business. On Web page 23, we present our continued initiatives to reinforce our working efficiency and productiveness with the lively deployment of Business 4.0, the continuing optimization of the group’s industrial footprint, particularly in North and Central America, and our growing innovation capabilities in software program and firmware.

We will now transfer on to Web page 25, concerning 2024 full 12 months targets. So making an allowance for the world’s present macroeconomic outlook and with confidence in its mannequin for creating built-in worth, Legrand has set the next full-year targets for 2024. Low single-digit gross sales development natural and thru acquisitions, then adjusted working margin earlier than acquisitions between 20.0% and 20.8%, a minimum of 100% CSR achievement charge for the third 12 months of the 2022-2024 roadmap. Earlier than we transfer to questions, you will discover in Pages 28 and 29, our company entry agenda for the approaching months and we can be internet hosting a Capital Market Day on September 24, 2024. That is it for the important thing matters of this launch. I counsel we now change to Q&A.

Query-and-Reply Session

Operator

[Operator Instructions] The primary query comes from the road of Daniela Costa from Goldman Sachs.

Daniela Costa

I’ve two questions. The primary one is whether or not you’ll be able to touch upon type of the way you’re managing your worth checklist for ’24. The second is concerning your steerage, your low single-digit information. Are you able to possibly assist us perceive just a little bit by product, the way you see issues evolving? Like, clearly, you have got an enormous datacenter publicity, considered one of your rivals simply talked about very excessive development ranges there. Kind of what’s offsetting that, when you give us some shade when it comes to specific merchandise or areas that you simply see as the main offset in 2024?

Benoît Coquart

So so far as your first query is worried, effectively, it’s not a secret that Legrand has been having fun with eternally good pricing energy. Now as you recognize, we’re utilizing it fastidiously, this pricing energy. We do not need to do an excessive amount of pricing. We need to do the suitable pricing with a purpose to stay aggressive. So to provide you numbers, in 2023, our costs have been up 4.8%. However when you take an extended run over 5 years, we had pricing which have been up 22%, which is principally kind of 4% per 12 months. And the price of uncooked mats and elements, which was up 24%. So 22% towards 24%.

So that you see that we’re extraordinarily cautious in not doing an excessive amount of pricing which additionally tells you that we’ve ample margin for maneuver to do further pricing if wanted. We don’t imagine the setting in 2024 can be for a powerful development within the worth of uncooked mats and elements. So we’re capturing for small pricing most likely 1%, plus 1% at most. However once more, if wanted, if for no matter purpose, we had a worth of uncooked mats and elements, which was to go greater than anticipated or worth of enter total, which can develop greater than anticipated, then we maintain quite a lot of margin for maneuver to do further pricing.

However to this point for 2024, we’re capturing for plus 1% pricing most. So far as the steerage is worried, so it’s a low single-digit development of gross sales combining like-for-like and perimeter. So far as the perimeter influence, you could possibly see within the press launch that we’ve carryover coming from the earlier acquisition of the acquisitions already accomplished of plus 1.5%. You already know that Legrand has as an goal to attain a fringe influence of plus 4%.

Effectively, plus 4% for 2024, could be very bold as a result of you recognize that, in fact, the extra acquisitions wouldn’t be consolidated beginning Jan 1. However clearly, we’re capturing to ship plus 2%, plus 3% perimeter influence which implies that this low single-digit steerage translate into like-for-like gross sales, which might be from, let’s say, barely all the way down to barely up.

Now when it comes to setting, we imagine certainly that the datacenter enterprise and market ought to proceed to develop quick. We grew our gross sales in datacenter in 2023, double digit. We did develop double digit in 2024. We don’t know, however I affirm that these market segments is having fun with a pleasant development and may proceed to develop.

So far as the two different massive segments are involved, so far as residential is worried, which is near 40% of our gross sales. It’s bottoming within the U.S. and most of the people count on some type of restoration beginning someplace in 2024. In Europe, the scenario stays fairly troublesome. I remind you that housing permits or constructing permits, housing permits have been down 20% final 12 months. Now right here once more, it should rely very a lot on the rates of interest. So you recognize that if the rates of interest begin to go down, there ought to be or there may very well be some restoration within the residential in Europe. Now will this restoration occur finish of 2024 or in 2025, we don’t know. However there’s a sturdy correlation between rates of interest and housing begins and housing permits. So far as the nonresidential is worried, it has been fairly flattish in Europe, down within the U.S. And right here once more, there’s no purpose why there wouldn’t be some restoration sooner or later. However once more, with some uncertainty and whether or not it should occur finish of 2024 or in 2025.

So we clearly have, let’s say, 3 totally different dynamics: datacenter up; residential, which to this point has been down double digit, however with some restoration, bottoming within the U.S. and potential restoration, together with Europe someplace between the tip of 2024 and starting of ‘25; and the office market, [indiscernible] nonresidential market pretty flattish in Europe, down in the U.S. and here again, potential recovery end of 2024 and 2025. Does it answer your questions, Daniela?

Operator

The next question comes from line of Nick Amicucci from Cowen.

Nick Amicucci

Just a couple on my end. Just wanted to get a little bit of clarity surrounding kind of the cadence throughout the year of that low single-digit growth. Is there any kind of bifurcation between the first half and the second half? Are we expecting a step up in the second half? Or is it pretty even keel throughout the year? And then I just wanted to dig in a little bit deeper just on the U.S., in particular, in the North America — North and Central America segment in particular, saw a little bit more pressure from an adjusted operating margin perspective in the quarter. I just wanted to see, was that strictly just because of the deterioration in the markets that you guys have touched on before? Or was there any kind of mix impact that we should be aware of?

Benoît Coquart

Okay. Nick, I’ll take the first question and Franck will take the second one. As far as the potential seasonality in 2024 between H1 and H2, well, it’s not a secret that we have a stronger basis for comparison for the beginning of the year than for the end of the year. So in this respect, Q1 should be more demanding than H2 typically, now — so this is, let’s say, an expected seasonality. Now the question mark is whether some rebound will occur or happen at end of 2024 or not. If you take the low end of our guidance, i.e. sales, slightly down like-for-like. It doesn’t imply some market recovery in H2. It implies a market which will remain difficult throughout 2024 and some other performance from Legrand due to its specific positioning on datacenters, on electrification and 0 faster expanding segments. The higher end, if I may say, of the guidance, i.e., like-for-like slightly up in 2024 indeed imply some — implies some of the markets recovering or starting again to grow at the end of 2024.

But the pure mechanical seasonality, let’s say, it’s a more demanding start because of the basis for comparison and to a lesser extent, because of the number of trading days. I’ll let maybe Franck answer the second question.

Franck Lemery

Yes. So talking about the profitability of North and Central America and our ability to protect margin in that difficult environment. First, we have to recognize that 2023 was good profitability for North and Central America, 19.4%. It’s precisely the typical of what we skilled final 12 months and the 12 months earlier than. So contemplating the highest line problem, it’s a great end result. This 19.4% embeds quite a lot of restructuring actions. So quite a lot of one-timer getting ready for the long run. So globally talking, good leads to 2023 and no purpose why we shouldn’t have the ability to maintain margin additionally in North and Central America sooner or later.

Operator

The following query comes from the road of Gael de-Bray from Deutsche Financial institution.

Gael de-Bray

I’ve 2 questions, please. Can I take them one after the other? So the primary query could be round your development initiatives. Might you assist us quantify maybe the influence of those investments in EBIT in 2023. And any shade on what the magnitude of those investments may very well be this 12 months as effectively? And particularly on restructuring, €60 million spent in 2023. So what’s embedded within the margin steerage for 2024?

Benoît Coquart

Okay. So so far as development initiatives certainly, you do not forget that mid of final 12 months, we launched a collection of initiatives with a purpose to enhance as a lot as we may high line development in H2. So we did it though the outcomes weren’t the identical in all places to provide you numbers. As you recognize, we had like-for-like gross sales up plus 1% in H2 final 12 months. And we had like-for-like SG&A rising plus 9%. So plus 9% in SG&A, plus 1% in high line development. And I’ve to say that amongst the assorted SG&A, we had a lot of discretionary SG&A, which grew much more than that. If you happen to take, for instance, gross sales community and promoting, it was near plus 30% in H2. So we launched a lot of initiatives within the varied zones. Outcomes are total constructive, however not in all places. It was a transparent success in Europe. Europe is constructive in quantity in H2 when it was destructive in H1 though the markets are down in Europe.

So we — for instance, we devoted extra price range to some product launches. We accelerated the deployment of some product providing. We elevated some manufacturing capabilities and so forth and so forth. The outcomes have been extra disappointing, I’ve to confess within the U.S. or in North America. We have now launched a lot of initiatives, however the market situations are such that these initiatives have not actually delivered on expectations. And in consequence, volumes in H2 have been destructive and really related between, to illustrate, This fall, Q3 and H1. The result of that’s that if you end up dealing with troublesome market conditions, the market would not at all times help you in launching these initiatives. Going into 2024, we’ll certainly proceed a few of these applications, and we’re not giving up our technique to speed up the expansion in market shares. However once more, it should rely available on the market situations. If the market situations are very unhealthy, not all these initiatives can be profitable. It is a bit early to let you know.

So far as restructuring is worried, certainly, we spent greater than €60 million in 2023 in restructuring. You already know that the typical distinctive years akin to 2020, however the regular, to illustrate, run charge of restructuring at Legrand, it is about €30 million per 12 months. So with €60 million final 12 months, it demonstrates that we’ve launched a lot of productiveness initiatives with a purpose to help 2024 margin steerage in addition to the margin profile within the coming years.

So far as 2024 is worried, it is at all times tremendous sophisticated to provide you a exact forecast for restructuring as a result of we might have good concepts coming alongside the 12 months. Acquisitions are bringing additionally further alternatives. However for the mannequin, you’ll be able to assume that it could be — it ought to be a minimum of the conventional €30 million. After which whether it is extra, it could somewhat be a excellent news for the group. However to illustrate, €60 million in 2023 and as a place to begin, €30 million for 2024.

Gael de-Bray

Can I maybe observe up on the expansion initiatives. I imply I can see you launched many new merchandise final 12 months invested quite a bit in SG&A and the traction was really comparatively restricted. Do you assume that you simply want maybe extra integration capabilities, extra digital capabilities which presently seem comparatively restricted in comparison with a few of your friends. Do you assume that will be required to develop within the methods enterprise and maybe be ready to serve the extra technical buildings on the market, which look like extra dynamic.

Benoît Coquart

Effectively, the software program – the constructing business is in no way software program intensive. Industrial automation is – however not constructing. None of our friends is doing a big enterprise in software program within the constructing piece of their enterprise. So sadly, it’s not very software-intensive. So far as the constructing administration methods are involved, to finish methods – the market share in BMS has been very flattish. It has a market share of 6% worldwide, BMS and it used to have 10 years again, a market share of 6%. So this isn’t the place the expansion ought to come from. We imagine that the expansion ought to come from integrating extra firmware into the product, which is totally different from software program. And we’re doing quite a lot of that. I remind you that 20% of our R&D effort goal in direction of firmware.

It is about launching superior capabilities. It is about launching linked merchandise and linked merchandise now symbolize 15% of our gross sales. So I don’t imagine that within the constructing business, software program, pure software program matter a lot and we’ve not seen any participant growing a big a part of enterprise within the software program business. Once more, it’s totally different in datacenter, totally different in industrial automation. However for constructing business, no, it doesn’t matter a lot. The important thing level to get is that, look, we’ve to confess that the constructing business was down final 12 months. And once more, minus 9% in housing begins within the U.S., minus 20% in residential permits in Europe. The workplace market within the U.S. being down, Chinese language actual property market being extraordinarily troublesome with quite a lot of actual property corporations taking place and being even bankrupted. So we’ve to confess that the constructing market has been very troublesome.

It should stay troublesome in 2024. And on this context, the efficiency we’re doing exhibit an excellent displaying when it comes to market share.

Operator

The following query comes from the road of Alasdair Leslie from Societe Generale.

Alasdair Leslie

Possibly only a follow-up on the North American development initiatives. So I suppose some fairly cautious feedback there, however I am simply attempting to type of parse that between possibly the underlying market setting after which your personal type of motion plans as a result of I believed that type of the onboarding of latest brokers and distributors within the U.S. was going comparatively effectively. I suppose there isn’t any change there to that focus. And if there is no, you’ll be able to assist us just a little bit with that course of when it comes to subsequent steps, time line in direction of the launch or scaling up of Legrand merchandise into a few of these new adjacencies. And I am simply questioning, do the related investments and prices ramp up from right here. So I am pondering significantly in regards to the stage of coaching, et cetera, additionally the potential for greater couple of rebates and incentives, maybe within the preliminary part of the launches?

Benoît Coquart

So specializing in North America, the very very first thing that you’ve to keep in mind so far as North America is worried is that — it’s a market with quite a lot of variations between the assorted segments. If you happen to take, for instance, the NEMA Affiliation, which is the official electro business affiliation, giving out some official numbers. Taking a look at these numbers, for instance, non-public manufacturing development within the U.S. was up final 12 months, 62%. However sadly, we’re not very, very small in non-public manufacturing development. On the similar time, business development was flat and amongst business development, you had the workplace market, particularly in massive metros, which was down. So the very first thing to bear in mind when trying on the numbers in North America is that, certainly, you had segments of the market, which grew very, very very like non-public manufacturing and development.

Now if we zoom on our market, I remind you our market publicity within the U.S. or in North America, resi 20%, non-resi barely lower than 55%, one thing like 53% as a lot as we will measure it. And datacenter, barely greater than 25%, 26%, 27%. On the non-resi piece, it’s clearly — we’re clearly overexposed, and we have stated that very clearly for some time to the workplace market, which is an enormous enterprise for us. And inside the workplace market, 2 massive metros, Chicago, New York, Atlanta and so forth and so forth. And this particular market was down. Now we’re persevering with. Clearly, our technique to carry new product to the market, within the checklist of merchandise that you’ve within the PPT, you have got a lot of merchandise that are devoted to the North American market, akin to some lighting merchandise, akin to some linked digital camera and so forth.

We’re persevering with to broaden our buyer attain by stepping into lighting brokers and into new channels. We are attempting to transform prospects each from the professional channel and for the DIY channel. So we’re — we do have quite a lot of initiatives, and we’ll proceed. Now once more, once you, for instance, need to give much more energy to a product launch, however when the market is down, it is a bit harder than when the market is up. So we’ll proceed. We’ll translate into quite a lot of development in SG&A within the U.S. in 2024. We do not know but. It should rely additionally on the underlying economic system. However I affirm that there is no such thing as a change in technique in North America that we proceed, in fact, to count on the market to rebound sooner or later and that we maintain pushing exhausting with a purpose to overperform our underlying market, which isn’t very, very supportive. The second query was on the ramp-up for AI. Is that right?

Alasdair Leslie

No. I used to be really simply whether or not — sorry, simply — once more, it is nonetheless on the expansion initiatives, but it surely’s simply maybe whether or not there could be type of greater investments, maybe as these launches come by if they arrive by in 2024 in North America?

Benoît Coquart

Effectively, we’ll proceed to do these investments. Now once more, I can not offer you a exact quantity when it comes to SG&A development. It should rely on many elements, together with, in fact, how supportive the market are. However I affirm that we’re not in a cost-cutting mode. We’ll maintain chasing development alternatives, however we’ll do it as regular, fastidiously ensuring on the similar time that we meet our margin commitments.

Alasdair Leslie

Only a fast follow-up query. Thanks for the up to date type of combine on North and Central America. I imply you type of stated 20% resi nonetheless barely lower than 55% non-resi, 53%. I believe you stated inside that, is workplaces nonetheless round about half of that. So if I suppose it was 25%, 26% of North America gross sales, is that right?

Benoît Coquart

Workplace, you imply, effectively, take these numbers with a pinch of salt as a result of the identical merchandise are bought into workplace constructing, universities, faculties and so forth and so forth. So it’s actually a really, very tough estimate, however certainly most likely greater than half of our business constructing publicity is devoted to workplaces. However once more, these will not be – as we stated in French, exhausting scientific numbers.

Operator

The following query comes from the road of Aurelio Calderon from Morgan Stanley.

Aurelio Calderon

I’ve received two, please. The primary one is a little bit of a follow-up on type of these — or that technique to try to to rebalance the portfolio within the U.S. Are you desirous about doing this organically or would you have the ability to do that inorganically one thing like, I do not know, that bigger acquisitions one thing [indiscernible] milestone. I am simply asking as a result of, clearly, your stability sheet place is in fine condition. And as you stated, it is troublesome to develop in shrinking market. So how are you desirous about rebalancing that publicity? And I am going to take the second after this one.

Benoît Coquart

Sure, sure, certain. We’ll do it each organically and inorganically. So organically, for instance, every of our companies within the U.S. do have some clear targets to get extra into adjoining markets or non-office market, akin to, for instance, well being, which is about to develop, logistics or a lot of different markets. And we’ll do it inorganically. That is what we have been doing. If you happen to have a look at the previous 2 acquisitions we made within the U.S., ZPE Methods was — which we introduced a few months again was in a datacenter. Encelium, the small acquisitions we did about 6 months in the past, was within the lighting controls so extremely correlated to vitality effectivity. So it may very well be inorganically and organically. Does it imply that we are going to make massive acquisition, i.e. any person amounting €500 million or €600 million or €700 million and €1-point-something billion when it comes to EV, massive query mark.

I’d personally be delighted to have such a pleasant alternative as a result of it should assist us to speed up certainly the rebalancing. However you do not have quite a lot of fascinating candidates of this measurement. So we’ll proceed organically and inorganically, we’re taking a look at a lot of alternatives, however the chance to see massive, to illustrate, acquisition is extra restricted than chance to see a small one. So far as our stability sheet place is worried, you’re fully proper. We have now a leverage of 1, which isn’t a excessive leverage. You already know that our goal leverage for us is between, to illustrate, 1.5 and a pair of. So we’ve ample margin for maneuver to do further acquisitions. We have now quite a lot of good concepts to take action.

If for no matter purpose, we can not discover the suitable candidates. In fact, we must make our thoughts about using the money we’ve and the right way to re-leverage just a little bit. That is what we did final 12 months. We have a look at the, to illustrate, 6 to 12 months acquisition alternatives on the dividend, we have been to restrict. We got here to the conclusion that given the excessive stage of money, it was a good suggestion to provide a few of this again to our shareholders. So that is the explanation why we launched this share buyback program. Once more, we’ve €100 million to spend out of this program if within the months to return, we come to a conclusion that past, to illustrate, the two% or 3% perimeter influence, we do not have the most effective use of this massive money that we did — that we had final 12 months, we’d contemplate launching one other share buyback program.

However to make an extended story brief, I affirm that we’ve — we do not have a excessive leverage, 1.0 that we’d like to, to illustrate, 1.5% to 2%, and that the precedence is to actively have a look at acquisitions. But when we do not have sufficient good concepts, we may at all times contemplate shopping for again some shares. You had a second query?

Aurelio Calderon

Sure. That was very clear. The second query is you are clearly guiding barely above your regular 20% margin. And we have additionally seen a few of your friends in Europe and within the U.S. popping out with very sturdy margins. The query is, do you assume that one thing has modified structurally out there? And the business is extra worthwhile and offers us, I do not know, electrification, greater demand structurally or I am simply attempting to consider that 20% anchor that we’ve totally grown. Is that the suitable stage? Or ought to we be desirous about one thing barely greater given business dynamics?

Benoît Coquart

Effectively, certainly we’ve been constantly 3 years in a row, delivering greater than 20% adjusted EBIT, 20.5% in ‘21, 20.2 – 20.4, sorry, in ‘22, 21% in ‘23, and we are again guiding before acquisition to 20 to 20.8%. Interesting point, this has been done financing every single year, 20 to 30 bps dilution of acquisition. If we had stopped doing acquisitions in 2020, our margin wouldn’t be 21%, our margin could be nearer to 22%. So certainly, it’s considerably greater than what we have been in a position to obtain a few years again. We haven’t modified but our midterm steerage. I believe this may be dialogue that we might want to have on the subsequent CMD. Effectively, now I believe that we’ve – certainly, we’ve proven a minimum of in ‘21, ‘22, ‘23 that we had a main profile which was slightly higher than historical one.

And interestingly, it doesn’t come a lot from gross margin. It’s a vital matter to remind. It comes quite a bit from SG&A. If you happen to examine 2023 numbers with 2018 numbers, we’ve, let’s say, 80 bps further EBIT, 21% as an alternative of 20.2%, however we’ve roughly the identical gross margin at 52%. We have now just a little bit extra working bills as a result of we’re spending extra in restructuring and we’ve 1 level much less in SG&A. And all that has been doing whereas on the similar time, financing 130 bps dilution coming from acquisition. So a really lengthy reply to a brief query. I can not let you know if structurally, we’ve improved the margin profile of Legrand. I can let you know that 3 years in a row and probably 4 years if we ship our 2024 steerage, our margin could be in extra of 20% certainly.

Operator

The following query comes from the road of William Mackie from Kepler Cheuvreux.

William Mackie

My first query would come again to pricing, Benoît. You gave a steerage about virtually possibly 0% to 1% pricing in mixture for the group. However may you throw just a little shade on to the place you see the strongest pricing energy, a function of your organization that you simply highlighted throughout the product segments or areas or conversely, the place it is extremely troublesome to attain a lot worth traction.

Benoît Coquart

Effectively, there’s the sturdy correlation between management positions and pricing energy. So it isn’t a matter of geographies. It isn’t a matter of product households. Is when you have got sturdy management on a given product household and if you end up 2x greater or 2x larger — sorry, or 3x larger than the #2, you then take pleasure in pricing energy as a result of your prospects are used to do repeat gross sales and will not be asking for low cost each time they contact you since you are effectively distributed and your merchandise are in all places in a given territory and so forth and so forth. So I can not offer you a exact geography or a exact product household. We do not have, to my data, a product household which would not observe this rule, whether or not conventional or quick increasing, the stronger the management the upper the pricing energy.

William Mackie

The second is a little more structural referring to the group’s provide chains and balances. We have seen up to now this influence of commerce tariffs in North America and the way you rebalance the flows from China. No. And the specter of an administration change appears to return with a brand new risk of tax measures that will influence imports into America. It could occur in different markets. To what extent do you assume the group’s provide chains have been adequately rebalanced? Or is there nonetheless extra want for native sourcing?

Benoît Coquart

Effectively, it’s an fascinating query. We stay, in fact, dependent when it comes to sourcing in China. So you recognize that when it comes to gross sales, China is a small marketplace for us. It’s about 3% of our gross sales. However when it comes to COGS, it was once near 25% of our COGS coming from China. We have now decreased that just a little bit. So it’s one other 25%. It’s most likely one thing like 22%, 23% of our COGS is coming from China. We’ll proceed this transfer. Now you shouldn’t count on that to return down to fifteen% or 10% inside 2 or 3 years. These strikes are – strikes that take a very long time as a result of it’s important to transfer factories, it’s important to appoint new suppliers. The variety of suppliers or change suppliers stay the most effective suppliers when it comes to know-how and value. So you can’t transfer out of China all of your provides.

So you need to count on this 22%, 23% coming progressively all the way down to 2019, however not [10] and over a sure time period. Now to be a bit candid, the place the tariff between China and the U.S., unhealthy information for Legrand. I’m undecided as a result of we had the power to do further pricing with a purpose to compensate for the extra value of the tariff since product by product, most of our rivals do have the identical publicity to China. Growing costs wasn’t aggressive challenge for us. So it translated into greater gross sales. So it’s not at all times a excellent news – unhealthy information when you have got the price of enter growing whether or not as a result of worth of uncooked mats and elements are going up or as a result of you have got tariff or as a result of salaries are growing and so forth.

When you have got some pricing energy, it’s not essentially a nasty information. So to make an extended story brief, sure, we’re rebalancing, however these are strikes that take a little bit of time, and this 25 will turn into 20 progressively or 18, however it should take a couple of years.

Operator

The following query comes from the road of Andre Kukhnin from UBS.

Andre Kukhnin

Might we discuss enter prices, please? Might you give us some concept what you count on for uncooked supplies and elements inflation for 2024? And likewise for labor? After which I’ve received a few follow-ups. So please.

Benoît Coquart

So let’s begin with 2023. So in 2023, our buy value of uncooked mats and elements was flat. So I instructed you that we had a pricing of 4.8%, however the price of uncooked mats and elements was flat. It was, as anticipated, barely up in This fall. Effectively, so far as 2024 is worried, from what we will see in the present day, it may very well be barely constructive or barely destructive, relying on the macro. We do not count on worth to go down considerably nor to go up considerably. If it — in the event that they — if the worth goes up considerably, it could be a excellent news for Legrand as a result of it could suggest a powerful financial restoration, which we’d profit from on the highest line. If it was to be strongly down, it would not be a nasty information when it comes to profitability as a result of since we’ll maintain the costs, it should have a great influence on margin.

So we’re, in fact, monitoring that fastidiously. However the influence on margin is just not enormous due to the counterparty we’ve in high line or due to our skill to carry the costs. So far as labor value is worried, it was up near plus 6% in 2023 which is, we imagine, a fairly good efficiency on this context of excessive inflation, nonetheless troublesome to forecast for 2024 as a result of it should someway additionally rely on the financial setting and on the inflationary stress. However when you take as an assumption between plus 4% to plus 5% i.e., coming again to the extent we had 2 years again, I believe it could be an affordable assumption. However remember that on high of doing wage enhance, we’ve quite a lot of labor productiveness. So near plus 6% in ’23 and between plus 4% to plus 5% in ’24.

Andre Kukhnin

Might I additionally simply observe up on a query that Gael requested on the finish in regards to the potential must construct out wider capabilities and possibly software program. What you stated on datacenter is kind of fascinating that you simply say it issues there, but it surely would not matter in the remainder of buildings. And I ponder when you may elaborate a bit extra on why that issues in datacenters and whether or not different buildings will turn into extra like that as edge gadgets proliferate to implement connectivity and vitality administration optimization and I do not know, as we’ll have extra workplace buildings with photovoltaic panels. And once more, these IoT options. Is that the place it is heading for development from understandably very low base proper now.

Benoît Coquart

Effectively, there’s many variations between the everyday constructing and the datacenter. I can title 2, however there are others. And in any other case, we may spend on now discussing this matter. The primary distinction is that you’ve an enormous present park of buildings, whether or not resi or non-resi whereas most datacenters are new or they’re a few years previous, however you do not have quite a lot of datacenters, that are 20, 30 years previous. So once you need to do a totally automated constructing, it is quite a bit simpler on a brand new constructing than an present constructing. Present constructing value simply an excessive amount of cash to do a standard BMS system. First distinction.

Second distinction, datacenter, it is an industrial kind of setting. It is a extremely designed, extremely protected, extremely vitality environment friendly. So it is an industrial kind of setting whereas a constructing effectively, you’ve got been all of your life into residential constructing, non-residential constructing. You may have many different matters which come into play. You may have consolation, you have got ease of use, skill to be simply reconfigurate and so forth and so forth. That is why the penetration charge of datacenter info administration system is kind of excessive, whereas penetration charge of constructing administration system could be very low and has remained very low for the previous 10 years. Now apparently, is it an issue for Legrand, the datacenter are most software program intensive than constructing. No, it isn’t as a result of we’ve many options that may be linked to a DCIM. Whenever you need to handle your datacenter, you need to handle the property, you need to management the heating, you need to cool the complete datacenter. You need to enhance effectivity. You need to just remember to haven’t got gust servers which can be consuming electrical energy with out having any computing energy and so forth and so forth.

With the intention to try this, you want captures, akin to, for instance, energy distribution models the place your servers are linked and that are sending again to the DCIM system details about the warmth, temperature, information consumption by server and so forth and so forth. So with a purpose to function with a software program datacenter, you’ll want to have quite a lot of merchandise which we’re promoting in white house. Therefore, the explanation why we strongly imagine that our positioning on datacenter and particularly on white house could be very a lot on web page with the long run wants of AI appropriate datacenters. AI appropriate datacenters with excessive server density, excessive energy consumption can be higher managed — are managed with the software program. However with a purpose to function this software program, you’ll want to have the easiest way, you’ll want to have stable cupboards. It’s essential to have PDUs. It’s essential to have fiber optics, connectivity and so forth and so forth, which Legrand is offering.

Andre Kukhnin

That is very useful. And also you type of preempted my second a part of follow-up on the type of AI implications from the high-performance compute change. So possibly I am going to simply use that for one thing else and ask on the U.S. non-resi publicity, it has been taking place for you for fairly some time. I simply needed to test, are you seeing any indicators of type of bottoming on the market out of your buyer exercise, we clearly observe the elements of ABI and Deutsche Part Index…

A – Benoît Coquart

You imply the residential — non-residential?

Andre Kukhnin

No, non-residential as a result of it has began taking place fairly early, however you given that you’re pure early cycle with workplace publicity there. I simply needed to test out of your type of channel out of your salespeople, you are seeing something that factors to inexperienced shoots somewhat than taking a look at ABI and stuff like that.

Benoît Coquart

No, there’s no clear sign of but that it’s bottoming, trying certainly at ABI, at statistics on business development, business renovation and so forth. There’s no apparent indicators that it’s bottoming. Now our perception is that it’s going to, sooner or later, will or not it’s H2 ‘24 or ‘25, we don’t know. It should as a result of there are sturdy wants for refurbishing a lot of this constructing, making them appropriate with the commitments, 25 or 30 states took to be carbon impartial by 2050, that a few of them can be transformed into residential that you’ll want to accommodate them to have a greater AV system or extra bandwidth. So there are structural causes for the market to rebound. Now we don’t see any signal of that but. Hopefully, we’ll see some in a few quarters.

Operator

The following query that comes from the road of Kulwinder Rajpal from AlphaValue.

Kulwinder Rajpal

So I had two questions. First one is on the sooner increasing segments. Might you discuss how they developed in This fall? After which what are you anticipating there in 2024? And the second is broadly on how renovation developed for Legrand in 2023 after which what kind of development do you see from it in 2024 and just a little bit past that?

Benoît Coquart

I perceive that your first query is in regards to the quick increasing segments, proper?

Kulwinder Rajpal

Sure.

Benoît Coquart

Okay. Effectively, so far as first increasing segments are involved. So I stated throughout the name that they grew in 2024 organically by barely greater than 10%, really plus 11% and all 3 subsegments, if I could say, grew double digit. So each datacenters, vitality efficiency-related merchandise and linked merchandise. So no vital distinction between any of the three segments on quick increasing. Effectively, we’re not giving quarterly numbers which I imagine will not be very related anyway for this sort of pivot in direction of sooner increasing. So I can not offer you particular numbers in This fall. What we count on and what we’re pushing exhausting for is the over efficiency in comparison with the historic numbers — to the numbers of the historic perimeter to proceed.

If we have a look at the 2019-2023 CAGR, the group went up like-for-like 4%, of which, to illustrate, 1% to 2% on conventional secular merchandise and greater than 9% on quick increasing. So we’re capturing to have possibly not yearly, however repeatedly, one other efficiency of seven, 8, 9, 10 factors between the historic perimeter, what we name important infrastructure and quick increasing. So far as second query is worried, I perceive that it’s on innovation, proper?

Kulwinder Rajpal

Renovation [indiscernible] market.

Benoît Coquart

Effectively, once more, sadly, we don’t have quite a lot of visibility – the residential renovation was fairly depressed in 2023, each really within the U.S. and in Europe. One of many causes being that with the excessive inflation that individuals expertise on meals, vitality and quite a lot of totally different matters. They needed to do trade-off between performing some electrical work and conserving their way of life when it comes to meals. So generally the trade-off we’re towards electrical merchandise. And really, the gross sales on consumer-related channels like DIY, for instance, have been quite a bit underneath stress in 2023. Will it change in 2024? Effectively, query mark, we begin to see some statistics on – within the U.S., for instance, implying or displaying that possibly the DIY, possibly the small contractor enterprise in residential will progressively backside and catch up. However once more, it’s nonetheless an enormous query mark. And it’ll – if it occurs, it’s extra geared in direction of the tip of the 12 months somewhat than the start of the 12 months.

This was for resi. So far as non-resi is worried, it’s – effectively, it relies upon very a lot on what I’ve stated in regards to the basic market. If the workplace market rebound within the U.S., will probably be not solely new, it should doubtless be extra on renovation. I don’t imagine that there can be quite a lot of new workplace house being constructed within the U.S. However once more, the necessity for energy-efficient buildings, extra bandwidth and capability – community capability and so forth and so forth, ought to progressively influence renovation. So far as Europe is worried, the entire matter of greenification of buildings – you recognize that 80% of the buildings will not be environment friendly energetically in Europe and we’ve a tricky and stringent 2050 targets to be carbon impartial. So sooner or later, this renovation wave certainly ought to help and assist the non-residential constructing. So not a clearcut reply to your query. Effectively, we count on to see some enchancment throughout 2024 or again of 2025, but it surely’s an enormous query mark.

Operator

The following query comes from the road of Martin Wilkie from Citi.

Martin Wilkie

Only a query on the M&A setting. You clearly talked about persevering with to broaden the group by acquisitions. Clearly, a few of the areas which can be quickest rising, significantly round datacenters and these type of areas, presumably, acquisitions in these areas are getting fairly costly even for a few of the small bolt-ons. Can you continue to discover the offers that make sense from a return on capital perspective? You touched earlier on probably doing buybacks that you simply could not discover M&A. So simply to know a bit extra about the way you’re seeing the setting for acquisitions.

Benoît Coquart

I would not say that acquisitions for datacenters are much more costly when it comes to multiples than acquisitions for conventional companies. As a result of we’re not buying start-ups which can be loss-making and which can be claiming they will develop 50% per 12 months. We’re shopping for corporations with vital market shares in a given market phase like ZPE System with a market chief for consoles within the U.S., so Raritan and Server Tech, which have been market leaders for PDU or Starline which was market chief for steady powered busway. All of the acquisitions have been made according to Legrand practices, i.e., to have acquisitions that are EPS impartial from 12 months 1 of full consolidation and acquisitions, that are EVA impartial at worst, to illustrate, from 12 months 5 of full consolidation. So — and at multiples, which on common are beneath Legrand a number of.

So there is no such thing as a structural variations when it comes to worth between datacenter acquisitions and the opposite ones. And you’ll see that truly as a result of constantly, for the previous 5 or 6 years, we have been on common shopping for corporations at a a number of of 2x gross sales, together with — and within the final 2 years, it was nearer to 1.5x together with many acquisitions in sooner increasing segments, together with datacenters, so no change in multiples. So far as the setting is worried, effectively, we imagine it’s an setting the place we will discover alternatives. We have now a bit much less competitors from non-public fairness, nonetheless quite a lot of contacts occurring, 350 corporations in our pipeline, many dialogues, we’re seen as a lovely firm. We pay the truthful costs. We entertain a relationship with some individuals for 10 or 15 years. So not all acquisitions are €100 million and €150 million when it comes to gross sales. A few of them are small ones, when you take MSS, it is €10 million of gross sales. So it is fairly small. However I can let you know with a fairly excessive stage of confidence that we are going to do further acquisitions within the coming quarters. Will there be in datacenter a query mark, however we’ll do another acquisitions certainly.

Operator

There are not any additional questions within the queue. So I’ll now hand the decision again over to your host for some closing remarks.

Benoît Coquart

Effectively, thanks quite a bit for connecting. I do know that these are very busy days for you with quite a lot of our friends and ourself speaking. So thanks quite a bit to your time. As you recognize, we can be roadshowing beginning tomorrow morning, and we’ll be happy to satisfy a few of you throughout these roadshows or at some conferences. Thanks quite a bit. Ought to you have got any extra questions, by the best way, don’t hesitate to provide a name this afternoon to Ronan and to Antoine and ourself if wanted, we’ll be happy to reply as a lot as we will. Thanks. .

Operator

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