Legrand Sa Unsp/Adr

Good morning, ladies and gentlemen, and welcome to today's Lee-Grant 2023 First Semester Results Conference Call. All participants are in listen-only mode. Later, there will be a question-and-answer session, and for your information, this conference is being recorded. At this time, I would like to hand the call over to CAO, Mr. Benoit Chukar, and the CFO, Mr. Frank Lemery. Please go ahead, sir.

Thank you. Good morning, everybody. Thank you for connecting to this webcast. So, Franck, Renaud, and myself are happy to welcome you to the Legrand 2023 first half result conference call and webcast. Please note, as usual, that this call is recorded. 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 4 with the two key takeaways of this release. First, Legrand recorded very solid results in the contracting building market, and we continue to deploy a strategic roadmap to a range of growth and development initiatives. Second, we have revised our full-year target upward. So moving to page 6 to 7, I will start with an overview of sales. In the first half of 2023, our sales grew in total by plus 4.9%, driven by an organic rise of plus 4.6%. In a contracting building market, these figures point to our resilience. It is driven by faster expanding segments, energy efficiency, connected products, and data centers. by pricing power and by the group's robust commercial performance. On top of organic growth, the scope effect was plus 1.3%, including plus 1.8% linked to acquisitions, and minus 0.5% to the net impact of Russia. Based on acquisitions made and the likely date of consolidation, the overall impact should be close to plus 2% full year, excluding the impact from Russia. The ethics effect is negative at minus 1% and should be close to minus 2.5% for the full year 2023, based on the average rates of June 2023 alone. You will read on page 7 the key takeaways per geographies on a like-for-like basis. In the first half of 2023, the group achieved overall a solid level of growth. Europe grew a very solid plus 6.8%. driven by a strong growth in energy efficiency solutions and despite residential market down in most geographies. In the U.S., we recorded a slight decline of minus 0.3%. This reflected a double-digit fall in residential and a slight retreat in non-residential, partially offset by a double-digit growth in data centers. Finally, the rest of the world area grew a solid plus 8.2%, driven by a very sustained growth in India, Africa and the Middle East. These were the main comments I wanted to make on sales. I will now hand over to Franck for more color on a robust financial performance.

Thank you, Benoit. Good morning to all of you. I will start on page 9, commenting the adjusted operating margin. Before acquisition and exceeding Russia, we recorded a high adjusted operating margin of 22.7% for H1, representing a remarkable plus 2.2 points increase versus H1 2022. The high profitability of the period is driven by gross margin, and it is reflecting our firm control of expenses and sales prices. The impact of acquisitions and of Russia were respectively of minus 0.3 and minus 0.2 points, meaning the adjusted operating margin all in for the first half of the year stood at 22.2%. Going now to page 10 and highlighting two main points. First, net income of 651 million represents 15.2% of our sales. Earnings per share are up plus 19%, standing at 2.45 euro. It shows the group very strong value creation. Second, the cash generated during the first half of the year is remarkable, with cash flow from operation up plus 9.7% at 863 million, Despite a continued strengthened coverage of inventory, the free cash flow stood at 18.9% of sales. These strong financial indicators demonstrate Legrand's continued best-in-class profitability and cash flow generation. Moving now to page 11, regarding the balance sheet structure, we have a very sound balance sheet, testified by two indicators. First, the debt. Net debt at the end of June amounts to 2.4 billion euros with a ratio to EBITDA standing at 1.2. Gross debt has a maturity of 4.6 years and more than 90% is at fixed rate. Second, we have 2.9 billion euros of available cash. This concludes the key financial topic I wanted to share with you. I'm now handing over back to Benoit.

Thank you, Franck. On both pages 13 and 14, we give a few examples of the wide range of initiatives launched in the semester around growth and development. First, following the acquisition of Encelium and Clamper earlier this year, today we are announcing the acquisition of Technica, the €45 million turnover Chilean specialists, notably in data center solutions. Second, we launched many new products, showing the group's focus and capacity on innovation, both for core infrastructure products and infrastructure expanding segments. Third, regarding the improvement of operational performance, we are consolidating, for example, our distribution centers in the U.S., and just opened a new plant in Mexico. We can now move on slide 16, about to raise the 2023 full-year targets. So, excluding a major economic slowdown, Legrand has now set the following full-year targets for 2023. Sales growth at constant exchange rates and excluding Russia in tax of between plus 5% and plus 8%, versus plus 2% and plus 6% previously, including a scope of consolidation effect of around plus 2%. an adjusted operating margin before acquisitions, i.e. at 2022 scope of consolidation, and excluding Russia and relative impacts of around 20.5% of sales versus around 20% initially. At least 100% achievement rate of our CSA roadmap. This is it for the key topics of this release. I suggest we now switch to Q&A. Thank you.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. We'll move on with our first participant, Daniela Costa from Goldman Sachs. Please go ahead. Your line is open.

Hi. Good morning. Thank you. I have mainly one question. Just in terms of understanding your situation, organic sales growth, guidance for the year. Can you talk through what you make in terms of volume and pricing, especially given, I guess, The market was slightly surprised by weaker organic growth in the second quarter, but you obviously are upgrading guidance. Can you talk behind that? And then, similarly, maybe can you make up the makeup for the 50 basis points extra on margin on why not more, given what you did imply, a pretty low second half? Thank you.

Hello, Daniela. So, first of all, before I give you a bit of the building blocks of our guidance, I wanted to highlight that... We have always warned you that you shouldn't extrapolate a given quarter. So, indeed, the second quarter is softer than the first quarter in terms of top line. But for us, it doesn't really mean that the markets have slowed down. Quarter performance can be impacted by many topics. For example, specifically, Q2 2023 was somehow impacted by the number of open days or days of trade. It was impacted by some from some distributors in a number of geographies, with the US, France, Australia, and a few others. But we don't see a significant change of trend, market-wise, between Q1 and Q2. Now, talking about the full year guidance, to make sure that the numbers are clear. So in terms of top line, we are shooting for between plus 5 and plus 8, including the scope of consideration as plus 2. So indeed, it means that organically, we are shooting for a number comprised between plus 3 and plus 6, with a midpoint of plus 4.5%. We expect the growth in H2 to be pretty consistent with the one we have in H1, a little bit more, a little bit less, but not inconsistent with what we have seen. What are the building blocks of this top-line performance? Well, number one, we don't expect the market to further deteriorate. We believe that the building market hasn't been supportive in H1, and our building market was probably down in many geographies. and we could discuss a bit later the value strength in the U.S., in Europe, and the rest of the world. But we don't expect in H2 a further deterioration in the market. Number two, we should have a little bit less pricing than in H1 mechanically because we do not intend to do additional price increase. So to give you the number We had a pricing increase in H1, which was slightly above 7%. And we expect in H2 to have a pricing, let's say, between 2% to 3%, leading to a total price impact of between 4% to 5% for the year. So a little bit less pricing than in H1. We intend, and then the third building block, which is important, is that we intend to reinvest part of the good margin improvement into additional growth. So our objective is to spend more in SG&A, in sales, in customer support, in communication, in order to grab additional volume and to boost a bit the sales in H2. So those are the building blocks for the guidance in top line. Well, you have made the math yourself, Daniela, but our organic growth guidance implies a year to go, which is comprised between 1.5% and 7.4%, which implies a volume growth from slightly negative to mid-single-digit positive. As far as the margin is concerned, you are right to say that it implies an H2, which is significantly softer than H1. because the year to go in terms of EBIT margin is basically around, let's say, 18% for H2, which is below the historical H2 margin that we have had of, let's say, between 19% to 19.5%. Why is that? Well, number one, we will have a little bit less pricing, as I said, than in H1. And in front of this sort of pricing, you shouldn't expect price of raw mass and components to go down. Our assumption today, of course it may change, but our assumption today that the price of raw mass and components will be from, let's say, stable to slightly up. Just a word on that. You know that raw mass and components represent 36% of ourselves, but 72% of the 36% are not raw mass, but are components. and the price of components include added value, energy cost, and so on and so forth. This is the reason why our current scenario assumes that the price of products and components will be from flat to flat here. So you will have less benefit from the difference in selling price versus versus purchase price. And number two, as I said, we intend to spend more in G&A than in H1 in order to go and grab some additional business opportunities. So as a result, all those, let's say, building blocks, if I may send it to these guidance of 5% to 8% in top line and 20.5% in bottom line.

Got it. Thank you. I assume you don't assume any further stocking from distributors, so you think it was just a Q2 phenomenon.

Well, our feeling is that the level of stock from our distributors is pretty low in many geographies. And, of course, it's always a question mark, but we don't embed in our H2 scenario significant stocking from our distributors.

Got it. Thank you. I'll go back to Q. Thanks. Okay.

Thank you. We'll move on with James Moore from Redburn. Please go ahead. Your line is open.

Yes. Hi, everyone. Thanks for the opportunity. I wondered if you could talk a little bit about the inflation numbers that we saw on raw material and components in the second quarter and inflation in the second quarter and how you expect those numbers to develop quantitatively in the second half. Please.

So, to give you the numbers, in H1, we had a pricing of, to be precise, 7.3% up for selling price, and we have an increase in price of products and components of 0.4%, plus 0.4%. So, of course, this gap between the plus 7.3% and the plus 0.4%, has been a strong benefit in terms of profitability. If we look Q1, Q2, specifically on Q2, the selling price was lower. It was closer to plus 6. And the raw mass and components were slightly down. This is specifically for Q2. As far as H2 is concerned, those are the numbers I just gave. So, selling price between plus 2 and plus 3%. And price of HOMAS and components between zero to slightly up. But again, be careful. You know that we have only very little visibility on the price of HOMAS and components. Of course, if the economy rebound sharply, then it's likely that the price of raw material components would go up again. If the economy decelerates, it would be the other way. So take that as today's assumption from LeBron, but it may change depending on the economy. Last comment. Should the price of romance and components go down instead of up, I confirm that we will retain our ability to do a bit of pricing in H2. So don't expect the selling price of Legrand to go down in H2, even in a context where the price of romance and components would go down. And the counterparty, or the other way, if the price of romance and components were to go up significantly because of a strong rebound in the economy, we still have retained the ability to do a bit more pricing. But based on today's assumptions, we assume that our selling price will be up 2% to 3%, and our purchase price will be from zero to slightly up.

That's very helpful. I think wage inflation, you talked about being about 5.5% in the first quarter. Is that still a significant, similar magnitude? And how do you think that progresses going forward?

Well, for Legrand, it's slightly more than 5% wage inflation. It used to be last year 4% to 5%, so indeed it has gone up a bit. The situation is very different from one geography to another. We believe it is still under control, and we have implemented locally a number of schemes in order to limit wage inflation. So slightly more than 5%. On top of that, I have also to say that the impact of this wage inflation in our accounts was limited by the fact that we have done some productivity. So, for example, in H1, our volumes are broadly flat, and our like-for-like headcount is down by a little bit more than 2%. So, no, we see the wage inflation as being a manageable topic.

Very helpful. One last one, if I could squeeze it in. Just looking at the US business, it looks like you were growing to around 3% in the first quarter and something like minus three in the second quarter. I haven't exactly done the math, but I think you commented that Resi was down double digit in both quarters and data center was strong in both quarters. It looked to me that the change was non-Res going from slight growth in the first quarter to slight decline. And I don't want to oversplit hairs, Benoit, but you talk about destocking. Do you really think this is a U.S. non-res destock? Or do you think there are any incremental deteriorations in, say, your big office market?

No, we don't see a deterioration. And again, you know, I'm always a bit uncomfortable to comment quarterly numbers. I prefer to comment high-share numbers, which are, for me, a bit more significant because you're given a quarter. You know, destocking or number of days or cutoff or stuff like that does not impact half a year, but it can impact a quarter. So I prefer to comment on a half-year basis. Now, looking at NCA, Legrand North America, over the first half of the year, a couple of comments. What I have to remind you, the Legrand exposure. In the U.S., 20% of our sales are made in resi, 55% in non-resi, and 25% in data center. I can later on comment Europe, and you'll see that in Europe it's pretty, pretty, pretty different. What have we seen in H1? So we saw a clearly double-digit negative market on residential with residential improvement being down, housing starts, all those numbers being down. In total, double-digit down. As far as non-residential is concerned, it's a very diverse situation per sub-verticals. If you look, for example, at private manufacturing construction, it is expected by market specialists, it's easier to be up close to 40%. But unfortunately, this is not the vertical in which we are playing. The office market is closer to zero, and in a number of verticals, such as, for example, finance, it is even down significantly. So the non-racy on which we are exposed, i.e., mainly office market in big metrals, is indeed down. It's not more depressed in Q2 than in Q1, but it's indeed down. And then you have the data center market, which is very well-oriented, and which we believe will keep going. In this context, we are doing pretty well, given the verticals on which we operate. As far as all residential business is concerned, it's double-digit negative. As far as the non-residential is concerned, it's slightly negative with a clear destocking on Q2. So, I can confirm that the destocking happened a little bit in RSI and a lot in non-RSI. And as far as data center is concerned, it is indeed a double digit up with a very strong number. So, this is what we saw in H1. Now, of course, As far as trends are concerned, this is always a question mark. As far as residential is concerned, we start to see some positive signals, which may more impact 2024 than 2023. But we start to see some measures with, for example, housing starts being positive. As far as non-resi, we see no reason why the market wouldn't enter into a progressive recovery mid-term. with a number of things that we help, energy savings, work from anywhere and so on. And data center, we remain very positive with the support of AI. So that's what we can see in the US. But again, we are not seeing a sequential deterioration of the market, nor on our market position between Q1 and Q2.

Very helpful. I've got a few more, but I'll go back in the queue and yield the cons. Thanks a lot.

Thank you. We'll move on with Alexander Virgo from Bank of America. Please go ahead. Your line is open.

Thanks very much. Morning, Benoit. I just wondered if you might go a little bit more into the trends. I guess you've done the U.S. now with James. I wondered if you could do the same with Europe for us. because, again, we're just trying to work out the sequential development. I appreciate you're looking at the H1 rather than Q2, Q1, but it does look like there was quite a big difference between the two. I'm just trying to understand that in Europe. Thank you.

Yeah, it's important. Well, Europe, as you know, has a very different exposure compared to the U.S. So in Europe, we do approximately 45% of our sales in residential areas. slightly less than 50% in residential and about 5-6% in data centers. So compared to the US, we are a lot more exposed to residential and a lot less exposed to data centers. What trends have we seen? Well, residential is probably mid-single digit negative in value. So probably a double digit negative in volume for the market. With the new world under pressure in many geographies, France, Germany, the Nordics, and a few others. Non-residential is probably flattish in value. And data center is very well oriented. But of course, it impacts not as much ourselves as in the US. In this context, I believe we are doing very well and part of this very good performance is coming from the leverage of our fast-expanding segments. For example, we are experiencing a very strong growth in Europe in the energy efficiency and electrification-related products, products such as, for example, circuit breakers, EV charging stations, high-efficiency cast-resin transformers, measuring, and so on. And we are also doing well in data center, but as I said, from a smaller base. To give you an order of magnitude, the energy efficiency products represent 27 percent of our sales in Europe, and data center only 5 to 6 percent. So I think we are doing well in the context, which is not a very easy context in Europe, especially on the residential side, which is down. What is the outlook? Well, as far as the residential market is concerned, there's no consensus yet on the timing of the recovery. When you look at the value statistics, it's a mixed bag of pluses and minuses, especially for 24. As far as the non-residential is concerned, we believe that for the U.S., no reason why the market wouldn't recover. given the huge number of commercial buildings which are not energy efficient in Europe, which are not well connected, which do not have the capability to hold remote conferencing and so on and so forth, we believe that at some point the non-residential market will grow. And as far as the data center market, it will remain very well oriented and and we believe we'll continue to expand a lot of growth. This is for Europe. As far as the rest of the world is concerned, well, India is doing very, very, very well. Both the market, but also on the market, we are gaining clearly market share compared to our competitors. As far as China is concerned, the Chinese market is depressed. I remind you that we're very much dependent in China from the new residential. So new construction in residential, which has been depressed for quite some time now, with so far no stimulus plan from the authorities. And in this context, being able to do growth in value, growth in volume, is, I think, a pretty good achievement. For the rest of the world, it's, as usual, a mixed bag. Africa, Southeast Asia, Middle East doing well. And in South America, the situation remains extremely difficult from a macro standpoint, including Brazil.

That's very helpful, Bernard. Thank you very much. Maybe one for Franck before I go. I wondered if you could just talk us through the cash flow, Franck, and particularly your own levels of inventory and destocking. Thank you.

Well, I'll let Franck maybe answer this question.

Franck? Yes, so talking about inventory, you remember that our historical level were between, let's say, 13 to 14%. That we grew deliberately the inventory last year to support the business in a very challenging supply chain. And we achieved up to 19% at the higher level, which was Q3 last year. And now it starts normalizing progressively with a ratio of inventory to sales around 60%. And you may remember that we said that we give ourselves around two years to fully normalize our inventory ratio. So we are currently on the trajectory of what we want to do. But there is no rush. First, the free cash flow is still very solid. And second, the supply chain stays a little bit challenging on some particular components. Keep doing that reasonably.

Thank you very much.

Thank you. We'll move on with Gail Debray from Deutsche Bank. Please go ahead. Your line is open.

Oh, thanks very much. Good morning, everyone. I have three questions, please. Hopefully, they're going to be pretty quick to answer. would you be able to quantify how much money you already reinvested for growth in selling and marketing expenses in H1 and by how much this could change in the second half of the year? So that's question number one.

Well, we have, of course, a number of programs that we have initiated. Now, You know, it's always a question mark on how efficient is going to be this program and how much money we're going to spend, so we prefer to embed that into a guidance rather than giving you a precise number. But I confirm that the strategic intent is clear. We will have more LGA put into the model, into the machine, than in H1. On top of that, There's another line which I haven't commented and which will impact H2. Well, you may have noticed, Gaëlle, that in H1 our level of restructuring was significantly higher than usual because we spent 30 million euros in restructuring in H1. And you know that usually we tend to spend 20 to 30 million euros on a yearly basis, and in H1 we did 30 million euros on H1. Well, it is also an area where we will look for opportunities in H2. So it's difficult to give you a precise guidance because there's also a timing issue. But our restructuring could range from 10 million euros to 30 million euros in H2. And it will also impact our H2 performance. So clearly, our intent is to invest into growth and productivity in H2. through many SG&A and if we can find good ways to invest our money through restructuring. But it's too early to quantify that. We'll comment that when we release our H2 numbers in February 2024. You see, Gaël, no question. Okay. Go ahead, go ahead.

I can see that. Well, maybe then could you help us appreciate what was the impact of this talking and the impact of the calendar situation in Q2?

Well, the current situation, I can give you the sort of mechanical impact compared to between Q1 and Q2, it probably had a negative impact of about two points of growth between Q1 and Q2. So it had Q1 and it was at the expense of Q2. Now again, you know, it's always the same story with the number of days. It may impact, it has a significant impact on the months. noticeable impact in a quarter, negligible impact on a semester, and no impact on a yearly basis. It's always the same topic, so you can explain a quite early performance, but hardly a yearly performance. As far as this talking is confirmed, super complicated to quantify. Those are more, you know, feedback we got from our distributors than hard numbers. But I confirm that there was some talking. I have named a few geographies. I can name others. So I said the U.S., France, Australia. We could also mention Brazil, for example. We could also mention smaller geographies such as Austria. So it was not...

uh hundreds of million euros but it was not disabled on the quarter but no measurable impact okay thank you and the final one is um on your data center exposure since you're only exposed to the white space in data centers in the us i'm i'm wondering if the development of AI-related data centers will actually make any major difference to you?

Well, yes, it will. And actually, the AI development will probably have more impact on the white space than on the gray space. Because in the white space, it will... It will change the design of the racks. You need to have higher density racks, so it will change the cabinets, the racks themselves, the way servers are connected. It will also imply smarter management of the rack, and that's what our PDUs are about. Our PDUs help better managing a smart system. managing the data center and the RAC. The cooling, we need to be closer to the RAC, so you need to have, for example, rear-door cooling and not only the big cooling system for the data center. So, no, we estimate that the AI will have a very significant impact on the growth of the data center market, especially at the white space. As far as our exposure between white and gray, worth mentioning that, indeed, On a worldwide basis, we are a lot more exposed to white than to gray, but we have a lot of ambitions in the gray space in Europe and in the rest of the world. And we have already secured a number of very interesting data center projects with products such as PowerBuzzBar, for example, or UPS. Now, specifically in the US, we intend to remain focused on the white space because we don't have the gray space offering. But the 25% of our sales made in white space in the U.S. should indeed be positively impacted by the AI trend.

Thank you very much, Benoit.

Thank you. We'll move on with Alistair Leslie from SG. Please go ahead. Your line is open.

Hi, good morning. Thank you. Just maybe start with a quick follow-up on destocking. I think France and the U.S., two of your largest markets, you've called out I think at least two quarters of destocking there Do you see any signs of stabilization, I suppose, in those channels maybe at all towards the end of the quarter? So that's the first question. The second question is really around sort of North America, non-resi. I kind of appreciate you've got high exposure to offices there in that space. The outlook is obviously still very uncertain. That's kind of outside of your control. But I was just wondering whether you've got kind of internal initiatives underway where you're kind of working on boosting growth there over the next 12 months or whether through kind of new product development across your offerings, greater marketing push, share gains, that kind of thing in new segments, just anything to kind of engineer your own growth. That's the second question. Thank you.

Well, as far as the first question is concerned, coming back to what I've said earlier, it's difficult for us to really anticipate what our distributors will do, all the more as You know, you as analysts always have in mind but actually our distribution network is made of hundreds of distributors, each of them having a different strategy. So what we feel today is that there's not a lot of products into the channel. If you visit, you know, a DIY shop or professional shop, you would not... see a lot of products on the shelf. So we believe that the level of stock is not too high in the channel. Now, we are not in the mind of our distributors. And depending on what they expect the market to be the next couple of quarters, they will have their decision as far as inventory is concerned. So again, our H2 scenario does not include a significant from our distributors. Now, again, we will see what happens. As far as the second topic is concerned, We see our dependency upon the office building in the U.S. indeed as a situation we should try to mitigate. So we are doing a number of things in order to mitigate this situation. Number one, for the next six to 12 months, we have launched a number of sales programs in order to secure additional volumes and additional market shares. And this is one of the reasons why we had this discussion earlier on the fact that we would reinvest part of our SG&A into growth. This is not the only geography where we intend to do that, but indeed we have a number of programs in order to achieve that. Number two, organically, we are trying to expand our product offering into additional verticals. For example, we have plants. for hospitality, for education, for health, in order to reduce our dependency upon the office market. Number three, we are still very active in terms of M&A. Even though we have not announced any transaction in H1 in the US, I can tell you that we are very active looking at interesting opportunities. I mean, not big ones, the usual Bolton acquisitions that would be positioned on other verticals than the office building in order to mitigate its dependency. So we are doing a lot of things both organically and inorganically. What I would like to insist upon is that, of course, for the past two years, this piece of the North American market has not been very supportive. Now, I wanted to insist on the fact that it remains a very attractive piece of business. nicely profitable, very cash-generative, with market shares which are well-enhanced, very solid market positions, stickiness with the customer. So those are strategically very good market positions. But it is a fact, indeed, that for the past 24 months, the office market in the U.S. hasn't been very supportive.

Very clear. Thank you. Thank you, Pamela.

Thank you. We'll move on with Jonathan Mounsey from BNB Exane. Please go ahead. Your line is open.

Hi, good morning. Thanks. Let me ask a couple of questions. Only first on the margin outlook going forward. Obviously, the guidance this year implies lower margins in the second half. We've talked about that. I'm just wondering what it really implies as a margin below the target, and what's the plan to recover the margin back to 20%, and is that something you'd achieve, say, in 2020? Is it cost-saving driven? Does it require volumes to cover? And maybe just link to that. As you're putting this investment in, this extra SG&A, focus more on volumes, do you need to update the scorecard for these devolved businesses maybe to reward volume growth a little more? Maybe reward the training, some of these new verticals that you've just touched on, where the market share is likely to be lower, margins may at least begin with the inferior. Do you need to kind of evolve to encourage more volume growth? relative to what you've done historically.

Okay, so on your first question, you know, whatever the margin in H2, even if we do the 18% or 18.5% implied by our guidance, our EBIT margin will remain well above 20%. At 20.5%, it will be one of the two highest margins ever regarded by Legrand. So there's absolutely no issue in the level of margin of Legrand. And if your question is about 2024, of course, it's far too early to guide on 2024. But I can tell you that there's no reason why Legrand wouldn't be consistent with its mid-term guidance of delivering a 20% EBIT. So delivering 18 or 18.5% EBIT in H2 because we would reinvest some of our proceeds into the growth wouldn't be a problem. Now, to make things clear, the 20.5% margin is before acquisition and rush up. Then you, of course, have to add or to deduct to this 20.5% dilution coming from acquisition, dilution coming from Russia. This is for the margin. As far as the second question is concerned, do you want to take it, Franck?

Yes, perhaps to give us some flavor about the question of reinvestment and HG&A, and also for the web to get its question. At the end of H1, our HG&S are growing by 7%. So, it's above the top line. They have some reinvestment already made. R&D heads are up, for example, Markom spendings are also growing quite significantly. And if you try to assess what could be H2 with 18, 18.5% of adjusted EBIT margin, then it would mean acceleration of the SG&A investment. So the 7% can be quite above the zone rise. It can come up around the double digits. So this would be the kind of effort and reinvestment that we would do.

I guess just what I really meant, I didn't want guidance for 2024. I just wanted to understand what your plan is. Obviously, when you choose to spend more on SG&A, you still have a plan to get back to 20% margin. I was just trying to understand the drivers. If you're only doing 18% in the second half, how do we get back there next year? I don't suppose the SG&A is going to go backwards. So what is it, gross margin? Is it volume, price? How do we get there?

Well, you know, I... I think we have 14 years of practical in delivering a 20% EBIT margin, so you can trust Legrand on our ability to do the SG&E adjustments which are needed or the right pricing which is needed in order to deliver 20%. Now, again, it is not a comment on... 2024 margin, because we discussed that in February, but trust Le Grand, our ability to manage our P&L in order to deliver the level of margin we commit to deliver. Second comment, which is something you should also have in mind, H2 margins, is most of the time lower than H1 margin. For many reasons, including the fact that you have a number of weaker months, such as the month of August in the U.S. and Europe. But when we deliver a 20% to bit margin, it's quite often the H1 is at 21 and it's roots at 19. So it is not per se a problem. But again, we can manage our level of... pricing, SG&A, and restructuring in such a way that we deliver our margin commitment.

One more question, unrelated, just on service levels. I know I think you've talked a number of times about the service level fell, I think, from 92% down to more like 80% during the supply chain issues. And I think you'd mentioned before that when it got back to 90%, you'd be willing to consider more proactively lowering your own inventory. I know you said you were doing it progressively, but What's the service level today? Are we back at 90 now? Are we back up to the level that you're seeking, or are we still actually below where we'd like to be?

No, we're not yet at this level. In H1, we are at the level of service which is slightly above 86%. So it's better than in 22 and 21, but it's not the 92% level we had in 2019. So we have made it almost half of the way to recover our level of service, and it is coming from different factors. At least two factors prevent us from being at the level of service we would love to be. Number one, you have a level of demand which is very different from one product to another. Depending on whether the product is positioned the electrification trend, for example, or on the classical residential, you can have a product family which is up 20-25% and another product family which is down 5 or 10%. So, of course, in terms of forecasting, it's always a bit more complicated than what it used to be a couple of years back. Number two, in terms of supply chain, the situation has improved in H1 2023, but there is one dark spot remaining, which are the electronic components. Even if the market is improving, there are still some difficulties to source some microcontrollers, power MOSFET, IGBT, a couple of components. Progressive improvements are expected in the months to come, but it has remained a source of tension. So those are probably the two reasons why we are able to deliver 86% service level, but not yet the 90% we're shooting for. Thank you.

Thank you. We'll move on with Alec Limerie from CIC Market Solutions. Please go ahead. Your line is open.

Yes. Good morning. Thanks for taking my question. I've got two actually. First one, on the faster expanding segments, could you give us the growth of this segment in H1 and maybe could you give us the contribution of these faster expanding segments to the consolidated sales as a whole in H1? And second question on the cash flow generation, obviously it has been very good in H1, but could you maybe help us and give you what we could expect in terms of working cap for the full year, in terms of working cap change for the full year? Thank you.

Well, we are not giving a number for fast expanding on the quarterly or half-year results, but I can tell you that there is a massive overperformance of fast expanding against traditional, and especially two pieces which grew very fast, data center in the U.S. and green in Europe. But if we take the consolidated, fast-expanding, so including connected green and data center, it's a very, very strong overperformance compared to the classic infrastructure product. As far as the second question is concerned, well, we cannot give you, of course, a guidance for cash flow generation. But even working capital is difficult to estimate. That's actually the reason why we were used to communicate on a normalized free cash flow. It's because what will happen the last two weeks of December is somehow uncertain. So we're not giving any guidance for free cash flow or for net working capital. I can tell you that 2023, but you have already guessed it, will be a very good millisim in terms of free cash flow. No question.

Thank you. Can I follow up on this faster expanding segment? You mentioned the connected product. Are they still penalized by the difficulties of the supply chain for electronic components in H1?

Well, the numbers, the gross numbers are very good. Now it's likely that we could have done better in a number of product families where the components were not readily available. So Take, for example, assisted living, which is a business related to people staying at home and all the alarm systems that help bringing some help to all people when they fall. Well, this is an interesting business which grew a lot in H1, which grew a lot in 2022, which would have gone even better if the components were available. So, yes, there has been a limitation to our growth. Now, again, it's probably a couple of tens of million euros, not a couple of hundreds of million euros. Thank you.

Thank you. We'll move on with William Mackey from Kepler Shorrock. Please go ahead. Your line is open.

Yes, good morning, Benoit, Frank. Thank you for the time. I'd like to come back to the discussion of the second half profitability. You've described an environment with positive net pricing in H2 and volumes flat or stable. And we've discussed a lot of SG&A as being the main factor. But I guess when you're talking about a 350 to 400 basis point drop, My question would be, can you walk through the bridge? Should we ascribe all of that to a step up in SG&A, or are there other factors in your assumptions? And then when we think about the skew between H2 and H1, could you provide a little more color on your expectation by region, given that we've seen some very strong performance in the first half? Thank you.

Well, I wouldn't quote the H2 margin as being a drop of 300 points. Bear in mind again that there is a seasonality traditional impact. If you look at the past five or six years, but of course sometimes on a given year the H2 was exceptionally low or exceptionally high, but on average our H2 margin over the past couple of years has been 19 point something. between 19 to 19.5%. So if we deliver 18% margin, the so-called drop should be seen as 100 or 150 bps and not 300 bps. So number one. Number two, apart from what I gave you, very precise guidance for selling price, purchase price, and potentially restructuring, so you can do the math itself, this margin doesn't imply a 30% growth in SG&A. It implies, indeed, a double-digit growth in SG&A. Now, let's make things clear. If we are not able to achieve the program we want to achieve, Well, we may not have the reward in terms of supply, but we will indeed have a slightly higher margin. But this is not the plan we have today in mind. The plan we have in mind is to invest into growth for H2 2023, as well as to prepare the start of 2024. So following up on that. By the way, as part of the building blocks of this H2 guidance, we should also have in mind that There is still some weight inflation, even though it's under control for Legrand. With more than 5%, it is to be put into the model also.

Thank you. And just following up in terms of your reinvestment plans for growth, would you describe those as to be applied broadly across the group, or do you see particular programs in specific regions or countries?

No, we have a broad program, including in countries which are doing well. Take India, for example. Even though we are very satisfied and very happy with our growth in India, we still believe that we can grab a few additional percentage points of market share. So we have also initiated a program in India. So it's not specifically specific to the U.S. or to Europe, or to the geographies which have a little growth in H1. In fact, growing segments, we also have some problems. Now, again, the uncertainty is will we be able to implement all those? Will it have the impact we want them to have? It is not as mechanical as I put one euro of SG&A into the market and it brings me two or four euros of sales. You have to achieve those programs. But if you are not able to achieve them all and to spend all the money, again, of course, we'll do a bit more savings and a bit more margin, but then a little bit less sales. This is a sort of, you know, this is the topic on which we are working today.

Thank you very much.

Thank you. We'll move on with Aurelio Calderon from Morgan Stanley. Please go ahead. Your line is open.

Hi, good morning, Benoit and Frank. Thanks for taking my question. I've got two, please. The first one is around market share. If you've seen any market share evolution, and I know that you don't like to comment on quarterly evolutions, but have you seen any different trends in Europe and in North America, maybe over, let's say, since the COVID recovery. Have you seen any market share shifts? That's the first one. And the second one is more trying to think about the inorganic growth part of the equation. Are you seeing anything different in the market in terms of multiples, in terms of ability to buy businesses? Just trying to think about that sort of implied deceleration in organic growth, if there's anything to read into that. Thank you.

No, we are not seeing anything negative in terms of market share. Of course, we have 100 geographies and 100 product families, so you always have market families in which you win and market families in which you lose. But overall, we think that we are holding firmly on market share, the traditional part of the business. We are probably gaining market share and fast expanding. And actually, it is confirmed when we compare ourselves with our listed peers. So of course, you know that the comparison is always difficult because each of the listed companies do have a different market exposure. But of course, you have the players which are helped, if I may say, by the U.S., industrial construction, such as ABB and Schneider. But if you look at companies closer to our world, where you have hybrid electricals being down 2 percent, well, you have Signify down 8 or 9 percent, you have Sengover, which is just up 1.5 percent, you have Assaablo S plus 5, you have, well, Rexel above Legrand. both on a micro perspective, i.e. by looking country by country to our performance compared to our local peers, and on a global standpoint when comparing ourselves to the listed peers, we don't have the feeling that we are losing any share. As far as the second topic is concerned, it is true that we will achieve a perimenoscope impact which will probably be lower than our historical average. You know that historically we've been able to deliver a 3% to 4% scope effect each year. And this year, given what we have announced today, it will be closer to plus 2%, which is a number we included into our guidance. Now, you shouldn't read that at all as the fact that we are lacking targets, lacking good ideas, or that the targets would be more difficult to grab because, for example, prices would go up or whatever. It is just a timing issue. I confirm that we have a number of advanced discussions going on, and that if we are doing the job properly, we should be able to sign one or several deals in H2. So it is just a timing issue, and we still believe that we are – we should be able to deliver, on a yearly basis, a 3 to 4 percent payment impact. As far specifically as the prices are concerned, we have not seen really prices going up in the past two or three years, so we are not really seeing prices going down today, despite the WACC are going up because of the exchange rate. And the reason being that most of the counterparty we have in front of us are individual sellers, And they have a price in mind which does not depend much on the interest rate or the beta or the risk premium, but it's more a psychological price which is usually not going up much or down much depending on the economy. So prices, in other words, remain reasonable and in a range that makes us confident that our next deals should be value-accretive and EPS-accretive as per our standards.

That's very helpful. And if I may squeeze in one last question. I think when we were speaking in one key and so on, you were talking about pricing carryover being highly theoretical because there are some effects from rebates and so on. So the question is, are you offering more of these rebates also as part of your efforts to boost the top line or have you not been offering rebates above any normal range?

No significant additional rebates because the rebate game is not a game which is paying off a lot in our business. So now our programs are more about grabbing additional customers, doing more powerful launches, increasing communication towards a number of targets, more than doing some rebates. And actually the 2-3% price impact that we expect to experience in H2 implies no price cuts, but no significant additional price increase. We may have to increase the price in geographies where the currency is depreciating a lot, but otherwise we don't intend to do any significant or meaningful additional price increase. So even though, indeed, carryover is very theoretical, most of the H2 pricing should be carryover.

That's very tanky.

Thank you. We'll move on with Delphine Broad from OdoBHF. Please go ahead. Your line is open.

Yes, good morning, gentlemen. Thanks for taking my questions. I have only one and one clarification. The first one is on Rishia and the acquisition. So the dilution was minus 50 bps in H1. I'm wondering how much you believe it should be in H2. And second one is on pricing. You just say that we should not expect price increase in H2. Did you raise prices in July? And if so, in which segment specifically? Is it a sum of some raise and some decrease? Just to understand how prices evolve.

Okay, starting with the second question, you know, it's crazy. We're not pricing every single monthly pricing per geography, but we haven't done any meaningful price increase in July. So I confirm that most of the 2% to 3% price increase we should record in H2 is coming from the carryover of last year and beginning of this year. Now, does it mean that we won't do any price increase? Again, I really want to make clear, today we are not planning any, but if for whatever reason the price of formats and components were to go up, we are not ruling out the possibility to do one more. As far as the dilution is concerned, so we have minus 50 bps dilution in H1, of which minus 30 bps is the usual dilution coming from acquisitions, and minus 20 bps the dilution coming from Russia, you know that we treat Russia as a negative scope in 2023. So we compute the dilution of Russia as if it was an acquisition actually. So minus 30 from traditional M&A and minus 20 for Russia. As far as the full year is concerned, well, it can always change, but our current assumption is that we should have a dilution coming from acquisitions of about minus 20. which is somehow consistent with the 2% scope effect, and the dilution from Russia at about minus 20 also. So in total, instead of being minus 50, it should be minus 40. Bear in mind that the dilution of acquisitions is almost known. We could make additional acquisitions because we did them over one or two months, but it's almost known. Dilution coming from Russia is still very uncertain, of course. So please take these minus 40 bps as today's best view from the management, but not as a, you know, number, as we said, completely as a commitment. Okay, thank you.

Thank you. We'll move on with Supriya Subramaniam from UBS. Please go ahead. Your line is open.

Yes, thank you. Good morning. Thank you for taking my question. Both of them have been answered. Just one question on growth trends. Could you share your thoughts on what you're seeing in trends between new build versus renovation market trends and also sort of regional highlights? Thank you.

Well, the trend against new versus Renault, it's a bit difficult to assess on a Le Grand standpoint because the products are broadly the same, whether they are new or Renault. So we can read at the market statistics, but it's difficult for us to have a sense of the impact it has on our top line. As far as market statistics are concerned, clearly in the residential piece, both in the US and in Europe, The new is going down more than ready, which is not a surprise because it is a pattern which we have often seen. But if you take the housing starts, the building permits, In the U.S. and in Europe, they are more down, if I may say, or plunging more than light or renovation work or stuff like that. As far as the commercial is concerned, it's a question mark. We don't have this level of granularity in all our statistics. But at least for Rezi, I can confirm that market-wise, the mu is going down more than renovation.

Okay. All right. Thank you very much.

Thank you. With that, it appears there is no further question at this time. I'd like to turn the conference back to Mr. Benoit for any additional closing remarks. Thank you.

Well, thanks a lot for your time. If you need more information on the Legrand results, you have, as usual, Franck, Renaud, Antonia, and myself. And for those who are lucky enough to take a summer break, I wish you a happy break and I'd be happy to see you again in a couple of weeks. Thanks a lot.

Thank you, everyone, for joining today's call. You may now disconnect. Have a nice day, everyone.