Legrand SA (LR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to today's Legrand 2020 First Half Results Conference Call. [Operator Instructions] For your information, this conference call is being recorded. At this time, I would like to turn the call over to CEO, Mr. Benoit Coquart; and CFO, Franck Lemery. Gentlemen, please go ahead.

Thank you. Hello, everybody. This is Benoit speaking. Franck Lemery, Ronan Marc and myself are happy to welcome you to the Legrand 2020 H1 results conference call and webcast. Before we start, I hope that all of you, your relatives and your colleagues are doing well and are in good health. Let me first remind you that we have published today our press release, our financial statements and a slide show to which we will refer. Those documents are available on the Legrand website. Please also note that this conference call is recorded and webcasted on our website. I will start with a few opening remarks, following which Franck and I will comment into more details our first half results. So I begin on Page 4 of the deck with the 3 main takeaways of today's release. First, against the backdrop of an unprecedented crisis, Legrand mobilized for all of its stakeholders in a balanced manner. Second takeaway is that our performance showed good resistance in the first half of 2020 in a very deteriorated environment where net sales fell by 12.2% and the adjusted operating margin stood at 17.5%, reflecting the many measures to adapt to the consequences of the crisis. Third, capitalizing on its well-positioned product offering and fundamentals, Legrand is actively continuing the deployment of its model in a still uncertain environment. Let's now move to Page 6 and start with an overview of group mobilization for all of its stakeholders. Amid the health and economic crisis, Legrand's first priority was to protect employees and partners by deploying very early the most stringent health protocols possible and new ways of working. The second priority was to actively support customers in pursuing their business. For that, the group kept nearly all of its logistics and production centers open while maintaining customer support and services wherever it operates. Now on Page 7, Legrand also continued to show solidarity to local communities in the fight against the impact of the health crisis with many initiatives from donating equipment to helping produce ventilators and supporting communities that are the more exposed -- the most exposed, sorry. Finally, in the spirit of responsibility, and given the efforts the crisis requires, Legrand has made a balanced appeal to all stakeholders from management to employees, but also partners, shareholders, civil society and government authorities. Let's now move to Page 9 with an overview of sales. So in a very deteriorated environment, sales fell by minus 12.2% in total for the first half of 2020. This trend resulted from an organic decline of minus 15.2% that was particularly marked in the second quarter across our main markets, which was offset by an increase in the scope of consolidation of plus 3.6%. Based on acquisitions already completed and their likely dates of consolidation, the scope of consolidation should come to around plus 3% in fiscal year 2020. The impact of FX was negligible over the period. If we apply the exchange rates of the month of June 2020 to the last 6 months of the year, the theoretical impact of exchange rate fluctuations should come to around minus 1.5% for 2020 sales as a whole. Let me now go into more details regarding the like-for-like evolution of sales by geographical zone, and I'm referring to Pages 10 to 12 of the slide show. So starting in Europe, where organic sales were down by minus 16.7% in the first half of 2020. In Europe's major countries, sales declined by 19.7%, including minus 31.8% in the second quarter alone. Business was down in almost all countries due to the impact of the health crisis, compounded by one-off factors relating to destocking by distributors. This decline was more marked in France, Italy and Spain, the hardest-hit markets by the pandemic in the area. In Europe's new economies, sales were up plus 2.2% from the first half of 2019 and down minus 5.2% in Q2 alone. This comes from a slight decline in Eastern Europe and a rise in sales in Turkey, thanks to ongoing projects. In this deteriorated context in Europe, the offerings of the Eliot program, but also the ones linked to assisted living, data centers and DIY stores showed good resistance in a number of countries. Moving now to North and Central America, sales recorded an organic decline of minus 11.2% in H1 2020. In the U.S. sales were down minus 10.1% compared with the first half of 2019, with minus 15.6% in Q2 alone. The 6-month increase in sales of products for data centers, including busways and PDUs, was not enough to offset declining sales observed in other regions. Let me now move to the last zone with rest of the world where sales recorded minus 19.9% organic decline in the first half of 2020. In Asia Pacific, sales retreated minus 16.9% as they decreased in most countries including in China and India, while recording a slight increase in Australia. In Q2 alone, sales were down in Asia Pacific minus 13.7%, with contrast from 1 market to another that including business halved in India and a marked rise in China. In South America, net sales fell by minus 29.3% in H1 with a minus 47.8% drop in Q2 due to the worsening epidemic. In Africa and the Middle East, sales were down minus 19% in H1, including minus 25.2% in Q2 alone. Let me now pass the mic to Franck for an overview of our financial performance.

Thank you, Benoit. Good morning to all of you. I hope that you are all doing well. Let's start with profitability on Page 13. As you can see, in the first half of 2020, the adjusted operating profit came to EUR 497 million, i.e., minus 25% from the same period of last year. Moving on Page 14, the H1 2020 adjusted operating margin came to 17.5%, meaning 3 points lower than in the first half of 2019. This includes a plus 0.4 points accretive impact of acquisition. Therefore, before acquisition, adjusted operating margin was up 17.1% of sales. Given the steep and sudden decline in business volume, this limited decrease reflects the group's quick action in implementing adaptation measures. More specifically, these result first, from an efficient management of sales and purchase prices, second from a significant adjustment in cost and expenses with double-digit decline from first half of 2019 and partially due to one-off initiatives; and third, from an increase in other income and expenses, in particular, restructuring costs, reflecting the rollout of structural adaptation measures. Moving now to net profit on Page 15, this was down minus 31.2% from first half of last year. This decline is mostly explained by a decrease in operating profit, followed by an unfavorable trend in net financial results. This was in part offset by a decrease in the absolute value of corporate income tax, with a tax rate almost unchanged. Moving now to the cash generation on Page 16. On the left-hand side, you can see that cash flow from operation amounted to 15.7% of sales, less minus 2.1 -- 2.5 points from the first half of 2019. Additionally, working capital requirement came to 10.7% of the last 12 monthly sales, down minus 0.5 points on H1 2019. You can see on the right-hand side of the slide that normalized free cash flow stood at EUR 470 million, i.e., down minus 8.7% from last year at 16.6% of group sales. We are going now to the last item of the financial performance on Page 17. The group's balance sheet at June 30, 2020 was very solid, as first, cash and cash equivalents stood at 2.7 billion and second, net debt was 3.1 billion with a ratio to EBITDA very close to the level of H1 2019 and an extended maturity thanks to the successful issue of a bond in May. These were the main points on our 2020 first half financial performance that I wanted to share with you. They reflect the good resistance of the performance in the first half, notably, thanks to the many initiatives taken rapidly to adapt to the consequences of the crisis. I give now back the mic to Benoit.

Thank you, Franck. Let's move now to the last part of this presentation with the continued deployment of the Legrand model. Let's first start with Page 19 with a few words on perspectives. The outlook for the global health situation and the world economy remains particularly unpredictable. In this context, and subject to favorable trend in the global health situation, net sales in the second half of the year should see a sequential improvement compared with the second quarter. Now moving to Page 20. We would like to emphasize that despite this uncertain context and relying on its fundamentals, Legrand is continuing to actively deploy its value-creating model. Five key areas are considered. The first key area is detailed on Page 21 to 24, where you will see that the group is extending and promising its product catalog, including items driven by structural trends linked to society, the environment and technologies. Page 21 with a few examples of offerings providing high energy efficiency for both residential and nonresidential buildings, such as Drivia with Netatmo, industry-leading connected electrical panel that we have just launched, but also the digital lighting management or the [ clear ] mode UPS system, which reduce energy consumption and improve building's carbon footprint. On the next page, on Page 22, you can see some examples of our deep and innovative catalog for data centers, going from busways to PDUs and cabinets, thus meeting every requirement for all kind of data centers. Moving to Slide 23, the group's offering also help enrich and secure the office space at work or at home as they make it more connected, efficient, modular and safer. On Slide 24, we also show here how our catalog meets the needs for assisted living, improved comfort at home, but also for critical spaces such as health care buildings. Overall, and as demonstrated, our offerings are perfectly positioned to meet the major changes the building industry is facing. Now on Page 25, Legrand is also focusing on 3 other important fundamentals of its model. First, by maintaining its drive for innovation with many new products launched in the first half of 2020 and a sustained momentum for the geographical deployment of Eliot. 5.3% of the H1 2020 sales is dedicated to R&D. Second, we pursue our disciplined M&A strategy by actively docking newly acquired companies and maintaining close contact with the leaders that would potentially join the group when conditions are right. Third, we are deploying many structural initiatives to adjust our cost base and strengthen our efficiency and agility, notably by rationalizing our footprint across the globe and through digitalization. Now on Page 26, and this will be the last part of this [ partition ], you know that CSR is a [ mirroring inherent ] part of the group's model and we confirmed our responsible commitment throughout the first half of the year. For example, we are accelerating the fight against climate change with the first commitment starting in 2022 aligned with the Paris agreement target of the 1.5 degrees Celsius increase. Second, we are pursuing initiatives for diversity as a workplace and maintaining the highest standards for governance with the nomination of an independent chairwoman since July 1, 2020, and with the shortening of directors' term of office to 3 years. That's it for this release. Now Franck, Ronan and, of course, I are ready to answer to the questions you may have. Thank you.

[Operator Instructions] We have 1 first question from Madame Daniela Costa from Goldman Sachs.

Actually, I have 3 questions. I'll ask them maybe 1 at a time. But the first question, I wanted to follow-up on your comment regarding some of the structural changes that you are doing in the business, if you could give us a little bit more detail on whether you were already like very lean and optimized on your cost base before, are these basically to stand still along with your around 20% sort of through-cycle margin or do you see these as incremental actions?

Hello, Daniela, I hope you are fine, too. So yes, we believe there are a number of structural changes that we can still do and are currently doing to our business. I can remind you the number -- the figure we gave in the press release as far as restructuring expenses are concerned. On a yearly basis, we usually have, let's say, between EUR 20 million to EUR 25 million of restructuring expenses, 20 to 25, that's the average of the last 4 or 5 years. In H1 alone, we had restructuring expenses of EUR 40 million which were well-balanced between Q1 and Q2. It was about EUR 18 million in Q1 and EUR 22 million in Q2. So it means that, yes, we have still a lot of ideas as far structural changes are concerned. Maybe give you a few examples. It can relate to the way we are organized. And for example, we have moved from 7 BUs, business units, to 4 in a matter of a few weeks. It can relate to a number of processes we are trying to optimize and strengthen. It can relate to our footprint. I can again give you a number. Since the beginning of the year, we have either closed or announced the closing of 7 sites worldwide across the different continents which is more or less twice the yearly pace we usually have. If you look at the past, let's say, 10 years, we are usually closing 3 to 4 sites a year, and we have already closed or announced the closing of 7 sites. So yes, there are still a lot of changes that we can, structural changes that we can do. When it comes to the second part of your question, you will have noticed that even though we have suspended our 2020 guidance, given the uncertainty -- and I may say a word about those uncertainties -- we haven't suspended our midterm model and our midterm guidance, which is shooting for a 20% EBIT margin across the cycle.

And my -- my second point, actually is a follow-up to this, which relates to -- in the second half, I mean, I guess, as you said, sequential improvement versus Q2 is hoping we don't have the same sudden drop in sales. Should we think about the second half as a bit more normalized on -- in terms of margin perspective, obviously, with the seasonality that we normally have every year in Q4. But shall we think that it's a more normalized environment, do you think, for margin?

Well, it's -- I would love to answer to this question. What we have hinted in the press release is, of course, a floor. So when we said that H2 sales performance should be better than Q2, we see that as a floor. Now will it be the same, better or a lot better? It's still a big question mark. And you perfectly know that the top line evolution has a significant impact on margin. So there is some -- there are series of uncertainties on H2. I can remind you that we still have half of our sales approximately, which are made in countries which have not yet reached the peak of the epidemic. Take U.S. plus South America plus India. It's approximately close to half of our sales. And in those countries, we have not yet reached the peak of the epidemic, not to mention the risk of the second wave. So there is a huge uncertainty as far as the health situation and economic situation is concerned. We are not pessimistic. We are cautious. We are doing the things which are necessary in order to cope with the uncertainty, putting in place a number of short-term and midterm measures. But it's difficult for me to commit to anything in terms of top line, and as a result, to commit to anything in terms of bottom line.

And then in terms of the working capital progression, I guess, you had sales decreasing in the first half, but there was still working capital consumption, I guess. Should we expect that now as is usual in a still declining environment, we will see a reversal? And can you cut still structurally maybe more inventories or sort of how should we think about working capital and cash going forward for the rest of the year?

Yes. So maybe let me describe what happened in H1 as far as working capital is concerned. So number one, our working capital requirements in H1 2020 stood at, if my numbers are correct, 10.7% of the last 12 months sales, which we believe is not a bad performance. And you have several things playing. Number one, we have a little bit more inventory than at the end of the year. The level of inventory-to-sales is about 14.8%. It was, I think, 12.9% at the end of 2019. It was 14.4% at the end of the first semester 2019. So slightly less inventory than at the end of H1 2019, but more inventory than at the end of full year 2019. And this was a strategy. Number one, we clearly told you at the end of 2019 that the level of inventory was very low. And number two, we also said in Q1 that we would do whatever it takes to continue to provide a good service to our customers, including by adding a little bit more inventory if needed. So that's what we did in H1. We deliberately decided to put a bit more inventory on some selected product because we wanted to continue providing good service to our customers. The other items of the operating working capital are well under control, including receivables, with no issue coming from this. Now we also have a negative impact coming from nonoperating working capital items, so all other items which can have a sort of erratic evolution from 1 quarter to another. So to make a long story short, the working capital requirements is well under control with a little bit more inventory. And with receivables well under control and other items a little bit on the negative side. Well, when it comes to H2, unfortunately, Daniela, I will do more or less the same answer as for the EBIT margin. It will a lot depend on the evolution of our sales and the mix, geographical mix of our sales, our mix of customers and so and so. So unfortunately, I have no clear guidance to give you for H2, except that midterm, we are sticking to our model which is to have a ratio of free cash flow to sales between 30% and 40%. Again, we have not suspended our midterm guidance, our midterm model. Now what can happen on a given short-term quarter depends on many [ effected ] factors that are not all of them under our control.

Just 1 clarification. I understand you mentioned you have no visibility for the whole of 2H, but you mentioned you've stepped up inventories towards the back end of the first half. Should we read into that, that at least the beginning of July is better than what June and 2Q has been?

No, you shouldn't read neither that nor the [ interpret tie ]. It is just that you have to realize that the month of April, as we said, was down minus 41% which means that in some geographies, big geographies for Legrand, France, Italy and a few others, sales were down as much as 60%, 70% on these given months. And at that time, we knew that things would improve. And indeed, when looking at the group level, April was minus 41, but May and June was already, if I may say, minus 14, and when you are moving from minus 41 to minus 14, in some countries from minus 60, 70 to better numbers, it is a stress you put on your factories, and it's a stress you put on your service level. And we have set up as a top priority to be able to serve our customers because we believe that this period of time are a period during which we can gain market shares, if you stay close to your customers and are providing good service to them. So as a result, we have decided to put more inventories in order to cope with this acceleration, let's say, between the minus 41 and minus 14. So don't read anything related to July. It's just -- in order to provide a good service in a quarter where by definition things got better, because the deepest month was April.

Next question is from Madame Supriya Subramanian from UBS.

Supriya here. Just 2 from my end, which -- a bit of a follow-on from the last question in terms of -- could you share a little bit more sort of granularity around the trend through the quarter in terms of growth trends through the quarter and what were the exit rates or maybe early July rates that you were looking at? And a little bit more around each of the regions and what's varying between, let's say, Europe or North America and rest of the world. And my second one is related to the cost savings program or restructuring program. You did mention that there are certain temporary measures that you have taken as well in the quarter. How much of this do you expect to reverse going into the second half? And would the sort of longer-term structural cost-saving measures that you're taking be enough to offset, let's say, the reversal of the temporary savings? And if there is, if at all, possible to provide any quantification of this?

Yes. I understand that you would love to understand within the quarter and going into July, if we have a trend to give you. But in our business, really so most weekly or a monthly number do not mean anything. So first, weekly. We don't have a weekly consolidation. We are not a distributor. So I'm not able to tell you what last week consolidated sales compared to the week before. Number two, if you zoom on a monthly number, it can be impacted by so many factors that are not relevant. Take, for example, the number of days. Take stocking or destocking from the distributors. So the fact that we gave in Q1, the April sales was more to hint that Q2 is going to be a very difficult quarter rather than the start of a new exercise which would be to give you monthly numbers. We believe that monthly numbers in our business might give you just the wrong indications of what's going on. So this being said, what I can tell you, zooming by geographies by geographies. Europe, clearly, the month of April, it was not a surprise to you, was the hardest hit by the lockdown measures and most of the month of April was closed in many geographies, with the situation being even more difficult in Southern Europe, where the lockdown measures were the strictest, so France, Italy, Spain, and the situation was a bit better as we said in Northern Europe and in Eastern Europe. And obviously, the European situation got progressively better in May and June along with the progressive ease of the lockdown measures. So the key driver behind the performance within the month of -- within Q2 was lockdown measures. Strict and almost across the continent in April and a progressive lift in May. As far as -- and for the whole quarter, as we said, Southern Europe was a lot more affected than Northern Europe, which mattered a lot for Legrand. To give you a flavor of our exposure to Southern and Northern Europe. Southern Europe, let's say, France, Italy, Spain, represents approximately -- or represented last year, approximately 25% of our sales worldwide. So it's a big exposure to those 3 countries, especially France and Italy. And it's approximately 4x more than the exposure we have to Northern Europe. So this was for Europe. North and Central America, as you could see in the press release and especially in the U.S., the situation was a bit less negative, if I may say. And the dip that we had was not as deep as the one we experienced in France, Italy and Spain. And there were even a number of businesses which were either up, like data centers, over the semester or only slightly down. Like, for example, the residential piece of our business, typically [ were in ] devices. Resi was better than commercial in H1 or the product dedicated to energy efficiency, like, for example, the DLM system that we put in the press release. So those [ topics ] behaved better than the rest. But again, it's difficult to see a trend within the quarter. And the rest of the world, it's a very mixed situation. Well, obviously, the most dramatic situation in Q2 is in Latin America and in India. And in those 2 areas, which represent cumulated 10% of our sales, so it's a significant part of our sales, sales were down by about 50%. But again, with a strong correlation between the level of sales and the lockdown measures. And most of the Latin American countries, take Chile, take Peru, were under very strict lockdown, same for India. So again, to make a long story short, the situation is very different from 1 zone to another. And within those, we have really to make the difference between countries and businesses. But I wouldn't extrapolate a trend within the quarter, except that the month of April was by far the most difficult month, with minus 41%, whether -- whereas May and June was minus 14%. As well as -- as far as your second question is concerned, yes, we had on H1, especially in Q2, a number of one-off. Some were positives, some were negatives. Amongst the positive one-offs, well, travels -- travel expenses were almost 0 in Q2, obviously, nobody could travel. We didn't have any convention or meetings. We did ask our people to take a number of day off in France, for example, and you cannot do that over 12 or 24 months. In some selected geographies we did some furlough, for example. So some of those measures are not all of them replicable over H2. Now it's not a negative message we are channeling to you. We believe that at the same time, we progressively have a number of structural measures that could positively impact our P&L starting from H2 and going into 2021. So the strategy was clear. It's to do as much short-term savings as we can, still preserving a number of topics. For example, R&D ex in Q2. So for example, R&D expenses are only slightly down in Q2 and in H1 in general. We are doing a bit of pricing, but not too much, and so on. And in H2 and in 2021, we expect to have the benefit of more structural savings. This is the way we have managed our P&L so far.

Okay, that's great. And just a quick question, sorry. Just could you share what's the exposure to data center as an end market, as a percentage of sales?

Well, last year, it was approximately 10%. Why do I say approximately? Because we have about half of that which are products which are only going to data centers. like busway, for example, or PDUs. And for those products, well, we know that each time we sell a PDU, it's a sale which is made to data centers, but we also have a number of products. Take, for example, cable tray, switchgear, floor boxes and a few others, which can either be sold to data centers or to other verticals, office space, retail and so on. And for those products, we have to estimate how much of them are sold to the data center. So this 10% should be seen as an estimate and not as a very accurate number. We are tracking month by month.

Next question is from Mr. Gael de-Bray from Deutsche Bank.

Can I try 2, please? The first one is really a follow-up on the working cap. I mean it looks like you've been less strict on inventories and payables than usual, and than some of your peers in Q2. So can you just help me reconcile the sort of apparent contradiction there seems to be, between your relatively conservative guidance for sales in H2 and this sort of buildup of inventories. The second question I have is on the impact of acquisitions in Q2. So there was apparently an accretive effect of about 100 bps in Q2 alone. So where did that come from?

Well, I wouldn't say that our management of working capital has been loose or that we have changed our approach. We have, as usual, a strict management of working capital. But again, remember that we have clearly told you at the end of 2019 as well as at the end of Q1 2020 that our level of inventory was at an historical low and that you should expect it to increase. So it shouldn't come as a surprise that it effectively increased. And at the same time, as I said, we have set as a priority to serve our customers. And even if at the expense of having a little bit more inventory. We've got remote working. We share the difficulty of remote working. I think all of us have some experience in this. So again, so no, it's not that we are building up inventory or that -- it's really that we are coming from a low level of inventory at the end of 2019 and end of Q1. And number two, we really wanted to serve our customers. Again, if you compare the level of inventory to sales from H1 2019 to H1 2020, it is slightly improving. As far as the second question is concerned, it is true indeed that we have an accretive impact of the acquisitions on our P&L. I said 100 bps in Q2. So it's 40 bps in H1. When it is coming from 2 things there. Number one, the fact that the group's margin is not at the sort of customary 30%. So as a result, it's a little bit easier for the acquisition to be accretive. Number two, the acquisitions that we have consolidated in H1, this is especially the case for universal electric, are doing very well in terms both of top line and in terms of bottom line. You remember universal, it's this business of busway for data centers. Mostly in the U.S., but also selling increasingly outside of the U.S. So number one, the group margin, excellent efficiency, which is lower than the usual 21%, 20%; and number two, a very good performance of the company that we are consolidating. Now the question is, should you impact -- should you expect to have the same positive impact for H2? Well, of course, I cannot comment on the group margin excluding acquisitions, but be aware of 2 things. Number one that it's not granted that the performance in H2 of the acquired and consolidated companies will be as good as the one in H1, which we believe is not necessarily sustainable. So be careful about that. And number two, as far specifically as Universal is concerned, you have a technical effect. Universal is consolidated over 6 months [ here ] in H1. It will be consolidated over 3 months for fiscal year 2020 because the way it was consolidated last year. So it's a good news for H1, but don't extrapolate necessarily this number for the full year 2020.

Understood. Can I just have a follow-up on the inventory equation? Was there any positive impact on margins in Q2 coming from the rise in finished goods?

No it was extremely marginal, so...

Marginal.

Marginal. In fact, you shouldn't embed that into the model. It has almost no impact. Maybe it's also the opportunity for me to say a word on free cash flow because, of course, working capital is highly related to free cash flow. So you could see that our free cash flow, nonnormalized free cash flow to sales is going down by 31%. A couple of things that you should have in mind: so number one, which is extremely important, the basis for comparison for nonnormalized free cash flow was extremely demanding. In H1 2019, our sales was up 8%, and our free cash flow was up 62.5%. So bear that in mind. That's why we are -- we think that you'd rather look at the normalized free cash flow, number one. Number two, even if you look at the non-normalized free cash flow, the free cash flow to sales is at 9.1%, which is the second best year in the last 5 years. So be careful when looking at the free cash flow because minus 31% might be due to saying that it's not a good performance, but at the end, it's coming exclusively from the basis for comparison. We believe that the nonnormalized free cash flow as well as the normalized free cash flow are quite healthy in H1.

Next question is from Madame Lucie Carrier from Morgan Stanley.

I guess I just have a couple of follow-up at this stage. One is I was hoping you can maybe give us a little bit more details on how the European margin has evolved because obviously the top line decline is quite pronounced, but this is also the case to some extent in the rest of the world. But the drop we are seeing year-on-year on the margin is quite spectacular in Europe. So was there anything specific in your cost base that you couldn't adapt as well as you have in the rest of the world, for instance? And how should we think about a step up? How quickly do you think you can step that up?

Well, it is true indeed that European margins are going down more than the average of the group. Maybe give you -- I can maybe give you a few numbers to start with and I will then comment. So we said that our EBIT margin, excluding acquisitions, was down for H1 by 340 bps compared to last year, moving from 20.5% to 17.1%. So this is for the group. If we split that for each of the 3 zones, Europe, again excluding acquisitions, was down 540 bps. Legrand North and Central America was down 310 bps, and rest of the world was up 100 bps. So indeed, you have Europe decrease in margin which is higher than the average of the group. There are 3 main reasons for that we see. The first reason is that the drop in sales was deeper than elsewhere. And not only the drop in sales was deeper than elsewhere, but we had, again in some geographies, on a given month, month of April, some countries which were down 60%, 70%. In this context, adjusting your cost base is, of course, difficult. Number two, we clearly have a negative mix impact between the countries. And you know that countries like France and Italy, for example, are nicely profitable countries and they were down more than the rest of Europe and down more than the rest of the world. Number -- I mean the third explanation, we have been very careful in protecting our R&D capabilities because we're seeing that it's a [ myth ] in the Legrand business model, and we should be able to launch a number of new products and continue to launch new products and benefit from the rebound whenever it comes. I can give you to exemplify that, 2 numbers: our expenses for the whole group in H1, so production expenses and SG&A, went down like-for-like by close to 11%, minus 7%. Within those expenses, R&D expenses were only -- were almost flat. Second number, our average number of people in H1 2020 compared to H1 2019 was down by a group level by 8%, minus 8%. Our R&D people was almost flat. So we have a deliberate strategy. It's a little bit like what I was saying about inventory. We have a deliberate strategy of preserving our R&D capabilities. And the fact is that Europe is a very big base for us for R&D. So we have, indeed, protected as much as we could, the R&D capabilities of Europe. So those 3 reasons, sales going down more than elsewhere, mix between countries and R&D, explain the reason why the margin dropped by 440 bps, where the group margin was down 340 bps. A word maybe on MCA and rest of the world, where MCA is close to the group's average. So nothing specifically to say. Rest of the world, be careful that the increase in margin, especially increase in gross margin is a bit technical. It's coming from the fact that the group's -- I mean the zones manufacture for [ all the other zones ] of the group. So it's a bit artificially boosted by that. But the, let's say, business gross margin is going down and not going up. Now on -- and on top of that, for the rest of the world, you have a one-timer which we explained in Q1, because revenue that we sold a building in Chile for EUR 15 million, and it impact positively the EBIT. So for us, the evolution in margin in Europe is not a concern. So it was expected, actually. And these 3 impacts were expected. Well, going into H2, which is your question, on the 3 topics it's a question mark. How much will sales evolve? What will the country mix be? Well, as far as R&D expenses are concerned, we still expect to preserve that, but we have in front of that, a number of structural initiatives that we are leading in Europe and which should help our cost base. So same as for your colleagues, I'm not able to give you a clearer guidance on H2 for the European margin because it depends on many inputs that we don't have.

Okay, my second question, I was hoping if you could comment a little bit on the trends you've seen in North America by kind of big segment for you in terms of activity. Non-resi or commercial, residential and so on. And also what you're seeing now in data center because we are hearing some noise about maybe a bit of a slowdown in this area of the business as we go into the second half of the year. And I know [ you have also ] North American business fees.

Yes, yes. So we've clearly seen in the U.S. that in H1, the resi piece of the business was a lot more supportive than the nonresi. And we have a couple of resi product ranges which were only very slightly down, for example. Well, this being said, you know our exposure in the U.S., you know that close to 80% of our sales are made on nonresi and slightly more than 20% on resi. But yes, there is a clear difference between resi, which was more positively oriented, and non resi, which was more difficult, except data centers which for Legrand was up in the U.S. in H1. And we haven't seen deceleration in data centers. Well, it is also true that we are progressively -- we are probably also gaining market share in data centers in the U.S. If I look at the other businesses, so basically, you have 3 categories. You have data centers which are up, then you have the traditional Legrand business and especially the resi part, which is 1-digit down. You have energy efficiency products which is 1-digit down, and then you have a couple of businesses which are going down more than -- which are double-digit down, which are basically lighting. We are nothing structural. We confirm that we are very happy with our lighting fixtures positions, but it is a fact that some of our lighting units are operating in places which were amongst the more difficult in terms of contamination. And as a result, we did have to close some factories, it was a bit more difficult to operate. And there are a number of businesses where we have, for example, a bit of backlog. And AV is also being down double digits. And again, nothing structural. It is coming from the fact that many customers were closed, but -- so this is a factor. Data center up, traditional Legrand business slightly down and the same for energy [ HP&C ] and lighting fixtures and AV down double digit.

And my last question would be, if you could give us the bridge between the raw material impact versus the price in the half year and quarter possibly.

Yes, so in H1, our pricing was up plus 1%. And the inflation of raw materials and components was about minus 1.6%. So we had, indeed, as you could compute, a slight benefit coming from the difference between selling price and purchasing price.

Next question is from Mr. Andreas Willi from JPMorgan.