Legrand SA (LR) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to today's Legrand 2021 9-Month Results Conference Call. [Operator Instructions] For information, this conference is being recorded. At this time, I would like to hand the call over to CEO, Mr. Benoît Coquart; and CFO, Mr. Franck Lemery. Sir, please go ahead.

Thank you. Good morning, everybody. Franck, Ronan and myself are happy to welcome you to the Legrand 2021 9-Month Results Conference Call and Webcast. We have published today as usual our press release, financial statements and a slide show to which we will refer. Those documents are available on the Legrand website. Please note that this conference call is recorded and webcasted. After a few opening remarks, Franck and I will comment into more details the 2021 9 months' results. I begin on Page 4 of the deck with 2 key takeaways. First, amid tensions and supply chains that have intensified, Legrand recorded a strong rise in financial results in the first 9 months of the year. Sales grew plus 15% year-on-year and plus 5.7% over 2 years, driven by a strong organic rise of plus 16% over 1 year or plus 4.4% over 2 years. Adjusted operating margin came to 21.4% of sales and net profit rose plus 42% from the first 9 months of 2020 or plus 12% from the same period of 2019. These very good results testify once again to the soundness and relevance of our unique model for value creation and confirm our continued capacity to improve competitive positions on our markets despite strong headwinds. Second takeaway. Given the solid showings recorded in the first 9 months of the year, but also a significant pressure on supply chains with a volatile pandemic environment, we are specifying the full year 2021 targets. Getting now into details, we are moving to Page 6, diving first into sales rates. Over 9 months, sales rose strongly in all regions. Organic growth reached a significant plus 16% at double-digit levels in both major countries with plus 13.2% and new economies with plus 24.7%. Over 2 years, organic sales grew plus 4.4%. This strong performance confirms Legrand continued capacity to improve its competitive positions on its markets as pressures built on supply chains, especially in the first -- in the third quarter. At end of September, this performance is notably driven by good demand in residential as well as sales in faster expanding segments, namely data centers, connected solutions and our energy efficiency programs. This is for organic growth. Acquisitions contributed to an increase in sales of plus 2.7%, and exchange rates had a negative impact of minus 3.4% over the first 9 months period. Applying September average ForEx rates to the rest of the year, this exchange rate effect should theoretically be about minus 2.5% in 2021 as a whole. Let's now move to Page 7 to go into more details regarding the like-for-like evolution of sales by geographical zone. In Europe, organic sales grew plus 21.8% in the first 9 months of 2021. In Europe's major countries, growth was plus 22.3%, including plus 4.3% in the third quarter alone. Over 9 months, the steep price recorded included strong showings in France and Italy with many commercial successes, notably in faster expanding segments. Sales in Europe's new economies were up plus 19.2%, including plus 11.9% in the third quarter alone, with very good showings in Turkey and Eastern Europe over 9 months. Moving now to North and Central America. Organic sales increased plus 7.9% in the first 9 months. In the U.S. alone, the organic rise in sales was plus 6% with a slight decline of minus 0.9% over the third quarter alone. Over 9 months, these trends reflect a marked sales increase in solutions for data centers and residential spaces while demand for other nonresidential spaces grew slightly. Let me now move to the last zone with Rest of the World, where organic sales rose plus 22.4% over 9 months. In Asia Pacific, sales increased plus 18.9%, including plus 5.4% in the third quarter alone. Over the 9-month period, China and India both grew double digit. In Africa and the Middle East, sales rose plus 16.6% with plus 5.7% in the third quarter alone. The region's 9-month performance was supported by strong gains in Africa. In South America, sales increased plus 43.1% with plus 22.8% in the third quarter alone, reflecting continued significant growth in main countries. These were the key elements on sales. I am now passing the mic to Franck for an overview of our financial governance.

Thank you, Benoît, and good morning to all of you. I hope you are doing well. Going to Page 8 now. Adjusted operating margin before acquisitions in the first 9 months stood at 21.6%, meaning an increase of plus 2.9 points from the end of September 2020. Inflation in raw materials and component reached nearly plus 10% over the 9 months period and nearly plus 15% in the third quarter alone. Despite this significant inflation, our profitability increased, reflecting, in particular, strong leverage and expenses together with group pricing initiatives. After acquisitions, the adjusted operating margin for the first 9 months of 2021 was 21.4%, setting the adjusted operating profit just over EUR 1.1 billion or up plus 31.5% from the first 9 months of 2020. Going now to Page 9, regarding the net profit attributable to the group. At EUR 699 million, it grew plus 41.7% compared with the first 9 months of 2020. The main driver is the strong growth recorded in the operating profit, trend in the financial results is also favorable and these positive items were partially offset by an increase in value of corporate income tax while the corporate tax rate was slightly down from the first 9 months of 2020 at 28.5%. Moving now to Page 10, with a few comments on cash and balance sheet. As a percentage of sales, cash flow from operation was up plus 2.3 points at 19.7% of sales above EUR 1 billion. It's driven first by the rise in cash flow from operation and second, as expected, an increase in working capital requirement. And then the free cash flow stood at a solid 15% of sales in the first 9 months of 2021. Now when normalizing working capital requirement variation on the right-hand side of the slide, the normalized free cash flow stands at EUR 859 million or 16.6% of sales in the first 9 months. One last point I wanted to share on this slide. End of September, Legrand successfully issued its first sustainability-linked bond index -- sorry, indexed on our carbon neutrality trajectory. And this trajectory is validated by the SBTi. This concludes the key topics on our first 9 months strong financial performance. And I'm now passing the mic back to Benoît.

Thank you, Franck. Moving now to the second part of the presentation regarding the 2021 full year targets that we are specifying today. We are on Page 12 of the deck. Given solid showings in the first 9 months of the year, but also significant pressure on supply chains with a volatile pandemic environment, Legrand is now aiming for the following full year targets: Organic growth in sales of between plus 11% and plus 13% compared to at least plus 10% previously; a scope of consolidation effect of nearly plus 3%; an adjusted operating margin of between 20.0% and 20.5% of sales, including acquisitions consolidated in 2021 compared to about 20% previously; the group also aims to achieve at least 100% of its CSR road map for 2021, testifying to its ongoing deployment of a bold exemplary approach to ESG with a particular focus on the fight against global warming and the promotion of diversity. Let's now move to the last part of the presentation. We are on Page 14 to come back briefly on our last CMD, where we reaffirmed our ambition to accelerate value creation. As you can see on the left-hand side, Legrand's strategic road map is supported by the strong pillars of our unique business model and by our solid integrated performance. Building on these strong assets, we accelerate growth initiatives, in particular, in what we name faster expanding segments. We target to raise the share of group sales made in this promising field from 31% in 2020 to 50% in the mid-term. Going to Page 15, a few additional words on 2 important aspects of our strategic road map. First, we will continue to build on our performance-driven and close to market organization, leveraging on our operational excellence, talent promotion and strong employee engagement, which stood at 80% this year, rising strongly from 2017 results. Secondly, we intend to keep on deploying the Board an exemplary approach to ESG, which, as you know, is driven by demanding CSR road maps with a fifth one starting in 2022. I am now moving to Slide 16. We have confirmed our mid-term targets regarding gross margin, cash flow and ESG. In terms of capital allocation, Legrand will continue its balanced policy, dedicating more than half of free cash flow to bolt-on acquisitions on average while maintaining an average dividend payout ratio of about 50%. As you know, the full event presentation and the replay webcast can be found on our website. Franck, Ronan and I are now ready to open to questions. Thank you.

[Operator Instructions] We have a few questions from Daniela Costa from Goldman Sachs.

I have 3 questions here relatively quick, I hope. First, I wanted to ask you regarding -- if you could comment a little bit in terms of your distributors, if you see them restocking, how's sell-in versus sell-out. I know in the past, you've commented on that. Second, on your inventory buildup in Q3. Can you talk about how much of that is just finished goods waiting to get out of the door because of supply chain issues? And then the final point, just checking regarding restructuring. Q3 in terms of restructuring expenses was relatively low. When you look into Q4, do you see any need to raise that given like the situation that you mentioned in terms of supply chain? Or shall we assume it remains relatively low going forward?

Daniela, so on the first question, I'm sure that our distributors would like to do some inventory, but given the constraints on the supply chain, I think they can hardly do so. So no, we haven't seen a significant change in their inventory in 2021, and they are not able, unfortunately, to build back some inventory. Now it compares -- 2021 compared to a situation where the level of inventory in 2020 was very low. So even with the current level of inventory and even without building back some inventory, there is some positive impact on the top line coming from inventory. But again, I don't believe that the level of inventory is particularly high. They would be happy and pleased to build back some inventory. And unfortunately, they cannot. As far as our own inventory, well, it's coming back to normal. We had a level of inventory, which was very low in H1 given the very strong surge in demand and in sales, which was somehow unexpected and our effort to answer to the demand. So it's now coming back to normal. So it has a mechanical, let's say, negative impact on our net working capital, which we expect it to happen. And we clearly guided the market when we read our H1 numbers, saying be aware that as far as the net working capital is concerned -- the free cash flow is concerned, the situation will somehow deteriorate a little bit in H2 compared to H1. So it was completely expected, but it's more coming back to normal than building a lot of inventory. Now let's make some things clear. If we have the ability to build further inventory in order to cope with the difficulty to get components and raw materials, we will. In other words, our strategy for Q3 and Q4 probably going into 2020 is to do whatever it takes to serve our customers even at the expense of extra inventory. Unfortunately, it's a bit difficult given the current scarcity of resource, but we will not hesitate in building a bit more inventory if needed to better serve our customers. As far as restructuring is concerned, I think that, as of the end of September, our level of restructuring is about EUR 18 million, which compared to EUR 55 million -- or EUR 70 million, sorry, EUR 70 million compared to the EUR 55 million at the end of last year. The key message is that we are coming back in 2021 to a sort of normal level of restructuring, i.e., a level of restructuring between, let's say, EUR 20 million to EUR 30 million or EUR 20 million to EUR 25 million, which is sort of historical level of restructuring. So you shouldn't expect anything exceptional in Q4. It should be more or less in line with what we have done so far since the beginning of the year. Last year level of restructuring was sort of exceptional given, of course, the crisis. I have to specify that the numbers I'm giving you are excluding the sales of assets. And you remember that last year in Q1, we saw the big asset, I think, for EUR 50 million in South America. So EUR 17 million as of the end of September, EUR 20 million to EUR 25 million or EUR 30 million for the full year. Q4, we should be consistent with the rest of the year. That's it.

Next question from Gael de-Bray from Deutsche Bank.

Look, on the -- If I look at the performance in Q3, the organic sales on a 2-year basis were up 4%. But then if I look at the midpoint of your guidance, it implies that in the fourth quarter, the organic sales would actually be down by about 3% on the same 2-year basis. So I mean, why do you guide for such a sequential deterioration? In particular, did you see some disruption from supply chain challenges going into the fourth quarter, more disruption actually than there was already in Q3?

Well, it is true that the plus 11% to plus 13% organic growth for the full year imply Q4, which would be over 1 year between minus 2.7% and plus 4.7%, and over 2 years, between the strong decrease to almost stability. So this is the range we are shooting for, for the plus 11% to plus 13%. And as you are rightly mentioning, the big uncertainty is coming from the supply chain. The situation has clearly deteriorated in Q3 on many fronts. It has become increasingly difficult to get the electronic components, for example. It has become increasingly difficult to get containers and transportation capabilities or capability to get the goods out of the custom quickly in a number of places. And it has also been the case for more traditional raw materials. So the situation has deteriorated. We'll see how it is in Q4, but this is the big uncertainty, let's say, between the plus 11% and the plus 13%. Now I believe that the plus 11%, to make things clear, is somehow a bit conservative. And it's really the low end of the guidance, and it assumes a very strong deterioration in the supply chain in Q4, which may not happen. But this is a clear, let's say, variable or input that can change a bit the profile of the Q4 compared to Q3. Last word beyond the supply chain constraints. Don't forget that Q4 2019 was a very strong quarter. So when you compare over the 2-year period, yes, Q4 2020 was not very strong as such, but Q4 2019 was very strong, both in terms of absolute growth and in terms of comparison with our peers, especially in North America. So it may also negatively impact the Q4 2021 performance.

Okay. Maybe a longer-term equation. At the CMD, you highlighted that you were seeing some new growth opportunities emerging in the past-COVID world with, for example, the upgrade of meeting rooms for hybrid meetings, including both virtual and in-person capabilities. And that was something you were seeing increasing the value of the low growth products per meeting room by a factor of nearly 10x. So could you elaborate a little bit on this upsell potential in the office market? Is this a marginal trend? Or do you really see today already a lot of inquiries on this? And what's your guess on the proportion of meeting rooms that could potentially be upgraded in the next 5 to 10 years? I know it's a difficult question to answer to, but any help on this would be appreciated.

Well, it's indeed quite a difficult question to answer. Well, it was a mid-term comment, not to comment for the next couple of quarters. And I think that the first priority is for people to get back to the office, which, again, is not the case everywhere. If you look at the big metros in the U.S., for example, the work-from-home is still present in many areas or it's still prevalent in many places. So I could hardly tell you that we have done an analysis in the pending quotes saying that there is a structural change in the value of office space. So it was more a mid-term comment than a short-term comment. Now we are very confident it will happen because it is supported by a number of requests and trends from people. For example, the fact that office spaces we need to be greener. There is a COP26 currently happening with the U.S. coming back to the table. It is sure that this will help. The fact that more and more spaces will need to be connected to support AV conferencing or remote conferencing. It is a fact, the fact that you need more and more connectivity, whether wired or wireless to accommodate for more needs. It's a fact, the fact that a number of people will require not only to have a desk to work, but also a number of social spaces a lot more than before will also happen. So France will somehow materialize. Frankly speaking, I have no precise number to tell you X or Y percent of office space will need to be remodeled for additional value of Y. so we'll see. If I may say, it's not yet happening because this is a long-term trend, but we are very confident that it will materialize.

Thank you. Next question from Andre Kukhnin from Credit Suisse.

Can I please start with extending the math that Gael ran on your organic growth rates and what's implied for Q4 to the implied profitability for the fourth quarter, because if my math is right, then even at the top end of your organic growth and margin guide, you're implying around 17.5% margin for Q4, down 200 basis points year-on-year. So I just wanted to check if that math is right, and I would love to hear your reasoning behind it as well.

Yes, of course. Well, the math are almost right. Our guidance imply Q4 in terms of adjusted operating EBIT all-in, including acquisitions between 15.3% in the low end of the guidance up to 17.9% in the upper end of the guidance. Well, 3 comments. Number one, 17.9% is not never seen. Q4 margins are always lower than the rest of the year. It's a seasonality topic. And if you look at the past 5 years, margins around 18% or let's say, 18% to 18.5% were not never seen. In 2015, Q4 margin was 18.4%. In 2016, it was 18.1%. So structurally, let's say, our Q4 margins are lower than our 9 months margin, and 18% EBIT margin is not never seen. Number two, there is a strong squeeze happening since the beginning of the year, which is not a surprise to you, between selling price and purchase price, which worsened in Q3. Maybe I can give you the precise number. In the first 9 months of the year, purchase price increased by close to 10% and selling price were up plus 2.7%. And those numbers were plus 7% for the purchase price in H1 and plus 1.9% for the selling price. So it implies Q3, which is at nearly plus 15% as far as purchase price is concerned and plus 4.3% as far as selling price. So you remember, I told you in July that, in H2, we would have the purchase price, which would be double digit, and selling price, which should be between 2% and 4%. Well, it's more than double digit, if I may say, why it's double digit. But it's probably more than expected, it's plus 15% for purchase price. And as a result, we did some pricing at the upper end of the sort of guidance I gave you, plus 4.3%. What to expect in Q4? Well, purchase price will probably be at the level of Q3 or even worse. So you could very much put in your estimate that the purchase price could be comprised between plus 15% and plus 20%, even though we have no crystal ball. This is the order of magnitude we could expect. And the selling price should be approximately at the same level as the one we recorded in Q3. So it will be something around plus 4%, plus [ 15% ]. So if you take those 2 numbers, and I remind you that raw material and components represent about 1/3 of our sales, you can see the sort of squeeze we are currently experiencing. So this is the reason why having a 17.9% EBIT margin only in Q4 or less than that is not something which is out of the probability, and it's very much consistent with the squeeze we have in front of us. Even though, of course, we are doing many things. We have some cost control. We have some restructuring charges, which, as pointed out by Daniela, will be lower than last year. So we have many things that we'll partially compensate for that, but the squeeze is significant. Third comment. The difference between the low end of the margin guidance and the high end of the margin guidance is clearly coming from the top line. And whether you have, let's say, minus 2% in Q4 or plus 5% in Q4, of course, that does not have the same impact on the margin. So the top line evolution in Q4 will be the driving force behind the 20% to 20.5% EBIT margin that we are shooting for.

Thank you very much for such a comprehensive answer. I really appreciate all the details you've given. Just one more question, conscious of time. Could I ask, in the rest of the world, you've seen a really healthy acceleration on kind of 2-year stack basis in Q3 versus Q2 or H1. Could you talk about maybe what regions or maybe product lines, what drove that and how sustainable it is, please?

Yes. Well -- So it's -- rest of the world, over 2 years. So rest of the world were 2 years. It is true that the quarter is plus 8.7%. And the 9 months is plus 6.4%. So yes, indeed, you have a bit of acceleration. I could hardly say that it's a big acceleration. And it's mostly coming from India, which is a positive single-digit over 2 years in Q3 and which is still negative single digit over 9 months -- over 2 years. So you remember that in India, the COVID crisis is more 2021 H1 topic than 2020 topic as opposed to most of the rest of the world. So India has progressively recovered from the COVID crisis as many countries did last year. And again, it represents most of the change in price, let's say, between H1 and Q3. If you look at the other places, Africa is doing also very well, both in Q3 and in 9 months. China is doing very well, both in Q3 and in 9 months. All my comments are over 2 years, of course, and North America also. The place which is a bit more difficult is the Middle East, which is down over 9 months and over Q3 or over 2 years. So to make a long story short, it's good all across the zone, except in Middle East, and the change in trend between H1 and Q3 is mostly coming from India.

Next question from Andreas Willi from JPMorgan.

I wanted to follow up on the guidance discussions we've had. We are in early November already, and you assume in your range a pretty material further deterioration in the supply chain. So maybe you could comment what you have seen in October so far and how much visibility do you normally have in terms of component stock at hand and so on. Would this imply a dramatic deterioration basically into the year-end to get to the middle or the lower end of the range? Or have you already seen a further deterioration in October? That's my first question.

Well, you know the rules of the game, Andreas. So no, I will not comment on October. But again, just looking at Q3, I can confirm that the situation is tough to give you orders -- I mean, to give you sort of feeling of what we are facing in front of us. So we had, for example, to reallocate a couple of our R&D -- some of our R&D team to do sort of redesign to supply. So to start redesigning a number of products to incorporate companies that were more available than the ones that the products currently have. We have a task force of supply chain people meeting weekly on the topics. We have daily discussions with our suppliers. So no, it does -- it was in Q3, but particularly difficult. We have probably lost a couple of tens of million euros of sales. Difficult to be more precise in terms of quantification because -- well, because, at the same time, we probably had a couple of distributors who ordered a bit more than they needed. When you want to make sure to get 10 products, you tend to order 15 or 20. So as a result, you think you are more sure, if I may say, to give the thing you really need. So you have many factors at play. So it's difficult to give you a precise number. But we have probably lost a couple of tens of million euros of sales over 9 months. And again, yes, plus 11 assume that there would be a strong deterioration in the situation. And as I said a little bit earlier, this is somehow a bit conservative, probably. So no, I cannot be more specific in October, you know the rules of the game. We are not commenting months. We are commenting quarters.

And my second question is on North America. Maybe you could give a little bit more granularity on the trends there in terms of volume growth, where volumes are now versus 2 years ago? I assume the U.S. has also seen -- or North America has also seen pretty high price increases this year. So where are volumes versus 2019? And what are you seeing or have seen in Q3 sequentially in terms of the growth trends momentum in the market in the res versus non-res?

yes. Well, we are not commenting price on a region-by-region basis, but I can tell you that there's absolutely no reason why we would do more price in North America and elsewhere. And I saw a couple of releases where people were stating price increases of 5% or 7% or 9%. This is not the sort of price increase we are seeing in North America. So we're not increasing prices in North America more than elsewhere. As far as the trends are concerned, not much new things to tell you compared to what we told you in H1. Over 9 months, data centers and residential are doing very well over the first 9 months of the year with a strong double-digit increase over 2 years. As far as other nonresidential spaces, which represents 16% of our sales, I remind you, they are still strongly negative over 2 years. However, the 2-year trend is improving in Q3 compared to H1. So the drop in sales over 2 years is not as strong in Q3 as it was in H1. And the result of that is that there is a slight growth over 9 months compared to 2020. So still a strong drop in sales over 2 years, a slight growth over 1 year. And if you compare H1 to Q3, Q3 is better than H1 over 2 years. Well, that's what I can tell you. And there's, again, nothing specific as far as the pricing is concerned in North America, measured between the various pieces of our business, residential, nonresidential data center nor when comparing North America with the rest of the group.

Next question from Lucie Carrier from Morgan Stanley.

I have a couple of follow-ups, actually. The first one is a follow-up on the question from Andreas just right now on North America. When you speak about a slight growth in the third quarter in non-resi in the U.S., is it in volume terms? Or is it in value terms? Just so we kind of know what we're talking about.

Well, it's in value terms.

Okay. So slight growth in value terms in the third quarter?

Yes, slight growth in value terms, indeed.

Are you able to give us an indication of how it might look like in volume terms?

Well, we are not giving pricing per region. Now again, you can assume that the pricing we are doing in North America is not much different from what we're doing elsewhere. So you can come to the conclusion by yourself. But no, we're not giving precise pricing per region.

Okay. My second question was around the logistics or transportation cost that you are facing. Are you able to tell us kind of how much they represent generally speaking as a percentage of sales? And also when you think about your procurement and whether this is procurement of components or procurement of finished products, how much of that is really dependent on what I would call sea freight rather than just kind of more traditional transportation and specifically coming from Asia into Europe or into the U.S.?

Well, the transportation is a slight -- transportation cost is slightly above 3% -- were slightly above 3% of group sales in fiscal year 2020. And of course, it includes domestic transportation where inflation is pretty reasonable, low single digit with transportation by sea or inflation could be as high as times 4, 5 or 6 for a cost of container, for example. And the only significant, let's say, flow we have, the big one is between Asia and the U.S. We already discussed that 2 years back when we discussed the Trump tariff, a year ago when we discussed COVID. So this is the biggest, let's say, flow of products or components from one continent to another. Now I'm turning to my colleagues that we're able to give more precise breakdown of those 3%. I'm not sure we can. Franck?

No, Lucie. Unfortunately, we cannot able to have that much, but you see 3% of sales is not a lot. As Benoît said, looking at our footprint, it's more domestic transportation than what you call the sea flows, the intercontinental flows. And third, our products that move the ones traveling from China to the U.S. are very small products where the freight in percentage of the cost or percentage of sales are minimum. So this is why the question is how much the transportation is harming our P&L, it's not material today.

And last, maybe comment as far as increase in price of transportation, it's pretty consistent with what I told you about raw materials and components. It's a little bit higher than what I told you for raw materials and components. It's a little bit lower for energy, for example, but it's pretty consistent.

Very helpful. And then maybe my last question is -- and I guess this may be a more theoretical question. But do you see across the value chain in construction, whether this is you, as a supplier, into this market, labor cost and so on? Do you see potentially that the price increase or the inflation acceptance is becoming more difficult? Do you think this is a risk for this industry in terms of demand as every single bit of cost across the value chain seems to be increasing?

Well, I don't -- today, I don't see that as a short-term risk because there's such a shortage in the components and material that the people are eager to continue the renovation of construction work, and that's not really stopped by inflation, which accordingly has somehow a negative impact on our top line, which, again, is difficult to size and to evaluate. But when you have no wood for wood and construction, where you have no concrete, for example, you have no wood and when you have no wood, you have no switch to install. So this impact is extremely difficult to evaluate, but it's probably happening here and there. Now, of course, if the construction cost was to increase by, I don't know, 30%, 40%, it could potentially -- you're right, it could potentially, over the mid-term, have a negative impact on the market itself. That's not what we are seeing so far. And I believe that part of this negative impact would be more than offset by all the positive trends, which I already mentioned. Whatever the cost of the goods, there is a strong political and social willingness to make the buildings greener. A lot of renovation work will happen. Whatever the cost of raw material and components, if you need to install a data com system at home to remotely work, you will. So I believe that those trends will more than offset any potential, let's say, negative coming from the cost of construction. This being said, our price is increasing by 2.9%. It's not increasing by 10% or 15%. And of course, the price of other inputs is also increasing. But today, I don't believe that the price for the total renovation, for example, price for a big construction is increasing by 30%, 40%, 50%. And it's not something we have never seen to do a price increase of plus 2.9%, so -- sorry, 2.7% not 2.9%. So I wouldn't be -- so 3 could happen. Roughly speaking, number one, given the level of pricing we see today in the market, which is not plus 10%, 15% or 20%, we're closer to what we are doing, plus 2.7%. And number two, all the mega trends, which will materialize, I don't believe it will really happen.

Next question from Supriya Subramanian from UBS.

On the -- sort of continuing on the pricing point, just wanted to get your thoughts on -- you said that you will potentially continue to take pricing action into fourth quarter as well. How much do you see that supporting sales maybe early in 2022? And also just wanted to get your thoughts on the supply chain issues and supply shortages. What is your outlook or thoughts on this situation? How do you see that developing? Or let's say, how long do you expect these constraints to last in the market? And maybe last question, a little bit more medium or long term is related to the European renovation market. Are you starting -- how do you see that developing in the context of the green deal as well as the recovery fund? Are you starting to see sort of demand and funds going into the market now?

So well, clearly, there will be a carry. So as I said, Q4 pricing should be around plus 4% compared to Q4 2020. So pretty much what we did in Q3. And of course, this will have a carryover impact on -- into 2022. Well, so will the cost of raw materials and components. So you have, of course, a negative impact also of the price of inputs. Well, it's far too early to discuss 2022 guidance. We'll do that in February when we release our 2021 numbers. But of course, you know our mid-term guidance, which is 5% to 10% top line growth on average per year, excluding foreign exchange and about 20% EBIT, which we repeated and reiterated at the end of September. As far as the supply chain constraint, well, I have no crystal ball and I have to listen to specialists and read the studies. And what most people say is that you have very sort of conjunctural thing to the issues, which, for example, is about containers and a number of traditional raw materials such as polypropylene. And most people say that this should ease in the coming months or quarters, but most of the specialists also expect the semiconductor issue and the electronic components issue to last until beginning of 2023 because it would take time for semiconductor, especially, to build capacities, extra capacities, additional capacities to answer to the demand. So that's what people say. Transportation and traditional raw materials and components, it should be a matter of months. And for electronic components, it should be -- it should last a little bit longer than that. As far as the third question is concerned, well, it's too early to see the European renovation wave. We see a number of initiatives locally taken by local government, such as, for example, the [indiscernible] in France, and we see similar initiatives in a number of countries, including Italy. But the big of the so-called renovation wave is still to come, and it's more a topic for the years to come than a 2021 topic. As you know, it always takes a bit of time between the time initiative is announced, is structured, then it is voted by the open parliament, then it is voted by the local parliament. And then the flow of money is getting to the market. So the renovation markets were pretty positively oriented in 2021, but it's not coming from any stimulus plans. It's coming from the fact that following the lockdowns, a lot of people decided to renovate their home because they felt that it would become -- that the new place where they would like to live is the place where they would need to be remotely connected to their doctors, to their office and so on and so forth. So renovation is pretty well oriented in 2021, but it's not coming from the renovation wave or the Fit for 55 or any other programs. It's coming mostly from the need of individuals and to a certain and lower extent from local incentive plans that were launched 1 or 2 years back.

Next question from James Moore from Redburn.

Benoît, Franck, I have two if I can. Maybe do them one at a time. Lots of my questions have been asked about price and road maps, and maybe I could shift to mix. You've often had the strategy of getting positive mix impact on sales and trading up over time. I wondered if you could comment on how mix impact to sales looked in the first 9 months and whether that was in line with historic trends.

Well, you know that, for us, it's always difficult to identify mix. We have, on one hand, pricing, which we can quantify and measure very accurately. And then we have volume and mix, and it's a bit difficult to split it in volume and mix. And we are doing the analysis over 9 months. So it's difficult for me to answer. What I can tell you is that when we look at the various product families, the sectors which we identified as -- or labeled as faster expanding segments, Eliot products, data centers and the green programs grew faster than the rest of our products. Now I have no more precise number to tell you. We haven't seen the big change whereby, for example, given the increasing price of products, customers will shift from added value products to simpler or access product. No, there's not such a move, and we don't expect this move to happen. But I have no more comment to give you. We're not doing this kind of in-depth analysis on a 9-month basis. Do keep in mind that we have 300,000 SKUs. So every time we want to dig into a bit more precisely into the numbers by product family, it's a big, big machine we have to put in place.

I understand. My second question you may have already touched on, but it's just on the fast-growing segment and the strategy there. Could you comment on the different speeds between the 3 buckets of data center, connectivity and energy efficiency this year? I'm not trying to be precise, but do you see a packing order in terms of fastest to slowest?

No, it really depends on the -- the main driver, if I may say, would rather be the geographical driver. Take, for example, U.S. non-resi excluding data center, as I said, it's still strongly down double digit over 2 years. So even if connected products or green products are doing better, well, they're not growing 20%. So all product families in non-resi in the U.S. somehow suffered from the fact that people have not yet gone back fully to the office and that the renovation work are not really -- has not yet really happened there. Take on the other side, Western Europe and residential market, which is booming. It's booming on those 3 segments as well as on traditional products. So no, I cannot make a difference between, let's say, data center, connected products and green. It really depends on the region and it really depends also on the basis for comparison. But I can tell you that taken as a whole, putting together, they're growing faster than the plus 16% that we are showing for the total of the group.

Any way you can quantify that positive spread?

We are usually doing it on a yearly basis, not over 9 months. So I -- let's say, park your question, and ask it again in February.

Next question from Alasdair Leslie from Societe Generale.

Just a question on pricing. So Q3 pricing came in at the top end of the 2% to 4% guidance range. I think you were talking about for H2, which I think, to a certain extent, was going to be dependent on tactical pricing initiatives. Does that mean that it's going to be hard for you to execute on those -- on that kind of pricing strategy to boost growth maybe due to the supply chain environment? And whether there's maybe implications there for your growth expectations in the short term, does it delay that at all? Or should we kind of not really read too much into that?

No. I mean, to make things -- to be sure that you get the numbers right. In July, we said 2% to 4% in pricing for H2. And now we are saying it's going to be more 4% than 2% because it was a 4.3% in Q3, and we are shooting for 4% in Q4. So we are sort of precising the pricing guidance. The 2% to 4% is becoming now a 4%, which is what it's never granted because you always -- you could always give some price out to your customers. But given the pricing initiatives we have launched until then, we are very confident in our ability to reach this plus 4% in Q4. If your question is why aren't we doing more? The answer is we could. And especially in the current context, we could do a 5%, 6% or 7% price increase instead of 4% in Q4. I don't believe it would be a wise decision for Legrand because even though everybody is increasing its price, I think that it will put us somehow at a competitive risk. So pricing, it's always a smart balance you have to find between protecting the profitability and protecting your competitiveness. And we believe with our country managers who are really driving these price increases, we jointly believe that plus -- 4% plus, if I may say, in H2, in Q4 is the best balance we can have today. We cannot do more, it's because we don't want to do more.

No, exactly. I just -- that's kind of what I wanted to check on that effectively. Even at 4%, you were -- there was a sort of an element of tactical pricing within that, that allows you to gain share and boost growth. And maybe just a quick follow-up then on U.S. non-resi. I was just wondering whether you're sort of seeing any signs at all the projects getting pushed to the right maybe due to labor or component shortages?

Well, it's always difficult to say. I think they are not pushed to the right, they are pushed ahead of us. And that's why I'm not negative for the U.S. for '22, '23, '24. Now we'll see. It is true that the labor shortage is a fact. It impacts actually not only people at -- new contractors, for example, but it is also something we have to manage in our factories. Well, -- So far, I think it's not a topic. The topic is more the fact that the recovery is, as expected, a bit slow. It will take a bit of time before people get back fully to work and all the renovation work are performed. Again, Q3 is already showing some sort of improvement compared to H1, both in value and in volume. And hopefully, this will materialize in the months to come.

Next question from Martin Wilkie from Citi Investment Research.

It's Martin from Citi. Just a question on customer behavior relative to the pricing. I appreciate your pricing is only up 4%, but presumably for certain product line, it's up a lot more than that. Are you seeing any indications of customers reacting to that, either as Legrand typically has premium products? Are customers choosing to sort of move to cheaper products as a result of pricing? And also if you can remind us what percentage of your products are specified by specialists such that the electro contractor has no ability to choose somebody else if they can find a product that's cheaper than Legrand, just to understand if pricing could have effect on competitive dynamics as well.

No, no, we are not seeing such a move, whereby given the price increase, the end user and the contractors would go to cheaper solutions. If we look at our, for example, premium ranges of wiring devices, as I said, in France, living now in Italy connected products, high-end panel boards. All those stuff, they are doing a very good performance, growing nicely and sometimes faster than the rest of our product offering. So we are not seeing such a move towards simpler products. And again, the answer being -- the reason being that when you are doing some renovation work, when you ask the contractor to come, the cost of product would be 10% of the total cost of his work. Out of this 10%, probably 3%, 4% would be the components. And then you have cables, lighting features and many other topics. So if on those 2% or 3%, you're increasing your price by 4%, 5%, 6%, it's not such a big deal for the end user. It's not a reason not to do the work. Well, it could be a reason for the contractor to switch to competitors, that's why we are doing plus 4% price increase and not plus 10%, but it might not be a reason for the end user to tell the contractor, let's stop the work, it's costing too much for me and I'll go invest my money in something else. Also more as -- don't forget that during the year 2020 in many countries, people saved a lot of money. I think the total savings for France. I don't remember the exact number, but it's EUR 120 billion or EUR 150 billion of money, which was [ savings ]. So to make a long story short, I don't see this kind of behavior, whereby there would be a migration, let's say, toward cheaper product. All the more, as all other factors are seen to play, the fact that your product need to be available. Today, clearly, there is a rush toward products, which are available. So it is also the opportunity for us if we can be smart to gain a bit of market share. So we're not seeing this move. As far as the percentage of product that would be specified, it's a large minority of our products. A lot of our products, the majority of our products, difficult to show the precise number, but the majority of the products would be chosen either by the contractor or by the end user. The end user being either an individual or a profitable company, more than by an engineering office typically or by a design bureau, by an architect. Now again, when it is a contractor choosing or the end user choosing, are they usually choosing a lower value product? The answer is no. And you have -- and you can still sell value-added products to those guys. If I may add maybe one factor, the current cost increase or price increase of energy which, by the way, is not a big topic for Legrand because I think that I'm turning to my colleagues, they can confirm the number, but I think the energy cost is 0.5% of our sales. So you see it's a couple of tens of million euros. It's not big. So it's not a big, let's say, a cost problem for us. It can even provide additional opportunities and push people either engineering offices, contractors, end users towards buying a lot more energy-efficient related solutions. When your hitting cost is increasing by 20% or 30%, and statistics show that in France, it represents EUR 1,200 a year, well, maybe this is a good opportunity for you to buy a thermostat, which you're going to pay EUR 250 or EUR 300 at best and which would help you to save 15%, 20%, 25% of your bill. So not only we are not seeing any negative mix effect coming from the current, let's say, supply chain crisis, but on top of that, it could even provide a number of opportunities, either in terms of market share if you can be better than your competitors or in terms of selling more products to help people to reduce their energy bill.

Next question from Eric Lemarié from Bryan Garnier.

I've got two, if I may. The first one, regarding the product you mentioned, the faster expanding product or your most successful product like connected product solutions for data center, et cetera. Do you think you've got more pricing power with this type of product than the other product of Legrand? That's my first question. And I got the second one regarding 2022, next year. In a scenario with further inflation next year, do you think you would have further room, further leeway to offset that inflation in terms of pricing, cost cutting, restructuring? Or would it be too much for Legrand?

So as far as the first question is concerned, we have neither more nor less pricing capability in those faster expanding segments than elsewhere. I don't see -- I don't think there is a specific difference at an extent that they are growing faster. So no, I wouldn't tell you that we have more pricing power. As far as the 2022 year is concerned, well, again, I will not repeat the fact that we are very confident in our ability to deliver our mid-term guidance, which imply mid-term an average of 20% EBIT. But on top of that, given the fact that we are pretty reasonable in terms of pricing, that's the feeling I have, not doing too much of pricing, that's probably a bit more margin to maneuver for 2022, if we need it. And as far as cost management is concerned, we have reinvested into cost expenses wherever needed in 2021. So again, if we did, we will have the ability to put costs under a little bit more constraint. So I'm not giving any warning for 2022, we will give a guidance in February 2022. And you can expect that the mid-term guidance will be expected. Maybe one indication on our cost base, which I didn't give and which can be useful. I told you that -- I mean, you know that our like-for-like sales over 9 months increased by 16%. Our like-for-like expenses, i.e., production expenses and SG&A increased by 8% in 9 months of 2021. So at the same time, you have one of the reason why we can compensate the increase in raw materials and components, not only for pricing, but also through leverage. And on top of that, you can see that we are punctually reinvesting into especially SG&A or whatever it is. So we are not cutting further our costs. We are putting some costs back into the machine. Well, part of that cost, of course, is variable. But part of it is also fixed cost. So I wouldn't give you today a specific warning or concern for 2022. Of course, our budget process is going on. And we'll tell you more in February 2022 when we release our full year numbers.

Next question from Jonathan Mounsey from Exane.

Yes. On the first question, maybe back to the same topic you were talking about there. I think about Q4 and the guidance you've given and what it implies for margins and the conversations we were just listening to around pricing and how far to push it and how pushing it much further, which you could do would probably ultimately hit your market share, which seems to be something you don't want to do. If that's the case, then you're kind of a bit boxed in, in terms of pricing from here, at least for a while. And margins are obviously under pressure in Q4. And I just -- as we go into Q1 and Q2 of next year, is this just something we have to weather? I listened to your comment around confident that you can recover the margin to 20% on the mid-term. And is that really how we should read things that the exit rate next year can be 20%? But honestly, as we move into the early part of next year, we're going to have to accept margins sub-20% for a while because you can't pull the lever of price without earning market share. Or is there an alternative such as a more aggressive restructuring campaign that we could see announced shortly as a different level you could pull to offset the headwinds you now seem to be experiencing?

Well, I told you that I didn't want to comment in detail 2022. I don't go one step beyond of commenting Q1, Q2 2022. Again, the performance over 1 quarter, and it applies -- my comment is more for Q4 2021, it's not of great interest to me. And delivering 17% or 18% or even 16% EBIT margin over a quarter is not a big concern provided, number one, I'm fully in line with my yearly guidance and the 20% EBIT margin. Number two, I'm doing what it takes to serve my customers, accelerate my top line growth and reinforce the group positioning. So well, I know that it will not precisely answer your question. But again, we'll discuss the '22 guidance in February.

Okay. But I guess is it fair to say...

You should trust a bit Legrand when we are telling you that we will do whatever it takes to deliver on our mid-term guidance, which is something we intend to achieve every year, of course.

Yes, I have confidence on you recovering a 20% margin. I just note that the exit rate is going to be something closer to 17.9%, I think you've said, as we leave 2021. On the -- maybe a different topic, acquisitions. Obviously, originally, you were guiding to 3%. I mean, we can never be sure about the scope effect and the timing that deals land or indeed when you choose to start consolidating deals that you do. How is the pipeline looking right now? Can we expect the usual sort of 4% contribution to the top line next year? Or is it becoming more difficult to get deals across the line in this sort of inflationary environment?

Well, we are indeed seeing that the scope of consolidation should be nearly 3%. But actually, it does not depend on sales of this to be made. It depends on how fast we will consolidate those who were already announced, namely two, Ensto and Ecotap. Either we can consolidate them before the end of the year, and the scope of consolidation will be slightly above 3% or we can't. And the scope of consolidation will be slightly below 3%. Frankly speaking, it's not a big deal, and we are not rushing to consolidate. For me, it's not an absolute must to be exactly at 3.1%, and I can very much live with a 2.8%, for example, because we wouldn't have raised too much in consolidating. So that's why the wording is nearly. It depends on the ability to consolidate fast, which does not only depend on us, but also on the state of the financials and the readiness of the companies to be consolidated. As far as our sort of mid-term scope effect, what we said during our Investor Day was that, historically, it was plus 4%, including the big deal, Milestone. And excluding Milestone, it was 3%. So we are not changing at all the guidance. We are shooting, let's say, between plus 3% or plus 4%, depending on whether or not we are doing a bigger deal. If we could do more, if we could do -- given here, 5% or 6%, we will, of course, be delighted to do so provided we are paying the right companies. Third comment as far as our pipeline is concerned. Well, we still have a number of discussions going on. So I'm not afraid about our ability to do further this in the quarters to come. We have quality discussions. Of course, sometimes prices are a bit high because of plenty of cash in the market. Now it has always been Legrand core asset to be able to buy quality companies at reasonable prices. That's what we did this year with Ensto and Ecotap, and that's what we intend to do in the quarters to come. So no, there's still a number of discussions going on. I couldn't be precise on when they will materialize because until you have signed the acquisition contract and even sometimes close the deal, you're never sure to make it. So I cannot be more specific except to tell you that the pipeline is not empty.

Next question from Simon Toennessen for Jefferies.

My first one is just maybe a bit more clarification on the organic growth guide, please, and here specifically about the comps you're seeing in the U.S. in the fourth quarter. I think last year, you were down 11% in the U.S. versus the minus 1.5% decline in Q3. So you're facing significantly easier comps. You're saying non-resi is improving sequentially. So I would think the U.S. should grow very nicely for you in Q4. So how should we weed this into your quite conservative implied Q4 guide? Secondly, on China, you're saying in the presentation, it was up double digit in the first 9 months. H1, you said it was up double digits. But maybe you can talk a bit more about how Q3 was maybe even throughout Q3. I know it's small for you, but just interested in that. And then lastly, can you comment a bit on your customer churn in any way over the last, say, 12 to 18 months? Has this changed in any way, given pricing strategies?

Well, as far as the Q4 is concerned for the U.S., the fact is that it was Q4 2019, which was very strong, especially compared to our competitors. And if you look at Q4 2019 compared to 2018, all of our listed peers namely the Eaton, ABB, the Hubbell, the nVent, all those guys went down pretty significantly, and our performance was a lot better. I think our performance was something like plus 2% in Q4 2019 compared to Q4 2018, and all of our peers were down sometimes 3%, 4%, 5%, 6%. So I think the performance in Q4 2021 will have to be compared with Q4 2019, which is sort of 2-year comparison, which must to be done for all our areas in 2021 given the very specific -- let's say, at the end of the year 2020. So that's why we don't expect a fantastic growth in the U.S. because the basic for comparison over 2 years is pretty difficult. As far as China is concerned, when I told you that post the 9 months period and the Q4 was positive, if you look at the 2 years, both Q3 and 9 months were up double digit where it is true that Q3 is a couple of points less than 9 months, but nothing to be worried about. The pattern is still very, very positive. Well, what to expect going ahead? It will depend very much on the -- of course, the Chinese economy and the Chinese GDP. If I may, we are so small in China. I remind you that it's between 3% and 4% of our sales that we should be able to pursue our growth strategy even if the market is not super positive. It's not saying that we will grow in China whatever happens. But it means that, for example, we will continue to look at potential acquisitions in China. We've done 2% in the past 4 years, and we remain interested to do more. And we'll keep investing into new products, and I'm pretty confident in our ability mid-term to keep growing nicely in China. So to make the long story short, nothing specific between H1 and Q3. No precise guidance for the rest of the year, no for 2022 because it's too early. And number three, we intend to pursue an offensive growth strategy in China because we believe that we should grow this 4% of our sales to something bigger. As far as customer churn is concerned, we haven't seen significant customer going down -- I mean going out of business maybe in 2020 because of financial constraints. So it's not reason why customers are changing, and we continue to work with all the big guys in the 3 being the big distributors, DIY, pure Internet player, professional distributors as well as big contractors and smaller contractors. So I don't see there's anything specific coming from customer churn that would be worth mentioning. We have a pretty solid and stable customer base, and I haven't seen a big shift from one customer to another coming from the crisis. Again, you are mentioning pricing. I don't want to repeat some things. But seeing pricing, such as the one we are seeing is plus 2.7% in 9 months or the plus 4.3% in Q3 is not everything. Legrand story, we have learned several years with pricing at plus 3% or plus 4%. So I wouldn't want you to think that this pricing is so exceptional that it is completely changing the mind of the market or changing the players that are active in the market. This is something we saw from time to time in the past years.

Next question from William Mackie from Kepler Cheuvreux.

I wanted to ask another question on the U.S.A., please. Just if you can help us understand. If I think about the year and how it's developed, I think in Q1, you've had 4% growth and non-resi decline. In Q2, you had 15% growth. And again, your non-resi was nearly unchanged. And in Q3, in value terms, you're reporting a 1% decline, but you're saying that non-resi in the 9 months has slightly grown. So can you be a bit more specific about why there was such a drop? It seems to be, if we assume pricing was plus 4% in Q3, then there's a volume drop of about 5 percentage points. Non-resi was growing according to your commentary. So why is there such an apparent drop in Q4 around data centers and residential or perhaps I'm reading it the wrong way? How would you describe the trend in the segments in Q3 across the business lines?

Well, I was more commenting over 2 years than over 1 year because when it comes to top line, the year 2020 is so, let's say, strategic, if I may say, than 1 year of comparison. It doesn't make a lot of sense. For example, in Q3, the resi in the U.S. was super strong than your Q3 2020 because there was these sort of consequences from the end of the various lockdowns happening here and there. So the basis for comparison in Q3 in residential is strong. And as a result, the Q3 performance in 2021 for residential is a bit smooth. But again, it's not coming from any negative trend. It's coming from the basis for comparison. That's why I'm, as much as possible, analyzing the numbers over 2 years. And over 2 years, that's what I can tell you, residential up -- strongly up, I mean, up double digit in 9 months, up double digit in Q3 with about the same number. So over 2 years, no change in trend for resi. Data center, very, very strong growth over 2 years. In 9 months, very strong years -- strong growth over 2 years in Q3, not -- slightly lower in Q3 than over 9 months, but it's not significant. And as a whole, it's growing fast. Now other non-resi, it's down double digit in H1, it's down single digit in Q3. And as a result, it's still down double digit in 9 months, but less than in H1. And from those numbers, I'm deriving the comments I'm making on trends, saying price in resi are still good, even though looking at Q3 alone over 1 year, it's smooth, but it's a basis for comparison topic. The market itself is still supportive. The market is still very supportive for the data center. And for other and resi, there is some sort of improvement because of the decrease in sales is more or less cut by half between H1 and Q3. So we see that as a sort of a sign for improvement, even though it remains negative over 2 years. Is that clear?

Perfectly clear.

Thank you. That was the last question. Back to you for the conclusion.

Well, thank you very much for your patience and for the time you dedicated to Legrand, and have a good day. Thank you very much. And of course, Ronan Marc, Samy Bensaid, Franck Lemery and myself will be available until the end of the week to answer any additional questions you may have. Thank you.