Legrand SA (LR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to today's Legrand 2022 First Half Results Conference Call. [Operator Instructions] For your information, this conference is being recorded. At this time, I would like to hand the call over to CEO, Mr. Benoit Coquart; and CFO, Mr. Franck Lemery. Please go ahead, sir.

Thank you. Hello, everybody. Frank Lemery and myself are happy to welcome you to the Legrand 2022 H1 results conference call and webcast. As you know, this call is recorded. We have published today the press release, financial statements and a slideshow to which we will refer. Those documents are available on the Legrand website. After a few opening remarks, we will comment on the results into more details. I begin on Page 4 with the key 4 takeaways from the H1 results. First, Legrand recorded strong growth in sales; second results were very solid despite an unstable and high inflationary environment; thirdly, we announced today 2 new bolt-on acquisitions in datacenters; and fourth and final item, we have raised our 2022 full year sales targets. So moving now to Page 6 to 7 with an overview of sales on the first 6 months, our sales grew by 18.5%, driven by a sustained organic rise of plus 10.9%. Organic trends in the first half reflected our many commercial successes, Legrand pricing power and a still very active management of the supply chain which remains under strong pressure over the second quarter, particularly for electronic companies. On top of organic growth, the scope effect was plus 2.4% based on acquisitions completed and their likely date of consolidation, the impact should be around plus 3% for the full year in 2022. Now last component regarding sales is the FX effect. It was also favorable at plus 4.4% on the first half and would be close to plus 4.5% on the full year 2022 based on average rates in the month of June 2022 below. On Page 7, focusing now on organic growth by area. Each of the 3 regions achieved a high level of growth. In Europe, the pace was upbeat at plus 11.3% over 6 months, with both mature and new economies growing strongly. In North and Central America, sales were up plus 11.2%, with a high level in the U.S. at plus 11.3%, where business for nonresidential applications recorded a marked growth. Finally, the Rest of the World area grew plus 9.7%, driven by very sustained growth in India and double-digit increases in many African and Middle East countries. Focusing on Q2 trends alone, group organic growth was also at a strong pace of plus 10.7%. I now pass it to Franck to provide insights on our results.

Thank you, Benoit, and good morning to all of you. I will start on Page 9 with the adjusted operating margin. Before acquisitions, it stood at 20.8%. This is a limited retreat of 1.2 points from the first half of 2021. This solid profitability in the first half reflects the group efficient management of both expenses and sales price, while the environment was strongly inflationary. As an illustration, being [indiscernible] administration, for example, the inflation of around plus 17% on raw material and components in the first half of 2022. Including acquisitions, the adjusted operating margin for the first half of 2022 was 20.5%. I'm now turning to Page 10 regarding the net profit attributable to the group. With EUR 548 million, this represents a growth of plus 13.9%. This was primarily driven by the rise in the operating profit of EUR 73 million and group corporate tax income, income tax stood at 27%. I'm now moving to Page 11 with a few comments on cash and balance sheet. As a percentage of sales, cash flow from operation was down 1 point at 19.2% of sales. The free cash flow stood at 7.8% of sales for the first half. This includes a continued strengthened coverage of inventory in order to serve our customer in this context of financial uncertainties. Normalizing working capital requirements. So with the normalized free cash flow, it stood at 16.8% of sales in the first 6 months. On the balance sheet structural side, net debt-to-EBITDA ratio was 1.6 at the end of June. This concludes the key financial topics I wanted to share with you. And I'm now passing the mic back to Benoit.

Thank you, Franck. Turning to Page 13 now regarding M&A. Following the acquisition of Emos early this year, we have announced today 2 new bolt-on acquisitions. First, Usystems, that is a British datacenter specialists that offer cooling solutions and racks to help their customers reduce their energy consumption and therefore, their carbon print in their datacenters. The second is Voltadis, a French player that offers a comprehensive support and definition of tailored power supply systems for datacenters grey rooms. Together, [indiscernible] sales of around EUR 24 million and both strengthen our position in adding value solutions for datacenters. The field buoyed by the rise in data flows. On Slide 15 now, as I said, starting in this call, we have raised our 2022 full year sales target. Before going into the figures, as you know, the economic perspective are getting increasingly uncertain. In this context, our group is led to the [ brand work ] to first, seize any growth opportunity, particularly by leveraging the quality of our positioning in segments structurally driven by digitalization and energy savings, but also by continuing to invest in innovation while pursuing bolt-on M&A. And second, we are working actively to limit the impact of an economic slowdown, thanks to an ongoing optimization of our cost base, our intact pricing power and teams that are quick to respond and fully in tune with our markets. Now our 2022 targets. In 2022, Legrand is pursuing its strategy of profitable and responsible development laid out in its strategic road map. Taking into account notable achievements in the first half of 2022 and the current macroeconomic outlook, Legrand has revised the full year target itself for 2022 and is now aiming for: gross sales at constant exchange rate raised and now anticipated between plus 9% and plus 12% compared to between plus 5% and plus 11% previously, with organic growth of between plus 6% and plus 9% compared to between plus 3% and plus 7% previously and the scope of consolidation effect of around plus 3% compared to between plus 2% and plus 4% previously. This was for sales. And as far as margins are concerned, we are shooting for an adjusted operating margin of about 20% of sales, with a margin of between 19.9% and 20.7% before acquisitions, i.e. at 2021 scope of consolidation and dilution from acquisitions of between minus 20 and minus 40 basis points. The group also aims to reach around 100% of CSR achievements for the first year of its 2022-2024 road map, testifying to its bold and exemplary approach to ESG. So this concludes today announcement on first half 2022 results, and we are now ready to open to questions. Thank you.

[Operator Instructions] Our first question comes from Andrew Wilson from JPMorgan.

If I could start with a question around the pricing dynamics that you've seen in the first half. I don't know if you're prepared to tell us the kind of the split between volume and price, but I'm also interested in terms of how your pricing expectations has changed for 2022 and how that plays into the raised guidance this morning, please.

I can start by the numbers. The pricing in H1 was up 9.1%. So you have slightly more pricing in Q2 compared to Q1. Q1 pricing was plus 7.8% and Q2 pricing was plus 10.4%. So in total, it leads to this plus 9.1%. So obviously, you can conclude that volume-wise, the volume growth in H1 was slightly below 2%. When it comes to the full year, well, of course, many things can happen, and you know that pricing is extremely dynamic as Legrand and we have the ability to move pricing paying down on a regular basis depending on the price of improved as well as our competitive position. So many things can happen. Now if we are taking the or, let's say, carryover impact, I see if we take the price level that we have now and if we push it to H2 without any changes, one way or the other, the total pricing effect for 2022 would be plus 8% approximately. But again, this is a pure mechanical impact. Now the reason behind the raise in our top line guidance is that H1 is somehow better than expected in [ volume ], not necessarily [ solid ] inflation. And even though we remain cautious for the remaining 6 months of the year, we don't believe that the past guidance was credible anymore. So it was a duty to raise our targets. Does this answer your question? Or do you need more information.

No, that's very clear indeed. If I can just squeeze in just a follow-up just on your last comment around the staying caution in terms of the second half. And obviously, just your comments as well around being ready to take actions if needed. I just wanted to see if you've seen any change in any of your markets relative to the very strong development you've seen in the first half, I guess, particularly thinking on the resi side where we've seen, obviously, I guess, some slightly more negative data points?

Well, it's difficult for us to identify early signs. You know that we don't have a lot of visibility on what the market will do next. A couple of comments that I can make though. Number one, well, volume-wise, you will have noticed that Q2 is a little bit less supportive than Q1. So overall, we are growing in volume in the 3 zones on H1. But if you zoom in Q2 alone, our volumes are slightly down in Europe. Most of the [indiscernible] is actually coming from Russia. If you exclude Russia, volumes are flat in Europe in Q2. They are flat plus in North America. In Q2, they are still growing mid-single digits in the Rest of the World. Now if you take the whole of Legrand, it is a fact that the volumes are about flat in Q2, and they were growing in Q1. This is for the sort of dynamics within the semester. What does it mean for the second half? Nothing special, unfortunately. Because, as I said, it's difficult for us to anticipate any trend. Now if you look at our guidance, the 6% to 9% growth, it implies that H2 between, let's say, plus 1% to plus 7%, approximately like-for-like, plus 1% for the low end of the guidance, plus 7% for the high end of the guidance. Well, we cannot provide the precise guidance on pricing or in volume because it depends on many things. But the guidance more or less implied in the upper end of the guidance, flattish volumes. It could be flat plus, it could be flat minus, depending on the pricing. And in the low end of the guidance, so mid-single-digit drop in volumes. So this is a set of dynamics that we see for 2022. Gross volume in Q1, flat volume in Q2 for H2, let's say, between mid-single digit down to flattish. Now again, take those sort of guidance with cautiousness. As you know, we are -- we are not the best company to tell you what the economy of the market will do. Now how do we deal in front of that? Well, as usual, at Legrand, we are preparing different scenarios internally and we have just reviewed the performance and the forecast from our main countries. And as you know, they are prepared to react whatever the scenario. So at the same time, investing whenever needed in order to capture growth, and there are pockets of growth, and we participate that even if the environment gets a bit more difficult, there will be a number of pockets of growth to sales. And at the same [indiscernible] should the market decelerate and the economy be less supportive. So we want to keep this flexibility at the country level to adjust and to adapt to evolving environment.

Next question comes from Daniela Costa at Goldman Sachs.

This is [indiscernible] on behalf of Daniela. I actually have a follow-up question on the 2H. Are you considering like destocking inventories into 2H [indiscernible] measures to adapt to the [ invention ] downturn you mentioned? And that's the first question. The second one is more on M&A side, where you're seeing the multiples becoming more favorable to you given that the public markets are derating recently?

Well, as far as restocking, destocking is concerned, so I guess your question was about what our channel is doing, we haven't seen anything sort of global trend, neither towards restocking, nor towards destocking. It's really dependent on the country. I can take 2 examples. In Italy, it is likely that our distributors have built a bit of inventory back and have somehow a little bit destocked. At the same time, in France, which is a big country for us. We have seen the other phenomena and probably a bit of destocking from our distributors. So the global basis, I cannot tell you that the inventory management from our distributors or from our customers has either helped or go against our performance in H1. I believe it had quite a neutral effect. As far as M&A is concerned, well, I have to tell you that even 2 or 3 years back, when the market multiples were a bit inflated, we were used to pay reasonable multiples, and it was coming from the fact that most of the discussions were held with companies we knew for a long time. With individual sellers who have usually a preferred clear view about the value of the business, and so even 2 or 3 years back, we're not paying [indiscernible] multiples, so same for the deals that we have made in 2022. To this, we announced this morning and Emos that we announced in February. For those [ 3 years ], we paid what I would call very [indiscernible] multiples, below the [indiscernible] multiples, of course, and multiples that makes us extremely confident on our ability to have value accretive transactions within a couple of years. And of course, the EPS accretive transactions. So the multiples we've been paying when those transactions have been very [ enable ]. Now if you look actually at the cash flow statement, you'll see that the companies we bought last year were paid an average 2x sales, and the companies we paid, we bought in edge were both on average, 1.5x sales. So -- of course, it doesn't give you a multiple, but it shows that the multiples remain pretty reasonable.

Next question comes from Andre Kukhnin from Credit Suisse.

Can I first come back to the discussion earlier on second half implied? And I'm sorry in advance [indiscernible]. I just wanted to ask if you've seen through the quarter a month's kind of trend that pointed down in Europe and U.S. specifically -- we can take Asia Pac aside, I guess, with the China lockdowns, but specifically in Europe and U.S. How is that kind of monthly cadence in the second quarter? And is that what points down to that sort of -- if I look on the [ ex comm ] basis, like a sort of 6 to 7 points down slowdown that you imply in the second half in your guidance versus the second quarter?

But if your question relates to trend that you would have seen within the Q2, monthly trends are not relevant in our business. They might be relevant at the distributor level, but at the manufacturer level at least they are not seen all because what given month can be impacted by many phenomenal specific supply chain issue, one [ more ] days, inventory move at the distributors' level. So no, we haven't seen any trend within the Q2 that would be relevant to tell you whether we will be in the upper end of the guidance in the central mid-point of the guidance or so. So we will have to wait for Q3 to be a bit more specific.

Right, right. So just to confirm, no kind of tailing off in demand in, say, in June versus May, April in Europe or...

Again, I know that it doesn't really answer your question, but I cannot really comment what monthly trends -- which again for a company like Legrand, that doesn't mean anything. So and again, we'll wait for Q3.

I have a much broader question. I don't know if that's kind of possible to answer, but I'd love to hear your thoughts on this kind of premium growth, thanks to the electrification and energy efficiency drive that we're seeing, I think, now emerging for players like yourselves versus kind of broader construction end markets and wider construction applications. Is that something you've looked into? Is that something you could possibly quantify? How much of that kind of premium of growth you're commanding because of that push for electrification and efficiency? And then secondly, maybe more specifically to that, in Europe, given the evolution of events since February, do you see evidence of that kind of push for and customer demand for energy-efficient products? And again, is there a way to tell how much of a kind of extra demand that is driving for you at the moment?

It's indeed a very important point, and we have very precise examples of the potential boost for example, specific green incentive plan can have on our top line. Take for example, Italy. Italy, there was a so-called super bonus scheme, which is providing a tax incentive to households willing to do works to have cleaner or more energy-efficient houses or flat. It is clearly supporting our top line growth in Italy, which is very sustained -- and actually, not only it helps our sales in great products. Take, for example, thermostat or [ load shedding ], but it also helps the rest of our product offering because when you are doing a complete renovation work, you also change the more active products such as [indiscernible] boards and [indiscernible]. So yes, it can have a very significant effect on our sales. Now it's difficult to quantify because it depends on the nature and the specifics of the scheme. Taken as for example, which is France with [indiscernible] which has been in the air for 2 years. Where [indiscernible] has had quite a limited impact on our top line because [indiscernible] was more geared as [ passive products ] or heat pumps, more than an active product. So depending on the nature of the scheme, the nature of the incentive, it can have either a neutral or a very positive impact on the top line. Now this being said, in the midterm, we are very confident on the fact that it will be -- it will provide the support for our top line growth, but in Europe, and actually [ dream ] products in Europe grew very nicely in H1 above the European average cost base. And it could also be the case in the U.S. and the news that Biden plan to potentially go through is, I think, a rather good news for our industry. So I cannot give you a specific number because again, it depends on how those incentives plans are translated into regulation and whether they are geared at passive, active, temperature management, window, heat and how much money is put into the system, but it should have an impact on top line in the midterm.

Our next question comes from Gael de-Bray from Deutsche Bank.

I have 3 questions. Do you mind if I take them one at a time. Firstly, I can see that your finished goods inventories increased by 44% year-on-year and now represent nearly 2 or more points of revenue. So what was the impact on margins this quarter? And could you talk about the rationale of holding such elevated levels of inventories, given your expectations for potential drop in volumes in the second half?

Indeed, our inventory increased significantly. And as you rightly pointed out, they represented in H1 -- at the end of H1, so 19.1% of sales which is pretty high level compared to 14.7% of sales at the end of June 2021. So a significant increase of more than [ 4 ] points. Where I don't want to get into that. I'm not getting into the [indiscernible], rationale behind this increase because it's pretty much in line with what we said at the end of Q1, i.e., a part of it is coming from inflation, half of the increase basically and part of it is coming from necessary coverage and our willingness to provide a good service to our customers. But indeed, the level is high. As far as the impact on profitability is concerned, it had a slight positive impact on Q1 and a slight negative impact in Q2. And overall, for the totality of H1, it had 0 impact on our profitability. So no impact on the profitability of our own inventory. Now as far as the coming quarters are concerned, well, it is a big uncertainty because the main driver -- there are 2 main drivers, actually, as I said, number one, it's a price of raw mats and components and it's clearly plateauing today. And we expect the price of raw mats and components to go down. Now we are not macroeconomists, and the valuation of inventory at the end of December will depend, of course, on the price of raw material and components. And the second uncertainty, which is probably even bigger than the first one is the scarcity of components, raw mats, which is one of the reasons why we increased our coverage because especially when it comes to electronic components, for example, it would be difficult to source electronic components. The situation remain difficult, and we don't expect it to improve before a couple of quarters. And again, we [indiscernible] have decided that the servicing of customers was more important than maintaining a level of inventory consistent with past practices. So I cannot give you a precise guidance. What we have said in Q1, and I can confirm the information is that midterm, we intend to progressively come back to historical level of inventory to sales, i.e., something like 13%, 14% of sales. But short term, we will do what it takes in order to continue to serve our customers in a context where you can gain or lose market share, not only depending on the quality of your product, but also depending on the availability of the product. So we are really shooting to increase our market share even at the expense of [ our own] inventory. Sorry for not being more specific, but of course, it will depend very much on what will happen in H2.

Okay. Understood. And then on the pricing side, I mean, you've now raised prices like never before in the past. So do you think -- do you still think you will be able to hold on to pricing even if cost inflation was to dissipate into the coming quarters?

Well, indeed, we have increased prices quite a lot. When -- if you compare to what the industry has claimed publicly, we are not amongst the companies who have increased the model price. There are a number of companies who have more price increases than us. So I don't believe that we have increased prices too much, which is a very important message for us. Now if the prices of raw mat and compliance was to come down, we would, of course, should to retain as much those price increases as possible. We have demonstrated in the past years our ability to retain our price increases once te raw mats and components pricing was going down. So well, we'll see, of course, but it will be our strategy. It will be our policy. And I think we have the methodologies tailored for that.

And then last 1 from me. Would it be possible to quantify the negative impact of the China lockdowns on the Q2 deliveries, not only in China but also in the Americas?

So what in China, which represent only 5% -- between 4% to 5% of our sales. It's not such a big market for Legrand. While there's a clear drop in sales in H1, and we are not particularly optimistic for H2. We'll see. But we believe that the Chinese market will remain difficult. And actually, the sales in China are down double-digit in H1. Well, again, we are small in China. We are very specific exposure [indiscernible] part of residential [ building ] even though we have good leaderships because more than half of our sales are made with energy position, we are a small player on [indiscernible]. This was for China. Now the impact of the Chinese lockdown outside of China, the main flow from China to the rest of the world is between China and the U.S. And the Shanghai factory we have, which represent approximately 10% of our Chinese production costs. So it's not big -- is manufacturing almost solidly for the U.S. So indeed, the shutdown or lockdown in Shanghai and the fact that our factory couldn't manufacture anything for 1.5 months or 2 months, had the biggest negative impact on our -- the supply of some products for U.S. operations and a negative impact on our U.S. supply. It's difficult to quantify. It's probably not more than a few tens of [ million ] U.S. dollar, but it did negatively impact our top line in the U.S. And actually, maybe to sort of step up a little bit, we have focusing on the supply chain issues. We have 2 issues remaining. What is specific to the U.S. and it includes the shutdown or the lockdown in Shanghai, but also the fact that the logistics to go to the U.S. -- within the U.S., remain difficult. It's difficult to go to customs. It's difficult to ship product to the U.S., difficult to carry products within the U.S. So we have a specific supply chain issue in the U.S., which we are working. And the second issue as far as supply chains are concerned, relates to electronic components and specific to China to electronic components. And as I said a little bit earlier in this call, it remains difficult to source electronic components. But to answer your question specifically on China. So drop in the Chinese sale, which is a small business for us and negative impact on our U.S. operations. And I wouldn't say -- I'd say probably no material impact outside of those 2 topics.

Our next question is from Alasdair Leslie from Societe Generale.

So follow-up on electronic components and just on your faster expanding segments, I kind of understand you've been a little frustrated with the growth due to the shortages in the previous quarters. So just wondering how those areas performed in Q2. Does that perhaps partly explain the slow volumes in Q2? And what's the scope for an acceleration as component availability improves? I understand you're still quite cautious there. But if you could just let us know your thinking there. And maybe as a second question, if you could also talk about the trends you're seeing in datacenters in Europe. I understand there was a lot of momentum in Q1. How did that develop in Q2? And maybe you could just elaborate a little on how your 2 new acquisitions fit into your strategy there to gain share.

Well, on your first question, to be plus agreement perspective so that [indiscernible] hasn't evaporated in Q2. So it's -- have -- we did not see an improvement in the availability of electronic components and semiconductors in Q2 compared to Q1. And talking to industry specialists, I don't see any improvement very soon. But it could happen. And it's not in our hands. But that's not what the specialists are telling us. And most people expect that the situation wouldn't get better before at best the end of '22 and most likely the course of H1 2023. So yes, indeed, it had a negative impact on products incorporating electronic components. So there are product families that where we couldn't sell for a month, for example, where we cannot sell as much as required by the market demand. And here, again, it has cost us a couple of tens of million euros. So it is, I would say, [indiscernible]. It's always preceding to miss sales, and we have missed sales in North America, in Europe and in the Rest of the World because of the shortage. At the same time, from what I can see in the market, everybody is facing the same difficulties. So it's not moving much market share. We are not -- all of us there, we don't have customers moving from Legrand to x, y or z when it comes to assisted living or connected mobile devices or traffic system because we wouldn't be able to supply. It is just that the lead time are increasing. Customers are a bit frustrated because they can't get their product, and we are missing a bit of sales. As far as your second question is concerned -- yes, datacenter is doing well everywhere taking into account the fact that we have a very big basis for comparison, especially in Europe and in the U.S. where 2021 was [indiscernible] nearly a year in terms of datacenters, but it's doing well. With also a very, very good performance actually in the Rest of the World. So midterm, we remain very confident on the fact that datacenter will be a booster for our top line. [indiscernible] is significant. It's 13% of our sales. It was 13% of our sales last year, and it should soon be 14%, 15%, 16%, given the growth we are experiencing there. And this growth will not flatten, I believe. And when you are looking at the trends such as remote working, metaverse and stuff like that, all that will lead to additional datacenters. As far as the 2 acquisitions are concerned, they have a perfect fit into the strategy we described at our last CMD. We got to Usystems, it's a sort of double play. Number one, we are buying some rack capability in the U.K.. We know that especially for racks and cabinets, it's very important to look at capabilities because we can customize a product after the customers' need. And on top of that, we are buying a nice cooling technology that we could now channel into our Legrand datacenter solution teams throughout the world. As far as Voltadis is concerned, it's small but good addition. You know that we are big in the [indiscernible] datacenter that we are shooting and we want to develop into the grey room. Voltadis will help us to provide a package of product and services to grey room customers. So [indiscernible] of course, in total 24 million of sales, but they have a perfect fit within our datacenter strategy.

Our next question comes from Phil Buller from Berenberg.

Maybe I'm missing something or heard one of the numbers wrong, but I think you said that in H1, your input costs have gone up 17%. Pricing was up 9% and volume was 1%-ish. And yet your margins look stable, which is great. Mechanically, it assumed that have gone down a lot more even if you are net price positive. So what am I missing? Is it mix? Or are there some big temporary costs out that we should think about needing to come back as it sounded like your answer to Gael's question is that we shouldn't really attribute anything in the H1 margin performance to inventories.

I would first clarify the number that [indiscernible] margin. So the number I gave was pricing H1 at 9.1%, with Q1 at 7.8% for pricing; and Q2, up 10.4% for pricing. And the average -- the total of those 2 numbers, it's 9.1%. Now maybe Franck you want to take the lead on [indiscernible].

Thank you, Benoit. So I understand that your question is the sequential evolution of margin -- gross margin between Q1 and Q2. So at the same time that sales price increased, the yearly evolution of raw mat slightly decreased. It's 17% on H1, and it was 18% in Q1, so close to 15% in Q2. So sequentially, there is still a slight improvement on the inflationary balance which is mitigated by lower leverage and production expenses. The inventory business impact that as Benoit already mentioned, was [indiscernible] sequentially. And last but not least, the freight costs have increased during Q2 versus Q1. So that's the main driver for the stable margin -- gross margin between Q1 and Q2.

Yes. I guess I was thinking more year-on-year, the margin performance.

It would be the same [ inflation ].

Our next question is from Eric Lemarie from CIC.

I got three actually. First one, you mentioned the procurement in the U.S. coming from China, a big part. Do you intend to reduce it in the midterm in order to reduce your dependency from China. That's my first question. Second question, I don't know, but could you share with us the revenue generated by this faster expanding segment. You mentioned that your -- one of your last Capital Market Days, datacenter, energy efficiency, et cetera, the business revenue generated by this segment in H1 and maybe the trend of the growth in H1. And the last question, you already answered a bit to this one, but could you confirm you don't see any slowdown for any of your line of products in H1 or in Q2, but a slowdown not due to the war or to the supply chain, but due to maybe the macro environment?

Well, as far as the supply is concerned. Yes, indeed. We have a pretty sizable Chinese sourcing for U.S. operations. It's probably, let's say, 20% to 25% of our LNCA cost of goods sold, which is coming from China. It's an approximate number. So the reason why we had this impact of the trend tariff a couple of years back, this is now the reason why we are not now suffering [ the old ] COVID policy. So it's a significant dependency, if I may say, but it's not a strategic risk. It's 20% to 25% of our LNCA operations, which represent 40% of our sales. This being said, we are indeed looking at reducing a bit the dependency. And it started. It is an approach which we started 1.5 years ago. For example, we have recently opened a factory in Vietnam, and we are moving a bit of manufacturing from China to Vietnam. We have moved a bit of manufacturing back from China to Mexico. We are qualifying a number of alternative suppliers outside of China, so that if some of the Chinese suppliers were not available, we could source our products or components from elsewhere. So we are indeed in the process of reducing the dependency, which again, I don't see as a strategic risk for U.S. operations. But from time to time, it can indeed be impacted by factory shutdowns, such as this one in Shanghai coming from [ the old ] COVID policy. As far as share of our sales made in faster expanding segments where it was 32% of our sales last year. I don't have a number to give you for H1 because this is a number we are updating once a year at the time of the February results. Qualitative comment, of course, all products incorporating electronics, whether fast expanding or more traditional products did suffer in H1 as I said, because of the [indiscernible] component shortage. But again, this is not specific to Legrand. I think it is a [indiscernible] impacting the whole industry. But as a result, some of the fast-expanding segment products were in this impact -- negatively impacted by the shortage. As far as the potential slowdown is concerned, I wouldn't say that we haven't seen any slowdown. Volume-wise, this 2% of volume increase that we had in H1 is more or less made by how much plus 3%, 4% in Q1, plus 0%, 1% in Q2. So we have seen flat plus volume in Q2. Where volumes were up if you are -- of course, part of this flat volume in Q2 is coming from Russia, which is -- which was in 2021, 2% of our sales -- so 5% of our European sale. So it's not big, it's not significant, but indeed, it has an impact. Now I wouldn't say that the market in Q2 are very supportive. I don't believe they were very supportive. And beyond Russia, you have China, which is, as I said, a pretty weak place to be for us. You have countries such as Brazil, which are not in super shape. The retail/DIY business is pretty mild, stores have been pretty mild starting end of last year. So Q2 wasn't a booming quarter when it comes to market trends or to top line growth. Now again, it doesn't say much about what we have ahead of us. The only thing I can repeat once again is that from what we can see so far, we are shooting for something between mid-single-digit profit volume to flat plus in volume in H2. That's what we incorporated into our guidance.

Our next question is from Jonathan Mounsey from BNP Paribas.

I'd like to return to the topic of price. From memory and some of the data we have in our model, I don't ever remember price for you being down on an annual basis, really since probably about 1990, I think that's as far as we can go. And yet, at the same time, it's only probably Q3, you were talking about you've never raised prices by more than 4%. And here we are, we're having to raise them by 10%. And I just wonder, if [ RMI ] starts falling, say it was to fall 17% like it rose in the most recent half, what happens? Are we going to see a year where -- on average across the group, pricing was going to go negative if we start to see raw materials come off to the kind of magnitude that I'm describing or do you think the business model is so powerful that actually you could retain much of that price? And if that were to happen, what happens to margins? I would imagine they're going to the mid-20s in that scenario, which I know is not something that you target, you'd much rather get volume growth, which points to me that you are likely to cut price if raw mat starts to fall? And then secondly, and maybe part of the reason why that might not happen, what about things like wages, what level of wage inflation are we now starting to see? And how do you think that progresses as we move forward over the next 4, 5, 6 quarters?

Well, I'm not sure that the history can tell us so much about what's going to happen in the next quarter because indeed, today's situation when it comes to inflation, is probably a situation anybody has seen -- or maybe the last time was the early '80s. But in terms of [ database ], at least you are right, Legrand has never decreased its selling price since we started to [ record ] KPIs, 20 or 30 years back. And indeed, Legrand has never raised price by 7%, 8% or 9% on a yearly basis for a couple of decades. Our strategy is going to be to retain as much of this pricing fees as possible. We've been able to do it in the past. But again, with price increases, which were not as high as 7%, 8%, 9% or 10%, but this will be our strategy. And I believe that we have the tools, processes, people in order for this strategy to be successful. Now of course, it will depend on the magnitude of the drop in price of raw mats and components and what happened in the market. But I think that we have the processes, tools and people tailored to retain as much price increase as possible. Now as far as margins are concerned, we are not shooting -- we say this -- we're not shooting to be in the mid-20s. We are shooting to be at the 20% EBIT midterm, and that's our guidance and we can confirm that it remains on our midterm objective because usually, when the price of raw mats and components are going down, you have unfortunately the counterparty as far as [indiscernible] is concerned. It also means that the economy is decelerating, so you don't have the same leverage and you sometimes even have negative leverage on your P&L coming from [ volume growth ] , which you have to finance. The extra margin you can get can also be reinvested into additional [indiscernible] in order to invest into a pocket of growth. Don't forget that every year, we have 20, 30, 40 bps dilution coming from our acquisitions, which we also have to finance in order to come to the 20% EBIT. Even if we are able, which is our strategy to retain as much of this price increase as possible, it will not translate into a 25% EBIT margin. And our sort of North Pole or North Star, it remains to be at 20%. As far as wages are concerned, it is -- I believe, quite under control. If I have to shoot the number, I would say that the wage inflation in H1 was around plus 5% -- plus 4%, plus 5% which is probably lower than inflation in a number of countries. But of course, there will be inflationary pressure on wages coming from the general inflation. Now well, I'm not concerned, and I believe that we should have the ability at the same time to provide the right wage remuneration to our people to keep them happy, motivated to compensate part of that through productivity, management of headcount, footprint, whatever it is. So it's part of the inflation. We have mentioned wages, we have mentioned raw mats and components. There's also transportation costs, which are skyrocketing. Energy price, which are going up. where it's -- I believe that we have the ability to manage those inflation, and that's what we have demonstrated in H1, and we'll continue to do so.

Ladies and gentlemen, we currently have 1 final question. [Operator Instructions] Our next question comes from Jonathan Day at HSBC.

It's a couple actually. I was wondering just to pick up on that last point, I was wondering if you could perhaps talk a little bit more about exposure to European energy prices and how you see the risks of gas supply and gas rationing over the winter months. And I was also wondering if you could talk a little bit about what you're seeing in perhaps in the U.S. residential market, which I know is quite small for you, but just wondered if you could touch on some of the trends there as well, please.

Well, yes, starting with the exposition, so first comment, we are not a big energy consumer. To give you order of magnitude, energy represented 0.5% of our 2021 sales, of which actually gas was less than 20%. So in terms of exposure, we are not a big -- we're not very much exposed to energy -- we don't have a big energy consumer and we're not very much exposed to gas. This is sort of a broad set plan for the whole group. When we are zooming in at Europe, Europe represents, as you know, slightly more than 40% of our group sales. Out of the 40%, we have 10% of sales where we have no manufacturing. We have 20% of sales approximately where energy mix is not much exposed to gas. And as part of the 20%, you have France which as a country has a very small exposure to gas. Then you have 10% of sales with a more significant dependency on gas, countries such as Italy and Hungary and Poland. Now -- so this is sort of -- so not a big exposure to gas as a whole. Zooming in Europe, a bit more exposed in a few countries, but not exposed or -- 3/4 of our European sales. Now of course, the big question mark in the uncertainty is the global impact gas shortage would have on the European economy. And we believe that this is the most important impact to look at rather than a potential shortage of or potential difficulty to manufacture because of shortage in gas. So it's what impact will it be on the Europe economy. Last comment, well, this energy crisis, midterm, will also have a positive impact on our business. I can take an example of -- currently for example, in France, you know that there is the strategy from the French government to cut by 10% energy consumption in France within 2 years. There was no later than yesterday, a meeting between the ministry and specialist of housing, looking at potential solutions. And amongst the solutions that were discussed, you have [indiscernible], you have limiting HVAC to 26 degrees, limiting heating to 19 degrees, putting [ presence ] detectors to shut down the light when people are not there, including [indiscernible]. So this could also have a positive impact on the top line and be part of those game plans that will have to be implemented in most of the European countries within a few years. Does it answer to your question?

Yes. Just to follow up on U.S. residential and what you're seeing...

U.S. residential, so it's only 20% of our U.S. [indiscernible], so it's a small business. And the sales have not been very supportive in resi in the U.S., especially the DIY piece. The reason for that being that we have a very strong base for comparison and exiting the various lockdowns at the end of 2020 and in 2021. There were a lot of consumer spending dedicated to housing, consumer electronics and so on, which boosted our residential sales, especially in 2021. And we don't have any more the support from this sort of post-lockdown trend, as well as incentive plans financing the consumer that were launched 1.5 years ago. So the demand is very soft. We remain optimistic midterm because we believe that there are plenty of interesting innovations that could be good for the U.S. customers when it comes to [indiscernible] working connected products and so on, but [ soft ] in H1.

Our next question comes from James Moore at Redburn.

I wondered -- and I'm sorry, I missed the first part of the presentation. So if you have already said this, apologies. But on pricing, you mentioned the 10.4% in the second quarter. And on the raw material inflation, I guess we've gone from 18% in the first quarter to 16% or so in the second quarter. I just wondered as we roll forward, into the third and the fourth quarter, what the carryover effect is at the moment and how you...

The inflation of raw mats and components was close to plus 17% in H1. So it was indeed slightly decelerating in Q2 compared to Q1 because Q1 was up more than plus 18%. And Q2 alone was at more than plus 15%. So deceleration in Q2 compared to Q1. As far as the carryover impact, if you take the prices and if you extend them throughout 2022, so for full year 2022, it would be, I think, something like plus 13%. But again, it's purely mechanical carryover impact. And if the price of raw mats is going down because of whatever deceleration in the market, of course, the numbers will be [ low ].

Right. And if I could ask a second question on energy efficiency and the premium growth, you talked in the first quarter about seeing clear energy efficiency premium growth in EV charging, climate control, they just -- are you still seeing those trends? And are you starting to see any of those in the U.S.? Or are you still not seeing those trends in the U.S.?

No, we continue to see the trend, not only in Europe, but it's more visible in the Europe than in the U.S. indeed. It's probably coming from the various incentive plans that were launched in a number of countries. So it's more visible in Europe than in the U.S. We also see them in the U.S. And we haven't seen any specific deterioration between Q1 and Q2, and we see indeed EV charging, climate controls, smart thermostat, cold corridors, optimize their flow in datacenters, all the products [indiscernible] have significantly. The only negative limitation or worries on the products remain the shortage of electronic components, which from time to time can impact some of those product families. Well, the [indiscernible] products, which is [indiscernible], but when it comes, for example, to assisted living, products that help all people to stay at home or to [ collected ] security, they have been negatively impacted by shortage. So -- we expect this growth to continue on green products. But with this concern that we should -- in order for this was to continue, we should continue to secure electronic components, and we don't have to go to suffer for a couple of quarters.

If I could just go back to the raw material and component, I couldn't hear because the line is a bit crackly. Did you say 18% in the first and 13% in the second?

I understand that you haven't heard it well. What was the purchase price increased for H1 2022? It was 17%, and the sequential is Q1 around 18% and Q2 around 15%, 1-5. And the carryover leads to [ plus ] 13%, 1-3, for full year 2022. We [indiscernible] H2 alone.

We currently have no further questions. So I'll now hand you back to your host for any closing remarks.

Well, I just wanted to thank you all for connecting. I know that those times are very busy with everybody in their results. Thank you very much for taking the time to listen to Legrand. Should you have more questions as well, you can call Ronan, you can call Samy, you can call Franck, you can call myself. We have made ourselves available for the full day to answer any questions you may have. Thank you very much, and have a nice summer break.

Ladies and gentlemen, thank you for participating. You may now disconnect your lines.