Legrand SA (LR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to today's Legrand 2024 First Half Results Conference Call. For your information, this conference is being recorded. [Operator Instructions] At this time, I would like to hand the call over to CEO, Mr. Benoît Coquart; and CFO, Mr. Franck Lemery. Please go ahead, sir.

Thanks a lot. Good morning, everybody. Franck, Ronan and me are happy to welcome you to the Legrand 2024 first half results conference call and webcast. As you know, this call is recorded. So we have published today our press release, financial statements and a slide show to which we will refer. Those documents are, as usual, available on the Legrand website. After a few opening remarks, we will comment the results into more details. I begin on Page 4 with the 3 key takeaways of this release. First, in a building market that remains depressed in many geographies, Legrand reports good resilience in the first half including sales growth in the second quarter and very firm margins. Second, we are actively rolling out our strategy through acquisitions and renovation. Last, we confirm our full year targets. As a reminder, we will host a Capital Markets Day in September 2024 in London. So moving now to Page 6 and to Page 7, I will start with an overview of sales. In the first half of 2024, excluding exchange rate in Russia, our sales decreased by minus 0.7% with an organic trend of minus 2.0% and a positive scope from acquisitions of plus 1.3%. In the second quarter alone, sales were up plus 1.5% organically, driven notably by the datacenters momentum. Considering the current building market environment, which remains depressed, many geographies. This limited decline in revenue highlights the relevance of Legrand business model. Looking forward, based on acquisitions made and their likely date of consolidation, the impact from acquisitions should be of nearly plus 2.5% full year. Regarding the 2 other elements on sales, the negative scope effect from Russia was of minus 0.9% for the first half and will be minus 0.6% on the full year 2024. The exchange rate effect was a negative minus 0.4% for the first half and based on average rates of June, it would be close to minus 0.5% for the full year. You will read on Page 7, the key takeaways per geographies on a like-for-like basis. On the first half of 2024, despite market conditions, the group's revenue recorded a limited decline. European sales fell minus 3.2% in the first half of '24 in a persistently tough building market in most countries. In the U.S., sales were up plus 1% over the period. We achieved a solid performance in the second quarter with a steep plus 7.9% rise driven by market growth in the datacenter segment as well as an increase in nonresidential applications. Finally, in the rest of the world, we recorded a decline of minus 3.1% in H1 with a mixed picture depending on regions and countries. Sales grew notably in India, the Middle East and South America but these failed to offset declines in China and Africa. These were the main comments I wanted to make on sales. I will now hand over to Franck for more color on our financial performance.

Thank you, Benoît, and good morning to all of you. I will start on Page 8, commenting the adjusted operating margin. Before acquisitions, we recorded a solid adjusted operating margin of 20.8% in H1. This level of profitability confirmed, once again, the ability of Legrand to hold margin high despite a decrease in sales. The impact of acquisition was minus 10 bps, meaning that H1 adjusted operating margin all-in stood at 20.7%. Going now to Page 9 and 11 and highlighting 2 main points. First, the net profit stood at EUR 578 million, representing 13.7% of our sales; and second, the free cash flow came to EUR 468 million at 11.1% of sales for the first semester. On Page 11, we can see the robustness of our balance sheet with a net debt-to-EBITDA ratio of 1.8 at the end of the period, which is fully consistent with the group credit rating and this level reflects both a solid free cash flow generation and the strong pace of acquisitions that Benoît will comment shortly. This concludes the financial key topic. I'm now handing over back to Benoît.

Thank you, Franck. Let me now move to Page 13, detailing our recent acquisitions. We are continuing and even accelerating our bolt-on acquisition strategy with 5 acquisitions announced this year, totaling more than EUR 200 million acquired sales on an annual basis. I would like to highlight the fact that out of these 5 acquisitions, 3 of them are in the bouyant datacenter segment and represent annual sales of EUR 140 million with NetRack in India, Davenham in Ireland and Vass in Australia. We intend to pursue this momentum in the coming quarters with a very active pipeline. On both Pages 15 and 16, you can see a few examples highlighting the strong renovation pace for the group. We launched many new products this year, such as the new iconic Céliane range in France, for example. This shows the group's continued robust capacity for renovation, both for core infrastructure products and in faster expanding segments. We can now move to Page 18. We stand by the full year targets announced in February with low single-digit growth for sales, meaning organically and through acquisitions, in adjusted operating margin before acquisitions of between 20.0% and 20.8% of sales, at least 100% CSR achievement rate for the third and last year of our 2022-2024 road map. Before we move to questions, I would like to remind you of our Capital Market Day scheduled on September 24, in London. This is it for the key topics of this release. I suggest we switch now to Q&A.

[Operator Instructions] Your first question comes from the line of Daniela Costa, Goldman Sachs.

I have 2 questions, if possible, if there's space for it. But the first one, just looking at sort of how you grew in North America, I guess, assuming would be interested in getting your breakdown of datacenters non-resi and resi, I would assume it's not -- the datacenters that has grown very strongly given construction read across as we here are yet not very buoyant. Was there any catch-up or is this from prior quarters where you were weak or is this sort of the normal growth that you see going forward for datacenters?

Well, indeed, the situation is very diverse in North America. You have to think of it as 3 different pieces. So you have the datacenter market, which indeed grew double digits in Q2. We don't see that as a catch-up. We knew as early as last quarter, given the quote, the orders, incoming and so on that the quarter 2 -- good and we believe this is a normal pace of the datacenter market. And well, nobody can say what the next quarter is going to be, but we believe that a double-digit growth rate is sustainable for the coming quarters and is in line with the growth of the data consumer. So it's clearly positive, growing and no specific catch-up, but the translation of a healthy datacenter market. Number two, and it's about, as you know, a big quarter of our sales. Then we have the nonresidential market; office, education and so on, which is more than 50% -- slightly more than 50% of our sales, which is growing single digit. I wouldn't want you to think that the market is growing. I think that we haven't seen any significant change in trend. This non-resi market remains difficult, but we are growing notably because we have an easier comp. You may remember that in Q2 last year, we indicated that there were some destocking in the non-resi market. So let's say, the Q2 basis for comparison for non-resi was somehow a bit easier, if I may say. So no change in trend as far as the market is concerned, but a technical factor, which explains why the non-resi market -- our non-resi sales are slightly up. The third piece is resi, which is about 20% of our sales. Clearly, the market KPIs are improving for resi. And if you look at the number of indicators such as investment in residential, new single family, [indiscernible] investment in residential and a number of others, the statistics should get better in '24 compared to '23. It does not really hitting yet ourselves. You know that you have a time lag between the time the statistics get better at the time it hits ourselves. So -- but we believe it will at some point, somewhere in the later this year or beginning of '25. So datacenter, very positive, and it will remain very positive. Nonresidential remain difficult, but it was held for Q2 by technical factors and resi, the market start to get better, but not yet hitting our sales.

Very clear. And maybe a comment on the free cash flow where the margin has been a little bit lower than it used to be in the past. Can you talk through the working capital build up? Is that something that we're going to see a reversal for in the second half? Or is it part of the strong growth in areas like datacenters and we won't see a reversal? How should we see it?

I will let Franck maybe to take this question.

Yes. Thank you. Well, you said a lot of -- 2 things in your question. Free cash flow at the end of H1 is quite decent, but it's not at the level of the last 2, 3 excellent years. It's at 11.1%, which is, by the way, the average of the last 7, 8 years, but lower than the most recent period. And it is about the working capital requirement which is exactly at the same level as last year and notably in terms of inventory to sales at 16%, which means that it's a little bit higher than the traditional metrics of Legrand. And you remember that in the past, we said that we took the delivery decision to carry over some extra inventory to support ourselves during COVID and post-COVID supply chain challenges. And this is also what is currently happening, but more on behalf of supporting the datacenter. It's not about global supply chain disruption, but it's more about supporting the datacenter business, which is growing strongly and which is also made of projects with some ups and downs. So to sum up and to talk about H2 and the full year, our target was to achieve free cash flow to sales between 13% to 15%. We'll achieve a target, but it will probably more in the softer range if we were to protect the datacenter business, which is bouyant. So to sum up, no structural changes in our free cash flow metrics. We will respect our full year target, but probably more in the lower end of our target.

Your next question comes from the line of Andrew Wilson, JPMorgan.

I've got 2, please. Can I just ask on pricing development in the Q2 and also expectations for the remainder of the year? And then secondly, and it's really a follow-up to Daniela's question, but I don't know if you could kind of quantify quite how strong the datacenter growth was in the Q2 and expectations for the second half. I'm just trying to see if we can kind of get above that double-digit rate for the full year as well.

Well, as far as pricing is concerned, for H1, the pricing was quite minimal, 0.2%, which implies more or less a flat pricing for Q2 and it has to be seen in the context of purchasing price being slightly down. Purchase price in H1 were down 0.7%. So quite a limited pricing. The reason being that we didn't need to do more pricing, actually, in order to deliver our margin target. As far as H2 is concerned, we will do a little bit more pricing, and we expect to land -- as we said last February, we expect to land at maximum 1%. So you shouldn't expect more pricing than plus 1%, it will be somewhere between plus 0.5% and 1%. Of course, all that will depend on the environment as far as raw mats and components are concerned. If the price of raw mats and components was to go up more than expected, of course, we'll do a bit more pricing. So 0.2% in H1 and for the full year, plus 1% maximum. As far as the datacenter growth is concerned, well, you can assume that in Q2, it's something which is close to plus 10% with a different product mix, depending on the areas. As far as the U.S. is concerned, it's mostly white space. You know that our datacenter exposure in the U.S. is mostly white space. As far as Europe is concerned where our exposure to datacenters is, of course, much smaller. The Q2 performance is more about the gray space, switchgear, UPS and busbars and so on, which is basically coming back to the growth rate we had for the past 4 or 5 years. For the past 4 or 5 years, we've been growing about 10% organically per year. So I cannot commit to any number for Q3 and Q4, but I see no reason why we wouldn't continue to grow in H2. We still have many incoming orders, many quotes, a very positive signal for the market. Well, now, of course, it's difficult for us to have full visibility. But I don't see any reason why we wouldn't continue to grow in H2 in datacenters. Again, because this growth is a structural growth, it's not coming from 1 specific big project, it's not coming from carryover of invoices from Q1 to Q2. It's -- we believe, a structural good growth coming from the fact that, number one, the market is bouyant and number two, we have solid positions on this market.

And if I can just squeeze in 1 quick further question, just on the second half margin, I'm just thinking about 2023, there was a good step-up in terms of investment in the second half. Just trying to think about sort of investment plans appreciate at this stage, but your investment plans for kind of second half and whether that can actually be a tailwind in terms of second half margin development given the step-up you saw last year?

Well, we will, as usual, manage the H2 margin, taking into consideration all factors, raw mats, the state of the economy, blah, blah, blah. So that at the end, we land where we have committed to land, i.e., for a full year margin between 20% and 20.8%. We don't expect a specific surge in energy investment. Now if we believe it will help to do targeted investments, we will. So I cannot commit to a level of investment, but we remain extremely vigilant and should we see further growth opportunities, we'll decide to dedicate the appropriate resources to support that.

Your next question comes from the line of Andre Kukhnin from UBS.

I'll just go one at a time. And can I follow up on datacenters first? And that 10% growth that you cited, I think right now, we're seeing higher growth rates in the market in terms of megawatt additions in the datacenters capacity than the 10%, especially in the U.S. Could you just talk about how your exposure correlates with that? And should we expect it to catch up at any point or is there a kind of different multiplier on your growth versus the megawatt additions?

Well, maybe it's a good opportunity for me to advise once again, our CMD, which will be held in September '24, because it's typically a sort of conversation that we should rather have at a CMD that when commenting results. Now be careful because you have to make a difference between investments in megawatts, which are announced, investments or CapEx into GPUs and stuff like that. Order books, book-to-bill and, let's say, forward-looking potential sales and actual sales. I don't believe that our market today is growing faster than 10%, which is already good. So of course, you can have a higher investment, higher CapEx announced, we have incoming orders or order books, which are growing faster than 10%. But again, between incoming orders and actual sales, many things can happen. You can have early booking from your customer, which are afraid not to have enough goods to be supplied. Those orders can be delivered over the next 12 or 18 months and not the next 3 months. Some orders can be delayed, can be canceled. So as far as Legrand, as a supplier of technology, is concerned, what matters is how fast our underlying markets are moving, and I can confirm that for Legrand, the datacenter market, which is held by AI, is growing probably approximately 10%, not 20% or 25%.

Got it. I was looking at the absorption data, which I thought was kind of close to the build rate as opposed to orders. But as you said, we look forward to the Capital Markets Day to learn more. And then I just have 2 quick follow-up questions -- further questions. One is you cited the destock effect in the U.S. nonresidential market in second quarter of 2023 that created an easy comp for this quarter. How did that destock progress through the second half of 2023? Was it still there in subsequent quarters of 2023?

No, we don't believe there has been any significant destocking in our market in H2. Of course, in the markets which are a bit difficult, such as France or China, for example, mechanically, there's a bit of destocking because the distributors cannot handle the same level of inventory as when the markets are booming. But I wouldn't quote that as significant type of level.

I just wanted -- this is really useful, but I just wanted to check, last year in 2023, you said U.S. non-resi was destocking in the second quarter and that helped this quarter, did it still -- did it proceed to destock further in the second half of 2023 or was that just a 1 quarter effect?

No, it was a 1 quarter effect. Nothing significant in H2 '23. So it shouldn't have any impact on our H2 performance in non-resi, neither positive nor negative.

That's very clear. And lastly, just on acquisition contribution for the year 2024 from everything you've done so far, what should we expect for the year?

Well, we should expect 2.5% excluding of [indiscernible] Russia, so plus 2.5%; Russia, minus 0.6%. All that is, of course, linked or based on acquisitions, which have been announced so far, should some more acquisitions come, this effect could be slightly higher than that, of course. But so far, based on what has been announced, plus 2.5% excluding Russia.

Your next question comes from the line of Max Yates from Morgan Stanley.

I just want to start on your comments on U.S. nonresidential. And obviously, kind of one of the big drags for you has been your U.S. kind of commercial and office exposure. I think it's down kind of more than 40% versus 2019 levels. I guess what I wanted to understand, the headlines, obviously, in that market are still quite challenging, but you've obviously had additional effects of destocking as well. So I just wanted to understand in that portion specifically, are you still seeing that being a drag to your overall Americas growth? And do you think we can start kind of talking about volumes there having bottomed or do you anticipate kind of a further drag to your North America growth from that subsegment specifically?

Well, it's difficult to say the volumes have indeed been down very significantly. And at some point, they can hardly be down a lot more, given the low base from which we start. So we are looking carefully at a number of KPIs, such as, for example, vacancy rates. And some of those KPIs are bottoming out, but it's too early to say that the market will bottom out. So we believe the market, at some point, would get better. Not sure it will come back to a strong 5% growth per year, but it will indeed start to rebound from a small base. But we remain a bit cautious, again, because the statistics are not yet super positive and our rebound in sales in Q2, as we said, is more linked to technical factors. It will have a lot more visibility than that.

No, that makes sense. And just a quick follow-up on your acquisitions that you've done in datacenter. I guess just maybe a kind of quick comment on the strategy and the pipeline, I mean do you see when you kind of line up future M&A, are there a lot of these kind of smaller acquisition opportunities in datacenter like the ones that you just did? And I guess you're clearly finding things in, I think, what are your kind of core datacenter products that kind of things like the busways and the PDUs, so yes, is there still a lot of opportunities there for M&A and/or do you think you'll have to start moving out of those product categories if you want to keep doing M&A in datacenters?

No, we have a lot of interesting opportunities remaining in datacenters. And out of the 350 targets we have on our pipeline, I cannot quote a precise number, but we have a lot of opportunities in datacenters. . Some of them on our, let's say, traditional product families, some other new product families. So we are doing the -- in datacenters as elsewhere, the traditional Legrand strategy of both reinforcing our market share in the core and expanding into adjacencies. So if you look at what we've done for the past couple of years, ZPE that we announced 6 months back, wasn't a traditional Legrand product family, it's a console, which is a new product category for Legrand. Davenham, on the gray space is also a new product family. Vass is a more traditional product family because we've been active for quite some time on busbars. So no, we have many opportunities remaining in datacenter both in the traditional core Legrand product families and in new families for Legrand.

Your next question comes from the line of Gael de-Bray from Deutsche Bank.

Actually, I have 3 questions, please. So maybe I'll take them one at a time. Can I start with the M&A activity, please? I mean, usually, you've been pretty prudent on the M&A side with multiples typically lower than the group's own multiples. But in H1, you spent more than EUR 1.2 billion. And if I'm not wrong, I think that's equivalent to about 4.2x, maybe 4.3x EV sales, so clearly above your own and what you've been used to pay in the past. I know there was something around software. But generally speaking, is there any change to the group's M&A approach or cautiousness or potentially any change to the competitive dynamics in the bidding processes? Has the market become perhaps more competitive on the M&A side?

Well, the numbers you quote are correct, Gael. Now the short answer to your question is, no, absolutely no change. The fact is that the companies we have both -- have a profitability, which is a very nice ones, sometimes higher than group's average profitability. So if you look at the multiple of EBIT we paid for those companies, it is significantly lower than Legrand multiples. But since those companies are nicely profitable in terms of multiple of sales, indeed, we are closer to 4 than to the 2.5-or-so, which we did last year and 2 years back. But I confirm that there's absolutely no change in the competitive dynamics. Most of the deals we've done were one-on-one discussions. We are still using the same valuation metrics, i.e., we want the deals to be EVA accretive within 3 to 5 years of full consolidation. All those deals are very well sketched out and correspond to a very good addition to group's plan of action. So no, no, we -- not overpay the deals, and we will remain reasonable when it comes to the EVA impact of those transactions. It just happened that from time to time, you buy a company, which has 25%, 30%-or-so more EBIT, so in which case, of course, the price of the multiple of sales seem to be higher.

Well, that's great to hear. And then the second question is on the restructuring cost, which appear to be particularly high in Q2, especially in the U.S. So could you provide perhaps more details around the actions being taken there?

Yes, Gael, you are once again right. Usually, yearly restructuring expenses for Legrand are about EUR 30 million per year. And it is true that in H1 alone, it amounted to EUR 40 million, of which EUR 25 million, I think, in the U.S. So in the U.S. alone in 1 semester, we did almost as much restructuring as we usually do yearly at the group level. Well, the reason being that, as you know, we are always optimizing our cost base. This is a condition for us to continue to deliver solid margins. And we have identified in the U.S., a number of restructuring opportunities, which we are currently conducting. Last year, it was Europe in H1, which has also been quite high. This year, it's the U.S. So it's part of the Legrand, let's say, habit of -- even when the numbers are solid to continue to look for restructuring opportunities and cost -- and opportunities to take some cost out of our P&L. So nothing specific. It is Legrand actual story. But you are right to say that it has a significant impact on the North American margin in H1 because, as you know, our EBIT margin is after restructuring.

Okay. And maybe finally, I know you reaffirmed the revenue guidance, but could you perhaps provide a bit more details on what we should expect organically excluding acquisitions? I think the prior indication was for the organic growth to be between slightly negative and slightly positive for the full year, so how is it trending now rather positively or rather negatively after Q2 moved back into growth?

Well, I confirm that it should be somewhere between slightly negative and slightly positive, so completely unchanged compared to what we told you in February. And Gael, the reason being that we are exactly where we thought we would be at the end of H1 in terms of top line. So indeed, from the financial community standpoint, Q1 was probably a bit softer than expected and Q2 is probably better than expected. But on the Legrand side, we expect it to be more or less at this level as in of H1. So since it is in line with our, let's say, road map, there's no reason to change our outlook for the full 2024. So organically, somewhere between slightly down and slightly up.