Legrand (LR.PA) has delivered impressive full-year results for 2023, achieving a net profit of €1.1 billion and proposing a 10% dividend increase to €2.09 per share. Despite a downturn in building markets, the company saw a 4.7% increase in sales, driven by organic growth and acquisitions. The adjusted operating margin reached 21.2%, with a record high free cash flow of 18.8% of sales. Legrand anticipates low single-digit sales growth in 2024, with an adjusted operating margin between 20.0% and 20.8%, and plans to complete €100 million in share buybacks.
Key Takeaways
- Legrand's sales grew by 4.7%, including a 2.7% organic increase and a 1.9% boost from acquisitions.
- Europe and the rest of the world experienced sales growth, while the US saw a decline.
- Adjusted operating margin improved to 21.2%, and net profit reached €1.1 billion.
- Earnings per share increased by 15.6%, with a proposed dividend of €2.09 per share.
- The company set a target for low single-digit sales growth and an adjusted operating margin of 20.0%-20.8% for 2024.
- Legrand plans €100 million in share buybacks in the near future.
Company Outlook
- Forecasts low single-digit sales growth for 2024.
- Aims to maintain an adjusted operating margin between 20.0% and 20.8%.
Bearish Highlights
- Decline in US sales by 2.8%.
- Nonresidential market has been flat in Europe and down in the US.
- The building market is expected to remain challenging in 2024.
Bullish Highlights
- Sales in Europe grew by 6% and 5.7% in the rest of the world.
- Strong performance in India and China.
- Datacenter business expected to grow, and residential market in the US may recover.
Misses
- Overexposure to the declining office market.
- Uncertain timing for the anticipated renovation wave to support non-residential buildings.
Q&A Highlights
- Legrand has a pipeline of 350 companies for potential acquisitions.
- The company is confident in finding reasonable M&A opportunities, including in the datacenter sector.
- Labor costs increased by around 6% in 2023, with a similar increase expected in 2024.
Legrand's performance in 2023 was marked by resilience in a challenging environment, with the company successfully navigating through a decline in building markets. The firm's strategic growth initiatives, including product launches and increased production capabilities, alongside a focus on expanding its customer reach, have contributed to its robust results. Despite the headwinds faced in North America, Legrand's commitment to investing in new agents and distributors demonstrates its dedication to overcoming market challenges.
The company's financial flexibility has allowed it to maintain a strong margin performance, primarily driven by SG&A improvements, and its leadership positions in product segments have provided it with pricing power. Legrand's efforts to rebalance its supply chains, reducing reliance on sourcing from China, and its ability to offset trade tariffs through pricing have further strengthened its market position.
Legrand's confidence in the datacenter market and its ability to provide necessary products and solutions is evident in its growth projections for this segment. While the renovation market was subdued in 2023, there are signs of improvement in 2024, particularly in the U.S. and Europe, which may bolster the non-residential buildings sector.
The company's M&A strategy remains robust, with a focus on finding acquisitions at reasonable prices and continuing to pursue opportunities, especially in the datacenter sector. Legrand's CEO, Benoît Coquart, expressed confidence in the company's attractiveness as an acquirer and its ability to identify valuable acquisition targets. The company's forward-looking approach, combined with its strong 2023 performance, positions it well for continued growth in the coming year.
InvestingPro Insights
Legrand's financial performance has been marked by several positive indicators, showcasing the company's ability to navigate a complex market landscape. According to InvestingPro data, Legrand has a market capitalization of 25.98 billion USD, reflecting its substantial presence in the industry. The company's Price-to-Earnings (P/E) ratio stands at 21.31, which, when adjusted for the last twelve months as of Q4 2023, slightly decreases to 21.01. This indicates that investors are willing to pay a premium for Legrand's earnings, which could be due to the company's consistent performance and growth prospects.
InvestingPro Tips highlight Legrand's impressive gross profit margins, which have been reported at 52.26% for the last twelve months as of Q4 2023. This is a testament to the company's efficient operations and strong pricing power. Furthermore, Legrand's commitment to shareholder returns is evident, as it has not only maintained but also raised its dividend for 18 consecutive years, demonstrating a reliable income stream for investors.
For those looking to delve deeper into Legrand's financial health and future prospects, InvestingPro offers additional insights and metrics. With the use of promo code PRONEWS24, readers can receive an extra 10% off a yearly or biyearly Pro and Pro+ subscription, granting access to a comprehensive suite of InvestingPro Tips. Currently, there are 9 additional tips available on InvestingPro for Legrand, including analysis on earnings revisions, stock volatility, debt levels, and profitability forecasts.
Investors interested in Legrand's future performance should note that the company is expected to remain profitable this year, with analysts predicting positive outcomes. As the next earnings date approaches on May 3, 2024, stakeholders will be keen to see if Legrand can continue its trajectory of growth and profitability in the face of market challenges.
Full transcript - Legrand Sa (LGRVF) Q4 2023:
Operator: Good morning, ladies and gentlemen, and welcome to today's Legrand's 2023 Full Year 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 our CEO, Mr. Benoît Coquart and CFO, Mr. Franck Lemery. Please go ahead, sir.
Benoît Coquart: Thank you. Hello, everybody. Good morning. Thank you for connecting. So Franck, Ronan and myself are happy to welcome you to the Legrand 2023 Full Year Conference Call and Webcast. As you know, we have published today our press release, financial statements and a slide show to which we will refer. Those documents are available on the Legrand website. After a few opening remarks, we will comment the results into more details. I begin on Page 4 with the 4 key takeaways of this release. First, Legrand delivered outstanding 2023 results amid building markets in retreat. Second, we are actively executing our strategic roadmap. Third, we have laid out our full year targets. And last, we will host a Capital Markets Day in September 2024. So moving to Page 6 and 7. I will start with an overview of sales. In 2023, our sales grew organically and through acquisitions by plus 4.7%, driven by an organic rise of plus 2.7% and a scope from acquisitions of plus 1.9%. With building markets in retreat in most geographies, these figures testify to Legrand resilience and confirm once again the relevance of our growth and value creation model, driven by faster expanding segments, pricing power and strong commercial performance. Based on acquisitions announced till now, the full year impact in 2024 should be around plus 1.5% in 2024. Regarding the 2 other elements on sales, the negative scope effect from Russia was of minus 0.9% in 2023 and will be minus 0.6% in 2024 on the full year. The exchange rate effect was a negative minus 2.7% in 2023 based on average rate of Jan, it would be close to minus 1% for the 2024 full year. On Page 7, you will find the key takeaways per geographies on a like-for-like basis. Europe grew a very solid plus 6%, driven by strong growth in each faster expanding segment and despite residential market that retreated in most geographies. In the U.S., sales declined minus 2.8% full year amidst strongly declining markets. The group registered thanks to double-digit sales growth in datacenters. Finally, in the rest of the world area, sales marked an organic rise of plus 5.7% in 2023 with a very robust momentum in India and an increase in China. These were the main comments I wanted to make on sales. I will now hand over to Franck for more color on our record high performance.
Franck Lemery: Thank you, Benoît, and good morning to all of you. I will start on Page 8, commenting the adjusted operating margin. Before acquisition and excluding Russia, we recorded a high adjusted operating margin of 21.2% in 2023, representing a remarkable plus 0.8 points increase versus last year. While investing in growth and spending significantly in restructuring, this very high profitability level demonstrates once again the quality of Legrand business model, our undiminished pricing power, our solid cost control and a high level of productivity. The impact of acquisition was of minus 0.2 points, meaning that the adjusted operating margin all-in stood at 21%. Going now to Page 9 and highlighting 3 main points: First, with a net profit of €1.1 billion, representing 13.6% of our sales. Earnings per share were up plus 15.6%, showing the group's very strong value creation. It benefited mostly from the favorable trends of operating profit and financial results. Second, the free cash flow came to a record high level of 18.8% of sales, meaning a conversion rate of 138% of net profit. Lastly, return on capital employed after tax stood at a high 14.7% for 2023. On Page 10, 3 figures to illustrate the robustness of our balance sheet with a net debt-to-EBITDA ratio of 1 at the end of the year, a high cash position and a vastly fixed rate gross debt. This concludes the key financial topics I wanted to share with you. I'm now handing over back to Benoît.
Benoît Coquart: Thank you, Franck. We will continue the presentation talking about our 2023 dividend and share buyback program on Page 12. So for 2023, Legrand will propose a payment of €2.09 per share dividend, up plus 10% compared to last year. Regarding our share buyback program for cancellation of shares, €400 million were completed over 1 year, which means that €100 million are left to be done in the coming months. Let me now move to our 2023 CSR achievements on Pages 14 onwards. So on Page 14, in 2023, Legrand reached an achievement rate of 118% on the targets set for the second year of its 2022-2024 CSR roadmap. We overall had strong showings and as expected, some challenges regarding circular economy. As you can see on Pages 15 and 16, we are particularly proud to have reduced scope 1 and 2 CO2 emissions by 39% at current perimeter over 2 years with minus 28% over 1 year clearly outperforming our targets while reducing our energy consumption by 17% and now using 82% of renewable electricity. Results on gender diversity are also very good with now more than 29% management positions filled with women. On Page 17, we announced our first international employee share purchase plan to recognize and promote employees' engagement. It will, of course, not be dilutive. Now going to the second part of this presentation with the ongoing implementation of Legrand strategic roadmap in 2023 on Pages 19 and 20, driven by strong R&D, Legrand was very active in terms of new product launches in both faster expanding segments and core infrastructure products. On Page 21, Legrand is announcing today the acquisition of MSS in New Zealand, together with the 4 acquisitions already announced over 1 year, the 5 companies represent annual sales of about €190 million. On Page 22, faster expanding segments made up of energy efficiency, datacenters and connected products grew organically double digit in 2023 and accounted for 36% of Legrand sales. More specifically, datacenters now represent 15% of total group sales with a unique leadership positioning as a white room specialist with an offering well adapted to the emerging needs of the growing artificial intelligence industry. On Page 23, we show our continued initiatives to enhance our operating performance and productivity with the active deployment of Industry 4.0, the ongoing optimization of the group's industrial footprint, especially in North and Central America, and our increasing innovation capabilities in software and firmware. We can now move on to Page 25, regarding 2024 full year targets. So taking into account the world's current macroeconomic outlook and with confidence in its model for creating integrated value, Legrand has set the following full-year targets for 2024. Low single-digit sales growth organic and through acquisitions, then adjusted operating margin before acquisitions between 20.0% and 20.8%, at least 100% CSR achievement rate for the third year of the 2022-2024 roadmap. Before we move to questions, you will find in Pages 28 and 29, our corporate access agenda for the coming months and we will be hosting a Capital Market Day on September 24, 2024. This is it for the key topics of this release. I suggest we now switch to Q&A.
Operator: [Operator Instructions] The first question comes from the line of Daniela Costa from Goldman Sachs (NYSE:GS).
Daniela Costa: I have two questions. The first one is whether you can comment on sort of how you're managing your price list for '24. The second one is regarding your guidance, your low single-digit guide. Can you maybe help us understand a little bit by product, how you see things evolving? Like, obviously, you have a big datacenter exposure, one of your competitors just talked about very high growth levels there. Sort of what's offsetting that, if you give us some color in terms of particular products or regions that you see as the major offset in 2024?
Benoît Coquart: So as far as your first question is concerned, well, it is not a secret that Legrand has been enjoying forever good pricing power. Now as you know, we are using it carefully, this pricing power. We don't want to do too much pricing. We want to do the right pricing in order to remain competitive. So to give you numbers, in 2023, our prices were up 4.8%. But if you take a longer run over 5 years, we had pricing which were up 22%, which is basically more or less 4% per year. And the cost of raw mats and components, which was up 24%. So 22% against 24%. So you see that we are extremely careful in not doing too much pricing which also tells you that we have ample margin for maneuver to do additional pricing if needed. We don’t believe the environment in 2024 will be for a strong growth in the price of raw mats and components. So we are shooting for small pricing probably 1%, plus 1% at maximum. But again, if needed, if for whatever reason, we had a price of raw mats and components, which was to go higher than expected or price of input overall, which will grow more than expected, then we keep a lot of margin for maneuver to do additional pricing. But so far for 2024, we are shooting for plus 1% pricing maximum. As far as the guidance is concerned, so it’s a low single-digit growth of sales combining like-for-like and perimeter. As far as the perimeter impact, you could see in the press release that we have carryover coming from the previous acquisition of the acquisitions already completed of plus 1.5%. You know that Legrand has as an objective to achieve a perimeter impact of plus 4%. Well, plus 4% for 2024, would be very ambitious because you know that, of course, the additional acquisitions would not be consolidated starting Jan 1. But clearly, we are shooting to deliver plus 2%, plus 3% perimeter impact which means that this low single-digit guidance translate into like-for-like sales, which would be from, let’s say, slightly down to slightly up. Now in terms of environment, we believe indeed that the datacenter business and market should continue to grow fast. We grew our sales in datacenter in 2023, double digit. We did grow double digit in 2024. We don’t know, but I confirm that these market segments is enjoying a nice growth and should continue to grow. As far as the 2 other big segments are concerned, as far as residential is concerned, which is close to 40% of our sales. It is bottoming in the U.S. and most people expect some sort of recovery starting somewhere in 2024. In Europe, the situation remains pretty difficult. I remind you that housing permits or building permits, housing permits were down 20% last year. Now here again, it will depend very much on the interest rates. So you know that if the interest rates start to go down, there should be or there could be some recovery in the residential in Europe. Now will this recovery happen end of 2024 or in 2025, we don’t know. But there is a strong correlation between interest rates and housing starts and housing permits. As far as the nonresidential is concerned, it has been pretty flattish in Europe, down in the U.S. And here again, there’s no reason why there wouldn’t be some recovery at some point. But again, with some uncertainty and whether it will happen end of 2024 or in 2025. So we clearly have, let’s say, 3 different dynamics: datacenter up; residential, which so far has been down double digit, but with some recovery, bottoming in the U.S. and potential recovery, including Europe somewhere between the end of 2024 and beginning of ‘25; and the office market, [indiscernible] nonresidential market pretty flattish in Europe, down in the U.S. and here again, potential recovery end of 2024 and 2025. Does it answer your questions, Daniela?
Operator: The next question comes from line of Nick Amicucci from Cowen.
Nick Amicucci: Just a couple on my end. Just wanted to get a little bit of clarity surrounding kind of the cadence throughout the year of that low single-digit growth. Is there any kind of bifurcation between the first half and the second half? Are we expecting a step up in the second half? Or is it pretty even keel throughout the year? And then I just wanted to dig in a little bit deeper just on the U.S., in particular, in the North America -- North and Central America segment in particular, saw a little bit more pressure from an adjusted operating margin perspective in the quarter. I just wanted to see, was that strictly just because of the deterioration in the markets that you guys have touched on before? Or was there any kind of mix impact that we should be aware of?
Benoît Coquart: Okay. Nick, I'll take the first question and Franck will take the second one. As far as the potential seasonality in 2024 between H1 and H2, well, it's not a secret that we have a stronger basis for comparison for the beginning of the year than for the end of the year. So in this respect, Q1 should be more demanding than H2 typically, now -- so this is, let's say, an expected seasonality. Now the question mark is whether some rebound will occur or happen at end of 2024 or not. If you take the low end of our guidance, i.e. sales, slightly down like-for-like. It doesn't imply some market recovery in H2. It implies a market which will remain difficult throughout 2024 and some other performance from Legrand due to its specific positioning on datacenters, on electrification and 0 faster expanding segments. The higher end, if I may say, of the guidance, i.e., like-for-like slightly up in 2024 indeed imply some -- implies some of the markets recovering or starting again to grow at the end of 2024. But the pure mechanical seasonality, let's say, it's a more demanding start because of the basis for comparison and to a lesser extent, because of the number of trading days. I'll let maybe Franck answer the second question.
Franck Lemery: Yes. So talking about the profitability of North and Central America and our ability to protect margin in that difficult environment. First, we have to recognize that 2023 was good profitability for North and Central America, 19.4%. It’s exactly the average of what we experienced last year and the year before. So considering the top line challenge, it’s a good result. This 19.4% embeds a lot of restructuring actions. So a lot of one-timer preparing for the future. So globally speaking, good results in 2023 and no reason why we shouldn’t be able to hold margin also in North and Central America in the future.
Operator: The next question comes from the line of Gael de-Bray from Deutsche Bank (ETR:DBKGn).
Gael de-Bray: I have 2 questions, please. Can I take them one at a time? So the first question would be around your growth initiatives. Could you help us quantify perhaps the impact of these investments in EBIT in 2023. And any color on what the magnitude of these investments could be this year as well? And specifically on restructuring, €60 million spent in 2023. So what's embedded in the margin guidance for 2024?
Benoît Coquart: Okay. So as far as growth initiatives indeed, you remember that mid of last year, we launched a series of initiatives in order to boost as much as we could top line growth in H2. So we did it even though the results were not the same everywhere to give you numbers. As you know, we had like-for-like sales up plus 1% in H2 last year. And we had like-for-like SG&A growing plus 9%. So plus 9% in SG&A, plus 1% in top line growth. And I have to say that amongst the various SG&A, we had a number of discretionary SG&A, which grew a lot more than that. If you take, for example, sales network and advertising, it was close to plus 30% in H2. So we launched a number of initiatives in the various zones. Results are overall positive, but not everywhere. It was a clear success in Europe. Europe is positive in volume in H2 when it was negative in H1 even though the markets are down in Europe. So we -- for example, we dedicated more budget to some product launches. We accelerated the deployment of some product offering. We increased some production capabilities and so on and so forth. The results were more disappointing, I have to admit in the U.S. or in North America. We have launched a number of initiatives, but the market conditions are such that those initiatives haven't really delivered on expectations. And as a result, volumes in H2 were negative and very similar between, let's say, Q4, Q3 and H1. The outcome of that is that when you are facing difficult market situations, the market doesn't always support you in launching those initiatives. Going into 2024, we will indeed continue some of those programs, and we are not giving up our strategy to accelerate the growth in market shares. But again, it will depend on the market conditions. If the market conditions are very bad, not all those initiatives will be successful. It's a bit early to tell you. As far as restructuring is concerned, indeed, we spent more than €60 million in 2023 in restructuring. You know that the average exceptional years such as 2020, but the normal, let's say, run rate of restructuring at Legrand, it's about €30 million per year. So with €60 million last year, it demonstrates that we have launched a number of productivity initiatives in order to support 2024 margin guidance as well as the margin profile in the coming years. As far as 2024 is concerned, it's always super complicated to give you a precise forecast for restructuring because we may have good ideas coming along the year. Acquisitions are bringing also additional opportunities. But for the model, you can assume that it would be -- it should be at least the normal €30 million. And then if it is more, it would rather be a good news for the group. But let's say, €60 million in 2023 and as a starting point, €30 million for 2024.
Gael de-Bray: Can I perhaps follow up on the growth initiatives. I mean I can see you launched many new products last year invested a lot in SG&A and the traction was actually relatively limited. Do you think that you need perhaps more integration capabilities, more digital capabilities which currently appear relatively limited compared to some of your peers. Do you think that would be required to grow in the systems business and perhaps be in a position to serve the more technical buildings out there, which appear to be more dynamic.
Benoît Coquart: Well, the software – the building industry is not at all software intensive. Industrial automation is – but not building. None of our peers is doing a significant business in software in the building piece of their business. So unfortunately, it’s not very software-intensive. As far as the building management systems are concerned, to complete systems – the market share in BMS has been very flattish. It has a market share of 6% worldwide, BMS and it used to have 10 years back, a market share of 6%. So this is not where the growth should come from. We believe that the growth should come from integrating more firmware into the product, which is different from software. And we are doing a lot of that. I remind you that 20% of our R&D effort target towards firmware. It's about launching advanced functions. It's about launching connected products and connected products now represent 15% of our sales. So I don’t believe that in the building industry, software, pure software matter much and we have not seen any player developing a significant part of business in the software industry. Again, it’s different in datacenter, different in industrial automation. But for building industry, no, it doesn’t matter much. The key point to get is that, look, we have to admit that the building industry was down last year. And again, minus 9% in housing starts in the U.S., minus 20% in residential permits in Europe. The office market in the U.S. being down, Chinese real estate market being extremely difficult with a lot of real estate companies going down and being even bankrupted. So we have to admit that the building market has been very difficult. It will remain difficult in 2024. And in this context, the performance we are doing demonstrate a very good showing in terms of market share.
Operator: The next question comes from the line of Alasdair Leslie from Societe Generale (OTC:SCGLY).
Alasdair Leslie: Maybe just a follow-up on the North American growth initiatives. So I guess some quite cautious comments there, but I'm just trying to kind of parse that between maybe the underlying market environment and then your own sort of action plans because I thought that kind of the onboarding of new agents and distributors in the U.S. was going relatively well. I guess there's no change there to that focus. And if there isn't any, you can help us a little bit with that process in terms of next steps, time line towards the launch or scaling up of Legrand products into some of those new adjacencies. And I'm just wondering, do the associated investments and costs ramp up from here. So I'm thinking particularly about the level of training, et cetera, also the potential for higher couple of rebates and incentives, perhaps in the initial phase of the launches?
Benoît Coquart: So focusing on North America, the very first thing that you have to bear in mind as far as North America is concerned is that -- it is a market with a lot of differences between the various segments. If you take, for example, the NEMA Association, which is the official electro industry association, giving out some official numbers. Looking at those numbers, for example, private manufacturing construction in the U.S. was up last year, 62%. But unfortunately, we are not very, very small in private manufacturing construction. At the same time, commercial construction was flat and amongst commercial construction, you had the office market, especially in big metros, which was down. So the first thing to have in mind when looking at the numbers in North America is that, indeed, you had segments of the market, which grew very, very much like private manufacturing and construction. Now if we zoom on our market, I remind you our market exposure in the U.S. or in North America, resi 20%, non-resi slightly less than 55%, something like 53% as much as we can measure it. And datacenter, slightly more than 25%, 26%, 27%. On the non-resi piece, it is clearly -- we are clearly overexposed, and we've said that very clearly for a while to the office market, which is a big business for us. And within the office market, 2 big metros, Chicago, New York, Atlanta and so on and so forth. And this specific market was down. Now we are continuing. Clearly, our strategy to bring new product to the market, in the list of products that you have in the PPT, you have a number of products which are dedicated to the North American market, such as some lighting products, such as some connected camera and so on. We are continuing to expand our customer reach by getting into lighting agents and into new channels. We are trying to convert customers both from the pro channel and for the DIY channel. So we are -- we do have a lot of initiatives, and we will continue. Now again, when you, for example, want to give a lot more power to a product launch, but when the market is down, it's a bit more difficult than when the market is up. So we will continue. We will translate into a lot of growth in SG&A in the U.S. in 2024. We don't know yet. It will depend also on the underlying economy. But I confirm that there is no change in strategy in North America that we continue, of course, to expect the market to rebound at some point and that we keep pushing hard in order to overperform our underlying market, which is not very, very supportive. The second question was on the ramp-up for AI. Is that correct?
Alasdair Leslie: No. I was actually just whether -- sorry, just -- again, it's still on the growth initiatives, but it's just perhaps whether there would be sort of higher investments, perhaps as those launches come through if they come through in 2024 in North America?
Benoît Coquart: Well, we'll continue to do those investments. Now again, I cannot give you a precise number in terms of SG&A growth. It will depend on many factors, including, of course, how supportive the market are. But I confirm that we are not in a cost-cutting mode. We will keep chasing growth opportunities, but we'll do it as usual, carefully making sure at the same time that we meet our margin commitments.
Alasdair Leslie: Just a quick follow-up question. Thanks for the updated kind of mix on North and Central America. I mean you sort of said 20% resi still slightly less than 55% non-resi, 53%. I think you said within that, is offices still around about half of that. So if I guess it was 25%, 26% of North America sales, is that correct?
Benoît Coquart: Office, you mean, well, take those numbers with a pinch of salt because the same products are sold into office building, universities, schools and so on and so forth. So it’s really a very, very rough estimate, but indeed probably more than half of our commercial building exposure is dedicated to offices. But again, those are not – as we said in French, hard scientific numbers.
Operator: The next question comes from the line of Aurelio Calderon from Morgan Stanley (NYSE:MS).
Aurelio Calderon: I've got two, please. The first one is a bit of a follow-up on kind of those -- or that strategy to try and to rebalance the portfolio in the U.S. Are you thinking about doing this organically or would you be able to do this inorganically something like, I don't know, that larger acquisitions something [indiscernible] milestone. I'm just asking because, obviously, your balance sheet position is in good shape. And as you said, it's difficult to grow in shrinking market. So how are you thinking about rebalancing that exposure? And I'll take the second one after this one.
Benoît Coquart: Yes, yes, sure. We will do it both organically and inorganically. So organically, for example, each of our businesses in the U.S. do have some clear targets to get more into adjacent markets or non-office market, such as, for example, health, which is set to grow, logistics or a number of other markets. And we will do it inorganically. That's what we've been doing. If you look at the past 2 acquisitions we made in the U.S., ZPE Systems was -- which we announced a couple of months back was in a datacenter. Encelium, the small acquisitions we did about 6 months ago, was in the lighting controls so highly correlated to energy efficiency. So it could be inorganically and organically. Does it mean that we will make big acquisition, i.e. somebody amounting €500 million or €600 million or €700 million and €1-point-something billion in terms of EV, big question mark. I would personally be delighted to have such a nice opportunity because it will help us to accelerate indeed the rebalancing. But you don't have a lot of interesting candidates of this size. So we will continue organically and inorganically, we are looking at a number of opportunities, but the likelihood to see big, let's say, acquisition is more limited than likelihood to see a small one. As far as our balance sheet position is concerned, you are completely right. We have a leverage of 1, which is not a high leverage. You know that our target leverage for us is between, let's say, 1.5 and 2. So we have ample margin for maneuver to do additional acquisitions. We have a lot of good ideas to do so. If for whatever reason, we cannot find the right candidates. Of course, we would have to make our mind about the use of the cash we have and how to re-leverage a little bit. This is what we did last year. We look at the, let's say, 6 to 12 months acquisition opportunities at the dividend, we were to limit. We came to the conclusion that given the high level of cash, it was a good idea to give some of this back to our shareholders. So this is the reason why we launched this share buyback program. Again, we have €100 million to spend out of this program if in the months to come, we come to a conclusion that beyond, let's say, the 2% or 3% perimeter impact, we don't have the best use of this big cash that we did -- that we had last year, we might consider launching another share buyback program. But to make a long story short, I confirm that we have -- we don't have a high leverage, 1.0 that we would love to, let's say, 1.5% to 2%, and that the priority is to actively look at acquisitions. But if we don't have enough good ideas, we could always consider buying back some shares. You had a second question?
Aurelio Calderon: Yes. That was very clear. The second question is you're obviously guiding slightly above your usual 20% margin. And we've also seen some of your peers in Europe and in the U.S. coming out with very strong margins. The question is, do you think that something has changed structurally in the market? And the industry is more profitable and gives us, I don't know, electrification, higher demand structurally or I'm just trying to think about that 20% anchor that we have fully grown. Is that the right level? Or should we be thinking about something slightly higher given industry dynamics?
Benoît Coquart: Well, indeed we’ve been consistently 3 years in a row, delivering more than 20% adjusted EBIT, 20.5% in ‘21, 20.2 – 20.4, sorry, in ‘22, 21% in ‘23, and we are again guiding before acquisition to 20 to 20.8%. Interesting point, this has been done financing every single year, 20 to 30 bps dilution of acquisition. If we had stopped doing acquisitions in 2020, our margin wouldn’t be 21%, our margin would be closer to 22%. So indeed, it’s significantly higher than what we were able to achieve a couple of years back. We haven’t changed yet our midterm guidance. I think this would be discussion that we will need to have at the next CMD. Well, now I think that we have – indeed, we have shown at least in ‘21, ‘22, ‘23 that we had a main profile which was slightly higher than historical one. And interestingly, it doesn’t come much from gross margin. It’s a very important topic to remind. It comes a lot from SG&A. If you compare 2023 numbers with 2018 numbers, we have, let’s say, 80 bps additional EBIT, 21% instead of 20.2%, but we have approximately the same gross margin at 52%. We have a little bit more operating expenses because we are spending more in restructuring and we have 1 point less in SG&A. And all that has been doing while at the same time, financing 130 bps dilution coming from acquisition. So a very long answer to a short question. I cannot tell you if structurally, we have improved the margin profile of Legrand. I can tell you that 3 years in a row and potentially 4 years if we deliver our 2024 guidance, our margin would be in excess of 20% indeed.
Operator: The next question comes from the line of William Mackie from Kepler Cheuvreux.
William Mackie: My first question would come back to pricing, Benoît. You gave a guidance about almost maybe 0% to 1% pricing in aggregate for the group. But could you throw a little color on to where you see the strongest pricing power, a feature of your company that you highlighted across the product segments or regions or conversely, where it is very difficult to achieve much price traction.
Benoît Coquart: Well, there's the strong correlation between leadership positions and pricing power. So it's not a matter of geographies. It's not a matter of product families. Is when you have strong leadership on a given product family and when you are 2x higher or 2x bigger -- sorry, or 3x bigger than the #2, then you enjoy pricing power because your customers are used to do repeat sales and are not asking for discount every time they contact you because you are well distributed and your products are everywhere in a given territory and so on and so forth. So I cannot give you a precise geography or a precise product family. We don't have, to my knowledge, a product family which wouldn't follow this rule, whether traditional or fast expanding, the stronger the leadership the higher the pricing power.
William Mackie: The second is a bit more structural relating to the group's supply chains and balances. We've seen in the past this impact of trade tariffs in North America and how you rebalance the flows from China. No. And the threat of an administration change seems to come with a new threat of tax measures that may impact imports into America. It may happen in other markets. To what extent do you think the group's supply chains have been adequately rebalanced? Or is there still more need for local sourcing?
Benoît Coquart: Well, it’s an interesting question. We remain, of course, dependent in terms of sourcing in China. So you know that in terms of sales, China is a small market for us. It’s about 3% of our sales. But in terms of COGS, it used to be close to 25% of our COGS coming from China. We have reduced that a little bit. So it’s another 25%. It’s probably something like 22%, 23% of our COGS is coming from China. We will continue this move. Now you shouldn’t expect that to come down to 15% or 10% within 2 or 3 years. Those moves are – moves that take a long time because you have to move factories, you have to appoint new suppliers. The number of suppliers or change suppliers remain the best suppliers in terms of technology and cost. So you cannot move out of China all your supplies. So you should expect this 22%, 23% coming progressively down to 2019, but not [10] and over a certain period of time. Now to be a bit candid, where the tariff between China and the U.S., bad news for Legrand. I’m not sure because we had the ability to do additional pricing in order to compensate for the additional cost of the tariff since product by product, most of our competitors do have the same exposure to China. Increasing prices wasn’t competitive issue for us. So it translated into higher sales. So it’s not always a good news – bad news when you have the cost of input increasing whether because price of raw mats and components are going up or because you have tariff or because salaries are increasing and so on. When you have some pricing power, it’s not necessarily a bad news. So to make a long story short, yes, we are rebalancing, but those are moves that take a bit of time, and this 25 will become 20 progressively or 18, but it will take a few years.
Operator: The next question comes from the line of Andre Kukhnin from UBS.
Andre Kukhnin: Could we talk about input costs, please? Could you give us some idea what you expect for raw materials and components inflation for 2024? And also for labor? And then I've got a couple of follow-ups. So please.
Benoît Coquart: So let's start with 2023. So in 2023, our purchase cost of raw mats and components was flat. So I told you that we had a pricing of 4.8%, but the cost of raw mats and components was flat. It was, as expected, slightly up in Q4. Well, as far as 2024 is concerned, from what we can see today, it could be slightly positive or slightly negative, depending on the macro. We don't expect price to go down significantly nor to go up significantly. If it -- if they -- if the price goes up significantly, it would be a good news for Legrand because it would imply a strong economic recovery, which we would benefit from on the top line. If it was to be strongly down, it wouldn't be a bad news in terms of profitability because since we'll hold the prices, it will have a good impact on margin. So we are, of course, tracking that carefully. But the impact on margin is not huge because of the counterparty we have in top line or because of our ability to hold the prices. As far as labor cost is concerned, it was up close to plus 6% in 2023 which is, we believe, a pretty good performance in this context of high inflation, still difficult to forecast for 2024 because it will somehow also depend on the economic environment and on the inflationary pressure. But if you take as an assumption between plus 4% to plus 5% i.e., coming back to the level we had 2 years back, I think it would be a reasonable assumption. But don't forget that on top of doing salary increase, we have a lot of labor productivity. So close to plus 6% in '23 and between plus 4% to plus 5% in '24.
Andre Kukhnin: Could I also just follow up on a question that Gael asked at the end about the potential need to build out wider capabilities and maybe software. What you said on datacenter is quite interesting that you say it matters there, but it doesn't matter in the rest of buildings. And I wonder if you could elaborate a bit more on why that matters in datacenters and whether other buildings will become more like that as edge devices proliferate to implement connectivity and energy management optimization and I don't know, as we'll have more office buildings with photovoltaic panels. And again, those IoT solutions. Is that where it's heading for construction from understandably very low base right now.
Benoît Coquart: Well, there's many differences between the typical building and the datacenter. I can name 2, but there are others. And otherwise, we could spend on now discussing this topic. The first difference is that you have a huge existing park of buildings, whether resi or non-resi whereas most datacenters are new or they are a couple of years old, but you don't have a lot of datacenters, which are 20, 30 years old. So when you want to do a fully automated building, it's a lot easier on a new building than an existing building. Existing building cost just too much money to do a traditional BMS system. First difference. Second difference, datacenter, it's an industrial type of environment. It's a highly designed, highly protected, highly energy efficient. So it's an industrial type of environment whereas a building well, you've been all your life into residential building, non-residential building. You have many other topics which come into play. You have comfort, you have ease of use, ability to be easily reconfigurate and so on and so forth. That's why the penetration rate of datacenter information management system is quite high, whereas penetration rate of building management system is very low and has remained very low for the past 10 years. Now interestingly, is it a problem for Legrand, the datacenter are most software intensive than building. No, it's not because we have many solutions that can be connected to a DCIM. When you want to manage your datacenter, you want to manage the assets, you want to control the heating, you want to cool the entire datacenter. You want to improve efficiency. You want to make sure that you don't have gust servers that are consuming electricity without having any computing power and so on and so forth. In order to do that, you need captures, such as, for example, power distribution units where your servers are connected and which are sending back to the DCIM system information about the heat, temperature, data consumption by server and so on and so forth. So in order to operate with a software datacenter, you need to have a lot of products which we are selling in white space. Hence, the reason why we strongly believe that our positioning on datacenter and especially on white space is very much on page with the future needs of AI compatible datacenters. AI compatible datacenters with high server density, high power consumption will be better managed -- are managed with the software. But in order to operate this software, you need to have the best way, you need to have solid cabinets. You need to have PDUs. You need to have fiber optics, connectivity and so on and so forth, which Legrand is providing.
Andre Kukhnin: That's very helpful. And you kind of preempted my second part of follow-up on the kind of AI implications from the high-performance compute switch. So maybe I'll just use that for something else and ask on the U.S. non-resi exposure, it's been going down for you for quite a while. I just wanted to check, are you seeing any signs of kind of bottoming out there from your customer activity, we obviously track the components of ABI and Deutsche Component Index...
A - Benoît Coquart: You mean the residential -- non-residential?
Andre Kukhnin: No, non-residential because it has started going down quite early, but you given that you are natural early cycle with office exposure there. I just wanted to check from your kind of channel from your salespeople, you're seeing anything that points to green shoots rather than looking at ABI and stuff like that.
Benoît Coquart: No, there’s no clear signal of yet that it is bottoming, looking indeed at ABI, at statistics on commercial construction, commercial renovation and so on. There’s no obvious signs that it’s bottoming. Now our belief is that it will, at some point, will it be H2 ‘24 or ‘25, we don’t know. It will because there are strong needs for refurbishing a number of this building, making them compatible with the commitments, 25 or 30 states took to be carbon neutral by 2050, that some of them will be converted into residential that you need to accommodate them to have a better AV system or more bandwidth. So there are structural reasons for the market to rebound. Now we don’t see any sign of that yet. Hopefully, we’ll see some in a couple of quarters.
Operator: The next question that comes from the line of Kulwinder Rajpal from AlphaValue.
Kulwinder Rajpal: So I had two questions. First one is on the faster expanding segments. Could you talk about how they developed in Q4? And then what are you expecting there in 2024? And the second one is broadly on how renovation developed for Legrand in 2023 and then what sort of growth do you see from it in 2024 and a little bit beyond that?
Benoît Coquart: I understand that your first question is about the fast expanding segments, right?
Kulwinder Rajpal: Yes.
Benoît Coquart: Okay. Well, as far as first expanding segments are concerned. So I said during the call that they grew in 2024 organically by slightly more than 10%, actually plus 11% and all 3 subsegments, if I may say, grew double digit. So both datacenters, energy efficiency-related products and connected products. So no significant difference between any of the 3 segments on fast expanding. Well, we're not giving quarterly numbers which I believe are not very relevant anyway for this kind of pivot towards faster expanding. So I cannot give you specific numbers in Q4. What we expect and what we are pushing hard for is the over performance compared to the historical numbers -- to the numbers of the historical perimeter to continue. If we look at the 2019-2023 CAGR, the group went up like-for-like 4%, of which, let's say, 1% to 2% on traditional secular products and more than 9% on fast expanding. So we are shooting to have maybe not every year, but regularly, another performance of 7, 8, 9, 10 points between the historical perimeter, what we call essential infrastructure and fast expanding. As far as second question is concerned, I understand that it is on innovation, right?
Kulwinder Rajpal: Renovation [indiscernible] market.
Benoît Coquart: Well, again, unfortunately, we don’t have a lot of visibility – the residential renovation was pretty depressed in 2023, both actually in the U.S. and in Europe. One of the reasons being that with the high inflation that people experience on food, energy and a lot of different topics. They had to do trade-off between doing some electrical work and keeping their standard of living in terms of food. So sometimes the trade-off we’re against electrical products. And actually, the sales on consumer-related channels like DIY, for example, were quite a lot under pressure in 2023. Will it change in 2024? Well, question mark, we start to see some statistics on – in the U.S., for example, implying or showing that maybe the DIY, maybe the small contractor business in residential will progressively bottom and catch up. But again, it’s still a big question mark. And it will – if it happens, it’s more geared towards the end of the year rather than the beginning of the year. This was for resi. As far as non-resi is concerned, it’s – well, it depends very much on what I’ve said about the general market. If the office market rebound in the U.S., it will be not solely new, it will likely be more on renovation. I don’t believe that there will be a lot of new office space being built in the U.S. But again, the need for energy-efficient buildings, more bandwidth and capacity – network capacity and so on and so forth, should progressively impact renovation. As far as Europe is concerned, the whole topic of greenification of buildings – you know that 80% of the buildings are not efficient energetically in Europe and we have a tough and stringent 2050 targets to be carbon neutral. So at some point, this renovation wave indeed should support and help the non-residential building. So not a clearcut answer to your question. Well, we expect to see some improvement during 2024 or back of 2025, but it’s a big question mark.
Operator: The next question comes from the line of Martin Wilkie from Citi.
Martin Wilkie: Just a question on the M&A environment. You obviously talked about continuing to expand the group through acquisitions. Obviously, some of the areas that are fastest growing, particularly around datacenters and these kind of areas, presumably, acquisitions in those areas are getting quite expensive even for some of the small bolt-ons. Can you still find the deals that make sense from a return on capital perspective? You touched earlier on potentially doing buybacks that you couldn't find M&A. So just to understand a bit more about how you're seeing the environment for acquisitions.
Benoît Coquart: I wouldn't say that acquisitions for datacenters are a lot more expensive in terms of multiples than acquisitions for traditional businesses. Because we are not acquiring start-ups that are loss-making and that are claiming they can grow 50% per year. We are buying companies with significant market shares in a given market segment like ZPE System with a market leader for consoles in the U.S., so Raritan and Server Tech, which were market leaders for PDU or Starline which was market leader for continuous powered busway. All the acquisitions were made in line with Legrand practices, i.e., to have acquisitions which are EPS neutral from year 1 of full consolidation and acquisitions, which are EVA neutral at worst, let's say, from year 5 of full consolidation. So -- and at multiples, which on average are below Legrand multiple. So there is no structural differences in terms of price between datacenter acquisitions and the other ones. And you can see that actually because consistently, for the past 5 or 6 years, we've been on average buying companies at a multiple of 2x sales, including -- and in the last 2 years, it was closer to 1.5x including many acquisitions in faster expanding segments, including datacenters, so no change in multiples. As far as the environment is concerned, well, we believe it is an environment where we can find opportunities. We have a bit less competition from private equity, still a lot of contacts going on, 350 companies in our pipeline, many dialogues, we are seen as an attractive company. We pay the fair prices. We entertain a relationship with some people for 10 or 15 years. So not all acquisitions are €100 million and €150 million in terms of sales. Some of them are small ones, if you take MSS, it's €10 million of sales. So it's quite small. But I can tell you with a pretty high level of confidence that we will do additional acquisitions in the coming quarters. Will there be in datacenter a question mark, but we'll do some other acquisitions indeed.
Operator: There are no further questions in the queue. So I will now hand the call back over to your host for some closing remarks.
Benoît Coquart: Well, thanks a lot for connecting. I know that those are very busy days for you with a lot of our peers and ourself communicating. So thanks a lot for your time. As you know, we will be roadshowing starting tomorrow morning, and we’ll be pleased to meet some of you during those roadshows or at some conferences. Thanks a lot. Should you have any more questions, by the way, do not hesitate to give a call this afternoon to Ronan and to Antoine and ourself if needed, we’ll be pleased to answer as much as we can. Thank you. .
Operator: Thank you for joining today's call. You may now disconnect your lines.
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