Legrand SA

PAR:LR

Earnings Call Analysis

Legrand Reports Resilient Margins Amid Market Slowdown, Confirms Growth Targets

In Q1 2024, Legrand's sales decreased by 3.7% due to market slowdowns, notably impacting Europe, U.S., and China. Despite this, the company maintained a solid adjusted operating margin of 20.5%. Net profit was EUR 276 million, representing 13.6% of sales, and free cash flow stood at EUR 146 million. Legrand confirmed its full-year targets, expecting low single-digit sales growth and an adjusted operating margin between 20% and 20.8%. Notable acquisitions include Enovation and Netrack, enhancing their presence in data centers and healthcare software. Legrand’s strategic investments aim to capitalize on market rebounds and drive future growth .

Introduction and Market Context

The CEO, Benoît Coquart, started the call by discussing the overall scenario. Despite a challenging building market, which constitutes 80% of their sales, Legrand managed to maintain a resilient margin. This performance was in line with the company's expectations and underscores the strength of their business model. He emphasized that the company is vigorously executing its strategic roadmap and confirmed the full-year targets. The firm will host a Capital Market Day in September 2024.

Sales Performance

Legrand's Q1 2024 sales saw a decrease of 3.7%, excluding exchange rates in Russia, with an organic decline of 5.4%. The positive impact of acquisitions contributed 1.8% to sales. The geographical breakdown revealed a 4.7% decline in Europe, 6% in North America, and 5.8% in the rest of the world. The company expects sequential improvement in like-for-like sales with Q2 performing better than Q1, and H2 better than H1 .

Financial Highlights

CFO Franck Lemery shared that the adjusted operating margin before acquisitions was a solid 20.6%, slightly dropping to 20.5% after acquisitions. Net profit stood at EUR 276 million, representing 13.6% of sales. Free cash flow was EUR 146 million, aligning with historical seasonality. The company's balance sheet showed a net debt-to-EBITDA ratio of 1.2x and a strong cash position, enabling future M&A activities .

Guidance and Strategic Moves

Legrand confirmed its guidance for low single-digit growth in sales for the full year, with an adjusted operating margin before acquisitions between 20% and 20.8% of sales. They also aim for at least 100% CSR achievement rate for the concluding year of their 2022-2024 roadmap. Newly announced acquisitions include Enovation, a Dutch market leader in healthcare software, and Netrack, an Indian data center rack specialist. These moves emphasize Legrand's focus on high-growth segments like data centers and connected solutions .

Market Outlook and Challenges

While the data center sector showed varied performance, being slightly down in the U.S. but up in Europe, Legrand remains confident in strong growth for the remainder of the year. The difficult residential market in Europe and a flat non-residential market have impacted sales. In North America, residential markets are showing signs of bottoming out. Despite these challenges, the company has a positive outlook on the building market rebounding in the near future due to its cyclical nature .

Q&A Insights

During the Q&A, it was highlighted that the company's margin, though slightly down, remains strong compared to historical averages. The margin was impacted by a 3% increase in production and SG&A expenses even as organic sales declined. The firm plans to continue investing in future growth through R&D and marketing activities. Also, they have a robust acquisition strategy, aiming for 3-4% growth in sales through acquisitions annually. The free cash flow is expected to be around 13-15% of sales for the year .

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to today's Legrand 2024 First Quarter 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.

[Benoît Coquart, executive]

Thank you very much. Good morning, everybody. Franck, Ronan Marc and myself are happy to welcome you to the Legrand '24 Q1 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 of the deck with the 3 key highlights of this press release. First, in a building market in retreats as expected, Legrand reports lower sales and good margin resilience. Those results are in line with our expectations. Second, we are actively executing our strategic road map. Third, we confirm our full year targets. As a reminder, we will host the Capital Market Day in September 2024 in London.

So moving to Pages 6 and 7, I will start with an overview of sales. In the first quarter of 2024, excluding exchange rates in Russia, our sales decreased by minus 3.7% with an organic trend of minus 5.4% and a positive scope from acquisitions of plus 1.8%. Considering that the building market, which represents 80% of our sales is experiencing as expected, the market slowdown across most geographies. This limited decline in revenue highlights the strength of our business model, the solidity of our market positions and the execution capabilities of our teams.

Regarding the 2 other elements on sales, the negative scope effect from Russia was minus 1.1% in the quarter and will be minus 0.6% on the full year 2024. The exchange rate effect was a negative minus 1% on the quarter, and based on average rates of April, it will be close to 0% for the full year.

On Page 7, you will find the key takeaways per geographies on a like-for-like basis. The quarter was overall impacted by: first, difficult building markets, as expected, including in Europe, U.S. and China; and second, by some technical shifts, including less number of days, significant basis for comparison and to a lesser extent, slight destocking. We expect the sequential improvement of the like-for-like sales evolution with Q2 being better than Q1 and H2 better than H1.

In total, the like-for-like decline in sales was minus 4.7% in Europe, minus 6% in North America and minus 5.8% in the rest of the world.

These were the comments -- the main comments I wanted to make on sales. I will now hand over to Franck for more color on our financial performance.

[Franck Lemery, executive]

Thank you, Benoit, 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 20.6%. This level of profitability of the group once again demonstrates Legrand's ability to protect its margin in the context of declining sales, thanks to its impact pricing power and solid cost control. The impact of acquisition was of minus 0.1 points, meaning that the Q1 2024 adjusted operating margin all-in stood at 20.5%.

Going now to Page 9 and 10. First, the net profit stood at EUR 266 million (sic) [ EUR 276 million ], representing 13.6% of our sales. And second, the free cash flow came to EUR 146 million at 7.2% of sales for the quarter, it's in line with group's historical seasonality.

On Page 11, 2 figures to illustrate the robustness of our balance sheet, we have a net debt-to-EBITDA ratio of 1.2x at the end of the quarter and a high cash position. Our cash generation and our balance sheet are clear enablers of the M&A development that Benoit will comment to.

This concludes the key financial topics I wanted to share with you this morning. I'm now handing over back to Benoît.

[Benoît Coquart, executive]

Thank you, Franck. We can now move to Page 13. We confirm the full year targets announced in February with low single-digit growth for sales, meaning organically into acquisitions, an adjusted operating margin before acquisitions of between 20% and 20.8% of sales, at least 100% CSR achievement rate for the third and last year of our 2022, 2024 road map.

Let me now move to Pages 15 and 16 detailing our ongoing acquisition strategy. We just announced 2 acquisitions and 1 minority stake. This means EUR 80 million acquired sales already announced in 2024 with MSS, Enovation and Netrack deals. First, the acquisition of Enovation, the Dutch leader in health care software in the market for connected health and assisted living with annual sales of more than EUR 60 million. Second, Netrack, an Indian specialist in racks, notably for data centers, with around EUR 10 million of annual sales. Last, we took a minority stake in UIOT, 1 of the Chinese leading players in wireless IoT smart home solutions. These acquisitions in the promising areas of data centers, assisted living and connected solutions, further strengthen Legrand group's leadership in its faster expanding segments and we will keep up the strong pace of external growth in coming quarters.

On Page 18, a quick CSR update. We have reached an important milestone this year in our decarbonation strategy with the SBTi validating Legrand 2050 Net Zero commitment that is more ambitious than our previous 1.5-degree trajectory validated in 2021. This new commitment involved reducing the group's GSG emissions by minus 90% across our entire value chain by 2050 with more demanding 2030 intermediary targets.

Now a few words on the key agenda topics of our incoming General Meeting of shareholders, which will take place on May 29. On Page 20, with the proposed nomination of Mrs. Menon as Independent Director. Her vast experience, including Accenture in India will bring a key expertise to the Board in digital, corporate strategy and CSR. Together with the proposed renewal of Jean-Marc Chéry, the CEO of STMicroelectronics. The Board composition will continue to be among the industry's best practices with 75% of independent members, 42% of women and 7 nationalities represented.

Now on Page 21, as announced previously, the proposed dividend for 2023 is of EUR 2.09 per share, up plus 10% versus last year.

To conclude on Page 23, we are very happy to share the success of our first international employee purchase plan proposed to more than 63% of employees, which testifies to the full confidence of Legrand teams in the group development model.

Before we move to questions, I would like to remind you of our Capital Market Day scheduled on September 2024 in London, the [indiscernible] date and registration link will be available on our website today.

Those were the key topics of this release. I suggest we now move to Q&A. Thank you.

[Operator]

[Operator Instructions] We will now take the first question coming from the line of Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

I have 2 questions. The first one I wanted to ask is related to the free cash flow into the working capital buildup on the free cash flow. If you could give us further details on what drove that? And how do you expect that to recover or not recover throughout the year? And then I'll ask my second question after this to make it easier.

[Benoît Coquart, executive]

Okay. Daniela, I will let Franck answer the question. Go ahead, Franck.

[Franck Lemery, executive]

Thank you, Benoît. Well, as I said in my previous comments, the cash flow is very usual for Q1 for Legrand. If you take, let's say, for example, the last 8 years average, it's 7.4%. The last 2 years average, it's 8.9%. So we are totally aligned with a typical quarter. So on you're working -- on the question on your working capital requirement. Once again, it's very close to last year number, it's actually slightly below the last year numbers, 1.7%. It was almost 12% last year. And last year, you remember that we recorded very high free cash flow. So no concern about the Q1 gate. There has been some inventory buildup is right during Q1, but it is typical to keep up on the seasonality. So in a nutshell, we are pretty confident to deliver usual a nice free cash flow of Legrand, let's say, between 13%, 14%, 15% of sales. No doubt about that. It's the Q1 seasonality.

[Daniela Costa, analyst]

Okay. And my second question is just more regarding the organic trends. And if you could -- I don't know if I missed it in your speech, but if you could maybe disaggregate pricing and volume and then within the volume environment, help us with the big things like how much is growing the -- how much is data center growing? How much is office is declining sort of like what is the makeup?

[Benoît Coquart, executive]

Sure. Okay. So first, we had a pricing in Q1 of plus 0.5%, which is, of course, in line with our plan and actually in line with what we told you 3 months back because we told you that given the environment of the raw mats and components, we expect it to do a plus 1% maximum. So we are at plus 0.5%. And to give you some context, our purchase price are slightly down. So the purchase price of raw mats and components is down minus 1.3%. When it comes to the market, so first comment, as I said during my speech, we have some technical shifts impacting Q1. I'm not commenting again, but I can, if you want, when it comes to the end markets themselves. We haven't seen any big shift versus H2 2023. Starting with Europe, we still face a difficult residential market in Europe, which is not a surprise, given the fact that the bad statistics of 2023 are hitting us now. If you look, for example, at the residential permits, which were down 20% last year, it started to impact our top line in H2 and still impacting our top line in Q1. So still difficult residential market and quite a flattish nonresidential market in Europe, and data centers are doing very well. As far as North America is concerned, as expected, residential is bottoming out. Unfortunately, it's only 20% of the sale, if I may say, but this is clearly demonstrated in the statistics where the provision organization is expecting some rebound in '24 in housing starts, in investments, in new single family, in residential improvements and so on and so forth. So residential bottoming out and progressively hitting our P&L. No improvement on nonresidential, so far, especially on the office market. As far as data center is concerned, the white space has been for a couple of months, a bit soft because a number of major guys have been redesigning their data centers to accommodate AI, have started to order quite a lot in the gray space and are starting now actually to order for the white space. So a bit soft for Q1 in the U.S., other wide space, but we expect now a very strong growth in the coming quarters. That's what we can say. So overall, let's say, a building market, which remains a bit difficult, especially in residential and the office market in the U.S. Data centers that should grow very significantly in the quarters to come.

The last word maybe in the rest of the world. China is clearly down. But again, when you look at the residential statistics in China, especially residential new, the market is down, let's say, between 20% and 30%. There is a pause in Africa, but which is not a concern, and it's a temporary pause and business will come again to growth in the coming quarters. And the rest of the world is okay, including India.

I don't know if it answers your question, Daniela?

[Daniela Costa, analyst]

It does.

[Benoît Coquart, executive]

Thank you.

[Operator]

We will now take the next question from the line of Gael de-Bray from Deutsche Bank.

[Gael de-Bray, analyst]

I have 2 questions, please. So maybe 1 at a time. So firstly, on the margin side. I mean, 10 years ago, so Legrand probably had one of the highest margins in the industry, if not the highest. And now some of your peers, including ABB Electrification, Eaton and a few others have caught up and they're reporting between 20% and 25%. And we've seen improvements of up to 700 bps for them over a few years. So is the different margin pattern versus your peers, purely a equation of mix, you think? Or is there anything else? And can you perhaps come back on the reasons why you can see a 20% margin objective and no more is appropriate for the group?

[Benoît Coquart, executive]

Well, Thanks, Gael. I'm a bit uncomfortable complementing the other margin, especially if you take some [indiscernible] margins, of course, it's already difficult to compare. Well, since you are pointing the margin on ABB, of course, there is a 7-point improvement, but the starting base was 8%, right? If I remember properly. So moving from 8% to 15%, and we are at more than 20%. So I can hardly comment on my competitor's margin. I can comment on my own margin, telling you that a 20% EBIT margin, which is what we've been able to deliver for -- consistently for quite some time, incorporating each year, 20, 30, 40, 50 bps dilution coming from acquisition, implies if we had stopped acquisitions, 22% or 23% EBIT margin, not a 20% EBIT margin. So the reason why Legrand is at 20 plus and not moving to 22%, it's because to the contrary of many of the listed peers which you have in your database and which are selling assets, we are buying assets. Every year, we intend to deliver 3% to 4% or more if we can permit impact, acquiring companies that do have a margin level which is most of the time below group's average. And as a result, we dilute our margin. Yes. So it has been the story of Legrand. Organically, if I may say, we have a margin which is improving 30, 40, 50, 60 bps per year. And this improvement is consumed, if I may say, to finance the dilution coming from acquisitions.

Last comment, which I would like to make, maybe to come back to the quarter comment, delivering 20.5% EBIT margin, as you know, is all in, including additional restructuring expenses, including many things. In a quarter where our top line is going down organically by more than minus 5%. I think it's quite an achievement and tends to be higher than what we were able to deliver a couple of years back. A couple of years back, with this level of evolution, we would have had the 19% EBIT margin. Now we have a 20.5% EBIT margin. So in the net share, I will not comment the margin of my competitor. Without acquisition or organic, let's say, gross in margin is 30, 40, 50 bps a year, which I believe is substantial. And last, we have a pretty healthy, I think level of margin in Q1, given the bookings that we have.

[Gael de-Bray, analyst]

Okay. And maybe the second question on your M&A strategy. I think that with innovation, you -- I mean, that's probably the first time ever you make a software transaction, and I was curious to perhaps understand the sort of multiple that's already to pay now on these sort of companies.

[Benoît Coquart, executive]

Yes. So actually, it's not the first time we do. But the first one was too small to be on your radar screen. So let me -- maybe tell you the story. So we have a business which we call Legrand Care, which is a bit too small for you to consider. It was last year, EUR 100 million of sales, and it is made of products that help old and disabled people to stay safety at home instead of going to a care place. So typically, for example, personal alarm system, so that if a person falls, it sends a signal to a monitoring center that send somebody to take care of the person. So EUR 100 million, and this business was built more than 10 years back by a series of 4 small acquisitions, 2 in the U.K., 1 in Spain, 1 in France. And it has been growing very nicely. As part of this EUR 100 million, we already have 30% of our sales made with software with annual recurring revenue. And this 30% is actually coming mainly from a small acquisition, Genentech we did in the U.K. than 15 years back. And the software, which we sell is the software used by the monitoring center, to match the park of connected devices as well as the cost -- incoming costs from the person and so on and so forth. Enovation is doing exactly that on other geographies. This business for Legrand, the software piece was concentrated in the U.K. Enovation is doing that in a number of geographies in Europe, the Netherlands, Belgium and a few others. And on top of that, has developed a catalog of additional complementary software to manage the connection between the patient and the care system as well as a portal to manage the patient engagement, if I may say. So it's very complementary to what we are doing with Legrand Care. It's not something new in terms of -- it's an adjacent fee, but it's not a diversification, of course. Legrand Care, once Enovation will have been docked will be EUR 160 million business. We intend to make it a EUR 200 million, EUR 250 million, EUR 300 million business. We don't think, given the size of the market, which remains small, that it will ever be EUR 1 billion or EUR 2 billion market. But it's a nice piece of our market, which is experiencing nice growth. As far as the price is concerned, well as a multiple of sales, it tends to be higher than the usual 2x sale that we're in, because the profitability of this company is substantially higher than gross profitability. It's a software type of profitability. Now when it comes to the price, we are taking to our usual rule, i.e., this deal as the other ones is EVA accretive within 5 years of full consolidation, i.e., within a 5-year of full consolidation, we have a return on capital employed, which is higher than the WACC. So nothing specific, if I may say, we want this deal to be value accretive as for the other transactions. Now as a matter of fact, given its level of profitability, indeed, as a multiple have said, it's higher than the usual 2 times.

[Gael de-Bray, analyst]

So I mean, in terms of the total amount you might have paid on this deal specifically. I mean, is it more than EUR 300 million, something like this?

[Benoît Coquart, executive]

We are not communicating on individual pricing nor are we commenting on what is coming out in the press. So no comment on the price. You will have anyway accumulated price pace for Q2 acquisitions in the financial statement, we will release end of July. But as you know, we are never commenting individual price of transactions.

[Operator]

We will now take the next question from the line of Max Yates from Morgan Stanley.

[Max Yates, analyst]

I just wanted to ask on your comments on inventory destocking. Could you just elaborate a little bit whether you were seeing that in any particular region? Is that a kind of new trend? Has it accelerated? And just in terms of giving us a feel of kind of where you think inventory levels are across your distributors and whether we should anticipate that continuing sort of into the second and third quarters?

[Benoît Coquart, executive]

Max. Well, we mentioned it because it is part of those technical factors impacting a bit Q1, but frankly speaking, it's not a big impact. It is limited to a few geographies, a bit in France and a bit elsewhere. But it's not a major trend. We're not seeing that across the board, and we don't believe that it is a start of a trend. Based on my discussions with distributors, even though I haven't met the thousands of distributors we have. I don't feel that they have entered into a systematic destocking approach. Although more as -- some of them start to believe that the market will, at some point, a rebound and then better prepare for that. So one-off, very small impact, not the beginning of a trend. And I don't have the feeling that our inventory is high at our distributors level. I have the feeling that it's a pretty standard inventory. Now of course, their inventory strategy in the quarters to come will depend on their expectations as far as the building market is concerned. But it's not a big concern for us. And of course, we don't believe that it should have a strong negative impact on our top line for the full year.

[Max Yates, analyst]

Okay. And just maybe a quick sort of follow-up. And I guess thinking more sort of strategically about your data center business, my kind of interpretation of it is you've been a bit more targeted in the kind of products and areas that you want to focus on, sort of some of the areas like bus ways. Could you just talk about kind of whether in terms of your data center portfolio, do you see any kind of major white spots or any kind of areas where you think you could sort of build up the business? Or are you kind of fundamentally happy, kind of focusing on the kind of 2 or 3 areas where you really have strong positions?

[Benoît Coquart, executive]

For the data center, you mean?

[Max Yates, analyst]

Yes, exactly. Yes.

[Benoît Coquart, executive]

No, clearly, the acquisition we have made, PDUs, busways, racks are just the start of the story. Every, let's say, 2 or 3 years, we are adding some capabilities in data center. The last one being ZPE that we acquired in Jan in the U.S. and we don't intend right -- before that, 1.5 years ago, we acquired a very small -- a very nice company in rear door cooling, liquid cooling called, USystems. So we have a lot of ambitions to add additional capabilities, additional products to our portfolio, either white space or gray space. So I can confirm that we have a number of discussions going on. And I hope that some of the discussions will come to a positive conclusion in the quarters to come. So the 15% of sales in data center we did last year should continue to grow. We will add new product categories complementary to those we have. We will target both white space and gray space. And last even though Q1 has been a bit soft in the U.S. once again because investments started with the gray space, I confirm that we are getting a very high number, of course, a very high number of orders for the white space. And we expect a very nice growth starting in April in this business.

[Max Yates, analyst]

I mean, just -- sorry, just to push on, I mean, would you think about expanding into liquid cooling? Or would you -- is that more kind of UPSs you're looking at? Just any color would be helpful.

[Benoît Coquart, executive]

Well, we are already in liquid cooling because liquid cooling includes a number of different technologies. The rear door cooling, I was mentioning, is a type of liquid cooling because it's channeling cool liquid in the door of the rack to cool.

[Max Yates, analyst]

I was thinking more -- direct to chip...

[Benoît Coquart, executive]

Yes, we are not in the immersion cooling or direct to chip cooling. If there is an opportunity, why not, we'll see. But we don't believe it is a must to be in direct to chip or immersion cooling because it will remain within a few years still a niche market for many reasons, I would be happy to elaborate. And we believe that still 90% of the market will be made of other type of cooling such as rear door cooling. And actually, USystems has been experiencing very nice growth. But again, we are looking at many interesting opportunities. And if we believe there is a technology or market segment, which is set to grow within data center space, we will clearly invest in it.

[Operator]

We will now take the next question from the line of Phil Buller from Berenberg.

[Philip Buller, analyst]

I've got a couple of questions, please. Just firstly, on the I guess the tone of messaging sounds quite upbeat and positive. I understand it was in line with your expectations in terms of the Q1 results. But I think it was a little bit light versus market expectations. So I understand the mechanical factors and the tough comps, but can you talk about what you've seen specifically in the quarter, perhaps you can talk about March versus February or April versus March, as I understand, there's lots of mechanical factors, but what have you actually seen on the ground in terms of green shoots [indiscernible] coming couple of quarters, please? That's question one.

[Benoît Coquart, executive]

Yes, Phil. Well, I'll not comment March against Feb or Feb against Jan because it doesn't say anything about the trend. This being said, 2 comments: as far as the technical factors are concerned, well, I can give you a bit more granularity. We have approximately 1 day less in the quarter, which is not a lot, but of course, which is playing. And number two, as far as -- number two is a slight destocking. And number three, basis for comparison, I remind you that Q1 2023 was up 7.4% for a full year, which was up only plus 2.7%. So if you put the 3 factors together, clearly, it is hitting and impacting Q1. As far as the remaining 9 months are concerned, the number of days won't play anymore actually -- should play the other way. The basis for comparison will become easier than it was in Q1. And as far as destocking is concerned, as I said, we don't expect what happened in Q1 to be the start of the trend. So the technical factors should either be neutral or play the other way for the remaining 9 months.

Second comment, which I can make is that, as I said during my introductory speech, we are expecting a sequential improvement, Q2 being better than Q1 and H2 being better than H1. And the month of April is clearly -- it is exact the trend. You're getting [indiscernible] month.

[Philip Buller, analyst]

I understand. Just 1 point of clarification as well. You mentioned white space being a bit soft. Can you just help frame what that looks like? Is it flat? Is it down? Is it up mid-teens?

[Benoît Coquart, executive]

Yes, sure. Well, it's -- yes, it's a bit soft. But again, it's not a surprise because when you build -- or when you refurbish a data center, you start with the gray space, you start with power input, if I may say, switch gear, transformer, UPS, power busbar. And then once it is done, of course, you are sketching your white space. So data center, it's up in Europe, but it's a small number. And in Europe, it's strongly up in gray space, down in white space. And in the U.S., it's slightly down, but with very fast and strong order buildup, which again gives us a lot of comfort. And you know that at Legrand, we are always very cautious when forecasting. But I can tell you that in that data center it gives you a lot of comfort on the growth we experienced in the months to come.

[Philip Buller, analyst]

And just finally, the comment about your -- I guess, not wanting to comment on the competitors. I totally understand that. Some of your competition have evolved their businesses beyond recognition. ABB actually did a 22% margin in Q1 that grew 6% organically. So I understand that there are different strategies and approaches to M&A and divestitures or whatever. But how are you thinking about benchmarking yourselves versus the competition, which has evolved? And are you focusing on your portfolio in any way with a view to divest assets? I know you acquired assets attractive multiples are making better. But is there anything in your portfolio that you're actually mind to review because of lower margin or lower growth profile?

Well, again, that's a difficult question to compare our performance with the competitor. Also -- you're comparing again with ABB. ABB is -- as far as I know, 20% of their business is in the building industry, 80% of our business is the building industry. So you are comparing apple to banana. We -- I prefer to focus on Legrand. As far as Legrand is concerned, you have the main elements of our strategy. We intend to keep growing even though Q1 is a bit soft. We've been -- we have -- we've never been a conglomerate. We are a pure play, super focused. So there's no significant assets, which would be so underperforming either in top line or in bottom line that it would be a good idea to sell. We have, of course, traditional businesses, which are going down more than others, but which are part of the portfolio and not easy to today's invest. But again, we are operating on a market and 80% of our sales are on the market, which for a couple of quarters, have been a bit depressed. Is it a concern to Legrand? No, it's not. Do we believe that some of those markets are bottoming out? Yes. Do we think that in the quarters to come, we should have a pretty good news and good statistics coming from the building industry that will help? Yes. And is our ambition to go back to growth organically? The answer is yes. This being said, indeed, Q1 is a bit weak as expected, again, because the market is not very positive. As far as the margin comparison with the peers, I already answered this question. Don't ask me to improve the margin by 7 points, starting with the 21% EBIT margin. The improvement of one of my peers margin came from the fact that they started from a low base and of course, the management should be applauded for that. But don't compare an 8% EBIT company with a 21% EBIT company. It's not exactly the same strategy that you have to follow.

[Operator]

We will now take the next question from the line of Delphine Brault from ODDO BHF.

[Delphine Brault, analyst]

So I have 2 questions. I will ask them one at a time. Coming back on the pricing of 0.5%, how much is coming from price increase down in 2023? So how much of carryover you have in Q1? Because -- well, I'm a little bit surprised by this 0.5%. So did you agree on price decrease in some segments in Q1?

[Benoît Coquart, executive]

Well, Delphine, well, I'm a bit surprised that you are surprised, if I may say, for 2 reasons because, number one, it's exactly in line with what we said in Feb, max 1%. And number two, because this is very typical of Legrand in a context where the price of raw mats and components are going down. If you look at the past couple of years, when the price of raw mats and components is going down, we are able to do 0.5%, 1%, 1.5% price increase, not 3 or 4. And it is actually a deliberate strategy from Legrand in a context where the price of raw mats and component is going down. We are very careful in keeping our competitivity. And as a result, we don't want to do too much price increase. Now are there targeted price increase here and there, as usual, not more than usual. When we have our price going up 0.5%, 1.5%, 2%, it is usually made of an average price increase on 80% ourselves, which is slightly higher and then targeted price decrease when you have some metal price going down 20% on the product, which has a high content in metal, for example, there's no reason that you don't give that part of that to the market. But again, the total of all that is that our price is up 0.5%, which is completely in line both with our past practices and with our guidance. Now when it comes to the remaining 9 months, of course, we will continue to monitor very closely the price of raw mats and component if the price remains negative, there's no reason why we should do more pricing, and we'll stick to the 0.5% or 1% maximum, let's say. If for whatever reason, the price of raw mats and components was to go up again, which, by the way, wouldn't be a bad news for the state of the underlying economy, then we would keep our ability to do more pricing, and we could very much end up with a higher price effect than plus 1. So again, as you know, it is something which we carefully monitor and which we adjust on a quarter-by-quarter, if not on a month-by-month basis, taking into account the price of for mat and component, the price of other inputs like wages and so on as well as our competitive position. It's a KPI which is carefully monitored, which is still -- it is not the result of any pressure on price. We're not seeing any specific pressure on price. But we have decided to be very, very careful in doing price increase, executing price increase, again, because we are in a context where the price of raw mats and component are going down.

[Delphine Brault, analyst]

Okay. That's very clear. Can you -- a second question is, can you help us with your full year guidance and provide a bit more color on the assumptions behind the top line guidance? What are your assumptions on the market trends in Europe and in the U.S.? Do you rely on any recovery in specific regions? Or is it purely basis of comparison that will ease going forward?

[Benoît Coquart, executive]

Well, our guidance, which is -- you have in top line, so you have to split between organic and inorganic. As far as organic is concerned, as you know, we are shooting for something between slightly down to slightly up. And when we design these guidance, we knew that Q1 would be of course, quite soft. As far as assumptions are concerned, number one, we won't have any more most of those technical factors negatively impacting Q1, as I said, with a number of days reversing and with the basis for comparison helping us. Number two, we expect strong growth in data center which, as a reminder, was last year, 15% of our sales. So it's something which is somehow substantial. Number three, we don't expect a very significant recovery on our building market. Again, some of those segments should improve. Take, for example, the residential in the U.S., but it's only 20% of our U.S. sales, i.e., 8% of our group sales. But we don't expect a major rebound in the market. We expect some statistics to improve along in 2024, some of those good news punctually hitting our P&L end of the year, some other in '25, but not a major rebound. This is for the, let's say, the underlying market. As far as pricing is concerned, I have already confirmed, maximum 5% in the context where raw mats and components are helping us, but a 1% and -- but potentially more if we need it to. This is for organic growth. As far as inorganic growth is concerned, as you know, we have a carryover impact of 1.5% coming from the acquisitions made last year and we have, as a clear target to acquire, not to consolidate, but to acquire companies representing 3% to 4% of our sales. i.e., you can make the math yourself, EUR 250 million or EUR 300 million or EUR 350 million. let's say, that we would then consolidate depending on the debt we buy them. We have already acquired close to 2% of our sales. ZPE, MSS, Netrack and Enovation. And we have a lot of discussions with on, including some of them quite advanced discussion. So I can clearly confirm that more acquisitions will be announced in the quarters to come. This is for the full year. And last element, the FX as written in the press release, based on the appreciation rate, it should be low. But again, it could be more, it could be less depending on how FX will evolve in the months to come.

[Operator]

We will now take the next question from the line of Alasdair Leslie from Bernstein.

[Alasdair Leslie, analyst]

So yes, just firstly, on data centers. We're getting quite a lot of questions on capacity additions and ability for suppliers to meet demand. I was just wondering whether you saw any constraints at all on your side, whether you've got a lot of headroom in case kind of demand significantly upside surprises you're obviously pointing to strengthening demand in the next couple of quarters? And maybe just remind us of any investments you're making or might need to make to kind of support growth? And then I've got a follow-up question.

[Benoît Coquart, executive]

Yes, of course, we are doing -- we expect to see some bottleneck or some constraints or challenges as far as supply chain is concerned, because some of those -- on some of those products, the demand can be -- and the orders we are getting and of course we are making can be very significant. Some of the bottleneck may not depend on us, but for example, when you are supplying the busbar system with the type of box, within the type of box, you may have some electrical components coming from a third party, not from Legrand. And sometimes the bottleneck is coming from the availability of some of those complaints. Now this being said, we believe it is manageable. We have a plan for this surge in demand for quite some time. So we have added the capacity whenever needed. And we believe that it won't be a significant issue. Worth mentioning, these additional capacity won't change the group metrics. So we still expect to have a level of CapEx to sales, let's say, between 3% to 3.5% of sales. It will not move up to 4% or 4.5% because we would need additional capacity. Capacity build up has always been part of our plan along with additional CapEx coming from new products, CapEx for productivity, CapEx [indiscernible] and so on. So yes, some challenge in the supply chain, which -- number two, which we believe are manageable, and the plans are drafting for that; and number three, no changes in the group's key KPIs.

[Alasdair Leslie, analyst]

Great. And maybe just a follow-up there. One of your U.S. peers, and I think this is sort of commented on by few others as well -- something high density AI workloads would be deployed in data centers first in North America than the kind of the rest of the world will follow with maybe a 9-month lag. I was just wondering whether you agree with that sort of timing? Is that what you're seeing in your own businesses, obviously, in Europe or perhaps is are you kind of sort of seeing a stronger pickup in Europe already?

[Benoît Coquart, executive]

Well, we are much bigger in the U.S. than in Europe and the rest of the world in data center. So I can comment very much on the trends in the U.S. I'm not sure that the evolution of our sales in the rest of the world. In Europe is typical of a trend. Now it would make sense that it happens this way. There are 2 trends that are back in. As I already said, number one, gray space before white space. But again, it's common sense to say that when you're building a data center, we first -- you first start with powering it before starting to manage the server. And number two, it wouldn't be completely a surprise if indeed, the rest of the world was following because a lot of those investments are coming from the big guys, the Amazon Web Services, Microsoft, the Google, the Oracle and so on and so forth. And of course, those are American companies, and it would make a lot of sense for them to start working on the next gen of data centers, first in U.S. and elsewhere. But to tell you what we are seeing at Legrand, we have, as I said, a very high level of orders, but not only in the U.S. We also have a lot of demand coming from Europe, coming from Asia. It's not limited to the U.S. But again, we are much bigger in the U.S. than elsewhere. So I'm not sure that the orders we are getting in Europe or in Asia, for example, are indicative of any trend.

[Operator]

We will now take the next question from the line of Andre Kukhnin from UBS.

[Andre Kukhnin, analyst]

Apologies. I had a technical difficulty. So I just wanted to follow up on data centers invariably. Was your business up, down or flat in Q1 in data centers globally?

[Benoît Coquart, executive]

Well, it was up in Europe, slightly down in the U.S. So globally, slightly down because you know that we are more exposed to the U.S. than elsewhere. But again, absolutely not a concern and very strong confidence -- and you know how strong those words are coming from Legrand, very strong confidence on the growth we will experience, starting in April and in the months to come.

[Andre Kukhnin, analyst]

Great. And you said strong growth for the full year, which I guess strong is above 10% and probably more like in 15%, right, what we're seeing from the...

[Benoît Coquart, executive]

Don't ask me that, please. I would love to be. That's precise, strong means strong. And yes, again, the next 9 months should be somewhat, but again, I cannot be more specific on that.

[Andre Kukhnin, analyst]

I appreciate that. I just wanted also to dig into the profit bridge a little bit. We kind of see, I think, over 50% drop through there from organic growth to EBIT, and you said that net prices are positive with a positive growth price and the raw material is actually down. So I just wanted to understand what else is in the bridge there that drove this maybe a little bit higher than I would have expected to drop through or certainly drop through implied on volumes?

[Benoît Coquart, executive]

Yes, okay. I'll make a broad comment and then Franck could comment in more detail. So indeed, our EBIT margin at 20.5% is down 170 bps compared to last year. i.e., 160 bps, excluding acquisitions. But it's down compared to last year, which was a superb quarter, but it's a very good quarter above what we -- most of what we've been able to deliver over the past couple of years. It's a very good quarter. If you take, for example, the average of 2019 -- 2015, 2019 margin, it was 19.5%. So it's a very good level of margin. Basically, you have gross margin, which indeed is supported by favorable inflation balance between the selling price and cost of raw mats and components. And at the same time, you have a plus 3% like-for-like growth in expenses, production and SG&A. So this is -- it explains most of the reason, most of the impact or most of the decrease in the margin. We have organic sales, which are down 5.4% and production and SG&A expenses, which are up 3%. It's coming mainly from the fact that on a given quarter, you cannot adjust your expense as much as the drop in sales. And number two, we have also kept increasing a number of discretionary expenses and some of those discretionary expenses are growing high single digit. So gross -- sort of a positive coming from the difference between selling price and price of raw mats and components, which is more than compensated by the fact that production and SG&A expenses increasing 2% where sales are down. Last topic, we have restructuring expenses, which amounted to EUR 11 million in Q1. And as you know, at Legrand, restructuring expenses are part of the operating margin, not below. It is to be compared to a typical year for Legrand, restructuring expenses are at about EUR 25 million to EUR 30 million. So with EUR 11 million, it's quite healthy, if I may say, Q1 as far as restructuring is concerned. And again, it's weighting on our margin. But what I would like you to understand is, again, 20.5% margin while your sales are going down by almost 6% in volume is quite of an achievement.

[Andre Kukhnin, analyst]

Yes, I completely agree. I just wanted to get exactly that color on what's inside there. And if I just may, on the discretionary expenses increase, is this aligned with what you talked about before in terms of investing in feet on the street and marketing activities to stimulate growth?

[Benoît Coquart, executive]

Well, yes, we keep looking at interesting opportunities, investing into growth whenever we can. But as I said several times, you can do whatever you want in a context where the building markets are difficult. We don't expect that to leap from minus 5 to plus 2, this are the number of targeted expenses, both in R&D, in advertising in order to feel our growth. It is more a thing that we are expensing to make the most of the market when they will rebound. You don't manage a quarter solely to improve the KPIs of the given quarter, but we are confident in the fact that there will be some rebound in the building market because by a sense, the building markets are cyclical. So the residential market will rebound -- the nonresidential market will rebound. The data center market should continue to grow fast. And to make the most of this recovery, we keep investing in expenses for future growth. So again, opening of rep offices, launch of new products. For example, we are just launching today -- I mean, not today, but these months, our most iconic brand in France called Celiane. We are launching the next generation of Celiane, very good news for the French installers. And we have a series of launches that will come -- in the months to come. We have a level of R&D to sales, which is again close to 5%. So we are not cutting our R&D expenses, and so on and so forth. So we are doing a number of growth of expenses and investment to fuel growth, but it's more to make the most of the market rebound and really to boost quarter sales.

[Operator]

We will now take the next question from the line of Eric Lemarie from CIC Market Solutions.

[Eric Lemarié, analyst]

I got 2 questions, actually. The first one, you mentioned data centers, but apart from data centers, what's the performance of the other faster expanding segments in Q1 in Europe and North America, connected products and group product? And the second question on software. So you mentioned this acquisition, Enovation in the software business. Would you be ready to acquire software in other segments?

[Benoît Coquart, executive]

So Eric, as far as fast expanding are concerned, it's down more or less as the rest of the group. But again, data center is almost half of that. And so it's not accretive to growth, which shouldn't last. And again, based on the scenarios we have and the plans we have, we expect the fast expanding segment to be accretive the top line evolution in 2024 as it has been for the past couple of years. So it's, let's say, a weak quarter, but it's not real event of any trend, and it should improve. As far as software is concerned, we are not in a business which is software intensive. It's not like in automation or stuff like that or planning or if you look at Legrand end market, it is not software intensive. You have -- we have niches where software matter and connected care is one of those niches. You could say that BMS, whatever the name you put on it, it is firmware intensive. But otherwise, it's not a business, which is software intensive. So we are not ruling out anything. Now you are a lot more likely to see in the coming quarters, acquisitions of market share or technology and product position in the areas which are field of interest to Legrand, either fast expanding our transient products in order to saturate our channel, then to see some additional software acquisitions. Some may come but again, since we are not in a business which is software intensive, we are not likely to see product type of acquisitions.

Now let me do a bit of advertising for the next CMD. All those questions will be better discussed and we'll have more time to enter into the details at end of September. So I hope you and your colleagues will have the opportunity to join at our CMD in London.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.

[Benoît Coquart, executive]

Thank you very much, everybody. Have a good day. Bye.