Legrand SA

PAR:LR

Earnings Call Analysis

Legrand H1 2023 Results: Raised Targets, Solid Growth

Legrand closed the first half of 2023 with strong performance in a challenging building market, boasting an organic sales increase of 4.6% and total growth of 4.9%. The company's strategic pursuits paid off, especially in fast-growing segments like energy efficiency and connected products. Despite a minor overall decline in the U.S., Europe and other regions saw significant jumps, such as Europe's 6.8% growth. Financially, Legrand's adjusted operating margin impressively rose by 2.2 percentage points to 22.2% and net income hit €651 million, representing 15.2% of sales with a remarkable free cash flow margin of 18.9%. Their balance sheet remains robust, underscored by €2.9 billion in available cash. In line with this momentum, full year targets have been raised with expected sales growth between 5% and 8% and an adjusted operating margin around 20.5%.

Reinvestment Strategy Amidst Marginal Adjustments

Looking closely at the company's strategy, as profitability improves, there is an intentional shift to reinvest in growth initiatives. Increased spending is anticipated in sales, customer support, and communications to stimulate sales in the second half of the year (H2). Despite this, the company forecasts organic growth to range from a slight reduction to a mid-single-digit rise. In terms of earnings before interest and taxes (EBIT) margin, the company projects a softer H2, around 18%, compared to historical margins of 19% to 19.5%. This adjustment accounts for anticipated lower pricing and stable to slightly increased components costs, implying less benefit from the selling-prices-to-purchase-prices gap.

Resilient Supply Chain Expectations

The company doesn't foresee further distributor destocking following the recent quarter, considering distributor stock levels to be low across various geographies. Provided there are no significant changes in these levels, destocking is not factored into H2 scenarios. Nonetheless, market conditions and sales prices of raw materials and components continue to be pivotal factors, with previous pricing advantages likely softened in upcoming quarters.

Residential and Data Center Market Dynamics

Focusing on market verticals, residential markets show signs of recovery that might be more relevant for 2024, while non-residential markets are poised for a gradual rebound in the medium term, supported by trends like energy savings and remote work flexibility. Notably robust is the data center segment, where growth is fueled by artificial intelligence (AI) and is expected to continue its strong trajectory. In North America, the residential business faces double-digit declines, office markets and some verticals within the non-residential sector are down, but the company is performing relatively well in data centers.

Wage Inflation and Operational Efficiency

Wage inflation exceeds 5%, marking an increase from the previous year's 4-5%. Different geographies present varying degrees of wage pressures, but overall, the company has implemented measures to manage these costs effectively. Operational efficiency initiatives, such as reduced headcounts alongside stable volume output, have helped to mitigate the impact of this inflation.

International Performance and Market Exposure

The company’s exposure differs significantly between the US and Europe, leading to varying performance trends. In Europe, where residential markets represent a larger portion of sales than in the US, there's been a substantial negative impact, with mid-single-digit decrease in value for the market. Non-residential markets are relatively stable, and data centers are thriving but contribute less to total sales compared to the US. The company is outperforming notably in energy efficiency products and is poised for growth in markets like India, where it is gaining market share.

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to today's Legrand 2023 First Semester Results Conference Call. Later, there will be a question-and-answer session. And for your information, this conference is being recorded.

At this time, I would like to hand the call over to CEO, Mr. Benoît Coquart; and the CFO, Mr. Franck Lemery. Please go ahead, sir.

[Benoît Coquart, CEO and Director]

Thank you. Good morning, everybody. Thank you for connecting to this webcast. So Franck, Ronan and myself are happy to welcome you to the Legrand 2023 first half results conference call and webcast. Please note, as usual, that this call is recorded. 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 2 key takeaways of this release. First, Legrand recorded very solid results in the contracting building market, and we continue to deploy our strategic road map through a range of growth and development initiatives.

Second, we have revised our full year target upward. So moving to Page 6 to 7. I will start with an overview of sales. In the first half of 2023, our sales grew in total by plus 4.9%, driven by an organic rise of plus 4.6%. In the contracting building market, these figures point to our resilience. It is driven by faster expanding segments, energy efficiency, connected products and data centers by pricing power and by the group's robust commercial performance.

On top of organic growth, the scope effect was plus 1.3%, including plus 1.8% linked to acquisitions and minus 0.5% to the net impact of Russia. Based on acquisitions made and the likely date of consolidation, the overall impact should be close to plus 2% full year excluding the impact from Russia.

Last, the FX effect is negative at minus 1% and should be close to minus 2.5% for the full year 2023 based on the average rate of June 2023 alone. You will read on Page 7 the key takeaways per geographies on a like-for-like basis. In the first half of 2023, the group achieved overall a solid level of growth. Europe grew a very solid plus 6.8% driven by a strong growth in energy efficiency solutions and despite residential market down in most geographies.

In the U.S., we recorded a slight decline of minus 0.3%. This reflected a double-digit fall in residential and a slight decrease in nonresidential, partially offset by a double-digit growth in data centers.

Finally, the rest of the world area grew a solid plus 8.2% driven by a very sustained growth in India, Africa and the Middle East. These were the main comments I wanted to make on sales.

I will now hand over to Franck for more color on our robust financial performance.

[Franck Lemery, Executive VP and CFO]

Thank you, Benoît. Good morning to all of you. I will start on Page 9, commenting the adjusted operating margin. Before acquisition and exceeding Russia, we recorded high adjusted operating margin of 22.7% for H1, representing a remarkable plus 2.2 points increase versus H1 2022. The high profitability of the period is driven by gross margin and it is reflecting our firm control of expenses and sales prices.

The impact of acquisitions of Russia were respectively of minus 0.3 and minus 0.2 points, meaning the adjusted operating margin all in for the first half of the year stood at 22.2%.

Going now to Page 10 and highlighting 2 main points. First, net income of €651 million represents 15.2% of our sales. Earnings per share are up plus 19%, standing at €2.45. It shows the group very strong value creation.

Second, the cash generated during the first half of the year is remarkable with cash flow from operation of plus 9.7% at €863 million. Despite the continued strengthened coverage of inventory, the free cash flow stood at 18.9% of sales. These strong financial indicators demonstrate Legrand's continued best-in-class profitability and cash flow generation.

Moving now to Page 11, regarding the balance sheet structure. We have a very sound balance sheet, testified by 2 indicators. First, the debt. Net debt at the end of June amounted to €2.4 billion with a ratio to EBITDA standing at 1.2. Gross debt has a maturity of 4.6 years and more than 90% is at fixed rate.

Second, we have €2.9 billion of available cash. This concludes the key financial topics I wanted to share with you. I'm now handing over back to Benoît.

[Benoît Coquart, CEO and Director]

Thank you, Franck. On both Pages 13 and 14, we give a few examples of the wide range of initiatives launched in the semester around growth and development. So first, following the acquisitions of Selim and Clare earlier this year. Today, we are announcing the acquisition of Technica, a €45 million turnover Chilean specialist notably in data center solutions.

Second, we launched many new products, showing the group's focus and capacity and innovation, both for core infrastructure products and in faster spending segments. Third, regarding the improvement of our operational performance. We are consolidating, for example, our distribution centers in the U.S. and just opened a new plant in Mexico. We can now move on Slide 16 about our raise the 2023 full year targets.

So excluding a major economic slowdown, Legrand has now set the following full year target for 2023. Sales growth. At constant exchange rates, excluding Russia impacts of between plus 5% and plus 8% versus plus 2% and plus 6% previously, including a scope of consolidation effect of around plus 2%. With adjusted operating margin before acquisitions, i.e., at 2022 scope of consolidation and excluding Russia and relative impacts of around 20.5% of sales versus around 20% initially, at least 100% achievement rate of our CSA roadmap.

This is for the key topics of this release. I suggest we now switch to Q&A. Thank you.

[Operator]

[Operator Instructions] We will move on with our first participant, Daniela Costa from Goldman Sachs.

[Daniela Costa, Goldman Sachs]

I have mainly 1 question. Just in terms of understanding your organic sales growth guidance for the year, can you talk through sort of what you make in terms of like volume and pricing, especially given, I guess, the market was slightly surprised by weaker organic growth in the second quarter, but you obviously are upgrading guidance. Can you talk behind that? And then similarly, maybe can you make up the makeup for the 50 basis points extra on margin on why not more given what you did imply a pretty low second half?

[Benoît Coquart, CEO and Director]

So first of all, before I give you a bit of the building blocks of our guidance, I wanted to highlight that we have always warn you that you shouldn't extrapolate a given quarter. So indeed, the second quarter is softer than the first quarter in terms of top line. But for us, it doesn't really mean that the markets have slowed down. Quarter performance can be impacted by many topics. And for example, specifically, Q2 2023 was somehow impacted by the number of open days or days of trade. It was impacted by some destocking from some distributors in a number of geographies, a bit of U.S., France, Australia and a few others. But we don't see a significant change of trend market-wise between Q1 and Q2.

Now talking about the full year guidance to make sure that the numbers are clear. So in terms of top line, we are shooting for between plus 5% and plus 8%, including a scope of consolidation at plus 2%. So indeed, it means that organically, we are shooting for a number comprised between plus 3% and plus 6% with a midpoint of plus 4.5%. So we expect the growth in H2 to be pretty consistent with the one we have a little bit more, a little bit less, but not inconsistent with what we have seen.

What are the building blocks of this top line performance. Well, number one, we don't expect the market to further deteriorate. We believe that the building market hasn't been supportive in H1, and our building market was probably down in many geographies, and we could discuss a bit later the various strengths in the U.S. and Europe and the rest of the world. But we don't expect in H2 a further deterioration in the market.

Number two, we should have a little bit less pricing than in H1 mechanically because we do not intend to do additional price increase. So to give you the number, we had a pricing increase in H1, which was slightly above 7%. And we expect in H2 to have a pricing, let's say, between 2% to 3%, leading to a total price impact of between 4% to 5% for the year. So a little bit less pricing than in H1.

We intend -- and there is the third going block, which is important, is that we intend to reinvest part of the good margin improvement into additional growth. So our objective is to spend more in SG&A, in sales, in customer support, in communication in order to grab additional volume and to boost a bit the sales in H2. So those are the building blocks for the guidance in supply.

Well, you have made the math yourself, Daniela. But our organic growth guidance implies you have to go, which is comprised between 1.5% and 7.4%, which implies a volume growth from slightly negative to mid single-digit positive. As far as the margin is concerned, you are right to say that it implies an H2 which is significantly softer than H1 because -- so you have to go in terms of EBIT margin is basically around 18% for H2, which is below the historical H2 margin that we have had of, let's say, between 19% to 19.5%.

Why is that? Well, number one, we will have a little bit less pricing, as I said, than in H1. And in front of this softer pricing, you shouldn't expect price of raw mat and components to go down. Our assumption today, of course, it may change. But our assumption today that the price of raw mat and components will be from, let's say, stable to slightly up.

Just a word on that. You know that raw mat and components represent 36% of our sales, but 72% of the 36% are not raw mat, but are components, and the price of components include added value, energy costs and so on and so forth. This is the reason why our current scenario assume that the price of raw mat and components will be from flat to slightly up. So you will have less benefit from the difference in selling price versus purchase price.

And number two, as I said, we intend to spend more SG&A than in H1 in order to go and grab some additional business opportunities. So as a result, all those, let's say, building blocks, if I may sell this to this guidance of 5% to 8% in top line and 20.5% in bottom line.

[Daniela Costa, Goldman Sachs]

Got it. I assume you don't assume any further destocking from distributors. So you think it was just a Q2 phenomenon?

[Benoît Coquart, CEO and Director]

Our feeling is that the level of stock from our distributors is pretty low in many geographies. And of course, it's always a question mark, but we don't invest in our H2 scenario significant destocking from the distributors.

[Operator]

We will move on with James Moore from Redburn.

[James Moore, Redburn]

I wondered if you could talk a little bit about the inflation numbers that we saw on raw material and components in the second quarter and what ratio in the second quarter and how those numbers to develop quantitatively in the second half, please?

[Benoît Coquart, CEO and Director]

So to give you the numbers, in H1, we had a pricing of, to be precise, 7.3% up for selling price, and we have an increase in price of raw mat and components of 0.4%, plus 0.4%. So of course, this gap between a plus 7.3% and plus 0.4% has been a strong benefit in terms of profitability.

If we look Q1, Q2, specifically on Q2, the selling price was lower. It was closer to plus 6%. And the raw mats and components were slightly down. This is specifically for Q2. As far as H2 is concerned, those are the numbers I just gave. So selling price between plus 2% and plus 3% and plant of raw mat and components, so between 0 to slightly up.

But again, be careful. You know that we have very little visibility on the price of raw mat and components. Of course, if the economy rebound sharply, then it's likely that the price of raw mat and components will go up again. If the economic data rise, it would be the other way. So take that as today's assumption from Legrand, but it may change depending on the economy.

Last comment, should the price of raw mat and components go down instead of up, I confirm that we will retain our ability to do a bit of pricing in H2. So don't expect the selling price of Legrand to go down in H2 even in the context where the price of raw mat and components would go down. And the counter-party or the other way, if the price of raw mat and components was to go up significantly because of the strong rebound in the economy, we still have retail the ability to do a bit more pricing. But based on 2-day assumptions, we assume that our selling price will be up 2% to 3% and our purchase price will be from 0 to slightly up.

[James Moore, Redburn]

That's very helpful. I think wage inflation, you talked about being about 5.5% in the first quarter. Is that still a similar magnitude? And how do you think that progresses going forward?

[Benoît Coquart, CEO and Director]

Well, for Legrand, it's slightly more than 5% wage inflation. It used to be last year 4% to 5%. So indeed, it has gone up a bit. The situation is very different from one geography to another. We believe it is still under control, and we have implemented locally a number of schemes in order to limit the wage inflation. So slightly more than 5%.

On top of that, I have also to say that the impact of this wage inflation accounts was limited by the fact that we have done some productivity. So for example, in H1, our volumes are broadly flat and our like-for-like headcount is down a little bit more than 2%. So no, we see there the way compression as being a manageable topic.

[James Moore, Redburn]

Very helpful. One last one, if I could squeeze it in. Just looking at the U.S. business, it looks like you were growing sort of around 3% in the first quarter and something like minus 3% in the second quarter. I haven't exactly done the math. But I think you commented that resi was down double digit in both quarters and data center was strong in both quarters. It looked to me that the change was non-res going from slight growth in the first quarter to a slight decline. And I don't want to over split hairs, Benoît., but you talked about destocking. Do you really think this is a U.S. nonres destock? Or do you think there are any incremental deteriorations in, say, your big office market?

[Benoît Coquart, CEO and Director]

No, we don't see a deterioration. And again, I'm always a bit uncomfortable to comment quarterly numbers. I prefer to comment half-year numbers, which are for me a bit more significant because given the quarter, destocking or number of days or cutoff or stuff like that does not impact half a year, but it can impact a quarter. So I prefer to comment on the half year basis.

Now looking at NCA, Legrand North America over the first half of the year, a couple of comments. So number one, I have to remind you the Legrand exposure. In the U.S., 20% of our sales are made in resi, 55% in non-resi and 25% in data center. I can later on comment Europe, and you'll see that in Europe, it's pretty different.

What have we seen in H1? So we saw a clearly double-digit negative market on residential with residential improvement being down housing starts, all those numbers being down in total, double-digit down. As far as nonresidential is concerned, it's a very diverse situation per verticals.

If you look, for example, at private manufacturing construction, it is expected by market specialists this year to be up close to 40%. But unfortunately, this is not a vertical in which we are playing. The office market is closer to 20%. And in a number of verticals, such as, for example, finance, it is even down significantly. So the nonresi, on which we are exposed, I see mainly office market in big metros is indeed down. It's not more depressed in Q2 than in Q1, but it's indeed down.

And then you have the data center market, which is very well oriented and which we believe we'll keep going. In this context, we are doing pretty well given the verticals in which we operate. As far as the residential, our residential business is concerned, it's double-digit negative. As far as the nonretention is concerned, it's slightly negative with a clear destocking in Q2, so I can confirm that the destocking happened a little bit in resi and a lot in nonresi.

And as for data center is concerned, it is indeed double digit up with a very strong, very strong number. So this is what we saw in H1. Now of course, as far as the trends are concerned, this is always a question mark. As far as residential is concerned, we start to see some positive signals, which may more impact 2024 than 2023, but we start to see some menses with, for example, housing starts being positive.

As far as non-resi, we see no reason why the market wouldn't enter into a progressive recovery midterm with a number of things that will help energy savings work from anywhere and so on. And data center we remain very positive with the support of AI. So that's why what we can. That's what we can see in the U.S. But again, we are not seeing a sequential deterioration in the market nor on our market position between Q1 and Q2.

[Operator]

We'll move on with Alexander Virgo from Bank of America.

[Alexander Virgo, Bank of America.]

I just wondered if you might go a little bit more into the trends, I guess you've done the U.S. now with James. I wondered if you could do the same with Europe for us because again, we're just trying to work out the sequential development. I appreciate you're looking at the H1 rather than Q2, Q1, but it does look like there was quite a big difference between the 2 and I'm just trying to understand that in Europe.

[Benoît Coquart, CEO and Director]

Yes. No, it's important. It did well. Europe, as you know, has a very different exposure compared to the U.S. So in Europe, we do approximately 45% of our sales in residential, slightly less than 50% in nonresidential and about 5% to 6% in data centers. So we are -- compared to the U.S., we are a lot more exposed to residential and a lot less exposed to data centers.

What trends have we seen? Well, residential is probably mid-single digit negative in value. So probably a double-digit negative volume for the market with the new both under pressure in many geographies, France, Germany, the Nordics and a few others. Nonresidential is probably flattish in value. And data center is very well oriented. But of course, it impacts not as much ourselves as in the U.S.

In this context, I believe we are doing very well, and part of this very good performance is coming from the leverage of our fast expanding segments. For example, we are experiencing a very strong growth in Europe in the energy efficiency and electrification-related products, products such as, for example, at breakers, EV charging stations, high-efficiency cash resin transformers, measuring and so on. And we are also doing well in data center.

But as I said, from a smaller base. To give you order of magnitude, the energy efficiency products represent 27% of our sales in Europe and data center only 5% to 6%. So I think we are doing well in a context, which is not a very easy context in Europe, especially on the residential side, which is down.

What is the outlook? Well, as far as the residential concern -- the market is concerned, there is no consensus yet on the timing of the recovery. When you look at the various statistics, it's a mixed bag of pluses and minuses, especially for '24. As far as the nonresidential is concerned, we believe that this -- for the U.S., no reason why the market don't recovered, given the huge number of commercial buildings, which are not energy efficient in Europe, which are not well connected, which do not have the capability to hold remote conferencing and so on and so on and so forth. We believe that at some point, the nonresidential market will grow.

And as far as the data center market, it will remain very well oriented and we believe we'll continue to experience a lot of growth. This is for Europe. As far as the rest of the world is concerned, Well, India is doing very, very, very well. But the market -- but also on the market, we are gaining clearly market share compared to our competitors.

As far as China is concerned, the Chinese market is depressed. I remind you that we're very much dependent in China from the new residential. So new construction in residential, which has been depressed for quite some time now with so far no stimulus plan from the authorities. And in this context, being able to do growth in value, growth in volume is, I think, a pretty good achievement. For the rest of the world, it's as usual a mixed bag. Africa, Southeast Asia, Middle East doing well. And in South America, the situation remains extremely difficult from a macro standpoint, including Brazil.

[Alexander Virgo, Bank of America.]

That's very helpful, Benoît. Maybe one before I go. I wondered if you could just talk us through the cash flow, Franck, particularly your own levels of inventory and destocking.

[Benoît Coquart, CEO and Director]

Well, I'll let Franck maybe answer this question. Franck?

[Franck Lemery, Executive VP and CFO]

Yes. So talking about inventory, you remember that our historical level were between, let's say, 13% to 14% that we grew deliberately the inventory last year to support the business in a very challenging supply chain and we were -- we achieved up to 19% at a higher level, which was Q3 last year.

And now it starts normalizing progressively with a ratio of inventory to sales around 60%. And you may remember that we said that as we give ourselves around 2 years to fully normalize our inventory ratio. So we are currently on the trajectory of what we want to do. But there is no rush. First, the cash -- the free cash flow is still very solid. And second, the supply chain stayed a little bit challenging on some particular components. So we will keep doing that reasonably.

[Operator]

We will move on with Gael de-Bray from Deutsche Bank.

[Gael de-Bray, Deutsche Bank]

Good morning, everyone. I have 3 questions, please. Hopefully, they're going to be pretty quick to answer. Would you be able to quantify how much money you already reinvested for growth in selling and marketing expenses in H1 and by how much this could change in the second half of the year? So that's question #1.

[Benoît Coquart, CEO and Director]

Well, we have, of course, a number of programs that we have initiated. Now it's always a question mark on how efficient it's going to be this program and how much money we're going to spend. So we prefer to embed that into guidance rather than giving you a precise number. But I confirm that the strategic intent is clear. We will have more SG&A put into the model and to the machine than in H1.

On top of that, there's another line which I haven't commented and which will impact H2. Well, you may have noticed, guys, that in H1, our level of restructuring was significantly higher than usual because we spent €30 million in restructuring in H1. And you know that usually, we tend to spend €20 million to €30 million on a yearly basis. And in H1, we did €30 million in H1.

Well, it is also an area where we are -- when we will look for opportunities in H2. So it's difficult to give you a precise guidance because there's also a timing issue. But our restructuring could range from €10 million to €30 million in H2. And it will also impact our H2 performance.

So clearly, our intent is to invest into growth and productivity in H2 through mainly SG&A and if we can find good ways to invest our money through structuring. But it's too early to quantify that. We'll comment that when we will release our H2 numbers in February 2024. Gael, no question. We talk to others. Go ahead.

[Gael de-Bray, Deutsche Bank]

I can see that. Well, maybe then could you help us appreciate what was the impact of destocking and the impact of the calendar situation in Q2?

[Benoît Coquart, CEO and Director]

Well, the calendar situation, I can give you the sort of of mechanical impact compared to between Q1 and Q2, it probably had a negative impact of about 2 points of growth between Q1 and Q2. So it helped Q1, and it was at the expense of Q2.

Now again, it's always the same story with a number of days. It may impact -- it has a significant impact on a month, noticeable impact in the quarter, negligible impact on the semester and no impact on a yearly basis. It's always the same topic. So you can explain the quarterly performance, but hardly yearly performance.

As far as the destocking is concerned, super complicated to quantify. Those are more feedback we got from our distributors than hard numbers. But I confirm that there was some destocking. I have named a few geographies. I can name others. So I said the U.S., France Australia, we could also mention Brazil, for example. We can also mention smaller geographies, such as Austria. So it was not hundreds of million euros, but it was noticeable on the quarter, but no measurable impact.

[Gael de-Bray, Deutsche Bank]

Okay. And the final one is on your data sensor exposure. Since you're only exposed to the white space in data centers in the U.S., I'm wondering if the development of AI-related data centers will actually make any major difference to you?

[Benoît Coquart, CEO and Director]

Well, yes, it will. And actually, the AI development will probably have more impact and white space that is a great space because in the white space, it will change the design of the racks, you need to have a higher density racks. So if you would change the cabinet, the rig themselves, the way servers are connected. It will also imply a smarter management of the rack, and that's what our PDUs are about. OPD help better managing or small managing the data center.

In cooling, we need to be closer to the rack. So you need to have, for example, render cooling and not only the big cooling system for the data center. So no, we estimate that the AI will have a very significant impact on the growth of the data center market, especially in the white space.

As far as our exposure between white and gray worth mentioning that indeed on a worldwide basis, we are a lot more exposed to white than to gray, but we have a lot of ambitions in the gray space in Europe and in the rest of the world. And we have already secured a number of very interesting data center projects with products such as power bus bar, for example, or UPS. Now specifically in the U.S., we intend to remain focused on white space because we don't have a great space offering. But the 25% of our sales made in white space in the U.S. should indeed be positively impacted by the AI trends.

[Operator]

We will move on with Alasdair Leslie from SG.

[Alasdair Leslie, SG]

Just maybe start with a quick follow-up on destocking. I think France and the U.S., 2 of your largest markets, you've called out, I think, at least 2 quarters of destocking there at least. Do you see any signs of stabilization, I suppose, in those channels, maybe at all towards the end of the quarter? So that's the first question.

The second question is really around sort of North American non-resi. And I appreciate you've got high exposure to offices there in that space. The outlook is obviously still very uncertain, that's kind of outside of your control. But I was just wondering whether you've got kind of internal initiatives underway where you're kind of working on boosting growth there over the next 12 months whether through kind of new product development across your offerings, greater marketing push, share gains that kind of thing in new segments. Just anything to kind of engineer your own growth? That's the second question.

[Benoît Coquart, CEO and Director]

Well, as far as the first question is concerned, coming back to what I've said earlier, it's difficult for us to really anticipate what our distributors will do also more as you analysts always have in mind excellent to par. But actually, our distribution network is made of 100 distributors, each of them having different strategies.

So what we feel today is that there's a lot of products into the channel. If you visit DIY shop or profits on shop, you would not see a lot of products on the shelves. So we believe that the level of stock is not too high in the channel. Now we are not in the minor for distributors and depending on what they expect the market to be in the next couple of quarters. They will have their decision as far as inventory is concerned.

So again, our H2 scenario does not include a significant destocking from distributors. Now again, we will see what happens. As far as the second topic is concerned, we see our dependency. We put the office building in the U.S., indeed, as a situation we should try to mitigate. So we are doing a number of things in order to mitigate the situation.

Number one, for the next 6 to 12 months, we have launched a number of sales programs in order to secure additional volumes and additional market share. And this is one of the reasons why we had the discussion earlier on the fact that we would reinvest part of our SG&A into growth. This is not the only geography where we intend to do that. But indeed, we have a number of programs in order to achieve that.

Number two, organically, we are trying to expand our product offering into additional verticals. For example, we are -- we have a plan for hospitality, for education, for health in order to reduce our dependency upon the office market. Number three, we are still very active in terms of M&A, even though we have not announced any transaction in H1 in the U.S. I can tell you that we are very active looking at interesting opportunities. I mean, not big ones, the usual bolt-on acquisitions that would be positioned on other verticals in the office in order to mitigate dependence. so we are doing a lot of things, both organically and inorganically.

What I would like to insist upon is that, of course, for the past 2 years, this piece of our North American market has not been very supportive. Now I wanted to insist on the fact that it remains a very attractive piece of business, nicely profitable, very cash generative with market shares which are well enhanced, very solid market position, stickiness with the customer. So those are strategically very good market positions, but it is a fact indeed that for the past 24 months, the office market in the U.S. hasn't been very supportive.

[Operator]

We will move on with Jonathan Mounsey from BNB Exane.

[Jonathan Mounsey, BNB Exane]

A couple of questions. Maybe first on the margin outlook going forward. Obviously, the guidance this year implies lower margins in the second half. You've talked about that. I'm just wondering what it really implies is the margin below the target. And what's the plan to recover the margin back to 20%? And is that something you've achieved, say, in 2020? Is it cost saving driven? Does it require volumes? And maybe just linked to that, as you're putting this investment in this extra SG&A, focus more on volumes, do you need to update the scorecard for these devolved businesses maybe to reward volume growth a little more, maybe reward, train some of these new verticals that you just took on where market share is like to be lower margins may begin with the inferior? Do you need to kind of evolve to encourage more volume growth relative to what you've done historically?

[Benoît Coquart, CEO and Director]

Okay. So on your first question, whatever the margin in H2, even if we do the 18% or 18.5% implied by our gates, our EBIT margin will remain well above 20%. At 20.5%, it will be 1 of the 2 highest margins ever by Legrand. So there's absolutely no issue in the level of margin of Legrand.

And if your question is about 2024, of course, it's far too early to guide on 2024. But I can tell you that there's no reason why Legrand wouldn't be consistent with its midterm guidance of delivering a 20% EBIT. So delivering 18% or 18.5% EBIT in H2 because we would reinvest our -- some of our proceeds into the growth wouldn't be a problem.

Now to make things clear, the 20.5% margin is before acquisition and Russia. So then you, of course, have to add or to deduct to the 20.5% dilution coming from acquisitions, the dilution coming from Russia. So this is for the margin. As far as the second question is concerned, do you want to take it, Franck?

[Franck Lemery, Executive VP and CFO]

Yes, perhaps to give us some of flavor about the question of reinvestment and SG&A and so follow-up to Gael's question. At the end of H1, our SG&As are growing by 7%. So it's above the top line. They have some reinvestment already made. R&D heads are up, for example, macro spending are also growing quite significantly.

And if you try to assess what could be H2 with 18%, 18.5% of adjusted EBIT margin, then it would mean acceleration of the SG&A investment. So the 7% can be quite a good run rate. It can come up around the double digit. So this would be the kind of effort and reinvestment that we would do.

[Jonathan Mounsey, BNB Exane]

I guess just what I really meant. I didn't want guidance for 2024. I just wanted to understand what your plan is. Obviously, when you choose to spend more on SG&A, you still have a plan to get back to 20% margin. I was just trying to understand the drivers. If you're only doing 18% in the second half, how do we get back there next year? I don't suppose the SG&A is going to go backwards. So what is it, gross margin? Is it volume, price? How do we get there?

[Benoît Coquart, CEO and Director]

Well, I think we have 14 years traffic in delivering a 20% EBIT margin. So you can first look on our ability to do the SG&A adjustments which are needed or the right pricing, which is needed in order to deliver this 20%.

Now again, it is not a comment on 2024 margin because we distance that in February, but cost grand ability to manage our P&L in order to deliver the level of margin we commit to deliver.

Second comment, which is something that you should also have in mind. H2 margins is most of the time lower than H1 margin. For many reasons, including the fact that you have a number of weaker months, which as the month of August in the U.S. and Europe. But when we deliver a 20% EBIT margin, it's quite often the H1, the 21% is 19%. So it is not per se a problem. But again, we can manage our level of pricing, SG&A and restructuring in such a way that we deliver our margin commitment.

[Jonathan Mounsey, BNB Exane]

One more question unrelated, just on service levels. I know I think you've talked a number of times about the service level fell, I think, from 92% down to more like 80% during the supply chain issues. And I think you've mentioned before that when it go back to 90%, you'd be willing to consider more proactively lowering your own inventory. I know you said you were doing it progressively. But what's the service level today? Are we back at 90% now? Are we back up to the level that you're seeking? Or are we still actually below where we'd like to be?

[Benoît Coquart, CEO and Director]

No, we're not yet at this level. In H1, we are at a level of service which is slightly above 86%. So it's better than in '22 and '21, but it's not the 92% level we had in 2019. So we have made it almost half of the way to recover our level of service. And it is coming from different factors, at least 2 factors prevent us from being at a level of service we love to be.

Number one, you have a level of demand, which is very different from one product to another, depending on whether the product is positioned on the electrification trend, for example, on the classical residential, you can have productivity which is up 20%, 25% and another product family, which is down 5% or 10%.

So of course, in terms of forecasting, it's always a bit more complicated than what it used to be a couple of years back. Number two, in terms of supply chain, the situation has improved in H1 2023. But there is 1 dark spot remaining, which are the electronic companies.

Even if the market is improving, there are still some difficulties to source some microcontrollers, power offset, IGBT, a couple of components. Progressive improvements are expected in the months to come, but it has remained a source of retention. So those are probably the 2 reasons why we are able to deliver 86% service level, but not yet the 90% we are setting for.

[Operator]

We will move on with Eric Lemarie from CIC Market Solutions.

[Eric Lemarie, CIC Market Solutions]

I've got 2, actually. First one, on the faster expanding segment. Could you give us the growth of this segment in H1? And maybe could you give us the contribution of these faster expanding segments to the consolidated sales as a whole in H1?

And second question on the cash flow generation. Obviously, it has been very, very good in H1. But could you maybe help us and give you what we could expect in terms of working cap for the full year in terms of working capital trends for the full year?

[Benoît Coquart, CEO and Director]

Well, we are not giving a number for fast expanding on the quarterly or half year results. But I can tell you that there is a massive overperformance of fast expanding against traditional. And especially 2 pieces, which grew very fast, data center in the U.S. and green in Europe.

But if we take the consolidated fast extending, so including connected Grain and data center, it's a very, very strong overperformance compared to the classic infrastructure product. As far as the second question is concerned, well, we cannot give you, of course, a guidance for cash flow generation. But even working capital is difficult to estimate. That's actually the reason why we were used to communicate on a normalized free cash flow because what will happen in the last 2 weeks of December is somehow uncertain. So we're not giving any guidance for free cash flow, for net working capital. I can tell you that 2023, that you have already guessed it, will be a very good mines in terms of free cash flow, no question.

[Eric Lemarie, CIC Market Solutions]

Can I have a follow-up one on these faster expanding segments? You mentioned the connected product. Are they still penalized by the difficulties of the supply chain for electronic components in H1?

[Benoît Coquart, CEO and Director]

Well, the numbers -- the gross numbers are very good. Now it's likely that we could have done better in a number of product families where the companies were not really available. So you're going to take, for example, assisted living, which is our business related to people staying at home and all the alarm system that help bringing some help to all people when they fall.

Well, this is an interesting business, which grew a lot in H1, which grew a lot in 2022, but which would have grown even better if the companies were available. So yes, there has been a limitation to our growth. Now again, it's probably a couple of tens of million euros, not a couple of hundreds of million euros.

[Operator]

We will move on with William Mackie from Kepler Cheuvreux.

[William Mackie, Kepler Cheuvreux]

I'd like to come back to the discussion of the second half profitability you've described an environment with positive net pricing in H2 and volumes flat or stable. And we've discussed a lot of SG&A as being the main factor.

But I guess when you're talking about a 350 to 400 basis point drop, my question would be, can you walk through the bridge? Should we ascribe all of that to a step-up in SG&A? Or are there other factors in your assumptions? And then when we think about the SKU between H2 and H1, could you provide a little more color on your expectation by region given that we've seen some very strong performance in the first half?

[Benoît Coquart, CEO and Director]

Well, I would quote the H2 margin has been a drop of 300 basis points. Bear in mind again that there is a seasonality traditional impact. If you look at the past 5 or 6 years, but of course, sometimes on a given year, the H2 was exceptionally low or exceptionally high. But on average, our H2 margin over the past couple of years has been 19-point-something, between 19% to 19.5%.

So if we deliver 18% margin, the so-called drop should be seen as 100 or 150 bps and not 300 bps. So number one. Number two, apart from what I gave you very precise guidance for selling price, purchase price and potentially restructuring. So you can lose on the math itself, this margin doesn't imply a 30% growth in SG&A. It implies indeed double-digit growth in [indiscernible], and that makes them clear. If we are not able to achieve the program we want to achieve, well, we may not have the reward in terms of top line, but it did have a slightly higher margin. But this is not the plan we have today in mind. The plan we have in mind is to invest into growth for H2 2023 as well as to prepare the start of 2024.

[William Mackie, Kepler Cheuvreux]

So following up on that...

[Benoît Coquart, CEO and Director]

And by the way, as part of the building blocks of H2, you should also have in mind that there is still some wage inflation even though it's under control for Legrand with more than 5%. It needs to be put into the model also.

[William Mackie, Kepler Cheuvreux]

And just following up in terms of your reinvestment plans for growth, would you describe those as to be applied broadly across the group? Or do you see a particular programs in specific regions or countries?

[Benoît Coquart, CEO and Director]

No. We have a broad program, including in countries which are doing well. Take India, for example. Even though we are very satisfied and very happy with our growth in India, we still believe that we can grab a few additional percentage point of market share. So we have also initiated a program in India. So it's not specifically specific to the U.S. or to the geographies which have a little growth in H1.

In fact, growing segments, we also have some products. Now I guess the uncertainty is will we be able to implement all those. We did have impact. We want them to have. It is not as mechanical as I put 1 year of SG&A into the market, and it brings me €2 or €4 of sales. You have to achieve that program. But if you're not able to achieve them all and to spend the money, again, of course, we'll do a bit more savings and a bit more margin but then a little bit less sense. This is a sort of this is a topic on which we are working today.

[Operator]

We will move on with Aurelio Calderon from Morgan Stanley.

[Aurelio Calderon, Morgan Stanley]

I've got 2, please. The first 1 is around market share. If you've seen any market evolution, then I know that you don't like to comment on quarterly evolutions, but have you seen any different trends in Europe and in North America, maybe over kind of, let's say, since kind of big obit recovery, have you seen any market share shifts? That's the first one.

And the second 1 is more trying to think about the inorganic growth part of the equation. Are you seeing anything different in the market in terms of multiples in terms of ability to buy businesses. Just trying to think about that sort of implied deceleration in organic growth, if there's anything to read into that.

[Benoît Coquart, CEO and Director]

No, we are not seeing anything negative in terms of market shares. Of course, it's -- we have 100 geographies and head up product families. So you always have market families in which you win and market sales which you lose.

But overall, we think that we are holding firmly our market share in the traditional part of the business. We are probably gaining market share in fast expanding. And actually, it is confirmed when you compare or we compare ourselves with our listed peers. So of course, you know that the comparison is always difficult because each of the listed companies do have a different market exposure. But well, of course, you have the players which are helped, if I may say, but by the U.S. industrial construction such as ABB and Schneider.

But if we look at companies closer to our world where you have hybrid electricals being down 2%, well, we have signified down 8% to 9%. You have Saint-Gobain, which is just up 1.5%, [indiscernible] you're plus 5%. You have when Rexel safely above Legrand. So both on the micro perspective, i.e., by looking country by country to our performance compared to our local peers and on a global standpoint, when comparing ourselves with the peers, we don't have the feeling that we are losing any share.

As far as second topic is concerned, it is true that we will achieve a parameter scope impact, which will probably be lower than our historical average. You know that historically, we've been able to deliver a 3% to 4% scope effect each year. And this year, given what we have announced today, it will be closer to plus 2%, which is a number we included into our guidance.

Now you shouldn't read that at all as the fact that we are lacking targets, lacking good ideas or that the targets would be more difficult to grab because, for example, prices would have go up or whatever. It is just a timing issue. I confirm that we have a number of advanced discussions going on. And that if we are doing the job properly, we should be able to sign one of several deals in H2. So it is just a timing issue.

And we still believe that we are -- we should be able to deliver on a yearly basis 3% to 4% impact. Specifically as far as basically as the prices are concerned, we have not seen really prices going up in the past 2 or 3 years. So we're not really seeing prices going down today despite the WACC are going up because of the exchange rate. And the reason being that most of the counter-party we have in front of us are individual centers. And they have a price in mind, which does not depend much on the interest rate or the beta or the risk premium, but it's more a psychological price, which is usually not going up much or down much depending on the economy. So prices in other words, remain enable. And in a range, that makes us confident that our next gift should be value-accretive and EPS-accretive as per our standards.

[Aurelio Calderon, Morgan Stanley]

That's very helpful. And if I may squeeze in 1 last question. I think when we were speaking in 1Q and so on, you were talking about pricing carryover being highly theoretical because there are some effects from rebates and so on. So the question is, are you offering more of these rebates also as part of your kind of efforts to boost the top line? Or have you not been offering rebates above any normal range?

[Benoît Coquart, CEO and Director]

No significant additional rebate because the rebate game is not a game which is a pay off a lot in our business. So no, our programs are more about grabbing additional customers at doing more powerful launches that increasing communication towards a number of targets more than doing some rebates.

And actually, the 2% to 3% price impact that we expect to experience in H2 implies no price cuts, but no significant additional price increase. We may have to increase the price in geographies where the currency is depreciating a lot. But otherwise, we don't intend to do any significant or meaningful additional price increase.

So even though indeed carryover is very theoretical, most of the H2 pricing should be carried over.

[Operator]

We will move on with Delphin Brault from ODDO BHF.

[Delphine Brault]

I have only one and one clarification. The first one is on Russia and the acquisition. So the dilution was minus 50 bps in H1. I'm wondering how much you believe it should be in H2?

And second one is on pricing. You just said that we should not expect price increase in H2. Did you raise prices in July? And if so, in which segment specifically, is it a sum of some rate and some decrease, just to understand how price is [indiscernible].

[Benoît Coquart, CEO and Director]

Okay. So starting with the second question. We're not taking every single monthly pricing per geography, but we haven't done any meaningful price increase in July. So I confirm that most of the 2% to 3% price increase we should record in H2 is coming from the carryover of last year and beginning of this year.

Now does it mean that we won't do any price increase again, I really wanted to make clear. Today, we are not planning any. But if for whatever reason, the price of raw mat and components was to go up, we are not ruling out the possibility to do one more.

As far as the dilution is concerned, so we have minus 50 bps dilution in H1, of which minus 30 bps is the usual dilution coming from acquisitions and minus 20 bps the dilution coming from Russia. You know that we treat Russia as a negative scope in 2023. So we completed the dilution of Russia as if it was an acquisition, actually. So minus 30 from transition M&A and minus 20 for Russia.

As far as the full year is concerned, well, it can always change, but our current assumption is that we should have a dilution coming from acquisitions of about minus 20, which is somehow consistent with the 2% scope effect and the dilution from Russia at about minus 20 also. So in total, instead of being minus 50, it should be minus 40. Bear in mind that the dilution of acquisitions is almost known. We make additional acquisitions because we in them over 1 or 2 months, but it's almost known. Dilution coming from Russia is still very uncertain, of course. So please take this minus 40 bps as today's best view from the management, but not as a number have it or not, as we said, completely.

[Operator]

We will move on with Supriya Subramanian from UBS.

[Supriya Subramanian, UBS]

Most of them have been answered. Just 1 question on growth sense. Could you share your thoughts on what you're seeing in sense between new build versus renovation market trends and also sort of regional highlights.

[Benoît Coquart, CEO and Director]

Well, the trend against the new versus renew, it's a bit difficult to assess on the Legrand standpoint because the products are broadly the same, whether they are new or renew. So we can read at the market statistics, but it's difficult for us to have a sense of the impact it has on our top line. As far as market authentic are concerned, clearly, in the residential piece, both in the U.S. and in Europe, the new is going down more than resi, which is not a surprise because it is a pattern which we have often seen.

But if you take the housing starts, the building permits in the U.S. and in Europe, they are more down, if I may say, or pledging more than light renovation work or stuff like that. As far as the commercial is concerned, it's a question mark, we don't have this level of granularity in all our statistics. But at least for resi, I can confirm that market wise, the market now is going down more than the renovation.

[Operator]

With that, it appears there is no further question at this time. I'd like to turn the conference back to Mr. Benoît for any additional closing remarks.

[Benoît Coquart, CEO and Director]

Well, thanks a lot for your time. If you need more information on the Legrand results you have, as usual, Franck, Ronan, Antoine and myself. And for those who are lucky enough to take a seller break, I wish you a happy break, and I'd be happy to see you again in a couple of weeks. Thanks a lot.

[Operator]

Thank you, everyone, for joining today's call. You may now disconnect. Have a nice day, everyone.