Legrand SA

PAR:LR

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to today's Legrand 2022 9 Months Results Conference Call. [Operator Instructions]. For your information, this conference is being recorded. At this time, I would like to turn the conference over to CEO, Mr. Benoît Coquart; and CFO, Mr. Franck Lemery. Please go ahead.

[Benoît Coquart, executive]

Thank you. Good morning, everybody. Franck Lemery and myself are happy to welcome you to the Legrand 2022 1st 9 months 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 detail. I begin on Page 4 with the 4 key takeaways for the first 9 months of the year. First, Legrand recorded sustained rise in sales. Second, results were robust despite many other external factors. Thirdly, we announced today 2 new bolt-on acquisitions and fourth, we have confirmed our 2022 full year target.

So moving now to Page 6 to 7 with an overview of sales on the first 9 months. Our sales grew by plus 19.1%, driven by a sustained organic price of plus 10.1% that reflects strong group business momentum including many successful commercial initiatives and pricing power as well as loan ongoing and very active management of supply chains, which were still under pressure. On top of organic growth, the scope effect was plus 2.4% based on acquisitions completed and their likely date of consolidation, the impact should be around plus 3% for the full year in 2022.

Now last component regarding sales is the FX effect. It was also favorable at plus 5.6% and will be close to plus 6% on the full year 2022 based on average rates in the month of October 2022 alone. On Page 7, focusing now on organic growth by area. Each of the destination achieved a high level of growth. Europe grew plus 10.5% over 9 months, with both mature and new economies growing strongly. In North and Central America, sales were up plus 10.7% with a high level in the U.S. at plus 11.1%. where business for nonresidential applications recorded a marked growth. Finally, the rest of the world area grew plus 8.0% driven by very sustained growth in India as well as Africa and Middle East.

Focusing on Q3 trends alone, group organic growth was plus 8.4%. This was for the sales. I am now passing the mic to Franck to provide insights on our results.

[Franck Lemery, executive]

Thank you, Benoît, and good morning to all of you. I will start on Page 9 with the adjusted operating margin. Before acquisition, it stood at 20.4% of sales. This is a limited reach rate of minus 1 point from the first 9 months of 2021. This solid profitability against the backdrop of persistently strong inflation reflects the group fair management of both expenses and sales pricing. As administration of inflation, the increase of purchase prices on the raw material and component is around plus 15% over 9 months. Including acquisitions, the adjusted operating margin was 20.2%. And now turning to Page 10 regarding the net profit attributable to -- with EUR 812 million. This represents a growth of plus 16.1%. This was primarily driven by the rise in operating profit of plus EUR 123 million.

Please note that group's corporate income tax stood at 27%. I'm now moving to Page 11 with a few comments on cash and balance sheet. As a percentage of sales, cash flow from operation was down minus 0.9 points at 18.8% of sales. The free cash flow stood at 10% of sales for the first 9 months. This includes temporary strengthened coverage of inventory. In the context of supply chain tension, it reflects our priority given to customer service.

Normalizing working capital requirement, the normalized free cash flow stood at 16.3% of sales in the first 9 months. On the balance sheet structure side, net debt-to-EBITDA ratio was 1.5x at the end of September. This concludes the key financial topic, I wanted to share with you. And now I'm passing the mic back to Benoît.

[Benoît Coquart, executive]

Thank you, Franck. Turning to Page 13 now regarding M&A. Following the acquisition of Emos, Usystems and Voltadis earlier this year, we have announced today 2 new bolt-on acquisitions A. & H. Meyer, a German leading player in power and furniture connectivity solutions for commercial buildings with annual sales of over EUR 20 million, and Power Control British specialist in UPS systems with annual sales of around EUR 15 million. These 2 acquisitions strengthened local level positions in segments supported by strong structural trends energy efficiency infrastructures as well as solutions for changing ways of working.

2022 is an active year with total annual sales of company acquired of nearly EUR 145 million. On Slide 15 -- 15, sorry, we have confirmed our 2022 full year targets, which were read on sales last July. First, I would like to insist on the fact that in an uncertain economic outlook, we are deploying all initiatives to post sales all cost opportunities, particularly in data centers and energy efficiency solutions and to optimize our cost structures.

Now taking into account our solid achievements in the first 9 months of 2022. Legrand has confirmed the full year target is set for 2022 with gross in sales at constant exchange rates of between plus 9% and plus 12% and adjusted operating margin of about 20% of sales and around 100% achievement on its CSR road map. So this concludes today's announcement on the first 9 months results. Before we open to questions, I would like to emphasize that Legrand is playing an active role and is a key factor in promoting frugal inert choices.

First, we announced early October that we are doubling our energy consumption reduction targets set between 2021 and year-end 2023, and we are now aiming for a global minus 15% cut. Second, Legrand is offering a wide range of solutions for automating the so-called ecofriendly actions in all buildings and making them easier to implement, which is absolutely key in the current energy crisis context. And now we are ready to open to questions. Thank you very much.

[Operator]

[Operator Instructions] We will take the first question from Ivan Zhang from Goldman Sachs.

[Unknown Analyst]

My question is around -- I have 2 questions. First 1 is on what do you think drove the Europe growth, you have a 10% organic growth? What products are driving the growth there given we see the weakness in Europe progressing markets. And have you seen some destocking from distributors in areas? And my second question around, can you quantify your pricing action in 2022? And how much do you expect the carryover effect in 2023?

[Benoît Coquart, executive]

So I will start with the second question, the pricing. So pricing over the first 9 months of the year was plus 9.9% coming from both carryover effect and new increases. So let me maybe remind you that the segments Q1 2022 was close to 8%, Q2 was slightly above 10% and Q3 is slightly above 11%. So total of all that leads to this plus 9.9%. So the theoretical carryover for the full year 2022 would be slightly below plus 10%.

But again, it's a theoretical carryover, it's purely mechanical. And the actual number could be different depending on the decisions we're going to take on pricing is up or down in Q4. As far as the first question is concerned is the total growth. So before zooming specifically to Europe, the third quarter was impacted by several things. So as you could notice, our volumes are slightly down in Q3 compared to Q3 of last year. This is coming from a number of factors, where, number one, a couple of geographies did suffer in Q3. We can, of course, mention Russia, where volumes are very significantly down and which is negatively impacting our European and worldwide performance, but we could also mention China, which is down actually in sales and in volume as well as an [indiscernible].

We have a number of geographies, which are going down. If we are zooming on the main and big geographies, which are the U.S. and Europe. Well, in the U.S., we have the same parameter in Q3 as in the first 6 months of the year. So the residential piece of the market is under pressure, coming from notably from a tough basis for comparison as well as from the fact that consumer spending are the pressure in the U.S. So that residential market is doing well despite we have a very tough comp and the nonresidential market except data center, is going significantly up, and it's pretty consistent with what we said at the beginning of the year where we expected the nonresidential market to grow in the U.S.

As far as Europe is concerned, the consumer-related products. So mainly DIY, small retail are again under pressure, and it is consistent again with what we see elsewhere in terms of consumer spend. And so it's either on our sales. And as far as areas boosting our sales, we can mention, for example, energy efficiency related products, which are growing in Europe faster than the rest of our product offering. If we take a 2-year approach, putting together '21 and '22, energy efficiency-related products in Europe grew 10 points faster than the average of countries in Europe.

So it's putting the demand -- now this was a number of comments on geographies. Now there's also a theme which is common to all geographies, which is the fact that our growth was remain significantly limited by supply chain tension, especially when it comes to electronic components. It has remained difficult to source components, and you know that the electronic components are an important part of our factor expanding segment, connected products, energy efficiency-related products and data centers, and the tensions have clearly limited our sales growth over the first 9 months of the year. Now we expect destinations to get better in the quarters to come, but it has been clearly weighting on our sale. Does it answer your question?

[Unknown Analyst]

Okay. But can you comment also on the distributor? Do you see any destock in there?

[Benoît Coquart, executive]

Yes, so for the first part of your question of where? We have seen a slight destocking in Q3 especially in Western Europe, but it has been a slight one. We haven't seen a huge destocking so far.

[Operator]

The next question comes from Lars Brorson from Barclays.

[Lars Brorson, analyst]

Benoît, Franck, Ronan. Maybe I can follow up on the guidance and the implied growth range, I guess, for the fourth quarter, assuming pricing can stay in the, should we say, high single digit, perhaps even low double for the fourth quarter. It would suggest that volumes are down quite meaningfully, perhaps even low double digit at the low end of your guidance in the fourth quarter. I take it U.S. is holding up outside residential. I'm trying to understand how we should think about European volumes in the fourth quarter at the low end of the guidance. Should we think about that could be down in the teens perhaps? And maybe you can elaborate a little bit on the earlier question with regards to European destocking. Do you see that as largely behind us? Or is that very much embedded within your fourth quarter guidance as well, please?

[Benoît Coquart, executive]

Okay. Well, to make sure that everybody has the right number this -- you have to go the fourth quarter top line implied by our guidance would mean approximately minus 5% in the low end of the guidance and plus 6% for the high end of the guidance between minus 5% to plus 6% for Q4.

Well, the low end of the guidance, given the price effect we have in our books and our forecast. The low end of the guidance would imply indeed close to double-digit decrease in volume, which is not the most likely to make things clear, whereas the higher end of the guidance would imply a low single-digit decrease in volume, we are clearly shooting for the higher -- highest of the guidance, not the lower one. So we don't believe that the scenario whereby the volume would be down double digit, a credible scenario given what we see for the remaining weeks or months of the year.

Now when it comes to your second question, we had absolutely no clue about what our distributors will do in terms of destocking. Again, you should ask better questions. It depends on their own forecast, but the sales of the next quarter is going to be. The only information we can give you is that as per our information. The level of inventory at our distributors is not very high. They have managed carefully their inventory throughout the crisis starting back in 2020. And I don't believe they have -- they are carrying a lot of extra metrics. Now again, what they will do going forward is a business decision on their side, which is not in our portfolio.

[Lars Brorson, analyst]

Can I secondly, just ask briefly to supply chain headwinds. I'm a little bit surprised that we are still seeing those headwinds. I thought we were coming out on the other side. We see some of your peers having had some success around redesign of products and starting to get on the other side of these headwinds. Can you help us understand how much that impacted you in the third quarter, particularly in your U.S. business and how to think about that in the fourth and into '23, please.

[Benoît Coquart, executive]

The situation has been improving since the beginning of the year. When it comes to number of plastics or metals. But still, there are 2 tax ports which remain and which are the same as in Q2. Number one, the situation on electronic components, which remain globally very difficult, and has limited the growth of our ranges and billing those electronic components. And I don't believe it is an issue specific to the ground. I think my competitors are facing exactly the same situation as me. And the second dark spot, if I may say, is North America, which suffered from a double impact. Number one, the impact of shortage of break-free component. And number two, the specific Chinese situation, you know that we have a significant flow of product sourced or manufactured in China and going to the U.S. And between the Q2 low downs, which has created a number of bottlenecks in Q3 in terms of supply chain.

Number of regions which are still under lockdown from time to time. The specific in-line situation in the U.S. where we are facing a number of transportation issues and so on and so forth.

North America clearly suffered from some supply chain attention. But otherwise, when it comes to most of the plastic materials, chemical materials, indeed, the situation has been improving throughout the year. When would it be sold? I have no idea. The feeling we have and the feedback we are getting from our suppliers, especially on the electronic component front is that the situation will progressively improve, and we should be able to see that in the coming months. How much has it costed us in terms of sales. It's a difficult question to answer, because since we have some orders which are difficult to fulfill, sometimes our distributors are doing twice the materials they really need. So to do the network product, it's a bit difficult. But tens of million euros, for sure yes.

[Operator]

The next question comes from Andrew Wilson from JPMorgan.

[Andrew Wilson, analyst]

I just wanted to try and clarify a couple of the comments on pricing that you made earlier. Just to try and understand, I think you were implying that given what you've seen so far and given what you're expecting in the Q4, you would expect a 10% benefit in 2022. Did I understand that correctly? And then did you quantify sort of what the run rate on the actions you've taken already would be for 2023?

[Benoît Coquart, executive]

Yes. Actually, 10% I was mentioning is really close to 10%, let's say, the pure carryover impact if we are taking the price level as of the end of September and taking this price level to Q4, it would lead to close to plus 10%. And it would actually imply Q4 alone at also close to plus 10%, but it is a pure mechanical impact, it could be less, it could be more, depending on the difference we're going to take in terms of pricing.

As far as 2023, carryover impact is concerned, it would be a bit too theoretical to communicate the figure or range for 2023 or any sort of carryover impact. The only thing I can mention is that pricing, as you know, has never been negative in the story. And of course, this is a nice traffic we are pretty proud of and we don't intend to have it negative pricing impact. But as far as the carryover is concerned, it would be too theoretical because many things can happen, many decisions can be taken that will impact the theatrical carryover.

[Andrew Wilson, analyst]

That's very helpful. And maybe just as a quick and, I guess, more specific follow-up. Just on North America, and clearly, the U.S. is overall developed very well, particularly on the non-res side. But just specifically in terms of -- I think you mentioned Canada had been weaker. If there was anything specific there into you're seeing in Canada, which was different to anywhere else or -- or is it a comp issue? I just -- it was just interesting to observe. It looks like the combination of calendar in Mexico is down when you look at North America overall.

[Benoît Coquart, executive]

Well, I don't believe there's anything specific happening in Canada. We have a pretty, pretty small position in Canada, which is -- which is not really material compared to the 1 we have in the U.S. I'm not aware of any specific issue we are facing in terms of competition or whatsoever. So not much specific information to give you in Canada. Is there another question? Hello? Operator?

Sorry, it seems like we have a major issue. Please stay connected. We are trying to solve the issue. Thank you.

[Operator]

The next question comes from the line of Andre Kukhnin from Credit Suisse.

[Andre Kukhnin, analyst]

I'll just go 1 at a time. Firstly, to follow up on price, I wanted to check, are you increasing prices further in Q4? Or should we think about the run rate of Q3 as the sort of ongoing and then think about next year late?

[Benoît Coquart, executive]

Well, I cannot answer this question. We are not guiding on pricing for the next quarter. We'll do what it takes to maintain the balance between competitiveness and value creation. But I cannot be more precise than that because it depends on a number of factors. And again, we are not guiding on the next quarter pricing. But we retain tolerability to the bit more pricing if they did. You know that last year, we told you that we were extremely cautious in increasing prices, I don't believe we have more pricing than our competitors in 2022. So we retain some tolerability to do a bit more if needed to fulfill our commitment.

[Andre Kukhnin, analyst]

That's clear. I wasn't asking for guidance. I was just thinking whether it kind of conceptually is hedging up further in Q4 or not, but that's clear. And in terms of energy costs, could you give us an idea of how much kind of inflation impact you saw in Q3? And also how close are we to be mark-to-market on this, i.e., kind of what are your contract lengths and -- just trying to gauge what the sort of full size of impact can be if it's not already there in Q3?

[Benoît Coquart, executive]

Well, in 2021, energy costs represented 0.5% of our sales. So it was not indeed so material, except, of course, that you find some energy costs as well than in your pure, let's say, energy cost line. The energy cost is also impacting the cost of raw mat, take aluminum, for example. You know that 2/3 of our purchase of components and raw mats are indeed components and components are manufactured by third party and include themselves in the energy cost. You can also find some energy costs in the remuneration increase. So the impact of energy cost goes beyond this 0.5%. But if you just take the energy we are consuming, it's 0.5% of our sales. The price has increased by about 70%, and we do have some short-term hedging contract. Now given the fact that this 0.5% if not that material, you shouldn't expect energy cost to have a huge impact on our P&L, which wouldn't be able to -- wouldn't be able to compensate.

With part of that, of course, we are trying to find the best deals in the market. But we are also -- and I believe it's as important as buying energy at the right price. We are also cutting our energy consumption. As I said during my introduction, we have decided to launch a plan to cut by 15% of energy consumption within 2 years from 2021 to 2023. We have associated a couple of additional CapEx to do that. It comes after a very significant reduction in the past 10 years, you may not know that, but in the past 10 years, we have reduced by 35% of energy consumption. And at the same time, the sales grew by 65%. So it takes us -- half of the energy took us back 10 years ago to do 1 year of sales. So those are the 0.5%, growing 7% Yes, indeed, we are trying to hedge when we can, but it's not so much at book level, and we are taking a number of deliberate actions to cut our energy bill.

[Andre Kukhnin, analyst]

Got it. So we shouldn't worry about the carryover kind of catch-up effect for energy cost inflation in 2023, given the current spot prices, assuming that they stay?

[Benoît Coquart, executive]

Well, it's likely that in 2023, the cost of energy, we would indeed energy would cost more than in 2020 and '21. At the same time, you should probably have also couple of us going down. So the net effect of transportation costs, which is, for example, 2.5% of our sales and which has increased by 30% or 40% this year compared to last year, could possibly down -- go down too. So the net result of that is, of course, difficult to factor into any model. You're not only having inflation. You also have some costs which could possibly go down.

[Andre Kukhnin, analyst]

And if I may, just lastly, on light commercial exposure, could you help us quantifying that within your non-resi, how much is kind of light commercial? And you mentioned it sounds like it's already coming slightly under pressure in Europe. Is there anywhere else globally that you see that trend that is kind of spreading from resi into light commercial?

[Benoît Coquart, executive]

Well, I've got able to notify light commercial against the heavier comment of or larger commercial because most of the products which are sold in light -- in light of larger commercial for the same products. My comment on smoothening market was more on the pure hedging side and especially on the part of the resi side, which is tied to customer spending, i.e., DIY small retail. And again, when you look at the DIY numbers, for example, when you look at a number of consumer goods, the demand has softened, especially in Europe and especially compared to what happened between, let's say, mid-2020 and the end of 2021, where those markets were moving. So it's more -- those were more comments made on the residential side than on commercial is light or large.

[Operator]

The next question comes from the line of Alasdair Leslie from Societe Generale.

[Alasdair Leslie, analyst]

So I was just wondering on the weak underlying margin in Europe this quarter. I appreciate you kind of encouraged us not to focus on regional margins, but that's the lowest in Q3 for a number of years. Just wondering if you could kind of elaborate on what drove that? Was it sort of a sudden slowdown in volumes, more pronounced impact from Russia, higher burden of perhaps more centralized costs, maybe something else? Just some more color there. And then in a kind of recessionary scenario, can you just confirm that your target would be to essentially keep margins at the group level at 20%, including any potential restructuring charges. And just kind of sort of tagged on to that. You mentioned deploying initiatives to optimize your cost structures in the press release.

Just wondering if you could, again, maybe elaborate on some of those. I guess most of those are going to be at the discretion of the local country managers, but are there any larger group-wide opportunities that you're kind of focusing on as well?

[Benoît Coquart, executive]

Yes. I will answer question 2 and 3, and I will let Franck comment on question 1. Well, as far -- as far as the second question is concerned, we have a midterm guidance, which is an EBIT of approximately 20% across the cycle. And clearly, it remains, of course, our objective in good and in bad times, and actually, when we look at what we've been able to deliver in 2020 in 2012 and in a period of harder economic times, we had margins, which were at or very close to 20%. So it remains our midterm objective, regardless where we stand in the cycle.

As far as cost initiatives are concerned, well, there are many things which are done, which relates to digitalization of a number of topics, analysis of a number of cost base where we could dig in. If you look at Q3, you will see, for example, that we have a pretty significant level of restructuring expenses, and actually, if we look at our 20 -- the 9 months restructuring, it stood at EUR 26 million and it was EUR 50 million that year.

So we have clearly increased our in Q3 and in 2022 of our restructuring charges because we have a number of plants, which we believe will be activated in order to cut our controller expenses. Needless to say, our EBIT guidance, which as mentioned, is after restructuring charges. Again, you know that our EBIT is only. It includes any positive or negative one-off. It includes restructuring. It includes impairment of assets and so on and so forth. And this way to compute a bit more change, of course.

So to make long story short, we stick to our 20% guidance across the cycle. We have no reason to change, and we believe that the ground business project has been conceived and geared in order to deliver the 20% EBIT all-in, including restructuring charges. And number two, we have increased the level of restructuring because we have a number of plants we're going to activate.

Franck, use the mic for the first question.

[Franck Lemery, executive]

Yes. So your first question is what was about the softer margin of Q3 and especially on Europe. So as Benoît said, what would call the softer margin of Q3 is mainly due to higher restructuring, which we have launched to prepare the future. Cost structuring was 20 bps of H1 sales, and it was 60 in Q3. So sequentially, it has successfully beat the profitability, but it's to protect the future.

Talking now specifically to Europe and talking specifically in Europe in Q3. You see that the EBIT margin -- adjusted EBIT margin is going down by 250 bps versus last year. First item being acquisition, acquisition of [indiscernible] is normal in [indiscernible]. And our acquisition were mainly in Europe in the recent months.

So excluding acquisition, the retreat is minus 180 bps, which is a little bit more than the group. Why? First because this is a place where inflation is the most important. Europe on behalf of energy and also because of the -- some FX with the USB, and second, this is a place also where we have restructuring. And in saying that, as we usually said, a given quarter on a given geography is not really meaningful. Talking in the 9 months result of Europe, we are at with 21.3% of profitability.

[Alasdair Leslie, analyst]

Okay. Great. Could I sneak in a quick follow-up just on M&A. There's obviously kind of more high now around kind of electrification, energy efficiency theme. So I was just wondering if you you're sort of seeing competitions for assets intensify and maybe also higher expectations now from some of your targets. It looks like you're going to add 3% to your top line from M&A this year. I think that leads to the 3-year average around about that same 3% level. I think in the preceding for years, you did sort of 7%. I was just wondering, do we think M&A can perhaps sort of reaccelerate again over the next few years? Are there some larger deals in the pipeline as well that could perhaps move the needle again?

[Benoît Coquart, executive]

Well as you rightly noted, we have acquired already 5 companies totaling sales of close to EUR 145 million, and we expect to have a 2% perimeter impact this year. We have a number of discussions going on, and we hope to be able to close more deals in the weeks and quarters to come. Are we likely to see -- well, in terms of price paid, you can look at the financial statements of Legrand. And you will see that over the first 9 months of the year, we have paid on average a multiple of 1.6x sales. And historically, we have paid an average multiple of 2. So we've been able to pay a pretty reasonable multiples, 5 small deals we have closed so far. Are we're likely to see a strong acceleration in M&A? The answer is no.

And that's not what we have guided the market to. We believe we should be able to do every year or 2, 3, potentially 4% scope effect. From time to time, we'll have a bigger acquisition. But the bigger acquisition is, by definition, highly uncertain. So I think it's more reasonable to include into model, the fact that we would have 2%, 3%, 4%. And actually, 3% payment impact we [indiscernible] pretty consistent with our historical numbers. As far as the prices of acquisition going forward, we see no reason why we shouldn't be able to pay approximately the same multiples we've been historically paying, i.e., between 1.6 to 2x sales. We see no reason why the multiples would all of a sudden neither deflate nor inflate, even through the 3 or 4 last years, we've been able to pay a reasonable multiples, and we will stick to this policy.

[Operator]

Your next question comes from the line of James Moore from Redburn.

[James Moore, analyst]

Yes. I have 3, if I could, 1 on price backlog and European volumes. Maybe I'll go 1 at a time if it helps. Just given that raw material prices are rolling over, but electronics still difficult, and we have accelerating wage inflation. I wonder without numbers, how you're feeling about your incremental price policy and whether you're trying to capture wages more than usual? And if you were able to say what wage inflation is this year and what you expect next year, that would be helpful, too. That's the first one.

[Benoît Coquart, executive]

Well, the reasoning we have is not saying, well, let's specifically look at the energy cost, the wage cost, the raw mat and see how much pricing we need to compensate each of those components. It's more how much pricing do we need in order to deliver our financial contract.

So far, in 2022, the wage increase has been pretty much under control. The wage inflation in 2022 was something between plus 4% to plus 5%. So it's not at the same level as raw mat and components. I don't know if I gave you the number, but the price of raw mat and components over the first 9 months of the year went up 15%. So raw mat and components at 15%, wages up from 4% to 5%.

So it's testing exactly the same order of magnitude. Now going forward, and this comment applies both for Q4 and for 2023, our pricing policy will be what we need to do, get in order to maintain a good balance between competitiveness and profitability and value creation. So if we believe we need to do a bit more pricing because of skyrocketing marketing energy costs or increasing wages, we do a bit more pricing. This is something which is not out of reach. Again, when you look at our pricing compared to what has been communicated by our peers, I don't believe we have done too much pricing. I think that we have retail ability to do a bit more pricing.

[James Moore, analyst]

The second one, if I could, is order backlog is normally, I think, quite short for you, maybe a month or so. But I imagine with the supply chain crisis, it's stretched. I wondered if you could say what the normal backlog in months of sales was and what it is today, to give us a feeling for what you have?

[Benoît Coquart, executive]

Well, the normal backlog, if we do well is 0 because we are almost done a few million as we -- the vast majority of our orders, if not almost all of orders, the orders we get to be delivered out of our existing stocks. They are not orders planned for next month or in 6 months. We should be able to deliver the orders we get out from our existing stock. Now indeed, we have a number of orders which we couldn't fulfill on time because of the lack of products, sometimes lack of components. I can't hardly quantify it because backlog is never given forever.

If you have an order, which you can only fulfill 6 weeks because it takes time for you to get the airplane component to manufacture the product. Well, this backlog can always be captured by the customer. So the backlog is not branded forever. So I don't believe it can give you one way or the other any feeling about what we have ahead of in terms of top line. This is unfortunately the nature of our business, which, of course, not apply with companies that have structurally a large order book is not the case for Legrand.

[James Moore, analyst]

And if I can finish with your European monthly volume momentum would be what I'm really trying to get to, but I'll be interested in whatever you can say. But as we've gone through the third quarter, into October? Just trying to scale really when the peak month was, excluding price and how much it's dropped. And I'm particularly thinking about new-build resi versus non-resi and whether renovation in resi is kind of holding up.

[Benoît Coquart, executive]

Well, I cannot comment on October in monthly numbers are not really the event in our trade. What I can tell you is that we have not seen within Q3, eastern Europe not elsewhere, a trend, which would be worth mentioning to the financial community. If we had seen a trend, we would make it public, but it is not the case.

Now again, monthly number at Legrand doesn't mean much. Don't forget that we are in a very complex economic chain where we are selling to distributors, selling it to contractors, installing them the products and so on and so forth. But no specific comments on October and no specific trend within the quarter within Q3.

[Operator]

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

[Gael de-Bray, analyst]

I have 2 questions, please. Firstly, volumes have been flat or even slightly negative for 2 consecutive quarters, and you're guiding for a further decline in Q4. So why do you continue to increase inventories? So that's question number one. Question number 2 is on the growth side of the story. I mean, your growth this quarter has been lagging that of your peers pretty considerably, I think. So could you perhaps comment on competitive dynamics, and since your mix is, of course, often a bit different from that of your peers. Could you also provide a bit more granularity on the organic growth that you achieved in Q3 in non-resi versus resi?

[Benoît Coquart, executive]

Okay. So in terms of volume, were no, Q1 was up, Q2 was slightly up, and Q3 is down. So no, you don't have 2 consecutive quarters of decline in volume. You have 1 which is indeed Q3, which is indeed slightly down. And I think that I gave a number of indications on what happened in Q3. We don't believe that Q3 should be to be read as a clear sign of the slowing end demand. It's more soft volume in Q3 are more linked to temporary structural factors, the conflict in Russia, Ukraine, Chinese and South American market dynamics, availability fleet components and a slight destocking from distributors.

As far as the competitive dynamics are concerned, well, let's look region by region. If you look at Europe, and if you put Russia back to the European parameter of some of our peers, which are publishing Europe, excluding Russia, where everybody is more or less at plus 10%. When everybody brand is that slightly above plus 10%. I said excluding copper, is plus 10-point-something. ABB plus 10. Schneider Russia back plus 10%. Signify is plus 8. Solarfective at plus 1%. So in Europe, we have no material difference compared to our peers over 1 year, and we are doing better than everybody over 2 years -- significantly better over 2 years.

In Americas, indeed, we are below a number of listed peers with plus 11%. We are below companies such as ABB, Hubbell, Eaton. And that's probably where the gap is coming from -- global, let's say, Legrand level from North America. Now don't forget that we have a different exposure compared to those guys. We are not exposed at all to the utility business or to the Industrial Automation business, and it has been the business booming in the U.S. And it has also been the business which has experienced the highest price increases. But we are not in this business. We are active on, as you know, the 50% is not ready. But it's mostly office building, schools, heads and so on, it's about 25% isn't that entered, and 20% is ready.

So we have absolutely no exposure to the infrastructure industrial automation and so on. But indeed, zooming on North America, we have a gap, which is higher in 1 year or 1 year than over 2 years. Now -- and third, the last zone where we can compare with a little bit because they are issuing numbers in Asia. In Asia, we are doing better than everybody, those release net numbers, with plus 10%. We are both Axel, Schneider, Vertiv and a few others. This is true over 1 year, and this is -- also true over 2 years.

So to make a long story short, we are at par in Europe with our competitors above over 2 years. We are lagging behind our listed peers in North America, which is the fact and we are ahead of the few listing peers, which release numbers in Asia. So these are not the pure mathematical analysis. Now again, as usual, I don't like this comparison because I don't believe that Schneider, Eaton have both really competing apple-to-apple against Legrand.

Our competitors are mostly, as you know, small to midsized companies. We are doing the in-depth analysis of our competitive position once a year. It's difficult to be competitive position every single quarter and we'll see what our market positions are doing. I don't believe we are losing market share. We are not, for example, in North America and the fastest-growing segment is the fact. As far as inventories are concerned, well, our increased inventory for the past 12 months has been linked to the fact that not only, of course, raw mat -- the price of raw mat and components was increasing but has a mechanical impact on our inventory level.

On top of that, you may have some FX factor and perimeter impact. But indeed, we have increased our inventory term by about 20%, I think, which is coming from the fact that since last year, we really wanted to favor [indiscernible] to our customers even at the expense of our level of [indiscernible]. That's what we've been consistently doing. We've said that very openly to the financial community that we were looking to do the best service possible, even at the expense of inventory.

Does mean that we are servicing very well our customers. The answer is no, not enough, because we are lacking a number of components. But if we hadn't increased the level of inventory, the situation would be even worse for distributors. And I don't believe that it would have been a smart decision considering all sides.

Now our level inventory to sales stood at more than 19%, it was 19.4% at the end of September 2022. And I tell you what I told you last quarter, we don't believe that it is a sustainable level. We don't intend to be at 19% or 20% forever. Fortunately, with the progressive easing of the supply chain situation in plastics, in metals and hopefully the electric component, we'll have less of a need to have this kind of level of entry, and we will progressively come back closer to historical levels. It may take a couple of quarters, but we'll do it. Does this answer your question, Gael? Or do you want me to be more precise?

[Gael de-Bray, analyst]

Yes. Thanks very much. Just very quickly, I understand that the comparison with ABB, Schneider and a few others is not perfect. So that's the reason I would be interested if you could quantify the difference in the organic growth rate between non-resi and resi this quarter?

[Benoît Coquart, executive]

Well, we don't have this kind of number right now. Again, because even between resi and non-resi, some of the products are the same. So we can give you a flavor of what we've been trying to do. And well, take for example the U.S. resi is in value up to low single digits, which means that it is down significantly volume.

But again, it's not specific to 1 look at what is happening in the consumer goods you'll see the same phenomenon. Data center is up despite it has a significant basic comparison and nonresidential, excluding data center, it's up between 10% and 20%. So mid-teens, if I may say. Well, this is kind of [indiscernible] in the U.S. When it comes to Europe, it's even more difficult to evaluate the DIY-related sales in Europe are down in significantly down volume, which again is not a big surprise given the trend is experienced when we exited down energy efficiency products, as I said, it's significantly faster than the average of [indiscernible].

And the [indiscernible] product, it's about at the same pace. So also both [indiscernible] European average. So this is kind of a directional indication I can give you. I cannot be more specific than that because -- this is -- those are not numbers we are tracking with the same accuracy because in our business [indiscernible] complicated to do so than, for example, sell by [indiscernible].

[Operator]

Next question comes from the line of Alexander Virgo from Bank of America.

[Alexander Virgo, analyst]

I wondered if I could clarify something on price and then ask a question on margins. So if I just clarify -- if you did 11% or slightly over 11% in Q3, your Q4 last year was about 5% to 6%, I think Q1 was 8%. So [indiscernible], I would have thought carryover is 5 and 3. So I'm just wondering where you get the 10 -- or can you help us get to the 10%? And then second question on margins. If I look at the last 3 quarters or so on your raw material inflation, I think you've gone '18, '16, '11 and pricing has come up to 11%. So I'm just wondering why we haven't seen better margins, notwithstanding your comments about restructuring costs in the Q3.

[Benoît Coquart, executive]

Okay. I will start with the second 1 on margin. Why not make bigger margin in Q2 -- in Q3, sorry. Well, as we said, the main driver is additional restructuring, roughly 30, 40 bps which is quite meaningful, but which is also quite smart considering the variance of an environment and the challenging environment in terms specific geographies. Then what are the dynamics in the margin of Q3. It's finally the evolution of sales price, which is quite parallel to the purchase price. So it means less pressure on the gross margin. But at the same time, with top line growing at 8.4% versus 10 -- 10 points in 9 months, less leverages on costs. Does that clarify your question?

[Franck Lemery, executive]

And there was a question about the carryover.

Let's remind the dynamic last year, Q1 was 1.9%, Q2 1.9%. Q3 was 4.3%, then 5.9% of increase. And in 2022, 7.8%, 10.4%, 11.3%. So if the carryover that we share with you that Benoît shared with you first. Now once again, I do insist it's very theoretical. If you remember the number we discussed during our prior earning release, it was lower at what we did actually in terms of pricing.

So it's a very theoretical turnover. And the point is, if we were to stay at the current level, meaning if pricing in Q4 were to stay at Q3 level then full year would be around 10% on board.

[Operator]

Next question comes from the line of Aurelio Calderon from Morgan Stanley.

[Aurelio Calderon Tejedor, analyst]

I've got 2. I'll take them 1 at a time. It's a bit of a follow-up on what you mentioned on market share in the U.S. and some peers being more aggressive in terms of pricing than you have been. I wonder if you could quantify the gap that you have in terms of pricing compared to what some peers or some competitors have done in the U.S. and how you think market share dynamics are evolving there?

[Benoît Coquart, executive]

I've not really said that the competitors were more aggressive in terms of pricing. I said that it seems like the pricing dynamics has been pretty different between the business in which Legrand is and business related to industrial automation, robotics, utilities and so on and so forth. Just looking at what most oil and gas and just looking at the release of my U.S. [indiscernible], which do have a sizable USR, looking at their [indiscernible], it seems like they have experience, stronger price increases mostly coming from pieces of business in which we are not, typically, again, utilities, oil and gas and so on and so forth.

Now when it comes to my business, the business segment in which I am, so data center, conduits and wearing devices, audio video, high-end lighting features, the smart home and so on. I don't believe that we are lacking pricing. We are doing the appropriate level of pricing. We're not doing too much pricing. Again, that's the reason why we retain the ability to do a bit more in the U.S. as elsewhere if we did. But we don't have a huge gap versus our competitor. Now, my comment was really about the fact that some market segments in which we do not operate utility, oil and gas related automation. And so apparently, we're not specialist of those businesses. But from what we read I experienced even stronger price increases in the electrical products.

[Aurelio Calderon Tejedor, analyst]

That's helpful. And my second question is around data centers. And I think you've already mentioned some of the growth rates that you've seen in the third quarter. I wonder if you can one, clarify the growth rates that you've seen, if you could and two, we've seen some announcements from hyperscalers not cutting down CapEx, but maybe more the rating into 2023. What are you hearing from your customers? Could you give us an indication on how could 2023 could look like for data centers?

[Benoît Coquart, executive]

No, we are not hearing of any slowdown in end demand, neither from hyperscalers nor from other data center specialist, we are hearing from them that they would like us to be better at delevering products. So data center is typically an area where it has been extremely difficult to not only for Legrand, but also for other manufacturers to supply products because most of those products are incorporating electronic components and some of them are coming from China.

So the underlying demand remained strong, if not very strong in Q3 as for in Q2, but we have faced significant supply chain issues, and we've not been able to fulfill the orders coming from our customers as much as we wanted to. So hopefully, it will -- it will support our top line going forward indeed.

[Operator]

The next question comes from the line of Jonathan Mounsey BNP Paribas Exane.

[Jonathan Mounsey, analyst]

So take the first one. You mentioned that you intend maybe over a couple of quarters to get inventory or sales back to maybe historic levels. I mean you are at kind of 19% on a trailing 12-month basis, even a bit above that. I mean could we just understand what's in that inventory? You've mentioned the higher price of purchases. I'm just wondering how much of the elevation in that ratio is just a function of the purchase price you paid is actually more than the pricing on the P&L. So on the sales line so far. And then actually, it's not just about higher volume. You mentioned 20% earlier. Is that how much extra volume you have on the balance sheet right now, roughly 20% versus the normal level.

And then as a follow-up question, obviously, I mean we're probably going to a slowdown. I don't expect volumes to reaccelerate anytime soon. And if they don't, how are you going to actually address those higher inventories? You're not going to unwind it from an accelerating top line, higher volume demand from customers. So you're going to probably have to underproduce. And when you do this, won't that impact your margins? I mean consensus is modeling 19.8% for next year for 2023. If you try to bring that volume number down on the balance sheet to something more akin to where it used to be sort of 15% of sales, Surely, you're going to have to underproduce. And isn't that going to impact margins and make it very difficult to keep the margin at that 20% level next year.

[Benoît Coquart, executive]

Okay. So let me take the questions 1 after the other. So maybe to make sure that, again, we really have the right numbers. So our ratio of inventory to sales, which is above 19%, is more or less 5 points above our historical level. Out of those 5 points, you can break down that between, let's say, plus 1 point, which is purely mechanical, basically FX and [indiscernible] plus 1 point, which is net inflation. So the inflation of raw mat components and so on, which is inventory versus last 12 months inflation and 3 points, which is the increase in coverage. And that's the reason why we're seeing that increase of coverage, it's about 20 to -- 20 points yes, you are true. If ever inventory to sales increase, means that even though not all of inventory, of course, is coming from finished goods. We also have an inventory of raw mat, components, goods in transit and so on and so forth. When our level of inventory to sales will come down from -- progressively from 19.4% to 15% and 14%. It will weigh on our margin for a couple of tests and maybe Franck will elaborate on that.

Now all that is, of course, embedded into our midterm guidance and model, and this is not the reason why we would deviate from the average 20% we are shooting for. I don't know, Franck, if you want to be more specific on that.

[Franck Lemery, executive]

We have perhaps shared with you a few numbers to quantify what could be the impact on margin. When we look at our inventory today, first 40% of our inventory of raw material and component meaning that is 40%, there is no question of cost absorption of added value, which would penalize the margin in the future.

And by the way, you will probably notice that our account payable on sales were slightly decreasing, meaning that it will progressively flow into the inventory part of raw material. Looking back then there is 60% of the inventory, 60% which include some added value, but it's not all fixed cost, not at all. So I really think like Benoît that by decreasing progressively and smartly our inventory, we will be able to manage that in our margin.

[Operator]

[Operator Instructions] And the next question comes from the line of Eric Lemarié from CIC.

[Eric Lemarié, analyst]

Yes. I have got 2, actually. First, you mentioned already your faster expanding segment, but could you be maybe more specific there and share with us the growth generated in the first 9 months or maybe in Q3 from this fast expanding segment? And do you -- do they still represent 33% of your sales? Or is it maybe more today? And the second question regarding the [indiscernible] investigation in France. I appreciate you can't say much, but do you get any idea of the possible timing there? One of your competitors mentioned -- well, nothing before mid-2023. Could you confirm that reason? And did you spirit -- a bit with this recent indictment regarding this investigation?

[Benoît Coquart, executive]

Okay. As far as the fastest paying segments concern will give you more meat on the bone or color in February. But clearly, it will not be a very good year 2022 for the so-called faster expanding segments, which has been growing more or less at the same pace as the rest of the group. The reason being against the shortage of expanding components. Most of those products do include an expanding components and we have had a number of product families where we had to stop selling for a few weeks we are lacking companies.

So it will not be a good year, and we will not see the same overperformance in the fastest expanding segment, compared to the rest of the group than the 1 we saw last year and in the previous years. Is it a concern? No. Very bluntly no, it's not because we don't believe that it has had any significant impact on our market share. We believe that our competitors are facing the same electronic component shortage issue. And all the megatrends we've been commenting for a couple of quarters now actually are accelerating.

I was mentioning that energy efficiency-related products have grown 10 points faster than the average of Europe over the past 2 years. We expect this trend to continue, and we have a product families such as despite the recurring component stage, productivity such as EV charging stations, thermostat, electrical valves, high-efficiency transformers, high-efficiency UPS, measures and a few others, which have been growing very significantly.

So even though it's a concern shorter because, of course, we would have loved to have the electric components, and we have lot to deliver more cost than what we did. It is not a concern midterm because we believe we have the right positioning and we should be able to just to come back to a faster trend compared to the traditional infrastructure-related products.

Well, when it comes to the French competition topic, we have issued a couple of press releases. The last one on October 20, where we confirmed that one of our French entity was indicted and we were ordered to provide security for an amount of EUR 80.5 million. We made it clear, I think in the press release is that we will challenge and we are challenging the process that we are strongly convinced that our press release is fully compliant with applicable law and we intend to demonstrate it clearly to the relevant authorities.

As far as the timing is concerned, I have no reason to believe that there would be a different timing compared to my peers. So indeed, it's highly unlikely that anything that would come out from that before late 2022 or even 2024. But this is a kind of process, which can last years and years and years, and I wouldn't like to make it such a big deal. This is part of corporate policy or corporate life, let's say, when you are living a company such as Legrand, you always have complaints or investigations on IP, on the competition, on taxes, on quality, on HR, a number of topics. And this is our role as managers to deal with that. But as far as the timing is concerned, I agree that you shouldn't have any news on that before a couple of quarters, if not a couple of years.

[Operator]

There are no further questions in the queue. So I'll hand the call back to your host for some closing remarks.

[Benoît Coquart, executive]

Well, thank you very much for your time. [indiscernible], of course, Franck and myself remain at your disposal if you want to have more color on the results. Thank you very much for your time.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.