Legrand SA

PAR:LR

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to today's Legrand 2022 Full Year Results Conference Call. [Operator Instructions].

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

[Benoit Coquart, CEO & Director]

Thank you. Good morning, everybody. Franck Lemery, Ronan Marc and myself are happy to welcome you to the Legrand 2022 results conference call and webcast. As said, please note 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 details into more details. I begin on Page 4 of the deck with the 3 key takeaways.

First, Legrand reports a very solid integrated performance in 2022, i.e., both financial and extra financial. Second, the group is actively implementing its strategic road map. Third takeaway, in 2023, Legrand is aiming to grow between plus 2% and plus 6% at constant exchange rate, with an adjusted operating margin of about 20% before acquisition. We are also taking the opportunity of this call to review our last 5 years' performance, which is an industry benchmark in terms of value creation.

So moving now to Page 6 and 7. I will start with an overview of sales. In 2022, we turned in another outstanding global performance, very much in line with our midterm targets despite all the challenges linked to a continued very unsettled environment. Sales rose a steep, plus 19.2% to over EUR 8.3 billion, reflecting a strengthened competitive positions. Organic growth in sales was plus 9.7%, by our business momentum, pricing power and very active supply chain management. On top of organic growth, the scope effect was plus 3%. Based on acquisitions announced and their likely date of consolidation, the full year impact should be around plus 1.5% in 2023.

Now last component regarding sales, the FX effect. It added plus 5.5% to sales for the year based on average exchange rates in the month of June 2023, the full year impact on 2023 sales should be around minus 2%. But of course, things can change. We'll see in the months to come. You will find on Page 7, the key takeaways per area. Each of the 3 regions achieved a solid level of growth.

Globally, we had many commercial successes, especially in faster expanding segments, data centers, energy efficiency with some negative impact coming from China and Russia, notably in Q4. These were the main comments on sales. Let me now pass the mic to Franck for more color on our robust financial performance.

[Franck Lemery, EVP & CFO]

Thank you, Benoît and good morning to all of you. I will start on Page 8 with operating margin. Adjusted operating margin before acquisitions and excluding asset impairment in Russia, stood at 20.7% for the year, meaning an increase of plus 20 bps from 2021.

This rise in profitability came despite an inflation of around plus 12% on the raw material and components during the year. TI and front-running profitability reflects once again the group's fair management of both expenses and sales prices. After acquisitions, the adjusted operating margin for the year was 20.4%.

Going now to Page 9, regarding the net profit attributable to the group. Excluding the effect of Russia impairments, it grew plus 26.8% over the year. The main driver was the strong rise recording in the operating profit. Trend in the financial results was also favorable. Group's corporate income tax is therefore increasing logically despite the tax rate being down.

Moving now to Page 10 with a few comments on cash and balance sheet. Against the backdrop of strengthened coverage of inventory linked to supply chain pressures and also the priority we gave to customer service, the free cash flow stood above EUR 1 billion i.e., a solid 12.4% of sales in 2022. Free cash flow was particularly high in the fourth quarter.

Last, balance sheet remained very robust with a net debt-to-EBITDA ratio of 1.2.

This concludes the key topics on Legrand 2022 financial performance. I'm now passing the mic back to Benoît.

[Benoit Coquart, CEO & Director]

Thank you, Franck. Let me present our 2022 ESG achievements on Page 12 to 14. As you know, Legrand launched its 2022 -- in 2022, sorry, its CSR roadmap structured around 4 pillars and 15 priorities. So as shown on Page 12, Legrand reached 123% overall achievement rate with strong achievements in 3 pillars: diversity and inclusion, carbon footprint and responsible business. And as expected, some challenges regarding circular economy despite some first good showings.

As you can see on Page 13, we are particularly proud to have reduced Scope 1 and 2 CO2 emissions by 15% at current perimeter and to have raised the share of women amongst managers to 28.5% in 2022. On Page 14, Legrand ESG policy that is already well recognized in various indexes and rankings was once again recognized by outside parties in 2022.

So let's move now to the fourth part of the presentation regarding dividend and capital allocation. So on Page 16, Legrand will propose the payment of 1 point dividend, up 15.2%. This will place the payout ratio of nearly 50% in line with the group's midterm targets. On Page 17, the very good showings over 5 years and our confidence in our value creation model enable us both to pursue an ambitious strategy of acquisitions with at least 50% of free cash flow dedicated to bolt-on acquisitions and to announce a share buyback program up to EUR 500 million over 18 months.

Now going to the fifth part of this presentation with the ongoing implementation of Legrand's strategic roadmap in 2022.

On Page 20 to 22, driven by strong R&D, Legrand is very active in terms of launches of new products with a particular focus on faster expanding segments that represent 1/3 of our sales.

On Page 23 and 24, a key area of growth, M&A, Legrand is announcing 2 new acquisitions Encelium in the U.S. with sales of over USD 20 million and CLAMPER in Brazil with sales of nearly EUR 40 million. Together with the 5 acquisitions announced over 1 year, so the 7 companies represent annual sales of about EUR 200 million.

On Page 25, we are very active in terms of productivity initiatives, notably regarding industrial footprint and product platforms.

On Page 26, some examples of our CSR progress. I would insist on the fact that we start actively embarking our suppliers to get their commitments to reduce their own CO2 emissions and hence, a large part of our Scope 3. I'm now moving to Page 28 and 29. As I told at the beginning of the call, the relevance of Legrand's strategic choices and successful execution have made it an industry benchmark for financial and extra financial value creation over the past 5 years.

Since 2017, our sales grew up by a total of over 50%. The adjusted net profit grew plus 83% and the free cash flow by plus 49%.

On the same period, on average, our adjusted operating margin stood at around 20% of sales despite division coming from acquisitions and despite inflation that clearly outpaced sales price increase. In other words, our productivity gains have helped Legrand improve its market positions while securing its long-term pricing power. At the same time, we reduced our CO2 emissions by minus 34% at current scope and so a very significant rise in gender diversity with a percentage of women amongst managers standing at 28.5% and for key executive positions at 24.4%, up from 14.8% in 2017.

The group plans to continue rolling out its strategic roadmap; and thus, remain on track to generate integrated value in line with the midterm targets we announced in 2021.

And now the last topic of this earnings release on Page 31 with our targets for 2023. Our targets for 2023 exclude impacts linked to the group's disengagement from Russia and are the following: Sales growth at constant exchange rates of between plus 2% and plus 6%, including a scope of consolidation effect of around plus 3% and an adjusted operating margin before acquisitions of around 20% of sales, at least 100% CSR achievement rate. This is what we wanted to highlight today. May I also underline that we have included into the deck, a detailed schedule of the meetings we plan to have with investors. It's on Page 34 and 35. So of course, we will be pleased and delighted to meet again most of the time face-to-face with our investors.

Thanks a lot, and we are now open to questions. Thank you.

[Operator]

[Operator Instructions]. We'll now take our first question from Andre Kukhnin at Crédit Suisse.

[Andre Kukhnin, Crédit Suisse]

I'll just go one at a time. Firstly, can I clarify on the Russia impact vis-a-vis the guidance that you gave. Should we think about the 2% to 6% ex-FX growth as you guided and then take 1.5% out for Russia disposal from that? Or is that already in the 3%?

And related to that, is there a margin mix effect should we think about related to that exit? Was that business dramatically different versus the average group margin, please?

[Benoit Coquart, CEO & Director]

Yes. Andre, this is indeed a good question. Well, as you know, Russia represented last year 1.5% of our sales. Of course, the situation is a bit uncertain because we don't know yet how long it would take for us to dispose from this activity. And we don't know either what the sales evolution is going to be in the coming months until the sales activity.

So the assumptions you can take. So number one, we will treat Russia into scope. So it will be a negative scope for Legrand in 2023. And indeed, our guidance is excluding an impact from Russia. Number two, as far as the Russian top line is concerned, difficult to estimate, but you can estimate that we may lose up to -- or we may have in our accounts in 2023, let's say, from 1/3 to half of the 2022 Russian sales, depending how long it takes to sale the activity and depending on the drop in sales we're going to experience in the next months.

As far as the margin impact is concerned, it can range from 0 bps if we are able to sell quickly the activity. And if meanwhile, we are able to retain an acceptable level of profitability up to minus 20 bps. So in other words, you can take the guidance as it is, plus 2% to plus 6%, which is including acquisitions, but excluding Russia, then you can have a negative perimeter impact which depends on your assumption, but which is going to be at worth 2/3 of the Russian sales recorded in 2022.

And as far as the margin guidance is concerned, again, a negative impact ranging from 0 to minus 20 bps. Clear?

[Andre Kukhnin, Crédit Suisse]

Crystal clear. Yes, absolutely. And can I ask a question on Europe. Just looking at the run rate there on kind of 2019 basis, trying to no doubt the comp effect. It seems to slow down quite meaningfully from the Q2, Q3 kind of run rate by about 8 points even though optically organic growth only went from 8% to 9.8%, it was quite an easy comp. Could you just talk about if there's anything specific happening there? Or is this the kind of ready slowdown has been well anticipated. And was there any particular kind of stocking moves in the quarter that we should be aware of as kind of a one-off nature?

[Benoit Coquart, CEO & Director]

Well, it's always difficult to analyze over a period of 3 years, 4 years, 5 years. What I can tell you is that, indeed, Europe is up 8% year-on-year on Q4, whereas it was up -- it is up close to 10% on the full year. So it's indeed deceleration. Well, by the way, you have to include the fact that it includes also a negative performance from Russia. And Russia performance wasn't so negative in Q1 because the work started late in February, but it was pretty negative in Q4. If you take Europe without Russia, the Q4 performance instead of being plus 8%, it's plus 11%. But this being said, it is true that the situation in Europe is a bit more demanding in H2 than in H1. By the way, European volumes are flat in 2022.

And going into 2023, it is indeed a question mark. And even though some macroeconomists are a bit more pessimistic in Europe than in the U.S. on our side, we are not overly pessimistic. And we believe that even though the economy might be demanding, there are a number of interesting trends that should support our business going forward in Europe and elsewhere, such as, for example, the green products, data center connected products and a number of other things.

So yes, so the volume and the sales are lighter in H2 compared to H1. I wouldn't talk of a strong deceleration and we are cautious, but not overly pessimistic going into 2023.

[Andre Kukhnin, Crédit Suisse]

Really helpful. And just the last one, if I may. On pricing, could you help us with how much pricing you're carrying over into 2023 from the actions already taken and whether you intend to raise further during 2023 or have done so far already?

[Benoit Coquart, CEO & Director]

I have to tell you that I don't like that much the concept of pricing carryover because the truth is that it doesn't mean anything. We can have a carryover, but because the environment of raw mats and components -- the prices of raw mats and components is going down, then we can give additional discounts to our customers, so we can give additional and other rebates to distributor. So your total performance in terms of pricing could be even -- either lower or stronger than the carry over.

What I can tell you, maybe it will answer your question. So as you saw, we are -- so 2 things. Starting with the Q4 numbers. In Q4, we had a pricing of about 10% and we had inflation of raw mats and components of about plus 4%. And for the total of the year, we have a pricing of, again, close to plus 10% and inflation of raw mats and components of about plus 12%. So of course, you have better and more positive relationship between selling price and price of raw mats and components in Q4 than for the first 9 months of the year. This was expected, and this could potentially help a bit of margin in 2023, first topic.

Second topic, let me maybe clarify the guidance we are shooting today. So as indicated, we are aiming to record a gross in sales excluding FX between plus 2% and plus 6%, including a plus 3% perimeter effect, which means you can do very easy math that organically, we are shooting for something between minus 1 and plus 3.

And the way it was built is that it integrates a modest price increase and volumes should be -- should range from slightly down to slightly up. This is the way we have built our guidance.

Now the usual caveat, you know that Legrand has no order book. You know that we are absolutely no visibility in when we will have to deliver in the coming weeks. So of course, this guidance was as usual based on the series of macro assumptions that can prove to be wrong.

[Operator]

We'll now take our next question from Daniela Costa from Goldman Sachs.

[Daniela Costa, Goldman Sachs Group]

I wanted to ask one more medium term and 1 more I'll start by the shorter term. On inventories, and can you tell us if you're sort of now comfortable with the level? Do you plan to destock a bit more next year? How should we think about that equation?

And then more on the medium term, I think now we've been talking about sort of green plans and stimulus for a number of years, and I know there have been sort of some lack of maybe data or values for you to be able to quantify it, but now looking at the U.S. IRA, there is a quite clear timeline and several amounts tag that specific building energy efficiency initiatives. Can you talk us through how you think that's going to feed through what's the cadence you expect that to see through in your business? And where -- which parts of your business you see the biggest impact?

[Benoit Coquart, CEO & Director]

I assume that your question on inventory, it's about our inventory, right, not our customers' inventory. Is that correct?

[Daniela Costa, Goldman Sachs Group]

Well, it was about your inventory, but I take the -- your customers as well.

[Benoit Coquart, CEO & Director]

So the 2 questions at the same time. Well, as far as our inventory is concerned, you know the Legrand historical numbers. We had a level of inventory to sales historically, which was at 13%, 14%. We reached a peak of more than 19% of ratio of inventory to sales in Q3 2022, and as we told you at that time, it was made on purpose because we really wanted in the context of shortage of components, raw mat and so on. We wanted to maintain a good level of service to our customers, which was completely made on purpose. And we are now back to 16.3%, and to be more precise, it is 16.9% if we exclude the impairments we made on the Russian inventory.

So the right number to have in mind is that 16.3%, is really 16.9%. So you can see it was slightly down compared to the level we recorded in Q3 2022, but not yet at a historical level.

Well, our intention is to -- remains to progressively come back to our historical levels. It won't take 1 or 2 quarters. It will be longer than that. It could be 1.5 years or 2 years, we'll see. We will do it in a very cautious manner because we don't want that move to damage our customer service and customer service will remain our first priority. But I can confirm that in the quarters to come in the next 1 or 2 years, you should expect our level of inventory to sales to continue to decrease.

As far as inventory in our channel, well, we haven't seen on globally, anything one way or the other in 2022. So we have not seen significant destocking nor significant restocking from our distributors. Some countries destocked a bit. Some of it restocked a bit, but if we do the total of all that, there's nothing worth mentioning that would have had an impact on our 2022 accounts. And as far as the global level of inventory at our distributors place, my feeling, even if it's difficult to have a precise color on that -- my feeling is that our distributors are not carrying too much inventory. So we'll see what happens in 2023, but it probably depends on their own perception of what the year 2023 is going to be, but so far, we are not expecting a massive or a very significant destocking or restocking in the quarters to come.

As far as the green plant is concerned, well, it's indeed something everybody is tracking very carefully. We have to split between, let's say, the U.S. and Europe. As far as the U.S. is concerned, there's nothing that should have a very strong impact on Legrand in the so-called IA plan, which is dedicated to other sectors than Legrand, but still this being said, you have a number of positive moves at the state level, which could have a positive impact on our business.

You have to understand that as usual in the U.S., you have different policies between the federal state and the local states. And you have now more than, I think, 30 local states, which have committed to targets in terms of CO2 emissions reduction, which are actually close to European targets. And in order to reach those targets, there's no choice but for those states, not only to work on transportation, not only to work on the industry, but also to work on buildings, which I remind represent 40% -- close to 40% of CO2 emissions.

So even if there's not a big federal plan supporting the green business, a number of states have taken some initiatives.

For example, you may know that you cannot build a house anymore in California without being net zero. And this regulation will soon be applied to commercial buildings.

So this is coming in the U.S., clearly, but at the state level, more than the federal state.

Well, as far as Europe is concerned, surprisingly because, of course, the organization in Europe is quite different from the one in the U.S. It's quite similar. So you have all those big for 55 grid plants and so on which we sometimes have difficulties to see how it really impacts our business. But at the same time, you have a number of local initiatives that are indeed pushing ourselves up, take in Italy, the so-called super bonus, which had significant impact on the top line in Italy. We grew very nicely in Italy. You have what we call Máquinas E Condutores in France. And every time -- even if some of those plants are not targeted directly at our sales, it has an indirect impact on our business. When you are installing, for example, a heat pump, we're not active in the heat pump business, but it's highly likely that you will also add some circuit breakers in panel board.

So it's the same story for Europe as for the U.S., no impact of a big European plan, but a number of interesting impacts locally. And looking at the numbers, I can tell you -- I can confirm that in Europe, our green products did very well, grew a lot faster than the rest of our products, both in value and in volume, and it includes the sales of EV charging stations, climate control products such as thermostat, for example, time switches, power busbars, data center called corridors, all those products grow very nicely. And part of this growth was supported by local plans.

Sorry, Daniela, it was a bit long. I hope it answered your questions.

[Operator]

We'll move on to our next question from Lars Brorson at Barclays.

[Lars Brorson, Barclays Bank]

Benoît, Franck, Ronan, can I talk and ask to pricing, please. First of all, what was pricing in the fourth quarter, that would be helpful if you can give it. And I appreciate you don't want to give us carryover, I'm going to assume it's a couple of percent or so. But if I understood your views on 2023 correctly on the guidance, it implied volumes down low single digit to up single digit. That would imply pricing at flat to maybe small up. I'm assuming you're starting the year at high single digits. So I'm trying to understand the pricing cadence as we go through the year. And whether there's a risk to negative pricing as we get into the back half, we've seen some of your particularly U.S. distributors come under a bit of pricing and gross margin pressure. So keen to try and understand how to think about pricing as we go through the course of this year, to the extent you can give some color on that.

[Benoit Coquart, CEO & Director]

Yes. Well, again, pricing is a very dynamic topic. So that's why I don't want to give you a carryover, which will be read as a forecast -- as a target, but you can compute it yourself. I can remind you the number quarter-by-quarter of pricing. Q1, 8%; Q2, 10%; Q3, 11%; Q4, 10%. So you can do your own math and compute carryover itself.

I can confirm that we are shooting for a modest price increase. I can also confirm that there's no way prices will go down. It is clearly a very important part of the Legrand equity story and business model to be able to increase prices year-on-year, and I confirm that prices will go up in 2023.

Now, we assume that even though the energy price will remain high, the price of raw mats and components will be more under control than it was in 2022. And as a result, our pricing instead of being plus 10% in 2022 will be modestly up in 2023, indeed.

And your assumption that our guidance includes volumes slightly down on the low end and volumes slightly up in the high end is indeed the right one.

Two more comments on pricing. Well, number one, pricing should be higher in H1 2023 and in H2 2023. The mechanical impact, if I may say, of a carryover. So you shouldn't bet that into your model.

Second comment, the U.S. situation is somehow a bit specific, reading at the releases from a number of U.S -- listed companies Prices have gone up 13%, 15%, sometimes 17%. I can confirm that our level of price increase in the U.S. was not at this level. And we've been very cautious in not increasing prices too much, neither actually in the U.S. nor elsewhere. And even though we are not communicating on a precise pricing by region, our price increase in the U.S. was closer to the group's average than to the 15% price increase that I can hear here and there.

So we don't believe that we have made too much pricing, and I'm not aware of any margin squeeze at our distributors level. And I still believe that we have retained some pricing capability should we need it.

Now it may be the opportunity also to give you a bit of color on what happened over the last 5 years. Over the last 5 years, prices increased by 19% over a period of 5 years, which is less than the price increase we recorded in raw mats and components, which is 10 points higher, and which is also less than -- slightly less than the wage increase.

So what does it mean Is number one, that we've been able to hold this 20% margin, plus or minus with other means, productivity, footprint, innovation and so on and so forth. Number one. And number two, it means that we haven't made too much pricing once again and that we have retained our ability to do pricing year-on-year, should we need it.

[Lars Brorson, Barclays Bank]

That's helpful. It's just that I'm struggling there with pricing for the full year if you're starting at 7%, 8% year-over-year in the first quarter and the guide implies say 1% to 2% pricing for the full year, how you see the pricing positively as we get into the back half, but maybe we can get -- take that offline.

If I can, secondly...

[Benoit Coquart, CEO & Director]

I mean I can answer this question because the way so-called carryover is understood, it's usually okay. There's a carryover of 1%, 2%, 3%, 4%. And then if you are doing further price increase, the total price effect on 2023 become 2%, 3%, 4%, 5%. But it can go one way or the other. You have a carryover of plus -- of, let's say, 100, but if you feel that because the price of raw mat and components is going down because you want to be a bit price aggressive, even though in our trade, it doesn't have such a good payback in this product family, you can decide to decrease or to have less price increase than your carryover. And it can be done almost overnight. You are giving more discount on a certain number of projects. You are increasing a little bit at the end of the year rebate you're granting to your customers.

So that's why a carryover is very political. I can tell you a carryover of 1%, 2%, 3%. But at the end, it doesn't meet much about the price impact it will have, the price effect it will record in 2023. What I can tell you is that -- is to tell you, number one, prices will go up. Number two, we will do what it takes to, at the same time, preserve our competitiveness and meet our profitability targets, i.e., 20%.

[Lars Brorson, Barclays Bank]

Clear, Very briefly, if I can, just on the volume outlook for '23. Any color around resi, non-resi and data centers will be helpful. I think you've been calling out data center still as an area of volume growth, at least that appears to be the expectation. I wonder where we are on the channel destocking in resi, particularly in Europe? And how do you see the sort of volume cadence? I appreciate that's difficult to call at this stage, but I wonder what thinking is around the key segments for the year. That's it.

[Benoit Coquart, CEO & Director]

What I can tell you what it was in 2022, it's always a bit more difficult to give you a forecast. So in 2022, clearly, the residential piece was less supportive, both in the U.S. and in Europe than commercial.

This being said, if we look at the level of our sales compared to the pre-crisis level compared to 2019, actually, we had significant growth starting from mid-2020 and throughout 2021 and a more difficult situation in 2022, but it's not a very tough situation. This is more the result of sort of one-off booming sales starting mid of the year '22. But as a result, residential was not as supportive as commercial. Commercial was better oriented, both in the U.S. and Europe and data center continued to experience very, very strong growth. And take, for example, the U.S., we grew double digit in data centers this year. We grew double digit last year. We grew double-digit a year before. So we grew double digit, 5 years in a row organically in the U.S. on data centers.

And data centers represent today 14% of group sales.

So if I had to put, let's say, ranking, the slowest vertical was residential then commercial was pretty good and sometimes supported by green products and data center was booming. Well, going into 2023, it's a big question mark. It's a bit difficult to answer. There are pros and cons. If you look at residential, some of the local statistics of housing starts, permits and so on are not very positively oriented.

Now we are not entirely dependent upon housing starts. We have a large part of our sales, which are renovation-driven. There's clearly a need for refurbishing residential buildings and the various green plants will help. I remind you that 70% of buildings in Europe are not energy efficient. And if we want to meet our 2050 targets, we should triple the pace of renovation in Europe, moving from 1% per year to 2%, 3%.

There are a number of new products that you should grow -- that should fuel growth.

So 2022 residential was not very supportive. And I believe that even though some of the statistics, especially in Europe, are not very impressive for 2023. We could have a number of opportunities, and I'm not, again, overly pessimistic on residential Europe.

[Operator]

We'll now move on to our next question from Aurelio Calderon of Morgan Stanley.

[Aurelio Tejedor, Morgan Stanley]

The first one is kind of touching on some of our points on data centers. And I think you've been flagging or I think you were flagging throughout this year that you have been impacted by supply chain constraints and not being able to ship as much as you would have liked to. I wonder if that supply chain situation has improved or has remained stable? How do you see that developing into 2023? And kind of touch that question. Do you feel like you have had any market share shift? That will be the first one.

[Benoit Coquart, CEO & Director]

Well, it's not specific to data centers, but indeed, we had faced 2 supply chain issues. One was on electronic components and it has impacted all products incorporating electronic components. So by definition, connected products, data center and some of the green products. This constraint should continue a couple of quarters that the feedback we are getting from our suppliers. It does not prevent us from growing, and that's what we showed in 2022. But clearly, we could have done more growth, especially in data centers and new connected products if we had more electronic components.

How long will it take to -- for the situation to smoothen if I may say, probably a couple of quarters, and we expect to have no longer any issues, but at the end of 2023, but depending on how fast the problem is solved, it could have, of course, a positive impact on our top line in 2023.

The second constraint we faced were supply chain issues coming from China. We have quite a significant flow of products between China and the U.S. And the zero-COVID policy in Q2 was an issue and the change in policy end of the year was also a short-term issue because all of a sudden, we had 60%, 70%, 80% of our people being contaminated, and I guess it was also the same in a number of suppliers.

So all these changes in policies created some issues, and we couldn't serve our customers as well as we wanted to in the U.S., not only in data centers, but on also simpler products, such as, for example, presence detectors or light switches. Well, we expect this issue to be solved within a few weeks. Once people will come back and they're actually coming back from the Chinese New Year.

From what we understand, a lot of the Chinese people have been infected. We don't expect a significant disruption at the factory level coming from this COVID policy. So the electronic component issue would remain for a couple of quarters. The Chinese supply chain issues are currently being clear.

As far as market shares are concerned. Well, it's -- I can answer broadly your question. I think that we have done well in Europe in most geographies. And I'm not commenting specifically on data centers, but as a whole, we have done very well in Italy. We have done very well in Spain, in Eastern Europe, in Germany, even though we are a small German player. We have been able to hold market share without significant gains or losses in France, which is, as you know, an important country for us. And we have a couple of countries where it has been more difficult. Of course, Russia since we complied with the sanctions, we couldn't sell any electronic components or products containing electronic components in Russia in 2022. So we lost share clearly on some product families that we couldn't sell anymore. And our market shares were also under pressure in the Netherlands. But if we make the total of all that, I think our market share did increase in Europe in 2022.

As far as the U.S. is concerned, clear gains in market share in data centers, when we look at -- so you remember in the U.S., we are mostly active on white room data center. We're not active at all in great space. So we're not selling any circuit breaker, power busbar, UPS in data centers, but we are selling busbar for the white room, PDUs, cabinets, jacks, fiber optics solutions and so on.

And on all those product families, we have significantly gained market share. We have clear evidence of that compared to our competitors.

As for the rest of our products are concerned, the situation is more balanced. You have some gains and you have some losses. And as for the rest of the world is concerned, where the situation has been difficult in Brazil, we are still convinced that Brazil is a very interesting geography to operate and that you can find niches which are high growth, high profitability issues. It's the reason why we bought CLAMPER specialists in search protection devices, especially for photovoltaic installations. But on the traditional product of reinstitution has been a bit more difficult, and we have sometimes accepted deliberately not to be active on some product families as a result to lose market share in order to hold or to increase our profitability.

The other way, the situation has been very, very positive in terms of market shares in India, where we are growing very, very fast and in Africa, where we are also gaining shares.

So as a whole, and even though it's always difficult because the analysis has to be done on a product by product family, and we have 100 different product families. On a country-by-country basis, we feel that 2022 was a pretty solid year as far as market shares are concerned.

[Aurelio Tejedor, Morgan Stanley]

That's incredibly helpful. And if I can squeeze one last question. I was just wondering why you've announced now the buyback. Why do you think now is the right time to announce this? And why is it in this format or not something like a special dividend? Is it to give you more flexibility in terms of potential M&A? Or what's the rationale behind that.

[Benoit Coquart, CEO & Director]

That was exactly the -- you have already the answer. So why now? Well, it's a very simple math. If you look at the past 5 years, we have generated EUR 4.8 billion of cash. We have done what we committed to do as far as M&A is concerned, i.e., over the past 5 years, we have spent more or less half of this free cash flow in acquisitions. We have done more or less what we had to do in terms of dividend. We increased the dividend per share by 50%. We have done -- what we wanted to do as far as employees are concerned, we have increased above inflation in most geographies, the wages of our people. We've done what we wanted to do as far as customers are concerned by doing not too much pricing and by delivering good customer experience, new products and so on.

And at the end of the year, we have a leverage, which is 1.2, i.e., a leverage which is not low, but reasonable. So we thought it was a good idea to give part of this cash back to our shareholders. Why share buyback rather than extra dividend because indeed it's more flexible to make things clear, our first priorities as far as -- as far as cash allocation is concerned, it's #1 acquisition, #2 dividend.

So we intend to keep spending half of free cash flow into acquisitions, and we intend to have a payout ratio for evidence, which should be at about 50% for net earnings. Those are the 2 clear priorities, and we'll continue along those lines. But since we have a bit of extra cash, we are giving the cash back to our shareholders. And the share buyback structure was meant to give us enough flexibility so that it can be stopped or postponed if we had for example, a big acquisition opportunity or a series of many different acquisitions. So we plan to do this share buyback program.

But as clearly stated in the press release, should we have a big acquisition, we will, of course, freeze it and give a priority to acquisitions.

[Operator]

We'll now take our next question from Gael de-Bray of Deutsche Bank.

[Gael de-Bray, Deutsche Bank]

Can I ask about margins Q4 is usually a seasonally weak quarter for you from a margin perspective. And you just printed a very strong margin of a bit above 21%. So the momentum here looks pretty positive. And I guess Q1 '23 margin will probably now be around 22%. The guidance being only 20% or around 20%, can you just elaborate on the driving forces that could actually lead the margins to gradually decline to around 20% for the full year. Is it a question of mix? Is it a question of more investments coming in or wage inflation?

[Benoit Coquart, CEO & Director]

Well, I'll maybe give the mic to Franck to answer this question, Gael.

[Franck Lemery, EVP & CFO]

Gael, thanks for the question. Well, you noticed that, of course, Q4 was quite positive in terms of profitability. You have in mind what Benoît reminded about the dynamic of pricing, sales prices and raw mat and component pricing, which were very unfavorable at the beginning of the year and more favorable at the end of the year.

Having saying that, of course, this dynamic could be the same last year, meaning better start on the front of pricing versus purchase prices. and which will progressively or mechanically fade a little bit out. Then what matters, of course, is the full year target. We will manage our 20% with all the traditional levers of the group, which is adjusting pricing, of course, to cost inflation, but also productivity, accelerating on some dedicated commercial or digital initiatives as we do usually. But the dynamic of pricing could be the one you have mentioned.

[Benoit Coquart, CEO & Director]

Now again to elaborate on what Franck said, we're not guiding on a quarter. We are guiding on a full year, and so be careful of not extrapolating your assumptions on a given quarter throughout the year.

[Gael de-Bray, Deutsche Bank]

Understood. Okay. And then a question on growth. within the organic growth guidance of between minus 1% and plus 3% I'm sure you have some assumptions regarding resi, non-resi and data centers. So can we just get a bit of color on this?

[Benoit Coquart, CEO & Director]

Well, actually, Gael, the question was asked, we have assumptions when it comes to countries and geographies, but the way we manage the business is not -- we are not managing worldwide residential or worldwide commercial business units. It's really country-based. So the assumptions on which -- this guidance was based is what the macroeconomics are telling us, i.e., that the situation should be a bit more difficult in Europe than in the U.S. and the rest of the world. The IMF, GDP forecast, if I'm correct, is plus 2.9% for 2023 with a tougher Europe as far as Europe is concerned or euro area, if I may say, the GDP was -- I mean, grew 3.5% in 2022 and it's supposed to grow only 0.7% in 2023. So our guidance is based on the fact that the European situation should be a bit tougher than in the U.S. -- as for in Europe and in the U.S.

As far as the rest of the world is concerned, we are super optimistic for India, super optimistic for Africa. A question mark for Latin America and a big question mark for China because it depends a lot on any measure of stimulus plan that could be implemented in order to boost the building industry and you know that we are highly dependent upon building in China. So that's it. A bit more optimistic in the U.S. than in Europe for 2023. But again, with the usual caveat, if for whatever reason, the Europe economy is a lot more supportive in Europe than expected. Then of course, it would have a direct impact on the top line and the other way.

But this is the way we look at our business. It's where our budgets are built, country by country and regions by regions. We are not building a budget for resi, non-resi and so on.

Last comment, of course, our sales throughout our geographies, U.S., Europe, rest of the world should be pulled by the fast expanding segment. So we expect data center to continue to grow everywhere. We expect green products to continue to grow, especially in Europe, and we expect connected products also to continue to grow because this is our strategy and those products should record higher than average growth.

[Operator]

[Operator Instructions]. We'll now move on to our next question from Eric Lemarié of CIC Market Solutions.

[Eric Lemarie, CIC Market Solutions]

I have got two questions, if I may. The first one regarding the U.S. I was wondering if you would consider adapting your offer there in order to maybe better catch some current positive trends like, for instance, infrastructures in the U.S. Could you make maybe some acquisition, for instance, to expand your offer beyond your current exposure to building and data centers there in the U.S. is my first question. And I have got the second question on this antitrust investigation in France. Did you try to measure or to calculate the financial risk linked with this investigation? And what could be, for instance, the maximum cost for you? And do you see any changes on that front recently on the front on this antitrust investigation.

[Benoit Coquart, CEO & Director]

So as far as the first question is concerned, we are always looking at adjacencies in the U.S. and elsewhere, and we have identified a number of adjacencies in which we'd be happy to enter. And without even talking about adjacencies are a number of product families in which we are not in the U.S., but in which we are elsewhere and where we could decide to enter.

Take, for example, EV charging station. We are solid and well-known player in Europe for EV charging stations. We're not active yet in the U.S. for those products, but this is typically something we could consider.

Now you are not doing a move into new field of activity in order to have an answer to plan such as IRA if this was your question. So infrastructure, no; industrial automation, no; industrial software, no; medium voltage, no. We will remain within our playground, but within this playground, which is a market of about EUR 120 billion worldwide and a couple of tens of billion euros of adjacencies. Yes, of course, we will keep looking at potential adjacencies.

As far as the French investigation is concerned, Well, we've made 2 press releases on that this year. We could mention -- I mean, the theoretical fine from the competition authorities is well known. It's up to 10% of the sales. Nobody expect the amount to be paid and has never been paid by anybody. If you want to have my feedback, I myself am pretty confident on the fact that we will demonstrate that our practices in France as elsewhere are perfectly compliant with the law that all this derogated price concept and mechanism is by nature and by definition, bringing prices down, not price is up, and that is made in perfect compliance with applicable laws.

So that's it. We will continue to do what it takes to demonstrate that in front of the authorities, and we'll see.

[Operator]

We will now move on to our next question from Alasdair Leslie at Société Générale.

[Alasdair Leslie, Societe Generale]

A follow-up on component availability subjects in relation to the faster expanding segments, that was flat as a share of sales, 33% of the group compared with last year. obviously impacted by component availability. I was just wondering, can you say what the organic growth was in 2022 in that area overall? Was it lower than the group average? And as it stands running now, do you expect that to kind of play a strong catch-up in 2023?

And then you've sort of implied the faster expanding segments have grown around 6% organic historically certainly in the kind of 5 years to 2020, 2021, but that was off a lower base. Given the strengthening set tailwinds, are you now more confident that that's really the kind of growth rate that this area can deliver over the next 5 years as well?

[Benoit Coquart, CEO & Director]

So indeed, the fast expanding segment represented 33% in 2023 and they grew organically only marginally more than the traditional core infrastructure products like-for-like by a few percentage points and not the 5, 6, 7 or 8 percentage points, you could think of, only a few percentage points.

And you have 2 main reasons: number one, the big reason, the main reason is a shortage of electronic components and those products include electronic components.

And number two, and this is a comment especially on connected products, connected products at Legrand are slightly more geared at residential than nonresidential.

But again, the lack and the shortage of electronic components was responsible for the slight or small other performance of those products in terms of like-for-like sales compared to the more traditional one.

Am I happy with this result? No. I'm a bit disappointed by the fact that we had to stop selling some of those products sometimes for weeks, sometimes even for a month or 2 because we didn't have the components. We have lead times that have gone up very significantly. Again, would it be completely solved in 2023. I'm not sure it will be solved from Q1 or Q2, but it should hopefully be solved by the end of the year. I'm very optimistic on our ability to significantly overperform or average like-for-like growth with those fast expanding segments. We have -- and on top of that to keep delivering acquisitions and M&A on fast expense roads. We have given the market guidance that we -- our long-term objective that we wanted those fast expanding segments to represent 50% of our sales. It will not take a year or 2. It will take more than that. But this is still the target that we have.

Now as far as the past is concerned, we have grown the percentage of our sales of those fast expanding segments from 18% in 2015 to 33% in 2022, which is a CAGR of 17.5%. So gross per year of 17.5%. Half of that was scope. Half of that was like-for-like. Will we be able to register the same cash in the years to come? I don't know. But I confirm that we still have the ambition for the products to represent half of our sales over the midterm.

[Operator]

We'll now take our next question from the Alexander Virgo of Bank of America.

[Alexander Virgo, Bank of America Merrill Lynch]

I wonder if you could just clarify your comments on data centers there in terms of growth you're expecting in 2022.

Second question would be, if I understand correctly, you'd still expect to see 20 to 40 basis points of margin dilution from M&A as you've typically guided for in 2023? Is that fair? And then last thing, last point, if I may. I just want to come back to this point on Russia. So if you're guiding slightly down to slightly up, volume-wise. That includes Russia declining 30% to 50%, I think you mentioned. When you talk about the guidance, excluding any impact of Russia, what you mean is we shouldn't be adjusting for 1.5% anywhere. We basically take everything as it stands until such time as you tell us that we should be taking Russia after that. Is that the right way to understand it?

[Benoit Coquart, CEO & Director]

Well, I didn't get your first question. Could you repeat, please?

[Alexander Virgo, Bank of America Merrill Lynch]

Just a clarification on data center growth, sorry, in 2022, I just -- and then I think you said you expect it to grow everywhere in I wasn't sure whether that meant now in 2023 or whether it's -- that was sort of a more of a mid-term comment.

[Benoit Coquart, CEO & Director]

Well, starting with the first question, I told you that the fast expanding segment grew marginally faster than the rest of the product offering. But if we look at the various segments, the highest growth was on data center and green products and the lower growth on connected products. So data center like-for-like sales overperformed significantly the rest of our product offering. The issue, if I may say, the fast-expanding segment, which I can hardly qualify as an issue, but as a sort of a short-term difficulty we had to face what was clearly coming from connected products. So very nice growth in 2022 in data centers. And we expect this growth to continue in 2023.

I'm sure that you have read a number of analysis, but the fact that the GAFAM were laying off people, sometimes improving their margin or cutting some investments. We don't believe that this will be -- will have a meaningful impact on the data center business in 2023 or 2024. There are still huge investments which are planned. If you take something like a ChatGPT, for example, it cannot work and being operated without a huge data center capabilities. So every time there is an innovation, call it Metaverse, call it ChatGPT, it requires additional capacity and international bandwidth. So we remain very optimistic on data center.

Number two, as far as margin dilution, it really depends on how much acquisitions, we do. If we are doing the plus 3% perimeter impact, which we are guiding for, yes, indeed, the dilution could be minus 20 bps, minus 30 bps, while minus 40 bps would be quite a high dilution. But I think it should be probably closer to 20 to 30.

And with the current scope we have, the dilution will be minus 10 bps with a 1.5% scope impact, which is already secured, if I may say. So assuming that the go get of 1.5% could add an additional 10 bps or 20 bps of that usual I think is the right assumption.

As far as Russia is concerned, to make things clear. We are guiding for like-for-like sales between minus 1 and plus 3. To that, you should have -- so excluding Russia, excluding all numbers from Russia, to that, you should add plus 3% of perimeter impact, of which already secured; 1.5% as a go get.

To that, you should deduct the activity we will have in Russia in 2023. It won't be minus 1.5% because we will still have some activity until we sell this business. And it could take as long as 6 months to be sold. What I don't know is how long it will take to be sold and how will the business be meanwhile.

So it will not be minus 1.5% of negative scope. It could be minus 1%, it could be minus 0.5%. Those are the orders of magnitude.

So minus 1% to plus 3% an additional plus of scope and a negative minus 0.5% to minus 1% coming from the exit from Russia.

[Alexander Virgo, Bank of America Merrill Lynch]

That's very helpful.

[Benoit Coquart, CEO & Director]

To be complete in terms of margin, we are shooting for the 20% EBIT margin. Then you can have, of course, minus 10%, minus 20% -- minus 20 bps, sorry coming from -- or even minus 30 bps coming from acquisitions. And then you have minus -- from 0 to minus 20 bps coming from Russia.

[Operator]

We'll now move on to our next question from James Moore at Redburn.

[James Moore, Redburn]

I wonder if I could follow up on the growth segments. You mentioned 14% data center, but we're still 33 for the faster expanding segments. Can I assume that Elliott was the one that dropped from 15% to 14%, and green stayed at 21%?

And also on the growth segments, you mentioned a bit better. Could we think about 12% or more 11% for the organic growth in '22 from the growth segments?

And then the third question is regarding the sequential Q-on-Q volume, excluding working day and price developments in Europe and the U.S. on my math, both Europe and the U.S. last quarter in the third quarter fell 7% Q-on-Q on pure volumes adjusted for working days and stripping out price versus the second was quite a big drop, and I think Europe bounced back up 3% this quarter and the Americas up 6%. And I just noticed that, that's much more than the normal seasonality over the last 10 years. And I wondered whether you noticed what was really driving that cadence in volumes?

[Benoit Coquart, CEO & Director]

Well, as far as -- maybe Franck -- we'll let Franck to answer the question 2. As far as the first question is concerned, don't forget that there is an overlap between the 3 subproduct categories within the fast expanding segment. A product can, at the same time, be connected green and be sold into data center.

So let me maybe give you the breakdown of the 33%. Green products represent 22% of our sales; connected products represent 14% of our sales; and data centers represent 14% of our sales. And then you have an overlap. If my computation is correct, you have overlap of minus 17%. So this is the breakdown.

If you look back in 2015 compared to 2015, green products have doubled in our sales; connected products have slightly more than doubled in our sales; and data centers have almost been multiplied by 4 as a percentage [indiscernible]. And then, of course, you have the overlap. So this is a way that the breakdown is made.

Well, as far as the organic growth of fast expanding segments are concerned, it's actually between the 2 numbers you shown. So between plus 11% and plus 12% as compared to an average group of plus 9.7%, i.e., less than 9% for traditional products. This is the order of magnitude indeed. I'll let maybe Franck to answer the seasonality question.

[Franck Lemery, EVP & CFO]

Yes, if I understood properly your question, James, it's about softer Q4 for Europe and a stronger Q4 for the U.S. As far as Europe is concerned, as we said at the...

[James Moore, Redburn]

If I could just clarify, and maybe my math is wrong, but the way I work is to remove price at the group level in all geographies. And then I take away a working day effect, which I calculate. And I come back to a year-on-year pure volumes, excluding working day. And then I index that and look at what's the sequential Q-on-Q. So I'm really talking about Q-on-Q pure volumes on a daily basis. And I just noticed both Europe and the U.S. were down 7% in the third versus the second. And now they bounce back up. Both of them have come back up. It's just Europe has come up 3%, which is good and the Americas has come up 6%, which is even better, and that's certainly better than we would have thought looking at all the construction data and confidence indicators. And I just wondered what was behind that positive rebound transatlantically.

[Franck Lemery, EVP & CFO]

Okay. Okay. So I understand. I'm afraid that your math doesn't work globally, but the main message is the same is why Q4 stronger Q4 in U.S. versus Q3 and while softer for Europe.

First, starting with your methodology, a number of days on a quarter for us doesn't work very much. Applying the average pricing of the group is also a shortcut. And third, if I understand properly, you are trying to combine year-on-year computation with a sequential view. So for me, it's a lot of caveat in your computation.

Having saying that, looking at Q4 versus Q3 in Europe, if you exclude Russia, the behavior of Europe is slightly the same, you're right, slightly better than Q3, but no meaningful changes.

Second, as far as NCA is concerned, so Legrand for Central America is concerned, Q4, you're right, slightly stronger than Q3. Remember that we said when we disclosed our Q3 numbers, that we had some supply chain challenges in the U.S. It was on behalf of components availability. It was also about the dependency to China.

As Benoît said earlier in the call, we have quite a meaningful flow of product between China and the U.S. And Q3 was particularly a challenge in terms of zero-COVID policy in China, impairing slightly our sales with a slight recovery. So that's the 2 main messages that would explain on what you have seen.

[Benoit Coquart, CEO & Director]

But in other words, we're not seeing a stronger sequential growth in the U.S. nor a strong sequential drop in Europe. Volumes are indeed a bit under pressure, which was expected. And again, for 2023, assuming that we will record from a slight -- volume slightly down to slightly up, I think is reasonable assumptions, both based on what we can see from the macro specialist and from what we recorded in our accounts in Q3 and Q4.

[James Moore, Redburn]

That's very helpful. And if you ever want to help with the caveat and give regional working day effects and pricing, please feel free.

[Benoit Coquart, CEO & Director]

Working days has an impact on our trade over 1 month. So when you have 20 or 21 or 22 days on a given month, of course, one well, you can do the math better than I do. One day, more or less, can have an impact of 4% to 5% on your top line. But out of a total number of days, of working days of 240 or 245 in a year, it has almost an impact. So we can, from time to time, mention it on a given quarter. But frankly speaking, it is not a meaningful input to analyze yearly sales. I am turning to the operator.

[Operator]

For Q&A -- yes, that's all the time. You may go ahead and conclude today's conference. Thank you.

[Benoit Coquart, CEO & Director]

Well, thanks, everybody, for taking the time to look at our numbers and for the discussion. I'm very happy to tell you the truth to meet some of you doing the roadshows to come. And should you have any more questions, you have Ronan, Samy, Antoine and Franck and myself, of course, at your disposal. Thanks a lot.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.