In the latest earnings call, Benoît Coquart, CEO of Legrand (LR.PA), presented the company's nine-month results for 2024. Legrand experienced a slight sales growth of 2.4% in Q3, attributed to strategic acquisitions and increased demand in the datacenter sector. Despite a general downturn in the building market, the company maintained a stable adjusted operating margin of 20.5% and reported a net profit of €834 million. Legrand confirmed its commitment to its 2030 financial goals, including a target sales CAGR of 6% to 10%, and set an adjusted operating margin target for 2024 at 20% to 20.4%.
Key Takeaways
- Legrand's sales grew by 2.4% in Q3, driven by acquisitions and datacenter demand.
- The adjusted operating margin remained stable at 20.5%, with a net profit of €834 million.
- Free cash flow stood at €749 million, or 12% of sales.
- The company completed seven acquisitions, primarily in the datacenter sector, with a combined annual sales of around €350 million.
- Legrand reiterated its 2030 financial goals, targeting a sales CAGR of 6% to 10%.
- A decline in European margins was noted, falling from 20.3% to 20% due to lower like-for-like sales and increased restructuring investments.
- The U.S. datacenter segment saw a 20% growth, while traditional business segments faced challenges.
- Legrand plans to allocate €5 billion for mergers and acquisitions (M&A) through 2030, averaging €800 million annually.
Company Outlook
- Legrand aims for a 2024 adjusted operating margin of 20% to 20.4%.
- The company does not expect immediate improvement in the challenging European residential market.
- Recovery in various markets is anticipated to align with falling interest rates.
Bearish Highlights
- The European margins declined slightly due to a decrease in like-for-like sales and higher restructuring investments.
- The residential market is slightly bottoming out, representing 20% of sales, with negative projections for 2024.
- China is experiencing a double-digit decline in the residential sector.
Bullish Highlights
- U.S. datacenter sales have grown significantly, now accounting for 30% of U.S. sales.
- The company remains optimistic about growth in India, which has become more important than China.
- Strong performance has been noted in the Middle East and Brazil.
Misses
- Gross margins have remained flat year-to-date, with slight increases in production costs amid declining sales.
- The office market shows no immediate recovery, and diversification from this sector is gradual.
Q&A Highlights
- Management discussed the impact of higher working capital on free cash flow.
- The dynamics of European margins were addressed, considering the tough market conditions.
- Legrand's diversified U.S. sourcing strategy was highlighted, with 55% of costs from the U.S. and 20% from China.
- The company is actively pursuing projects in Europe, though their contribution to total sales is currently limited.
Legrand's financial performance in a challenging market environment demonstrates the company's strategic focus on growth sectors like datacenters and its ability to maintain profitability through acquisitions and operational efficiency. The company's outlook remains cautiously optimistic, with a clear strategy for continued expansion and investment in innovation.
InvestingPro Insights
Legrand's (LGRVF) recent financial performance aligns with several key metrics and insights from InvestingPro. The company's market capitalization stands at $27.67 billion, reflecting its significant presence in the electrical and digital building infrastructures sector.
One of the most relevant InvestingPro Tips for Legrand is that the company "has raised its dividend for 4 consecutive years." This consistent dividend growth supports the company's commitment to shareholder returns, even in challenging market conditions. Additionally, Legrand "operates with a moderate level of debt," which is crucial for maintaining financial flexibility in a fluctuating market environment, especially as the company pursues its ambitious acquisition strategy.
The company's gross profit margin of 52.07% for the last twelve months as of Q3 2024 is particularly noteworthy, supporting the InvestingPro Tip that Legrand has "impressive gross profit margins." This robust margin aligns with the company's ability to maintain a stable adjusted operating margin of 20.5%, as reported in the earnings call.
Legrand's P/E ratio of 24.57 suggests that investors are willing to pay a premium for the company's earnings, possibly due to its strong market position and growth potential in sectors like datacenters. The revenue of $9.28 billion for the last twelve months as of Q3 2024 reflects the company's substantial market presence, although the slight revenue growth of 0.31% in Q3 2024 indicates the challenging market conditions mentioned in the earnings call.
For investors seeking more comprehensive analysis, InvestingPro offers additional tips and metrics that could provide deeper insights into Legrand's financial health and future prospects. There are 9 more InvestingPro Tips available for Legrand, which could be valuable for understanding the company's position in the current market landscape.
Full transcript - Legrand SA (EPA:LEGD) (LGRVF) Q3 2024:
Benoît Coquart: Good morning, everybody. Franck, Ronan and myself are happy to welcome you to the 2024 nine months results conference call and webcast of Legrand. 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’ll comment the results into more details. I begin on Page 5 of the deck with the key takeaways of this release. First, in a building market that remains in decline in most of our geographies, Legrand reports stable sales in the first nine months of the year, including a plus 2.4% sales growth in the third quarter, driven by acquisitions and datacenters. Over nine months, we delivered a solid margin and free cash flow. Second, we are sustaining a strong acquisition momentum. Third, we are specifying our margin full year target. And lastly, we recall our 2030 ambitions as presented during our last CMD. So moving to Pages 7 to 8, I will start with an overview of sales. Over nine months, excluding FX and Russia, our sales increased by 0.3% with an organic trend of minus 0.8% and a positive scope from acquisitions of plus 1.1%. In the third quarter alone, sales grew plus 2.4%, excluding FX and Russia, driven by an organic growth of plus 1.7%, embedding a particularly sustained growth in datacenters in the U.S. This is a good performance when considering the current building market environment that remains depressed in many geographies. Looking forward, based on acquisitions made and the likely date of consolidation, the impact from acquisitions should be close to plus 2.5% full year. Regarding the two other elements on sales, the negative scope effect from Russia was minus 0.8% for the nine months of the year, and will be minus 0.6% for the full year 2024. The FX effect was a negative minus 0.7% for the nine months of the year, and based on average rates of October, it will be around minus 1% for the full year. You will read on Page 8, the key takeaways per geographies on a like-for-like basis. In Europe, sales fell minus 3.4% over nine months in a persistently tough building market in most countries. These trends reflect a particularly deteriorated context in major countries during the quarter and do not point to a recovery in the construction market in the very short term. In North and Central America, sales were up plus 2% over the period. We achieved a solid performance in the third quarter with a steep plus 6%, mostly driven by offers dedicated to the datacenter market segment in the U.S. Lastly, the Rest of the World, we recorded a decline of minus 0.9% in the first nine months with a mixed picture depending on regions or countries. Sales grew notably in India, the Middle East and South America, but this failed to offset a slight decline in Africa and the sharp fall in China, while the construction market continues experiencing a marked decrease. These were the main comments I wanted to make on sales. I will now hand over to Franck for more color on our financial performance.
Franck Lemery: Thank you, Benoît. And good morning to all of you. I will start on Page 9, commenting the adjusted operating margin. Before acquisitions, we recorded a solid adjusted operating margin of 20.6% at September end. This resilience confirms the ability of the group to hold margins high in a difficult environment. The impact of acquisition was minus 0.1 point, meaning the adjusted operating margin all-in, stood at 20.5% at the end of the first nine months of this year. Going now to Page 10 and 12 and highlighting two main points: first, the net profit stood at €834 million, representing 13.4% of our sales; and second, the free cash flow came to €749 million at 12% of sales. On Page 2, we can see the robustness of our balance sheet and a net debt-to-EBITDA ratio of 1.7 at the end of the period. This reflects both a solid free cash flow generation and a strong pace of acquisition that Benoît will comment shortly. This concludes the key financial topics I wanted to share with you. Now handing over back to Benoît.
Benoît Coquart: Thank you, Franck. We are now moving to Page 14 of the deck, detailing our recent acquisitions. Our pace of acquisition is very dynamic this year with seven acquisitions already announced, adding around €350 million, we acquired sales on an annual basis. I would like to highlight the fact that out of those seven acquisitions, four of them are in the buoyant datacenter segment and represent annual sales of €170 million with Netrack in India; Davenham in Ireland, Vass in Australia and UPSistemas in Colombia. We intend to pursue this momentum in the coming quarters. On Page 16, a short reminder of our 2030 financial ambitions as detailed during our last CMD, we can maybe highlight two of them, sales with a plus 6% to plus 10% CAGR combining organic and M&A and unchanged targets regarding adjusted EBIT margin, free cash flow and capital allocation. You can find the full presentation on our website for more information. We can move now to Page 18, we specified our 2024 margin target. We now have an adjusted operating margin now of between 20% and 20.4% of sales after acquisitions, which is fully in line with our initial target communicated in February of 20% to 20.8% before dilution from acquisitions. This is it for the key topics of this release. Before we move to the traditional Q&A Session, you will find in Page 21 to 23, our corporate access agenda for 2025 should you wish to meet with Legrand management. Let’s now switch to Q&A. Thank you.
Operator: Thank you. [Operator Instructions] And your first question comes from the line of Daniela Costa from Goldman Sachs. Please go ahead.
Daniela Costa: Hi, good morning. So I will start with the first one and then a follow-up. But first, can you maybe help us out on free cash flow? I think sort of it’s been disappointing at least versus the market expectations for quite a few quarters now. Can you guide us again through what is structurally in there of maybe perhaps a higher working capital level for longer versus what is temporary? And how quickly can we see a recovery?
Benoît Coquart: Hello Daniela, I will let Franck take this question.
Franck Lemery: Yes. Thank you, Benoît. Good morning Daniela. The question is very clear, and the short answer is also very, very clear. We are talking about temporary higher working capital requirement than usual that drives the free cash flow at 12% at the end of the nine months, 12% is not a concerning achievement at all. We had in the past free cash flow softer than that. When we look also in the absolute value, the cash generation of €750 million is nice. But it’s fair to recognize that the working cap is – requirement is slightly higher than the pre-pandemic level that’s for two reasons. First, considering the declining business mainly in Europe, we are – it will take time to adjust the inventory level. Second, and once again, a temporary effect, we are carrying some extra inventory to support the datacenter business. If we were to exclude the Clamper acquisition impact of last year and datacenter additional inventory, the ratio of inventory to sales would be softer than – lighter than last year. So this is it, nothing concerning. I think quite a satisfactory free cash flow generation on behalf of working cap, which is protecting the correct business.
Daniela Costa: Thank you. And then maybe for my follow-up, if I could ask sort of what prompted you on the margin guidance change, both changing it from before to post M&A? And then also, it sounds like reducing it slightly. Is it just mix because of the Europe trend? Or is it something else?
Benoît Coquart: Well, I’ll take this one, Daniela. The reason why we are talking about the margin after acquisition is to make your life easier and simpler. 2024 has been quite an active year in terms of M&A with a plus 2.5% perimeter impact. And based on the Legrand traditional model this plus 2.5% would have led to a dilution of 30 bps. Now you know that the deals we have made in 2024 are on average more profitable than the one we usually do. So we wanted to clarify the dilution impact, which will be closer to minus 10 or minus 20 bps to avoid any misunderstanding on the fact that despite we will have quite a nice perimeter impact, the dilution would be lower than the one you could have expected based on the traditional Legrand model. Now if we look at what we said initially. Initially, we said 20% to 20.8% before acquisitions based on the, let’s say, minus 10 to minus 20 bps of dilution this would have translated into, let’s say, a 19.8% to 20.7% after acquisitions, i.e., a midpoint of about 20.25% to be very precise. This is our, let’s say, initial guidance, including what we can now see in terms of dilution. And what we’re now saying is 20% to 20.8% – sorry, 20% to 20.4%, plus acquisitions, i.e., a midpoint of 20.2%. So, we are moving from, let’s say, a midpoint of 20.25% to a midpoint of 20.2%. So frankly speaking, there’s no change compared to our initial guidance. But we just wanted to make clearer to you the dilution you could expect from the acquisition consolidated in 2024. Is it clear enough?
Daniela Costa: Got it. Yes, thank you. I appreciate that, thanks.
Operator: Thank you. We will now take the next question. And your next question comes from the line of Max Yates from Morgan Stanley (NYSE:MS). Please go ahead.
Max Yates: Hi. Just my first question is just around the European margin. So, 20% this quarter looks like it’s taken kind of quite a big step back versus the first half. And then I guess also year-on-year when you look at the decline in sales, it’s quite a high drop through to get that margin decline. So, I just wanted to understand, could you give any color for kind of exactly what is happening here in Europe? I mean, obviously, volumes is one element, but is this – is there something to do with kind of a particularly profitable region within that falling? Just any color around that European margin would be helpful.
Franck Lemery: Yes. Okay. I will take this one. It’s true that the margin in Europe has declined in Q3. It’s also fair to say that it’s still a very nice margin at 20%. Two reasons for that softer margin. First of all, as you rightly pointed out, business, the like-for-like sales are at minus 4% in Europe. So accordingly, SG&A absorption will need sometimes to be fully digested. And second, restructuring was quite dynamic in Europe versus last year, it’s minus 40 bps of additional restructuring investments, if I may say so. So, that’s the two main drivers, but nothing to be concerned of in terms of profitability management or trajectory.
Max Yates: Okay. Thank you. And maybe just a quick follow-up on data centers. I mean, obviously, it sounds like that’s accounted for a lot of your U.S. growth. Could you just give us a feel or maybe a number on kind of what the datacenters grew at? And also whether your book-to-bill this quarter? And any view on kind of how far ahead your orders are than revenues as well would be useful.
Benoît Coquart: Yes, sure. Well, in Q3, our datacenter sales in the U.S. grew more or less plus 20%, which is a pretty good performance. But unfortunately, it was partially offset by the weakness in our, let’s say, more traditional businesses even though the underlying markets have not deteriorated, but it is true that unfortunately the building market in the U.S. – are not as supportive as the datacenter, but the datacenter piece grew about 20%. As far as the next couple of quarters, we believe that the demand should remain quite sustained in the datacenter market. We can, of course, not commit to a precise number. But in terms of incoming orders, book-to-bill, and so on and so forth, all that remains very dynamic. And we think that we are up for a couple of quarters of nice growth.
Max Yates: That’s great. Thank you very much.
Operator: Your next question comes from the line of Jingyi Zheng from UBS. Please go ahead.
Jingyi Zheng: Good morning. Thank you so much for taking my questions. I have three if I may. Firstly, can I just ask about the pricing contribution...
Benoît Coquart: Sorry to interrupt, but the sound is very bad. Could you kindly talk closer to your microphone, please? Hello.
Jingyi Zheng: Sure, let me try again.
Benoît Coquart: Okay, thank you. It sounds better, go ahead.
Jingyi Zheng: Perfect, perfect. So I want to first talk about the pricing contribution in Q3. So, after flattish pricing in Q2, if I remember correctly, I wondered how has it developed in the quarter and does your expectation for the full year still hold? And my second question is on the acquisition pipeline. Should we expect a similar pace as you’ve done so far year-to-date in Q4 and into 2025? And are there any particular regions and areas you’ll be focusing on going forward? Thank you.
Benoît Coquart: Okay. Thank you. So, as far as the first question is concerned, our selling price over nine months was plus 0.4%. And I can already mention that our purchase price was minus 0.3%, the purchase price – sorry, selling price was plus 0.4%, which implies in Q3, a selling price of plus 0.6%. Those are the numbers. As far as the full year pricing is concerned, from the very beginning of the year, we said that the price would be positive, but reasonable. So we initially said that we would have a maximum price increase of plus 1%, and we confirm this number. So, it will be maximum plus 1%. Q4 alone will be slightly positive, but we don’t expect to have a lot more pricing because we intend to remain reasonable in terms of pricing leverage. So, to make a long story short, plus 0.4% at the end of the nine months, plus 0.6% in Q3 alone, and Q4, which will remain slightly positive. As far as M&A is concerned, indeed, we have had quite an active year. Well, of course, I cannot commit on the number of deals for Q4 or for Q1 2025, but I can confirm that we have still a very active pipeline, a lot of discussions going on. Some of them at quite advanced stage. So, I’m pretty confident in our ability to do more deals in the quarters to come. Don’t forget that we have decided to dedicate a develop of €5 billion to M&A from now to 2030, which implies more or less €800 million per year, give or take. So yes, I confirm we will remain very active.
Jingyi Zheng: Okay, thank you very much.
Operator: Thank you. Your next question comes from the line of George Featherstone from Barclays (LON:BARC). Please go ahead.
George Featherstone: Hi. Good morning everyone. Thanks for taking the questions. Just a follow-up on datacenters. I wondered if you could talk a little bit about the competitive landscape you have now in rear door heat exchanges in particular. Obviously, there has been a bit of consolidation in that part of the market. So it would be good to get your thoughts on the outlook there and the competitive landscape? Thanks.
Benoît Coquart: Well, the competitive landscape is not that different from what we could see in our traditional building market. You have a mix of big guys, companies such as ABB (ST:ABB), Vertiv, Schneider, Eaton (NYSE:ETN) and a few others. And then you have tens, tens, tens, if not hundreds, of local specialists on a given product family on busbar, on rear door cooling, which are extremely active and which are the targets of Legrand. And the four acquisitions we have made in 2024 are good examples of this landscape of active, dynamic, small and midsized companies. So it’s the same landscape as what we see in the building – in traditional, let’s say, building industry and the small ones are as active as the big ones. So nothing specific. And I cannot identify a change in the competitive landscape that we have had occurred in the last, let’s say, 12 or 18 months. Yes, there is a bit of consolidation and Legrand is definitely part of this consolidation game. But it has always been the case as it has always been the case on the building market. So active competition made of either big guys or smaller companies.
George Featherstone: Okay, thank you very much.
Operator: Thank you. Your next question comes from the line of Gael De-Bray from Deutsche Bank (ETR:DBKGn). Please go ahead.
Gael De-Bray: Thanks very much. Good morning everybody. Could you elaborate a bit more on the margin bridge this quarter? I mean, volumes were up, the price cost equation appears to be positive. So what drove the margin down on a year-on-year basis? And in relation to this, really, as you narrowed a bit the margin outlook, what surprised you the most? Was there an unexpected deterioration in any specific category or segment, or was it just the magnitude of the decline in Europe? Thanks very much.
Benoît Coquart: Well, I’ll start with the second question, and I will let Franck answer the first one. Again, [indiscernible] our outlook or guidance or cutting our guidance, we are just switching from before acquisitions to [indiscernible] and we are narrowing the range. But again, I will not do again the math that I did earlier in the call, but the midpoint post-acquisition of our previous guidance was 20.25%. The midpoint of our guidance today is 20.2%. So, there is almost no change. So in other words, the Q3 performance from a Legrand standpoint is very much in line, Gael, not only with our guidance, but also with what we had in mind a couple of months back. The profile, both in terms of top line and in terms of bottom line is very similar to the one we had in our forecast. Now to be a bit more specific on Q3 performance, I will let Franck take this one.
Franck Lemery: Thank you, Benoît. Gael, yes, to be really precise about the bridge of Q3, as you have asked, last year, Q3 was at 20.3%, this year, it’s at 20% of adjusted EBIT margin. It’s minus 30 bps, sorry, out of which minus 20 is the gross margin. As you rightly pointed out, sales price versus purchase price is slightly positive. Production expenses are slightly dilutive. Then SG&A dilution is minus 20 bps, which is a good performance considering the growth of the top line, which is 1.7%, but the growth of the – which means that the growth of the SG&A is rather soft and softer than the year-to-date. And then 10 bps coming from the other. And so that’s a very logical Q4, if I may say so, and there is absolutely – Q3, sorry. And there is no surprise for us in that Q3 is fully on the trajectory that Benoît just recapped.
Gael De-Bray: Okay. Thanks very much.
Operator: Thank you. Your next question comes from the line of Martin Wilkie from Citi. Please go ahead.
Martin Wilkie: Yes, thank you. Good morning. It’s Martin from Citi. Just a couple of questions on your U.S. business. So it sounds like the business, excluding datacenter, still negative. But if you could just talk sequentially about the nonres market in the U.S. Obviously, you said Europe is deteriorating. Is the U.S. stable relative to what you saw in the second quarter? Are there some signs of improvement even though it’s still negative? So that was my first question. Thank you
Benoît Coquart: Yes, sure. So well, it’s a bit difficult to really be super specific on one quarter trend versus the previous quarter. But what we can say is that Q3 are probably more or less in line with Q2 in terms of trends. So, in other words, residential slightly bottoming out, but it’s only 20% of our sales. And the fact that the residential is bottoming out is not yet translated into our numbers. You know that there is a time lag between the time the statistics get better in terms of housing starts, permits and so on at the time it gets into our P&L. The nonresi market are still not really improving. So no visible improvement in the nonresi market. And third, of course, datacenter is very positive. So no significant change in trend from what we can see market wise between Q2 and Q3. As far as Europe is concerned, it’s about the same, still difficult residential market. And it’s very easy to – if you look at statistics like residential permits, residential construction, renovation, new and so on in Europe, the statistics in 2024 remain quite negative. So still difficult and no visible improvement. And frankly speaking, we don’t expect those markets to improve in the very short term. They will improve together with the drop in interest rate, but it’s not a matter of months. The nonresi is flattish or slightly negative and the datacenter market is doing pretty well. So those are the trends for the U.S. and for Europe. As far as the Rest of the World is concerned, well, as usual, it’s a mixed bag. The one country, which is in a difficult shape is clearly China, where the building market and especially the residential market is down double digit.
Martin Wilkie: Thank you. And if I could a follow-up on the U.S. Could you remind us your sourcing into the U.S? I think some components have in the past come from China and how that was offset in previous waves of tariffs, particularly if we think back to 2018, 2019? And I appreciate it’s obviously way too early to understand how tariffs may change into 2025, but you must have some thoughts already about how you might offset that. So yes, intrigued to hear what you might think.
Benoît Coquart: Okay. So about 55% of our COGS in the U.S. are coming from the U.S. and 45% of our COGS are coming from the Rest of the World. Out of those 45%, you have about 20% coming out of China, about 10% coming out of Mexico – 15% sorry. Ronan is helping me, 15%. And the Rest 10% is a mixed bag of Canada, India, Vietnam. And so this is more or less the landscape today. As far as the previous tariff increase was concerned, back in 2018, it was an additional cost for our COGS of US$50 million to US$60 million, which was entirely passed on into the selling price. So it had very little, if no impact on our profitability. Now as far as the potential next tariffs are concerned, of course, it’s an open item, and it’s a question mark. Will the tariff be implemented across the board? Or will that be for all products? Will there be a – what will be the percentage rate? What will the exemptions be? If the tariff were to be implemented as per the initial thoughts of the new administration, the inflation in the U.S. would be so big that it would be difficult for U.S. citizens to bear the impact of those tariffs. So it’s highly likely that there will be a lot of exemptions. So there are a lot of question marks. As usual, we will adapt whatever is implemented. Product by product, we have the same footprint as our competitors. We are not more or less exposed to China or to Mexico. So if tariffs are implemented, it will not be a competitive issue. But again, we will see, depending on the magnitude of the tariff and the potential exemption and the way they are implemented.
Martin Wilkie: Great. Thank you very much.
Operator: Thank you. Your next question comes from the line of Alasdair Leslie from Bernstein. Please go ahead.
Alasdair Leslie: Yes, good morning. Thank you. Maybe a couple of questions, one on a follow-up. If I could just start on datacenters. So, very good growth there in Q3, it looks like a strong sequential acceleration. I was just wondering if there’s any kind of comp effect that might help there and whether you can remind us as well of the kind of basis of comparison for Q4 because obviously heading into Q1, you’re going to have a very easy comp given the flat growth earlier in the year? And then I’ve got a follow-up. I’ll ask that in a second, if that’s okay.
Benoît Coquart: Well, no specific easy or tough comp in Q3, no specific easy or tough comp in Q4. Be careful about the concept of basis for comparison when it comes to datacenter because datacenter is a project-based business, not a flow business. So if you have two or three big projects slipping from one quarter to another, it can impact the performance of the quarter. So no, I wouldn’t say that Q1 2025 is going to be an easy comp, we’ll see. But you shouldn’t expect anything, let’s say, technical happening in Q4, at least. So Q4 should be a normal quarter in terms of basis for comparison.
Alasdair Leslie: Great. Thank you. And then just a follow-up, it’s on the subject of projects, I suppose. You previously highlighted in the gray space in Europe. I think you’ve won some projects there, some reference projects, I think, France, Italy, Switzerland. Are you delivering and executing on many of those now? And can you say anything about sort of whether your win rates are now increasing on the back of those reference projects? And I think also broader portfolio with Davenham power control, et cetera. Thank you.
Benoît Coquart: Well, it’s a bit early to tell you a lot of things about the Davenham success rate. It has been consolidated for – it will be consolidated now actually, so it’s a very recent acquisition. No, we continue to gain projects. Now of course, datacenter business, it’s about close to 30% of our sales now in the U.S. It’s how much, it’s 5% of our business in Europe, approximately. So even though we are successfully grabbing some projects actually white and gray space in Europe. It has still a very little impact on our total sales just because it’s only 5% of our sales and unfortunately, the remaining 95% are under pressure because they are exposed to the more traditional building market. So yes, I can confirm we are still actively pursuing and getting some projects in Europe. Unfortunately, it has a very – still a limited impact on our top line. As far as precise KPIs are concerned, we will be a bit – on our recent acquisitions we will be a bit smarter next year.
Alasdair Leslie: Got it. Thank you very much.
Operator: Thank you. Your next question comes from the line of Eric Lemarié from CIC Market Solutions. Please go ahead.
Eric Lemarié: Yes. Yes, thank you. I got a question on the U.S. What about your strategy to rebalance your U.S. volumes in other nonresidential verticals there? I know you regularly mention it, but do you recon you could achieve positive results in Q4 or next year regarding this strategy? And still in the U.S., do you have any fresh news or fresh comments to make on the recent the office issue in the U.S.? Have you noticed any change recently? Thank you.
Benoît Coquart: Well, the rebalancing, we tried to give a bit of color about this rebalancing during our CMD, but of course, it will take time, and you are not – it’s not a matter of switching drastically in two or three quarters your business from the office market to the education or to the health market, takes a lot of time, and this change can -- will be very, very progressive. So don’t expect it to have a huge impact on our top line in the coming quarters. It is more a midterm strategy in order to diversify our risks and to be a bit less exposed to the office market in the U.S. The big change which is growing fast and which is visible in our sales is more the fact that the datacenter piece of our U.S. market is growing nicely. And it used to represent 20% or 15% of our sales not too long ago, and it’s now at 30%. This is something which is growing a lot faster and which is more visible than pushing ourselves into the education or the health market and a little bit less in the office market. As far as the office market is concerned, we haven’t seen any visible change so far. So we’re still seeing that in the next couple of years, this market will grow again. Remember what we told you during the last CMD, this growth won’t be 5% per year, we’d be happy enough if it is 2%, 3%. But it’s still not very dynamic. So it’s now more a 2025 story potentially than a 2024 story.
Eric Lemarié: Thank you very much. And by the way, maybe a follow-up. I asked the question but Motivair, you know the acquisition of Schneider Electric (EPA:SCHN). Did you look at Motivair as well?
Benoît Coquart: Well, we’re not commenting acquisitions made by others. We know Motivair very, very, very well. We know Motivair key numbers very, very, very well. And I confirm that we wouldn’t have been interested at this level of price.
Eric Lemarié: Thank you.
Operator: Thank you. We will now take our final question for today. And the final question comes from the line of Delphine Brault from ODDO BHF. Please go ahead.
Delphine Brault: Yes, good morning. Thank you for taking my questions. I will ask them one at a time. Coming back on your gross margin that has deteriorated in Q3, but also by several tens basis points over the first nine months. Can you provide a bit more granularity? What is behind? Is it mix, is it lack of pricing versus input costs? And what will be your strategy as regard to gross margin in the coming quarters? For how long are you ready to accept a small pressure on gross margin?
Benoît Coquart: Well, Delphine, to make a long story short, excluding acquisitions, over the first nine months of the year, the gross margin is flat compared to last year. Well, basically, we have an inflation balance, which is slightly positive. So, the sales price versus purchase price slightly positive. But as it is always the case when your sales are a bit under pressure, we have production expenses that are slightly growing, where our sales are slightly declining. So, you have [indiscernible] production expense on our gross margin. But overall, the gross margin is flat compared to last year. The decrease in margin compared to last year, which was fully expected and fully embedded into our guidance. It’s coming more from SG&A and from this fact that our like-for-like SG&A is slightly increasing, which again, is not unusual in a concept of sales which are a bit under pressure. And if I wanted to add a comment with the 50 – I think our gross margin is 52% over nine months, which is historically a very good level of gross margin. So there is nothing specific to be said on gross margin, and particularly, no issue in terms of selling price versus purchase price.
Delphine Brault: Thank you. And then can you provide a bit more granularity on the trend by country in your Rest of the World segment?
Benoît Coquart: Well, yes. So it’s a mixed bag of many things as usual, so China is down quite a lot with – – nothing very surprising, but it’s down double digit. And with the first number not being one, which is completely consistent with the market trend. You know that the building market in China is super, super depressed, especially the residential side. India, I should have started with India actually because India is now much larger than China for Legrand. India is slightly up. There were the elections in H1. And during election time, the market is always very, very soft. Now it’s progressively catching up. So we are very optimistic on our ability to accelerate our growth in India in the coming months and quarters. Except that we have Africa, which had a very difficult start of the year for geopolitical reasons, recovering nicely and growing nicely in Q3. Middle East is very good in terms of top line, double digit. And in the rest of America, it’s a mixed bag, but Brazil is doing very well. Chile and Peru is a bit more complicated. So it’s a very mixed bag. It’s clearly a group of, let’s say, three countries. Those who are growing double digits, and in those – and there, you find Middle East, Brazil and a few other countries, those growing single digit, notably India and last group, China, where sales are down quite a lot.
Delphine Brault: Thanks a lot.
Operator: Thank you. We do have time for one final question. And the final question for today comes from the line of William Mackie from Kepler Cheuvreux. Please go ahead.
William Mackie: Yes, good morning to everybody. Thank you for squeezing me in. My question, Benoît, would be around your thoughts around the evolution of your organic investment not really so much CapEx, although that would be interesting, but more restructuring. You talked about restructuring. I think it’s up 25% year-on-year in the first nine months €50 million or something. What are your thoughts running into the year? Where are you adjusting the balance of capacities across the business? And perhaps on the R&D side, whether you see scope to accelerate the innovation?
Benoît Coquart: Yes. So, in terms of restructuring, indeed, our expenses were €51 million over the first nine months. So, for the full year, you remember that historically, net restructuring was at Legrand at about €30 million per year. So clearly, 2024 will be quite an active year in terms of restructuring. We’re not giving specific guidance, but the numbers could be above 2023, which was €62 million, right, for the full year. And it shows that we have a lot of ideas. The way we work on restructuring, it’s not really to allocate an envelope. If there is a good idea in terms of restructuring coming from our business units or coming from our countries with a nice payback. Then of course, we will add it to the basket of projects and we will finance it. So, it’s more like the higher the better, even though, as you know, it’s included in our adjusted EBIT margin. So to make a long story short, €51 million in nine months. And probably a higher – slightly higher than 2023 for the full year, i.e., more than €62 million. As far as R&D is concerned, well, for nine months – over the first nine months of the year, R&D cash is about 4.5% of our sales. So it’s very close to historical average. It’s growing 5.2%. So this is one of the reasons why our margins are a bit under pressure, as expected, again, in the first nine months. It’s part of those SG&A, which are increasing despite the sales like-for-like are decreasing, but it is a clear strategy. We believe that if we want to keep growing as per our midterm targets, i.e., 3% to 5% per year until 2030, we have to fill the machine with new products. So, I confirm that we will remain very active in terms of new product launch, and we don’t expect to do significant cuts in our R&D expenses. On the contrary, we will keep investing into new products.
William Mackie: Thank you. One short follow-up, I think it’s short. It relates to your M&A strategy and your financing. Clearly, you benefit from very strong cash generation. But I’m just thinking when you look at leverage, how far up would you take leverage in the pursuit of deals in the near term? Would you go up as high as 2.5 or something?
Benoît Coquart: Yes, yes. Right, it’s funny because a year ago, the questions were more how far down you can go because we were closer to 1. Well, the leverage at the end of September is 1.7. You will notice that earlier this year, when our leverage was closer to 1, we’re a bit challenged in our ability to make this. And my answer has always been that our sort of target leverage was to be between 1.5 and 2. So as of the end of September, we are fully within this range with a leverage of 1.7. Now we are not limiting ourselves to 2, it’s if we were to have interesting acquisition opportunities in terms of strategic interest and value creation, which is also a very important topic, we could go well above the 2, if needed. So it could be 2.2, 2.5. So I don’t believe that leverage is really the limit. The limit is more the discipline we want to have in terms of M&A to make sure that we are doing this, which makes sense from a strategic standpoint and from a financial standpoint. That’s it. And again, midterm, you have our target, €5 billion to be invested, i.e. €800 million or so per year, which is consistent with the leverage of between 1.5 and 2.
William Mackie: Very helpful. Thank you very much.
Operator: Thank you. That concludes the Q&A Session. I will now pass the call back for closing remarks.
Benoît Coquart: Well, thanks a lot for your time and for your questions. And I wish you a good end of the day. And should you have more questions, the whole Legrand team. So Antoine, Ronan, Franck and myself will be fully available during the day. Thank you.
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