Good morning, ladies
and gentlemen, and welcome to today's L'Oreal 20 21st Quarter Results Conference Call. All participants are in listen only mode. Later, there will be a question and answer session. For your information, this conference is being recorded. At this time, I would like to hand the call over to CEO, Mr.
Benoit Coherent, CFO, Mr. Franklin Marie. Sir, please go ahead.
Hello, everybody. Henk, Namri Vonomark and myself are happy to welcome you to the Legrand Twenty Twenty Twenty Q1 results conference call and webcast. Let me first, as usual, remind you that, we have published today our press release or financial statements and a slide show to which we will refer. Those documents are available on the Luvoir website. Please also note that this conference call is recorded and webcasted on our website.
Before we start, I wish that all of you and your close relatives are safe and good health despite the trend epidemic. I will start with a few opening remarks following which Frank and I will comment into more details our 2020 Q1 results. I begin on Page 4 of the deck with the 3 main takeaways of today's release. 1st, Lebron mobilized very quickly and helping believe to tackle the consequences of the global health crisis, which is of an unprecedented magnitude. Second takeaway is that our performance showed good resistance in the first quarter of 2020.
With a minus 2.2% fall in total sales and an organic decline of minus 7.3%, the adjusted operating margin before acquisitions reached 18.7 percent. Lugo had a solid balance sheet financial position, which guarantee the group's ability to fully preserve a development model over the long term. 3rd, in a highly deteriorated context, LeGrande is actively protecting its model against the deep recession expected in 2020 and is still uncertain outlook the group is recently deploying a series of measures designed to protect both profitability and cash generation, while leveraging sound fundamentals to prepare the future for the future, sorry. I will come back to this point later in the call. So after this quick introduction, let me start first with an overview of Fluor on a happy mobilization, moving to page 6, Laurent, EMEA's first focus was on protecting employees, in particular, by holding out group wide guidelines on best practices and by strictly applying recommendations from officials and from the world health organization.
The group is also working actively to ensure continuity of service for customers whose businesses are critical for the economy. On May 5, 2020, almost all of Locron Logistics centers were open. In addition, lebron is ordering all of its payment commitments and is maintaining its proper dividend for 2019, unchanged from the previous year, thus lower than slightly lower than initially proposed. Now on Page 7, in addition, Leroy has rapidly taken a number of support measures for communities in the countries where it operates. For example, by delivering health care or parts, supplying urgent health care coal solutions, the manufacturing of mass for the distribution of meals to population in need.
Moreover, Le Mans announced the creation of a solidarity fund for nursing homes for the elderly to help patients and staff working in these institutions. Finally, as a gesture of solidarity, the CEO's total annual value compensation is reduced by 25%. The fixed compensation in respect of 2020 To the executive committee is frozen with a significant reduction in the target value of the annual viable portion of the compensation, and last to 2020 composition of Board of Directors is also frozen. Let's continue then with another view of sales on Page 9. So marked by a significant decline in business at the end of the period, we recorded a total fall in sales of minus 2.2% in Q1 2020.
This change rejected from an organic decline of minus 7.3 percent, negative in both Metro Countries and new economies, that was offset in large part by the sustained increase in the acquisition driven growth, the group's 2nd cost driver of plus 4.8% and a slightly positive currency effect of plus 0.7%. Based on acquisitions already completed and the likely date of consolidation, the scope of consolidation should come to around plus 3% in FY 2020. As far as FX is concerned, if we apply the last 9 months of the year. The average ForEx rates observed in April 2020, then annual ForEx effect for 20 20 would be about minus 0.5%. This is, of course, as usual, a very theoretical computation, and it will depend on the actual exchange rate of the various currencies in the lumen suits and quarters to come.
Let me now go into more details regarding the like for like evolution of sales by geographical zone. And I'm referring to pages 10 to 12 of the slideshow. Starting with Europe, organic sales were down minus 5.1% in Q1 twenty twenty. In Europe's major countries, sales retreated by minus 7.4%, recording a more marked decline in the month of March. Although goods warehouses were kept open.
This trend was observed in the main countries, including France, Italy, the UK and Spain, while sales increased in a limited number of countries like Germany and the Netherlands. In Europe's new economies, with still a limited impact of the health crisis, sales increased plus 9.4% with good showings in Turkey, Hungary, Russia and Poland. Moving now to North And Central America, The organic change in sales was negative at -4.2 percent with a decline steepening for March alone. In the U. S, alone, set restricted minus 3.9%, The good performance in user interfaces and best way for data centers were not enough to offset the retreat in other ranges such as PDUs or control end lighting solutions.
Sales decreased slightly in Canada and more remarkably in Mexico. Let me now move to the 0.2% on a like for like basis. In Asia Pacific, sales were down minus 20.6%, as business decreased by close to 50% in China. Sales marked a clear decline in India notably in March alone after a positive 1st 2 months of the year. In Australia, sales increased over the quarter.
In South America, sales declined by 12%. Many countries, including Brazil, reported a sequential deterioration business March as the first lockdown measures were implemented. In applicants, the Middle East, sales retreated minus 12.6%, business was down in the Middle East. The first impact of the health crisis were combined with a persistently difficult environment. Africa where the 2019 basis for comparison was particularly demanding sales decline in a number of countries.
That's for the for the top line. Let me now pass the mic to Frank for an overview of our financial performance.
Thank you, Benoit, and good morning to all of you. Let's start with profitability on Page 13. Where you see that Q1 twenty twenty adjusted operating profit at $283,000,000 was down minus 7.4% from the first quarter of 2019. Moving to Page 14, 2020 adjusted operating margin before acquisitions came to 18.7 percent, 1 point lower than the first quarter of 2019. Against the backdrop of a sharp and sudden deterioration in the business environment, this performance reflects good profitability resistance linked to the group's early adaptation measures and efficient management of pricing.
Including the minus 0.1 point of dilution of commercialization, adjusted operating margin came to 18.6 percent. Moving now to the net profit attributable to the group on Page 15, it was down minus 12.2 percent from the first quarter of 2019. Most of the decrease came from the fall in operating profit, then from an unfavorable trend in the foreign exchange results. This was partly offset by a decrease in absolute value of corporate income tax with a tax rate almost unchanged. Moving now to the cash generation on Page 16.
You know that the right reading of free cash flow generation should be done on a normalized basis You can see on the right hand side of the slide that normalized free cash flow stood at 200 1,000,000, I. E. Down minus 4.1% compared to the first quarter of 2019, representing 15.2 percent of sales in the first quarter of 2020. So additional information on the left hand side of the slide. 1st, cash flow from operation amounted to 14.7 percent of sales, down by 2.9 points.
2.9 points. 2.9% of the last 12 months sales at the end of March 2020. It's down minus 3.1 points from the same period of 2019. This decrease was primarily due to a positive trend in operating working capital. Moving now to the last feature The group's balance sheet at March 31, 2020 was solid, with key features, including cash and cash equivalents of EUR 1,800,000,000 and net debt of EUR 2,900,000,000 with a ratio on the last 12 months' EBITDA of 1.9, along with a well controlled debt of loan maturity.
Laurent has also significant residual financing capacity. That's for the key topics on lookout 20 21st quarter performance that I wanted to share with you. They reflect first the good resistance of the performance in the first quarter. And serve on the solid financial position of the group. I now give back the mic to Benoit.
Thank you for So let me now move to the last part of this presentation, which will explained our initiatives regarding the active protection of Locomodel in a highly deteriorated context. We On page 19, first, the 2020 outlook is still uncertain. The current hedge crisis creating a rapid worsening in the global economic outlook for 2020 with a severe recession now anticipated As you know, in the deteriorated and uncertain context, we suspended our 2020 targets on March 26. Sales continued their organic fall in April 2020 with a retreat of minus 41% for the month alone, confirming trends observed in the second half of March in several countries. On this basis, we anticipate a marked decline in sales in Q2 due to the adoption of many lockdown measures.
Compared to Q2 2020 and subject to favorable trend in the global health situation, the second half of the year should see a sequential improvement. Now on Page 20, again, declining business volumes, we focused on protecting both profitable and cash generation. The initiatives taken to date include adapting the group's cost base, stepping up the pace of industrial footprint initiatives, postponing non prioritized investments and adapting as well as tightening the management of working data requirements and treasury. All those initiatives are taken leveraging on our experience in fully engaged teams, of structure that is as close as possible to our markets and our solid performance management processes. Let me now conclude with 2 slides regarding the Legrand solid fundamentals for the future on Page 21 and 22.
First, as you know, LeBlanc is a worldwide player with operations in nearly 90 countries. We operate in residential, commercial and industrial buildings, And these imposed new construction and innovation were being driven by new meros' long term technological and societal megatrends. Keep in mind that Lebon offers a host of essential products that help keep the economy operating smoothly. 2nd on Page 22, the group is actively addressing the fundamentals that earned their business model of profitable and sustainable development to prepare for the future. To this end, Luca continues to develop its leadership positions to date around 2 34 total sales.
This notably through ongoing R and D effort new product launches. The group continues the deployment of initiatives relative to the digitalization of its processes and efforts of its product offering, notably with Elliott. It did also actively docking newly acquired companies such as Focal Poilt, a U. S. Front runner on the high value niche lighting market acquired at the beginning of 2020.
Last, Laurent pursued the demanding responsible long term approach and is prepared to achieve its announced 2019, 2021 for CSL or Naturate. That's it for this release. For Renault and myself are now ready to open to questions. Thank you.
Thank We have a first question from Gail De Bray from Deutsche Bank. Please go ahead.
Thanks very much. Good morning, everybody. I have two questions, please, to start with. Firstly, I mean, some other industries put China into a context of a V shaped recovery So I'd like to get your view on this. I mean, did you see a pickup too in China in March or in April or are sales still trading down?
And are there any lessons we can take from what's going on in China for all the geographies? The second question is about beyond the negative impact of the lockdowns in the second quarter. How do you think about the trajectory of the recovery by segment in the second half? I mean, you're talking about the sequential improvements. So I'd like to get your views on, how you see the difference in terms of, the path to the recovery between resi versus non resi, between new deals versus renovation.
Hello, Gail. So addressing your two questions, maybe I can give you some, a bit of granularity on the XL sales and and with a specific focus on China. So as we indicated in the press release, our sales were down by 41% in April. And there's an obvious and clear correlation between The magnitude, if I may say, of the local measures and, the magnitude of the sales decline. So typically, there were a few countries in April where we recorded almost no sales.
Take, for example, countries like India or Peru because the lockdown measures were very, very strict there are most of in most of Western European countries, we had a decline in sales, which was deeper or stronger than this minus 41% because lockdown measures were implemented quite strictly. It's the case, for example, for France, for Italy, for Spain, for number country. So Europe, as a whole, declined more than this average of 41%. Then moving to the U. S, the decline was more limited than the minus 41% because even though a number of cities were under quite split lockdown of theatrical measures, for example, New York City, the West Coast, the Chicago and a few others, you have a large part of the country, which was, not implementing this kind of measures.
So so decline instead is more limited than -41%. And indeed, you have a few countries which are up in April, especially those who went earlier than the others into the sanitary crisis. So to answer you directly your question, Gail, China is up in April. South Korea is up in April in terms of sales. And then you have a few other countries, limited number of countries, which are which are still up now.
Does it mean that there will be a V, U, shape recovery in China, I have absolutely no clue is the month of April sort of catch up of all the works. That's where, started before the lockdown and that needs to be completed, is it a phenomenon of a bit of a restocking from a number of players? Or is it something more likely more sustainable than that, we have absolutely no clue. I understand your concern guide, which is to try to find a pattern in China that you can apply elsewhere. But unfortunately, I believe that it's a bit too early, to do that.
And we'll probably have a better visibility about the recovery in China after a couple of months. But very, you know, fact based, China was down by almost 50% in Q1 and was up in April. As far as your second question is concerned, it's extremely difficult obviously to anticipate what's going to be the next month's and the next quarters. The month of April was probably, the worst month in terms of logged on measures. You can see that there are a number of countries which are progressively exiting logged on measures.
Not only France, Italy, Austria, Spain, but also a number of U. S. States, but also in the end, a few other countries. Now what is extremely difficult to anticipate it to forecast is what will be the behavior of the construction industry. And what will the trend be in the next weeks or months?
And as you know, Le Mans has a very limited visibility, We have no order book, so it's extremely difficult for us to anticipate what's going to be the next month's and weeks. As far as trend between resi and resi, commercial, renovation, new and so on. It will depend very much it will depend very much on the country. And I think that the main drivers will more be, the country, either country going into a lockdown, how tax is a lockdown, how fast is the construction industry to recover. So driver will not be the country sale process and deal with that segment.
Last comment on my side, obviously, even though this is not the scenario, which is expected by most of the people, you could always, start of the uncertainty, seeing that they could potentially be new episodes of infections And that's the additional refinements on, let's say, loans and measures are not completely excluded. So all that adds with uncertainty. So to make long story short on your second question, we don't have a definitive answer telling you already should be be a better than commercial or a new better than renovation. It will very much depends on the country, and this will be conceivate that portion.
Thank you. Next question from William Malachy from Kepler Cheuvreux. Please go ahead.
Thank you very much for the time. And I hope you're all well. A couple of questions from me, please. Firstly, could you share with us your thoughts on how you see your distribution partners responding at this time? Did you, or do you assess that there was any significant stocking or destocking in and across the business that impacted in the first quarter.
My second question would be relating to the longer term thoughts you might have from this crisis, I suppose every period like this creates opportunity. How do you think your strategy or parts of your might change post this crisis with respect to perhaps the way in which you've structured your supply chain or the way in which you are using and implementing digital tools and, processes within your business.
Hello, Juliet. So to answer your first question, we have seen, in the laboratory, we have is some destocking, even though you know that it's always difficult for us to precisely assess the assets, because we don't always, in every way, have the exact size of the inventory of our distributors. And again, it's in their hands and it's their policy to manage it, not ours, but we could see, some destocking in the future that is take France, for example, where clearly our selling in Q1 is lower than our sellout. So it has a clear destocking effect. It was also slightly the case in a few businesses in the U.
S. So it's highly likely that part of the very good performance we did in Q4 last year organically was probably a little bit helped Q and A by some stocking. On inventory buildup. And the Q1 performance was a bit negatively impacted by some which, again, is not a surprise for us in the context of declining sales and, of a tough environment. This being said, beyond the inventory changes at a distributor level, what I have to, also indicate is that our distributors are acting and reacting very professionally in this high seeing 5 Cs.
We don't see significant distributors having financial difficulties. They are holding firmly the relationship with our customers. So again, it's not because there is some punctuality talking here and there that are not extremely happy to have those partners as partners in these scientific times. As far as long term opportunities are concerned, well, would require probably more than an hour, will you have to go through or whether it could possibly be changed I don't expect this crisis to change significantly. It's a lot more strategic.
I feel that what we're looking at the strategic let's say core assets of the group, I believe they are well designed to fit with these crises. And we tried to give this sort of a hint in the press release, but we are not making compromise with our strategy, even though the situation is demanding as far as the underlying markets are concerned. We keep investing in new products. We keep investing in R&D. We keep investing in Elliott and in digital.
We keep CSD in relationship with potential targets for the future. We keep deploying our CSS road map and so on and so forth. I believe that so Legrande fundamentals will not change, because of these crisis and we are currently strengthening them and not, sacrificing, if I may say, a personal development task. This being said, of course, the recovery, whenever it will happen, we'll open a number of opportunities. I can pinpoint a few of them, clearly, data center and digital as a whole will be an opportunity.
Videos of people will have understood what it takes to work from home, be in queue from home, being trained from home. And all that will probably develop and will imply more solid data code infrastructure for the residential buildings. So it will potentially have a positive impact on data centers, on connected homes, on on connected, the residential building. And so Number 2, health will be more than ever on top of the agenda of the public policymakers, and we have a number of product family that are in the health sector, whether in the hospital, in the nursing home, or an assisted living part of our business for all people staying at home. The relationship with a lot of people with their the office without a change and people will require their office to be even more friendly communicating safer, sustainable.
So definitely midterm, I think that these virus crisis will imply a few change in people's habits that can possibly have a positive impact on our sales. But again, I don't expect this crisis to significantly change leucomo there. We believe that leucomo there, which is, you know, geared at the gross when the economic situation is good and protection of the model when the economic situation is a bit tougher, is a good, model for the answer.
Next question from Lucy Carrier from Morgan Stanley.
Hi, good morning gentlemen. Thanks for taking my question. Actually, my first question, I think the opportunity may be to rebound on the on the last point you've made around healthcare, data center and so on. Are you able to maybe give us a little bit more color in your non residential exposure. How much is the health care exposure data center you had given that in the past, but how it has evolved Are you able to provide us how big retail, for example, is in your portfolio, hospitality and market?
Are you able to give some color on your non residential exposure?
Well, as always, see, I would love to, but it's a bit difficult because most of the time, as you know, the products, are the same, whether they are sold in, university, hospital, traditional commercial building. And so take a switchgear, for example, it's exactly the same, whatever is the building. So we've been able to do these analysis for data centers because in data you have a few specific products, like for example, passway for data centers, PDUs, cabinets, racks, connectivity, fiber, and so on. But for most of the buildings, most of the verticals, it's difficult. So as you know, data center, it's about 10% of our sales as far as retail speed at AT And Health Care, unfortunately and not in a position to give you a precise answer last but you know that already we see commercial buildings to present approximately as a whole and all type of buildings including to present approximately 60% of sales.
Thank you very much. My second question, I guess, was trying to understand, how we should think about your overall profitability performance for this year in light of the great financial crisis. I appreciate that 2009 is very different than what we are experiencing now. And I was looking back into your numbers. And at the time, I think the organic decline was about 14% and we had a 17 basis point margin decline between 'eight and 'nine.
If I look at what we've seen in the first quarter is a much lower line. It's about half of that, but already quite the double in terms of profitability. So can you maybe help us understand either what has changed in the portfolio that create that effect or what is different in this kind of crisis versus 2009, so we can calibrate, maybe a bit more closely the estimates for the rest of the
year? Well, You know, it's always very difficult to compare one crisis, with another Lucia. So it's there are a number of things that are very different between the levoiret 2020 and the levoiret 2009 and seeing that our very very common. So take, for example, the group itself, we don't have at all the same size. We are a EUR 6,500,000,000 group.
And at that time, we were EUR 4,000,000,000 your group, the geographical mix is very different because the U. S. Is a big set of hotels. It used to be less than 15%. The margin level is not the same.
And we used to have a 15% to 16% EBIT, and we are at a 20% EBIT. The crisis itself is, of course, very different. It is more suited than 1008. So this is not a liquidity crisis, but, but this is an entirely crisis. So comparing the 2008, 2009 2020, is a very difficult exercise, both because of crisis is different.
And because Leroy itself has a different profile. So I cannot a lot to help you on your computation as far as potential leverage impact by quarter and so on is concerned. Now to make things clear, I believe that there are also a number of things that are common between 292020. The model itself of sustainable and profitable growth is quite the same. The pricing power that we have is also there.
The process of performance management are well in place in 2020 as they were in 2009. We have quite an experienced management team and actually most of the country managers, for example, that our emerging countries today. We're also country managers who did have responsibilities at the time of 2008 and 9 crisis. We have a vast vast variety of markets as we had it's at the end of the commercial end. So I would hardly be able to give you a hint to compare the performance of 2020 in the performance of 2009 because I believe that the crisis, the crisis are quite different and no more if it's the same company.
As is being said, you know what our assets are, and it makes us confident in our ability to go through this crisis.
Thank you. And I guess as you were just mentioning the pricing power, are you able to provide us, what was pricing in the quarter? And also, what was the raw material benefit that you accrued in the quarter, please?
Yes, of course. So our Q1 pricing, was up plus 0.9%. On a Q1 twenty nineteen pricing, which was very solid, as you remember, and the inflation of raw materials and components was about minus 1.1% for Q1 2020. So you can do the math yourself, but, there was a slight benefit of the difference between the pricing and price of raw materials and components. And again, you were questioning the 2008 to the 9 comparison our ability to hold prices and even to record price increases even in difficult times and in times during which, the raw material price of chromatin components is going down.
It definitely is the part of the remote air, you know, that We've never decreased our selling price on a yearly basis since we recorded numbers. So since decades, And we are confident in our ability to hold our prices in 2020 across these crisis.
Thank you very much.
Thank you. Next question from Anastasia Lesley from SG Corporate Investment Banking. Please go ahead.
Yes, hi, good morning. I suppose a couple of follow-up questions in a way. Firstly, you highlighted an expected mark decline in sales in Q2. I was just wondering if you can help us a little bit more with how you view the outlook for margins in the second quarter as well, just given your comments on accelerated cost adaptation, it looks as well that your drop rate margins were around in Q1 organically. Do you think you can kind of maybe maintain that level or perhaps even better that in Q2 despite that, obviously, what would be anticipated to be severe fine pressure?
And then the second question, in past downturns, you've been able to structurally optimize costs. I think you re engineered a number of processes. Interested in whether you see the current crisis in the same light and maybe another opportunity to the fast track structural improvements across the group?
Well, I'm not sure I get, I completely got your first question, especially the 30% is the 30% you were mentioning what it relates to? I'm sorry.
Oh, it's the organic drop through just on your margins relative to sales. So basically the outlook for, for Q2 margins.
Yes, no, look, so I'll look for Q2 margin. We don't know if you stated it had very much top line will achieve in May June, which is highly uncertain. So, not only we're not providing yearly guidance, but it will also be extremely difficult to provide the quality guidance, both in terms of top line and bottom line. So unfortunately, I cannot give you any guidance. Accept that as you rightly mentioned, we are doing whatever it takes to mitigate the impact of the volume drop in our P and L and our balance sheet.
Now as far as your second question is concerned, yes, we believe that, those crises are the opportunity for a group like Legrand, to re engineer a number of processes and to optimize our organization. So it's not only about, sort of, doing short term savings, it also it's also about doing some, optimizations, structural intimidation for footprint and our organization. I can give you a number. You know that, on average, Historically, net restructuring charges fluctuate on a yearly basis between 1,000,000 25,000,000 per year. That's what you can find in the account in the previous years.
Well, in Q1 2020, If you look at our accounts, we have an expense of only minus 1,000,000 on restructuring, but actually, it includes The 16,000,000 gain on asset disposal coming from the sale of our premises in Chile and the true Restructuring stands at EUR 17,000,000 to EUR 18,000,000. So we, on average, we do on a yearly basis is 1,000,000 to 1,000,000 for securing. And we booked, 17 to 18, so almost, let's say, 3 quarter of a year, in Q1. So it means that and, you know, Laurent, what we are looking there are only effective restructuring plans. So it's a sign that, we are doing a number of initiatives in order to structurally optimize our processes.
And we anticipate that for the full year, the level of restructuring expenses that we record will be, obviously, significantly higher than the one we usually record, I. E. The 1,000,000 to 1,000,000. So yes, we have lot of initiatives and a lot of ideas in order to optimize and to engineer a number of processes There is sometimes the financial community, this idea that we have done all what we could do. And this was the reason why we had a 20% EBIT margin No.
This is not the case. They are the group is quite different from what it was, as I said, earlier, 10 or 12 years ago, we have made a number of acquisitions. We are a lot bigger. We are in more countries. We have more processors.
So we still have a lot of areas where we could optimize.
Thank you. Next question from Andre Kukin from Credit Suisse.
Good morning. Thank you very much for taking my questions. And thank you for the detail on April. I just wanted to dig a little bit further into it, particularly in the countries where you had, shutdowns and restarted. I guess Austria is one example that restarted a while ago.
Could you give us some idea on where that is running now compared to pre COVID? And a similar question for maybe the countries that didn't shut down like Germany and Sweden, how far are they off, the pre COVID level, if at all?
Well, I wouldn't like you to draw too much conclusions on countries where we might not be as meaningful and significant than others. 2 things, this being said. Number 1, clearly, you have, in Q1, and in March, in April, a clear difference between Southern Europe, with, countries and organic freight lockdown. So Southern Europe France, Italy, Spain, Portugal, let's say. And Northern Europe where, the local measures were not as Street.
They were applied differently, if I may say, so Germany, Austria, Scandinavia. So if you look at the the Q1 performance, Southern Europe was down quite significantly. Northern Europe was slightly up you have a clear difference between the 2. And as you know, for Legrand, Southern Europe is a lot more meaningful than Northern Europe. Southern Europe is about one quarter of our sales and Northern Europe, it's probably something about 5% of our sales.
So this is for, for Q1. As far as the most of April is concerned. I think it's a bit too early, and we don't see, in countries like Germany, Korea or offhand in Avia, a significant change in trend compared to the end of the Q1, But again, this end of the Q1 was not as tough as a decline than Southern Europe.
Got it. Thank you. And in terms of operational gearing for the second quarter. Maybe I could try that, as well, not to give a forecast, but in terms of the measure of the cost actions that you're taking and in the face of that sharp drop in activity in April. Do you think you can keep it proportionate to, kind of level of activity, your cost adjustments or from your experience at least so far in this quarter in April?
Or should we think about, a bit higher drop through, at least for the periods of this kind of extreme decline for this kind of month or 2 just because more costs become fixed as proportion of sales, just automatically given the size of the drop?
Well, it's again, I understand that you want to have this short term vision of what the margin could do in Q2 and what how the margin could react to a minus 41% drop in sales. Again, if I was in a position to give you a more or a clear guidance for Q2 margins, I would definitely do. But in such a high level of uncertainty, extremely complicated Now what I can remind you is a cost structure of Le Mans so that you can do your old math where if you have a cost, let's say, on a total cost base of a 100, you have about 40% of consumption. So raw materials and components, which would typically be 3 quarter of components and 1 quarter of raw materials, about 40%. You have about 30% of personnel costs, You have about 6% or 7% of depreciation.
And then the rest, about 22% of other costs, which are many, many things, sales commission, advertising, freight, and so on and so forth. So this is our constructor. Now of course, some of those costs are viable, typically consumption. Some of those are very fixed, like depreciation, for example, some of them depends on the geography. If you take personal cost, they could somehow viable, some geographies that more fixed in others.
Well, so using this construction tool, you can do your math. Since being said, of course, adapting the cost structure to a month where your sales are down by 41%. It's an extremely difficult task. So our sort of a target as far as LUKOR Management is concerned, then be to adapt in a given month. Our internal objective and targets and the commitment of your board is more of the yearly performance and then, of course, on a monthly performance.
Thank you. I appreciate that. And just a very last question on flipping a little bit longer term and thinking about the opportunities where the ground can emerge stronger on the other end. You've talked about restructuring and taking more measures. You mentioned data centers and health care exposure.
Is there anything beyond that we should think of in terms of where you can or see yourself coming out stronger post, the COVID situation?
Well, yes, there are many areas, I believe generally speaking, a lot of people, we will have to spend, I mean, we have, I think, close to 4,000,000,000 people worldwide, that we're under a locked down process. And, you know, it is a unique moment in the recent history where a and families had the opportunity, if I may say, to spend weeks, if not, if not, months ago, at home. So I think there will be a number of, people that will decide to spend more purchase, in their home to have a smarter, more comfortable home. So this could be an opportunity climate change and energy efficiency, which was already before a crisis, a growing concern for many people, I think there is a sort of, growing awareness now that we have to take care a lot more than we used to to our environment and that the resources are limited and that we should optimize them. And I think that in many geographies, the fight against climate change is going to be part of the public plans that will be implemented in order to support the economy.
Could also be the opportunity for everyone, you know, that we have a lot of solutions and products that are, helpful for our customers to do energy savings, whether in commercial buildings with high efficiency UPS and transformers, lighting controls, and so on, as well as in residential buildings with a number of small products. And the early care, you know, that a couple of years back, we invested significantly on the at is still living. I think what is currently happening to our, all people in Malaysia graphic is dramatic and there is a growing a one is also that we should take care a lot more to people being more than 70, seventy five, eighty years old. So I believe that solutions in assisted living could also help. So it's difficult to size that precisely Although more as it will somehow also depend on the, sort of, regulations and public support.
But yes, I believe that, we will be amongst the sector of activities that could be supported long term or help, or that could have some positive consequences, sorry, for the words, when we will go out of these same type cases.
Got it. Thank you. Thank you for your time. Thank
you. Next question from Simon Tunising from Jefferies.
Yes, good morning, gentlemen. I've got a question on M and A. You had previously guided for at least 4% scope for this year, which is now reduced to 3%. Is that only due to So the worst performance of your acquired businesses or do you just expect to close less deals going forward as well for this year? And maybe as an add on, historically, the grower always had a pretty positive correlation between organic growth and acquisition growth.
In other words, when the economic environment was positive, you've tended to do more deals. If I look back over the last 15 years and whenever it was whenever organic growth was significantly below average, your M and A growth was often less than 2% in 2010, I think it only rebounded to 1.2% M and A growth after almost flattish in 2009. How should we think about it maybe beyond the 3% you've guided for this year, which obviously, mainly due to the deals you've already booked quite sizable as you booked over the last quarters. Maybe a bit more color how we should think about M and A pipeline and deal activity in an environment where things likely going to be slower going forward and whether there's a difference in the way you go about M And A versus maybe prior, weaker periods? Thank you.
Yes. So actually, Yes, indeed, we guided initially for a 4% perimeter impact. Well, the 3% we have included in the press release in not exactly a guidance. It's a sort of mechanical impact of the acquisitions already, done. The sort of mechanical impact it should have on our accounts, including focal point, which was acquired a couple of months back.
Now this being said, we suspended our guidance on March 26, And this suspension, of course, also include the 4% perimeter impact. So in other words, It's highly likely that we're not 24%. The reason being that we have decided to put on hold a number of discussions that we had. And we did it, with, I personally discussed with, a lot of companies that we were currently talking to, and we did that in very, in a very good spirit. And both those companies and ourselves decided that We were better off focusing on dealing with the crisis rising as others and entering into deals.
In a context where it's difficult to perform adjudication. It's difficult to have a face to face meeting to negotiate. It's difficult to assess what will be the underlying accounts of 2020 on which you will base your valuation. So all those difficulties make it somehow a bit more difficult to do a deal in 2020 than it was supposed to at the beginning of the year before the crisis to make long story short, we suspended our 4% perimeter impact to the guidance. We are still and sustaining a goal of relationship with some companies and actually as part of their, guidelines for 2020, our country managers do have as a task to keep and if possible reinforce strengthen the relationships they have with some potential targets so that when the times will be better, will it be able to start again, offensive M and A strategy.
But in the next quarters, it makes more sense, to focus on our own performance rather than doing a lot of these So being said, there could potentially be small opportunities, and we might decide to pursue them, but we'll not pursue bigger ones. Now as far as, the correlation between organic growth and external growth is concerned, the driver is more the economy. When you have the depressed economy, obviously, you tend to have less positive organic growth and you have a lot less people that are willing to talk, for reasons, number 1, because they know that they will not get the same valuation than the record times. Number 2, we ourselves, as we do today, are more focusing on our own performance, rather than spending our cash to do acquisitions. So this is the reason why you often have, at the same time, lower organic performance and lower M and A because underlying economy is not good and it has an impact in both organic and not organic.
3rd, long term, we remain extremely interested to make this an M and A is completely part of our cost model, It is one of the reasons why we have over performed our peers as far as top line growth. Total top line growth is conservative in the past years. So we remain extremely interested when the economy will be stabilized and when we will be able to do all those things I. E, talking face to face to targets, visiting companies, visiting factories and so on. We are we will be extremely motivated to do acquisitions.
And I'm very confident on the fact that our balance sheet will be solid enough to do that. You have, the full balance sheet, as of the end of March, you could see that, we have a gearing, which, which remain reasonable, 1.9, leverage. You could see that we have very significant amount of cash, EUR 1,800,000,000, which is actually higher than what it was at the end of December, despite we had to finance the acquisition of Focal Point So to make a long story short, suspension of guidance, no significant deals in Zuppoda to call because we want free to focus on our performance, contact maintain with many targets. And whenever the situation will be better, Then we will be able to resume, offensive organic growth approach. We have the contacts for that, we have the strategy for that, we have the teams for that, we have the relationships, and we have the cash.
Thanks a lot. And can I just have an add on working capital? Obviously, even significance of April and obviously the sales decline you've seen, Is there any way you could give a bit more color on the sort of working capital move in April? Obviously, I appreciated your comments around you continue paying your suppliers in time. But and obviously, the free cash flow performance in the quarter was much better than expected.
But was there any change in April in the way you got paid, for example?
You are getting 3 d. We give you the sets as a monthly sets, which we never did. You are asking, working capital, the monthly working capital, no, not forget about. Number 1, we don't intend to comment in detail given months because we wanted to give these organic top line evolution in April because we wanted you to have a flavor of what it means when we have a lot of geographies under lockdown. So we thought it was an important information to channel into the market, but obviously, we we do not have the intention to comment the measles and working capital nor any detailed financials of the month of April.
It's not relevant. We already told you that in a given commenting on a given quarter, capital or highly difficult exercise, doing that on a monthly basis, wouldn't make any sense. Now if your question is about, are our customers paying Do we expect to have significant issues coming from some defaults? For example, that some of our customers will experience Well, I have to I have to remind you two things. Number 1, our partners for most of the time, our distribution partners, of the time, are those carings that can exist, and those distribution partners are solid companies, reliable companies, professional companies holding that very nicely.
Number 2, as usual, we have a very strict discipline. And if you remember, the various crisis that we had, we have been able to maintain, it cipline as far as payment terms, as far as customer selection, tracking of customers, tracking of event is concerned. So if you put together the fact that we are organized, leveraging a number of distribution partners. And number 2, we have very strict financial discipline. You shouldn't expect meaningful issues neither for the months of April or the year.
Much appreciated. Thank you very much.
Thank you. Next question from Daniel Acosta from Goldman Sachs. Please go ahead.
Daniela, you have seen you on mute.
Can you hear me now?
Yes. Okay. Good morning.
Thank you. Sorry about that. I have 2 quick questions. First, I wanted to ask you. I don't think we've discussed yet on the call.
Sorry if I've missed it. Regarding milestone, and the performance of Milestone during the quarter and what you see going forward? Just a bit of color on that versus the rest of of Americas would be great. And then, a second quick question, in a lot of these calls, sometimes you give us the breakdown of how pricing and raw mats have been, have been doing, it would be, would appreciate also if you could give us that.
Yes. Well, actually, we did already for pricing and raw materials, but I can again, give you the number. So our pricing, our prices were up 0.9% in Q1, and the price of raw materials and components was down minus 1.1% in Q1. Well, as far as my story is concerned, if you and OMEA will maybe address the U. S.
To peak and not only milestone. So maybe let me first remind you the numbers. So in the in Q1 for local North And Central America, we had sales down 4.2%. And if we zoom specifically on the U. S, this decline was minus 3.9%.
Well, as usual, it's a mixed bag of many things. As far as, Lukron AAV is concerned, you know, that it's no longer, my external load, but we put together my stood and a few other businesses dedicated to audio video that we had before the U. S. So now it's division called Laurent AV. It did pretty well in Q1.
Actually, it's a slightly up to take or stable to slightly up in Q1. So we did the slightly better than the rest of our operations. Now maybe a word in the U. S, are we disappointed or happy with the QM performance? Well, this minus 3.9% should be seen as a relatively good performance for 2 reasons.
Number 1, if you look at our peers, Most of them are down between minus 3% and minus 8% in Q1. Well, you have the numbers like me, it's the electrical segment of Itau is down 4%. Electrical segment of Haverde is down 3%. The equity that's 6, invented on 8, well, I said on North America is done close to 6. So with our minus 3.9% or performance, let's say it's, in line with the market.
And it's also loss satisfactory, if at least sorry to be satisfied with the minus 4% drop in sales. That's our Q4 last year, was a lot better than anybody else. You remember that we commented that, last year, we had, in Q4, our U. S. Sales up by 2.5% and you should look at most of our competitors, they were down between minus 1% and sometimes minus 12%.
So We had a Q1, we have a Q1 2020, which is, let's say, in line with the market, up after Q4, twenty nineteen, which was a lot better and probably be boosted by some stopping. So we are, quite happy with our Q1 performance in the U. S. And number 2, my son is doing slightly better than the rest. So maybe a last comment on the U.
S. On the margin, because, you may have noticed that our margin was down in North And Central America. It was down actually 220 bps in Q1, which is 300 bps excluding acquisitions. Well, I'm interested into the numbers. I know that all of you did not yet have time to do that, but out of these minus 300 bps drop in, as you see, the operating margin excellent acquisitions, 2 third of that is coming from restructuring, IP, 200 bps, So we booked a significant restructuring expense in the U.
S, in order for us to adjust it to adapt to the situation. But otherwise, the cost margin is quite flat. And we have a slight decrease in SG and A coming from the fact that our volumes are down. And even though we have started to adjust our SG and A, we didn't do it at the same magnitude of ourselves. So don't speak there's no specific warning for the U.
S. In top line. We are doing other our peers, and no specific warning on the balance. Thank you.
Question from Eric Lamargi from Bryan Garnier. Go ahead.
Yes, good morning. I got 31 remaining questions. In your slide, I observed that you were not mentioning, not mentioning any government's ads on this slide, does that mean that you're not interested by the virus financial or technical ads provided by various governments in the countries you are located today?
Well, it depends on the country. It is very much a country to country decisions depending on depending on the support you can get, the conditions attached to this support, the impact it has in our account and the limits, it gives, as far as your mobility and adaptation capabilities are concerned. So it's really very well. It depends. It costs specifically we have decided not to call on any public support.
So we are not, you know, leveraging the basically the support provided as far as warranted loans are concerned, we are not we have not implemented the partial employment scheme. So we have decided to use other leverage to adapt, especially we played on days of the number of other bonuses. And there's a number of other topics, but So in force, no, we have decided not to implement or to use any public scheme.
Is there any specific with them beyond that? Any instance in France, for instance?
Well, because we believe that as far as our French, and, you know, who think is concerned, number 1, we have also leverage, which are made available, such as, you know, that in France, we have a tradition of a lot of days off. And there was a number of new lows, allowing to impose the number of days off. So we have a number of other bins that we could use order to adapt and to adjust. Number 2, being a French corporate, we thought that it was somehow responsibility. Because Le Mans is a big organization in France and, pulling everybody under employment, partial employment would have been a big cost for the community.
Number 3, it was also a good way for us to present as much as possible, the remuneration of our teams because partial employment scheme translate into lower salary for a number of factory workers And again, the 4th, the most important reason, if I may say, is that we believe that there are plenty of different ways, which gives new number of, I mean, which gives all the leverage into your hands, if I may say, to adjust your footprint. We're not having to call on the public
Thank you. We have one last question registered for the moment from William Mackie from Kepler Cheuvreux. Please go ahead.
Thank you very much for the follow-up. It relates to restructuring for primarily. When I look at the accounts, it seems that you, you mentioned earlier you booked a GBP 16,000,000 gain within restructuring. Which appears set against the rest of the world in the adjusted operating profit result. So should we think about the adjusted operating profit result in rest of the world in Q1 being closer to the 15% underlying if I exclude the game.
That's the first thing as a clarification. And then with respect to looking forward for this year on your planning, What are what is your planning around the level of restructuring charges we can expect? You mentioned earlier in the call that you would adjust when compared to the historic run rate? And are there any other gains that you might be able to realize to offset that within the results this year? Thank you.
Well, as far as one off coming from the sales of our Chile grading. I confirmed that the amount is about $16,000,000, and it's, it's in the rest of the world, the adjusted operating margin. If you look at the the adjusted operating margin in the rest of the world region, in Q1, it's up 4 70 bps, And if you exclude the impact of acquisitions, it is up 400 40 bps. Well, this increase is entirely coming from the selling building. If you were to exclude the sale of this building, you would have a margin, which would be or I'll let you do the math, but it would be slightly down.
With, basically, 2 things, gross margin, which is expecting improving and a negative impact from SG And A, because of the strong and sudden impact of the crisis, which started by Zidaria with China. So yes, you have to, take into account the fact that all of the margin improvement, right? So the word is coming from this is Chilean, as a sense of this building. Looking at the year 2020, as a whole, I told you that, we expected these restructuring charges to increase and to be higher than the average of the previous year's, I. E.
EUR 20,000,000 to EUR 25,000,000. I cannot set the precise number because all the plants are not yet decided and the timing of some of those plants Navalari. So it's extremely difficult to give you a precise guidance, but we have a lot of ideas and a lot of commitment from our units to find the good productivity and, and adaptation opportunities will there be additional sales of building to finance seasonal structuring? Well, it's very uncertain. You know, this is one timer came in Q1 2020.
It could very much come last year or in 2 years' time. So I wouldn't commit to finance 100% of the restructuring plan using set of buildings. You will have, versus doing charges indeed in geocals definitely. So if I were you, I wouldn't, for my model, I wouldn't take for granted that we will be additional sales of bloodings, even though it can happen, but it will be reasonable, even the uncertainty not to take any more than Chilean sales. And you can take into account the fact that we will have restructuring charges that will be that should be typically higher than the one we usually book at e1000000.
That's very, very useful. 1, if you allow me, just one final question. We haven't discussed really the supply chain much. Obviously, supply chain performance is critical for your business. Around the world.
What have you experienced in terms of the supply chain performance deliveries Has there been incremental cost on logistics expediting logistics? And what do you assess as the current situation going into the second quarter? Thank you very much.
It's indeed a very important question. A couple of points. Number 1, we do not have any significant shortage as far as the supply chain is concerned. We were afraid we would have at the beginning of the year when, of course, many Chinese factories shut down. But this has been solved, and we don't expect any significant shortage going forward, also more as, obviously, the demand being lower than anticipated by many players in the beginning of the year, it's a bit easier for suppliers to adapt, but most of our almost all of our suppliers are open, open and up and ready.
Number 2, in a context of crisis, usually, you would expect high performance sales and components to go down significantly. Where it's going down. That's what we showed in the Q1 result, which is a minus 1.1% price decline of raw materials and components, it is true that it's a bit more competitive than usual for capital reasons. You can have additional cost And you're rightly mentioning the fact that some of the logistics costs are higher because some of the supply that we're that were shipped by, both are now shipped by plane. You have still some tension on some electronic components coming from China.
You have some suppliers adjusting their capacity and shutting down factories was because they decide to do so just because of the local measures. So it creates a number of uncertainty on how the price of humanitarian compliance will react in 2020 compared to classical crisis. Now the outcome of all that, so pressure, that downward pressure on prices from raw materials, but on the other way, additional longevity costs and so on, translated in Q1 into a declining minus 1.1 percent, declining price of Prometas and compliance. Thank you. Well, as far as our sites are concerned, I didn't mention that, but I should have, we said in the press release that almost all of our logistics centers, invoicing capabilities, salespeople and service people are up and running.
It's also a case for our own factories not at full capacity, of course, but almost all of our factories are open, including actually in countries like France, for example, they open a few weeks back and they are progressively ramping up. They open a few days back in India at the end of the lockdown. And there are, of course, up and running in countries like the U. S. And a few others.
So as far as we look more, let's say, a footprint, supply chain, factory logistics, invoicing capabilities, sales team and service team, you can consider that almost all of them are up and running.
Thank you. Next question from Wazih Reszvi from RBC Capital Markets.
Hi, good morning, Ann. Thanks for taking my question. I just wanted to pull together a few things you said. I made sure I've understood correctly So you mentioned no major strategic changes coming as a result of this crisis, but then you've also said you're accelerating some restructuring And you also then talked about some markets where you think the outlook may have changed such as datacom and people want to make their homes smarter and more comfortable. So Is the accelerator restructuring simply, sorry, is the higher restructuring simply an acceleration of plans you're doing anyway?
Or are there things in there that reflect the fact that you've taken some markets that are now going to be more attractive than others? And I don't know, maybe generating product development for datacom markets because you're getting this opportunity and maybe you're pulling back from other areas. Can you just help me understand that a bit Thanks.
Yes, sure. I mean, what I was mentioning is that we do not expect to do strategic changes. The Laurent strategy has been in place for, 50 years. I may say. And we have gone through many things, many shocks, and, I believe that times such as difficult times we are going through today, we should keep the cold minded, and it's not because we have this kind of shock that, that entire work would change.
And this strategy made of, growth oriented strategy, a lot of investments into R&D And Products, small type products with connectivity, bolt on acquisitions with many deals, in addition of many brands, expansion into complementary product family is focused on spaces where people leave and work, building systems, growing international financial discipline, profitability and cash flow oriented, strong CSR inclusion, care to people, doing good for people, customers, but all that will remain unchanged just because we believe that this is a high strategy to cope with tomorrow's world. And it's, it's, and this being said, so Number 1 is the strategic launching. As far as restructuring is concerned, we are not hindering or expensing hostile joint charges because it would finance the strategic change, but because we are accelerating or doing a number of changes that we seek are necessary for us to adjust. So for example, we are closing more factories We are merging, faster number of units we are doing some process of engineering. We have a number of people.
We are doing a number of attrition as far as people are concerned. So reducing a number of teams, to adapt. So Also those restructuring charges are not there because we would need to finance a change in the strategy. They are expensed in our P and L because we want to adjust to the new domain, if I may say, or to the crisis. And as far as investments into interesting fields of activity that could potentially benefit from the crisis.
They were already there. I mean, last year, we did an investor day saying how important and critical it was for the group future to grow in that outcome. If we need to reallocate more budgets to some of those areas that Genesis is being enhanced, we will, of course, do it but we'll do it, I'm expecting the group in Escodeon and I'm expecting the group for the models. Thank
you. Next question from Gal De Bray from Deutsche Bank. Please go
Yes. Thanks very much for the follow-up. I was just looking at the performance in Q1 by geography. And quite obviously, the drop in sales was much more severe in the rest of the world, the markets where typically margins are a bit lower than elsewhere. So I guess there was some benefit to margins coming from that at the group level.
And my question is, how shall we think about the about the regional mix effects on margins for Q2 versus Q1.
Well, I don't believe there was a meaningful impact on the margin of the fact that the rest of the world declined more than the rest because actually the country mix effect should really be seen at the country level, not as a zone level. Because within the rest of the world, you have countries which are less profitable than group's average, And you have countries which are more and sometimes a lot more profitable than the group's average. So if the rest of the world, the decline is coming from the 1st country, yes, you have a positive impact, if it's coming, from the from the 7 type of countries, then you don't have on top of that. It's the same comment for the other zones. You know that our margins in France and Italy is pretty nice.
So if that country is indicating more than than others where more limited margin will have negative, contributing impact. So I don't believe that we have a significant, impact in Q1, maybe a couple of bits, but it's not the material. We don't believe that we have a material impact in the Q1 margin coming from the country mix. Going forward, 2 things, Number 1, in analyzing the relative performance of the players as far as top line is concerned, I would really encourage you to take into account more than ever Cisco C mix and this business activity because your concrete mix, so looking at players doing minus 5, minus 10, minus 15, minus 2, the overall. Usually when you have one country doing a plus 1 and another country doing plus 5, of course, it's country mix matter, but it's not that relevant.
When you have a country doing such as in April, plus something in a country doing a minus 80% or, obviously, the relative exposure of X Y or Z player to deal with that country is extremely impactful and a strong driver behind the top line performance. So number 1, I would really encourage you to whether you have a more in China or in India, strong or in the U. S, more in 1000 or Europe or Northern Europe, all that matter a lot. Going forward, I have no clue about the country mix for Le Mans. What will Western Europe do going out of the local measures.
I don't know. Will the course in China be sustainable or not? I don't know. I told you that over the months of April, we did almost no sales in India, which is never seen, for this country. What BBB going on that measure.
I don't know. So it's extremely difficult for me to give you any guidance for the rest of the year because depends on the behavior of deals that country. The only guidance I can tell you is that, you should, of course, both of them embed country mix into your model because it's not, it's not so usual to have a country doing minus 95% and others doing Thank
you. Ladies and gentlemen, if you have another question.
Well, I think maybe we can, because I know that some of you do have another course starting at 10, Thank you very much for attending this call. If you have a further follow-up questions, you know, that Ronald Mack, Savi Ben Said, and of course, the talk and myself are fully available to answer any more questions you may have. Today or the days to come. So thank you very much for attending this call.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.