Morning, ladies and gentlemen, welcome to today's Legrand 2019 first half year 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. Benoît Coquart, and CFO, Mr. Franck Lemery. Sir, please go ahead.
Thank you. Hello, everybody. Franck Lemery, François Poisson, and myself are happy to welcome you to the Legrand 2019 first half results conference call. Let me first remind you that we have published today our press release, our financial statements, and a slideshow to which we will refer. Those documents, as usual, are available on the Legrand website. Please note that this conference call is recorded and webcasted on our website. Let me start first with a few opening remarks, following which Franck and I will comment into more details our 2019 first half results. I will start on page four with the three main takeaways from today's release. First, Legrand reports today solid first half performance with all main financial KPIs on the rise compared to H1 2018. Total growth in sales was plus 8%. Adjusted operating profit increased plus 6%.
Net profit attributable to group was up +6.5%, normalized free cash flow grew +10%. Second takeaway, we have actively pursued our initiatives to develop our positions and optimize operating performances. Innovation momentum is indeed very good, with a robust flow of new products since the beginning of the year, including, of course, connected offerings. On the M&A front, we have acquired a leading position in busways for data centers in the U.S., the docking of recent acquisitions is well on track. Talking now about digital acceleration, we have set ourselves ambitious new targets for Eliot that were presented and discussed during our investor day on June 12th. Lastly, you know this is a key feature of the Legrand model, we actively continue to launch operating initiatives aimed at optimizing purchasing, industrial footprint, R&D, SG&A, and so on and so forth.
Lastly, based on first half 2019 achievements, Legrand confirmed today its targets for 2019. I will come back to this point later in this call. After this brief introduction, let's start with an overview of sales on page six. As I said, total sales rose +8% in the first half of 2019. This good showing comes first from a +2.2% organic growth, Legrand first growth driver. All three geographical zones are on the rise like for like in H1. More specifically, organic growth in Q2 alone stood at +1.5%, as it has been impacted by basis for comparison and seasonal effect between Q1 and Q2, notably in India. The underlying organic growth in sales remained almost stable over the course of H1 at about +2%.
Over two years, organic growth came to +7.5% in H1 2019 versus Q1 2017, a two-year trend that was consistent between Q1 and Q2. Acquisition-driven growth, which is the group's second growth driver, contributed +3.5% in H1 2019 and should contribute based on acquisitions completed in 2018 and 2019 to around +5% in full year 2019. Lastly, Forex impact was favorable at +2.2% for the semester. If we apply to the second half of the year, the average Forex rates observed in June 2019, annual Forex effect for 2019 would be around +1.5%. This is, of course, and as usual, a theoretical computation. Let me now go into more details regarding the like-for-like evolution of sales by reporting segment. Please refer to page seven to nine of the slideshow.
Starting with Europe, organic growth in sales was +2.3% in the first half of 2019, showing overall similar trends in Q1 and Q2. In Europe, metro countries grew +2.4% in H1, driven by good showings in Italy, Germany, Belgium, as well as Southern Europe. In France, increase in sales in the second quarter, driven in particular by the launch of new products, compensated for the retreat in sales in Q1. Organic growth in France in H1 was thus flat. In Europe and new economies, organic growth in sales stood at +2% in H1 2019, fueled by sustained growth in Eastern Europe. More specifically, sales in Europe and new economies retreated in Q2 alone due to a steep decline in sales in Turkey that comes as announced from a particularly high basis of comparison.
Let me now move to North and Central America, where sales were up +2.3% on a like-for-like basis in H1. Sales trend in Q2 remaining almost in line with the one of Q1. This increase was fueled by the U.S., where sales grew +3% in H1 2019, with good showings in cable management, user interfaces, and lighting management. Revenues were down like-for-like in Mexico and Canada compared with H1 2018. Let me now move to the rest of the world, where sales rose +1.6% on a like-for-like basis. In Asia Pacific, sales were up +1.9%, driven by good showings in China as well as in India. Whilst business trends didn't change between Q1 and Q2, sales in India declined in the second quarter alone due to a very demanding basis of comparison.
Organic growth in sales in Latin America was up +3.3%, thanks to a rise in revenues in Brazil and Peru, which offset the decrease in sales in Colombia. In Africa and Middle East, sales retreated organically -1.6% in H1 2019. In the Middle East, where business is facing a sluggish economic environment, sales dropped sharply. In Africa, many countries such as Egypt and Algeria recorded sustained rise in sales over the course of the first half. Let me now pass the mic to Franck for an overview of our financial performance.
Thank you, Benoît. Good morning to all of you. Let's start with profitability on page 10. As said by Benoît, H1 2019 adjusted operating profit rose +6.0% to reach EUR 663 million. Moving to page 11, H1 2019 adjusted operating margin before acquisition, meaning a 2018 scope of consolidation, came to 20.9%. Adjusted operating margin before acquisition was thus stable compared with the adjusted operating margin recorded in the first half of 2018. The good control of administrative and commercial costs over the course of H1 compensated for the decline in gross margin, decline mainly due to the rise in raw material and component prices, including U.S. tariff impact. Talking about tariffs, the rise in U.S. custom duties was fully offset by ongoing pricing and adaptation initiatives. Including the 0.4 points dilution from acquisitions, adjusted operating margin came to 20.5%. Two side comments here. First, on the quarterly performance.
As you know, Q1 adjusted operating margin before acquisition was down -30 basis points versus Q1 2018. Recording flat margin H1 means that Q2 adjusted operating margin before acquisition was up +30 basis points versus Q2 2018. This was achieved thanks to good management of pricing in a context of almost flat raw material and component prices, excluding U.S. tariff impact, and by good control of SG&A. Second comment on the impact of acquisition of adjusted operating gross margin. Taking into account the acquisitions completed in 2018 and 2019, the dilution from acquisition on adjusted operating margin should be, as announced early February, around -0.4 points for the full year 2019. Moving now to the net profits attributable to the group on page 12. It was up +6.5% from the first half of 2018.
This good growth resulted mainly from the increase in the operating profits and a two-point decrease in tax rate that were partially compensated by higher financial and FX results. Financial charges have indeed mechanically increased close to EUR 5 million in H1 2019 due to the implementation under IFRS 16 from January 1st. Moving to the last picture of our financial performance with cash generation on page 13. As you know, the relevant reading of free cash flow generation on a quarter, on a semester is on a normalized basis. You can see on the right-hand side of the slide that normalized free cash flow was up +10% in the first half of 2019. Additionally, on the left-hand side, you can see, first, that cash flow from generation remained very solid at 18.2% of sales.
Second, that working capital requirement remained under control, but was a bit affected by the impact of the recent acquisitions. Third, that free cash flow stood at a solid 11.6% of sales. These were the key topics of Legrand's 2019 first half performance I wanted to share with you. I now give the mic back to Benoît.
Thank you, Franck. Let's move now to the second part of this deck on page 15, with Legrand ongoing initiatives for development and operational optimization with four main topics: innovation, acquisition-driven growth, new Eliot targets, and performance reinforcement. As you can see on page 16 and 17, we kept on actively innovating with several new product launches, covering many of our product categories and including connected offerings from our Eliot program. You can see, of course, user interface solutions and notably Valena Next, a connected range conceived with Netatmo for Belgium and Spain, but also Mosaic in France, Lyncus in India, and many others.
We also remain quite active in UPS systems, architectural lighting, energy distribution, connected emergency lighting that we presented at our last investor day, new connected door entry system, connected audio-video solutions, assisted living alarms, and in digital infrastructures, which as you know, is a key enabler for IoT. Legrand solutions are well-known for their reliability, quality, and innovative design, and as you can see on page 18, won many awards in the first half of the year. Moving now to page 19. As you know, in April, we completed the acquisition of Universal Electric Corporation, the undisputed number one in the U.S. for busways for data centers. This move will ideally roll out Legrand front-runner positions in data centers in the U.S. More generally, tuck-ins of recent acquisitions are well on track, and acquisitions are performing overall in line with our roadmap and have reported encouraging results.
Focusing on Netatmo, and as explained at our June ID, we will lever on Netatmo's expertise in user experience, artificial intelligence, and software integration into products to accelerate our Eliot program. We have first added page 20 and 21 as a reader digest of Legrand plan to accelerate its digital offering we presented on June the 12th. Finally, on page 22, a reminder of one of the key features of the Legrand model, i.e., the ability of the Legrand team to constantly work on initiatives to strengthen operating performance. This goes through, first, the active rollout of the Legrand Way program to new industrial and logistics sites, but also to R&D and product marketing organizations. Second, we launch every year initiatives to optimize group's industrial footprint. Such initiatives have already been implemented this year in Spain, Turkey, Russia, China, and Saudi Arabia in relate mainly to plant closures.
Coming now on page 24 to the last topic of this earnings release, i.e., our target for the full year. Based on its 2019 first half achievements, Legrand confirms its 2019 target for organic growth in sales of between 0% and +4%, and its 2019 target for adjusted operating margin before acquisitions, i.e., at 2018 scope of consolidation of between 19.9% and 20.7% of sales. Legrand will also pursue its strategy of value-creating acquisitions. François, Franck, and myself are now available to answer your questions. Thank you very much.
Ladies and gentlemen, we will now begin the Q&A session. If you wish to ask a question, please press zero and one on your telephone keypad. We have a first question from Gael de-Bray from Deutsche Bank. Please go ahead.
Yes, good morning, everybody. Thanks for taking the questions. The first question I have is, you mentioned specifically that Legrand will continue to strengthen its positions in data centers. I guess you're referring to Universal. Beyond this, perhaps could you elaborate on how you intend to further reinforce your position? The question I have is, can you be really credible in the U.S. when dealing with large data centers in particular, without having any positions in protection devices and only a small one in UPS? That's question number one. Question number two is about the difficult comps you're mentioning in Turkey and India. Apparently, you sort of suggested that it could be a one-off, obviously.
That'd be great if you could give us a bit of granularity in terms of quarterly organic growth in those two markets, starting in Q1 2018, so that we can understand a bit better what's going to happen in the second half of 2019. The third question I have is on the free cash flow performance, which was obviously very strong, in the first half of the year and in particular in Q2. Perhaps could you give us some indication on, in particular, the impact of IFRS 16 on this free cash flow performance? Thank you.
Hello, Gael. I will start with your first question on data center. I will not do again the IT story, but clearly, we have a clear roadmap to keep growing on data center, which is articulated around many topics. Further acquisitions, we have a number of ideas that could potentially reinforce our positions. Organic growth, of course, optimization of operations, innovation, and so on and so forth. Going specifically to your question, I think you have to differentiate what we call the gray space and the white space. The gray space is really the technical part of the data center, the building part of the data center, if I may say. That's where you have a number of products such as switchgear, such as a power busbar, for example, such as transformers, such as power UPS, and so on and so forth.
It is true indeed that in the U.S., we are not active in the gray space. We are elsewhere. We are, for example, a contender in this space in Europe, where we have a large switchgear offering and good market position, but we are not in the U.S., where we have no switchgear offering. In the U.S., we focus specifically on what we call the white space, i.e., the space where you have the servers. In this space, we have very relevant market positions. We are a market leader in PDUs following the acquisition of Raritan and Server Technology. We are a very important key contender in racks and cabinets. We are now a market leader with Universal Electric on busway for data centers.
Yes, in the U.S., our positioning is a bit specific in data center because we are, of course, a player in structured cabling, both copper and fiber. In the U.S., our positioning in data center is a bit specific because we are focusing on the white space. By the way, of course, it depends on the quarter and it depends on the product family. For example, Universal Electric is recording very good growth in 2019 and is able to secure a lot of the, what we call the Super 8 projects. We don't believe that we have any competitive issue in data center in the U.S. It's the exact opposite. We have strong leadership or very interesting changing position, which should give us a good basis to grow in the coming years. Let's move now to Turkey and India.
I think we have a different situation between the two geographies. In Turkey, clearly the economy was extremely supportive, extremely strong until, let's say, the summer 2018, where you first had a currency crisis and then an economic crisis. The second half of the year was a lot more difficult, and everybody expected 2019 to be tough, both because the base for comparison of 2018 was strong, but more importantly, because Turkey is a difficult economic environment. To give you a flavor of our performance in 2018, our H1 growth in Turkey was very sustained. It was even above 50%, if I may say. The base of comparison was tough, and on top of that, Turkey entered into a very difficult economic crisis, starting in H2 2018.
The sales evolution in Turkey in H1 is very negative, and it's not a surprise, having in mind both effects, i.e., the base comparison of H1 and the economic environment. As far as India is concerned, it's very different. It's a pure technical effect. We think that India is a very good and very supportive market. The performance in India for H1 was nice. It's a high single-digit growth in sales. Clearly, Q1 2018 was slightly down. Q2 2018 was strongly up by more than 20%. As a result, there is obviously a different basis for comparison between Q1 and Q2 2019. Q1 base comparison being a lot easier than Q2. You have to differentiate the two situations, if I may say. Turkey, very demanding base for comparison and difficult economy, difficult market in 2019. India, it was a very positive market last year.
It was a positive market in H1. We believe that it will be a positive market over the full of 2019, but there is just a technical effect between Q1 and Q2 being a demanding basis for comparison. As far as the free cash flow performance is concerned, the impact of IFRS 16 on the ratio of free cash flow to sales was plus 100 basis points. You have, let me say, to discount it by 100 basis points to have it without the IFRS 16 impact. I think the normalized free cash flow as a percentage of sales is good, has been consistent over the semester, is at a good level and growing 10%. As far as the non-adjusted free cash flow to sales, well, of course, the growth is very impressive, plus 60%.
As we said many times, the right metrics for Legrand is more the normalized free cash flow to sales, because on a quarterly basis, working capital requirements may vary very significantly one way or the other, depending on technical topics. For example, in Q1, where the free cash flow non-normalized was, let's say, quite low. The change in working capital had a very negative impact, and it came from a temporary rise in non-operating working capital in relation mainly to tax. In Q2, we had the opposite effect, plus a number of punctual favorable effects. I really encourage you to look at the normalized free cash flow, which again, is very healthy on H1 and very healthy in Q2 rather than the non-normalized free cash flow.
Okay. Thanks very much, Benoît.
Thank you. Next question from Andreas Willi from JP Morgan. Please go ahead.
Yeah. Good morning. Thanks for the time. I've got a couple of questions related to top-line growth. Maybe you could talk a bit more about the U.S. You had 3% growth there in the first half overall. What do you see in the specific sub-markets in terms of the lighting business Milestone, data centers, and the rest? Obviously, looking at it from a headline basis, if we adjust for some pretty good price increases you probably had, it seems like the volume business in the U.S. isn't really growing much at the current point. Secondly, just from a bigger picture view, you had the company overall at 2% organic growth in the first half. Maybe you could break that down into volume and price. It looks like volume is relatively flattish.
Which businesses are negative in terms of volume growth, given that you should have, as you said, very strong growth in data centers, you should have good growth in the connected products. What businesses other maybe than the specifics you just highlighted on Turkey and so on are negative in the first half?
Okay. Hello, Andreas. In the U.S., you rightly said that the top-line growth over the semester was plus 3%, which by the way, when we compare ourselves with what the retail distributors have released, what the professional distributors have released, and what a number of our U.S. peers have released, is in line with the market growth. We see, and we already made the same comment in Q1, we see the U.S. market growing more or less at the same pace as GDP growth. Well, as usual, it's a mixed bag. We are not reporting Milestone as a separate segment because, as you know, we merged Milestone into a bigger AV division in the U.S., where the AV division has been slightly growing, but on tough comps because, remember last year, the AV performance was very strong.
Lighting controls and lighting overall, lighting features, it's overall quite good and growing nicely. For data center, it's a mixed bag because Universal Electric Corporation is growing very fast, as we said, but it's not consolidated. It's part of the perameter impact. As far as the other data center positions, we have a difficult comp on the quarter because we had very big projects last year, and one data center project can easily be $3 million, $4 million, $5 million, $6 million. It makes a difficult comp. It's really a mixed bag. We have different businesses there, but my point is that with the 3% growth in the U.S., we believe, and it is supported by what many companies have released as numbers, we believe we are well in line with the market growth.
Also more as I remind you that we have, again, for LNCA, so for North and Central America, a difficult basis for comparison. Q2 was up 5.8% last year. Over two years, North and Central America, so not only the U.S. but also Mexico and Canada, is up more than 8%. It's quite a good performance. As far as the split between volume and price, let me find the numbers. We have a price impact of plus 2.3% in Q2, which is very much in line with what we had in Q1 because, for the full semester, it's up plus 2.3%. Now, zoom, you're right to say that the volume was quite flattish. Well, you could see in the press release that we have, unfortunately, a number of areas where our sales are going down. This is the case in Turkey, of course.
This is the case in Canada. This is the case in Mexico. This is the case in Middle East. Again, even if Middle East is only 2% of our sales, it's 10% of the rest of the world area, and it's down very significantly. It impacts negatively our top line. It shouldn't be a surprise for you because everybody knows that Middle East is not doing very well. Well, in Q2, India, for the reasons we explained, is also down. We have a couple of other geographies. Clearly, it shouldn't be a surprise for you. There are a number of spots which are a bit more difficult than others. Overall, to answer your question, +2.3% price impact on Q2 and +2.3% price impact on H1. Overall, quite a consistent price over the full semester. Thank you very much.
Thank you. Next question from Lucie Carrier from Morgan Stanley. Please go ahead.
Oh, hi. Good morning, gentlemen. Thanks for taking my question. The first question I have is, what more in terms of how should we think about the business into the second half in 2020? Basically, we have seen a certain number of leading indicators in various country actually decelerating. If I think, for example, ABI index in the U.S. or some others here in Europe. What do you see typically as the delay or the correlation of your businesses versus those leading indicators? Are we looking at a six-month delay? Is it longer? Do you think that generally speaking, they don't reflect well the trend in your business?
[Non-English content] Lucie. Well, unfortunately, I would love to have a set of leading indicators which could help us to forecast what our markets and ourselves will do in the coming months and quarters, but none of them are relevant enough or tie enough with our market growth to be good leading indicators. I wouldn't take any of those as indication of what our markets will do in the coming quarters. Well, as far as 2019 is concerned, you can see that, with 2.2% growth, we are close to the middle of our guidance. We reiterated this morning our guidance of 0% to +4%, we are confident in our ability to meet our guidance, of course. As we said last quarter, as we said two quarters ago, we are in a world where there are a lot of uncertainties. The U.S. and China disputes continue.
I remind you that we always have this tariff topic, which is significant for Legrand. Approximately $60 million of additional cost in 2019 compared to 2018, so it's very significant. We have a number of dark spots such as Turkey, for example, and a few others. We have overall uncertainties, uncertainty connected to the Brexit in October, uncertainty coming to some of the leading indicators you mentioned. We believe that in the first half, the economy was obviously less supportive than in 2018. This is a fact. We still see in front of us a number of uncertainties. In this context, we reiterated our guidance this morning. As far as 2020 is concerned, it's of course far too early to give any guidance. We have not yet started our budget process. It will start in September.
Again, we have no visibility for the second half of 2019 and even less visibility for 2020. Well, you know well the Legrand business model. Our objective is not to forecast precisely, but it's to adapt whenever things are happening, and that's what we are doing. The geographies in which we suffer, take, for example, Middle East, which again has been a difficult situation in the first half. We have initiated a plan not only to boost sales as much as possible, but also to preserve our profitability there with, for example, significant factory closure in Saudi. Again, no clue on what the economy will be and will do in the second half of the year in 2020, but as always, it's Legrand ability to adjust whenever there are negative things.
Thank you. My second question was a follow-up on Andrea's question on pricing. Could you remind us maybe the sequencing of your price increase last year, also related to the tariff? I'm just curious to understand a bit better how the price carryover would work in the second half of 2019 versus the first half 2019.
Well, don't forget that pricing is a very dynamic topic. We have had significant pricing since in Q4 in the U.S. to compensate with tariffs. You remember the 2018 sequence. Tariffs were first implemented in Q3 2018, especially in September. When we released our Q3 numbers, we said that there's always a lag effect between the time the tariffs are implemented and the time we do pricing. This is the reason why the tariffs negatively impacted Q3 2018. We reacted in Q4, and as early as Q4 2018, our pricing in the U.S. could compensate in value the rise in tariffs in 2018. Significant pricing increases, if I may say, were implemented as early as Q4 in the U.S. The result of that is at the group level, the Q4 pricing was +2.5%, and the full-year pricing was +1.7%.
That's why you see the sort of the rise in pricing in Q4 coming mainly from the U.S. As far as pricing for H1 is concerned, as I said, it's +2.3% for H1, +2.3% for Q1, +2.3% for Q2. If we need more pricing in H2, as usual, we should have the ability to pass on prices. One of the difference, if I may say, between Q1 and Q2 2018 is not coming from pricing. It's not much coming from tariff, but it's coming from raw material and components. To give you maybe interesting numbers, in H1, the inflation of raw materials and components was about +3.2%, including 2.5 points coming from U.S. tariff. If we zoom on Q2 2019 only, the inflation of raw materials and components was about +2.1%, including 2.4 points of tariff.
In other words, we've been able to have a consistent pricing throughout H1, same level of price increase between Q1 and Q2, even though we were helped a bit by the price of raw materials and components in Q2, which went slightly down excluding the U.S. tariff. It's, I think, again, the demonstration of the Legrand model, which is able to sustain a healthy level of pricing even in context where raw material prices and components are not sharply going up. Does it address your question, Lucie? It's a long answer.
Yes, it does. Thank you very much. Just my last question, if you just comment maybe qualitatively on the development of the connected sales and Netatmo in the quarter, please.
Well, as far as the total Eliot sales, I remind you briefly the story. Eliot is not a reporting segment. Eliot, it's an additional layer of added value that we put on many different products. We report it on a yearly basis, not on a half-year basis, on a quarterly basis. We will give you full details on the full-year comments. As far as Netatmo is concerned, it's a little bit easier because it's a reporting segment, if I may say. Netatmo is completely in line with its roadmap. I remind you the two objectives we had with Netatmo. Number one, sustain very high top-line growth. It does in H1. The growth rate in top line is consistent with historical growth rate, which is good. Number two, progressively move to high single-digit profitability as far as adjusted operating income is concerned.
Those six months with Netatmo is in line with this target. Number three, contribution of Netatmo to the Eliot roadmap. Well, it's a bit early because Netatmo is only six months into Legrand. As you could see at the investor day, there are many plans to make the most of Netatmo assets and expertise. As far as the Netatmo tuck-in is concerned, it's completely in line with our plan.
Thank you.
Thank you. Next question from Sebastien Gruter from Redburn. Please go ahead.
Hi. Good morning to everyone. Just a follow-up on Lucie's question about Netatmo. If you think it's still going in line with the historical trend, does it not expand all the organic growth you had in France in Q2, given the inclusion of Netatmo?
Well, no. Netatmo, it's mainly perimeter and path, and it's small. Don't forget that only a very small part of Netatmo sales are made in France. Netatmo is a European company with a majority of sales outside of France, Germany, Italy, U.K., and a few other geographies. The percentage of sales made in France by Netatmo is a minority percentage of sales. No, the explanation behind the small growth in France in Q2 is coming mainly from the fact that we have launched good and interesting products, mainly two. Number one, a range of connected EV charging units. Number two, a new range of wiring devices or user interfaces named Mosaic. It explains part of the good performance in Q2 in France. As far as the sellout that we have in France, at Legrand we look at same level as a sellout as a sell-in.
The sellout are slightly up in France over the semester, in line with the market growth. If we look at the federation of wholesalers and what the number of our peers and competitors and distributors have read, the French market is probably only slightly up, and our sellout, excluding Netatmo, are also slightly up. To answer your question, no, performance in Q2 was mainly coming from Legrand-owned strength, if I may say, especially the launch of new products.
I have a follow-up on the guidance and the outlook for H2. I understand you don't have any backlogs, when you thought about your budget and the phasing, of course, in H1 versus H2, and given comps and the calendar effects in the year, were you expecting H1 to be lower than H2? Is it in line with what you expected when you did your budget six months ago? Thank you.
Well, when we are doing our budget, again, our main objective is not to forecast precisely our monthly or quarterly sales, because this is an exercise which is extremely difficult to do at Legrand, probably more difficult at Legrand than many other companies. Again, our priority is to react to events, not only in bottom line, by the way, but also in top line. In other words, when we see a geography where we feel we have the potential to accelerate because the market is supportive and we have potentially good products to sell, then we put additional resources and try to push the sales, and the other way. Again, our performance in H1 is + 2.2%, is very much in the middle of our guidance. As a result, you could assume that it's not a big surprise to us.
Again, we've seen that for the full of 2019, we reiterated our guidance, so as a result, should be between zero and plus four.
Would you say comps get easier as we go through the second half? We know France was very weak in Q3 2018, but in other geographical areas, do you think the comps are getting easier?
Well, not necessarily. It is true that Q3 has a slightly easier comp, but this is the other way for Q4, which has also demanding comp. Many other things than comps could play. I think what will make Legrand performance, as far as top line is concerned in 2019, is not much comp, which can impact one quarter or the other, but not completely the full year. It's rather the economy and our ability to perform better. I wouldn't take for granted that we'll have a lot easier comp in the second half. This is true for Q3, as far as top line is concerned. It's not true for Q4. As far as results are concerned, same comment. Yes, Q3 optically is a easier comp for profit. Well, at the same time, you have many things that could come into play.
For example, as far as U.S. tariffs are concerned, it's the most demanding quarter, Q3 2019, because we have the full of list one, list two, list three tariff, including the list three at 25%. It compares with the Q3 of 2018, where you had tariff, part of it, only starting September. Even though optically we have easier comps for Q3, it will be demanding quarter as far as the tariffs are concerned. As far as Q4 is concerned, it's a more demanding comp for top line and for bottom line. Again, we can hardly commit to a quarterly performance. This is what I've been consistently telling you for a couple of quarters now. Our commitment vis-a-vis our shareholders is on a yearly basis, and both for top and for bottom line, we confirm this morning our guidance.
This is very clear. Thank you.
Thank you. Next question from Alex de Marco from Societe Generale. Please go ahead.
Yeah. Hi. Thanks. Good morning. I was just wondering if you could expand a bit more on France. I'm just wondering if you're maybe a bit more optimistic now compared, certainly with the start of the year. Perhaps maybe you can update us on what you're seeing on the ground, obviously through Q2 in different areas, obviously res, non-res, new build and renovation, et cetera.
Well, I wouldn't say that I'm a lot more optimistic for France. For a couple of quarters or a couple of semesters, we've been qualifying the French market as being lackluster, i.e., flat plus. Even though if for Legrand, from one quarter to another, it can be either positively or negatively impacted by de-stocking or restocking. As far as the market itself is concerned, it has been only flat plus and well, cross fingers, but I don't really see what would be the triggers for a much better market, going forward. The GDP numbers for France are not very high. They were downgraded a few weeks back by the Monetary Fund. We still have a renovation market, which is not very supportive. It is true that you have verticals which are going fast. Take for example, HVAC.
Well, we are not part of this market and we are not selling new HVAC product. As far as the main market itself is concerned, both resi and non-resi, and especially the renovation part, it remains extremely stable, with no obvious triggers for the market to improve.
Thank you. Thanks, very helpful. I was just wondering as well if you could just update us on the rollout strategy for connected user interface. Seems like that's created a lot of momentum in Italy. I was just wondering, you've obviously got strong positions there, but maybe you could talk about the traction you're seeing in other launch countries. I think Germany was one of those. Maybe you can talk about what's happening there, perhaps where your positioning isn't as strong as in Italy. Thank you.
Well, the good performance in Italy, which indeed, continued in Q2, and H1 overall did a good performance in Italy. Performance, you remember, was also good in 2018. Well, it's not only coming from connected wiring devices, it's coming from, let's say, a couple of things. Number one, a market which is okay, so not as depressed as the GDP numbers would suggest. Typically, the Italian market is growing a bit faster than the French market, for example, which is not common sense because the GDP numbers are better in France than Italy. As far as our market is concerned, it's growing slightly better in Italy than in France, so a bit more supportive Italian market. Number two, a number of product launches, well, including on non-connected wiring devices.
The Living Now range, which was launched last year, and which is indeed doing very well, has a large non-connected piece, and it is replacing three ranges that we had in Italy, namely Living, Livinglight, and Axolute. The connected piece is doing well, but also the non-connected piece is doing well. For example, we have a record high percentage of high-end finishes for a high-end range being sold. Number three, on top of that, we have a sort of support of other product launches, such as, for example, the connected doorbell or the connected thermostat. I wouldn't say that the connected wiring devices or connected user interfaces range only is responsible for the good growth in Italy.
Well, as far as the rollout is concerned, as we presented at the last investor day, we launched those connected user interfaces in four countries in 2018, France, Italy, Greece, China. We have a rollout plan of more than 30 countries in 2019, all along the year. It's mainly in Europe with Valena Next, so we are launching in Germany, in Russia, in Spain, in a number of other countries. Well, will it help supporting our performance in those countries? Yes. Again, in many of those countries, we don't have the same position we have in Italy. Again, the performance will more depend on the economy and how supportive our markets are, rather than only on those launches. Yes, it will be support for our business, but don't expect it to boost significantly sales on a given quarter.
What will really matter in H2 is how supportive is the economy.
Very clear. Thank you. Thank you, Benoît.
Thank you. We don't have any more questions for the moment. Ladies and gentlemen, if you wish to ask a question, please press zero and one on your telephone keypad. That's zero and one on your telephone keypad. We have a new question from Daniela Costa from Goldman Sachs. Go ahead.
Oh, hi. Good morning. Just a very quick final question. I guess it's almost about a year ago since we've heard about the French antitrust organization picking up documents in a few players. I was wondering if there have been any other conversations back and forth, or when do you think we should expect a resolution of that matter? Thank you.
Hello, Daniela. Well, as you remember, we released a press release in September 2018, where we confirmed a number of things. Obviously, we're not able to comment on the investigation, and at this stage, we have no information about the further procedure on this topic.
Thank you.
Thank you. We don't have any questions for the moment. Ladies and gentlemen, if you wish to ask a question, please press zero and one on your telephone keypad. We have a new question from Sebastien Gruter from Redburn. Please go ahead.
Thanks. A final question on the raw material. If we exclude the U.S. tariff slightly down in the quarter, I believe you have some visibility about what could happen in the next six months. I'm not talking about the raw material price, but what you have in your inventories and maybe secure with your suppliers. How should that develop going into Q3 and Q4, this raw material and component impact ex U.S. tariff? Thank you.
Well, we have very little visibility because we don't have, as you know, a huge stock of raw materials. We don't have a long-term contract where we secure our prices. On top of that, it depends a lot on the exchange rate. For example, one of the reasons why the price of raw material and components went slightly down for Legrand in Q2, part of it is coming from the fact that some raw material prices went down, copper, silver, lead, and a few others, for example. It also came from the exchange rate between euro and US dollar. No, we have very little visibility. Again, as for the economic environment, the priority is to adapt.
We are constantly monitoring the difference between selling price and purchase price and adjusting purchase price, should we think that we need to compensate for an increase in raw material prices and components. This is the way we manage the company. We have to cope with this lack of visibility. Well, it has been part of our model for years or decades, and we'll continue that. No, unfortunately, no visibility.
Okay, thank you.
Thank you. Next question from Graham Phillips from Jefferies. Sir, please go ahead.
Hi, good morning. Just a question on capital expenditure and capitalized development costs. I did see a bit of a tick up in the second quarter. Are you anticipating spending towards the high end of your guidance range for those two metrics, or was this just a bit of an unusual quarter?
No, nothing specific happening in Q2 as far as both R&D and CapEx. I would really encourage you to look at it on a yearly basis and not on a quarterly basis, because it really depends on the phasing of projects. You can have one quarter where you have a big project to finance, a CapEx of around EUR 6 billion, EUR 7 billion, EUR 8 billion, which is going through the cash flow statement on the one given quarter. On a yearly basis, we don't expect to move out of our range, and post CapEx, R&D, non-capitalized or capitalized are well under control. Nothing specific happening in Q2.
No. Okay. Perhaps just what was the big item? Where were you investing in CapEx, particularly in the second quarter, that might have absorbed another EUR seven or EUR eight million?
Well, as usual, there are many different projects. The big ticket item, if I may say, for CapEx, are new products. On average, we have invested in H1 approximately half of our CapEx into new products, and this was more or less the same ratio in 2018. This is the most substantial part of our CapEx. On top of that, of course, we have a growing percentage of our CapEx dedicated to Factory 4.0. I remind you that we said in February that we would, over time and over a number of years, dedicate up to 10% of our CapEx to Factory 4.0 without changing the ratio of CapEx to sales, of course. We have also capacity, productivity, and the usual topic. Half of it is new products.
Okay, so you're not expanding capacity anywhere, and particularly as a result of that investment in the quarter. When you say Industry 4.0, so you're basically going back to all your factories globally and then just putting in more automation, more connections, connected products yourself or connected machines?
Well, we have, I think, 130 different factories worldwide. Yes, there are places where we increase the capacity, of course, because there are markets which are growing. Now, we are constantly optimizing our footprint, and that's what we put in our press release. We have either closed or plan to close factories in Russia and in Beijing, so in China, in Turkey, in Saudi. Our footprint is not something which is not moving. We have many initiatives underway. Number one, we have this Factory 4.0, where we intend progressively to roll out a number of techniques, automated guided vehicle, data management, and so on and so forth, to make our factories more efficient. On top of that, we are optimizing our footprint. There's no big move, let's say, from high cost to low cost, because a lot of those moves were made already years back.
It's more within a geographical area, within a cluster, where we believe we have still a number of optimization to be made. You could notice, for example, that looking at the accounts, that our restructuring charges were at a good level in H1. They are at EUR 13 million in H1 as far as restructuring charges are concerned, which is in the upper end of what we've been doing. I remind you that on average, we've been spending in restructuring from EUR 20 million-EUR 25 million per year, and it's EUR 13 million in the first half. It means that we have a lot of plans to keep optimizing our footprint. As a reminder, our restructuring charges are embedded into our adjusted operating income. It's part of it.
Thanks. That helps explain.
Thank you. We don't have any more questions for the moment. Ladies and gentlemen, if you wish to ask a question, please press zero and one on your telephone keypad. It's zero and one on your telephone keypad. We have a new question from Andreas Willi of JP Morgan. Please go ahead.
Yeah, thanks for the time. Just wanted to follow up on two topics. First, on the operating leverage in Q2, which was much better than in Q1. Other than the help a bit from the raw materials, is there anything specific in Q2 versus Q1 that helped you in terms of the underlying year-on-year margin improvement? Second question on cash flow and IFRS 16. I think in your normalized free cash flow, you also include the benefit from the accounting change, which is a bit surprising given that an accounting change shouldn't really benefit free cash flow or compensation linked to that. Maybe you could explain that. It looks like the benefit is like EUR 65 million-EUR 70 million on an annualized basis to free cash flow from an accounting change. Why have you chosen to include that in normalized free cash flow?
Let's starting with the second question. Year impact, as I said, is 100 basis points positive on free cash flow over the semester, and it should be the same impact in the full year. Actually, we announced it in February. Well, we included in the normalized free cash flow because we will not every year retreat free cash flow to exclude it. Again, the normalized free cash flow is normalizing only net working capital. Our intention is not to normalize 10 things. We want to be as close as possible to GAAP measures. It's only normalized to account for the fact that there could be quarterly changes in net working capital. Now, when we released our midterm model, we told you that we have as an objective to achieve normalized free cash flow to sales of between 13% to 14%.
Obviously, the 100 basis points positive impact coming from IFRS 16, as we said at that time, was included into those numbers. It shouldn't be a surprise the fact that it's part of our midterm model. The part that it's 100 basis points positive impact has been clearly communicated to everybody in February. As far as Q2 performance is concerned, so excluding acquisitions, we have a rise of 30 basis points. That's what Franck mentioned. Over in Q2, compared to Q2 of last year. We have, to make a long story short, flat gross margin, which is a change compared to Q1. This change is coming from the fact that we are able to achieve a flat gross margin is coming from good control of pricing, in a context where the price of raw material and components is going slightly down.
We have +60 basis points coming from SG&A, so a good control of administrative and commercial expenses, which are almost flat. - 30 basis points coming from other charges and expenses, mainly connected to some higher restructuring charges in relation to our industrial footprint optimization. All the countries I've mentioned, i.e., Saudi, China, Russia, and a few others. In a nutshell, the good performance in Q2 is coming from good pricing management and good control of SG&A.
Thank you. The reason I ask on cash flow is just that an accounting change shouldn't really boost free cash flow, and a lot of other companies have chosen to adjust their CapEx to remove the artificial benefit of IFRS 16.
Well, we have discussed with our accounting experts and auditors, and we have followed their recommendations. I understand that companies are accounting for the IFRS 16 different way. For example, we take it as a part of the net debt. It's about EUR 300 million additional net debt that we have to finance. Some other companies don't. From what I understand, our accounting treatment is very standard and in line with many other companies' practices. Actually, again, we basically don't really care, and we accounted it the way we were advised to account it by our auditors.
Thank you.
We have a precise disclosure. Actually, I think we were amongst the first company to precisely disclose as early as February the impact IFRS 16 will have on our accounts on EBIT, EBITDA, free cash flow, net debt, net income, and so on and so forth.
Thank you. We don't have any more questions for the moment. Ladies and gentlemen, if you wish to ask a question, please press zero and one on your telephone keypad. That's zero and one on your telephone keypad. We don't have any more questions. Back to you for the conclusion, sir.
Well, thank you very much for attending our call. I understand that you have another one starting soon. As usual, if you have further questions when doing your analysis, please do not hesitate to contact François, Franck, or myself. We are at your full disposal today. Thank you very much.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.