Good morning, ladies and gentlemen, and welcome to today's Gilberto 2019 First Half Year Results Conference Call. Allparts for your information, this conference is being recorded. At this time, I would like to hand the call over to CEO, Mr. Benoit Aca and CFO, Mr. Franklin Marie.
Sir, please go ahead.
Thank you. Hello, everybody. Frank Lemarie, Francois Poisso 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 the press release, our financial statements and a slide show to which we will refer. Those documents, as usual, are available on the Livent website.
Please note that this conference call is recorded and webcasted on our website. So let me start, first, with a few opening remarks, following which Frank and I will comment into more details our 2019 first half results. I will start on Page 4 with the 3 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 gross in sales was +8percentadjustedoperatingprofitincreasedplus 6%.
Net profit attributable to group was up plus 6.5% and normalized free cash flow grew plus 10%. 2nd takeaway, we have actively pursued our initial is 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 offering On the M and A front, we have acquired a leading position in Bestways for data centers in the U. S. And the talking of recent acquisitions well on track.
Talking now about digital acceleration, we have set ourselves ambitious new targets for ADIO that were presented and discussed during our Investor Day on June 12th. Lastly, and you know, this is a key feature of levoire model, we actively continue force. And lastly, based on first half twenty nineteen achievements, Lucron confirmed today his targets for 2019. I will come back to this point later in this call. After this brief introduction, Let's start with another view of sales on Page 6.
So as I said, total sales rose plus 8% in the first half of twenty nineteen. This good showing comes first from a plus 2.2 organic growth. LeGrand first growth driver. All three geographical zones are on the highs like for like in H1. More specifically, organic growth in Q2 alone stood at +1.5 percent, and it has been impacted by pages for comparison and CECO 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 percent. Over 2 years, organic growth came to plus 7.5% in H1 2019 versus H1 2017, a 2 year trend that was consistent between Q1 and Q3 2. Acquisition driven growth, which is a group segment cost driver, contributed plus 3.5 percent in H1 2019 and should contribute based on acquisitions completed in 2018 and 2019 to around +5 percent in full year 2019. Lastly, ForEx impact was favorable at +2.2 percent for the semester. Now if we apply to the 2nd for the year.
The average Forex rates observed in June 2019, then annual Forex effect for 2019 would be around plus one point 5%. This is, of course, and as usual, theoretical computation. Let me now go into more details of the regarding the like for like evolution of sales by reporting segment, please refer to Page 7 to 9 of the slideshow. Starting with Europe, organic growth in sales was plus 2.3 percent in the first half of twenty nineteen, showing overall similar trends in Q1 and Q2. In Europe, Metro Countries grew plus 2.4% in H1, driven by good showings in Italy, Germany, Belgium as well as Southern Europe In France, increasing sales in the 2nd 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 1st flat. In Europe and new economies, organic growth in sales stood at +2 percent in H1 2019, fueled by such same 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 Let me now move to North And Central America, where sales were up plus 2.3% on a like for like basis in H1, sales trend in Q2 remaining almost in line with the 1 of Q1. This increase was fueled by the United States where sales grew plus 3% in H1 2019 with good showing cable manage user interfaces and IT Management. Revenues were down like for like in Mexico and Canada compared with H1 20 Let me now move to the rest of the world where sales rose plus 1.6% on a like for like basis.
In Asia Pacific fig, sales were up +1.9 percent, driven by good showings in China as well as in India. However, while business trends didn't change between Q1 and Q2, sales in India declined in the 2nd quarter alone due to a very demanding basis of comparison. Organic growth in sales in Latin America was up +3.3 percent, thanks to rising revenues in Brazil and Peru, which offset the decrease in sales in Colombia. In Africa, Middle East, sales retreated organically minus 1.6 percent 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 sustain rise in sales over the course of the first half. Let me now pass the mic to Frank for an overview of our financial performance.
On Page 10. As said by Benoit, H1 2019 adjusted operating profit rose plus 6.0 percent to reach EUR 663,000,000. Moving to Page 11, H1 2019 adjusted operating margin before acquisition, meaning at 2018 comp of consolidation came to 20.9 percent. Adjusted operating margin before acquisition was stable compared with the adjusted operating margin recorded in the first half of twenty eighteen The good control of administrative and commercial costs over the course of H1 compensated for the decline in gross margin declined 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 initiative Including the 0.4. Dilution from acquisitions, adjusted operating margin came to 20.5%.
2 side comments here. 1st, on the quarterly performance, As you know, Q1 adjusted operating margin before acquisition was down minus 30 basis points q11 2018. Recording flat margin H1 means that Q2 adjusted operating margin 4 acquisition was up plus 30 bps versus Q2 2018. This was achieved, thanks good management of pricing in the context of almost flat raw material and component prices, excluding U. S.
Tariffs. Impact and by good control of SG And A. So long comment on the impact of acquisition of Agilecotte in gross margin, Taking into account the acquisitions that completed in 2018 2019, the dilution from acquisition on adjusted operating margin should be as announced early feb around minus 0 point four points for the full year 2019. Moving now to the net profit attributable to the group on Page 12. It was up plus 6.5% from the first half of twenty eighteen.
This good growth resulted mainly from the increase in the operating profit and a 2 point decrease in tax rate. Financial charges, as indeed, Nicolas, increased close to EUR 5,000,000 in H1 2019 due the implementation of the IFRS 16 from Jan De First. Moving to the last feature of our financial performance with cash generation on Page 13. 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 plus 10% in the first half of twenty nine Additionally, on the left hand side, you can see first that cash flow from generation remained very solid at 18.2% of sales. 2nd, that working capital requirement remained good as their control, but was a big asset by the impact of the recent acquisitions.
And third, that free cash flow stood at a solid 11.6% of sales. These were the key topics of Lagrange 2019 first half performance I wanted to share with you. I now give the mic by 2 by 1.
Thank you, Frank. Let's move now to the second part of this deck on Page 15 with local ongoing initiatives for development and operational optimization with 4 main topics innovation, acquisition driven growth, new agent targets and performance reinforcement. As you can see on Page 2017, we kept on actively innovating with several new product launches covering many of our product categories and including connected offerings from our Elliott program. You can see, of course, user interface solutions and notably Valinix connected rents considered net that move for Belgium and Spain, but also moderate in France, the increase 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 directory system, connected audio video solutions, assistive living alarms, and in digital infrastructures, which as you know, is a key enabler for IoT. Logon Solutions are well known from 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 and disputed number 1 in the U. S. For First Way's product as centers. This move will ideally roll out lebron front runner positions in data centers in the U.
S. More generally, dockings of recent acquisitions are well on track and acquisitions are performing overall in line with their road map and have reported encouraging results. Focusing on NetATMOO and as explained at our June ID, we will lever our net debt most expedited user experience, artificial intelligence, and software integration into products to accelerate our We have first added Page 20 and 21 as a readout digest of Legrand plant to accelerate digital offering we presented on June 12. Finally, on Page 22, a reminder of one of the key features of the Legrand model, I. E, the ability of the LeBlanc team to constantly work initiatives to strengthen operating performance.
This goes through 1st the see roll out of the long haul way program to new industrial and logistics sites, but also to R&D And Product Marketing Organization, 2nd, we launched every year initiatives to optimize group's industrial footprint. Such initiatives have already been implemented this year, Spain, Turkey, Russia, China, and Saudi Arabia, in relation mainly to plant Coming now on Page 24 to the last topic of this earning release, IV or target for the full year based on its 2019 first half achievements Laurent confirms its 2019 target for organic growth in sales of between 0% +4 percent and its 2019 target for adjusted operating margin before acquisitions, I. E. 2018 scope of consolidation of between 19.9% 20.7% of Laurent will also pursue its strategy of value creating acquisitions. Francois, for and myself are now available to
Ladies and gentlemen, we will now begin the Q And A We have a first question from Guijn DuMre from Deutsche Bank.
Yes, good morning, good morning, everybody. Thanks for taking the questions. The first question I have is, I mean, you mentioned specifically that that Legrand will continue to strengthen its positions in data centers. I guess you're referring to Universal. But beyond this, perhaps, could you elaborate on how you intend to further reinforce your position?
I mean, the question I have is can you 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 on your small one in UPS. So that's question number 1. Question number 2 is about the difficult comps you're mentioning in Turkey and India? And apparently, you sort of suggested that it could be a one off, obviously, but 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 twenty nineteen.
And then 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?
Hello, Gail. So I will start with your first question on data center. Well, I will not do again the ID story, but clearly, we have a clear roadmap to keep going on data center, which is articulated around many topics, further acquisitions. We have a number of ideas that could potentially reinforced positions, organic growth, of course, optimization of operations, innovation, and so on and so forth. Now Going specifically to your question, I think you have to differentiate, what we call the grace space and the white space.
So gravespace is really the technical part of the data center. It's a building part of the data center, if I may say. And that's where you have number of products such as switch gear, such as a power bus bar 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 still in the gray space, we are elsewhere.
We are, for example, a contender in this space in Europe where we have a large strategic offering and good market position, but we are not in the U. S, where we have no strategic offering. In the U. S, we focus specifically in what we call the white space, I. E, the space where you have the servers.
And in this space, we have very relevant market positions. We are a market leader in, in PDUs, following the acquisition of Harito and CyberTech, we are a very important, key contender in racks and cabinets. We are now a market leader with universal electric on the pathway for data centers. So yes, in the U. S, our positioning is a bit specific in data center because we are, of course, a player in the structured cabin, post copper and fiber.
So in the U. S, our positioning in data center is a bit specific because we are focusing on the white space. And by the way, of course, it depends on the quarter and it depends on the product availability. But 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. So, 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 challenging 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 2 geographic in Turkey, clearly the economy is extremely supportive, extremely strong until, let's say, the summer 2018, where you first had a currency crisis and then an economic crisis. And the second half of the year was a lot more difficult.
And everybody expected 2019 to be tough, both because the biggest form comprising of 2018 well strong, but more importantly, because the key is a difficult economic environment, to give you a flavor of our performance in 2018, or H1 growth in Turkey was very sustained. It was even above 50%, let me see. It's better for comprising of my stuff. And on top of that, Turkey and 32, very difficult economic crisis, starting in H2 2018. So the sales evolution in Turkey in H1 is very negative, and it's not a surprise, having in mind, post effects, I.
E. The best 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. But clearly, Q1 2018 was slightly down. Q2 2018 was strongly up by more than percent. And as a result of as a result, there is obviously a different basis for comparison between Q1 and Q2 2019.
Q1 based comparison, being a lot more easier than Q2. So you have to differentiate the 2 situations, if I may say Turkey. Difficult very demanding, mainly 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, Q2 being a demanding basis for comparison.
Well, 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 bps. So you have, let me say, to discount it by 100 bps to have it with the IFRS 16 impact. Well, I think the normalized free cash flow as a percentage of sales is good, has been consistent with 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%. But as we said, many times, the right metrics for overall is more than normalized free cash flow to sales because on a quarterly basis, working capital requirements may vary very significantly one way of the user, depending on topic. So for example, in Q1, where the free cash flow non normalized was, let's say, quite low.
So change in working capital, had a very negative impact and it came from a temporary rise in not operating working capital in relation mainly to tax. In Q2, we had the opposite effect plus a number of punctuality variable effects. So I really encourage you to look at the normalized free cash flow, which again, is very healthy on H1, a very healthy in Q2 rather than the non normalized Africa.
Thank you. Next question from Andres Willey from JP Morgan. Please go ahead.
Yes, good morning. Thanks for the time. I've got a couple of questions related to top line growth. Maybe you talk a bit more about the U. S, you had 3% growth there in the first half overall.
What see in the specific submarkets in terms of the lighting business milestone data centers and the rest I was 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? And secondly, just from a bigger picture review, you had the company overall at 2 percent 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 given that you should have, as you said, very strong growth in data centers, you should have good growth in the connected products. Well, this what businesses other maybe than the specifics you just highlighted on Turkey and so on are negative in the first half?
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 are released, whether the professional distributors are released, and what the number of our U. S. Peers have released, is in line with the market growth.
So we see and we already made the same comment in Q1 with seeing the U. S. Market growing more or less at the same pace as a GDP grows. And well, as usual, it's a mix of of, it's a mixed bag. So, we are not reporting, Maestro as a separate segment because as you know, we might have turned into a bigger heavy division in the U.
S, whereas the heavy division has been slightly growing, but on tough comps, because remember last year, the AV performance was very strong. The lighting controls, and lighting overall, I think features, it it's overall quite good and growing nicely. For data center, it's a mixed bag because Universal is growing very fast, as we said, but it's not consolidated. I mean, it's part of the climate change impact. And 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 3,000,000 dollars, 4,000,000 dollars, $5,000,000, $6,000,000. So it's it makes a difficult comp. So it's really mixed bag. We have different businesses there, but my point is that with a 3% cost 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, as I remind you that we have, again, for NMCA, so for North Central America, very difficult basis for comparison, Q2 was up 5.8% last year. So over 2 years, Legrande North America is so not only the U. S. Flu.
So Mexico and Canada is up more than 8%. So it's quite a good performance. As far as So split between volume and price, let me find the numbers So 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 semester. It's so it's up, plus 2.3%. Now Zoom toll, so you're right to say that, the volume was quite, West Coast flattish.
Well, you could see in the press release that we have Unfortunately, a number of areas where our sales are going down. It is the case, in, in Turkey, of course, as is the case in Canada. This is the case in Mexico. This is the case in Middle East. And again, even if Middle East is only 2% of our sales, it's 10% of the rest of the world, IR, and it's down very significantly.
So impact negatively or to apply, it shouldn't be a surprise for you because everybody knows that Middle East is not going, going very well. Well, in Q2, India, for the reasons we explained, is also down. And we have a couple of other geographies. So so clearly 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, plus 2.3% price impact, on Q2 and plus 2.3% price impact in H1. So overall, quite consistent price over the full semester.
Thank you. Next question from Lucy Karri from Morgan Stanley. Please go ahead.
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 and twenty twenty? So basically, we have seen a certain number of leading indicators in various countries actually decelerating. If I think, for example, 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 6 month delay? Is it longer Or do you think that generally speaking, they don't reflect where the trend in your business?
That's all you see. 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 2 of them are relevant enough, or tight enough with our market growth to be a to be a good leading indicator. So I wouldn't take any of those as 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 percent. And we are confident in our ability to meet our guidance, of course. But as we said last quarter, and as we said 2 quarters ago, we are in a world where there are a lot of uncertainties. So the U. S.
And China disputes continue, And, I remind you that, we always have this tariff topic, which is significant for Le Mans, 60,000,000 approximately $60,000,000 of additional costs 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 and a few others. And we have overall uncertainties, uncertainty connected to the Brexit in October, uncertainty coming to some of the leading indicators, you mentioned. So, we believe that in the first half, the economy was obviously less supportive than in 2018.
In fact, We still see in front of us a number of uncertainties, but in this context, we reiterated our guidance at 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. And again, we have no visibility for the second half of twenty eighteen.
And even less visibility for 2020, well, you know, whether it's all of our business model, our objective is not to forecast precisely, but 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 push ourselves as much as possible, but also to, preserve our profitability there, which, for example, significant factory closure in Saudi. So again, no clue on what the economy will be and we'll do in the second half of the year in twenty But as always, the low probability to adjust whenever there are negative things.
My second question was a follow-up on the on Andreas 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 in second half of twenty nineteen versus the first half twenty nineteen?
Well,
don't forget that pricing is a very dynamic topic. And so we have had a significant pricing feed in Q4 in the U. S. To composite the tariff. If you remember the 2018 sequence as a tariff were first implemented in Q3 2018, especially in September.
When we released our Q3 numbers, we said that there has always a lag effect between the times that tariff are implemented and the time we do pricing. So it's the reason why the tariff 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 high scene the high scene in tariffs in 2018. So, significant price increases, if I may say, where implemented as early as Q4 in the And the result of that is at the group level, the Q4 pricing was plus 2 point 5% and the full year of pricing was 1.7%.
So that's where you see the sort of the highsing pricing in Q4, probably many from the U. S. Well, as far as pricing for H1 is concerned, as I said, it's plus 2.3 for H1 plus 2.3 for Q1 plus 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 an interesting numbers, in H1, the inflation of raw materials and components was about 3.2 percent +3.2 percent, including 2.5 points coming from U. S. Tariff. But if we zoom on Q2 twenty nineteen only. The inflation of raw materials and components was about +2.1 percent, including 2.4 points of dive.
So in other words, we've been able to have system 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. So it's, I think, again, the demonstration of the lecrom model, which is able to sustain a healthy level of pricing even in context where all material prices and components are not sharply going up. Does it address your question, Lucie?
It's a long answer, but
Yes, it does. Thank you very much. And 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 totality of sales, I remind you briefly the story, Elliott, it's not a reporting segment. I got it. It's not it's an additional layer of added value that we put in many different products. So we report it on a yearly basis, not on a half year basis, on a quarterly basis. So 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. So net debt move is completely in line with its road map. I remind you the 3 objectives we had with net debt move. Number 1 sustained very high top line growth, editors in H1. So the growth rate in top line consistent with historical growth rate, which is good.
Number 2, progressively move to high single digit profitability as far as adjusted operating income is concerned. And it was 6 months that was in line with this target. And number 3, contribution of Netatmo to the Elliott road map. Well, it's a bit early because Netatmo is only 6 months into Leandro. But as you could see at Investor Day, there are many plans, to make the most of that more, assets and expertise.
So as far as the net add put token is concerned, it's completely in line with our plan. Thank you.
Thank you. Next question from Sebastian Ritter from Redburn.
Hi, good morning to everyone. Just a follow-up on Lucy's question about Netatmo, if you think it are still growing in line with historical trend. Does it not expand all the organic growth you had in France in Q2? And the inclusion of net debt more?
Well, no, I mean, net that move, it's mainly perimeter and, Pat and it's a small, don't forget that only a very small part of Net debt, most sales are made in France, net debt, most European company with majority of sales outside of France, Germany, Italy, UK, and a few other geographies. So the percentage of sales made in force by Netatmo is a minority percent 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 2, number 1, a range of connected, demonstrating needs, number 2, a new range of foreign devices or user interfaces, named Mosaic. And it explain part of the good performance in Q2 in France. As far as the sellout that we have in France, and at LeGrande, we look at as, you know, same level as a sellout, as a sell in, the sellout are slightly up in front of as a semester, in line with the market So if we look at the federation of wholesalers and what the number of our peers and competitors have elite, the French markets probably only slightly up, and our set out, excluding Netatmo, are also slightly up.
So to answer your question, no. The performance in Q2 was mainly coming from LeGrand owned strength, if I may say, especially with our chocolate products.
And I have a follow-up on the guidance and the outlook for each to understand you you don't have any backlogs, but when you thought about your budget and the phasing, of course, in H1, in H2, and given comps and the calendar effects in the year, while you're expecting H1 to be lower than H2? And is it in line with what you expected when you did your pitch at 6 months ago? Thank you.
Well, when we are doing our budget, again, our main objective is not to forecast precisely amongst your quarterly sales. Because it's an exercise, which is extremely difficult to do at LeGrande, probably more difficult at LeGrande than many other companies. So again, our our priority is, to react to events, not only bottom line, by the way, but also in top line. There's a word 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. So again, our performance in H1 is +2.2 percent is very much the middle of our gaddels.
So as a result, you could assume that it's not a big surprise to us. And again, we've seen that for the full of 2019, we reiterated our guidance. So we, as a result, should be between C1+4.
Would you say comps are get easier as we go through the second half? We know France was very weak in Q3 'eighteen, but in other geographical areas, do you think the comps are getting a year?
Well, not necessarily. I mean, it is true that Q3 has a slightly easier comp, but this is the other way for Q4, which has also demanding comp. And many other things and comps could could play. I think what will make, look on performance in, as far line is concerned in 2019 is not much comp, which can impact 1 quarter of the other, but, not completed a full year, but it's rather the economy and our ability to perform better. So I want to take for granted that we will be we'll have a lot easier comp in in a 20 in a second half.
This is true for Q3 as far as operating concerns. This is not true for Q4. And as far as results are concerned, same comment, yes, the 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 the U. S.
Tariffs are concerned, And it's a it's the most demanding quarter, Q3 2019 because we have the full of least 1, least 2, least 3 type, including the least 3% at 25%. And it compares with a Q3 of 2018 where you had tariff part of it only starting September. So even though we optically, we have easier comps for Q3, the tariff is a it would be a demanding quarter as far as the tariffs are concerned. And as far as Q4 is concerned, it's a more demanding comp for top line and for bottom line. So again, we can hardly commit to 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 or guidance.
Thank you. Next question from Alice Donegal from Societe Generale. Please go ahead.
Hi, thanks, and good morning. I was just wondering if you could expand a bit more on France, then just wondering if you're maybe a bit more optimistic now compared certainly with the start of the year and perhaps maybe you can update us on what you're seeing on the ground, obviously through Q2 in different areas, obviously, whereas non res, new build and renovation, etcetera?
Well, I wouldn't say that for force. And for a couple of quarters, our couple of semesters, we've been qualifying the French market as being a lackluster, I. E, flat plus, even though if for Legrand, from 1 quarter to another can be either positively or negatively impacted by, by destocking or restocking, as far as the market itself is concerned, it has been only flat plus and, well, contributors, 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 Moneta Iphone.
We still have a renovation market, which is not very, 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, HVAC product. But as far as the mark the main market itself is concerned, both resin and resi and especially the renovation part, it remains extremely stable, with no obvious triggers for the market to improve.
Thank you. And thanks very helpful. I was just wondering as well if you could just update us, on the rollout strategy for connected user interface. So 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 seeing in other launch countries.
I think Germany was one of those. Maybe you can talk about, what's happening there, perhaps where you're positioning isn't as strong as in Italy?
Yes. Well, the good performance in Italy, which indeed continued in Q2 and H1 overall did a good performance in Italy. You remember, it 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 1, the market, which is, okay. So not as depressed as the GDP numbers market, for example, which is not common sense because the GDP numbers are better in France and Italy, but as far as our market is concerned growing slightly, better in Italy than in France. So a bit more supportive in market. Number 2, a number of product launches, well, including on, non connected warring devices. So leaving now range, which was launched last year which is indeed doing very well, has a large non connected piece, replacing 3 ranges that we had in Italy, namely leaving light and absolute.
So the connected piece is doing well, but also the non connected piece is doing well. And for example, We have a record high percentage of high end finishes for a high end range being sold. And number 3, on top of that, we have a sort of support of other product on shoes, such as, for example, the connected doorbell or the connected thermostat. So I wouldn't say that the connected warring 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, re launched those connected user interfaces in 4 countries in 2018, France, Italy, Greece, China.
And we have a rollout plan of more than 30 countries, in 2019 all along the year, and it's mainly in Europe, with Valinalex. So we are launching in Germany, in Russia, in Spain and the number of other countries. Well, will it help supporting our performance in those countries, yes. But again, in many of those countries, we don't have the same position we have in Italy. And again, the performance will more depend on the economy and how supportive our markets are, rather than only on those launches.
So yes, it will be a support for our business. But don't expect it to push the significantly assess on a given quarter what will really matter in H2 is how is it supportive is the economy.
Very clear. Thank you. Thank you, Benoit.
Thank you. 011 on telephone keypad. That's 0 and 1 on telephone keypad We have a new question from Daniela Costa from Goldman Sachs. Go ahead.
Hi, good morning. It's a very quick final question. I guess it was about 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. Well, we, as you remember, we released press release in September, 2018, where we confirmed the number of things. Obviously, we're not able to comment on investigation and at this stage, we have no information about further procedure on this topic.
Thank you.
Thank you. We don't have any questions for the moment. We have a new question from Sebastian Carter from Whitburn. Sir, please go ahead.
Yes, thanks. A final question on the raw material, if we exclude the U. S. Tariffs slightly down in the quarter. I believe you have some visibility see that what could happen in the next 6 months.
I'm not talking about the raw material price, but what you have in your inventories and maybe secure with your suppliers. So how should that develop going into Q3 and Q4 this raw material and component impact ex U. S. Tariffs? Thank you.
Well, we have a very little visibility because we don't have, as you know, huge talk of raw materials. We don't have a long term contract where we secure our prices. So and on top of that, it depends a lot on the exchange rate. Because, for example, one of the reasons why, price of raw material and compliance went slightly down for La Grange in Q2. So part of it is coming from the fact that some raw material prices went down in copper still very late and a few others, for example, but it also came from the exchange rate between, between euro and U.
S. Dollar. So, no, we have very little visibility. And again, as for the economic environment, the priorities is to adapt. So we are constantly monitoring the difference between selling price and purchase price and adjusting purchase price should we think that we, we need to compensate for an increase in raw material prices and components.
So this is the way we manage the company. We have to cope with this lack of visibility, well, it has been part of a model for years or decades, and we'll continue that. So no, unfortunately, no visibility. Next
question from Graham Phillips from Jefferies. Sir, please go ahead.
Hi, good morning. Just a question on capital expenditure and capitalized development I did see a bit of a tick up in the 2nd quarter. Are you anticipating spending towards the high end of your guidance range for those 2 metrics or it's just a bit of a unusual quarter.
No, nothing specific happening in Q2 as far as those R and D and CapEx. And I would really encourage you 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 a 1 quarter where we have, well, you have a big project to finance CapEx of 1,000,000,000, 1,000,000,000, 1,000,000,000, which is which is going through the cash flow statement on the one given quarter. So on a yearly basis, we don't expect to move out of our range and post CapEx R and D non capitalized or capitalized are well underway. Those things specifically happened in Q2.
No, okay. But perhaps just what was the big item, where were you investing in CapEx, particularly in the second quarter that might have absorbed another 7000000 or 8000000
Well, as usual, it's a big, so there are many, many different projects. As usual, it's a big ticket item, if I may say, for CapEx, our new products And on average, we have invested in H1, approximately half of our CapEx into new products and it was more or less the same ratio in 2018. So this is the most substantial part of our CapEx. On top of that, of course, we have growing percentage of our CapEx dedicated to a factory 4.00. 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, the factory 4.0 without changing the ratio of CapEx to sales, of course, and then we have also capacity it's unusual to be, but half of it is new products are new products.
Okay. So you're not expanding capacity anywhere. And particularly as a result of that investment in the quarter. And 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, you know, we have, I think, 130 different factories worldwide. So yes, there are places where we increase the capacity, course, because there are markets which are which are growing. Now, we are constantly up optimizing our footprint. And that's what we put in our press release. We have either closed or planned to close factories in Russia, in in Beijing, so in China, in Turkey, in Saudi.
So our footprint, is that something which is not moving We have many initiatives underway. Number 1, we have this factory 4.00 where we intend progressively to roll out a number of techniques automatic guided vehicle, data management, and so on and so forth to make our factories more efficient. And on top of that, we are optimizing our footprint. There's no big move, let's say, from low cost to high cost, but for high I'm sorry, from high cost to low cost because a lot of those moves were made already years back, but it's more within the geographical area. We did within a plus sir, where we believe we have still a number of intimidation to be made.
You could notice, for example, that looking at the accounts that are restructuring charges, were at a good level in H1. They are at the EUR 13,000,000 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, you know, sort of doing from 1,000,000 to 1,000,000 per year, and it's 1,000,000 in the 1st half. So So it means that we have a lot of plans, to keep optimizing our footprint. And as a reminder, our restructuring charges are embedded in to our adjusted operating income.
It's not it's part of it. Thank
you. We have a new question from Andreas Willey from JP Morgan. Please go ahead.
Yes, thanks for the time. Just wanted to follow-up on 2 topics. First on the, operating leverage in Q2, which is 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 And second question on cash flow and IFRS 16, you 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 links to that. Maybe you could explain that.
And it looks like the benefit is like 1,000,000 on an annualized basis to free cash flow from an accounting change. Why have you chosen to include that in normalized free cash flow?
Well, so let's start with the second question. The hedging impact, as I said, is 100 basis points positive on free cash flow. Of the semester and should be the same impact in the full year. Actually, we announced it in February. Well, we included in the in the normalized free cash flow because we will not every year retreat free cash flow to extrude.
And then again, the normalized free cash flow is normalizing only networking capital. Our intention is not to normalize 10 things. We want to We want to be, to be as close as possible to GAAP measures. So, it's only normalized 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 a normalized free cash flow to sales of between 13% to 14%.
Obviously, the 100 bps coming positive impact coming from IFRS 16, as we said at that time was included into the numbers. So it shouldn't be a surprise. The fact that it's part of a material there, the top that it's 100 bps positive impact has been clearly communicated to everybody in February. As far as Q2 performance is concerned, so actually acquisitions, we have a rise of 30 bps That's what Frank mentioned. And over in Q2, compared to to Q2 of last year.
We have to make a long story short, flat gross margin, which is a change compared to Q1. And this change is coming from the fact that we are able to achieve a flat cost margin is coming from the good control of pricing, the in a context where the price of raw material and compliance is going slightly down. We have plus 60 bps coming from SG And A. So good control of administrative and commercial expenses, which are almost flat, and minus 30 bps coming from other charges and expenses mainly connected to some higher restructuring charges in relation to our industrial footprint documentation, all the the countries I've mentioned, I. E, Saudi, China, Russia, and a few others.
So to make, in a nutshell, the good performance 2 is coming, good pricing management and good controller of Engineering. Thank you. I mean, at
the 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 the recommendations. So I understand that the company is accounting for the IFRS 16 different way. For example, we take it into as a part of the net debt. And so it's about EUR 300,000,000 additional net debt that we have to finance. So most of our companies don't, but from what I understand, our accounting treatment is very standard and in line with many other companies practicing, actually, again, we basically don't really care, and we accounted the way we were advised to account it by our auditors.
Thank you.
And we have a precise Azure, and 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, and so on, net income, and so on and so
We don't have any more questions for the moment. 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. And as usual, if you have further questions, when doing your analysis, please do not hesitate to contact Francois Franco, 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.