Ladies and gentlemen, good morning, and welcome to today's Legrand 2019 first quarter results conference call. All participants are on 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 Plessen, and myself are happy to welcome you to the Legrand 2019 Q1 result conference call. Let me first remind you that we have published today a press release of financial statements and a slideshow to which we will refer. Those documents are available on the legrand.com website. Please also note that this conference call is recorded and webcasted on our website. Let me start with a few opening remarks, following which Franck and I will comment into more details our 2019 Q1 results. I am starting on page four of the deck with the four main takeaway from today's release. The first takeaway is that all main financial KPIs are on the rise in Q1 2019 compared to Q1 2018.
Total growth in sales were more than +7%, adjusted operating profit increased about +5%, and net profit attributable to group was up more than +8%. Second takeaway, we have pursued our innovation and acquisition strategy by launching many new products, including new connected offerings as part of the Eliot program, and by completing the acquisition of Universal Electric Corporation, the undisputed U.S. leader in busways for data centers. We also continued the deployment of our initiatives aimed at strengthening the group's development model. Third, we are launching today our fourth CSR roadmap, 2019-2021, which is built around three focal areas, business ecosystem, people, and environment, with ambitious targets contributing to the UN Sustainable Development Goals. Lastly, based on its first quarter 2019 performance, Legrand confirmed today its targets for 2019. I will come back to this point later in this call.
After these brief highlights, let's start with an overview of sales on page six. Total sales rose +7.3% in the first quarter of 2019. This good showing comes first from a solid +2.9% organic growth, Legrand first growth driver. All three geographical zones are on the rise like-for-like. Acquisition-driven growth, which is the group's second growth driver, contributed +1.9% in Q1 2019. Based on acquisitions completed in 2018 and 2019 and their likely consolidation dates, the scope of consolidation should come to close to +5% in fiscal year 2019. Finally, Forex impact was favorable at +2.3% for the period. If we apply to the last nine months of the year, the average Forex rates observed in March 2019, the annual Forex effect for 2019 would be nearly +2%.
This is, of course, as usual, a theoretical computation. Time will tell what will the actual Forex impact on sales be for the full year. Let me now go into more details regarding the like-for-like evolution of sales by reporting segment. For that, please refer to page seven, eight, and nine of the slideshow. Starting with Europe, organic growth in sales was +2.3% in Q1 2019. In Europe's major countries, sales grew +1.7%. This increase was mainly driven by sustained growth in sales in Italy, supported by a steep rise in sales of connected products, as well as in Germany, Greece, Portugal, and the U.K. The French market remained lackluster overall. Legrand sales in France retreated due to destocking by some distributors. In Europe's new economies, growth stood at +5.7% with strong growth in Russia, Turkey, Hungary, and the Czech Republic.
Let me now move to North and Central America, where sales were up +2.4% on an organic basis. This increase was driven by the U.S., where sales grew +3.3% like-for-like, with good showings in lighting control, smart PDUs for data centers, cable management, and user interfaces. Revenues were nearly stable in Mexico compared to Q1 2018 and retreated in Canada. Let me now move to the rest of the world, where sales rose +4.9% on a like-for-like basis. In Asia Pacific, sales were up +6.2%, with double-digit growth in India and Thailand and healthy showings in China. In Latin America, organic growth was +3.1%. In Africa and Middle East, sales rose organically +3.3%. Many African countries recorded very strong rise in sales. Sales retreated in the UAE and in Saudi Arabia.
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, Q1 2019 adjusted operating profit is up +5.1% to reach EUR 305 million. Moving to page 11, Q1 2019 adjusted operating margin before acquisition at 2018 scope of consolidation came to 19.8%, including a favorable impact of around +0.1 points linked to the implementation of the IFRS 16 standard. The 0.3 points decline compared with Q1 2018 adjusted operating margin essentially reflects a demanding basis for comparison and a decline in gross margin linked in particular to the rise in raw material and component prices. Nevertheless, the rise was fully compensated in value consistently with Legrand's model. I would like to highlight here that the rise in U.S. custom duties was fully offset by pricing and adaptation initiatives in our North and Central America accounts.
Including the 0.1 point dilution from acquisition, adjusted operating margin came to 19.7%. Taking acquisition completed in 2018 and 2019 into account, the dilution from acquisition should be around -0.4 points for the full year 2019. Moving now to the net profit attributable report to the group on page 12. It was up +8.6% from the first quarter of 2018. Most of the increase came from the rise in operating profit completed by a favorable change in financial results and a two-point decrease in tax rate due to favorable one-off factors. Moving finally to the last indicator of the financial performance on page 13. As you know, the relevant reading of free cash flow generation on the quarter is on a normalized basis.
You can see on the right-hand side of the slide that normalized free cash flow was up over +9% in the first quarter of 2019 to represent 15.5% of sales. Additionally, on the left-hand side, you can see first that cash flow from operations increased close to 10%, reaching 17.6% of sales. This is 0.4 points above Q1 2018 level. As for free cash flow, it stood at 3.9% of sales as working capital requirement represented 12% on the last 12 months sales at March 31st, 2019. This was mainly due to a temporary rise in non-operating working capital requirements. These were all the elements I wanted to share with you regarding the first quarter 2019 of our financial performance. Let me now give the mic back to Benoît.
Thank you, Franck. Let's move now to the second part of this presentation, i.e., the pursuit of Legrand innovation and vision strategy as well as of operational initiatives. As you can see on page 15 of the deck, we were active again on the innovation front, launching several products covering many of our product categories, including smart offerings from our Eliot program. You can see, of course, user interface solutions on the left side of the slide, and notably, Valena Life, the connected range recently launched in Belgium and Spain. We are also pushing offerings for digital infrastructures with fiber optic cassettes, including an SA3 program, for example, but also an all new TRIMOD MCS range within UPS systems, architectural lighting features under the Finelite and Pinnacle brands, and the rich digital connected residential alarm units for assisted living. Moving now to page 16.
We have completed in April the acquisition of Universal Electric Corporation, the undisputed number one in the U.S. for busways, i.e., electrical power distribution systems based on metal busbars. Universal's offerings are mainly sold under the Starline brand and have long been known for their quality, ease of installation, and use, making it a true benchmark for the market. They will ideally round out Legrand front-runner positions in data centers in the U.S. Finally, on page 17, you have a few examples of ongoing initiatives that Legrand is pursuing and that I've been presenting in February.
These initiatives include, for example, the organization of the group's front office into three regions, which has been fully up and running since the end of 2018, the optimization of the industrial footprint, for example, in Turkey and in Saudi, and the targeted digitalization of our front office and our operations. I would like now to move to our third part on page 19, dedicated to our CSR initiatives. Indeed, the group has launched today its fourth CSR roadmap, which covers three years from 2019 to 2021. It is built around three focal areas, business ecosystem, people, and the environment. These areas are broken down into 10 key challenges that contribute to the UN Sustainable Development Goals, and that have been defined through a materiality survey that involved more than 3,600 group stakeholders.
Within the frame of this roadmap, Legrand has also set itself ambitious targets for 2030, aimed at deriving 80% of group sales from sustainable products, increasing the number of women in management and achieve a gender balance workforce, and reducing its carbon footprint through a 30% decrease in CO2 emissions directly linked to our operations. Full package of information on the CSR roadmap is available on the legrand.com website. Coming now on page 21 to the last topic of this earnings release, i.e., our targets for the full year. Based on its first quarter 2019 performance, Legrand confirms its 2019 target for organic growth in sales of between zero and plus 4%, and its 2019 target for adjusted operating margin before acquisitions at 2018 scope of consolidation of between 19.9% and 20.7% of sales.
Please note that this range embeds an estimated favorable impact of around 0.1 point linked to the implementation of IFRS 16 standard. Legrand will also pursue its strategy of value creating acquisitions. Franck, François, and myself are now ready to open to questions. Thank you.
Ladies and gentlemen, if you wish to ask a question, please press zero and one on your telephone keypad. We have a first question from Andre Kukhnin from Credit Suisse. Please go ahead.
Start with a couple of obvious ones. On France's destock, could you please help us with quantifying the size and maybe what impact that made on profitability, if significant? On France, just more broadly, has your outlook on the end market changed at all since Q4 results? Some of your peers have commented a bit more positively, while you call it still lackluster. Just wanted to get your latest thinking. I'll start with that, please. Thanks.
Hello, Andre Kukhnin. Well, to give you a bit more color on France, our sales are slightly down, not to the magnitude of our Q3 performance. Still, they are slightly down. To be compared with sellout, which are slightly up. To give you order of magnitude, our sellout in France are close to +1%, and the selling are slightly decreasing. The difference between sellout and selling, obviously, is the destocking. The destocking was not as strong as it was in Q3, but some of that happened. By the way, it's not a big surprise, because you remember that we delivered a very strong Q4 in France, and we said at the time that part of our Q4 performance and part of our Q4 clear overperformance compared to the French market was coming from the fact that some of our distributors have restocked a bit.
This Q1 destocking did not come as a big surprise to us. Well, what impact does it have on profitability? Obviously, given the level of the French margin, it didn't help the European margin. Now, we'll probably comment a bit later the profitability topic in Q1 is more coming broadly from discrepancy between selling price and the price of raw material and components broadly, rather than specifically an issue in France. Last, going forward, well, as usual, we have no clue. We've kept telling the market that the French market hasn't been supportive for quite some quarters. Sellout, which are slightly up, market which is only very slightly up for us is typical of a lackluster market. Unfortunately, we don't really see a reason why the market would become suddenly a lot more supportive than it used to be.
All the more as on the economic front, you could see that recently the IMF has downgraded a bit the GDP expectations for France. The market, which hasn't been supportive for a couple of quarters now, and we don't really expect that to change in the quarters to come. Does it answer your questions?
Absolutely. Thank you. You've touched on the second one in terms of more broader profitability question. You explained in the past that offsetting the absolute value of raw material and tariff inflation with price increases still leaves you with a margin headwind. We kind of calculate that margin headwind to be about 20 basis points in Q1 2019. Just purely from the effect of raising price to offset raw materials, but obviously sales base increases with that as well. Does that concur with what you have or should we calibrate that number?
Let me give you a bit more numbers maybe to calibrate that. Overall in Q1, our pricing was up by 2.3%. The inflation of raw materials and components was about +4.5%, including 2.6 points coming from the U.S. tariff. Excluding the U.S. tariff, the increase in price of raw material and components was something like +1.9%. Those are the numbers. Obviously, you have everything you need to compute the impact it has on the margin. Clearly, this is an important driver behind the small decrease in profitability at the 2018 perimeter. Number one, our commitment has always been to compensate in value, and we did. We did compensate in value in Q1, the increase in raw material price and price of components, even though it had a negative impact on the margin.
Number two, the good news is that zooming on the U.S., the tariff was fully compensated, and you know that it was, and it remains a challenge for Legrand. Number three, we remain very confident on the fact that the Legrand traditional model of adjusting selling price, depending on the price of the inputs, including raw materials and components, is obviously still working. Going forward in the quarters to come, if there were to be a decrease in the raw material price and components, we have already notified a number of geographies and a number of product families on which we could, if needed, do additional pricing. We are very confident on the fact that our model, of course, is still running very well.
This is the main driver behind the profitability evolution between Q1 2018 and Q1 2019, to which I would like to add also that the Q1, in terms of results, was a demanding basis for comparison. You can do the math yourself, obviously it's a quarter which was a bit demanding.
Thank you. That's very useful. Just last one from me, probably a usual one as well. On growth guidance, it is slightly surprising you didn't raise the bottom end at that 0% given Q1 performance and no obvious deterioration in the markets, at least for near term. I know it's a range of outcomes, but just in terms of that bottom end at zero, what are those risks that you see out there for the rest of the year that could turn your revenue growth down later in the year for that scenario to materialize?
Well, we released the Q1 which is very consistent with our guidance. Our guidance of zero to plus 4%, and we delivered plus 2.9%. What we said two months back when we released our full year results, 2018 results, remain valid. It is a year where we have a lot of uncertainty. The recent IMF downgrades in a number of markets have sort of backed up the fact that 2019 going to be an uncertain year. You know the Legrand model, we have no other book. Given what we have seen so far, both in our performance and in our end markets, we see no reason to change our guidance. Again, Q1 is very consistent with the guidance.
Okay, that's very clear. If I had to interpret it's not something that's emerged that you see in front of you that is a risk. It's more of an element of conservatism, given that we still have got three quarters to go.
That's not at all what I said.
No? Okay.
It's not an element of. We have only three months of performance behind us, we have nine months in front of us. There are the usual uncertainty on a number of markets. No. Again, if we were to have markets deteriorating, a negative impact from Brexit, deceleration in Italy, and so on and so forth, we'd be definitely closer to the zero. If for whatever reason, the markets were to be more supportive, and even sometimes rebounding, it would be closer to the four. What we said in February remains true. We have only one quarter behind us. It's very difficult to give you more precise guidance on what the markets will deliver and will do from now to the end of the year.
Great. Appreciate this. Thank you very much.
Thank you. Next question from Andreas Willi from J.P. Morgan. Please go ahead.
Yeah, good morning. Thanks for your time. My first question is on the U.S. performance in terms of organic growth, or the North American one in general, which was weaker than I would have expected. Also, given that's probably the area where you've had the biggest benefit from price and therefore volume growth looks pretty weak. Most of your peers have reported strong results in general in the general kind of electrical construction exposed U.S. market. Maybe you could elaborate a bit on the drivers by business, you highlighted some of the areas that did well, so there must be other areas that had negative year-on-year performance on volume particularly. The follow-up question to the pricing discussion earlier was that the mechanical impact on margins is clear, but I'm still a bit surprised compared to the historic performance of Legrand in terms of timely offsetting of raw material price inflation.
Given that many of your input costs in terms of the base metals have actually come down a bit compared to where they were a year ago. Should we expect some tailwinds as the year progresses, just as copper, silver, and some of the other materials may not increase anymore or be down slightly and you keep increasing or having the carryover effect from price?
Okay. On the first question, well, number one, you always have to be extremely careful when comparing the performance of one player to the other, because all companies have a very different scope of products. You call that low voltage, but within low voltage, if you look at the especially North American market, we are competitive positioning, which is very different from the one of Eaton, Schneider Electric, Hubbell, Acuity Brands, and the like. You always have to be very careful when comparing the performance. This being said, looking at what all those guys have reported, and you could also include the distributors, both professional and DIY. It seems like the U.S. market in Q1 grew, in value, more or less in line with GDP, i.e., somewhere between 3%-4%, or 3%-3.5%.
This is very consistent with the numbers released by most of the companies I have mentioned. With our +3.3% growth, we are in line with the market growth. We are not significantly gaining market share, but we are in line with the market growth overall. We don't see that as a disappointing performance. We see that as a performance which is in line with the market. By the way, and again, I'm referring to the release of some of those companies. Most of the companies have increased significantly their selling price in the U.S. in order to compensate for the negative impact coming from the tariff. With 3.3%, we are broadly in line with the market and with minimum volume growth, given the fact that we have had a significant pricing impact in the U.S.
We are more or less in line with what the market is doing. You could always claim that Legrand should win market share everywhere, we are not losing. We are in line with the market. As far as your second question is concerned, the pricing versus raw material and pricing components, again, our track record has always been to compensate in value when raw material pricing components is going up, to have a positive impact on margin when raw material pricing components is going down. This is a Legrand model. That's what we've been able to demonstrate in the previous years. This is what happened in Q1. There's no compensation in margin. There's a negative impact on our margin, but it is compensated in value. Going forward, it's always difficult to understand what the raw material and the component price will do.
Not only you have the impact of the raw material price itself, you have also the FX, which has an impact. Looking at Q1, for example, the number of metals price went down, especially when consumed in EUR, the number of other raw materials went up or component went up. It's the case for a number of plastics. This is the case for packaging, for example. This is the case for a number of components, which represent, I remind you, biggest part of our supplies. A part of that was impacted by the USD-EUR currency. Going forward, in your scenario, you have to embed not only the price of raw material but also the FX. It is true that a number of economists are expecting the price of raw material and components to ease a bit. What will it be?
We don't know. What matters, I think, for you is that on a yearly basis, this is something we'll keep monitoring closely, we have the ability to keep adjusting our selling price in order to mitigate the impact of raw material price and component price into our accounts. Again, not a lot of visibility going forward, but the ability to adjust on a yearly basis. On a given quarter, of course, you can sometimes have a bit of bonus, such as we had in Q1 last year, coming from pricing. You can sometimes have a bit of malus coming from raw material and components. What really matters is the way it is balanced on a yearly basis.
Thank you very much.
Thank you. Next question from Gael de-Bray from Deutsche Bank. Please go ahead.
Thanks very much, good morning, everybody. My first question is, would you say you were surprised by the rise in raw material and component costs over the quarter? In which geographies do you feel you need and still have the ability to raise pricing further in particular? That's question number 1. Question number 2 is about the sort of margin volatility we've seen now in the past three quarters. I'd like to better understand perhaps the reasons behind. In particular, do you think there was some catch-down effect in Q1 with extra spending now required after the strong cuts in cost you made in Q4? The last one is about the basis of comparison you highlighted for Q1. Would you say it's going to be the same as demanding as it was in Q1 in the second quarter? Thank you.
Hello, Gael. First question. Well, we were not surprised by the rise in raw material and components, there are a number of inputs to that, which, by the way, are not known at the time you start the quarter. Typically, for example, the U.S. dollar/EUR, the foreign exchange rate wasn't known in January, this is a very important and very significant input for the raw material and the components we are consuming in our accounts. Again, I have to remind you, Gael, that adjusting or selling price is not something which is completely mechanical, you just don't decide overnight that you're going to increase price by 1% here and 3% there. This is something which is extremely progressive and which you have to think a lot to make sure that competitive-wise, it is not a potential issue.
You don't decide overnight, January 1st, that you're going to increase the price by 2% or by 3%. It's a progressive work. Well, we have identified, as I said, a number of geographies where it was worth doing a bit more pricing. I cannot elaborate a lot more than that because this is highly competitive information, we are not much commenting on pricing per regions, the action plans are there. Well, as far as the margin volatility is concerned, I wouldn't call -30 basis points to be such a strong and high volatility. I don't believe there's been any significant catch-down, if I may say, to use your own words, in fact. You can, for example, look at our SG&A. A lot of the savings we did in Q4 were SG&A related, our SG&A in Q1 2019 had a positive impact on our profitability.
Our SG&A are growing not as fast as our sales. We have had some leverage impact on our SG&A. No significant catch-down. It is just the fact that from one quarter to another, many things can happen in terms of pricing, in terms of mix of geographies and so on and so forth. By the way, this is a volatility we've always had at Legrand, by definition. As far as the basis of comparison is concerned, you remember the sort of specific profile of 2018, with quite a difficult, if I may say, Q3. To make a long story short, the basis of our comparison should be a lot easier in Q3 and a bit more demanding in Q1, Q2, Q4. It's the mechanical impact of the fact that our operating margin all-in was up 20 basis points in 2018 compared to 2017.
These plus 20 basis points was, let's say, between plus 20 and plus 40 basis points for Q1, Q2, Q4, and was -110 for Q3. The basis for comparison should be easier in Q3.
Okay. Thank you, Benoît.
Thank you. Next question from Lucie Carrier, from Morgan Stanley. Please go ahead.
Hi, good morning, gentlemen. Thanks for taking my question. The first one, I was hoping if you could give us a bit more color on your business of connected sales, how it has been growing in the quarter. If you could give us the indication on organic growth, that would be quite helpful. In which area of your business are you expanding currently in connected? That's the first question.
Well, Lucie, as you know, we are not giving any specific insight or numbers on our connected sales on a quarterly basis, so I will not. On top of that, you were invited to attend an Investor Day on June the 12th. I hope you'll be able to come, and you'll have a lot more color on the Eliot strategy, numbers, and many things at the time.
Thank you. I will come to the Investor Day.
Thank you.
in June. If you're not able to give us a number, I would still be curious to have a sense of whether this has accelerated, decelerated versus what you had seen last year. The reason for that is because if we are looking at your volume versus price in the first quarter, it looks like your volume was up only 0.6%. As you said, that price was up 2.3%. I think, it would be helpful for us to understand why the volume momentum is so low. Is it because, I would say the classic offering has been declining, or is it because connected sales maybe haven't delivered, as much as usual, also considering that connected sales usually have a higher price point than the standard offering?
Same question, same answer. Again, nothing to be hidden or not to be commenting, but just we are reporting on Eliot process on a half-year basis or even yearly basis, not on a quarterly basis. As far as the volume growth is concerned, again, it is very consistent with our guidance. We told the market two things. When we released our numbers, we said we're going to grow our sales between 0% and +4%, number one. Number two, there will be significant pricing anyway, because for example, there will be a very significant impact on our costs coming from the U.S. tariff. The fact that the 0% to +4% in base, significant pricing was already completely included in our guidance, and that's what we've delivered in Q1. There shouldn't be any surprise to the fact that we are not growing very fast in volume.
It was completely expected. This is coming from the fact that a number of markets are a lot less supportive than they used to be in 2018. A number of European markets are under a bit more pressure. On top of that, we have a demanding basis for comparison. France, we've already commented. The U.S., again, referring to what I was saying earlier, our, let's say, peers, if I may say, or the other companies in the electrical segment have clearly indicated that the market was growing 3%-4% and that they were doing significant pricing. I.e., the U.S. market is only growing slightly in volume. Number one, Q1 performance volume price value is consistent with our guidance. Number two, the fact that the markets are not growing fast in volume is not a big surprise to us.
Thank you. My second question was more follow-up on the question from Gael earlier around the base of comparison. You said easier in the third quarter, tougher second quarter and fourth quarter. I'm guessing that was for the profitability, or was that for profitability and sales? Just to understand a little bit better the rest of the year in terms of the base comparison, because from a sales standpoint, the first quarter was one of the easiest comps you have in the year, especially in the U.S., for example. If we think about typically the seasonality you have in the margin, historically, you've had a first half which was seasonally stronger than the second half of the year from a profitability standpoint.
I think I just would like to understand a little bit more the different bases of comparison, if you were only talking about margin or if it was margin and sales.
I was only talking about margin and the very simple math which is not worth a Nobel Prize, that was doing a bit earlier is to say that our adjusted operating margin in 2018 was up 20 basis points compared to 2017. We moved from 20% to 20.2%, so plus 20 basis points. And this +20 was +40 in Q1, +50 in Q2, -90 in Q3, and +60 in Q4. My only comment was referring to the fact that, in terms of profitability, we had this profile for the year 2018 with a very soft Q3 and a stronger Q1, Q2, and Q4. As far as sales are concerned, we know that we have for the full year, a difficult bases for comparison in a couple of geographies, especially the case in Italy and in the rest of Europe.
Otherwise, I wouldn't say that Q1 is neither easy nor difficult in terms of base for comparison.
Thank you. Just my last question was more one of accounting. You had 10 basis points of IFRS 16 benefits in the first quarter. Is that expected to stay the same during the year, or should we expect variation in that?
Well, we expect it to be broadly the same for the full year. It shouldn't be neither lower nor bigger. You can take the plus 10 basis points for the full year.
Okay. Thank you very much.
Thank you.
Thank you. Next question from Alasdair Leslie from Societe Generale. Go ahead.
Yeah. Thank you. Hi, good morning. Most of my questions have been answered, but I was wondering on one on new product launches. You've talked about that quite a lot in the Q1 release. Did you see the full benefit maybe from those launches already in terms of the growth in the first quarter? It's not necessarily that visible from the headline numbers, but maybe that's down to tough comps or perhaps the underlying markets were even a bit weaker. Or should we think about that benefit ramping up in the second quarter? Linked to that, there does seem to be more emphasis on innovation again in the release. Was there any impact on the margins, either from higher strategic investment or perhaps launch costs as well? Thank you. That's my first question.
No, we just wanted to put a slide on innovation in the Q1 release to remind everybody how important it is to the Legrand strategy and the fact that even though the markets are a bit less supportive than they were last year, we keep investing in new products. This is not a new piece of our strategy. This is very consistent with what we've been doing the previous quarters and years. None of the products that were launched in Q1 are of such magnitude that it will have a significant boost in our expenses, nor a negative or positive impact on profitability. Again, if you look at our SG&A in Q1, which includes commercial expenses to launch new products, they are contributing positively to our profitability.
Nothing new, except the fact that as usual, even in times which are a little bit more difficult, we are investing on growth. Now, maybe we can take the opportunity to make another comment. Our +2.9% performance organic growth in Q1 is a fairly good performance. If you are comparing with a number of other releases, and if you are taking the same angle, i.e., current number of days and current geographical perimeters, this is pretty solid performance. Again, very in line with our guidance. What is changing.
Thank you.
compared to what we could say two months back was the fact that FX seems to be a bit more supportive now, hence the +2% positive impact coming from FX that we are computing based on the exchange rate of the 1st quarter. Number two, with Universal Electric being acquired, now we are shooting for a perimeter impact of close to +5% for the full year. Those two things are a slight change, if I may say, compared to our February release. As far as organic growth is concerned, our Q1 performance is very much in line with our guidance.
Thank you. If I can just follow a question, maybe pick out one of those areas in the U.S. where you are still seeing some volume growth. You've called out lighting control, again in the U.S. as a driver. Can you update us on your lighting control activities in that region? You've obviously made a number of acquisitions there a couple of years ago. How have those been integrated? Are you satisfied with the growth in that area? Has it lived up to expectations? I know you tend to focus on niches where energy codes can drive demand. I think there's a new version of Title 24 in California coming up in 2020. Anything there that can perhaps move the needle for you? Thank you.
Well, we call that lighting. It includes the lighting controls. It includes architectural lighting fixtures, not only the control piece. Growth mid-single digit in Q1. The growth was accretive to the U.S. growth and to LCE growth. It is quite a good performance. Including actually the Kenall company, which, as you know, joined Legrand at the end of last year. The lighting and lighting control piece is growing nicely and is accretive to our growth. We believe that there is significant potential coming from this piece, either prompted by some code changes or just by the fact that there are a number of corporates that are eager to do energy savings. Yes, we believe this part has the potential. How much will it grow in 2019 and 2020 and beyond?
Obviously, we don't know. So far in Q1, it has grown a little bit faster than the rest of our operations in the U.S.
Great. Thank you. Just perhaps a final housekeeping question, if I may. I was wondering if you could comment on the phasing of the M&A dilution you expect, perhaps, for the balance of the year. Given the impact of Netatmo, is there any great seasonality there, perhaps skewed towards Q4? Or should we really kind of expect that.
Actually, we guided. When we released our numbers in February, we said that the dilution should be -40 basis points for the full year.
Yeah.
It is true indeed that in Q1, the dilution was only -10 basis points.
Yeah.
Not all the acquisitions we made last year were consolidated. For example, Netatmo, which was supposed to bring, if I may say, half of the dilution, -20 basis points, is not yet consolidated in our P&L in Q1. You don't have yet the dilution coming from Netatmo. There are actually four companies that are not yet consolidated: Netatmo, Debflex, Trical, the small company we acquired in New Zealand, and obviously Universal Electric, because the closing of the transaction was April 1st, so it was even post-close. Those four companies are expected to be consolidated in the months to come. As a result, the dilution should be around -40 basis points for the full year. The fact that it's below, it's only -10 basis points, does not mean anything in terms of seasonality, it just means that not all acquisitions are consolidated yet.
Exactly. No, I kind of appreciated Netatmo wasn't in there. I was just wondering going forward, A, does Netatmo come in in Q2 for the full quarter? Is there any seasonality in Netatmo, perhaps the profitability skew towards Q4? Just trying to think about that phasing. Are we going to see uniformly a kind of 50 basis points M&A dilution?
I can't yet tell you what will precisely be consolidated in Q2 because it also depends on the state of readiness of some of the acquisitions, especially the last ones, of course. You can assume that there is no significant or material seasonality. You shouldn't have a quarter which would be a lot more or less dilutive than the others.
Okay, thank you.
What will be the key input is really the schedule of consolidation, which is not yet completely validated, especially for Universal Electric.
Great. Thanks. Thank you.
Thank you. Next question from Ben Zakarin from Goldman Sachs. Go ahead.
Good morning. Thanks for taking my question. Most of them have been answered, but I did want to ask about the temporary rise in the non-operating working capital requirement that you mentioned. If you could provide any color around what it is driven by and perhaps when we should expect a reversal, and perhaps magnitude, that would be much appreciated.
Well, first question, be careful when looking at the Q1 working capital and free cash flow, and you know that Q1 is a bit of not very relevant in terms of quarter. For example, if you take the non-normalized free cash flow, which was last year something like EUR 700 or EUR 750 million, Q1 is only EUR 60 million. Q1 is traditionally a very small quarter in terms of free cash flow, it's very non-typical in terms of working capital. In other words, you shouldn't extrapolate really what's happening in Q1. Now, it is true that working capital as a percentage of sales in Q1 was 12%, which is three points above the level of end of March 2018. Well, a lot of that is coming from non-operating working capital, mainly taxes, actually, and which are things that are not in our control, which are beyond our control.
It explains a lot of the change, as far as the rest is concerned, you have some mechanical impact from FX. You have some mechanical impact also from acquisitions. The fact that you have some acquisitions in the balance sheet, i.e., you have their working capital accounted in the balance sheet, but you don't have them yet in the P&L. Mechanically, it has a negative impact on the ratio, and a number of other things. There's nothing, let's say, material happening, it's just mostly technical or related to the non-operating working capital.
Thank you. That's very clear. Maybe just one more, if I may, about some of the new economies in Europe, if you have any kind of expectation in terms of how you expect some of the growth there, that would be appreciated as well.
I can hear listening to your question that you are not expecting much guidance from us because you know that it's always a very difficult exercise for us to forecast. We still believe, as I said, that the rest of the year is going to be uncertain. We looked at some of the IMF downgrades, which were sometimes significant in countries like Germany or Italy, for example. The downgrades of IMF between January and April were as strong as 50 basis points. We also listened to a number of analysts saying, or macroeconomies saying that the U.S. market should remain somehow supportive. All that is very consistent with what we had in mind at the time we built our guidance. Uncertain markets, some of them decelerating, some of them holding steady.
The mix of all that led us to deliver the quarter we delivered and to confirm our guidance. Unfortunately, not much guidance I can give you on the markets themselves because, as usual, we have no order book and very little visibility.
Thank you.
Thank you. Next question once again from James Willie from JP Morgan. Please go ahead.
Yeah, thanks for the additional time. On the French destocking, is that something you think has completed? We've heard that kind of Sonepar is changing how they are organized in France and basically doing that has a negative impact on their
on their stocking levels. Do you think that's completed, or should we expect an additional impact in Q2? On the M&A dilution, you said earlier that we shouldn't expect big variations between the remaining three quarters. If you consolidate Netatmo for six months during Q2, shouldn't that have an additional impact then?
I'll start with the second question. Yes, of course. My point was that we shouldn't expect impact coming from seasonality of the acquisitions. We should obviously expect impact from the schedule of consolidation. If we consolidate six months in one quarter, obviously, it will have an impact. Whether we consolidate the Universal Electric over six or nine months, obviously, we'll have an impact. The schedule of consolidation will have an impact, but not the seasonality of acquisition. That was my point. As far as the first question is concerned, I would love to be able to answer you, but I have absolutely no clue. You and your colleagues raised the same question at the end of Q3, and I told you the same answer, and what happened was that there was some sort of restocking in Q4. It is highly unpredictable on the Legrand side.
We are not part of the decision-making process of our distributors. What we have to do, of course, is to adapt, especially our industrial facilities, which are not conceived to have ups and downs in demand from one week to another, and to try to mitigate the impact it can have on our accounts. This is our strategy, but we have absolutely no clue about the precise inventory level for distributors and what they want to do in terms of strategies. This is their call, their strategy, and their way to manage their working capital. The very important thing for us is that, obviously, destocking or restocking can have a punctual impact, a one-off impact on one quarter. What is most important for us, and what we are really looking at very carefully and actually incentivizing a lot of salespeople on, is the sell-out.
Because sell-out is really the measure of our competitive position in the market and how it's evolving, and the market share we can gain, wins, new customers we can earn. Most of our KPIs are geared at sell-out, market share, success of new product, pockets of growth we can try to grab in this or that product family, rather than on the sell-in, because the sell-in, again, and the inventory management for distributors is purely their call, not ours.
Thank you.
Thank you. We don't have any more questions for the moment. Ladies and gentlemen, if you wish to ask a question, you have to press zero and one on telephone keypad. That's zero and one on the telephone keypad. We have another question from Wesley Wisbey from RBC Capital Markets. Please go ahead.
Hi, good morning. Yeah, thanks for taking my question. I just had one follow-up. When I'm looking at the year-on-year margin movement by region, it looks like it's all come from Europe. Could you help me understand how that splits between the rise in raw material costs, the geographic mix within that region, and then the acquisition impact, particularly given the larger acquisition impact is still to come in the rest of the year? Just help me understand that margin movement year-on-year.
Well, in Europe, they did not have much acquisition impact because most of the acquisitions that were consolidated are not in Europe. Maybe slight acquisition impact, but not a big one. What happened in Europe is exactly what happened elsewhere, or what happened for the whole of the group, i.e., gross margin, which is under pressure and which is coming especially from the rise in raw material and component price over the quarter in EUR, and that's the area where what I commented earlier about the impact of the foreign exchange rate on the consumption of raw material and components happened. Negative evolution gross margin coming from that, also coming from the fact that sales in France retreated, and French sales are profitable.
To avoid any misunderstanding, our French margins or the margins we are delivering on the French domestic markets are held at a very good level. Just a pure mixed effect. The fact that Europe is growing and with France decreasing has also a negative impact on the gross margin. Most of the, let's say, margin, all of the margin decline in Europe is coming from the gross margin. The base for comparison. Nothing specific to Europe. The comments we made for the full group are also valid for Europe.
Got it. Thank you.
Thank you. Next question from Graham Phillips from Jefferies. Please go ahead.
Yes, good morning. Graham Phillips from Jefferies. Could you just please remind us with your change in disclosure, so moving Europe away from the countries now to just one big region, why you sort of reduced disclosure? If you are actually intending perhaps to increase disclosure elsewhere, maybe to compensate. Again, I know you're reluctant to give out things like Eliot sales are going. Obviously, we are looking for trying to understand the drivers of the company in terms of product areas. Of course, it's a bit of a retrograde step to reduce the disclosure in terms of regions.
Well, Number one, we are not reducing disclosure. We used to disclose sales with five regions. We are now disclosing sales with three regions plus a number of sub-regions, if I may say. We are disclosing sales evolution for Asia, for Africa, for Latin America, for mature Europe, for emerging Europe. This is more disclosure than less disclosure. Again, why have we done that? It's not for the sake of changing the disclosure. It is because we have adjusted the organization. We had five zones. We are now running the company with three zones. I can elaborate if you want. The reason why we did that, it was mostly because we wanted to have a lot more share of good practices and a number of other topics between France, Italy, and the rest of Europe. We are not disclosing less.
We are disclosing more as far as that's concerned, number one. Number two, I don't believe that all companies are disclosing quarterly results. We do. You have a full set of accounts on a quarter by quarter basis. I wouldn't like you to come out from this call with this idea that Legrand has reduced reporting and reduced disclosure. We are disclosing quarterly results with a full set of results, full balance sheet, P&L, cash flow statement, notes, blah, blah. Instead of giving sales evolution with five geographical segments, we are doing with seven, if you add Asia and so on and so forth. Again, we have an Investor Day where we discuss Eliot in a month and a half's time. You'll have the ability to raise any questions you want on Eliot, and we'll try to address all of them if you wish.
If it was a material explanation of the performance in Q1, I would, of course, give more insight. We are not bound to communicate on Eliot on a quarterly basis. All the more as evolution in product sales are more relevant, I believe, on a yearly basis than on a quarterly basis.
Okay, thank you. You're going to still keep Eliot disclosure on an annual basis, although I thought you'd intimated earlier you might move six months.
We haven't taken any commitment on the frequency of the Eliot release. I don't believe I have ever committed to release Eliot numbers on a quarterly basis.
Okay. All right. Thanks very much.
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. We don't have any more questions. Back to you for the conclusion, sir.
Well, thank you very much for your presence at this conference call and have a good rest of the week. 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.