Good morning, ladies and gentlemen, welcome to today's Legrand 2018 Full Year Results conference call. All participants are in listen-only mode. Later, there will be a question and answer session. For your information, this conference is being recorded. At this time, I would like to hand the call over to CEO, Benoît Coquart, and CFO, Franck Lemery. Sir, please go ahead.
Thank you. Hello, everybody. Franck Lemery, François Poisson, and myself are happy to welcome you to the Legrand 2018 Full Year Result conference call and webcast. Let me first remind you that we have published today our press release, our financial statements, and a slideshow to which we will refer. Those documents are available on the Legrand website. Please note that this conference call is recorded and webcasted on our website. Let me start first with a few opening remarks, following which Franck and I will comment into more details our 2018 full year results and share with you more midterm considerations. I'm starting on page four and five of the deck with the three main takeaways of today's release. The first takeaway is that all financial KPIs are recording strong growth in 2018, showing significant value creation. More precisely, sales and adjusted operating profit were up high single digit.
Net income attributable to group grew over 23%, and normalized free cash flow was up more than 21%. The second takeaway is that all our 2018 targets are fully met. Organic growth in sales was up +4.9%, above the high end of our 2018 target. Adjusted operating margin before acquisitions reached 20.2% of sales within the 20%-20.5% range set in February last year. Finally, the achievement rate of our 2014-2018 CSR Roadmap reached 122%. This very good integrated performance reflects Legrand's ability to create lasting value for all of its stakeholders, thanks to a clear strategy, a robust business model, and the commitment of its teams. The third takeaway is that in 2018, Legrand undertook many initiatives to strengthen its sustainable and profitable growth profile, building on proven fundamentals.
Legrand thus intends to step up the development of Eliot, thanks to the acquisition of Netatmo, to boost its organic expansion by pursuing growth initiatives, to pursue its strategy of bolt-on acquisitions, to optimize continuously its performance, and to launch its fourth CSR Roadmap for the period 2019-2021. As a result, Legrand confirms its medium-term value creating model. I will come back on those key topics in more details during my presentation. After this brief introduction, let me first start with an overview of our sales on page seven. We recorded a total rise in sales of +8.6%, that should even be read +13%, excluding an unfavorable Forex impact.
The first growth driver, which is contributing well, is organic growth, reaching +4.9% in 2018, driven by healthy rises like-for-like in both new economies, where sales were up +6.2%, and in mature countries, where sales were up +4.3%. Acquisition-driven growth, which is the group's second growth driver, contributed +7.8% to sales growth in 2018. Based on acquisitions already completed and their likely consolidation dates, acquisition-driven growth should contribute around +3% to 2019 sales growth. Last, Forex impact, as expected, was unfavorable at -3.9% in 2018. If we apply to the last 11 months of 2019, the average Forex rate observed in January, then annual Forex effect for 2019 would be around +1%. This is, of course, as usual, a theoretical calculation, and time will tell what will be the actual Forex impact on sales for the full year.
Let me now go into more details regarding the like-for-like evolution of sales by reporting segment. For that, I'm referring to page eight and nine of the slideshow. In France, organic growth in sales was up +1.1% in 2018. Our market has remained lackluster overall since the beginning of the year, and as you know, the third quarter was impacted by marked destocking by distribution. In this context, Legrand performance in 2018 was good and resulted from healthy momentum in energy distribution and digital infrastructures. Activity was also sustained in user interfaces, thanks notably to the very favorable response to our new ranges, Céliane with Netatmo and Dooxie. These favorable trends were partially offset by a decline in sales in bulkhead lights, installation components, and cable management. In Italy, like-for-like sales growth was +6.2% in 2018.
This very good performance was supported by the success of the launch of the Living Now new user interface range, as well as the good showings of connected products. It is worth noting that in this respect, 2018 represents a demanding basis of comparison for 2019, in particular, in H1. In the rest of Europe, sales were up +9.2% like-for-like compared to 2017. Fueled by commercial initiatives, revenues were up double digit in Eastern Europe, including Russia, Romania and Hungary, as well as in Turkey. Here also, these very healthy performances represent high basis of comparison for 2019. Growth in sales was also strong in a number of major countries, including Spain, Germany, the Netherlands, Portugal and Greece. Finally, in the U.K., sales grew moderately. Moving now to North and Central America, where sales were up +4.2% on an organic basis.
More specifically, sales in the U.S. were up +5.2% in 2018, driven by the success of offerings for wire mesh, for intelligent PDUs, lighting control solutions, as well as for Milestone audio-video products. Sales rose very slightly in Canada, but were down in Mexico. Let me now move to the Rest of the World, where sales were up +4.9% on a like-for-like basis. We reported very healthy performances in India, China, and South Korea, but also in several African countries. Sales showed moderate growth in Australia and a decline in Malaysia. Business trends were mixed in Latin America, with sales nearly steady in Brazil and declining in Colombia. Finally, sales were down in both the United Arab Emirates and in Saudi Arabia.
To make a long story short, overall, our like-for-like growth in sales was healthy in 2018 and fairly consistent among each main geographical zone, since Europe, including France and Italy, was up +5.5%, North and Central America was up +4.2%, and Rest of the World was up +4.9%. 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, where you see that 2018 adjusted operating profit is up a healthy 9.7%, driven by growth in sales and operating performance. Moving on page 11, 2018 adjusted operating margin before acquisition came to 20.2%, showing a rise of 0.2 points on 2017, which reflects good operating performance overall. You can see on the slide that after acquisition, 2018 adjusted operating margin also stood at 20.2%. The impact of acquisitions was indeed not whole in 2018. For 2019, based on acquisition completed and their likely date of consolidation, the impact of acquisitions on adjusted operating margin should be around -0.4 points, with half linked to the consolidation of Netatmo, whose operating profit was at breakeven in 2018, and the other half to the consolidation of other companies acquired in 2018.
Moving now to the adjusted net profit attributable to the group on page 12. It was up +23.3%, i.e., EUR 146 million. This strong rise results from many positives, including predominantly a strong growth in operating profit for EUR 113 million, lower financial expenses and favorable change in the Forex results for EUR 22 million, and last but not least, a five-point decrease in income tax rate. This drop in tax rate is coming from three points for lower corporate taxation in the U.S., as announced last year, and for two points from specific one-off elements. Moving to cash generation on page 13. As you know, the good reading of free cash flow generation should be done on a normalized basis. You can see on the right-hand side of the slide that normalized free cash flow was up +21.5% compared with 2017 to reach 14.9% of sales.
Some additional information on the left-hand side of the slide. Cash flow from operations increased close to 20% in 2018 and stood at more than 18% of sales. Working capital requirements remain below 10%, at 9.2% of sales at the end of 2018. Now, a word on our balance sheet on page 14. At 2018 year-end, net debt on EBITDA stood at 1.7, and the average maturity of gross debt was six years. This corresponds to a solid balance sheet structure, which provides Legrand with the resources and the flexibility it needs for sustainable development. That's all for the set of our 2018 financial metrics. I give now the mic back to Benoît.
Thank you, Franck. Let me now conclude the review of our 2018 performance with our CSR achievements on page 15 and 16. Here also, Legrand performance was good, with an achievement rate of our 2014-2018 CSR Roadmap of 122%, demonstrating the group's commitment to creating sustainable value while taking all stakeholders into consideration. Two examples of important initiatives that were launched in 2018 as far as CSR is concerned. First, we have adopted a target validated by Science Based Targets that calls for a 30% reduction in greenhouse gas emission by 2030. Second, we have released our first human rights charter on the occasion of the 70th anniversary of the UN Universal Declaration of Human Rights. Two slides to conclude on 2018. On page 17, a reminder that all 2018 targets were fully met.
On page 18, Legrand will propose to the general meeting of its shareholders to approve the payment of a EUR 1.34 per share dividend, up +6.3% versus 2017 dividend, which was at EUR 1.26. Coming now on page 20 with our targets for 2019. In 2019, the group will pursue its value-creating strategy of profitable and sustainable growth. Based on macroeconomic forecasts for 2019 that are favorable overall, but that have become more uncertain, Legrand has set a target for organic growth in sales of between 0% and +4% in 2019. Additionally, the group has retained a target for adjusted operating margin before acquisitions at 2018 scope of consolidation of between 19.9% and 20.7% of sales in 2019. Please note that this range embeds an estimated favorable impact of around +0.1 point linked to the implementation of the IFRS 16 standard.
Legrand will also pursue its acquisition strategy and its CSR approach by launching a new roadmap for 2019-2021. This is it for 2018 and for 2019. I will comment now on a number of initiatives that Legrand is taking to strengthen its sustainable and profitable growth profile, and that belong to five key themes that will be developed. This being said, I understand that we are not the only company releasing its result today, I will go quickly through those few slides. Of course, I'll be happy to be more specific on those points during the Q&A session. Starting on page 24, the first priority and initiative is to boost our Eliot program, is reminded on this page 24 the fact that we have achieved as early as 2018, the targets we set for 2020.
Both in terms of growth in sales for connected products with a +28% CAGR from 2014 to 2018. The Eliot sales have now reached EUR 635 million in 2018, all in, including, of course, acquisitions and forex. Also in terms of the number of connected product families, since we have, including the Netatmo product families, more than 40 product families that are now connected. Zooming on Netatmo, you have on page 25, 26, and 27, show information of the company. Page 25, this is, as you know, a very interesting product offering. Page 26, it reminds you that Netatmo is a very interesting company, a fast-growing startup. For example, in 2018, sales were up 37% with an operating profit, which was at break even. It's a leader in IoT for building, with a large R&D capability and large installed base of products.
It has a strong cultural fit with Legrand. We have been a shareholder and a director of Netatmo since 2015. We have had up to 100 people working together on developing especially three ranges, Céliane with Netatmo, Dooxie with Netatmo, and Valena with Netatmo. So we are well-positioned to confirm that there is a very good fit between the teams. Last, on page 27, we see Netatmo as a unique opportunity to accelerate our Eliot program, because it will enrich our product offering and because we will be able to leverage their expertise, their skills, their know-how. For example, the founder and CEO of Netatmo, Fred Potter, was appointed the Chief Technological Officer of our Eliot program. Other examples of initiatives that are taken to support our Eliot strategy on page 28.
A few examples of new products that were launched and introduced at the last CES show in Vegas. User interface embedding Alexa capabilities and a connected range of emergency lighting. One of the 2019 focus on page 29 will be to deploy this Eliot program. For example, we launched user interface embedding IoT in five countries in 2018, and we have a plan to launch in 30 new countries in 2019, and 30 new countries in 2020. We will also continue this deployment into what we may call master market solutions. You have a couple of examples in this slide, and we keep working on the user experience. This was for Eliot. Now moving to the second type of initiatives. We are also fostering organic growth capabilities.
On page 31, you have a reminder of the strong Legrand fundamentals, which I will not elaborate because they are known by most of you. Leveraging those fundamentals, we have launched a large number of products. We have actually an exceptional density of product launches in 2018, and those products are shown on page 32, 33, and 34. As part of the initiative that we have done, there is also the fact that we have implemented a three-zone front office organization. This is shown on page 35 and 36. To make things clear, of course, our organization remains country-based, and you know that the contract of a country manager is at the heart of the Legrand performance tracking and optimization model, and this will remain.
But in order to be more efficient, we have grouped those countries into three zones: Europe, North and Central America, and Rest of the World. All of them be headed by Legrand veterans, as we may say, having between 16 years of experience within Legrand, up to 26 years of experience. The objective is to improve the coverage of a couple of global customers, even though most of our customers remain local. To accelerate growth in dynamic verticals, to enhance deployment of group international programs, as well as to enhance further cross-fertilization of sales and marketing best practices amongst country. We will start reporting as per those three zones, starting in our Q1 release.
As part of those organic growth initiatives, we have new products, we have new zone organization. We also have on page 37, a step-up in digital initiatives in communication, R&D, customer relation, commercial data, and so on and so forth. All those are part of our so-called growth expenses, and those are significant investments which will support the growth. Third initiative, on page 39, acquisitions. We intend to keep fueling our acquisition-driven growth. You have on page 39, the list of the seven acquisitions that were completed in 2018, as well as the impact they should have on 2019 numbers. The impact on 2019 sales should come to around 3% on sales, and as Franck said, - 40 bps on adjusted operating margin, half of that coming from Netatmo and half of that coming from the other transactions.
On page 40, you have a reminder of very selective criteria to do transactions that are creating values. As well as on page 41, a reminder also on the fact that we have a large number of potential opportunities. Our accessible market is worth more than EUR 100 billion. On this market, you have close to 3,000 small to mid-size companies, of which about 300 are part of our day-to-day monitoring list. As I already said, we completed out of this list seven transactions in 2018. Fourth type of initiatives, we will keep constantly optimizing performance. Again, on page 43, you have a reminder of the Legrand strong fundamentals. A number of strategic assets driving performance.
The fact that our back office is already competitive and agile, and the fact that we have an organization which is focused on execution with contract-based budget, with an incentivization which is in line between stakeholders and managers, and very solid processes for performance monitoring. Those are Legrand core assets in terms of performance. On page 44, you have a number of initiatives, a number of additional levers which are implemented to further boost this performance. So we have, on the left side of the slide, initiatives to improve operating performance, Legrand Way acceleration, saturation rationalization, light automation, make or buy, and so on. As part of those initiatives, you may have noticed in our accounts that our restructuring expenses increased slightly in 2018 compared to the previous years, because we are financing, in 2018, a number of interesting plans.
On the center of the slide, you see that we are also doing targeted back-office digitalization. So we have a number of proof of concept that were launched, and some of them have already demonstrated that they are yielding significant payback. We are already deploying some of them, and we intend to progressively dedicate a larger part of our CapEx to Industry 4.0 investments. Last, we have a number of other levers. For example, the fact that we have made large number of acquisitions in the previous years that we are docking and that are bringing a number of synergies. Well, page 45, just an illustration of a number of Industry 4.0 initiatives. The fifth and last initiative relates to CSR. We are launching our fourth CSR Roadmap, as shown on page 47 of the deck, which is a 2019-2021 roadmap.
You see how CSR is rooted in Legrand organization. We started as early as 2004, our CSR strategy. You have on page 48, main focus point of our CSR Roadmap. It's around business ecosystem. Improvement of value chain. It's about people, human rights, diversity, involvement in communities. It's about environment with decrease in carbon footprint, circular economy, and the inclusion of CSR priority into our industrial processes. Those are for the 2019-2021 CSR Roadmap. On page 49, we have also added longer term, 2030 objectives in line with United Nations Development Goals, which are very important for Legrand, which we are pushing hard. Number one, we want 80% of our revenue which is sustainable by design or by usage.
Number two, in terms of diversity, we are aiming to have parity in the workforce and to have at least 1/3 of our key positions being held by a woman. Number three, in terms of CO2 emissions, we intend to reduce by 30% the emissions for scope 1 and scope 2. Based on all those initiatives, we wish to confirm the Legrand medium-term value-creating model, which is on page 51. Confident in the soundness of its model and its ability to fuel lasting profitable growth, Legrand confirms its medium-term model. Assuming a buoyant economic backdrop and excluding exchange rate effects, the group intends to achieve annual growth in sales and adjusted operating profit of around 10%. Assuming a lackluster or unfavorable economic backdrop, Legrand will focus on protecting its model, profitability, and generation of free cash flow. Either one or the other.
Over a full economic cycle and excluding any major economic slowdown, this model would result, in average, annual total growth in sales above that of the group's reference markets, adjusted operating margin averaging around 20% of sales, normalized free cash flow ranging on average between 13% and 14% of sales, and an attractive dividend. Legrand also intends to continue rolling out an ambitious approach to CSR driven by demanding roadmap. That's what we wanted to tell you today. Now I'm pleased to open the floor to Q&A. Thank you.
Ladies and gentlemen, if you wish to ask a question, please press your one on your telephone keypad. Your first question from Gael De Bray from Deutsche Bank. Sir, please go ahead.
Thanks very much, and good morning, everybody. I have two questions, please. The first one is regarding the change in the reporting structure you are planning for Q1. I mean, given the local market structure of your industry, what is the rationale of creating a front office organization for Europe? That is question number one, and question number two is about the revenue growth acceleration we saw in Q4 in both France and Italy, and I guess that was clearly not expected, at least not to that extent. How do you explain this kind of sequential acceleration? In light of the recent statistics on the residential market in those countries, what do you see for the Italian and French markets in 2019? I mean, do you expect these two geographies to continue to grow this year? Thanks very much.
Hello, Gael. On your first question, actually, obviously you cannot have 80 countries reporting directly to the CEO. The Legrand organization is a mix between respecting local organization, local contract, local commitment, local customers, local policies and practices, and at the same time, making the most of its size and international footprint. We were already organized by zones before this reorganization, but for example, we had a big export zone that was putting together countries as different as Spain and China, for example. This reorganization is a way to make an organization which is a lot more in line with the market and, for example, to make the most of potential synergies, potential exchange of experience between countries such as France, Italy, Spain, Germany, and so on, which were in different clusters.
Again, key message is that we are not changing the Legrand approach, which is and will remain country-based, but we are trying to make the most of that by facilitating synergies and exchanges between countries, especially in Europe, which were in different clusters in the previous organization. As far as your second question is concerned, we clearly do not believe that neither the French nor the Italian markets are growing at the pace which is the one shown in Q4, i.e., a +4% for France and +7.9% in Italy. What happened in France is that clearly Q4 is a good performance, which was clearly helped by a bit of restocking from distributors. You remember that there was very strong destocking in Q3. There was a bit of restocking in Q4. Our feeling is that the French market has been quite depressed in 2018.
The French market was probably only very moderately up in 2018. Going into 2019, as you know, we have no visibility. At the same time, we have no triggers that would push a significant change in trend upward in France. We remain extremely cautious on the French market. The Italian situation is a bit different. Italian market is probably a bit more supportive than the French market, has been a bit more supportive than the French market. Now, this being said, the Legrand BTicino performance in Italy is a clear overperformance compared to the market. This is due not only to BTicino's, let us say, core assets and deeply rooted qualities and quality of its team, of its management, strong relationship with customers, and a number of assets that you know well. On top of that, we have had very successful product launches.
The one launch in 2016, 2017, I'm thinking of Classe 300 door entry and the smarter thermostat. Also more recently, the launch of Living Now which is replacing the standard and high-end range in Italy. It's a big event, a big range for Italy. Clearly it helped and supported the 2018 performance. Here again, moving into 2019, we are, as we are for France, very cautious because there is, according to what we read, significant uncertainty on the Italian market. If you look at what the European Commission, the central bank is saying, the IMF, and so on, everybody is wondering what will the evolution of the Italian market be. We remain extremely cautious, having in mind that our objective remains, and this is actually true also for France, to overperform our market.
It's the reason why we keep launching new products and investing in growth. Last, to conclude on that, obviously, and we put that in the press release, the basis for comparison going to be challenging for Italy because 6.2% growth in 2018 is such a very good performance that it creates a challenging basis for comparison for 2019.
Okay. Thanks very much for the color.
Thank you. Next question from Sebastien Gruter from Redburn. Sir, please go ahead.
Hi. Good morning. I have two questions. One on pricing. Your pricing strategy was a full in Q4 for North America and affecting the tariff. Can you give us at the group level, the pricing versus raw material and components inflation? My second question is a bit more longer term, but an update on your strategy following the purchase of Netatmo and the appointment of Fred Potter as CTO. Should we read this move as a more ambitious core strategy in home automation? Do you intend to unify the brands for home automation or keep different brands? Some color would be helpful. Thank you.
Thank you, Sebastien. As far as pricing is concerned, let me maybe give you, if you agree, the big picture on pricing, I will zoom on the tariff specific topic. As far as pricing is concerned, for the full of 2018, the pricing was up 1.7%, inflation of raw materials and components was up about 4.1%, including about one point from U.S. tariff impact. Without the tariff impact, the inflation of raw materials and components would have been up by slightly more than 3%. Those are the numbers for the full of 2018. Now, zooming on the tariff, because it was part of your question. First, as we've said, this is not of course an important topic, but it's a developing topic. Things may change from one day to another.
The best example of that is list three, which was supposed to move from 10% to 25% tariff in January, and this was postponed to March 1st. There is apparently some uncertainty in whether it's going to be implemented or not. We have to remain extremely cautious when analyzing the numbers. This being said, in November, we explained that in the worst case scenario, the yearly impact of the U.S. tariff, i.e., comparing a year with tariff fully enacted with a year with no tariff enacted at all, would result in a rise of close to 7% of Legrand North and Central America cost of goods sold, which is about $90 million. Some of these already had an impact in Q3 and Q4.
To give you the numbers, the gross impact on Q3 was about EUR 4 million, and the gross impact on Q4 was about EUR 12 million, which is what we said it would be in Q3. As a consequence, if we put together the fact that some tariff was implemented already in 2018, and that we would have the full impact in 2019, the U.S. tariff should increase LNCA costs by close to 5% in 2019 compared to 2018, i.e., an unfavorable gross impact of about EUR 65 million. I hope it is clear it would be EUR 90 million if no tariff was enacted in 2018. Putting together the fact that some tariff was already enacted in 2018, plus we had two months relief on list three, this 90 becomes 65 additional costs in 2019. In front of that, those numbers are for gross. What have we done?
In Q3, you remember the tariff were put suddenly, and as we explained in November, haven't been compensated given the short notice. In Q4, we have launched a number of action plans, and U.S. tariff impact have been almost compensated in value. Our objective for 2019, based on those action plans, which are a mix of many things, a mix of pricing, a mix of changing our logistic flow, changing our manufacturing locations, and so on and so forth. We will, of course, continue to work on all those levels with a target to fully mitigate in value, in Legrand North and Central America accounts, the impact of U.S. tariff. This is for the tariff topic and for the raw materials topic. As far as Netatmo is concerned, well, the deal was closed in December, so we have only a month and a half of Netatmo without us.
The plans are currently being done. Will it lead to an acceleration of our Eliot program? I hope so, and this is a plan. Typically, for example, Fred Potter, together with Netatmo and Legrand teams, have started to work on our roadmaps, both the Legrand roadmap and the Netatmo roadmap, and on a number of topics which we believe will help accelerating our growth, cloud, API, partnerships, technology options, and so on and so forth. Well, will it lead to Legrand to change its brands? Why not? The plans are currently being drafted. By the way, Eliot, you remember that it's not only about residential. Eliot, it's residential and commercial, even though Netatmo is mostly a residential company selling residential products. The Eliot program is both residential and commercial.
To give you order of magnitude, about 2/3 of our sales in Eliot are commercial, and 1/3, excluding Netatmo, 1/3 is residential. Yes, we intend to accelerate the growth, how will it be done? We'll probably give you more color and more flavor in a couple of months or a couple of quarters.
If I can come back on the pricing, I calculate it's about 2.5% in Q4, the price increase. Do you see further price increase to come in? Have you done any more in the first two months, and do you expect a further price increase? If we are at 2.5% run rate, could we see a higher rate for 2019 than the 2.5% you achieved in Q4?
It is true that the Q4 pricing is about 2.5%. Will we do further pricing if needed? You know the way pricing is managed at Legrand. It's really a country-based approach, depending on a number of topics, not only actually increase in raw material prices, but increase in other inflation and also competitiveness, position of the market, a number of things. If needed, we always have the ability, even though not immediately, to increase pricing. The good example is what happened in the U.S. The fact that we almost compensated in value, which, by the way, have then a slight negative impact on margin, even if we compensate in value, is a rather good news.
If we are able to fully compensate in value the tariff increase in 2019, to offset the $65 million of additional costs coming from the tariff, it would have a slight negative impact on our adjusted operating margin of about 20%. This would then be good news anyway. 20 basis points, sorry. To make a long story short, if we feel that it is needed in a given geography, and provided of course, it does not hurt our competitive position, yes, we always have the ability to do further pricing.
That's very helpful. Thank you.
Thank you. Next question from Andreas Willi from JPMorgan. Go ahead.
Yes, good morning. Thanks for the time. My first question to follow up on the earlier question on France and Italy. Particularly in France, what's the inventory levels now? Rexel said yesterday they ended up with a bit too much inventory in France at the end of December. If you could comment on what you think inventory levels are in those two markets as we go into 2019. The second question on Netatmo in terms of the growth strategy, you laid that out. What's the plan there in terms of profitability? Is that a focus for the coming years, or is that mainly a growth story, so you will keep profitability around break even while reinvesting, or should we expect that M&A dilution from that deal to decline as we go into 2020? Thank you.
Hello, Andreas. As far as your first question is concerned, I have absolutely no clue on the level of inventory of our customers. It is true that we felt in Q4 that there was a bit of inventory of, let's say, restocking from our distributors, which is not unusual at the end of the year. We did not really have the same feeling in Italy. At the end, it's extremely difficult to know. We are able to measure, if you want, the difference between sell-in and sell-out, and that's why we were able in Q3 to give you quite a precise indication of the fact that even though our sales in France were down significantly, as far as the sell-in was concerned, the sell-out was still slightly up. We absolutely have no clue about the level of inventory of our distributors.
As far as your second question is concerned, we don't intend Netatmo to come even close to the group's level of margin in the years to come. It wouldn't be reasonable. We really want to keep the dynamics of the company. This being said, we don't expect either to remain at 0%+ forever. The objective is threefold, as far as financial metrics are concerned. To keep having a very strong growth in sales, which is a top priority. I'm not able to shoot a number. Will it be 30%, 40%, 15%? I don't know. It depends on many things, including, of course, the economy. We intend to accelerate growth. We'll be, of course, happy if the margin could improve a bit. I think we will remain in the single-digit territories.
Number three, which is of course a very important topic, because I was mentioning Netatmo standalone. At number three, there are all the synergies we intend to do with Netatmo, which may be captured in Netatmo accounts, but which may also be captured in Legrand accounts. It's about technology sharing, it's about purchase of components, it's about helping Netatmo to sell its products in Legrand territories. For example, we are building plans to take Netatmo products outside of Western Europe to Russia, for example, or to Latin America. On the other way, it's about Netatmo helping Legrand to penetrate certain customers. It's about bringing Netatmo R&D people expertise into Legrand Eliot products. To tell you a bit the way we are looking at this transaction, these number three objectives, i.e. synergies between the two companies and the impact it could have on Eliot, is internally seen as even a more important priority than lifting Netatmo's margin up, or even the number one or number two priority.
Those are the plans. I can tell you that internally, everybody is very excited by the opportunity because we are strong believers that it could be of a great support to Eliot. A last point, we do not intend to change our acquisition strategy and to enter into a strategy where we would buy, every year, one or two companies with 0% EBIT. Obviously not. The Legrand acquisition strategy remains unchanged. We are targeting mostly market shares, and we are extremely excited by companies if they own a significant market share in a given product family in a given country. The Netatmo deal was really an exception.
An exception coming from the fact that it's a fantastic company. We have contact with the owner for a year. We had a partnership in place. We were already a shareholder of the company. It's not a change in the acquisition strategy. It's a very different animal because we believe it could help accelerating our Eliot sales.
Thank you very much.
Thank you. Next question from Daniela Costa from Goldman Sachs. Please go ahead.
Hi, this is actually Ben dialing in on behalf of Daniela. I was wondering whether you could give some additional color on what you expect in terms of market environment in other regions outside of Italy and France, maybe the rest of Europe or even the U.S. going forward. Thank you.
As every year, you're going to be very frustrated by my answer. Of course, you know the Legrand model. We have absolutely no visibility on what we have in front of us. As you do, we rely on what the economic specialists are saying, what we are hearing from our customers, trade associations, and so on and so forth. All those are light signals and not hard signals. Overall, why did we qualify the forecast as being favorable? It's because when we listen to what many opinion leaders are saying, they are still planning for key economies to be in positive territories in 2019. For example, if you look at the IMF, the IMF expect for 2019, a +3.5% world GDP growth, which is more or less in line with the average GDP growth from 2015 to 2018.
This being said, you know that as much as I do, everybody is also underlining the fact that the outlook is extremely uncertain. That the level of uncertainty has increased a lot with many potential factors affecting the economy. It's the U.S. and China dispute, which could also have some impact both on the U.S. economy and on the Chinese economy. It is the Brexit, where nobody really knows what's going to happen. The European elections, which are always creating some uncertainty, situation in France and in Italy, election in India, Turkey, Brazil. The level of uncertainty has clearly increased a lot compared to what it was a year ago. This being said, France and Italy, you understand that we are a bit cautious because of this level of uncertainty.
Rest of Europe, I think it's going to depend a lot on the U.K. and Germany, and for that, it's extremely difficult to say. Everybody expect India to remain on positive territories, and as a matter of fact, we have always recorded growth in India, and we intend to continue. China, we have a very different positioning from some of our peers or competitors. We are mostly on the real estate market. We are not on industrial or OEM market. So far, the real estate market is pretty nicely monitored by the Chinese authorities. This being said, if the Chinese economy was to go down, of course, we would be impacted. U.S. has been still quite positive.
Reading what people says, most people expect that at some point, this positive cycle will end, but nobody's really able to tell us whether it's going to be in 2019 or in 2020. Unfortunately, I cannot be more specific than that because, again, we have absolutely no visibility. As usual, as we are always doing, the Legrand model is to be ready whatever happens. Typically, in our budget process, for example, in our plans in countries where we knew there would be uncertainties, we have, as usual, prepared scenario-based budget, where we have plans, targets ready, whatever the economic environment. I think the Legrand specificity is more to be able to react should the economy deteriorate, rather than precisely forecasting where the market's going to be, because unfortunately, we're not able to do so.
Appreciate it.
Thank you. Next question from Lucie Carrier for Morgan Stanley. Please go ahead.
Hi. Good morning, gentlemen. Thanks for taking my question. I actually have a follow-up on the connected products and the connected strategy. I was curious if you could maybe explain to us what the impact of your connected offering has on your existing, i.e., standard offering, non-digital, non-connected, in terms of price and in terms of volumes. We see very strong growth rate around Eliot, and it doesn't seem to be fully matching always what we see on the overall top line group. I was curious to get your view on the dynamics on pricing and volume here, and then I have a follow-up question.
Hello, Lucie. Don't forget that the 28% CAGR that we are mentioning for the Eliot program is all-in. It's not organic. Organic, it's still double digit, but it's not the same order of magnitude. It embeds a number of acquisition which we qualify as Eliot. Of course, it also includes Forex. The objective with Eliot is clearly to do trading up. What impact does it have on our traditional offering? Sometimes it replaces a traditional product. For example, instead of selling a traditional switch, you are selling a connected switch. Instead of selling a traditional door entry, you are selling a connected door entry. It's purely trading up. Yes, you would qualify that as being cannibalization, but at the end, it's selling a product at a higher price to the same customer. This is one effect. Sometimes it can pull the whole range.
If you look, for example, at Living Now in Italy, which is basically for you, Lucie, who knows Legrand well, it's a range replacing Light, Living, and Axolute in Italy. It's big deal for us. It's doing very well as far as the connected part of Living Now is concerned. It's clearly a way to convert some of our customers that were using competitive products to Living Now, because they are attracted by the connected piece of our offering. Of course, they buy Living Now connected, which, by the way, is also based on the Netatmo technology. On top of that, they are also buying the basic traditional power socket to connect their devices. It really depends on the product. Sometimes it cannibalizes, if I may say, but I would call that trading up, and sometimes it's just pulling the whole range.
Again, keep in mind that the right, let's say, organic figure to have in mind is more low double-digit growth year-on-year for Eliot.
Thank you, Benoît . That's quite helpful. Just following up on that for us to understand maybe a bit more the margin dynamic. I understand the Eliot range is sold at a higher price, but how does that compare for the moment, in terms of profitability versus your traditional product? I guess my concern is a little bit that at some point to allow Eliot to become a bit more, what I would call a bit more mass market or accessible to most people, you would have to take that level down in terms of pricing. How should we think about that a bit more long-term?
This is a good question, referring to the previous discussion on Netatmo, I wouldn't want you to come back home with the feeling that Eliot products or connected products have a 0% margin. This is really Netatmo profile, which, by the way, has on some products margin which are a lot higher than that, which is a pure startup. Which has so far reinvested all of its proceeds, all of its results, all of its profit into growth. As far as Eliot is concerned, there is not only one answer. The level of profitability really depends on the market share we have on the range. If we have on the full range a very good level of profitability because we have a good level of market share, then we have a good profit on the Eliot piece of the offering.
The other way, if we don't have a good market share of the product family, then it's highly unlikely that we'll have a good profit on the connected piece of it. We do not believe that the sales in Eliot will change substantially the margin profile of the group. This is well exemplified, if I may say, by the model we have reiterated. In this model, we are at the same time planning strong and fast growth in Eliot-related products because we believe that our product families will increasingly be impacted by the need by customers to get connected. At the same time, we have also reiterated the fact that we were shooting to maintain the margin level, the EBIT level, at around 20%. We do not believe that it's going to change the margin profile of Legrand.
Thank you.
Thank you. Next question from Andre Kukhnin from Credit Suisse. Please go ahead.
Yes, good morning. Thanks very much for taking my questions. I'll just go one at a time. Firstly, on Eliot, a quick follow-up. You talk about kind of a low double-digit organic growth for that range, within that overall nearly 30. Could you give us an idea how that compares to your kind of historic new product launches when you did major introductions of new replacing products or rolling out in new countries? How does that compare to that?
I'm afraid I'm not able to answer this question because there's not a magic number. It really depends on the product. What usually happens when you launch a new product is, of course, that you have inventory built up by your customers because they need to serve the market, so they build their inventory. Short-term, you have inventory built up, then a couple of months you have a sellout, and then inventory is rebuilt. This is short-term impact when you're launching a new product, but I'm not able to give you a magic number saying, when I launch a product, it's growing X% or Y%. It also depends on whether your range is replacing an existing range or not. For example, Living Now, of course, it's a great success, and we have very interesting numbers, but it's replacing three existing ranges.
You cannot expect the growth rate on Living Now to be as high as when you are launching a new range, which is not replacing an existing one. Unfortunately, I'm not able to give you a synthetic number.
I understand. What I'm really just trying to get some gauge on whether Eliot is a true accelerator, or it's just a new version and a modern version of the new product launches. Maybe another way to look at it is, how is the growth in the Eliot products that were launched at the beginning of the program three years ago? Is that continuing at the same pace at the moment?
When I was spotting the 10% or low double-digit grossing sales for Eliot, it's referring to products that were already in the catalog in 2014 at the time we launched the program. At that time, we already had 20 product families which were part of the program. It's also referring to products that were introduced in 2015, 2016, 2017. What you can do maybe is to look at the average growth rate of Legrand, organic growth rate from 2014 to 2018, which was probably something like 3%. I didn't do the math. Obviously, taking 10% + for the Eliot program. Those are the orders of magnitude. Everything which is not Eliot, of course, you can make the math.
To make a long story short, the group has grown by 2%, 3%, 4%, depending on the year, organically in the past three or four years, including double digit on Eliot. Clearly, yes, I confirm that Eliot is an accelerator, and it's a very strong piece of our trading up strategy.
Thank you. In terms of new targets now that you've surpassed your 2020 targets already, am I right to pick up that point you made that you'll say something in March? March, April, on that?
We are currently building the plans with our friends from Netatmo. You can assume that, of course, we'll not drop the pen and we'll continue work hard to grow as fast as possible and to keep increasing the number of product families which are connected. I cannot commit to March, but I'm sure that we will have the opportunity in the coming months or quarters to come back to you to tell you the step two of the story.
Great. Thank you. The final one, could you just quantify the size of that restock in France in Q4, maybe just relative to how big the destock was in Q3? I think that was 5%. Was that restock half of that, more or less, roughly?
It's always very difficult. You remember that the trend in the first semester of the year in France was about + 2%. We had the - 4% something in Q3, we said, look, the difference in trend between this +2% and this -4% , of course, is a clear sign of destocking. If you wish, you could keep the same sort of approach, saying that maybe the difference between the +2% or +1% trend of the year and the +4% in Q4 is somehow to be qualified as restocking. Those are orders of magnitude. Again, we don't have a precise view of the inventory level at our distributors, but those would be consistent math, if I may say, between Q3 and Q4.
Great. Thanks very much.
Thank you. Next question from Graham Phillips from Jefferies. Please go ahead.
Yes, good morning. A couple of follow-ups. On the French restocking, is this your restocking? Does this impact your margins, or is this what you're saying once the product has left your factories? I'll follow up with the other question after.
No, when we say potential restocking, just the fact that it's the orders from our distributors, the factual analysis that the French market didn't grow +4% in Q4. Since it didn't grow 4 +4% in Q4, probably part of this growth, is it 1 point, 2 point, 3 point? I don't know. I'm not able to tell you that. Is coming from the fact that our distributors have built somehow some inventory. Again, it's a very factual analysis looking at our full-year performance, looking at the effect of the status of the French market, as well as the performance in Q4. We are not talking about any restocking in our factory, but potential bit of restocking on the market.
Okay. You yourself didn't change your stocking levels between the end of the quarters at your facility?
No, not materially. You may refer to the fact that our non-normalized free cash flow or that our networking capital is higher in December 2018 than it used to be in December 2017. This is really coming from the basis for comparison. As far as our ratio of networking capital to sales is concerned, it's slightly above 9%, which is still below the sort of 10% midterm range we've been giving consistently to the market. The fact is that this level at the end of 2017 was much lower than that. We have not done any specific restocking in our factories. I'm insisting on the words, potential restocking from our distributors.
Okay, thank you. Just also following up on Eliot. What we're saying is that the organic growth for Eliot is around 10%. That's what you mean by low double digits. Where would we be seeing that? In which geographic regions is Eliot more represented in the group?
It's not exactly reflecting precisely what we are doing in sales. If you take the EUR 635 million of sales we achieved in Eliot in 2018, we have a bit more in North and Central America than the breakdown of our sales. A bit less in Europe. It would typically be something like 40% of our sales are made in Europe, more than 45% in North and Central America, and 15% in the Rest of the World. This would more or less be the breakdown of our sales in Eliot. You see that it's really impacting all markets one way or the other. Our most significant markets, one way or the other.
Yeah. Okay. It's underrepresented in the U.S., I guess. That's the point.
It's also represented in the U.S. We are doing almost 80% of our sales in the U.S. on commercial buildings. Typically, we launched a connected range of wiring devices in the U.S. in 2018. Its name is radiant. It's still very small numbers, and most of Eliot sales in the U.S. are related to commercial products. It could be, for example, presence detectors and lighting management products. It could be smart PDUs, like Raritan Server Tech PDUs, and a number of other products. In Italy, Eliot sales would be a lot related to residential. It's door entry, it's thermostat, it's wiring devices. In the U.S., in the contrary, it would rather be commercial.
This is also a reason why on page 29 of the deck, we insisted on the fact that in 2019, a big part of our Eliot plan will be to deploy the international programs.
Okay.
To take each of the programs, or not each, but most of the programs that we have and to deploy them in an additional number of geographies.
Okay. Right, that makes sense. On your organic growth targets for this year, 0%-4% , how much of that is pricing?
Well, you know the rule of the game. We never give a precise guidance on pricing because it depends on, of course, many things. The evolution of raw materials, potential tariff, for example. If for whatever reason there would be another relief in the list three tariff. If again for whatever reason, the increase from 10%-25% was to be pushed by an additional three months, well, obviously we wouldn't get in the U.S. all the tariff we intended to get. It's such a fast evolving situation that we don't give a precise guidance because, again, what we aim at is to remain extremely flexible on this front as on the other fronts.
Okay. I guess, if you were to repeat what you had for last year, and if you could just remind me of that number, because actually my line dropped out for a while. What was the figure that you said last year, and would you think that 0%-4% for this year, you would take the same for last year?
What I said for last year was that the pricing was up 1.7%. That was the number. The Legrand pricing in 2018 compared to 2017.
Okay. Just, I haven't had a chance to look through the full financial numbers yet, with all the other releases and some printouts I've got today. Could you just please take us through R&D and CapEx, how it evolved for the year, and into this year, what you're expecting 2019?
The level of R&D to sales is 4.8%, so it's fairly consistent with what it used to be in the past two or four years. It's close to 5%, which is what we've been doing in order to fuel our growth. The level of CapEx to sales was 3.1%, so here again, in the sort of long-term average, between 3%-3.5%. Now, of course, we've been saying that consistently for at least 12 months, on boost or peaks, we could very much go above or below the long-term trend, which wouldn't be necessarily a bad news for shareholders, but in 2018, 4.8% for R&D and 3.1% for CapEx to sell.
Okay. The trend in 2019, there's nothing more you can give us than just to say you'd be staying in the range?
Well, same as for pricing. We are not guiding precisely on those two topics, because again, it depends also on many topics. Obviously, for example, if you take CapEx, well, the CapEx level is different, whether you have to build capacity or not, or you can decide to postpone for a few months a few projects. There's no reason why mid-term, we shouldn't be close to 5% for R&D. It could be, let's say, slightly below, slightly above, and between 3%-3.5% in CapEx to sales. Again, sometimes it could be 2.8%, and sometimes it could be 3.7% are the sort of long-term targets, if I may say, that are embedded into our long-term model. So close to 5% as far as R&D to sales is concerned, and between 3%-3.5% on average for CapEx to sales.
Okay, thank you.
Thank you. We don't have any more questions for the moment. Ladies and gentlemen, if you wish to ask a question, please press your one on your telephone keypad. We don't have any questions. Back to you for the conclusion, sir.
Well, thank you very much to all of you for your interest in Legrand, and for taking the time to attend this call, and good luck for today because I understand that it's going to be a very busy day for all of you. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.