Good morning, ladies and gentlemen, and welcome to today's Le Goure 2018 First Half Results Conference Call. All participants are in listen only mode. Later, there will be a question At this time, I would like to hand over the call to CEO, Mr. Benoit Acre and CFO, Mr. Antoine Burell.
Sir, please go ahead.
Thank you. Hello, everybody. Benoit Cuca speaking. I am with Antoine Bureau and Francois Pesson, and we are happy welcome you to the LeBlanc 2018 First Half Results Conference Call. Let me first remind you that we have published today our press release, our financial statements and a slide show to which we will refer.
So those documents are, as you rule available on the Logan website. Please also note that this conference call is recorded and webcasted on our website. So let me first start with a few opening remarks, following which Antoine and I will comment into more details for 2018. First half results and achievements. I will start on Page 4 of the deck with the 3 main takeaways of 2 day cities.
So the first takeaway is that we are reporting a very good overall performance in H1 A good illustration of these showings is that we have recorded double digit growth in all key indicators in the first half of twenty eighteen. Sales were indeed up close to 12%. Adjusted operating profit was up over 14% Net income attributable to group up over 23% and normalized free cash flow was up more than 25% This good performance was in particular, supported by very robust organic growth as well as solid level of adjusted operating margin. 2nd takeaway, Legrand actively pursued its innovation and growth initiatives by continuing to launch new and to develop businesses recently acquired abroad. Acquisition driven growth was also active with 4 bolt on transactions announced since the beginning of the year.
Finally, the 3rd main takeaway of this release is that Legrand fully confirms its target for 2018. And we'll, of course, come back, but this in more details later in this presentation. Let me then turn to Page 6 and a few comments on it. Sales. As said, we recorded a total rising sales of 11.8% Leuxon's first growth driver is contributing well with organic growth reaching a solid +5.2 percent in H1, driven by healthy rises like for like in both new economies where sales were up plus 8.1% and in mature countries, that were up 4.1%.
These good showings were also supported by outstanding performance in Italy, and in the rest of Europe, partly driven by one off effects. External growth, which, as you know, is a group's 2nd growth driver, contributed plus 13.6 percent to sales rise in H1 2018. Based on acquisitions announced and the likely consolidation dates, acquisition driven growth should contribute to Iran plus 7.5% for the full year. Forex impact was unfavorable at minus 6.5% in H1. Now if we apply to the last 6 months of the year, the average ForEx observed in June 2018, then annual ForEx for the full year 2018 would be around minus 3.5%.
This is, as usual, a theoretical calculation and time will tell what will be the actual price impact on sales for the full year. Let me now go into more details regarding the like for like evolution of sales by reporting segments. And for that, I will go on page 78 of the slide show. So starting with France, in France, organic growth stood at +2 percent in H1. Driven by good showings in energy distribution, user interfaces and home systems, new products benefited from a good response notably the cellular with net add more range of connected user interface as well as the Dixie range.
Moving to Italy. In Italy, like for like sales growth was plus 6.3% in H1. This strong increase in sales was underpinned by the sales of connected products. In addition, 1st half performance benefited from 1 off effects, including in the second quarter alone, an inventory buildup by distributors in relation to the launch of the leading now new users in their face match. In the rest of Europe, sales were up 11.3% like for like compared to the first half of twenty 17.
Thanks to successful commercial initiatives and favorable one offs in the first half, sales growth was very sustained in many new economies, namely Russia, Romania, Hungary, Hungary and Turkey. Sales in Spain Germany, the Netherlands and Greece rose also strongly. And in the UK, sales grew very flake Moving to page 8, in North And Central America sales rose by +3.8 percent on an organic basis. This good performance was driven by solid achievements in the U. S.
In many product lines, wire mesh cable management, lighting controls, intelligent PDUs and audio video infrastructures and power systems. In this field, it is interesting to know that milestone recorded healthy growth in sales in the first half of the year. Finally, due to to the high prices for comparison sales in Mexico were down in the first half of twenty eighteen. Let me now talk about the rest of the world where sales rose +5 percent on the like for like disease We reported very good showings in our 2 main countries in the rest of the world, Ivy, India and China, performance was also very good in South Korea, Australia, Peru, Algeria and Egypt. Business continued to decline in Brazil and in Colombia.
So overall, our like for like growth in sales was very healthy in the first half, and very consistent amongst each major vertical area since Europe, including France and Italy, was up 6.6%. North And Central America was up 3.8% and rest of the world was up 5%. Let me now pass the mic to Antoine for an overview of our financial performance.
Thank you, Benoit, and good morning to all of you. Then Benoit just told you that H1 was strong in terms of sales growth. Actually, it was also very good in terms of profitability and value creation. And let's start with profitability on Page 9, where we compare H1 2018 adjusted operating margin to H1 2017, adjusted margin. As you can see, this adjusted operating margin before acquisitions came to 21 point 1% showing a rise of 70 bps on H1 2017.
And this 70 bps rise resulted from a good global operating performance and the adjustments of group, groups selling prices to inflation in raw materials and components. In more details, Laurent selling prices were up about 1.3% in H1 2018 and raw material and component prices were up about 2.7%, and this demonstrates a good coverage in value of raw materials and component inflation. And as already announced, this good coverage embed a kind of bonus in Q1 due to immediate selling price increase and in parallel progressive rise in raw material and component prices. On page 10, now talking about value, you see that adjusted operating profit was up 14.4%. Affecting we believe BlueGram's capacity to generate profitable growth.
Moving now to 11 with another key indicator, which is a net profit attributable to the group. It was up 23.3% that the 3 190,000,000 in H1 2018, demonstrating here also our ability to create value for our shareholders. Strong growth in sales, increased operating profitability, lower financial expenses, favorable change in the Forex result and last but at least the already announced 3 point decrease in group income tax rate coming from lower corporate taxation in the U. S. Moving to the last indicator of the financial performance on page 12, you can
see on the right hand side
of the slide that normalized free cash flow reached EUR 468,000,000 and was up more than 5% compared with H1 2017. This was driven by a strong growth in cash flow from operations As far as working capital requirement is concerned, we recorded the usual mechanical ride in the first half. One additional word to tell you that in the free cash flow, non normalized free cash flow. It grew only 1.4% in H1, and it doesn't relate to a underperformance in H1 2018. You may remember that H1 2017 free cash flow was helped by an exceptionally low level of working capital requirement at the end of June 2017, which stood at 7 point end.
As far as the end of June 2018, working capital requirement is concerned, it was well in hand at 10.3% of sales, I. E, in line with the historical average. That's all on my side for the good set of financial networks in H1. And I give now the mic back to Benoit. Thank you.
Thank you, Antoine. Let's move now to the 2nd part of the presentation, I. E, our numero innovation and Roche initiatives. I will quickly cover 4 main topics: innovation with new products international deployment of our programs efficiently required businesses, external growth and CSR. Starting with innovation, you can see on Page 1617 that we remained very active in terms of new product launches in H1, I'll not, of course, comment all those products that are ranging from traditional products, if I may say, like the NiroA step, user interface, it takes cube, RCC breakers, the highlight an impact series of milestone to a number of connected products, notably user interfaces with the launch of Silvia Luz Netatmo Dub C, leaving now in Italy, as well as in smart UPS with care SP.
But of course, I'll be happy to answer to any questions you may have on those products. Turning to our programs, and the other C expansion of recent acquisitions on page 19, starting with Elliott. On the left hand side, Aegis is doing very well. 11 new connected product ventures have been announced so far this year. And the progress progressively deployed in all our geographies.
We are also successfully pursuing geographical deployment of our international programs launched recently, including, for example, the high performance structured Cabling SCS 3 system and UPS system. Finally, on the right hand side of the slide, the international development of companies who recently acquired continues to do well, especially on the hariton, a smart PDO business. Moving now to acquisition driven growth on Page 21. We have been quite active in H1 with 4 bolt on operations, 2 in digital infrastructures, 1 in the UPS business and 1 in electrical equipment for DIY activity I would highlight here the acquisition of Chandon Claver Electronics, You may remember that we recently bought 2 U. S.
Players in the PDU business, Hariktar and Serbatek creating a U. S. Leadership in intelligent PDU in the U. S. With shared then clever equity, we are now at our existing position adding to leadership in China in a high added value segment.
More generally, this move strengthens our positions in digital infrastructure in particular, those dedicated to data centers. A quick word now on CSR on page 23 to say that Le Mans remains totally committed to creating sustainable value for all of its stakeholders In that aspect, we are proud that our targets for reducing greenhouse gas emissions by 2030 have been approved by the Science Based target initiative. We are the 6 company as a CAP-forty to get this approval. We are also very happy to be included and to rank among the leading companies in the category positivity index. Coming now the last topic of this earning release on Page 25, our targets for the full year.
Taking into account Both is very good performance in the first half, partly benefiting from one off items, but also in a certain environment, Laurent fully confirmed its target for 2018. Organic growth in sales of between +1 percent +4 percent and adjusted operating margin before acquisitions, I. E. At 2017 scope of consolidation of between 20% 20.5% of sales. Now Antoine Francois and myself are ready to open and answer your questions.
We have a question from
Andre Kukhnin from Credit Suisse. Sir, please go ahead. Good morning. Yes. Thanks so much for taking my questions.
Can I start with the obvious one on France and if you could walk us through, the reasons for the sequential slowdown in growth there and given the easier comp and the days effect?
Yes. Hello, it's Benoit speaking. It is indeed fact that France has been quite soft in H1. It's always difficult commence from one quarter to another. So the longer the period, the better, also easiest it is to commence, but We consider that in H1, the French market, have been quite soft, not specifically for everyone.
When you look at GDP numbers, the GDP numbers were soft, when you're looking at what other market operators are reporting, it has been soft also. And even in adjacent field of activity, other companies reported quite the mild and soft numbers. So the market hasn't been very supportive in France. So it's always the same topic that in France, 60% of our sales are coming from renovation. And this piece has been quite calm.
So whether it's coming from the overall economy and level of activity, from a number of days, from Tykes, from the months of May, from the so called labor shortage that the professional bodies have been reported for more than a year now. It's difficult for us to give you only one result, but the fact is that the market hasn't been very supportive in force for two quarters. In this context, we do consider that all performance, plus 2 is a good performance and that we are recording interesting growth in the number of productivity.
Got it. Thank you. And I appreciate it. We can overdo sort of flavoring the trends the quarter, but it's really that Q2 slowdown within H1, off the Q1 base that I think most concerning. So just to double check, was there a slowdown in end market in Q2 sequentially that you saw, or was that the Ebb and flow of all the factors that you mentioned in terms of bank holidays timing and strikes, etcetera?
Well, I mean, the so called slowdown between Q1 and Q2, it's we are really talking of digits because Q2 is +1.4 percent and 1st semester is plus 2%. So I wouldn't call that a slow down. And we are not seeing a slowdown, be careful not overheating a quarterly number. When we release a very strong Q4 in France in 2017, a few a few of you got a very excited about the potential people in the French market. And we told analysts, be careful It's not because you have very strong quarter that it means anything in terms of trend.
So the same comment would apply for the difference between Q1 and I wouldn't over read if I may say the change in trend between Q1 and Q2, we prefer to come in the full of the 1st semester. And as I said, it is true indeed that the fruit of the semester was quite tough in France. But once again, not only for LeGrand but for for the market and even for the volatility.
Got it. Got it. Thank you. And can I ask just a couple of quick ones, Firstly, on milestone performance, you mentioned it's been doing well in terms of growth? How has it done in terms of stability, has it been able to pass through, all the steel price increases that we've seen in the U.
S?
I confirmed that my stock performance was a good in terms of sales with actually a mid single digit growth in H1, and it was also a good in profitability with the profitability, which was broadly in line with H1 2017. So overall, We are very happy with my son, both in terms of top line and in terms of bottom line.
Great. Thank you. And last one on your data center performance. Could you just give us a bit more color on firstly, what is the overall size of your exposure now to that segment? Within LeGrande and how that's performed, across the kind of data center specific products versus the traditional Volt products that go into data centers if we can go into that sort of level of granularity?
Well, it's very difficult for us because, the same products are getting sometimes into data centers and sometimes into, into commercial buildings, hospitals, universities. And so when it comes to, I don't know, safety practice, for example, or buzz or or UPSs, a number of the same products are going into one vertical or the other. So we are not reporting specific 3 numbers by end market just because it's not possible. It's possible for a few product analysts, for example, intelligence PDUs are going only into data centers. And we have recorded very good growth in intelligent PDUs, but for the bulk of the products, most of the other productivities, there are sometimes going into data center, but also into other of the type of vertical.
So unfortunately, I'm not able to answer specifically, but the growth we are recorded in such a such vertical.
Got it. Thank you. I appreciate that.
Thank
you. So next question from Lucy carrier from Morgan Stanley. Madam, please go ahead.
Hi, good morning, gentlemen. Thanks for taking my question. I will have three questions. I will go one at a time. The first question I had was around the recent trade tension tariffs.
And I was curious to know whether first of all you could indicate us any potential impact you see on your business from the current tariff measure that has been announced, whether this is in terms of your own sales or whether this is in terms of your supply chain? And maybe a bit more, kind of specific on that. We've heard of some companies mentioning shortages in terms of electronics components. And I was curious to know whether you could be potentially affected by that or whether you've seen any pressure in your supply chain. So that's number 1.
Thank you, Lucy. So as far as tariff U. S. Tariffs are concerned. Today, two tariffs have been enacted what we call a section 232 and section 201 at least 1.
And of course, there are other lists that are the discussions and so on and so forth. And on the basis of the tariffs that were already enacted, the impact for 2018 should be around $10,000,000 on our cost of goods sold. This is the order of magnitude. And of course, we are reacting as you expect us to react. So we are doing potential pricing actions We are adding more productivity.
We are negotiating with suppliers and so on and so forth. This is so the tariff piece. As far as the shortage are concerned, it is true indeed that we are experiencing some pressure on a number of electronic components as a number of other market players So here again, we have a number of action plans going on. But sometimes, of course, we have to pay a bit more of some of the components. We are also building whenever necessary some extra inventory of some of some components.
We are diversifying our supplier base. We are doing increasingly through the bulkers whenever it's needed. So yes, unfortunately, I can confirm that there are some, sometimes shortages, but I would rather call that pressure on the supply of a number of electronics in the company.
And just maybe if I can have a 2 small follow-up on the the impact you mentioning for 2018, is that an annualized impact or this is just the impact for the second half of the year that you're expecting? And are you able maybe to pinpoint at some specific components where you are seeing specific pressure?
Well, so $10,000,000 is really the impact we should have on the second half of twenty 18. So it's not an annualized impact. And once again, this is based on what has been so far inactive Of course, this is impact we should have in the second half of twenty eighteen provided the tariff increase last until the end of the year. And This is a part of the uncertainty with the tariff, which is what tariff will be enacted with which rate which will, which origin of countries and how long will it last? And all that is a number of successes based on what was enacted so far.
And and assuming that they will last until the end of the year, the impact would be $10,000,000 in the second half of twenty eighteen. And as far as the short term is concerned, we, for example, have a number of
difficulty
to get the products or the number of what we call capacitors, for example, is a ceramic capacitors or traditional capacitors. But I suspect that you might hear the same from a number of players. So it's not something specific to the volume. Again, it's something that the number of players are always facing.
Thank you. Thank you for the color. My second question was around Italy. I think you've mentioned some some restock from your distributors in Italy. I'm not sure whether there was already in the first quarter or whether this is specific to the second quarter.
And I was just curious, how much do you think it has been adding to your sales growth and potentially also lifting up your margin a little bit higher?
Well, this industry build up was really, on a Q2, And this was this is something we expected actually. This is coming from the fact that we have launched this new living now range, which is a very important branch for Italy because it aims at for those who no more cataract, he aims at replacing, leaving light and absolute. So really important branches for LeGrande. And it has a number of features in it. And whenever we launch Sepshire Edge, traditionally, the district returns are building up some inventory in order to serve the market.
So it was in Q2 with a possible reverse impact on H2, when you have some inventory built up lots of points, you also have to sell out those inventory before you build back additional inventory. So this was for Q2. As far as Q1 is concerned, We highlighted when we released our Q1 numbers that the sales in Italy were somehow boosted by a favorable basis for comparison in 2017. You remember that So Q1 2017 was up in Italy by 1.9% I think. So to make a long story short, Q1 Italian performance was supported or boosted by a basic for comparison.
Q2 very good performance in Italy was supported or boosted by eventually build up and this phenomenon could have some adverse, one off impact on on H2. How much does it add? It's always difficult to say. It adds a few €1,000,000 of sales, obviously,
Thank you. And then my last question actually is still on Italy. Of course, with some of the political uncertainty and so on, we are hearing about some changes in terms of a little bit of slowdown in the economy, some changes in terms of approval in the entity that approved construction project and so on. I was just wondering what you have seen and how you think about this market for the second half of the year considering the recent political change and the uncertainty? Well,
you see, you do look almost as much as I do. So, you know, that it's extremely difficult for us to forecast what will happen is the months to come because we have the order book and very little ability. It is true that the Italian situation is somehow uncertain, especially the political situation. Or people in Italy are so far not negative on the Italian market for the quarters to come. So this experience between, for example, the end of 2017 and the first half of twenty eighteen any sort of slowdown.
Our point in Italy is not a warning. It's just, to highlight the fact that we believe the sort of stable growth rate in Italy, in H1 was more close to 4%. Let's say, if I have to shoot a number, then 6%. So we really wanted to highlight the fact that there were some, elements that boosted a bit the performance, but It remains the fact that we did a very good first half in Italy, and that our team are not a specificity for the rest of the year. Having in mind the fact that in our trade, it's very difficult have a clear visibility on what we have read in the months that took up.
Okay. Thank you very much.
Next question from Ms. To Gail Dupree from Deutsche Bank. Sir, please go ahead.
Thanks very much and good morning, everybody. I have two questions, please. The first one is about the margin bridge in Q2. Could you give us a little bit more details on the bridge really? Because the underlying margin before all the operating expenses is actually down year on year in nearly all geographies.
And I think it is a little bit surprising given the acceleration in growth. So what's really driving the slightly lower margin performance? And the second question is about the pricing environment mean, a few electrical equipment suppliers have talked about increased price realization this quarter. Some others have mentioned higher price rises to come probably in the second half. And I know your prices typically follow general in inflation trends, but I don't think we've seen any sort of improvement between Q1 and Q2 for you at least not yet.
But given the inflationary pressures that we see right now on wages on tariffs, on the supply chain challenges and so on and so forth, I mean, could you perhaps elaborate a bit on your pricing strategy for H2? Thanks.
Hello, Garth speaking. Actually, I will take the 2 questions because maybe there is a
link between the two. Yes.
And starting with the adjusted operating margin of Q2, you are writing saying that there is a before the other items different year on year, a bridge difference between Q1 and Q2. That's the first point. If we start with figure now on Q2, the adjusted operating margin stood at 21.7 percent. It was 21.2 percent, q22 2017, and it's 50 bps more than last year. And excluding acquisition, it is even a plus 60 bps in Q2, then it's all in.
And your question was before the automated, but you also know Garell, that this is not the way we manage a country, the management is done at the very bottom line. Now to complete by answer because your point was certainly focusing on gross margin. And in Q2, gross margin, reported gross margin is down 60 bps for acquisition, it's actually 20 bps 60 bps is what you see in our reporting. Before acquisitions, it's only, if I can say so, minus 20 bps, declined in gross margin vis a vis last year. 20 bps is a few 1,000,000.
You also have in mind, and here I come to the link between the two questions that in Q1, because in Q1, it was up in Q2, it was down. You remember that in Q1, we benefited from a bonus of a few 1,000,000 due to, as I was saying in my receiving comment, a few years ago due to the fact that we had benefited in Q1 from immediate selling prices increase and in parallel, a progressive rise in raw material and component questions that we sum up Gross margin, first, before acquisition, I would say, only down 20 bps in Q2 vis a vis rising Q1 and this shift is partly due to this, the slight bonus we are Q1. Now you would say we remain with a drop of 20 bps in Q2 than many, maybe something on that. First, you know, that, again, we managed concrete at the bottom line, second, that the price increase we had in H1 or in Q1 or in Q2 discovering in value, the raw material and governance position could not be in margin. 3rd, the fact that we are in many countries, many channels, and let's take the example of rest of the world.
We have gross margin up Q1, we have a gross margin done in Q2, but you know that we are in 40 countries in the rest of the world. And at the end of the day, adjusted operating margin is good on both quarters and bottom line. If you take the example of China, the U. S, U. M.
B. V. S. And pattern is a good rise in gross margin in Q1 and decline in Q2, but both in both quarters, we have a good operating profitability. Why?
Because depending on channels, you can have low gross margin, no SG and A, if it's the case, for example, for the retail activity, and if we take the lighting control activity. You have high gross margin, high SG and A, but again, both are good in operating profitability then. We have to be a bit cautious looking at the P and L on a line by line basis because first, as far as management of performance is concerned, not the way we manage the countries. We are managing them at the bottom line. And this is a choice of the U.
S. Team to promote, for example, retail business, if there are some opportunities there, then it could impact the gross margin. But at the end, of the day operating profitability will be protected because also FGRD will be lower or if we have a good project in lighting lighting business and you will see a rise in gross margin and
a rise in SG And A.
Then you see that my answer is finally saying, something very simple. We do not see any issue between Q1 and Q2, we have this form of 1 off effect in Q1 that this is a fact that we already announced when really seeing Q1 earning. And now for the rest of the analysis, you have this kind of a mix countries, mix up channels, the fact that, again, countries are managed at the bottom line, and that could influence, the line of the P and L. But again, what counts is at the bottom bottom line, right here, we have a plus 6 70 bps, sorry, before acquisition in adjusted operating margin vis a vis last year for H1 and plus 60 bps in Q2 than it So huge difference. I made the link between just question 1 and question 2, then the point is that, yes, selling price increase was a bit lower in Q1, Q2, sorry, then Q1 for improvements is that you remember when we released our Q1 earnings, we said 2 things.
We said we increased prices at the end of Q and the beginning Q1, sorry, when the slight value inflation finally is a bit progressive. And second, last year, due to the inflation that came progressively in the P and L. You may remember that quarter after quarter, we said that selling prices were progressively then between Q1 and Q2, you have this basis for comparison due to the fact that this year, we increased prices at the beginning of the year. And last year, it was provided that it's not a, I believe, a slowdown of our touch setting price, power or pricing power is just a question of basis for comparison.
Yes, it is. But I guess now in terms of your pricing approach for the second half, mean, do you intend to accelerate a bit more on the pricing side to cover the what seems to be generally in fashionary environment?
Sub countries have planned to increase, again, they are saying prices in 2. It's done really on a country by country basis and we provide them with the old inform needed in terms of inflation received. We discussed that. And then this is the responsibility to see how to mitigate that. It would be a through selling price increase, productivity, price adaptation, whatever you want.
But to answer your question, it will it will be the case in some countries and we will continue to monitor if humanitarian if it was to accelerate, certainly we will initiate, additional initiatives And again, you know, the story with the potentially some lag effect because when if we see additional inflation coming through Q3. It would take 1 or 2 or 3 quarters or let's say 1 or 2 quarters before being able to pass it to the market because that increase our prices every year, every week. Okay.
Thank you. Next question from William Mackie from Kepler Cheuvreux. Please go ahead.
Very good morning gentlemen. Thank you for taking the question. Can I just start at a very high level? Perhaps it's simple, but I'm sure with a good explanation. Your guidance of 1% to 4% growth for the year after a achieving that even in the second half of the year at the top of your guidance, it would imply a sub-three percent growth.
And when I think about your achievements with selling prices, and the general momentum in your main end markets, it seems out of sync with what should be thinking. So perhaps could you explain a little more why you chose to stick with the guidance at this point in the year against the backdrop of such a strong underlying growth in the first quarter. The second is more perhaps on your product introduction pipeline. Can you just update us with where you are in the implementation of Elliott throughout the product pipeline? And how much further the innovation rollout has to go in terms of bringing the connected product to market And then lastly, 4 deals in the first quarter is encouraging to show the momentum and the continued execution of that part of your growth in the business model.
But perhaps you could highlight a bit more about how you see the pipeline from for M and A and where your priorities lie with regard to the allocation of capital for inorganic growth?
Hello, William. So I'll take the 3 questions, starting with the numbers. So, plus 5.2 percent reported organic growth, as you rightly said, for the 3rd half, and again, which is between +1 percent +4 percent. A few comments. Number 1, obviously, we don't believe that the most likely scenario is to be at plusone@theendoftheyear.
This is not the scenario in which we believe. This being said, we have fully confirmed the guidance. Despite, we are above the upper end of the range with this 5.2% for 2 reasons. Number 1, as we said, we believe that this 5.2% is somehow boosted by 1 offs in the first half. It's always difficult to put a number, but if you consider that Italy should be running more at a 4% off rate and that the rate of euro be running more at 5% or 6% growth rate.
You end up with this 5.2% without the one off being probably closer to 4. Number 1. Number 2, you have a number of uncertainties that remain. And since lebron has no order book at very little visibility, we of course have to take to count the uncertainties. And why I don't want to write down a list of of the night Mayor Museum as we may call that, but you have the tariff in the U.
S. You have the Brexit uncertainty, even though we have recorded a slight increase in sales in H1, you have political and stable situation in a few countries such as Italy and Spain. You have Brazil, that suffered from this strike in May, June and which will be uncertain until at least the next election. So you have these pressure on electronic components. So all that push us of, I mean, should, of course, when you are managing a company such as Avon being integrated into your plan.
So all that explained why even though, we are recording higher than 4% growth in H1, we confirm or +1 percent to +4 percent guidance. As far as Asia is concerned, we usually a lot more information on Elliott on a yearly basis, and that's where we report on our plan. We're not doing it on the high tier results. So what we said at the end of last year was that in terms of number products. We are a number of product families.
We already have more than 30 product families that were incorporating various guest So we were halfway between the initial number in 2015 of 2020 and the target number in 2020 of 40. And that we were recording good growth on Elliott products. Obviously, this plan is continuing in H1. We'll continue in H 2. And amongst the launches that incorporate some Elliott's capabilities, we've already mentioned serial with Netatmo in France.
And we should also mention this living now range in Italy, which is also an address compatible. Plus, we have a number of other a compatible products such as UPS, for example. So in other words, we are very happy with the progress of our Elias plan. We are all planned, all targets growing, but we will give more information when we report yearly numbers in As far as the M and A is concerned, we have announced 4 deals, from, let's say, small size to midsize. So those are the traditional bolt on acquisitions made by LeGrande.
And I can confirm that we have a pipeline which remain full of those mid sized acquisitions. So we have a lot of them in our files. We have a lot of contacts going on. We have a lot of discussions going on. Now it's always a self-service.
When will those discussions, come to conclusion? It's always difficult to say, but
you should
keep seeing a number of those bolt on acquisitions in the quarters to come. Can confirm that.
That's great. Thank you very much. 2 short follow ups. Firstly, on Elliot, as you increase your variance in the relevant countries in introducing the product portfolio towards your target of 40. Could you comment a little bit on how the gross margin structures of your Elliott connected products typically compares to the more traditional final low voltage offer that was always within the catalog?
And then secondly, perhaps a question for Antoine as a follow-up, working capital development and the increase in working capital that we saw in the first half, partly I'm sure supported to or driven by the need to support service levels for your customer base. But should we think that that level is now stable in the second half were there particular countries where you saw the change in working capital occur? And what are you expecting in terms of a release from working capital in H2?
So I'll take the first question and let Antoine, answering the second one. A lot of the answer on the gross margin affiliate products. I will have to tackle the operating margin of updated products because even on let's say, traditional none of your products, you can have products with very high cost margins and products with lower cost margins. But at the end, what matters is really the operating income, you know, because the level of SG and A could also vary from Android if you look at the operating margin level, is Elliott or is not Elliott. In other words, the level of margin you are getting from a product will definitely depend on the market share more than on the product family itself or more than on the fact that it's connected or not connected.
In other words, if you have a good market share on a given product family, you will have a good profitability on the non connected and connected part of the family. If you don't have a good market share, then you won't have a good margin. So you know, in other words, if your question is, is the gross margin evolution in Q2 coming from the fact that we are selling lots more ideal products, the answer is no. The answer and the rationale behind the gross margin evolution in Q2 was given by Antoine. It's not connected at all to the to the areas that piece of the business.
One for the given question maybe.
Yes, William. And maybe to come back on the explanation about the working capital requirement vaccination in H1. It should be clear that we ended the semester with a ratio of working capital we went on to sales of 10.3%. And if you look at the average of a 2012 to 20 16. For the end of the semester of all those years, the 5 years, it was 10.1% do you see end of June?
We are very much in line with this historical average. It despite the number of acquisitions since this period and you know that the acquisition acquisitions we make, they don't have this level of 10%. It's higher than that. And we are at the end of June of 2018 in line with the historical level. It happened that last year, due to some phenomenon, but in particular to the fact that the end of the quarter was a bit lower in terms of activity that the working capital requirement at the end of June 20 teen was low at 7.9%.
And we do not see any you, coming from H1 of 2018 or the end of H1 of 2018, it's more a question of credit for comparison and your question, if I'm correct, Ryan was about some support that we would give to our customers and the DSO is not deviating in 2018. And if I take the same sequence of figure of our contraceptive evolve, end of June of 2018, we were at 13.6%. The average for 2012, 2016 was set 0.8%, then it was even a bit below at the end of 2018, June 2018, vis a vis this historical average of 13.8%. And he also, you see that we were very much in line, but he also in June 2017, the level was 12.3%. And we have this question of basis for comparison.
No deviation in DSO Management at the end of June 2018, it's clear that the acceleration of sales created a variation in value, which is not abnormal, but no division in percentage. And the last point, on inventory, we have more or less the same pattern We have a bit of, maybe, safety stock due to potential shortage in components and bond, but it's not meaningful and this is not the what is changing the picture at the end of June. Is it clear like that?
It's very clear. Thank you very much. That's an excellent explanation. Thank you.
Thank you. We have a new question from Alice Dyer Lesley from Societe Generale Please go ahead.
Hi, good morning. Just a couple of follow-up questions. Firstly, just on component shortages. I was wondering whether you could clarify whether saw that already impact Q2 growth? And also confirm, is this really a global phenomenon for you or perhaps you have more flexibility in some areas or maybe geographic there's some regions that are going to be more impacted than others for you on a kind of go forward basis?
And then the second follow-up is just on data centers. Wondering if you could give any detail on how you're positioned now in terms of addressing the different areas of the data center market, so hyperscale, colos, kind of enterprise My understanding was rare return was quite focused on enterprise server technology, a little bit more on large, a very large data centers. Some other businesses you've acquired a bit more mixed. And then maybe also how well your position just in terms of capturing the coming growth potential in edge data centers as well. Maybe you can provide any commentary on whether you're particularly focused on say cell towers codes for the upcoming rollout of 5G, your positioning in retail channels, etcetera?
Thank you.
Okay. I will take that first step. Good morning, saying that, that very simple and then the we consider that a slight shortage we experienced in some components that supply did not affect our growth in Q2 neither in H1. And it is not enough meaningful for affecting our growth today or or even tomorrow, I don't know for tomorrow, we will see, but the second point about it global or local? Do we have any flexibility?
I think it's a global phenomenon that does not apply to La Grange something more general, more general in terms of, again, players, but also more general in terms of job feed and we talk about some sourcing from China or some stuff like that. Then to sum up we monitor that carefully because it's important for us. It's part of the good management or bad management of a business. I don't know how to be able to anticipate to change suppliers, to have a bit of safety stock, but well targeted not to affect too much of free cash flow. And this clearly what we do on a day to day basis.
Now coming back to the impact of this, the short hedges we can have in some components no meaningful impact on Le Cron and no impact on
Well, as far as the second question is concerned, it would require a couple of hours explanation So to make a very long story short, in terms of type of data centers, we are present on all types of data centers. So co location, enterprise, smaller proximity data centers and so on. And we are present either in the white, what we call the white room. So that is a server room, let's say, or in the technical room. In the white room, We are active to products such as, wraps and cabinets, for example, where we made a number of acquisitions through smart PDUs, through structured cabling, through wire mesh, and a number of other products and the technical in the technical rooms we are present through the traditional Laurent settings, if I may say so our power protection offer, first part, transformers, and so on.
In terms of geographical reach, we are probably somehow overexposed to data centers in the U. S. Because we've made a number of acquisitions there. As a reminder, we acquired, 2 PDU companies. We also acquired few years back, Electroac, CAGINET company.
We were very present and active in the connectivity piece of the business through the Ophonics range. So we're probably a bit overexposed in the U. S. To data centers compared to other geographies. Now we have a rollout plan, which is worldwide, and which is, as usual at Legrand, made of either organic growth, So for example, we are currently rolling out, so hariton, smart PDUs, all over the world, and it's going very fast.
And this rollout program is also made of, specific well targeted acquisitions whenever we feel that we are missing the market access or we are missing the product. So that's the reason why we acquired a Shantel Teva. We were having a very small position PDU in China to Haritong. And we thought that in order to give a boost to that essential approach in China, was a right move to acquire a leader in smart PDU there. So it's a very synthetic answer, but going into that strategy would take us, unfortunately, a few hours.
Okay. Well, thanks very much. Just on that comment, then maybe follow-up. You say you're over indexed U. S.
Is it therefore also fair to say you're kind of under indexed Europe at the moment? And I just wonder whether opportunities to perhaps address that inorganically? Your comment about being over indexed U. S. I just want to kind of conversely, does that mean therefore that you're kind of under indexed Europe and and whether you can address that maybe through acquisitions?
That's right. I understand the question. My comment was the fact that we are, as a percent, probably because once again, we are not tracking the percentage of our sales by verticals. As a percentage of ourselves, we're probably doing more sales in data centers in the U. S.
Than elsewhere because we made a number of acquisitions there. To make long story short, we are number 1 in intelligent PDU in the U. S, for example, which is a product specifically dedicated for white space in data centers. Now if your question is Will we continue to look at potential acquisition in the data center field? The answer is obviously yes.
And there are many geographies where we have ongoing contact with potential companies that we be nice adult to our data center plan of action.
Next question from Graham Phillips from Jefferies. Sir, please go ahead.
Yes, good morning. Thanks for taking my question. A couple of questions. Just on France, I know you've commented why the economic indicators have had some of the reasons why you're underperforming there. But I'm sure your ambition is is to outgrow the market.
Can you talk specifically, is whether there has been increased competition? Obviously, we can follow the performance of your distributors there and you do continue to underperform. So perhaps you're not selling the right products, is the ambition to outgrow the market you need to make an acquisition there? That's my first question.
Well, I thought agree at all with your view that we are underperforming now. Let's we are talking about our distributor. Let's take bluntly the numbers. In France, because Rexel released the numbers this morning in France, Rexel, increasing its sales by +2.9percentinthe1sthalf I'm taking the comparable measures to LeGrande. So at current number of days, we are not reporting the sales at constant number of days.
So if you take the same metrics as Legrand at current number of days. Legrand is reporting plus 2 and Raxel is reporting plus 2 point Now out of those 2.9% like sales in their press release, they indicate that they have a copper effect of plus 0.8 So excluding copper, if my reading of the press release is correct, excluding copper, wholesale growth in France, is plus 2.1%. And we are doing plus 2%. And on top of that, they said it's publicly stating that it is that they're giving market share. So looking at the numbers, I really don't see where we can.
You can come to the conclusion that we are a drop performing the French market, plus 2.1 gaining market share against plus 2%. It's about the same, the same level Now obviously, we would love to do a lot more than that. And our ambition is to do more than that. And then the reason why, we are putting in place a number of initiatives in France, we are launching Ciela and we did that move. We are launching Dixie which is an interesting new range of access user interfaces.
We are opening showrooms. We are investing in digital and so on. So we are putting in place all the pieces of the L'Oreal model, so that we can do better than 2. But at the end, our performance also depend on the French market, underlying market. And the fact is that the French underlying market has not been very supportive in the past months.
Look again at the GDP numbers. The GDP numbers are not very supportive either So is the competition tough in France? Yes, of course, it is. It has always been, and it will remain tough as it is tough in all of our geographies. I don't know of any geography, what I can say is that we don't are not facing a tough competition.
That's the nature of our business. Are we losing market share in France? The answer is no.
Okay. Thank you for the expiration. But do you think your pricing also benefited from copper then in the 1st or second quarter?
We are not buying any, I mean, marginally, some copper cable, So that's why the comparison with our distributor, excluding copper is important because copper cable Oh, it can boost one way or the other, actually. Sometimes it's boosting, sometimes it's only capping the performance of our distributors by a half a point, one point, 1.5, the reason why, they are usually reporting their performance, including and excluding cables. But we are not we are selling almost no cables. So that's the reason why we are trying to compare April to April. So all performance versus contributors, government, excluding cable.
Now if your question is, do we have a pricing issue in France? The answer is no, don't have any pricing
trend activity in Europe. You've sometimes pointed to some of the indicators, whether they be sentiment or otherwise. And also the IFA Institute came out with a little bit more cautious outlook for building construction activity. Can you give some sort of overall view for Europe in terms of where you think sentiment and activity is going?
Well, it's always a very difficult exercise, probably more difficult for Lebron than for other companies because as you know, we have no visibility at all. We barely know what we will have to deliver tomorrow to make long story short. So as you do, we rely very much on input from external specialist And for example, it is true that this is part of the reasoning why we have emphasized the uncertainty. It is true that when reading the IMF report. The last IMF award economic outlook dated July 16th, The IMF seems to be a bit more cautious, on the months or quarters to come, that it was a few months' back.
With work such as the expansion is becoming less even at least to the outlook amounting. So the IMF itself is a bit more cautious emphasizing the fact that you have a number of uncertainties ahead. Now frankly speaking, it's extremely difficult to even though we remain positive for the second half and for the full of the year. It's extremely difficult for us to give you precise input about the construction market. We can't do that on a business and a hardship, it's a bit difficult.
And as you do, we rely on external sources.
Okay, thank you. And just finally on CapEx, again, just the numbers for where the full year might end up because the long term I think numbers are 3% to 3.5 percent CapEx and capitalized R and D of sales. And you've had sort of 1.4% and 2.4% in the First And Second Quarters. Are we still, in an upward trajectory on that? Or we do you think you'll come in well below the 3% to 3.5% level?
Antoine speaking, I will take this 1. Maybe starting with figure of your point is correct. H1 2018 is low at 2.2% of sales. Versus last year, 2.6%. Now two things, a very important first one is that you have a usual seasonality between H1 and H2 did you have in mind that being at 2.6percentendofJune2017, we ended the year at 3 point percent.
If it was not specific to 2017, this is, again, the usual seasonality that CapEx always accelerate in the second half of the year. 2nd, comment I will have is that, depending on yearly on year, you can have, what we could call, project, a phase phasing topic then in 2018, we consider that into the 2nd half, we should see the number of initiatives terms of new products, investments of productivity. And that's why that should come. And it's very difficult to give a clear speak on CapEx because it's not a day to day story. You can have a big topic in November or December or or in the Jan of Feb the year after.
We see 2 things. 1st, an acceleration, no of course, no Madhuizen is mas far as CapEx is concerned again because we intend to continue to be very active on new products and productivity, then there is no reason for being on a long term basis, above or below the range of 3% to 2.5% you were quoting. And it's not easy answer, and I'm not sure you will be fully satisfied satisfied with this answer, but I cannot tell you it will be 3.4,2.5,2.6,2.2 for this year. At this stage, it's difficult say, what I can tell you is that it should accelerate in H2. It will accelerate in H2, and we continue to have a very program in terms of a new product.
This is what has been explained by Benoit. And of course, it will be affected in our CapEx the quarters to come. Will it be Q3, Q4 or next year time we tell?
We have a new question from Jay Cheung from Citi. Sir, please go ahead.
Hi, Chi Chung at Citi. Thanks for taking my question. I just have a quick follow-up on the favorable one off effects you mentioned for the rest of your I think you mentioned Eastern Europe and Turkey. Can you elaborate what the details are for this? And is this impact just within the second quarter or throughout the first half?
And also, you mentioned you mentioned that ex 1 offs, the rest of Europe should be running more at 5% to 6% growth. Is this for the first half comparison or for the second quarter comparison? Thank you.
Well, it's so as far as your first question is concerned, it's a mix of a lot of different effects. You have some exceptional projects. You have some business here and there, some inventory buildup, you have some commercial actions that prompt itself. So it's a mix, you don't have one single element. It's a mix of element.
And some of them could have an adverse impact on H2, even though it's difficult to quantify. But as explained for Italy, when you have industry build up given country, sometimes the time you said that was implemented or is done, you may have some advanced impact on yourself on a given quarter. So yes, we think that part of that could have an adverse impact on H2, even though it's difficult to quantify. And even though the total performance for SMA Europe will remain very good in 2018. Now, Seguin, to comment on the 5% to 6% which is an estimate not a hard number, of course, is for H1.
The feeling we have when talking to our teams locally is that And the exercise, the way it's difficult to do when you get rid of those one off, the pace, of course, we are having is probably 5%, 6% with probably, let's say, half what we have shown in the first half, But I wouldn't like these message and the one off tools, let's say high to the fact that the performance in the rest of Europe is structurally very good. It's mainly coming from a number of initiatives that have been put in place, new products, commercial, etcetera, free cash flow, so commercial organization locally. I'm thinking of Turkey, for example, leverage on the acquisition that were made. So the growth is really sound solid and coming from fundamental reserves, but it was a bit exceptionally good to take my So to make long story short, this 5% to 6% comment was, let's say, for the first half of the year, not specifically for Q2.
Thank you.
And we already made actually the same comment when we release our Q1 number.
Thank you. We have a new question from Andre Kukhnin from Credit Suisse. Sir, please go ahead.
Yes, hello again. Thanks so much for taking the follow-up. I just want to double check on the pricing comment you made at the beginning when walking through the bridge. Was sort of on the north, unfortunately. Can I just confirm you said the pricing was up 1.3% in H1?
Is that right? And then secondly, was that offsetting the raw material impact fully or not?
It's very important to come back on that.
If it was not clear, then
I think it was clear. It was just us on the line If you could clarify, that would be great.
Thank you.
No problem. Then yes, selling price increase was 1.3% for the 1st semester. And in front of that, the increase in raw material and components was 2.7 end. And what we say is that in absolute terms, in euro terms, can say so. It demonstrates a good coverage.
It means that in absolute value, the euro generated by the selling price increase is more than the impact we have in euro on our cost of goods sold due to raw material component in pressure and then good providing absolute value. But when you have 1.3 on the top line and 2.7 on the COG, you don't cover in relative terms or in margin, and this is not new. This is something we have explained for, last year also in 2020 till 2021 is that when the inflation accelerating to 2, 3, 4 maybe more than that. We manage this inflation through, I would call it a coverage in absolute euro or in value. And when inflation is low or even done.
In that case, we have, of course, a coverage in value, but also in terms of margin.
That's very clear.
Thank you. We don't have any question back to you for the conclusion.
Well, thank you very much. For, having attended this conference call. I understand that for most of you, it's a busy day. So we won't take more of your time. If you have any follow-up questions, of course, please feel free to call Francois Poisson or Tunbjorn and myself.
We'll be happy to get you into more details. So thank you very much. Happy holidays for those of you who will have good holidays in a few days and see you in the months to come. Thank you.
Vision. You may now disconnect.