Good morning, ladies and gentlemen, and welcome to today's Legrand 2018 first half 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 over the call to CEO, Mr. Benoît Coquart, and CFO, Mr. Antoine Burel. Sir, please go ahead.
Thank you. Hello, everybody. Benoît Coquart speaking. I am with Antoine Burel and François Poisson, and we are happy to welcome you to the Legrand 2018 first half results conference call. Let me first remind you that we have published today our press release, our financial statements, and a slideshow to which we will refer. Those documents are, as usual, available on the Legrand website. Please also note that this conference call is recorded and webcasted on our website. Let me first start with a few opening remarks, following which Antoine and I will comment into more details our 2018 first half results and achievements. I will start on page four of the deck with the three main takeaways of today's release. The first takeaway is that we are reporting a very good overall performance in H1.
A good illustration of this showing is that we have recorded double-digit growth in all key indicators in the first half of 2018. 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. Second takeaway, Legrand actively pursued its innovation and growth initiatives by continuing to launch new products, to leverage on the geographical deployment of international programs, including Eliot, and to develop businesses recently acquired abroad. Acquisition-driven growth was also active with four bolt-on transactions announced since the beginning of the year.
Finally, the third main takeaway of this release is that Legrand fully confirms its target for 2018 and will, of course, come back on this in more details later in this presentation. Let me turn to page six and a few comments on sales. As said, we recorded a total rise in sales of 11.8%. Legrand first growth driver is contributing well with organic growth reaching a solid +5.2% in H1, driven by healthy rises like-for-like in both new economies, where sales were up +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 the group's second growth driver, contributed +13.6% to sales rise in H1 2018.
Based on acquisitions announced and their likely consolidation dates, acquisition-driven growth should contribute to around +7.5% for the full year. Forex impact was unfavorable at -6.5% in H1. If we apply to the last six months of the year, the average Forex observed in June 2018, then annual Forex for the full year 2018 would be around -3.5%. This is, 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 segments. And for that, I will go on page seven and eight of the slideshow. Starting with France. In France, organic growth stood at +2% in H1, driven by good showings in energy distribution, user interfaces, and home systems.
New products benefited from a good response, notably the Netatmo range of connected user interface, as well as the Dooxie range. Moving to Italy. In Italy, like-for-like sales growth was +6.3% in H1. This strong increase in sales was underpinned by the sales of connected products. In addition, first half performance benefited from one-off effects, including in the second quarter alone, an inventory build-up by distributors in relation to the launch of the Living Now new user interface range. In the rest of Europe, sales were up 11.3%, like-for-like, compared to the first half of 2017. 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, and Turkey. Sales in Spain, Germany, the Netherlands, and Greece rose also strongly, and in the U.K., sales grew very slightly. Moving to page eight.
In North and Central America, sales rose by +3.8% 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 note that Milestone recorded healthy growth in sales in the first half of the year. Finally, due to the high basis for comparison, sales in Mexico were down in the first half of 2018. Let me now talk about the rest of the world, where sales rose +5% on a like-for-like basis. We reported very good showings in our two main countries in the rest of the world, i.e., 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.
Overall, our like-for-like growth in sales was very healthy in the first half, and very consistent amongst each main geographical 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, Benoît, and good morning to all of you. Benoît 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. Let's start with profitability on page nine, where we compare H1 2018 adjusted operating margin to H1 2017 adjusted operating margin. As you can see, this adjusted operating margin before acquisitions came to 21.1%, showing a rise of 70 basis points on H1 2017. This 70 basis points rise resulted from a good global operating performance and the adjustments of groups selling prices to inflation in raw materials and components. In more details, Legrand selling prices were up about 1.3% in H1 2018, and raw material and component prices were up about 2.7%. This demonstrates a good coverage in value of raw materials and component inflation.
As already announced, this good coverage embeds 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%, reflecting, we believe, Legrand's capacity to generate profitable growth. Moving now to page 11 with another key indicator, which is a net profit attributable to the group. It was up 23.3% at EUR 390 million in H1 2018, demonstrating here also our ability to create value for our shareholders. This strong increase in net profit is a result of a lot of positives, i.e., strong growth in sales, increased operating profitability, lower financial expenses, favorable change in the Forex result, and last but not least, the already announced three-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 million and was up more than 25% compared with H1 2017. This rise was driven by a strong growth in cash flow from operations. As far as working capital requirement is concerned, we recorded a usual mechanical rise in the first half. One additional word to tell you that in the free cash flow, not normalized free cash flow, it grew only 1.4% in H1 and it doesn't relate to an 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 7.9% of sales versus an historical average level at the end of June of 10.1%.
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 metrics in H1, and I give now the mic back to Benoît. Thank you.
Thank you, Antoine. Let's move now to the second part of the presentation, i.e., our numerous innovation and growth initiatives. I will quickly cover four main topics. Innovation with new products, international deployment of our programs in recently acquired businesses, external growth, and CSR. Starting with innovation, you can see on page 16 and 17 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 new Estep user interface, the DX³ RCBO breakers, the tile and impact series of Milestone, to a number of connected products, notably user interfaces with the launch of Céliane with Netatmo, Dooxie, Living Now in Italy, as well as in smart UPS with Keor SP.
Of course, I'd be happy to answer to any question you may have on those products. Turning to our programs, and the overseas expansion of recent acquisitions on page 19. Starting with Eliot on the left-hand side, Eliot is doing very well. 11 new connected product ranges have been launched so far this year, and the program is progressively deployed in all our geographies. We are also successfully pursuing the geographical deployment of our international programs launched recently, including, for example, the high-performance structured cabling, LCS3 system, and UPS system. Finally, on the right-hand side of the slide, the international development of companies we recently acquired continues to do well, especially on the Raritan smart PDU business. Moving now to acquisition-driven growth on page 21.
We have been quite active in H1 with four button operations, two in digital infrastructures, one in the UPS business, and one in electrical equipment for DIY activities. I would highlight here the acquisition of Shenzhen Clever Electronic. You may remember that we recently bought two U.S. players in the PDU business, Raritan and Server Technology, creating a U.S. leadership in intelligent PDU in the U.S. With Shenzhen Clever Electronic, we round out our existing position, adding leadership in China in a high added-value segment. More generally, this move strengthens our positions in digital infrastructures, in particular those dedicated to data centers. A quick word now on CSR on page 23 to say that Legrand remains totally committed to creating sustainable value for all of its stakeholders.
In that respect, we are proud that our targets for reducing greenhouse gas emissions by 2030 have been approved by the Science Based Targets initiative. We are the 6th company of the CAC 40 to get this approval. We are also very happy to be included for the fourth year in a row within the Corporate Knights Global 100, and to rank amongst the leading companies in the CAC 40 Positivity Index. Coming now to the last topic of this earnings release on page 25, our target for the full year. Taking into account both its very good performance in the first half, partly benefiting from one-off items, but also an uncertain environment, Legrand fully confirms its target for 2018. Organic growth in sales of between +1% and +4%, and adjusted operating margin before acquisitions, i.e., at 2017 scope of consolidation of between 20% and 20.5% of sales.
Antoine, François, and myself are ready to open and answer your questions. Thank you.
Ladies and gentlemen, we will start the question and answer session now. If you have a question, please dial zero and one on your telephone keypad. We have a first question from Andre Kukhnin from Credit Suisse. Sir, please go on.
Good morning. Yes, thanks so much for taking my questions. Could I start with the obvious one on France? If you could walk us through the reasons for the sequential slowdown in growth there and given the easier comp and the days effect.
Yeah. Hello, Andre. It's Benoît speaking. It is indeed a fact that France has been quite soft in H1. It's always difficult to comment from one quarter to another, the longer the period, the better or the easiest it is to comment. We consider that in H1, the French market has been quite soft, not specifically for Legrand. 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, even in adjacent field of activity, other companies reporting quite mild and soft numbers. The market hasn't been very supportive in France. It's always the same topic. You know that in France, 60% of our sales are coming from renovation, and this piece has been quite calm.
Whether it's coming from the overall economy and level of activity, from number of days, from strikes, from the month of May, from the so-called labor shortage that the professional bodies have been reporting for more than a year now, it's difficult for us to give you only one reason. The fact is that the market hasn't been very supportive in France for 2 quarters. In this context, we do consider that our performance, +2, is a good performance and that we are recording interesting growth in a number of product families.
Got it. Thank you. I appreciate it. We can overdo sort of laboring the trends of the quarter, it's really that Q2 slowdown within H1 off the Q1 base that I think most concerning. 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, et cetera?
The so-called slowdown between Q1 and Q2, we are really talking of digits because Q2 is +1.4% and first semester is +2%. I wouldn't call that a slowdown, we are not seeing a slowdown. Be careful not overreading a quarterly number. When we released a very strong Q4 in France in 2017, a few of you got very excited about the potential rebound in the French market, we told analysts, "Be careful. It's not because you have a very strong quarter that it means anything in terms of trend." The same comment would apply for the difference between Q1 and Q2. I wouldn't overread, if I may say, the change in trend between Q1 and Q2.
We prefer to comment the full of the first semester, as I said, it is true indeed that the full of the semester was quite soft in France. Once again, not only for Legrand but for the market and even for the whole economy.
Got it. Thank you. 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 profitability? Has it been able to pass through all the steel price increases that we've seen in the U.S.?
I confirm that the Milestone performance was good in terms of sales with actually a mid-single-digit growth in H1, and was also good in profitability, with the profitability which was broadly in line with H1 2017. Overall, we are very happy with Milestone, both in terms of top line and in terms of bottom line.
Great. Thank you. Last one is 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 Legrand, and how that's performed across the kind of data center specific products versus the traditional low-voltage 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 commercial buildings, hospitals, universities, and so on. When it comes to a lot of safety breakers, for example, or bus bars or UPSs, a number of the same products are going into one vertical or the other. We are not reporting specifically numbers by end market just because it's not possible. It's possible for a few product families. For example, intelligent PDUs are going only into data centers, and we have recorded very good growth in intelligent PDUs. For the bulk of the products, most of the other product families, they are sometimes going into a data center but also into other type of verticals. Unfortunately, I'm not able to answer specifically about the growth we are recording in such and such vertical.
Got it. Thank you. I appreciate that.
Thank you. Next question from Lucie Carrier from Morgan Stanley. Madam, please go ahead.
Hi. Good morning, gentlemen. Thanks for taking my question. I will have three question. I will go one at a time. The first question I had was around the recent trade tension tariffs. 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 have been announced, whether this is in terms of your own sales or whether this is in terms of your supply chain. Maybe a bit more kind of specific on that, we've heard of some companies mentioning shortages in terms of electronics components. I was curious to know whether you could be potentially affected by that or whether you've seen any pressure in your supply chain. That's question number one.
Thank you, Lucie. As far as U.S. tariff are concerned, today two tariffs have been enacted. What we call Section 232 and Section 301, list one, of course, there are other lists that are under discussions and so on and so forth. On the basis of the tariff that were already enacted, the impact for 2018 should be around $10 million on our cost of goods sold. This is the order of magnitude. Of course, we are reacting as you expect us to react. We are doing potential pricing actions. We are adding more productivity. We are negotiating with suppliers and so on and so forth. This is for the tariff piece. As far as the shortages 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.
Here again, we have a number of action plans going on. Sometimes, of course, we have to pay a little bit more for some of the components. We are also building, whenever necessary, some extra inventory of some components. We are diversifying our supplier base. We are going increasingly through brokers whenever it's needed. Yes, unfortunately, I can confirm that there are sometimes shortages, but I would rather call that pressure, on the supply of a number of electronics components.
Just maybe if we can have two small follow-up on those, the impact you're 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? Are you able maybe to pinpoint at some specific components where you are seeing specific pressure?
The $10 million is really the impact we should have on the second half of 2018. It's not an annualized impact. Once again, it is based on what has been so far enacted. Of course, this is impact we should have in the second half of 2018, provided the tariff increase lasts until the end of the year. This is part of the uncertainty with the tariff, which is what tariff will be enacted, with which rate, which origin of countries, and how long will it last. All that is a number of uncertainty, but based on what was enacted so far and assuming that they will last until the end of the year, the impact should be $10 million in the second half of 2018.
As far as the shortage is concerned, we, for example, have a number of difficulty to get products on a number of what we call capacitors, for example, either ceramic capacitors or traditional capacitors, but I suspect that you might hear the same from a number of players. It's not something specific to Legrand. Here, again, it's something that a number of players are facing.
Thank you for the color. My second question was around Italy. I think you've mentioned some restock from your distributors in Italy. I am not sure whether that was already in the first quarter or whether this is specific to the second quarter. 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 inventory buildup was really on Q2, and 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 range for Italy because for those who know our catalog, it aims at replacing Livinglight and Axolute. Really important ranges for Legrand, and it has a number of features in it. Whenever we launch such a range, traditionally, the distributors are building up some inventory in order to serve the market. It was in Q2 with a possible reverse impact on H2. When you have some inventory built up, at some point, you also have to sell out the inventory before you build back additional inventory. 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 the Q1 2017 was up in Italy by 1.9%, I think. To make a long story short, Q1 Italian performance was supported or boosted by basis for comparison. Q2, very good performance in Italy was supported or boosted by inventory buildup, this phenomenon could have some adverse one-off impact on H2. How much does it add? It is always difficult to say. It adds a few million EUR of sales, obviously.
Thank you. 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 approves construction projects, 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.
You see, you know Legrand almost as much as I do. You know that it's extremely difficult for us to forecast what will happen in the months to come because we have no order book and very little visibility. It is true that the Italian situation is somehow uncertain, especially the political situation. Our people in Italy are so far not negative on the Italian market for the quarters to come. They did experience between, for example, the end of 2017 and the first half of 2018, 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 sustainable growth rate in Italy, in H1, was more close to 4%, let's say, if I have to shoot a number, than 6%.
We really wanted to highlight the fact that there were some elements that boosted a bit the performance. It remains a fact that we did a very good first half in Italy, and that our teams are not pessimistic for the rest of the year. Having in mind the fact that in our trade, it's very difficult to have a clear visibility on what will happen in the months to come.
Okay. Thank you very much.
Thank you. Next question from Mr. Gaël 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 about the margin bridge, in Q2. Could you give us a little bit more details on the bridge really because the underlying margin before other operating expenses is actually down year-over-year in nearly all geographies. I think it is a little bit surprising given the acceleration in growth. What's really driving the slightly lower margin performance? The second question is about the pricing environment. 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. I know your prices typically follow general inflation trends. I don't think we've seen any sort of improvement between Q1 and Q2, for you, at least not yet.
Given the inflationary pressures that we see right now on wages, on tariffs, on the supply chain challenges and so on and so forth, could you perhaps elaborate a bit on your pricing strategy for H2? Thanks.
Hello, Gael. Antoine speaking. Actually, I will take the two questions because maybe there is a link between the two.
Yes.
Starting with the adjusted operating margin of Q2, you are right in saying that there is, before the operating items, a difference, year-over-year bridge difference between Q1 and Q2. That's the first point. If we start with figures now on Q2, the adjusted operating margin stood at 21.7%. It was 21.2% in Q2 2017. It's 50 bps more than last year. Excluding acquisition, it is even a plus 60 bps in Q2. Here it's all-in. Your question was before the operating items. You also know, Gael, that this is not the way we manage countries. The management is done at the very bottom line. Now, to complete my answer because your point was certainly focusing on gross margin. In Q2, gross margin, reported gross margin, is down 60 bps. Before 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, -20 bps decline in gross margin vis-a-vis last year. 20 bps is a few EUR million. 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 EUR million due to, as I was saying in my preceding comment a few minutes ago, due to the fact that we benefited in Q1 from immediate selling prices increase and in parallel, a progressive rise in raw material and component prices. To sum up, gross margin first before acquisition is, I would say, only down 20 bps.
Vis-a-vis rise in Q1, this shift is partly due to this slight bonus we had in Q1. You would say we remain with a drop of 20 bps in Q2. Maybe some things on that. First, you know that again, we manage country at the bottom line. Second, that the price increase we had in H1 or in Q1 or in Q2 is covering in value, the raw material and components inflation, but not in margin. Third, the fact that we are in many countries, many channels. Let's take the example of rest of the world. We have a gross margin up in Q1. We have a gross margin down in Q2, but you know that we are in 40 countries in the rest of the world. At the end of the day, adjusted operating margin is good on both quarters and bottom line.
If you take the example of channels in the U.S., you have maybe the same pattern with a good rise in gross margin in Q1 and decline in Q2. In both quarters, we have a good operating profitability. Why? Because depending on channels, you can have a low gross margin, low SG&A, which is the case, for example, the retail activity. If we take the lighting control activity, you have high gross margin, high SG&A, but again, both are good in operating profitability. We have to be a bit cautious, looking at the P&L on a line-by-line basis, because first, as far as management of performance is concerned, this is not the way we manage the countries. We are managing them at the bottom line.
This is a choice of the U.S. team to promote, for example, retail business, if there are some opportunities there, it could impact the gross margin. At the end of the day, operating profitability will be protected because also SG&A will be lower. Or if we have good projects in lighting business, you will see a rise in gross margin and a rise in SG&A. 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 one-off effect in Q1, and this is a fact that we already announced when releasing Q1 earnings. Now for the rest of the analysis, you have this kind of mix of countries, mix of channels.
The fact that, again, countries are managed at the bottom line and that it could influence the line of the P&L. Again, what counts is the bottom line, and here we have +60, 70 basis points, sorry, before acquisition in adjusted operating margin vis-à-vis last year for H1 and +60 basis points in Q2. It's not so huge difference. I made the link between just question one and question two. The point is that, yes, selling price increase was a bit lower in Q2 than Q1 for simple reasons. You remember when we released our Q1 earnings, we said two things. We said we increased prices at the beginning of Q1, when material inflation finally is a bit progressive.
Second, last year, due to this inflation that came progressively in the P&L, you may remember that quarter after quarter, we said that selling prices were progressive. 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 progressive. It's not finally a slowdown of our selling price power or pricing power. It's just a question of basis for comparison. Is it clear?
Yes, it is. I guess now in terms of your pricing approach for the second half, do you intend to accelerate a bit more on the pricing side to cover what seems to be a generally inflationary environment?
Some countries have planned to increase again their selling prices in H2. It's done really on a country-by-country basis. We provide them with all the information needed in terms of inflation received. We discuss that. This is their responsibility to see how to mitigate that. It could be through selling price increase, productivity, cost adaptation, whatever you want. To answer your question, it will be the case in some countries. We will continue to monitor this raw material and commodity inflation. If it was to accelerate, certainly we will initiate additional initiatives.
Again, you know the story with potentially some lag effect, because if we see additional inflation coming through Q3, it could take one or two or three quarters, or let's say one or two quarters before being able to pass it to the market, because we do not increase our prices every week, yeah.
Okay. Thanks very much, Antoine.
Thank you.
Okay, thank you. Next question from William Mackie from Kepler Cheuvreux. Please go ahead.
A very good morning, gentlemen. Thank you for taking the question. Can I just start at a very high level? Perhaps it is simple, but I am sure with a good explanation. Your guidance of 1%-4% growth for the year after achieving 5.2% growth in the first half appears very conservative in the sense that even in the second half of the year, at the top of your guidance, it would imply a sub 3% growth. 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 we should be thinking. 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 Eliot throughout the product pipeline and how much further the innovation rollout has to go in terms of bringing the connected product to market? Lastly, four 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. Perhaps you could highlight a bit more about how you see the pipeline for M&A and where your priorities lie with regard to the allocation of capital for inorganic growth. Thank you.
Hello, William. I will take the three questions. Starting with the numbers, plus 5.2% reported organic growth, as you rightly said, for the first half, and a guidance which is between plus 1% and plus 4%. A few comments. Number 1, obviously, we do not believe that the most likely scenario is to be at plus one at the end of the year. 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 two reasons. Number 1, as we said, we believe that this 5.2% is somehow boosted by one-offs in the first half.
It is always difficult to put a number, but if you consider that Italy should be running more at a 4% growth rate and that the rest of Europe should 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. Since Legrand has no order book and very little visibility, we of course have to take into account those uncertainties. I do not want to write down a list of the nightmare museum, as we may call that. 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. You have this pressure on electronic components. All that pushes, or should, of course, when you are managing a company such as Legrand, be integrated into your plan. All that explain why even though we are recording higher than 4% growth in H1, we confirm our +1% to +4% guidance. As far as Eliot is concerned, we usually give a lot more information on Eliot on a yearly basis, and that's where we report on our plan. We're not doing it on the half-year results. What we said at the end of last year was that in terms of number of product families, we already have more than 30 product families that were incorporating Eliot capabilities.
We were halfway between the initial number in 2015 of 20 and the target number in 2020 of 40, and that we were recording good growth on Eliot products. Obviously, this plan is continuing in H1, will continue in H2. Amongst the launches that incorporate some Eliot capabilities, we've already mentioned Céliane with Netatmo in France, and we should also mention this Living Now range in Italy, which is also an Eliot compatible. We have a number of other Eliot compatible products such as UPS, for example. In other words, we are very happy with the progress of our Eliot plan. We are on plan, on target, growing, but we will give more information when we report yearly numbers in. As far as the M&A is concerned, we have announced four deals from, let's say, small-size to mid-size.
Those are the traditional bolt-on acquisitions made by Legrand. I can confirm that we have a pipeline which remain full of those mid-size acquisitions. 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. It's always the same story. When will those discussions come to a conclusion? It's always difficult to say, but you should keep seeing a number of those bolt-on acquisitions in the quarters to come. I can confirm that.
That's great. Thank you very much. Two short follow-ups. Firstly, on Eliot, as you increase your experience 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 Eliot-connected products typically compares to the more traditional final low voltage offer that was always within the catalog? Secondly, perhaps a question for Antoine as a follow-up. The working capital development, 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. 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? What are you expecting in terms of a release from working capital in H2?
Thank you.
I'll take the first question and let Antoine answer the second one. I'll not really answer on the gross margin of Eliot products. I would rather tackle the operating margin of Eliot products, because, even on, let's say, traditional non-Eliot products, you can have products with very high gross margins and products with lower gross margins. At the end, what matters is really the operating income. The level of SG&A could also vary from one product to another. If you look at the operating margin level, the golden rule at Legrand applies whether a product is Eliot or is not Eliot. In other words, the level of margin you are getting from a product will really 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, you won't have a good margin. In other words, if your question is the gross margin evolution in Q2 coming from the fact that we are selling a lot more Eliot 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 Eliot piece of the business. Antoine, for the second question, maybe.
Yes, William. Maybe to come back on the explanation about the working capital requirement variation in H1. It should be clear that we ended the semester with a ratio of working capital requirement to sales of 10.3%. If you look at the average of 2012 to 2016, for the end of the semester of all those years, the five years, it was 10.1%. You see, end of June, we are very much in line with this historical average, despite the number of acquisitions since this period. You know that the acquisitions we make, they don't have this level of 10%. It's higher than that. 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 2017 was low, at 7.9%. We do not see any issue coming from H1 of 2018 or the end of H1 of 2018. It's more a question of basis for comparison. Your question, if I'm correct, William, was about some support that we would give to our customer, the DSO is not deviating in 2018. If I take the same sequence of figures for accounts receivable, end of June of 2018, we were at 13.6%. The average for 2012-2016 was 13.8%, and it was even a bit below at the end of June 2018, vis-à-vis this historical average of 13.8%.
You see that we were very much in line. Also, in June 2017, the level was 12.3%. 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 deviation in percentage. 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 so on, but it is not meaningful. This is not what is changing the picture at the end of Q2. Is it clearer like that?
It's very clear. Thank you very much. Excellent explanation. Thank you.
You're welcome.
Thank you. Before going to the next question, ladies and gentlemen, let me remind you that if you wish to ask a question, you can press zero and one on your telephone keypad. We have a new question from Alasdair Leslie from Société Générale. Please go ahead.
Yeah. Good morning. Just a couple of follow-up questions. Firstly, just on component shortages. I was wondering whether you could clarify whether you 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 geographically there's some regions that are going to be more impacted than others for you on a go forward basis? The second follow-up is just on data centers. I'm 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, enterprise. My understanding was Raritan was quite focused on enterprise Server Technology, a little bit more on large and very large data centers. Some other businesses you've acquired a bit more mixed.
Maybe also how well you're positioned just in terms of capturing the upcoming growth potential in edge data centers as well. Maybe you can provide any commentary on whether you're particularly focused on, say, cell towers, telcos for the upcoming rollout of 5G, your positioning in retail channels, et cetera. Thank you.
Okay. I will take the first, Alasdair. Good morning. Saying that very simple answer, we consider that slight shortage we experienced in some components of supply did not affect our growth in Q2, neither in H1. It is not enough meaningful for affecting our growth today or even tomorrow. I don't know for tomorrow, we will see. The second point about is it global or local, do we have any flexibility? I think it's a global phenomenon that does not apply to Legrand. It's something more general. More general in terms of, again, player, but also more general in terms of geography than we talk about some sourcing from China or some stuff like that. To sum up, we monitor that very carefully because it's important for us.
It's part of the good management or bad management of a business 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. This is clearly what we do on a day-to-day basis. Coming back to the impact of these shortages we can have in some components, no meaningful impact on Legrand and no impact on sales to date.
As far as the second question is concerned, it would require a couple of hours explanation. To make a very long story short, in terms of type of data centers, we are present on all types of data centers. Colocation, enterprise, smaller proximity data centers and so on. We are present either in what we call the white room, so the server room, let's say, or in the technical room. In the white room, we are active through products such as racks 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. In the technical rooms, we are present through the traditional Legrand settings, if I may say so, our power protection offer, busbar, 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 two PDU companies. We also acquired, a few years back, Electrorack cabinet company. We were very present and active in the connectivity piece of the business through the Ortronics range. We are probably a bit overexposed in the U.S. to data centers compared to other geographies. We have a rollout plan which is worldwide and which is, as usual at Legrand, made of easier organic growth. For example, we are currently rolling out Raritan smart PDUs all over the world, and it's going very fast. 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.
That's the reason why we acquired Shenzhen Clever. We were having a very small position PDU in China through Raritan, and we felt that in order to give a boost to a data center approach in China, it was a right move to acquire a leader in smart PDU there. It's a very synthetic answer, but going into a data center strategy would take us, unfortunately, a few hours.
Okay. Well, thanks very much. Just on that comment, though, maybe a 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. I just wonder whether there's the kind of opportunities to perhaps address that inorganically.
Which one? Sorry.
Your comment about being over-indexed U.S., I just wonder commercially, does that mean therefore that you're under-indexed Europe, and whether you can address that maybe through acquisitions?
Let me try and answer. I understand the question, actually. My comment was the fact that we are, as a %, probably because once again, we are not tracking the percentage of our sales by vertical. As a percentage of our sales, 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 a long story short, we are number one in intelligent PDU in the U.S., for example, which is a product specifically dedicated for white space in data centers. If your question is, will we continue to look at potential acquisitions in the data center field? The answer is obviously yes. There are many geographies where we have ongoing contacts with potential companies that would be nice add-on to our data center plan of action.
Great, thank you. Thanks, Benoît.
Thank you. Next question from Graham Phillips, from Jefferies. 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 are perhaps some of the reasons why you're underperforming there, I'm sure your ambition 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. Perhaps you're not selling the right products. Is the ambition to outgrow the market? Do you need to make an acquisition there? That's my first question.
Well, I don't agree at all with your view that we are underperforming. You are talking about a distributor. Let's take bluntly the numbers. In France, because Rexel released their numbers this morning. In France, Rexel is increasing its sales by +2.9% in the first half. I'm taking the comparable measure to Legrand. At current number of days, we are not reporting the sales at constant number of days. If you take the same metrics as Legrand at current number of days, Legrand is reporting +2%, and Rexel is reporting +2.9%. Out of those 2.9%, Rexel in their press release, they indicate that they have a copper effect of +0.8%. Excluding copper, if my reading of the press release is correct, excluding copper, Rexel growth in France is +2.1%, and we are doing +2%.
On top of that, Rexel is publicly stating in their release that they are gaining market share. Looking at the numbers, I really don't see where you can come to the conclusion that we are underperforming the French market. Plus 2.1% gaining market share against plus 2%. It's about the same number. Obviously, we would love to do a lot more than that, and our ambition is to do more than that. That's the reason why we are putting in place a number of initiatives in France. We are launching Céliane with Netatmo. We are launching Juxi, which is an interesting new range of access user interfaces. We are opening showrooms. We are investing in digital and so on. We are putting in place all the pieces of the Legrand model so that we can do better than 2.
At the end, our performance also depends 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. 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 where I can tell that we 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 explanation. Do you think your pricing also benefited from copper then in the first or second quarter?
We are not buying any, marginally, some copper cable. That's why the comparison with our distributor excluding copper is important because copper cable, it can boost one way or the other, actually. Sometimes it's boosting, sometimes it's handicapping the performance of our distributors by half a point, one point, one point and a half. That's the reason why they are usually reporting their performance, including and excluding cables. We are selling almost no cable. That's the reason why we are trying to compare apple to apple, our performance versus our distributor's performance excluding cable. If your question is, do we have a pricing issue in France? The answer is no. We don't have any pricing issue in France.
Okay, thank you. Second question, really just the general outlook for building construction activity in Europe. You've sometimes pointed to some of the indicators, whether they be sentiment or otherwise. Also, the Ifo 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 Legrand 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 a long story short. As you do, we rely very much on input from external specialists. For example, it is true that this is part of the reasoning why we have emphasized the uncertainties. It is true that when reading the IMF report, the last IMF World Economic Outlook dated July the 16th, the IMF seems to be a bit more cautious on the months or quarters to come than it was a few months back. With words such as the expansion is becoming less even, risks to the outlook are mounting.
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 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 do that on a yearly basis, on a half yearly basis, it's a bit difficult. As you do, we rely on external sources.
Okay, thank you. 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%-3.5% CapEx and capitalized R&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 do you think you'll come in well below the 3%-3.5% level?
Antoine speaking. I will take this one. Maybe starting with figure, your point is correct. H1 2018 is low at 2.2% of sales versus last year, 2.6%. Now two things very important. The first one is that you have a usual seasonality between H1 and H2. Maybe you have in mind that being at 2.6% end of June 2017, we ended the year at 3.2%, it was not specific to 2017. This is again, the usual seasonality. CapEx always accelerates in the second half of the year. The second comment I will have is that depending on the year, you can have what we could call project phasing topic. In 2018, we consider that in the second half, we should see a number of initiatives in terms of new products, investments of productivity and such like that should come.
It's very difficult to give a clear prognostic on CapEx because it's not a day-to-day story. You can have a big topic in November or December or in Jan or Feb the year after. We see two things. First, an acceleration. Of course, no materialism as far as CapEx is concerned, again, because we intend to continue to be very active on new products and productivity. There is no reason for being on a long-term basis above or below the range of 3%-2.5% you were quoting. It's not easy answer, and I'm not sure you will be fully satisfied with this answer, but I cannot tell you it will be 3.4, 2.5, 2.6 or 2.2 for this year. At this stage, it's difficult to 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 strong program in terms of new product. This is what has been explained by Benoît, and of course it will be reflected in our CapEx in the quarters to come. Will it be Q3, Q4 or next year? Time will tell.
Okay, thanks very much for the explanation.
Thank you.
Thank you. Before going to the next question, let me remind you that if you wish to ask a question, you have to press zero and one on your telephone keypad. We have a new question from Ji Cheong from Citi. Sir, please go ahead.
Hi, Ji Cheong 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 Europe. I think you mentioned Eastern Europe and Turkey. Can you elaborate what the details are for this? Is this impact just within the second quarter or throughout the first half? Also you mentioned that ex one-offs, the rest of Europe should be running more at 5%-6% growth. Is this for the first half comparison or for the second quarter comparison? Thank you.
Well, 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 a sale. It's a mix. You don't have one single element.
It's a mix of elements. Some of them could have an adverse impact on H2, even though it's difficult to quantify. As explained for Italy, when you have some inventory buildup in a given country, sometimes the time the sellout is implemented or is done, you may have some adverse impact on your sales on a given quarter. Yes, we think that part of that could have an adverse impact on H2, even though it's difficult to quantify. Even though the total performance for rest of Europe will remain very good in 2018. Second, the comment on the 5%-6%, which is an estimate, it's not a hard number, of course, is for H1.
The feeling we have when talking to our teams locally is that, the exercise is always difficult to do, when you get rid of those one-off, the pace of growth we are having is probably 5%-6%. It's probably, let's say, half what we have shown in the first half. I wouldn't like this message on the one-off to, let's say, hide 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 excellence, reshuffle of some commercial organization locally. I'm thinking of Turkey, for example. Leverage on the acquisitions that were made. The growth is really sound, solid, and coming from fundamental reasons, but it was a bit exceptionally boosted. That's my point.
To make a long story short, this 5%-6% comment was, let's say, for the first half of the year, not specifically for Q2.
Thank you very much.
We already made actually the same comment when we released our Q1 number.
Great. Thank you very much.
Thank you. We do not have any more questions for the moment. Ladies and gentlemen, if you wish to ask a question, please press zero and one on your telephone keypad. We have a new question from Andre Kukhnin from Credit Suisse. Sir, please go ahead.
Yes, hello again. Thanks very 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. We were sort of on and off, unfortunately. Can I just confirm, you said the pricing was up 1.3% in H1. Is that right? Secondly, was that offsetting the raw material impact fully or not?
No, it is 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.
No, no.
If you could clarify, that'd be great. Thank you.
No problem. Yes, selling price increase was 1.3% for the first semester. In front of that, the increase in raw material and components was 2.7%. What we say is that in Axolute terms, in Euro terms, if I can say so, it demonstrates a good coverage. It means that in Axolute 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 and component inflation. Good coverage in Axolute value. When you have 1.3% on the top line and 2.7% on the COGS, you don't cover in relative terms or in margin. This is not new.
This is something we have explained for last year, also in 2010, 2011, is that when the inflation accelerating to two, three, four, maybe more than that, we manage this inflation through a, I would call it a coverage in Axolute Euro or in value. When the inflation is low or even down, in that case, we have, of course, a coverage in value, but also in terms of margin.
That's very clear. Thank you very much.
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 zero and one on your telephone keypad. We don't have any questions. Back to you for the conclusions.
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 François Poisson or Antoine Burel and myself. We'll be happy to get you into more details. Thank you very much. Happy holidays for those of you who will go on holidays in a few days, and see you in the months to come. Thank you.