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Edited Transcript of LR.PA earnings conference call or presentation 30-Jul-19 6:30am GMT

Half Year 2019 Legrand SA Earnings Call

Limoges Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Legrand SA earnings conference call or presentation Tuesday, July 30, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Benoît Coquart

Legrand SA - CEO

* Franck Lemery

Legrand SA - Executive VP & CFO

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Conference Call Participants

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* Andreas P. Willi

JP Morgan Chase & Co, Research Division - Head of the European Capital Goods

* Daniela C. R. de Carvalho e Costa

Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team

* Gael de-Bray

Deutsche Bank AG, Research Division - Head of European Capital Goods Research

* Graham Phillips

Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* Sébastien Gruter

Redburn (Europe) Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to today's Legrand 2019 First Half Year Results Conference Call. (Operator Instructions). For your information, this conference is being recorded.

At this time, I would like to hand the call over to CEO, Mr. Benoît Coquart; and CFO, Mr. Franck Lemery. Sir, please go ahead.

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Benoît Coquart, Legrand SA - CEO [2]

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Thank you. Hello, everybody. Franck Lemery, Francois Poisson and myself are happy to welcome you to the Legrand 2019 First Half Results Conference Call.

Let me first remind you that we have published today a press release, our financial statements and a slide show to which we will refer. Those documents, as usual, are available on the Legrand website.

Please note that this conference call is recorded and webcasted on our website. So let me start first with a few opening remarks, following which, Franck and I will comment into more details our 2019 first half results.

I will start on Page 4 with the 3 main takeaways from today's release. First, Legrand reports today solid first half performance, with all main financial KPIs on the rise compared to H1 2018. Total growth in sales was plus 8%. Adjusted operating profit increased plus 6%. Net profit attributable to group was up plus 6.5% and normalized free cash flow grew plus 10%.

Second takeaway, we have actively pursued our initiatives to develop our positions and optimize operating performances. Innovation momentum is indeed very good, with a robust flow of new products since the beginning of the year, including, of course, connected offerings.

On the M&A front, we have acquired a leading position in busways for data centers in the U.S. and the docking of recent acquisitions is well on track.

Talking now about digital acceleration, we have set ourselves ambitious new targets for Eliot that were presented and discussed during our Investor Day on June 12.

Lastly, and you know this is a key feature of the Legrand model. We actively continue to launch operating initiatives aimed at optimizing purchasing industrial footprint, R&D, SG&A and so on and so forth.

And lastly, based on first half 2019 achievements Legrand confirmed today its targets for 2019. I will come back to this point later in this call.

After this brief introduction, let's start with another view of sales on Page 6. So as I said, total sales rose plus 8% in the first half of 2019. This good showing comes first from a plus 2.2% organic growth. Legrand's first growth driver. All 3 geographical zones are on the rise like-for-like in H1. More specifically, organic growth in Q2 alone stood at plus 1.5% as it has been impacted by basis for comparison and seasonal effect between Q1 and Q2, notably in India. The underlying organic growth in sales remained almost stable over the course of H1 at about plus 2%.

Over 2 years, organic growth came to plus 7.5% in H1 2019 versus H1 2017, the 2-year trend that was consistent between Q1 and Q2. Acquisition-driven growth, which is the group's second growth driver contributed plus 3.5% in H1 2019 and should contribute based on acquisitions completed in 2018 and 2019 to around plus 5% in full year 2019.

Lastly, ForEx impact was favorable at plus 2.2% for the semester. Now if we apply to the second half of the year, the average ForEx rates observed in June 2019, then annual ForEx effect for 2019 would be around plus 1.5%. This is, of course, and as usual, a theoretical computation.

Let me now go into more details regarding the like-for-like evolution of sales by reporting segment. Please refer to Page 7 to 9 of the slide show. Starting with Europe. Organic growth in sales was plus 2.3% in the first half of 2019, showing overall similar trends in Q1 and Q2.

In Europe, major countries grew plus 2.4% in H1 driven by good showings in Italy, Germany, Belgium as well as Southern Europe. In France, increasing sales in the second quarter driven in particular by the launch of new products, compensated for the retreat in sales in Q1. Organic growth in France in H1 was first flat. In Europe and new economies, organic growth in sales stood at plus 2% in H1 2019, fueled by sustained growth in Eastern Europe. More specifically, sales in Europe and new economies retreated in Q2 alone, due to a steep decline in sales in Turkey, that comes as announced for a particularly high basis of comparison.

Let me now move to North and Central America, where sales were up plus 2.3% on a like-for-like basis in H1. Sales trend in Q2 remaining almost in line with the one of Q1. This increase was showed by the United States, where sales grew plus 3% in H1 2019, with good showing from cable management, user interfaces and IT management. Revenues were down like-for-like in Mexico and Canada compared with H1 2018.

Let me now move to the Rest of the World where sales rose plus 1.6% on a like-for-like basis. In Asia Pacific, sales were up plus 1.9% driven by good showings in China as well as in India. However, whilst business trends didn't change between Q1 and Q2, sales in India declined in the second quarter alone, due to a very demanding basis of comparison. Organic growth in sales in Latin America was up plus 3.3%, thanks to rising revenues in Brazil and Peru, which offset the decrease in sales in Colombia. In Africa and Middle East, sales retreated organically, minus 1.6% in H1 2019. In the Middle East, where business is facing a sluggish economic environment, sales dropped sharply. In Africa, many countries such as Egypt and Nigeria recorded sustained rise in sales over the course of the first half.

Let me now pass the mic to Franck for an overview of our financial performance.

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Franck Lemery, Legrand SA - Executive VP & CFO [3]

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Thank you, Benoît. Good morning to all of you.

Let's start with profitability on Page 10. As said by Benoît, H1 2019 adjusted operating profit was plus 6.0% to reach EUR 663 million. Moving to Page 11. H1 2019 adjusted operating margin before acquisition, meaning a 2018 scope of consolidation came to 20.9%. Adjusted operating margin before acquisition was stable compared with the adjusted operating margin recorded in the first half of 2018. The good control of administrative and commercial costs over the course of H1, compensated for the decline in gross margin declined mainly due to the rise in raw material and component prices, including U.S. tariff impact.

Talking about tariffs, the rise in U.S. custom duties was fully offset by ongoing pricing and adaptation initiatives. Including the 0.4 points [deletion] from acquisitions, adjusted operating margin came to 20.5%.

Two side comments here. First, on the quarterly performance. As you know, Q1 adjusted operating margin before acquisition was down minus 30 basis points versus Q1 2018, recording flat margin in H1, means that Q2 adjusted operating margin before acquisition was up plus 30 bps versus Q2 2018. This was achieved, thanks to good management of pricing in a context of almost flat raw material and component prices, excluding U.S. tariff impact and by good control of SG&A. Second comment on the impact of acquisition of adjusted operating gross margin. Taking into account the acquisitions completed in 2018 and 2019, the dilution from acquisition of adjusted operating margin should be as announced early Feb, around minus 0.4 points for the full year 2019.

Moving now to the net profit attributable to the group on Page 12. It was up plus 6.5% from the first half of 2018. This good growth resulted mainly from the increase in the operating profit and a 2-point decrease in tax rate, that were especially compensated by higher financial and FX results. Financial charges ended mechanically increased close to EUR 5 million in H1 2019, due to the implementation on the IFRS 16 from Jan 1.

Moving to the last feature of our financial performance, with cash generation on Page 13. As you know, the recent reading of free cash flow generation on the quarter on the semester is on a normalized basis. You can see on the right-hand side of the slide, that normalized free cash flow was up plus 10% in the first half of 2019.

Additionally, on the left-hand side, you can see, first, net cash flow from generation remained very solid at 18.2% of sales; second, that working capital requirement remained under control but was a bit affected by the impact of the recent acquisitions; and third, that free cash flow stood at a solid 11.6% of sales.

These were the key topics of Legrand's 2019 first half performance, I wanted to share with you.

I now give the mic back to Benoît.

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Benoît Coquart, Legrand SA - CEO [4]

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Thank you, Franck.

Let's move now to the second part of this deck. On Page 15, with Legrand's ongoing initiatives for development and operational optimization with 4 main topics: Innovation, acquisition-driven growth, new Eliot targets and performance reinforcement.

As you can see on Page 16 and 17, we kept on actively innovating with several new product launches, covering many of our product categories and including connected offerings from our Eliot product.

You can see, of course, user interface solutions and notably Valena Next connected range [considering we'd had that move] for Belgium and Spain, but also Mosaic in France, Lyncus in India and many others.

We also remain quite active in UPS systems, architectural lighting, energy distribution, connected emergency lighting that we presented at our last Investor Day, new connected door entry system, connected innovative solutions assisted-living alarms and in digital infrastructures, which, as you know, is a key enabler for IoT.

Local solutions are well-known from their reliability, quality, innovative design. And as you can see on Page 18, won many awards in the first half of the year.

Moving now to Page 19. As you know, in April, we completed the acquisition of Universal Electric Corporation, the undisputed #1 in the U.S. for busways for data centers. This move will ideally rolled out Legrand frontrunner positions in data centers in the U.S. More generally, talking of recent acquisitions are well on track and acquisitions are performing overall in line with our road map and have reported encouraging results.

Focusing on Netatmo, and as explained at our June ID, we will lever on Netatmo's expertise user experience, artificial intelligence and software integration into products to accelerate our Eliot program. We have first added Page 20 and 21 as a reader digest of Legrand plan to accelerate its digital offering, we presented on June 12.

Finally, on Page 22, a reminder of one of the key features of the Legrand model, i.e., the ability of the Legrand team to constantly work on initiatives to strengthen operating performance. This goes through, first, the active rollout of the Legrand Way program to new industrial and logistics sites, but also to R&D and product marketing organizations.

Second, we launch every year initiatives to optimize group's industrial footprint. Such initiatives have already been implemented this year in Spain, Turkey, Russia, China and Saudi Arabia, and relate mainly to plant closures.

Coming now on Page 24 to the last topic of this earnings release, i.e., our targets for the full year. Based on its 2019 first half achievements. Legrand confirms its 2019 target for organic growth in sales of between 0% and plus 4%, and its 2019 target for adjusted operating margin before acquisitions, i.e., at 2018 scope of consolidation, of between 19.9% and 20.7% of sales. Legrand will also pursue a strategy of value-creating acquisitions.

Francois, Franck and myself are now available to answer your questions. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions). We have a first question from Gael de-Bray from Deutsche Bank.

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Gael de-Bray, Deutsche Bank AG, Research Division - Head of European Capital Goods Research [2]

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The first question I have is, I mean, you mentioned specifically that Legrand will continue to strengthen its positions in data centers, I guess, you're referring to Universal. But beyond this, perhaps, could you elaborate on how you intend to further reinforce your position? I mean the question I have is, can you be really credible in the U.S. when dealing with large data centers, in particular, without having any positions in protection devices and on your small one in UPS? So that's question number one.

Question number 2 is about the difficult comps you're mentioning in Turkey and India. And apparently, you sort of suggested that it could be a one-off, obviously, but that would be great if you could give us a bit of granularity in terms of quarterly organic growth in those 2 markets, starting in Q1 '18, so that we can understand a bit better what's going to happen in the second half of 2019.

And then the third question I have is on the free cash flow performance, which was obviously very strong in the first half of the year, and in particular, in Q2. Perhaps, could you give us some indication on, in particular, the impact of IFRS 16 on this free cash flow performance.

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Benoît Coquart, Legrand SA - CEO [3]

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So I will start with your first question on data center. Well, I will not do again the IT story, but clearly, we have a clear road map to keep growing on data center, which is articulated around many topics. Further acquisitions, we have a number of ideas that could potentially reinforce our positions. Organic growth, of course. Optimization of operations, innovation and so on and so forth.

Now going specifically to your question. I think you have to differentiate what we call the gray space and the white space. So the gray space is really the technical part of the data centers, the building part of the data center, if I may say. And that's where you have a number of products such as a switchgear, such as a power busbar for example, such as transformers, such as power UPS and so on and so forth.

It is true, indeed, that in the U.S., we are not active in the gray space, we are elsewhere. We are, for example, a contender in this space in Europe, where we have the large switchgear offering and good market position, but we are not in the U.S., where we have no switchgear offering. In the U.S., we focus specifically on what we call the white space, i.e., the space where you have the servers and in this space, we have very real leader market positions. We are a market leader in PDUs, following the acquisition of Raritan and Server Tech.

We are a very important key contender in racks and cabinets. We are now a market leader with Universal Electric on busway for data centers. So yes, in the U.S., our positioning is a bit specific in data center because we are, of course, a player in structured cabling, plus copper and fiber. So in the U.S., our positioning in data center is a bit specific because we are focusing on the white space. And by the way, of course, it depends on the quarter, and it depends on the product family but for example, Universal Electric is recording a very good growth in 2019, and is able to secure a lot of the -- what we call the Super Eight projects. So we don't believe that we have any competitive issue in data center in the U.S. It's the exact opposite. We have strong leadership, or a very interesting challenging position, which should give us a good basis to grow in the coming years.

Let's move now to Turkey and India. I think we have a different situation between the 2 geographies. In Turkey, clearly, the economy is extremely supportive, extremely strong until, let's say, the summer 2018, where you first had a currency crisis and then the economic crisis and the second half of the year was a lot more difficult, and everybody expected 2019 to be tough, both because of this for comparison of 2018 were strong, but more importantly because Turkey is a difficult economic environment.

To give you a flavor of our performance in 2018, our H1 gross in Turkey was very sustained. It was even above 50%, let me say. So the basis for comparison was tough. And on top of that, Turkey entered into a very difficult economic crisis starting in H2 2018.

So sales evolution in Turkey in H1 is very negative, and it's not a surprise, having in mind those effects, i.e., the base for comparison of H1 and the economic environment.

As far as India is concerned, it's very different. It's a pure technical effect. We think that India is a very good and very supportive market, the performance in India for H1 was nice. It's a high single-digit growth in sales, but clearly, Q1 2018 was slightly down.

Q2 2018 was strongly up by more than 20% and as a result of -- as a result, there is obviously a different basis for comparison between Q1 and Q2 2019. Q1 base comparison being a lot more easier than Q2.

So you have to differentiate the 2 situations, if I may say, Turkey, very demanding basis for comparison and difficult economy, difficult market in 2019.

India. It was a very positive market last year, it was a positive market in H1. We believe that it will be a positive market over the full of 2019, but there is just a technical effect between Q1 and Q2, Q2 being a [demanding] basis for comparison.

Well, as far as the free cash flow performance is concerned, the impact of IFRS 16 on the ratio of free cash flow to sales was plus 100 bps. So you have, let me say, to discount it by 100 bps to have it without the IFRS 16 impact.

Well, I think the normalized free cash flow as a percentage of sales is good, has been consistent over the semester is at a good level and growing 10%. As far as the nonadjusted free cash flow to sales. Well, of course, the growth is very impressive, plus [50%]. But as we said many times, the right metrics for Legrand is more than normalized free cash flow to sales, because on a quarterly basis, working capital requirements may vary very significantly.

One way of user depending on technical topic. So for example, in Q1, where the free cash flow non-normalized was, let's say, quite low, the change in working capital had a very negative impact. And it came from a temporary rise in nonoperating working capital in relation mainly to tax.

And in Q2, we had the opposite effect, plus a number of [controllable variable] effect. So I really encourage you to look at the normalized free cash flow, which, again, is very healthy on H1, and very healthy in Q2 rather than the non-normalized free cash flow.

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Operator [4]

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Next question from Andreas Willi from JPMorgan.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [5]

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I've got a couple of questions related to top line growth. Maybe you could talk a bit more about the U.S., you had 3% growth there in the first half overall. What you see in the specific submarkets in terms of the lighting business milestone, data centers and the rest. Obviously, looking at it from a headline basis, if we adjust for some pretty good price increases you probably had, it seems like the volume business in the U.S. isn't really growing much at the current point?

And secondly, just from a bigger picture view, you had -- the company overall had 2% organic growth in the first half. Maybe you could break that down into volume and price. It looks like volume is relatively flattish. Which businesses are negative in terms of volume growth, given that you should have, as you said, very strong growth in data centers, you should have a good growth in the connected products, what is -- what businesses [other] maybe than the specifics you just highlighted on Turkey and so on, are negative in the first half?

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Benoît Coquart, Legrand SA - CEO [6]

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Okay. Andreas, so in the U.S., you rightly said that the top line growth over the semester was plus 3% which, by the way, when we compare ourself with what the other retail distributors have released -- what the professional distributors have released and what a number of our U.S. peers have released, is in line with the market growth. So we see -- and we already made this same comment in Q1, we see the U.S. market growing more or less at the same pace as a GDP growth.

And well, as usual, it's a mix of -- it's a mixed bag. So we are not reporting Milestone as a separate segment because, as you know, we merged Milestone into a bigger AV division in the U.S., where the AV division has been slightly growing, but on tough comps, because remember last year, the AV performance was very strong. Lighting controls and lighting overall I think futures -- it's overall quite good and growing nicely.

For data center, it's a mixed bag because Universal is growing very fast, as we said, but it's not consolidated. I mean it's part of the perimeter impact. And as far as the other data center positions, we have a difficult comp on the quarter because we had very big projects last year. And one data center project can easily be $3 million, $4 million, $5 million, $6 million so it makes a difficult comp. So it's clearly a mixed bag, we have different businesses there. But my point is that with a 3% growth in the U.S., we believe, and it is supported by what many companies have released as numbers. We believe we are well in line with the market growth. Also, more, as I remind you that we have, again, for LNCA, so for North and Central America, a difficult basis for comparison. Q2 was up 5.8% last year. So over 2 years, Legrand North and Central America is -- so not only the U.S. but also Mexico and Canada, is up more than 8%. So it's quite a good performance.

As far as the split between volume and price. Let me find the numbers. So we have a price impact of plus 2.3% in Q2, which is very much in line with what we had in Q1 because for the full semester is -- so it's up plus 2.3%.

Now (inaudible) -- so you're right to say that the volume was quite -- was flattish. Well you could see in the press release that we have unfortunately a number of areas where our sales are going down. This is the case in Turkey, of course, this is the case in Canada. This is the case in Mexico. This is the case in Middle East. And again, even if Middle East is only 2% of our sales. It's 10% of the Rest of the World IR, and it's down very significantly. So it impact negatively our top line, it should be a surprise for you because everybody knows that the Middle East is not doing very well.

Well, in Q2, India, for the reasons we explained, is also down. And we have a couple of other geographies. So clearly, shouldn't be a surprise for you, there are a number of spots which are a bit more difficult than others. But overall to answer your question, plus 2.3% price impact in Q2 and plus 2.3% price impact in H1. So overall, a quite consistent price over the full semester.

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Operator [7]

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The next question from Lucie Anne Carrier from Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [8]

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The first question I have is one more in terms of how should we think about the business into the second half in 2020. So basically, we have seen a certain number of leading indicators in various country actually decelerating, if I think, for example, ABI Index in the U.S. or some others here in Europe. What do you see typically as the delay or the correlation of your businesses versus those leading indicators. Are we looking at a 6 month delay? Is it longer? Or do you think that, generally speaking, they don't reflect well the trend in your business?

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Benoît Coquart, Legrand SA - CEO [9]

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Also, (foreign language), well, unfortunately, I would love to have a set of leading indicators, which could help us to forecast what our markets and ourselves, will do in the coming months and quarters. But none of them are relevant enough or tie enough with our market growth to be good leading indicators. So I wouldn't take any of those as indication of what our markets will do in the coming quarters.

Well, as far as 2019 is concerned, you can see that with 2.2% growth we are close to the middle of our guidance. We reiterated this morning, our guidance of 0% to plus 4%, and we are confident in our ability to meet our guidance, of course. But as we said last quarter, and as we said 2 quarters ago, we are in a world where there are a lot of uncertainties.

So the U.S. and China disputes continue, and I remind you that we always have this tariff topic which is significant for Legrand and $50 million, approximately $50 million of additional costs in 2019 compared to 2018. So it's very significant.

We have a number of DACH spots, such as Turkey, for example, and a few -- and a few others. And we have overall uncertainties, uncertainty connected to the Brexit in October, uncertainty coming to some of the leading indicators you mentioned.

So we believe that in the first half, the economy was obviously less supportive than in 2018. This is a fact.

We still see in front of us a number of uncertainties. But in this context, we reiterated our guidance this morning. As far as 2020 is concerned, it's, of course, far too early to give any guidance. We have not yet started our budget process, it will start in September.

And again, we have no visibility for the second half of 2019. And even less visibility for 2020. Well, you know with the Legrand business model our objective is not to forecast precisely, but it's to adapt whenever things are happening, and that's what we are doing, the geographies in which we suffer. Take, for example, Middle East, which, again, has been a difficult situation in the first half. We have initiated a plan, not only to boost the sales as much as possible, but also to preserve our profitability there with, for example, significant factory closure in Saudi.

So again, no clue on what the economy will be and will do in the second half of the year in 2020. But as always, the Legrand ability to adjust whenever there are negative things.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [10]

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My second question was a follow-up on the Andreas' question on pricing. Could you remind us maybe the sequencing of your price increase last year, also related to the tariff? I'm just curious to understand a bit better how the price carryover would work in the second half of '19 versus the first half '19?

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Benoît Coquart, Legrand SA - CEO [11]

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Well, don't forget that pricing is a very dynamic topic. So we have had significant price increase in Q4 in the U.S. to compare it with. [If you have --] you remember the 2018 sequence, as the tariff were first implemented in Q3 2018, especially in September, when we released our Q3 numbers, we said that there's always a lag effect between the time the tariff are implemented, and the time we do pricing. So this is the reason why the tariff negatively impacted Q3 2018. We reacted in Q4 and as early as Q4 2018, our pricing in the U.S. could compensate in value the rise in tariff in 2018. So significant price increases, if I may say, were implemented as early as Q4 in the U.S. And the result of that is that the -- at the group level, the Q4 pricing was plus 2.5%, and the full year pricing was 1.7%. So that's why you see to sort of the rise in pricing in Q4, coming mainly from the U.S.

Well, as far as pricing for H1 is concerned, as I said, it's plus 2.3% for H1, plus 2.3% for Q1, plus 2.3% for Q2. If we need more pricing in H2, as usual, we should have the ability to pass on prices.

One of the difference, if I may say, between Q1 and Q2 2018 is not coming from pricing. There's not much coming from tariff, but it's coming from raw material, and components. To give you maybe in interesting numbers. In H1, the inflation of raw materials and components was about 3.2% -- plus 3.2%, including 2.5 points coming from U.S. tariff. But if we assume on Q2 2019, only, the inflation of raw materials and components was about plus 2.1%, including 2.4 points of tariff.

So in other words, we've been able to have a consistent pricing throughout H1, same level of price increase between Q1 and Q2.

Even though we were helped a bit by the price of raw materials and components in Q2, which went slightly down, excluding the U.S. tariff. So it's -- I think, again, the demonstration of the Legrand model, which is able to sustain a healthy level of pricing even in context where raw material prices and components are not sharply going up.

Does it address your question Lucie? It's a long answer but...

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [12]

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Yes, it does, thank you very much. And just my last question, if you just comment maybe qualitatively on the development of the connected sales in Netatmo in the quarter, please?

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Benoît Coquart, Legrand SA - CEO [13]

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Well, as far as the total Eliot sales. I remind you briefly the story. Eliot, it's not the reporting segment. Eliot, it's an additional layer of added value that we put on many different products. So we report it on a yearly basis, not on a high pure basis, on a quarterly basis. So we will give you full details on the full year comments.

And as far as Netatmo is concerned, it's a little bit easier because it's a reporting segment, if I may say. So Netatmo is completely in line with its road map, I remind you, the 3 objectives we had with Netatmo. Number one, sustain very high top line growth. And it does in H1. So the growth rate in top line is consistent with historical growth rate, which is good.

Number two, progressively move to high single-digit profitability as far as adjusted operating income is concerned. And over 6 months has put us in line with this target.

And number three, contribution of Netatmo to the Eliot road map, well it's a bit early because Netatmo is only 6 months into Legrand. But as you could see, at Investor Day, there are many plans to make the most of the debt move assets and expertise.

So as far as the net debt we're talking is concerned, it's completely in line with our plan.

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Operator [14]

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Next question from Sébastien Gruter from Redburn.

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [15]

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Just a follow-up on Lucie's question, about Netatmo. If you think it's still growing in line with the historical trend, does it not explain all the organic growth you had in France in Q2, given the inclusion of Netatmo.

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Benoît Coquart, Legrand SA - CEO [16]

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Well, no -- I mean, Netatmo, it's mainly perimeter impact and it's a small -- don't forget that only a very small part of Netatmo is -- sales are made in France and Netatmo is a European company, with majority of sales outside of France, Germany, Italy, U.K., and a few other geographies. So the percentage of sales made in France by Netatmo is a minority percentage of sales.

So the explanation behind the small growth in France in Q2, is coming mainly from the fact that we have launched, good and interesting products, mainly two. Number one, a range of connected emergency lighting LEDs. Number two, a new range of foreign devices or user interfaces, named Mosaic.

And I think it explained part of the good performance in Q2 in France. As far as the sellout that we had in France. And at Legrand, we look same level as the sellout as the sell-in. The sellout are slightly up in France over the semester in line with the market growth.

So if we look at the federation of [for sellers] and what the number of our peers and competitors and distributors affiliate. The French market is probably only slightly up, and are set out, excluding Netatmo are also slightly up. So to answer your question, no, performance in Q2 was mainly coming from Legrand owned strength, if I may say, especially the launch of new products.

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [17]

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And I have a follow-up on the guidance and the outlook for H2. I understand you don't have any backlogs, but when you [sourced the batch of Beachhead] and the phasing, of course, in H1 versus H2? And given comps and the calendar effects in the year, were you expecting H1 to be lower than H2? And is it in line with what you expected when you did your budget 6 months ago?

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Benoît Coquart, Legrand SA - CEO [18]

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Well, when we are doing our budget. Again, our main objective is not to forecast precisely our monthly or quarterly sales. Because it's an exercise which is extremely difficult to do at Legrand. Probably more difficult at Legrand than in many other companies. So again, our priority is to react to events not only in bottom line, but also in top line as when we see our geography, where we feel we have the potential to accelerate because the market is supportive, and we have potentially good products to sell, then we put additional resources and have tried to push the sales in the other way.

So again, our performance in H1, this plus 2.2%, is very much in the middle of our guidance. So as a result, you could assume that it's not a big surprise to us, and again, we've seen that for the full of 2019, we rated our guidance. So we -- as a result, it should be between 0% and plus 4%.

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [19]

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Would you say comps get easier as we go through the second half. We know France was very weak in Q3 '18, but in other geographical areas, do you think the comps are getting easier?

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Benoît Coquart, Legrand SA - CEO [20]

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Well not necessarily. I mean it is true that Q3 has a slightly easier comp, but this is the other way for Q4, which has also demanding comp.

And many other things and constant good player. I think what will make Legrand performance in -- as far as top line is concerned in 2019 is not much comp, which can impact one quarter or the other, but not completely the full year, but it's rather the economy and our ability to perform better.

So I will not take for granted that we will be -- we'll have a lot easier comp in '20 -- in second half. This is true for Q3 as part of pricing concern, it's not true for Q4. And as far as results are concerned, same comment, yes, Q3 optically is an easier comp for profit. Well at the same time, you have many things that could come into play, for example, as far as the U.S. ties are concerned, it's the most demanding quarter, Q3 2019, because we have the full of List 1, List 2, List 3 tariff including the List 3 at 25%, and it compares with the Q3 of 2018, where you had tariff part of it only starting September.

So even though we -- optically, we have easier comps for Q3. The tariff is -- it would be a demanding quarter as far the tariffs are concerned. And as far as Q4 is concerned, it's a more demanding comp for top line and for bottom line. So again, we can hardly commit to a quarterly performance. This is what I've been consistently telling you for a couple of quarters now. Our commitment vis-a-vis our shareholders, is on a yearly basis and both for top and for bottom line, we confirm this morning (inaudible).

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Operator [21]

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Next question from [Alasdair Markel] from Societe Generale.

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Unidentified Analyst, [22]

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I was just wondering if you could expand a bit more on France. I'm just wondering if you're maybe a bit more optimistic now compared certainly with the start of the year. And perhaps maybe you can update us on what you're seeing on the ground, obviously, through Q2 in different areas, obviously res, nonres, new build and renovation, et cetera.

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Benoît Coquart, Legrand SA - CEO [23]

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Well, I wouldn't say that I'm a lot more optimistic for France, and for a couple of quarters or a couple of semesters, we've been qualifying the French market as being lackluster, i.e., flat plus. Even though if for Legrand from one quarter to another it can be either positively or negatively impacted by destocking or restocking. But as far as the market itself is concerned, it has been only flat plus and well cross fingers, but I don't really see what would be the triggers for a much better market going forward.

The GDP numbers for France are not very high, they were downgraded a few weeks back by the monetary fund.

We still have a renovation market, which is not very, very supportive. It is true that we have verticals which are going fast. Take, for example, HVAC. Well, we are not part of this market, and we are not selling new HVAC products. But as far as the main market itself is concerned, both [resi, nonresi], and especially in the renovation part, it remains extremely stable, with no obvious triggers for the market to improve.

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Unidentified Analyst, [24]

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Very helpful. I was just wondering as well, if you could just update us on the rollout strategy for connected user interface. So it seems like that's created a lot of momentum in Italy. I was just wondering, you've obviously got strong positions there. But maybe you could talk about the traction you're seeing in other launch countries. I think Germany was one of those, maybe you can talk about what's happening there, perhaps where your positioning isn't as strong as in Italy.

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Benoît Coquart, Legrand SA - CEO [25]

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Yes. Well, the good performance in Italy, which, indeed, continued in Q2 and H1, overall did a good performance in Italy. As you remember, was also good in 2018. Well, it's not only coming from connected or in devices. It's coming from, let's say, a couple of things that overall the market, which is okay. So not as depressed as the GDP numbers would suggest.

Typically, the Italian market is going a bit faster than the French market, for example, which is not common sense because the GDP numbers are better in France and Italy. But as far as our market is concerned, it's growing slightly better in Italy than in France. So a bit more supportive Italian market.

Number two, a number of product launches, well, including on nonconnected wiring devices. The Living Now range, which was launched last year and which is indeed doing very well, has a large nonconnected piece and it's replacing 3 ranges that we had in Italy, namely Living, light and [Absolute]. So the connected piece is doing well, but also the nonconnected piece is doing well. And for example, we have a record high percentage of high-end finishes for a higher-end range being sold.

And number three, on top of that, we have sort of support of other product launches, such as, for example, the connected doorbell or the connected thermostat. So I wouldn't say that the connected wearing devices or connected user interface range only is responsible for the good growth in Italy.

Well, as far as the rollout is concerned, as we presented at the last Investor Day, we launched those connected user interfaces in 4 countries in 2018. France, Italy, Greece, China. And we had a rollout plan of more than [30] countries in 2019 all over the year. And it's mainly in Europe with Valena Next, so we are launching in Germany, in Russia, in Spain, in a number of other countries.

Well, will it help supporting our performance in those countries? Yes, but again, in many of those countries, we don't have the same position we have in Italy. And again, the performance will more depend on the economy and how supportive our markets are rather than only on those launches.

So yes, it will be super for our business. But don't expect it to boost significantly sales on a given quarter. What will really matter in H2 is how supportive is the economy.

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Operator [26]

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We don't have any more question for the moment. (Operator Instructions). We have a new question from Daniela Costa from Goldman Sachs.

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Daniela C. R. de Carvalho e Costa, Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team [27]

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It's very quick final question. I guess it was about -- it's almost about a year ago, since we've heard about the French antitrust organization, picking up documents in a few players. I was wondering if there have been any other conversations back and forth? Or when do you think we should expect a resolution of that matter?

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Benoît Coquart, Legrand SA - CEO [28]

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Daniela, well -- we as you remember, we released a press release in September 2018, where we confirmed a number of things. Obviously, we're not able to comment on investigation. And at this stage, we have no information about further procedure on this topic.

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Operator [29]

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We don't have any question for the moment. (Operator Instructions). We have a new question from Sébastien Gruter from Redburn.

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [30]

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A final question on the raw material, if we exclude the U.S. tariffs, slightly down in the quarter. I believe you have some visibility about what could happen in the next 6 months, not talking about the material price, but what you have in your inventories and maybe secure with your suppliers. Or should that develop going into Q3 and Q4, this raw material and component impact ex-U. S. tariff?

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Benoît Coquart, Legrand SA - CEO [31]

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We have very little visibility because we don't have, as you know, a huge stock of raw materials. We don't have a long-term contract where we secure prices. So -- and on top of that, it depends a lot on the exchange rate. Because, for example, one of the reason why price of raw material and components went slightly down for Legrand in Q2, so part of it is coming from the fact that some raw material prices went down in copper, silver, lead and a few others, for example. But it also came from the exchange rate between euro and U.S. dollar.

So no, we have very little visibility. And again, as for the economic environment, the priority is to adapt. So we are constantly monitoring the difference between selling price and purchase price and adjusting purchase price, should we think that we need to compensate for an increase in raw material prices and components. So this is the way we manage the company, and we have to cope with this lack of visibility, well, it has been part of our model for years or decades and we will continue that. So no, unfortunately, no visibility

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Operator [32]

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Next question from Graham Phillips from Jefferies.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [33]

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Just a question on capital expenditure and capitalized development costs. I did see a bit of a tick up in the second quarter. Are you anticipating spending towards the high end of your guidance range for those 2 metrics? Or was this just a bit of an unusual quarter?

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Benoît Coquart, Legrand SA - CEO [34]

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No nothing specific happening in Q2, as far as both R&D and CapEx. And I would really encourage you to look at it on a yearly basis, not on a quarterly basis because it really depends on the phasing of projects. So you can have one quarter where we have -- where you have a big project to finance CapEx of around EUR 6 billion, EUR 7 billion, EUR 8 billion, which is -- which is going through the cash flow statement on the one given quarter. So on a yearly basis, we don't expect to move out of our range and post CapEx, R&D and noncapitalized or capitalized, are well under control. Nothing specific happening in Q2.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [35]

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Okay. But perhaps, just what was the big item? Where were you investing in CapEx, particularly in the second quarter that might have absorbed another EUR 7 million or EUR 8 million?

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Benoît Coquart, Legrand SA - CEO [36]

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Well, as usual, the big -- so there are many, many different projects. As usual, the big ticket item, if I may say, for CapEx, are new products. And on average, we have invested in H1 approximately half of our CapEx into new products. And this was more or less the same ratio in 2018. So this is the most substantial part of our CapEx.

On top of that, of course, we have a growing percentage of our CapEx dedicated to factory 4.0. I remind you that we said in February that we would, over time, and over a number of years dedicate up to 10% of our CapEx to factory 4.0 without changing the ratio of CapEx to sales, of course. And then we have also capacity, productivity and the usual topic. But the high profit is new products.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [37]

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Okay. So you're not expanding capacity anywhere? And particularly as a result of that investment in the quarter. And when you say Industry 4.0. So you're basically going back to all your factories globally and then just putting in more automation, more connections, connected products yourself or connected machines?

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Benoît Coquart, Legrand SA - CEO [38]

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Well, you know, we have, I think, [130] different factories worldwide. So yes, there are places where we increase the capacity, of course, because they are markets which are growing.

Now we are constantly optimizing our footprint, and that's what we put in our press release. And we have either closed or plan to close factories in Russia and in Beijing, so in China, in Turkey, in Saudi. So our footprint is not something which is not moving.

We have many initiatives underway. Number one, we have this factory for Brazil where we intend positively to rollout a number of techniques, automatic guided vehicle or data management and so on and so forth, to make our factories more efficient. And on top of that, we are optimizing our footprint. With no big move, let's say, from local to high cost -- I'm sorry, from high cost to low cost because a lot of those moves were made already years back, but it's more within geographical area within a cluster, where we believe we have still a number of optimization to be made.

You could notice, for example, that looking at the accounts that our [restructuring] charges were at a good level in H1. They are at EUR 13 million in H1. As far as restructuring charges are concerned, which is in the upper end of what we've been doing. I remind you that, on average, we've been spending (inaudible) from EUR 20 million to EUR 25 million per year and it's EUR 13 million in the first half.

So it means that we have a lot of plans to keep optimizing our footprint. And as a reminder, our restructuring charges are embedded into our adjusted operating income now. It's not -- it's part of it now.

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Operator [39]

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We don't have any more questions for the moment. (Operator Instructions). We have a new question from Andreas Willi from JPMorgan.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [40]

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Just wanted to follow up on 2 topics. First, on the operating leverage in Q2, which was much better than in Q1. Other than the help a bit from the raw materials, is there anything specific in Q2 versus Q1 that helped you in terms of the underlying year-on-year margin improvement?

And second question on cash flow and IFRS 16, you -- I think in your normalized free cash flow, you also include the benefit from the accounting change, which is a bit surprising given that the net accounting change shouldn't really benefit free cash flow or compensation linked to that. Maybe you could explain that. And it looks like the benefit is like EUR 65 million, EUR 70 million on an annualized basis to free cash flow from an accounting change. Why have you chosen to include that in normalized free cash flow?

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Benoît Coquart, Legrand SA - CEO [41]

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Well, so let's -- starting with the second question, yes impact, as I said, is 100 basis points positive on free cash flow over the semester and should be the same impact in the full year. Actually, we announced it in February. Well, we included in the normalized free cash flow, because we will not every year retreat the free cash flow to exclude it. And again, the normalized free cash flow is normalizing, only net working capital, our intention is not to normalize 10 things. We want to -- we want to be as close as possible to GAAP measures.

So it's only normalized to account for the fact that there could be quarterly changes in net working capital. Now whether we release our midterm model, we told you that we have as an objective to achieve normalized free cash flow to sales of between 13% to 14%. Obviously, the 100 bps coming -- positive impact coming from IFRS 16, as we said at that time was included into those numbers. So it shouldn't be a surprise. The fact that it's part of our mid-term model. The fact that it's 100 bps positive impact has been clearly communicated to everybody in February.

As far as Q2 performance is concerned, so actually, acquisitions, we have a rise of 30 bps. That's what Franck mentioned. And although in Q2 compared to Q2 of last year.

We have, to make long story short, flat gross margin which is a change compared to Q1. And this change is coming from the fact that we are able to achieve a flat gross margin is coming from the good control of pricing in the context where the price of raw material and components is going slightly down.

We have plus 60 bps coming from SG&A, so a good control of any such information expenses, which are almost flat; and minus 30 bps coming from other charges and expenses, mainly connected to some higher restructuring charges in relation to our industrial footprint optimization, all the countries I've mentioned, i.e., Saudi, China, Russia and a few others.

So to make -- in a nutshell, the good performance in Q2 is coming good pricing management and good control of G&A.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [42]

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Thank you. I mean the reason I ask on cash flow is just that an accounting change shouldn't really boost free cash flow and a lot of other companies have chosen to adjust their CapEx to remove the artificial benefit of IFRS 16.

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Benoît Coquart, Legrand SA - CEO [43]

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Well, we have discussed with our accounting experts and auditors, and we have followed their recommendation. So I understand that the company's accounting for the IFRS 16 in a different way. For example, we take it into -- as a part of the net debt. And so it's about EUR 300 million additional net debt that we have financed, some other companies don't. But from what I understand, our accounting treatment is very standard and in line with many other companies' practices. Actually, again, we basically don't really care, and we accounted it the way we were advised to account it by our auditors.

And we have a precise disclosure. And actually, I think we were amongst the first companies to precisely disclose as early as February, the impact IFRS 16 will have on our accounts, on EBIT, EBITDA, free cash flow, net debt and net income and so on and so forth.

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Operator [44]

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Thank you. We don't have any more question for the moment. (Operator Instructions). We don't have any more questions. Back to you for the conclusion, sir.

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Benoît Coquart, Legrand SA - CEO [45]

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Well, thank you very much for attending our call. I understand that you have another one starting soon. And as usual, if you have further questions when doing your analysis, please don't hesitate to contact Francois, Franck or myself. We are at your full disposal today. Thank you very much.

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Operator [46]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.