Legrand S.A.

Antoine Burel - Chief Financial Officer Francois Poisson - Investor Relations

Lucie Carrier - Morgan Stanley Gail Dubray - Deutsche Bank Andreas Willi - J.P. Morgan Alasdair Leslie - Societe Generale Martin Wilkie - Citi Andre Kukhnin - Credit Suisse Jonathan Monsey - Exane BNP Paribas William Mackie - Kepler Cheuvreux James Stettler - Barclays Dennis Dinkelmeyer - Goldman Sachs Graham Phillips - Jefferies

Thank you. Francois Poisson and myself are happy to welcome you to the LeGrand 2017 first quarter result conference call.

Let me first remind you that we have published today our press release, our financial statements and the slide show to which I will refer. Those documents are available on the LeGrand Web site.

Please note also that this conference call is recorded and webcasted on our Web site. Let me start with an executive summary following which, I will comment into more details our 2017 first quarter results and achievements.

I start on page 4 with three main takeaways for our first quarter, good achievement. First takeaway.

We have been continuing to deliver profitable growth. Indeed, group sales rose close to 11% in total.

And on a like for like basis, sales were up plus 4.6%, driven by all geographical regions. Compared with the first quarter of 2016, the adjusted operating profit was up plus 14.5% and the adjusted operating margin before acquisitions stood at 19.8%, up plus 70 bps.

Finally, net income, excluding minority interest, rose plus 17% in the first quarter of 2017. Mainly driven by good operating performance, we believe that these strong showings demonstrate our capacity to create value through profitable growth.

The second takeaway is about external growth, which continues to be active. You may remember that we have already announced this year the acquisition of OCL, $15 million of sales, U.S.

company. Today, we announced the two additional acquisitions in the U.S.

totaling $223 million of annual sales, as well as a joint venture with €60 million sales Italian company. And the third main takeaway of this release is that we confirm our 2017 targets.

After this brief introduction, let's start with an overview of the good sales of the first quarter on page 6. So as said, sales growth was strong at 10.9%, made of plus 4.6% from organic growth, plus 3.9% from acquisitions, and plus 2% from favorable ForEx.

Before getting into more details on organic growth, three other comments here on sales. The first one relates to organic growth.

All geographical regions are on the rise in Q1 2017, which is encouraging. Nevertheless, it is important to note that this good performance benefits from two tailwinds.

The first one is a favorable calendar effect estimated at plus 1.6 points. That should reverse for the rest of the year and more specifically, in the second quarter.

Second tailwind, in some countries Q1 sales benefited from orders placed in advance by distributors. This was triggered by the announcement by LeGrand of a rise in sales price in the second quarter in relation to the ongoing increase in raw material prices observed since the beginning of the year.

Please note that this second tailwind should mechanically reverse in the second quarter. And finally, on organic growth.

I remind you that the second and the third quarter of 2016 represent a high basis for comparison in the U.S. and in Italy.

My second comment relates to FX. Based on April average exchange rates applied to the last eight months of 2017, the full year ForEx impact on sales would be plus 1.8%.

And the third comment, the last one, is that based on acquisitions announced, the full year scope of consolidation would represent more than 3.5%. Let me now get into more details regarding the like for like evolution of sales by reporting segment, and please refer to page 7 and page 8 of the slide show.

Starting with France. Organic growth in sales came to plus 4.1% in the first quarter of 2017.

This good performance was helped by a one day favorable calendar effect. And this effect should be more than compensated in the rest of the year and in particular in the second quarter where calendar effect is estimated at minus two days.

As anticipated, new construction activity, which I remind you represents around 40% of our sales in France, is a supportive factor of the quarter's growth, while renovation business, about 60% of our sales in France, remains almost flat. Moving to Italy.

Like for like sales growth was plus 1.9%. This good performance was in particular driven by good showings in home systems, energy distribution and cable management.

I remind you that the second and the third quarter of 2016 represent demanding basis for comparison as they benefited from favorable one-offs related to the launch of our new connected door entry system and to some projects in energy distribution. This is for Italy and now moving to the rest of Europe.

Like for like sales growth was plus 8.8% from the first quarter of 2016. Mature countries as a whole recorded a double digit growth in the quarter, supported in particular by outstanding performances in Spain and in the U.K.

As a whole, new economies also reported robust drive in sales, and in particular, Russia recorded a solid performance over the period while sales in Turkey were nearly stable in the first quarter. Moving now to North and Central America, where sales rose plus 4% on an organic basis.

In the U.S. alone we report a healthy plus 3.5% organic growth, showing a continuation of a good trend in activity.

And as a reminder, the underlying trend of our relevant end markets in the U.S. was about plus 3% in 2016.

I also remind you that in the U.S., the calendar effect should be unfavorable for the rest of the year and that we will face a demanding basis for comparison in the second quarter and even more in the third one. In the rest of the region of North and Central America, let's quote Mexico, where LeGrand reported double digit like for like growth.

And let me now talk about rest of the world where sales rose plus 4% on a like for like basis. This good overall performance was in particular supported by a good start to the year in India and China.

It more than compensated for the decline in activity in other countries like Australia and Malaysia. Lastly, Middle East recorded a slight decrease over the period.

This is for sales and let me now comment on profitability on page 9 and page 10, where we compare Q1 2017 adjusted operating margin and Q1 2017 adjusted operating margin, but also operating profit on page 10. As you can see then on page 9, adjusted operating margin before acquisitions came to 19.8%, up 70 bps on Q1 2016.

This 70 bps improvement is a result of an ongoing good operating performance in the context of overall rising sales. And including acquisitions, the adjusted operating margin came to 19.7%.

On page 10, talking now about value. Adjusted operating profit came to €259 million, i.e., up 14.5%.

This represents an increase of €33 million, reflecting LeGrand's capacity to create value through profitable growth. Consistently with our model, by reacting quickly to adjust sales price LeGrand was able in the first quarter to offset, in absolute value, the inflation on raw material prices.

More precisely, LeGrand selling prices increase was around plus 1%. And this 1%, as in 2016, is excluding the impact of major currency fluctuations, mainly Russia and Brazil.

As far as commodities and components prices are concerned, they were up plus 3%, and plus 1% for selling prices, plus 3% for commodities and component prices. As you know, change in raw material prices is a developing story and we continue to be focused and reactive and have announced additional selling price increase in Q2.

On page 11 now, I move to net income excluding minority interest. You see that it was up 17% at €149 million for the first quarter of 2017.

This robust increase is mainly the result of the good operating performance and the decrease of financial cost. Moreover, in absolute value the income tax is up but the tax rate is almost stable versus 2016 full year.

Now moving to the last indicator of the financial performance on page 12. As you all know, regular cash generation is a key feature of LeGrand's business model.

On the left hand side of the slide, a reminder of the key items driving a high cash flow generation at LeGrand, including robust cash flow from operations supported in Q1 2017 by good operating performance. The working capital requirement is still at a particularly low level at 8% of sales and compares with 8.9% at the end of Q1 of 2016.

Moving to CapEx now, you see that they are up €9 million, the rise being mainly dedicated to new products for all types of segments and all geographies. And finally, you see on the right hand side of this slide that normalized free cash flow came to €181 million in Q1 of 2017.

This is for our financial performance. I now move to page 14 of the slide show.

I would like to elaborate a bit on the second takeaway of this presentation relating to our active acquisition driven growth. As in 2016, where we closed eight transactions, favorable current economic conditions in certain countries are helping to continue to be active on external growth.

You are already aware of the acquisition of OCL that we have announced early Feb this year. OCL is a $15 million sales company, specialized in architectural lighting solutions for commercial and high-end residential buildings.

Today, we announced three additional bolt-on acquisitions or transactions. First, the acquisition of Finelite, which is still subject to usual standard conditions precedent.

Finelite, a $200 million sales company, is a well known U.S. player in specification grade linear lighting fixtures for non-residential buildings.

We talk about offices, hospitals, schools, government buildings and retail outlets. On its niche market, Finelite has a leading position and enjoys a good profitability.

This acquisition also runs out LeGrand's presence in lighting control in North America. As you know, we already have positions in the wall mounted controls with our Pass & Seymour brand, in control panels with WattStopper, and in architectural lighting solutions with Pinnacle and OCL, and also management systems for light intensity and chromatic quality through partnerships with U.S.

local players. For more details on Finelite, please refer to page 21 of the slideshow.

The second acquisition we announced today is the purchase of AFCO Systems, a $23 million sales company, specialized in Voice-Data-Image cabinets for data centers in the U.S. AFCO Systems Group strengthens LeGrand's existing data center offerings in the U.S., which is sold under the Ortronics, Electrorack, Lastar and Raritan brands.

Lastly, we also announced a joint venture agreement on Borri, an Italian UPS producer known for its customized solutions. This move will complete our existing offer in the UPS business.

Please note that LeGrand holds 49% of equity and that Borri will thus be consolidated on the equity method. This acceleration of the acquisition driven growth since 2016 is good news as it allows us to continue to build leadership position on many markets, segments, geographies and I would like to also mention that these bolt-on transactions do not derive from an inflation in multiple space but meet our well known strict financial criteria.

Furthermore and as a side comment, multiple space are far below LeGrand's multiple. To conclude on this acquisition story, please take into account in 2017 an estimated dilution impact of acquisitions of minus 20 bps in relation to the acquisitions announced today.

Turning now to the last part of my presentation on page 16. As said earlier, we confirm our 2017 targets on the basis of LeGrand's strong showings in the first quarter of 2017, but also taking into account the unfavorable effects on sales in the coming quarter that I already mentioned.

As a reminder, LeGrand's two targets are, organic growth in sales of between 0% and plus 3%, and adjusted operating margin before acquisitions, i.e., at the 2016 scope of consolidation, of between 19.3% and 20.1% of sales. Well with this in mind, ladies and gentlemen, Francois and myself are happy to open to questions.

Thank you.

The first one would be on the organic growth guidance, specifically. I appreciate you highlighting working days in the first quarter having helped you but even without the working days, you are at plus 3% in the first quarter.

And if I look at the comp for the group, not by geographic but for the group throughout the rest of the year, they don't seem necessarily massively more demanding than what we've seen in the first quarter. So my first question is, can you maybe explain why you seem so cautious around the organic growth for the rest of the year considering the start you've had?

So that's question number one. And I will go of the others after you answer.

Thank you. Good morning, Lucie.

First, I would maybe start by saying that we usually review targets if and when needed, not before Q2 results, and most often in Q3. That's the first part of my answer.

Second, you are right in saying that the reported organic growth of Q1, adjusted for the calendar effect is maybe in the range of plus 3%. But you also noticed that we quoted three items.

The first one is this story of orders placed in advance by a distributor in some country. I would, for example, here quote India and China where we recorded double digit growth in Q1.

The performance is good, but you can imagine that these orders placed in advance played a role in this double digit growth and that this impact will reverse in Q2. This is the first point.

Second, coming back to the calendar effect. It's positive in Q1, and it will reverse in Q2, mainly Q2 and Q3.

But the net-net for the full year is negative, not a specificity of LeGrand. It's just, I would say, a normal calendar effect that will apply to all players then positive in Q1, net-net negative on the full year basis.

And the third point is, and this is really as the second point of the first one, not an issue in terms of underlying performance. But we also mentioned last year that in Italy and in the U.S., Q2 and Q3, they are very good.

They are very strong due to some one-offs. Good performance, good commercial performances are due to a good commercial activity but those one offs are representing a higher basis for comparison for Q2 and Q3 of 2017.

And if we aggregate all those factors and mostly maybe the first one, the fact that we do not give you targets in Q1 because it is of course too early. There are some reasons for having this form of confirmation of target as far as the organic growth is concerned.

Now it does not mean that the performance is bad. The performance is good.

We have seen, again, if we take the big regions everywhere, good growth. And this is encouraging.

Thank you. Can I maybe have a follow up on that?

Are you able to kind of quantify the impact of pre-buy at the group level, how much it helped you? Because you quantified the calendar effect, but...

No, it's not possible to do so because, again, it's information that were provided by some country managers. First, it depends on country, and the behavior of distributors is different from one country to the other.

Second, it relates to the fact that we are very reactive in terms of pricing management, and this is good news. And we continue to increase our prices and some distributors took that into account by placing advance orders in Q1.

And I come back to the good examples of India and China with again a very good start to the year with a double digit growth. It's clear that you cannot consider this double digit trend is a full year trend because part of this double digit performance was helped by this phenomenon.

And to sum up, no, it's not possible to quantify that at group level but we wanted to highlight that it played a role in the Q1 performance. And second, for specific countries like India and China, again the performance is good and the teams have done a very good job locally, but part of the performance is related to the orders.

Thank you. The second question I had was around the margin.

If you can confirm, but I'm guessing the performance in Italy to some extent is driven maybe also by export activity. But I was wondering if you could maybe focus a bit more on U.S.

and France because we had seen U.S. margin continuously improving.

It seems to be a little bit at a standstill now in the first quarter despite the strong performance on the organic growth side. And France is up year-on-year but versus historical level it does seem still pretty low, and we've now kind of moved into positive territory.

If you could maybe explain us the dynamic on these two, please?

Of course, Lucie. Then first on Italy, you're right in saying that the performance of the first quarter was helped by export activity.

This being said, the domestic performance was very good. Second, moving to France, and this is something that deserves some explanation but you may remember that we have a specific situation in France.

And maybe I can start with figures saying that in France, the adjusted operating margin at 16.5% in Q1 of 2017 compared with 15.4% for the same period of 2016, it's a growth or an improvement of 110 bps for France. That's the first point.

Second, and as explained now many times, the France margin is indeed made up of two parts. The first one is the group related activities made of intercompany sales, but also support to all countries that are under the responsibility of SBUs and corporate functions.

Then those activities should clearly be seen globally at group level and their impact on margin should be seen at the group level. Now what matters is the second part.

This is the domestic business activity on which the margin in Q1 in 2017 was stable versus Q1 of 2016, which is good because it's very good profitability in relation with our strong market share. And thus, thanks to growing sales and a well controlled margin, we are creating value in France in the first quarter.

Moving to North and Central America. Here also I would start with figures, saying that our adjusted operating margin in Q1 was close to 18%, almost stable versus the same period of last year.

In spite of a demanding basis for comparison, you also have to keep that in mind because I remind you that last year the growth in Q1 was plus 7.6% the organic growth. But despite this demanding basis for comparison, we recorded a strong plus 4% organic growth in sales, fueled by growth investments, front office and R&D, and total sales grew 18%.

We also have a very good activity, M&A activity. Then also interesting to note that the North and Central America adjusted operating profit now is up close to €11 million, half coming from acquisitions.

And that this close to €11 million is contributing more than 30% to group adjusted operating profit growth, which is €33 million or €32.8 million. And then North and Central America in Q1 really contributed to group value creation.

This being said, this is for absolute value, but this being said -- and value creation -- but this being said, North and Central America team remains focused on profitability and the roadmap for the full year is to continue to deliver leverage, which comes on top of the doubling of adjusted operating margin achieved over the last ten years.

Sorry, just have one quick follow up on France. I understand that there's other costs in France which are supporting the rest of the group.

But wasn't that always the case? And the reason why I'm asking is because historically, your French margin was at a significantly higher level than 15% or 16%.

So is that those costs have increased? And is that what on the R&D side for the other region?

I'm just trying to understand the dynamic here.

Maybe a very simple answer saying that first, those costs have increased over the past five years. If I take recent history, really in line with the group growth and no deviation on those costs, but again, they apply to group activity.

Second, you may have in mind, Lucie, that we have recorded five years in a row of declining sales in France. And then the top line, when we report the group cost to the top line there was, of course, a headwind.

But a mechanical headwind, it's not an underlying headwind, if you can say so. The good news is that now things seem to improve in France with positive growth.

And third, if I come back to the most important point is that the domestic activity despite this decline in sales between 2012 and 2015, this domestic activity remained under control. And I apologize because this is not something that you can see directly in our financial assessment but you have to believe me or to trust me.

But the job that was done by the team in charge of the domestic activity was extremely good, with typical management at LeGrand with the financial performance contract. And in that condition, they focus on margin in the good conditions when we have are this kind of context of countries with very good profitability, mostly focused on growth and value creation then the model works well in France.

Can you talk a bit more about your M&A priorities, please? We've seen many deals in recent years in lighting fixtures or UPS but not so much really in your traditional areas of wiring devices or circuit breakers.

So does it reflect a lack of opportunities in the traditional core or is it more like a conscious decision to redirect the group's operations towards some faster growing segments? And perhaps in relation to that, can you elaborate a bit more on the Finelite acquisition?

It's clearly one of the largest deals for you in a long time. So I'm curious to hear a bit more about the margin profile of the business.

And also that would be great if you could talk a bit more about the recent sales momentum in the U.S. lighting fixtures market.

Thank you.

Good morning, Gail. Your first question is about priorities and I would maybe start by saying that the M&A activity, and you know that very well, is very much related to first, the economic environment.

And then when we talk, for example, about the geographical priorities, it is more a question of having the opportunity in certain countries to be active because the economic momentum or economic environment is improving. This is exactly the case in the U.S., but it's also the case in Europe.

And we have also made some acquisitions last year in Europe, in Italy, the U.K. in Germany, that are the geographical priority.

Second, in terms of product segments, there is no, of course, no taboo. We are looking at all opportunities.

But it's clear that what we try to do is to continue to enlarge our accessible market. This is what we have done over the past history of LeGrand.

You may remember that ten years ago, we were talking about an accessible market for LeGrand of below €15 billion and we are now talking of an accessible market above €90 billion. And this enlargement is, of course, done looking for complementary activities, possibly growing fast and also possibly supported by technological and social megatrends.

This is what we do then no, if we were to have good opportunities in traditional segments and maybe this will come, we would of course catch them. But it's true that what we have done in the history of LeGrand is also to look for those complementary segments that are again giving us a better footprint.

Also having in mind, and this is for me a way to move to your second question or third one, sorry, of Finelite, also having in mind that we are looking for great market share, great leadership, to acquire companies that have a good position on the market. And this is very, very important, not only of course for profitability.

We know that there is a strict relationship between profitability and market share and this applies to our recent acquisition, including Finelite. But also, it's absolutely key when you launch new products, when you want to deploy new activities to be strong on the market and this is a key feature of LeGrand model.

The LeGrand model is to be strong on its market with, you have that in mind, close to 70% of our sales which are made with number one and number two positions. Your second question, if I'm correct, was about the trend in activity, in the lighting activity.

Maybe I can -- and this is something I said during my earliest presentation. I think that first we report a healthy plus 3.5% organic growth in the U.S.

and showing a continuation of a good trend in activity and this is for the overall activity. I remind you that the underlying trend of our relevant end market in the U.S.

was about plus 3% in 2016, a good ongoing trend. Second, I would go to your question about the lighting business.

I would say that in spite of a challenging basis for comparison, you may remember that last year, we expressed that part of the growth was very much related to the lighting activity or the WattStopper activity, for example, the DLM. And despite this challenging basis for comparison, the overall U.S.

LeGrand's lighting business in Q1 is growing. The second point is that you also have to take into consideration that some of those businesses are project driven and thus may fluctuate from one quarter to the other.

But what is important to understand is that the LeGrand U.S. lighting business is made up of a combination of different niche markets.

We talk about energy efficient lighting control, architectural lighting or human centric lighting. And they have specific growth patterns and business models on which we acquire strong market position, as I was saying, and thus good level of profitability.

And this is the first point about those trends and this lighting activity of LeGrand in the U.S. And maybe the other interesting point is that our lighting activities are at least as attractive as our other markets due to, first, technological evolution.

This is something I mentioned earlier in my answer. You know that lighting, for example, is becoming natively digital and thus easily connectable.

And also driven by societal trends. We talk here again about energy efficiency, human-centric lighting solutions and so on.

And to sum up, Q1 as a whole was growing for us despite this basis for comparison. And longer term, we are on certain niche markets that we believe will continue to be driven by those evolutions, technical evolutions and societal trends.

You had a question about the margin of Finelite, but I think I answered the question saying that Finelite enjoys a very good profitability in addition with its market share.

I would like to come back to the Finelite acquisition and some of the questions we had before. In terms of a deal, was this an auction or a privately negotiated deal and what happens to management, the owners that were there before?

Maybe you could give us a bit more background to that? And secondly, in terms of the U.S.

lighting market and the timing of the deal, how confident are you that the slowdown in the overall industry we have seen in lighting, which used to grow kind of construction plus 2%, but now seems to grow construction minus 2%, 3%, that this is not kind of more durable in terms of having had many years of pulled forward demand on LED energy efficiency upgrades that have kind of exhausted a little bit the pool of opportunities near term?

Good morning, Andreas. Okay, first to come back about the story of the Finelite acquisition.

It's interesting to note that, first, there is a proximity between the lighting control and the lighting fixture, as I explained earlier. It's for us a very good combination in the U.S.

activity of LeGrand. And second is, you were asking the question about the origin of the contract.

Is it an auction? Is it a one to one acquisition?

It's interesting to note that the former founder and CEO of WattStopper, you know WattStopper, you have been in the group now for decades. This guy left five years ago the company, LeGrand, to develop Finelite.

Interesting because we are happy to have him back on board. This guy is a very, very smart guy, a real entrepreneur, and I think we share exactly the same point of view.

He is very happy to be back on board at LeGrand. And this is the origin of the deal and it's a good example of the way it works at LeGrand and we are talking mainly about companies that are identified locally by our country manager, then it's a story of a long-term relationship between our country manager and those guys.

And this is for the story of the Finelite acquisition as far as the contract is concerned. Now about your question about lighting business trend.

And it's clear that some large players in this field have reported some comments in this first quarter. First, if we look at the outlook that was commented by those players, that the outlook should remain a favorable outlook, even if H1 is a bit weak.

Second, we are talking about a very large business and we are not competing on this very large business. We are really on niche activity in this lighting activity.

And this is, I would not repeat the answer I made to Gail. We are looking at companies really on a standalone basis at the beginning, saying how we're talking about big leaders on the niche market.

And then do we have any chance to create a very good combination with our existing market activity -- sorry, lighting activity we have currently in the U.S., if you're talking about the U.S. And if the answer is yes, then we move ahead.

But again, sticking to our global activity, which is a lighting control business activity, first. And, second, to stay on niche markets that are profitable, if we talk about niche market and leadership.

And second, speaking to the fact that those activities longer term be driven by technological evolution and societal evolution. I cannot comment more on that but we think that we are doing very good move in this field and longer term, it's a very good story for LeGrand.

And just a follow up. Do you see lighting specifically confined to the U.S.

in terms of your investment focus? I mean, you have acquired a lighting company in the U.K.

as well in terms of controls. But would you consider the European luminaries market as well or is that structurally just too different and too competitive when you compare it to the U.S.?

Well, it's not a question of competitivity . If we take the example of the acquisition of CPE in the U.K., we are clearly again in the business of LeGrand.

It's a business of lighting control, it's a form of WattStopper or a U.K. player, if I can say so.

And then if we were to have additional opportunities really in line with our strategy in our core activity, we would continue to grab companies even in the Europe, but it's not lighting strategy. It's just a strategy of buying companies that are again on the niche market, niche activity, that are very complementary to our existing core business.

First, a follow up on the distributor pre-buy. You can't quantify the impact.

But can you say if it was material in each region? You obviously stressed double digit growth in India and China, but these are relatively, at least on relative terms, smaller markets for you.

So that's question number one. And just on France as well, I'm just wondering if you could provide any more color or commentary on the renovation market.

Your closest peer was a little bit more positive on activity levels there, at least on the residential side. Do you see any early indications at all of demand starting to pick up there?

Thank you.

Thank you and good morning. We quoted India and China for [indiscernible], one because the effect was more significant than in other countries, and second, we talk about large countries of LeGrand.

Now this phenomenon of orders placed in advance by distributors also occurred in other countries. But again, it's very difficult to give a full picture in terms of gross impact in the first quarter.

About your second question on the French market and renovation market, I think you said that we are a bit low profile. Maybe this is a part of your comment then.

No, what we believe is that first so far, and this is very good news, new construction activity is clearly on a good path now for some quarters. And this is good news because this is 40% of our activity.

As far as our renovation activity is concerned, what we see today is a flat activity or a flat plus activity. And historically, the renovation activity in France was up in relation with the GDP.

And what we expect is that if progressively the state of the French economy was to improve, then this renovation activity would start to pick up also. We are not negative.

We are just saying that so far, this recovery has not occurred. It is not negative.

It is flat, flat plus. But what we expect now is that if the economy again was to improve, then we would benefit from both this new construction recovery and this renovation, also recovery, but it's too early to have this kind of trend in France.

Maybe it will take a few quarters before seeing that.

If I could take the opportunity to ask a follow up question on discussion around M&A. It's obviously good to see further acquisitions announced.

Obviously, most of your acquisitions are still centered on the U.S., I think three out of four, year-to-date. That sort of continues the trend we saw in '16.

Just if you could talk a little bit about the pipeline in Europe. Are you still seeing more opportunities there?

Can we expect that to really accelerate in coming quarters? I understand the lag between organic growth and M&A but obviously your organic growth in Europe has sort of really turned positive, I think, back in Q2 2015.

So any comments there would be great. Thanks.

No, you're right in saying that the economic conditions are improving in Europe now for some quarters and this is clearly the reason why last year we made part of our acquisition story in Europe. And again, I quoted Italy, Germany, the U.K.

And I think we made four acquisitions in Europe last year out of the eight. And, no, this is -- and we hope this trend will continue, but now you know how we do not communicate on that not because it's, of course, a confidential activity or relationship, just because it could take quarters or even years before being, I would say close, if we talk about a deal.

But, yes, we intend to continue to focus on Europe but not only Europe, there are many regions on which we are active today and the pipeline is active there.

A couple of questions related to pricing. You mentioned that there is obviously been some restocking ahead of price increases.

But in your margin comments, you alluded there have been some price increases already gone through during the quarter. So just if you could give us some sort of flavor as to how far you are through that price, sort of increase step up.

Are you sort of halfway through? Just some general sort of trend there.

The second question is, obviously, a lot of these price increases are coming through now at a point where raw material inflation is easing off. And we're actually seeing, in China for example, general measures of manufacturing inflation becoming a little bit weaker.

And just to sort of understand, does that suggest that these price increases may not be able to go through as easily as perhaps they might have done during the second quarter, if we continue to see softness in raw material and general inflationary pressures? Thank you.

Good morning. Maybe I will start answering your question by coming back to figures to make sure that we are all on the same page then.

In Q1 of 2017, we talk about LeGrand pricing of around plus 1%, and this 1%, as in 2015, excludes a major currency fluctuation impact. And inflation on raw material and components or commodities and components was about plus 3%.

That's the first point. Second, yes, we have announced a number of new price list initiatives in Q2, and this will be favorable on our pricing trend for the H1.

Now moving forward, you say the one important thing is that the trend in raw material and commodity prices could change rapidly, then today what we are seeing is a continuation of this increase. Now you are right in saying that for some prices, we talk about iron or oil, we have seen recently some decrease in prices.

And then if it was to translate in a decrease or stabilization of raw material and components prices for LeGrand, certainly it would occur in H2 of 2017. This is exactly the reason why the way we look at pricing management at LeGrand.

First, it's a local story. Then it's the responsibility of country managers to manage this pricing activity on the local level and on the quarter to quarter level.

It means that during the first quarter, we have seen a continuation of raw material inflation, then country managers took the decision to set new price lists in April, then this is April or May. This is what is going to be in our Q2 performance.

At the same time, we are seeing a continuation of raw material inflation for H2 or for Q3. We will have a negotiation with suppliers that will take place end of May or through June.

And then depending on what will be the outcome of those negotiations on the raw material and commodity components, we will see if it is wise or not to continue to increase our prices in H2. Then it's a developing story.

It's very difficult to give you a forecast as far as raw material inflation is concerned or as far as pricing is concerned. But what is important is to have this form of reactivity of LeGrand.

Maybe my answer is a bit long, but it's a good opportunity to remind how the LeGrand model works. You know that when we are in a form of scenario, one, of economic growth, as it was in 2010 or 2011, and this is the same case for the start of 2017, raw material inflation is often significant.

And the approach is to cover, in absolute value, by pricing and to cover this inflation by, in absolute value, by pricing. And thanks to growth performance, we are driving the operating leverage.

And when we are in the scenario two of no or low growth in playing commodity deflation, then pricing covers all inflation received, enabling the resilience of adjusted operating money. Then Q1 2017 is more a kind of scenario one, with operating leverage coming from growth, then raw material inflation being covered in absolute value, thanks to pricing.

It's a developing story. Q2 will be maybe of the same approach in Q1, and for H2, it's too early to say.

I've got a few follow ups left so I'll go one at a time. Just on where we left on raw materials and pricing inflation.

Could you give us an idea by how much prices are going up in Q2? Are we going to be looking at sort of 1.5%, 2%, year-on-year change?

No, no, we don't have any consolidated view. Some of those price increase will take place in April.

The other one will take place in May, and it's really a country by country situation. And, no, I don't have any guidance on this Q2 situation.

But again, what you have maybe to keep in mind, Andre, is that the rule of the game in this kind of context of a big inflation but also good growth is to compensate in absolute value the inflation of raw material. And longer term, we know that when things are cooling down a bit on the raw material inflation side, then we continue progressively to increase prices.

But for Q2 only, I have no guidance in terms of selling price increase.

Thank you for this. But would it be fair to say that the Q2 kind of price increase would be more incremental as opposed to what you've seen in Q1 was a bit more broad based, given the raw materials inflation really kicked in into the end of last year?

Yes, incremental, of course. It will be incremental and what is behind your question is that as we did not have any price increase last year in Q2, or very few, because the situation was very different in terms of material inflation, yes, it will be also incremental in terms of average selling price effect.

Hit another way, normally, H1 selling price effect is going to be higher than Q1. Yes.

Got it. Thank you.

And a follow up on the France margin dynamics that was discussed earlier. If we try to sort of sum it up and if I were to think about this in terms of when domestic activity growth realigns to the group growth, i.e., when I guess France renovation growth kicks in, should we then expect your France margin to recover back towards to where it was?

Kind of offsetting back the, what I think sounds like was kind of negative operational gearing that you had in there from cost from outside of France activities and domestic activity coming off. Would that be the right sort of way to think about this?

Andre, I should maybe be a bit more clear on that. When you are talking about recovery of the French domestic margin, actually, again the French margin, domestic margin, that you cannot see looking at the total reporting segment, is high.

Higher than the average of the group, much higher, first. Second, there have been no deviation in terms of profitability over the past five years despite the organic decline in sales.

And third, coming back to your point of this improving situation in France, which is a very good news for us, yes, we are able to produce some leverage, but you know the way we manage the company for that. When we are in a situation of a very profitable country in relation with its good market share or leadership, what we try to do is to have a balanced approach between leverage and value creation.

And to put it another way, the financial performance contract of those kind of country is very much oriented towards growth as this high profitability that we experience in this kind of country, first, is creating value. Growth is creating absolute value.

And second, it is mechanically relative on group average margin. Then the situation is this one, that, of course, it's easy to make leverage when you have goals because we continue to be very, I would say, serious on cost management.

But it's also very interesting to fuel this growth with innovation, with new country resources, with new activities, because as we are starting from very good profitability, we are easily, again, easily creating absolute value profit for the group and relative effect on group margin.

Got it. Thank you.

That's very helpful. It was the mechanical kind of workings of it that I was alluding to.

I'm very clear that your domestic margin has held up despite a downturn. And can I just ask on a couple of things we've picked up at the trade fairs.

There is a development of data centers by Facebook on this open computing project, OCP, that looks like customers trying to define kind of a standard for server racks, and that appears to do away without some of the equipment that's relevant to you, like PDUs. Is this something that we should be kind of thinking about?

Is this actually relevant to you?

I cannot answer clearly to your question, Andre. Just to say that this, and this is very much related to the AFCO move in the first quarter for LeGrand, or this one's for LeGrand because the acquisition announced today is that clearly the move we have done in terms of racks for data center and the PDU activity with Raritan is an excellent move.

And looking at the figure, for example at Raritan, it demonstrates that our product offering is very much in line with the expectations of our customers. And I'm sorry because my answer is not so precise vis-à-vis your question, but our belief is that our product offering is very much again in line with our customers' expectations and trends in the data center management.

I appreciate that. And on circuit breakers, again, there seem to be talks about a new regulation or sort of regulation coming over from U.S.

to Europe on the AFDD, the Arc Fault Detection Devices. And I think there's quite a substantial difference between kind of a circuit breaker that does that and one that does not.

Do you see that regulation coming into Europe? Because we heard about that, but couldn't actually find evidence.

We are. And this is very much the responsibility of a full department at LeGrand to be clearly focusing or to clearly focus on this non-standard evolution because it's a key asset of LeGrand.

And if it was to be the case, of course, we would adapt in relation with that. But so far, the situation is not this one and it's a moving story.

Got it. Thank you very much for your time.

I appreciate that.

Maybe a follow-up, maybe to follow up on the answer, Andre, on your question about the data center activity. Something also may be of interest is that our approach is clearly a customized approach.

And that has been the success of LeGrand in racks for the data center, for example, in the PDU activity, is to offer customized solutions. It's not the only or it's not only in the data center activity.

I mentioned the lighting activity, where it is also the case. We have many activities at LeGrand where customized solutions are the key determinants for a customer to make decision.

And this is something you have to keep in mind is that it's not, I would say, a standard product. It's really a customized product, and this is a strength of Raritan, AFCO, but also the preceding acquisitions of Eletrorack or Minkels in Europe, including also SJ Manufacturing in Asia.

This is the first point. The second point is that the geographical footprint we have created with those acquisitions, again, not only in the U.S.

but also in Europe or in Asia, is enabling us to deliver those customized solutions but it's very difficult to, I would say, have a global product offering and be far from our markets when it comes to talk about the customized solution. But this is a strategy we have in this field.

And again, it's a follow up answer to preceding question. But the story is the same for the lighting activity.

I think one question earlier was to say that the shift from LED may have been a booster for companies producing phosphate lamps , for example and that it may be no more the case. But for WattStopper, for example, or Pinnacle, the growth was not driven by that.

The growth was driven again by a customized solution in energy efficiency. We talk about design solution, digital solution, the DLM activity at WattStopper.

And this is clearly the way we look at those activities or niche markets is not to be in a very big game on a very standard solution but really to offer to our customers customized solution and this is where we have leadership, and this is where we make our profitability.

That's very helpful. Thank you.

And so for your then data center exposure, would you say that the very large kind of hyper scale data centers is really not relevant for what you do within your offering in data centers, or data center-specific equipment? I appreciate on the standard core products there will be exposure.

I would answer, it's not a question finally of size of the data center, but types of demand. And then if for a large data center, there is a small portion of the activity which is really customized, this is where we compete with other competitors.

So a couple, if I may. First of all, I think usually, in most years, you're able to deliver a net positive price by the end of the year.

So I think given that the comment is that you've already been able to recover the absolute raw material rises in Q1 and that there's more price rises to come in Q2. Is it possible at that price, so at the EBIT level, could already be positive in Q2?

Secondly, just thinking about growth. So even adjusting for the working day effect, I think Q1 is the best quarter the group's delivered on an organic growth, sales growth basis since 2011.

And as growth continues, I know the market investors are worried for some time about what will happen to investment. What can you say about spending rises, particularly related to Eliot, R&D, CapEx, over the next couple of years if we see this kind of growth trend continue going forward?

Good morning, Jonathan. Finally, again, difficult to answer your question, but you are true in saying that we were able, first, to cover material inflation received in Q1.

Second, what I have said is that this raw material inflation has been continuing since the beginning of this year. It means that, and you know that it takes time before translating into our cost of goods sold due to the timing of purchasing and delivering and also the timing of stock consumption.

It means that you have this form of a lag effect between raw material increase, I would call them index, and at time it starts to show up in our P&L. Then for Q2, we continue finally to have a price increase in parallel of this inflation of raw material that is going, that is showing up in our P&L.

I'm not sure we'll have positive EBIT level. And here we talk about absolute value, not margin.

But certainly in Q2, we will be able to cover as in Q1, this inflation that is continuing. And this is the rationale for those price increases.

And again, H2 will be maybe another story depending on the raw material trends. Second, talking about growth and investments in parallel of this growth, this is clearly an interesting question because what we have constantly tried to explain is that when economic conditions are unfavorable, we focus on the resilience of the model, the protection of the model on margin.

And, yes, we demonstrate a good resilience, of course, because we want to protect our profitability and cash flow generation, but also because the market is less receptive to innovation, acceleration of initiative and so on. And it's clear that when things are improving, we are in better conditions to fuel the market with additional innovations, additional new products or additional initiatives.

And then your question was about the CapEx. You have seen that maybe that in the first quarter of 2017, CapEx reached €33 million or €32.6 million, an acceleration of €9.3 million.

Maybe just to remind you that our long-term ambition is a ratio of CapEx to sales ranging between 3% to 3.5%. And of course, this is a long-term average calculation.

And as you may remember then, between 2012 and 2015, when the average organic growth was about flat with consequently a bit less new product launches, our CapEx-to-sales ratio has been a bit below the low end of the range at 2.8% in average. And 2012 to 2015, we were at 2.8%, which is below the 3% to 3.5%.

And since 2016, we have entered in a period of more supportive economic background. And this is also more supportive for innovation and we are therefore a bit above the high end of the range.

And this is clearly, first, absolutely consistent with the trend of the economy. And second, it does not, I would say, change our long term ambition of having this average of 3% to 3.5%.

And to sum up, in 2016, for example, you may remember that we went from 2.8% to 3.2%, and it was an acceleration. And we were going or moving towards the high end of the range.

Certainly in 2017, looking at the start of the year, we are going to continue to increase this CapEx, but this is very much a story consistent with the story of the economic pattern. Third, certainly it does not change our long term ambitions, again, of sticking to the 3% to 3.5% in average.

Then your question was also, sorry, about Eliot...

Yes, indeed. Yes.

We have to be clear on that. We continue, of course, to be very much focused on the digital opportunities, and all the company is very active on it, yes, but not only.

We are very active on traditional products. I just remind you that Eliot which is, again, a very nice story, was a bit more than 9% of group sales, around 9% of group sales in 2016.

But we continue to be very, very active on the 91% of the rest of the portfolio, then the acceleration in CapEx, is not related to Eliot. It's absolutely across the board story because economic conditions are favorable and then we want to be very, very active in terms of innovation and new products.

A couple of questions. Firstly, on working capital.

You delivered another very good performance in Q1, 8%, I think of sales, and a very strong trend in trade payables. This looks like your initiatives have been successful over the past couple of years.

But in an environment where we're seeing rising volumes and the need to stop channels, how sustainable is it to maintain this very attractive working capital to sales ratio going forward? I mean, is that something we should expect for the rest of the year?

And then coming back to organic growth at the group level. I mean, you called out in the rest of the world the double digit growth in China and India.

In your internal assumptions, how should we expect that to play out through the rest of the year? And also in the rest of Europe, the organic growth surprised at least me.

I guess you've signaled that Russia was very strong, but also double digit growth in the U.K. is quite surprising.

Maybe you can quantify how you see the sort of trends evolving in the rest of Europe, please. Thank you.

Of course. Thank you, William, good morning.

First question about working capital requirement. Yes, 8% is a very good level.

I maybe mentioned more precisely that it was a low level. And what does it mean, it means that I think that we do not expect any deviation coming from, for example, an acceleration of the economy.

Then yes, in absolute value, when sales are rising you have to increase a bit your inventory but here there is no reason for having an increase as a percentage of sales. I would say the same for trade payables and account receivable because we do not want to deviate from our current terms and conditions and you also know that the financial performance contract of country managers is based on what we call economic margin of profit or even EPAT, which is the economic profit after tax.

And this ratio, which is a unique ratio, embeds the working capital requirement. And this is the responsibility to play between top line margin, pricing, terms and conditions, to deliver a good contract and they know that if they were to deviate in terms of working capital requirement, in terms of terms and conditions, for example, to increase too much their sales to have, I would say, an abnormally high level of sales level, which is not necessary, they would pay it in their financial performance contract.

The same would go if they were to extend their terms and conditions with any customer to grab some projects, for example. And this is a discipline we have internally.

Now you know that the working capital requirement target for LeGrand is a long term target of 10%, and we have this kind of target, and 8% is certainly non-sustainable. It would not, I would say, mean that we have a somewhat deviation.

It is just because the 10% seems to us normal even if that you are right in saying that we have for some years, we have been building this 10%. But what counts again is to have people focusing on free cash flow because, finally, free cash flow is one of the key items of the group.

And then to have them focusing on free cash flow, their financial performance contract in terms, again, of economic margin or EPAT, is a strict and demanding contract. Coming to organic growth in rest of the world.

Yes, China and India recorded a double digit growth in Q1. What we say today is that it cannot be a yearly trend, first, because those economies are not running at this pace.

You know that in China, the economic condition, the construction activity although it is well supported by the government, cannot imply -- or the underlying trend cannot imply this 10% growth over the long term, over the next quarters. Then we know that part of this growth, again, there is a growth, there is good performance, but the portion of this growth is very much related to either exceptional supportive actions from the government, for example in China, or to this order placed in advance by distributors.

For rest of Europe, I would have exactly the same comments not for the same reason, but the underlying trend is good, first. And then if we look at the recovery, it's strong.

Last year, we already recorded good growth, and we think that in countries, for example like Spain, like southern Europe, like Italy, also Italy is not in Rest of Europe, but also Germany, we had good figures in Belgium. We had good figures also in Switzerland.

Then it is clear that those economies are doing better than in the past, but here also the double digit growth, for example, recorded in the U.K. cannot be sustainable.

We understand there are some exceptional item in that. It does not mean that it is, of course, a bad story as far as the economic trends are concerned because it's fantastic to have this growth in the U.K.

After all, what has been said about the Brexit, for example, but today, first because of innovation, second, because we are on specific segments, for example, like the assisted living or because our, for example, activity in lighting control did well in the first quarter and we have reported a good [indiscernible]. To sum up, the same story for rest of the world and rest of Europe.

In those regions, trend is improving and continues to improve in the rest of the world or has improved in 2016 in the rest of Europe and remains solid in 2017. But no, we cannot expect to have a 10% organic growth trend for the coming quarters.

Thank you. One follow up on pricing, the question there.

I appreciate the country managers have an element of control and it will depend on categories, some with high raw material content, some with low. But can you characterize where particularly you're most successful in achieving pricing increases across the catalog on a country basis?

Is it particularly strong in sort of emerging regions as opposed to developed? And then the second, relating to what you've said of demand in India, China.

Did you ever aim to quantify the level of impact of destocking which occurred last year, which was perhaps reversed in the first quarter? Thank you, very much.

Thank you, William. About pricing, no, it's very difficult to give figure on a country-by-country basis.

But clearly, this is again, very much related to our positions in different countries. And second, this is a key feature of the LeGrand model.

And then for us it's clear, and this is also for country manager, the clear enabler to achieve the financial performance contract. And third, what you have also to keep in mind is that currency, the fluctuations are also a big driver for pricing.

To put it another way, you can imagine that today, in Russia, with the ruble being up 30% in a row, 30% on last year Q1, pricing is taking that into consideration. And we have raw material inflation for Russia, like everywhere, but we have this fantastic effect, I would say, of the re-appreciation of the ruble that drives pricing down.

It does not mean that we are losing pricing power. Of course not.

It's just a natural trend given the fact that for imported products that are also imported for competitors, we have to be very clear with the customer, when the currency is going down, we have to increase prices along with this depreciation. When the currency is recovering, of course, we adapt our pricing reason.

But it is not, we're just not having a weak or strong pricing power, it's just a question of having a customized pricing power vis–à–vis external environment. But across the board, we have these pricing initiatives in many, many, many countries, and this is not a specific story over one or two countries.

As far as demand in China is concerned, no, we do not think that the destocking, that there is any destocking in our trade that could play a role in the first quarter of 2017. And this is not really something significant.

Just the fact that it's not -- your point was about the destocking of 2016 that would be a basis for comparison. But again, I come back to the orders placed by distributor we had an exceptional restocking in Q1 that will reverse in Q2.

But it is not a question of growth, it's a question of opportunity in relation with a form of anticipation of a price increase in Q2.

Two quick ones from me. Are there any big product launches ahead that we should be aware of over the coming quarters?

And then, secondly, could you just talk about what's in the miscellaneous items of 17.1 million in the quarter? Thank you.

Good morning, James. No real big product launches, but a lot of initiatives, and this is very much in relation with what you have seen last year in R&D or CapEx this year that our teams, SBUs, but also countries, because finally the demand initially comes from countries.

Our countries are very, very demanding in terms of new products, and SBUs are very active to provide them with those innovations then. But it is clearly across the board as far as geography, product segments are concerned.

But no big product launches in the near future that would have a significant impact on the, I don't know, Q2 or Q3 or Q4 sales. As far as miscellaneous costs are concerned, maybe a few regions, I would give a full picture of what we call other operating expenses.

Then, first to say that there is nothing particular so far in this figure. We talk about a total other operating expenses to sales of 1.6% in 2017 to be compared with the same figure for last year.

Again, no significant topic. I'm just reminding that we are talking about provisions costs like restructuring but also for the typical miscellaneous, usual provisions such as the slow moving accounts receivables, litigation and so on.

This is more, I would say, day to day business. And you may also remember that we recommend to analyze these other operating expenses at group level and on a yearly basis, but because it's clear that from one quarter to the other or from one region to the other, we can have pluses or minuses depending on quarters.

But to sum up, this is a continuation of the past trend and we have these kind of provision that are quite day to day business. But there is no particular topics in Q1 figures of note, it was the case in 2016.

Just one follow up on M&A. If you assume a quick integration of the deals that you've announced year-to-date, your current run rate is over 4% and is basically almost on par with the run rate year-to-date.

So considering this, what do you expect for M&A and the scope for further consolidation for the rest of the year and the next 12 months?

Yes, your calculation is certainly correct, Dennis. Now what we say that today we have closed AFCO, this is behind us, and also OCL at the beginning of the year.

For Finelite, the process is still going on, notably as far as the antitrust, usual analysis is concerned. And it could take weeks and some weeks now before closing the deal.

And then given that, our estimation is that based on that, the scope of consolidation for the full year should be above 3.5%, based on what we have announced today. And if we were to announce other good news in the future, it would complement this 3.5% that is -- or plus 3% -- more than 3.5%, sorry, that is already embedded on the full year scope.

It's just a question of timing, okay.

Just a question around lighting. Can you talk a little bit which business area does this fit into?

I think you've normally spoken about wiring, energy, cable management, VDI. How big is lighting in total to the group now?

And what do you think gives you a competitive advantage against the long list of competitors that we can see in the lighting space?

Good morning, Graham. It's not for public information.

But as we have a lot of announcement on this field, we can provide this information saying that on a pro forma basis, it would be in the range of 13% of group sales, including a full year consolidation of new acquisitions. And we talk about all the activities.

Again, we talked about WattStopper, CPE, all what is lighting control, lighting and lighting control. Again, WattStopper, Finelite, OCL, Pinnacle, CPE and so on and so forth.

Okay. But I mean in terms of where do you put sort of market share do you think you have in this business?

What sort of growth rates do you think lighting will provide? So you're saying it's around 13% on a pro forma basis is lighting related, and it doesn't fit with any of the business units.

It's spread across all of them, is it?

Yes, it is. And I forgot mentioning also the emergency lighting, which is an old story of LeGrand.

We have been in this field now for decades. And lighting, and again I'm not going to repeat my long answer on this call saying that we are talking about some specific businesses that are very complementary to our activity, customized activity for most of them.

We are talking about control, the wall panel control and so on. And also, we are talking about historical activity of LeGrand.

It's not a new move. And if we take the example of energy efficient lighting control, we have been in this field now for decades.

The same goes for emergency lighting. And not the complementary activities that are expanding our accessible market but it is, I would say, almost a traditional activity of LeGrand.

Okay. Thank you.

And maybe just finally, on the 40% increase in CapEx and capitalized development cost. Where specifically would you be expecting to see that to generate extra revenue?

So where are you expanding facility or is it mainly in R&D? Is it actually CapEx or R&D, that 40% increase there?

That's a good question, and I am saying that a big portion is related to new products because you are mentioning the 40% increase of the €9 million. The big portion is related to the new products, maybe something in the range of 80%.

Second, the additional part of the growth is also related to, for example, some localization capacity. We continue to step up our productivity initiatives and it's related to that.

And third, coming back to the products concerned. Again, if we are really talking about many -- you know that we have our seven SBUs, all are very active in, again, areas of traditional products in all geographies.

And it's not a form of a specific story, it's really across the board as far as the products are concerned and geographies are concerned.

Okay. Thank you very much and thank you to all involved in this conference call.

And of course, we remain with Francois at your disposal, should you have additional questions. Thank you very much.

Have a nice day. Goodbye.