Legrand S.A.

Thank you. Hello, everybody.

Thank you for attending this conference call. Franck Lemery, Ronan Marc and myself are happy to welcome you to the Legrand 2019 Full Year Results Conference Call and Webcast.

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

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

I begin on Page 4 with the four main takeaways of today's release. First, Legrand reports a strong top line growth with sales up plus 10% in total, reflecting the group's position development both organically and through acquisitions.

Second takeaway is that all our 2019 targets are fully met. Organic growth in sales was plus 2.6%, above the midpoint of our 2019 target of 0% to plus 4%.

Adjusted operating margin before acquisitions reached 20.4%, within the 19.9% to 20.7% range set in February. And finally, the achievement rate of our 2019-2021 CSR road map reached 113%.

Third, in addition to this very good integrated performance, Legrand delivered in 2019 the growth of its net profit attributable to the group of plus 8% and the normalized free cash flow up plus 13%. Overall, this strong growth in all KPIs in 2019, fully in line with its medium-term business model, reflects Legrand commitment and ability to create lasting value for all its stakeholders.

The fourth takeaway is that in 2019, Legrand pursued many initiatives aimed at strengthening its profitable growth profile and leading positions. The group reiterated its focused ambition as a strategic player in connected buildings through steady deployment of the Eliot program.

Sales of connected products have risen by plus 29% in 2019, including plus 10% organic growth, reflecting the success of both IoT products and the docking of Netatmo. Momentum was also very good for both innovation and acquisition-driven growth.

As far as innovation is concerned, we have delivered a dynamic flow of new products, including, of course, connected offering. On M&A, Legrand has announced three acquisitions of leading players in 2019: Universal Electric Corporation and Connectrac in the U.S.

and Jobo Smartech in China, totaling annual sales of more than €180 million. Lastly, Legrand is actively pursuing initiatives aimed at improving its performance, including in particular, rollout of the Legrand Way program, digitalization of its organization and optimization of its industrial footprint.

Now moving to Page 5. As you remember, we confirmed last February Legrand medium-term model.

Let's come back to it, looking now at our KPIs over the last two years. As you can see on this slide, the average increase in net sales was close to plus 10%, the adjusted operating margin above 20%, and the average growth of both normalized free cash flow and earnings per share was above plus 15%.

Together with the non-financial performance ahead of schedule, the group's two year achievements fully reflect the momentum that stems from its medium-term business model for value creation. After this introduction, let's start with an overview of sales on Page 7.

So as I said, we recorded a total rise in sales of plus 10.4% in 2019. The strong growth resulted, first, from a plus 2.6% organic growth, driven by similar rises in both mature countries and new economies, all 3 geographical zones being on the rise.

More specifically, the fourth -- in the fourth quarter 2019 alone and despite a challenging basis for comparison, organic growth in sales stood at plus 3.4% with a solid performance in new economies, plus 5.1%, driven by Eastern Europe, Turkey, Africa and China. On the other hand, the rise in sales in mature countries in Q4 2019 was a healthy plus 2.7%, driven notably by good showings across Europe and in the U.S.

Acquisition-driven growth, which is the group's second growth driver, contributed plus 5.3% to sales growth in 2019. Based on acquisitions already completed and their likely dates of consolidation, acquisition-driven growth should contribute around plus 1% to 2020 sales growth.

Lastly, ForEx impact was favorable at plus 2.2% in 2019. Now if we apply to the last 11 months of 2020, the average ForEx rates observed in Jan, the annual ForEx effect for 2020 would be about plus 0.5%.

This is, of course, as usual, a theoretical calculation and time will tell the actual ForEx impact on sales for the full year. Let me now go into more details regarding the like-for-like evolution of sales by geographical zone, which are all positive.

I'm referring to Page 8 to 10 of the slide show. So let's start with Europe, organic growth in sales was plus 3.3% in 2019.

In Europe mature countries, sales grew plus 2.9% in 2019, driven by good showings in Italy, UK, Benelux, Switzerland and in Southern Europe. Sales rose also in France.

In Europe and new economies, organic growth in sales stood at a solid plus 6% with Eastern Europe turning in a particular good showing. This -- the very sustained growth recorded in Europe in the fourth quarter alone, plus 5.1%, benefited from some one-off factors, notably in Turkey and Eastern Europe, which sets a demanding basis for comparison for 2020.

Moving now to North and Central America where sales were up plus 2.5% on an organic basis. This increase was fueled by the U.S.

where like-for-like sales rose plus 2.9% in 2019 with solid growth in user interfaces, cable management and busways for data centers, rounded out by rising sales in lighting commands and solutions. Like-for-like sales also rose in Canada but retreated in Mexico.

Overall, sales evolution in Q4 confirm a steady underlying growth over the year. It should be noted that 2020 sales of North and Central America are expected to be impacted negatively for around minus 2% of 2019 sales as the group will not be pursuing a U.S.

retail contract that no longer meets Legrand profitability criteria. Let me now move to the last zone with Rest of the World where sales were up plus 1.4% on a like-for-like basis.

In Asia Pacific, sales were up plus 2.4%, driven by good showings in India and China. These were partly compensated by declining sales in Australia as well as in certain countries in Southeast Asia.

In South America, organic growth in sales came to plus 0.4% with sales almost flat in Brazil and mixed trends for the rest of the area. In Africa and Middle East, sales retreated by 0.5% minus 0.5% like-for-like.

In the Middle East, the decline in sales was marked, reflecting the region's difficult environment. This was partly compensated by strong growth recorded in many African countries.

In 2020, the Rest of the World zone should remain marked by an uncertain environment in several regions. Let me now pass the mic to Franck for an overview of our solid financial performance and strong value creation.

Thank you, Benoit, and good morning to all of you. Let's start with profitability on Page 12, where you see that 2019 adjusted operating profit is up and healthy plus 9.4%, driven by growth in sales and operating performance.

Moving to Page 13. 2019 adjusted operating margin before acquisitions came to 20.4%, showing a rise of plus 0.2 points on 2018.

Against the backdrop of rising U.S. tariffs, fully offset, this improvement reflects efficient management of pricing, a good operating performance over the year and a solid control of administrative and selling expenses.

Including the previously announced minus 0.4 points dilution from acquisitions, adjusted operating margin came to 20%. Moving now to the net profit attributable to the group on Page 14, it was up plus 8.2% in 2019.

This solid growth resulted mainly from the increase in operating profit, partly offset by unfavorable change in net financial expenses and the FX result as well as higher corporate tax in value. This deserves 2 additional comments.

First, on financial charges, they have increased by about EUR 12 million in 2019 due mainly to the implementation of IFRS 16 from Jan 1. Second, on corporate tax, the increase in value is due to higher profit before tax when corporate tax rate decreased from 2018 benefiting from favorable one-off impact.

Moving now to the last feature of the financial performance with cash generation on Page 15. You know that the right reading of free cash flow generation should be done on a normalized basis.

You can see on the right-hand side of the slide that normalized free cash flow was up plus 13% compared with 2018, reaching 15.2% of sales. Some additional information on the left-hand side of the slide.

First, cash flow from operations increased plus 11% in 2019 and stood at more than 18% of sales. Second, working capital requirement came to 8.1% of sales in 2019, down 1.1 points from 2018.

This decrease was primarily due to a positive trend in operating working capital. Third, exceeding €1 billion, free cash flow was up nearly plus 40% at 15.8% of sales.

These were the key topics of Legrand 2019 performance of value creation. Now I give back the mic to Benoît.

Thank you, Franck. Let me now conclude the review of our 2019 performance with our CSR achievements on Page 16 to 19.

Legrand launched in May 2019 its fourth CSR roadmap structured around three focal areas, i.e., business ecosystem, people and the environment; and 10 key challenges that contribute to the UN Sustainable Development Goals. On Page 17, here also, Legrand performance was good in 2019 with an achievement rate for our 2019-2021 CSR roadmap of 113%, plus we're ahead of schedule and demonstrating the group's commitment to creating sustainable value while taking all stakeholders into consideration.

On the next pages, 18 and 19, as you can see here, Legrand was again active on CSR in 2019, tackling climate issues while increasing inclusivity and health and safety at the workplace, all while developing its involvement into local communities. Two slides to conclude on 2019: so on Page 20, to remind you that all 2019 targets were fully met; second, on Page 21, Legrand will propose to the general meeting of its shareholders to approve the payment of €1.42 per share dividend, up plus 6% versus 2018 dividend of €1.34.

Let's now move to the fourth part of this presentation on Page 23 to see how Legrand is strengthening its profitable growth profile through four key themes. I will be somewhat very fast on this part, but of course, I will be happy to answer any questions you may have and come back to any specific point.

So first, as announced in June last -- this year, Legrand is stepping up -- I mean last year, actually, June, is stepping up its development in the field of connected buildings. As you can see on Page 24 to 26, in 2019, sales of connected products were up plus 29% from 2018, sales already accounting for over 12% of total group revenues for the year.

This strong showing is in line with group's targets as Eliot sales grew plus 10% organically in 2019, reflecting the program's good momentum over the year. This was by the graphical deployment of user interfaces and the launch of many new products, the successful docking of Netatmo and an even more seamless digital customer experience, notably through the Home+ Control app.

Second, as you can see on Page 27 to 31, we continued to invest 4.8% of R&D on sales, keeping on actively innovating with several new product launches covering many of our product categories and increasing, of course, connected offering from our Eliot program. I will not go into much details for these offerings, but of course, we remain available to answer any questions you may have.

Moving now on Page 32, third theme, acquisitions. In 2019, Legrand acquired three leading players in their markets: first, Universal Electric Corporation, the undisputed American leader in busways for data centers; Jobo Smartech, the Chinese leader in connected hotel room management systems; and Connectrac, an innovative U.S.

company specializing in over-floor power and data distribution. Ten acquisitions were first made in total in the past two years, enabling Legrand to strengthen its positions in promising markets in 6 different countries.

Last theme, on Page 33, on improving performance momentum. Legrand continued its policy for performance improvement with, on the one hand, the active deployment of Legrand Way, now extended to all functions after successful implementation at industrial sites; and on the other hand, with the digitalization of both front- and back-office organizations.

The group also kept on actively optimizing its industrial footprint, particularly by rationalizing the configuration and number of its production sites in many countries and by strongly reducing its carbon emissions. Coming now on Page 35 to the last topic of this earning release with our targets for 2020.

In 2020, Legrand will pursue its strategy of profitable and sustainable growth. Based on current macroeconomic projections, which are uncertain on the whole for 2020, and excluding any major changes in the economic environment, Legrand has set as targets, on the one hand, organic evolution in sales in 2020 of between minus 1% and plus 3%; and on the other hand, adjusted operating margin before acquisitions, i.e., at 2019 scope of operations of between 19.6% and 20.4% of sales.

Legrand with also pursue -- will also pursue, sorry, its strategy of value-creating acquisitions and, subject to finalization of opportunities currently under discussion, intends to aim for a total increase of at least plus 4% in scope of consolidation on sales in 2020. Legrand will moreover actively continue to deploy its demanding CSR roadmap for 2019-2021.

This is it regarding our 2020 targets. And now Franck, Ronan and myself are ready to open to questions.

Thank you.

Could we start with talking about pricing on how it's developed in 2019, just to get the levels right, and also whether you're planning anything special for 2020 or whether we should expect normal pricing actions?

Yes, sure. So the total pricing in 2019 was up 1.8%, with the pricing which was smoother in Q4 because in Q4 alone, it was plus 1.1%.

We shouldn't be as surprised, actually, because from the very beginning of the year, we told you that part of the pricing was also coming from the tariff imposed by the U.S. on imports from China.

And as you remember, the tariff on China started in Q3 last year. So as a result, we had a little bit less tariff to compensate for in Q4 and a little bit less pricing for that.

So total pricing for the year was 1.8%, including 1.1% for Q4 alone. Now going into 2020, it's always the same story, pricing at Legrand is a very dynamic story.

We don't set, let's say, a tariff increase of X or Y for the full year. We adjust pricing on a country-by-country basis, on a case-by-case basis, depending on many factors; depending, of course, on our strategy to remain competitive; depending on the evolution of the cost of components and raw material; depending on potential tariff imposed or deleted on such imports.

So we are not setting a precise target for pricing in 2020. What I can tell you is that the Legrand model which will apply, and you remember the model, which is that we have the ability to increase prices whenever needed.

It's part of our business model. But of course, it depends on the cost of the various inputs, which is still unknown at this time of the year.

So there will be some price increases in 2020. And in 2019, the figures are those which are commented, and you could notice that the pricing was very dynamic in 2019

Got it. I appreciate that.

And my second question was more on relationship of the growth between digital and connected products versus the rest of the group. I'd really like to spend some time just to discuss on how incremental that is to the group as opposed to being an adjusted development to sustain the levels of growth that we have seen already.

Looking at 2019, given the pricing component you've just described and Eliot growing 10% like-for-like, kind of driving a point of growth, it implies not very much kind of growth or a small negative for the rest of the portfolio, while I think end markets on balance were positive for you during 2019. So just wanted to hear how you're thinking about this and how we should think about it for kind of 2020 and 2021, whether we should be relying on Eliot and connected devices to drive growth, whether that's actually incremental?

Well, let's make it clear that our growth on connected products is not all incremental to the group. Let me take an example.

When you are selling connected emergency lighting unit or connected wearing devices, it means that you will not sell, by definition, a non-connected one. So sometimes, the connected products you are selling is sold instead of a competitor's product and then it's purely incremental.

Sometimes it is sold instead of one of your non-connected products. So I wouldn't embed in my computation, if I were you, the fact that this 10% growth on -- slightly more than 10% of our group sales, it's purely incremental.

It is sometimes done at the expense of non-connected products. So some people call that cannibalization.

We call that mix. This is a mix effect that we have had at Legrand for years.

Instead of selling a non-connected product, we sell a connected one. Instead of selling a white piece of plastic as a cover plate for switches, we are selling a well-designed finish and so on and so forth.

So this is mix. And as any mix effect, this is not purely incremental.

Right, right. And now -- I mean somewhat perennial question for me, but if I may just ask that again.

Now that Eliot is getting to kind of nearly €1 billion of sales, can we think about it holistically and say that ASP for connected devices is X times of ASP of the non-connected equivalent, do not have kind of enough data and experience there to call out? Or is it still kind of very much case by case?

Well, I understand that it's somehow difficult to model, but there's not a simple answer to this question. I can take -- sometimes the added value and added pricing of connecting a product will represent 2% or 3% of the price of the product.

Let's take, for example, a big UPS, three phase big UPS, well, connecting this UPS is just adding a module which will cost or which you will price a couple of percent more of an unconnected product. Second example, we launched in France, at the beginning of the year, connected emergency lighting units, those exit signs that you have in all commercial buildings that are guiding the people outside of the building should there be a fire or a problem.

We took the decision to sell those connected emergency lighting unit at the same price as non-connected emergency lighting unit because we really wanted to make connectivity popular. And we think that the benefit Legrand will get from launching these connected products is not in getting more pricing from the product, but it's gaining market share from its competitors.

So those are two examples where the added pricing or added, let's say -- yes, added pricing to then connected products is either 0 or minimal. At the same time, when you are selling a connected door-entry product, it is priced 30%, 40% more than a non-connected one.

And when you are selling connected wearing devices, it is sold, depending on the range and the product and so on, five to 10 times more than a non-connected wearing devices. So there's not a clear question to this -- to your -- clear answer, sorry, to your question, except the fact that it's extremely important for us to keep growing fast on connected products, not only because it can add pricing value mix, but also it is a way also to gain market share and to build franchise, if I may say, by being the first one to sell those products.

So it's extremely important, but it's difficult to factor or to give you one single number, saying, on average, a connected product is priced X or Y more than a non-connected one. It really depends on the product family.

I appreciate that, and that's really helpful to have those examples. And very finally, on your data center exposure, could you tell us how much you grew there in Q4 and in 2019 overall?

Well, so as a reminder, data center is approximately, on a pro forma basis, 10% of our sales. I said approximately because it is sometimes -- there are some products that are purely sold -- only sold into data centers, for example, the PDUs or busway for data centers.

But there are other products that are not only sold in data centers, it could be Switchgear, for example, or could be cable tray. So sometimes, since we're not selling direct to all of those customers, we have to estimate how much of those sales are made in this or that vertical.

But on average, approximately 10% of our sales. It really depends on the product family.

Overall, if we look at, for example, busway for data centers, so the Universal Electric sales, it grew very fast in 2019. We also had a positive growth in PDUs with close to, let's say, mid-single-digit organic growth, which is good.

It is also more good that we had a demanding basis for comparison. We saw good growth momentum for fiber connectors, starting from a small base.

So overall, it really depends on the product family. What I can tell you is that overall, we confirm that the data centers represent a very attractive vertical that we keep pushing hard to develop our sales.

And at the midterm, we should have a sustained growth in sales in this vertical.

Thanks very much for your time.

Hi. Good morning, gentlemen.

Thanks for taking my question. The first one, I was just curious if you could maybe comment on the potential impact you see from the current situation in China with the coronavirus.

I know China is not necessarily a huge percentage of your sales, but I was curious if you could maybe comment on potential disruptions to your supply chain on some of the components or whether you have actually some manufacturing activity in China, either from third-party manufacturers or of your own manufacturing but exporting to other countries.

Yes. Lucie, so this is obviously a very serious topic, and this is addressed and tracked in detail and, from the beginning, at group level.

So first, our first priority, to make things clear, has been to ensure that our 5800 employees were safe and protected. The good thing is that we got confirmation that all of our employees all across China, including in Wuhan and in the Hubei region where we have 40 people, actually, are fine.

And none of them or their relatives are infected by the virus, which is a very good news. And of course, we are taking all necessary measures to safeguard the health of our local team.

So it's a number of measures implemented in China, several temperature control checkpoints per day, de-infection of public places such as the canteens, for example, mandatory wearing of masks and so on and so forth. So this is our first priority.

This is a very good news. Second, well, you know that China is not, unfortunately, a big market for us.

It represents close to 4% of group sales. So if the sales were to be negatively impacted in China for some months, the impact on our business would be limited.

Now a third point, of course, China is a significant supplier for the group. It's difficult to assess the precise impact, if I may say, because you have the product that we manufacture locally, and you know that, for example, we manufacture some product locally for the U.S., you have the products you are sourcing there.

You have the components that you are sourcing in China. There are components that your suppliers are sourcing in China.

There are components that are going to other countries that you support. So it's very difficult to assess the precise impact.

There are too many actors and factors. Obviously, if the situation was to last for long, we might, of course, face some shortages in a couple of products.

And we are trying to mitigate this risk as much as possible, so we are building safety stock whenever needed. We are booking some capacity in the ships.

We are looking some alternative sourcing, either within the group or outside the group. We are doing many things.

But of course, if the situation were to last for long, we would somehow be impacted, as everybody, if I may say, because China is an important supplier for everybody. So that's what we can say at that time.

Just maybe a last word. Our factories are progressively restarting.

So the first factories were reopened Monday. Some important ones were reopened also yesterday, on Wednesday.

And the last one to reopen will be next Monday. And you know the way it works in China, before reopening, you have a very stringent inspection from local authorities that is double-checking that everything has been put in place to avoid issues.

So in this very fast-evolving situation, this is, I believe, what I can tell you today.

Okay. My second question was around M&A.

So first of all, I was curious if you could give us, based on the M&A announced so far, what you would expect for M&A dilution on the profitability for 2020? And then this is actually, if I remember well, the first time you are giving actually an M&A guidance for 2020 on deals which might not have been announced at the moment.

So I'm guessing you're quite close to come to a positive outcome on this pipeline. But can you maybe help us to then understand what you see as the more global M&A dilution impact if we think about that 4% M&A that you are talking about at the minimum for 2020?

Yes. Lucie, so to make things clear, I think it was in the press release.

But maybe to make things crystal clear, so we have a carryover impact in 2020 of the deals made in 2019, so the 3 deals I mentioned, Connectrac, Jobo and Universal Electric of plus 1%. And indeed, we are saying in the press repress release that we will -- we aim at a total increase of at least plus 4% in 2020.

So it means that we have, let's say, a go-get of 3 points between the carryover of 1 point and this target of at least plus 4%. So let me start with your second question.

Yes, it is the first time we are guiding for M&A. Clearly, this is because we have a number of discussions going on which are well advanced and in which we are quite confident that we will come to a favorable conclusion.

In other words, don't expect us to give you every -- to guide you every year on M&A, but this one is a bit specific. We have a number of very advanced discussions, let's say.

As far as dilution is concerned, the dilution on the carryover impact of 1% is negligible. So you can take into account that it's 0 dilution, if I may say, a few bps one way or the other, but you can say it's a 0 dilution.

As far as the potential dilution, should we meet our target of 4% M&A, it's difficult to tell you one number, Lucie, because we have a number of discussions going on. It depends on which one will materialize.

Well, if you look at the past 10 years, you know that on average, the dilution has been between 0 and minus 40 bps, let's say. So it will definitely be within this range.

Would it be closer to 0 or to the average, a little bit more than that? It's difficult to say at this time of the cycle.

Okay. And just -- I was curious if you could help us to understand some of the one-off effects you had in Europe in the fourth quarter that you were mentioning.

Are you able to quantify this? So we would know, basically, what's the benefit of that that we might not be finding again in 2020?

Yes. It's very difficult to quantify because when you have a big project, of course, it's exceptional, but somehow, it's also part of your business.

I can tell you that it's coming from two things. Number one, very strong basis for comparison in Turkey.

You remember that the crisis started in Turkey mid of 2018, and it impacted a lot Q4 2018. So the basis for comparison was quite an easy one in Turkey.

And the second reason were a number of significant projects that we got in a few countries in Eastern Europe. So we have, for example, some of them in Czech Republic, in Romania and in Hungary.

So it's more, is it basis for comparison or specific projects? Have there been any exceptional restocking in December from some of our customers?

We don't feel so, but it's extremely difficult to assess, as you know. So it's more coming from basis for comparison and big projects.

So I've got two. The first one is about the U.S.

where you've grown quite extremely fast over the past five, six years. And I guess you've grown so much that it's been a little bit difficult for us to keep track of the transformation there.

So could you give us a bit more granularity on your operations in the U.S.? How much is lighting control?

How much is in the white space for data centers? How much is cable management, user interface and so on and so forth?

And that'd be great if you could talk a little bit about the trends for each of these very specific segments at the moment. So that's question number one.

The second one is a very simple question. From a strategic perspective, I mean everything has been great in 2019, in particular, cash flows.

But today, what's your biggest concern at the moment? Thank you.

Okay. Let me try, Gael, to address those two questions.

So what I can give you -- we are not giving, including for competitive reasons, the precise breakdown of our sales by country and by business entities. This being said, you have been tracking Legrand for quite some time.

So if you add up the sales -- I mean the announcement we made on the various acquisitions, Milestone, Server Tech, Raritan and so on, you can have a good feel of that. But we are not making information public.

What I can tell you is that in the U.S., we are doing slightly more -- Slightly less than quarter of our sales in residential. So I think the last numbers are 23%, and 77% in commercial and industrial, but mostly commercial.

So it includes, of course, data centers, but it also include commercial buildings, universities, schools, hospitals and so on and so forth. And well, as far as the other, by then -- for sales, it's -- then it's, of course, confidential information.

We can also tell you the market position. So we are number one in PDUs for data center, number one in busway for data centers.

We are number one in cable management products, the plastic floor boxes and cable tray and so on. We are number two in wiring devices.

We have a good position in home systems. We are number one in audio/video distribution.

So I know that it's not fully answering your question, but we have a number of good positions in the U.S. which have been built through acquisitions.

Well, as far as the strategic issue is concerned, frankly speaking, and going to be a bit disappointing for you, Gael, but I don't feel that we have any strategic issue at Legrand. It's the way we want to go.

And the means to go there are extremely clear: growth-driven strategy, organic growth driven by R&D innovation, Eliot and so on, complementary acquisitions, financial discipline, the CSR approach. So I don't feel that we have any strategic issue.

The main risk that we have, but it has been the case for years, if not for decades, at Legrand, the main risk we have is definitely the economy. And we could demonstrate in 2018 that when the economy is supportive, we are able to grow fast both organically and through acquisitions.

But of course, if the economy slowed down in such or such region, we are impacted. But I don't feel we are facing any strategic issue.

And actually, this has been confirmed by the evolution of our market shares, which is good; by our customers, which are giving us a good feedback. Well, that's it.

Okay. Thank you.

Just back to the U.S., I think that's the first time I hear from Legrand that you would not be pursuing a contract with one of the retailers or at least stop the contract, and that can have apparently a pretty big impact on the top line. So what's behind that decision?

I guess profitability, obviously, is a criteria. But what was going wrong specifically in that contract?

And is there any reason to believe that there is a slight change in the strategic approach and that we could see more of these decisions going forward?

No, not at all. It's not a change in our approach.

And actually, the fact that you sometimes win, sometimes lose or decide not to pursue a contract has been part of our day-to-day business forever. We are making it public because this one is material at the zone level.

So we don't want you to be surprised. So that's the reason why we make it public.

But otherwise, we have gained and lost some of those contracts for decades. And if we lose specifically on this case, it is a DIY customer, one of the biggest in the U.S., and discussing with them the terms and conditions of this contract was no longer acceptable to Legrand.

And we are not in this trade not to make money, so we have decided not to pursue it. It's a very specific situation, number one, because it's our biggest DIY customer worldwide.

It's 1% of our sales, and a little bit less than 1%, so it's not major, but it's actually, the biggest customer and number 1. And because it is in the U.S.

where the brand, not only for Legrand, but for everybody, the brand is less the driver in the DIY market than in many other countries. So I don't believe that this could occur in any other country than in the U.S.

because in those countries, you have many more things that plays that relationship you have or the objective that your customers have. So that's why we are making it public.

But again, it's regularly happening that we gained some contracts, and we are happy because they are bringing profit and margin to Legrand or we are dropping some contracts, which are not profitable enough. And sometimes, recovering the customer after 2 years, once you have seen that it has not been a good bet for him to get rid of Legrand, so it is part of our day-to-day life.

And maybe to finish, I wouldn't like you to come back home with the idea that DIY is not a very interesting channel. It is a very interesting channel.

And we have been gaining share in the DIY chain for a very long time. It represents a slightly bigger share of our sales today than it used to be 10 years back.

So it's a very interesting channel to be in, but it happens that sometimes you're winning customers, and sometimes you don't.

I was hoping you can expand a little bit more on the scope and ambition of the Legrand Way program, really wondering what the opportunities might be to kind of accelerate cost-cutting measures. And particularly in the context of SG&A costs, 27% of sales are still quite high, restructuring costs of 0.5% of sales, which by industrial standards are quite low.

And I look at the share of front-office employees as well, that appears to have sort of plateaued at around 20% of the group total, kind of moved up from 15% back in 2004. So I was just wondering if there's an opportunity to kind of further redeploy kind of back-office staff into more commercial roles as kind of part of a sort of digitalization initiative within the organization as well.

Well, yes, I'll say a word on the Legrand Way maybe just before we say that word on the -- level of SG&A. Well, number one, you could see in 2019, it was also the case in 2018, that the SG&A level is well under control and that we are doing leverage on our SG&A expenses.

So it's not like if you were spending for the sake of spending. As you know, SG&A level is well under control.

Number two, as far as our overall level of SG&A, be careful not to compare bananas and apple, if I may say. Yes, we may have a higher level of SG&A than some other companies, but at the same time, we have higher growth, higher pricing power.

We are in more countries. We have more products.

We are spending a lot more in R&D. Don't forget that we are spending close to -- I mean 4.8% last year in R&D, which tends to be two times higher than our competitors.

So the fact that we have, compared to a number of other industrial companies, a higher level of SG&A doesn't mean that we are not cost cautious or putting our cost under control. It means that we are investing more than others into innovation, into commercial aggressiveness, into pricing power and too many other things.

So you should really look at the Legrand model as a whole, not zooming only SG&A, but taking top line, gross margin, SG&A and other expenses at all. As far as the Legrand Way program is concerned, so Legrand Way, it's the sort of booklet of good practices that we implement in our units.

So it started with industrial facilities, so it is like -- a little bit like the old Toyota program, if you may say. So it's part of it.

It's lean, but it's not only lean approach. It is also about the gross productivity, level of service, the quality, health and safety.

So it's a 360-degrees program. We started to implement it in our factories.

It's not completed yet. So we still have a number of factories where we have to roll out the complete program.

We also started to roll it out in our R&D department. And what we are doing it -- doing now is trying to put it in different departments, including marketing, sales and so on.

Should we expect -- is it a big cost-cutting program where you should expect to see a strong drop in SG&A in the years to come? No.

The answer is no. It's the implementation of good practices, again, not only focusing at cost control and productivity, but also at the quality, level of service, health and safety and so on and so forth.

So it's part of the main initiatives we are putting in place to keep improving the Legrand model. But again, the one message I would like to channel to you, Alasdair, is that don't believe that Legrand is not cost cautious as far as the SG&A level is concerned.

This is something we are tracking very, very closely. But we feel that it's needed by the Legrand model to have a certain level of SG&A to invest in growth, innovation and so on and so forth.

Good example of our, let's say, if I may, for strong -- good practices in terms of management is, for example, the level of inventory. You could notice this year that we have a level of inventory, which is quite low.

So don't forget -- don't worry, we keep improving the Legrand model in all aspects, capital employed, cost and so on.

That's great. Thank you.

Very clear. I was just wondering if I could have a follow-up question just on the organic sales guidance for 2020.

I think a lot of the organic growth in 2019 came from pricing. And I guess it looks like that's going to be more neutral this year, just given the easing inflationary headwinds from tariffs and raw materials, et cetera.

So I guess your guidance for this year would imply maybe a reacceleration in volume growth in 2020, and that's really despite, I guess, you get a negative impact on sales from pulling out the U.S. retail contract.

So just wondering if that's the kind of correct way of interpreting the kind of guide, whether you're a bit more confident about some of your end markets now with perhaps easier comps than you had coming out of 2018. And then maybe if you could also comment on some of the markets in terms of where you see the greatest growth potential.

Thank you.

Well, it depends, Alasdair, which -- if you are more on the low end of the guidance or the high end of the guidance. If it is the high end of the guidance, yes, it implies an acceleration in volume.

If you are in the low end of the guidance, no, of course, it doesn't. So it really depends on where we would be at the end of the year.

And we always have the same discussion at this time of the year. The reason why we are providing a range and not the precise set of -- precise number is the fact that we have a lot of uncertainties at this time of the year.

And not only to mention the virus in China, but if you look at the other uncertainties, there are many things. The U.S.-China dispute is not over.

You have the situation in the Gulf. You have time of elections in the U.S.

And we know that the Europe elections, it's always difficult to predict what's going to happen. You have GDP numbers that were quite low in Q4 in France and Italy, which are two important markets for us.

So the reason why we're giving a range is obviously, as usual, the fact that we have to live with all of those uncertainties. Now looking at the market in 2020, we remain, of course, cautious.

We did, I think, a very, very good year in Europe, clearly above our competitors, above our peers. Now as I said, when you look at the IMF numbers and forecast for Europe, some of them are not very supportive.

And again, looking at the economy in France and Italy in Q4, it was not very, very good. So we remain very cautious.

As far as the U.S. are concerned, we told you that from midyear, we felt that the market was smoother.

We told you that as early as our release of the nine-months number, and actually, it was smoother. And I think our performance in Q4 was clearly above our peers.

It was a very good performance, but still, the market remained less supportive in H2 than in H1 in the years -- in the previous years. What will it be in 2020?

We don't know. And again, the presidential election might somehow have an impact.

Well, as far as the Rest of the World is concerned, China is a big question mark for everybody, I think. India, you could see that the macro numbers are a bit less supportive than it used to be.

Brazil, a question mark. You have spots which are even more difficult to read, such as Lebanon.

Even if it is 0.1% of our sales, well, it's bad in Lebanon, but Chile, Peru and so on. So again, at this time of the -- we'll try to give you more insight in April and May when we will release our Q1 number or in July.

But at this time of the year, it is extremely difficult to give you a more precise feeling about the market, all the more as we have this sanitary issue going on, which add to the 2020 uncertainty.

It's Martin from Citi. So I had a question on how you think about the perimeter of potential acquisitions.

And obviously, you've broadened away from your historical low-voltage scope, and you've been buying into areas like access control, audiovisual installation, temperature control, all these kind of things. And just to understand a bit more about how you think about the common underpinning of what you're buying.

I mean, historically, I think we've always thought that you're selling to installers through distributors. Is that still sort of the underpinning of how you think about companies you want to buy?

And then related to that, obviously, that model was very good for pricing power in low voltage. And now that you have more of these non-low-voltage products, do you think the pricing power of these areas you're moving into is just as good as what you've had in the past on the low-voltage side?

Yes. I mean, what I want to make clear is that all those entries into complementary fields of activities are not diversification.

When we go into lighting fixtures, when we go into data center, busway for data centers, audio/video and so on and so forth, and when we are progressively expanding our accessible market, which is now worth more than €100 billion, it is not a diversification. So we are selling to the same customers and/or selling as part of the same system.

I can give you many examples. But when we buy UEC, which is doing busway for data centers, where it's exactly the same customers as the cabinets and racks or the connectivity that we have had as part of our catalogs since our operation in 1998, right, more than 20 years.

So yes, it is interesting to enter into new fields of activities because instead of operating in a market which is worth €60 billion, we are in a market which is worth €100 billion, let's say. So it makes our position more powerful vis-à-vis our customers.

It adds weapons to grow. We can create cost and revenue synergies.

So it's extremely interesting, but it's not a diversification. It's addition of complementary portfolio of products.

As a result, and then actually, in our process, I can tell you that we are extremely careful not to diversify. And there are a number of attractive companies that have proposed to us by either advisers or by our people, which we are not pursuing because we believe that it would be a stretch that we don't want to do.

So as a result of that, there is no, let's say, significant or big difference in business model between those new fields of activities and the old one. There's no, of course, areas which require 10% of R&D to sales and some other which require 1% of R&D to sales, but the difference is not between the new and the old.

We have old, I mean, products that has been part of our portfolio. And there are new product categories, which we have acquired in the past five years, where we spend 1% of our sales to R&D.

So there's no -- there's, of course, differences between this and that product family, but there's no significant difference, let's say, between the old product family and the old one and the new one. And it is true for the R&D intensity.

It is true for the capital intensity. It is true for distribution channel.

It is true for pricing power. It is true for many, many for P&L structure and so on and so forth.

I got a question to follow up on the earlier discussions of the DIY contract in the U.S. Just to clarify, the 2% is relative to the Americas sales, and that's part of the overall, obviously, for the overall guidance for the year.

But also maybe you could indicate some benefit that could have to the profitability. And is this a situation where the Legrand brand is going to be replaced by private label?

And is that a general trend that you see in DIY? Or is that really a one-off specific situation where they go for one brand to another brand?

And then the second question, a follow-up on the discussions on the U.S. we just have.

Maybe you could break down your organic growth performance for the U.S. in 2019 into, basically, what the lighting fixtures business and what Milestone did, so we have an idea of what the rest of the business did in the year.

Well, as far as the DIY customer, yes, of course, it's part of our guidance. It will have no significant impact on profitability because this is a contract, which was approximately the same level of profitability as the rest of [NCA] and no material impact on profitability.

And no, we were not replaced by a private label. We're replaced by another competitor which, by the way, also had a more extensive range of product than we had.

So it's probably also was part of the decision that was taken by the DIY customer. But again, I would not like to exaggerate the importance of that.

And again, I can tell you that I've been in this race for 23 years now, and I have lost and gained many of those contracts. This is purely part of the game.

As far as the growth of the various entities are concerned, cannot be too precise. But as far as our lighting fixtures business is concerned, we had a nice growth in 2020, which was satisfactory.

Don't forget that as far as our lighting position in the U.S. is concerned, it's very specific, and we are not competing in the big lighting market against the big guys.

We are really addressing a specific niche of highly specified architectural higher-value lighting fixtures. And as a result, this market and our market position is quite supportive, and we've been growing nicely there.

As far as our Milestone position is concerned, so now you know that we are no longer reporting on Milestone because Milestone was merged with other units in the U.S. in order to build an AV division in the U.S., putting together a number of brands and Milestone, but also Middle Atlantic, but also a number of residential brands.

So we cannot give you the performance of Milestone alone. As far as the AV division was concerned, it was flat in the U.S.

in 2019. Bear in mind that our 2018 sales was up by close to 5%, which is above for AV, which is above the sort of midterm projections that we gave to the market at the time we bought Milestone.

We told the market that Milestone was set to grow approximately 2% per year, 2% to 3% per year. So if you look at the growth of our AV division over 2 years, it is completely in line with this guidance.

So a nice single-digit gross in the lighting fixtures and flat for AV.

Good morning. Thank you for taking the questions/ A couple, please.

You've broken out the growth in connected products, very helpfully, but you've also discussed in the past the scope around digital infrastructure, which I believe you were willing to scope on an annual basis. I think, last year, you described it as about €1.2 billion of sales.

If you think of that group of business in 2019, could you discuss how it grew and your expectations for the year ahead? That would be the first question.

The second is easy. With respect to -- you said there were a number of exceptional items in the tax this year.

What is the official guidance for your tax for the full year? And the last is coming back to China.

We've had, over the last 18 months, a number of discussions about the importance of China as a supply base, particularly into your North American operations. Clearly, there's a risk of disruption through the supply chain.

Can you at least spend a little more time discussing the risk to the supply chains? And for how long you can operate within the inventory levels and your businesses without needing to seek or find alternative supplies from your current sourcing in the region?

Thank you.

Okay. I'll take the first and the third question.

I will let Franck answer the second one on tax. Well, on digital infrastructure, we're not reporting sales by product family or product categories just because this is not the way we are organized.

So we give this flavor for Eliot sales because we feel that it's a very important information to give to the market. But we are not organized to report either on a quarterly basis nor on a yearly basis of sales by product family.

Our reporting the way we manage the company internally is really country-based and not product-based. So of course, we have analysis product by product, but our internal reporting is not product-based.

We don't, for example, have a P&L by product. It is really country-based.

What I can only confirm, as I said at the beginning of this call, is that the number of those product categories grew nicely and that we think it's a very important category to be in. As far as the third question is concerned, yes, definitely, China is an important place to supply our products.

And obviously, you could see that for the U.S. And it's the reason why we had a big tariff impact in 2019 that we could compensate.

I don't have a clear answer to your question because it does not only depend on us. You have the stock that the stocks that our customers have, the stocks that we have, the stocks that our suppliers have.

You have the ability to restart the production. And again, we are currently restarting the production.

My feeling is that it will be difficult for China to stop operations for weeks and months. I mean the impact in the economy would be too disruptive.

So my feeling is that the efforts will be made by the Chinese authority, of course, under a number of very strict controls so that the manufacturing capabilities of suppliers could be resumed quite quickly. And again, if we were to have a shortage of components, I believe that it would be the case for everybody.

And I tend to believe that we are probably less exposed than others to this. So I cannot give you a clearer quantification of that.

But I can tell you that we are tracking this topic extremely carefully with our own facility, with our people, with our suppliers. And the feeling I have is that there will be a lot of efforts made by the Chinese authorities to restart quite quickly the manufacturing operations in China.

The good thing, if I may say, I shouldn't employ this word, but the luck of the Chinese economy that it happened, this outbreak happened at the time of the Chinese New Year where most of the facilities were, anyway, not running, where a lot of safety stocks have been made by various companies because the country was to stop for 10 days. So again, if there was to be a shortage for a very long time, we would be impacted and everybody will be impacted.

But I feel that everything is put in place so that it doesn't last for too long.

Perspective about tax rate, we are currently benefiting from onetime early. It was already the case in 2018.

So 2018 tax rate was 28.1%. 2019 tax rate is 27.5%, still benefiting from some one-timers, plus a small positive impact of a lower Indian tax rate.

What about 2020? We don't expect significant changes in local tax rates.

You probably have in mind the decline of the French tax rate, but it's not very material. So what we can say is that our tax rate for 2020 could be in the range between 20% to 30%.

I wasn't clear. I said between 28% and 30%.

I wonder if you could comment. So obviously, Schneider has announced an acquisition today in the building information modeling space.

I mean they see it as key to their building product strategy. There's quite a lot of product overlap between you and them in the low-voltage space.

I wonder how sort of you feel about the evolution of this. Do you feel it's necessary to look in that direction in order to maintain or even take share in the product space by being earlier in the decision-making process in terms of the construction of buildings, the design of buildings, that kind of thing?

What's your thoughts on that?

So obviously, it is very important for Legrand to be part of building the BIM. But let's make it clear, for us, I mean BIM is used by many specifiers and engineering companies to plan for the construction, maintenance, operations of a given building.

So whenever they are using the BIM software, it is important for Legrand to have, what we call, BIM objects to supply to them so that when they are digitally mapping, if I may say, the building, they can have a digital twin of the Legrand products. So we have a number of BIM objects that we are already making available to our customers, either directly or through a number of database, BIM object and so on.

Do we intend to own a company specialized in BIM? No, definitely, we don't.

And of course, I'm not commenting on Schneider's strategy. Each company has its own strategy.

As far as Legrand is concerned, we've always been very clear on the fact that we don't want to do the work of our customers. So yes, we are supplying all information which is needed by engineering companies using BIM, by engineering companies using AutoCAD, by our distributors selling online and so and so forth.

But we do not intend to do a BIM platform ourselves or to do -- to sell online to our customers or for customers ourselves, for example.

Well, thank you very much for attending this call. I know, as usual, it's a very busy day for you, so thank you very much.

And should you have further questions, please do not hesitate to contact Franck, Ronan or even myself, and we'll be happy to answer you. Thank you very much.