Legrand SA

PAR:LR

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, good morning, and welcome to today's Legrand 2019 First Quarter Results Conference Call. [Operator Instructions] For your information this conference is being recorded. At this time, I would like to hand the call over to CEO Mr. Benoît Coquart; and CFO Mr. Franck Lemery. Sir, please go ahead.

[Benoît Coquart, Chief Executive Officer]

Thank you. Hello, everybody, Franck Lemery, François Poisson and myself are happy to welcome you to the Legrand 2019 Q1 Results Conference Call. Let me first remind you that we have published today our press release of financial statements and a slideshow to which we will refer. Those documents are available on the Legrand website. Please also note that this conference call is recorded and webcasted on our website.Let me start with few opening remarks, following which Franck and I will comment into more details of 2019 Q1 results. I'm starting on Page 4 of the deck with the 4 main takeaways from today's release.The first takeaway is that all main financial KPIs are on the rise in Q1 2019 compared to Q1 2018. Total growth in sales were more than plus 7%, adjusted operating profit increased about plus 5% and net profit attributable to group was up more than plus 8%.Second takeaway. We have pursued our innovation and acquisition strategy by launching many new products, including new connected offerings as part of the Eliot program and by completing the acquisition of Universal Electric Corporation, the undisputed U.S. leader in busways for datacenters. We also continued the deployment of our initiatives aimed at strengthening the group's development model.Third, we are launching today our fourth CSR road map 2019-2021, which is built around 3 focus areas, business ecosystem, people and the environment, with ambitious targets contributing to the UN sustainable development goals.Lastly, based on its first quarter 2019 performance, Legrand confirmed today its targets for 2019. I will come back to this point later in this call.After this brief highlight, let's start with another view of sales on Page 6. So total sales rose plus 7.3% in the first quarter of 2019. This good showing comes first from a solid plus 2.9% organic growth, Legrand's first growth driver. All 3 geographical zones are on the rise like-for-like. Acquisition-driven growth, which is the group's second growth driver contributed plus 1.9% in Q1 2019 based on acquisitions completed in 2018 and 2019 and their likely consolidation dates, the scope of consolidation should come to close to plus 5% in fiscal year 2019. Finally, ForEx impact was favorable at plus 2.3% for the period. If we apply to the last 9 months of the year, the average ForEx rates observed in March 2019, then the annual ForEx effect for 2019 would be nearly plus 2%. This is, of course, as usual, a theoretical computation, and time will tell what will the actual ForEx impact on sales be for the full year.Let me now go into more details regarding the like-for-like evolution of sales by reporting segments and for that, please refer to Page 7, 8 and 9 of the slide show.Starting with Europe. Organic growth in sales was plus 2.3% in Q1 2019. In Europe's major countries, sales grew plus 1.7%. This increase was mainly driven by sustained growth in sales in Italy, reported by a steep rise in sales of connected products as well as in Germany, Greece, Portugal, and the U.K. The French market remained lackluster overall, and Legrand sales in France retreated due to destocking by some distributors. In Europe's new economies, growth stood at plus 5.7%, with strong growth in Russia, Turkey, Hungary and the Czech Republic.Let me now move to North & Central America, where sales were up plus 2.4% on an organic basis. This increase was driven by the U.S., where sales grew plus 3.3% like-for-like, with good showings in lighting control, smart PDUs for datacenters, cable management and user interfaces. Revenues were nearly stable in Mexico compared to Q1 2018 and retreated in Canada.Let me now move to the rest of the world, where sales rose plus 4.9% on a like-for-like basis. In Asia Pacific, sales were up plus 6.2%, with double-digit growth in India and Thailand and healthy showings in China. In Latin America, organic growth was plus 3.1%, and in Africa and Middle East, sales rose organically, plus 3.3%. Many African countries recorded very strong rise in sales and sales retreated in the UAE and Saudi Arabia.Let me now pass the mic to Franck for an overview of our financial performance.

[Franck Lemery, Executive VP & CFO]

Thank you, Benoît. Good morning to all of you. Let's start with profitability on Page 10. As said, Q1 2019 adjusted operating profit is up plus 5.1% to reach EUR 305 million.Moving to Page 11, Q1 2019 adjusted operating margin before acquisition at 2018 scope of consolidation came to 19.8%, including a favorable impact of around plus 0.1 point linked to the implementation of the IFRS 16 standard. The 0.3 points decline compared with Q1 2018 adjusted operating margin essentially reflects a demanding basis for comparison and a decline in gross margin linked in particular to the rising raw material and component prices. Nevertheless, the rise was fully compensated in value consistently with Legrand's model. I would like to highlight here that the rise in U.S. customs duties was fully offset by pricing and adaptation initiatives in our North and Central America accounts. Including the 0.1 point dilution from acquisition, adjusted operating margin came to 19.7%. Taking acquisition completed in 2018 and 2019 into account, the dilution from acquisition should be around minus 0.4 points for the full year 2019.Moving now to the net profitable -- sorry, to the net profit attributable to the group on Page 12. It was up plus 8.6% from the first quarter of 2018. Most of the increase came from the rise in operating profit completed by a favorable change in FX results and a 2-point decrease in tax rate, due to favorable one-off factors.Moving finally to the last indicator of the financial performance on Page 13. As you know, the relevant reading of free cash flow generation in the quarter is on a normalized basis. You can see from the right-hand side of the slide that normalized free cash flow was up over plus 9% in the first quarter of 2019 to represent 15.5% of sales. Additionally, on the left-hand side, you can see first that cash flow from operations increased close to 10%, reaching 17.6% of sales. This is 0.4 points above Q1 2018 level.As for free cash flow, it stood at 3.9% of sales as working capital requirements represented 12% of the last 12-month sales at March 31, 2019. This was mainly due to a temporary rise in nonoperating working capital requirement. These were all the elements I wanted to share with you regarding the first quarter 2019 of our financial performance.Let me now give the mic back to Benoît.

[Benoît Coquart, Chief Executive Officer]

Thank you, Franck. Let's move now to the second part of the presentation, i.e., the pursuit of global innovation and acquisition strategy as well as of operational initiatives. As you can see on Page 15 of the deck, we were active again on the innovation front, launching several products covering many of our product categories, including smart offerings from our Eliot program. You can see, of course, user interface solutions on the left side of the slide, notably Valena Life connected range recently launched in Belgium and Spain. We were also pushing offerings for digital infrastructures with fiber-optic assets, including LCS3 products, for example, but also an all new Trimod MCS range within UPS systems, architectural lighting under the Finelite and Pinnacle brands and the Reach Digital connected residential alarm units for assisted living.Moving now to Page 16. We have completed, in April, the acquisition of Universal Electric Corporation, the undisputed #1 in the U.S. for busways, i.e., electrical power distribution systems based on metal busbars. Universal's offerings are mainly sold under the Starline brand and have been known for the quality, ease of installation and use, making it a true benchmark for the market. They will ideally round out Legrand front-runner positions in datacenters in the U.S.Finally, on Page 17, you have a few examples of ongoing initiatives that Legrand is pursuing that has been presented in February. These initiatives include, for example, the organization of the group's front office into 3 regions, which has been fully up and running since the end of 2018; the optimization of the industrial footprint, for example, in Turkey and Saudi; and the targeted digitalization of our front office and our operations.I would like now to move to our third part on Page 19 dedicated to our CSR initiatives. Indeed, the group has launched today its fourth CSR road map, which covers 3 years from 2019 to 2021. It is built around 3 focal areas, business ecosystem, people and the environment. These areas are broken down into 10 key challenges that contribute to the UN sustainable development goals, and it has been defined through a materiality survey that involved more than 3,600 group stakeholders. Within the frame of this road map, Legrand has also set itself ambitious targets for 2030 aimed at: deriving 80% of group sales from sustainable products; increasing the number of women in management and achieve a gender-balanced workforce; and reducing its carbon footprint through a 30% decrease in CO2 emissions directly linked to our operations. Full package of information on the CSR road map is available on the legrand.com website. Coming now on Page 21 to the last topic of this earnings release, i.e., our targets for the full year. Based on its first quarter 2019 performance, Legrand confirms its 2019 target for organic growth in sales of between 0% and plus 4%, and its 2019 target for adjusted operating margin before acquisitions at 2018 scope of consolidation of between 19.9% and 20.7% of sales. Please note that this range embeds an estimated favorable impact of around 0.1 point linked to the implementation of IFRS 16 standard. Legrand will also pursue its strategy of value-creating acquisitions. Franck, François and myself are now ready to open to questions. Thank you.

[Operator]

[Operator Instructions] We have a first question from Andre Kukhnin from Crédit Suisse.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Start with the couple of obvious ones. On France destock, could you please help us with quantifying the size and maybe what impact that made on profitability, if it's significant? And on France, just more broadly, has your outlook on that market changed at all since Q4 results? Some of your peers have commented a bit more positively, while you call it still lackluster, so just wanted to get your latest thinking. I'll start with that, please.

[Benoît Coquart, Chief Executive Officer]

Andre, well, to give you a bit more color on France, we have -- our sales are slightly down, not to the magnitude of our Q3 performance, but still they are slightly down. To be compared with sell-out, which are slightly up. To give you order of magnitude on sell-out in France are close to plus 1 and then -- and the sell-in are slightly decreasing, so the difference between sell-out and sell-in, obviously, is a destocking. So destocking was not as strong as it was in Q3, but some of that happen. And by the way, it's not a big surprise because you remember that we delivered a very strong Q4 in France. And we said at that time that part of our Q4 performance and part of our Q4 clear overall performance compared to the French market was coming from the fact that some of our distributors have restocked a bit. So this Q1 destocking did not come as a big surprise to us.Well, what impact does it have on profitability? Obviously, given the level of the French margin, it didn't help the European margin. Now, we'll probably comment a bit later on the profitability. Profitability to pick in Q1 is more coming broadly from discrepancy between sell-in price and the price of raw material and components broadly rather than specifically an issue in France.Last, going forward, well, as usual, we have no clue. We've kept telling the market that the French market hasn't been supportive for quite some quarters. And sell-out which are slightly up, market which is only very slightly up, for us, is [indiscernible] of lackluster market. So unfortunately, we don't see this as a reason why the market would be considered as nearest possibility than it used to be. Also more as -- on the economic front, you could see that incentive in the IMF has downgraded a bit GDP expectations for France. So the market which hasn't been supportive for a couple of quarters now, and we don't really expect that to change in the quarters to come. Does it answer your questions?

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Absolutely. And first and the second one in terms of kind of more broader profitability question. You explained in the past that offsetting the absolute value of raw material and tariff inflation with price increases still leaves you with a margin headwind? We're going to calculate that margin headwind to be about 20 bps in Q1 '19, just purely from the effect of raising price to offset raw materials, but obviously sales base increases with that as well. Does that concur with what you have or should we calibrate that number?

[Benoît Coquart, Chief Executive Officer]

Well, let me give you a bit more numbers, maybe, to calibrate that. So overall in Q1, our pricing was up by 2.3% and the inflation of raw materials and components was about plus 4.5%, including 2.6 points coming from the U.S. tariff. So excluding the U.S. tariff, the increase of -- in price of raw material and components was something like plus 1.9%. So those are the numbers. Obviously, you had everything you need to compute the impact it has on the margin, but clearly, this is an important driver behind the small decrease in profitability at the 2018 perimeter.Now number one, our commitment has always been to compensate in value and we did it. We did compensate in value in Q1, increasing raw material price and prices of components. Even though it had a negative impact on the margin. Number two, the good news is that zooming on the U.S., the tariff was fully compensated. In Europe, it was -- it remains a challenge for Legrand. Number three, we remain very confident of the fact that the Legrand's traditional model of adjusting selling price depending on the price of the inputs, including raw materials and components is obviously still working. And going forward, in the quarters to come, if there were to be a decrease in the raw material price and components, we have already notified a number of geographies and a number of product families in which we could, if needed, do additional pricing. So we are very confident of the fact that our model, of course, is still earning very well. So this is the main driver behind the profitability evolution between Q1 2018 to Q1 2019, to which I would like to add also that Q1, in terms of reserves, was demanding basis for comparison. You can do the math yourself, but obviously, it's a quarter which was a bit demanding.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

That's very useful. Just last one from me. Probably the usual one as well. On growth guidance, it is slightly surprising, you didn't raise the bottom end at that 0%, given Q1 performance and no obvious deterioration in the markets at least for near term. I know it's a kind of a range of outcomes, but just in terms of that bottom ended 0, what are those kind of risks that you see out there for the rest of the year that could turn your revenue growth down later in the year for that scenario to materialize?

[Benoît Coquart, Chief Executive Officer]

Well, we believe the Q1 which is very consistent with our guidance, our guidance of 0% to plus 4%, and we delivered plus 2.9%, and what we said 2 months back when we released our full year results, 2018 results, remain valid. It is a year where we had a lot of uncertainty. The recent IMF downgrades in a number of markets have sort of backed up the fact that 2019 going to be an uncertain year. You know the Legrand model, we have no order book, so given what we have seen so far, both in our performance and in our end markets, we see no reason to change our guidance now. And regarding Q1, it's very consistent within guidance.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Okay. That's very clear. So if I have to interpret it, it's not something that's kind of emerged that you see in front of you that, that is a risk, it's more of an element of conservatism given that we still have got 3 quarters to go.

[Benoît Coquart, Chief Executive Officer]

That's not at all what I said.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

No?

[Benoît Coquart, Chief Executive Officer]

It's not an element of conservatism-- we have only 3 months of performance behind us, so we have 9 months in front of us. And there are -- the usual uncertainty for a number of markets. So no, it's -- again, if you were to have a market significantly -- some of our markets deteriorating negative impact from Brexit, deterioration in Italy and so and so forth would be definitely because of euro. If, for whatever reasons, the markets were to be mostly sportive and even sometimes rebounding because of [indiscernible]. So what we said in February will remain true. We have only one quarter behind us. It's very difficult to give you more precise guidance on what the market will deliver and will do from now to the end of the year.

[Operator]

Next question from Andreas Willi from JPMorgan.

[Andreas P. Willi, Head of the European Capital Goods]

My first question is on the U.S. performance in terms of organic growth, which was -- for the North American one, in general, which was weaker than I would have expected, also given that's probably the area where you had the biggest benefit from price, and therefore, volume growth looks pretty weak. Most of your peers have reported strong results in general and the general kind of electrical construction exposed U.S. market. Maybe you could elaborate a bit on the drivers by business. You highlighted some of the areas that did well. So there must be other areas that had negative year-on-year performance on volume particularly.And a follow-up question to the pricing discussion earlier was that the mechanical impact on margins is clear, but I'm still a bit surprised, even today, given -- compared to the historic performance of Legrand in terms of timely offsetting of raw material price inflation. Also given that many of your input costs in terms of the base metals have actually come down a bit compared to where they were a year ago. Should we expect some tailwinds as the year progresses, just as copper, silver and some of the other materials may not increase anymore or be down slightly and you keep increasing or having the carryover effect from price?

[Benoît Coquart, Chief Executive Officer]

Okay. On the first question, and the one you always have to be extremely careful when comparing performance of one player to the other because all companies have very different scope of products. You call that low voltage, but within low voltage, if you look at especially North American market, we are competitive positioning, which is very different from the one of Eaton, Schneider, Hubbell, Acuity and the likes. So you always have to be very careful when comparing the performance. Now looking -- this being said, looking of -- at what all those guys have reported, and you could also include the distributors, both professional and DIY, it seems like the U.S. market, in Q1, grew in value more or less in line with GDP, i.e., somewhere between 3% and 4% or 3% and 3.5%. This is very consistent with the numbers released by most of the companies I have mentioned. With our plus 3.3% growth, we are in line with the market growth. We are not significantly gaining market share, but we are in line with the market growth, overall. So we don't see that as a disappointing performance, we see that as a performance which is in line with the market. And by the way, and again, I'm referring to the release of some of those companies, most of the companies have increased significantly their selling price in the U.S., in order to compensate for the negative impact coming from the tariff.So with 3.2%, we are broadly in line with the market and with minimum volume growth given the fact that we have had the significant pricing impact in the U.S., again, we are more or less in line with the market -- what the market is doing. So you could always claim that Legrand should win market share everywhere, but we are not doing. We are in line with the market.As far as your second question is concerned, the pricing that's just raw material and pricing components, again, our country club has always been to compensate in value, when raw material price and components is going up and to have a positive impact on margin, when raw material pricing components is going down. And this is a Legrand model, that's what we've been able to demonstrate in the years to -- in the previous years. And this is what happened in Q1, so there is no compensation in margin. There was a negative impact on our margin, but it is compensated in value.Going forward, it's always difficult to understand what raw material and the component price will do, furthermore, as not only you have the impact of the raw material price itself, but you have also the FX, which has an impact. Looking at Q1, for example, a number of metals price went down, but especially when consumed in euros, a number of other raw materials went up or components went up. It's a case for number of plastics. This is a case for packaging, for example. This is a case where a number of components, which represent, as I remind you, biggest part of our supplies and a piece of -- part of that was impacted by the dollar/euro pricing. So going forward, it's -- in your scenario, you have to embed not only the price of raw material, but also the FX. It is true that the number of economists are expecting the price of raw material and components to ease a bit. What will it be? We don't know. What matter, I think, for you in that -- on a yearly basis, this is something we'll keep monitoring closely, and we have the ability to keep adjusting our selling price in order to mitigate the impact of raw material pricing components and then component price into accounts.So again, not a lot of visibility going forward, but the ability to adjust on a yearly basis. On a given quarter, of course, you can sometimes have a bit of bonus, such as we had in Q1 last year coming from pricing. You can sometimes have a bit of minus coming from raw material and components. What really matters is the way to balance on a yearly basis.

[Operator]

Next question is from Gael de-Bray from Deutsche Bank.

[Gael de-Bray]

My first question is, would you say you were surprised by the rise in raw material and component cost over the quarter and in which geographies do you feel you need and still have the ability to raise pricing further in particular. So that's question number one. Question number two is about the sort of margin volatility we've seen now in the past 3 quarters, so I'd like to better understand perhaps the reasons behind. And in particular, do you think there was some catch-down effect in Q1 with extra spending now required after the strong cuts in cost you made in Q4. And the last one is about the basis of comparison you highlighted for Q1, would you say it's going to be the same as demanding as it was in Q1 in the second quarter?

[Benoît Coquart, Chief Executive Officer]

Hello, Gael, so first question. Well, we were not surprised by the rise in raw material prices and components but there are number of inputs to that which by the way our not known at the time you start the quarter typically, for example, so U.S. dollar/euro and the foreign exchange rate wasn't known generally and this is very important, a very significant input for the raw material and the components we are consuming in our accounts. Now again, I have to remind you, Gael, that adjusting offering price is not something which is completely mechanical and you just don't decide overnight that you're going to increase price by 1% here 3% there, this is something which is extremely progressive and which you have to think a lot to make sure that competitive-wise it is not the potential issue. So you don't decide overnight, Jan 1, that you're going to increase the price by 2% or by 3%. There's a policy work. Well, we have identified, as I said, a number of geographies, where it was worse doing a bit more pricing. I cannot elaborate more than that because this is a highly competitive information. And we are not much commenting on pricing per regions but the action plans are there.Well, as far as the margin volatility is concerned, I wouldn't call minus 30 bps to be such a strong and high volatility. I haven't -- I don't believe there's been any significant catch-down, if I may say, to use your own words, impact. You can, for example, look at our SG&A, a lot of the savings we did in Q4 were SG&A related. And our SG&A in Q1 2019 had positive impact on our profitability, our SG&A are growing not as fast as offers. So we have had some leverage impact on our SG&A. So no significant catch-down, it is just the fact that from one quarter to another, many things can happen in terms of pricing, in terms of mix of geographies, and so on and so forth. And by the way, this is a volatility we have always had at long by definition. As far as the basis for the prices is concerned, remember the sort of specific profile of 2018 was quite a difficult, if I may say, Q3. So to make a long story short, the basis for comparison is -- should be a lot easier in Q3 and a bit more demanding in Q1, Q2, Q4. This is -- but this is a mechanical impact of the fact that our operating margin all-in was up 20 bps in 2018 compared to 2017. And this plus 20 bps was, let's say, between plus 20 bps and plus 40 bps for Q1, Q2, Q4 and was minus 110 for Q3. So base for comparison should be easier in Q3.

[Operator]

Next question from Lucie Carrier from Morgan Stanley.

[Lucie Anne Lise Carrier, Executive Director]

The first one, I was hoping if you could give us a more color on your business of connected cells. How it has been growing in the quarter. If you could give us the indication on organic growth that would be quite helpful. And in which area you have been kind of or in which area of your business are you expending currently in connected? That's the first question.

[Benoît Coquart, Chief Executive Officer]

Well, you see, as you know, we're not giving any specific insight or numbers on our connected sales by -- on a quarterly basis. So I would not. And on top of that you were invited to attend Investor Day on June 12. I hope you will be able to come and you will have a lot more color on the behavior, strategy, numbers and many, many things at that time.

[Lucie Anne Lise Carrier, Executive Director]

I will come to the Investor Day in June. But just, I mean, okay. So if you're not able to kind of give us a number, I would still be curious to have a sense of whether this has accelerated, decelerated versus what you had seen last year. The reasons for that is because if you're looking on your volume versus price in the first quarter, it looks like your volume was up only 0.6%. As you said, that price was up 2.3%. And so I think it would be helpful for us to understand, why the volume momentum is so low, is it because, I would say, the classic offering has been declining or is it because connected sales maybe haven't delivered as much as usual, also considering that connected sales usually have a higher price points than the standard offering?

[Benoît Coquart, Chief Executive Officer]

Same question, same answer. There maybe just -- so -- again, not saying they are to be hidden or not to be commented, but just we are reporting on Eliot growth sales on a half year basis or even yearly basis, not on a quarterly basis. As far as the volume growth is concerned, again, it is very consistent with our guidance. We guided -- we told the market 2 things, when we released our numbers. We said, we're going to grow our sales between 0 and plus 4%, number one. Number two, there will be significant pricing anyway because, for example, there will be very significant impact on our cost coming from the U.S. tariff. So the fact that -- so Europe 2 plus 4% impact significant pricing was already computing for [indiscernible] since that what we've delivered in Q1. So they should be -- they shouldn't be any surprise to the fact that we are not going very fast in volumes. It was completely expected and it's just coming from the fact that the markets are -- a number of markets are lot less supportive than they used to be in 2018. A number of European markets are under a bit more pressure. On top of that, we have demanding basis for comparison. France, we've already commented. The U.S. again, I think to what I was saying earlier our, let's say, peers If I may, say or the other companies in the electrical segments have clearly indicated that the market was growing at 3% to 4% and that they were doing significant pricing, i.e., the U.S. market is only growing slightly in volume. So number one, Q1 performance, volume/price value is consistent with our guidance. Number two, the fact that the markets are not growing fast in the volume is not a big surprise to us.

[Lucie Anne Lise Carrier, Executive Director]

And my second question was more a follow-up on the question from Gael earlier around the base of comparison. So you said, easier in the third quarter, tougher second quarter and fourth quarter. I'm guessing that was for the profitability or was that for profitability and sales, or just to understand a little bit better the rest of the year in terms of the base comparison because from a sales standpoint the first quarter was one of the easiest comps you have in the year, especially in the U.S. for example. And then if we think about typically the seasonality you have in the margin, historically, you've had a first half which was seasonally stronger than the second half of the year from a profitability standpoint. So I think, I just would like to understand a little bit more the different basis of comparison if you were only talking about margin or it was margin and sales?

[Benoît Coquart, Chief Executive Officer]

No. I was only talking about margin. And it's a very simple math, which is not worth Nobel Prize, I was doing a bit earlier to say that our adjusted operating margin in 2018 was up 20 bps compared to 2017. So we moved from 20% to 20.2%., so plus 20 bps. And this plus 20 was plus 40 in Q1, plus 50 in Q2, minus 90 in Q3, and plus 60 in Q4. So my only comment was referring to the fact that in terms of profitability we had this profile for the year 2018 with a very soft Q3 and a stronger Q1, Q2 and Q4. As far as sales are concerned, we know that we have, for the full year, difficult basis for comparison in a couple of geographies, especially the case in Italy and in Rest of Europe. But otherwise, I wouldn't say that Q1 is neither easy nor difficult in terms of base for comparisons.

[Lucie Anne Lise Carrier, Executive Director]

And just my last question was a more one of accounting. You had 10 bps of IFRS 16 benefit in the first quarter, is that expected to stay the same during the year or should we expect variation in that?

[Benoît Coquart, Chief Executive Officer]

Well, we expect it to be broadly the same for the full year. So it shouldn't have -- shouldn't be neither lower nor bigger. So you can take plus 10 bps for the full year.

[Operator]

Next question from Alasdair Leslie from Societe Generale.

[Alasdair Leslie, Equity Analyst]

Most of my questions have been answered. But -- so zooming on -- one on new product launches, you've talked about that quite a lot in the Q1 release. Did you see the full benefit maybe from those launches already in terms of the growth in the first quarter? It's not necessarily that visible from the headline numbers, but maybe that's down to tough comps or perhaps the underlying markets were even a bit weaker. Or should we think about that benefit ramping up in the second quarter. And linked to that, does -- there does seem to be more emphasis on innovation again in the release. Was there an impact on the margins either from high strategic investment or perhaps launch costs as well. That's my first question.

[Benoît Coquart, Chief Executive Officer]

No, we just wanted to put a slide on innovation in the Q1 release to remind everybody how important it is to the Legrand strategy. And the fact that even though the markets are a bit less supportive than they were last year. We keep investing in new products but this is not a new piece of our strategy. This is very consistent with what we've been doing in the previous quarters and years. So -- and none of the products that were launched in Q1 are of such magnitude that it will have a significant boost in our expenses nor negative or positive impact on profitability. And again, if you look at our SG&A in Q1, which includes commercial expenses to launch new products, they are not -- they are contributing positively to our profitability. So nothing new except the fact that as usual, even in times which are a little bit more difficult we are investing on growth. Now if I maybe can take the opportunity to make another comment, our plus 2.9% performance, organic growth in Q1 is fairly good performance. I mean if you are comparing with a number of other [indiscernible] and if you are taking the same angle, i.e., current number of days and current geographical parameters. It is pretty solid performance and again very in line with our guidance.What is changing compared to what we could say 2 months back was the fact that FX seems to be a bit more supportive. Now hence, the plus 2% positive impact coming from FX that we are computing based on the exchange rate of the first quarter. And number two, we -- as Universal Electric being acquired, now we are shooting for a perimeter impact of close to plus 5% for the full year. So those 2 things are slight change, if I may, say compared to our February release. As far as organic growth is concerned, our Q1 performance is very much in line with our guidance.

[Alasdair Leslie, Equity Analyst]

And if I can just -- sort of a follow-up question, maybe pick out one of those areas in the U.S. where you are still seeing some volume growth. You've called out lighting control again in U.S. as a driver. Can you kind of update us on your lighting control activities in that region? You've obviously made a number of acquisitions a couple of years ago, how are those kind of being integrated, are you kind of satisfying with the growth in that area is kind of lived up to expectations. And then I know you tend to focus on niches where energy codes can drive demand. I think there's a new version of Title 24 in California coming up in 2020, anything there that can perhaps move the needle for you?

[Benoît Coquart, Chief Executive Officer]

Well, we call that lighting, so it includes lighting controls, it includes architectural lighting fixtures, so not only the control piece. Low mid-single digit in Q1. So the growth was -- it was accretive to the U.S. growth and to NCA growth. So it is quite a good performance. And including actually the Canale company, which, as you know, joined Legrand at the end of last year. So the lighting and lighting control piece is growing nicely and accretive to our growth. And we believe that there is significant potential coming from this piece. It is prompted by some code changes or just by the fact that there are a number of also corporates that are eager to do energy savings. So yes, we believe this part has a potential. Now how much will it grow in 2019 and 2020 and beyond, obviously we don't know. But so far in Q1, it has grown a little bit faster than the rest of our operations in the U.S.

[Alasdair Leslie, Equity Analyst]

Great. And just perhaps a final housekeeping question, if I may. Just -- I was wondering if you could comment on the phasing of the M&A dilution. You expect perhaps for the balance of the year, I mean given the impacts of Netatmo is there any great seasonality that perhaps skew towards Q4, or should we really can't expect the...

[Benoît Coquart, Chief Executive Officer]

Actually, so we guided, when we released our numbers in February, we said that the dilution should be minus 40 bps for the full year. And it is true indeed that in Q1 the dilution was only minus 10 bps. But not all the acquisitions we made last year were consolidated. And for example, Netatmo, which was supposed to bring, if I may say, half of the dilution, minus 20 bps is not yet consolidated in our P&L in Q1. So you don't have yet the dilution coming from Netatmo. There are actually 4 companies that are not yet consolidated, Netatmo, Debflex, Trical, it's a small company we acquired in New Zealand and obviously, Universal Electric because the closing of transaction was April 1, so it was even post-close. And those 4 companies are expected to be consolidated in the months to come. And as a result the dilution should be around minus 40 bps for the full year. So the fact that it's below -- it's only minus 10 bps does not mean anything in terms of seasonality just mean that not all acquisitions are consolidated yet.

[Alasdair Leslie, Equity Analyst]

Exactly. No, I kind of appreciate that in [ terms ] that wasn't in there. I was just wondering going forward, a, there's no time line coming in Q2 for the full quarter and then also, is there any seasonality in the time that perhaps the profitability skew towards Q4. And just trying to think about that phasing, are we going to see uniformly kind of 50 basis point M&A dilution?

[Franck Lemery, Executive VP & CFO]

I can't yet tell you what will precisely be consolidated in Q2 because it also depends on the state of readiness of some of the acquisitions especially the last ones, of course. But you can assume that there is no significant or material seasonality. So you shouldn't have a quarter, which would be a lot more or less dilutive than the others.What we -- the key input is release -- schedule of consolidation which is not yet completely validated especially for Universal Electric.

[Operator]

Next question from [ indiscernible] from Goldman Sachs.

[Unknown Analyst]

Most of them have been answered. But I did want to ask about the temporary rise in the nonoperating working capital requirement that you mentioned. I mean, if you could provide any color around what it is driven by and perhaps when we should expect a reversal and perhaps the magnitude that would be much, much appreciated?

[Benoît Coquart, Chief Executive Officer]

Well. So first question, be careful when looking at Q1 working capital and free cash flow. You know that Q1 is a bit of not really relevant in terms of quarter. For example, If you take the non-normalized free cash flow, which was last year something like EUR 700 million or EUR 750 million, Q1 is only EUR 60 million. So Q1 is traditionally a very small quarter in terms of free cash flow, in term of -- so it's very nontypical in terms of working capital. So -- in other words, you shouldn't extrapolate really what's happening in Q1. Now it is true that working capital as a percentage of sales in Q1 was 12%, which is 3 points above the level of end of March 2018. Well, you have -- a lot of that is coming from nonoperating working capital, mainly taxes actually and which are things that are not in our control, which are beyond our control. So it explains a lot of the change and as far as the rate is concerned, well you have the mechanical impact from FX, you have some mechanical impact also from acquisitions. The fact that you have some acquisitions in the balance sheet so, i.e., you have their working capital accounted in the balance sheet but you don't have them yet in the P&L. So mechanically it has a negative impact on the ratio and a number of other things. So there's nothing let's say, material happening, it's just mostly technical or related to the nonoperating working capital.

[Unknown Analyst]

That's very clear. And maybe just one more, if I may about some of the new economies in Europe. If you have any kind of expectations in terms of how you expect some of the growth there, that would be appreciated as well?

[Benoît Coquart, Chief Executive Officer]

Well, I can hear listening your questions that you are not expecting much guidance from us, I think as you know that it's always a very difficult thing, as I said, for us to forecast. Well, we still believe, as I said, that there are going to be uncertain. We looked at some of the IMF downgrades, which were sometimes significant in countries like Germany or Italy, for example. The downgrades of IMF between Jan and April were as strong as 50 basis points. But we also listened to a number of analysts saying or macroeconomist saying that the U.S. market should remain somehow supportive. All that is very consistent with what we had in mind at the time we put our guidance. So in certain markets, some of them decelerating, some of them holding steady. And the mix of all that led us to deliver the quarter we delivered and to confirm our guidance. So unfortunately not much guidance I can give you on the markets and sales, because as usual, we have no order book and a very little visibility.

[Operator]

Next question once again from Andreas Willi from JPMorgan.

[Andreas P. Willi, Head of the European Capital Goods]

On the French destocking, is that something you think has completed? We've heard that Sonepar is changing how they are organized in France and basically doing -- that has a negative impact on their stocking levels. Do you think that's completed or should we expect an additional impact in Q2? And on the M&A dilution, you said earlier that we shouldn't expect big variations between the remaining 3 quarters. But if you consolidate Netatmo for 6 months during Q2, shouldn't that have additional impact then?

[Benoît Coquart, Chief Executive Officer]

I'll start with the second question. Yes, of course. My point was that we shouldn't expect impact coming from seasonality of the acquisitions. We should, obviously expect impact from the schedule of consolidation. So if we consolidate 6 months in one quarter obviously it will have an impact and whether we consolidate Universal Electric over 6 or 9 months, so there's obviously we have an impact. So the schedule of consolidation will have an impact but not the seasonality of acquisition that was my answer, that was my point. As far as the first question is concerned, I would love to be able to answer you but I have absolutely no clue. You and your colleagues raised the same question at the end of Q3 and I told you the same answer. And what happened was that there were some destocking in Q4. So it is highly unpredictable on the Legrand side. We are not part of the decision-making process of our distributors. What we have to do, of course, is to adapt, especially our industrial facilities, which are not conceived to have ups and downs in demand from one week to another and to try to mitigate the impact it can have on our accounts. But this is our strategy. We have absolutely no clue about the precise inventory level of our distributors and what they want to do in terms of strategy. This is their call, their strategy and their way to manage their working capital. The very important thing for us is that obviously, destocking or restocking can have a punctual impact or one-off impact on one quarter. What is most important for us and what we are really looking at very carefully and actually incentivizing a lot of salespeople on ease of sellout because sellout is really the measure of our competitive position in the market and how it's evolving and the market share we can gain, win new customers, we can then -- so a lot of our KPIs are geared at sellout, market share, success of new product, bookings or growth we can try to grab in that product family, rather than on the sell in, because sell in, again -- and the inventory management of our distributors is purely their call not our.

[Operator]

Thank you, we don't have any more questions. [Operator Instructions] Another question from Wasi Rizvi from RBC Capital Markets.

[Wasi Rizvi, Analyst]

I just had one follow-up and I'm looking at the year-on-year margin movement by region. It looks like that it's all come from Europe. And could you help me understand how that splits between the rising raw material costs, the geographic mix within that region and then the acquisition impact, particularly given the large acquisition impact still to come in the rest of the year, just help me understand that margin movement year-on-year.

[Benoît Coquart, Chief Executive Officer]

Well, in Europe they did not have much acquisition impact because most of the acquisitions that were consolidated are not in Europe, so might be slight, slight acquisition impact but not a big one. And what happened in Europe is exactly what happened elsewhere or what happened at the -- for the whole of group, i.e., gross margin, which is under pressure and which is coming especially from the rising raw material and component price over the quarter in euros and that's the area where -- what I commented earlier about the impact of the foreign exchange rate on the consumption of raw material and components happened. So negative evolution gross margin coming from that. And also coming from the fact that sales in France repeated and French shares are profitable so to avoid any misunderstanding our French margins, or the margins we are delivering on the France domestic markets are held at a very good level, but just a pure mix effect, a fact that Europe is growing and with France decreasing has also negative impact on the gross margin. And this is a -- so most of the, let's say, margin -- all of the margin decline in Europe is coming from the gross margin and the basis for comparison. So nothing specific to Europe. The comments we made for the full group are also valid for Europe.

[Operator]

Next question from Graham Phillips from Jefferies.

[Graham Phillips]

I'm Graham Phillips from Jefferies. Could you just please remind us with your change in disclosure? So moving Europe away from the countries now to just 1 big region. Why you sort of reduced disclosure. And if you are actually intending perhaps to increase disclosure elsewhere maybe to compensate. And again, I know you're reluctant to give how things like Eliot sales are going, but obviously, we are looking for and trying to understand the drivers of the company in terms of product areas. And of course that's a bit of a retrograde step to reduce the disclosure in terms of regions?

[Benoît Coquart, Chief Executive Officer]

Well, now the one -- we are not reducing disclosure. We use to disclose sales with 5 regions. We are now disclosing sales with 3 regions plus a number of sub-region, If I may say, we are disclosing sales evolution for Asia, Africa, Latin America, or major Europe or imagining Europe. So this is more disclosure than less disclosure. Again, why have we done that? It's not for the sake of changing the disclosure, it is because we have adjusted the organization. We had 5 zones, we are now grown and we are now running the company with 3 zones. And I can elaborate if you want the reason why we did that, it was mostly because we wanted to have a lot more share of good practices and number of other topics between France, Italy and the Rest of Europe. So we are not disclosing less, we are disclosing more as far as that is concerned. Number one. Number two, I don't believe that all companies are disclosing quarterly results. And you have full set of account on the quarterly -- quarter-by-quarter basis. So I wouldn't like you to pronounce on this call with this idea that Legrand has reduced reporting and reduced disclosure. We are disclosing quarterly results with a full set of results, full balance sheet, P&L, cash flow statement, notes, blah blah blah, and instead of giving sales evolution with 5 geographical segments we are doing with 7, if you add the Asia and so on and so forth.Now, again, we have an Investor Day where we discuss Eliot in 1.5 month time. You have the ability to raise any questions you want on Eliot and we'd try to address all of them if you wish. We -- I don't feel that it's -- if it was material explanation of performance in Q1, I would, of course, give more insight. But we are not bound to communicate on a year and a quarterly basis. Also more as evolution in new product sales are more relevant I believe on a yearly basis than on a quarterly basis.

[Wasi Rizvi, Analyst]

Okay. So what -- you're still keeping -- you're going to still keep Eliot disclosure on annual basis, although I thought you did mention early you might move 6 months?

[Benoît Coquart, Chief Executive Officer]

We haven't taken any commitment on the frequency of the Eliot release. And I don't believe I have ever committed to release Eliot numbers on a quarterly basis.

[Operator]

Thank you. We don't have any more questions for the moment. [Operator Instructions] We don't have any more questions. Back to you for the conclusion sir.

[Benoît Coquart, Chief Executive Officer]

Well, thank you very much for your presence at this conference call and have a good rest of the week. Thank you very much.

[Operator]

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