Legrand's (LGRVF) CEO Gilles Schnepp on Q2 2016 Results - Earnings Call Transcript

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Legrand SA (OTCPK:LGRVF) Q2 2016 Earnings Conference Call August 1, 2016 2:30 AM ET

Executives

Gilles Schnepp - Chief Executive Officer

Antoine Burel - Chief Financial Officer

Francois Poisson - Investor Relations

Analysts

Andreas Willi - JPMorgan

Simon Toennessen - Berenberg

Daniela Costa - Goldman Sachs

Lucie Carrier - Morgan Stanley

Andre Kukhnin - Credit Suisse

Gail Dubray - Deutsche Bank

Alasdair Leslie - Societe Generale

Graham Phillips - Jefferies

Alfred Glaser - Oddo Securities

Jonathan Monsey - Exane BNP

Gilles Schnepp

Thank you. Thank you. Good morning everyone. Welcome to the Legrand 2016 half year results conf call. I will make 10 minutes introduction and then Antoine Burel, Francois Poisson, and myself will be happy to answer any question that you may have.

As a reminder, we have published today our press release, our financial report, and a slideshow and I will refer to this slideshow during this introduction. And those documents are available on the website legrand.com. And this conf call is recorded and is also webcasted on our website.

So before commenting into more details, our 2016 first half results, and coming back briefly on our growth initiatives, I start on page 4 of the slideshow. So three main takeaways from this first half figures, first, the performance is robust. Group sales grows 1.9% at constant scope of consolidation and exchange rates. In more details, we experience a good performance in the U.S. Rising sales in mature Europe and flat sales in new economies.

Please note that first half growth benefited overall from around one day favorable calendar effect which should be reversed in the second half of this year. As far as profitability is concerned, adjusted operating profit showed a healthy 3.1% rise driven mainly by good operating performance against a backdrop of rising sales and this demonstrate again our ability to create value.

The second takeaway is that consistently with what we have said early Feb when we issued our full year accounts and in May for the first quarter, we have continued our development in connected offerings. About our Eliot program and we've been also active in terms of M&A with seven deals concluded since the beginning of the year totaling close to €160 million of annual sales acquired. And third and last main takeaway of this publication, we fully confirm our 2016 targets.

So now I'm on page 6, and I start with an overview of H1 sales. So, total sales are up 1.5%, three components in this performance. First, healthy organic growth plus 1.9%; second, acquisitions which contribute 3%, and last a negative ForEx impact of 3.3% which is mainly due to the decline in currencies of some new economies.

Now let me go maybe into more details regarding this like for like evolution of sales which I referred to, 1.9% globally for the Group, by reporting segment. And I'm on page 7 and 8 of the slideshow. In France to start with, the organic evolution of sales in the first half was minus 2.7%. In the second quarter alone, the sales declined 1.5% benefiting from a favorable calendar effect which should be reversing in the second semester and particularly in the third quarter.

However, leading indicators for new residential and also for non residential construction have improved since the beginning of the year. Now, these positive trends will only be reflected in LeGrand's activity with, you know there's sort of several quarters' lag, therefore, the impact in 2016, if any, should be limited and the real actual impact is expected in 2017.

Now, in Italy sales are up 4.3%. Again these are like-for-like evolution of sales. This good performance was driven mainly by two factors, first, the success of the launch of our class 300X door entry systems which is a connected product. And second, a number of one off projects especially in energy distribution with utilities. So that was France, Italy, now West of Europe sales are up 6%. Again, this is like for like.

We recorded healthy growth in several mature countries, and these include Germany, Austria, Spain, Greece, and Portugal. We had also good growth in many new economies such as Romania, Hungary, Slovakia, the Czech Republic, over the same period of the first semester sales in Russia rose. And as far as the UK is concerned, which I remind you represents only about 2.5% of Group sales, we had a modest rise in sales.

North and Central America now up 5.7%. In the U.S. alone, where the construction market remains well-oriented, we recorded organic growth of 5.5% outperforming trends in LeGrand's market indicators and this was notably driven by the continued success of our lighting management activity and mostly the digital lighting management which is again a connected product, and also good showings in non-residential segments. Excluding these one-off positive effects, sales in the U.S. alone showed an organic rise in the neighborhood of plus 3%, which is in line with the estimated trend in LeGrand's market. In the region, so apart from the U.S. and mainly in Mexico, in Costa Rica, and in Canada, sales as a whole showed a healthy rise in this first half of 2016.

Now last reporting segment, rest of the world sales down 2% on a like-for-like basis. We had healthy rise in countries including India, Chile, Colombia and Algeria, but they did not compensate for the decline that we experienced in Brazil and in certain countries in Asia and even Middle East. And to conclude, on this region, a specific comment about China, LeGrand sales in China were flat for the first half on like-for-like basis and remember that we had nonrecurring positive impact of government measures at the beginning of the year and they were in support of housing sales and the market resumed its downward trend in the second quarter.

Now before commenting on the profitability one last comment on sales, applying average exchange rate for June 2016 to the rest of the year of 2016, the full-year exchange rate FX should be close to minus 3%.

Now, I'm on page 9 for profitability. I remind you that adjusted operating income was up 3.1% this semester. As a result, as you can see adjusted operating margin including acquisitions came to 20.1% which is up 30 bps. Before acquisition, adjusted operating margin came to 20.3% for this semester which compares to 19.8% for the same period of last year which is a 50 bps improvement. And this improvement of 50 bps in adjusted operating margin before acquisition is mainly due to good operating performance in a context of rising sale. And moving on now on page 10, the net income excluding minority interest, which was steady at €283 million for the first half of 2016, it is made of what I referred to, a good operating performance and this is the result, this evolution in net income excluding minority interest of the combination of good operating performance that I've just commented, two elements first a rise in net financial expense which is due in particular to a issue in December of 2015, late last year, of a bond to anticipate a refinancing of the bond manufacturing in February of 2017. This means that starting from March 2017, our P&L will bear less financial cost nevertheless and all in all net financial expense remains well under control at less than 2% of sales. That's the first element. The second element is income tax expense rose to a limited increase due to sorry, limited increase in our tax rate which continues to stand below what we call our non achieved tax rate. As a whole, net income excluding minorities accounted for a healthy 11.6% of our sales in this first semester.

Now moving to the last key indicator of this financial performance, this is on page 11, as you all know regular cash generation is a key feature of Legrand's business model that enables the Group to self finance its development and getting into figures you see on the right hand side of this slide 11 that normalized free cash flow came to a healthy 13% of sales in H1 which is in line with our ambition of generating normalized free cash flow of between 12% and 13% of sales on an annual basis as you know. And on the left hand side of the same slide 11, you see that this performance was supported by a robust cash flow from operation of €381 million which represents 15.5% of sales. And CapEx and working capital requirements are under control and consistent with our ambition.

I'd like to move now on the second takeaway of this presentation regarding our growth initiative and I'll start on page 13 with a wrap up of the topics which we were presented at our Investor Day which was on June 30 [indiscernible] I remind you that that Investor Day presentations are available on our website. Four main topics very rapidly. First, we deployed industrial and commercial initiatives in line with the development plan which was presented at the time of the last Investor Day in 2014. Three examples to illustrate that point. As announced, we have actively pursued expansion through complementary channels and business model, strengthening for instance our position in IT, datacenters, and assisted living. We continue to deploy our industrial initiatives. You remember about our product platforms, but now we're talking of a product electronics and software platforms. And finally we were ahead of our targets in terms of CSR, and our CSR roadmap with achievement rates of 120% for an objective of 100% in 2015, and this came as a follow up of our over performance in 2014 which was 123%. The second topic of this Investor Day of June 30 was the success of our business model in the United States and Canada. This is why we held it in West Hartford. From 2002 to 2015, we have expanded our market positions in the U.S. with leaderships in audio and video, smart PDUs, etcetera. In the meantime, the dollar denominated sales of U.S. and Canada region more than doubled between 2002 and 2015 and with adjusted operating margin expressed as a percentage of sales of margin, which more than doubled to reach nearly 18% last year.

Third topic, we are continuously expanding in connected offerings and I will have a word on this in a minute. And last fourth topic, we have demonstrated our capacity to deliver our strong performance and create value on the long term basis building on robust fundamentals which is [Indiscernible] organization in view of our markets. You know this worldwide back office organization and the local front office organization with proven processes, indicators which are shared across the organization and a strong capacity for execution through our skilled teams.

So, as I was mentioning I would like now to specifically come back on our ongoing development in connected offerings and this is on page 14. You can see on the left hand side that we are deploying our Eliot program. It was launched in France and Italy almost a year ago, that was July of 2015, and we are in the process now of deploying this in many other countries in the second half of this year. We've also introduced on the market and since the beginning of the year quite a few connected products. And you have the sample of these new products shown in the middle of the slide. And on the right hand side, we are continuing to partner with leading players in the IoT world. And for instance we have just signed in July, so earlier this month, a partnership with the Chinese consumer electronic company TCL to connect their TV and appliances with our solutions. So, to conclude on the development of our connected offerings, we are conducting a lot of initiatives and we are ahead of our development plan.

To finish with our growth initiative, a word on our active external growth in the first semester, this is page 13, as announced early Feb, we are actively pursuing our acquisition strategy. Legrand has announced seven acquisitions in the beginning of the year. I won't go back into the detail of each of them. You have this on the slideshow and on the press release. Globally you have to know that these acquisitions are fully consistent with what have been doing over the last few years and for instance almost 90% of the sales acquired, I'm talking of these seven acquisitions, hold either number 1 or number 2 positions on their market, on their geography. Five out of these seven deals were in what we call new business segments, you remember, digital infrastructure and education, assisted living, and home systems.

And finally almost 70% of the sales acquired are in the U.S. Overall we have announced so seven deals I was saying since the beginning of the year. They represent annual sales of around 160 million and based on the likely date of consolidation of those acquisition, 2016 sales will be boosted by over 4% as a direct consequence of acquisition, so the scope of consolidation. So overall a good performance in H1 and therefore we can fully confirm our 2016 targets and this is stated on page 16.

Well, with this in mind, ladies and gentlemen, Antoine, Francois, and myself, we are ready to now open up to a Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is coming from Andreas Willi, J.P. Morgan. Sir, please go ahead.

Andreas Willi

My first question is on your U.S. performance which continues to be very strong, kind of most quarters you call it a one-off and then caution us that it shouldn't repeat or even kind of reverse. As you say, it's tough comparables, isn't that just kind of your commercial initiatives that allow you to continue to outperform the markets? Shouldn't we just expect that that's -- that is the norm now with your -- with all the other growth initiatives that you can continue to outgrow the market rather than reverse and they shouldn't be called the one-offs in that sense?

And the second question just on the numbers, is 33% kind of the right tax rate to use for the next few quarters and on the M&A consolidation if you could give us some indication on the dilution effect in the second half and maybe carry over into next year from the announced deals?

Gilles Schnepp

Maybe I'll take the first one and Antoine, you'll take the tax rate and the impact on -- I mean dilution impact of acquisitions. Okay. So U.S. performance, we're looking at our main market indicators and they show that globally this is more or less a 3% growing rate this year, very much as a continuation of what we have seen last year and this is a supporting marketing environment. This is positive, and we have no specific concern as far as the next few quarters are concerned.

Now, what we're saying is that we have had a number of, you call it commercial initiatives, I would agree with the wording. And they are mainly in two areas. One is digital liking management in relation to energy codes. And there were a number of large states on which the mechanical impact of the enactment of those energy codes creates sort of a boost to sales and this may last for a few quarters, but not much beyond. And we know that we have benefited from this. And the second is significant projects that we have succeeded getting. We have mentioned some of them when you were in the U.S. late last month. And those are one off. Of course, the teams are highly encouraged to continue to get those large contracts but they may not reoccur again. So we have to know this because it has two consequences. One is the underlying market evolution is only 3%, so this sort of performance is due to those events that may not reoccur. And two, this represents a tough basis of comparison whenever we are looking forward. So we have to convey this information to use so that when you see a deceleration, this doesn't mean that we are losing share or that the market is necessarily decreasing, it's just to say that they are some, one offs which are very positive. We try to have some of those one offs every quarter, but it's not guaranteed. Antoine?

Antoine Burel

Yes, thank you Gilles, and good morning Andreas. And on the tax rate before directly answering your question about the form of guidance for this year, maybe just as a reminder to tell you that the normative tax rate of Legrand is in the range of 35% which is consistent with Group organization and geographical footprint. The second point is that the P&L effective tax rate is between 30% to 35% depending on year. The approach remains the same. Every year we are trying to seize operating opportunity in order to deliver our tax rate then below the normative tax rate. And you are right in saying that we are 32.9% or on 33% at the end of H1 and normally it should remain in this range for the full year.

I would finish my answer by saying that maybe more importantly and as reflected in our cash flow statement, what we effectively pay is on average below 30%. And we can call it this cash flow tax rate is more relevant is maybe a more relevant measure as it is what we pay and that free cash flow is for us of course a very important or is a key metric. Maybe just to complete this last comment just to say that if you compare the P&L tax rate and the cash flow tax rate, the favorable gap is driven by acquisition, by innovation. We can have for example depreciation of good will through acquisitions or R&D credits with innovation, and for example if we take our recent acquisition in the U.S. about $70 million of cash tax benefit will be or will go with the free cash flow over the next 15 years. Your second question, Andreas, was about the M&A dilution. It stood at 20 bps for H1 and we expect this dilution to be in the range of minus 10 to minus 20 for the full year. And about the carry over effect for next year, it's a bit early to say, but as far as the carry over effect of 2016 acquisition is concerned, maybe this minus 10 bps to minus 20 bps will be confirmed last year for next year.

Andreas Willi

Thank you very much.

Operator

The next question is coming from Simon Toennessen, Berenberg. Sir, please go ahead.

Simon Toennessen

The first one is on your guidance and obviously your conservatism here, but obviously due to another strong performance here in terms of organic growth and also margin, so you're sitting quite comfortably above kind of the midpoint of the guidance now and I know historically you've tend to adjust margins at the Q3 stage. But what are you seeing kind of for H2 which could make you more cautious relative to your guidance because obviously it seems the trends are still well intact in the U.S. and also parts of Europe. Secondly on Italy I mean it's the fourth quarter of growth if I'm right and the margin was again very strong at I think similar level to Q1 around 36%. Do you think that margin is sustainable for the second half and maybe you can comment just a bit on obviously lot of concern on the banking crisis in Italy whether you see potentially any impact there on the businesses and the end markets that you're exposed to in Italy? And then lastly on cash flow, a bit lighter than I think what consensus expected, I think there was about 47 million higher working capital in the quarter and it was I think payable in at line of other operating assets and liabilities. Maybe, Antoine, you could comment a bit on that, what was in there and what was driven has driven down the working capital here? Thanks very much.

Gilles Schnepp

So I'll let Antoine take the margin in Italy and the cash flow as you suggested. So, a word on the guidance. But you actually you made the question and you made the answer with respect to the fact that tradition at Legrand is really to revise the guidance at during our Q3 publication, well, mostly because as you know we have no other book and a limited visibility on the whole. But your question anticipating my answer was what could make us more cautious in H2. Well, clearly I would not have any concern as far as the Legrand's performance is concerned. So we're talking of I would call it exogen factors and then you name it. I think we've seen a number of geopolitical situation that were of concern in the UK, in Turkey, in the rest of the world.

So those could potentially have an impact on our sales is likely I would say no given the information that we have today. So this is why we fully confirm our guidance, but one must say that given the nature of our market, we are to be vigilant, and the way we are organized is to respond to any abrupt evolution in sales in any geography based on the financial performance contract which is revised every three months with our country managers so that if we have the impact of significant deviation on that line we protect our margins. So basically what you should interpret from my answer is that there is no specific concern that we have today that would make us more cautious in H2, but we are vigilant. Antoine?

Antoine Burel

Yes. Okay. I then take the second question about profitability in Italy and the third one about the free cash flow evaluation. Starting with Italy and maybe with a brief reminder of figure, then in H1 of 2015 the adjusted operating margin came at 35.9%. It was last year for the same period 34.6%. It reflects a growth of 130 bps on a year-on-year basis. And this overall good performance is due first to growing sales, but also to a good control of cost.

And your question about -- was about the sustainability of this level of profitability. Then what we have constantly said is that the profitability in Italy is made of two parts, the domestic activity, the domestic activity which is a parameter on which we set financial performance contract with the local team. And on this aspect, the profitability is under control and it has been managing really well now for many years and since the crisis of 2008-2009. And you know that we can be affected positively or negatively by some volatility in relation with Group activity. And depending on what will happen in Q4 or in Q3 as far as the Group activity is concerned, you may have some variation on your valuation on the total Italian operating margin, but concerning the domestic one, we do not see any reason for not keeping the current level of profitability and I will answer, yes, it is sustainable.

Let me address one point also about the seasonality. You certainly, Simon, you have clearly in mind that in Italy we always have or we used to have historically a strong first half, and the Q4 is always a bit lower due to, first, this relationship between Group activity and domestic activity. The domestic activity is lower and also inventory buildup is often lower in Q4. But if we get rid of this seasonality effect again coming back to the full year profitability on the domestic market we expect it to remain sustainable. About the free cash flow now, if you're okay, on the free cash flow, I would comment first on the free cash flow, the normalized free cash flow and then I will come to the reported free cash flow to explain what is going on there.

But first, maybe just to say that for us it's absolutely a key component of Legrand's self finance business model, you know that well. We are self financing innovation and acquisitions regardless of the economic environment and this is this has been the case now for many, many years. It is a factor, it is a factor of differentiation in favor of Legrand and you may have noticed that comparing Legrand to other players, but our recurring level of normalized free cash flow [Indiscernible] of 12% to 13% is for us again a differentiating factor. This being said, within the year, quarter, our free cash flow performance has always been very volatile in relation with the working capital requirement, which is by nature erratic, and this is the reason for introducing now many years ago the concept of normalized free cash flow which is for us the relevant indicator. And again this normalized free cash flow is quite healthy and it stood at 13% of sales for the first half of 2016, which is in line with our ambition of 12% to 13%.

And coming back to your question and a reported free cash flow figure, this reported free cash flow is down €51 million and we have three components, the cash flow from operations, CapEx, net of asset disposal, and change in working capital requirement. The two first items, cash flow from operation and CapEx are the same in the reported free cash flow and in the normalized free cash flow. And the change in working capital requirement is normalized in the normalized free cash flow and is reported of course in real or actual in the reported free cash flow. Then for H1 of 2016 the cash flow from operation is flat versus last year, a level which is consistent with the net income as cash flow from operation also embeds, of course, operating performance, but also interest, FX, and tax and same trend then the net income. And the bulk of the decline in free cash flow comes from the change in working capital requirement.

This is this was your point. This change of working capital requirement in H1 of 2016 is as expected penalized by the very low level of working capital requirement as of December 31st of 2015. You may remember that we flagged that working capital requirement at this date stood at 7.1% of sales due to nonrecurring favorable effect. And H1 of 2015 also benefited from a punctual favorable impact of a non operating working capital requirement linked to income tax. And to sum up again first what consists normalized free cash flow, second, the reported free cash flow is under control as far as cash flow from operations and CapEx are concerned. And third, the decline of €50 million or €51 million is coming from working capital requirement, but it's not a question of issue at the end of H1 where we finished the semester at 9.5% of sales, it's just coming from the starting point of December of 2015 with abnormal low level of working capital requirement as a percentage of sales of 7.1%.

Simon Toennessen

Very clear, thanks very much.

Antoine Burel

Thank you.

Operator

Thank you. The next question is coming from Daniela Costa, Goldman Sachs. Madam, please go ahead.

Daniela Costa

Actually two things, one sort of a follow up on Italy, but I guess regarding growth and the sustainability of growth. A couple of quarters back, you talked a lot about sell in and sell out your sales versus distributors. Can you comment, so have those two things are two things now basically the same or is there still a gap there? And then the second thing, in terms of M&A pipeline, obviously you've done quite a lot. The beginning of this year it wasn't sort of it got easier to build this year. What are you seeing in terms of valuations and how does the outlook for the rest of the year in terms of M&A pipeline look?

Gilles Schnepp

So, on Italy, you're right saying that we have experienced now a number of quarters of good growth. And we're not mentioning any sell in, sell out issue as we did a few years ago, well, mostly because the situation has stabilized. There's still productivity in Italy which means that there is still destocking, but the destocking is not increasing. So on a sort of a comparison period per period, it doesn't affect the analysis of sales figures. As far as the M&A activity is concerned, you're right saying that this has been a buoyant first semester and we are glad about it. Two questions that you have in this regard, valuation and outlook. Valuation is very much in line with what we have constantly monitored, i.e., immediate positive impact on EPS and value creation with the horizon of three to five years, and the transaction that we have made on average do respect those criteria's. As far as the outlook is concerned, we're confident. So you may remember that we have prepared, that was maybe a year ago, a sort of a comparison between acquisition and organic growth and there was this correlation showed that one year after organic growth evolution, we were seeing the impact on acquisition. So the recent evolution that we have seen in our organic in many geographies, positive ones, in Italy, in India, in the U.S. have led us to make a number of acquisitions in those region, which is of course good. And as long as the economy remains supportive we are confident our capability to continue to close transactions. And we'd expect to see more in H2 and in 2016, 2017 based on the pipeline that we're seeing today and the number of discussions that we entertain with number of parties.

Operator

The next question is coming from Lucie Carrier of Morgan Stanley. Please go ahead, madam.

Lucie Carrier

I still have a couple of them. The first one is on the margin dynamics in France. Historically it used to be relatively stable or not moving so massively from one quarter to the other, and this is true you were at relatively low margin in France in the first quarter at about 16% and you are over 25% in the second quarter. So I just was wondering how we should think about these moves and how we can kind of extrapolate the dynamic here on the French margin. So that's question number one.

The second one was actually if you could actually precise what was the impact of the benefit of the calendar effect in the second quarter. So how many basis point did it benefit to your top line and obviously also which region were kind of the biggest beneficiary?

And then the last one I had was you spoke about the -- some refinancing. I was wondering if you could quantify how much benefit you expect on your financial expense versus 2015 for the years 2016, 2017, and beyond?

Gilles Schnepp

Antoine, you take number one and number three, so margin dynamics in France, speaking domestic and Group, and the last on financial expense. So maybe I'll take immediately the one on the calendar effect. Calendar effect is a bit theoretical and when you have a situation like for instance in France where the month of May add two more days compared to 2015, given that this is a period during which a lot of French people take vacation due to habits and regulation, that tells you that it's difficult to analyze these as being a real two days impact. However, globally for the first semester and speaking between Q1 and Q2 is a bit I would say difficult and I would not interpret it too much into it, but what we are saying is that for the first semester, globally there is one day more which is close to one point -- a bit less than one point of equivalent boost in the top line. And this is we're seeing in H2. And this is a bit across the board in terms of geographies and we should of course be careful because for instance in France there are more than one day impact. But again, we know that because this is during the month of May that we had most of the positive impact in the number of days, we considered that probably the impact is significantly less than what mechanically it should be. So globally one day more in H1 to be reversed in H2, and I would probably be a bit cautious not to interpret quarter to quarter what those impacts are. What we know is that when we're talking to our customers and the customers of our customers, they consider that this one-day effect is the probably best estimate that we can take out of these full semester period. Antoine, you want to?

Antoine Burel

Good morning Lucie. Then the first question is about the margin dynamic influence. Maybe we can start with again start with figures. In H1 of 2016, we achieved 21%, I'm talking here about the adjusted operating margin and it was in 2015 32.2%. It means that we have observed a decline of 220 bps and this decline is mainly coming from Q1 and you may remember that we explained in Q1 that we had some specific items and just before coming back on those specific items, but just to remind that as we have explained for many times now, France margin is made up of two parts. The first one is the Group related activities made of intercompany sales and support to all countries that are under the responsibility of SBUs and corporate functions. And of course, the impact of the cost of those function or this activity to Group has to be seen globally at Group level and is not relevant at the level of the French P&L. And of course what matters is the performance, domestic performance, and this is same comment then for Italy. This domestic activity is under responsibility of the France general manager with and we set a financial performance contract with the team with this financial general sorry, manager of France, but also his team, and the financial performance contracted on this set on the domestic activity and of course not on the Group related activity.

And as far this domestic activity is concerned, the margin was down 10 bps in H1 with a good performance in Q2. And globally in H1, a good relative performance given the 2.7% decline in robotic sales. And you talked about the volatility. You may remember then in Q1, we explained that Q1 was affected by the form of cut off effect of sales between Q4 of 2015 and Q1 of 2016. Then the Q1 performance on the domestic activity was affected by that. And to sum up, if we talk about the margin itself, the domestic margin itself, there is not so much volatility, again a 10 bps decline this first semester. Also Q1 was a bit specific due to this cut off effect. And the volatility is driven by or influenced by a form of mechanical effect of the Group related activities, but again it is not reflecting neither a good performance nor a bad performance, it has to be analyzed at Group level.

Lucie Carrier

Thank you. And the question on the financing expenses?

Antoine Burel

Yes, then this is this was your third question. I guess, Lucie, you were referring to the fact that Gilles mentioned that one bond is maturing in 2017, and if I'm correct, your question was about the effect of the recurring effect of in 2017, is it correct?

Lucie Carrier

Yes, just wondering how much reduction of your financial expenses you expect from this refinancing if any?

Antoine Burel

Yes. Let's say, all the things equal, then we talk here about €300 million of euro bonds maturing in at the end of February of 2017. And on an annual basis, we talk here about around €12 million of financing cost that will then disappear in 2017 starting from March.

Operator

Thank you. The next question is coming from Andre Kukhnin, Credit Suisse. Please go ahead.

Andre Kukhnin

I'll just go one at a time if that's okay. Firstly, on the U.S., coming back to previous question about the two areas of commercial initiatives that drove the outperformance, could you give us some idea on the significant projects on the pipeline of this projects and whether you do have much visibility on these?

Gilles Schnepp

As far as projects are concerned, we're talking mostly of very large projects, which typically consist of a large hospital ahead of these, other large consumer electronic company which I will not name, but you may guess. And those large projects would I mean, typically, what we are identifying as large project is in the magnitude of 5 million to 15 million 20 million. So significant enough to represent on a given quarter a sudden surge in sales evolution.

Your question regarding the sustainability of those project, we organized to a deal on those projects with key account managers and the capability to show all of the LNA product buffering to those large projects who typically, remember that during the Investor Day we showed a number of non resi projects where we had a combination of datacom infrastructure products as well as cable management and a few others. So these are what we consider topics on which we should have a continuation of projects in the next quarters or semester. What led us to point out these exceptional projects for the first semester, the reason for this is that there were exceptional projects within this project activity. And for that reason we do not consider that we would mechanically reproduce the same magnitude of projects, let's say, in H2 or next year.

Of course, we encourage our teams to do the same, but it's unlikely that they will reoccur. Maybe two or three projects will compensate for the same, but maybe not. So this is flagged just to be sure that in a given quarter when we are going this will occur, in a given quarter when we are showing less buy ins [Indiscernible] do not necessarily interpret these as being either negative relative performance overall nor the market declining, it's just that those events do not necessarily occur on a complete stabilized basis. What was your third question, Andre?

Andre Kukhnin

Yes, and that's very clear, thank you. And on the regulation side, that should be something that we should have a lot of visibility on. Is this kind of just one event and now we are done for next five years or something like that, or do you see any upcoming regulation changes that you can take advantage of?

Gilles Schnepp

Well, that's a very interesting question. I need to answer this on a sort of two time-span. One is the long-term evolution. It's been now 20-30 years that the energy goals are being regularly upgraded in most states in the U.S. This is going to continue. That's the way it's organized. Regularly those goals are [indiscernible] and they are upgraded to make it more constraint full, i.e., more energy-saving produced as time is moving on.

Now, some states which are big states typically lead the way. I'm thinking of California, where Wattstopper is based historically and those states have significant influence both because they are pushing -- I mean, raising the bar significantly and also because the weight of those states in the global LNA activity is significant. So this is what has been producing the good figures in DLM so far and a number of less important states are going to upgrade and raise the bar themselves. But the impact should be of a lesser magnitude given that now we have seen the main benefit in some larger states. But again, what matters is this leadership position that we own in this lighting management activity, what matters is the innovation that we have brought through DLM, digital lighting management, which is significantly less costly for installers to install and producing a significant productivity for the management teams of large commercial buildings. And all these are benefits for the long term.

Now, of course, the benefit of one large state upgrading or raising the bar is significant on a given period. This is what we call one-off because those events do not reoccur more than maybe once every five years, four years, to give sort of an idea of how often those regulations are revisited in a given state.

Andre Kukhnin

Got it. Thank you. And can I just ask one more on the U.S. on acquired growth side that came in a bit below than we expected and that Raritan itself could have done 30 million in the quarter, and I think you reported just over 20 million all together. Is it the timing of the deals or is it actually a destination of sales of some of the businesses you bought that are driving this?

Gilles Schnepp

Well, Francois, you want to -- because this is scope of consolidation, there is a period -- take a microphone.

Francois Poisson

Yes, it's a question of -- hi, Andre, this is a question of -- good morning -- time at which things are consolidated, but also due to the fact that part of the business of Raritan is not only in the US, and maybe in other zones. So this is a reason why on the US zone you don't have 100% of the sales of Raritan.

Gilles Schnepp

A portion of Raritan business is in the rest of the world covenant. Raritan is an international company with strong positions in Europe and Asia. I believe between 35% to 40% of the total sales of Raritan are outside of the U.S.

Gilles Schnepp

And the second point is that for Pinnacle and Luxul, you have no impact coming from those two acquisition is Q2. They will be consolidated in the coming quarters.

Andre Kukhnin

Right. Got it. And the very final one, I guess, unavoidably, on China you continue to be very cautious and flagging that there has been actually a slowdown in activity by the looks of what you're saying in the second quarter versus first quarter. Do you see this from, again, large projects that you got maybe in Q1 that are not reoccurring in Q2 or are you seeing just a broad based underlying slowdown in activity?

Francois Poisson

What we flagged, Andre, regarding China was that the figures that we showed in the first quarter were some of artificially boosted by government measures to support housing sales and we knew that following the impact of these measures there will be a sudden drop which occurs, so that was no surprise to us and we flagged these in our Q1 publication. So, we consider that the Chinese market is still in this sort of one to two year digesting period of excess inventory. So, I would be vigilant and prudent on the Chinese market for the next few quarters. That was the message.

Andre Kukhnin

Very clear. Thank you very much.

Francois Poisson

Welcome, Andre.

Antoine Burel

If I may, I would like just to come back on the question of Lucie about the financing cost to precise something. Then I said that the cost of the euro bond that is maturing in 2017 is €12 million per year and that this bond will mature end of February of 2017. And all what I said was correct, but maybe to be a bit more specific, it means that the impact in 2017 alone will be in the range of €9 million to €10 million.

Operator

Thank you. The next question is coming from Gail Dubray, Deutsche Bank. Please go ahead, sir.

Gail Dubray

I have three questions please. Could you tell us what the benefit to margins was in H1 from the net effect of the price rises and raw material cost deflation, and how we should think of it for the second half of the year? The second question is on the research and development expenses which accounted for 5% of sales in H2 and were about 50 bps higher than in the previous year's. So how should we think about this, I mean, do you see it as a momentary increase or is it more like a new structurally higher level that you intend to maintain over the next few years perhaps in relation with the Eliot program? And the third question is about the gross performance in France. It seems you've underperformed the market by a couple of percentages so far this year. And it's a bit surprising given the launch of many new connected product ranges. So could you perhaps elaborate on this? Thank you.

Gilles Schnepp

I'll let Antoine maybe take the first question, maybe I'll start with question two and three and you will take the one answer. So research and development, 4.9% of sales for H1 I believe, which is 20 bps above the same period of last year and due to the consolidation of a number of companies that have sort of mechanical impact on this ratio, I'm thinking of companies like Raritan for instance. Okay. So it means that like for like, it's a very marginal deviation, if any. And I remind you that we have touched and gone above 5% several times in the last two decades. So this situation is not new.

Okay. What we said in the Investor Day -- during the Investor Day on June 30 and you remember Patrice Soudan explaining clearly that there were a number of initiatives regarding platforms that created productivity benefits. I'm thinking product platforms, electronic platform and now software platforms. And those productivity benefits allow us to be more ambitious on developments without adding all in all a deviation in our figures. So to sum up, apart from of course the impact of acquisitions, and I'm thinking of companies like Raritan, they have higher gross margin and higher SG&A, including higher R&D compared to the traditional LNA activity. So apart from those mechanical impact which is not variance because we're interested in companies that have those business models as much as any other business model. Apart from this, we do not consider that there is a risk of a deviation. So that was actual deviation in the R&D figure.

And last, to complete, keep in mind, Gail, that the commitment of LeGrand and all country managers is on adjusted operating margin after restructuring and all the other cost which is the sort of one key indicator that we're looking at. So the position within this commitment of SG&A, R&D, gross margin is under the responsibility of country managers which may find it more interesting at a given point in time to invest in activities where there might be a higher gross margin and higher SG&A. And this doesn't mean that it would reflect in a lesser attractive adjusted operating margin.

As far as France is concerned, Gail, we're not of course comparing LeGrand to companies that may have published the figures for France given that activities of LeGrand vis-à-vis some of what you may consider peers or customers is not necessarily completely relevant given that the scope of activities are the same. What you have to look it is that the -- as the leading indicator to understand what's going on. If I want to take maybe two minutes to help you interpret leading indicators of the construction market in France and the way it translate into LeGrand sale, so sort of waterfall is simple. The furthest leading indicator is sales. And I'm talking of new building and mostly new home building. I make a diversion for minute just saying that as far as renovation is concerned, we have not seen any pick in the activity yet probably because the general state of economy in France, even unemployment, flat growth in Q2 et cetera is not supportive, so, renovation, which accounts for 60% of our sales in France, has not picked up yet.

Now, if I'm concentrating now on new building, so that the furthest leading indicator is sale, sale by promoters, land developers, home builders, other unit, which is done and which mechanically translate into a permit or a start because those two are almost coincident six to nine months later. So there's a purchase for this real estate and then the building starts. You know the French technique, which is [Foreign Language] which I would translate badly like a sale of a building that is not erected yet, but based on the plan. And then when there is a start there is a typically between six to 12 -- up to 15 months of delay between the start of a building and the time we are selling the product because typically we're not in the sort of a core infrastructure of the first space of the building. And if it's a simple single family home, then we will come probably six months after the start. If it's a large collective multi-dwelling unit or a large commercial building, then this would be up to 15 months later. So we're talking the addition of six to nine months between sales and start and six to 15 months between start and the business of LeGrand, which altogether represents 12 to 24 months. So what we're seeing in today's activity of LeGrand during this first semester of 2016 is basically the reflection of those starts that we have seen in 2015. And in 2015, if you're taking the statistics, you will see that for the residential activity it was all I mean flattish plus 1%. And as far as a non-residential activity, which is significantly more in importance than residential, we're talking of minus 8% for start in 2015. So the good news -- so what we're seeing today is basically the situation of start in '15. What we're seeing in '16 figures of LeGrand is the reflection of starts of '15.

Now, the good news is that we've seen an inflection both in resi and non-resi for the new building in the first semester of '16. So you have noted that I mentioned housing -- I'm sorry, start for housing, yes, for residential being flattish plus 1% for '15. The same figure at the end of June is almost 5%, plus 5%. So clearly the inflection is continuing and that bodes well for '17. And the same six months figure of '16 for the non-resi, which is very important, which was negative 8% in '15, globally for the full-year, is almost up 2% for the first semester of 2016. So you see the situation of today is the direct consequence of the '15 start figures. Situation that we're going to see in '17 will be the reflection of the figures that we are seeing today in 2016, as far as start are concerned and which are entering into positive territory both for resi and non-resi, so that the nature of the activity of Legrand has to be clearly understood to correlate it with leading indicators. I hope, Gail, this is clear.

Gail Dubray

Yes, that's great. Thanks very much for the very elaborated answers.

Gilles Schnepp

Thank you, Gail. I appreciate your comment, and I pass it to Antoine.

Antoine Burel

I will do my best to do the same. Okay, I will start, Gail, with a comment on H1 and then answer your question about H2 trend. Then concerning H1, as far then inflation is concerned, first, we can say that pricing was slightly above 1%. And as we say the at the time of Q1 publication, if we exclude from pricing, what is pricing to compensate currency devaluation in some new economies and devaluation versus euro, we can say that pricing in H1 of 2016 was slightly below 1%, below plus 1%. As far the price of consumption is concerned, it was down around 1%. And you also know that when it comes to talk about inflation management, we and pricing versus inflation, we also intend to cover wage inflation through our pricing management and wage inflation remains positive. To sum up, at the level of the adjusted operating margin, the pricing in H1 of 2016 covered all inflation received with a slight bonus as a whole. And this is for H1.

Now, coming to H2 and the trend for H2, first, we can say that we do not know at this stage what will be the overall environment in terms of commodity prices. But there is today a rising trend in price of metals, but this being said, and this was exactly what we achieved in H1, we are confident in our ongoing ability to adapt whatever the raw material cost environment is, and of course we can say that, but give or take one quarter of lag effect as we do not adapt our pricing list every month on all products. But you know what is the rule of the game at Legrand and the rule of the game for country manager, they are managed on their bottom line, they are adjusted operating margin. But as far as inflation is concerned the principle is to manage it versus all inflation received and to be able to cover if possible with a slight bonus.

Operator

Thank you. The next question is coming from Alasdair Leslie, Societe Generale. Please go ahead, sir.

Alasdair Leslie

You've already addressed most of my questions, so maybe I could give you an opportunity to talk about India as your largest market in new economies. I think 6% of sales, a lot of cap goods companies seem to be reporting about perfectly on it. So can you just talk a little bit more about in detail in terms of how your business is developing there and updates on your strategy both organically and inorganically?

Gilles Schnepp

Thank you for this question on India because you are right to mention that this is largest emerging market, and this is also a market on which we have had a sustainable organic growth for many, many years coupled with many acquisitions, three acquisition in the last five years, and we consider that this market is being boosted by both being somewhat a late sort of a catch-up effect compared to many other new economies and also their political situation is today more business-friendly than it has been in the past with a number of reforms that are due, thinking of the GST reform that could facilitate the business of companies like Legrand while operating in many different state within the country. So it's a positive situation. We are developing well. Today we have mostly three main activities on which we have a good visibility with leaderships for challenging position. This is on second [indiscernible] to name it sort of a general term wiring devices or user interface which is switches and second outlets, and UPS, mid-sized UPS. So those activities are doing well. It's a mid single-digit growth this semester on top of a continuing good evolution with a nice positive evolution in margins. So again we have to be vigilant because those markets can sometimes react to international events, but as far as the market is concerned and the Indian economy is to a large extent centered on its own development, it is clear that today's environment is positive. And if I'm factoring the cheaper cost of energy which is mechanically a benefit to the Indian economy, this is even more supporting.

So I would not call it blue sky because the spine of Legrand is always to be vigilant from a possible deterioration of the weather, but clearly there are a number of positive signals from the Indian economy and we are going to continue to develop our position there with fantastic team made of mostly Indian nationals which are very impressive in their capability to build a long-term position for the book. This is the story.

Alasdair Leslie

Very -- that's very helpful. Thank you. If I could just ask a follow-up on M&A maybe. Seems most European construction markets have maybe now stabilized, and just in terms of the M&A pipeline in Europe, how does that look generally in terms of maybe size compared to a year ago? Would you say it's still very much skewed to a few countries in general or maybe you're actually seeing a broadening of opportunities now across the whole of your..?

Gilles Schnepp

I would consider that what we have shown in the first semester is a good reflection of the change of the state of mind in Europe with two acquisitions in the UK, with one in Germany, one in Italy. So we are placing a sort of unlocking process of a number of parties we are talking to, which is good. So what we referred to in the past as the correlation between the economic situation and the acquisition opportunities hopes to be appropriate to explain that in Europe we are seeing more and more opportunities to discuss and to enter into negotiations with those companies which are typically these bolt-on acquisition strategy mid-size companies being very complementary to LeGrand's business. So no, I mean, I'm confident in our capability to continue to close transactions both in Europe, in US, and outside of those two continents.

Operator

Thank you. The next question is coming from Graham Phillips, Jefferies. Sir, please goahead.

Graham Phillips

Couple of questions from my side. Just firstly the R&D as you mentioned is within the corridor range, but if you look at CapEx I think that was slightly lower than your corridor range. Can you give us a little bit of a indication about when that may pick up towards the band that you've given?

And also related to this I think there was a slight benefit of capitalization over amortization in the P&L in the first half and I'm just not quite sure the split between the second quarter and the first quarter, perhaps you could give us an idea of that and which country region does that impact?

And the second question was about new products. The door entry, the dimmer, and the home automation products that you highlight as well in the presentation, I think they're mainly in the U.S., and how transportable to other regions are these products and what sort of pricing dynamics are you expecting to see on these because they are in areas where there is slightly more competition and -- or different competitors to what you're normally being used to?

Gilles Schnepp

So I'll take the question on R&D and CapEx and the one on new product. If, Antoine, you any clue on the capitalization I'll let you answer this one. So on CapEx, you're right to mention that the ratio is a bit lower compared to our sort of guidance or ambition which is 3% to 3.5%. There is typically a situation seasonality where we have more CapEx in the second half and first half and this is what we would expect for 2016. So I think that the ratio that we're mentioning, 3% to 3.5%, is valid. It has been a bit less probably because organic growth has been muted in the past few years, but I would expect these to be in that range. We do not expect any deviation above that range for any reason. As far as new product is concerned, actually the three products that we are mentioning as for non-U.S. countries, door entry, the dimmer, and MyHOME Play, they're all for European and in some cases Asian and Middle East countries. So I would maybe reverse your question and say what do we have in the U.S. in the case those because those three products are not meant to be sold on the U.S. We have lots of initiative in the U.S. as far as DLM is concerned, we've talked about it, digital lighting management. This is maybe an important element of the success of the U.S. organic growth. But there are more I mean, product that have lesser importance, but still important in the U.S. market. I'm thinking of mostly datacom, datacenters, and some home automation products which are all connected products and which have been introduced recently on which probably we will have more benefit in the in next year or few quarters. Pushing dynamic in those products, I'm coming to those door entry, dimmer, and MyHOME Play parts, but you have to understand is that those products are connected products and you may interpret this as, okay, Legrand is entering into consumer electronic products, it's going to sell these massively through DIY or consumer electronic stores and would have to fight against the larger joint companies that have of course fantastic position on this market, that's not the case.

I mean, the door entry 300X is being sold through our channel of installers and the connectivity is an additional feature that is creating a lot of benefit to the users, as well as the installer, and as a consequence we would expect the pricing dynamic of those products to be available because we're selling the unit price of the product is higher when it's connected than when it's not connected. And then of course, we will have continuing monitoring of the pricing of those products once launched to make sure that we remain competitive. But do not this is very important, and I insist, do not consider that with connected products we are entering into the channels of consumer electronic products. That's not the case.

Graham Phillips

Okay. Thank you. And then just on the financial technical side of the capitalization?

Gilles Schnepp

Antoine?

Antoine Burel

Maybe I'll start with figures and please tell me if it answers your question. If we talk capitalization first, we talk about €14.6 million in the first half of 2016, it was €13.2 million last year than products in line. And as far the depreciation is concerned, it stood at €13.1 million in H1 vis-a-vis €14.4 million last year for the same period. And we have a form of consistency between capitalization and depreciation also and this was the case in Q2 of 2016, can have for a given quarter, a new project or R&D on new project that are capitalized and that will weigh in the future as far as the position is concerned. But if your question is about change in methodology or something like that, the answer is no, we are continuing to do as we have done in the past.

Graham Phillips

Again, no, thanks, I understand that, but actually I was wondering between the split, the first and the second quarter and which that 14.6 million versus 13.1 million first and second quarter split, in which country -- if you don't disclose those numbers, which country actually gets a benefit of that slightly higher capitalization versus depreciation?

Antoine Burel

You know that our R&D center are -- we have some of multiple organization and it's not related to a country activity. As far as the top line is concerned it's just a question of R&D and SBU in charge of R&D at Group level, on a global scale telling China or telling Italy or France R&D centers to develop products depending on their skills and their competencies. Then if I was to answer your question, the additional capitalization is certainly coming. When I say certainly coming, I don't have the exact detailed answer, but from France and Italy, but again, it does not reflect anything special in terms of localization just because again if you have given products that relates to the skill of the French or the Italian or the Chinese team, you choose where you do the R&D and then you have the consequence as far as the capitalization is concerned in this campaign.

Operator

Thank you. The next question is coming from Alfred Glaser, Oddo Securities. Please go ahead, sir.

Alfred Glaser

I have two questions, one is related to France. Do you see in France any kind of stocking or destocking effects with your clients? And the second question is on Russia. There seems to be some marginal improvement in Russia. Do you think that there are any chances we get back into some serious growth numbers again anytime soon in Russia or should we expect that Russia remains more or less close to zero?

Gilles Schnepp

So your first question regarding stocking, destocking, there is continuously quarter by quarter activity of stocking, destocking which is based on rebate opportunities on the opening of regional warehouse by this particular distributor. But I do not consider that for the full figures of 2016, except for what we mentioned between the fourth quarter of '15 and the first quarter '16 there is any significant impact.

As far as Russia is concerned, it is true that the situation has improved and it's good news. You may remember then when the oil price sort of plunged abruptly, we flagged that the Russia economy -- I mean Russian electrical market is extremely reactive and that we were anticipating a significant decrease in the sense you may remember that our guidance for -- Francois, correct me if I'm wrong, for '15 had specific sort of option on the Russian situation. So it is sort of a tradition in Russia to be reacting extremely rapidly and quickly to the various exogen factors such as oil price or the overall economic situation. In the beginning of this year we have seen a gradual improvement. That is probably the consequence of oil price moving back from the sort of $25 a barrel to $50. Now the oil price has been weakening recently. So that could potentially affect the Russian activities in Q3 and Q4. But this is sort of ever moving situation. So I would be probably a bit prudent on the Russian market.

What has been done in H1 is good news. This is sales growth that we are welcoming and I will not consider that this is necessarily what -- I don't remember what was your wording, but serious growth soon. Well, I think this would be an optimistic view which is not absolutely out of reach, but you would need probably a recovery in oil price due to experience such serious growth opportunities.

Operator

Thank you. The next question is coming from Jonathan Monsey, Exane BNP Paribas. Please go ahead, sir.

Jonathan Monsey

I guess most questions have been asked, but maybe if we could concentrate on the connected devices. I wonder as you are transitioning more and more the portfolio over with the Eliot program whether there's any elements of the portfolio that you retain which will effectively be non-core, i.e., they can't really move into the world of connected devices and so maybe you would have to exit, any thoughts of the portfolio?

And then on M&A acquisitions, obviously you've increased or made moves into lighting solutions during the half, I wonder if you could comment on how much more or how significant a market that might be for LeGrand in the coming years? Could we see material amount of M&A there as well?

Gilles Schnepp

On connected device, you're right to say that not necessarily all product families will move into the nature of being connected. What we -- you may remember last year what we targeted was to have 40 product families out of the 83 product families that we have today having at least a portion of their products being connected. It's an evolving situation. Maybe one element to show how fast this evolution is happening and the fact that sometimes things that we considered as not necessarily being part of the connected world would become, I remember that when we discussed with Patrice the opportunity of having SBUs being involved in the study of program, we started with talking of two, three, four, five and maximum six product families considering that cable management would not be necessarily part of it. And today we consider that the seven SBUs are really working closely under the leadership of Gary and group, who was in West Hartford presenting this Eliot program. So, all SBUs are now working. So this is a sort of qualitative signal that really this is really potentially affecting all types of activities. So I'm confident that there will be opportunities in many, many product families, maybe beyond 40, I have not made any recent reevaluation of the target, but I'm confident in our ability to reach the 40 product families by 2020. As far as the M&A activity is concerned, maybe a word of caution regarding the word lighting which covers many, many activities including bulbs, lamps, including general luminaries, lighting fixtures, and which also covers specialty and control activity. And this is really in the later two that we have no interest, specialty lighting products which is mostly specified niche type of activities that are best the representent of these niche activity is Pinnacle.

And control activity which is again one of the best representative, representent of this activity would be Wattstopper and recently CPE that we acquired in the UK. So, those are the lighting activities that we are interested in because they are highly complementary to all light command, light control activity that we have today that are either lights switchers on the wall and systems based on panels and lighting fixture for their capability to imbed controls, intelligence is for us a very complementary way of managing light, of commanding light, which has been the business of Legrand forever, I mean for decades and decades. So do not expect Legrand to move into the general lighting activity or bulbs and lamps. This is not the activity of Legrand. We are of course sourcing those products as much as we need them for making a complete system in our product offering, but the main target of strategy of Legrand is to really be a leader in the control activity and in those niche lighting fixture areas that are highly specified, highly customized with a lot of support in designing the product for specific applications which can significantly improve the comfort and cost of using lighting in any building.

Operator

We have a follow up question from Mr. Andreas Willi, JPMorgan. Sir, please go ahead.

Andreas Willi

Yes, just a quick question on inventory. Last year Q2 had the benefit if you increased production versus sales. Was there any impact from that in Q2 this year and if not was it -- that would have been a margin headwind year on year, is that correct?

Antoine Burel

This is a good follow-up question. thank you for it.

Operator

I'm sorry, sir.

Antoine Burel

Yes?

Operator

Please go ahead, thank you.

Antoine Burel

Can you hear me?

Operator

Antoine Burel

Yes, thank you. Yes, there is a bit of unfavorable inventory affect in Q2 of 2015 due to this unfavorable basis for comparison you were referring to. It is finally partly compensated by other items and for instance a bit of bonus on raw material cost specific to Q2. Also my comment -- my previous comment about inflation management, it remains valid. And this being said, as far as basis for comparison are concerned, you also have to keep in mind that you are right in mentioning this 30 bps positive impact in Q2 of 2015, but don't forget that it was also comparing to a negative 30 bps in Q2 of 2014, and we have this situation of Q2 of 2015 comparing to this Q2 of 2015, but by itself comparing to Q2 of 2014, and no year impact or no significant impact in Q2 of 2016, just a bit of unfavorable inventory effect and again partly compensated by other items.

Operator

We have no other questions for the moment. [Operator Instructions] We have a follow up question from Mr. Andre Kukhnin, Credit Suisse. Sir, please go ahead.

Andre Kukhnin

Just a couple of very small ones. Firstly on France, there was a bit of diversions between sales by origin versus by destination growth and that turned out to be also a bit different to what we expected. Is there anything in there that we should be aware of in terms of by destination sales being worse? Is there some particular countries or products that turned during Q2 versus Q1?

Antoine Burel

Andre, certainly not and by the way it's also one explanation of this potential volatility we can have with activity to group when it comes to talk about export sales to third parties as again we only -- or we do manage the trends profitability only looking at domestic activity, but, yes, you can have a bit volatility of export to group, export to third parties as far as sales are concerned. Yes, you talk about export to third parties when you talk about sales by destination and sales by origin, but not --

Andre Kukhnin

Yes. Okay, great. Great. Thank you. And on restructuring could you give us any indication for the second half, or what to expect, cost of restructuring?

Antoine Burel

It's always a bit difficult to predict as it depends on what will be decided by country managers. Maybe you have seen that what we call other operating items and restructuring were up in H1 of 2016 vis-à-vis H1 of 2015. It partly relates to those initiatives implemented by country manager to adapt to unfavorable economic conditions and we'll continue to do that in the coming months, quarters, or semester. Then for H2, there is no specific guidance, but if we look at the past we can say that a range of 25 million to 30 million for the full year might be a form of normal restructuring cost for the full year. Now again -- and this is the reason why we do not guide on this specific item, this is clearly an item that is depending on the decisions of country managers to adapt depending on their local economic conditions.

Operator

[Operator Instructions] We currently have no more questions gentlemen. So back to you for the conclusion.

Gilles Schnepp

Thank you very much. Thank you for your participation and your question. Of course the team is available for any follow-up question, but there has been enough of question this morning. So for those who are taking summer-break, enjoy this summer-break and the team is ready to answer any question if you have. Thank you.

Antoine Burel

Thank you. Goodbye.

Francois Poisson

Thank you, bye bye.

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