LeGrand SA (LGRVF) Q4 2016 Results - Earnings Call Transcript

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LeGrand SA (OTCPK:LGRVF) Q4 2016 Earnings Conference Call February 9, 2017 4:30 AM ET

Executives

Gilles Schnepp - Chief Executive Officer

Antoine Burel - Chief Financial Officer

Francois Poisson - Investor Relations

Analysts

Daniela Costa - Goldman Sachs

James Stettler - Barclays

Andre Kukhnin - Credit Suisse

Gail Dubray - Deutsche Bank

Lucie Carrier - Morgan Stanley

Andreas Willi - J.P. Morgan

Alasdair Leslie - Societe Generale

Simon Toennessen - Berenberg

Jonathan Monsey - Exane BNP Paribas

Denise Molina - Morningstar

Graham Phillips - Jefferies

William Mackie - Kepler Cheuvreux

Wasi Rizvi - RBC

Operator

Ladies and gentlemen, good morning and welcome to today's LeGrand 2016 Full Year Results Conference Call. All participants are in listen-only mode. Later, there will be a question-and-answer session. For your information, this conference is being recorded.

At this time, I would like to hand the call over to Mr. Gilles Schnepp, CEO; and Mr. Antoine Burel, CFO. Gentlemen, please go ahead.

Gilles Schnepp

Good morning. Thank you. So Antoine Burel, Francois Poisson and myself are happy to welcome you to the full year result conference call. So we have published today our press release together with the financial report and a slide show. I will use the slide show for the presentation. And those documents are available on the website legrand.com and the conference call is webcasted on our website.

So as I said, I would be using the slide show. So turning to Page 2, I will cover the first two topics and mostly the growth drivers, Antoine will take over for the performance detail and I will come back for the value creation, which is a wrap up all this and recalling the 2017 targets.

So I move directly to Page 4. Well, the two key messages for the day are the following. The first one is 2016 was a clear year of acceleration of our two growth engines. You know that the specific business part of LeGrand is made of these very good positions that we hold throughout the world that generate high cash flow, high cash flow which is used to finance innovation, therefore, organic growth, acquisitions and of course the dividend, acquisitions up to EUR400 million per year in our model.

So what we call total growth is basically the addition of these two engines, which is organic and acquisitions, keeping in mind that the ForEx can be positive or negative - it was positive in 2015, negative in 2016. So when referring to total growth, I'm talking of these two engines. And when I'm talking of acceleration, I refer to the 6.5%, which the addition of the 1.8% of organic and 4.7% of scope in 2016 compared to last year or last year 2015, which was a total growth of 2.1%. This is a combination of both engines made of 0.5% of organic and 1.5% of scope.

So that's the first message, acceleration of these two growth engines. The second message is the 2016 performance and Antoine will cover this, both financial performance and non-financial performance, which is at the high-end of our objectives. And here I'm referring to the top line, which is close to the high-end of our objective with 1.8%, as well as the bottom line with performance - we will cover this later - of an improvement in our adjusted operating margin before acquisition of 40 basis points, which has been done despite or maybe thanks to a bit of reinforcement of our growth investment.

And I will now switch to this, talking of R&D and CapEx. So, I'm moving to page - well, maybe directly 7. So I'm tackling the organic growth topic. Of course you know that in LeGrand's ecosystem, macro economy is important, geopolitical. So construction industry cycles are very important. But initiatives are very important for LeGrand.

You may remember we've said this over the last few Investor Days that our initiatives cover geographic rebalancing and 2016 showed progress there again with the improvement of our share of activity in the US, but also channels and business models that was really the core of the Investor Day that we held in July of 2014. But LeGrand of course never underestimates the fundamentals of any industrial company, which is basically to design, manufacture and sell products, hopefully good products. And 2016, in that respect, was very much focusing on those fundamentals.

I'm turning to Page 8. And the topic of this page is to show that R&D and CapEx efforts are really focusing on growth and we have had mostly two priorities in 2016. First, continuing the move of the proportion of our R&D resources onto electronic, software and digital offering. You see the proportion moving from 39% to 41% of the total heads and this is a 10% increase of heads in this segment. And the other we have priority was CapEx and CapEx specifically dedicated to new products, which increased by 18% in 2016 versus 2015. So 10% more this year for staff dedicated to electronic, software and digital offering and 18% more CapEx dedicated to new products.

These are significant efforts, but as you can see highly focused and help really transforming the Group, becoming more digital, more connected, closer to customers because you see in CapEx that we also have showrooms, we also have IT, including CRM, and also basically to be competitive with productivity, relocation and what we touched upon during the last Investor Day, Industry 4.0, to start with some pilots.

I’m moving to Page 9 just to make it clear that those significant efforts are highly focused. And therefore, yes, as you can see on those charts, there is a bit of inflection, but it's deliberate and disciplined, and we're still within the long-term ambition that you are seeing on this slide. And even more importantly, those efforts have been financed in 2016 by operating performance. In other words, the inflection that you see here has not had any negative impact at all in our 2016 performance.

Now I'm moving to Page 10. I said that the fundamental of any industrial company such as LeGrand is to design and develop products, good products. Here we see the benefit of the new organization that we have put in place mid of 2014. You remember that we created these seven SBUs that you have on this slide, highly focused, and therefore, being extremely active on their portfolio management. And you see a sample of the activity of development and launches of new products by SBU.

And you also remember that this new organization is reporting to a single management, helping or facilitating the implementation of Kaizen or so initiatives - I'm thinking of course of productivity programs such as The LeGrand Way, but also visions for the future. I was referring a minute earlier to Industry 4.0. And also cross-functional initiatives like ELAN with energy efficiency program and Eliot.

And this is actually a good transition to move to Page 11 and to make an update on Eliot. You remember that we launched this program in mid of 2015. It's E-l-i-o-t, E-l for electricity, i-o-t for Internet of Things. And the purpose of this program was really to coordinate, monitor and hopefully accelerate the development and the sales of connected products for LeGrand. And the key message that we want to convey to you today as far as Eliot is concerned is that it's not a specific product category. It tackles all the four product segments that you see on this Slide 11, comfort, security, energy efficiency and assisted living. And we hopefully are targeting to reach 40 product families that would have connected products in their portfolio by the end of the decade.

And of course it's development, of course it's R&D, but it's also front office. And it's not only internal resources. It's also external resources through co-development, total innovation and partnerships. And I will refer to this a bit later. So Eliot in a word is a new way, a very interesting way for LeGrand to interact in its trade with existing and also new partners. And we will see in a minute what I refer to for new partners.

But on the Pages now 12, 13, 14 and 15, you have a demonstration of how active the portfolio of connected products is. And here the message and the key inclusion is that Eliot is about value, it's about value for end users. You may remember that we mentioned entry phone 300X, which brings a lot of new way of using the product for end users in their homes, but it's also increased value for partners.

You may also remember that we mentioned the digital lighting management, which for installers, contractors as well as for facility managers brings a lot of value for the business, both productivity and additional business, and it is also of course increases value in a selfish way for LeGrand because it's a better mix.

So I will not go through those four pages, but I'll be happy to answer any question that you may have and I'll switch straight to Page 16. So maybe one word to say that we have - I mean it's a long dated conviction - we are convinced that there will be - there won't be one dominant technology, one dominant protocol or ecosystem in our world. And we believe that the key success factors for players in this market is both the ability to work with various technologies, protocols, ecosystems and the ability also to work the interoperability at various levels on those markets. I may come back on this if you have any question later on.

And what I want to say is that this analysis of the way this market works is very current with our understanding but also the DNA of LeGrand and its confirmed by the attractivity of LeGrand vis-a-vis partners who are really coming to us to build this partnership, this association that you see on this Slide 16. So that's what I called earlier a new way to interact with both existing and new trade partners.

I said - and this is on Page 17 - that Eliot is not solely about research and development and marginally back office topic. It's also a front office topic. And part of this is key of course to channel these connected products to our customers. And the good news is that Eliot fits perfectly with our existing and also the new routes to markets, and therefore, we have the benefit of decades of relationship with our trade partners, distributors, contractors, specifiers. And here you remember all the values of the brand, the loyalty and the network of showrooms and training center that we have to channel those products to the market.

And the evidence of this came to us when we held this events in France, Italy, US and we have more to come in 2017 when we see the number of participants to those events and also the traction that we see. Whenever we are launching a product, it's quite a paradox to see that the adoption of those connected products seems to go even faster than what we have with traditional products. And this was evidenced with the DLM and the entry phone.

Now, I'm moving on Page 18. And you may say, okay, words, words, words, what about figures? So more quantitative figures on Eliot. You remember that we had a double-digit CAGR objective for the period 2014 to 2020 for sales. We've reached in 2015 34%. This is total growth, including exchange rate, acquisition, et cetera. And we reiterated a very performance in 2016 with 40% rise, which makes a compounded CAGR of 37% since the launch of the program.

And we're reaching now more than EUR400 million - EUR440 million total sales, which is 9% of the Group sales. Well, 9% may look modest, but I believe it's interesting because it means that at that level most channels and partners, distributors, contractors, specifiers do business today with LeGrand connected products and therefore see the benefit of it.

Now, I said I would not - because you have many publication today, so I don't want to take too much time to discuss products. But just for your information, on Page 19, we were at the CES in Las Vegas earlier this year, which is by the way another evidence of the transformation of LeGrand. Five years ago you would not have believed very appropriate for LeGrand to be there. I can tell you that we had lots, lots of visits on this - on our booth in earlier this year.

So Celiane with Netatmo is the scoop of the year. I mean actually this is something that we are now seeing and we're going to have a number of pilot workshops with BNP Real Estate, BNP Paribas Real Estate and a few others later this year. But the formal launch will be beginning of 2018. Basically, it's a switches and circuits outlet range, so nothing very, very spectacular you may say. But it's really bringing value, as I said earlier, for end users with voice control, remote control, scenario setting and repositioning because you have wireless command - and actually wireless and also you have the option to have it battery-less. It's also value for the contractor because it provides for retrofit a very easy to do it. It's using the existing cabling, no box. And the configuration, the commissioning takes only a few seconds and it's upgradable, scalable very easily.

And for partners, that's interesting. And this was, for instance, the discussion that we had with homebuilders. For them, it's a way to be more productive because it's part of the infrastructure, the same infrastructure for all the building with a common backbone allowing them to either provide service, energy efficiency, and also to allow all service providers to access whether tenants are in the building. And we have also developed with La Poste a partnership on those products.

So this is it for the first growth engine. I will go faster on the second growth engine, which is acquisition. Well, faster, although I don't want to de-rate acquisition as opposed to organic growth. This is part of the model of LeGrand. It is - and I'm moving to Page 21 - it is programmatic, meaning that we don't wait for any formal mail to fall in our e-mail. We are reorganizing it. It's processed and discipline as always with LeGrand because it's recurrent and it's important. You see that over the last three decades it has represented about half of our total growth.

And therefore, this is not new, that this is mostly a bolt-on, targeted strategy, although we have done larger deals in our history. We are very careful about financial criteria there, with no deviation over the last few years in the multiples. And this discipline approach results in no significant missed opportunity that would have jeopardized our long-term strategic positioning, no divestment, which is I believe a direct consequence of how selective we are in what we're looking at. And the financial criteria, our major - remember that the most demanding one is the three to five year value creation that we respect.

This, on Page 22, has been implemented or executed quite successfully in 2016, both quantitatively, with eight transactions, and qualitatively given the good value of those companies. 80% of the sales are what we call leaders, so number one or immediate challenger to the number one. And six of the eight acquisitions are in what we call the new business segments. And the last one that came last week is OCL, a complement to Pinnacle, so lighting solutions in the US. It's a smaller deal, $15 million.

This combination of organic growth and acquisition, on Page 25, is fully working in 2016, which was a good contribution to the progress of LeGrand, progress in terms of better balancing our geographic coverage with the US representing 25%, US and Canada 27%; North and Central America, so including Mexico and Central America, but not Latin America, 29%. So that shows how fast things are moving at LeGrand. And this is not done at the expense of the quality of our positions because we are building year after year a large base - larger meaning in size - of quality positions.

This is it for my part. I now turn to Antoine for the 2016 performance analysis. Thank you.

Antoine Burel

Thank you, Gilles, and good morning to all of you. Let's turn now to an overview on our 2016 integrated performance on Page 27. On the left hand side column, you can see that it is made of three components: two financial KPIs that you well know, organic growth and adjusted operating margin before acquisitions, and one non-financial criteria, which is the achievement rate of our CSR roadmap.

As far as CSR achievement is concerned, as you may know, we have annual milestone within our CSR roadmap and the aim is to reach 100% of the annual milestone every year. The second column of the table recalls the objectives that we announced in February 2016. The third one relates to the targets we updated in November 2016, in particular slightly upward, as far as profitability is concerned. And finally, the fourth column is our 2016 achievements.

And you can see that overall LeGrand reported a solid integrated performance in 2016, fully in line with its target. And in more detail, organic growth in sales came to plus 1.8%, near the high end of the target range, i.e., plus 2% and this good performance was driven in particular by a strong rise in the United States and Italy, part of it being due to one-offs.

As far as the adjusted operating margin before acquisitions is concerned, I remind you that we slightly raised the high end of the target to 19.6% in November 2016 and you can see on the slide that we slightly exceeded this raised target with 2016 achievement of 19.7%. And finally, we are ahead of schedule for our 2014-2018 CSR roadmap, thanks to 122% achievement rate in 2016. We believe that those good showings demonstrates once again LeGrand's capacity to create value for all of its stakeholders.

Let's make now a quick overview of full year sales on Page 28. Total sales were up plus 4.3%, reflecting, number one, a healthy organic growth of plus 1.8%; number two, plus 4.7% rise coming from acquisitions; and number three, an unfavorable ForEx impact of minus 2.1%, mainly due to the decline of some new economy currencies versus the euro.

Excluding ForEx, as said by Gilles earlier, sales grew plus 6.5% in 2016 to be compared with plus 2.1% in 2015, reflecting a clear acceleration of LeGrand’s two growth drivers. In more detail on Page 29 and 30 of the slideshow and regarding the like-for-like evolution of sales by reporting segment, in France organic change in sales in 2016 was minus 2.7%. As announced, the fourth quarter was hit by unfavorable calendar effect, and excluding this calendar effect, the change in sales in the fourth quarter alone would be only down very slightly.

About the market now, and as already said in previous earning releases, the improvement in leading indicators observed in 2016 for new residential construction should be reflected in LeGrand's business over the next few quarters. I remind you that the residential new-build activity represents 15% to 20% of our total sales in France.

In Italy, 2016 organic sales growth was plus 3.4%. This solid performance was in particular driven by two factors: first, the success of the launch of our Class 300X door entry system, which I remind you is connected and as such is part of the Eliot program; and second, one-off projects in energy distribution in H1 2016 alone. Excluding these two one-offs, organic growth in sales in Italy would have come to around plus 2%, in line with the estimated market trend.

In the rest of Europe, 2016 organic growth was plus 5.2%. As far as mature countries are concerned, sales rose sharply in Southern Europe, i.e., Spain, Greece, Portugal, as well as in several other mature countries, including Germany, Austria, Belgium and the UK. As far as new economies are concerned, now sales turn in good showings in Eastern Europe as a whole and were down in Turkey in the context of tough geopolitical situation in the country.

Moving now to North and Central America, where sales rose plus 5.8% on an organic basis. And in the United States alone over the full year, we recorded plus 5.6% organic rise in sales. This was in particular driven by the success of our digital lighting management offering, as well as good showings in the non-residential segment. In the second half alone, one-off load-in in the retail business also contributed to the strong growth. Excluding one-off and on a full year organic growth basis, we believe that the United States was around plus 3%. Other countries in the region, including Mexico also reported a good rise in sales.

And let me now talk about the rest of the world on Page 30, where growth was recorded in a number of countries like India, Chile, Colombia, as well as in North Africa. But that could not compensate declines in activity in many countries of the Middle East and of Asia and also in Brazil. In addition, a specific comment about China, which accounts for 4% of Group total sales. 2016 sales in China were steady compared with 2015, benefiting in the first quarter from one-off government measures.

Let me now say a word on profitability on Page 31, where we compare 2016 adjusted operating margin to 2015 adjusted operating margin. The adjusted operating profit was up plus 5.2%, while sales were up plus 4.3%. As a result, and as you can see on the slide, adjusted operating margin, including acquisition was up 20 bps to come to 19.5% and before acquisitions adjusted operating margin came to 19.7% versus 19.3% in 2015, then 40 bps up.

This 40 bps improvement in adjusted operating margin before acquisitions is due to good operating performance in the context of overall rise in sales - and two additional comments. First, note that, as usual, we talk about the all-in performance, which embeds ongoing investments to fuel growth in many countries, also restructuring and provisions in countries facing unfavorable market conditions and this all-in performance also embeds all productivity and cost adaptation initiatives.

On Page 32, let's turn to adjusted net income excluding minority interest. It came to EUR567 million in 2016, i.e., up plus 3% on 2015. Let me say now a word about this concept of adjusted net income. The net income excluding minority interest benefits in 2016 from a favorable non-recurring continuing impact of a tax income of EUR61.2 million. Where did it come from? As you may remember at the time of the LBU, deferred LeGrand - LeGrand, sorry, embedded trademarks have been revalued and consequently deferred tax liabilities were booked.

Those tax liabilities represent taxes LeGrand would have to pay if it were to sell those trademarks. You can imagine that this is really a theoretical. And in 2016 and along with accounting rules, these deferred tax liabilities have been revalued downward following the announcements of reductions in the corporate income tax rate, mainly in France. This resulted in a EUR61.2 million tax profit and of course it has no cash impact and there's no relationship with the good performance, and as a consequence, this tax profit has been eliminated, i.e., adjusted to measure the performance of LeGrand.

And adjusted for this EUR61.2 million tax profit, 2016 net income, excluding minority interest is up plus 3% on 2015. As shown on the left hand side of the slide, this increase is a result of a good operating performance, which is partially offset by the same items that we already mentioned at the time of the release of our nine months results, i.e., mainly income tax expense and net financial expense.

To sum up, adjusted net income excluding minority interest came to EUR567 million in 2016, representing a healthy 11.3% of sales. Maybe one last comment here, the reductions in corporate tax income tax rate I was referring to if maintained over time should have a positive impact on our tax rate in the future.

Moving to the last two indicators, I would like to comment about the financial performance on Page 33 and Page 34. On Page 33 first, as you well know, regular cash generation is a key feature of LeGrand's business model, enabling the group to self-finance its development. On the left hand side of the slide, a reminder of the key items driving high cash flow generation at LeGrand, including robust cash flow generation - or cash flow from operations, sorry, and under control capital employed. You see that CapEx stood at 3.2% of sales, in line with the last 10-year average and which is also consistent with our long-term range ambition of 3% to 3.5% of sales.

As far as the working capital requirement is concerned, I draw your attention on the fact that expressed as a percentage of sales it represented 6.1% at the end of 2016. It is an exceptionally low level compared with the past performances, and as a consequence, it makes it mechanically a challenging basis for comparison in 2017 for free cash flow. As you may remember with the concept of normalized free cash flow we get rid of these kinds of short-term situations in working capital requirement. You see on the right hand side of the slide that normalized free cash flow came to a healthy 12.4% of sales in 2016.

And on Page 24 - sorry, on Page 24, you will notice that net debt increased more than EUR150 million compared to the level at the end of 2015. And as mentioned on the slide, this rise embeds first a payment of more than EUR300 million of dividend, and second, more than EUR400 million of investments in acquisitions. And all in all, net debt end of 2016 stands at about EUR1 billion. So, overall solid financial result for the full year of 2016.

Moving now to the non-financial performance on Page 35 and on Page 36. On Page 35, first, about our 2014-2018 CSR roadmap. It is built on four focused points covering users, society, employees and environment. And two comments. First, this roadmap is widely shared internally and there is a strong commitment for managers to deliver on it. And second comment, this roadmap is also evaluated externally by auditors and agencies.

And to finish, on Page 36 now about the 2016 CSR achievement. First, LeGrand is ahead of its roadmap with an achievement rate of 122% in 2016. Second, the four focus points are all above 100%. And third, you will be finding on this slide some of the 2016 details, CSR achievements along with LeGrand joining the Science Based Targets Program, the program encouraging companies to act against global warming.

This is it for me and I now hand over to Gilles for the end of the presentation.

Gilles Schnepp

Thank you, Antoine. So now quickly on Page 38. All the good performance that Antoine detailed for you lead us to propose to align this performance and the dividend proposal. So this is reflected in the EUR1.19 that is being proposed for the next shareholders' meeting which is due on May 31 compared to EUR1.15. This is a 3.5% increase, representing a yield based on the close of last month of 2.2% and a stable payout at 56%.

And on Page 39, this is an updated picture of the performance since IPO. So, you are used to it. I will not comment it much into detail. We have this improving return of capital based on faster growth in earnings per share compared to capital employed. We have the continuous CSR roadmap, which is well executed. And this is our third roadmap. The first two were very successful and this one is well on track. And this represents a total shareholder return since IPO of 13% per year, which is a good way to illustrate the value creative model of LeGrand.

Now, the last slide before we hand over to you for Q&A is the target on Page 40. As every year at this time of the year, we take the opportunity of the full year publication to set targets for the following year, for 2017. So the targets are what you see here. Zero to 3% for organic growth. This is the same metrics, as usual. Adjusted operating income - margin, sorry, before acquisition with a range of 19.3% to 20.1% based on the 2016 performance, which is 19.5%.

And the background for building these targets is what you see on the slide with both external input - external input is, as usual, macroeconomic surveys, IMF and the likes, which call for a gradual improvement of the situation moving into 2017 - and of course internal objectives, which is to continue to enhance growth through every and each means, but also keeping in mind that we have a high base of comp for - specifically for US and Italy, as Antoine has explained during his geographical detail.

Okay, this is it for the formal presentation. Thank you, Antoine. And Francois, Antoine and myself are now ready to answer any question that you may have. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we have our first question from Daniela Costa from Goldman Sachs. Please go ahead.

Daniela Costa

Hi good morning. Actually two questions. First, I wanted to see if you - can you help us understanding with the US tax reform changes that are being discussed, like destination based tax, how you're positioning in terms of how much you manufacture in the US, how much you sell there, whether you have any imbalances or not? That would be extremely helpful.

And then the second thing, just wanted to check on the raw material price inflation and your price list changes, so where do you stand at the moment in terms of thinking sort of about the bridge of raw mats versus pricing? Thank you.

Gilles Schnepp

Good morning Daniela. So we share the stage with Antoine. I'll take the first one and Antoine will take the next one. As far as US tax reform is concerned, I'm not sure whether you refer to potential custom duty or whether you refer to tax reduction, I mean income tax reduction because both have been discussed.

Maybe very - to take a rule of thumb - and I'm speaking under the control of Antoine and Francois - for every 5 points of decrease of the income tax rate in the US it would produce something around 1.5 points of decrease of the Group income tax rate. So, you have the sort of methodology. And of course we'll see what comes if those tax reduction, income tax reduction are put in place.

As far as the other topic is concerned, which maybe the core of your question, which is the potential impact of a custom duty - and this has been discussed for countries like Mexico and China - what you have to know is that more than 50% of our US cost of goods sold is in relation to manufacturing operations located in the US. I mean you were attending the Investor Day last July and you were in a factory of LeGrand. And this is probably a model very similar to the one of main players in our market.

And of course we have also operations in Mexico and in China serving the US markets. We also have exports from US namely to Mexico to a lesser extent. As far as imports from Mexico and China are concerned, a bit more than 5% of the cost of goods sold of what we said in the US comes from Mexico and it's about one-third coming from China. That's the figures themselves. Now, maybe a sort of a more qualitative comment.

As far as sourcing of components or raw material is concerned, this is one part of the topic, the other part being manufacturing. So as far as sourcing of components or raw material is concerned, this is really the day-to-day work of our central purchasing teams who are accustomed to deal with all types of situations like shortage, ForEx, substitution, opportunity for substitution, copper versus aluminum, et cetera, bans, anti-dumping duties and custom duty of course being one of those situations. So this is not new.

And as far as manufacturing in Mexico or China to serve the US markets is concerned, I believe that this industrial footprint is very similar to the one that our main competitors in our market have product category by product category because of course it depends upon the type of product. And I believe that we have proven our ability to adapt ourselves to changes. And of course LeGrand, like all corporates, continuously reappraise their industrial strategy through outsourcing, insourcing, relocation one way or the other based on those many factors, including custom.

And maybe if you allow me, Daniela, a last comment based on our experience because we're talking of Mexico and China vis-a-vis US, but what we are seeing - what we have seen in our long experience when significant custom duty or ForEx or raw material prices changes, but significant occurred, our market has generally passed through quite mechanically and quite rapidly the impact on final customers. And I have many examples in mind that I can detail for you if you wish.

And, Antoine, you will take question number two?

Antoine Burel

Thank you Gilles, and good morning Daniela. Then your question was more specifically about our pricing policy vis-a-vis commodity prices, inflation and I will answer this question and maybe take the opportunity of your question to come back a bit on this management of pricing versus cost of consumptions in 2016.

Then starting with the current situation, and as you all know, we have all seen a rise in commodity prices or components and then for LeGrand cost of consumption now over the past months. And this is clearly driven by a number of commodities, but in particular metals, steel, copper, all of the things that you know as well as me. What we do and as far as 2017 is concerned is that selling, pricing policy will, as usual, be managed by country manager. This is their duty while managing their P&L. It is managed on a country-by-country basis and family products by family products. And it's a very, very analytical management and the aim being to continue to cover the global inflation received not only of commodities, but also, for example, wage inflation, but at the same time of course remain competitive vis-a-vis market conditions.

Then this is for the general aspects. Now, we have seen constant price increase and what can happen is to have one or two quarter of lag effect between this kind of inflation and the translation of this kind of inflation in pricing list because you know that we do not adapt or grade our pricing list every month except for specific category of products. But more frequently what is done by country managers is to take the opportunity of the beginning of the year or midyear to adapt this kind of pricing list.

Daniela Costa

Thank you very much.

Antoine Burel

Coming back to 2016, as announced in my - at the start of my answer, pricing reported by countries was around plus 1% as whole for 2016 compared with 2015. Excluding the compensation we already referred to in previous publications, compensation for specific emerging countries currencies devaluation, it is actually below 1% than - plus 1% - or 1% plus 1% price increase and below plus 1%, excluding this compensation for specific emerging countries currencies devaluation.

And as you know, Daniela, this pricing aims at compensating global inflation received with two main components I referred earlier. First, purchasing prices of material and components. And as a whole for 2016 there - or there were actually done between minus 0.5% and minus 1% year on year. And now, as said earlier, this is an average for the 2016 situation, with Q3 and Q4 on the rise.

The second main component of global inflation received is wage inflation and that of course remained positive in 2016. And as a whole when we compare then this pricing to currency devaluation, commodity prices or consumption, drop in cost, but also wage inflation, we can say that we have or it was - the balance was about flat on 2016 adjusted operating margin.

Daniela Costa

Thank you.

Antoine Burel

Welcome.

Operator

We have another question from James Stettler from Barclays. Please go ahead.

James Stettler

Yes, thank you good morning all. Just as a follow on to that last point, do you think the balance would also be zero in 2017? And then in terms of product launches, is there anything we need to be aware of, any sort of big launches you have by country? And then my last question is just in terms of M&A. You appear to be moving from lighting controls into more lighting solutions. How significantly do you want to move into that end market? Thank you.

Antoine Burel

Maybe I take first the first question to follow-up on the preceding one, saying that, yes, James, this is the goal. We tried to cover then inflation received thanks to pricing and this is the goal. Second, we never know precisely at the beginning of the year what is going to be or what could - what is going to happen, sorry, as far as the purchasing prices are concerned because those prices are renegotiated every quarter. And third, I said earlier, you can have one or two quarters lag effect because it could time to adapt your pricing list. But fundamentally and on an ongoing basis, yes, this is the goal. The goal is to cover inflation received through pricing list adaptation.

Gilles Schnepp

So, I'll take over for question two and three. Product launches, nothing extraordinary to be expected in 2017. A good flow of product launches. And I would even say for 2017 and 2018, probably more in 2018 than 2017, both on connected products but also on more traditional ranges. So a good animation of portfolio of products for the next 24 months. As far as M&A is concerned, you are right to say that as far as the lighting space is concerned LeGrand has historically had a number of positions in emergency lighting, in specific lighting luminaires in Europe. And more recently, we've moved into - and I must also say lighting control in the US back in the mid-90s. So these are positions that we've held for now at least two decades.

And as far as the new moves are concerned, it's true that - what we've explained when we made the acquisition of Pinnacle is that we see a sort of continuum of the concept of lighting control being both at the level of simple command like switches and dimmers. And this is the core of the historical activity of LeGrand and the same for LeGrand of America. And control in panels or specific controls on the wall that are most sophisticated like switch panels. And then also in the ceiling or the floor as well as in lighting feature in luminaires.

And in any building, mostly commercial buildings, you will find those solutions co-exist, i.e., you would have local command controlling the panel, some intelligence in the lighting fixtures and a combination of these depending upon the users and the convenience of use as well. So with this in mind, we have decided to complete - not to complete, but to complement our product offering to cover all those situations and to be more of a solution provider than simply part of the equation. And this is why we did more acquisitions in the control area with CP in the UK a year ago - I mean last year. And - last year or the year before, Francois? CP was -

Antoine Burel

2016.

Francois Poisson

2016.

Gilles Schnepp

2016, okay. So last year, correct. And also Pinnacle of course and OCL, which has been announced last week. So this is clearly a move that is very deliberate, that is very interesting because this is a space that is the real DNA of LeGrand, i.e., goes through the same channels using specifiers, contractors, distributors, of course specific entities such as lighting agents depending upon the countries.

It has the capability to generate a good mix thanks to energy efficiency and environmental concern. And we consider this space as both growing and quite profitable and this is confirmed by the positions that we have built and also the ones that we have acquired. So that's a interesting space. Again, this is clearly not a diversification or a change in the strategy. We see evolution of the technology. This offer to LeGrand complementary spaces to develop and we believe that with LED and control embedded in lighting feature, this is a space where our position can be reinforced.

James Stettler

Great. Thank you.

Operator

We have another question from Andre Kukhnin from Credit Suisse. Please go ahead.

Andre Kukhnin

Good morning everybody. Thanks very much for taking my questions. I will go one at a time if that’s okay. So the first question is on the organic growth target that you've presented. Can I ask whether that assumes any of the repeat of the one-offs that you mentioned in Italy and in the US or whether that excludes - those are excluded from the range all together or is this kind of repeat of the one-offs, will be in the top end of the range just to understand where that 0% to 3% stands versus the one-offs that you mentioned?

Gilles Schnepp

Good morning Andre. So for this first question, basically that's the purpose of the range. The 0%, which would be the low end of the range, would mean that we would have a number of countries that would deviate from what most people would expect and this sometimes occur and this has occurred in 2016. So, we have to be a bit prudent. And also that we would not be able to repeat at least at the same pace, at the same magnitude the one-offs, the positive one-offs that we have had in countries like US and Italy.

No need to say that - this is not the scenario that John Selldorff in the US or Franco Vedni in Italy are working on. And 3% would be symmetrically no big accident on big countries and the capability to reproduce or reiterate those one-offs through new initiatives and there are plenty on which we are working. So that's the answer to your question.

Andre Kukhnin

No, that's very clear. I just wanted to check if it was in the range or was it completely outside of the range. And then on - a couple of other small ones, just on Turkey, could you quantify the impact there and also was there anything kind of specific in the quarter maybe related, any write-downs or anything like that? I appreciate it's very small, but just to check.

Gilles Schnepp

Yes, Turkey, as you can imagine, the geopolitical situation is not favorable and we've recorded mid single-digit retreat in sales and no very significant - and this is within rest of Europe, correct?

Antoine Burel

Yes.

Gilles Schnepp

Okay. And to my knowledge, no specific whatever provision or so.

Andre Kukhnin

Great. Thank you. And could we talk about Eliot a little bit more, that 40% all-in growth? Could you give any idea on how much of that was like-for-like versus acquired? And also you mentioned that it creates better mix. Is this purely from the perspective of having higher kind of revenue generation capability or a higher content or is it also accretive to your profitability?

Gilles Schnepp

Okay. Let me just take note of your question. So the like-for-like evolution in sales of Eliot is double-digit. So that's - compared to the 1.8% average of the Group, you see the gap between the two. So it's encouraging and this was most of the case last year, I mean last year in 2015. When I refer to mix, Andre, I was referring actually to potentially two things. One is obviously when you sell digital versus analogical lighting control systems that sells at a higher selling price. When you're selling connected entry phone, that sells at a higher price compared to the non-connected product. It can be 10%, 20%, 30% more. That's the first mix effect.

And the second mix effect is that you're creating traction. I mean people that would have said, okay, I'm sure it's good enough to have a black and white entry phone or an audio entry phone, would potentially be tempted to jump to a connected product given the type of new improved application uses that those products provide. So, I believe that one of the successes of the Eliot program is to change the game by introducing products that simply behave differently, bring value to end users. And that's more difficult of course to measure.

Andre Kukhnin

Got it. But in terms of profitability of this, is it possible to say that the 9% that is Eliot related is higher or lower margin versus Group or in line?

Gilles Schnepp

The answer is the one that we have given for decades whenever we are being asked on profitability by product and the same would be for countries, its market share driven, purely market share driven.

Andre Kukhnin

Got it. Thank you. And lastly just on the tax comment you made on France that there could be a potential positive impact there down the line. So, if things do stay as they are, what would be that impact, maybe even in rough figures?

Gilles Schnepp

Okay. If it were to stay what it has been announced, which, given the capacity of legislature in France to change the rule of the game frequently, but still that's your question, the impact would be 0.7 points of Group tax reduction.

Antoine Burel

And we talk about 2020.

Gilles Schnepp

And it's 2020, you're right you mentioned this. Because this is - for companies of our size, the impact would be only by 2020.

Andre Kukhnin

Got it. Thank you very much for your time.

Operator

We have another question from Gail Dubray from Deutsche Bank. Please go ahead.

Gail Dubray

Good morning everyone. I have actually two questions please. So, I agree that over time you should be able to fully cover cost inflation as usual, but the recent swings in commodities prices have been particularly significant. So given the typical time lag between the raw material price rises and your selling price rises, I mean when would you expect the headwind to be highest? I mean would that be Q1, Q2 or Q3? And then the second question is on the other operating expenses line, which was much bigger than usual for the fourth quarter. So can you remind me what's in this other line? And maybe related to that, I mean is this a real increase in proficiency or does it actually give you a little bit of safety cushion for 2017? Thank you.

Antoine Burel

Good morning. Antoine speaking. I will take your first question, answering that - and you know well LeGrand - you're right in saying that finally Q3 commodity prices were on the rise, again in Q4. And we see in Q1 of 2017 that it continues. No later than this week, copper touched the $6,000 per ton. We have seen data yesterday from Chile about the mining issues and yet it continues. And you also know that when it comes to talk about pricing list upgrade, as said earlier, for the bulk of the products, it could take one month or one month-and-a-half to prepare it and to agree with customers before implementing effectively this price list increase. Then it means that what happened in December or what is happening in the beginning of the year is not embedded in Q1 performance.

I would also add - and this is the reason why I mentioned one or two quarters lag effect, it means that for products with a very high content of copper, for example, or steel - I'm referring to cabinet, for example - we are going to upgrade our pricing list quite happily. But maybe we talk about something like 20% of products of LeGrand. But for the 80% left for most of countries, we will have to wait for July before upgrading our pricing list. And, yes, you can have this lag effect, but you also have to take into account, Gail, that you have the basis for comparison with pricing going down in Q1 of 2016, Q2 of 2016 and then starting to go up in Q3 and Q4.

And to answer your question, my feeling is that for Q1 we may have a bit of lag effect, but it will depend again on also the basis for comparison for these products and Q2. And maybe if we were to have this issue of lag effect, this would be cut off - caught up, sorry, in July to ensure that - I'm not sure that this is on a full-year basis, because again it's an ongoing trend. But longer term, we will continue to cover this inflation received. I know this answer is not very precise, Gail, but it is very, very difficult because again we're talking about the situation on a country-by-country basis and product category by product category.

Gail Dubray

Sure. Understood, yes.

Antoine Burel

Two is that what we see today is that this rise in commodity prices is continuing and then this is something that all companies will have to take into account for the coming months. Your second question was about operating expenses that were on the rise in Q4. Maybe we can start with the total picture and say that this total picture should really be seen on a full-year basis as far this other operating expenses are concerned because you know that it is something that is very difficult to consider as a recurring performance item.

Then, if we look at Group figures and on a full-year basis, you see that other operating expense represented 2% of sales in 2016, finally in line with the average of the last 10 years. And this is not a specific situation, but clearly above the 1.3% of 2015 and in line with the historical trend and above what could be maybe considered as a low point in 2015.

Second, because you were also asking the question about what are we talking about, maybe just to say that other operating expenses is clearly an increase in provisions in countries facing unfavorable market conditions and mostly in countries of Europe like Turkey. And Andre asked earlier the question of Turkey. Then no impairment or such issue in Turkey, but it's clear that when you have sales starting to go down quite significantly in a given quarter - well, in the second half of 2016 because the geopolitical issue started in July - you progressively account for provisions notably in inventory.

And this is for rest of Europe. And rest of the world is also one area which is or one region which is concerned - I'm referring here to the drop in sales due to unfavorable market conditions in the Middle East, in some Asian countries, but also in Brazil. And maybe in more detail and taking the example of rest of the world because I was finishing with it, you see that the configuration of the 2016 P&L is a bit specific. You know that the rest of the world is made of about 40 different countries with different growth and economic pattern and 2016 is unusually contrasted with many countries performing very well and overall facing clearly challenging economic conditions.

And as a result, gross margin minus SG&A of rest of the world is up 90 bps, reflecting this unusually high, good performance of growing countries. And symmetrically, in the many countries where economic conditions are more challenging, we may have accounted for voluntary provisions like restructuring, but we have also provisions in this kind of a context, for example, for slow moving inventories.

I was referring to that for Turkey, but it's also the case for many countries of rest of the world. And just taking this inventory provision, we're talking of something in the range of EUR10 million in 2016. And this is also accounted for in other operating expenses. And all in all, if we look at the rest of the world 2016 fully adjusted operating margin, it is down 120 bps with sales down almost 3 points, which we consider as an average performance, and to say it another way, a normal performance.

Now, coming back to the Group - because your question was also about the Group - and to recall figures I referred to earlier, at Group level other operating expenses represent in 2016 then 2% of sales, which is again a ratio in line with the average of the last 10 years. And this being said, I remind you that the way we managed the performance of the Group is through a financial performance contract with countries, which is on operating margins including other operating expenses. And it's not a quarterly contract, but it's a yearly contract. And this is a commitment for country managers and this is why we use the same metric to set Group targets vis-a-vis the market.

Maybe to finish my answer, my long answer by saying two things. One is that all-in 2016 adjusted operating margin before acquisition stands at 19.7%, i.e. up 40 bps versus 2015 - again, an all-in performance - and also slightly exceeding the high end of the raised target at 19.6%.

And the second point - I think your question was a question of cautiousness or anticipation. No, it's a normal day-to-day continuing life. And again this is the reason why this 2% is more or less in line with the average of the past 10 years. Now if, as Gilles was saying, we were to go towards the high end of the organic growth due to a good economic or improving economic conditions, maybe next year we will have a lower level. If the potential or geopolitical issues were to continue in many countries, then we can have this repetition of this again, I would call it, normal level of provision for such conditions.

Gail Dubray

This is great. Thanks very much, Antoine.

Operator

So, we have another question from Lucie Carrier from Morgan Stanley. Please go ahead.

Lucie Carrier

Hi good morning gentlemen. Thanks for taking my question. I just have a few left. One is actually a follow-up on the question you had earlier on US lights asset. The question I had there is, we've seen some of the largest lighting companies in the US - and I don't need to mention them - but in their latest comments they seem to suggest that the market for lighting in the US could somewhat slow. So, I was wondering considering you've invested very recently in that market, why or how you were seeing things differently than them? That was question number one and I will ask the others after your first answer.

Gilles Schnepp

Yes good morning Lucie. Maybe two comments. One to say that the bulk of our US operations in lighting is in the control and this is the Wattstopper activity that we described. Tom Lowery, Head of Building Control System, described this during the Investor Day in July, where you were there. And this activity is mostly driven by energy efficiency codes or energy codes, as we call them, Title 24 in California, but basically the deployment of the same in many, many states. And we don't see the end of this situation for many, many years. So that's the good fundamentals for this activity.

As far as the lighting feature typical of Pinnacle or OCL is concerned, I think that this is typically an activity where you have bumps and dips in relation to large projects. So at the scale of the Group, no impact. Even at the scale of L&A, very little impact given that it's EUR100 million out of EUR1.4 billion for L&A, for LeGrand of America. But still it can of course have temporarily some effect.

So, I don't believe that we have seen a general trend, but I know that I have read a few comments from players in the market calling for - I mean talking about a deceleration at the end of the year. I believe that we will have to wait for - to see the development. But I believe that all the fundamentals of the lighting industry remain positive both because the construction industry, non-resi is still on the positive tone and the move to LED and to technology is not over at all because of energy efficiency, because of comfort, because of quality of lighting, et cetera. So this is we believe longer term a good space to be in.

Lucie Carrier

Thank you very much. My second question was around the French business and I understand you had some adverse calendar effects in the quarter. But if we kind of compare with either some of your distributors or some of your competitors, it seems that for last few quarters the performance has been maybe a bit below in terms of growth, even though you have, proportionally speaking, a bit more of resi business, which has started to pick up in terms of starts already at the beginning of 2016. So is there - have you been more selective here in the market maybe?

Gilles Schnepp

Okay. No - the answer is, no, there hasn't been any deliberate selectivity in our approach to the French market. I mean what we have said regarding the fourth quarter is I believe a confirmation of this improvement in the general tone of the French market, because if you retreat from the two less days in Q4 versus 2015 - Q4 2015, you end up having less than 1%, between 0% and 1% retreat in the evolution of like-for-like sales, which is a clear improvement compared to the situation that we have seen for the first nine months.

So this inflection is already seen. And I believe that what we have seen in resi data and also to a certain extent with the sort of - maybe a certain lag in the non-resi bodes well for 2017 because many indicators like permits and housing starts have started to turn positive since - if we're talking of last 12 month figures, in December of 2015 for permits and three months later for starts. I'm talking of residential. And the same, three months later for the non-resi permits, starting to be positive last 12 months in March of 2016 and construction starts in June of 2016.

So keeping in mind that the sale of our products - and be careful because you may see cables or a number of products early in the erection of a building. Our products come later - and that's not new - in the process of erection of a building. And typically we consider that - for a simple construction, we typically sell products six months after starts and 15 months for a complex building.

So let's take an average of 12 months, this is one year. So what we have seen at the end of 2015 and up till June 2016 respectively for permits resi and for starts non-resi should be now seen in 2017 for LeGrand. So we are confident that the first indication of an improvement that we have seen in later part of 2016 will be seen in 2017.

Lucie Carrier

Thank you. And just the last question, which is a bit more mechanical, but considering the acquisition you've made last year and that are going to be kind of fully included in 2017, based on those solely, how much dilution are you expecting from M&A for 2017 on the EBIT?

Antoine Burel

Then, first, the carryover effect in terms of sales - but you have it in mind because it is in our press release, Lucie - we talk about plus 1.3%. And about the margin dilution, it's of course a bit difficult to assess, but it's a limited dilution you have seen in 2016 that should be replicated in 2017 between 0 bps and 20 bps.

Lucie Carrier

Thank you very much.

Operator

We have another question from Andreas Willi from J.P. Morgan. Please go ahead.

Andreas Willi

Good morning Gilles, good morning Antoine. I have a question on the guidance and then a follow-up on the numbers for Q4. On the guidance, if I compare what you did in 2016, the 1.8% organic drove 40 bps in underlying margins. So, if I take the midpoint of your 2017 guidance, then 1.5% organic growth only drives like 15 bps, 20 bps on the profitability. This is despite what you said earlier about the hits to the P&L in Q4 of 2016 from these maybe high provisions in the other line. What else is there that basically makes you think that 2017 should see less operating leverage than in 2016? We talked about raw materials that maybe a head win in H1. Is there anything else that explains that lower operating leverage?

Antoine Burel

Okay. Then maybe I will not come back on the explanation of the top line guidance because Gilles commented about it earlier. And maybe regarding profitability then because this is what your question - and the rational of this guidance in terms of profitability. As far as the low end of the range is concerned, you know that now for some years - this is quite recent because in the past it was not the case - we intend to maintain our adjusted operating margin before acquisitions with flat organic sales. This would mean finally - starting from 19.5% in 2016, this would mean 19.5% in 2017.

However , and consistently with what we have observed for many years now, we also know that some events may impact a bit adjusted operating margin up or down and this includes destocking of finished products, adaptation initiatives in countries facing challenging economic conditions, could have some mix, also mix effect, but also productivity, commercial initiatives and so on and so on and so forth. Then we know that we can have this kind of events and then consistently our 2017 target is built with a cautiousness of minus 20 bps.

Therefore, the 19.5% that I was referring to before and then flat margin with flat organic sales becomes 19.3%. And this is the rational for the low end of the guidance. Although again, it seems to me that it's a bit difficult to make very strict relationship between top line and bottom line because it's not a uniform trend. You know that the trends are very different from one country to another one. But this is the rational, this - again, low end of the range being built on the principle of flat operating margin before acquisition with flat organic sales and a cautiousness of 20 bps. And turning now to the high end of the range, it is consistent with potential operating leverage coming from growth, although again this is not so mechanical.

Andreas Willi

Thank you. And my second question on the Q4 comment on the trading day adjustment particularly in France, but I guess it applies to other parts as well particularly in Europe. The additional trading days in December between Christmas and New Year, how have you treated those? Was that for you a holiday basically which you then strip out when you say France x trading day is underlying? Because it varies a bit what companies say. Some say we didn't have a big impact in Q4 because they assume those days were working days. But you seem to assume then they weren't working days.

Gilles Schnepp

Good morning Andreas. Of course the answer depends region by region and country by county. The habits for certain country is clearly to have a very weak month of December, especially the later part, I'm thinking of Italy. Others have, on the contrary, a very buoyant season and this is the case, for instance, China and India. So, it's very difficult to have sort of a global answer to your question.

Was there any particular situation in December? The answer is no. Did we have a specific calendar effect in Q4? The answer is yes. And you're right to say not only in France, but in France it was bigger than the average for the Group because it was two days. So that's the best of what we can say. And obviously calendar days and sell-in, sell-out, rebate programs, et cetera, plus promotions, I mean a lot of things may have an impact on a given period of time.

But I would say that Q4 has been impacted by this calendar effect and this is why - and this was anticipated and flagged repeatedly along the quarters and that the overall performance of 2016 is a good reflection of what we have achieved. And we are not starting 2017 with either a carryover or an anticipation of 2016 sales.

Andreas Willi

Maybe, lastly quickly on M&A. You had EUR400 million spending in 2016, acquired EUR170 million worth of businesses in terms of sales. It may be slightly higher EV-to-sales multiple than in the past. When you look at profitability, how does that compare to what you normally get on day one in terms of initial consolidation?

Gilles Schnepp

Yes. And as I, Andreas, mentioned during my comments on acquisitions, this has been very in line with our financial criteria. So multiples were very controlled and monitored as far as 2016 acquisitions are concerned. Of course depending upon the profitability of the companies that we acquire the price-to-sales value may differ. But I can confirm that 2016 multiples were very, very in line with both actually history and also meeting the financial criteria that we set.

Andreas Willi

Thank you very much.

Operator

We have another question from Alasdair Leslie from Societe Generale. Please go ahead.

Alasdair Leslie

Good morning. Most of my questions have already been addressed, but a couple of follow-up questions on rest of the world and Italy. So rest of the world down 2% organically in Q4, maybe a little bit weaker than I expected. Can you maybe provide a bit more color on how India performed there through the quarter given the - obviously the impact of demonetization and whether you expect a stronger or indeed weaker effect in Q1 and maybe even in Q2? And then also just the provisions you booked, were there any in India relating to obviously the high miscellaneous items in Q4 and the larger operating expenses in the rest of the world segment?

And then the second question just on Italy, very positive underlying development in the margins in Q4 again and indeed for the whole year. Maybe you can just provide some more color there on how much of that was obviously driven by good underlying volume leverage as the market returned to growth? This is perhaps mixed benefits, it's contribution from new products, et cetera. And really looking at those margins now, they seem to be at record levels. Just whether you think they are kind of sustainable going forward? Thank you.

Gilles Schnepp

Yes good morning Alasdair. So, I'll take the first one centered on India and I'll let Italy to Antoine. So demonetization, the decision to refrain the use of bank notes has created a disturbance in the Indian market - and I would say markets, all sectors - at the end of the year. This has a bit affected of course the performance of India, which remains clearly positive both top line and bottom line for LeGrand in 2016.

Carryover effect of this demonetization in 2017 is a question mark. The Indian teams were probably too cautious at the end of 2016 and actually we did better than what we anticipated for the full year and probably the management of the situation has been better than maybe in other sectors. And this is really in our business to a large extent a B2B activity going through professionals, so less probably affected than retail.

And for 2017 the question is open, but we - I don't think that we're going to enter into real trouble and that doesn't seem to be the spirit of what we are getting from our Indian teams locally. So, I would be cautiously optimistic, as far as the capability of India to digest these anti-corruption efforts which I believe is a sound initiative, although it's creating a disturbance.

Antoine Burel

And maybe - one question about India was also, did we account for any provision in Q4 related to that. I would say no, no. Moving onto Italy and maybe before entering into figures, I remind you that a material portion of the Italian industrial activity is dedicated to inter-company exportation and of course, as we have constantly explained, this inter-company activity may impact up or down on a year-on-year basis or analysis the Italy reported operating margin.

And now coming to figure of - 2016 operating margin was quite good and at 35.4% versus 31.9% last year. It means 260 bps improvement between 2015 and 2016. Overall, a good performance on domestic activity and on domestic margin on both Q4 and full year, which improved versus last year thanks, first, to a good level of sales, and second, to a good control of cost and management of all the item of the P&L, including the balance of pricing versus inflation received. Then good performance on the domestic margin and improved performance, and on top of that, the full year - and on a full-year basis and more specifically in Q4 the activity to Group has boosted the Italy reporting operating margin of 2016.

Alasdair Leslie

Great. Thank you.

Operator

We have another question from Simon Toennessen from Berenberg. Please go ahead.

Simon Toennessen

Yes thanks. Good morning to Antoine and Francois. My first question is on the US market. So it has been the sort of the strongest market for you last year where you saw the biggest out-performance I guess relative to the market overall. You've commented in the past that the US market was growing at probably around 3%, is what you said in 2016. So, how do you think about it in 2017? Also, maybe if you take out the tougher comps that you're having. If I look at some of the construction related companies in our sector reporting, they still expect a relatively solid and similarly strong US construction market for 2017. And maybe just generally commenting on where you think you can outgrow market in 2017, is there any particular country, region, maybe not to the degree that we've seen in US, but where you think you can grow quicker than the market, product launches, et cetera?

The second question is just on M&A. I mean you had a very strong M&A obviously in 2016. I remember being on many calls where you got criticized for not being as active in M&A. 2016 has been the strongest year since 2012. Can you maybe if you reflect on 2016, just what changed? Was it that obviously your lighting piece was interesting to you or were sellers more willing to sell and just how you see that for 2017 in the context of 2016? And then just lastly maybe just a housekeeping for Antoine. You commented on the tax - corporate tax change in France and the impact there. But, Antoine, can you guide us a bit maybe for and even in the range what the tax rate might be for 2017 for the Group? Thanks.

Gilles Schnepp

So, I'll take the first two and, Antoine, you keep the tax for you. So as far as the perspective on US market is concerned, it's true that our performance has been above 3% thanks to over performance. Some of this could very well be reiterated into 2017. I'm thinking of lightning control, which I referred to earlier. We still believe that this activity should continue to grow faster than the average of the US market and that's the business that is under responsibility of Tom Lowery.

Now, there were some load-ins in - for DIY chains. Those typically can be decided with very, very short notice like one or two quarters. We have had - we were lucky to have eight good ones in 2016. We don't know yet whether we're going to repeat it in 2017. So that's an open question. So part of it, yes. As far as capability to continue to outgrow the market in 2017, part of it remains to be achieved. And this is why we have - coming back to the earlier question that we had on the guidance by Andre - this is why we have this range.

M&A - and this is - obviously, you were referring to US, but more globally to the increase of the pace of acquisitions globally. You may refer that - you may remember that we used sometimes a chart and it's probably part of the deck somewhere. Francois, maybe if you can find the page where we have this? There is a correlation between macroeconomic conditions, hence our organic growth, and acquisitions for tons of reasons, but basically when sellers believe that the market conditions are stabilizing or improving, they may get a better value for their business. That's on Page 52, Francois is showing me on the slide.

So basically what we have seen in the US is more than a stabilization, an improvement in the business conditions, and that has led potential sellers to be more open to discuss. The same has been seen in Italy, where we have made an acquisition. And I would say that this could be the same in other countries if it were to be the case. And this is probably a bit early to say, but I'm confident that in 2017 we should see good opportunities. Whether we will be able to close those transactions as early as 2017 and to continue to a good pace as we've seen in 2016 is too early to tell. But the general tone is more positive than the one that we have had before 2016, that is clear. So this is encouraging. I would call it encouraging kind of a climate.

Antoine Burel

Yes, rapidly to - for the last question. Many things could change a bit the picture. But to make it simple, we expect to be able to maintain the tax rate of LeGrand around 33%, three-three, in 2017.

Simon Toennessen

Great. Thank you.

Operator

We have another question from Jonathan Monsey from Exane BNP Paribas. Please go ahead.

Jonathan Monsey

Hi good morning. Thanks for taking my question. I guess all the ones I was going to ask have already been answered. Maybe a slightly longer question. If we look at the Eliot growth, which I think you had a CAGR of 37% and obviously very strong and - well, that I guess implies for the 90% of the Group sales. There must be some material pockets which aren't growing or even in structural decline. I wonder if that is the case and whether Eliot is perhaps the disruptive influence that's causing that, the extra connectivity, the Internet of Things. I wonder - although you haven't disposed businesses in the past, whether perhaps as a result of this disruptive change you may need to in the future, or if not, perhaps increase restructuring to adjust some of the businesses that you own for the effects of this disruptive change?

Gilles Schnepp

Good morning, Jonathan. That's a very interesting question and this may help me maybe clarify a number of things. First of all, you were referring to 40% or 37% depending upon the year of growth in Eliot products. Keep in mind - 37% is for the combination of the two years. Keep in mind that this is total growth that includes acquisitions as well as ForEx. And this is why answering to the question earlier on the like-for-like evolution of Eliot products - that was a question from Andre - I said it's double-digit. So you have to compare double-digit to whatever growth of non-connected products is, which is like-for-like 1.8% or a bit less if you take the balance of it.

That's one thing. The second thing is that there's obviously an element of substitution. When someone wants to have an entry phone, he has the choice between a chime, a bell, an audio, a black and white video, a color video and connected products. So whenever we sell a connected product, entry phone, most likely that is a substitution to one of those and that's what I referred to earlier. And your question, which is interesting, is to say, well, are you going to have maybe in 10 years time an issue because you have products that would be non-connected and you would need to dispose those traditional activities.

This is why we said that we are not talking of a specific product range that is completely separated from a product family. What we are saying is that Eliot, i.e., connected products is going to deploy in about 40 product families - and when we started the program we had 80 product families, so that gives you an idea of how far this can go - in 40 product families by 2020, which is not too more, but not far away. So in other words, you will have - and the entry phone is a good example. You still will have those customers looking for a simple technology product and you will have a proportion, a growing proportion of people looking for - customers looking for these connected products because of the features that is associated with this.

So again, do not consider the 37% as - you're conversely saying that the rest is decreasing, for instance, it is double-digit organic compared to close to 2%. And the substitution exists. In other words, obviously when we sell connected products, we do have this non-connected products that is not sold of course. But as we said, it's a good mix. So it's a good way to improve the trading gap of LeGrand products going forward.

Jonathan Monsey

Sure. Yes. No, I didn't mean the whole 90% was declining, rather that maybe there were some pockets, which is a result of the disruptive change maybe would - or already were heading into decline.

Gilles Schnepp

And it's true that in certain cases we may see situations where the connected products will become the standard that may well be the case. So in that situation, we will certainly reduce the efforts that we have on certain traditional versions of the products and concentrate on connected products. This could be good news certainly.

Jonathan Monsey

Understood. Thank you.

Operator

We have another question from Denise Molina from Morningstar. Please go ahead.

Denise Molina

Hi thanks for taking my question. Actually, I wanted to ask a question that follows up on that, is to think about the roadmap for adoption for the Eliot products. So if you look at the EUR440 million in sales that you booked, I wonder if you could give us a sense of the geographic breakdown and also of the customer segment breakdown. Did a lot of that come from the hospitality market? So, I'm just thinking about the roadmap. I'm just wondering if the first kind of contracts that you're - not really contracts, but if you're selling into sort of the first adopters, the early adopters and if you could tell us if that's a certain end market or certain geography?

Gilles Schnepp

Actually, I will refer to the presentation. And this is why we put those four pages, to give an idea of how wide the types of applications can be on those Eliot products. That's on Page 12 to 15, yes, 15, 12 to 15. And you see that obviously for comfort products, you're really talking of the connected home, smart homes. And here you refer to early adopters. This is typically the world of Vantage, My Home Play and all the connected entry phones, et cetera, and to a certain extent what we are developing with Celiane with Netatmo would fall into this category.

When you're moving to safety and security, you're moving typically to more professional products, except for the entry phones, which can be both comfort and security. But you're talking of emergency lighting, for instance. Emergency lighting would be typically handled by professionals both at the time of installation and at the time of maintenance, and therefore, the early adopters on those products would typically be those who are running large portfolio of building management would be interested to look at the productivity at the time of installation and to provide services, maintenance services that are higher in terms of commitment, capability to react faster to any issue in power maintenance, bulb default or whatever.

And when you're moving to Page 14 and energy efficiency, here you're entering into the world where a lot of service providers can be utilities, ESCO companies, et cetera, can be the promoters of those products. So it's again a different sample. And the last, assisted living, which is a bit specific and it's not a very wide product area. But here you're talking of both public and private entities, insurance companies, call centers, and as far as public is concerned, regional or local institutions that are the promoters of those assisted living products.

And clearly, they would be interested in both the security aspect of the connected products and also the features that would be embedded in the most sophisticated units, that is surveillance units, for instance, to bring them more valuable information about those who are benefiting from those services. So, you see there is no one single answer to your question because, as I said earlier, those products have the ambition to really go through all - I mean a lot of the product families that LeGrand is seeing today. And 2020 ambition to have connected products in 40 product families is probably not the end of the story.

Denise Molina

That's very thorough. Thank you. I wonder if you could just, just to go back, if you could give us a breakdown of the actual revenue split by geography of the Eliot. If you could tell us is it heavily weighted towards North America and towards - if you think about the segments that you just discussed - more towards energy efficiency because those would be bigger maybe end markets. I think the home adoption is going to be slow and kind of fragmented.

Gilles Schnepp

No, there is no obvious answer to your question. Of course given that the US is the largest market for LeGrand, US comes first on the breakdown of sales of connected products and this is the digital lighting, this is the PDU, this is et cetera, but you also have not only in mature economies connected products doing well because we have connected products for energy distribution for UPS that we find in new economies as well. And I would not anticipate that there would be necessarily a geographic bias in the sale of connected products long term.

Denise Molina

That's great. Thank you so much.

Operator

We have another question from Graham Phillips from Jefferies. Please go ahead.

Graham Phillips

Thank you. I'll just stick to one question. Just can you talk a little bit - I see R&D CapEx kicking up in line with your previous guidance and a slight tailwind on the R&D capitalization versus the expensed. Is that what's the view into 2017 on that? Will you get a slight tailwind to margins from that?

Antoine Burel

And, yes, two things. As maybe already discussed - and you will find it in the different documents we are making them available since now 7:30 this morning. You will be finding two things. First is that - and this is what was commented by Gilles earlier, is that for R&D as a percentage of sales, the ratio went from 4.6% to 4.9% in 2016 compared to 2015. And part of this increase was capitalized, which is absolutely consistent with the fact that we are developing or designing products that are going to produce sales in coming quarters or coming years.

And I will say the same for CapEx. But staying on the example of R&D - and I think your question was how this - the depreciation of R&D to sales increase is going to impact the future P&L. You know that as we are going to put sales in front of those depreciations, normally this is not an issue. Then this is for a small portion of this acceleration, because within the 30 bps, maybe 10 bps is related to this situation. The rest of the gap is around 20 bps and this is neither a deviation nor bad news that it relates to scope and mix and therefore not affecting the performance of LeGrand.

Maybe we already mentioned, but just to recall it for everybody, but recent US acquisitions had or have a high level of R&D, but this is not an issue as they also have a high level of adjusted operating margin. It's just a question of a business requiring more R&D, sometime more SG&A, but also delivering a much better gross margin. Then I would take maybe two examples here with the recent acquisitions of Raritan and Luxul in the US with a R&D-to-sales ratio quite in a high - or in the high single-digits. And this is for part of the 20 bps explanation.

The second part is related to the organic parameter, but it's a mix effect, with some businesses here also with a high R&D-to-sales ratio or higher R&D needs, but all sales are growing faster than the Group with a good profitability. And the best example I could take there - and this is an example that Gilles quoted many times during this call - is building control system at Wattstopper, a business that is growing in sales about three times faster than the average of the US and with a high R&D-to-sales ratio, maybe about 3 times, 2. Then of course you're creating a mix effect on your average ratio, but it's also important to note that this is a business with a very good level of profitability.

And this is something maybe that we have to be conscious about. It's clear that if it would be - I don't know if I can say it like that and if you're going to share my point of view, but it would be stupid for us to say we do not acquire a company like Raritan, very profitable, fast growing company, because the R&D ratio is too high or higher than the average of the Group and then we are maybe going to affect a bit our ratio.

I would say exactly the same for DLM. DLM is a fantastic product, creating value because again fast growth, very profitability that's not only good for the business prospect, but it's very good in terms of value creation. Okay, it creates a mix effect on the R&D ratio to sales, but again it would be - again should we shout out, but stupid to tell our team slowdown a bit please because you're going to affect the ratio of the Group.

Then to sum up, those ratio we are referring to are valid ratio in terms of objectives for the Group. But if we were - or if we were to have a repetition of this good situation of 2016, again, acceleration of good businesses, very profitable businesses that could affect a bit the R&D ratio to sales ratio or why not the CapEx ratio or SG&A ratio because again DLM is a business with a higher SG&A ratio, two-thirds, but very profitable. Of course we are not going to refrain ourselves from moving in this direction.

Graham Phillips

Okay, thank you.

Operator

We have another question from William Mackie from Kepler Cheuvreux. Please go ahead.

William Mackie

Good morning Antoine and Gilles. A couple of questions. Firstly, I wanted to maybe throw out on a blank piece of paper again and go back to the revenue guidance for 2017. When you've rolled in your divisional and regional management thoughts with your financial contracts, can you share with us perhaps a little bit more how you're thinking about how that - maybe the upper end, the 3%, for example, breaks down between your volume assumptions or your price assumptions? And perhaps more specifically, how you've started to think about each of the specific geographic regions within that rolled up head line number?

And then I think you've specified the contribution from acquisition as being 1.3% in 2017. I just wanted to go into the detail on the rest of the world. We've dug into the various variances by country in that segment and I think you've touched on the EUR21 million or so in other operating expense. But what level of - I think you said 10 million of that 21 million was, if you like, a one-time we could think about. But when we go - if I add that back, there's still quite a dilution in the quarter-on-quarter margin development. So can you throw some light on what's happening around the rest of the world in the very complex sort of country picture you see as to what impacted that or created that dilution and is it something we should expect in Q1 or Q2? Thank you very much.

Gilles Schnepp

Good morning William. I'll take the first one and Antoine, who has already covered a part of your question, will take the second one. I'm not sure I will be very helpful with my answer on the first question, William, because, as you can imagine, the way it is done at LeGrand, which probably doesn't differ from the way it's done at many other companies, is - countries work on a macro environment, which of course has to take into account all the prevailing and relevant information and we ask countries to really, really work on this hard to have a solid base for making their assumption.

Then typically front office would work on a scenario that would be a scenario that is aggressive, taking market share, launching successfully new products, et cetera. Typically, if at the level of the country there are several businesses, then there's sort of hack ups being made by the country managers to allow for some of those good events not happening all of them. And then at the Group level together with Antoine, we also make a second hack to take into account the fact that there are accidents in countries because of geopolitical situations like Turkey this year, et cetera.

So this is done with the experience of many decades of doing this at LeGrand and this is why you can consider that this is well educated guidance that we show with 0% to 3%, and that is taking into account all factors, both positive and negative. It is not at the level of each unit in each country conservative, but at the level of the Group - this is realistic. Of course, as I said earlier, answering to, I believe that was Andre, the 0% to 3%, which is actually narrower compared to last year and even narrower compared to the year before. I mean we had a 5 points gap in 2015, 4 points gap in 2016 and we are showing a 3 points gap between top and bottom for 2017. I believe this is well educated and I believe we are confident that we should stick within this band.

Now, volume and price, of course would depend upon a number of input factors that we would have to monitor during the year. Antoine was referring to a continuing increase in raw material prices, hence pricing will be monitored accordingly. And if it were to deviate one way or the other, we would adapt during the course of the year. As far as volume is concerned, this is very much reflecting the overall feeling of macroeconomic environment that is improving slightly, gradually we said, reflected in the IMF assumption of a 3.4% for 2017 compared to 3.1% in 2106. Difficult to go much beyond this. That's the answer for question number one, if it's okay for you, William. And I pass over to Antoine.

William Mackie

Thank you. Yes.

Antoine Burel

Okay, thank you Gilles. Then, as already said, this is - those operating expenses are typical continuing items that may vary from one quarter to another one and one country or one region to another one. And this is the reason why I recommend to look at it on a full year basis in a Group level. And it's very difficult to answer your question about what could happen in Q1 and Q2 of 2017. But if we stay on this full year basis and Group level approach, what I can say is that 2016 - if 2016, sorry, economic pattern was to replicate in 2017, maybe we could again have a ratio of operating expenses to sales of around 2%, in line with the historical average.

Now, if things were to improve - and this is partly embedded in the high end of the top line guidance, or - because it's not only a question of overall improvement, it's also a question of less segmentation between good trends and bad trends because this is also what could produce this kind of situation. Then if we have then again an improvement on the overall trend and less segmentation between good trends and bad trends depending on countries, yes, there may be - the figures could be a bit lower in 2017 than 2016. But this is something that cannot be anticipated. And to go back precisely to your question, nothing specific could be said today for Q1 or Q2.

William Mackie

Thank you very much.

Operator

We have another question from Wasi Rizvi from RBC. Please go ahead.

Wasi Rizvi

Hi. I did actually have one left on Q4. I was just wondering, North and Central America organic growth slowed a little as you've been saying it would. How much of that growth rate do you think is now underlying and do you think - underlying, sorry, or do you think there is still some one-offs in there? And then just one on Eliot quickly, I mean you're a couple of years into the program. Do you have an idea on what the lifecycle of Eliot products looks like versus your traditional range and what that means for your R&D and marketing spend?

Gilles Schnepp

Yes good morning Wasi. And maybe if everybody agrees, this would be the last question because we've gone far beyond the two hours of the call now. So your question is on North and Central America Q4, the apparent deceleration is really a more calendar and non-fundamental factors driven. We do not see any inflection in US tone of activities being for resi, non-resi, electrical distributors and other channels. So, it seems to be going well. And typically whenever you're looking at a period like one quarter, you have those yearend rebates, promotions, larger projects, et cetera, that can have an impact on the performance, but no signal whatsoever of a deceleration or concern by the trader.

Well, with this, ladies and gentlemen, thanks a lot for your patience and your interest in our results. Of course Antoine, Francois, [indiscernible] and myself are available for questions if any for those who have not been able to ask the questions, but just to make sure that we are not going too much beyond two hours. Thanks a lot. Have a good day.

Operator

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

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