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Good morning, ladies and gentlemen, and welcome to today's Legrand 2020 First Quarter Results Conference Call. [Operator Instructions] For your information, this conference is being recorded. At this time, I would like to hand the call over to CEO, Mr. Benoît Coquart; and CFO, Mr. Franck Lemery. Sir, please go ahead.
Hello, everybody. Franck Lemery, Ronan Marc and myself are happy to welcome you to the Legrand 2020 Q1 Results Conference Call and Webcast. Let me first, as usual, remind you that we have published today our press release, our financial statements and a slide show to which we will refer. Those documents are available on the Legrand website. Please also note that this conference call is recorded and webcasted on our website. Before we start, I wish that all of you and your close relatives are safe and in good health despite the current epidemic. I will start with a few opening remarks, following which Franck and I will comment into more details our 2020 Q1 results. I'll begin on Page 4 of the deck with the 3 main takeaways of today's release. First, Legrand mobilized very quickly and responsibly to tackle the consequences of the global health crisis which is of an unprecedented magnitude. Second takeaway is that our performance showed good resistance in the first quarter of 2020. With a minus 2.2% fall in total sales and an organic decline of minus 7.3%, adjusted operating margin before acquisitions reached 18.7%. Legrand has a solid balance sheet and financial position which guarantee the group's ability to fully preserve its development model over the long term. Third, in a highly deteriorated context, Legrand is actively protecting its model against a deep recession expected in 2020. And a still uncertain outlook, the group is resolutely deploying a series of measures designed to protect both profitability and cash generation while leveraging its sound fundamentals to prepare for the future. I will come back to this point later in the call. So after this quick introduction, let me start first with an overview of Legrand responsible and rapid mobilization, moving to Page 6. Legrand immediate first focus was on protecting employees, in particular, by rolling out group-wide guidelines on best practices, and by strictly applying recommendations from officials and from the World Health Organization. The group is also working actively to ensure continuity of service for customers whose businesses are critical to the economy. On May 5, 2020, almost all of local logistics centers were open. In addition, Legrand is honoring all of its payment commitments and is maintaining its proposed dividend for 2019, unchanged from the previous year, plus lower than -- slightly lower than initially proposed. Now on Page 7. In addition, Legrand has rapidly taken a number of support measures for communities in the countries where it operates. For example, by delivering respirator parts, supplying urgent health care call solutions, the manufacturing of masks or the distribution of meals to population in need. Moreover, Legrand announced the creation of the solidarity fund for nursing homes for the elderly to help patients and staff working in these institutions. Finally, as a gesture of solidarity, the CEO's total annual 2020 target value compensation is reduced by 25%. The fixed compensation, in respect of 2020 to the Executive Committee, is frozen with a significant reduction in the target value of the annual variable portion of the compensation. And last, the 2020 compensation of Board of Directors is also frozen. Let's continue then with an overview of sales on Page 9. So marked by significant decline in business at the end of the period, we recorded a total fall in sales of minus 2.2% in Q1 2020. This change resulted from an organic decline of minus 7.3%, negative in both mature countries and new economies, that was offset in large part by the sustained increase in the acquisition-driven growth, the group's second growth driver, of plus 4.8% and a slightly positive currency effect of plus 0.7%. Based on acquisitions already completed and the likely date of consolidation, the scope of consolidation should come to around plus 3% in FY 2020. As far as FX is concerned, if we apply to the last 9 months of the year the average ForEx rates observed in April 2020, then annual ForEx effect for 2020 would be about minus 0.5%. This is, of course, as usual, a very theoretical computation, and it will depend on the actual exchange rate of the various currencies in the [ months ] and quarters to come. Let me now go into more details regarding the like-for-like evolution of sales by geographical zone, and I'm referring to Pages 10 to 12 of the slide show. Starting with Europe. Organic sales were down minus 5.1% in Q1 2020. In Europe's mature countries, sales retreated by minus 7.4%, recording a more marked decline in the month of March. Although finished goods warehouses were kept open, this trend was observed in the main countries, including France, Italy, the U.K. and Spain, while sales increased in a limited number of countries like Germany and the Netherlands. In Europe's new economies, with still limited impact of the health crisis, sales increased plus 9.4% with good showings in Turkey, Hungary, Russia and Poland. Moving now to North and Central America. The organic change in sales was negative at minus 4.2%, with a decline steepening for March alone. In the U.S. alone, sales retreated minus 3.9%. The good performance in user interfaces and busways for data centers were not enough to offset the retreat in other ranges such as PDUs or control and lighting solutions. Sales decreased slightly in Canada and more markedly in Mexico. Let me now move to the last zone with Rest of the World, where sales declined minus 17.2% on a like-for-like basis. In Asia Pacific, sales were down minus 20.6% as business decreased by close to 50% in China. Sales marked a clear decline in India, notably in March alone, after a positive first 2 months of the year. In Australia, sales increased over the quarter. In South America, sales declined by 12%. Many countries, including Brazil, reported a sequential deterioration in business in March as the first lockdown measures were implemented. In Africa and the Middle East, sales retreated minus 12.6%. Business was down in the Middle East. The first impact of the health crisis were combined with a persistently difficult environment. In Africa, whereas the 2019 basis for comparison was particularly demanding, sales declined in a number of countries. That's for the top line. Let me now pass the mic to Franck for an overview of our financial performance.
Thank you, Benoît, and good morning to all of you. Let's start with profitability on Page 13, where you see that Q1 2020 adjusted operating profit at EUR 283 million was down minus 7.4% from the first quarter of 2019. Moving to Page 14. 2020 adjusted operating margin before acquisitions came to 18.7%, 1 point lower than the first quarter of 2019. Against the backdrop of a sharp and sudden deterioration in the business environment, this performance reflects good profitability resistance linked to the group's early adaptation measures and efficient management of pricing, including the minus 0.1 point of dilution from acquisition, adjusted operating margin came to 18.6%. Moving now to the net profit attributable to the group on Page 15. It was down minus 12.2% from the first quarter of 2019. Most of the decrease came from the fall in operating profit, then from an unfavorable trend in the foreign exchange results. This was partially offset by a decrease in absolute value of corporate income tax with a tax rate almost unchanged. Moving now to the cash generation on Page 16. You know that the right reading of free cash flow generation should be done on a normalized basis. You can see on the right-hand side of the slide that normalized free cash flow stood at EUR 230 million, i.e., down minus 4.1% compared to the first quarter of 2019, representing 15.2% of sales in the first quarter of 2020. Some additional information on the left-hand side of the slide. First, cash flow from operation amounted to 14.7% of sales, down by 2.9 points; second, working capital requirement came to 8.9% of the last 12-month sales at the end of March 2020, it's down minus 3.1 points from the same period of 2019. This decrease was primarily due to a positive trend in operating working capital. Moving now to the last feature of the financial performance, with balance sheet structure on Page 17. The group's balance sheet at March 31, 2020 was solid with key features including cash and cash equivalents of EUR 1.8 billion and net debt of EUR 2.9 billion with a ratio on the last 12 months in EBITDA of 1.9 along with a well-controlled debt of long maturity. Legrand has also significant residual financing capacity. That's for the key topics on Legrand 2020 first quarter performance that I wanted to share with you. They reflect, first, the good resistance of the performance in the first quarter; and second, the solid financial position of the group. I now give back the mic to Benoît.
Thank you, Franck. So let me now move to the last part of this presentation which will explain our initiatives regarding the active protection of Legrand model in a highly deteriorated context. On Page 19. First, the 2020 outlook is still uncertain. The current health crisis is creating a rapid worsening in the global economic outlook for 2020 with a severe recession now anticipated. As you know, in the deteriorated and uncertain context, we suspended our 2020 targets on March 26. Sales continued their organic fall in April 2020 with a retreat of minus 41% for the month alone, confirming trends observed in the second half of March in several countries. On this basis, we anticipate a marked decline in sales in Q2 due to the adoption of many lockdown measures. Compared to Q2 2020, and subject to favorable trend in the global health situation, the second half of the year should see a sequential improvement. Now on Page 20. Against declining business volumes, we focused on protecting both profitability and cash generation. The initiatives taken to date include adapting the group's cost base, stepping up the pace of industrial footprint initiatives, postponing nonpriority investments and adapting as well as tightening the management of working capital requirements and treasury. All those initiatives are taken leveraging on our experienced and fully engaged teams, a structure that is as close as possible to our markets and our solid performance management processes. Let me now conclude with 2 slides regarding the Legrand solid fundamentals for the future on Page 21 and 22. First, as you know, Legrand is a worldwide player with operations in nearly 90 countries. We operate in residential, commercial and industrial buildings, and this in both new construction and renovation while being driven by numerous long-term technological and societal megatrends. Keep in mind that Legrand offers a host of essential products that help keep the economy operating smoothly. Second, on Page 22, the group is actively addressing the fundamentals that underpin its model of profitable and sustainable development to prepare for the future. To this end, Legrand continues to develop its leadership positions, today around 2/3 of our total sales, this notably through ongoing R&D efforts and new product launches. The group continues the deployment of initiatives relative to the digitalization of its processes and of its product offering, notably with Eliot. It is also actively docking newly acquired companies, such as Focal Point, a U.S. front-runner on the high-value niche lighting market, acquired at the beginning of 2020. Last, Legrand pursues a demanding, responsible, long-term approach and is prepared to achieve its announced 2019-2021 fourth CSR road map targets. That's it for this release. Franck, Ronan and myself are now ready to open to questions. Thank you.
[Operator Instructions] We have a first question from Gael de-Bray from Deutsche Bank.
I have 2 questions, please, to start with. Firstly, I mean, some other industrials put China into a context of a V-shaped recovery. So I'd like to get your view on this. I mean did you see a pickup too in China in March or in April? Or are sales still trending down? And are there any lessons we can take from what's going on in China for other geographies? The second question is about beyond the negative impact of the lockdowns in the second quarter. How do you think about the trajectory of the recovery by segment in the second half? I mean you're talking about a sequential improvements. So I'd like to get your views on how you see the difference in terms of the path to the recovery between resi versus non-resi, between new build versus renovation.
Gael, so addressing your 2 questions. Maybe I can give you a bit of granularity on the April sales and with a specific focus on China. So as we indicated in the press release, our sales were down by 41% in April, and there's an obvious and clear correlation between the magnitude, if I may say, of the lockdown measures, and the magnitude of the sales decline. So typically, there were a few countries in April, where we recorded almost no sales. Take for example countries like India or Peru, because a lot of the measures were very, very strict. There are -- most of -- in most of Western European countries, we had a decline in sales which was deeper or stronger than this minus 41% because lockdown measures were implemented quite strictly. It's the case, for example, for France, for Italy, for Spain, for a number of countries. So Europe, as a whole, declined more than this average of 41%. Then moving to the U.S., the decline was more limited than the minus 41% because even though a number of cities were under quite strict lockdown or stay-at-home measures, for example, New York City, West Coast, Chicago and a few others, you have a large part of the country which was not implementing this kind of measures. So the decline in sales is more limited than minus 41%. And indeed, you have a few countries which are up in April, especially those who went earlier than the others into the sanitary crisis. So to answer your -- directly your question, Gael, China is up in April. South Korea is up in April in terms of sales. And then you have a few other countries, limited number of countries which are still up. Now does it mean that there will be a V or a U-shape recovery in China, I have absolutely no clue. Is the month of April the sort of catch-up of all the works that were started before the lockdown and that needs to be completed? Is it a phenomenon of a bit of restocking from a number of players? Or is this something more likely -- more sustainable than that? We have absolutely no clue. I understand your concern, Gael, which is to try to find a pattern in China that you can apply elsewhere. But unfortunately, I believe that it's a bit too early to do that. And we'll probably have a better visibility about the recovery in China after a couple of months. But very fact-based comment, China was down by almost 50% in Q1 and was up in April. As far as your second question is concerned, it's extremely difficult, obviously, to anticipate what's going to be the next months and the next quarters. The month of April was probably the worst months in terms of lockdown measures. You can see that there are a number of countries which are progressively exiting lockdown measures, not only France, Italy, Austria, Spain, but also a number of U.S. states, but also India and a few other countries. Now what is extremely difficult to anticipate and to forecast is what will be the behavior of the construction industry and what will the trend be in the next weeks or months. And as you know, Legrand has a very limited visibility. We have no order book, so it's extremely difficult for us to anticipate what's going to be the next months and weeks. As far as trend between resi and non-resi, commercial, renovation, new and so on, it really depends very much -- it will depend very much on the country. And I think that the main drivers will more be the country. Is a country going to a lockdown? How tough is the lockdown? How fast is the construction industry to recover? So driver will more be the country itself rather than this or that segment. Last comment on my side. Obviously, even though this is not the scenario which is expected by most of the people, you could always, as part of the uncertainty, think that there could potentially be new episode of infections and that additional confinement or, let's say, lockdown measures are not completely excluded. So all that add to the uncertainty. So to make a long story short on your second question, we don't have a definitive answer telling you resi should be -- behave better than commercial or new better than renovation. It will very much depends on the country, and this will be a country-based approach.
Next question from William Mackie from Kepler Cheuvreux.
A couple of questions for me, please. Firstly, could you share with us your thoughts on how you see your distribution partners responding at this time? Did you -- or do you assess that there was any significant stocking or destocking in and across the business that impacted the shape of your demand or your revenue developments in the first quarter? My second question would be relating to the longer-term thoughts you might have from this crisis. I suppose every period like this creates opportunity. How do you think your strategy, or parts of your strategy, might change post this crisis with respect to perhaps the way in which you've structured your supply chain or the way in which you are using and implementing digital tools and processes within your business?
William, so to answer your first question, we have seen, in a number of geographies, some destocking, even though you know that it's always difficult for us to precisely assess because we don't always and everywhere have the exact size of inventory of our distributors. And again, it's in their hands and it's their policy to manage it, not ours. But we could see some destocking in a few geographies. Take France for example, where clearly, our sell-in in Q1 is lower than on our sell-out. So there's a clear destocking effect. It was also slightly the case in a few businesses in the U.S. So it's highly likely that part of the very good performance we did in Q4 last year organically was probably a little bit helped here and there by some stocking. Our inventory buildup and the Q1 performance was a bit negatively impacted by some destocking, which again is not a surprise for us in the context of declining sales and of a tough environment. This being said, beyond inventory changes at our distributor level, what I have to also indicate is that our distributors are acting and reacting very professionally in this crisis. We don't see significant distributors having financial difficulties. They are holding firmly the relationship with our customers. So again, it's not because there is some punctual destocking here and there, but we are not extremely happy to have those partners as partners in these difficult times. As far as long-term opportunities are concerned, well, it would require probably more than an hour, William, to go through. It could possibly change. I don't expect this crisis to change significantly the Legrand strategy. I feel that when looking at the strategic, let's say, core assets of the group, I believe they are well-designed to fit with this crisis. And we try to give this sort of a hint in the press release, but we are not making compromise with our strategy, even though the situation is demanding as far as the underlying markets are concerned. We keep investing in new products. We keep investing in R&D. We keep investing in Eliot and in digital. We keep creating relationship with potential targets for the future. We keep deploying our CSR road map and so on and so forth. So I believe that the Legrand fundamentals will not change because of this crisis. And we are currently strengthening them and not sacrificing, if I may say, those fundamentals. This being said, of course, the recovery, whenever it will happen, will open a number of opportunities. I can pinpoint a few of them. Clearly, data center and digital as a whole will be an opportunity. Billions of people will have understood what it takes to work from home, being cured from home, being trained from home. And all that will probably develop and will imply more solid datacom infrastructure for the residential building. So it will potentially have a positive impact on data centers, on connected homes, on connected residential building and so on. Number two, health will be more than ever on top of the agenda of public policymakers. And we have a number of product families that are in the health sector, whether in the hospital, in the nursing home or assisted living part of our business for all people staying at home. The relationship with a lot of people with their -- the office will also change. And people will require their office to be even more friendly, communicating, safer than ever. So definitely, midterm, I think that these virus crisis will imply a few change in people's habits that can possibly have a positive impact on our sales. But again, I don't expect this crisis to significantly change the Legrand model. We believe that the Legrand model, which is geared at growth when the economic situation is good and protection of the model when the economic situation is a bit tougher, is a good model for the long term.
Next question from Lucie Carrier from Morgan Stanley.
Actually, my first question, I take the opportunity maybe to rebound on the last point you've made around health care, data center and so on. Are you able to maybe give us a little bit more color in your nonresidential exposure? How much is the health care exposure, data center, you had given that in the past, but how it has evolved? Are you able to provide us how big retail, for example, is in your portfolio, hospitality end markets? Are you able to give some color on your nonresidential exposure?
Well, Lucie, I would love to, but it's a bit difficult because most of the time, as you know, the products are the same, whether they are sold in university, hospital, traditional commercial building and so on. Take a Switchgear, for example. It's exactly the same whatever the building. So we've been able to do this analysis for data centers because in data centers, you have a few specific products like, for example, busway for data centers, the PDUs, cabinets, racks, connectivity, fiber and so on. But for most of the buildings, most of the verticals, it's difficult. So as you know, data center, it's about 10% of our sales. As far as retail, hospitality and health care, unfortunately, I'm not in a position to give you a precise answer. Last, but you know that already, you see commercial buildings represent approximately, as a whole, all type of buildings included, represent approximately 60% of our sales.
My second question, I guess, was trying to understand how we should think about your overall profitability performance for this year in light of the great financial crisis. I appreciated that 2009 is very different than what we are experiencing now. And I was looking back into your numbers and at the time, I think the organic decline was about 14%, and we had a 70 basis point margin decline between '08 and '09. If I look at what we've seen in the first quarter, it's a much lower decline, it's about half of that, but already quite the double in terms of profitability. So can you maybe help us understand either what has changed in the portfolio that create that effect? Or what is different in this kind of crisis versus 2009, so we can calibrate maybe a bit more closely the estimates for the rest of the year?
Well, it's always very difficult to compare one crisis with another, Lucie. There are a number of things that are very different between the Legrand of 2020 and the Legrand of 2009 and things that are very common. So take, for example, the group itself. We don't have at all the same size. We are EUR 6.5 billion group and at that time, we are a EUR 4 billion group. The geographical mix is very different because the U.S. is a big part of our sales. It used to be less than 15%. The margin level is not the same. We used to have 15% to 16% EBIT, and we are at 20% EBIT. The crisis itself is, of course, very different. It is more sudden than 2008. This is not a liquidity crisis, but this is sanitary crisis. So comparing the period 2008, 2009 and 2020 is a very difficult exercise, both because the crisis is different and because Legrand itself has a different profile. So I cannot a lot to help you on your computation as far as potential leverage impact by quarter and so on is concerned. Now to make things clear, I believe that there are also a number of things that are common between 2008, 2009 and 2020. The model itself of sustainable and profitable growth is quite the same. The pricing power that we have is also there. The process of performance management are well in place in 2020 as they were in 2009. We have quite an experienced management team. And actually, most of the country managers, for example, that are managing countries today were also country managers did have responsibilities at the time of the 2008 and '09 crisis. We have a last -- a variety of markets as we had in 2009, the commercial. So I would hardly be able to give you a hint to compare the performance of 2020 and the performance of 2009 because I believe that the crisis are quite different and Legrand is not the same company. This being said, you know what our assets are, and it makes us confident in our ability to go through this crisis.
And I guess how you were just mentioning the pricing power. Are you able to provide us what was pricing in the quarter? And also what was the raw material benefit that you accrued in the quarter, please?
Yes, of course. So our Q1 pricing was up plus 0.9% on Q1 2019 pricing, which was very solid, you remember. And the inflation of raw materials and components was about minus 1.1% for Q1 2020. So you can do the math yourself, but there was a slight benefit of the difference between the pricing and the price of raw materials and components. And again, you were questioning the 2008/'09 comparison. Our ability to hold prices and even to record price increases, even in difficult times and in times during which the raw mat price of components is going down, it's definitely part of the Legrand model. You know that we've never decreased our sell-in price on a yearly basis since we record these numbers, so since decades. And we are confident in our ability to hold our prices in 2020 across this crisis.
Next question from Alasdair Leslie from SG Corporate Investment Banking.
I suppose a couple of follow-up questions in a way. Firstly, you highlighted an expected marked decline in sales in Q2. I was just wondering if you can help us a little bit more with how you sort of view the outlook for margins in the second quarter as well, just given your comments on accelerated cost adaptation. It looks as well that your drop-through margins were around 30% in Q1 organically. Do you think you can kind of maybe maintain that level or perhaps even better that in Q2 despite that, obviously, what would be anticipated to be severe top line pressure? And then the second question. In past downturns, you've been able to structurally optimize costs. I think you've reengineered a number of processes. Just interested whether you see the current crisis in the same light and maybe another opportunity to fast-track structural improvements across the group.
Well, I'm not sure I get -- I completely got your first question, especially the 30% you were mentioning. What it relates to, I'm sorry?
It was the organic drop-through just on your margins relative to sales. So basically, the outlook for Q2 margins. [indiscernible]
So our outlook for Q2 margin will obviously depend very much on top line we'll achieve in May and June, which is highly uncertain. So not only we are not providing a yearly guidance, but it will also be extremely difficult to provide quarterly guidance both in terms of top line and bottom line. So no, unfortunately, I cannot give you any guidance, except that, as you rightly mentioned, we are doing whatever it takes to mitigate impacts of the volume drop in our P&L and our balance sheet. Now as far as your second question is concerned, yes, we believe that those crisis are the opportunity for a group like Legrand to reengineer a number of processes and to optimize our organization. So it's not only about sort of doing short-term savings, it's also about doing some optimization, structural optimization of our footprint and our organization. I can even give you a number. You know that on average, historically, net restructuring charges fluctuate on a yearly basis between EUR 20 million and EUR 25 million per year. That's what you can find in the accounts in the previous years. Well, in Q1 2020, if you look at the accounts, we have an expense of only minus EUR 1 million on restructuring, but actually, it includes the EUR 16 million gain on asset disposal coming from the sale of our premises in Chile, and the true restructuring expense at EUR 17 million to EUR 18 million. So we -- on average, we usually do on a yearly basis EUR 20 million to EUR 25 million restructuring, and we booked EUR 17 million to EUR 18 million, so almost 3/4 of the year in Q1. So it means that -- and we are Legrand, what we are booking there are only effective restructuring plans. So it's a sign that we are doing a number of initiatives in order to structurally optimize our processes. And we anticipate that for the full year, the level of restructuring expenses that we will record will be obviously significantly higher than the one we usually record, i.e., the EUR 20 million to EUR 25 million. So yes, we have a lot of initiatives and a lot of ideas in order to optimize and to reengineer a number of processes. There is some talk in the financial communities, this idea that we have done all what we could do. And this was the reason why we had a 20% EBIT margin. No, this is not the case. There are -- the group is quite different from what it was. As I said earlier, 10 or 12 years ago, we have made a number of acquisitions. We are a lot bigger. We are in more countries. We have more processes. So we still have a lot of areas where we could optimize.
Next question from Andre Kukhnin from Crédit Suisse.
Thank you for the detail on April. I just wanted to dig a little bit further into it, particularly in the countries where you had shutdowns and restarted. I guess Austria is one example that restarted a while ago. Could you give us some idea on where that is running now compared to pre-COVID? And a similar question for maybe the countries that didn't shut down like Germany and Sweden. How far are they off the pre-COVID level, if at all?
Well, I wouldn't like you to draw too much conclusions on countries where we might not be as meaningful and significant than others. Two things, this being said. Number one, clearly, you have in Q1 and in March and April, a clear difference between Southern Europe, with countries under very strict lockdown. So Southern Europe, France, Italy, Spain, Portugal, let's say; and Northern Europe, where the lockdown measures were not as strict or applied differently, if I may say, so Germany, Austria, Scandinavia. So if you look at the Q1 performance, Southern Europe was down quite significantly, Northern Europe was slightly up. So you have a clear difference between the 2. And as you know for Legrand, Southern Europe is a lot more meaningful than Northern Europe. Southern Europe is about 1/4 of our sales, and Northern Europe is probably something about 5% of our sales. So this is for Q1. As far as the month of April is concerned, I think it's a bit too early, and we don't see in countries like Germany, Austria or Scandinavia significant change in trend compared to the end of the Q1. But again, this end of the Q1 was not as tough as a decline than Southern Europe.
Got it. And in terms of operational gearing for the second quarter, maybe I could try that as well. Not to give a forecast but in terms of the measure of the cost actions that you're taking and in the face of that sharper drop in activity in April, do you think you can keep it proportionate to kind of level of activity, your cost adjustments? Or from your experience at least so far in this quarter in April? Or should we think about a bit higher drop-through at least for the periods of this kind of extreme decline for these kind of month or 2 just because more costs become fixed as a proportion of sales, just automatically given the size of the drop?
Well, it's -- again, I understand that you want to have this short-term vision of what the margin could do in Q2 and what -- how the margin could react to a minus 41% drop in sales. Again, if I were in a position to give you a clearer guidance for Q2 margins, I would definitely do. But in such a high level of uncertainty, this will be extremely complicated. Now what I can remind you is the cost structure of Legrand, so that you can do your own math. Where if you have a cost, let's say, on a total cost base of 100, you have about 40% of consumption, so raw materials and components, which would typically be 3/4 of components and 1/4 of raw materials, about 40%. You have about 30% of personnel costs. You have about 6% or 7% of depreciation. And then the rest, about 22%, of other costs which are many, many things, sales commission, advertising, freight and so on and so forth. So this is our cost structure. Now of course, several of those costs are variable, typically consumption. Some of those are very fixed, like depreciation, for example. Some of them depends on the geography. If you take personnel costs, they could be somehow variable in some geographies but more fixed in others. Well -- so using this cost structure, you can do your math. This being said, of course, adapting the cost structure to a month where your sales are down by 41%, it's is an extremely difficult task. So our sort of target, as far as Legrand management is concerned, shouldn't be to adapt in a given month. Our internal objectives and targets and commitment with our Board is more on the yearly performance than, of course, on a monthly performance.
I appreciate that. And just a very last question on -- flipping a little bit to longer term and thinking about opportunities where Legrand can emerge stronger on the other end. You've talked about restructuring and taking more measures. You mentioned data centers and health care exposure. Is there anything beyond that we should think of in terms of where you can or see yourself coming out stronger post the COVID situation?
Well, yes, there are many areas. I believe that generally speaking, a lot of people, we will have spent -- I mean we have, I think, close to 4 billion people worldwide that were under a lockdown process. It is a unique moment in the recent history where people and families have the opportunity, if I may say, to spend weeks, if not months, at home. So I think there will be a number of people that will decide to spend more budgets in their home, to have a smarter, more comfortable home. So this could be an opportunity. Climate change and energy efficiency, which was already before crisis a growing concern for many people. I think there is a sort of growing awareness now that we have to take care a lot more than we used to, to environment and that the resources are limited and that we should optimize them. And I think that in many geographies, the fight against climate change is going to be part of the public plans that will be implemented in order to support the economy. It could also be the opportunity for Legrand. You know that we have a lot of solutions and products that are helpful for our customers to do energy savings, whether in commercial buildings with high-efficiency UPS and transformers, lighting controls and so on, as well as in residential buildings with a number of small products. Elderly care. So you know that a couple of years back, we invested significantly on assisted living. I think what is currently happening to our -- old people in many geographies is dramatic. And there is a growing awareness also that we should take care a lot more to people being more than 70, 75, 80 years old. So I believe that solutions in assisted living could also help. So it's difficult to size that precisely all the more as it will somehow also depend on the sort of regulations and public support. But yes, I believe that we will be amongst the sector of activities that could be supportive long-term or help or that could have some positive consequences, sorry for the words, when we will go out of this sanitary crisis.
Next question from Simon Toennessen from Jefferies.
I've got a question on M&A. You previously guided for at least 4% scope for this year. which is now reduced to 3%. Is that only due to sort of the worst performance of your acquired businesses, or do you just expect to close less deals going forward as well for this year? And maybe as an add-on. Historically, Legrand always had a pretty positive correlation between organic growth and acquisition growth. In other words, when the economic environment was positive, you have tended to do more deals. If I look back over the last 15 years and whenever was -- whenever organic growth was significantly below average, your M&A growth was up less than 2%. In 2010, I think it only rebounded to 1.2% M&A growth after almost flattish in 2009. So how should we think about it maybe beyond the 3% you've guided for this year, which obviously mainly due to the deals you've already booked and quite sizable deals you booked over the last quarters? Maybe a bit more color how we should think about M&A pipeline and deal activity in an environment where things likely going to be slower going forward and whether there's a difference in the way you go about M&A versus maybe prior weaker periods?
Yes. So actually, yes, indeed, we guided initially for 4% perimeter impact. Well, the 3% we have included in the press release is not exactly a guidance. It's a sort of mechanical impact of the acquisitions already done, the sort of mechanical impact it should have on our accounts, including Focal Point which was acquired a couple of months back. Now this being said, we suspended our guidance on March 26, and this suspension, of course, also include the 4% perimeter impact. So in other words, it's highly likely that we will not do 4%. The reason being that we have decided to put on hold a number of discussions that we had, and we did it with -- I personally discussed with a lot of companies that we were currently talking to. And we did that in a very good spirit. And both those companies and ourselves decided that we were better off focusing on dealing with the crisis rather than entering into deals in the context where it's difficult to perform a due diligence, it's difficult to have a face-to-face meeting to negotiate, it's difficult to assess what will be the underlying accounts of 2020 on which we will base evaluation. So all those difficulties make it somehow a bit more difficult to do a deal in 2020 than it was supposed at the beginning of the year before the crisis. So to make a long story short, we suspended our 4% perimeter impact to guidance. We are still entertaining a lot of relationship with some companies. And actually, as part of their guidelines for 2020, our country managers do have as a task to keep and if possible, reinforce, strengthen the relationship they have with some potential targets. So that when the times will be better, we'll be able to start again an offensive M&A strategy. But in the next quarters, it makes more sense to focus on our own performance rather than doing a lot of deals. This being said, there could potentially be small opportunities, and we might decide to pursue them, but we will not pursue bigger ones. Now as far as the correlation between organic growth and external growth is concerned, the driver is more the economy. When you have a depressed economy, obviously, you tend to have less positive organic growth, and you have a lot less people that are willing to talk for 2 reasons. Number one, because they know that they will not get the same valuation than in better times. Number two, we, ourselves, as we do today, are more focusing on our own performance rather than spending our cash to do acquisitions. So this is the reason why you often have, at the same time, lower organic performance and lower M&A because the underlying economy is not good and it has an impact on both organic and nonorganic. Third, long term, we remain extremely interested to make deals, and M&A is completely part of our cost model, which is one of the reasons why we have overperformed our peers as far as top line growth. Total top line growth is concerned over the past years. So we remain extremely interested when the economy will be stabilized. And when we will be able to do all those things, i.e., talking face-to-face to targets, visiting companies, visiting factories and so on, we will be extremely motivated to do acquisitions. And I'm very confident on the fact that our balance sheet will be solid enough to do that. You have a full balance sheet as of the end of March. You could see that we have a gearing which remain reasonable, 1.9 leverage. You could see that we have very significant amount of cash, EUR 1.8 billion, which is actually higher than what it was at the end of December despite we had to finance the acquisition of Focal Point. So to make a long story short, suspension of guidance, no significant deals in the quarters to come because we want really to focus on our performance. Contact maintained with many targets. And whenever the situation will be better, then we will be able to resume offensive organic growth approach. We have the contacts for that. We have the strategy for that. We have the teams for that. We have the relationships, and we have the cash.
Can I just have an add-on on working capital? Obviously, given significance of April and obviously the sales decline you've seen, is there any way you could give a bit more color on the sort of working capital move in April? Obviously, appreciated your comments around you continue paying your suppliers in time. But -- and obviously, the free cash flow performance in the quarter was much better than expected. But was there any change in April in the way you got paid, for example?
Well, you are getting greedy. We give you the sales, the monthly sales, which we never did. And you are asking the working capital -- the monthly working capital. No, don't forget, number one, we don't intend to comment in detail given months because we wanted to give this organic top line evolution in April because we wanted you to have a flavor of what it means when we have a lot of geographies under lockdown. So we thought it was an important information to get into the market. But obviously, we do not have the intention to comment on the working capital nor any detailed financials of the month of April. It's not relevant. We've already told you that in a given -- commenting on a given quarter, the working capital is already a difficult exercise. Doing that on monthly basis wouldn't make any sense. Now if your question is about, are our customers paying? Do we expect to have significant issues coming from some defaults, for example, that some of our customers will experience? Well, I have to remind you 2 things. Number one, our partners, for most of the time -- our distribution partners for most of the time are those carrying the credit risk. And those distribution partners are solid companies, reliable companies, professional companies, holding that very nicely. Number two, as usual, we have a very strict discipline. And if you remember the various crisis that we had, we have been able to maintain the discipline as far as payment terms, as far as customer selection, tracking of customers, tracking of payment is concerned. So if you put together the fact that we are organized, leveraging a number of distribution partners; and number two, we have very strict financial discipline, you shouldn't expect meaningful issues either for the month of April nor for the year.
Next question from Daniela Costa, Goldman Sachs.
Daniela, I think you are on mute.
Can you hear me now?
Yes, Hello, Daniela.
I have 2 quick questions. First, I wanted to ask you, I don't think we've discussed yet on the call, sorry, if I missed it, regarding Milestone and the performance of milestones during the quarter and what you see going forward. Just a bit of color on that versus the rest of Americas would be great. And then the second quick question. In a lot of these calls, sometimes you give us the breakdown of how pricing and raw mats have been doing. It would be -- would appreciate also if you could give us that.
Yes. Well, actually, we did already for pricing and raw materials, but I can again give you the number. So our pricing -- our prices were up 0.9% in Q1. And the price of raw material and components was down minus 1.1% in Q1. Well, as far as Milestone is concerned, if you allow me, I will maybe address the U.S. topic and not only milestone. So maybe let me first remind you the numbers. So in Q1, for Legrand North and Central America, we had sales down 4.2%. And if we zoom specifically on the U.S., this decline was minus 3.9%. Well, as usual, it's a mixed bag of many things. As far as Legrand AV is concerned, you know that it's no longer Milestone alone, but we put together Milestone and a few other businesses dedicated to audio/video that we had before in the U.S. So now it's division called Legrand AV. It did pretty well in Q1. Actually, it's slightly up, stable to slightly up in Q1. So it did slightly better than the rest of our operations. Now maybe a word on the U.S. Are we disappointed or happy with the Q1 performance? Well, this minus 3.9%, should be seen as a relatively good performance if you -- for 2 reasons. Number one, if you look at our peers, most of them are down between minus 3% and minus 8% in Q1. Well, you have the numbers here, it's -- the electric segment of Eaton is down 4%, electrical segment of Rexel is down 3%, equity is at 6%, nVent is down 8%. Well, Rexel North America is down close to 6%. So with our minus 3.9%, our performance, let's say, is in line with the market. And it's all the more satisfactory, if we say. Sorry to be satisfied with the minus 4% drop in sales, that our Q4 last year was a lot better than anybody else. You remember that we commented that. Last year, we had in Q4, our U.S. sales up by 2.5%. And if you look at most of our competitors, they were down between minus 1% and sometimes minus 12%. So we have a Q1 2020 which is, let's say, in line with the market after the Q4 2019, which was a lot better and probably a bit boosted by some stocking. So we are quite happy with our Q1 performance in the U.S. And number two, Milestone is doing slightly better than the rest. Now maybe a last comment on the U.S. on the margin because you may have noticed that our margin was down in North and Central America. It was down actually 220 bps in Q1, which is 300 bps excluding acquisitions. Well, I'll let you dig into the numbers. I know that all of you did not yet have time to do that, but out of this minus 300 bps drop in adjusted operating income margin, excluding acquisitions, 2/3 of that is coming from restructuring, i.e. 200 bps. So we booked a significant restructuring expense in the U.S. in order for us to adjust and to adapt to the situation. But otherwise, the gross margin is quite flat. And we have a slight decrease in SG&A coming from the fact that our volumes are down. And even though we have started to adjust our SG&A, we didn't do it at the same magnitude of our sales. So don't -- there's no specific warning for the U.S. in top line. We are doing as our peers. And no specific warning on the margins.
Next question from Eric Lemarié from Bryan Garnier.
Yes. I got actually one remaining question. In your slide, I observed that you were not mentioning any government aids on this slide. Does that mean that you're not interested by the various financial or technical aids provided by various governments in the countries you are located today and why?
Well, it depends on the country. It is very much a country-to-country decisions, depending on the support you can get, the conditions attached to this support, the impact it has on our accounts and the limits it gives as far as your mobility and patient capabilities are concerned. So it's very much depends. In France specifically, we have decided not to cut on any public support. So we are not leveraging the support provided as far as warranted loans are concerned. We are not -- we have not implemented the partial employment scheme. So we have decided to use other leverage to adapt and especially we played on the days off, the number of other bonuses, and a number of other topics. So in France, no, we have decided not to implement or to use any public scheme.
Is there any specific reason behind that, I mean, in France, for instance?
Well, because we believe that as far as our French footprint is concerned -- well, number one, we have other leverage which are made available, such as that in France, we have a tradition of a lot of days off. And there was a number of new laws allowing to impose the number of days off. So we have a number of other means that we could use in order to adapt and to adjust. Number two, being a French corporate, we thought that it was somehow a responsibility because Legrand is a big organization in France and putting everybody under employment -- partial employment would have been a big cost for the community. Number three, it was also a good way for us to preserve as much as possible remuneration of our teams because partial employment scheme translates into a lower salary for a number of factory workers. And again, number four, the most important reason if I may say, is that we believe that there are plenty of different ways which gives you a number of -- I mean, which gives all the leverage into your hands, if I may say, to adjust your footprint without having to call on the public help.
We have one last question registered for the moment from William Mackie from Kepler Cheuvreux.
It relates to restructuring, primarily. When I look at the accounts, it seems that you mentioned earlier, you booked a EUR 16 million gain within restructuring, which appears set against the rest of the world in the adjusted operating profit result. So should we think about the adjusted operating profit result in rest of the world in Q1 being closer to the 15% underlying if I exclude the gain? That's the first thing as a clarification. And then with respect to looking forward for this year on your planning, what are -- what is your planning around the level of restructuring charges we can expect? You mentioned earlier in the call, that you would adjust when compared to the historic run rate. And are there any other gains that you might be able to realize to offset that within the results this year?
Well, as far as one-off coming from the sales of our Chile building, I confirm that the amount is about EUR 16 million, and it's in the Rest of the World adjusted operating margin. If you look at the adjusted operating margin in the Rest of the World region, in Q1, it's up 470 bps. And if you exclude the impact of acquisitions, it is up 440 bps. Well, this increase is entirely coming from the sell-in in building. If you were to exclude the sale of this building, you would have a margin which would be -- I'll let you do the math, but it would be slightly down with basically 2 things: gross margin which is slightly improving and a negative impact from SG&A because of the strong and sudden impact of the crisis which started by this area with China. So yes, you have to take into account the fact that all of the margin improvement in the rest of the world is coming from this Chilean sales of this building. Looking at the year 2020 as a whole, I told you that we expected these restructuring charges to increase and to be higher than the average of the previous years, i.e., EUR 20 million to EUR 25 million. I cannot set a precise number because all the plans are not yet decided. And the timing of some of those plans may vary. So it's extremely difficult to give you a precise guidance, but we have a lot of ideas and a lot of commitment from our units to find good productivity and adaptation opportunities. Will there be additional sales of building to finance this restructuring? Well, it's very uncertain. This one-timer came in Q1 2020. It could very much come last year or in 2 years' time. So I wouldn't commit to finance 100% of the restructuring plan using sale of buildings. You will have restructuring charges in due time definitely. So if I were you, I wouldn't -- for my model, I wouldn't take for granted that we will be additional sales of buildings, even though it can happen, but it will be reasonable, given the uncertainty, not to take any more than the Chilean sales. And you can take into account the fact that we will have restructuring charges that will be -- that should be significantly higher than the one we usually book, i.e., EUR 20 million to EUR 25 million.
That's very useful. One -- if you allow me, just one final question. We haven't discussed really the supply chain much. Obviously, supply chain performance is critical for your business around the world. What have you experienced in terms of the supply chain performance, deliveries? Has there been incremental cost on logistics, expediting logistics? And what do you assess is the current situation going into the second quarter?
Well, it's indeed a very important question. A couple of points. Number one, we do not have any significant shortage as far as the supply chain is concerned. We were afraid we would have, at the beginning of the year, when, of course, many Chinese factories shut down, but this has been solved, and we don't expect any significant shortage going forward. All the more as, obviously, the demand being lower than anticipated by many players at the beginning of the year. It's a bit easy -- easier for suppliers to adapt. But most of our -- almost all of our suppliers are open and up and running. Number two. In a context of crisis, usually, you would expect price of raw materials and components to go down significantly. Well, it's going down. That's what we showed in the Q1 result, which is a minus 1.1% price decline of raw materials and components. It is true that it's a bit more complicated than usual for a couple of reasons. You can have additional cost, and you are rightly mentioning the fact that some of the logistics costs are higher because some of the supplies that were shipped by boat are now shipped by plane. You have still some tension on some electronic components coming from China. You have some suppliers adjusting their capacity and shutting down factories because they decided to do so just because of the lockdown measures. So it creates a number of uncertainty on how the price of raw material and components will react in 2020 compared to classical crisis. Now the outcome of all that, so pressure -- downward pressure on prices from raw materials, but on the other way, additional logistic costs and so on, translated in Q1 into a declining -- minus 1.1% decline in price of raw materials and components. Well, as far as our sites are concerned, I did not mention that, but I should have. We said in the press release that almost all of our logistics centers, invoicing capabilities, the salespeople and service people are up and running. It's also a case for our own factories. Not at full capacity, of course, but almost all of our factories are open, including actually in countries like France, for example, they opened a few weeks back, and they are progressively ramping up. They opened a few days back in India at the end of the lockdown. And they are, of course, up and running in countries like the U.S. and a few others. So as far as the Legrand, let's say, footprint, supply chain, factory, logistics, invoicing capabilities, sales team and service team, you can consider that almost all of them are up and running.
Next question from Wasi Rizvi from RBC Capital Markets.
I just wanted to pull together a few things you said to make sure I've understood correctly. So you mentioned no major strategic changes coming as a result of this crisis. But then you've also said you're accelerating some restructuring, and you also then talked about some markets where you think the outlook may have changed, such as datacom and people wanting to make their homes smarter and more comfortable. So is the accelerated restructuring simply -- sorry, is the higher restructuring simply an acceleration of plans you're doing anyway? Or are there things in there that reflect the fact that you're thinking there are some markets that are now going to be more attractive than others. And I don't know, maybe you're accelerating product development for datacom markets because you think there's opportunity and maybe you're pulling back from other areas. Can you just help me understand that a bit?
Yes, sure. I mean what I was mentioning that we do not expect to do strategic changes, the Legrand strategy has been in place for 50 years, if I may say. And we have gone through many things, many shocks. And I believe that times, such as difficult times we are going through today, we should keep cold-minded. And it's not because we have this kind of shock that the entire world will change. And this strategy made of gross variance strategy, a lot of investments into R&D and products, smarter products with connectivity, bolt-on acquisitions with many deals and addition of many brands, expansion into complementary product families, focus on spaces where people live and work, building systems, growing international, financial discipline, profitability and cash flow-oriented, strong CSR, inclusion, care for people, doing good for people, customers. But all that will remain unchanged just because we believe that this is the right strategy to cope with tomorrow's world. And it's -- this being said, so number one, the strategy is unchanged. As far as restructuring is concerned, we are not enduring or expensing restructuring charges because it would finance a strategic change, but because we are accelerating or doing a number of changes that we think are necessary for us to adjust. So for example, we are closing more factories. We are merging faster a number of units. We are doing some process reengineering. We have a number of people. We are doing a number of attrition as far as people are concerned, so reducing a number of teams to adapt. So all those restructuring charges are not there because we would need to finance a change in the strategy. They are expensed in our P&L because we want to adjust to the new normal, if I may say, or to the crisis. And as far as investments into interesting fields of activities that could potentially benefit from the crisis, they were already there. I mean last year, we did an Investor Day saying how important and critical it was for the group future to grow in datacom. If we need to reallocate more budget to some of those areas, such as assisted living or health, we will, of course, do it, but we'll do it respecting the group business model and respecting the group fundamentals.
Next question from Gael de-Bray from Deutsche Bank.
Yes. I was just looking at the performance in Q1 by geography. And quite obviously, the drop in sales was much more severe in the rest of the world, the markets where typically margins are a bit lower than elsewhere. So I guess there was some benefit to margins coming from that at the group level. And my question is how shall we think about this, about the regional mix effects on margins for Q2 versus Q1?
Well, I don't believe there was a meaningful impact on the margin of the fact that the Rest of the World declined more than the rest because actually, the country mix effect should really be seen at the country level, not at the zone level. Because within the Rest of the World, you have countries which are less profitable than group's average. And you have countries which are more and sometimes, a lot more profitable than the group's average. So if the Rest of the World, the decline is coming from the first countries, yes, you have a positive mix impact. If it's coming from the second type of countries, then you don't have. On top of that, the same comment for the other zones. You know that our margins in France and Italy is pretty nice. So if those countries are declining more than others, we are more limited part if we have negative country mix impact. So I don't believe that we have the significant impact in Q1, maybe a couple of bps but it's not material. We don't believe that we have a material impact in the Q1 margin coming from the country mix. Going forward, 2 things. Number one, in analyzing the relative performance of the players, as far as top line is concerned, I would really encourage you to take into account more than ever this country mix and this business activity mix. Because country mix, so looking at players doing minus 5, minus 10, minus 15, minus 20, usually, when you have one country doing a plus 1 and another country doing plus 5, of course, this country mix matter, but it's not that relevant. When you have a country doing, such as in April, plus something and a country doing a minus 80%, obviously, the relative exposure of X, Y or Z player to deal in that country is extremely impactful and a strong driver behind the top line performance. So number one, I would really encourage you to -- whether you are more in China or India, strong or not in the U.S., more in Southern Europe or Northern Europe, all that matter a lot. Going forward, I have no clue about the country mix for Legrand. What will Western Europe do going out of the long-term measures? I don't know. Will the growth in China be sustainable or not? I don't know. I told you that over the months of April, we did almost no sales in India, which is never seen for this country. What will it be going after the measure? I don't know. So it's extremely difficult for me to give you any guidance for the rest of the year because it depends on the behavior of view of that country. The only guidance I can tell you is that you should, of course, more than ever, embed country mix into your model because it's not so usual to have a country doing minus 95% and others doing positive.
[Operator Instructions]
Well, I think maybe we can -- because I do know some of you do have another call starting at 10. Thank you very much for attending this call. If you have further follow-up questions, you know that Ronan Marc, Samy Bensaid and of course, Franck and myself are fully available to answer any more questions you may have today or the days to come. So thank you very much for attending this call. Goodbye.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.