LEGRAND_REGISTRATION_DOCUMENT_2017

GROUP OVERVIEW

A profitable growth strategy based on leadership development

2.2.3 – A business model creating long term value

R 2.2.3.1 A MODEL BASED ON PROFITABLE GROWTH

2.2.3.1.2 Profitability driven by commercial positions, internal processes, and continuously improving competitiveness The Group’s ambition is to continue to strengthen its commercial positions: in 2017, around 69% (1) of sales were generated from number one or number two positions. These positions, which give the Group the critical mass to achieve economies of scale and be recognized by its customers, have enabled it to generate high levels of profitability. Expressed simply, the business models works as follows: in less buoyant economic conditions, which prevent the Group from exploiting growth-related operational leverage, Legrand uses active and differentiated management of its business to keep profitability under control. When economic cycles become buoyant, the Group generates profitable growth. The functioning of Legrand’s business model is based on simple and efficient internal processes. In particular, each Country Department has to fulfill a Financial Performance Contract included in its annual roadmap, in which it undertakes to deliver a given level of growth and economic margin (the economic margin is the operating profit less the cost of capital employed, expressed as a percentage of sales). In addition, Legrand relies on its unique, efficient and responsive Back Office structure (see section 2.3.2 of this Registration Document) to constantly improve its competitiveness. Thus, by applying industry best practices at its production facilities and applying the concepts of product platforms and technology platforms (see section 2.2.2.1.1 of this Registration Document), Legrand continually optimizes its cost base and capital employed. Some of these gains are reinvested, particularly in research and development (in the various initiatives linked to new technologies, for example) and in Front Office initiatives aimed at boosting organic growth. Thus, the benefits generated by the Group’s industrial transformation enable it to participate in the financing of many ongoing initiatives linked to new technology. This is reflected in the Group’s control of its R&D, industrial capital expenditure and working capital requirement ratios. (see section 2.2.3.2 of this Registration Document). The Group’s adjusted operating margin amounted to 16% on average between 2003 and 2009, and nearly 20% between 2010 and 2017.

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2.2.3.1.1 A market characterized by solid economic fundamentals On a global basis, Legrand’s accessible market is characterized by a relative lack of range commoditization, and by a very diffuse flow of business from hundreds of thousands of electricians. These electrical installers, product specifiers, or end-users pay considerable attention to products’ technical features. Thus, for example, electrical installers tend to favor market-leading products that can be installed efficiently (safety, quality, reliability, and ease and speed of installation) and offer the qualities expected by the end-user (functionality, design and ease of use). This is one of the reasons why, every year, Legrand makes long term research and development investments averaging 4 to 5% of its sales ensuring a steady flow of products with new features and designs responding to customers’ needs. By continually building more added value into its products and solutions, Legrand reinforces brand loyalty among electrical installers, product specifiers and end-users, enabling the Group to expand its numerous leadership positions. While some structurally deflationary industries are seeing the price of their products steadily eroded, Legrand’s market is displaying a different overall trend. In particular, end-user sensitivity to the price of products is specifically mitigated by the fact that electrical installations (including cables and labor) usually account for only a small portion of the total average cost of a new-build construction project (between 7 and 8% for a residential project, for example). Similarly, because labor represents a significant cost component for installers, they first look for products that will enable them to work efficiently, particularly with ease and speed of installation. In addition, Legrand has developed a certain expertise in pricing, with pricing managers based all over the world who are responsible for managing sales prices. Their role is to translate into prices the innovation that Legrand’s products bring to the market and to adjust the sales price for each product category, or even individual products, by taking account of trends in raw material and component prices, the overall inflation received by the Group, and market conditions. More generally, all the Group’s management and finance staff have been trained on, and made aware of, price management. Historically, Legrand’s average selling prices have increased every year over the last 20 years.

(1) Based on 2017 sales including 12 months of 2017 acquisitions.

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REGISTRATION DOCUMENT 2017 - LEGRAND