LEGRAND_REGISTRATION_DOCUMENT_2017

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GROUP OVERVIEW

A profitable growth strategy based on leadership development

R 2.2.3.2 A SOLID BALANCE SHEET STRUCTURE BASED ON HIGH FREE CASH FLOW GENERATION By combining a high level of profitability and tight control on capital employed (working capital requirement and capital expenditure), Legrand’s business model enables the Group to generate high levels of free cash flow over the long term. Free cash flow generation has thus been around 13% of sales over the past five years. This gives the Group significant financial and operational flexibility, and a solid and attractive balance sheet structure. The strength of the Group’s balance sheet also ensures the confidence of investors on whom Legrand can call when financing its growth or refinancing transactions. For instance, in 2017 the Group launched two successful bond issues, for a total amount of €1.4 billion to finance the acquisition of Milestone AV Technologies (€1 billion) and for its refinancing operations (€400 million). The continued development of product and technology platforms, the systematic application of a “make or buy” approach to all investment projects and the transfer of some production to less capital-intensive countries should enable the Group, in the long and medium term, to maintain a ratio of capital expenditure to consolidated sales of between 3% and 3.5%. The Group also believes that it is able to maintain its ratio of working capital requirement to sales at around 10%, excluding acquisitions. R 2.2.3.3 CAREFUL MANAGEMENT OF FINANCIAL PERFORMANCE ENABLING SIGNIFICANT VALUE CREATION To ensure a high level of profitability and strong free cash flow generation, Legrand manages its financial performance based on three pillars: W synthetic key performance indicators; W strong processes organized around a permanent management dialog between country managers and the Group; W accountable, experienced and motivated senior management teams, particularly through compensation aligned with the challenges of creating value in the short and long term. Synthetic key performance indicators Three key performance indicators are measured for each country manager. First, the local market shares of each product family that drive profitability. Then, economic profit (after or before income tax depending on countries), defined as adjusted operating profit less the cost of capital employed. Finally, CSR performance, measured by the level of achievement of the priorities set out in the roadmap.

Solid processes organized around a permanent management dialog between country managers and the Group As part of the management of the Group’s financial performance: W once a year, the Group signs a Financial Performance Contract with each country manager and his/her team for the coming year. This outlines several scenarios of change in revenue and economic margin (economic profit on sales); one scenario is chosen and the country manager and his/her team are fully responsible for its implementation; W a quarterly performance review with managers from the Group’s main countries. This is an opportunity during the course of the year to assess the level of achievement of the performance contract and if necessary choose a different scenario depending on whether business is better, not as good or in line with the scenario initially chosen; W finally, comprehensive monthly reports are used to confirm that the performance of each country is in line with the latest approved scenario. Accountable, experienced and motivated senior management teams, particularly through compensation aligned with the challenges of creating value in the short and long term. On average, members of Legrand’s senior management team have around 20 years of experience in the electrical and digital building infrastructure industry. Their experience and commitment have allowed Legrand to create and maintain a unique corporate culture, which inspires and rewards talent and initiative. The influence of its senior management team has enabled Legrand to continue growing while maintaining a strong financial performance. Countries are run by managers who are true entrepreneurs. Management and management dialog between countries and the Group are based on the high accountability of local managers, who are incentivized to create long term value. The Group also set up long term performance linked profit sharing schemes involving more than 2,000 beneficiaries in 2017, to drive value creation over the long term and increase the management team’s loyalty to the Group (see sections 4.4.3.1, 7.2 and 7.3 of this Registration Document). For the Group’s key managers, this might take the form of performance shares (see section 6.2. of this Registration Document). This scheme, with a four-year vesting period, depends on future performance conditions and thus reinforces the interest of key managers in creating value over the long term. In addition, the Group’s current and former senior management and employees held 3.83% of the Company’s share capital as at December 31, 2017.

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REGISTRATION DOCUMENT 2017 - LEGRAND