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Edited Transcript of LR.PA earnings conference call or presentation 7-Nov-19 7:30am GMT

Q3 2019 Legrand SA Earnings Call

Limoges Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Legrand SA earnings conference call or presentation Thursday, November 7, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Benoît Coquart

Legrand SA - CEO

* Franck Lemery

Legrand SA - Executive VP & CFO

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Conference Call Participants

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* Alasdair Leslie

Societe Generale Cross Asset Research - Equity Analyst

* Andre Kukhnin

Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst

* Andreas P. Willi

JP Morgan Chase & Co, Research Division - Head of the European Capital Goods

* Gael de-Bray

Deutsche Bank AG, Research Division - Head of European Capital Goods Research

* Ji Cheong

Citigroup Inc, Research Division - Senior Associate

* Jonathan R. Mounsey

Exane BNP Paribas, Research Division - Analyst of Capital Goods

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* Wasi Rizvi

RBC Capital Markets, Research Division - Analyst

* William Mackie

Kepler Cheuvreux, Research Division - Head of Capital Goods Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to today's Legrand 2019 9 Months 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. Benoit Coquart; and CFO, Mr. Franck Lemery. Please go ahead.

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Benoît Coquart, Legrand SA - CEO [2]

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Thank you. Hello, everybody. Franck Lemery, Francois Poisson and myself are happy to welcome you to the Legrand 2019 First 9 Months Results Conference Call. Let me first remind you that we have [already] published today our press release, our financial statements and a slide show to which we will refer. Those documents are available on the Legrand's website. Please note that this conference call is recorded and webcasted on our website. Let me start first with a few opening remarks, following which Franck and I will comment into more details of 2019 nine months results.

I begin on Page 4 of the deck, with the 4 main takeaways from today's release. First, Legrand reports strong top line growth with sales up 10% in total. This is a very positive achievement as we clearly continue to develop group's positions, both organically and through acquisitions. Second takeaway, this strong sales growth translates into robust value creation. As you can see on the slide, all main financial KPIs are on the rise by more or less plus 10% compared with 9 months 2018. Adjusted operating profit increased plus 10%, net profit attributable to group was up plus 9%, and normalized free cash flow grew plus 12%.

Third, momentum is very good for both innovation and acquisition-driven growth. As far as innovation is concerned, we have delivered over the first 9 months of the year with dynamic flow of new products, including, of course, connected offerings.

On the M&A side, we are pleased to announce today the acquisition of 2 leading companies, Connectrac in the U.S. and Jobo Smartech in China. Taking into account the purchase of Universal Electric Corporation, early Q2, Legrand has thus announced 3 acquisitions since the beginning of the year, totaling annualized sales of more than EUR 180 million.

And lastly, based on our 2019 first 9 months achievements, Legrand confirmed today its target for 2019. I will come back to this point later in this call.

After this brief introduction, let's start with another view of sales on Page 6. So in total, sales rose plus 10.2% in the first 9 months of 2019. This strong growth resulted first from a plus 2.3% organic growth compared with the first 9 months of 2018, including 2.6% major countries and 1.5% in new economies, all 3 geographical zones being on the rise. More specifically, in the third quarter 2019 alone, organic growth in sales stood at plus 2.6%. This reflects, on the one hand, a solid performance in major economies, plus 3.3%, driven notably by good showings in Italy, the U.S. as well as in France, where, as you may remember, the basis of comparison of the third quarter of 2018 was favorable due to destocking by distributors at that time. On the other hand, the rise in sales in new economies in Q3 was limited plus 0.8%, driven by high single-digit growth in sales in China and India, but affected by ongoing decreasing business in the Middle East, declining sales in Turkey, due as announced to a particularly demanding basis of comparison, and reflecting sales in Brazil. This was for organic growth.

Acquisition-driven growth, which is a good second growth driver, contributed plus 5.2% in 9 months 2018 and should contribute, based on acquisitions completed in 2018 and 2019 and their likely date of consolidation, around plus 5% in fiscal year 2019.

Lastly, ForEx impact was favorable at plus 2.4% in the first 9 months of the year. If we apply to Q4 the average ForEx rates observed in October 2019, the annual ForEx effect on sales for 2019, for the whole of 2019, would be around plus 2%. This is, of course, and as usual, a (inaudible) computation.

Let me now go into more details regarding the like-for-like evolution of sales by geographical zone, which are all positive. And for that, I'm referring to Page 7 to 9 of the slideshow. So starting with Europe. Organic growth in sales was plus 2.7% in the first 9 months of 2019. In Europe's major countries, sales grew plus 2.8% in 9 months, driven by good showings in Italy, Benelux, Southern Europe as well as in the U.K.

In France, sales were slightly up on a like-for-like basis. One should keep in mind that in France, Q4 2018 represents a challenging basis for comparison, as it benefited from some restocking by distributors after the destocking experienced in Q3 2018. In Europe and new economies, organic growth in sales stood at plus 2.3% in 9 months of 2019, fueled by very good showings in Eastern Europe. Sales in Turkey were down, stemming from, as announced, the particularly demanding basis of comparison.

Let me now move to North and Central America, where sales were up plus 2.6% on a like-for-like basis in the first 9 months of 2019. This increase was fueled by the U.S., where sales grew plus 3.1% in 9 months of 2019 with good showings in cable management, user interfaces and revenue growth in lighting management. Over the first 9 months of the year, sales were almost stable like-for-like in Canada and down in Mexico.

Moving now to the last zone, Rest of the World, where sales rose plus 1.1% on a like-for-like basis. In Asia Pacific, sales were up plus 2.3%, driven by good showings in India and China. This was partly compensated by declining sales in Australia. Organic growth in sales in Latin America was plus 0.3%, due notably to a slight rise in revenues in Brazil and a decrease in sales in Colombia. In Africa and Middle East, sales were down minus 2% like-for-like in 9 months of 2019. In the Middle East, where business is facing weaker business environment, the decline in sales was marked. This was partly compensated by rising sales in many African countries.

Let me now pass the mic to Franck for a presentation of how our strong growth in sales convert into robust value creation.

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Franck Lemery, Legrand SA - Executive VP & CFO [3]

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Thank you, Benoit, and good morning to all of you. Let's start with profitability on Page 11. As said earlier by Benoit, adjusted operating profit rose plus 10% to reach close to EUR 1 billion in the first 9 months of the year.

Moving to Page 12, 9 months 2019 adjusted operating margin before acquisitions, i.e., 2018 scope of consolidation, came to 20.8% of sales. Adjusted operating margin before acquisitions was thus up 0.3 points compared with the adjusted operating margin recorded in the 9 -- first 9 months of 2018. When markets uncertain on the whole and differentiated from one country to another and with rising U.S. custom duty, we believe this is a good performance driven by efficient pricing as well as effective control of SG&A and other operating expenses. One should also keep in mind that the group benefited from a favorable basis for comparison in the third quarter and will face a demanding basis for comparison in Q4. Including the 0.4-point dilution from acquisition, adjusted operating margin came to 20.4%. Once I comment on the impact of acquisitions on adjusted operating margin, taking acquisition completed in 2018 and 2019 into account, the dilution from acquisition and adjusted operating margin should be as announced 30 Feb about minus 0.4 points for the full year of 2019.

If we now look at net profit attributable to the group on Page 13, it was up close to 9% from the first 9 months of 2018. The solid growth resulted mainly from the increase in operating profit, partially offset by higher FX and financial results and higher corporate tax in value. This deserves 2 additional comments: First, on financial charges, they have mechanically increased by about EUR 7 million in 9 months 2019, due mainly to the implementation of IFRS 16 from January 1. Excluding IFRS 16, financial charges would have been almost flat year-on-year. Second comment on corporate tax. The increase in value is due to higher profit before tax when the corporate tax rate benefited from a favorable one-off impact of about 1 point.

Moving to the last feature of the financial performance with cash generation on Page 14. As you know, the relevant reading of free cash flow generation in the quarter is on a normalized basis. You can see on the right-hand side of the slide that normalized free cash flow was up plus 12.3% in the first 9 months of 2019. In more detail, on the left-hand side, you can see first that cash flow from operation was very robust at plus 18% of sales -- sorry, 18% of sales. Soon, working capital requirement as a percentage of sales was under control, increasing 0.5 points as it was a bit affected by the impact of recent acquisitions. Third, that free cash flow stood at a solid 13.7% of sales. One should also keep in mind that Q4 2018 free cash flow generation was particularly strong and represents, accordingly, a demanding basis for comparison for Q4 2019.

These were the key topics on Legrand 2019 first 9 months performance and value creation that I wanted to share with you. I now give the mic back to Benoit.

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Benoît Coquart, Legrand SA - CEO [4]

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Thank you, Franck. Let's move now to the fourth part on Page 16 with Legrand's strong momentum in innovation and acquisition driven-growth. As you can see on Page 17 to 19, we kept on actively innovating with several new product launches, covering many of our product categories and, of course, including connected offerings from our Eliot program. This includes, for example, Valena Next connected user interface range conceived with Netatmo Belgium and Spain, Mosaic in France, Plexo in Europe, the Lyncus in India and many others. We were also active in architectural lighting, energy distribution, connected emergency lighting in France, new connected door entry system with the plus 100X range successfully launched in Italy, audio/video solutions, assisted living alarms and digital infrastructures.

Moving now to Page 20 and 21. You remember that in April, we completed the acquisition of Universal Electric Corporation, the undisputed #1 in the U.S. for busway dedicated mainly to data centers. We are pleased to announce today 2 smaller new acquisitions. First, Connectrac, an innovative U.S. company specializing in over-floor power and data distribution. Connectrac products are designed to be very easy to install in both new and existing commercial buildings. By adding this business to our catalogs, we strengthened our position in cable management in the U.S.

The second deal is Jobo Smartech, the Chinese leader in connected hotel room management solutions. Jobo Smartech's offering will round out Legrand product ranges in China's hotel segment, a very dynamic market. So 3 deals closed this year, and we still, of course, very active on the M&A front.

Coming now on Page 23 to the last topic of this earnings release, i.e., our targets for the full year. Taking into account achievements in the first 9 months of 2019 and the demanding basis of comparison of the fourth quarter of 2018, to which I would add, as you know, the usual seasonality in Q4 performance, you are all aware, Legrand confirms its 2019 target of -- for organic growth in sales of between 0% and plus 4%, and its 2019 target for adjusted operating margin before acquisitions, i.e., at 2018 scope of consolidation of between 19.9% and 20.7% of sales.

Legrand will also pursue its strategy of value-creating acquisitions. This is it regarding our 2019 targets.

One very last comment before we open the Q&A session. I am pleased to announce that as of January 1, 2020, Francois Poisson, who you all know, will take over new responsibilities within Legrand, and Ronan Marc will become our VP, Financing and IR. A few words on Ronan. Ronan joined Legrand about 20 years ago and has handled many financial and corporate duties within the group, including [profit share for] in India and in Russia, M&A Officer and Head of Internal Audit. I'm convinced that his strong knowledge of group business and strategy will highly contribute to further foster the strong and trusted relationship Legrand has been entertaining with the financial community for decades. Of course, until December 31 this year, Francois remained fully in charge of financing and IR. Franck, Francois and myself are now ready to open to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have one first question from Ms. Lucie Carrier from Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [2]

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I have a couple. I'll go one at a time. The first one, I was hoping you could give us -- you could maybe break down for us kind of the organic growth trend we've seen in the quarter based on price, volume and working days, please? And I -- for the group, and if you can give us some indication by geographies as well, please?

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Benoît Coquart, Legrand SA - CEO [3]

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Lucie, what do you want by geography? I didn't get the end of your question.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [4]

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I'm just trying to understand the dynamic between price, volume and working days as part of the organic growth.

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Benoît Coquart, Legrand SA - CEO [5]

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Okay. So over the first 9 months of the year, through it all, price was up plus 2%. So the plus 2.3% organic growth was basically plus 2% of price and the rest being -- would have been mix. This is for the 9 months. As far as the Q3 alone is concerned, pricing was up 1.4% and in both cases, Q3 and 9 months. So, of course, it includes part of this pricing were dedicated to compensate for the rise in the U.S. tariff, and we may say a word, if you want, on the U.S. tariff. As it was for pricing/volume, as far as the number of days is concerned, well, it's always very difficult question to answer for us because you have a sort of theoretical computation and you have the practical computation. So you should take the theoretical computation. There was 1 day more in Q3 in a number of regions, 2019 compared to Q3 2018, but this is sort of ex ante computations. Ex post, we don't believe that the number of days really played one way or the other in Q3, nor that it played one way or the other in the 9 months. So for us, it has -- I understand that it's a bit more important for distributors and for manufacturers. For us, we don't believe that it has a significant impact.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [6]

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Okay. My second question was more to understand some of the trends in the North American margin and also the level of the group, specifically in North America. Would you say that you now have kind of more than offset some of the headwinds, thanks to the price increase that you've had for the past 12 months and how we look kind of further? How should we think about this dynamic between the pricing, the raw materials and the tariffs, please?

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Benoît Coquart, Legrand SA - CEO [7]

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Yes. So specifically on the U.S. tariff, let me maybe give you the numbers. In the first 9 months of 2019, we had a rise in the U.S. custom duties of about EUR 38 million, so that's what we have as an additional cost for COGS in our accounts over 9 months. And indeed, this was fully offset in LNCA accounts by pricing, mostly, but also by a number of adaptation initiatives, and it was offset both in value and in margin. So this is a very good performance as it wasn't such an easy game to play to compensate for increase. If you look now at the whole of 2019, well, this is a fast-evolving story and from one day to another, it can change. You're much aware of the current talks between the U.S. and the Chinese administration. We believe that the various tariff implementation could have a maximum impact, maximum impact of $55 million in the fall of 2019, including the various list -- the List 3, which rose to 25% in June 15, the List 4 at 15% implemented since the September 1, so maximum impact of $55 million. And our commitment vis-a-vis the financial community hasn't changed. Our commitment is that we aim at compensate at decent value this increase in tariff by pricing and adaptation. Now again, it can change very quickly. By the way, from what we understand, the current discussion are on the List 4. So the current discussion, which may potentially lead to lift some of the tariff, are mostly on the List 4. And List 4 for Legrand, it's a total annual cost of maximum $3 million to $4 million. So this wouldn't have, unfortunately, a very big impact on the Legrand accounts.

So this was for the tariff alone. Now your question was a bit broader. You see it was also the impact on raw material at a group level, where over 9 months the inflation of raw materials and components was about plus 2.6%, including 2.6 points of U.S. tariff. So all of the increase we have in the raw material and component cost over 9 months came from U.S. tariff. Excluding the U.S. tariff, it would have been flat compared to the first 9 months of 2018.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [8]

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And just maybe my last question, if I may, is around the trend in the North American business because I appreciate the price kind of momentum there must be quite large, considering the tariff situation. It seems that we are continuing to somewhat decelerate in terms of volumes or volume growth. And so I was just hoping whether you could comment on what you are seeing in the North American business in terms of a market dynamic. And as we head into 2020, are you expecting significant changes or requirements in terms of the energy code in some of the large states in the U.S., because I remember that in the past, it had benefited you?

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Benoît Coquart, Legrand SA - CEO [9]

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Well, first, and what we saw in Q3, and it was experienced by many U.S. players, was a softer U.S. market in Q3. If you look at the release of many U.S. players, clearly, they are showing flat-plus growth in sales in Q3 compared to last year. And they have a lot of them revised down the outlook. So clearly, there was a softer U.S. market in Q3. In this context, our 3.3% like-for-like growth in Q3 is a good performance and a good performance compared to our peers and compared to -- on the softer U.S. market. As far as 2020 is concerned, we will not give any clue or indication at this stage. We will be a lot more precise in February. We see when we release our full year 2019 numbers.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [10]

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Apologies to press, but just on the energy code, I mean, sometimes these are kind of released a bit ahead of time. So I appreciate you cannot maybe comment on the market. But have you seen some regulatory requirements on a state-by-state basis around this energy code that covered that...

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Benoît Coquart, Legrand SA - CEO [11]

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No, but yes, really good story. I mean it's a story which have been lasting for 20 or 30 years, especially back to 20 in the U.S. So year after year, you have new states entering -- or applying energy codes. So it is something which has been lasting for 4 years. So it has no specific boosting impact on 2019. And I don't feel or see why it will have a specific impact in 2020. So this is not a new story. It is a developing story. And again, I see a step-by-step, state-by-state -- sorry, version-by-version that it is implemented in the U.S.

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Operator [12]

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And our next question is from Mr. Gael de-Bray from Deutsche Bank.

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Gael de-Bray, Deutsche Bank AG, Research Division - Head of European Capital Goods Research [13]

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I have 2 questions, please. The first one is on the pricing dynamics because if we if we try to adjust for the price rises required to offset the custom duties in the U.S., it seems the underlying price rises in Q3 were pretty negligible in the quarter, perhaps 0.3% or 0.4% only. So that shows a clear deceleration compared to the Q2 price rises. So I guess the question is whether there's been any change to the pricing approach between within Q2 and Q3. The second question is regarding the margin in Europe because I was surprised to see a small decline year-on-year for the fully-adjusted margin in Europe this quarter, despite the much easier comps in France. So if you could comment on this, that would be great.

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Benoît Coquart, Legrand SA - CEO [14]

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Okay, Gael. Let me maybe give you the full picture for Q3. So I said that Legrand pricing was up 1.4% but I did not give inflation of raw materials and components, which was up 0.6%, including about 2.7 points of U.S. tariff. So excluding the U.S. tariff, the whole price -- the price of raw materials and components was down. So as a result, this is not surprising that we do a softer pricing than in H1, where the price of raw material and components was -- I mean, increased a lot more. As you know, we have a very dynamic pricing strategy. So our objective is not to apply a 2% or 3% pricing fees, whatever happens. If the price of raw materials and components is going down, we have a softer pricing approach to (inaudible) of course competitive. Now all in, in Q3, I can confirm that on with this pricing on one side and the inflation of components on the other side, the impact of the gross margin was positive. So no specific issue on pricing. We just adapt quarter-by-quarter, month-by-month to what is happening and of course the price culture, taking into account, of course, also a competitive environment.

As far as the second question is concerned, so the European margin were. It's always difficult to give a precise analysis because, as you know, Europe is a mixed bag of 40 countries with a profitability which can be very different from one country to another. Now if we look at the numbers, the European-adjusted operating margin indeed went down from 80 bps -- by 80 bps from 9 months 2018 to 9 months 2019. So it moved down from 23.4% in the 9 months of 2019, down to 22.6% in the 9 months of 2019. But don't forget Gael that it is including acquisitions. If we look -- excluding acquisitions, the margin was almost at the same level. It was down by 10 bps, actually, so almost at the same level as last year. So the acquisitions had a dilutive impact on the European margin. So it was almost stable. And this stability is minus on gross margin, let's say, plus other costs. This is the way we should. So almost stable margin, excluding acquisitions.

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Operator [15]

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Our next question is from Mr. Andreas Willi from JPMorgan

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [16]

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My first question is on the performance in France versus Italy, if you could shed some more light on that. You keep doing very well in Italy relative to GDP growth or maybe with expectations. But in France, growth is relatively weak also relative to what other people say, so what's the difference there in terms of kind of your own commercial momentum, product introductions and so on that Italy seems to continue to respond to that much better than France?

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Benoît Coquart, Legrand SA - CEO [17]

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Well, let's take markets one by one. So starting with France. In France, the market is clearly not very supportive and hasn't been very supportive for a couple of semesters. Now again, looking at Legrand markets, for example, we are not active in the HVAC market, as you know, and the HVAC market in France has been growing double digit. We are not active in the cable market, and the cable market has been growing also, and the insulation market. So looking at Legrand market, and this is very much backed up by the professional wholesaler data. The French market is up -- is slightly positive in 9 months, so slightly positive. That's what we are doing as far as sales is concerned. That's also what we are doing in terms of selling. So our performance in France is very much in line with the performance of the market, so slightly up. As far as data is concerned, the GDP numbers in Italy are indeed worse than in France. And take, for example, the IMF. I think today the IMF is expecting 0 GDP growth in 2019. This being said, the market is a bit more supportive in Italy, probably because it went down more than the French market in the previous years. So the market is a little bit more supportive, little bit faster than the French market. And it is true indeed that all these markets, we are gaining market shares in energy distribution, in smart thermostat, in door entry, user interfaces and so on. So when comparing France and Italy, you should bear in mind that the Italian market is slightly more supported than the French one. So this being said, this is maybe for me also the opportunity to highlight that in France, we have a basis of comparison which was easier in Q3 because of last year's strong destocking, and which will become a lot more demanding in Q4 because there was a slight restocking from our distributors in Q4 last year. So the basis for comparison is somehow demanding. Same comment for Italy. We made a very strong finish in Q4 2019 in Italy, as you know. And as a result, for both countries, the Q4 is going to be a bit demanding comp.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [18]

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And my second question on the tariffs price raw material, if now see some of these tariffs lifted over the next period, should China and U.S. agree, what do you expect to happen on the pricing side? Historically, when your business had basically falling raw materials, you tended to keep some of that benefit after you've increased prices like we have seen in Q3 this year, where you make a positive margin between price and raw material. Would you expect the same kind of market behavior to happen on tariffs, where at least temporarily, you will get, basically, a boost to margins as tariffs fall and pricing is more sticky? Or is tariffs going to be different because your customers and distribution partners and so all transparently see that and want that price increase immediately back.

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Benoît Coquart, Legrand SA - CEO [19]

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So first, coming back on what we were seeing when commenting the tariff, the current talks from what I understand is 4, not List 1, 2, 3. And List 4, it's maximum, $4 million -- $3 million to $4 million relief on -- for Legrand. So unfortunately, this is mostly consumer units. There is not much to see with Legrand products. This being said, nobody knows what will happen next year. And indeed, some further talks could occur between the U.S. and China and potentially, some of the List 1, 2, 3 tariff could either be lifted or could go down. By the way, they could also go up. So they could move 2 ways. Well, I can tell you that our customers are touching very closely this tariff issue. And clearly, if some of those tariffs were to be relieved, we would have to give the benefit back to the market. We were able to increase prices and compensate for the tariff increase, but clearly our customers will require us to give back the tariff decrease to the market. So don't expect any kind of significant benefit coming from the potential tariff relief.

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Operator [20]

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Next question is from Leslie, Alasdair from SG Corporate.

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Alasdair Leslie, Societe Generale Cross Asset Research - Equity Analyst [21]

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Really the ones around pricing U.S. tariffs have been asked, but maybe a couple of outstanding questions. Just firstly, on Brazil. I think that's the first time in recent quarters that you've specifically called out weakness there. Not a surprise, I guess, but I think you were talking about an increase for H1. So I'm just wondering if you could give us a bit more insight to what you see there, sort of the scope of your activities. I think, from memory, it was your third largest emerging market after India and China. So maybe just a bit of a comment on the outlook as well? And then the second question was really regards to the Jobo Smartech acquisition. It sort of seems like quite an interesting deal, but only EUR 10 million of sales in what I imagine is a pretty huge market. So maybe, again, you can just elaborate a little bit more on what this brings you, expand a bit on your current offering, which you kind of alluded to on the slide deck and the strategy and kind of market opportunity there?

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Benoît Coquart, Legrand SA - CEO [22]

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Yes. So Brazil, it's about 2% of our sales only. It used to be a lot bigger, but we've gone through 4 or 5 years of difficult economic times in Brazil, plus the currency hasn't helped. So now it's only about 2% of our sales. And indeed, we thought in H1 that the situation was improving. So Brazil was down double-digit 2 years back. It was down 1 -- I mean single digit last year, and it was up in H1, and everybody expected that the Brazil situation will get better. Now when we commented sales in Brazil in H1, we clearly told you, be careful because we have very limited visibility in Brazil, and things can happen very quickly. And what happened in Q3 was that sales were down double digits in Q3 on a like-for-like basis compared to last year. I mean will the situation be better in Q4? How will it be going into 2020? Brazil is clearly one of those countries where you have always a huge uncertainty on what to predict and what to forecast. So yes, it was a bit of a disappointing time. We expected Brazil to be in a better shape and indeed, Q3 was by strongly negative in Brazil, but again, it's only 2% of our sales.

Second, as far as Jobo Smartech is concerned. Well, as far as the products are concerned, it's really control units for hotels. So those touchpads, either off the wall or in the wall that you have in hotel room which allows you to command lighting, shutters, temperature and so on. And this is highly complementary from our offering. And we actually already had, as part of the portfolio, a product offering mostly made for European markets of such kind of products but we were lacking of a market position and of specific Chinese technology for those products. So we decided to acquire this company, which is bringing us 2 things: number one #1 specific Chinese technology for hotel rooms; number two, [door] name and presence amongst Chinese hotel chain. It is small, indeed, in terms of sales, but in this specific niche, it is a leader. And this has clearly been our strategy in China. It's not to go after all potential markets and chasing smaller market shares all over (inaudible). Our strategy in China has been to pick up, either organically or through acquisitions, businesses where we could be #1 or #2. And that's what we've been able to achieve in wiring devices, that's what we achieved last year with the acquisition of Clever Shenzhen (sic) [Shenzhen Clever] in Smart PDUs, and that's what we are achieving with the acquisition of Jobo. So yes, indeed, we fixed more in China. I'm quite confident on the fact that it will soon be our fifth largest market. And it's a profitable market for us, and we are growing nicely, both organically and through acquisitions. So it's a good -- it's a small but good addition to our Chinese footprint.

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Operator [23]

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Next question is from Martin Wilkie from Citi.

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Ji Cheong, Citigroup Inc, Research Division - Senior Associate [24]

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This is Ji on behalf of Martin. I just have one question on your M&A strategy. Just looking at the couple of acquisitions you made this quarter and last quarter. So just wondering if you had a specific portfolio or geographical targets on your acquisition strategy going forward that you were specifically focusing on.

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Benoît Coquart, Legrand SA - CEO [25]

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Well, actually, we are, indeed, more focusing on the quality of the targeted sales than on a given geography. So what we are looking for are targets which have #1 or #2 positions in complementary niches where we could grow our position somehow, regardless of the country. So whether in new economies, Europe or North and Southern America, if we find a very interesting target, being #1 or #2 complementary to Legrand that we could do at a reasonable price, then we would look at it. So it is true that we have made many in the U.S., but this was mainly coming from the fact that we were underrepresented in the U.S. But we are very happy of the deals we have made in Dubai, in Germany, in China, and we will continue to look at targets across the board in terms of geographies, in terms of productivities.

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Operator [26]

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(Operator Instructions) We have another question from Andre Kukhnin from Credit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [27]

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Firstly, can I just get your indication for raw materials versus price for Q4? Should we expect that to be any different versus Q3? And maybe just to extend that raw materials question, I know tariffs bit is very uncertain. But just if raw material prices were to prevail at the current rates, what would 2020 look like for you?

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Benoît Coquart, Legrand SA - CEO [28]

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Well, as far as Q4 expectations for pricing in raw materials, frankly speaking, I have no clue. It depends on so many things, not only on the price of raw materials themselves. It depends on what is going to happen in Chile, for example, for copper. It depends on the exchange rate also. Many metals are listed in U.S. dollar. So the price in euro will also depends on the U.S. dollar currency. So it's really a big question mark as far as raw material price is concerned, so it's -- it is also a situation for tariff, of course, which can move one way or the other very quickly. And since our dynamic pricing somehow the results of our input costs, the same answer for pricing, our pricing in Q4 will also depend on what's going to happen in raw materials and components and type. So unfortunately, I cannot be more precise than that because this is a reality of our trade, i.e. that we have to adapt to what's happening rather than the planning for a price increase in that month or this month. So the only thing I can tell you about Q4, which we already said during this call, is the fact that it's for all of the group a demanding basis comparison, especially as far as the margin is concerned. Maybe let me remind you the -- remind you that the numbers, as far as the top line is concerned, we had a Q4 at plus 5.2%, which was above the average of the year. And with, as I already said, very strong growth in France and Italy. As far as adjusted operating margin is concerned, Q4 2018 was up 60 bps, whereas the full year of 2018 was up only 20 bps. So a little bit in terms of top line and more material in terms of margin. Q4 2018 is a demanding basis comparison. Now what will be as far as tariff, raw material components and pricing is concerned, it's still a question mark.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [29]

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Got it. And thanks for the additional color on the comp as well. My second question was on your data center-related content. Could you give an indication of how much it grew in Q3 and maybe year-to-date?

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Benoît Coquart, Legrand SA - CEO [30]

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We are not giving this kind of granularity because it's -- especially on a quarterly basis because it depends on many things. If you look at a given quarter, it also depends on the comp and so on. The fact that the Universal Electric Corporation is doing very well, for example, since the beginning of the year. But for example, the trend is a bit softer in PDUs because of the basis for comparison. We had last year a big data center project and the data center project could very easily be a USD 2 million, USD 3 million, USD 4 million, USD 5 million. So we don't have a consolidated number for the whole of our data center play to give you. We'll maybe give you a bit more color in full year 2019. This being said, whatever happens on a quarterly basis, it, of course, remain very attractive segment for Legrand. I remind you that it's about 10% of our sales, which is a very attractive segment. And we now have the relevant offer, especially for the [wired room]. We're putting together cabinets, connectivity, busways, PDUs. We have really a high-quality offer which is very attractive for customers.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [31]

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Got it. And my next question was just on France. We had quite a few kind of stocking variations there, as you've already flagged kind of into the end of last year and then earlier this year. Do we need -- I know you mentioned Q4 comp, but do you think that 2019, as a year overall, are we kind of ending up with a net kind of positive or negative effect on stocking in France? Just trying to think about these effects for 2020. I mean do we need to think about them as we draw some 2020 numbers?

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Benoît Coquart, Legrand SA - CEO [32]

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Well, if you find a way to predict stocking or destocking, please let me know. I would be highly interested to factor that into my budget process. I mean 2018, I remind you that very strong destocking in Q3 and a slight restocking in Q4. As for 2019 is concerned, we can see a slight destocking over the 9 months, which is very, very small. And I believe, at the end, it didn't have such a material impact. So the destocking or restocking impact was more than one coming from 2018 than anything material that we would have experienced in 2019. Going into 2020, for us, it's completely impossible to predict. It's even impossible to predict what's going to be the behavior for customers in Q4 of 2019. So unfortunately, this is a sort of uncertainty we have to live with, and again, this can negatively impact or positively impact a month or quarter, but we believe that a long-term basis, this is something we have to live with, and it doesn't affect long-term or performance vis-a-vis, of course, of our relationship with our customers.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [33]

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Got it. And you obviously appreciate you can't -- it's impossible to predict. It was just the base effect is what I was wondering about, and you've given the answer on that. And the final one, if I may. Just really taking a big step back and looking at your kind of M&A appetite. In the past, you gave very clear slides where you talked about your expectations of M&A kind of stepping up in the markets where organic growth had stepped up, and I just wanted to check if your M&A appetite is changing at all, especially given that in North America, you have seen the underlying volume growth rates now moderating and trending towards stable and arguably some leading indicators pointing to a more stable 2020 as well. Are you as active in M&A there? And is the appetite changing anywhere else in the world?

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Benoît Coquart, Legrand SA - CEO [34]

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Well, the fact that in the past, in so-called difficult times, you had less deals was a bit coming [indiscernible] less appetite on our side, but it was a lot coming from the fact that sellers were less interested to sell in difficult times than in good times because as far our appetite is concerned, we are thinking long term. So of course, we embed into the valuation -- into our valuation, whatever is happening on the macro front. So if we are in a market which is less supportive, well, we factor that into our business plan and as a consequence, into a valuation. But if there is a quality company which is for sale, even in good -- difficult times, which is highly complementary to Legrand which is a good leader and which will support the group long-term strategy, we will look at it even in difficult times. So to make a long story short, it's not much a matter of changing appetite for Legrand. It's going to matter that's -- there may be at some point less people willing to sell if they feel that they can get a better price in 5 or 7 years. This being said, we still have a pipeline with a lot of opportunities. We still have a lot of discussions going on. It's highly likely that in the coming quarters, you will see more deals coming from Legrand but again, with the usual uncertainty that people might not be always willing to sell. Some of those deals might not go through because of valuation discussion and such. But we still have a very healthy pipeline and a lot of discussions going on.

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Operator [35]

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Next question is from Mr. Wasi Rizvi from RBC Capital.

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Wasi Rizvi, RBC Capital Markets, Research Division - Analyst [36]

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Just a follow-up, just to get some granularity on North America. Actually a reasonably solid numbers, as you said, given some of the peers are reporting a pretty flattish growth. But just within the business, I'd be interested if you could give us some flavor as to what the different bits are doing? And you talked a bit about digital infrastructure, but also maybe what the lighting business is -- what lighting is doing versus maybe your core low voltage. And then on -- in terms of prospects, I think you mentioned at your Investor Day that busways and PDUs and things give you a bit of insight into where the data center market projects are going. So it does give you some level of visibility. Could you tell us what you're seeing in that part of your business? And what that makes you think the data center part of your business will do over the next kind of 1 or 2 quarters?

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Benoît Coquart, Legrand SA - CEO [37]

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Well, the second question, my answer is going to be very short because we -- yes, we are usually selling busways before we are selling PDUs, but they are sort of, depending on topology of data center, you have data centers which are using busways and/or PDUs or the other way. So you can hardly take busway as a leading indicator for data center business going forward. So unfortunately, we don't have a lot more visibility in data centers compared to our other businesses. As far as the first question is concerned, lighting management is doing well. So it's growing low single digits, if I may say, but it's growing. User interface is also doing well. AV is quite flat. So AV, again, it's sort of merger between Milestone and Middle Atlantic, but it's not a surprise, and it was factored into our budget because last year, it had a mid-single-digit growth above the sort of long-term market growth of 2% to 3%. So if you take the 2 years, it is completely in line with the long-term market growth trend. But this year, indeed, it is quite flattish. And as far as data center, I answered I think it is actually doing very well and PDUs on the software side, but we don't see that as a competitive problem. It's more some of the big data centers, which materialize -- where PDU I assumed which materialized last year did not materialize this year. So this is, as usual, given the large portfolio of products we have, a mixed bag of a lot of different situations.

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Operator [38]

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Our next question is from Mr. William Mackie from Kepler Cheuvreux.

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William Mackie, Kepler Cheuvreux, Research Division - Head of Capital Goods Research [39]

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A couple of questions around development of the business segment and product portfolio. Firstly, on digital infrastructure. In the past, you've aggregated that number at the group level and demonstrated the ambitions for growth. Can you give us or provide some insight into the rate of growth of the digital infrastructure business across the group rather than just within the geographic segments against that baseline of revenues, which you described at around GBP 1.2 billion last year? And the second question really relates to your product launch strategy. I seem to have an impression you have a wave of product introductions, particularly in Europe, that come through in Q3 and Q4 this year, particularly around the IoT product capability or the portfolio with the IoT product capabilities. Can you give us a sense of how your IoT product enabled portfolio is developing against that 10% midterm growth target? And perhaps specifically, I know you don't want to break many things out, how the Netatmo business is developing against the initial business plans.

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Benoît Coquart, Legrand SA - CEO [40]

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Well, you have to have in mind that our sort of reporting approach is a geographical one. So that's why we are also reporting geographically to the market. We are not organized by sort of BUs having their own P&L by product families and by [buy zones]. So it's the way we're organized. We're organized by country and buyer -- and buy zones . Typically, when we mentioned, for example, the business we are doing in data centers, the business we are doing in [Asia] products and so on, this is the agglomeration or the addition of a number of different product families that we are not always doing on a quarterly basis and obviously, not commenting on a quarterly basis. So we can give you a flavor, but we do not comment just because this is not the way we're organized. And it's not the way we report to the market on precise trends by product every year. Otherwise, we would have to take the 100 products earnings we have and getting to the details of each product family and each country. So unfortunately, I cannot answer your question on digital infrastructure, except by reminding the numbers we gave at the [next Investor Day], which is that we did EUR 1.2 billion in 2018 compared to EUR 0.2 billion in 2008. And so about 20% of our sales compared to 5% (inaudible). Again, we are not commenting on quarterly trend by family because we're not organized to do so. Our organization is by country. As far as product launches are concerned, well, this is a [next few year] as far product launches is concerned, not more active than last year from -- if you look at the number of launches, we already had significant launches last year. It is true indeed that on a given quarter, launch can positively or negatively if you have basis for comparison impact a given geography. Now impact is not huge on a yearly basis except, of course, the gaining market share it helps you to achieve. Take, for example, France, we clearly said that the Q2 performance in France will somehow be boosted by the launch of new products, namely 2, the new connected emergency lighting unit and the new Mosaic. But on a full year basis, this sort of one-off positive impact is not so material. So again, we are launching a number of new products. Same comment for (inaudible) as well I was making for digital infrastructure, i.e., we are not publishing and commenting on the 9 months figures by product family. As far as the net debt is concerned, well, not much to say, except that we are completely in line with our [target] plan. I remind you that the target -- midterm target we have for net ARPU is threefold: number one to sustain strong growth in top line; number two, to progressively lift the margin, EBIT margin from 0 to high single digit; number three, to leverage net ARPU to accelerate our growth in areas where, even though we are only 9 months into the docking of Netatmo, I can confirm that we are completely in line as far as the 3 targets are concerned.

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Operator [41]

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(Operator Instructions) We have another question from Mr. Andreas Willi from JPMorgan.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [42]

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Thanks for the follow-up. On the guidance, which you often tighten at the Q3 results and haven't this year, was implying an unusually wide range for Q4. I just wanted to check whether this is just because you didn't need to feel -- you didn't feel that you need to change the guidance because we are somewhere on track? Or is there anything specific you signal about Q4 beyond the tough comps that you already mentioned by not tightening the guidance, didn't removing the lower end, particularly on organic growth?

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Benoît Coquart, Legrand SA - CEO [43]

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Yes, I wouldn't say that it's a sort of normal practice for Legrand to tighten or change the guidance in Q3. It really depends on what we have delivered as far as results are concerned and the sort of state of the market. So don't read the fact that we're not taking the guidance as a change in practice. Well, you know the 2 components of our performance for the full year and for Q4. Another one, when I look at 9 months 2019 performance, it is well -- it fits very well with our targets. We are doing plus 2.3% organic growth compared to 0% to 4%. So we are almost right in the middle of the guidance. As far as adjusted operating margin before acquisitions, it's up 30 bps. So it's close to the average of the guidance, which is minus 30 plus 50, having in mind that the basis for comparison, Q3 helps these performance. So as far as our performance is concerned, it's very consistent with the guidance. As far as what we see for Q4 is concerned. Number one, you have the demanding basis for comparison, which we already described a little bit in top line and a bit more in bottom line. And second, there is even more uncertainty than before, one way or the other. Not only you have the discussions between China and the U.S., you have the Brexit, which can happen at any time. You have Turkey, which is a difficult situation now. You have countries like Lebanon or Chile that are in difficult conditions. You have the war in the Turkey and the Turkish border. You have many -- you have many, many things that can happen and give us uncertainty. We think that it's extremely adaptive, and given the performance we have done so far, it's very suitable not to change the guidance.

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Operator [44]

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We have another question from Ms. Lucie Anne Carrier from Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [45]

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I was just hoping if you could comment on the trends in France, notably around the renovation market because I know for you, it's quite a large market. And we've heard from some players in the construction market that it was now that the new starts were kind of had been tailing down, there were maybe also some more workforce available for renovation. So what do you see there precisely?

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Benoît Coquart, Legrand SA - CEO [46]

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Well, we are not seeing much change. What it is indeed that goes for new and for renovation, you have a number of subsegments that are growing nicely. Again, I was mentioning insulation because the French player (inaudible) clearly stated that insulation subsegment was growing fast. But as far as the renovation is concerned, we still see very flat-plus trends. So we haven't seen any sort of acceleration, neither deceleration. The order books of our contractors are still significant. So no, we haven't seen any change in trends.

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Operator [47]

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Next question is from Jonathan Mounsey from Exane Paribas.

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Jonathan R. Mounsey, Exane BNP Paribas, Research Division - Analyst of Capital Goods [48]

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Regarding the tariffs, I guess, obviously, there's 2 ways to deal with these: one, raise prices as you've been doing; but another, maybe slower longer-term, would be to adjust where you're buying your components and subassemblies from. Given that the tariffs have now been ongoing for well over a year, are we seeing progress there? Are you still on a wait-and-see approach, hoping the tariffs go away? Or are you actively looking to change how you source your products? And if so, is there a tailwind going into 2020, potentially, as you find other ways to mitigate the tariffs than simply putting prices up.

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Benoît Coquart, Legrand SA - CEO [49]

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Well, there are 2 kind of adaptation measures that you can take. The one, very short-term change in your supply chain, where, for example, instead of sourcing some products from a Chinese supplier, you would source from somebody else, in Vietnam or elsewhere. Those short-term moves were done very rapidly after the implementation of the tariff. But to make things clear, they represent a small part of our response to the tariff issue. A large part of the response was pricing because it was -- it has always been the Legrand model and this was, of course, easier to implement. And you cannot always switch from a Chinese supplier to somewhere else. The second piece of the reaction is potentially moving some manufacturing from China to elsewhere. Well, this kind of decision cannot be taken only because of the tariff issue because tariffs are thing that can move very quickly, and industrial footprint decisions are decisions that are taken for plus 10 years; no decisions are taken for 2 years. So we are actively looking at our footprint, actively analyzing alternative manufacturing places, especially in Southeast Asia. But any move that we would do there would be based on a long-term footprint strategy, more than a short-term tariff issues. And that's what we've been doing forever. We closed last year a site in China, for example, in Shenzhen. We closed a site in India, closed a site in Turkey. So we are very actively doing this kind of footprint optimization, but again, not specifically as an answer to the tariff issue, but more as a footprint optimization.

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Operator [50]

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(Operator Instructions) We have no other questions, sir. Back to you for the conclusion.

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Benoît Coquart, Legrand SA - CEO [51]

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Well, thank you very much for your time in attending this call. Should you have further questions when digging into the numbers, please do not hesitate, as usual, to call Francois [and Sami], and have a good day. Thank you very much.