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Edited Transcript of LR.PA earnings conference call or presentation 8-Nov-18 7:30am GMT

Q3 2018 Legrand SA Earnings Call

Limoges Nov 20, 2018 (Thomson StreetEvents) -- Edited Transcript of Legrand SA earnings conference call or presentation Thursday, November 8, 2018 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Antoine Burel

Legrand SA - Executive VP & Group CFO

* Benoît Coquart

Legrand SA - CEO

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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

* Daniela C. R. de Carvalho e Costa

Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team

* Gael de-Bray

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

* Graham Phillips

Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research

* Ji Cheong

Citigroup Inc, Research Division - Senior Associate

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* 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 2018 9-Months Results Conference Call. (Operator Instructions) For your information, this conference is being recorded.

At this time, I would like now to hand over to Mr. Benoît Coquart, CEO; and Mr. Antoine Burel, CFO. Sir, please go ahead.

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Benoît Coquart, Legrand SA - CEO [2]

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Thank you. Hello, everybody. Benoît Coquart speaking. So Antoine Burel, François Poisson and myself are happy to welcome you to the Legrand 2019 (sic) [2018] 9-Months Results Conference Call.

Let me first remind you that we have published today our press release of financial statements and a slideshow to which we will refer. Those documents are, obviously, available in the Legrand website.

Please note that this conference call is recorded and webcasted on our website.

So let me start first with a few opening remarks, following which Antoine and I will comment into more details our 2018 9-months results and achievements.

I will start on Page 4 of the deck with 5 main takeaways of today's release. The first takeaway is that all financial KPIs are growing double digits in the first 9 months of 2018, first showing a lot of value created. More precisely, sales and adjusted operating profit were up more than 11%. Net income attributable to group grew over 21%, and normalized free cash flow was up more than 24%.

The second takeaway is that we have a healthy organic growth in sales of plus 4.8% in 9 months, including a plus 3.9% in Q3 2018. As you have noticed in the press release, the Q3 2018 sales have been unfavorably impacted by a marked and one-off destocking distribution in France. As a consequence, sales in France declined by minus 4.3% in Q3 on a like-for-like basis. Now excluding France, group organic growth in sales remained strong at plus 5.3% in Q3 2018.

The third takeaway is that the first 9-months adjusted operating margin before acquisitions was stable compared with the same period of 2017 at 20.4%. More specifically, adjusted operating margin before acquisitions was down minus 150 basis points in Q3 due to specific items. Some items are nonrecurring, such as the marked and one-off destocking distribution in France in Q3 I was referring to, but also the challenging basis for comparison of Q3 2017. Some items should last, such as increased U.S. tariff or the impact of some growth initiatives. To mitigate those items, adjustment measures have already been launched. We will come back on this into more details during the presentation.

Fourth takeaway, Legrand's growth initiatives are underway. We have continued to actively launch new products with higher revenues, in particular with digital and connected offerings. Acquisition-driven growth also continues to be active with already 4 acquisitions announced since the beginning of the year in attractive businesses, such as digital infrastructures, UPS and electrical equipment for DIY activities. So M&A momentum is good and our pipeline is active.

Finally, the fifth takeaway of this release is that Legrand confirmed and specified its target for 2018. I will come back on this later during this call.

Now through this briefing production, let's start with another view of sales on Page 6 of the deck. So we recorded, as I said, a total rising sales of plus 11.3%. Legrand's first growth driver is contributing well with organic growth reaching plus 4.8% in 9 months, driven by healthy rises like-for-like in both new economies where sales were up plus 7.1% and in major countries where revenues were up plus 3.9%.

Acquisition-driven growth, which is the group's second growth driver, contributed plus 11.8% to sales growth in the first 9 months of 2018. Based on acquisitions announced and their likely consolidation dates, acquisition-driven growth should contribute to around plus 7.5% for the full year.

Lastly, ForEx impact was unfavorable at minus 5.1% in the first 9 months of 2018. Now if we apply to the last quarter of the year the average FX rate observed in October 2018, then annual ForEx effect for 2018 would be around minus 4%. This is, of course, as usual, a theoretical calculation, and time will tell what will be the actual ForEx impact on sales for the full year.

Let me now go into more details regarding the like-for-like evolution of sales by reporting segments. I'm referring to Page 7 and 8 of the slideshow.

So in France, organic growth in sales was almost flat in the first 9 months of the year. The 2% growth in sales recorded in H1 was followed by a minus 4.3% decline in Q3 alone. Obviously, we were not expecting such a poor quarter in France. The drop in sales was due to a marked and one-off destocking in distribution. It is indeed worth noticing that downstream sales of Legrand products by the professional distributors, what we call the sell-out, was overall flat plus over Q3 2018, a performance that is consistent with our end-market trend.

There is, therefore, no market share issue there, but -- and about 5-points difference between our sell-in and our sell-out in Q3 due to destocking in distribution. This being said, over the first 9 months of the year and in the context of the market that remained lackluster, Legrand recorded good showings in its key product lines such as energy distribution and digital infrastructure.

In addition, the launches of Céliane with Netatmo and of dooxie with Netatmo have been a great success. The good performances were partly compensated by unfavorable changes in sales in cable management as well as in some niche markets such as installation components and bulk headlights.

Moving to Italy. In Italy, like-for-like sales growth was plus 5.7% in 9 months of 2018. This very good performance was supported by the success of the launch of the Living Now new user interface range as well as the ongoing good showings of connected products.

As far as Rest of Europe is concerned, sales were up plus 10.4% like-for-like compared with the first 9 months of 2017. Sales were up double digits in new economies, thanks to commercial initiatives. Showings were notably good in Romania, Hungary, Turkey and Russia. Growth in sales was also sustained in some major countries, including Spain, Germany, the Netherlands and Greece. And finally, in the U.K., sales grew slightly.

Moving now to North & Central America where sales were up plus 4 -- sorry, plus 4.1% on an organic basis. It should be noted that more specifically, sales in the U.S. were up plus 4.9% in 9 months 2018 and plus 5.9% in Q3 alone. This good performance was driven by solid achievements in many product lines, such as wire-mesh cable management, intelligent PDUs and lighting controls and by the good performance of Milestone. Sales in Mexico were down due to the high basis for comparison last year.

Let me now move to the Rest of the World where sales were also very well oriented with a growth of plus 4.7% on a like-for-like basis. We reported strong rise in sales in India, China and South Korea, but also in some African countries, including Algeria, Egypt and Côte d'Ivoire, Ivory Coast, as well as in Australia and Malaysia. Sales were up very slightly in Brazil, but retreated in Colombia and Chile as well as in Saudi Arabia.

So overall, our like-for-like growth in sales was healthy in the first 9 months of the year and, as you could see, fairly consistent among each main geographical zones since Europe, including France and Italy, was up plus 5.5%; North & Central America was up plus 4.1%; and Rest of the World was up plus 4.7%.

Let me now pass the mic to Antoine for another view of the financial performance.

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Antoine Burel, Legrand SA - Executive VP & Group CFO [3]

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Thank you Benoît, and good morning or good afternoon to all of you.

Let's start with profitability on Page 9, where you see that the 9 months 2018 adjusted operating profit was up a healthy 11.4%, thanks to the good organic and external growth in sales.

Moving to Page 10. On the left-hand side, the 9 months 2018 adjusted operating margin came to 20.5%, i.e. 10 bps above the same period of last year. It is interesting to note that the good performance of acquisition was due to Milestone and Server Technology, and those acquisitions had an accretive effect on group adjusted operating margin.

On the right-hand side of the slide, you can see that adjusted operating margin before acquisitions was 20.4%, flat versus the same period of 2017. As said earlier by Benoît, this flat evolution embeds the performance of the third quarter alone. This performance was negatively affected by specific items.

In more details on Page 11, you can see that Q3 2018 adjusted operating margin before acquisition dropped 1.6 points. About 2/3 of this drop, i.e. 1.1 point comes from 2 nonrecurring items. The first nonrecurring item is the marked and sudden destocking in distribution in France. Another consequence -- as a consequence of this one-off, the contribution of France domestic group margin to group gross margin as well as the coverage of group cost, including SG&A, have both significantly decreased in Q3 of 2018. And the impact of this first nonrecurring item on group adjusted operating margin is about minus 60 bps.

The second nonrecurring item is the high basis for comparison in the third quarter of 2017. This second item has an impact on group adjusted operating margin of about minus 50 bps. And that's it for the 2 nonrecurring items. We are left with about 1/3 of the drop of 160 bps to explain, i.e. 0.5 point.

It is due to other items, including: number one, the increase of the U.S. tariff with an impact of about minus 30 bps on group adjusted operating margin; and number two, the cost of some growth initiatives with an impact of about minus 20 bps on group adjusted operating margin. As said earlier by Benoît, Legrand has already launched adjustment measures that aimed at offsetting the impact of those items on profitability.

For Legrand North America and as far as the measures to mitigate price are concerned, it mainly includes pricing, but also sourcing relocation, cost adaptation, productivity and negotiations with suppliers. And for the rest of the group, we are applying measures of adaptation of SG&A, and we do it on a country-by-country basis.

Moving now to the net profit attributable to the group on Page 12. It was significantly up 20.1% (sic) [21.1%] above last year, i.e. EUR 100 million above the same period of 2017. And this strong rise results from many positives, including the strong growth in operating profit for EUR 78 million, lower financial expenses and favorable change in the ForEx results for EUR 19 million and, last but not least, a 4-point decrease in income tax rate at 29%. 3 points of the drop of this income tax rate are related to the lower corporate taxation in the U.S. And on top of this positive for Legrand that you know well, we also had the benefit of some one-off elements that account for 1 point.

Moving to the last indicator of the financial performance on Page 13. You know that the good reading of the underlying free cash flow generation should be done on a normalized basis. And here, you can see that on the right-hand side of the slide, that normalized free cash flow was up close to 25% compared with the same period of 2017 to reach EUR 674 million.

Some additional information on the left-hand side of the slide. Cash flow from operations increased more than 20%. For the 9 months of 2018, it stood at close to 18% of sales. And although standing at the rate above last year, working capital requirement remained well in hand at around 10%.

That's all for the set of our financial metrics in the first 9 months of the year, and I give now the mic back to Benoît. Thank you.

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Benoît Coquart, Legrand SA - CEO [4]

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Thank you, Antoine. Let's move now to the second part of this presentation, i.e. our innovation and cost initiatives. I will quickly cover our 2 growth drivers: new products and external growth.

Starting with new products. You can see on Page 17 and 18 of the deck that since the beginning of the year, we've been continuing to be active in innovation, notably in digital solutions. We have been, of course, launching connected products, including in user interface but also in smart UPS, home automation, human-centric lighting as well as mobile products. We have obviously also been continuing to develop non-connected products, notably in user interface and energy distribution.

Moving now to acquisition-related growth on Page 20. As you can see, we have already announced 4 acquisitions that strengthened Legrand's position in upbeat segments of its accessible markets, such as UPS, digital infrastructures for data centers and equipment for DIY activities. Those 4 deals illustrate the good momentum of our M&A activity, and I can confirm that some deals should come out in the months to come.

Coming now on Page 22, to the last topic of this earnings release, i.e. our target for the full year. Based on its performance in the first 9 months of 2018 and excluding any economic slowdown by the end of the year, Legrand is confirming and specifying its 2018 targets. Legrand is aiming for an organic growth in sales of close to plus 4% and an adjusted operating margin before acquisitions of between 20.0% and 20.5%.

Antoine, François and myself are now ready to open to questions. Thank you.

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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 Madame 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 will have a couple. The first one is on the effect of tariffs, and I was wondering if you could give us a little bit more granularity in terms of what is impacting you right now. Is that because you are producing in China for the U.S.? Or is that more in terms of sourcing components? For us to understand a little bit more where the impact is coming from. And as we look at 2019, based on the announcement that have been already made, I mean, which type of impact are you expecting then from U.S. tariffs? That's question number one.

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Benoît Coquart, Legrand SA - CEO [3]

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Lucie, Benoît speaking. I will take this question. So obviously, the tariff topic in the U.S. is a very important topic that we are tracking very closely with our U.S. colleagues. This is also a developing topic, and you know that many things have happened. I'm not -- list them all, but China could take measures. It could be a favorable impact coming from the exchange rate. There could be a trade agreement between the U.S. and China. So many things can happen in the months to come. Now let's look at numbers. In the worst-case scenario, and I'll come back to that later, in the worst-case scenario for Legrand, i.e. excluding any of those potential favorable impacts, exchange rate and so on, and excluding our own mitigation measures, the tariff, as currently enacted, would translate into an increase of close to 7% of the cost of goods sold of Legrand North & Central America on a yearly basis. This is coming from the fact that we are both manufacturing in our own facilities in China for the U.S. market and also procuring, sourcing some products from third-party vendors in China. Now as an example of how volatile the topic can be, you know that there are a number of different tariffs, different lists. If the List 3, which was the last list enacted, on which the tariff was first 10% and it's supposed to be 25% starting Jan, if the List 3 was no longer subject to tariff, then the total impact on the cost of goods sold of Legrand North & Central America, instead of being 7%, would be approximately 3%. So of course, the scenario could very, very much depending on your own scenario. Other point. You know that the Legrand model has always been to compensate, at least in value, an increase in cost by pricing. So mechanically, the pricing of slightly more than plus 3% in Legrand North & Central America would be required to fully offset the increase in cost in the worst-case scenario, the one I mentioned first, and less than plus 1.5% would be required in the second scenario, here, again, on a yearly basis. So that's all, let's say, the mechanical impact of tariff on a full year basis. Now obviously, we are working actively with a target to fully mitigate in Legrand North & Central America accounts the impact of the tariff, including the worst-case scenario. And for that, we had a mix of pricing measures, of course, which represent significant part of the action plan: sourcing and manufacturing relocation, negotiation with suppliers, productivity and other measures. Several of those measures was implemented as early as Q4 2018, and here, again, with an objective to fully compensate the negative impact of the tariff over the fourth quarter. So this is the total story as we see it, a developing story. Those are the mechanical impacts in 2 scenarios, but you could have many other scenarios depending on your own assumption of what will happen in the months to come in terms of discussions between U.S. and China in terms of exchange rate, in terms of many things. And third, we have an action plan, which is fairly attractive and aimed at fully mitigating the impact of those tariffs in the LNG account. Now last word, of course, Legrand is exposed, as our competitors. So it's not a competitive issue. It's more, like when you have a sudden hike in raw materials, for example, it's more a financial topic on how to compensate in our accounts. it's not a competitive topic. I hope that has been clear, Lucie.

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

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Yes, very helpful. My second question was around Italy. And of course, it was still very strong in the quarter. But we hear here and there from some of your competitors or some other companies in the sector that it seems that there is a slowdown. And so I was wondering if you could comment on the move you have seen throughout the quarter, i.e. July, August and September in Italy, and how you are looking at this market going forward, one, considering the political situation; but two, as well, considering the level we are now in terms of the recovery, considering that the country has started to improve already a bit more than 2 years ago.

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Benoît Coquart, Legrand SA - CEO [5]

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Well, our performance in Italy has been strong over 9 months, was again strong in Q3. It was a bit boosted, as we said in our release in H1, over second quarter, by the launch of an important range of product which is called Living Now in Italy. But over the 9 months, the performance has been good. And even though our Italian colleagues are monitoring carefully the situation, they are not overly pessimistic about the quarters to come. We usually meet that. As you know, Lucie, we have absolutely no visibility on the market trends in the months to come. Now I'm not sure that our performance in Italy is really evident of what the market is doing. Clearly, the market is not growing 5.7%. It's growing much less than that. So it's clearly some overperformance of Legrand Italy due to the quality of its teams, the quality of its commercial initiatives, the launches of new products. So whatever the underlying market, we expect at least this overperformance to continue the quarters to come. But so far, Q4 -- Q3, sorry, was at plus 4%, which remains a very healthy level, as said. And don't forget that you are mentioning the cycle, total level of sales remain something like close to 30% below peak time in Italy.

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

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Okay. Just...

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Benoît Coquart, Legrand SA - CEO [7]

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Yes, but again, Lucie, keep in mind that we have very little visibility in Italy, as elsewhere.

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

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Okay. Just last question around the pricing. I was just curious to know how much were you able to increase prices on the quarter versus the third quarter last year. And if you could give us a little bit of granularity in terms of pricing trends by region, please?

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Antoine Burel, Legrand SA - Executive VP & Group CFO [9]

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Lucie, Antoine speaking. And then to be quite specific on that, in the third quarter alone, our pricing effect was 1.6%. And you did not ask the question, but I can give you also the effect of purchasing prices excluding the tariff effect. It was around 3.5%; and top line, 1.6%; raw material and components, that's 3.5%, which represents more or less the same trend in terms of coverage of raw material and components inflation by pricing. This is for Q3, your question for Q3.

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

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And by regions? I mean, is the 1.6% kind of homogenous across the group? Or...

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Antoine Burel, Legrand SA - Executive VP & Group CFO [11]

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Yes, this is across the group or this is a global performance. Now we can have variation, and we have variation from one region to another one, depending on this inflation I was referring to, depending on the ForEx. We talked about countries that are importing products, for example, from the Eurozone and the DACH. In a country with currencies that are depreciating, you can imagine, for example, like in Turkey, today, we are having a level of pricing above this level of the group, but you also know that we do not disclose this pricing effect by country. But this is following the total.

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Operator [12]

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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 [13]

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First question I have is around margins. If you look at the Q3, the big benefit from the acquisitions, which had a very strong performance in Q3, so you had 70 bps accretion from that, but you had 20 bps dilution in the first half of the year. So I would like to better understand why, particularly, I guess, Milestone was so much better in Q3 in terms of the benefit they gave you than earlier in the year. And what should we expect for Q4 for M&A contribution to margin year-on-year, because it's quite complicated with you having consolidated Milestone for 5 months in last year's Q3 -- Q4 and, therefore, get a negative consolidation effect this year? Second question around the underlying margins, ex-M&A, ex-tariffs, ex-destock and so on, it's flattish despite positive organic growth. And you said you had compensated raw material with price. So why is there no underlying operating leverage? And the last question on the tariff situation, what you highlighted for Q3. You also had some benefits from importing from China, given the FX weakness. Is the number you give for the tariff impact including or excluding the benefit you had from purchasing in China at a much weaker renminbi against the dollar?

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Antoine Burel, Legrand SA - Executive VP & Group CFO [14]

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Okay. Antoine speaking. First, concerning the accretive effect of acquisitions. You have 2 main effects in Q3. The first one is the ongoing good performance of Milestone, but you are right in saying that it was already there in H1, although it has accelerated a bit and the profitability is very good. Second, we have also the ramp-up of Server Technology, doing very well both in terms of sale, but more than that in terms of profitability. And if you add to that all the acquisition, you have this very good effect in Q3, having in mind that the second topic is that as the operating margin, excluding acquisition, was below, of course, you have a better level of valuation or accretion. And you know that the touching model of Legrand is something on which we pay a lot of attention. It is working very well in the U.S. Then you have after that, destocking effect is producing good numbers in terms of profitability and you have also somewhat basis for comparison, which is favorable because the rest of the activity of the group was a bit lower in terms of profitability. Moving ahead in Q4 of 2018, today, if we take the example of Milestone and Server Technology, today, you have 9 months of Milestone in 2018 vis-à-vis last year. For the full year, we will have 7 months of Milestone vis-à-vis last year because you have clearly in mind that we consolidated Milestone last year for 5 months in the last quarter. And of course, the positive impact of Milestone on the profitability would -- will lower a bit, but just due to this mechanical effect. For Server Technology, it will not be the case because we started to consolidate Server Technology in our P&L 1st of Jan this year. Then we have to the 9 months and we have on a full year basis 12 months, then no dilution, I would say, of the effect of acquisition in the fourth quarter. If you take all this comment into consideration, we expect the impact of acquisition on a full year basis of being 0 or around 0 on our group adjusted operating margin. Talking about pricing and volume and, as you were saying, compensation that should produce leverage, I would say 2 things: one very simple and then another comment that will be more detailed. First, when I say that we have compensated in value raw material and component inflation, thanks to pricing, I'm talking about value. You know that this is typically the model of Legrand when inflation is accelerating or is quite high in terms of raw material and components. We compensate in value but not in margin, then you don't have the benefit or any leverage coming from that. Of course, the contrary, you have a dilution in gross margin as you increase your prices less than the inflation you received as a percentage. Then just to remind you the figure that I was mentioning, 1.6% for sell-in prices and a bit more than 2.5% for maturing prices, and then you have a division margin. And normally, volume, productivity and so on should produce the compensation to keep a healthy level of operating margin. What happened in Q3, your question was about Q3. Benoît and myself already commented on that. I can be -- if you want a bit more specific, then what we say is that then 2/3, i.e. 110 bps, is coming from 2 nonrecurring items; and 1/3, i.e. 50 bps, is coming from tariff and some other elements mainly related to growth initiatives. To be more specific for each item. Item number one is the impact of the one-off and sudden destocking in distribution in France. And you have in mind, like in H1 of 2018, the trend of like-for-like growth in France was plus 2%. And then this sudden change in plan due to this one-off destocking, mostly located in September on top of that, have moved this trend from plus 2% to minus 4.3%. And then we have 6 points of drop in sales trend. And let me now explain how this impact the Q3 group profitability. First, the drop in sales in France has been sudden and, as said, and mostly then concentrated on September. With this, no adaptation in the cost base except what is purely valuable. You cannot compensate the rest of the activity. And not only because it was sudden, but also because we are talking about nonrecurring item. Second, you have in mind that the level of domestic gross margin in France is very good and clearly above the group average. And as a consequence of those 2 elements, the contribution of France domestic gross margin to group gross margin as well as the coverage of group cost have both significantly decreased in Q3 of 2018. And the impact on group adjusted operating margin is estimated at minus 60 bps. This is for item one. The item two is impact of the basis for comparison. And let's say, if you agree the level of gross margin minus SG&A because you know the total operating items are moving from one quarter to the other and certainly the good level to measure the underlying performance in terms of margin. Then looking at 2017, full year was up 50 bps on 2016. Q3 alone was very good and was up 120 -- 100 basis points on 2016, then you have 50 for the full year. It's even less in H1 and 100 in Q3, then you have more or less 50 bps of basis for comparison in Q3 of 2017. The number -- third item is impact of the increase in the U.S. tariff. In Q3 2018 then, we had the impact of the start of the increase of the tariff. And we had estimated this impact at minus 30 bps on group adjusted operating margin. But you know that this ability of Legrand to offset notably for pricing with the inflation received. Next time, you cannot do it overnight. You have to oversee what is going on in the market. You have, of course, to pay attention to a competitive situation, then it takes time. This is the reason why this first step of tariff increase has impacted our margin in Q3. By the way, you were asking the question of the Chinese yuan devaluation. No, we did not take that into account. And as said by Benoît, this could be a positive in the coming months. That could lower the worst-case scenario mentioned at close to 7% impact on COGS. Of course, if the Chinese yuan was to devaluate and to decrease the value of the U.S. dollar, this impact would be, on COGS, would be lowered. And certainly, our pricing would be less strong because we want to remain competitive and just to be transparent with customers. The customers understand when we increase prices in relation with inflation received, that's when we take a benefit now. That's for the third item. And the last one is representing 20 bps. We are talking about many SG&A commercial initiatives, digitalization. The growth is very good, and those initiatives and costs are supporting current and future growth in the Q3 alone. In Q3 alone, the impact was around 20 bps. And this is it for this long explanation. And as I have the microphone, I will then -- I will maybe just add one thing on this operating margin that's related on Q3, which is quite important in our press -- in our earnings release is that the 4 items I mentioned I hope clear for you. We can complete the analysis looking at the geographies, mixing geographies and the 4 main items I mentioned. Then it's clear that in France, we have had 3 topics. The main one is this sudden destocking, marked and sudden destocking. And the second and third one are the basis for comparison and investment in growth. And for the first, you have understood that we were talking about 60 bps. And for the rest, we are talking about 40 bps. The basis for comparison, in particular, SG&A was very favorable in Q3 of 2017, then challenging for Q3 2018. Then, again, mixing items and geography, the big portion of all the items I mentioned, excluding tariff, located in France. The second topic is tariff. Tariff is, of course, in North & Central America. And the third is also the basis for comparison on gross margin in Rest of the World. If you look at the last year gross margin, it was quite high in Q3 of 2017 at 47.4% when it was 44% in Q4 or 44.9% in H1. Then to sum up, you have 4 items and those 4 items are -- for 3 of them, located in France; for 1 of them, located in North & Central America; and for 1 of it, located in the Rest of the World. That's it. It was a very long answer, but I think it was useful for you to have this explanation. And just to come back, I think you have clearly understood that in the answer of Benoît that then the tariff impact of the worst-case scenario mentioned by Benoît is a gross impact. And in front of that, we intend then to offset this gross impact through pricing, maybe devaluation, maybe a level of that. Not in Q3, of course, because Q3, it was the start of this tariff increase, and we were not able to compensate it. But starting in Q4, we intend to compensate this tariff impact.

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Operator [15]

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We have another question 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 [16]

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Actually, 2 questions, please. The first one is on the French market. I'm wondering if the one-off destocking process in Q3 means that distributors are now getting much more cautious on the French market outlook. So I'd like to get your thoughts on that. And in relation to this, why do you think there's been such a disconnection between the negative trend in housing starts, building permits and the more positive construction confidence index that we saw in France? And then the second question relates to your supply chain organization for the U.S. market. So obviously, you do assemble the products locally in the U.S. But can you give us some idea on the share of confidence in some of your finished products that are shipped from China into the U.S. so that we can better understand what you're dealing with now with the tariffs? And I guess, the question is also to understand if you've always doubted to change the supply chain organization and roots? Or is it something you really consider only in the course of 2019, basically, only after the 25% duties are implemented?

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Benoît Coquart, Legrand SA - CEO [17]

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Okay. Let me try to take the first question, and Antoine will take the second one. So number one, obviously, inventory decisions from our distributors are their decisions, not ours. And we are taking their decisions based on their own strategy and the input they have. So it's difficult for me to comment on the rationale of something which is not under my control, but which is under my customer's control. This being said, based on the feedback I'm getting, it's not that they expect a sudden drop or slowdown on the French market. That's not the input they are giving us. Nor do they expect to have another destocking of such magnitude in Q4. Nor do they expect to have a strong, brutal restocking in Q4. So that's the kind of feedback I'm getting. It's purely their decision. But it's not like if they were expecting that ahead of us, we would have strong restructuring down the French market. Now it is true that, call it the way you want, call it lackluster, call it moderately growing or call it something else, but since the beginning of the year, the French market has been extremely slow, which is a flat plus. That's what -- flat plus, including some pricing, that's what most of the customers are reporting to us. That's most of the manufacturers are seeing. That's what the wholesaler as efficient is also seeing. So the French market hasn't been very supportive so far. And we've been clearly explaining that since the beginning of the year. Now once again, obviously, the Q3 drop in sales was unexpected. And for us, it's not the start of a trend, in other words. And this is not all the feedback we are getting from our customers either. But it's a one-off, a punctual phenomenon purely linked to the industry management of our customers. Now maybe turning to your second question, well, for us, the reason why the French market hasn't been very supportive is, of course, the statistics on residential new build are not very positive. But more importantly, it's the renovation piece which hasn't been very good. And you have already the case last year, and that's what we've been consistently saying since the beginning of the year. And you know that renovation and refurbishment represents the majority of our sales in France. So then, of course, depending on your positioning, whether you are residential, commercial, industrial, more renovation, more new, all the statistics might have a different impact on your sales. As far as Legrand is concerned, this is a lackluster French market. It is mostly coming from the fact that renovation piece is slow that we are not really helped anymore by the renovation new builds.

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Antoine Burel, Legrand SA - Executive VP & Group CFO [18]

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Gael, Antoine speaking. To be clear, it's not really a public information. And the portion of the industrial footprint of Legrand as a whole, specifically for the U.S., what you have understood is that a significant portion of our sourcing is coming from China. Not only China, by the way of Mexico, Mexico and China are 2 competitive countries for the U.S. When I say for the U.S., not only for Legrand, but you know that the U.S. industrial or U.S. businesses are seeing a lot of their products in China and Mexico. What we said a few quarters ago was that maybe half -- around half of the cost of goods sold was sourced from external or remote countries and the rest was manufactured locally, then this is very well figured, just to give you a feeling. What is important, finally, is what? First, the impact on the cost of goods sold that should be monitored very closely, as Benoît was explaining. And second, to identify if we have or not an issue in terms of competitive advantage. We are feeling today is that our industrial footprint, when you look at deep on the category by category of products, it's quite similar to the competition. Then I'm sure you can compare the impact for Legrand to other players in the electrical businesses, for example, large electrical players. What counts is not to know if we are exposed globally, but if we are exposed in energy distribution, on wiring devices, on lighting activity because in some -- each segment that you could have a competitive or not, an issue or not. To sum up, we think today that certainly around half of it or something like that is sourced from both countries, number one. Number two, it's more or less, finally, certainly, the industrial footprint of competitors we have in front of us in each demand categories. And your following question was about relocation of sourcing. It takes time, not so much, but it takes time and it should take time because, as said by Benoît, we have to make sure that things are going to last, number one. And number two, to make the good choice between increasing prices and stay, for example, in China, because China, including tariff, remains competitive. Not to talk about the point of Andreas that it could be also helped by the depreciation of the Chinese yuan. And we have to be clear on that. And pricing being the bigger piece, finally, relocation of sourcing will come, but it will be a complementary measure and not the main measure. If over the course of 2019, without questioning the fact that we intend to mitigate everything in 2019, but if, over the course of 2019, we were coming to the conclusion that this situation of tariff could last for a long time, then certainly we can accelerate a bit to prepare the future and find, as we have done in the past, better places to produce to be more competitive and so on and so forth. But it's not something that will challenge or should challenge 2019 to take time before making these relocations because, as said by Benoît, we intend to compensate the impact of tariff from 2019 or even from Q4 of 2018.

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Benoît Coquart, Legrand SA - CEO [19]

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In other words, you have short-term actions. Short terms, meaning that it doesn't mean that you could do that overnight, but short-term actions which are implemented or currently implementing, which are pricing, which are change of some suppliers, which are relocation of some purchases, negotiation with vendors, productivity and so on and so forth. And all that should impact our accounts as early as Q4 and should give us the ability to fully compensate the impact of the tariff in 2019, should the tariff last. And on top of that, of course, we have more structural measures, which are a potential relocalization of manufacturing activities for Legrand, all manufacturing activities which are understudies, but of course which should be done if the tariff situation is lasting and if it makes sense in terms of quality, cost, service level and so on and so forth.

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Operator [20]

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We have another question from Mr. Andre Kukhnin from Crédit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [21]

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I'd just like to tidy up a couple of things first. On the tariff impact that you cited of plus 7% on COGS, is that at the 25% for List 3 from January '19?

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Benoît Coquart, Legrand SA - CEO [22]

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So number one, once again, it's gross impact. It's gross impact, probably everything stays equal in terms of exchange rate and so on and, of course, not taking into account any of the measures we have discussed. And yes, I confirm that it is assuming the List 3 is moving from 10% of tariff to 25% in January 2019. So it is the reason why I call that the worst-case scenario.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [23]

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Very clear. And in terms of price increases for 2019, have you announced them already?

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Benoît Coquart, Legrand SA - CEO [24]

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Well, price -- so 2 elements. Number one, price increases is not only tariff increase. You have to have in mind that price increase is a mix of many things. So it's a mix, of course, including tariff, managing the discount differently, managing the end-of-the-year EBIT differently and so on and so forth. So it's not only tariff increase. But second answer, yes, we have already started to announce and to implement some pricing increase in the U.S.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [25]

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Got it. And just final one on this. The 30 bps impact in Q3, coming back to an earlier question, was that gross? Or was that with the help from renminbi already because it has obviously been depreciating already?

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Antoine Burel, Legrand SA - Executive VP & Group CFO [26]

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It was gross and net because the valuation was not so significant. And what is clear is that why, if we get rid of this ForEx effect, why is it probably gross and net is that, as I said earlier, implementing pricing takes a bit of time not to talk about renegotiation with the third player of productivity or even relocation that will happen in 2019. And this is the reason why Q3 was a bit special, if I can say so, where our gross and net are more or less the same figure.

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

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Great. And then just on pricing versus raw materials or versus component inflation in Q3. Was that inflation 3.5% or 2.5%? I thought it's 3.5%, but then later on you mentioned it sounded like 2.5%?

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Antoine Burel, Legrand SA - Executive VP & Group CFO [28]

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A bit more than 3.5%.

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

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Okay, great. And just on France destock, sorry to keep coming back to the same topics. But has that now firmly ended and no impact should be anticipated in Q4? Or was there a carryover into October?

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Benoît Coquart, Legrand SA - CEO [30]

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Well, obviously, I'll not comment October. What I said a bit earlier is that we are not anticipating to have further significant destocking in Q4. But the other way is also true also. We are anticipating. We have to have a significant restocking in Q4. But all that, again, having in mind that this is not our decision, and we have many customers. And of course, our customers are obviously free to manage their purchase and their inventory the way they want. But having that in mind, we are not expecting neither further destocking in France nor a significant restocking.

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

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Great. And if I can just take a step back or 2 steps back from so and just looking slightly beyond 2018. I know you don't have as much visibility, and I'm not asking for guidance or a detailed outlook. But just as you kind of assess the end market situation on what you -- prepping your organization for across North America and Europe, has that been changing much for you since kind of summer? And what is your kind of broader assessment of what's in store for us in 2019 in your space?

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Benoît Coquart, Legrand SA - CEO [32]

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Well, as I commented earlier, we -- and as you could see in our press release, we keep investing in growth, on new products, acquisition and so on. So we are extremely ambitious in terms of market share. Now as far as the market themselves are concerned, we are in the middle of our budget process. We are not yet fully consolidated, of course, the numbers. So we will have the discussion in February. I think it's a bit earlier to discuss the 2019 trend. But we remain extremely motivated to continue to gain market share in majority.

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Operator [33]

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We have another question from [Dennis Ergen] on behalf of Daniela Costa from Goldman Sachs.

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Daniela C. R. de Carvalho e Costa, Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team [34]

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It's Daniela here. I wanted to ask 2 things. One on sort of to better understand the visibility that you have in various regions of these type of things, like the destocking that happened in France, impacting you or not. Can you comment maybe on when you look throughout your main clients across the key regions, on level of inventories they have now versus the level of inventories they have sort of over long history, where are things? Sort of we're at a depressed level of inventories already? Are there any countries where we are a little bit more elevated than what is long-run history? Because I guess, sort of understand you don't have visibility on what the outlook is, but do you have some views on what is the level of inventory in distributors across the globe? That's my first question. And second question, I just wanted to sort of to ask you about the environment in terms of M&A and valuations for the targets you're looking at, if you have seen, given sort of the turmoil in the markets in the last few weeks. I know you obviously mainly look at private businesses, but whether you have seen sort of sellers starting to have a bit more realistic expectations about both valuations for their business and what that means for sort of your M&A pipeline.

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Benoît Coquart, Legrand SA - CEO [35]

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Daniela, well, the first question is there cannot be one and only one answer because it really depends on the customers and on the countries. There are customers and countries that are extremely professional in terms of inventory management, and you know some of them, and precisely the inventory level manage that on an almost day-to-day basis and so on. But obviously, they don't always share that with us because we are a supplier and a partner. And also, processes where it is a lot more difficult to know either because they don't manage it the same way, the same professional way or because they don't always share information. So the bottom line is that it's extremely difficult for us to have visibility on our customers' strategy as far as the inventory level is concerned. So typically, what happened in Q3 in France was not expected. And it may happen one way or the other in a number of countries. So I know it's not a very satisfactory answer, but this is the reality of our business, which is made of a lot of different situations, a lot of different customers, a lot of different countries, each of them having their strategy. And unfortunately, inventory strategy does not depend on us. What depends on us is, of course, what we are doing with our customers to grow market share. So launching new products, training our customers, communicating a lot of innovation and so on and so forth. As far as second question is concerned, as you rightly said, most of our targets are privately owned companies. And frankly speaking, whatever is the state of the market, they tend to have a price in mind, which is how they value their business. So last year, as you remember, we had many questions on whether the valuation were inflated because of the market, and my answer was not really and we could still make this at reasonable prices. See Milestone that we bought 9x 2017 EBITDA, which I think is a reasonable price for a quality company such as Milestone. And same comment, but the other way today. It's not because some of the valuation or the market price went down, that the valuation suddenly went below 8 or 9x or 10x EBITDA. So since most of the sellers are private owners, they do not really value their companies based on the market price, but have in mind that their company is worth X or Y. So in other words, the acquisition we've made -- the 4 acquisitions we made so far and the discussions we currently have are based on stand-up classical multiples, if I may say.

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Operator [36]

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We have another question from Mr. Graham Phillips from Jefferies International.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [37]

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A couple of questions. Could you give us, please, an update on Eliot? You've launched 10 products you listed in the slide pack there. What sort of proportion of sales is now Eliot-derived, what sort of growth rate is Eliot-derived products generating? That would be the first question.

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Benoît Coquart, Legrand SA - CEO [38]

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Well, Graham, we'll give you the update on the 12 months because we usually don't communicate precisely on the Eliot sales on a quarter-by-quarter basis. So we'll give all those precise data in February when we release our full year numbers. What I can tell you is that, and I hope that it was made clear in the press release, we remain extremely ambitious on Eliot. We are investing a lot on Eliot in terms of R&D, in terms of new product launches, commercial support and so on. Those are part of the so-called growth initiatives that we commented earlier. And you will continue to see in the coming weeks and months a number of very interesting initiatives as far as growth is concerned. Now as far as number themselves are concerned, we'll give a detailed and precise update at the time of the release of our full year results.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [39]

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Okay. Well, perhaps related to that then, we look forward to seeing that next year. But you've mentioned a couple of times, increased growth costs and you again just mentioned R&D there. Your R&D expense as a percentage of sales is not moving much during the course of this year. It's come down a little bit. So where is it that we should be seeing this? Is this in SG&A or is it in CapEx? Where is this growth being charged and which regions we'll be seeing that? Is it more of a headwind in your margin?

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Benoît Coquart, Legrand SA - CEO [40]

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You're right in terms of R&D expenses. Well, even though the products that are currently being launched were R&D a couple of quarters back, but when we are talking about the growth initiatives, it's more related to commercial expenses and to a number of digital expenses, more than R&D alone and more than CapEx. You could see that because of the traditional phase-in topic on CapEx, our CapEx level is not particularly high. So it's clearly more the trend in commercial expenses and a number of digital expenses, especially to support several of the launches, as mentioned. Or in terms of region, it could be across the board, having in mind that the number of expenses are incurred in France or financed by the French P&L for the benefit of a number of other regions. And that's always the same story. When you look at the French P&L, have in mind that the French P&L has some expenses that are pushing, that are made for -- to support other regions.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [41]

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Okay. I'll be mindful of that. And also, I can remember, there's a lot of discussion about the fourth quarter margin in France last year because you changed the basis of the business allocation cost, I think. So when we look at the fourth quarter margin in France this year, and again, mindful of the comments you're making about increased commercial expenses, is there anything compared to the fourth quarter of last year we should be thinking about? Or was that now pretty much in the comparison because there was a step down between the fourth quarter and the third quarter last year?

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Antoine Burel, Legrand SA - Executive VP & Group CFO [42]

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Maybe 2 things, Graham, Antoine speaking. One is that I think you are referring to the shift that occurred, if I'm correct, François, end of 2016, and then it was the basis for comparison in 2017, but not a basis for comparison for 2018. That's the first point. Second, what was good last year, if you have it in mind, is that the level of sales and growth was good in France last year. But excluding this topic, no, there is no specific items in the Q4 P&L of France for 2017.

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Operator [43]

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(Operator Instructions) We have another question from Mr. Alasdair Leslie from Société Générale.

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Alasdair Leslie, Societe Generale Cross Asset Research - Equity Analyst [44]

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So I had a few questions. Just -- and sorry, I missed the start of the call. But did you give an estimated split between the pricing initiatives and finding alternative suppliers to offset the tariff increases? And sort of related to that, I heard your earlier comments about -- I think you said the price rise is sort of perhaps required to fully offset that 7% headwind on America's COGS. Does that seem basically 100% mitigation from pricing actions?

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Benoît Coquart, Legrand SA - CEO [45]

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Well -- Benoît speaking. So the number I gave were sort of mechanical effect. As said, if we had to -- if -- worst-case scenario, 7% negative impact on the Legrand North & Central America COGS, and to fully compensate at least in value the 7% impact, would require to have a plus 3% increase -- slightly more than 3% increase in price over our full year numbers. And what I've also said is that if you are in the second scenario where, for example, List 3 wouldn't be anymore subject to tariff, then this 7 -- plus 7% increase in COGS should be plus 3% only. And then the plus 3% -- slightly more than 3% in price would have to be slightly less than plus 1.5%. Those were to give you order of magnitude. Now our intent is not to use only price as a leverage to compensate. Pricing will represent a majority of the mitigation actions. But on top of pricing, we have all what was said, i.e. we'll switch from one vendor to another. We'll do some -- do further negotiation in purchases. I mean, we are doing a number of productivity measures and productivity actions and so on and so forth. So -- and all that, with the target to fully mitigate the impact in our Q4 accounts and should it last in the 2019 accounts. I hope this is clear.

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Alasdair Leslie, Societe Generale Cross Asset Research - Equity Analyst [46]

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Okay, very clear. Yes, very clear. And just, I suppose, another quick follow-up, just on the growth initiatives and digitalization investment, the margin headwind of 20 bps. I mean, could you just quickly clarify if you had a similar impact in previous quarters? Maybe you just didn't call it out. And whether we are at kind of a run rate where the year-on-year impact starts to kind of comp out?

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Antoine Burel, Legrand SA - Executive VP & Group CFO [47]

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The point was a bit more located in Q3 of 2018, both with a bit more spending; and second, the fact that the trend in top line, of course, was less strong than in H1, but impact due to the French situation. Now Q3, it was particularly located in Q3.

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Alasdair Leslie, Societe Generale Cross Asset Research - Equity Analyst [48]

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Got it. And then just a sort of final question, if I may. Just I suppose if we are to see a flat year in France in terms of construction activity next year in 2019, absent a sort of strong pickup in renovation, and it seems that sort of flat outlook is really what the permits and starts are telling us is going to be, do you think you can outperform in that kind of environment? Is there anything you see that could support such a view? I mean, it does seem like benchmarking your growth in recent years in France, you've underperformed the market. I guess, that might be just because of the heavier focus on renovation. But is there anything just in terms of new product pipeline, launches, et cetera, which should give us a little bit of confidence that you can outperform next year?

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Benoît Coquart, Legrand SA - CEO [49]

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Sorry, Alasdair, but it's a 9-months release, and the whole process of budgeting, planning, forecasting is currently being done. And we'll -- so I cannot really help you to forecast what 2019 would be. It's too early. We'll have this detailed discussion in February, I think.

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Operator [50]

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So we have another question from Mr. William Mackie from Kepler Cheuvreux.

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William Mackie, Kepler Cheuvreux, Research Division - Head of Capital Goods Research [51]

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I'd just like to clarify France's demand situation, if I may. You've obviously declared down 4.3% in Q3 by destination, and you've also stated that most of the destocking came in September. So -- and you don't expect a significant change in restocking or destocking. But can you just give us an idea of what the sort of level of decline you experienced in September versus September last year was, so we can begin to estimate what the fourth quarter demand rates may be like as we go into the fourth quarter? The second question comes to the overall restructuring costs for the year. Now with the changes that you've seen and perhaps the shift that you may make in purchasing or decisions related to tariffs, is there any change in that? How much restructuring provision you may require for the full year in total? And then I'm sorry if I missed it in the release somewhere, but can you just clarify for me, perhaps again, the step up in the other expenses that were recorded in the P&L within France, please?

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Benoît Coquart, Legrand SA - CEO [52]

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So I will answer the first question. I'll let Antoine answer the second and the third one. So what Antoine said was that there was a strong drop in sales in September, but the way we evaluate stocking and destocking is on a quarterly basis. So we really look at the quarter itself. And the third quarter, we estimate that there's more or less 5 points impact of destocking over the third quarter impact in France, about 5 points approximately. Now again, we are not expecting some sort of strong reversal of this destocking. We're not expecting on the fourth quarter the same impact the other way. Nor are we expecting to have another strong destocking. But the other -- but you have to keep in mind that over the third quarter, it's about a 5-points destocking impact. What will, of course, play in Q4 is that as in Italy, France has a third basis for comparison, but both basis for comparison of France and of Italy are, of course, embedded into the guidance we gave and into the plus 2%, plus 4% we are targeting. Now Antoine maybe will take your 2 questions on restructuring and step-up of expenses.

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Antoine Burel, Legrand SA - Executive VP & Group CFO [53]

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So for the first one, William, restructuring is, as you know, one tool used by country managers to adapt when things are turning bad. We have not been, let's say, warned about the strong restructuring in the short term. When we talk about relocation of sourcing, for example, in the U.S., because it was your point, relocation of sourcing could be not only from existing manufacturing capacity of Legrand today but from the supplier. Then we are going to move from one supplier to another one. Then restructuring associated with this kind of move is not so significant. If we have to adapt a bit the SG&A because this the plan in the U.S. and everywhere in the short term, of course, without affecting our growth capacity, this is something you can do through natural attrition, in particular, in the U.S. because the employment market is quite active, then you don't have to do some matching. Then to sum up, yes, we are going to continue restructuring. We can have some proposal by the end of the year from some countries, not only the U.S., but from other countries. Do I see a very big amount to be expected in Q4? No. Acceleration, maybe a bit, but very significant amount that would require to be announced today, absolutely not. I'm not sure to understand your third question about the step up of expenses. Could you rephrase it, please?

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William Mackie, Kepler Cheuvreux, Research Division - Head of Capital Goods Research [54]

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I beg your pardon, it was a clarification. When I look at the other operating income or expense line within the French P&L, as you declared by destination, it stepped up to minus EUR 11.2 million against minus EUR 3.2 million in Q2. And I was just -- I know it's not a significant step-up over the recorded EUR 8.8 million last year, but I was just wanting a clarification on where that was coming from.

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Antoine Burel, Legrand SA - Executive VP & Group CFO [55]

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Okay, okay. Sorry, because I thought you were mentioning the step up in gross spending that I mentioned about the 20 bps. You are talking about other operating item, okay. And I will maybe first remind you, William, that this is something, and you know the story, sorry for reminding it, but that vary a lot from one quarter to the other in a given region. But this is something also to be looked at on a global basis. Then if we -- if you look at on a global basis, you will see that even a bit lower than last year. And for France only, if you look at the cumulative effect at the end of the 9 months, there is not so much differences between 2018 or 2017 even if we have had a bit more of other operating items in France. Then what you have to keep in mind is that there is no big issue that were present. I don't know, EUR 10 million, that has been accounted for in France. It's the sum of a provision that you can have. For example, when you have sales going down, your inventory could be a bit higher. Then when you have a higher level of inventory, you have to mechanically depreciate it. And this is a -- this kind of stuff that you have or some provision that you can have on litigation or stuff like that, but nothing very significant to be mentioned in this P&L.

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William Mackie, Kepler Cheuvreux, Research Division - Head of Capital Goods Research [56]

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If I may, one quick follow-up, although I suspect it's a difficult answer. When you described pricing up 1.6% in Q3 and input cost up -- or procurement expect costs up 3.5%. I mean, how do you expect that would trend either in Q4 or if you look at the situation of the world in your businesses today into 2019? So what sort of expectation might we build in with regard to your achieved pricing increases or inflation of pricing level in Q4 or into 2019? And what sort of incurred step-up in procurement costs might be expected like-for-like from what you see today?

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Antoine Burel, Legrand SA - Executive VP & Group CFO [57]

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You were well expecting the fact that it was a difficult question to answer, William. But no, to be fair, because I understand you need some visibility. In the short term, we do not see any relief in terms of raw material and component inflation. The demand is still there, although some analysts are expecting maybe some less inflation in the coming quarter due to less momentum in terms of global growth in the world. The reality today is that the shortage -- some shortages on the market in many companies, electronics-specific companies, rest is still there and then it is creating -- then we have a double effect on the raw material and component inflation. First, the demand -- the global demand is still quite good. And looking at the Legrand number, for example, with this 4.8% organic growth, we have seen a lot of competitors or other players reporting very good organic growth for the first 9 months, then it's quite a good growth overall for the world. And then this demand to suppliers, plus this kind of shortages on the specific components, it makes me thinking that in the short term, inflation should continue and then we should continue to be cautious. We're actually cautious to be quite -- or look closely to pricing to make sure that we are going to continue to cover this inflation in absolute value. And to sum up, I do not see any decline in terms of material and component inflation in the short term. Maybe it will come after that, I don't know. It's too early to say. And second, the coverage by pricing should continue at Legrand.

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Operator [58]

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We have another question from Ji Cheong from Citi.

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Ji Cheong, Citigroup Inc, Research Division - Senior Associate [59]

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Ji Cheong from Citi. I have a quick couple of questions on the Rest of Europe. First is on the U.K. So you mentioned the U.K. revenue slightly up for this quarter, and I think this follows last quarter as well. So this is better than many peers, what they are saying with Brexit concerns. Can you give us some insight on why this is? And on a related note, so last quarter, you mentioned the growth rate of Rest of Europe should be running more on 5% to 6%. But clearly, if you look at 9-month like-for-like growth, this is much higher. So is there any reason or initiatives that are notable driving this beyond your expectations? And what can we expect for the year for this region?

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Benoît Coquart, Legrand SA - CEO [60]

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Well, as far as the U.K. situation is concerned, it's -- I mean, I've been constantly reminding you that it all depends on, I mean, the performance. In a country-by-country basis, all depends on the footprint you have on a given country. And in the U.K., I don't see a company which has the same activities that we do have at Legrand. There's a mix of activities. For example, we are not at all in lighting fixtures in the U.K., but we are active in lighting controls, which is completely different. We are in, what we call, people care or assisted living. We're in cable management, a bit of foreign devices. So it's a mix of activities, which is definitely not comparable to any other companies, which we have a different footprint. So it's always difficult in our trade to compare an animal with another one. This is my first answer. Now this being said, it is true that our fares are slightly up. But at the same time that we remain extremely careful, extremely cautious for next year and for the quarters to come because, at some point, most people believe that the Brexit will have some impact. So our operations in the U.K. are ready to adapt should the market situation being much less supportive than it is today. So it's more a matter of reactivity and having plans so that if there is, for example, a hard Brexit scenario, our teams can react. But it is true that so far, the performance has been pretty good with up in H1, up in Q3 and up in 9 months. As far as the second question is concerned, what we highlighted in the first half of the year was that we had some sort of over-performance in H1. That was a bit exceptional, and that was up -- that could, at some point, reverse in the quarters to come. That's why we were a bit cautious that you should not extrapolate the H1 performance over the full year. The reasoning remains the same. There could be some reversal of some very good performance, a good example being Turkey. We had very strong performance in Turkey in H1. Still good performance in Turkey in Q3, but everybody knows that the market situation has become a lot tougher in Turkey than what it was a couple of months back. So this is a good example of a situation that could negatively impact Q4. And as I said already, potential good news, potential bad news in the Rest of Europe and in other areas are, of course, once again fully embedded into the top line guidance we gave at the beginning of the call.

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Operator [61]

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We have another question from Andreas Willi.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [62]

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I just wanted to ask again on tariffs and inventories. On tariffs, you talked about the offsetting measures you do, which I assume also includes going to non-U. S. or -- non-China or domestic U.S. suppliers for some of these components. Do you think that will really give you a relief? Given that many of these suppliers already operating at high capacity, most other companies will probably want to do the same and switch from some Chinese to non-Chinese suppliers. And they're probably going to just increase their prices and, at the end of the day, that you don't really get a relief. And the second question on inventories. If you look at some of the other regions, do you see any similar situations to France where maybe the sell-in was too high beforehand and then you have an adjustment? And do you think in the U.S., currently, we have a high sell-in due to anticipated price increases coming? Or have you not seen that in the U.S. since the summer in terms of the tariffs triggering incremental buying from distributors to stock up?

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Benoît Coquart, Legrand SA - CEO [63]

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Well, starting with your first question. Our relocation plans are not specifically to relocate from China to the U.S., but it could be to, indeed, to relocate from China to a number of other places. It could be -- you know that we have factories in about 100 countries in Legrand, including countries such as Mexico, for example, or Southeast Asia or a number of other places. So it's not specifically relocating to the U.S. We have vendors who themselves, say, for example, face shortage issues or other inflationary costs. So this is the plan, and we have already priced in into a plan those relocation activities. Now obviously, in some cases, as Antoine said, it will be more interesting to be in China with a 25% tariff than to relocate to another country. In which case, we will, of course, stay in China, take the 25% tariff and increase in cost and find other ways to compensate, including, of course, the tariff. So that's clearly not a single answer. Our plan is made of several actions. And we clearly have evaluated the opportunities of going to U.S., going to Mexico, going to Vietnam, to Indonesia, to a number of other places. As far as the inventory is concerned, it's not that -- so number one, the feedback we are getting is not that our distributors had extra -- a lot of extra inventories that they had to get rid of. But again, it's not -- it's difficult for me to comment or to analyze precisely because it's not my decision, it's my customer's decision. The situation in the U.S. is a lot -- it's very specific compared to France. France, number one, most of our business is going through distribution. And number one -- number two, it is true that the market is more concentrated than elsewhere. In the U.S., a lot of the -- I mean, even though electrical distribution is, of course, a preferred channel partner, we are going through a lot of different channels. It could be electrical distribution, it could be direct distribution, it could be IT distribution, it could be the MRO, it could be direct to integrators, it could be of course online, it could be many different channels, number one. And number two, those channels are a lot more fragmented than they are in France. So of course, you could always have inventory buildup, destocking and so on. But obviously, the impact in the U.S. would be a lot more directed, if I may say, on our performance than it is in France. And I'm not aware of a significant inventory buildup that would have been made by a lot of our clients to prepare themselves for the tariffs.

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Operator [64]

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We have no further questions. I'll now return the floor to Mr. Coquart and Mr. Burel.

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Benoît Coquart, Legrand SA - CEO [65]

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Well, thank you very much for your time and for your questions. And obviously, François and the team, Antoine and myself, of course, will be available for further questions in the hours to come if you have some follow-up questions. Thank you very much, and I hope to see you soon. Thank you.

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Antoine Burel, Legrand SA - Executive VP & Group CFO [66]

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Thank you.

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Benoît Coquart, Legrand SA - CEO [67]

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Goodbye.

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Operator [68]

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