Good morning, ladies and gentlemen, and welcome to today's Chevron 2018 9 months results conference call. All participants are in a listen only mode. Later there will be a question and answer session. For information, this conference is being recorded. At this time, I would like now to hand over to Mr.
Benoit Coker, CEO and Mr. Antoine Briel, CFO. Sir, please go ahead.
Thank you. Hello, everybody. Benoit Kocar speaking. So Antoine Bureau Francoispois, I myself are happy to welcome you to the Lecon 2019 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 on the Locon 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 1st 9 months of 2018, thus 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%. So second takeaway is that we have a healthy organic growth in sales of plus 4.8 percent 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 1 of 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 +5.3percentinq32018 The 3rd takeaway is that the 1st 9 months adjusted operating margin before acquisition was stable compared with the same period 2017 at 20.4%.
Most specifically, adjusted operating margin before acquisitions was down minus 160 basis points in Q3 due to specific items. Some items are nonrecurring, such as a marked in 1 off destocking distribution in France in Q3. I was referring 2, but also the challenging basis for comparison of Q3 2017. Some items should last such as increase in the U. S.
Tariff or the impact of some growth initiatives. To mitigate those items, adjustment measures have already been launched. We'll come back on this into more details during the presentation. 4th takeaway, Laurent's growth initiatives are on the road. We have continued to actively launch new products higher value news, 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 TiO activities. So M and A momentum is good and our pipeline is active. Finally, the 5th takeaway of this release is that Legrand confirmed and specified its target for 2018 I will come Now after this brief introduction, let's start with another view of sales on Page 6 of the deck. So we recorded, as I said, the total rise in sales of +11.3 percent. Legrand 1st growth driver is contributing well with organic growth reaching +4.8 percent in 9 months, driven by healthy rises like for like in bus new economies where sales were up plus 7.1 percent and in major countries where revenues were up plus 3.9%.
Acquisition driven growth, which is a group's 2nd growth driver, contributed plus 11.8 percent to sales growth in the 1st 9 months of 2018. Based on acquisitions, we now 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 percent in the 1st 9 months of 2018. Now if we apply to the last quarter of the year, the average FX rates observed in October 2018, Then annual ForEx effect for 2018 would be around minus 4%. This is, of course, as usual, a theoretical and time will delve what will be the actual ForEx impact on sales of 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 78 of the slide So in France, organic growth in sales was almost flat in the 1st 9 months of the year. The 2% growth in sales recorded in H1 was followed by a minus 4.3% decline in Q3 3 alone. Obviously, we were not expecting such a full quarter in France. Z drop in sales was due to a marked and one of talking based distribution.
It is indeed worth noticing that downstream sales of legged product by the professional distributors, what we call the sellout, was overall flat plus over Q3 2018, the performance that is stand 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 distribution. This being says over the 1st 9 months of the year, and in the context of the market that remained lackluster, leandro recorded good showing in its key product lines, such as energy distribution and digital infrastructure, in addition, launches of sell in with Netatmo and of Dixie with Netatmo, have been a great success. Those 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, gross was plus 5.7% 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 health of Europe is concerned, sales were up plus 8.4% like for like compared with the 1st 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 Gross in sales was also sustained in some major countries, including Spain, Germany, the Netherlands and Greece And finally, in the UK, sales grew slightly. Moving now to North And Central America, where sales were up plus 4.1 percent on an organic basis.
It should be noted that most basic said 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. Says Mexico were down due to a 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 +.7 percent on a like for like basis. We reported strong rising sales in India, China and South Korea, but also in some African countries, including Algeria, Egypt, and cut due our hybrid cost as well as in Australia and Malaysia. Sales were up very slightly in Brazil, but treat cities in Colombia and in Chile as well as in Saudi Arabia. So overall, or like for like growth in sales was healthy in the 1st 9 months of the year. And as you could see, fairly consistent among each main geographic zones since Europe, including France and Italy, was up plus 5.5%.
North And 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 an overview of financial performance.
Thank you, Benoit, 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 percent, thanks to the good organic and external growth in sales. Moving 2018 adjusted operating margin came to 20.5 percent. I see 10 bps above the same period of last year. It is interesting to note that a good performance of acquisitions was due to milestone and cellular technology and lose acquisition 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 Benoit, the flat evolution embeds performance of the third quarter alone, this performance was negatively affected by specific items. In more details on page 11, you can see that the Q3 2018 adjusted operating margin before acquisition dropped 1.6 points. About twothree of this drop, I E 1.1. Come from 2 non recurring items.
The first non recurring item is a marked and sudden destocking in distribution in France, And as a consequence of this one off, the contribution of France domestic group margin to group cost margin as well as coverage of group costs, including SG And A, of course, significantly decreased in Q3 of 20 And the impact of this first non recurring item on group adjusted operating margin is about minus 60 bps. The second non recurring item is a 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 non recurring items. We are left with about 1 third the drop of 160 bps to explain, I.
E. Alpha Point. It is due to other items including number 1, the increase of the U. S. Tariff with an impact of about minus 30 bps from group adjusted operating margin And number 2, the cost of some growth initiatives with an impact of about of about minus 20 bps on group adjusted operating margin.
As said earlier, by Elegoire, has already launched adjustment measures that aimed at offsetting the impact of good items on profitability for Legrand, North America, and as has a measure of to mitigate tariffs 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 and A and redo 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 percent above last year, I. E, EUR 100,000,000 above this entire of 2017.
And this strong rise, whether it's from many positives, including a strong growth in operating profit, for EUR 78,000,000, lower financial expenses and favorable change in the Forex results for EUR 19,000,000, And last but not least, a 4 point decrease in income tax rate, up 29%. 3 points of the drop of this income tax rate are related to the lower corporate taxation in the U. S. And on on top of this positive for Legrand that you know well, we also have the benefit of some one off elements that account for one point. Moving to the last indicator you know that the good reading of the underlying free cash flow generation should be done on a normalized basis.
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 EUR674 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 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 1st 9 months of the year.
And I give now the mic back to Benoit. Thank you. Thank you, Antoine. Let's move now to the second part
of this presentation. Your innovation and growth initiatives, I will quickly cover our 2 growth drivers, new products and external growth. Starting with new products, you can see on Page 1718 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 user interface, but also in smart UPS, Automation, human centric lighting, as well as mobile We have obviously also been continuing to develop non connected products, notably in user interface and energy distribution. Moving now to acquisition driven growth on Page 20.
As you can see, we have already announced 4 acquisitions that strengthen lebron's position in upbeat segments of its accessible market such as UPS, digital infrastructure for data centers, equipment for DIY activities. Those 4 deals illustrate a good momentum of our M and A activity, and I can firm that some deals should come out in the months as 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, it's the 1st 9 months of 2018, and excluding any economic slowdown by the end of the year, LeGrand is confirming and specifying its 2018 targets.
Lugo is aiming for an organic growth in sales of close to +4 percent and an adjusted operating margin before acquisitions of between 20.0% and 20.5%. Antoine and myself are now ready to open two questions. Thank you.
We have one first question from Madam Lucia from Morgan Stanley. Madam, please go ahead.
Hi, good morning gentlemen. Thanks for taking my question. 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 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 1.
Hello, Lucy. But one speaking, I will take this question. So obviously, if tariff took in the U. S, it's 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 can happen, and not at least at 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 just 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 Lebon, 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 La Grange North And 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 3rd 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 list 3, which was the last list enacted, on which tariff was 1st 10% and it's supposed to be 25% starting Jan. If at least 3 was no longer subject to tariff, then the total impact on the cost of goods sold of Lobornos and Central America instead of being 7% would be approximately 3%. So of course, the scenario would vary very much depending on your own scenario.
Other point, you know, that the long haul model has always been to compensate, at least in value, an increase in COGS by pricing, So mechanically, a pricing of slightly more than +3 percent in Locorn North And Central America would be required to fully offset the increase in costs in the worst case scenario, the one I mentioned percent would be required in the second scenario, here again on a yearly basis. So those are, let's say, the mechanical impact of tariff on a full year basis. Now obviously, we are working actively with a target to fully meet gate in Legrandorf and Central America accounts, the impact of the tariff, including the worst case scenario, And for that, we have a mix of pricing measures, of course, which represents a significant part of the action plan sourcing and manufacturing relocation, negotiation with suppliers, productivity and other measures. Several of those measures has implemented as early as Q4 2018. And here again, with an objective to, fully compensate the negative impact of the tariff offers the 4th quarter.
So this is, 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 the U. S. And China in terms of exchange rate in terms of many things. And third, we have an action plan, which is clearly drafted and aimed at fully mitigating the impact of those tariffs in the LNC account.
Now that's were, of course, Le Goure 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 the financial topic and how to compensate in our accounts. It's not a competitive topic. The shipping fee and receipt.
Yes, very helpful. Thank you. Thank you for the color. My second question was around Italy and of course, you were still very strong in the quarter, but we hear, you know, hearing 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, in September, in Italy and how you are looking at this market going forward. 1, considering the political situation, but 2, as well, considering the level we are now in terms a recovery, considering that the country has started to improve already a bit more than 2 years ago?
Our well, our performance in Italy, has been strong over 9 months. It was again strong in Q3. It was a bit boosted, as we said, in our release in H1, over the second quarter, but the launch of important rental product, which is called leaving 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, but the quarters to come.
With the usual limit that, as you know, you see, we have absolutely no ability on the on the market trends in the months has to come. Now I'm not sure that our performance in Italy is relevant to what the market is doing. Clearly, the market is not growing 5.7%. It's growing much later than that. So it's, carry some other performance of Le Von, 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 other performance to continue the quarters to come. But so far, Q4 Q3 sorry was a plus 4%, which remains a very healthy see a level of sales. And the don't forget that, you were mentioning the cycle, a total level of sales remains something like close to 30% below a peak in a peak time in Italy. Yes, but again, as you see, keep in mind that we have very little visibility in Italy and elsewhere.
Just last question around the pricing. I was just curious to know, how much were 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.
Good morning, Lucy 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 components, the 3.5, which represents more or less the same trend in terms of coverage of raw material and component inflation by pricing. This is for Q3, your question.
And by region? I mean, is the 1.6 kind of homogeneous the across the group or?
Yes, this is across the group or this is a global performance. Now we can have a variation, and we have variation from 1 agent to another one. Depending on the disinflation and what we're referring to, depending on the ForEx, the, if we talk about is that are importing products, for example, from the Eurozone and that are in a country with the currencies that are depreciating, you can imagine, for example, jerkadia, we are having a level of pricing above this average of the group, but you also know that we do not disclose this pricing effect by country, but
this is followed.
Thank you, madam. We have another question from Mr. Andreas Willi from JPMorgan. Sir, please go ahead.
Yes. Good morning. Thanks for your time. 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 3, 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 that gave you then earlier in the year?
And what should we expect for Q4 for M and A contribution to margins 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 and A, ex tariffs, ex destock and so on, is 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 the tariff situation, what you highlighted for Q3, was he also had some benefits from importing from China given the effect weakness? Is the number you give for the tariff impact including or excluding the benefit you had from purchasing in China the much weaker remind me against the dollar?
Thank you.
Okay, Antoine speaking, good morning, Andrea. First, concerning the accretive effect of acquisitions you have 2 main effects in Q3. The first one is the ongoing good performance milestone, but you are right in saying that it was already there in H1, although it had it a bit and the profitability is very good. 2nd, we have also a 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 order acquisition, you have this very good effect in Q3, having in mind that the second topic is that as the operating margin in executing acquisition was below. Of course, you have a better level of volition or accretion.
And you know that the touching model of LeGrande is something on which we pay a lot of attention. It is working very well in the U. S. Then you have after that, the destocking effect is producing good number in terms of profitability. And you have also, from a basis for comparison, which allowable because the rest of the activity of the group was a bit lower in terms of profitability.
Moving moving ahead in Q4 of 2018, you you today, if we take the example of my stone and cyber technology, today, you have a 9 months of milestone in 2018 vis a vis last year. For the full year, we will have 7 months 7 months of milestonevisavis 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 Sabra Technology, it will not be the case because we started to validate further technology in our P and L, 1st Jan this year, and then we have 2 to 9 months, and we'll have on a full year basis, 12 months, and no dilution, I would say, of the effect of acquisition in the fourth quarter.
If you take all this comment, consider into consideration, we expect the impact of acquisitions on a full year basis of being 0, of all 10, on our group adjusted operating margin. I'm talking about price seeing in volume and, as you were saying, compensation that should produce leverage I would say 2 things. 1, very simple and then another comment that would will be more detailed. First, when I say that we have compensated in value raw material and components inflation. Thanks to pricing.
I'm talking about value. You know that, it is typically the model of lecron when inflation is accelerating is quite high in terms of raw material components. We compensated value, but not in margin, then you don't have the benefit or any leverage coming from that all the contrary. You have a dilution in gross margin as you increase your price is less than the inflation you receive as a percentage, than just to remind you the figure that I was mentioning, 1.6% for selling prices and bit more than 3.5% for budgeting prices and then you have a division margin. And normally, for you, 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, Benoit and myself already commented on that. I can be you want to be more specific, then what we say that twothree, I. E. 110 bps is coming from 2 non recurring terms. And one third, I see 50 bps is coming from a tariff and some other elements when we are ready to go initiatives.
To be more specific, and for each item, item number 1 is the impact of the one off and certain destocking in distribution in France. And you have in mind that in H1, of 2018. The trend of like for like growth in France was +2 percent. And then this sudden change in trend due to this one of the stocking, mostly located in September on top of that. Have moved the strength from plus 2 percent to minus 4.3 percent.
And then we have a 6 points of Dolphin sales trend. And let me now explain how this impact the Q3 group profitability. First, The topping side in France has been settled and as said, and mostly then concentrated on September. With that, no adaptation in the cost base, except what is purely valuable, cannot compensate the rest of the activity and not only because it them, but also because we are talking about nonrecurring items. So you have in mind that the level of domestic gross margin in France, it's very good and clearly above the group average.
And as a consequence of 2 elements, the contribution of France domestic gross margin to gross margin, as well as the coverage of group costs, have both significantly decreased in Q3 of 20 And the impact on group adjusted accounting margin is estimated at the minus 60 bps. This is for item 1. The item 2 is the impact of a basis for comparison. And, let's say, if you agree, the level of gross margin and minus SG and A because know that those auto IT items are moving from 1 quarter to the other and certainly the good level to measure the underlying performance in terms of and looking at 2017, full year was up 50 bps on 2016. Q3 alone was very good and was up 120 basis points on 2016.
And you have 50 for the full year, even less in H1 and 1 on 1 in Q3 that you have more or less a 50 bps of basis for comparison. In Q3 of 2017. The number 3rd item is the impact of the increase in the U. S. Tariff, in Q3 2018, and we had the impact of the start of the increase of the tariff and the we have estimated this impact at minus 30 bps on gross group at the Philadelphia margin.
But you know that
this
surprising what the inflation we receive. It takes time. You cannot do it overnight. You have to oversee what is going on in the market. You have potential to a competitive situation that it takes time.
This is the reason why this is the first step of tithing. Has impacted our margin in Q3. By the way, you were asking the question of Chinese yuan devaluation, no, we did not take that into account. And as said by Benoit, this could be a positive in the coming months that could lower the worst case scenario mentioned at the close 7% impact of COGS. Of course, if the Chinese yuan was to evaluate and to decrease it, I U.
S. Dollar, this impact would be of on COGS would be the world. And certainly, our pricing would be less strong because we want to remain competitive and just to be concerned with customers as a customer understand when we increase prices in relation, we efficiently received, that's when we take a benefit. That's for the 3rd item. And the last one is, representing 20 bps, we are talking about mainly SG And A, a commercial initiative, digitalization, the growth is very good.
And those initiatives are, and costs are supporting current and future growth and in the Q3 Q3 alone, the impact was around 20 bps. And this is this is for this long explanation. And as I have the microphone, I will maybe just add one thing on this operating margin analysis on Q3, which is quite important, in our workplace you know, is that before items I mentioned, I hope clear for you, can complete the analysis, looking at the geographies, mixing geographies and the form and items I mentioned. Then it's clear that in France, we have had a suite of the main one is a sudden destocking, marked and sudden destocking, and the third one are the basis comparison and investment in growth. And for the first, you have understood that we are talking about 60 bps.
And for the rest, we are talking 40 bps, the basis for comparison, in particular, SG And A was a 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 allocated in France. The second topic is tariff. Tariff is, of course, enough 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 18 at 47.4% when, it was 44% in Q4 or 44.9% in each one. Then to sum up, you have 4 items and 4 items are for 3 of them, located in France, for one of them, located in North And Central America, and for one of it, located in the rest of the world. That's it. It was a very long answer, but I think was useful for you, to have this, exploration. And just to come back, think you have clearly understood that in the uncertain one that the tariff impact on worst case scenario mentioned by, but what is the growth impact?
And in front of that, we intend them to accept this was impactful pricing, maybe devaluation, maybe blah blah blah. It's not in Q3, of course, but in Q3, it was the start of this, a nice increase and we were not able to compensate it, but starting in Q4, we intend to compensate this type impact.
Thank you.
You're welcome.
Thank you, sir. We have another question from Mr. Gayle DuBree from Deutsche Bank. Sir, please go ahead.
Yes, good morning all. Thank you very much for taking the questions. Actually two two 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.
Obviously, you do assemble the products locally in the U. S, but I mean, could you give us some idea 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 already started to change the supply chain organization and routes? Or is it something you will consider only in the course of 2019 basically only after the 25% duties are implemented.
Okay. Let me let me try to take the first question and I'm sorry we'll take the second one. So number 1, obviously, inventory decisions from our distributors are their decisions. Not ours. And they are taking their decisions based on their own strategy and the input they have So it's a bit 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 inputs they are giving us. Nor do they expect, to have another, a destocking of such magnitude in Q4 nor do they expect to have a strong bulleted or restocking in Q4? So that's the kind of impact I'm getting. It's purely their decision, but it's not like if they were expecting that ahead of us, we will have a strong slowing 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 fresh market has been really slow, which is a flat plus. That's what, flat plus, including some pricing, and that's what most of the customers are reporting, to us. That's most of the manufacturer are saying. That's what the wholesaler association is also saying.
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 it's not all feedback we're getting from our customers either, but it's a one off, a punctual phenomenon, purely to the inventory management of our customers. Now maybe turning to a second question, Well, for us, the reason why the French market hasn't been very supportive is, of course, the statistics on the residential new build are not very positive, but more importantly, it's a renovation piece, which hasn't been very good. And it was already the case last year, and that's what we've been consistently saying. During the year. And you know that the renovation and refurbishment represents the majority of our sales in France.
So there, of course, depending on your positioning, whether you are a residential, commercial, industrial, more innovation, more new, also analytics might have difference impact on yourself. As far as Bluegrass is concerned, this is a lackluster, French market. Is mostly coming from the fact that the renovation piece is slow and that we are not really helped anymore by the, by the recession you built.
Good morning, Antoine speaking. To be clear, it's not really a big information. And the portion of the industrial footprint of LeGrand as a role of specifically for the U. S. So what you have understood is that a significant portion of our sourcing is coming from China, not only China, by the way, also makes Mexico, Mexico and China are about 2 competitive countries for the U.
S. When I say for the U. S, not only for LeGrande, but the U. That the U. S.
Industrial or U. S. Businesses have seen a lot of their products in China. And Mexico. What we said at once a few quarters ago was that maybe half, around half of the cost of goods sold was sourced from external or broad countries that And the rest was by the fact you have the colleague, and this is very much figured, but 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 quickly at what was paid in.
And second, to identify if we have if we have or not an issue in terms of competitive advantage. Our feeling today is that our industrial footprint, when you look at it, on the category by category of products is quite similar to the competition. Then I'm sure you can compare the impact for LeGrande to other players in the electrical businesses. For example, large electrical players. What comes is not to know if we are exposed globally, but if we are exposed energy distribution, on varying devices, on the late fee activity because it's on each segment that you could have a competitive or not issue or not.
And sum up, we think today that, at the near half of it or something like that is a source from a broad country. Number 1, number 2, it's more or less finally at a industrial footprint of competitors we have in front of us in each segment category. 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 I said by Benoit, we have to make sure that things are going to last and this is number 1.
Number 2, to make the good choice between increasing prices and stay, for example, in China, because China is including tariffs remains competitive and not to talk about the point of Andreas that it could be also helped by 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, 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 2019, we are coming to the conclusion that this situation of tariffs tariff could last for a long time. Then, certainly, we can accelerate the bid to prepare or the future and find as we have done in the past to better assist to produce to be more competitive and so on.
But it's not something that will challenge or should challenge 2019. To take time before making these relocations because as said by Benoit, we intend to compensate the impact of tariff from 2019, or even from Q4
of twenty nineteen, in other words, you have short term actions, short term meaning that doesn't mean that you could do that overnight, but short term actions, which are implemented did or currently implementing, which are pricing, which are change of some suppliers, which are relocation of some purchases, negotiation with vendors, productivity and so forth and all that should impact our accounts as early as Q4 and should give us the ability fully reported 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 whole localization of manufacturing activities or all manufacturing activity which are under studies, but of course, which should be done, if the tariff situation is nothing. And if it makes sense in terms of quality, cost, service level and so on and so forth.
Thank you, sir. We have another question from Mr. Andre Kukin from Credit Suisse. Sir, please go ahead.
Good morning. Thanks so much for taking my questions. 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 2019?
So number 1, once again, it's gross impact. It's gross impact provided everything stable in terms of exchange rate and so on. And And of course, not taking into account any of the measures we have discussed now. And yes, I confirmed 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.
Very clear. Thank you. In terms of price increases for 2019, have you announced them already?
Well, you know, price, so two elements. Number 1, price increases is not only tariff in You have to have in mind that price increase is a mix of many things. So it's a mix of, of course, increasing tariff, managing the discount differently. Managing the end of the year rebate differently and so on and so forth. So it's not only tariff increase, but second and sir, yes, we have already started to announce and to implement some pricing increase in the U.
S.
Got it. Thank you. And just final one on this, the 30 bps impact in Q3 coming back to another question. Was that growth or was that, with the help from renminbi already? Because it has obviously been depreciating already.
Well, it was a growth and net because the variation was not so significant And what is clear is that why if we get rid of this Forex effect, why is it, why is it causing growth at net? Is that, as I said earlier, implementing pricing takes a a bit of time not to talk about renegotiation with a supply curve, productivity or even relocation that will happen in 2019. This is the reason why Q3 was a bit, a special, if I can say so, where our gross and net overall has the same Great.
Thank you. And then just on pricing versus raw materials or versus component inflation, in Q3, was that inflation 3.5or2.5? I thought it was 3.5, but then later on, you mentioned, it sounded like 2.5.
A bit more than 3.5.
Okay. Great. Thank you. 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 is there a carryover in October?
Well, obviously, I'll not comment, I'll not comment October. What I said a bit earlier is that we are not to have a further significant destocking in Q4, but the other way is not so true. So we are not anticipating. We have to have a significant restocking in Q4. But all that, again, having in mind that 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. So But having that in mind, we are not expecting neither further destocking false or significant restocking. Great.
Thank you. And now if I can just take a step back or 2 steps back from Solon, just looking slightly beyond 2018, I know you don't have as much visibility, and I'm not asking for guidance or detailed outlook. But just as you kind of assess the end market situation and what you're 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 what's installed for us in 2019 in your space?
Well, I commented the 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. No, 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 a discussion in February, I think.
And it's a bit earlier to discuss the 2019 trend. So we remain extremely motivated to continue to gain market share in our major markets.
Got it. Thanks so much for your time.
Thank you, sir. We have another question from Dennis Logan on behalf of Daniela Costa from Goldman Sachs. Sir, please go ahead.
Hi, it's Daniela here. Thank you for taking my questions. I wanted to to ask 2 things. One on sort of to better understand the visibility you have in various regions of these type of things like the destocking that have it 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 overall history.
Where are things? I sort of, we're at a depressed level of inventories already? Are there any is where we are a little bit more elevated than what is long run history. Because I guess, sort of, I 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 and A and evaluations for the targets you're looking at if you have seen given sort of the turmoil in the market in the last few weeks? I know you obviously mainly look at private businesses, the weather you have seen sort of sellers starting to have a bit more realistic expectations about valuations for their business and what that means for sort of your M and A pipeline? Thank you very much.
Hello, Danielle. Well, the first question is there cannot be one and only one answer because it really depends on the customers and on the countries. They are customers and countries that are extremely professional in terms of inventory management and as 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 partner, And there are some others where it is a lot more difficult to know either because they're not guaranteed the same way. The same professional way or because they don't want to share the information.
So the bottom line is that it's extremely difficult for us to have a visibility key on our customer strategy as far as their 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 So I know it's not a very satisfactory answer, but this is a reality of our business, which is made of a lot of different situation, a lot of different customers, a lot of different countries, of them having their strategy. And unfortunately, the investors strategy does not depend as what depends on us is, of course, what we are doing with to grow market share, so launching new products, training our customers, communicating our innovation and so on and so forth. As far as the 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, which is how they value their business. So, last year, I 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, C milestone that we bought 9 times 2017 EBITDA, which I think is visible price for quality competitors has might start. And same comment, but the other way today, it's not because some of the valuation of the market price went down, that the valuation suddenly went below 8 or 9 times or 10 times EBITDA. So Since most of the sellers are private owners, they do not really value their company is based on the market price, but they have in mind that their companies were XO XO Y. In other words, the acquisition, we've made the 4 acquisitions we made so far and discussions we currently have are based on a standard, the classical multiples, if I may say.
Thank you, madam. We have another question from Mr. Graham Phillips from Jefferies International. Sir, please go ahead.
Yes, good morning. A couple of questions. Could you give us a please, an update on Elliot? Launched 10 products you listed in the slide pack there. What sort of proportion of sales is now Elliot derived?
What sort of growth rate is Elliot derived? Products, generating? That'd be the first question.
Well, Brenna, we'll give update on the 12 months, because we usually don't communicate precisely on the agent sales the quarter by quarter basis. So we'll give all those precise data, in February when we'll release our full year numbers. What I can tell you is that then I hope that it was made clear in the press release. We remain extremely ambitious on Elliott. We are investing a lot on Elliott in terms of R&D, in terms of new product launches, commercial support, and so on.
Those are part of the so called cost initiatives that we commented a year. And you will continue see in the coming weeks and months. So a number of very interesting initiatives as far as Egot is concerned. Now as far as the numbers themselves are concerned, we'll give a detailed and precise update at the time of the release of our full year results.
Okay. Well, perhaps related to that then, we'll look forward to to seeing that next year. But you've mentioned a couple of times increased growth costs and again, just mentioned R and D there. The R and D expenses 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 is this in SG And A or is it in CapEx?
Where is this growth being charged and which regions will be seeing that as a more of a headwind in margin?
No, you're right. In terms of R&D expenses, but those are the products that are currently being were R and D a couple of quarters back. But, when we are talking about gross initiatives, it's more related to commercial expense and to a number of digital expenses more than R&D alone, and more than CapEx. You could see that because of the traditional phasing topic on CapEx or CapEx level, is not particularly high. So it's really more the trend in commercial expenses and a number of digital expenses, especially to support some of the launches I've mentioned.
Or in terms of region, it could be across the board, having in mind that a number of expenses are incurred in France or financed by the French P and L the benefit of the number of other regions. And that's always the same story. When you look at the French P and L, have in mind that the French P and L has some expenses that are pushing, that are made for, to support other agents.
Okay, thank you. I'm 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 costs, I think. So when we look at the 4th 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 3rd quarter last year?
Need to think, Ram, speaking, one is that I think you are referring to the shift that occurred, if I'm correct, Francois, end of 2016. And then it was a basis for comparison in 2017, but not a basis for comparison for 2018. That's first point. 2nd, 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 4 P and L of France for 2017.
Okay. All right. Thanks very much.
We have another question from Mr. Alistair Leslie from Societe Generale. Sir, please go ahead.
Yes, hi, good morning. So I had a few questions. Just, 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 that the price rises that were perhaps required to fully offset that 7% headwind on America's COGS. Is it does that seem basically 100% mitigation from pricing actions?
Well, Bruno, speaking, so the number that I gave were sort of mechanical effect, I said, if we had to, if it was worst case scenario, 7% negative impact on the Legrande North And Central America curves and to fully compensate at least in value So 7% impact would require to have a plus 3% increase, slightly more than 3% increase in price. All that are full year numbers. And what I've also said is that if you are in a single scenario where, for example, least 3 wouldn't be any more, subject to tariff, then this 7% to plus 7% increase in COGS. Should be plus 3 only. And then the plus 3% recyclable and 3% in price would have to be slightly less than +1.5 percent.
Those were to give you orders of magnitude. Now our intent is not to use only price as a leverage to compensate, price pricing will represent the majority of 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 further negotiation in purchases.
I mean, we are doing 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 impact in our Q4 accounts and should it last in the 2019 accounts?
Okay. Very clear. Yes, very clear. Thank you.
And just I suppose another quick follow-up, just on the growth initiatives and digitalization investment, the margin headwind, 20 I mean, could you just quickly clarify if you had a similar impact in previous quarters? Maybe just didn't call it out and whether we're kind of a run rate where the year on year impact starts to to kind of compound?
No, no, the point was a bit more loaded in Q3 of twenty eighteen. Okay. 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 in particular, due to the trends situation. No, Q3, it was particularly located in Q3.
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, absence a sort of strong pickup in renovation and it seems that the sort of flat outlook is really what the permits and starts are telling us is going to be. 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 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, etcetera, that would just give us a little bit of confidence that you can outperform next year? Thank you.
So it's Dan, but it's it's a 9 point series and the whole process of, of budgeting, planning, forecasting is currently being done. And we'll so I cannot really help you to forecast what 2019 will be. It's too early. We'll have this detailed discussion in February.
Okay. All right. Thank you.
Thank you, sir. We have another question from Mr. William Mackie from Kepler Cheuvreux. Sir, please go ahead.
Hello, good morning. Thank you for the question. I just like to clarify France demand situation, if I may, you've obviously declared down 4.3% in Q3 by destination. And you 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 4th quarter demand rates may be like as we go into the 4th quarter.
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 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 and L within France, please?
So I will answer the first question. I'll let Antoine answer the second and the third one. So what Antwerp 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 3rd quarter we estimate that, more or less, the 5 points impact of destocking over the third quarter in France, about 5 points, approximately. Now again, we are not expecting some sort of strong reversal of is destocking and we're not expecting over the fourth quarter, the same impact the other way.
Nora, we expecting to have another, strong destocking, but there's an order that 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 as a tough basis for comparison, but both the beer component of France and of Italy are of course embedded into the guidance we gave and into the plus, close to plus 4% we are targeting. The other one, maybe we'll take your two questions on restructuring and step up of expenses. Okay.
For the first one, we have a good morning. Last week during is you know, one tool, used by a country manager to adapt when things are turning bad. We have not been, I would say, worn 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 exist in manufacturing of capacity, manufacturing capacity also can't do that. But from supplier, then we are going to move from 1 supplier to the 1, then restructuring associated with this kind of move, is not so significant. If we have to adapt the, the SG and A because it's the plan in the U. S. And everywhere in the short term, of course, without our growth capacity.
This is something you can do through natural attrition, impact 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 US, but other countries, do I see a very big amount to be expected in Q4? No, acceleration, maybe a bit, but a very significant amount that would require to be announced today Absolutely not.
I'm not sure to understand your first question about the step up or expenses, but would you refresh it, please.
I beg if I may. It was a clarification. When I look at the other operating income or expense line within the French P and L as you declared by destination, it stepped up to minus 11.2 or minus 3.2% in Q2. And I was just, I know it's not a significant step up over the recorded 8.8% last year, but I was just wanting a clarification on where that was coming from.
Okay, okay. Sorry, because I thought you will mention sharing the step up in a high growth spending that I mentioned about the 20 bps, you are talking about all the advertising, okay. Then I will maybe first remind you we have that this is something and you know the story, sorry, for reminded it, but that vary a lot from 1 quarter to the other. In a given region, but this is something also to be looked at on a global basis. Then if if you look at it on a global basis, you will see that even a bit lower than last year.
And forefrontently, if you look at the cumulative effect at the end of the 9 months, there is not so much differences between 2018 or 20 17, even if we have had a bit more of those other IT items in France, then What you have to keep in mind is that there is no big issue that would represent, I know, EUR 10,000,000 that has been accounted for in France. It's a sum of a provision that you can have. For example, when you have a sales going down, your inventory could a bit higher. And then when you have a higher level of inventory, you have to make it equally depreciate it. And this is a kind of stuff that you have or some provision that you can have on litigation or stuff like that.
But the thing very significant to be mentioned EPSN.
If I make one quick follow-up, although I suspect it's a difficult answer, When you describe pricing up 1.6% in Q3 and input costs 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 and your businesses today, into 2019. So what sort of expectation might we build in with regard to your achieved pricing increases or inflation 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?
You are well expecting the fact that it's rather difficult question to answer, Liam, but 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 components inflation. The demand is still there. Although, some analysts have a expecting maybe some less inflation in the coming quarter due to less momentum in terms of global growth. The reality today is that shortage, our shortage is on the market in many, on many components, economics, specific expense is still there. And then it is creating that we have a double effect on the raw material compensation.
First, the demand, the global demand is still quite good. And looking at the local number, for example, with this 4.8 organic growth, and we have seen a lot of competitors or other players reporting very good organic growth for the first time. And it's a quite a good growth overall for the world and then big demand to suppliers plus this kind of shortage shortages on us specific components. It makes me thinking that in the short term, inflation should continue and then we should continue to be cautious when I say cautious, to be quite a look closely to pricing to make sure that we are going continue to cover this inflation in absolute value. And to sum up, I do not see any decline in terms of material and compliance inflation in the term, maybe it will cover for that.
I don't think it's too early to say. And so on the coverage, pricing should continue at the Thank
you very much.
You're welcome.
Thank you, sir. We have another question from Ji Young from Citi. Sir, please go ahead.
I have a quick couple of questions on the rest of Europe. First is on the UK. So you mentioned the UK revenue is slightly up for this quarter. And I think this follows quarter as well. So this is better than many peers what they are saying the 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, you look at 9 month like for like growth, this was much higher. So is there any regional or initiatives notable driving this beyond your expectations? And what can we expect for the year region?
Thank you.
Well, as far as the UK situation is concerned, it's I mean, I've been constantly reminding you the that it all depends on I mean, the performance in the country by country basis all depends on the footprint you have on the given entry. And In the UK, I don't see a company which has the same activities that we do have at the loss. A mix of activities. For example, we are not at all in lighting fixtures in the UK, but we are activity lighting controls, which is different. We are in what we call people care or assistive 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 will 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 after the slight year up, but at the same time, that we remain extremely careful, extremely cautious for next year.
For the quarters to come because at some point most people believe that the Brexit will have some impact. So our operations in the UK are ready to adapt should the market situation being much less important than it is today. So it's more a matter of reactivity and having plans so that either it's, for example, a hard Brexit scenario or teams can react. But it is true that so far, the performance has 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 a over performance in H1s and what was exceptional, and that was at 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 a 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. That's what it was a couple of months back.
So this is a good example of a situation, that could negatively impact Q4. And as a summary, potential good news, potential bad news in the rest of Europe as in other areas are, of course, once again, fully embedded into the top line guidance we gave at the beginning of the call.
Thank you, sir. We have another question from Andreas Rudi. Sir, please go ahead.
Yes, thanks for the time for the follow-up. Question. I just wanted to ask again on tariffs and inventories. On tariffs, you talked about the offsetting mesh 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 you'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 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 tariff triggering incremental buying from distributors to stock up?
Well, starting with your first question, our relocation plants are not specifically to relocate from China to the U. S. But it could be to and it is to relocate from China to a number of other places. It could be be, I mean, you know, that we have factories in about the 100 countries, in, in La Grange, including countries such as Mexico, for example, pool or Southeast Asia or a number of other places. So it's not specifically relocating to the U.
S, with vendors that would themselves face, for example, shortage issues or other inflation in cost. So, this is a plan and we have already priced in into our plan, those valuation activities. Now obviously, in some cases, as Antoine said, it will remind more interesting, to be in China with a 25% dive than to relocate to another country. Which case, we will, of course, stay in China, take the 25% tariff and increase in COGS and find other ways to compensate, including, of course, 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 US, going to Mexico and going to Vietnam to Indonesia and the number of other places. As far as the inventory is concerned, It's not that the number 1, the feedback we are getting is not that our had extra, a lot of extra inventory that they had to get rid of. But again, it's not it's it's difficult for me to comment or to analyze precisely because it's not my decision. It's my customer decision. The situation in the U S, it's not it's very specific compared to flaws.
France, number 1, most of our business is going to distribution. And number 1, it is number 2, it is true that the market is more concentrated than elsewhere. In the U. S, a lot of our I mean, even though electrical distribution is, of course, a preferred, a channel partner, we're going through a lot of different channels. Could be an equity distribution.
It could be that income distribution. It could be IT distribution. It could be the MRO. It could be direct to direct to intake letters. It could be, of course, online.
It could be many different channels. Number 1 and number 2, it's 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 diluted, if I may say, on our performance than it is in France. And I'm not aware of significant inventory buildup that that would have been made by a lot of our clients to prepare themselves for the types.
Thank you.
Thank you, sir. We have no further questions. I'll now return the floor to Mr. Cochar and Mr. Biren.
Well, thank you very much for your time and for your questions. And obviously, Francois And the team, I'll put it myself, of course, will be available for further questions in the hours to come if you have some, for that question. Thank you very much and hope to see you soon. Thank you. Thank you.
Bye.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.