Good morning, ladies and gentlemen, and welcome to today's Legrand 2018 Nine Months Results Conference Call. All participants are in a listen-only mode. Later, there will be a question-and-answer session. 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.
Thank you. Hello, everybody, Benoît Coquart speaking. Antoine Burel, François Pouget, and myself are happy to welcome you to the Legrand 2019 nine months results conference call. Let me first remind you that we have published today our press release, our financial statements, and a slideshow, to which we will refer. Those documents are obviously available on the Legrand website. Please note that this conference call is recorded and webcasted on our website. Let me start first with a few opening remarks, following which Antoine and I will comment into more details our 2018 nine months results and achievements. I will start on page four of the deck with five main takeaways of today's release. The first takeaway is that all financial KPIs are growing double digits in the first nine 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%. The second takeaway is that we have a healthy organic growth in sales of + 4.8% in nine months, including a + 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 - 4.3% in Q3 on a like-for-like basis. Excluding France, group organic growth in sales remained strong at + 5.3% in Q3 2018. The third takeaway is that the first nine 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 - 160 basis points in Q3 due to specific items. Some items are non-recurring, 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 increase in the 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 on the run. We have continued to actively launch new products with higher value news, in particular with digital and connected offerings. Acquisition-driven growth also continues to be active, with already four acquisitions announced since the beginning of the year in attractive businesses such as digital infrastructure, UPS, and electrical equipment for DIY activities.
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. After this brief introduction, let's start with an overview of sales on page six of the deck. We recorded, as I said, a total rise in sales of +11.3%. Legrand's first growth driver is contributing well, with organic growth reaching +4.8% in nine months, driven by healthy rises like-for-like in both new economies where sales were up +7.1%, and in mature countries where revenues were up +3.9%. Acquisition-driven growth, which is the group's second growth driver, contributed +11.8% to sales growth in the first nine months of 2018.
Based on acquisitions announced and their likely consolidation dates, acquisition-driven growth should contribute to around +7.5% for the full year. Lastly, Forex impact was unfavorable at -5.1% in the first nine months of 2018. 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 -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 seven and eight of the slideshow. In France, organic growth in sales was almost flat in the first nine months of the year.
The 2% growth in sales recorded in H1 was followed by a -4.3% decline in Q3 alone. Obviously, we were not expecting such a poor quarter in France. This drop in sales was due to a marked and well-known destocking-based distribution. It is indeed worth noticing that downstream sales of Legrand products by the professional distributors, what we call the sellout, 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 an about 5 points difference between our sell-in and our sellout in Q3 due to destocking and distribution. This being said, over the first nine months of the year, and in a context of a 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. 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 bulkhead lights. Moving to Italy. In Italy, like-for-like sales growth was +5.7% nine 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 +10.4% like-for-like, compared with the first nine 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. Finally, in the U.K., sales grew slightly. Moving now to North and Central America, where sales were up +4.1% on an organic basis. It should be noted that more specifically, sales in the U.S. were up +4.9% in nine months 2018 and +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 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 +4.7% on a like-for-like basis.
We reported strong rise in sales in India, China, and South Korea, also in some African countries, including Algeria, Egypt, and Cote d'Ivoire, Ivory Coast, as well as in Australia and Malaysia. Sales were up very slightly in Brazil, but retreated in Colombia and in Chile, as well as in Saudi Arabia. Overall, our like-for-like growth in sales was healthy in the first nine months of the year, and as you could see, fairly consistent among each main geographical zones since Europe, including France and Italy, was up +5.5%, North and Central America was up +4.1%, and rest of the world was up +4.7%. Let me now pass the mic to Antoine for an overview of our financial performance.
Thank you, Benoît. Good morning or good afternoon to all of you. Let's start with profitability on page nine, where you see that the nine 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, nine months 2018 adjusted operating margin came to 20.5%, i.e., 10 basis points above the same period of last year. It is interesting to note that the good performance of acquisitions was due to Milestone and Server Technology, and those 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 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 the Q3 2018 adjusted operating margin before acquisition dropped 1.6 points. About 2/3 of this drop, i.e., 1.1 point, come from two non-recurring items. The first non-recurring item is a marked and sudden de-stocking in distribution in France. 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 costs, including SG&A, have both significantly decreased in Q3 of 2018. The impact of this first non-recurring item on group-adjusted operating margin is about -60 basis points. 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 -50 basis points. That's it for the two non-recurring items.
We are left with about 1/3 of the drop of 160 basis points to explain, i.e., half a point. It is due to other items, including, number one, the increase of the U.S. tariff with an impact of about - 30 basis points from group-adjusted operating margin. Number two, the cost of some growth initiatives with an impact of about - 20 basis points 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 tariffs are concerned, it mainly includes pricing, but also sourcing relocation, cost adaptation, productivity, and negotiations with suppliers. 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% above last year, i.e., EUR 100 million above the same period of 2017. This strong rise results from many positives, including a 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 have 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 nine months of 2018, it stood at close to 18% of sales. And although standing at a 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 nine months of the year, and I give now the mic back to Benoît. Thank you.
Thank you, Antoine. Let's move now to the second part of this presentation, i.e., our innovation and growth initiatives. I will quickly cover our two 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-driven growth on page 20.
As you can see, we have already announced four acquisitions that strengthen Legrand's position in upbeat segments of its accessible market, such as UPS, digital infrastructures for data centers, and equipment for DIY activities. Those four 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 nine 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 +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.
Ladies and gentlemen, if you wish to ask a question, you may press 01 on your telephone keypad. We have one first question from Madame Lucie Carrier from Morgan Stanley. Madame, 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 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. As we look at 2019, based on the announcement that have been already made, which type of impact are you expecting then from U.S. tariff? That's question number one.
Hello, Lucie. Benoît speaking. I will take this question. 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. You know that many things can happen. I'll not list them all, China could take measures. There could be a favorable impact coming from the exchange rate. There could be a trade agreement between the U.S. and China. Many things can happen in the months to come. Now, let's look at numbers. 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 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 third-party vendors in China. 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 three, which was the last list enacted, on which the tariff was first 10% and is supposed to be 25% starting January.
If list three was no longer subject to tariff, then the total impact on the cost of goods sold of Legrand, North and Central America, instead of being 7%, would be approximately 3%. Of course, the scenario could vary 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 costs by pricing. Mechanically, a pricing of slightly more than +3% in Legrand, North and 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 +1.5% would be required in the second scenario. Here again, on a yearly basis. Those are, let's say, the mechanical impact of tariff on a full year basis.
Obviously, we are working actively with a target to fully mitigate in Legrand, North and Central America accounts the impact of the tariff, including the worst-case scenario. For that, we have a mix of pricing measures, of course, which represent a significant part of the action plan, sourcing and manufacturing relocation, negotiation with suppliers, productivity, and other measures. Several of those measures as 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. This is the total story as we see it, a developing story.
Those are the mechanical impacts in two 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. Third, we have an action plan which is clearly drafted and aimed at fully mitigating the impact of those tariffs in the LNCA account. Last word, of course, Legrand is exposed as our competitors. 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. Hope I have been clear, Lucie.
Very helpful. Thank you for the color. My second question was around Italy. Of course, it was still very strong in the quarter. 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. 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. 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 two years ago.
Well, our performance in Italy has been strong over nine months, was again strong in Q3. It was a bit boosted, as we said, in our release in H1 over the second quarter by the launch of an important range of product, which is called Living Now in Italy. Over the nine months, the performance has been good. Even though our Italian colleagues are monitoring carefully the situation, they are not overly pessimistic about the quarters to come. With the usual limit 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 relevant of what the market is doing. Clearly, the market is not growing 5.7%, it's growing much less than that.
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. Whatever is the underlying market, we expect at least this overperformance to continue in the quarters to come. So far, Q3 was a +4%, which remains a very healthy level of sales. Don't forget that you were mentioning the cycle, total level of sales remains something like close to 30% below peak time in Italy.
Okay. Thank you.
Yeah. Again, Lucie, keep in mind that we have very little visibility in Italy as elsewhere.
Okay. Just last question around the pricing. I was just curious to know how much you were able to increase prices on the quarter versus the third quarter last year. If you could give us a little bit of granularity in terms of pricing trends by region, please.
Good morning, Lucie, Antoine speaking. To be quite specific on that, in the third quarter alone, our pricing effect was 1.6%. You did not ask the question. I can give you also the effect of purchasing prices excluding the tariff effect. It was around 3.5%. Top line 1.6%, raw material and components 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.
By region? Is the 1.6% homogeneous across the group or?
Yeah. This is across the group. This is the global performance. We can have a variation, and we have variation from one region to another one, depending on this inflation and what we're referring to, depending on the Forex, if we talk about countries that are importing products, for example, from the Eurozone and that are in a country with currencies that are depreciating. You can imagine, for example, that in Turkey today, we are having a level of pricing above this average of the group. You also know that we do not disclose this pricing effect by country.
All right.
Total.
Thank you very much.
Thank you.
Thank you, madam. We have another question from Mr. Andreas Willi from J.P. Morgan. Sir, please go ahead.
Yeah. Good morning. Thanks for your time. First question I have is around margins. If you look at the Q3, you had a big benefit from the acquisitions, which had a very strong performance in Q3. You had 70 basis points accretion from that, but you had 20 basis points dilution in the first half of the year. I'd like to better understand why particularly, I guess, Milestone was so much better in Q3 in terms of the benefit it gave you than earlier in the year, and what should we expect for Q4 for M&A contribution to margins year-on-year? Because it's quite complicated with you having consolidated Milestone for five months in last year's Q4, and therefore get a negative consolidation effect this year. Second question around the underlying margins, ex M&A, ex tariffs, ex e-stock, and so on, is flattish despite positive organic growth.
You said you had compensated raw material with price, why is there no underlying operating leverage? 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 U.S. dollar? Thank you.
Okay. Antoine speaking. Good morning, Andreas. First, concerning the accretive effect of acquisitions. You have two 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 profitability is very good. Second, we have also the ramp-up of Server Technology doing very well, both in terms of sales, but more than that, in terms of profitability. If you add to that other 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 dilution or accretion. You know that the stocking model of Legrand is something on which we pay a lot of attention. It is working very well in the U.S.
You have, after that, this stocking effect is producing good numbers in terms of profitability. You have also a form of 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 nine months of Milestone in 2018 vis-à-vis last year. For the full year, we will have seven months of Milestone vis-à-vis last year, because you have clearly in mind that we consolidated Milestone last year for five months in the last quarter. Of course, the positive impact of Milestone on the profitability 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 first of January this year. We have today nine months, and we will have on a full-year basis 12 months, 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 acquisitions on a full-year basis of being zero, or around zero, on our group adjusted operating margin. Talking about pricing and volume, as you were saying, compensation that should produce leverage, I would say two things. One very simple, another comment that 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 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. You don't have the benefit or any leverage coming from that. On the contrary, you have a dilution in gross margin as you increase your prices less than the inflation you receive as a percentage. Just to remind you, the figure that I was mentioning, 1.6% for selling prices and a bit more than 3.5% for purchasing prices. You have a dilution margin. 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 than what we say, that 2/3, i.e., 110 basis points, is coming from two non-recurring items, and 1/3, i.e., 50 basis points, is coming from tariff and some other elements mainly related to growth initiatives. To be more specific and for each item. Item number one is the impact of the one-off and sudden destocking in distribution in France. You have in mind that in H1 of 2018, the trend of like-for-like growth in France was +2%. This sudden change in trend due to this one-off destocking, mostly located in September, on top of that, have moved this trend from +2% to -4.3%. We have 6 points of drop in sales trend, and let me now explain how this impacts 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 variable, cannot compensate the rest of the activity, and not only because it was sudden, but also because we are talking about non-recurring item. Second, you have in mind that the level of domestic growth margin in France is very good and clearly above the group average. As a consequence of those two elements, the contribution of France domestic growth margin to group growth margin, as well as the coverage of group cost, have both significantly decreased in Q3 of 2018. The impact on group adjusted operating margin is estimated at the -60 basis points. This is for item one. The item two is the impact of the basis for comparison.
Let's stay, if you agree, at the level of gross margin, minus SG&A, because you know that those other items are moving from one quarter to the other, and certainly is a good level to measure the underlying performance in terms of margin. Looking at 2017, full year was up 50 basis points on 2016. Q3 alone was very good and was up 100 basis points on 2016. You have 50 basis points for the full year, even less in H1 and 101 basis points in Q3, you have more or less 50 basis points of basis for comparison in Q3 of 2017. The number third item is the impact of the increase in the U.S. tariff. In Q3 2018, we had the impact of the start of the increase of the tariff, and we had estimated this impact at -30 basis points on group adjusted operating margin.
You know that this ability of Legrand to offset, notably through pricing 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, of course, to pay attention to a competitive situation, 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. 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 vis-à-vis the U.S. dollar, this impact 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, not when we take a benefit. That is for the third item. The last one is representing 20 basis points. We are talking about mainly SG&A, commercial initiatives, digitalization. The growth is very good, and those initiatives and costs are supporting current and future growth. In Q3 alone, the impact was around 20 basis points. This is it for this long explanation.
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 earning release, is that the four items I mentioned, I hope clear for you. We can complete the analysis looking at the geographies, mixing geographies and the four main items I mentioned. It is clear that in France we have had three topics. The main one is sudden destocking, marked and sudden destocking, and the second and third one are the basis for comparison and investment in growth. For the first, you have understood that we are talking about 60 basis points. For the rest we are talking about 40 basis points. The basis for comparison, in particular, SG&A was very favorable in Q3 of 2017, then challenging for Q3 2018.
Again, mixing items and geography, the big portion of all the items I mentioned, excluding tariff, are located in France. The second topic is tariff. Tariff is, of course, in North and Central America, and the third is also the basis for comparison on gross margin in the rest of the world. If you look at 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. To sum up, you have four items. Those four items are, for three 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 is it. It was a very long answer, but I think it was useful for you to have this explanation.
Just to come back, I think you have clearly understood that in the answer of Benoît, that the tariff impact of the worst case scenario mentioned by Benoît is a growth impact. In front of that, we intend then to offset this growth impact through pricing, maybe devaluation, maybe blah, blah. Not in Q3, of course, because Q3, it was the start of this tariff increase, and we are not able to compensate it. Starting in Q4, we intend to compensate this tariff impact.
Thank you.
Welcome.
Thank you, sir. We have another question from Mr. Gaël de-Bray from Deutsche Bank. Sir, please go ahead.
Yes. Good morning, all. Thank you very much for taking the questions. Actually 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 could you give us some idea on the share of components and semi-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? 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?
Let me try to take the first question and Antoine will take the second one. Number one, obviously, inventory decisions from our distributors are their decisions, not ours. They are taking their decisions based on their own strategy and the input they have. 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 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. That's the kind of feedback I'm getting.
It's purely their decision, it's not like if they were expecting that ahead of us, we would have a strong slowing down the French market. It is true that, call it the way you want, call it lackluster, call it moderately growing, or call it something else, since the beginning of the year, the French market has been extremely slow, which is a flat plus. Flat plus including some pricing. That's what most of the customers are reporting to us. That's most of the manufacturers are saying. That's what the wholesaler association is also saying. The French market hasn't been very supportive so far. We've been clearly explaining that since the beginning of the year. Once again, obviously, the Q3 drop in sales was unexpected, for us, it's not the start of a trend, in other words.
This is not all the feedback we are getting from our customers either. It's a one-off punctual phenomenon, purely linked to the inventory management of our customers. Maybe turning to your second question. 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, more importantly, it's a renovation piece which hasn't been very good. This was already the case last year, that's what we've been consistently saying since the beginning of the year. You know that renovation refurbishment represents the majority of our sales in France. Of course, depending on your positioning, whether you are a 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 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 residential new build.
Good morning, Gaël. Antoine speaking. To be clear, it's not really a public information, the portion of the industrial footprint of Legrand as a whole or 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, also Mexico. Mexico and China are two competitive countries for the U.S. When I say for the U.S., not only for Legrand, you know that the U.S. industrial or U.S. businesses are sourcing a lot of their product in China and Mexico. What we said at one point a few quarters ago was that maybe around half of the cost of goods sold was sourced from external or abroad countries, the rest was manufactured locally. This is a rough figure, 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. Second, to identify 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 a category by category of products, is quite similar to the competition. 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, if we are exposed on the energy distribution, on wiring devices, on lighting activity, because it's from each segment that you could have a competitive issue or not. To sum up, we think today that certainly around half of it or something like that is sourced from abroad 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 segment category. Your following question was about relocation of sourcing. It takes time. Not so much, it takes time, it should take time, as said by Benoît, we have to make sure that things are going to last, that is number one. Number two, to make the good choice between increasing prices and stay, for example, in 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. We have to be clear on that. Pricing being the bigger piece, finally, relocation of sourcing will come, 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. If over the course of 2019, we are coming to the conclusion that this situation of tariff could last for a long time, 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. It's not something that will challenge or should challenge 2019 to take time before making these relocations, as said by Benoît, we intend to compensate the impact of tariff from 2019 onwards or even from Q4 of 2018 onwards. In other words, you have short-term actions.
Short-term 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. All that should impact our accounts as early as Q4 and should give us the ability to fully compensate impact of the tariff in 2019 should the tariff last. On top of that, of course, we have more structural measures, which are potential relocation of manufacturing activities or Legrand owned manufacturing activities, which are under studies, 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.
Okay, that's great. Thanks very much.
Thank you, sir. We have another question from Mr. Andre Kukhnin from Credit Suisse. Sir, please go ahead.
Yes, good morning. Thanks very 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 + 7% on COGS, is that at the 25% for list three from January 2019?
Number one, once again, it's gross impact. It's gross impact, provided 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.
Sure.
Yes, I confirm that it is assuming the list three is moving from 10% of tariff to 25% in January 2019. 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, two 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. It's a mix of course, increasing tariff, managing the discount differently, managing the end of the year rebate differently, and so on and so forth. It's not only tariff increase. Second answer, yes, we have already started to announce and to implement some pricing increase in the U.S.
Got it. Thank you. Just final one on this, the 30 basis points 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.
Well, it was a gross and net because the variation was not so significant.
Right.
What is clear is that why, if we get rid of this forex effect, why is it very gross and net? Is that, as said earlier, implementing pricing takes a bit of time not to talk about a renegotiation with a supplier of productivity or even relocation that will happen in 2019. This is the reason why Q3 was a bit special, if I can say so, where gross and net are more or less the same figure.
Great. Thank you. Then just on pricing versus raw materials or versus component inflation in Q3, was that inflation 3.5% or 2.5%? I thought it was 3.5%, but then later on you mentioned what sounded like 2.5%.
A bit more than 3.5%.
Okay, great. Thank you. 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?
Well, obviously I'll not comment October. What I said a bit earlier is that we are not anticipating to have a further significant destocking in Q4. The other way is also true. We are not anticipating we have to have a significant restocking in Q4. 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. Having that in mind, we are not expecting neither further destocking in France nor significant restocking.
Great. Thank you. If I can just take a step back or two steps back from [guess], just looking slightly beyond 2018, I know you don't have as much visibility, I'm not asking for guidance or detailed outlook. 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's in store for us in 2019 in your space?
Well, as I commented earlier, as you could see in our press release, we keep investing in growth, on new product acquisition and so on. We are extremely ambitious in terms of market share. Now, as far as the markets themselves are concerned, we are in the middle of our budget process. We are not yet fully consolidated. Of course, the numbers, we will have the discussion in February, I think. It's a bit earlier to discuss the 2019 trend. We remain extremely motivated to continue to gain market share in our major geographies.
Got it. Thanks so much for your time.
Thank you, sir. We have another question from Denise Egan on behalf of Daniela Costa from Goldman Sachs. Sir, please go ahead.
Hi, it's Daniela here. Thank you for taking my question. I wanted to ask two things. One on to better understand the visibility 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 had over long history, where are things? Are we 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? I guess, and 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.
Second question I just wanted to ask you about the environment in terms of M&A and evaluations for the targets you're looking at. If you have seen, given the turmoil in the markets in the last few weeks, I know you obviously mainly look at private businesses, but whether you have seen sellers starting to have a bit more realistic expectations about valuations for their business and what that mean for your M&A pipeline. Thank you very much.
The first question, there cannot be one and only one answer because it really depends on the customers and on the countries. There are customers in 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. Obviously, they don't always share that with us because we are a supplier and partner. There are some others 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 want to share the information. The bottom line is that it's extremely difficult for us to have visibility on our customer strategy as far as their inventory level is concerned.
Typically, what happened in Q3 in France was not expected, and it may happen one way or the other in a number of countries. I know it's not a very satisfactory answer, this is a 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. Unfortunately, inventory strategy does not depend on us. What depends on us is, of course, what we are doing with our customers to grow our market share. Launching new products, training our customers, communicating around innovation, and so on and so forth.
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 deals at reasonable prices. See Milestone that we bought nine times 2017 EBITDA, which I think is a reasonable price for a quality company such as Milestone. 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 eight or 9x or 10x EBITDA.
Since most of the sellers are private owners, they do not really value their companies based on the market price, but they have in mind that their company is worth X or Y. In other words, the four acquisitions we've made so far and the discussions we currently have are based on standard classical multiples, if I may say.
Thank you, Madame. 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 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'd be the first question.
Well, Graham, we'll give you the update on the 12 months because we usually don't communicate precisely on the Eliot sales on the quarter by quarter basis. We'll give all the precise data in February when we'll 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 initiative that we commented earlier. You will continue to see in the coming weeks and months a number of very interesting initiatives as far as Eliot is concerned. 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.
Well, perhaps related to that then, we look forward to seeing that next year. You mentioned a couple of times increased growth costs, and you, again, just mentioned R&D there. The 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. 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 are we'll be seeing that as more of a headwind in the margin?
You're right in terms of R&D expenses, even though the products that are currently being launched were R&D a couple of quarters back. When we are talking about 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. 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. In terms of region, it could be all across the board, having in mind that a number of expenses are incurred in France or financed by the French P&L for the benefit of a number of other regions. 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 made to support other regions.
Okay, thank you. We're mindful of that. Also, I can remember there was 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. 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? Was that now pretty much in the comparison because there was a step down between the fourth quarter and the third quarter last year?
Maybe two 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 a 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. Excluding this topic, no, there is no specific items in the Q4 P&L of France for 2017.
Okay. All right, thanks very much.
Thank you.
Thank you, sir. Ladies and gentlemen, I would like to remind you that if you wish to ask a question, you may press zero one on your telephone keypad. We have another question from Mr. Alasdair Leslie from Société Générale. Sir, please go ahead.
Yeah, hi. Good morning, sir. I had a few questions. Sorry, I missed the start of the call. Did you give an estimated split between the pricing initiatives and finding alternative suppliers to offset the tariff increases? 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 Americas COGS. Does that seem basically 100% mitigation from pricing actions?
Benoît speaking. The numbers I gave were sort of mechanical in effect. I said if the worst-case scenario, 7% negative impact on the Legrand, North and Central America COGS, to fully compensate, at least in value, those 7% impact would require to have a +3% increase, slightly more than 3% increase in price. All that are full year numbers. What I've also said is that if you are in a similar scenario where, for example, list three wouldn't be any more subject to tariff, then this +7% increase in COGS should be +3% only. The slightly more than 3% in price would have to be slightly less than +1.5%. Those were to give you orders of magnitude. Our intent is not to use only price as a leverage to compensate. Pricing will represent the majority of the mitigation actions.
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. We are doing a number of productivity measures and productivity actions and so on and so forth. All that with the target to fully mitigate impact in our Q4 accounts and should it last, in the 2019 accounts.
Okay. Very clear. Yeah, very clear. Thank you. Just I suppose another quick follow-up, just on the growth initiatives and digitalization investment, the margin headwind 20 basis points. 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 at a run rate where the year-on-year impact starts to kind of compound?
No, the point was a bit more located in Q3 of 2018.
Okay.
First, with a bit more spending, second, the fact that the trend in top line, of course, was less strong than in H1, but in particular, due to the France situation. Q3, it was particularly located in Q3.
Got it. Just a sort of final question, if I may. 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, 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? 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. Is there anything just in terms of new product pipeline launches, et cetera, that would just give us a little bit of confidence that you can outperform next year? Thank you.
Sorry, Alasdair, it's a nine-month release and the whole process of budgeting, planning, forecasting is currently being done. I cannot really help you to forecast what 2019 will be. It's too early. We'll have this detailed discussion in February, I think.
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'd 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 de-stocking came in September. You don't expect a significant change in restocking or de-stocking. Can you just give us an idea of what the 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? Second question comes to the overall restructuring costs for the year. 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?
I'm sorry if I missed it in the release somewhere, 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?
I will answer the first question. I'll let Antoine answer the second and the third one. What Antoine said was that there was a strong drop in sales in September, but the way we evaluate stocking and de-stocking is on a quarterly basis. We really look at the quarter itself, and the third quarter, we estimate that they're more or less 5 points impact of de-stocking over the third quarter in France, about 5 points approximately. Again, we are not expecting some sort of strong reversal of this de-stocking. We're not expecting over the fourth quarter the same impact the other way. Nor are we expecting to have another strong de-stocking. The other magnitude you have to keep in mind is that over the third quarter, it's about a 5 points de-stocking impact.
What will, of course, play in Q4 is that as in Italy, France has a tough basis for comparison, but both the basis comparison of France and of Italy are, of course, embedded into the guidance we gave and into the close to +4% we are targeting. Antoine, maybe you will take your two questions on restructuring and step-up expenses.
For the first one, William, good morning. Restructuring is one tool used by country managers to adapt when things are turning bad. We have not been, I would say, warned about a 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 suppliers. We are going to move from one supplier to another one, restructuring associated with this kind of move is not so significant. If we have to adapt a bit the SG&A, because this is 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, you don't have to do so much. 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 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 third question about the step-up of expenses. Could you rephrase it, please?
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 declare by destination, it's stepped up to EUR -11.2 against, what, EUR -3.2 in Q2. I know it's not a significant step-up over the recorded EUR 8.8 last year, but I was just wanting a clarification on where that was coming from.
Okay. Sorry, because I thought you were mentioning the step-up.
I-
You are talking about other operating items. I will maybe first remind you, William Mackie, 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. This is something also to be looked at on a global basis. If you look at it on a global basis, you will see that it's even a bit lower than last year. For France only, if you look at the cumulative effect at the end of the nine months, there is not so much differences between 2018 or 2017, even if we have had a bit more of those other IT items in France.
What you have to keep in mind is that there is no big issue that would represent, I don't know, EUR 10 million that has been accounted for in France. It's a sum of a provision that you can have. For example, when you have sales going down, your inventory could be a bit higher, and then when you have a higher level of inventory, you have to mechanically depreciate it. This is 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.
Thank you very much. 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%, 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? 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?
You were well expecting the fact that it was a difficult question to answer, 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 and components 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. The reality today is that shortages on the market on many components, electronics, specific components, is still there. It is creating, we have a double effect on the raw material and component inflation. First, the demand, the global demand is still quite good.
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 nine months, it's quite a good growth overall for the world. Big demand to suppliers plus this kind of shortages on a specific component. It makes me thinking that in the short term, inflation should continue, we should continue to be cautious. When I say cautious, to look closely to pricing to make sure that we are going to continue to cover this inflation in absolute value. To sum up, I do not see any decline in terms of material and components inflation in the short term. Maybe it will come after that, I don't know. It's too early to say. Second, the coverage by pricing should continue at Legrand.
Thank you very much.
You're welcome, William.
Thank you, sir. We have another question from [guess] from Citi. Sir, please go ahead.
Yes. Hi, [guess] from Citi. Thanks for taking my questions. I have a quick couple questions on the rest of the year. First is on the U.K. You mentioned the U.K. revenue is slightly up for this quarter, and I think this follows last quarter as well. This is better than many peers are saying with Brexit concerns. Can you give us some insight on why this is? On a related note, last quarter you mentioned growth rate of rest of Europe should be running more on 5%-6%, but clearly if you look at nine months, the like-for-like growth, this was much higher. Is there any regional or initiatives notable driving this beyond your expectations, and what can we expect for the year for this region? Thank you.
As far as the U.K. situation is concerned, I've been constantly reminding you that it all depends on the performance on a country-by-country basis, all depends on the footprint you have on a given country. In the U.K., I don't see a company which has the same activities that we do have at Legrand. It'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 Legrand Care or assisted living. We're in cable management, a bit of wiring devices. It's a mix of activities which is definitely not comparable to any other companies, which will have a different footprint. It's always difficult in our trade to compare an animal with another one. This is my first answer.
This being said, it is true that our sales 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. our Operations in the U.K. are ready to adapt should the market situation being much less supportive than it is today. 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. It is true that so far, the performance has been pretty good, with up in H1, up in Q3, and up in nine 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 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. Everybody knows that the market situation has become a lot tougher in Turkey than what it was a couple of months back. This is a good example of a situation that could negatively impact Q4. 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.
Got it. Thank you.
Thank you, sir. We have another question from Andreas Willi. Sir, please go ahead.
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 measures you do, which I assume also includes going to 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 are already operating at high capacity? Most other companies will probably want to do the same and switch from some Chinese to non-Chinese suppliers. They're probably going to just increase their prices, and at the end of the day, that you don't really get a relief. 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?
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?
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, and it is to relocate from China to a number of other places. 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. It's not specifically relocating to the U.S. with vendors that would themselves face, for example, shortage issues or other inflation in cost. This is a plan, and we have already priced into our plan those relocation activities. Now, obviously, in some cases, as Antoine said, it will remain 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 costs, and find other ways to compensate, including, of course, the tariff. There'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, and going to Vietnam, to Indonesia, to a number of other places. As far as the inventory is concerned, number one, the feedback we are getting is not that our distributors had a lot of extra inventory that they had to get rid of. Again, 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 very specific compared to France. France. Number one, most of our business is going to distribution.
Number two, it is true that the market is more concentrated than elsewhere. In the U.S., 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 Datacom 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. Number two, those channels are a lot more fragmented than they are in France. Of course, you could always have inventory buildup, destocking, and so on. 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.
I am not aware of a significant inventory buildup that would have been made by a lot of our clients to prepare themselves for the tariffs.
Thank you.
Thank you, sir. We have no further question. I now return the floor to Mr. Coquart and Mr. Burel.
Well, thank you very much for your time and for your questions. 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 hope to see you soon. Thank you.
Thank you. Bye.
Bye-bye.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.