Rexel SA

PAR:RXL

Earnings Call Analysis

Rexel's Solid Performance Amid Challenges and Future Outlook

Rexel's first half of 2024 saw sales reach €9.6 billion, a 1.8% increase in Q2, driven by acquisitions like Talley in the US and WESCO in the Netherlands. The adjusted EBITA margin was a robust 6%, despite Europe's challenging market conditions. Free cash flow hit a record €335 million with a 53% conversion rate. However, net debt rose to €2.7 billion. The company confirmed its 2024 guidance, expecting stable to slightly positive same-day sales growth and an adjusted EBITDA margin of 6.3-6.6% by year-end. North America's resilience contrasts with Europe's struggles, yet digital sales and strategic M&A bolster future prospects.

Stable Performance Amidst Challenges

In the first half of 2024, the company navigated through challenging market conditions, particularly in Europe. Despite this, they managed to deliver a solid performance. Reported sales stood at EUR 9.6 billion, with a notable improvement in Q2, which saw a 1.8% increase compared to Q1’s decline of 4.5%. This uptick was largely driven by acquisitions, notably Talley in the U.S. and WESCO in the Netherlands, which enhanced their exposure to the datacom and heat pump markets.

Geographic Sales Trends

Sales trends varied by geography. North America displayed resilience with slightly positive volumes in both the U.S. and Canada. This was supported by a healthy backlog particularly in data centers and infrastructure sectors. Conversely, Europe faced more significant challenges, continuing trends from Q1. Here, same-day sales declined, impacted by a high exposure to the deflationary solar activity, although there were active operational expense (OpEx) management efforts to mitigate the effects.

Profit Margins and Free Cash Flow

The company’s adjusted EBITA margin was a solid 6% for the first half, bolstered by productivity gains and cost-saving initiatives. This figure represents a slight decline from 6.4% in H2 2023. Remarkably, the free cash flow before interest and tax reached a historical record of EUR 335 million, corresponding to a 53% conversion rate—well above the norm for the same period in previous years.

Guidance and Future Outlook

Looking ahead, the company maintains a cautious outlook, foreseeing continued softness in Europe due to economic and political uncertainties, while North America is expected to remain resilient. The full-year guidance for 2024 has been reaffirmed, with expectations to be at the lower end of the projected ranges. Specifically, same-day sales growth is anticipated to be stable to slightly positive, and the adjusted EBITDA margin is projected to be between 6.3% and 6.6%.

Operational Efficiency and Self-Help Initiatives

The firm has ongoing self-help initiatives focusing on productivity and cost reduction. These actions are expected to ramp up in the second half of the year, helping to achieve the target profitability margins. The company has reduced its workforce by 400 people since June 2023, focusing mainly on temporary and interim positions to streamline operations.

Strong Financial Position

The company's financial health remains robust, with an indebtedness ratio of 1.9x even after significant acquisitions and shareholder returns. Liquidity stands strong at around EUR 1.1 billion with no short-term refinancing needs. They also executed a successful private placement raising EUR 200 million, further indicating strong investor confidence.

Europe and China Market Dynamics

The European market continues to struggle with a combination of negative selling price trends and lower volumes, though some improvements are noted in the Nordics and DACH regions. Meanwhile, China saw same-day sales up by 8.9% in Q2, driven by favorable volume trends, although the market remains tough with persistent pricing pressures.

Challenges and Adjustments

The company faces significant challenges from deflationary pressures in specific product categories like solar panels and industrial automation in China. However, the impact is being managed through strategic cost reductions and operational adjustments. For instance, Europe’s adjusted EBITDA margin was down 197 basis points due to sales declines, but North America showed more resilience with only a 79 basis point drop in adjusted EBITDA margin.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. This is the conference operator. Welcome, and thank you for joining the Rexel's second quarter sales and H1 2024 Results Presentation. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Guillaume Texier, Group CEO. Please go ahead, sir.

[Guillaume Jean Texier, executive]

Thank you. Good morning to everyone, and thank you for joining us today for our second quarter sales and first half results conference. As usual, I'm here today with Laurent Delabarre, our CFO. I will focus on a few highlights of our performance. Laurent will give you greater granularity on our numbers, and I'll conclude with the confirmation of our outlook for 2024 and a few considerations on the follow-up of the strategic road map we presented at our recent Capital Markets Day.

So in the first half of 2024, we evolved in challenging market conditions, especially in Europe, and I will come back to that. In this environment, we delivered what I consider a very solid performance, leveraging our transformation and the different levers that we put in place as part of our Power Up Strategy. This is captured in the 5 key figures that make up Slide 3. First, our reported sales stood at EUR 9.6 billion in the first half and progressed by 1.8% in Q2, a clear improvement to Q1, which was down 4.5%. And here, which is a result of our steady acquisition strategy in particular, the acquisitions of Talley in the U.S. and WESCO in the Netherlands, which are respectively increasing our exposure to datacom and heat pumps.

I should say that in both cases, we are very happy with the integration. Second, on a same-day basis, our sales also showed an improving trend in Q2 versus Q1 and ending the half down a little bit at 3.5%. Third, our adjusted EBITA margin stood at a solid 6%, supported by our productivity gains and cost initiatives as we will detail shortly. We are proving that we can stay way ahead of our profitability standards from the years 2010 to 2020, even in tough conditions. Fourth, we posted a free cash flow before interest and tax of EUR 335 million, which is a historical record in euros. This represents a 53% conversion rate, which is also significantly above our norm in the same period of the year in previous years.

The cash culture we have put in place over the last few years is clearly paying off. And last but not least, our indebtedness ratio stands at 1.9x even after the payment of the recent Talley acquisition, the payment with dividend and some share buybacks, which leaves us ample flexibility.

Let me give you some more granularity on our sales trends by geography on Slide 4. Same day sales were resilient in North America with slightly positive volumes, both in the U.S. and Canada, the market environment is fairly supportive in particular, in some verticals like data centers or infrastructure, and we expect this to remain true in the next few quarters. We also continue to have a high backlog, both in Canada and in the U.S. And what is interesting is that this backlog continues to be replenished quarter after quarter, even after good execution in Q2. This gives us a good cushion of visibility equivalent to approximately 3 months of sales.

In Europe, markets were more challenging in continuation with the trends we had seen in Q1. There are mostly 3 reasons to that, which will not be new to those of you who have listened to the last few quarters call. One, the electrification base effect, especially in the DACH region and Northern Europe, which is, however, easing quarter after quarter. Second, our higher exposure to residential and third, the macroeconomic and political situation, which is not helping in several important countries. This leads also to price and margins being slightly down as is typical in this type of environment, and you will see that on the next slide.

Finishing on a more positive note, just like in North America, we saw sequential improvement between Q1 and Q2 coming mainly from the improvement of the comparison base. Asia Pacific also showed an improvement in Q2, notably driven by China, whose same-day sales were up 8.9% in Q2, reflecting more favorable volumes in electrification.

Slide 5 focuses on the price and volume breakdown of our sales by product family and by quarter to give you a better idea of the dynamics we are seeing. As the table allows us to highlight a few trends, first, our core LED business, including cable is progressing both in price and in volume growing respectively from minus 1% to minus 0.6% in contribution and from minus 0.7% to plus 0.2% in contribution. Cable contributed strongly to the price component improvement as could have expected based on base effect on copper evolution.

Second, the electrification market remains challenging, but improved sequentially with a minus 2% contribution to same-day sales evolution in Q2 after minus 2.8% in Q1 24, notably driven by better volume. Prices remain negative in Q2, but it's important to remind that this deflationary situation is limited to a few categories, notably solar panels and industrial automation in China.

Moving to Slide 6. We turn to the financial side of the equation, highlighting our resilient profitability and our record free cash flow generation. As mentioned on the first slide, our adjusted EBITDA margin came in at 6% in H1 despite the challenging top line environment, which confirms that Rexel has made a step change in terms of profitability, thanks to a number of action plans that we put in place in most countries, focusing notably on 3 types of initiatives: one, optimizing gross margin through initiatives on pricing, mix or purchasing conditions; two, boosting productivity with the head count reduction that broadly match the volume decrease; and three, various actions on OpEx, which were down more than 2% in H1 despite cost inflation.

Our performance was also driven by the positive impact of the different Power Up levels that we outlined at our recent Capital Markets Day, notably the use of data, the ramp-up of digital, the increased automation of our supply chain or value creating M&A. Another very satisfactory sign of our H1 performance was our record free cash flow generation for the period. The conversion rate, as I mentioned, of 53% is significantly above the level of that stage of the year in prior years. This is notably the result of great responsiveness in inventory management to adapt fast to lower demand, combined with sound credit management.

All this allows us today to confirm our full year 2024 guidance, which we expect to be in the lower end of the range given the environment, as I will detail in my concluding remarks, but for now, let me first hand over to Laurent to take you through our financials. Laurent, over to you.

[Laurent Delabarre, executive]

Thank you, Guillaume, and good morning to all. Let's start with the different building blocks of our Q2 '24 sales performance. Our sales of EUR 4.9 billion were up 1.8% on a reported basis, a positive performance achieved, thanks to our acquisition strategy, which contributes for plus 3.4% and offset the minus 1.9% evolution in actual day sales. The scope impact includes the positive contribution of WESCO in the Netherlands and Talley in the U.S., which is consolidated since the first of June. And for full year '24, we anticipate the scope effect to be at circa 2.5% based on already completed acquisitions. The currency effect stood at plus 0.3% in Q2 '24 and is expected to be broadly flat for the full year, assuming spot rates remain unchanged.

On Slide 9, you see the selling price impact and the breakdown of our sales evolution by geography. First, non-cable selling price stood at minus 1.1% in Q2 '24 reflecting deflation on solar panels, piping in North America and initial automation in China. Cable price stood at minus 0.4%, improving compared to Q1 '24, benefiting from the first effect of a more favorable copper price.

And by geography, we saw good sales resilience in North America at minus 0.9% and a recovery in APAC at plus 4.1%, while Europe improved compared to Q1, but was still negative. I will detail Europe and North America in the next slide and more specifically for Asia Pacific accounting for 7% of our group sales.

China recovered at plus 8.9% reflecting the more favorable volume trend in industrial automation and an easier base effect, while the temporary oversupply situation remains unchanged. And moving to Pacific, the region was up, thanks to Australia, driven by residential and nonresidential end markets. The country further focused on digital sales, almost reaching the 20% threshold.

Slide 10 focused on our performance in Europe. Our Q2 '24 same-day sales were down 4.5%, improving compared to the minus 6.9% posted in Q1 '24, mainly from an easier base effect in electrification, notably solar. Our core ED business, including cable was down a limited 1.1% in contribution, improving compared to Q1 '24, down 2.9% in contribution. Overall, demand in Europe remains mute with second full improvement, notably in the Nordics and DACH regions. And more specifically, let me highlight the key evolutions of the quarter.

We further outperformed in France in a challenging market environment. Demand in HVAC remains impacted by the lack of regulatory visibility and difficult base effect. It's also interesting to note that solar benefited from positive momentum in this country. The trend in Benelux are very similar to the first quarter on electrification and core ED and same thing in the U.K. where we recorded a similar trend to Q1 when we stated for the large public project with the Department of Education executed in '23.

On Slide 11, we turn to our performance in North America, where same-day sales were down a very limited 0.9% in Q2, thanks to the core ED business, including cable and the Industrial Automation business. Similar to Q1 '24, activity continued to be boosted by good backlog execution. Our order intake is also positive in the quarter, which bodes well for coming quarters, both in the U.S. and in Canada.

More specifically for our 2 countries. In the U.S., same-day sales evolution stood at minus 1% with resilience in nonresidential and industrial, mitigating lower demand in ED, in industrial buildings. Our diversified portfolio of nonresidential activity remains a strong factor. We continue to benefit from favorable trends, for example, in data center or water, wastewater. It's also worth noting that residential activity showed for signs of improvement.

Canada saw same-day sales evolution of minus 0.5%, driven by project activity in nonresidential and specific industrial segments such as manufacturing and automotive. The backlog grew by more than 4% compared to Q1 '24, which is a positive for the second part of the year.

On Slide 12, we show you the building blocks that led to the adjusted EBITDA margin of 6% in H1 '24. Of course, we build the bridge versus H1 '23, but before commenting on, another good point of comparison is the adjusted EBITDA posted in H2 '23 at 6.4% as it was in a more normalized volume and price environment with same-day sales growth in H2 '23 of plus 0.6%. And compared to H2 '23, our adjusted EBITDA margin is only down 40 basis points in a more challenging volume and price environment, which confirms the transformation of our company.

So returning to the bridge, our adjusted EBITDA margin has decreased by 130 bps to 6% from first, an operating deleverage, impacting our profitability by 58 basis points reflecting the drop in actual day sales of close to 4% in the first half. Second, the impact of 84 basis points at gross margin level, explained by the negative selling price evolution this year compared to a still exceptionally high pricing contribution on non-cable product of plus 5.7% in H1 '23.

Our 25% gross margin this half is very similar to the level generated in H2 '23 at 25.2%. OpEx inflation had a negative impact largely from salary inflation for minus 35 basis points and on other costs for minus 10 basis points. Overall inflation stood at plus 2.3% with plus 3.9% from wage increases and plus 1.3% from other OpEx including building and occupancy, transportation and leases.

This OpEx inflation was more than offset by the plus 52 basis point positive impact resulting from our action plans and more specifically, cost savings, productivity gains and better credit management. As an illustration, we have reduced the number of people by 400 in June '24 compared to June '23, mainly temps and interim functions.

And by geography, Europe posted adjusted EBITA of 6.1%, down 197 bps explained by sales decline combined with higher exposure to the deflationary solar activity mitigated by active OpEx management. On the other side, North America was more resilient with adjusted EBITDA margin at 6.8%, down a limited 79 basis points, thanks to a better top line and a more resilient gross margin.

On Slide 13, we look at the bottom line part of our P&L with a zoom on other income and expense, financial expense, tax rate and recurring net income. Other income and expense stood at a limited minus EUR 6 million, including circa EUR 4 million on restructuring. Financial expense stood at EUR 96 million, higher than last year, resulting from the rise in gross debt and interest rates. It includes EUR 31 million of interest on lease liabilities and pure financial cost of EUR 65 million. The effective interest rate increased to 4.3% compared to 3.4% in H1 '23 in the context of rising interest rates. And for '24, we anticipate financial expense of circa EUR 140 million, excluding one-off and interest on lease liabilities and assuming current interest rate conditions remain unchanged.

In addition, interest on lease liabilities should be close to EUR 65 million in '24 due to WESCO. So a total of circa EUR 205 million of financial results expected for full year '24. Our income tax rate stood at 26.6%, similar to the 26.7% in H1 '23, excluding one-offs. And for '24 onwards, we anticipate the tax rate to be below 27%. And as a result, recurring net income was EUR 341 million compared to EUR 455 million in H1 '23.

Moving to cash flow on Slide 14. We generated robust cash flow before interest and tax, reaching an all-time high level of EUR 335 million implying a free cash flow conversion rate of 53%. And as a reminder, this compared with free cash flow that was historically at breakeven or slightly up before interest and tax in H1. This record level of free cash flow generation resulted from our operational results, combined with a significant cash inflow from working capital management and more specifically, responsive inventory management adapting fast to lower demand. Also note that the change in trade -- in nontrade working capital was an outflow of EUR 78 million, significantly better than last year as H1 '23 was impacted by the cash out of 2022 higher performance-linked bonuses and commissions.

Lastly, the CapEx-to-sale ratio stood at 0.6%, in line with H1 last year. We confirm midterm ambition of 0.8% of sales on a full year basis. As shown on Slide 15, net debt increased by EUR 768 million mainly resulting from the cash out of EUR 413 million for net financial investment, mainly for the Talley acquisition. It includes a noncash earnout of circa EUR 80 million that will be paid, only the team delivers on an ambitious business plan. The dividend payment related to 2023 result for EUR 357 million, share repurchase of circa EUR 50 million. All these lead to a net debt of close to EUR 2.7 billion and an indebtiness ratio of 1.9x.

Let's turn now on Slide 16 to our balance sheet and liquidity picture. In H1, we continue to actively manage our balance sheet and diversified our investor base. On July 2, we issued EUR 200 million Schuldschein private placement market in 2 tranches. The placement was oversubscribed by French and international investors leading us to double the initial targeted amount. The first tranche is a 3-year floating rate note for EUR 80 million and the second is a 5-year floating rate note for EUR 120 million. With this rate, we issued Schuldschein to diversify our investor base to issue a smaller than usual amount and also because it's more flexible in terms of maturity. Following this operation, our liquidity is close to EUR 1.1 billion, and we have no short-term refinancing needs. With this, I will hand back to Guillaume.

[Guillaume Jean Texier, executive]

Thank you, Laurent. So let me now conclude first by reiterating our full year 2024 guidance, which we presented in February. In H1, we experienced markets, which were overall slightly less supportive than our mid-range assumption. On the other hand, we delivered strongly on our action plans, which offsets partially the softness of the market. The second part of the year will be in continuity with the first half, with Europe continuing to be soft due to economic and political uncertainties and North America more resilient and supported by its backlog.

As you can tell, we are cautious on end markets and do not bet on any sequential recovery. Now what will help is the ramp-up of our self-help action plans and the easier comparison base quarter after quarter as the second part of last year was much less favorable than H1. Overall, we hold on to our guidance, but we now think based on our H1 that we will be rather in the bottom half of the bracket than in the top 1 for sales growth and EBITDA percentage.

Let me repeat the main elements of our guidance, a stable to slightly positive same-day sales growth while facing a high comparable base in the first half. An adjusted EBITDA margin to reflect the resilience I highlighted at between 6.3% and 6.6% and a conversion rate into free cash flow before interest and tax above 60%.

Before handing over the floor to you for the Q&A, I'd like to end the presentation by 1 slide highlighting how we implement our strategy. Today, our #1 priority is, obviously, margin protection, but we also continue to build quarter after quarter a stronger Rexel providing more value to its customers. At our recent Capital Market Day, we spelled out how we were focusing on efforts on a handful of so-called acceleration businesses, and we have demonstrated that with the previously announced acquisitions of Talley in the U.S. in datacom and Itesa in France in security.

Today, we are announcing another bolt-on acquisition in the core ED space, Electrical Supplies, Inc., which will strengthen our footprint in Florida. The company will add $60 million in annual sales through its 3 branches and nearly 100 employees. It will be integrated under the Mayer banner, which is another illustration of how we are using M&A as an additional growth engine as already shown in our H1 numbers. We also continue to push hard to progress digital and technology and we continue to make headway on that in H1.

Our digital sales continue to ramp up, reaching 31% of total sales, up 290 basis points on the year. Europe is significantly above group average and reached 43% of digital sales, thanks to particularly strong growth of more than 400 basis points year-on-year while North America and Asia Pacific are quickly catching up at 22% and 12%, respectively. We also continue to invest in state-of-the-art supply chain solution and we opened 3 new distribution centers in the half, of which 2 are automated.

And last, but certainly not least, we are further developing our value proposition to customers with several initiatives in the half. This includes, for example, a program to advise customers on energy efficiency renovation project in France as well as a new secular economy offer in our home market to repair and recondition products, a chatbot service in Switzerland and several initiatives in the U.S., such as one Flexset, a panel building offering with key suppliers or to Rexel Delivered Services, another initiative with key industrial automation suppliers to offer air leak detection, thermal audits and on-site support and repair.

In every market throughout the world, we work on extending our importance to customers by providing them services going way beyond the traditional distribution services. So in the same time, as we are focusing on day-to-day execution and delivery, we continue to prepare the midterm future. So that ends our presentation for today. We would obviously have preferred in H1 to benefit from more supportive markets. It is likely that we will have to wait a few months to get that, but this gave us the opportunity to prove how different Rexel is from the old Rexel in terms of resilience. Because a few years ago, 6% was the ultimate goal, and now it has become what we deliver when market conditions are more mixed. And this is a great source of pride for me and for the teams.

I'm now happy to take any questions with Laurent.

[Operator]

This is the conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Martin Wilkie with Citi.

[Martin Wilkie, analyst]

It's Martin from Citi. The first question I had was on pricing dynamics. Obviously, you've called out certain categories in electrification, which obviously we can see has been negative from industry data. But just generally, what do you see on pricing beyond those categories? Is that stabilized sequentially? Or how do we think about pricing in sort of your core electrical business, excluding cable. That's my first question.

[Guillaume Jean Texier, executive]

Okay. So overall, we had a pricing effect of minus 1.5% in Q2. That's entirely made of PV, cable and piping in the U.S. The rest is basically very slightly positive if I take all the rest with some negatives, like, for example, as we mentioned, industrial automation in China and the rest being broadly very slightly positive.

What we are seeing in the market is exactly that, apart from those 3 categories, the rest is stable. We don't see price increases for the second part of the year. The situation is depending on countries, but I would say, broadly stable sequentially that's our main assumptions. But it's not going to be the case everywhere. In some markets, there is a little bit more competition. In some markets, there is still a little bit of price increase. But broadly, you can expect it to be stable for the rest of the categories. I think that's basically what we are seeing. Laurent.

[Laurent Delabarre, executive]

No, I do.

[Martin Wilkie, analyst]

If I could have a follow-up just separately on North America. So a good performance there. Obviously, the backlog is helping you, and there are some categories in electrification that are quite strong in North America, but there is industry data where the general industrial cycle in North America is softening slightly. I was wondering if there are any parts of your industrial business that you are concerned about for growth during the second half? Or does that backlog support give you comfort going into H2?

[Guillaume Jean Texier, executive]

Look, in North America, you're right. We have quite a supportive backlog, but the situation is contrasted between the different categories. And I would say industry is one of the ones on which we have already seen in Q2, some kind of weakness, not a huge weakness, but if we compare to last year, the industrial category overall, which includes industrial automation, but also all the industry projects has weakened a little bit in North America over the second quarter to the opposite segments, which are very active, are everything which is linked to infrastructure, including very good activity in water and wastewater, for example, or data centers, and it's not the first time that you hear about that. We are exposed also to data centers, to digital centers, electrical utilities of data centers.

So all of that is quite active. But I would say, we are already seeing a slight weakness in industrial activity in North America and especially in automotive, for example, oil and gas, et cetera. But that is already part of our Q2 figures. I mean, Laurent, I don't know if you want to add anything at all.

[Laurent Delabarre, executive]

Yes, you're right, general manufacturing is a bit down, metal down and pulp and paper. But on the other side, the food and bev is doing very well. Petrochemical and automotive are doing well. So at the end, we have a quite diversified portfolio.

[Operator]

The next question is from Daniela Costa, Goldman Sachs.

[Daniela Costa, analyst]

I have two as well. I'll ask them one at a time. But first, clarifying on the guidance for margin this year, so the 6.3% to 6.6%, and you're guiding to the bottom end. You did 6%. Normally, you're sequentially up 30, 40 basis points in the second half. Can you comment to get to the bottom end of guidance, if it's not pricing, like you mentioned in the prior -- what do you see improving? Is it volume? Is it your self-help initiatives? How will you make it to the bottom end of the guidance?

[Guillaume Jean Texier, executive]

Yes. So first of all, I mean, there are several things to that. I mean, first of all, as we mentioned in the first half, we had in the gross margin an effect, which is linked to the negative inflation effect and especially on the categories that we talked about. And this one, we should be in a more stable pricing environment. Secondly, more importantly, we think that the self-help action that we have put in place in terms of productivity, in terms of gross margin optimization, will ramp up very clearly. I mean, we have plans in several countries of reducing the cost base further, which are going to kick in.

And thirdly, in terms of top line growth because of the comparison base, we are going to be in a better environment. So nothing which has to do with any bets on sequential recovery in the market. But we feel confident that we can get to the 6.5% of overall profitability in the second half that we need to deliver the guidance. I don't know, Laurent, if you have any additional comments to make.

[Laurent Delabarre, executive]

No. I mean, maybe a bit of seasonal where usually we have a bit higher performance in the second half because of the product mix we are selling.

[Daniela Costa, analyst]

Got it. And then the second one, just following up on China. As you mentioned, you still have pricing pressure there, but you printed almost 9% growth. Do you see some sequential demand acceleration there, some restocking at clients? What are the underlying trends you're observing?

[Laurent Delabarre, executive]

Well, we had a sharp rebound in Q2, but mostly linked soft in Q1, there was a very high base effect the year before with the rebound after COVID. So the Q2 was easier in terms of base effect. Third, we have -- we are quite resilient in terms of end markets, doing quite well in urbanization, water, wastewater, food and bev and so on. And third, we are grasping market share through more services in industrial automation and opening also sales office. But the overall market is still very tough and the pricing environment still deflationary. And on that, we don't see any early sign of recovery for the second half. So mainly our self-help and base effect is helping us to grasp this Q2 performance.

[Daniela Costa, analyst]

Sorry, if I understood correctly on the end markets, you -- it's not then that you're seeing automation accelerating?

[Laurent Delabarre, executive]

No, we don't see any clear sign of recovery yet. It's more the action we have taken and the different -- yes, different initiatives that are paying off.

[Operator]

The next question is from Akash Gupta, JPMorgan.

[Akash Gupta, analyst]

The first one I have is on pricing and a follow-up to Martin's question. The 3 categories that you mentioned, solar panel, piping in North America and industrial automation in China, could you quantify how much of group share in first half came from these 3 product categories.

[Laurent Delabarre, executive]

Piping in the U.S. the contribution in pricing on that is around minus 0.9%...

[Guillaume Jean Texier, executive]

No, no, no. There was negative pricing of solar panels was approximately 0.9% solar activity. And the others were...

[Akash Gupta, analyst]

Sorry, my question was, what was the share of revenues coming from these 3 deflationary categories? Like are these 3 together 20% of revenues or 25% or 15%? Sorry, that was my question.

[Guillaume Jean Texier, executive]

So the total of the 3 categories, industrial automation in China, piping, cable -- without cable it's probably 5% to 10%. Yes, less than 10% -- a little bit less than 10%, Akash, if you take those categories. Yes.

[Akash Gupta, analyst]

So basically, in roughly 90% of product categories, you are seeing slightly positive aggregate pricing. It's only a little bit less than 10%, which is deflationary, so to speak.

[Guillaume Jean Texier, executive]

Yes. I wouldn't say slightly positive pricing. It's neutral -- yes, neutral or slightly positive, absolutely.

[Akash Gupta, analyst]

Okay. And my second question is on market share gains in Europe. Maybe if you can elaborate on where they are coming from? Are they coming from core electrical distribution or they're coming in the new areas of growth and maybe if you can say what was the underlying market growth if we exclude the market share gains that you have seen in Europe?

[Guillaume Jean Texier, executive]

I mean, first of all, I would say that the underlying market growth wouldn't be significantly different from what you saw in our results. We gained a little bit of market share, but I wouldn't say it was -- it would change materially the figures, maybe a few percent but not more than that.

Now the second thing is where did we gain market share, I would say it's mostly on core electrical distribution products. I don't think that -- I mean it's always difficult to measure the market share gains because depending on the countries, you know that we have or we have not reliable information on what the market shares are, but I would say where we gained market share, we gained it mostly on core electrical distribution products, mostly thanks to our value proposition and the mix of digital, the mix of services, which help us do that. But I don't think it was specifically on electrification categories, no.

[Operator]

The next question is from Alexander Virgo, Bank of America.

[Alexander Virgo, analyst]

I wondered if you could just dig a little bit into the different end market developments in Europe, I guess, given that it was probably weaker than expected, and I'm just trying to get a feel for the, I guess, sequential developments as you try and identify what it is that was weaker than expected. What are you attributing that to?

It looks like your core ED business actually may be a little bit better. And so is that the reason that things -- sorry, is that an offsetting reason for things relative to our expectations. And then I guess the question is into Q3, how are we looking? Or any kind of comments around the quarter as we've started?

[Guillaume Jean Texier, executive]

Yes. No, I would say that the one market which started in some countries, the early signs of a recovery is probably residential here and there. For the rest, for the nonresidential and for the industrial businesses, we were in a relatively weak situation. I think the global economical environment, coupled with the political situation in several countries, led to wait-and-see situation. And at this stage, it's very difficult to predict what Q3 and Q4 are going to be about because it will depend both on the interest rate situation, obviously, but also on political evolution in this country. So that's one thing which is difficult to predict. And that's the reason why in our guidance, we have not bet on any sequential recovery in European countries.

I would say the other parameters, which came in a little bit at the bottom end of our range -- not outside of our range, but at the bottom end of our range is electrification rebound. You know that on electrification we have obviously a high comparison base compared to last year. What we saw in several countries. And here, it can be linked very much to the political situation is the continuation of wait-and-see attitude of either investors or homeowners when it comes to buying heat pumps or solar panels because there is a mix of price of electricity being relatively low and also incentives being uncertain because of political situations, for example, in the Netherlands, for example, in France, and that played a role.

So I would say the places where we can see, feel or smell the start of a recovery could be in the residential area. For the rest, we are very cautious about, first, the present situation and the future. So that's a little bit of the story in Europe. We would prefer it to be better, but I think we will have to wait a few more months to see anything that I can call -- that I could clearly call a recovery. I don't know if it's clear.

[Alexander Virgo, analyst]

Yes. I guess the question in terms of the electrification rebound or the point you make on the electrification rebound, is that something that you would see as starting to improve or not? I guess the bottom end of the range is your comment. I'm just sort of trying to gauge of how that's improved. Obviously, sequentially, it got a little bit better, but we're still looking at down 8%, I think you said down 8.5%, didn't you?

[Guillaume Jean Texier, executive]

In our expectations for the second part of the year or in the way we build the guidance, there is no particular sequential recovery on electrification categories. But remember, that the comparison base last year overall for Rexel was quite dissymmetrical. As a reminder, but you know that we had a sales growth overall at Rexel level, but it was mostly driven by electrification of 10% in Q1, 6% in Q2, 2.6% in Q3 and minus 1.4% in Q4.

So the comparison effect is playing a big role in this evolution. And so we are not planning on sequential recovery. If it comes, which is a possibility after the clarification of the political situation and economic situation, it's going to be an upside. But at this stage, this is not what we are basing our forecast on.

[Operator]

The next question is from Phil Buller, Berenberg.

[Philip Buller, analyst]

Maybe I'm wrong. It feels as though sequentially speaking, the demand is actually starting to turn a bit more positive overall. I understand the comments on automation in the U.S., but the backlog as a whole in the U.S. has expanded. You've mentioned seeing signs of improvement in resi in the U.S. And then in Europe, I understand the macro is difficult, but interest rates are starting to come down. Some of those tough comps are behind you. So I was wondering if you see the guide as conservative due to any specific end markets or if it's really just the macro environment really that you're most concerned about?

[Guillaume Jean Texier, executive]

Look, I mean, I would say, yes, if we see a meaningful recovery in Europe or in the U.S. based on the trends that you identified. I mean, in theory, I could absolutely see that happening. The reality, when we talk to the customers today, when we look at our end markets, is that we prefer to be conservative on this side because we have theoretical signs of -- this is what should happen if you look at the economy. But that being said, the information we prefer to give you is what we are seeing at this moment in the markets. And at this moment in the market, in Europe, I cannot see clear signs of a recovery in the various countries where we are. It's stable, but stable at a level which I would qualify as down cycle.

And in the U.S., things are more encouraging, but with moving parts which go in both directions, as I said, and as Laurent mentioned, I mean, on one hand, infrastructure projects and everything which is related to datacom and artificial intelligence being fairly active. But on the other hand, the confidence in industry and the industrial projects being a little bit on the low side.

So at this stage, I don't know if I would call that conservative, but it's clear that we are not at the point where we can identify signs of a significant recovery.

[Philip Buller, analyst]

That's understood. And just to follow up, obviously, there's a lot of elections going on at the moment, some of which have happened, some of which are imminent. Can you just share your views on what different election scenarios in the U.S. may or may not do for your outlook in the U.S., please?

[Guillaume Jean Texier, executive]

First of all, I'm not going to bet on the results, first of all, it seems to be a little bit complex and my expertise is muted on that. I would say that in terms of the various political outcomes what -- I mean, there are many things in the economic programs in the U.S. that are common in terms of protection of the industry in the U.S., a willingness to grow it, and that's a positive in both sides.

Where I see a big difference is in terms of renewables and green energy which may make a difference. But overall, for us, in the U.S., contrary to Europe, it's not that significant on exposure. So I would say in terms of elections in the U.S., I feel that Rexel is relatively neutral to the results. What we are more interested in is the results on the global economic activity rather than one of the other segments.

Now what I can say and with the experience of having seen that in Europe is that any election anywhere is creating some kind of a moment of a few months where people delay a little bit their investment decisions. So I would rather have them behind us and clarification being done rather than in front of us. And maybe that's also a part of what is creating this industry slight loss of confidence in the U.S. that the fact that people are waiting to see what the future is about and we have seen that in France, and we continue to see that in France, for example.

So in summary, I'm a little bit more concerned about the uncertainties and about the outcome.

[Operator]

The next question is from Delphine Brault with Oddo.

[Delphine Brault, analyst]

I have two and will ask them one at a time. First, can you comment on your HVAC activity and how WESCO performed in Q2 and the H2 prospects for that segment?

[Guillaume Jean Texier, executive]

So our HVAC activity is fairly concentrated in 2 countries in reality. It's concentrated in France and in the Netherlands with WESCO. I would say the level of activity in those countries is not great at this stage because exactly of what I was just mentioning which is the political uncertainty and especially the uncertainty on regulations or on incentives in those 2 countries.

So I would say, going forward, midterm, I'm very confident about the prospects in those countries. But the political situations in both countries and especially the uncertainty you know that in the Netherlands, there is still no complete clarity on what the government policy is going to be on that. In France, there is absolutely no clarity on what the government is going to be about is creating a headwind to those categories.

I have to say in the Netherlands that WESCO is doing better than the average of the Netherlands. But still, it's a market which is a little bit challenged both by the overall economy of construction in the Netherlands and by the uncertainty I was just talking about. But I have to say, in both cases, a lot of confidence on the fact that this is a market which is going to continue to be very positive in the next few years, no short term headwinds.

[Delphine Brault, analyst]

And then can you update us on the ongoing investigation in France?

[Guillaume Jean Texier, executive]

Yes. So you remember that in France, we have a competition investigation going on since, I think, 3 years now, which is progressing step after step. You remember that the topic is that 4 economic actors are accused of vertical anticompetitive behavior. We are strongly denying that, and we are strongly defending things because all of this -- it's a complex topic. So it would take a long time to explain, but it's about the way the pricing is structured in France, which is totally transparent. And in our mind, totally favorable to competition and to the protection of consumers, which we have argued.

We had a hearing taking place in front of the French Competition Authority in June. It was the expected next step, and we are now waiting for a decision, but we have no particular information as to when this will come either in the second part of this year or in the first part of next year, I would assume. So impossible at this stage, to estimate the level of a potential fine, if any. We are strongly defending the case. I think we have a strong case, but like any topic like this one, there is uncertainty.

[Operator]

The next question is from Andre Kukhnin UBS.

[Andre Kukhnin, analyst]

You called out the China inventory still being on the high side. I just wondered if you could talk about the inventory levels more broadly across the board.

[Guillaume Jean Texier, executive]

Can you repeat, please, Andre?

[Andre Kukhnin, analyst]

Yes. It's on the stock levels. So you called out China being on the high side in Industrial Automation still. I just wondered if -- when you look at your global landscape, are there other areas where the stock levels stand out as being too high or too low?

[Guillaume Jean Texier, executive]

On initial automation with our customer in the OEM field, we feel that there are still some kind of overstock that will phase out in the coming quarters. On the rest, it's overall at average normal level, I would say, I mean, there are 2 questions in your question. One is about our own inventory level, and you've seen the figures and it's well under control, and we don't have excess inventory and you've seen the cash transformation in H1. So I think we are doing a very good job.

Now about what's in the supply chain, I think the topics are concentrated in the OEM part of Industrial Automation. And I think in China, we are not at the end of the flushing of the OEM inventory, which has been built. In the U.S., we are probably closer to the end of that, but not done yet. So I think we will continue to see some kind of headwind on the OEM part of Industrial Automation in the U.S. based on that. But as a reminder, I think OEM for us in the U.S. that represents probably 1/3 or a little bit less than our exposure to Industrial Automation. So that's a little bit what we are seeing.

In other parts of the supply chain. I would say in Europe, you still have inventory of solar material, I would say, in several distributors knowing whether this inventory is completely up to date to the latest technologies is something else. I hope for them, but that's probably the other place where I would see a little bit of inventory. For the rest, no. We don't have any other part of the supply chain where we would know of any inventory accumulated. As a reminder, except maybe for the OEMs, none of our customers are in the business of building inventory. They don't have the capabilities to do that. They don't have the space to do that and they don't want to do that. So except for this particular subsegment, we don't have any inventory situation.

[Andre Kukhnin, analyst]

That's very helpful. If I may -- on the second question, just thinking about the second half implied margin bridge, I think your guidance now implies plus 20 bps and you mentioned several drivers for it. I just wanted to check on the two. Self-help, would you expect something similar to the H1 result at sort of minus 400 employees that you mentioned for the second half as well. And pricing, would you expect that to flatten out in the second half or still to land in small negative?

[Guillaume Jean Texier, executive]

Laurent, do you want to comment more on that?

[Laurent Delabarre, executive]

Yes, yes, we don't want to disclose any specific figure, but we will continue to intensify our action managing closely the FTE in a couple of countries where necessary. So FTE will continue to trend down on that front.

[Guillaume Jean Texier, executive]

And on pricing, do you want to say anything about pricing?

[Laurent Delabarre, executive]

Yes. Well, we said that we don't anticipate any significant price increase from our supplier in the second half. And on the other side, on the electrification category, we don't anticipate any significant depletion coming into second half as well. So the way we see our second half is a continuation of what we can see today.

[Guillaume Jean Texier, executive]

What I would say in terms of year-over-year figure in pricing, it should improve a little bit compared to the first half figure. Will it be as much as getting into positive territory, I'm not completely sure about that. Given the various moving parts, I'm not completely sure about that because we will continue to see a negative, I think, on the solar panels for the second part of the year, which is going to create a drag on the rest. So I'm not sure that we're going to see difference in the second half, we'll see. It will depend very much on the price of cable also.

[Operator]

The next question is from Eric Lemarie at CIC.

[Eric Lemarié, analyst]

I got two questions actually. So first one on M&A. Did you notice any change in multiple pay for transaction? Do you feel more competition from other players in terms of acquisition in this more challenging environment? And what about the pipeline of acquisitions, do you think you have a lot of opportunity to do M&A in H2 next year?

And I've got a second question on the -- regarding your success in implementing online sales, could you tell us you deal with the cyber risk? Do you reckon the cyber risk is increasing currently or not?

[Guillaume Jean Texier, executive]

So on M&A, on multiples, I mean, there are opportunities, especially in the U.S., but not only -- there are opportunities, and we are clearly following our strategy of pursuing those opportunities. We do that with discipline, which means that in many cases, when we feel that the price is too high compared to the synergies we decided not to go. I would say the multiples environment has not changed drastically. It's still a competitive market, mostly between strategic players, the presence of private equity is relatively limited. It's mostly a competition between those strategic players having the scale and the balance sheet to consolidate in the U.S.

And the only thing I can say is that we are watching every potential acquisition opportunity with very strict discipline. I can remember many cases in which we decided not to go because we felt that compared to both the value creation standard and also the multiple at Rexel, we were too tight in terms of economics. What we do when we have -- when it's feasible is we use earnouts also. For example, in the -- I think it's disclosed in the appendices to the semester. For Talley, we had a structure with a fixed price and an earnout to make sure that we pay a complemental price if the performance goes according to plans. So that's something which usually is helpful in terms of bridging the gap between the seller's expectations and our own criteria. So that's what I want to say.

So -- and so in terms of the second half, yes, we will have acquisitions. So we don't have big targets in the pipes. So you shouldn't expect that we are going to do transformative acquisitions in the second half, more bolt-on acquisitions. On the rest on cyber security, you're absolutely right. This is a very important concern for us, especially as our proportion of sales going through digital channels is increasing. So I mean, we invest a lot in cybersecurity at all levels, like any company would do, but probably with more intensity that compared to a company being less sensitive to their IT systems, which means that we can protect -- I mean, we do phishing campaigns, very frequent phishing campaigns to make sure that we reduce the possibility of a threat entering.

And then we have several action plans in place to harden the active directories to make sure that even if a threat is entering we are protected by segregation of the various segments by protection of the value systems by backups also. So we have invested since many years on cybersecurity. We continue to invest in cybersecurity.

Do I think that the threat level is increasing? I don't know. It's high. And I can tell you that -- and I think it's public because it's written like that on our risk matrix. It's probably one of the top risks that we have and that we try to protect ourselves to the best against.

Crossing fingers for the moment, we didn't have any catastrophic event. I can know of a few competitors, which are not listed, which had issues for the moment we were relatively protected from that, but nothing is completely sure. And so we continue to invest in that quarter after quarter because it's a race.

[Operator]

The next question is from William Mackie, Kepler Cheuvreux.

[William Mackie, analyst]

A couple of follow-ups. On the guidance question, I mean you've delivered a very, very well record free cash flow in the first half. seasonally, you've had a stronger second half. I hear what you're saying about a normalization of internal inventories. But just broadly, how should we think about the elements of free cash flow development in the second half? Any reason why you wouldn't be able to deliver a similar strong performance to what we've seen in the first half?

[Guillaume Jean Texier, executive]

One of the difficult things about free cash flow is that it depends very much on the last few months of the year and especially on the sales momentum in the last few months of the year when you have a sales slowdown, usually you reduce your inventory building, which means that you reduce your inventory, you reduce your payables. But at the same time, you still get the receivables from 3 months before. So in this situation, which was a little bit the situation at the end of last year, you get a benefit based on that. And that's the reason why we are a little bit cautious when it comes to predicting free cash flow beyond the 60% that we are talking about because, for example, if we were in the situation at the end of the year of seeing the start of a recovery in several markets, we would be exactly in the opposite situation.

And so because of that, we prefer to be relatively cautious. What we can tell you is that we are going to be obviously extremely disciplined in terms of cash flow in a number of -- in terms of inventory in number of days, payable, receivables, control. In terms of CapEx, we had a first half which was very much under control. I think we had 0.6% of sales in terms of CapEx. And we don't anticipate to have much more CapEx in the second part of the year. But it's really the big one, the big question mark, for the end of the year is going to be working capital in the last 3 months. And so because of that, even though I would be very tempted to say it's going to be more than 60%, I think it's more cautious to stay where it is.

[Laurent Delabarre, executive]

A lot of discipline within the group to invest. The profile of the top line of the last month will be important, and we stick to our guidance at this stage.

[William Mackie, analyst]

And the follow-up question relates to European profitability. I mean, I noticed the margins were resilient in North America, which was great and important but almost a 200 basis point drop in Europe was perhaps a bit more than consensus was expecting. I mean when we dig into the countries, I mean, you gave a discussion around regional and country performance in Europe at the revenue level. But is there anything you could share about what particularly impacted the profitability in Europe? Were there any countries that stood out or business lines, which caused the disproportionate drag on profitability in the quarter -- in the year.

[Guillaume Jean Texier, executive]

One parameter that you need to understand is that there is a little bit -- in the gross margin evolution, both in North America and in Europe, there is a little bit of inflation effect. If you remember, and I don't want to get technical, but since last year, we are not restating inflation anymore in the one-offs because we feel that we are in an inflation range, which doesn't justify that, which means that the impact of inflation or negative inflation to the inventory is going directly through the gross margin. And I think Europe, as you know, was more exposed -- very much more exposed to especially the photovoltaic business. And so in the gross margin in Europe, you had a greater impact of this deflationary situation to Europe than it was to North America. So that's one element of explanation.

For the rest, in both markets, Europe and North America, what is happening also because -- it's not only about inflation, what is happening also is that there is also a little bit of competitive pressure between the distributors. There is obviously -- I mean, this competitive pressure, we transmit a part of that to the suppliers. But still, in an environment with lower volume, as is normal in the market in a competitive market, people are trained to gain additional volume through price. And we usually don't play this game too much, but we maintain our market share. And so because of that, since Europe is in a situation where the market volumes are a little bit weaker than North America, you also had a little bit more pressure.

So I would say those 2 elements are the main ones. The inflation, the net inflation effect on gross margin, which is not restated in the one-offs anymore. And secondly, maybe a little bit more pressure on the gross margin because of the competitive situation.

[William Mackie, analyst]

Was H1 '24 the final lap? Are we now lapping the disinflationary effects? So as we go into H2, we shouldn't see this disinflationary effect impacting the gross margin. Is that correct in terms of thinking?

[Guillaume Jean Texier, executive]

I mean the disinflationary effect comes mostly from the sequential pricing and not from the year-to-year pricing. So it will depend on whether we have additional price decreases on this or this category. At this stage, we don't feel that we are in an environment where we would see additional sequential pricing. I remain cautious on photovoltaics, even though photovoltaics is only EUR 120 million of our inventory or EUR 130 million of our inventory. Still historical, I mean, it can have big effects when there is additional sequential deflation. And the information that we get from the market is that we are close to the bottom, but who knows. So on this one, I would be a little bit cautious. On the rest, we have no particular signs of additional effects.

[Operator]

The next question is from Miguel Borrega, BNP Paribas Exane.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

I've got three, if I may. The first one on organic sales growth. Can you talk about your expectations for Q3? Are you already seeing a return to organic growth, given the easier comps?

[Guillaume Jean Texier, executive]

For Q3 -- I'm not going to give a guidance for Q3 in reality. I think we prefer to give a guidance for the full year, but you have seen that for H2 overall, our guidance, obviously, if we want to get back to the guidance is to have obviously a positive contribution for the second half of the year.

Q3 last year was -- I mean, as I mentioned, the total sales comparison effect was last year of 2.6% in Q3 compared to 6.2% in Q2. So we have a little bit of tailwind. If your question is about the trading update in July. July is a little bit difficult to read because we had two effects in two important countries at the beginning of the month of July, which is the U.S. with Hurricane Barrier, which had a big impact on the growth, which we are recovering from, but the month starting a little bit softly. And in France, obviously, the Olympics, which is not helping. So overall, we should see -- we should continue to see improvement between the Q2 figures and the Q3 figures. To what extent, I'm not sure. I'm going to get into more details in the quarter after quarter forecast.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

And then just a follow-up to the adjusted EBITDA margin guidance. You mentioned that you need 6.5% in the second half to get to the low end, which would still be above the second half of last year and the first half of this year. If we look at Slide 5, for example, most sequential trends relative to Q1 are still negative. Is it your expectation that all of these will turn positive in the second half relative to the first half? In other words, don't you need a positive sequential improvement to get a better margin in the second half?

[Guillaume Jean Texier, executive]

No. I mean it will help, obviously, to get a positive sequential improvement, but as we mentioned, there is a gross margin effect of deflation, which should ease in the second half. You will have also the full effect of our cost reduction action plans, which is going to help us optimize even more our OpEx base. And all of that should help us deliver the 6.5% profitability margin in the second half. I mean, Laurent, do you want to say more about that?

[Laurent Delabarre, executive]

Yes. And compared to which to last year and a bit more top line, so also a bit operating leverage.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

Great. And then if you -- if I can squeeze in one more question. In terms of self-help, can you maybe quantify how much you would expect in the second half? I think you mentioned 50 basis points in the first half from action plans. So just wondering if you've got the figure, how much will kick in, in the second half.

[Guillaume Jean Texier, executive]

Laurent?

[Laurent Delabarre, executive]

Yes, we have different actions that are going to materialize and that are going also to benefit from our OpEx to sales ratio. On the other side, we will have a bit more top line, so a bit more variable cost. But at the end, we have the ongoing action that will be intensified in the second half since I don't have any specific...

[Guillaume Jean Texier, executive]

I mean I think we prefer to be -- we prefer not to disclose that because in many countries, it's a sensitive information in terms of social negotiations. We need to discuss that first with the employees before saying anything to the outside. So I prefer to stick to the global guidance rather than give you -- to give you that. But yes, we are going to accelerate in several countries, our action plans to reduce especially the number of FTEs, absolutely.

[Operator]

[Operator Instructions] Mr. Texier, there are no more questions registered at this time.

[Guillaume Jean Texier, executive]

Thank you very much for being with us that early. And we'll see you next time for the Q3 results, which are going to be at the end of October. Thank you. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.