Rexel SA
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Earnings Call Transcript

Earnings Call Transcript
2018-Q3

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Operator

Ladies and gentlemen, thank you for standing by and welcome to Rexel's Q3 and nine-month 2018 results call. Before we begin, I must advise you that today's conference is being recorded. [Operator instructions] Now without any further delay, I'd like to hand the conference over to your first speaker today, Mr. Patrick BĂ©rard, CEO. Please go ahead.

P
Patrick BĂ©rard
CEO, Europe GM & Director

Good morning, ladies and gentlemen, and welcome to this presentation of Rexel's third quarter and the 9 months 2018 performance. I am here in Paris with Laurent Delabarre, our Group CFO. I will start with an overview of the key highlights and detail our performance by geography. Then Laurent will present our financials in the quarter and I will then conclude and confirm our 2018 outlook. Obviously, after that, we will be very happy to take all your questions. I am very pleased to share with you the strong performance in Q3 and 9 months, further proving that our strategic plan is delivering results and our transformation initiative in several countries. And notably, in the U.S., we are making Rexel a stronger and more competitive company in its key markets. As you can see on Slide 3, Rexel sales and profitability improved in Q3. Our sales grew for the eighth quarter in a row, reaching more than EUR 3.3 billion. This represents same-day growth of 3.4%, a satisfactory performance given the more challenging base effect, call it like this, the lower contribution from copper also and the impact of the transformation underway, this time in Germany and Spain. Concerning profitability, our adjusted EBITA grew more than 9%, with a margin increase of 22 bps on a comparable basis to 4.4%. This was achieved despite short-term impact from transformation measures, which we have now fully implemented, as I say, in Germany and Spain, laying the foundation, all of this, for improved profitability in coming quarters. Recurring net income was up by a strong 20% in the quarter. On Slide 4, we turn to our 9 months performance. Our sales of more than EUR 9.8 billion went up 4.1% on a same-day basis, rising in all 3 geographies in the period. Our gross margin was broadly stable at 24.6%, which is a solid performance in the current environment. Our adjusted EBITA rose by 5.1% in the period, and margin at 4.4% was up 4 basis point on a comparable basis. It was driven by positive volumes and continued cost control, which more than offset the broad-based inflationary environment and our investment into future growth. Recurring net income was up 15.3% at EUR 214 million, thanks to a good operating results, lower financial expenses throughout 2017 active refinancing operations and lower taxes as we improved our free cash flow before interest and tax by more than EUR 37 million to EUR 56.6 million in the 9 months, demonstrating the strength of our model and confirming that we are returning to better cash conversion rates. Now let me bring you to our performance by geography. On Slide 6, you will see that we posted solid same-day sales growth, up 3.4% in Q3 or 4.2%, excluding Germany and Spain. All 3 of our geographies grew with accelerating growth in North America. In Europe, representing 53% of our sales, revenue was up 0.8% on a high base effect with growth of 6.5% in Q3 last year. In North America, which accounts for 38% of our business, sales rose 7.3%. And in Asia-Pac, which accounts for the remaining 9% of group sales, saw its revenue rise 3.3%. As you can see on the graph, if you look at our last 12-month sales on a running basis, we have added nearly EUR 800 million in additional organic sales, with all 3 of our geographies contributing. On Slide 7, if we focus on Europe, sales in our biggest region stood at EUR 1.77 billion in the quarter, up 0.8% on a same-day basis, up 2.3% excluding Germany and Spain under reengineering. In our home market of France, which accounts for more than 1/3 of our European sales, our revenue was 0.8% on a high base effect. This growth was supported by good demand in residential and industrial markets. We are also seeing positive trends in several key countries, including Switzerland, Benelux, Sweden. Switzerland benefited from its strategy of focusing on project and grew by 7.4%. Benelux posted solid point -- 6.8% growth, with good momentum in Belgium but also in the Netherlands. Sales in Scandinavia went up 3.5%, with positive momentum in Sweden due to public spending and the large C&I business and also Norway. In Germany, with the closure of 17 branches in C&I in the North at the end of September, our network reorganization is now completed. It's over. We now have refocused our business on the more profitable industrial segment on a national base and in the south part of the country under C&I where we have a stronger footprint. As a result, sales in the country were down 10.9% but up 0.4% excluding branch closures. In Spain, the 12 branch closures and the 4 mergers are completed and the logistic organization is expected to be finalized gradually over coming months here.Lastly, in the U.K., sales dropped by 2.9%, mainly due to lower business and mainly with 6 large C&I accounts and 30 branch closures. We're really focused on developing and strengthening our digital business and our sales force following the banner merger. We added 57 commercial reps since May as part of this evolution. On Page 8, let me be very pleased to share with you the effect of the digital strategy in Europe. 1 out of 4 euro is digitally transacted now. And we saw a strong boost of digital sales, which were up 14% on a same-day basis in Q3. Digital penetration reached 23.5% in Q3, up 100 bps versus H1 of the same year and up by 270 bps compared with Q3 last year. The penetration rate improved by 240 bps in France and by almost 500 bps in Switzerland, the Netherlands and Sweden, which are already our most heavily digitized countries. Four of our countries have penetration rates above 40%. As mentioned in our Q2 call, digital is a clear driver and clearer driver of profitability for many in the future. Page 9. Page 9, North America. In North America, I'm very pleased to share with you that the sales grew by a strong 7.3% on a constant and same-day basis. And when we look at greater detail at where we stand in our transformation in the U.S., I'm pleased to report that our Q3 performance provides another demonstration that the approach in the U.S. is producing results. Sales grew in high single digits for the seventh consecutive quarter at 8%, confirming regain-ability to capture market growth and gain market share in specific regions. We are gaining market share. This is a major step for Rexel after years of market underperformance. Thanks to our regionalization strategy, we have gained 7,000 additional customers in the last 12 months here, and we are seeing strong double-digit growth in electrical distribution in key regions. In addition, our branch openings initiative has generated additional sales of 1.8% in Q3. We have opened, as we speak, 44 new branches or counters since the launch of the plan in 2017, and we expect to be at around 50 openings by the end of the year compared to 60 initially announced, as the teams were also focusing on regionalization construction. We confirm our expectation of a positive impact of 2% on the full year. And quite importantly also to all of us, Canada sales were up 4.8%, driven both by mining and large wind projects but also by very focused sales organization by the 2 banners, which contributed for 2%, and in the mining and large wind, 2% of the 4.8% and the rest being the focus of our teams. Page 10, to complete the geography, Asia-Pacific. In Asia-Pacific, our sales were up 3.3% for -- and this [ is what ] count 6.2% restated for the impact of the disposal in Q2 '18 of our Rockwell automation business in Australia. In Australia, we proceeded good underlying performance, with growth at 3.5% excluding the asset disposal, mainly by Small and Medium Electrician customers. New Zealand also grew strongly, with sales up 8.4%. In Asia, sales were up by a strong 8.1%. In China, despite the high base effect, sales were up 1.9%, reflecting good underlying demand in industrial product and solutions. We also saw a favorable dynamic in the Middle East and India, supported by a large project in the Middle East and strong automation in India. This is the global picture in terms of regions. And now, let me hand over to Laurent for the review of the financial performance.

L
Laurent Delabarre
Group Chief Financial Officer

Thank you, Patrick, and good morning to all of you. On a reported basis, our sales were up 2.4% in the quarter as a result of the positive 3.4% same-day sales growth and a positive calendar impact of 0.4%, partly offset by 2 unfavorable effects: scope for minus 0.7%, resulting from the divestments in Southeast Asia last year; and currencies for minus 0.6%, mainly due to the depreciation of the Australian and Canadian dollars and the Swedish krona against euro, partly offset by the slight appreciation of the U.S. dollar. Concerning currencies, we expect the foreign exchange effect to continue to ease over the year, and our forecast, assuming spot rates remain unchanged, is an impact of minus 2.6% on sales in full year 2018. As shown on the chart on the bottom right-hand side, we saw lower contribution from copper price at plus 0.3% in Q3. Based on current copper price, we expect now our copper contribution to go to minus 0.5% in Q4. On the bar chart above, you clearly see that the comparable base will become more challenging in Q4. On Slide 13, we see our adjusted EBITA bridge. Adjusted EBITA was up 9.2% to EUR 147 million and margins to that, 4.4%. Our 22 basis points improvement in Q3 '18 on a comparable basis is explained by the 55 basis points volume and price contribution that more than offset the negative impact of investment for 27 basis points, while productivity gains largely offset cost inflation, notably from wages and freight. You should know that the low performance of Germany and Spain in the context of transformation had a negative impact of circa 16 basis points on our adjusted EBITA margin in Q3. On Slide 14, we turn to our profitability by regions. Overall, with adjusted EBITA of EUR 146.8 million, our adjusted EBITA margins stood at 4.4%, a 22 basis point increase coming from North America and Asia-Pacific. In Europe, adjusted EBITA margin was down 8 bps, impacted by Germany and Spain for minus 25 basis points. Restated from those 2 countries in transformation, our performance is very satisfactory, notably thanks to good cost control that is partly offset by a negative customer mix in Switzerland and a more competitive environment in Norway. In North America, adjusted EBITA margin grew 63 basis points to 4.7%, thanks to volume growth and positive pricing contribution, especially in Canada, where we act proactively to prevent any margin impact from trade tariff increases. This action more than offset the cost inflation and the carryover effect of investments in people and branch opening. In Asia-Pacific, adjusted EBITA margin rose 63 basis points to 1.9%, thanks to volume and supplier concentration, offsetting the disposal of the Rockwell automation business in Australia. Our corporate costs stood at EUR 6.4 million, reflecting investments in digital and strict cost control at H2. On a full year basis, we anticipate the normative level of spending at corporate level at around EUR 35 million. In the 9 months, adjusted EBITA stood at EUR 435 million, up 5.1%. On Slide 15, we look at the bottom line part of our P&L. Let's start with our reported EBITA of EUR 428.4 million, down 0.8% including a one-off negative copper effect of EUR 6.6 million. Other income and expense amount to a negative EUR 63.5 million, including restructuring costs for EUR 60 million, mostly related to reorganization in Germany and Spain. For the full year, we confirm the restructuring expense will be above the normative level at around EUR 90 million. Our net financial expense improved to EUR 75.4 million, reflecting a reduction in average net interest rate on our gross debt to 2.81% as a result of the refinancing activities of last year. For 2018, we expect financial results to be around EUR 100 million, assuming no major volatility in currency and interest rates. We also saw a drop in our income tax to EUR 99.3 million as we benefited from the positive impact of the U.S. tax reform. Our effective tax rate stood at 35.8%, above our normative tax rate of 32%, owing to the restructuring expense in Germany and Spain where deferred tax assets cannot be recognized. On a full year basis and taking into account this one-off effect, tax rate should be close to 36%. Net income was EUR 178.1 million, up 8.8%, and our recurring net income was up 15.3% at EUR 240.1 million. On Slide 16, we turn to our balance sheet, which we reinforced in the quarter with improved cash flow and working capital that results in lower net debt. Indeed, as you can see on the chart, our working capital improved by -- to more than EUR 15 million. Our free cash flow before interest and tax improved to an inflow of EUR 56.6 million from EUR 19.3 million in 9 months 2017. We confirm our objective to return in 2018 to a higher level of cash conversion versus 2017, demonstrating the strength of our model. Net capital expenditure was down to EUR 58.8 million from 17 -- from EUR 77.6 million in the same period last year. This includes the proceeds of the disposal of our Rockwell automation business in Australia and our gross CapEx stood at EUR 76.8 million. We now anticipate that our full year 2018 gross CapEx to be close to EUR 110 million versus the EUR 130 million for this year, which corresponds to a net CapEx of close to EUR 90 million, including the proceeds we see from the disposal of our Rockwell business in Australia. Our net debt was reduced by EUR 94 million or 4% to EUR 2.26 billion. On Slide 17, let's take a closer look at the breakdown in maturities of our debt. The chart shows that we have no short-term maturities on our bonds, with no significant repayment before June 2023 and an average maturity close to 3.8 years. Rexel's 2017 refinancing strategy is reflected in the average effective interest rate on gross debt, down 37 basis points year-on-year to 2.81%. We also maintained strong financial flexibility with liquidity of around EUR 1 billion at the end of September, including our undrawn senior credit facility. Let me now hand over to Patrick.

P
Patrick BĂ©rard
CEO, Europe GM & Director

Thanks, Laurent. I will conclude this presentation with our outlook. We are clearly seeing the benefits of our strategic actions implemented in the U.S. in terms of logistic organization and branch [ and club ] expansion. Taking into consideration the performance of the first 9 months and expectation for the last quarter, we confirm our 2018 full year financial targets. As a reminder, we said in February that Rexel targeted at a comparable scope and exchange rate. One, sales up in the low single digits on a constant and same-day basis. Two, a mid to high single digit increase in adjusted EBITA. Three, a further improvement in our net debt-to-EBITDA ratio. Looking ahead, we remain totally focused on our key priorities: investment in the U.S., IT and digitalization every day, turnaround in Germany and execution of the divestment program. Thank you very much for the attention. And now we will be very happy to take all your questions.

Operator

[Operator Instructions] Your first question this morning comes from the line of Andre Kukhnin from Crédit Suisse.

A
Andre Kukhnin
Mechanical Engineering Capital Goods Analyst

I've got a couple. Firstly, I have a question on stock levels. In the kind of system globally, how do you view your own inventory levels versus the end markets' performance? And how -- if you could offer us an assessment of the broader industry, and in particular, in China? I guess that's where we've seen most of the concerns in the industrial automation space over volume slowing down and maybe inventories being excessive. But if you could give us a global picture, that would be really great.

P
Patrick BĂ©rard
CEO, Europe GM & Director

First of all, I am like you, I am reading a lot of things. And if I look at the numbers and our activity level right now, globally first before China, the inventory level is not showing any change in the pattern in the named territories, countries and activity. And the mix of countries we are in are just on the same trends as we have been experiencing in the beginning of the year. This is the shorter view I can give you as an input right. Regarding China, the one thing we know and we are focusing heavily on our -- on the automation, the wave and the need and the desire to go in automation faster than ever before is there. And whether it is for efficiency reasons, for wages inflation reason, or for capacity, or whatever, or to be more competitive, the wave is just enormous. The automation, globally speaking, whether it's in the U.S., in Europe, regarding Germany or in China, the automation before the deal or industry trend is only at the beginning obviously. We see that clearly.

L
Laurent Delabarre
Group Chief Financial Officer

Just on China, you may see the growth at [ to be detailed at ] 1.9%. But we have a very challenging base effect. We had a lot of projects last year, I'm not sure on the same quarter, we had about something like close to 10% growth. So our underlying industrial business, as explained by Patrick, still then very good in China.

A
Andre Kukhnin
Mechanical Engineering Capital Goods Analyst

Got it. And just on China specifically, ex that project, if we can even think about further sort of like-for-like days effect -- sales, did you see any change in trends in industrial or broader in China as you went through the months of the quarter?

L
Laurent Delabarre
Group Chief Financial Officer

No.

P
Patrick BĂ©rard
CEO, Europe GM & Director

Not as we speak. Now we are not in the big project. Let's say, distribution is always attached to medium-sized company, and the number of companies who are driving new demand and coming to the wave of automation is in its very early stages. Big projects [ that we honored ] in, and therefore further, we don't see if there is any change there. But for the medium to low-end and sized company, we don't see any change.

A
Andre Kukhnin
Mechanical Engineering Capital Goods Analyst

That's very clear. And just if I may follow up, my line broke up, when you talked about Germany and Spain transformational impact on margin, was it 16 or 60, 6-0 impact?

L
Laurent Delabarre
Group Chief Financial Officer

16, 1-6 [ at group level ]. And if you take a look at the European perimeter, it's close to 30 basis points in Q3.

A
Andre Kukhnin
Mechanical Engineering Capital Goods Analyst

And you're wearing that inside adjusted EBITA but offsetting it by own measures. Is that right?

L
Laurent Delabarre
Group Chief Financial Officer

Yes.

Operator

The next question comes from the line of Lucie Carrier from Morgan Stanley.

L
Lucie Anne Lise Carrier
Executive Director

I'll have 3 in total. The first one, I would like to come back to the momentum in North America because the comp base in the third quarter was more demanding than the second one, and we are seeing a sequential acceleration. I'm just curious to understand what you are doing differently than your peers now in North America because you highlighted you have gained share. You're the only distributor in North America from what we can see on the industrial side actually having raising gross margin. So what are you doing differently? And how advanced do you think you are in what I would call the rehabilitation process now in North America? This is my first question.

P
Patrick BĂ©rard
CEO, Europe GM & Director

Yes. Lucie, you're right, we do top line and margin, and that's a concern from Day 1. And we are selective on certain projects because we could grow much faster by taking a lot of volume, ask Laurent. They don't have enough good volume to be taken, therefore we pursue the strategy of volume end market. There is something else also, we have improved our service level. And we are defending less through low prices, and we can now go into a positive pricing evolution thanks to all the efforts which are now bringing fruits. So that's -- we are on a more constructive [ mode in the safest pattern than defensive mode ]. And this has an effect on the pricing structure. And thirdly, we grow with our partners. We have efficiency through volume in our fixed cost base, whether it's logistic or absorption of certain fixed costs, which increased the margin to a new commercial margin and back margin, all of it contribute also to the results. Yes, we -- but it's a clear choice. It's a conscious management, and we will continue to do so.

L
Laurent Delabarre
Group Chief Financial Officer

And net, the branch opening, it's rougly 2% and likely result to helping the top line. And also, we commented last year on the North with the GEIS and now everything is not to its full potential. But we are recovering compared to last year, and we are back to positive growth with that supplier from the sale from that supplier, so that is helping us also.

P
Patrick BĂ©rard
CEO, Europe GM & Director

They are taken over by ABB stock to see the first effect. Not yet there but compared to the decline of last year, we would see the positive effect. Lucie? Do you have another question?

L
Lucie Anne Lise Carrier
Executive Director

Yes, I had another question. Here I am again. So my second question was more looking forward a little bit. You still have about 30 basis point impact on margin from investments in growth. You said of course that the German and Spain restructuring would also be benefiting to the margin going forward. So -- and you have your pricing initiative. So when -- how much do you think, first of all, that the Germany and Spain can push up your margin when we look at next year when everything is implemented? And when we think about pricing, cost inflation and investment for growth, do you expect to be able to continue that cost inflation we are seeing in certain countries, specifically around labor?

P
Patrick BĂ©rard
CEO, Europe GM & Director

On Germany, we were able to do all the cutting, closing, restructuring in a short period of time once we got the approval of all the authorities internal and external. So that I can tell you as of -- as we speak, it's done. When I'm saying it's done, it's people are gone, the branch are closed. And in doing so, we have eliminated the lowest-margin business we were in, which was the C&I business in the North of Germany, which was also the most costly one for us to serve due to our lack of density. Meaning we didn't have the right densification, critical mass in order to be efficient in the C&I business in the North of Germany. In doing so, we have also closed part of, let's say, local DCs warehousing system. So that now we serve global country for industrial product and only the south, where we have a much bigger density for the nonindustrial. Therefore, what we see in terms of these improvements is a clear-cut of elimination of either too high cost or too low margin business in Germany. Therefore, yes, we expect to see with every month passing by the effect of what we have cut, but also the fact that we focus on industry, we expect to see growth and further improvement on this side. In Spain, it's a little bit different because 2 steps in the restructuring. You had the closure of the branches with, let's say, loss-making type of business. It's done or being done, but it's done. And we have, to come, the gradual evolution of the logistic network to support the remaining branches, which will call for gradual steps throughout the coming, let's say, next 2 quarters. But both will be -- will generate the equivalent of 30 bps of improvement we wait for.

L
Laurent Delabarre
Group Chief Financial Officer

And for next year, this attrition plan, from what we see today, will give us an upside of circa 10 bps at group level.

L
Lucie Anne Lise Carrier
Executive Director

Sorry, Laurent, just to make sure I understood, so you're saying 30 basis points from German and Spain initiatives and then the last 10 basis points, what was that about?

P
Patrick BĂ©rard
CEO, Europe GM & Director

No, no.

L
Laurent Delabarre
Group Chief Financial Officer

30 is impacting Q3 in Europe, the headwinds because of Germany and Spain. Now that the branch has been closing at the end of September, so we stopped to see the positive impact starting Q4. And when we look at next year, we consider that next year the [ revenue projection we had implemented ], both in Germany and Spain, should help us of circa 10 basis points on the EBITA of the group.

L
Lucie Anne Lise Carrier
Executive Director

For the group. And how do you think about the ongoing impact from the investment, which are still about 30% -- 30 basis point drag on the margin currently? Are we accelerating? Are we going to stay the same? Are we going to be continuing to invest at maybe at a slightly slower pace?

L
Laurent Delabarre
Group Chief Financial Officer

It should -- everything is not finalized. We are still in the middle of the budget session, but probably, we will be not higher than that, but in that ballpark. We still have some programs, open branches in the U.S. as we have commented, and there are a couple other initiatives, especially in the digital, that will continue over next year.

L
Lucie Anne Lise Carrier
Executive Director

Okay, understood. And then just my last question, quickly on France. It was up 1% in the third quarter, I think, on a comp of plus 9%. Just how do you see this market? Because when we hear some of the other companies in the sector talking about French construction in France generally, they seem to point to deceleration. How do you see it from your standpoint because you're still on a high comp in positive territory?

P
Patrick BĂ©rard
CEO, Europe GM & Director

Well, all our customers today have good activity level. Quotations for the coming months are good and solid. I read the numbers like you, I read the commentary of the others like you. The mix of our activity between, let's say, the vertical, the new housing start. There are reasons, all the regional, the new and the maintenance make us probably less sensitive than others to certain numbers. But in any case, we are doing fine right now. And for the coming months, I expect to stay at the same level of activity. It is true also that the model we have make us win some market share month-after-month. And the more customer, more SKU strategy continues to be positive in this country. We apply it. And now the next wave is the growth in digitalization, which has still room for maneuver. We have a very good company share, and we expect further growth in the coming year. I'm used to -- you know where I come from, and I'm used to have a market here with a much more difficult environment. And therefore, I think we know actually where, how and when to ask, and so far, we have good [ results ].

Operator

The next question comes from the line of Andreas Willi from JPMorgan.

A
Andreas P. Willi
Head of the European Capital Goods

My first question is on your guidance for the full year, which you have left unchanged. Given we already passed 9 months now and where you stand after 9 months, do you see yourselves closer to the high end or closer to the low end in terms of your adjusted EBITA growth target of mid to high single digit for the year, given that this implies still quite of a big range for the implied Q4?

P
Patrick BĂ©rard
CEO, Europe GM & Director

Andreas, you know that, firstly, I would never answer this, therefore I give it to Laurent.

L
Laurent Delabarre
Group Chief Financial Officer

We keep seeing a good momentum in Q4, despite that more difficult base effect, which is a good trend in France and the U.S. We expect the [ top ] benefits from the savings and from the country in transformation. But I mean, more of what we're expecting in Q4 is the same EBITA growth as to what we had in the last 2 quarters. So you can do then your math on that basis.

A
Andreas P. Willi
Head of the European Capital Goods

And the second question, on the branch restructuring in Germany and Spain, you helped us with the EBIT impact. Maybe you can help us a bit with the top line impact. Given that some of these branch closures happened during Q3, particularly in Germany, kind of what's the annualized effect in that sense that we should take into account now for the next 3 quarters until we kind of lap the comparison again?

L
Laurent Delabarre
Group Chief Financial Officer

We anticipate that the impact of Germany and Spain was minus 0.8% at group level and minus 1.5% at European level. And going forward, it would be globally up to EUR 160 million less next year, spread over the 3 quarters.

A
Andreas P. Willi
Head of the European Capital Goods

Sorry, could you just repeat that? I didn't hear -- you said it's 160 basis points?

L
Laurent Delabarre
Group Chief Financial Officer

No, no. I don't have the percentage, but with the branch closing, we calculate precisely the impact on the top line in Q3, which is minus 0.8% in Q3 on our top line. And for next year, all the branch closing will have a negative impact of EUR 160 million for next year, EUR 160 million of self-decline.

A
Andreas P. Willi
Head of the European Capital Goods

Yes. And that's basically for 8 months or so, given you'd closed all of these branches in that time period?

L
Laurent Delabarre
Group Chief Financial Officer

Yes. 9 months, yes, to be precise.

A
Andreas P. Willi
Head of the European Capital Goods

9 months.

L
Laurent Delabarre
Group Chief Financial Officer

You're right. Yes.

Operator

The next question comes from the line of SĂ©bastien Gruter from Redburn.

S
SĂ©bastien Gruter
Research Analyst

I have 2 questions. First of all, I mean, just coming back on Germany, Spain, the impact on supplying is about EUR 25 million in the third quarter. You were guiding for an impact of 16 bps on the EBITA margin, so that's about EUR 5 million. So I guess a 20% margin on those businesses, which seems fair for gross margin, but do you account for any OpEx savings in that number? Or maybe the timing did not let you make any savings in this quarter? And I have another question, but maybe could we answer this one first?

L
Laurent Delabarre
Group Chief Financial Officer

All right. So the 16 basis points is just looking at the group with or without these 2 countries. So it's taking all the measure -- all what is factored in the Q3 on this. And yes, it's around EUR 3 million on the quarter.

S
SĂ©bastien Gruter
Research Analyst

So EUR 3 million net on the quarter?

L
Laurent Delabarre
Group Chief Financial Officer

Yes.

S
SĂ©bastien Gruter
Research Analyst

Okay. And second question would be about next year. You are in the budget process, but if I look at next year, Europe is actually to have a tougher year than the last 2. Besides the expected benefits of the restructuring of Germany and Spain, are there any plans you are ready to trigger to reduce OpEx in case demand weakens as budgeting time would suggest?

P
Patrick BĂ©rard
CEO, Europe GM & Director

Yes. As always in our business, we look carefully at the activity level and the margins. What I would look first is at the inflation. What I would look immediately after is at the OpEx because the margin has to defend it. It's unclear yet, the level of inflation we will get in the -- I mean, I'm talking Europe here. In the U.S., it's a different exercise. But given everything going up, whether it's in the wages and transportation and the raw materials for Q1 kind of stuff, we wait to know the kind of inflation we will be facing, that the one that we will pass in the pricing and the one we will face in our cost base. And this is what budgets are all about. And at the end of it, we will adjust should it be, we will adjust the cost base accordingly to defend the margin and the EBITA generation.

S
SĂ©bastien Gruter
Research Analyst

And just a last one on the trade tariff. Have you seen any planned price increase from suppliers? We've seen a large price increase in '19, but have you seen other suppliers pushing for price increase following the tariff? And do you have any impact from trade tariff on your private level business in the U.S. that could pressure the gross margin going forward?

P
Patrick BĂ©rard
CEO, Europe GM & Director

In the U.S., private level or not private level where we trade directly or indirectly, directly if it's privately enforced or indirectly if it's through the suppliers. So many things are being made by U.S. suppliers, at least partial or total, let's say, China-made products that there will be a tariff. In fact, which is just coming up gradually now and -- between now and the end of the year. And we expect a visible tariff effect on the inflation in the coming months, it's definitely one. Our policy is clear, it has to be passed 100%. There is no room for margin squeeze in such, let's say, a major, major change. Should the tariff materialize in what we have been reading, the day it comes, it will be automatically passed further down.

Operator

The next question comes from the line of Peter Testa from One Investments.

P
Peter Testa
Analyst

Maybe just following on from that point, when you say 100% passed through, you think that your suppliers will pass it through to you purely just the tariff as a line item, so you pass it straight through? Or it pass through with the gross margin? And if you could give some view on how you think the sequencing of that will happen between the suppliers and your private-label needs?

P
Patrick BĂ©rard
CEO, Europe GM & Director

Traditionally, when suppliers announce a price increase to us, we get a couple of weeks announcement. They're very short term. And we know it via data [ week-by-week ] this is coming to us. And we've got -- we have to make a revision of the entire pricing construction to our installers or end users. And so that we don't experience a margin squeeze between the customer pricing and the purchasing price -- purchase price. This time, the tariff is probably -- it's no longer, let's say, a standard inflation of 1% or 1.5%. We may face a major percentage and bigger percentages to face a different moment in time. This is what I call 100% passed further down to the customer. Meaning, if we get 10% on something, just to pick up a number, the entire 10% will be transferred to the end user or the installer [ in time ]. The difficulty in a market like this, this is the time at which the market will recognize this in making contracts, long-term contracts, quotations with a certain time. And because there is a shortage of installation label right now in the U.S., people tend to make -- or to take charge that will probably materialize in 4, 5, 6 months after. And we need to be sure and we already gave all the instructions to everyone not to commit that kind of [ advisement ] -- not to commit to term pricing because we know it's not going to have to be the case. The ability to get the right pricing strategy and pricing management in such a changing environment require a lot of managerial attention and discipline in different ways of doing the business. And everything has been already announced and passed and is our daily attention.

P
Peter Testa
Analyst

So since the tariff numbers are more or less known, assuming that it all goes ahead and given you know your private-label, for example, supply chain, have you been preparing already your customers on that price increase? Have you been quoting for longer projects based upon those new prices?

P
Patrick BĂ©rard
CEO, Europe GM & Director

Every day.

P
Peter Testa
Analyst

And are the customers reacting in any way?

P
Patrick BĂ©rard
CEO, Europe GM & Director

Well, I will be frank with you. If somebody wants -- well, they try to -- we have to give them the evidence first of all. And there is enough news around in order to gather evidence. The second thing, if they find somebody to -- who can skip it, I prefer to get the volume from this one, but this one will not last long. It's too big to be able to be swallowed by anyone. And the good thing right now in the U.S., the demand is so high that right now, you may lose 1 month, 2 months, but you recover immediately after because it's the same punishment for everybody.

P
Peter Testa
Analyst

And at the same time...

P
Patrick BĂ©rard
CEO, Europe GM & Director

Yes, please.

P
Peter Testa
Analyst

No, okay. So therefore, with your private label, are you looking at adjusting supply chains at all based upon tariffs? I mean, have you -- well, you probably looked at it. Have you been adjusting supply chains at all based upon the tariff flow to see whether you can improve your private-label position vis-Ă -vis what it would be without changing?

P
Patrick BĂ©rard
CEO, Europe GM & Director

It's not -- it's limited what can be done on such a short term. There is prescription, there are technical specs, very short term. You cannot adjust a lot. In the medium run, it could be. Depending how much the tariffs would continue having an impact on what. Commodities, you can. Non-commodity items, impossible. And first, we act in protecting the margin, then react in optimization, second step.

P
Peter Testa
Analyst

Right. And then just a question at copper price, which has been coming down. You had less impact in Q3. Do you have any sense on what -- how we should account for the copper price impact in Q4?

P
Patrick BĂ©rard
CEO, Europe GM & Director

No. Unfortunately, no I don't. Maybe, Laurent...

L
Laurent Delabarre
Group Chief Financial Officer

Yes. At group level, based on return of copper price, we said that the impact on Q4 on the top line will be minus 0.5%.

P
Peter Testa
Analyst

Fine. And last question is just on the gross margin North America and the improvement of the situation with ABB earning the GE business. Can you give some sense as to how you think that is helping the gross margin already or will help the gross margin going forward as they will have more modern and relevant products?

P
Patrick BĂ©rard
CEO, Europe GM & Director

No. Maybe we have to clear 2 things. Our improvement in gross margin is generally across all the sources because we work on our pricing and we grew and we work on getting better conditions, globally speaking. It happened and comparative to last year, last year, we were suffering heavily from the GEIS situation we couldn't deliver. And obviously, when you don't get the product, there are 2 things happening. To keep the customer, you lower your prices or you try to get -- it's almost low service, put prices down and create margin issues. With the ABB, it's not yet perfect, but the ABB effort, significant efforts made to give -- I mean, normal delivery pattern out of the 3 factories, the 1 in Monterrey, Mexico and the 2 out of the American plants. We are really in a disarray. Starting -- we start to have visible output, better deliveries, which allow us to regain position at customer, having a GEIS -- ex-GEIS now, ABB GEIS product base. In doing so, we are likely spending by lower pricing, and we could sell, let's say, at standard normal conditions. You see what we meant by the restoration of GEIS ABB, doing the effort for GEIS, which helped us on that particular front. Therefore, I split the 2. You have the cost margin and the pricing effort, and you have what was taking us down, which now start to be less sensitive to our reserves in the U.S.

Operator

The next question comes from the line of Rory McKenzie from UBS.

R
Rory Edward McKenzie
European Support Services Analyst

Just 2 left from me, please. Firstly, I want to ask about, I guess, following on the pricing pressure in Europe, in cables. Are there any signs of that gross margin decline coming to an end? And then secondly, I was just wondering if you could make any comment at all about the current investigation in France, even just an idea of the timing and when can we expect to hear more.

P
Patrick BĂ©rard
CEO, Europe GM & Director

Laurent, you want to take the pricing cable?

L
Laurent Delabarre
Group Chief Financial Officer

Yes. The cable business impacting Europe is flat. In fact, we have a pretty positive effect in Germany and Austria, which affect Sweden and France. So yes, overall, no headwinds at this stage.

P
Patrick BĂ©rard
CEO, Europe GM & Director

On the investigation, there is nothing new. I can only recall you that early September rates were performed in the offices of Rexel and the order of the industry. This investigation, conducted with the assistance of the French Competition Authority, this was a mechanism of price formation on the market distribution of electrical equipment, that's one thing. At this point, Rexel is not party to the proceedings and therefore is not aware of the practices that it might be accused of, to be transparent. While the information has been released in the press, it does not allow us to determine the offenses that Rexel could be accused of. And it's absolutely not possible to date to evaluate the degree of probability of formal indictment being made against Rexel, nor foreseeable adverse judgment and by far not to evaluate the financial risks, which Rexel would potentially be exposed to. There is no significant change relating to the litigation since that moment and which are disclosed in the financial statements. We cannot -- there is no material impact on Rexel's financial position or profitability as we stand. You know that may last long.

Operator

The next question comes from the line of Martin Wilkie from Citi.

M
Martin Wilkie
Director

It's Martin from Citi. Just a question on portfolio. If you could just remind us how much of the sort of exits or disposals has still to be announced? You've obviously downsized branches and so forth in Germany, done some other exits. From memory, I think you probably have EUR 100 million or so of sales still to be exited. But could you just remind where we are on that? And also just in terms of the process, you've obviously had some divisions that were more branch closures as opposed to making sales. And how should we think about the remaining revenue that you will be exiting? Is there any -- is it all essentially zero-profit revenue that you would be getting out of over the next 6 or 12 months? And just how we should think about that in terms of group profit?

L
Laurent Delabarre
Group Chief Financial Officer

The disposal process is going on. We still have yet some -- a bit more than EUR 120 million to exit, retire businesses in various activity, which is quite a low-margin contribution to the group at this stage. In some parts, it could imply a branch closing, but all that is in process. And we expect to finish that, as we've said in July, by the end of the first semester of 2019.

M
Martin Wilkie
Director

And once you've got to that stage, will you then be happy with the portfolio and we should be back to sort of business as usual, you could do small bolt-on deals? Or was that simply stage 1 and there will be more to do beyond that? I mean, how should we think about the Rexel portfolio once you get to that mid-2019 level, having cut your revenue by EUR 800 million or so to that point?

P
Patrick BĂ©rard
CEO, Europe GM & Director

Well, so far, the portfolio -- the criteria for portfolio management was to retrieve or sell or close or whether activities or countries, where we didn't show conditions of success on, let's say, whether not even a year or 2 years or even longer terms. It was a lot like correcting some element of the portfolio, which were already being negative and a burden on all of us, whether from cash flow, meeting cash or for rebates. Looking ahead of us, we will probably enter into more active -- what I call active portfolio management. Meaning acquisition on one hand and eventually, if something would be in 1 year or 2 years less in the center of our activity, it could be also divested, but it would be buy and sell. So far, it has been more correcting and now we will grow into an active buy and sell, developing, acquiring, adding capabilities, it could be driven by scale, it could be driven by digital, it could be driven by market share. That is on the acquisition side and on the selling side. It could be driven by a very good -- very good return on an asset for which we'd see, medium term, a more delicate future. We will go into more re-profiling of the activities to what will be long lasting and a profitability increase on the medium term for our business.

Operator

The next question comes from the line of Alfred Glaser from ODDO.

A
Alfred Glaser
Analyst

I just wanted to quickly get back on pricing, maybe I missed it, I had a problem with my line. Could you just give us the pricing evolution, excluding cable, copper prices, and for the group and by region? And then I had a second question on digital sales.

L
Laurent Delabarre
Group Chief Financial Officer

Yes. So pricing, excluding cable, is a bit higher than in H1. In H1 2018, the price increase, excluding cable, was 0.9% at group level, with around 1% in North America and 0.1% in Europe. And in Q3, the group will go from 0.9% to 1.3%, with Europe going from 0.9% to 1.5% and North America from 1% to 1.6%. So we are starting to see a bit more inflation on our supply, which is something that our industry likes a lot.

A
Alfred Glaser
Analyst

Okay. And on digital sales, you're making progress, actually, in revenues. Could you give us some indications where you expect to be at the end of this year in terms of digital revenues versus total revenues? And where you might be by the end of next year? Is your target of doing 20%, 25% of your revenues in the short to medium term, is that still your target right now?

L
Laurent Delabarre
Group Chief Financial Officer

Yes. We don't have so far, I will not guide on precisely here for next year. When we see what it can bring to Europe, which is tracking more than 20% to date and what it brings in terms of contribution to the bottom line, we really want to continue to invest and accelerate in that field. And we have not changed to our guidance to be as soon as possible around 25% at group level and midterm of 35% to 40%.

P
Patrick BĂ©rard
CEO, Europe GM & Director

On that front, when I see certain B2B people in the business coming from, let's say, similar origin and we do more brick-and-mortar as the origin, I'm very pleased compared to them with the adoption, the adoption efforts. Yes, there is in our OpEx, we have some costs for allocating people to make the adoption happen. Then when I see the adoption rate happening right now and the transformation, and the said generating acceleration that we start to see on that in the main countries and a few more to come, I start to be very confident in what we are doing. So that we will participate in what I call the [indiscernible] channel, meaning the conventional and the digital field, and we see that happening more and more. That's probably -- I cannot give you numbers for next year, but the numbers you mentioned, definitely, we maintain as targets.

L
Laurent Delabarre
Group Chief Financial Officer

We'll be around 15% in digital sales at the end of this year. And we will crack -- certainly, we will crack to EUR 2 billion of digital sales at the end of this year.

P
Patrick BĂ©rard
CEO, Europe GM & Director

For sure.

Operator

The next question comes from the line of Andre Kukhnin from Crédit Suisse.

A
Andre Kukhnin
Mechanical Engineering Capital Goods Analyst

Firstly, on the tariffs in the U.S., are you considering stocking up ahead of that implementation with the pre-tariff price products?

P
Patrick BĂ©rard
CEO, Europe GM & Director

No. If I would tell you one thing, it's coming too fast. And the pipeline is not able to -- I mean, the machine in the U.S. is absolutely at the max of what it can be done, can be produced. And the demand is strong, but nobody can produce more than -- I mean, let's look at the tricky part of the tariffs, that it might not benefit so widely to the U.S. company in terms of capacity to load because they're already full. And even if we would like to, let's say, reserve volumes and get things, nobody has an intention to do so. And tariffs will create inflation on the imports, but they create inflation on the internally produced. And to be seen in the coming months, it will be interesting.

A
Andre Kukhnin
Mechanical Engineering Capital Goods Analyst

Got it. And then could you comment a bit more on M&A pipeline in the U.S.? We thought you were getting more active on that front from kind of mid-year or from early this year. Has there been progress on that? Are you making more offers or speaking to more companies?

P
Patrick BĂ©rard
CEO, Europe GM & Director

Okay. We are screening the market for certain targets in the regions where we are. Obviously, there are a few on the market right now, which we look like everybody else, but we are not making progress in these directions because they might not match our criteria of already digitalized for part of it, having the franchise of suppliers with whom we work in the other regions and kind of -- and I will not divert from the original strategy of region densification. There are 2 things on the M&A front. One, we look carefully at -- and we are candidate for, this is where we can be in the regions where we are in the Rockwell automation APRs. This is open, well-known that whether it's a good APR to be taken, they could complement what we have in industry automation, we will and we are a candidate each time. Okay? That's the only clear pipeline I could really openly say. If there is something that can come at any time, I would be on it. The rest, we are looking, we are screening. Sometimes, we are getting a little bit closer. There is nothing very close in the coming months. [ Without ] knowing this one, it could accelerate, but I don't want to create here an expectation unnecessarily. It's more that we were not active at all during the period of time, and we are heavily interested in looking what could make sense.

A
Andre Kukhnin
Mechanical Engineering Capital Goods Analyst

That's crystal clear. And just final one, if I may ask, if I could be a pain. Could you repeat that answer you gave on the pricing? We didn't get all the numbers down unfortunately because the line is a bit blurred.

L
Laurent Delabarre
Group Chief Financial Officer

Yes.

A
Andre Kukhnin
Mechanical Engineering Capital Goods Analyst

For Laurent.

L
Laurent Delabarre
Group Chief Financial Officer

Yes. I will give it to you. So I am talking excluding cable. So for the group in H1, the price increase we have 0.9%, of which 0.9% in Europe and 1% in North America. And in Q3, the group is at 1 -- plus 1.3%, with plus 1.5% in Europe, North America is 1.6% and the difference is the decrease in price in Asia-Pac.

Operator

We have no further questions at this time. Please continue.

P
Patrick BĂ©rard
CEO, Europe GM & Director

Well, if there are no more questions, first of all, I would like to thank all of you and each of you for the time you spent, for the question you asked. And hopefully, we -- when will see you now, February 13, if I'm -- I'm turning to my colleague to be sure that I'm right with the dates. Yes, please, books. February 13, full year results, next year. And in the meantime, I wish you a good balance of the year, and thank you very much for your time and attention.

Operator

Thank you very much. That does conclude our conference for today. Thank you all for your participation. You may now disconnect.