Rexel SA

PAR:RXL

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Rexel Third Quarter Sales Publication. [Operator Instructions] I must advise you, the conference is being recorded today, Thursday, the 17th of October, 2019. And I'd now like to hand the call over to your speaker today, Laurent Delabarre, Chief Financial Officer. Please go ahead.

[Laurent Delabarre, Group Chief Financial Officer]

Thank you. Good morning, ladies and gentlemen, and welcome to our Third Quarter 2019 Sales Call. I am with Ludovic Debailleux, our Head of Investor Relations. I will start by focusing on some key highlights, then take you through our geographical performance. I will conclude with a reaffirmation of our guidance, and then hand the floor over to you for the Q&A session. Let's now start this presentation. So let me begin on Slide 3 with the key highlights of our Q3 sales. Rexel posted a good quarter in term of sales, which grew for the 12th consecutive period to reach more than EUR 3.4 billion, supported by North America, key European countries, notably France, as well as China. This represents same-day growth of 0.9% or 1.9% if we exclude the effect of asset disposals and turnaround measures. Indeed, the transformation measures we took in Germany and Spain to refocus our business had an unfavorable 1% impact on our sales. While our growth was solid, it is lower than we saw in Q1 and Q2. This reflects 3 factors. First of all, lower industrial demand, especially in the U.S. and in Germany where we will see shortly -- that we'll see shortly. Secondly, a more challenging base effect as Q3 of last year was our strongest quarter on a 2-year basis. And finally, an unfavorable copper contribution of minus 0.3%. We were seeing a positive plus 0.3% effect in the same quarter last year. So overall, I would say that this quarter demonstrates that our underlying business is resilient in an [ unyear ] event that became more challenging. On Slide 5, we take a closer look at our Q3 sales performance, which, as you see on the graph on the top right-hand side of the slide, represents our 12th consecutive quarter of same-day growth. At EUR 3.4 billion, our sales are up 3.3% on a reported basis and up 0.9% on a same-day basis. We benefit in the quarter from a positive currency effect of 1.7%, many thanks to the U.S. dollar appreciation versus euro. We also had a positive calendar effect of 1%, while facing an unfavorable scope effect of 0.3% from our disposal of our Chinese business in Q4 of 2018. Concerning currencies, and assuming spot rates remain unchanged, we expect now foreign exchange rate to have an impact of plus 1.7% on sales in full year basis. Concerning scope and taking into account previously announced disposals, the expected 2019 impact stands at minus 0.4%. Turning to Slide 6, you see that we posted sales growth in 2 out of 3 geographies. In North America, which account for 39% of our sales, same-day sales were up by 2.8%, mainly driven by Canada. In Asia Pac, accounting for 9% of our revenues, sales were up 2.7%. In Europe, which represent 52% of our sales, same-day sales were down 0.7%. This is due to last year reorganization in Germany and Spain and also reflect a slowdown in industry and continued uncertainty in the U.K. Let's now look at our sales by geography, starting on Slide 7 with Europe. With sales of EUR 1.7 million, Europe is down by 0.7% on a constant and same-day basis in Q3. However, if you exclude the impact of branch closures in Germany and Spain, growth was 1%, demonstrating good momentum in key countries. Especially in our own market of France, which account for more than 1/3 of our European sales, sales rose 3.3% with good momentum in the commercial and residential business, while growth in industry slowed down. A particular highlight in France is the strong growth of digital, which now represent over 17% of sales, up around 30%, 3-0, compared to the same period last year. In Germany, as mentioned previously, our sales reflect the slowdown in industry, and we are down 4.5% (sic) [ 4.6% ] restated from the closure of the 17 branches in end of Q3 of last year. However, we're encouraged by the solid fundamentals of our business, following the reorganization of our C&I activity. The U.K. continues to be a difficult market, and sales were down 10.6%, reflecting both the challenging conditions in the country as the Brexit deadline nears and our decision to be more selective to protect our margin. The drop also reflects the effect of the 28 branch closures, including 13 this year. We remain very vigilant in the U.K. and do not rule out further restructuring measures should the environment deteriorate further. Elsewhere in Europe, we saw very good trends, notably in the Benelux countries, with strong 9.6% growth and also in Sweden and Switzerland. In North America, on Slide 8, we continue to see growth with contrasting trends between the U.S. and Canada. Overall, in the region, sales were up 2.8% on a constant and same day basis, reaching EUR 1.3 billion. In the U.S., representing 17.8% of our North American activities, same-day sales were up 1.8%. U.S. sales growth in the U.S. are softened as a result of the slowdown in the industrial business, notably OEM, which was partly offset by maintenance. The sales performance also reflects a challenging comparable base of around 400 basis points over 2 years. Residential, on the other hand, grew in mid-single digits in a broadly flat market, reflecting our investment in branches and in the sales force, which are clearly paying off. In Canada, we also saw continued momentum with growth of 6.3%, driven by the commercial and industrial end markets. We have a solid backlog, so positive trends should continue in Q4. On Slide 9, we take a closer look at our performance in the U.S. by region. As you see on the slide, we had a contracting performance with good momentum in the electrical distribution business in the Northwest, Southeast, mountain plains and California, while the industrial regions, notably the Midwest, recorded a slowdown. We round up our geographical overview on Slide 10 with Asia Pacific, where sales were up 2.7% on a constant and same-day basis to EUR 306 million. Sales in Australia were up 1.5%, driven by industrial. Overall, in the Pacific, sales were up 1.2%. In Asia, sales were up 4.4% and up by a strong 7.6% in China. This was driven by a large project, while our underlying Chinese business was impacted by the trade war and was down mid-single digits. This large project will fade out in Q4. We saw particularly strong growth in India, up 19.9%, while sales in the Middle East dropped sharply due to the non-repeat of a large contract in the Middle East that brought EUR 6 million in Q3 2018. And we anticipate a similar pattern in Q4 in Middle East. Before concluding with our outlook, let me focus on Slide 12 on our cash generation, which is a priority for Rexel. As you know, we have set the full year 2019 ambition of free cash flow before interest and tax conversion of around 60%, which we confirm and which compares to 51.2% for 2018 on a pro forma basis. As a reminder, in calculating the conversion rate, it must be applied to EBITDA post IFRS 16 reduced by lease payments, which are disclosed on a separate line in the cash flow statement. Let me also remind you that the impact of IFRS 16 on free cash flow is very limited. On Slide 13, we turn to our full year 2019 outlook. As mentioned in my introductory remarks, we are operating in a more challenging environment that has notably impacted our industrial business. However, we remain focused on reaching our 2019 financial targets, helped by selectivity measures and cost control. Consistent with our medium-term ambition and assuming no material changes in the macroeconomic environment compared to Q3, we target for 2019, a comparable scope of consolidation and exchange rate; 2% to 4% same-day sales growth, excluding an estimated unfavorable impact of 1% on 2019 from branch closure in Germany and Spain; a 5% to 7% increase in adjusted EBITDA; and a further improvement of the net debt-to-EBITDA ratio. In conclusion, on Slide 14, Rexel is entering the second phase of its Perform & Transform strategy. After implementing our More Customer, More SKU strategy, refocusing our business through asset disposal and restructuring our operations in key country, we are now accelerating the execution of our transform [ phase ]. During the Rexel Expo that is being held in Paris, we will host a digital event tomorrow morning that will provide greater detail on how we are turning Rexel into a data-driven company, leveraging the power of digital. We will notably share with you, through concrete examples, our web functionalities as well as the power of our analytical tools, which have already been deployed. We will look forward to seeing you there. Thank you very much for your attention. And I am now happy to take your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Lucie Carrier.

[Lucie Anne Lise Carrier, Executive Director]

I have 3 questions, actually. I will go one at a time. The first one is really kind of around the guidance. The macro is slowing. We've seen U.S. ASM, European PMIs all down. I mean, arguably, you are still growing, but they are, I think, have there some concern regarding the guidance, so, I think, especially on the EBITA side. Can you explain to us how we bridge that? Is it selectivity? Is it the impact of countries with high-margin in the mix? Is it digital? Where do you get the confidence that you can deliver in this slowing environment? That's my first question.

[Laurent Delabarre, Group Chief Financial Officer]

Yes. Thank you, Lucy. As pointed out in my quote, we remain focused on reaching our financial targets. Obviously, the business has slowed down, mainly in the industrial. And of course, as you have seen, a lead indicator, has worsen. So yes, the environment has became indeed more challenging. In that context, we became also more agile, so we took some business activity measure to protect margin, especially in the U.S. with a large project where we have now flow margin. We start to adjust cost where needed. For example, again, in the U.S., we have reduced the number of FTE by around a bit less than 200 compared to the end of June. And that was additional action not factored until that time. And on the other side, we have high-margin countries such as France, Switzerland, Benelux that are developing very well. So I would not say that the guidance is a given, but again, we are very focused, and we have a lot of action that are ongoing. And as you know, we have some backlog on our project activity, especially in the U.S. that are at quite good level and that will materialize into the plan in Q4. But we have still in front of us 2 very large months, which are October and November months, for which at this stage -- I mean the first part of October is in line with our expectation.

[Lucie Anne Lise Carrier, Executive Director]

If I can just have a follow-on because we receive a lot of question on the starting point on adjusted EBITA considering some of the restatement, FX variation, IFRS and so on. When we calculate your organic guidance on growth for adjusted EBITA, what is the starting point we should take considering what we know now on FX and scope for 2018, please?

[Laurent Delabarre, Group Chief Financial Officer]

Yes. Thank you for your question. As you have seen in our H1 publication, we presented the 2018 adjusted EBITA post IFRS 16, which stand at EUR 640 million. That is a 2018 basis, with 2018 average interest rate -- in FX. If you factored into that our scope and currency assuming spot rates, the additional impact is around EUR 8 million. That is a starting basis for 2018.

[Lucie Anne Lise Carrier, Executive Director]

So final number is?

[Laurent Delabarre, Group Chief Financial Officer]

It's 648, something like that. Yes. Or [indiscernible].

[Lucie Anne Lise Carrier, Executive Director]

Okay. And then just maybe kind of my last question around the selectivity initiatives. Can you maybe just help us to understand how much do you think it has impacted the top line, particularly in North America, if you have an estimate?

[Laurent Delabarre, Group Chief Financial Officer]

Although, it's not -- I would say, probably 1% or 2%. I don't have any detail track of what the project we have not done. But we know that on a -- on the -- in a large project side, we have been slightly more selective than we were before. And on the same time, I can see the impact where I can see some leverage on the commercial margin that has improved. So I know it has happened. The exact number on the top line is difficult to assess more precisely.

[Operator]

Your next question comes from the line of Ji Cheong.

[Ji Cheong, Senior Associate]

Ji Cheong from Citi. I have a couple. First of all, just to clarify, on the -- can we confirm on your latest tally on the number of branches for North America, please? I realized that you've stopped reporting them.

[Laurent Delabarre, Group Chief Financial Officer]

Yes. We have opened 54 branches between '17 and year-to-date June. And we have just opened one more in July. So again, we said that the full program to reopen a large number of branches. And 2 years ago, we had a program to reopen 100 branches. We stay where we start at from half of the program, maybe a couple of ones, which are just technical one. But we now want to focus more on our digital transformation. And we believe at this moment of the cycle, it's not the right time to continue to add fixed cost. What is important is that these branches we have are ramping up. So they are contributing very nicely to the top line of the U.S., especially at the moment, where industry is going down. So the contribution on the Q3 top line of the U.S. is 1.5%.

[Ji Cheong, Senior Associate]

1.5%.

[Laurent Delabarre, Group Chief Financial Officer]

Yes. And overall, we have now 390 branches in the U.S.

[Ji Cheong, Senior Associate]

390. Okay. And then the second question is on -- so you -- to add on to the selectivity on focus on profit and cash, was this one reason, in particular or a global effect just to confirm, please?

[Laurent Delabarre, Group Chief Financial Officer]

No. It's global. I mean on the protection of cash and the delivering of free cash flow, you know that the last 2 years, we had our strategy of more customer, more SKU. We had invested on inventory, more than EUR 200 million on that. We accelerate confirmation, especially in Europe with more cash out through our securing. And we increased slightly the CapEx by around EUR 30 million, having a 1% top line guidance on CapEx. All of that lead us to have a cash conversion between 50% and 55% free cash flow, transformation of the EBITDA after this into free cash flow. Now we want -- as we pointed out in our press release early August, to be back to at least 60%. And that we are working on by making sure -- I mean the credit management is very focused on keeping right DSOs. And then it's tactical reduction of inventory, especially where we can see some slowdown, so especially in the industrial region like Midwest.

[Operator]

Your next question comes from the line of Alfred Glaser.

[Alfred Glaser, Analyst]

Yes. I was just wondering if you could give us some information on pricing, excluding cable. How did pricing evolve in the group and in the main regions in Q3? And then second, I wondered if you could give us some additional info on France, where you posted good numbers in Q3. How do you view demand and your revenues going into Q4 and maybe Q1 2020?

[Laurent Delabarre, Group Chief Financial Officer]

Yes. Thank you, Alfred. So on the side of price, in Q3, we have Europe that is around slightly below 1% and North America, that is slightly above 1%. And the group is stuck at 1%. It's a slight decrease compared to what we saw in Q2, especially in North America. Some supplier have reduced their price that then was factored onto the market.With respect to France, I mean, we see a quite good resilience, both in commercial and residential that are up in the mid-single digit. So we think we are, at the moment, as we can see the same indicator as you on the drop at housing start. So clearly, renovation is starting to offset, part of the lower demand in new build. On commercial, our team have done a good job, and we gain a larger recurring project in the price area that will be rolled over Q4 and next year. So globally, the volume of activity is really good in France. We still have this bottleneck on electrician manpower that is not boosting more our field. And we still are also working strongly on grasping some progress around the Grand Paris. It's mostly infrastructure today, so we have not a large part of it. But it will gradually come and should help us probably second part of next year in a larger dimension.

[Operator]

Your next question comes from the line of [ Shristy Madden ].

[Unknown Analyst]

I have 3 questions. The first question is, what structural cost measures can you do if growth continues to deteriorate? And second question is would you expect a significant release of working capital in second half if economy continues to slow? Is there any upside to the FCF? Also, how would you get 5% to 7% EBITDA growth for FY '19? What are the considerations for the bridges? That is how much is the underlying improvement versus easy comps.

[Laurent Delabarre, Group Chief Financial Officer]

Okay. So well, as I have presented already in Q3, we have taken some measures. It's a review country-by-country as the dynamic, may be different on either -- maybe different from one region to the other, especially in the U.S. So the first one, I mean, is selectivity into all the flexible OpEx. We can, by a management decision, decide to reduce. Then in region where we have lower activity, as you know, in our distribution center, we have some temps. So we'll reduce the number of temporary worker. And then depending on the region also, we can adjust FTE. So the number of employee depending on the country, it is a quick or a bit longer. But that's what we have done already in Q3 in the U.S. So we adjust our flexibility on cost. And on the same time, especially in the U.S., we are very focused to be sure that where we are working, we are focusing on a contract with the right level of margin to protect our margin, to be very cautious on what kind of product we are selling to be sure. Then afterwards, it will go into the right supplier rebate bucket. With respect to free cash flow and trade working capital, as you know, in the distribution business, when the slowdown is materializing, you've got an inflow in the working capital as we are collecting at the same pace our receivable and being able to adjust our inventory. Today, it's a slowdown, so not a massive drop. But yes, we are doing our homework to make sure that we will reach our free cash flow conversion guidance.

[Ludovic Debailleux, Investors Relations Director]

Can you please repeat the...

[Laurent Delabarre, Group Chief Financial Officer]

Third question. Sorry, I didn't get it very well. If you could repeat it.

[Unknown Analyst]

So what structural cost measures can you do if growth continues to deteriorate?

[Laurent Delabarre, Group Chief Financial Officer]

Yes. So I pointed out, I mean, it's really -- as we said, and as Patrick is saying [ via phone ], we will not close branches. But again, we adjust the flexible cost. We adjust the fixed cost and mostly, the FTE one, and we make sure that we can still boost the sales force to make sure we can protect as much as we can the top line. And we believe that with all the good work and the penetration we are achieving in the digital realm, we are now -- our digital sales in Europe are north of 25%. So it's 1 out of [ 4 sales ] that has done that. It creates a better stickiness with our customer base. So we believe that will also protect the slowdown of the business. And we see that we are really holding very well in the region and commercial activity across the board. And it's only, I would say, at this stage, a first sign of slowdown only focused on the industrial part.

[Operator]

[Operator Instructions] No further questions coming through on the line.

[Laurent Delabarre, Group Chief Financial Officer]

Okay. Well, thank you very much for this question and for attending this presentation. I will be happy to meet most of you tomorrow at the Rexel Expo where you will see, in concrete, actions and see what Rexel has changed into a more digital and data-driven work. So see you tomorrow, and have a great day. Thank you very much.

[Operator]

Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect. Speakers, please stay on the line.