Rexel SA

PAR:RXL

Earnings Call Transcript 2018-Q4

[Patrick Bérard, CEO, Europe GM & Director]

First of all, good morning, and thank you for having joined us today. We are here in the quarter of Rexel. And on the line we have many of our people following us around the world. Therefore, when it comes to Q&A, there will be the Q&A from the room and Q&A from, I should say, the cloud. Before anything else, if I may ask you one thing. Turn off your mobile. There might be some interferences for the people who are coming by line. The -- I am very pleased to review today because we will present you the results of previous year and Q4. Laurent Delabarre, our CFO is here, assisting me, in order to bring you all the clarification, clarity to, first of all, better understanding where we are, what we do. And also giving an answer -- precise answer to any questions that you would like to raise. But one thing I would like to start with is really to tell you where we are right now and the solid results and strategic advances that we are making. And if you go to Slide 3. Let me say in a nutshell, and I'm very pleased to tell you that first of all, we have done the job. We are back on organic growth. This company was not an organic growth company. And in the last 30 months, we have done EUR 1 billion organic growth sales. It's something that has never been in our group, where we grew by acquisition, M&A, integration. And when I took over, you remember I was telling you we will go for organic growth. The second thing, which is quite key to me that everything that we've done so far, and I remember all the questions you raised in the previous quarters about when do we see, is it ongoing, is it the macro, the operating leverage, are you reinvest part of it, when does it come? To that question, I listened to all of them. But first of all, I would like to say here that it's profitable growth with lot to come and continuous effort because we grew more customers, more SKUs, more digital. And with some densification, with branch opening here and there, especially in the U.S. With transformation of certain countries that at the end of the day it's a robust organic growth, profitable growth. We have made progress in every single country, in all the countries regarding the service level. We are measuring now the customer satisfaction, the net promoter score, KPIs in order to figure out how to improve the service to get even more customers, even more SKU and accelerating the digital interface to them. Another big question, I'm pleased to tell you, is the U.S. During years, we were not performing in the U.S. and we couldn't capture the macroeconomic favorable trends. In the last 24 months, and even accelerating in the last 12, the U.S. results are significantly better. We are gaining share. We're growing organically. All the branches opening is exactly on track to provide the results we expect them to bring, and it's a very robust organization redesign that we have done. Agility locally, focusing by regions and really getting the support of both the customers and the vendors. Regarding France, which is very often a question by which you start telling us "Yes, you were dependent on France. And should France becoming weaker, what's going to happen? Is it the cycle?" In France, we are gaining market share, we are continuing to grow, we are continuing to work on the margin side, and we continue to boast very good, resilient, robust EBITAs. And it's exactly on our plans. Regarding the disposal program, where in February '17, I was telling you that we are starting a divestment in certain region, whether we couldn't, nonstrategic, or where we didn't have the condition to succeed. And this program is already at which by the promise that we are delivering 25 bps EBITA improvement as promised, and we have reached EUR 650 million. The initial program is over. And the evolution of our model. At the time, you told us many times that there is threat coming from here, threat coming from there, how digital could take us out of the market. I am very glad to tell you we have made significant, robust progress. More than EUR 2 billion sales is being traded digitally. EUR 1 out of EUR 4 in Europe is made by digital trading. We are implementing order evolution, which I'll comment at a later stage of the presentation. We are on track to be one of the player in the digital field. I wanted to put this as a nutshell as an opening remark. Mind, it's already -- I have highlighted, some of which we'll see in the later slides. But I wanted to have this kind of a summary being presented to you because if you go back to February '17, that's where we are, and we are there, okay. And I realize that some people could have some questions at that time, but it's good sometime to be very transparent where are we. And obviously -- so Slide 4 it is really supporting that. We have consolidated the footprint, we have revamped the operating model, and we've strengthened the financial structure, which was another commitment. Let's go to -- from a certain level of leverage, above 3, and we went down below 3, and we are now at 2.67. And we will continue to deleverage ongoing further down. And on the Page 5, you have also the exiting geographies, which we just finished in Q4, with the exit of the nonindustrial business in China. And therefore, I'm happy to tell you this program, initial program is over. And we have done some acceleration in 2018 in term of turnaround. I took the conscious decisions of giving a little bit of more power into restructuration, which is reflecting in the numbers in '18, in order to be safer for the future in an earlier stage. Therefore, we have divested in Germany, the C&I business in the north of Germany. And we are only focusing on the industry hold footprint in Germany, first, C&I only in the South, where we have proper density in order to be robust. We had to adjust similar elements in Spain, where we have closed branches and reduced some of the warehouses' footprint in order to be more agile and more present locally where there is better market. And we have done, and we are conducting some further downsizing in the U.K. in order to adapt to the situation which we had to do once we had done the regrouping of the 5 banners into 2 that was finished at the end of '17, early '18. Therefore, we could then get to a better position to adjust to what the potential Brexit situation could mean or whatever it could be. If you could help me on that front would be great. On the Page 6, the one thing which is -- and revamped our operating model, and we are continuing to do this every day, improving the business model, per se, definitely more customer satisfaction, more customer, more SKU, we'll not stop. We have reached a certain level. This is proving the case, and we continue, and we accelerate. There is no reason. That's the only way to gain the market share and to grow organically with the best results that we can get from there. We are working also a lot on pricing initiatives along. It's not growth at the cost of margin. It has to be growth with robust and solid margin generation. We adjust the skills, and we adapt these skills and the managerial model. There have been many changes, and some people asked why and if and so and what. It is a fact that going from a company making growth through acquisition and you go to organic, coming from conventional, going to more digital, coming from very independent banners to structural countries or sometimes clusters. Obviously, there are lots of skills the brands have to be added and lots of money and all the changes to be done. We even changed the way we interface with our country. We are doing deep dives which are sessions of 1 or 2 days where we go through all elements, and of which transformation into more robust model. We look at the robustness. Obviously, we look at the financial moment, but we look at the transformational changes which needs to be done in that so that the future is better secured. And this is working, and it's well understood, and it works well. And we have the increasing multi-channel interaction, which start to really be visible. There is always a ramp-up time, but I can say the last 12 months have been accelerating, and we have invested in additional skills where we continue to do this and to do more and to accelerate. We are on the right place where we wanted to be. And obviously, I have always more ambitious targets, but the results are highly visible. And we are reinforcing through all of this our supplier relationship. This is a business where you have to be good with your customer but to really serve with a value-added your suppliers, otherwise, life can -- the robustness could not be very long term stable. And this is what Slide 6 is describing to you. And which leads us to the Slide 7, where we strength -- I say that for people being online. Allow me to say the paging of the pen because of this. We strengthened the financial performance. And this is very important because we will follow and continue to follow and continue to do, and we have done, deleveraging the balance sheet. As I told you, we come from 3.04% and we are down to 2.67%. And we are continuing this and [ firm down ] what's further down. Streamlining central costs. We are taking out certain elements in the regional HQ or in central HQ, or even the country management team in order to reinvest in the digital world, in order to reinvest in the transformation towards the future in terms of skills and teams. And therefore, we are able now to have simple or simpler processes where we'll continue to do more of this in order to free up resources to go to the digitalization. And also to help the financial performance because this is the kind of cost that we take out in order to get more leverage out of this if we put them in the field. And rebalancing the OpEx. First, field coverage. The one thing which is essential for us to reach the more customer, more SKU is to have increased sales force efficiency, not just through the tools but through the quality of people. Not just through the number of people but through ongoing productivity efforts in order to have enlarged customer portfolio for each of our skilled salespeople, which is the first priority. And the second is strengthening of the digital program. I think I have already give you a flavor of this. When it comes to the results, we go to successful execution reflected in the numbers. You know the numbers of growth: 3.5% of adjusted EBITA, EUR 608.3 million EBITA, recurring net income continuously growing. And the one thing which you see on this chart on Page 8, this is what I call the value-creation chart which was key to us. We are back now to have reached and to pass above the WACC line, the WACC. And you know, we were below. But trading value for our shareholders on the long term means we have to be above. And therefore, we have returned to be above the WACC level. And it was critical for me, therefore I put it here as a benchmark by which now we enter into value creation above the WACC line. And obviously, the EBITA margin and deleveraging, which I have already commented. You see the numbers here on the last 2 elements of the slide. 2018 achievements in absolute value. We are at EUR 13.3 billion -- EUR 13 billion, which is a plus 3.5% on same-day basis. EBITA, EUR 608 million -- EUR 608.3 million, which is another plus 6.1% comparable to the previous year, plus 6.1% year-on-year. And recurring net income at plus 12.8% compared to previous year. The gross margin, very interesting the gross margin because I keep this as a [ net session ] line for the future to stay in this 24.7% range, which is really key when you grow, if not done at the cost of the gross margin. And the 3 bps here are not representative of a trend. The adjusted EBITA margin 4.6%, 10 bps above. And indebtedness ratio, I already commented, which is 17 bps improvement year-on-year. And these are the picture. And obviously, now I will pass to Laurent so that he will give you more flavor about the numbers, about the geographies. And I will come back in order to put the global picture of the future and the outlook. Laurent, I don't you all to come here? Okay.

[Laurent Delabarre, Group Chief Financial Officer]

Sorry. For those on the call, I am on the Slide 7, which gives us an overview of our strong Q4 performance, which just reflects the trend that Patrick commented, further demonstrating that our strategic plan is delivering results. Our transformation initiatives in several countries are making Rexel a stronger and more competitive company in its key markets. So Slide 10, so the sales and profitability improvement in Q4. Our sales grew for the ninth consecutive quarter, reaching nearly EUR 3.5 billion. This represents same-day growth of 1.9%, a satisfactory performance given the more challenging base effect we have this quarter. The negative contribution from copper and the impact of the transformation underway in Germany and Spain, I will comment further. Concerning profitability. Our adjusted EBITA grew by close to 9%, with a margin increase of 27 basis points on a comparable basis to 5%, driven by the strong performance in North America. Recurring net income was up by a strong 9.7% in the quarter. From a more business point of view, I'd like to share with you 2 key highlights of this quarter. First of all, thanks to our transformational efforts, our U.S. business is back to sustainable growth. Second, we have repositioned our business in Germany to focus its more profitable segments. This lays the foundation for future profitable growth. At the same time, we continue to restructure U.K. in a difficult market environment. We also continue our disposal plan in Q4 with the sales of our retail and virtually all our commercial business in China. On the next slide I'd like to comment on our top line growth in the full year. On a reported basis, our 2018 sales were up 0.5%, the result of the positive 3.5% same-day sales growth, and a positive calendar impact of 0.3%. On the other side, we have 2 unfavorable effects: plus the scope with minus 0.7%, resulting from the divestments in the South East Asia end of 2017, and currency for minus 2.5%, mainly due to the depreciation of the U.S., Canadian and Australian dollar, and the Swedish krona against the euro. Concerning currency and assuming spot rates, we expect foreign exchange to have an impact of circa plus 1% on sales in the full year 2019. And concerning scope and taking into account the previously announced disposal in China, the expected 2019 impact stand at minus 0.4%. Breaking down the sales growth by quarter. You see on the box chart on the right-hand side of the slide that we have posted growth every quarter, not just in 2018, over 9 consecutive quarters, on a constant and same-day basis. This achievement came in Q4, despite an increasingly challenging comparable base over the year and a lower contribution from copper, which ran into negative territory at minus 0.3% compared to plus 1.6% in Q4 '17. Let's now take a closer look at our top line performance by geography in the coming slide. From Slide 13, you can see that we post solid same-day sale growth in Q4 at group level at plus 1.9% or 3.1%, excluding branch closure in Germany and Spain. In Europe, representing 55% of our sales, revenue was down 0.8% on a difficult comparable basis, with growth of 5.5% (sic) [ 1.7% ] in Q4 '17. In North America, which accounted for 36% of our sales, sales growth was strong 6.9%. And Asia-Pac which accounts for the remaining 9%, sales were broadly flat at minus 0.1%. But were positive after taking into accounts, as you remember, the disposal of our automation business in Australia. And we also have challenging -- especially more challenging base effect in Q4. As shown on the slide, since December 2016, Rexel added almost EUR 900 million of sales on an organic basis, with all 3 of all the geographies contributing. It's a big number, which is very close to the entire Nordic zone. Let's now look at each region beginning on Slide 14, with Europe. Sales in our biggest region stood at EUR 1.9 billion in the quarter, down 0.8% on a same-day basis, or up 1.2% excluding Germany and Spain. In our own market of France, which accounts for more than 1/3 of our European sales, our revenue were down minus 1.3% on a challenging base effect, due to lower export project and a temporary impact of lower activity in December. Business was, however, in the quarter supported by good demand in residential and industrial markets. We are also seeing positive trends in several key countries, including Switzerland, Benelux and Sweden. Switzerland benefited from its strategy of focusing on projects and grew by 6.9%. Benelux posted solid plus 13% growth, with good momentum in Belgium, where we acquired 1 branch and grew sales, and in The Netherlands as well. Sales in Scandinavia was up 5.2%, with robust growth in Sweden of 5.4%, thanks to public spending and large C&I business than -- that more than offset negative trends in residential. In Germany, with the closure of the 17 branches in C&I in the north at the end of September, our sales in the country were down 15.9%. However, excluding this impact, our sales were broadly flat. Lastly, in the U.K., sales dropped by 6.4%, mainly due to lower business with large C&I accounts and 33 branch closures. In a highly uncertain political context, we will continue our effort to control costs in that country. On the next slide, as part of our strategic plan. We said we will turn around our operations in several key markets, and I would like to focus on 3 of them. Slide 15 now. Germany first. We moved decisively to refocus our operations on more profitable market segments. With the closure of the 17 branches in C&I in the north at the end of September, our network rationalization is now completed. We have also closed 2 of our 5 distribution centers, and adapted the cost base at the HQ. The industrial business is now at around 42% of sales in Germany, and we have market share between 20% to 30% in the region in which we are still present. In Spain, we have adopted a more regional approach with a new organization around 5 regions, the closure and merger of 16 branches, and a new management team in place. We will be progressively implementing 4 Hub & Spoke in 2019 as we continue to optimize our logistics.The measure in Germany and Spain should lead in 2019 to around 10 basis points of EBITA margin increase at group level, and the reduction in sales is estimated to around EUR 140 million in 2019 compared to 2018. And in the U.K., where EU-funded projects have gone to us, we have closed 33 branches to adapt to challenging market conditions, and we are focusing on margin-driven businesses. On Slide 16. Now we turn to North America, where sales grew by a strong 6.9% on constant and same-day basis. Let's look in greater details at where we stand on our transformation in the U.S. We're very pleased to report today that our Q4 performance provides another demonstration that our new regional approach in the U.S. is positioning clear results. Sales grew in high single digits for the third consecutive quarter at plus 8.5%, confirming our regained ability to capture market growth and gain market share in specific regions. The backlog is now back to normative levels and will support 2019 sales growth. We have gained 3,600 additional customers in the last 12 months and are seeing strong double-digit growth in electrical distribution in several key regions, notably Denver, California, Texas and Florida. In addition, we have opened 48 new branches or counters in the launch of the plan in 2017, contributing to 2.4% on our Q4 sales growth and about 2% in the full year, in line with our objective. In Canada, sales were up 1.3%, driven by mining potash offsetting the non-renewal of a large wind project. On Slide 17, we focus more specifically through this chart on our U.S. transformation, which again is paying off with the acceleration of our profitable growth. As you know, we have reorganized our business in 8 regions, reversing the past trends of branch closure. Our 2017 plan called for opening 100 branches or counters in the medium term. At the end of 2018, we're about halfway there. About half of the opening are branch and the other half is counter into agencies. Those 48 openings are concentrated in our key priority regions, notably, Florida, Texas, California and the Northwest, where we have really a strong market presence already supplied in the Northwest. Let me also highlight on Slide 18 what we have performed in Canada, where we are a market leader with 23% market share, operating through the largest network in the country with 190 branches and 3 banners, Westburne, Nedco and Rexel Atlantic. In Canada, we can say that our business is now firing on all cylinders. From an organization point of view, we have strengthened the management and our teams. From a regional point of view, business has picked up throughout the country. From the banner point of view, performance is strong across the board. And from a segment perspective, we are seeing improvements in Oil & Gas and have broadened our offer in other segments. We have a very strong business, with Rockwell Automation in the country. And we have recently been awarded a distinction of best distributor in British Columbia. This has been reflected in our numbers, with 2018 sales up 3.6% on a same-day basis. So overall, if we look at North America, what's important to note is our adjusted EBITA in 2018 grew by a strong 18%. Moving on Slide 19 with Asia-Pacific, where our sales were more broadly stable, up 2.9% with the restated impact of the disposal in Q2 '18 of our Rockwell automation business in Australia. In Australia, excluding the asset disposal, sales were down minus 1.8% on a more difficult base effect and lower commercial projects in public areas. In Asia, sales were up by a strong 6.4%. In China, despite a challenging base effect, the sales were up 9.3%, reflecting good underlying demand, in the industrial product and solution more than offsetting the negative trend in our retail and commercial business which we sold in Q4 2018. We also saw a favorable dynamic impact in India, supported by strong automation sales. On Slide 20, we're down to our full year profitability with our adjusted EBITA bridge. Adjusted EBITA was up 6.1% to EUR 608.3 million, and margins stood at 4.6%. Our 10 bps improvement in the full year on a comparable basis is explained by the 50 basis points volume and price contribution [ existing ] from our investments. In the quarter, sales price increased by 1.7% at group level, a higher number than H1, showing good momentum in the pricing environment. Our adjusted EBITA also reflects investment for future growth of 33 basis points. Lastly, productivity gains partly offset the cost inflation notably in our wages and [ freight ]. Please note that for 2019, as already mentioned, we expect our transformation in Germany and Spain to contribute to circa 10 basis points to the group adjusted EBITA margin improvement. Our priority will remain to further improve operating leverage while maintaining investments in digital. On Slide 21, we turn to our profitability by region. Overall, the adjusted EBITA of EUR 608.3 million in the full year, our adjusted EBITA margins to that 4.6%, 10 bps increase coming mostly from North America and Asia-Pacific. In Europe, adjusted EBITA margin was down 19 basis points, impacted by countries in transformation, the one I -- we mentioned, Germany, U.K and Spain; and the more competitive environment in Norway, which more than offset the very good performance in France and Benelux. In North America, adjusted EBITA margin grew by 40 basis point to 4.2%, thanks to volume growth, positive pricing contribution and supplier concentration, which more than offset the cost inflation and the carryover effect of investments we made in people, IT and branch opening. In Asia-Pacific, adjusted EBITA margin was 64 basis points to 2%, thanks to volume and superior concentration, offsetting the disposal of the Rockwell automation business in Australia. And our corporate cost to that EUR 30.7 million, reflecting investments in digital and strict cost control at HQ. And this number is in line with our objectives. On Slide 22, let's look at the bottom line part of our P&L. Let's start with our adjusted EBITA of EUR 608.3 million, up 6.1%. Reported EBITA was lower at EUR 600.4 million, at 1.1% year-on-year, reflecting mostly the impact of the nonrecurring swing in copper prices. Other income and expense amount to a negative EUR 174.9 million, including restructuring costs for EUR 82.5 million, mostly related to the reorganization in Germany and Spain as well as goodwill impairment in Norway, Finland and Spain for nearly EUR 62 million. And also, the asset impairment relating to our Chinese retail and commercial businesses disposal for EUR 26 million (sic) [ EUR 25.4 million. ] For 2019, we expect restructuring costs to be closer to our normative level of EUR 45 million to EUR 50 million every year. Our net financial expense improved to EUR 100.6 million. This is reflecting a reduction in average interest rate on our gross debt to 2.81% as a result of the [ activation of ] financing, especially the one done at the end of 2017. We also saw a sharp increase in our net income tax to EUR 157 million. Note that in 2017, our income tax benefited from the one-off gain from the U.S. tax reform. In 2018, our tax rate stands at 50.8%, sharply above our 33% normative level due to the non-deductability of goodwill depreciation, asset impairment and restructuring expense in Germany and Spain, where deferred tax assets cannot be recognized yet. For 2019, we expect our normative tax rate to be between 32% and 33%, depending on the decision taken in France for the tax rate for 2019. Net income was EUR 152.3 million, up a solid 45.6%. And our recurring net income grew strongly to EUR 328.1 million, up 12.8%. On Slide 23, we turn to our Cash Flow Statement. Over the year, our free cash flow after interest and tax improved by EUR 11 million to EUR 191 million. Before interest and tax, our free cash flow was EUR 357 million, EUR 27 million below last year. This resulted from several effects, firstly, as mentioned earlier, an unfavorable year-over-year EUR 22 million impact of copper. Second, EUR 32 million cash-out related to the restructuring plan in Germany and Spain. Third, higher outflow in working capital of EUR 43.3 million, partly resulting from our decision to increase inventory in North America to improve service level and support growth. As a consequence, our conversion of free cash flow before interest and tax to EBITDA stood at 61%. We expect to improve this conversion rate in 2019 to be closer to historical levels. Net capital expenditure was down to EUR 93.8 million from EUR 110.3 million in the same period last year. This include the proceeds of the disposal of our Rockwell automation business in Australia. And our gross CapEx stood at EUR 122.1 million, in line with our objective. For 2019, we anticipate the CapEx level as a percentage of sales to be around 1%. Our net debt was reduce to -- close to EUR 11 million, at EUR 2.03 billion, also impacted by negative currency effects. On Slide 24, 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 repayments before June 2023 following the 2017 refinancing. Our average maturity is 3.8 years. Our debt can be split between securitization backed by our assets, bonds and the senior credit agreements. Our net debt-to-EBITDA ratio stand at 2.67x at December 31, 2018, down 17 basis points year-on-year. Our active financial management 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 around EUR 1.3 billion at the end of December, including our undrawn senior credit facility. Our hedging policy protect us from the current volatile credit market conditions. We expect our recurring financial results for 2019 to be close to the 2018 level. We also remain attentive to market opportunities to further enhance our financial structure. On Slide 25, we present our proposed dividend for the 2018 financial year to be paid in 2019. Rexel will propose to shareholder a dividend for EUR 0.44 per share, EUR 0.02 higher than last year, payable in cash in early July 2019. This remains subject to approval of the general shareholder meeting we have in Paris on May 23, 2019. The dividend represents a payout ratio of 41%, in line with our policy of paying out at least 40% of recurring net income. It's also a 4.2% yield based on yesterday's share price. On Slide 26, I'd like to highlight 2 changes in our reporting that will impact 2019. First of all, I'd like to take the opportunity to inform you that our board has decided to move to half-year and full year results with quarterly sales released in Q1 and Q3 rather than quarterly results. This is in line with French market practice and will improve our operational efficiencies. Second, I'll share details on the adoption of IFRS 16 accounting rules, which as you know, relates to real estate [ earnings ]. We will start report on the IFRS 16 in H1 2019, providing comparable numbers for H1 2018. Our soft estimates leads to the following impacts: an expected increase in net debt of EUR 900 million; an increased EBITDA margin of 150 basis points; an increase in EBITA margin of 30 basis points. Our leverage ratio according to the senior credit agreement definition will remain unchanged. Let me now hand back to Patrick for a look at our strategic road map going forward and his concluding remarks.

[Patrick Bérard, CEO, Europe GM & Director]

Thank you, Laurent. And I'm sure there will be questions around this presentation later on. But for the time being, allow me to take you a little bit -- Laurent, you steal away for me the -- thank you. So one thing on the road, and it's not a new strategy. This is how we are going further in our improvement and, at the same time, becoming even more robust and more competitive because the environment is changing. And the one thing I want to highlight, very often, we forget that this business, as by in itself, in itself, is right now generating the future growth. It is getting to be major. We are in a good business. We are in a good business because there are now new revenues by which growth will come on top and above of the previous usage. And IoT is not something totally neutral. It brings a lot of IoT everywhere, but this require from the electrical installation, some evolution, some enrichment and new solutions, new approach, but this is enriching. And this is not just something that everybody can do. It also is something that electricians are now embarking and will get the installations made. New safety norms, very key. I mean, the more norms, the more safety, the more moment to measure, to stop, to allow this to happen or to prevent things to happen. It's all in electrical. You can't take it by any way. It's always -- there are always electrical connectors, devices and ways to adapt. Quite importantly, something which very often we're seeing by the end users. For example, electric car. Electric cars need charging stations. So far, it's a device, it's a product. When you look at the installation, you change out the mainboard and the main panel and the connection and the extension and the relay and the dispatch and how to send the information toward to your home and kind of stuff. It's amazing how in terms of nonvisible electrical equipment installation this is slowly but surely growing demand. But one more important thing, whether we talk carbon-free, I know only one carbon-free real way of getting there: electrical. Now electricity can be produced in one way or the other, but every engine, carbon-free, an engine in a factory, the way you get it done, the way we move and more of this, it's all electrical. And for us, irrelevant from how electricity is being made, nuclear, wind, solar and more, we are on the -- at the other end of the chain. And in that part of the chain, it means a lot of a growing demand. And therefore, very often, we forget to look into it. But obviously, there are macroeconomic cycles, but there is also a resilient growing demand for electrical products at the same time by structural support and evolution. And very often, we forget about this. I have been long enough in that business to tell you that what is coming is more than what I have seen in the last 15 years. The other thing which is very important is how do we tackle with the evolution. And the strategy that we are evolving towards and not forgetting what we've done and continuing what we have done, which is what I call the perform. But we've done is really restoring, repair, go to growth and capture the growth, get money out of it, do the repair job that had to be done here and there or exit. And this is all the points that you see on Page 29. We go to pricing and margin, supplier improvement in the supplier relationship, the turnarounds, the focus, we already mentioned. And there will be more, probably more portfolio -- active portfolio management to be made over years in term of where we do we stay, where do we develop, how do we increase there and a bit less in another place. It could be geography, but it still be also activity. It could be even product line. And so that, we are sorting out what is good to be in, what is really needed to be in for the long term and, at the same time, we have to get -- we need to get into it. And there would be new activity, new services, new ways of making the performance happen. And one of them is obviously the digital transformation, our internal one, in order to gain more flexibility, more productivity and lower the fixed cost base. And it could be obviously done by changing our own business model. We have initiated some of the moves, but there is more to do. And probably, in the coming quarters and year, we will talk you more about our own personal transformation in digital transformation, how to generate ourselves more performance through this digital transformation. At the same time, the business is in the transform mode, and we need to capture. And if you allow me to say, the line, the dark blue line on the -- this is more the EBITA generation. And the above line, if you compare to the WACC, this is a multiple line, if I make it simple. Because we will [ grow ] a much more data driven company. We will use all the huge, immense amount of data that we collect every day in order to make better decisions, better assortment, better anticipation, where to put the resources, how to spend the money in order to get higher returns. This is what the data-driven means. And there are a lot of programs going on right now and developments being made and hiring being made in order to be able to really get these done, and it's being developed and embarked on as much as there will be improved services and adaptive metrics to it. In the moment you measure data, you can get to new services. And there is a whole range of potential ways by which we will monetize certain services which are just bubbling up today but very efficient to others tomorrow. It could be for our customers, could be with our vendors, it could be vis-à-vis our maintenance companies, it could be many other partnering. And obviously, there is a huge trend towards customization. During years, we were treating our customer base by nature: residential, industrial and so on. Tomorrow, it's more by which service to provide to them in order to have them making a better job. It is no longer the product we take to them. This is a service we bring to them. And the service being some logistic services, which we will continuously to improve, but much more, the individualized and customized services that data allows us to provide. Sensitivity to price, sensitivity to marketing, sensitivity to innovation, sensitivity to different subjects, we are able now to capture and provide differently to each of our customer, and we will do more of this. This customization process is probably the avenue of the future so that we are getting in the value chain even more finding our own value and space. In doing so, on the page after, the dotted line is where we come from. We invested in acquisitions. We invested in growing the customer base, and we are doing more customer and more SKU in an organic way because it's a [ phase ] by which we do organically. At the same time, we are moving now to value-added distributor. And what does it mean, concretely speaking? The more digital allow to have the good -- better assortment, predictive assortment, predictive churn in terms of management of the customer base. There is room for additional growth. How often do we lose a customer without having known and do we need to work up to replace this one. This is a B2B syndrome which we are now tackling heavily in order to get better leverage from our sales force. And process and back office optimization, obviously, this is what we're doing more and more now. In the future, which we are paving the road to, is really a future of customizing individual value propositions with data driven. And for example, we take care of every individualized customer experience in order to be able to propose and transact individually. And then very soon, if you go to our website, you will see that there is personalization capabilities which is already envisaged, which is now on the -- even on the homepage, some information will be dedicated to the customer depending on his login so that we are really getting now as fine-tuned as the retail business has been doing recently, we will do in the B2B world, just to give you a sense for. And obviously, segmented services and collaborative supplier, end to end, in order to have a very good [ trend and trace ] of the future and knowing where is my product, I can even find it, whether it's still at the supplier or will be reaching in 20 minutes the door of our customers. This is a time of new business we are entering into. It's a real service business in order to give you a full view to the customer for their best need and their -- the best service we can provide to them. We used to say internally that this is what is next best offer and next best action. I have mentioned this one or 2 times already. And I'm really obsessed with all my people to get there, telling our customer and telling our sales force, saying to everybody on the phone, on the web, on the traveling what is the next best action and next best offer in order to be at the right time, for the right people. And we are getting there at that time. We learn fast, a lot. It's a fun journey. It is also a journey of growth, but it is also a journey -- to the one who thought that some big players could really take me out of business. Yes, it could have been. I don't know because it didn't materialize so far. And on the other hand, we are joining this battle by moving our strategy into this field of the digital competition because it's another competition. Fine, but we delivered this competition. And this is with challenge. We are not resisting. I am not opposing. I'm not rejecting. To the opposite, it's a lot of fun to get there and bring all our customer base and our team into these new rules of the game of the future, fine. And obviously, in doing so, you can see we tried to build even a competitive advantage while moving into it. Because just to be as good as is not good enough, we have to do a few things better than, and some others will do some few things better than us, okay. And -- but we have to be in the right place. And building competitive advantage means for us systematic web and EDI transaction, full digital content for customer and suppliers. It looks trivial, but it's so rich, so complex, so difficult to get everything at the high quality. We are there. We're getting there. Seamless multichannel customer experience. Every customer at Rexel has a good sales rep, a branch attached to but also a login, an EDI. Somebody on the phone who is recognized by his login when he calls, "This is he, Mr. XYZ," knowing immediately he's an industrial, he is a residential, he talks to a specialist, he is not somewhere on the phone with nobody knowing exactly who he is and what his needs are. These are the kind of customer experience we are getting to. And we may join forces on some marketplaces. We are not entitled to do everything by ourselves. We do the electrical installation and product, but if somebody medium term needs other products that we are not entitled to make, we join forces with certain marketplaces to have a complementary partnership. And we are testing this, for example, right now in Belgium. And we are also -- like electrical vehicle partnership in Sweden, Austria, Switzerland, we are already participating to the evolution of these bubbling up markets. Now the way to re-profile ourselves in all of this and continuing to do what we have done by migrating to being a service company, what are the proximity services that people require from our 2,000 and so branches? They need the proximity. They don't need a big size. They need a number of outlets close enough in order to give them the big impact, from a logistic standpoint, all the advice. But they need also the digital proximity, getting to them through digital ways. This is getting the digital proximity as much as physical proximity in order to make sure that a customer stays in his environment. And if I take right now, for example, one of the things which is a key highlight, I take a country, rather conservative when moving to digital because the habit. For example, in France and in Northern Europe, it's much faster than the south of Europe, and in France is in the middle. And the number of Web transaction is rather low here in this country in our business, okay. But recently, we go through 40,000, slightly above 40,000 installers being in our digital ecosystem. Only slightly 1 out of 4 place every day a Web order. But 33,000 are coming every week. They need a quotation, they need a product information. When they need, they come, they go in our digital environment and work with it. And to me, this is a very fundamental because of the migration from physical to digital. This is first taking our customer base, our golden asset, into our digital environment so that they look for a product, they look for our product, they look for chat, they look for advice, they can get through the Web, through the EDI, through the phone or direct contact if they need in any point physical proximity. And this is why I am saying digital proximity. The people who need projects, they will get dedicated services, dedicated logistics because you need to deliver on time in full, during the night, where the train is about to go. They give you one hour of the train to go to the 27th floor of a building in La Défense. And with the wrong ferry, we will have lots of this because nothing can be done during the day and kind of stuff. These are our services to be charged, to be done but to be with our customer. And the same customer may have a need for proximity. He may have a need for a project. Or he may have a need, for example, for our best specialty business. Specialty business, in lighting, specialty business in data comms, specialty business in a tier solution like we do have with our U.S. -- in the U.S. or Capitol Light in lighting or Sofinther in France or more in different places and countries. This is -- I'm highlighting here the journey which fuel our growth of today, even more will fuel our growth of tomorrow in the market, which is by itself bringing new avenues. Now, if I go even further down, I mean, artificial intelligence. We invest right now in artificial intelligence development. We are spending. We are spending money internally, and we're spending money externally in order to get faster artificial intelligence support to run our business. And there is critical back office to be done, steps right now in the process of. I'll give you an example, I mean, in this business, we receive tons of e-mails every day in order to get this. And the whole thing is to get e-mail through EDI, straight. And nobody touch, and nobody -- and it was done manually during years. And these are the kind of things and changes, but on a broad scale, it looks simple, right, if you're alone. But on a scale of 2,000 to 100 branches around the world and a lot of different culture and adoption in order to come and stand down and so on, and I'm very glad that we are embracing this and getting done. It looks invisible. This is how we transformed the company At this stage. In order to go to the next one, leveraging artificial intelligence for predictive analytics, predictive analysis. The more we can predict, the better we will spend our money at the right place at the right time. And I can tell you we're very encouraged because we are -- we have notified 16 different usage and transformation of the profile of the company the way we exist, by which 2 are being prioritized and being now developed and rolled out. We are beginning to do so. And there will be more because all of this will feed a machine learning type of approach so that it's a never-ending progress in these first 2 and, later on, 16 avenues by which we change our business model profile. And just the sales force efficiency, really from more customer, more SKUs, it may qualify to sales force, intensive presence but selective because productivity is key there. And obviously, the sales force is being highly helped in order to, what I say, what is next best action, next best offer. And at the same time, we do not forget that we have a capital allocation policy that is needed in order to get shareholder value creation and shareholder support on the long run. And organic growth to fund the core business and also some of the evolution I just mentioned. A good dividend policy, predictable year-on-year. Therefore, we have committed to a certain ratio, and we will commit to continue to match them. Further deleveraging because -- without M&A because active management portfolio is always needed in a company in order to not to be loaded too late with something that you should have looked into it differently. And some selective acquisitions. Some of what I have mentioned before, whether it's digital or non-digital, require selective acquisition. And we will focus on digital M&A. I mean, who is a digital contributor to the building intelligence modeling, who is a solid contributor and could be acquired for getting more in-depth into IoT and who else could be a good one to be acquired in order to be faster in industry for this year. And these are what we would be looking at but, obviously, always by very strict criteria. All of this to highlight on the future, you got what we have done, you got what the numbers are telling us about where we are and we have done the year, and now I give you a sense for the future, which bring me to the last page and last moment before the Q&A, the outlook. And the outlook, as you can see it, consistent with our medium-term ambition and assuming no material changes in the macroeconomic environment, we target for next year, 2019, at comparable scope of consolidation and exchange rates a 2% to 4% same-day sales growth, excluding an estimated unfavorable impact of 1% from branch closures in Germany and Spain, in order to be sure everybody has a same way to calculate; a 5% to 7% increase in adjusted EBITA; and a further improvement in our indebtedness ratio, which is defined by net debt to EBITDA. And in saying that, I thank you for your time, your attention, and hopefully we will be to answer all your questions from now on. And -- or we'll not go through the appendix. And okay. And can I take the first question in the room? And just immediately after, we may move to the question on the Web. And question from the room? Yes?

[Andreas P. Willi, Head of the European Capital Goods]

It's Andreas Willi from JPMorgan. I've got a question on the profit bridge for 2019. You gave us the details for 2018 around investments and inflation and so on. Maybe you could help us to a bit with what to expect for 2019 both on the cost inflation side, which I guess will continue to put some pressure on the labor inflation and so on, whether kind of the 30 bps productivity a year is a normal level we should also see next year in '19 and what you're going to do with investments. Are we going to keep going at the same pace? Or is that slowing down?

[Patrick Bérard, CEO, Europe GM & Director]

Absent an inflation in pricing, they would cover the inflation in costing, which is still the case today. Even if we see a little bit of, potentially, change in this, so far, in the equation there, I turn only on productivity gains in order to cover the inflation on cost. Not knowing what could come from outside, I will look internally in the company for productivity gains. This is budget that each of my country has to deliver. One piece of the equation. Yes, we continue to invest but slightly differently. I was investing in branches and branch opening with a payback profile, which we have seen. Actually, we invest now a little bit more in digital, which is a less fixed asset, less -- and more probably a viable cost in the future. But digital requires some investment, as I told -- as I just said before. And now, the investment in digital, some of them have more effect than CapEx. This is different because everything on the platform, on the cloud and everything is on OpEx. And therefore, I'm looking for even further productivity in order to finance some of this. And we're going through the exercise also of selectivity within our own digital way between conventional ERPs of yesterday to move to more digital application and type of stuff. I mean, what I have said about the outlook is changing the profile of this. Now yes, there is an inflation piece. There is, to be clear. And therefore, we are doing a significant effort in accelerating, for example, the back office digitalization. And accelerating, certainly, because this is a way to get productivity gains, as one of the route.

[Andreas P. Willi, Head of the European Capital Goods]

My second question on North America, particularly the U.S., where you have had that strong turnaround in the last few years. When you started as CEO, there were many questions on the role of North America within Rexel and whether you should look, for example, to consolidate the market with combining with a U.S. competitor or so on. And your message was always very clear: the focus is to make value and turn it around. Now you have achieved a lot of that, are you more open to look at potential consolidation moves in the U.S. or merging it with a peer or something like that? Or now that the business is doing well, it's kind of earned its place and is a core of Rexel in the future.

[Patrick Bérard, CEO, Europe GM & Director]

Yes, my first answer is things have to be at the right time. I still have the self-help to come in the U.S. Everything we have done is rather recent. I have about 15 months of improvement. Never forget that -- I will never forget that it was a day of Thanksgiving in '17, which is November, when we went through regionalization. It's only last year same time we were finalizing regional budgets and adjustments too, meaning we got all of this because we have done not just this, we have done many other stuff. But we are getting there, and we can capture more benefit of this in the sense that it's still going on and accelerating. And you know that Platt has been, for example, in digital portion that we are rolling out throughout the country, and we have all these benefits still to come. The second thing about the question about consolidation, therefore, today, I'm not looking at it, to be clear, because I'm looking at getting the results of everything we have done. I have also committed to the market to say when I open branches, it's an 18 months before you get the positive results into our EBITA. Some of them are not yet there. And you know that the operating leverage, the leverage, have suffered, so to speak, suffered. I mean, it was relatively modest to the investment and that you told me that all the time, collectively and individually, which I fully understood, and it was correct. The time would come where we will have all these investments as more of the [ payback ] on our EBITA line. And now consolidation of the market, there are a few more movement. One of my competitor has acquired somebody recently. Okay, fine. It's something we couldn't do it because it's an all-credit [ PR ]. If you are exclusive all-credit, you have to eliminate something, it will be in the Platt region. I'm not going to have to sacrifice Platt for something which is not better than Platt. That is to make it simple and short. Now there are other things in the market going around. We are looking at different things. Cycle is, rather, is 10 years of growth in the U.S. And the second thing, and I'm not good enough to know if we are 1 year, 2 years before the cycle is slowing down or turning. This is an element of -- I'm very prudent. I will always wait for you. When I feel the cycle will [ churn ], I would stop certain investments. At the earliest signal, I will not commit because I want to get this in the result and not continue to be on an exposed mode. And I'm continuing to watch carefully at this. The second thing is multiple will be very high today, very high in multiple, at maybe they are high end of the cycle and, at the same time, probably significant in size, would put me back into corners where I'm sure I won't do well, because the digital way is the one I don't want to miss. Now if I find to be very -- if I find a very good highly digital, digitalized and that could bring skills, presence, market share at a reasonable price, why not? So far, I have not seen that.

[Pierre Bosset, Head of French Equity Research]

Pierre Bosset from HSBC. Just a follow-up question on the U.S. If look at the number of branch opening in 2018 from 2017, there's been a sharp drop 6 like in '17, I think. And I think that you are more and more cautious on getting the cycle in North America. And because I see some states like Texas, for instance, where you have a lot of things to do. So what are your plans in terms of branch opening for next year?

[Patrick Bérard, CEO, Europe GM & Director]

Now, there's a little bit of a [ sematic ] issue with branch opening and because it's really new. And we have done more than 100 refresh, meaning staying at the same place, rebuilding, reassortment. You would see that in working cap. Because you put inventory, we put salespeople, and we really rebuild from inside the strength of the model without always adding. And investment-wise, it's a bit lower. Working-capital-wise, it's the same. And the effect is shorter, which is always, for me, vis-à-vis a potential slowing down or whatever naming the way you want for the cycle coming into an end. It was a more prudent way of getting faster results. That's the balance. The other thing is opening a branch. It takes people before anything else. To find good people right now in the U.S., wow, that's not the easiest job. It's by far one of the toughest. And right now, in our own company as for the perimeter we have. This year, I have to replace 1,000 people because [ we're building ], because pension, because of -- 1,000. To find 1,000 different caliber than to past is a hell of a job. Therefore, yes, the branch which you see in the numbers is correct. It's a little bit hiding the fact that a refresh is in the same building getting a different branch, different presence, different service, different skills, maybe more people and much more working cap to get the Net Promoter Score up because we have a long way to go to be yet at the level we would like to be in terms of services.

[Laurent Delabarre, Group Chief Financial Officer]

[indiscernible] early 2018 and couple of months put in place. So we wanted to be sure that the regional were in place before going to further opening up branches. So we have a certain a number of sites, and we are very cautious on our opening policy.

[Patrick Bérard, CEO, Europe GM & Director]

Your question about Texas and the South and -- in the U.S.A. that we have players, high-density players locally. I mean, in Texas, there is a family business with the 300 branches around Texas. This is not the battle -- my battle is tomorrow. Because I will never be able to open a 300 branches in Texas. And even buying a company of that kind, I would buy assets. I think I have enough of assets. And I need to gain market share. I need to get digital. I need to get a new stream of revenues and margins without adding too much assets. Now it's not assets for 0. There might be something good in there to be done but highly selective. I understand I'm puzzling you a little bit because it's a strong belief that I had to do a few things, then fine. And I try to get the positive of what we have done. We show you and we give you as much as we can details so that you can better judge for your modeling. But I'm entering into different worlds too. Because, today, my problem so far has not yet been Amazon, as everybody has tried to make me, but they are the Screwfix of other world, they are pure players, they are other people coming into our world, coming in from outside, and they play different roles. Therefore, I have to move, like I told you, rather fast without assets into a different battle. And I'm there.

[Pierre Bosset, Head of French Equity Research]

I have a second question on digital sales. What was the percentage of revenue in 2018 coming from digital sales? I haven't seen that in the presentation. But maybe I missed it

[Patrick Bérard, CEO, Europe GM & Director]

So far EUR 1 billion of our sales. You could take an average margin. However, there's EDI in industry and digital transaction. It tends to be a lower-margin erosion business than the rest, for the simple thing that you don't negotiate with a machine. And if you take 18 months, 24 months, you adjust the price to the -- each of the customer because it's annualized pricing. But it tends to be that there is less, what we call, the [ override ] at the counter, or the [ override ] -- there are people, [ as you do need something, do need that ]. At the end of the day, it's [ helping us ].

[Pierre Bosset, Head of French Equity Research]

And do you have targets in terms percentage by region that you disclose? Or...

[Patrick Bérard, CEO, Europe GM & Director]

No, we will not disclose yet because it's moving. There will be an [ asymptotic ] moment which we'll see. But there are -- I always have a few examples that contradict what I would tell you, but they are exceptions. 70% in the Bern region in Switzerland. 70%. 7-0. But if you take Belgium and Netherlands, it's above 40%. To cross between 40% and 50% and above 50%, it starts to be a little bit [ asymptotic ]. But it's already in terms of productivity gains lowering the cost and, again, gain. And EBITA increase grow proportionally with this when you reach this level.

[Laurent Delabarre, Group Chief Financial Officer]

Which is fine because more transparency usually come with higher margin.

[Patrick Bérard, CEO, Europe GM & Director]

Yes, but we try now to have the first results as of when. Yes, below 20%, no effect. You keep your cost [ and you have ] -- because it's everybody doing a little bit of but not of enough of each. Above 40%, you start adding pure players, roughly. This is what we see in Germany, and Sweden, in Benelux and in our first countries. In the middle, between 20% and 40%, wow, there is more of an acceleration to get to the 40s so that you get even more benefit from the cost side OpEx.

[Laurent Delabarre, Group Chief Financial Officer]

And we have 5 counties above 30% of digital sale. In Europe, it's at 24%. So it's already a very good performance in Europe. And digital sales grew by almost 16% this year. And the EUR 2 billion represent around 16% of our total sales.

[Patrick Bérard, CEO, Europe GM & Director]

Yes.

[Alfred Glaser, Analyst]

I'm Alfred Glaser from ODDO BHF Just on digital, Patrick mentioned before that in fact you invested a lot in digital also in the back office in order to improve productivity. What's your target in terms of productivity evolution for the whole group and into the next few years? Could you explain a bit like this?

[Patrick Bérard, CEO, Europe GM & Director]

If I give you our productivity, you will take my OpEx line. You will apply to it on a generic mode, and then you will come back and tell me Patrick, 2 years ago, you told me this and that. Probably yes, and I recognized. And it's fair. And I know to whom do I talk, okay? Besides who you are, I'm sure. Never forget, I mentioned, productivity gains I need to make to offset the difference between inflation in pricing and inflation in costing. Costing going faster than pricing so far. And I have also to finance some of the transformation to digital, meaning it's probably a product far superior to the one we ever did before. If I don't digitalize the back office, it's impossible. Therefore, the must is digitalization. But digitalization means something else. It means different processes. It's not order to cash, how many people does it take tomorrow, but you have to rethink the way you do it. Opening an account, it has to be a 1 minute opening. But years ago in our business, opening an account, it was 5 days. And this transformation will obviously have an impact on the way we do things. Now, there's a social dimension to everything depending on the country. When we did the restructuring in Germany, 100 people at the HQ. We are almost too short. But I prefer to be too short now, and not to have to do it again in 2 or 3 years' time with higher digitalization. Just to give you a sense, through the restructuring, we also took care in where it was needed of already having made the back office [ consummate ]. Therefore, I don't give you a good number, I understand. But I give you a sense for how I look at it which we never had done like this so far. It's first year we go for this. We can give you a sense that the OpEx increase because as I said digitalization increase OpEx per se compared to CapEx of yesterday. It's not ERP and not the AS/400 we were acquiring 10 years ago. This is cloud-based. This is licensed, not even when -- it's a lot of developments that we cannot by the way protect CapEx. And we need to get it is therefore, sometimes it sucks some of the margin generated by additional growth, which I tried to minimize so that it goes to the bottom line. At the same time, without compromising on the evolution.

[Alfred Glaser, Analyst]

From 2018, how much of your CapEx was digital related?

[Patrick Bérard, CEO, Europe GM & Director]

60%.

[Alfred Glaser, Analyst]

60%?

[Laurent Delabarre, Group Chief Financial Officer]

[indiscernible]

[Patrick Bérard, CEO, Europe GM & Director]

Yes, because sometimes we have to touch on ERP too in order to make it happen for the future. 60%. Couple of years ago it would've been 70% logistics.

[Alfred Glaser, Analyst]

And how much of your OpEx evolution was due to the investment in digital?

[Laurent Delabarre, Group Chief Financial Officer]

The IT and digital patch was roughly 8% of our OpEx. So in the bridge, it's probably 2/3 of the bucket of investment in the 2018 bridge.

[Patrick Bérard, CEO, Europe GM & Director]

Any other question? Maybe some question coming from the line?

[Laurent Delabarre, Group Chief Financial Officer]

From the line, yes. We'll take questions from the line.

[Operator]

Your first question comes from the line of Lucie Carrier with Morgan Stanley.

[Lucie Anne Lise Carrier, Executive Director]

I was hoping you could maybe come back to the building blocks of your guidance, and specifically the top line. I was curious to know whether you're factoring in there some potential to continue to outgrow the U.S. market, whether you can comment on that. Because when I compare your number for the fourth quarter specifically towards we are seeing a trend in the U.S. It seems that there is some form of outperformance here. So just to understand maybe the building blocks of the top line guidance please? That's the first question.

[Patrick Bérard, CEO, Europe GM & Director]

[ Not only do we see that ], there's nothing of the U.S. The top line guidance, the 1%, it's EUR 140 million. This is EUR 140 million, we extracted from Germany and Spain, and if you take 1% of EUR 14 billion, it's EUR 140 million. Therefore to avoid miscalculation, we made it clear here that this is without the -- we have to take care of the EUR 140 million that we have not repeat this year in Germany and Spain for having done the restructuration. It's just 1% of our top line.

[Laurent Delabarre, Group Chief Financial Officer]

That's for the German and Spanish 1%. And for the U.S., as we stated in the raw part of the guidance, we said assuming no material change in the macroeconomic environment. Today, we have a stronger momentum in the U.S. with a quite high level of backlog. So we are yes, guidance is made on the assumption that we keep a good momentum on that way.

[Lucie Anne Lise Carrier, Executive Director]

Thanks for the explanation on Spain and Germany. That was not so much my question. I'm trying to understand here how you think about the dynamics by geography to come up to the net 1% to 2% same-day sales growth. And whether within that, you are assuming some outperformance in the U.S. market because I think we cannot necessarily say that the U.S. industrial demand or construction demand at the moment is growing 8% organically as you've done in the fourth quarter. So this is why I was saying it seems that there is some outperformance on your side. And I'm just curious to understand how you see next year, i.e., 2019 from that standpoint?

[Patrick Bérard, CEO, Europe GM & Director]

I would never take and I know that this has been done at the end of '17. I would never take a Q4 for a normal trend. Sometime customer need to finish the job before year-end. Sometime people need to make their bonuses, and they rush to get it done. They are always slightly distortion. However, this year I have to admit it has been the growing trend without having space for any artificial kind of thing happening in Q4, especially in the U.S., the U.S. business, whether it's our customer or our self, it's dimensioned by the number of man days available. It's not the demand, which is high or low. It is by the way, today, you choose 3, 4, 5, 6 months to get a good electrician or contractor to do a commercial building. And by the way, this is why there's so much subcontracting, and this is why there are so many places in the U.S. who are unionized make the whole thing much more expensive because the unions, whether it's Miami, San Francisco or New York, are controlling the electricians' installation world and not just the electricians. Most of what's going into the construction world. And now it's booming. Let's put it this way, it's booming, there is demand. It's probably fueled by the 15% of taxes that was made available to the Americans. They had projects. It took a bit of time to get a project out running. And therefore, we are on a solid trend, in which we see in our backlog. We see in our demand, and at the same time, we have freed up our resources and people are gaining market share. Our people are gaining market share a little bit, but we come from so far, it hasn't been our case. It's good to recover and gain a little bit on others. Yes, we do. Yes, we do. And not -- if you have noticed, not at all at the cost of margin. If some other people have done lower margin, higher volume, in the U.S., we have done higher volume, higher margin. That's where we are, and we are continuing.

[Lucie Anne Lise Carrier, Executive Director]

Okay, very good. My second question was around the inventory level. I just wanted to understand how much of the increase was due to the transition in the operational structure in the U.S., and how much is maybe due as well to the fact that you are increasing the number of SKUs as well across the firm? So just maybe to understand how much it can be resolved fairly quickly? And how much it may be a little bit structural?

[Patrick Bérard, CEO, Europe GM & Director]

The one thing which had to be done without which no growth would've existed, it's not an organization design that make something happen. It should facilitate, that's all. And what the first investment we did remember, and everybody was scary about the effect was working capital on inventory. And we've done a lot on inventory because making product available was a condition to sell, and having the right assortment is a condition to sell. On the quality side of this through digital, we will do, we will do better and probably come to a better use of inventory, money put into inventory. But it was the first fundamental bridge. Now it was not done at the same day everywhere around the states. We had to do it in the branches, and one of the way to get it done and not exploding out-of-control was also helped by regionalization. That regionalization is a way to put our hands around markets which are no longer valid reason. Remember, it was JetPro, Rexel, Platt and other banners across the state, and now we put this multi-banner presence within a region so that we can put the right resources in the right place. There's a second thing which we still have a negative effect last year. It was the GEIS and the GE business which was going down. ABB has fixed the GEIS, in broad terms, has fixed the issues that even beginning of last year, we were going down. Now on comparable last year and this year, I have still see that has being favorable to us, which is not the case for the one less dependent on GE and GEIS in terms of my competitors. We're less dependent upon. Meaning we got structural things to do. The GEIS is [ stirring ], the GE customer base to be replaced by other customers because GE closed activities, and poof we were their main supplier. Disappeared. EUR 100 million. And therefore we had to touch new customers, you know EUR 100 million each time. It's not small fish. And we are doing this, and we have recovered from this. Now you need also management, and the way you manage yourselves was the way you manage this region and by the way, we got a lot of layers in order to become very agile to become short in terms of the decisions made. And it goes too. And Jeff Baker and myself, we spend a lot of time making sure this is the way we get things done. My wife will tell you how many trips I have made. I would not comment on that. But believe me this has been going down towards fixing the breaks one by one. Therefore, yes, there is a structural capability to embrace this market and its complexity. Its supplier is very complex, very different from Europe. Pricing, same story. Very complex. Because you have visible pricing everywhere on the net. On the other hand, you have a lot of specialty pricing, and how does it fly in and people going around and for every single vendor, everybody comes with "I have done this, I have done that. I have seen this." At the same time, costing is high. Manpower rare, and go and get it fast. ASAP. Therefore, yes we have adapted to this. We have changed our structure, change the way of doing. We're building on our essential blocks, projects through the project houses. Proximity, physical and digital using the Platt, extending to. And a specialty because.Rexel Energy Solutions, Capital Light, continue to be good providers. But think this, Capital Light. Capital Light, it's a company who is a real turnkey project of lighting systems for the malls. With the retail going to the Web, the malls are not being -- first of all, no new malls. And certain going down and not investing a lot. Within a year we had to reestablish this company to a new market. And they become a specialist of car dealership. Because this is where to sell cars you need to have the lighting, the nights, and all the system very effective. They did it. And they're looking for what is next, because this is the agility by which we will go in the U.S. market. But at least it's there. It's now in the DNA.

[Operator]

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

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

It's Andre from Crédit Suisse. I will try on the growth as well. I'm really interested to know what underlying market forecast you have for North America and Europe within your guidance, i.e., what do you expect the markets to grow?

[Patrick Bérard, CEO, Europe GM & Director]

Markets in Europe. The growth of the markets in Europe are very contracted by the way. I have to eliminate the U.K. First of all, I don't know. And I don't expect any nice news. Therefore, better be prepared for let's say rather -- as the market as slowed down significantly already in the U.K. I mean people think the Brexit will be the beginning of. In our business, one side of the market was financed by projects that EU was financing and nobody knew whether it would be coming or not. I have a long list of projects that would probably never materialize. And there are still open for 3 years, that have never been started. By the way, Rexel was pretty good in this project business. And that's part of the issue, we had to restructure and get to something much leaner and much lower, because other players were more approximated. And we won more project. And this project has 2 effects. The one left over our low margins. Forget, it's not contributing to what it should be. Or, they are so uncertain, and certainly, I would like to be sure we're getting paid at the end. The carry-on case is something that nobody should forget. It has happened once, it may happen a few more times. Therefore, we are highly selective and are looking for margins and not for volume. And I'm looking for results and not for market share. There is a choice to be made there. And by the way, should any recession happen in one or the other country or slowing down in Europe, this is the way we will tackle the slowing down. Go for margin. And then keep your sales force. And get the rest the leanest as you can. I think the chance to open this avenue because people ask me what are you going to do if you have the answer. And we have the plan prepared everywhere. And should we see that needed here or there, or globally or locally, we do it. It's a way of life. It's known. It's shared. So what? And we're doing it right now in the U.K. And now the rest of the business if I take Sweden continues to grow. Some people say the end of the cycle. Here, I was recently in -- but Sweden is 3 towns. Sweden is Stockholm, Malmö and [ Gothenburg ] in our business except a few industrial sites outside. It's 75% of the demand of the gross. And when I look at the 3, they are full of projects, full of staff, full -- different nature, more renovation than [ granule ], but it's very good renovation to be sure, to a distributor. It's even better than some news. And no it is very different. It's fragmented all over the place, and it is totally different market. Now when it comes to Germany, we've done restructuring. We need to go back to let's say no more market growth because after such a cut and everything, I'm going to no more market growth which is probably something in the range 2% to 3% in the residential, and even if the latest news on industry are a bit lower, it's still positive. And we have market share to gain an industry, good partnering, good partnership with Siemens and assure the vendors who needs us in the field. I mean there's no reason much to believe that what we have done is right. France, well my French colleague could tell you more, but I know this market a little bit too. It's still on a high demand volume. Now, is it going up to where high-growth on top of significant volume? Probably not. But we don't need a lot of growth here in this market because we are looking for the right mix. We're in the right mix. We have still projects to grow. We are not our average market share everywhere. We are regional, we are in demand in some places. We can gain. We are going after. We are rebalancing the workforce. We are rebalancing the sales force to go on the projects where there is more to be done. It's very local now, and when I say local, or regional. And by the way, if there was a little bit of softening in December, there was no softening in January, close bracket. Okay?

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Can I ask for a similar one across U.S. and Canada?

[Patrick Bérard, CEO, Europe GM & Director]

Well I'm not sure I fully understand your question.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

I was really just interested in what market growth assumptions you have behind your guidance i.e. what you expect the underlying markets to grow at? And I think we now have a pretty decent idea on Europe and the segments there. So just interested in the other chunk in North America and the 2 components of that?

[Patrick Bérard, CEO, Europe GM & Director]

In the North American market, I have to compound it by the region we are in. And they will be very different. I still expect on the both coasts to be reasonably solid. Midwest, I don't know. On the other hand, Denver Valley and the south is booming, absolutely booming. It's a new California in the commercial business and bringing a lot of people to come. But the more I look at the U.S, it's driven by the local tax. You have markets doubling in 5 years by people moving because taxes are much lower in a place, and if you follow the tax, you follow the demand. And now it goes by states and no longer by my region. Within my region, I have certain states booming, and others are more flattish. And it goes fast. Now globally, similar to last year it's probably something not too far from what I can judge, but please, I am not macroeconomic institute. I should give you an indication. I don't give you a commitment. This one. Asia, after we have re-dimensioned our business to industry, we go with the automation industry, and there's still a lot of demand for internal demand in China, in China, because we're not in any other Asian markets anymore. There is still good, resilient demand in automation.

[Laurent Delabarre, Group Chief Financial Officer]

And we are in [indiscernible] which [ could serve ] and we have just for the industrial segment.

[Operator]

Next question comes from the line of William Mackie from Kepler.

[William Mackie, Head of Capital Goods Research]

Will Mackie from Kepler Cheuvreux. A couple please. Firstly, when we think about your future initiatives and investments into digital, which will no doubt transform your business in the midterm. How should we think, or how do you think about which core capabilities you need to develop in-house to support predictive service or improve customer relation or logistics management? And what do you think you can buy or continue to acquire, cloud-based or via CapEx investment from third parties? So how should we look to you developing that skill set in digital? And perhaps to talk about the impact on the physical assets you have over the next 2 or 3 years? And my second question which you can just carry is relating to how you run the leverage or how you see the capital structure of the business midterm? Clearly, the message today is you will continue to reduce or delever the company, reduce debt. But what sort of level do you or the board think is the appropriate level of leverage within the group over the midterm if you have a target?

[Patrick Bérard, CEO, Europe GM & Director]

We have targets, whether I will give you all my targets, it's a different story. But we have our internal targets, and we will answer the last one first. Deleveraging further down may require certain choices at some moment in time. But it's a commitment. The pace is more -- it could be more accelerated because at some moments, but the trend of this year, it's a good place for the future. The trend of decrease for this year, it's a good pace for the future. Now it does not go forever like this. There's a moment probably we say it's good enough and it's sound. Remember, when I took over the job about 3 people say or if you could be below it would be good. Than 1 year later, 2.5 was already, you should be below. And recently, it's below 2%. And you know where does it make sense? Once you reach something in that range. Further down, it really depends other what will happen in the market on the interest rate, and other things. And then I say it's a market which tells me well distribution B2B, you need to transform, but deleverage also to be less sensitive to the cycle and kind of stuff, which I will understand. It's a balancing. Therefore, I'm telling you deleveraging at the speed at the pace of what we have done this year is for 2 or 3 years is not a bad thing to [ end with this ], okay? Everything being equal, that's the best answer I can give you as we speak. Regarding the transformation, and indirectly or directly, you touch on when do I get the different physical footprint because I have more heavily digitalized. Until you are not at 40%, 45% of digital, difficult to really get something significant on your physical footprint reduction. The other thing we can do and we are really doing now is rethinking what the physical presence means. Meaning major building 3,000, 4,000 square meters with so many things inside who are no longer absolutely no longer the right way by which we approach the market. Either, it's a place where, of that size which are like a semi-hub fully automotized or it's much smaller. But the present I told proximity model, may require more, much higher -- not a much, a little bit higher number of outlet presence, but probably 1/3 the size of what they are today when it comes to effects, it has a significant impact. If I would had 1/3 less square meter to be paid, even if there are more numbers of outlets. The manning. Manning is also different. Manning over the phone required to consolidate skills on a few places because it's giving advice. It is taking somebody on the phone. It takes 0.75 hour to make a correction, you need to have all the digital to have to be done. People try to work like this today, and it's a different setup. And then, at that moment, telephone lines for example an installation require CapEx in OpEx to increase because we need to get the right power to go through. By the way, this business goes to big files, images. The telco business that is supporting us, we never talk about it. But this is one of the things which goes up every day because power and very soon it's 5G, and 5G will require another set of equipment which has a large span of about 3 years. Therefore, we gain a lot on one hand. We rebalance on the other hand. So the beginning of your question, which is the skills. It will be balanced between external and internal. We will never be 100% internal because it goes too fast. And to get the right skills and not to be on an obsolescence journey, we need to own some of it, and we need to externalize and work with outside people. It's new because we have been used during decades to do everything by ourselves. And therefore we need to select a few partners, not so many. Sometime we test and not good enough for we cannot find the proper way and we have to change. But we have to work with a few partner in platforming if -- do we host ourselves on an Azure platform of Microsoft of somebody else, but we need to choose once it's done, you need to work and get it on right. And who is helping you doing it? When it comes to predictive, you need to develop algorithm. We will never develop our own algorithm. They are specialist and they are language and they are skilled. On the other hand, we need to really understand which data should be provided so that the algorithm can bring you the right output and the decision-making. And recently, the people helping us were telling us of the total intensity, whether it should be translating into cost or into timing, the algorithm is only 10%. The processes around and around the algorithm, the data, to bring the data and the quality is another 20%, 2x the algorithm, and the intensity, the onboarding, the usage, 70%. Meaning when you have 10% on the algorithm, consider the algorithm, we know roughly what it is to get it written down by people tested and running. This is a certain amount of money. You consider it's 10%. In the moment you put EUR 2 million or EUR 3 million in a algorithm, it means you will spend EUR 25 million, getting this algorithm used every day by the population of Rexel. Just to give you a flavor what it means, and it a new world. It's not direct OpEx that you see on the P&L, it's people, it's usage, it's training, it's onboarding, it's effort, but it's a shift in the way we run our operating model. Any other questions?

[Operator]

Next question comes from the line of Martin Wilkie from Citi.

[Martin Wilkie, Director]

It's Martin from Citi. Just a question on your global footprint. Obviously, you mentioned or you answered a question earlier on the U.S. But elsewhere in the world, you've obviously cut back your EUR 650 million or so of sales in Germany, Southeast Asia, China and so forth. When you look at your global geographical footprint now, are you happy with it? Or has the world shifted again since you set that target? And are there other areas that you might consider, or should we think that your footprint is now essentially where you'd like to have it?

[Patrick Bérard, CEO, Europe GM & Director]

I think we've done enough of the retail mode, and now we will come to sorting out in the future, whether it's good to be, or less good to be, but not so much and also to be balanced. To be balanced means 3 things to me: we have to have balance in which part of the world are doing better than others and not to be too dependent on one market. And therefore, first of all, Europe and U.S. is very important to us to be balanced and growing more in the U.S. to be more balanced with Europe. And it's 55% Europe and 39% or something in the U.S. Rebalancing a little bit more would help. And China, because in China and Pacific where we are today it's good to be observed. It's also very needed for the second criteria. I have a supplier relationship which required and we work together in different markets. I cannot be with one and ask to be their star in one market. And not to be in other major markets. Otherwise, we don't have a stable relationship. And supplier relationship is not just a matter of volume and rebates and pricing, it's a matter of having access to R&D, having access to partnership, what I call the core platforming of the future and IoT on digital platforms, having access to certain developments, comarketing, codevelopment and coplatforming are key in the relationship with the supplier. I will not do it. I could open a chapter on the evolution between the suppliers and the distribution of the future in terms of value chain, adding more end-to-end working ways, not duplicating certain things like inventories but working much more on the visibility in each other how much we could gain in doing things like that. Therefore, if you don't have solid relationship with supplier they will never allow this to happen. And, however, it's highly needed to finance the future. Just if I look from a cash standpoint, locating an inventory, that everybody should bring it down to have a higher score ensuring the customer for a lower inventory, global inventory which only on end-to-end allow this to happen. Which require file standardization, exchange of data and availability of product which -- and it goes quite far into each of the system. And I make it very concrete that the third reason for me to stay or to keep this -- accept the rebalancing between U.S. and Europe which I would wish we could get as fast as we can, this is also of the skills. And there are things developing one continent and that we can expand to the other one and vice versa. It's no longer the digital world is no longer everybody needs [indiscernible]. And we're learning things today in China in industrial automation. They are more advanced except in Germany, they're more advanced than anybody else as the Chinese themselves. On the other hand, when you're working for Google, campus in the Silicon Valley, you learn the building of the future before the beam has even done it in Europe. And things like that. Therefore there is intelligence and richness in our business that you cannot get only by being present in one.

[Operator]

Next question from the line of [ Jay Shawn ] from Citi.

[Unknown Analyst]

In [ Jay ] from Citi. Just one, you've invested in working capital, especially in North America. Is that more to support growth or is the model of opening branches and counters inherently more working capital intense? Should we also think that the further branch openings in the U.S. need similar investment in working capital?

[Laurent Delabarre, Group Chief Financial Officer]

No, fortunately, this is because no the branch opening will be very cautious in opening the next branch and the requirements in working capital is far less than the investments we have made over the last 2 years. So we see at the level today is even with the [ schedule ] where we have a bit over 30 is on the high side.

[Patrick Bérard, CEO, Europe GM & Director]

Any other question?

[Operator]

No further questions.

[Patrick Bérard, CEO, Europe GM & Director]

Okay, no other questions in the room? Well I would like to thank -- I think it's lunch time therefore there are no questions anymore. Thank you for having taken the time. Thank you for having joined whether by Skype phone or directly here in presence. And hopefully in the coming days for the one we will see on the road, where we can clarify further questions to come. Thank you.