Rexel S.A. (RXL) Earnings Call Transcript & Summary

Good morning. This is the conference operator. Welcome, and thank you for joining the Rexel Analyst Conference Call for the Full Year 2022 results. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Guillaume Texier, Group CEO. Please go ahead, sir.

Good morning to all of you, and thank you very much for joining us today for this presentation of our fourth quarter sales and full year 2022 results. I'm joined on this call, as usual, by our CFO, Laurent Delabarre. Before getting into the details, I'd like to say that we are very pleased with our 2022 results for several reasons. First of all, because they are very good, reaching record highs and even beating our latest updated guidance. But also together with the teams, we are proud of the way those results were obtained, implementing the actions that we had talked about at the June Capital Markets Day. This really proves the case that Rexel has reached a new level in terms of growth potential, profitability, agility and resilience, and we will illustrate that today throughout the presentation. So let's move to Slide 3 with the main highlights of what was for Rexel, a second straight record year. We will look at the numbers in detail shortly. But suffice it to say at this stage that in 2022, Rexel posted all-time high sales, adjusted EBITA, net income and free cash flow while at the same time, deleveraging its balance sheet with the lowest indebtedness ratio since the 2007 IPO. The excellent metrics were driven throughout the year by a robust performance in terms of volumes. We continue to benefit from the positive structural momentum of electrification trends in Europe with increased electrical usage and demand for energy efficiency. We're also seeing continued growth in the U.S., and this combination results in market share gains for Rexel in several important key countries. Our business is also supported by consistently high backlogs, which bodes well for future quarters, driven both by strong underlying demand as well as continued tensions in the labor market and in product availabilities. In addition to strong volumes, we had a positive pricing effect in 2022 as we continue to have success in passing through price increases, which we expect to continue, albeit at a lower pace in 2023 in most categories. This has also allowed us to protect our gross margin supported by our database pricing tools. And finally, let me highlight our continued cash discipline, evidenced not only by strong cash conversion, but also tight inventory management with our days of inventories in line with 2021. I'd like to take this opportunity to publicly thank the teams for their energy and drive in challenging times to deliver this very strong 2022 performance. It's also the result of many years of transformation and improvements in our business model, which drove commercial success and margin enhancements. On the following slides, we look at some of the factors that not only drove our robust 2022 performance, but also contribute to building a strong platform for continued success. Indeed, we are fully on track to achieve the objectives of our Power Up '25 strategic plan. Our underlying profitability has risen to a higher level through strong execution of our 2 strategic pillars. First of all, excellence on fundamentals, leveraging our processes, tools and best practices to further optimize our core model. And second, striving to be a differentiated leader on topics shaping the future of the industry, such as ESG, energy transformation solutions and advanced services in order to accelerate growth. At the same time, we are actively deploying our capital allocation strategy through portfolio management, as you will see shortly, with the 2 acquisitions and the divestment recently announced, but also through the launch of our share buyback program during the course of the year. To date, we have bought back shares for a total amount of EUR 66 million out of our total program of EUR 400 million. We are first building a strong platform for continued growth, leveraging on 3 trends. First of all, we are harnessing the powerful and sustainable trend towards greater electrification driven by the growing traction of net zero agendas; action by government, such as the Inflation Reduction Act in the U.S.; and demand for more energy efficiency in the face of rising energy prices. Second, the continued ramp-up of digitalization, which now accounts for 27% of our Q4 sales, up circa 310 basis points over the past year. And finally, a heightened focus on ESG. In 2022, the key highlight for Rexel was that our net zero targets were approved by the science-based target initiative and our efforts were rewarded by inclusion in Euronext CAC 40 ESG index. This index groups the 40 big French companies that demonstrate best practices in ESG issues. On Slide 5, we look at how this translates into record numbers for Rexel on 4 key metrics. First, our same-day sales grew by 14.1% in the full year, above the upgraded guidance of circa 12% that we provided to you in October of last year. Second, we achieved a record level of adjusted EBITA margin of 7.3%, also coming in above our upgraded guidance of circa 7.2%. Third, the conversion of free cash flow before interest and tax was 61.4%, in line with the guidance we provided at above 60%. And last but not least, our indebtedness ratio was also at a historical low level of 0.96x EBITDA after leases, down from 1.37x 1 year earlier. Having a sound balance sheet gives us even greater leeway to pursue our growth strategy. The number I have just presented -- no, I think you are not in the right side. Yes, yes. The numbers I have just presented put us fully on track to achieve the 2022 to 2025 ambition that we presented at our Capital Markets Day in June. And so on Slide 6, we provide you with the scorecard of the main actions we outlined in June and our achievements in year 1. The first set of numbers relate to financial targets. And as you can see, our 2022 performance outpaced the objectives that we set in terms of same-day sales growth, adjusted EBITA margin and cash conversion as mentioned on the previous slide. The second set of numbers relates to capital allocation. And here too, you see that we are well on track. We have completed more than 15% of our planned share buyback plans or EUR 60 million out of EUR 400 million. We have acquired EUR 500 million of sales in 2022 as part of our plan to complement organic growth with acquisition of up to EUR 2 billion of sales. And in parallel, we have nearly completed our disposal program of up to EUR 500 million, including one recent disposal I will present shortly. And the third set of numbers relates to our business objectives. One is the continued ramp-up in digital sales. And with growth of 25%, our digital sales accounted for 27% of sales in Q4 2022, on track to reach our objective of 40% in 2025. The second is becoming a leader in ESG, which was materialized, among other things, by SBTi's validation last summer of our net zero targets. On Slide 7, we zoom in on another main element of our strategic plan capturing accelerating trends in electrification by growing our business in solar, HVAC, electric vehicles, charging infrastructure and industrial automation, what we call electrification categories. At our Capital Markets Day, we outlined the ambition of growing in these businesses at twice the pace of our traditional electrical distribution business. In 2022, businesses linked to the electrification trend grew by 25% to represent, today, 19% of our total sales. And as you see in the second column of the slide, we saw a robust and steady growth throughout the year, starting at 16% in Q1 and accelerating to more than 30% growth rate in Q3 and Q4. To help drive this growth, we are focusing investments in this area. We are first developing expertise, for instance, by tripling the number of employees dedicated to solar between '21 and '23. We are building up capabilities with new specialized distribution centers. We are optimizing purchasing in solar in Europe by centralizing procurement for our large European countries. And we are making also acquisitions in industrial automation in the U.S., as I will detail shortly. And we expect this growth to continue as there are a number of catalysts to drive it in 2023, including government plans such as the IRI in the U.S. and the similar plan that is expected in Europe. New requirements, such as the obligation to equip all large outdoor car parts in France with solar panels by 2028 and trends such as reshoring, which is a catalyst for industrial automation, among others. On Slide 8, we look a little bit more closely at the reasons behind this clear acceleration of electrification trends. There are many, but three of them play a particularly big role: corporate net zero agendas at our customers; government actions; incentives or investment plans; and the price of energy, which played a big role in many countries in 2022 to push economic actors to decide to invest in the energy transition. One question you may ask is how sustainable are those trends going to be, especially if we see variations of the energy price. And we try to put on this slide a qualitative answer. What we see in the field is that the other 2 drivers besides energy prices are gaining momentum extremely quickly. And we'll continue to accelerate, and guarantee electrification is here to stay. Energy may experience short-term variations in price, but the corporate and governmental push towards energy savings and green electricity will undoubtedly continue. And another very convincing way to look at this is simply to read on Slide 9, the energy scenarios put together by the official authorities in each country. You have a summary on this slide, which is quite striking. As you can see, energy consumption is expected to decrease significantly in most major countries, except the U.S. through 2050, even though those countries are going to experience economic growth. This meets huge efforts in terms of energy savings. And you can see on the right that we have solutions and services to address this need for less energy-intensive economics. But what is obviously very impressive also is the yellow bar, which shows how much electricity in the same time is going to increase. This goal will not be reached without a strong contribution of all players, including Rexel. Major usages have to be made electric like mobility or heating. Electricity generation, including decentralized and renewables has to be put in place to answer the new demand and the infrastructure as well as the electrical organization of all buildings has to be rethought and modernized. These are buoyant trends that will help over Rexel's growth going forward. On Slide 10, we focus on another key part of our Power Up 2025 strategy, which is active portfolio management to concentrate on our strengths. Let me share with you 3 recent transactions that include 2 acquisitions in North America and the disposal of our activities in Norway. We have completed the acquisitions of Buckles-Smith, a California-based company, specializing in high value-added industrial automation, which will offer synergies both with our regional operations and with our global expertise in industrial automation. The company has 6 branches and a high-quality and respective team, and it posted 2022 sales of USD 150 million. And this acquisition was signed and closed on January 5. We also announced the acquisition of LTL in Canada. This acquisition reinforces our footprint in the attractive Canadian utility market with a set of services, products and solutions that will be a very valuable complement to Rexel's portfolio. LTL operates 2 branches and generated sales of CAD 25 million last year. And the transaction was signed and closed on January 17. And at the same time, we have also announced the signing of the divestment of our operations in Norway to Kesko. Rexel's activity in Norway, generating approximately sales of EUR 250 million in 2022, were less profitable than group average and were deemed nonstrategic for market and competitive reasons. The completion of the transaction, which was signed on January 27, is subject to the approval of Norway's Competition Authority, and we expect closing in the course of the first half. The 3 transactions combined are accretive in year 1 to Rexel's EBITA and EBITA margin, net income and return on capital employed. They are part of our strategy to focus our resources on high value creation opportunities. And if we take a step back on Slide 11 and look at our active portfolio management over the past 2 years, you can see that since January 1, 2021, and through today, we have carried out a total of 10 acquisitions and 6 disposals. All in, we have acquired about EUR 1.5 billion in sales and divested about EUR 0.5 billion. These transactions materially enhance the group's growth and profitability profile and reinforce its capabilities to address the challenges and opportunity of the energy transition and electrification trends. We are strengthening Rexel's portfolio both in economic terms with the EBITA margin of the net acquired activities above group average and in strategic terms, as we focus on fast-growing geographies, segments and adjacencies. And moreover, these transactions were carried out at attractive valuations with the acquisitions net of disposals making a combined multiple of less than 6x 2022 EBITDA, resulting from reasonable acquisition prices and well negotiated disposal terms. We are very happy with these acquisitions, the timing and the way that integration is taking place. There are excellent examples of the disciplined approach to M&A that we presented to you in June, and they further strengthen our core electrical distribution positions. Now let me now hand over to Laurent to present the Q4 sales and full year 2022 financial review.

Thank you, Guillaume, and good morning to all of you. Let me start with Slide 13. The bar chart shows that we continue to operate at high levels in terms of same-day growth with double-digit progression in each of the 4 quarters this year on top of high growth in each quarter in 2021, making Q4 '22 the eighth consecutive quarter of positive organic development. Tier 2 and similar to previous quarters, we are displaying a very good balance between volume and price. The volume effect in Q4 was 6%, while the net price effect stood at a strong 6.4%. As expected, we had a slight negative cable price effect in Q4 of minus 0.8%, reflecting the lower copper price in the quarter compared to the same period last year. Moving to Slide 14. Volume rose sharply with group contribution of 600 basis points to our Q4 growth, reflecting favorable trends in Europe and North America. More specifically, volume grew by 7.2% in Europe, boosted by strong momentum in electrification, notably in the [ dark ] region, but also by the more traditional business that is holding up very well in many countries, including France. On North America, volumes stood at plus 6.4% showing positive development quarter-after-quarter, despite a more limited contribution from solar at this stage, the category of products that is expected to benefit from the IRA in coming quarters. In addition, the level of backlog remains elevated in both countries as we will illustrate later. Moving to Slide 15. The 6.4% pricing contribution to same-day sales growth include 7.2% from non-cable products and minus 0.8% from cable products. Specifically on non-cable products, the 7.2% effect is in line with expectations, slightly lower than in Q3 on a higher comparable base and in the absence of carryover effect in this last quarter of the year. Specifically on cable products, the negative 0.8% contribution in the quarter is explained by the lower copper price in H2 '22 compared to H2 '21. Indeed, copper price dropped to $7,850 per ton versus circa USD 9,500 per ton in H2 '21. Also note that we have entered '23 with a more favorable copper environment with prices slightly below USD 9,000 per ton. Slide 16 focus on the contribution of our 3 geographies to the group, plus 12.3% same-day sales growth in Q4 '22. You have all the details in the press release on a country-by-country basis, so I will just highlight the key evolutions of the quarter. In Europe, Q4 sales were up 16%, driven by overall market outperformance, our strong ability to capture electrification trends. Solar, EV and HVAC product families accounted for 18% of sales, growing at more than 60% and contributing to 810 basis points of sales growth in the quarter. The countries that benefited the most from these trends are Benelux, Germany, Nordics and Italy. We also benefited from a growth acceleration in France in all our end markets. In North America, we posted same-day sales growth of 10.2% in the quarter. More specifically in the U.S., overall growth is driven by the robust demand in commercial and industrial businesses that offset the declining trends in the residential segment. The lower sales growth than Q3 '22 can notably be explained by lower residential business in the Northwest and also lower project activity in the Southeast due to a base effect. In Canada, the good performance was still driven by industrial end markets and more specifically, oil and gas and mining activities. In Asia Pac, sales were up 0.7% in Q4 '22, largely resulting from the negative momentum in China, impacted by the COVID situation in December and offset by the positive trend in Australia driven by robust commercial business. On Slide 17, we see that we continue to have a record level of backlog, which bodes well for the coming quarters. Similarly to previous quarters, this is due to several factors such as strong underlying demand as well as delays in projects because of labor and project scarcity that disrupt activity. Let me illustrate this with our backlogs in the U.S., Canada, France and China that you see on the graph. As you know, while backlogs represent a material part of the North American and Chinese businesses around 3 to 5 months of activity, they are much smaller in France, around half a month of business. And this level of backlog gives us some visibility for part of our business in the coming quarters. Slide 18 shows you the different building blocks of our growth. And you can see it is well balanced between organic growth and M&A, leading to 27.3% growth on a reported basis. As shown on the graph, organic same-day growth reached 14.1%, driven by the combination of volume and price described before. We also had a positive net scope effect of 7.4%. This is an opportunity to underline the contribution of our recent acquisitions, mostly Mayer, but also Horizon Solution in the U.S. and Trilec in Belgium. We also benefited from a positive impact from foreign exchange of 4.6%, mainly from the appreciation of the U.S. and Canadian dollars. And we now anticipate the '23 scope impacted -- impact to be close to minus 0.5%, including the latest transaction announced early '23 and the full year currency impact to be close to minus 1.5%, assuming spot rates remain unchanged. On Slide 19, we show you the building blocks that led to a record adjusted EBITDA margin of 7.3%, up circa 120 basis points. The progression notably includes a positive operating leverage impact of 156 basis points, largely from our capacity to pass through price increases, a net positive nonrecurring items of circa 66 basis points. As a result, on one hand, of a positive one-off gross margin gain on non-cable inventory price inflation for 95 basis points. And on the other hand, a negative 29 basis point one-off effect from higher performance-linked bonuses, notably for our sales force in the context of better-than-anticipated activity versus our initial budget. Lastly, our OpEx inflation impact of 70 basis points due to overall inflation that include almost 4% in price and 6% in other OpEx inflation. On Slide 20, you see how each geography contributed to our record profitability. Europe's adjusted EBITA margin stood at 7.7%, including circa 75 basis points of nonrecurring items. Profitability improved by 55 basis points from robust sales growth, offsetting investments in people, negative country mix mostly from Germany as well as overall cost inflation. North America's adjusted EBITA margin stood at 8.2%, including circa 60 basis points of nonrecurring items. Profitability improved by 190 basis points, thanks to higher level of activity, strong pricing power and synergy from Mayer. North America has become the most profitable geography. Asia Pacific's adjusted EBITA margin stood at 1.9%, including circa 40 basis points of nonrecurring items. The profitability is down 50 basis points due to lower activity and bad debt in China in a COVID context with a negative 140 basis point impact on APAC profitability. On Slide 21, we look at the bottom line part of our P&L. Reported EBITA stood at EUR 1.3 billion, including a negative nonrecurring impact of EUR 24 million from copper price, which were lower in '22 compared to '21. Moving to financial expense. This stood at EUR 190 million versus EUR 133 million last year, restated from the one-offs related to the refinancing in '21 and interest on lease liability. Our financial costs slightly increased from EUR 63.4 million to EUR 69.6 million from higher average gross debt. On the other side, the effective interest rate decreased to 2.29% in '22 compared to 2.42% in '21, largely from refinancing, offsetting the rise in interest rates. For '23, we anticipate financial expense to be circa EUR 95 million, excluding one-off and interest lease liabilities in the context of rising interest rates and assuming current interest rate conditions remain unchanged. In addition, interest liabilities should be close to EUR 50 million in '23. Restating from nonrecurring items, notably the impact from portfolio management, our income tax rate stood at 25.7%, lower than the 26.6% in '21, mainly from the drop in the French legal tax rate. And for '23 onwards, we anticipate our tax rate to be below 28%. As a result, net income was EUR 922 million and our recurring net income stood at EUR 912 million, up 59%, reaching an all-time high level. Moving to cash flow on Slide 22. We generated record cash flow before interest and tax, reaching EUR 873 million. This reflects the robust operating results and the disciplined trade working capital management with a stable trade working capital on sales at 14%. Free cash flow conversion before interest and tax stood at 61.4%, slightly lower than last year due to the higher cash out from non-trade working capital that is expected to normalize in 2023. Gross CapEx represented 0.8% of sales, in line with our guidance of 0.9% and above '21 level due to the investment in automotive supply chain solution with the ambition to triple the number of automated distribution center by 2025. Free cash flow after interest and tax reached EUR 503 million, after paying EUR 60 million in interest and EUR 311 million in income tax, notably from higher pretax results in '22. And going forward, we expect a similar impact on current tax, both on P&L and cash flow statement. On net financial investment, we have a cash out of EUR 57 million corresponding to the net effect between acquisition and the cash received from disposals, notably Spain and Portugal. We also paid EUR 230 million in dividend related to the 2021 results. All this leads to a net debt level of EUR 1.46 billion, lower than last year, and to an indebtedness ratio below 1x at 0.96x, an all-time low. Let me now turn on Slide 23 to our balance sheet and liquidity picture, which show that we have no short-term repayment schedule. Let me remind you that we refinanced our 2 bonds last year with 2 sustainability bonds maturing in '28. We have no short refinancing need. The other half of our financing is from accounts receivable securitization, an asset-based solution with an attractive rate and no risk of interruption as we remain responsible for both receivable generation and the collection. Let me also remind you that '22 was marked by an upgrade of our rating by both S&P and Moody's with respective rankings of BB+ and Ba1. As of December 31, we have EUR 1.7 billion [Technical Difficulty]

Ladies and gentlemen, please hold the line. The conference will resume shortly. Thank you.

Hello. So we had a drop in the phone line at Slide 25, I think. So what I was saying is that we were going to share details about the execution of our Power Up 2025 strategic plan. It was presented at our Capital Markets Day. And Slide 26, you find a brief reminder of what this plan is about with the first pillar focusing on excellence on the fundamentals of our business, including development of talent and culture, building strong and lasting supplier relationships, strengthening our supply chain and footprint, digitalizing our business and enhancing productivity. And the second pillar is to strive to be a differentiated leader by leveraging data and AI, creating and rolling out advanced services, capitalizing on the acceleration of electrification trends, further growing our business through targeted M&A and becoming a leader in ESG. And on the next few slides, I will illustrate our progress through a few specific examples. Let me start on Slide 27 by presenting a few supply chain initiatives as part of our ambition to triple the number of automated distribution centers that we operate. Last September, we went live with our new distribution center in the Greater Lyon in France. That is our largest fully automated DC, stocking 40,000 SKUs. This DC offers a differentiated value proposition that is fully in line with our ambitions to offer more services and reduce carbon emissions. For instance, it allows us to make 2 p.m. same-day deliveries to our branches. It offers such logistic services at kitting or system setup. And we can make also low emission deliveries inside Lyon within 2 hours on 6,000 SKUs through an ecosystem of touch points. This year, we will be rolling out 3 new projects in Germany, U.K. and Austria that follow a similar line of enhancing services, improving efficiency and productivity or supporting our priorities, for instance, with a dedicated area for solar activity in the German DC. Slide 28 provides you with an update on the rapid ramp-up of digitalization of our business that makes Rexel a best-in-class B2B player. Today, our digital sales already reached nearly EUR 5 billion. As you can see on the graph, we have multiplied the share of digital sales in our total sales by 2.7x in a little over a decade, growing from 10% in 2011 to 27% at the end of 2022. And as you know, we aim to continue growing that share significantly to reach 40% in 2025. This slide also features a few key metrics to give you an idea of the breadth and depth of our digitalization. We record 100 million visits to our website every year. Our clients launched 40 million sessions using the search engine. We had 25 million order lines on our web platforms, and we have 400,000 customers with web accounts. Let me now conclude with our outlook and our 2023 full year guidance. So how do we see 2023? First of all, we are overall quite optimistic, especially when we see the momentum at the end of last year and at the beginning of this year. There are some headwinds, and we are not blind to that. But we feel that the multiple growth opportunities linked to electrification as well as our own sales action plans will allow us to more than offset reduced visibility on volume growth in what we could call our traditional businesses. Keep in mind also what Laurent was mentioning about the backlog, which gives us even -- an even higher level of confidence. As far as pricing is concerned, we feel we are going to operate in an inflation environment again, maybe at a lower pace than in the past 18 months. We also continue to see some cost inflation in our own cost base, but we have strong action plans in place to offset them. For example, the automated distribution center that I was mentioning as well as the rise of digital are here mostly to give better service to our customers, but they also allow us to optimize our productivity. In 2023, our management and our teams are fully mobilized with a growth-oriented mindset, but what is important to mention is that they are also prepared to face all possible scenarios. We know what levers to pull should we need to secure our financial objectives, and we will be nimble to activate it if needed, which is clearly not the case today. So how does that translate into numbers? You can see that on Slide 31 on which we share our guidance. As far as top line is concerned, same-day sales growth of between 2% and 6%. At this stage, we see positive contribution of price and volume also likely to be positive, but with the risk through the macroeconomic environment turn more negative than how we see today. EBITA margin of between 6.3% and 6.7% to be compared to 6.65% this year after restating the one-offs. This means that we should be able to largely offset the effect of inflation in August. And finally, free cash flow conversion above 60%, continuing on the very good cash discipline, which is now a solid feature of the group. Let me finish talking about our new purpose that we are unveiling today. It is summed up in the short statement that you see on this slide, electrifying solutions that make a sustainable future possible. It is completely in line with our strategy. It is in sync with the new trends we are seeing in the market, and it will serve as a powerful motivator to our teams to align our 26,000 employees behind one common goal. As always, the words are important. So let me comment them very briefly before we turn to questions. Electrifying is a reference to electricity and electrification trends, but also to the patient of our teams. Solutions is a powerful statement that we are not just about delivering products, but also expertise and services. This is more and more part of our value-added in the supply chain. Sustainable refers to our ESG focus. Future is about innovation, new energies as well as advanced digital services, which are powerful drivers of our business. And finally, make possible refers to our [ unique ] supply chain, offer logistics and credit player that we may have been 10 years ago. We partner with suppliers and professionals to propose the best products, push new services to the market to help make the energy transition a reality in the field. With that, thank you very much for your attention. And Laurent and I are now happy to take your questions.

[Operator Instructions] The first question is from Martin Wilkie of Citi.

It's Martin from Citi. Just a couple of questions on the guidance. One, just to clarify pricing. I think you've said you still expect an inflationary environment, albeit at a slower pace in 2023. Do you still expect sequential price increases from here? Or is the pricing that you'll get in '23 really just a carryover effect? So that was the first question. And the second one was you do talk about backlog. Obviously, you yourself have a limited amount of backlog, but many of your customers and projects probably give you a bit more visibility. Just perhaps you could talk a little bit about some of the visibility you have from some of those projects and larger projects that might give you some sense of projects going into the first half of the year.

Okay. Thank you very much, Martin. In terms of the inflation component and the inflation environment, we continue to see sequentially inflationary environment. We had price increase -- sequential price increase in the last quarter of last year. And we have price increases in generally all categories in the first quarter -- I mean the first 2 months of this year. I think our suppliers are experiencing and have experienced a high level of inflation. They themselves have inflation in their salary base as well as in the energy consumption and also in the embedded components of energy and salaries, which goes into their own components. So we are seeing sequential price increases. We had a carryover effect, plus as far as we can see, a slight sequential inflationary component next year. That's obviously not [ taking copper ], which is a topic. So I hope it answers your question on the inflation environment, but there is carryover plus a little bit of sequential price. In terms of what we are seeing on backlogs, I mean, there are 2 things. You say that we have limited visibility. But in the last few years, we have seen in some countries, especially in North America, a substantially high level of backlog in our own activity. And you remember because we show that on our slides since 2 years, that we have in North America. In the U.S., for example, close to 5 months of backlog, which is giving us quite a good visibility on our own orders. Now when we talk to our customers in terms of what they see in the market. First of all, they are overwhelmingly extremely busy. Their main concern is to find labor to execute the projects that they have. They see we have differences by market, obviously. What with new construction is weaker, obviously. But there is such a high demand in electrification projects in renovation, for example, and also a very strong demand in the industrial sector that at the end of the day, the backlog for our customers, large and small, remains extremely healthy as far as they can see. Actually, I was -- I think I told you a wrong figure. The backlog coverage in the U.S. is 3 months. And in Canada, it's 4 months. But it's still a high level compared to where we were at the end of 2021.

That's very helpful. And just to clarify on the pricing. I would like to think that within your guidance then, you have a couple of percent of carryover and we've seen another low single digit at the start of the year. Is that how we think about it?

Looking in our guidance, what you can consider that we have between 1% and 2% of carryover, a little bit of rational pricing and flat to positive volume depending on the scenario that we see going forward.

The next question is from Akash Gupta of JPMorgan.

I have two as well. My first one is on digital sales target. Maybe if you can talk about what sort of investments we required from getting to 40% from 27%. And secondly, on the same topic, how shall we think about potential of cost savings through SG&A when your digital sales levels will reach to 40%? Will you be able to quantify how it will change on SG&A and sort of benefit on margins that you may see? And the second question I have is on share buyback. I mean you announced share buyback at last CMD when share price was very low. Since then, we have seen significant increase. Do you think current share price is still attractive to continue on share buyback? Or would you wait for a correction to double down on buyback?

So a very good question, Akash. First of all, on digital, it's not so much. I mean, we have continued investment in digital to continue to modernize our platform. But there is no significant investment required to go from 27% to 40%. It's mostly a question of engagement of our teams, of them explaining in the field what the benefits are to the end user and continuing to refine our, too. So you will not see a big level of investment to go from 27% to 40%. We are actually seeing good momentum on that in several countries, especially in the U.S. Now, is there a potential of cost savings in the digital investment? There are 2 things. Margin on the digital sales is the same as the margin in the normal sales. It's just a different channel. We tend to think that we are omnichannel, and all channels in terms of the direct commercial margin have the same profitability. Now it's true that digital usually allows our customers on one side and us on the other side to gain time and to push productivity. In general, by the way, productivity is something that we are pushing every year. And if I take, for example -- if I take one example, despite the growth of volumes that we have experienced since 2019 in terms of number of people at comparable scope, we are below 2019 in terms of number of people employed. So we see every year the benefits of us increasing the productivity. That's what we include overall in our global guidance in terms of margin, and that's what we include also in our global guidance -- that we included at our global guidance in terms of CMD. So the details of what represents what in terms of potential are not disclosed. But that being said, it's clearly a contributor to our efficiency. Now in terms of share buyback. Look, I mean, I may be a little bit biased, but I consider the share price, although at record highs, to be, when I look at it in terms of multiples, relatively low, in fact. And in terms of multiple, we have seen limited appreciation despite the fact that we are on the market -- on an end market, which is clearly accelerating. So to me, it's very clear that the share price is at a price which is attractive. And we will continue to do share buybacks, and we are not going to be slowed down by the level of the share price because, once again, when I look at the acceleration of our end markets, the growth prospects, when I look also at the multiples of peers and suppliers, I tend to think that Rexel is at an attractive valuation. But you wouldn't expect me to say anything else.

The next question is from Aurelio Calderon of Morgan Stanley.

Guillaume and Laurent, congratulations on very strong results. My first question is around your M&A strategy. And I think back in 2020, you said that 2023 or current management or management said that 2023 expectations or targets were to get to 6% EBITA margin, 6.5% with M&A. I wonder if you can give us an update on where we are in that journey of disposals because you mentioned being very close to the end of that journey? Have we added 50 bps? Have we added 60 bps? Have we added 30 bps? How can we can quantify that margin impact from your disposals?

The margin impact, I mean, the disposals that we have done were lower than -- lower in profitability than the rest of the group. So you have a small effect of disposals to the positive effect of the disposal to the profitability of the group. Laurent, do you want to give more figures or...

Yes, I would say, between 10 to 20 basis points impact. And then we'll have the impact of the acquisition and the synergies we are delivering on those, which are creating additional value to the EBITA.

Okay. Great. And my second question is around the North American business. And obviously, you've done a very impressive turnaround in terms of margins. And obviously, synergies are helping there. But I wonder if you can comment if you would expect that region to become the most profitable one going forward and especially given that some of your U.S. peers have very aggressive targets. And if I remember well, you've been usually higher margin than them in the U.S. So if you could comment a little bit on that would be helpful as well.

Yes. I think you're right. I mean a few years ago, North America used to be less profitable than the average of Rexel. Today, it's more profitable than the average of Rexel. So it's a big change. But I think still that we are at the beginning of the journey, and so we have high ambitions for the U.S. Will it become the most profitable country in the group? I don't know. But we have high ambitions of progressing both -- I mean, continuing to have a good growth rate, continuing to gain market share through acquisitions and through organic growth and deliver improvement in EBITA percentage. Why am I saying that? Because on many aspects, for example, one very good example would be digital. We are far from what we consider being the best level -- I mean the best practice at group level. For example, in the U.S., we are still below 20% in digital with strong improvements and good growth rates. But that being said, there is potential. And I could mention the same situation in other aspects. So I look at what our competitors are saying in terms of margin ambition. We also have ambitions, which are contributing to our global ambition. But clearly, you are absolutely right, we expect to see higher improvement potential in the U.S. compared to the rest of the group.

And we will continue to improve the profitability in Europe with the progression of Germany and the impact of the disposal.

No, it's not to say that the rest of the group is not going to progress. But in comparison, I think the U.S. has great potential. This is also the reason why we are focusing on our M&A strategy also on North America, not only, but you are seeing that many of the acquisitions that we have made over the last 2 years were in North America to reinforce our position there. It's a promising market.

The next question is from [ Ethan Frank ] of Goldman Sachs.

It's actually Daniela here. So wanted to ask regarding sort of your faster grower areas like solar and PV, if you could talk a little bit about how gross margin on those compares with your other products, more traditional products. You have commented on the past, cable versus the rest. So I guess if you could help us understand the impact of growth there in terms of mix. And then my second question just more related to the cadence of like the U.S. IRA, which you probably have some relevant exposure to. But how do you see that playing out throughout the year? Is there a risk that some of these areas that are going to benefit from a lot of tax rebates and subsidies, people just push out the investment until they have clarity on that? Or do you think you're seeing sort of the momentum regardless of this type of stimulus?

Okay. So on the electrification categories, we should distinguish between the various categories. If I take a PV, for example, which was the big question in your question, I would say that in terms of margin, in terms of gross margin, it's slightly lower margin than the rest of the group. So it's dilutive to the margin of the group. Now in terms of cost to serve, in terms of central costs, it's usually lower because the orders are bigger and take a little bit less time to process, which means that in terms of EBITA margin, it's neutral, basically. You can consider it's neutral and slightly dilutive on the gross margin level. That's for PV. On other categories and especially on industrial automation, it's relative, which means that it has slightly higher margin in gross margin as well in EBITA margin. So it depends really on the categories. So I hope it answers your question. On the second part, which is the IRA. I would say, we have seen, especially when it comes to industrial projects, reshoring, et cetera, immediate reaction to the IRA in terms of investment decisions of players in the U.S. We are -- for the rest, especially for the impact on, for example, photovoltaic solutions, you're right that the ramp-up is going to be more progressive because people have to prepare. People are expecting and waiting to see what exactly is going to be part of the plan, et cetera. So we will see the effect progressively throughout the year and next year probably. But -- so 2 different effects. But let's not forget about the fact that for us, one big impact of the IRA is reshoring and the impact it has in terms of industrial investment and automation, knowing that in the U.S., if you remember well, our end markets, we have approximately 30% -- a little bit less than 30% of our end markets, which are dedicated to the industrial business.

The next question is from Andre Kukhnin of Credit Suisse.

I'll just go one at a time. Firstly, sorry to labor it on pricing, but I wanted to just double check on that additional pricing expectation. We obviously take the copper effect aside, but you also have got some product categories that also have a rather kind of pass-through pricing mechanism like cable enclosures or cable management, I think. So I just wanted to double check that you do expect additional kind of incremental small positive pricing this year, including those effects as well.

Yes. My answer was, overall, including everything. We may -- I mean on most of the categories, we see positive sequential pricing. We may have exceptions here and there. But overall, yes, including all categories except for the copper effect, we expect small potential -- small incremental pricing to the carryover effect, absolutely.

Great. And on copper, just to double check, I mean, in terms of what you've been reporting as a copper effect on P&L seems a little bit different to what we calculate based on the copper spots. So I wondered if you could help us calibrate that and what we should expect for 2023 with the current spot -- should the current spot prevail?

Laurent?

Yes. There is a bit of lag because we are not buying copper, but cable from our manufacturer. So there is a lag. There is a production cut out of the inventory level. So at the end, yes, we need to move it by almost a quarter. But I mean, assuming -- and you know the sensibility that USD 500 per ton has an impact of around 0.8% on our sales. So -- and compared to the level 2022, we expect to have a negative impact in H1 and then assuming the copper stays around USD 9,000 per ton to have a positive impact next year in the second half.

Got it. Got it. And my last question, just a bit broader on the profit bridge for 2023. You've clearly given us the adjusted EBITDA margin guidance, and that seems to be pointing to kind of around 6.5%, which compared to, I think, around 6.6% if we take the 2022 level and take out the one-off effect. So it seems a little conservative given that you're expecting at least flat volume, and it looks like pricing is heading in the right direction. It looks like you've got some help from disposals or net M&A and all those initiatives that you talked about on digitalization in U.S. and Germany. I just wanted to check if there is a kind of outstanding headwind there that we should be aware of and should be baking in explicitly? Or is it just the fact that at the beginning of the year, there are some uncertainties out there? So it makes sense to kind of build going through the year as opposed to put a lot there.

That's a fair question. I think you know that we like to be cautious at the beginning of the year. You're right. As I mentioned, in our hypothesis of volume, we have a positive volume expectation. And when I look at the trends in January, those positive expectations in volume are fully confirmed very clearly when I look at the trends and when I listen to our customers. That being said, in our guidance, the low end of the guidance includes a slight decrease in volume. Then in the EBITA guidance, you're right that it's probably a little bit cautious, but also keep in mind that we have inflation in our cost base. We have inflation in our cost base, inflation in our salary, inflation in energy, inflation in transportation, which is going to impact us. We think that our efforts in terms of productivity, in terms of efficiency will offset most of that. But that being said, a remaining effect may be present, which explains also the slight dilutive effect with the EBITDA. So there is a little bit of both to answer your question.

The next question is from William Mackie of Kepler Cheuvreux.

A couple of questions. First of all, perhaps a question about your ongoing strategy towards automation, digitization and specifically, the investment in the distribution centers. As you roll out these larger distribution centers and enhance the distribution model, what sort of effects do you see on the necessity to carry or the level of net working capital or trade working capital that you have to carry? And what sort of productivity benefits do you achieve when you implement those? So when we think forward, basically, where should the trade net working capital begin to normalize? And what sort of actual savings can you achieve to offset the inflationary headwinds, particularly around employment as you go into '23 and '24?

William, so the effects of automated DC is different depending on the situation. If I take the example of the newly DC to Lyon, it was replacing an existing DC, which was not automated. The fact that it's automated doesn't change much in terms of working capital. You still have the same level of safety stock. It just is accessible quicker and easier -- in a more easier way from the operators. So the main effect is in terms of service to the customer. So we may, in the long run, expect to gain market share because of increased service to the customer. And the second effect is productivity in Lyon. I think we removed 30 people based on that. So you're going to have a little effect on productivity based on that in the places where you do such projects. The majority of the projects are of these kinds, the automated distribution centers, replace existing automated -- existing nonautomated DC. So the main effect is customer service and a little bit of productivity. There is another situation, which is, for example, the situation of our new DC close to London in the U.K., where we replace a system of Hub& Spoke where some branches had a little bit more inventory than others. And we're serving others by a new automated DC. And in this case, there is an effect on working capital indeed because we have all the inventory.

The next question is from Eric Lemarié...

Sorry, I had not finished. So in reality, you're going to see a slightly positive effect on working capital overall based on the few projects that we have, which are like the U.K. DC. But it's not going to be very meaningful. I expect for 2023 and 2024 the level of inventory to remain fairly stable, maybe to progress a little bit, but to remain fairly stable. As far as productivity is concerned, I will give the same answer. Yes, we are able to offset a big part of the inflation that we are seeing in wages by productivity. To give you just an order of magnitude of the inflation in wages, what we anticipate for next year is to have something between 4% and 5% of inflation of wages. So we are going to be able to offset a little bit of that, but not all by our productivity efforts. But our productivity efforts are not only in the DC. They are all over the place. We try to be more efficient, thanks to digital in our call centers, in our sales organization, et cetera, et cetera. So a long answer, long answer to tell you that, yes, it has an impact mostly on productivity. It's not the only place where we do productivity, and it's going to offset part of the inflation that we are going to see on the cost base, maybe not all. And that's the reason why coming back to the previous answer that we are cautious on the margin.

Is my line still open? Hello?

Hello. Yes, yes, yes, your line is still open.

Perfect. My second question comes back to the development of M&A. Historically, there was an argument that Legrand -- sorry, Rexel as a distributor could run with quite a high level of leverage. This year, you've achieved, I think, a record low level of leverage, and you've highlighted that the rating agencies have improved your rating. So looking forward, clearly, there are opportunities for you in North America and other parts of the world for M&A. But how do you see the optimal balance sheet structure? And what sort of level of capital do you envisage allocating to M&A on a medium-term basis each year?

Look, I mean, first of all, you've seen that M&A is quite attractive in terms of value creation, and it's proved extremely successful over the last 2 years. I would stick to the targets that we have given previously. In terms of leverage, we think that the sweet spot for us is to be around 2. We are below 2, largely below 2. We are below 1, in fact, but -- so it's comfortable. But overall, our sweet spot is 2. In terms of the capital that -- in terms of, first of all, the M&A target that we are looking at, we are looking at small and midsized M&A targets. You're not going to see us do huge transformation deals. We think that the track record that we have started to create doing midsized and small-sized acquisition is quite good, and we feel comfortable with that in terms of value creation. Now how much are we going to dedicate to M&A? It's going to depend on the targets, which are available. It's going to depend also on the market conditions. We don't want to overpay. But overall, we would say that we'll come back to what we said at the Capital Markets Day, which was to say that we wanted to add EUR 2 billion of additional sales -- up to EUR 2 billion of additional sales between '22 and '25. We have done EUR 500 million this year, so we are on to do that. This is in average what we have in mind basically in terms of contribution rate. Now depending on the year, it may be more, it may be less.

The next question is from Eric Lemarié of CIC.

Yes. I've got three, actually. The first one, you mentioned this 6x EV EBITA ratio or combined acquisition divestment multiple. Could you share with us the multiple for the acquisition and the multiple for the divestments. I got a second question on data center because I understand that WESCO in the U.S. was mentioning the good dynamics of the data center segment, and I was wondering how much are actually exposed to data centers. The question because I don't -- it doesn't seem to be a big issue for you, and I was wondering why and if that change in the future. And last question, maybe could you give us some highlights on the French antitrust investigation, what your view today on that? And are you more confident than last quarter, for instance, on that issue?

Okay. The answers can be quick. 6x EV on EBITDA, it's already an information and additional information that we are giving. We are not going to get into the details of acquisitions, divestments, et cetera. But I thought it was important to give you an idea of the fact that, overall, our M&A strategy was very clearly value creative. Data centers, we have limited exposure to data centers in the U.S. We wish sometimes we would have greater exposure. It's due to historical reasons. We know that for some of our competitors, it's quite successful. It goes up and down. But right now, it's quite successful. It's good for them, but we have other markets which are growing fast and it's mostly due for WESCO to the acquisition of Anixter a few years ago as our exposure to data centers. Antitrust investigation, nothing new. So limited evolution for the time being. No clear calendar on the next steps in the procedures of which there are many foreign cash out. We don't expect any conclusions and decisions that could lead to potentially a cash out in H1 2023. And overall, as I said several times in the past, we -- I would like to remind that it's not at all a question of price fixing. It's a question of a challenge of the specific pricing organization that is completely public and transparent in France. We strongly argue against that, and we'll continue to argue against that. So no particular evolution on this and confidence in the position that we have on this perspective.

Mr. Texier, there are no more questions registered at this time.

So thank you very much for your attention. As you can tell, a very good set of results in 2022. But more importantly, good foundations, which paves the way for, I think, a good 2023 with an initial 2 months of 2023 going clearly in the right direction. Thank you very much.

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