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

Good morning. This is the conference operator. Welcome, and thank you for joining the Rexel's Half Year 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Guillaume Texier, Group CEO. Please go ahead, sir.

Hey. Good morning to all of you, and thank you very much for joining us today for this presentation of Rexel's first half 2023 results. I'm joined on this call by our CFO, Laurent Delabarre. We are aware that this is a very busy morning for you. So we have tried to be succinct in our presentation while, of course, being thorough so that you get a clear picture of what the, of the progress is that Rexel continues to make. So before going into the presentation, I'd like to say that I'm particularly proud to present our performance for the first half of 2023. First of all because it's strong, but also because it provides clear answers to questions I'm often asked about Rexel's fundamentals. A frequently asked question, for example, is, can Rexel deliver growth throughout the cycle? And you'll see that we continue to be solidly in positive volumes territory, even though the macroeconomic environment is a little bit more uncertain. This has to do with the diversity of our end markets and the confirmed contribution of long-term electrification trends, and we will talk about that. And the second important FAQ is, can you maintain profitability high in the long term and in a normalized inflationary environment? And you have seen that we are delivering strong EBITA margin, north of 7% once again, and this time, without the help of any one-offs or exceptional volume. This is the result of our actions over the last few years, focusing on digital, smart use of data, efficiency and productivity, and it is very comforting to see the results of that in numbers. But let me get right away into the results. I'll begin by summing up on Slide 3 our strong start to the year with 5 key numbers. First, our reported sales stood at nearly EUR 9.8 billion, up 7.5% versus the same period last year. Second, on a same-day basis, our sales growth in the first half was 8.1%, of which 6.2% in Q2, with growth in both volumes and price. Third, our adjusted EBITA margin stood, as I said, at a very solid 7.2%, up 16 bps, excluding exceptional items that boosted last year's profitability, and I will detail that shortly. Fourth, we posted robust free cash flow before interest and tax of EUR 242 million, up 4.7% versus the same period. And last but not least, our indebtedness ratio stood at 1.26. And having a sound balance sheet gives us even greater leeway to pursue our growth strategy. Let me give you some granularity on our business performance on Slide 4. So as I mentioned, our H1 growth was well balanced, with positive contributions from both volumes and price. On the volume side, we posted growth of 3.7% in H1, which breaks down into 4.1% in Q1 and 3.3% in Q2. Volumes in Q2 were positive in all geographies. And as far as we can measure, we posted market share gains in several important markets for us, thanks to our operational excellence and our broad and growing service offering. What is also interesting is that this volume growth is not totally uniform by end market. On the commercial construction side, most verticals are quite active, especially when linked to infrastructure or government works, with a limited number of exceptions to this overall positive picture. Like, for example, the office building segment, which represents less than 10% of our global sales. Industry remains fairly strong everywhere across most of the verticals. And in residential, new residential showed clear signs of weakness in most of our geographies, as you would expect, while renovations, to the contrary, continue to hold very firm. To this overall picture, you need to add the electrification megatrends which continued to be strong, especially in Europe. The 4 categories that we have identified are directly impacted by electrification grew in Q2 at 5x the base of traditional electrical distribution, and they represent 22% of our direct sales. As a reminder, they consist in solar, EV charging stations, HVAC, industrial automation. And once again, we are talking here direct sales, which doesn't take into account the electrical infrastructure which is often necessary to activate those systems. Going forward, all analyses point in the direction of further mid-term growth in those categories, and we put a few graphs in Appendix highlighting that. Overall this volume picture, with a few minuses offset by numerous pluses, is what we we're expecting in 2023, and it is quite comforting for the future. On the price side, we continue to record a positive contribution from noncable-based products while cable prices decreased in line with the fall of copper price. Most product categories benefited from significant price increases, except conduits in North America and some industrial automation products in China and PV panels in Europe at the end of the quarter, which we managed to offset through our action plans. We also continue to have success in passing through price increases, and we expect an additional selling price increase in H2. Moving to Slide 5. We look now at the financial side of the equation. Our profitability was very robust, with adjusted EBITA margin coming in at 7.2%. So at first glance, that's a drop versus last year's comparable H1 figure of 7.9%. But that number was boosted by nonrecurring items from inventory price inflation on noncable products, as you remember. So if we restate for that one-off effect, it's actually a 16 bps rise, and we have crossed the above-7% level for the first time on a clean basis, capitalizing on the implementation of various aspects of our Power Up 25 plan, notably digital, operational efficiency and a focus on the most attractive categories, geographies and customers. This very solid performance allows us to upgrade our guidance with sales growth now expected in the upper end of the range of the initial guidance, and adjusted EBITA guidance raised by 25 bps at the midpoint, fully in line with our Power Up 2025 goal despite a more challenging macro environment. I will return to the guidance in my conclusion. One last aspect to highlight, our very disciplined capital allocation. In line with the Power Up 25 plan, we recently announced a very attractive acquisition of Wasco in the Netherlands, which increases our exposure to the fast-growing heat pump market. And we continued our share buyback program, resulting in a 1.7% accretion since its launch. I will detail this and those other elements of our Power Up 25 plan shortly, but let me first hand over to Laurent to take you through our financials. Laurent, over to you.

Thank you, Guillaume, and good morning all. Let's start from Slide 7 with a look at our overall Q2 '23 sales performance. Our sales of EUR 4.8 billion were up 2.8% on a reported basis and 6.2% on a same-day basis. This reported sales were impacted by an unfavorable foreign exchange effect of 2%, mainly due to the depreciation of the U.S. and Canadian dollars and a scope impact of minus 0.4%, resulting from the net effect between contribution from acquired companies, net of the disposal, notably Norway, which was deconsolidated early March '23, together with Spain and Portugal last year. Acquisition included Horizon and Buckles-Smith, 2 specialists of industrial automation distribution in the U.S., as well as Trilec, the #3 player in Belgium; and LTL in Canada. We now anticipate the full year '23 scope impact to be close to 0, assuming the consolidation of Wasco as of October 1. Concerning foreign exchange, the currency impact is now expected to be a minus 2.9%, assuming spot rates remain unchanged. On Slide 8, looking at the breakdown of our growth by geography, we saw positive same-day sales growth in all 3 regions. In North America, accounting for 43% of group sales, we posted growth of 4.4% in Q2. In Europe, representing 50% of group sales, we grew by 8.3% in Q2. And in Asia Pacific, accounting for 7% of group revenue, our sales were up 2.6%, resulting from contracting situation. Pacific on one side is progressing well, up 2.8%, thanks to Australia, offsetting a negative trend in New Zealand as the country entered into recession. Asia is also progressing well, up 2.5%, thanks to a strong industrial demand in India, up more than 50% in the quarter, which offset the decline of 1.2% in China due to increased business selectivity and a slow recovery of the Chinese economy. Lastly, the same-day sales growth of 6.2% at group level is well balanced between volumes up 3.3% and price up 2.8%. I will detail this in the following slides. Moving to Slide 9 that's focused specifically on volumes, which contributes for 3.3% to growth in Q2 2023 with solid performance, especially in North America. Indeed, volumes were positive in all geographies in the quarter, driven by megatrends. Volumes were up plus 4.4% in North America, boosted by reshoring of industrial production, and plus 2.4% in Europe from electrification, and more specifically solar, EV and HVAC. Now looking at the bottom of the slide, which shows the evolution of volume at group level and by geographies since 2018 on an indexed basis. We clearly see that group volumes are around 7% above pre-COVID level in H1 '23, largely thanks to Europe, while North America is now back to pre-pandemic levels. Moving to Slide 10, the 2.8% pricing contribution to same-day sales growth include 4.7% from noncable products and minus 1.8% from cable products. Specifically on noncable products, the 4.7% effect is in line with expectations and reflects the combination of carryover effect and additional prices passed in 2023. The lower contribution than in Q1 is explained by lower carryover effect, as it automatically is quarter after quarter. By geography, prices in Europe increased by 6.6% compared to 3.4% in North America. This reflects the fact that Europe started to increase prices later than North America post-COVID. Specifically on cable products, the negative 1.8% contribution in the quarter is explained by the lower copper price in Q1 '23 compared to Q1 '22. Indeed, copper price dropped to USD 8,500 per ton versus circa USD 9,500 per ton in Q1 '22. Slide 11 focused on our performance in Europe and illustrates how we capture the sustainable electrification trends. Our Q2 '23 same-day sales growth was plus 8.3%. 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. By country, we record strong growth in France, in Germany, Austria, Switzerland and in Benelux, with market share gains in key countries such as France or Germany. By product, Solar, EV and HVAC were up 31% to reach 20% of sales. In total, the contribution stood at circa 510 basis points, corresponding to more than 60% of the total growth in Europe. By end market, we benefited from the positive trends in the 3 markets. Similar to previous quarters, residential was boosted by renovation and electrification effects, offsetting decreasing demand in the traditional EV business. Lastly, let me remind you that integration of Trilec in Belgium is going well, with synergy at more than 5% of acquired sales, a very high level reached by the teams which bodes well ahead of the Wasco integration process. On Slide 12, we turn to our performance in North America, where same-day sales grew by 4.4% in Q2. In the U.S. same-day sales rose by 4.2%. We seized the robust industrial demand driven by product reshoring and oil and gas segments, offsetting the negative trend in the residential market. We are also very happy with the strong resilience of our commercial activity, leveraging the very diversified end markets as illustrated in our Q1 23 presentation. By region, we gained market share in California and Gulf central, offsetting the lower demand in the Northwest and Northeast. Our backlog in the U.S. remains at a high level, which still represents 3 months of activity, resulting from both good project execution and healthy underlying order intake in the quarter. This provides good visibility for our business going forward. Canada also saw robust growth of 5.1%, driven by strong industrial demand and more specifically, petrochemical and mining contributing for respectively, 280 basis points and 40 basis points. On Slide 13, we show you the building blocks that led to a record adjusted EBITA margin of 7.2%, up 16 basis points excluding nonrecurring items, that benefited H1 2022. The progression from last year's reported adjusted EBITA margin notably includes a positive portfolio management impact of 20 basis points, resulting from the combined effect of our accretive acquisition and the low profitability of the disposed countries, a positive operating leverage impact of plus 92 basis points, largely from our robust activity, coupled with our more efficient organization and action plans. This more than offset the OpEx inflation impact of minus 76 basis points from inflation on pay rise for 43 basis points and on other costs for 33 basis points. The overall inflation stands at plus 4%, with plus 5.3% on wage increases and plus 3.8% from other OpEx, including building and occupancies and transportation. The inflation rate in H1 '23 was in line with our initial expectations. On Slide 14, you see how geography contributed to our record profitability. Europe's adjusted EBITA margin stood at 7.9% and improved by 10 basis points from robust sales growth, suppliers' initiative and internal actions on cost control, offsetting overall cost inflation. North America's adjusted EBITA margin stood at 7.6% and improved by 13 basis points, thanks to a high level of activity, synergies from recently acquired companies and productivity gains, offsetting investments in people and OpEx inflation. Asia Pacific's adjusted EBITA margin stood at 2.3% and is up 101 basis points on improved credit control, especially in China, with lower bad debt. On Slide 15, we look at the bottom line part of our P&L and zooming on financial expenses, tax rate and recurring net income. Financial expenses stood at EUR 76 million, higher than last year's EUR 52 million, resulting from the rise in interest rates. It includes EUR 26.7 million of interest on lease liabilities and pure financial cost of EUR 49 million. The effective interest rate increased to 3.39% compared to 2% in '22. For '23, we anticipate pure financial expense of circa EUR 100 million, excluding one-off and interest lease liabilities, in the context of rising interest rates and assuming current interest rate conditions remain unchanged. This excludes Wasco's financing, which would add around EUR 25 million on a full year basis. In addition, interest lease liabilities should be close to EUR 55 million in '23, excluding Wasco. Our income tax rate stood at 26.7%, similar to the 27.2% in '22. For '23 onwards, we confirm our [ seeitseed ] of below 28%. As a result, recurring net income was EUR 455 million compared to EUR 471 million in H1 '22, which had benefited from record high inflation tailwinds on noncable products. Moving to cash flow on Slide 22. We generate robust cash flow before interest and tax, reaching EUR 242 million, slightly above last year. Let me remind you that we used to have negative free cash flow in the first half before COVID. Let me highlight the key elements. Trade working capital on sales is stable at 15.1% of sales. Cash out from non-trade working capital stands at EUR 148 million and is notably related to the cash-out of 2022 performance-linked bonuses and will normalize in H2 '23. Gross CapEx represents 0.6% of sales, in line with last year's level, which should be closer to 0.9% guidance on a full year basis. Our net financial investment, we have a cash out of EUR 65 million corresponding to the net effect between acquisition costs and the cash received from the disposal of Norway. We paid EUR 362 million in dividend related to 2022 results. We have bought back EUR 50 million of shares this year as of mid-July. All this leads to a net (sic) [ net financial ] debt level of EUR 1.9 million, close to last year's level and a similar indebtedness ratio at 1.26x. Let me turn on Slide 17 to our balance sheet and liquidity picture. Let me remind you that we refinanced our 2 bonds in 2021 with 2 sustainability-linked bonds maturing in '28. We have no short term refinancing needs, as the other half of our financing is from accounts receivable securitization. As you know, an asset-based solution with an attractive rate and no risk of interruption as we remain responsible for both the receivable generation and the collection. As of June 30, we have EUR 1.3 billion of liquidity, including EUR 0.9 billion in undrawn facility on our senior credit agreement and EUR 0.4 billion in cash. We will use this cash on our balance sheet to finance the Wasco acquisition. And as always, we monitor the bond market, and if there is an opportunity to extend our maturities at an affordable rate, we will seize it. Thank you for your attention, and we'll now hand back to Guillaume.

Thank you very much, Laurent. Before turning to the 2023 outlook, I'd like to spend a few slides sharing with you a bit on the execution of our strategic Power Up 2025 plan that we presented at our Capital Market Day in June 2022, 1 year ago. So first of all, there are the financial results on Slide 19. And from this point of view, we are well on track, and even though this looks natural today, I remember that those objectives, those goals were welcomed with some skepticism 1 year ago. So I'm very happy to be able to say that we are delivering and even over-delivering on what we promised. Growth is well above our guidance, driven by inflation but also positive volume trends. Profitability is already in the range which we envision for 2025, even when we restated from the one-offs, we discussed that for H1. And we continue to be extremely disciplined on cash flow, which translated last year in a record high dividend. So clearly, from a financial point of view, well on track. But from my point of view, what is even more interesting than the results are the actions which are behind the results, because those actions tell a lot about how sustainable this performance is. And you see that on Slide 20. As a reminder, Power Up 25 consists in several action plans aiming at transforming all aspects of the way we do business with 2 guidelines: one about operational excellence in all our countries and the other one about differentiation on new opportunities, both supporting our purpose: electrifying solutions that make a sustainable future possible. Those plans are in place and delivering and I took here 3 very visible examples among others. The digitalization of our business is at the heart of Rexel's transformation and the ramp up towards our target of 40% of digitally enabled sales in 2025 continues. We were at 24% at the end of last year, and we are at 28% at the end of H1. We also strive for supply chain excellence with the aim of tripling the numbers of automated distribution centers. And to date, we are at 7 automated distribution centers with the opening in H1 of a new 1 outside of London. And as mentioned earlier, we aim to grow our activity linked to electrification trends at twice the pace of our traditional electrical distribution business. And after growing above our target last year, in the first half we accelerated to about 5x the speed of the traditional EV business. This is not only a result of the market but also of our efforts to position ourselves on those fast growth segments quicker and more actively than competition. On Slide 21, one important aspect of Power Up '25 was also to be more active than in the past on the capital allocation side with the combination of acquisitions, divestments and share buybacks. In line with this, we have completed 30% of the EUR 400 million share buyback program we announced last year, up from 17% at the end of last year. We have almost completed our plan to divest activities that taken together generated up to EUR 500 million in sales, and we reached EUR 480 million at the end of H1 of this year with the sale of Rexel's activities in Spain, Portugal and Norway. And we are at the halfway mark in our ambition of making acquisitions that will add up to EUR 2 billion in sales, including the recently announced acquisition of Wasco in the Netherlands that I will present in the next 2 slides. So as you see on Slide 22, talking about Wasco. Wasco is one of the leading distributors of HVAC products and services in the Netherlands, and its acquisition is another move to seize fast-growing electrification opportunities. Wasco operates 35 branches, 2 distribution centers in the Netherlands and generated turnover of circa EUR 550 million, including nearly 60% through digital channels. Wasco has posted double-digit growth over the past few years, driven by the domestic regulatory framework and its acquisition with [ the new ] Rexel to benefit from energy transition-related opportunities. With an EV of EUR 485 million, the implied multiple stands at 9.2x Wasco's EBITA or less than 7x after full realization of the expected synergies, notably including [ proselling ] opportunities and logistics optimization. The transaction is expected to be accretive in year 1 to Rexel's adjusted EBITA margin and EPS, as well as value creating in year 2, and this acquisition is in line with the capital allocation strategy that we just talked about. We expect to close it in the third quarter. And as you see on Slide 23, the Netherlands acquisition is interesting because the Netherlands are in the forefront of the energy transition in Europe and one of the most exciting European markets from an electrification perspective. It benefits from a fast-paced transition from gas, driven by incentives and regulations, notably the ban on gas boilers and the switch to electric heat pumps, both in new build and renovation. In new build, Wasco benefits from a gap between demand and supply, driven notably by an influx of immigrant to Holland that is driving population growth. In renovation, it is estimated that 7 million gas boilers will be replaced by heat pumps from 2026 onwards and 100% of homes in Holland should have an A energy rating by 2050, up from 23% today. Wasco is thus ideally positioned to be an active player in this transition, driving further growth for Rexel. Let me now conclude with our outlook and our 2023 full year guidance. On Slides 25 and 26, we discuss our guidance for the rest of 2023. On the top line side, as I said in my introduction, we are seeing a less uniform environment than last year, but this environment remains overall quite supportive with an additional contribution of backlog execution and electrification trends, even though those electrification trends will start to compare to higher 2022 base. We also expect to be able to pass through some additional price increases on noncable in the second part of the year. On the profitability side, we are happy with the action plans that we have put in place, as you could tell in H1, to offset cost inflation, and we are already seeing the results of that in our P&L. This translates on Slide 26, into upgraded financial targets for the year. On the sales side, we have adjusted our guidance to now target the upper end of the broad range we had given at the beginning of the year. On the profitability side, we target an adjusted EBITA margin of between 6.6% and 6.9%, up from 6.3% to 6.7%, to take into account our strong H1 performance and also our confidence in our action plans. As a reference, H2 2022 profitability without one-offs was 6.5%. And the free cash flow conversion guidance above 60% remains unchanged. Lastly, I would like to comment on the second press release that you have seen this morning about governance changes at Rexel. I'd like to take the opportunity to thank Ian Meakins for his support and guidance to the company over the last 7 years, as he chose to take new challenge with the chairmanship of Unilever. As stated in the press release, Rexel has tremendously evolved over this period, and this is only the beginning. I'm very happy that the Board has chosen Agnes Touraine to succeed Ian Meakins. Agnes Touraine was Deputy Chairwoman and lead independent Director since the last AGM and had responsibilities as the chair of the Remuneration Committee, and more recently of the [ NomGov plus ] CSR committees. So this is a choice of continuity to build further on Rexel's momentum. And the management team and I are very happy and looking forward to continue to write Rexel's transformation with her. 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 with Citi.

It's Martin from Citi. The first question I had was on pricing. You've commented that there could be some incremental pricing in the second half, which I think is probably not what people have expected. Just to understand some of the backdrop from that, is that across all product categories? And what's the reception from that from customers given the inflation in many commodities and so forth is now beginning to ease off? So that was the first question.

Okay. So on pricing, I will make a difference, first of all, between cable and noncable. On noncable categories and most of the noncable categories, we are seeing price increases from our suppliers, from the manufacturers because they themselves continue to experience an inflationary environment, especially on the salary side. So we are seeing sequentially price increases in most of the categories, most but not all categories. As I mentioned during my comments, there are a few categories, limited in extent, like for example, PD panels, we talked about that before, like also the ones -- the products which have a high content in commodity, like conduit, for example, in the U.S., which are more on the negative side. But for most categories, we are seeing sequential price increases. And so we expect to continue to see sequential price appreciation in the second half. Now is it accepted by the customer? I have to say that historically Rexel, as all distributors, has been relatively good at passing through price increases. And based on the fact that the manufacturers are putting those increases out, yes, it's going to be accepted. Yes, absolutely.

And if I can ask a second question, just you've highlighted 20 basis points of portfolio effect in your margin uplift. Obviously, you've done some deals in the U.S., you've done some deals in Europe. How are you thinking about the opportunities in terms of incremental acquisitions? Is the environment still accepting in terms of finding good value deals, just to understand how we should think about possible portfolio changes?

When I look at the objectives that we gave at the Capital Market Day, we are more or less at the halfway mark in terms of the global envelope that we have given as a guidance for acquisitions. We had said up to EUR 2 billion of additional sales by acquisitions, and we have done approximately half of that basically. So there are still opportunities out there. I think as we disclosed before, we see 2 kinds of opportunities: consolidation opportunities, especially in North America, and also adjacencies like we saw, for example, with Wasco or with a few smaller acquisitions. And both of them are quite exciting in terms of opportunities and in terms of value creation, and I think we have demonstrated over the last 2 years that we were able to actually deliver value there. Now, what is the landscape today, and will we continue at the same pace? It depends very much on the opportunities and on the availability of targets. The environment is -- on one hand, a little bit more difficult because the price discussions are more tense because we tend to look at the environment of today and not the environment of yesterday and to pay the price based on that. So we are very cautious in terms of value creation from this point of view. But on the other hand, there are still possible additions to the Rexel portfolio which will be value creative. So we are cautious in terms of price that we pay, but there are still opportunities out there to continue our strategic progression and the use of this lever as a value creation lever.

The next question is from Daniela Costa with Goldman Sachs.

I have two questions as well, if possible, but I'll ask them one at a time. First, just wanted to get your views in terms of going into the second half and into the beginning of next year. And you had very strong growth lately in terms of solar and electrification, and we're sort of hearing some more mixed feedback from channel checks across solar, particularly regarding the links with resi and also the lower energy prices now than we had last year. Can you talk us through how you see -- is that a continuing strong structural growth progression in your view? Or could we have sort of some temporary weaker patch in those segments near term? And then I'll ask the second one, once you've addressed these.

Yes. Yes. So we continue to have an environment which is very favorable to electrification in the mid-term in all of those categories. So the environment remains very favorable midterm. Now there can be variations on a short-term basis based on the various incentives in the various countries and the electricity price, as you mentioned. We are -- in the second half, we will be [ seating ] a higher comparison basis. We had grown last year at a very good double-digit rate in most of those categories. So what you will see anyway is a slowdown of the year-to-year growth rate of those categories. So our guidance for the second half is not based on a continuation of the year-over-year growth rate that we had in the first half or in the second half of last year. So on a year-to-year basis, we anticipate a plateauing of the growth of those categories. But that being said, in the meantime, we are still highly confident with the fact that the volume is increasing, driven by regulation, by incentives and by government plans. So I hope it answers a little bit more clearly what your question, which is a good question.

Sure. And then everyone is sort of talking about data center growth on the back of AI. And a lot of your suppliers, they supply products for data centers as well. I believe historically, you said you had relatively limited exposure. But can you remind us if that is something that is -- how easy would it be for you to start distributing for data centers? And whether there are fits your category of like adjacencies that would be synergetic with your portfolio?

That's part of the categories that we are looking at. But for the moment, we are exposed to those projects on the construction side because in every data center, there is a building, there is an electrical infrastructure, et cetera. When it comes to the heart of the electrical part of the data center or the data com part of the data center, as I said before, we have a very limited exposure. That's a possible part of what we could look into. But for the moment, we don't participate in this growth. But that being said, there are many other opportunities, as we mentioned, in the electrification space we are participating in, but this one a little bit less than the others.

The next question is from Aurelio Calderon with Morgan Stanley.

I've got two, if I may, please. The first one is on market share gains. And I think for a few quarters, you've been indicating market share gains in key countries like France and Germany. So if you could elaborate more on what's driving that, that would be helpful. That's the first question.

Okay. Market share gains, each country is very specific in terms of why we gain market share. It's a combination of having engaged teams, having the right processes, having a differentiated value proposition in terms of, it can be because of logistics. It can be because also of additional services that we are providing. So that's what's creating the momentum. And once you have the momentum, it's a momentum which is self-sustaining in many cases because if you start to have a good sales momentum in the country, then you get the enthusiasm of the teams and then you get also the buy-in of the suppliers who are able to go with you and to partner with you to continue to build on this success. So that's a little bit the story behind the countries where we are gaining market share. We are very cautious on that on the fact that -- on the way we measure market share. But we have relatively good evidence that in some large countries, we are gaining market share, and we are very happy with that because for us, it's also the result of the action plan that we have put together in the last few years. So really, there is no one recipe. It's based on many things, mostly service, mostly additional services, mostly the quality of the relationship. One thing that we don't gain market share with is pricing. We try not to gain market share through price and to buy market share.

Great. That's very helpful. And the second question is a bit more in kind of the operating leverage that you saw -- that you showed now in the slide and kind of offsetting the noncable -- or sorry, yes, the non-cable impact last year. So can you go more about that operating leverage, what initiatives have you launched? And where are you seeing the most benefit from that kind of shift from pricing to the operating leverage?

Operating, you want to start the answer, Laurent, maybe? And...

Yes. The operating leverage is coming mostly from additional volume on the baseline of cost and operational setup that we try to maintain as fixed as possible, so the flow-through from the bottom line to -- from the top line to the bottom line is very strong. So we have different action plans to make sure we can gain productivities through digitalization, through a values initiative to make sure that we can continue to grow volume-wise while keeping the cost base as stable as possible.

But you know the enhancement of profitability and the fact that we are raising the guidance in terms of profitability is due to the results of a combination of several actions because we are firing on all cylinders from this point of view. I mean it can be linked to pricing and we are going in each country to more elaborate pricing systems based on -- I wouldn't call it AI, but advanced use of data. So that's one thing that we are doing. There is, in some countries, selectivity on customers to make sure that we are aligned with the most successful customers and the one which provide the highest profitability. There is the rise of digital, which is bringing productivity because digital is obviously more efficient in terms of order taking, in terms of funding the transactions, than the nondigital way of doing it. There is a logistics efficiency. We talked about that, the automated distribution centers. Each time we automate a distribution center, it's providing us with productivity, additional productivity. So all of that is part of what we do to make sure to enhance our profitability. And that's -- and what we are seeing today is the result of the combination of all of that, but there is not 1 magic bullet which would provide the enhancement in profitability. Which is good, at the end of the day, because it shows that it's a result of hard work.

The next question is from Akash Gupta with JPMorgan.

My first question is on the non, these one-offs that you had last year on margins. So last year, we had first half positive pricing of 9% in noncable and you had 86 basis points [ and ] net one-off. And this year, despite having 5.5% positive noncopper pricing, there is no one-off from [ disinflation ]. So maybe if you can talk about what has changed or whether this was offset by some negative item, and therefore, at a net level, it was not visible? So that's the question.

No, that's a good question, Akash, but you have to understand that the one-offs linked to pricing are mostly due to sequential pricing because what we are talking about is the effect in the inventory, which has to do with the sequential pricing. And the big difference between the figures -- I mean, the figures that you're talking about are year-over-year pricing figures. And this year, the pricing was mostly due to carryover. Not only due to carryover, but mostly due to carryover or in a bigger proportion than last year. And that's what explains the fact that this year, there is no particular one-off linked to that, whereas last year, there was important -- there were very important one-offs linked to that. But that's really the answer. There are no negative also one-offs in the picture, nothing hidden here. It's mostly the difference between year-over-year and sequential pricing.

And the second one is on solar pricing. I mean we have seen deflation in polysilicon value chain. And I wanted to ask what sort of protection do you get from your suppliers to hold the inventory? I mean, we have seen warnings from Meyer Burger early on. So just asking that, is this something where we should be worried about pricing in the second half from any deflation? Or do you have the ability to pass it on to your suppliers through the mechanisms?

No, that's always what we try to do. There is no automatic mechanism. But in all cases, we negotiate with suppliers. I mean what we do is we negotiate with suppliers to get price protection. And very often -- I'm not able to give you a proportion -- but very often, we get some kind of price protection, which was the case in many countries in the recent months. The other thing that we do is we try to be on top of our inventory situation. And in terms of panels, as you remember, it's a relatively limited amount of inventory that's in the order of magnitude of something like 100 million, I believe. So in terms of solar panels, it's relatively limited. And the other thing that we can do is to also have contracts with our customers to make sure that we are protecting against that. So overall, you shouldn't be concerned at Rexel level. This is something that we know how to handle, which is limited in amplitude and on which the levers are those ones: manage inventory, negotiate with suppliers, negotiate with customers, and that's what we are doing.

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

Guillaume, Laurent. I wondered if you could dig a little bit into the dynamics of new build and renovation in resi? And also whether or not you've seen any evidence of customers trading down. I think it's something that we've started to hear a little bit across the value chain over the earnings season. I wondered if you'd seen anything around that. And then the second thing is, I just wanted to dig a little bit also into your comments around some of the faster-growing sort of high-profile electrification product lines like solar and EV charging, et cetera. Again, we've started to see evidence of consumers perhaps deferring these sorts of decisions given constraints on spending. Again wondered if you'd seen any signs of that.

On the momentum of -- on new and renovation, there is nothing really changing compared to what we said in Q1, which means that new construction is difficult. And it's been since the beginning of the year. So there is no particular news, and the areas where we are more exposed to new construction, as you could tell in the results, are posting more difficult results, like, for example, the northwest of the U.S. But as a reminder, our exposure to new residential construction is...

[Foreign Language]

Overall at group level is less than 10%. So it's relatively limited. When it comes to resi, and I'm still staying on residential, when it comes to renovation, when it comes to innovation, which is a bigger exposure. Here, we have benefited from the electrification. We are benefiting from the electrification trends. And overall, we see a very active market, and this is not -- once again, this is not changing since Q1, so we continue to see that. And on the commercial side, on the commercial construction side, as we mentioned, you have to do, the interesting part of this year is that it's a less uniform picture than last year with most of the segments being very active actually when it comes to airports, government spending, hospitals, even entertainment categories, et cetera, distribution centers, all of that is quite active. And a few -- or 1 category that I could identify as being more depressed because hit by interest rates, which is the office buildings segment, but which is once again quite limited for us. And then the last category, the [ last market for us ] industry, which continues to be very, very active with on top of that, a lot of backlog still to serve in this industrial automation category. So that's what I would say for the end markets. Now you were talking about the electrification trends. It depends a little bit on the segments and on the products. If I take an example, Industrial Automation is still in high demand, and it will continue to be in high demand because the inflation of the cost of labor is the difficulty to hire remains here, and so the drive towards more automation in the U.S., in Europe is something which is, continue to be strong, which will continue to be strong. So we don't see a slowdown here. There is a high backlog to be served. And if anything, the reshoring opportunity that we see in the U.S. and to a lesser extent in Europe, are also pushing industrial automation. For the other categories like EV charging, solar panels, HVAC, you have to understand also that it's not only residential. It's residential and small commercial, and what we are seeing, for example in Europe, on the small commercial buildings or the small industry from this point of view, is that it doesn't depend too much on the price of electricity, on the spot price of electricity because people were burned last year with the availability of electricity and the scare about availability of electricity and the scare about the price. And they understand that they are in a world today where cheap electricity, cheap, stable, steady electricity will not be there anymore and will not be part of the picture. So which means that the incentive is still there. Now I'm not saying that it's not, that it's 100% immune from the variations in the electricity price. But when I see that situation with most of our customers who are thinking a little bit more mid-term and when I look at all the forecasts that we can look at everywhere in terms of electrification, I'm very positive about the future.

Okay. Can I just follow up one quick one on your comments on industrial automation product pricing in China? Can you give us a little bit more color on what you're calling out there?

Laurent, if you want to comment maybe.

Yes. I mean, first, the recovery of the China economy is a bit lower than expected in the second half. And also, we faced some bad debt issue in the last year. So we are very selective in the way we are doing business. That's why we prefer to reduce our growth and to protect our profitability there. We have less than 3% market share. So [ exclude SACT ]. The rest is doing quite fine, but in a global environment that is a bit less positive than what we were expecting.

Okay. But is pricing down, sorry, I was just trying to understand what you -- you've seen the pricing coming down in industrial automation products in China. Any kind of indication of magnitude?