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

Thank you very much for being available on a short notice. As you saw, we have decided to anticipate, by a few weeks, the release of our Q3 figures. During the quarter, we have experienced a change of trends in the European markets, which is leading us to adjust our initial guidance. And rather than issuing a press release without any additional comments, we thought it would be a better solution to expedite the production of our full quarterly figures, so that we can discuss the geographical details of the situation with you, which we are doing tonight. As usual, I am holding this call with Laurent Delabarre, our CFO, who will enter into the details of the figures, but let me say a few additional words of introduction. As I just mentioned, and I'm here on Slide 3, we saw a change of trends in the European markets during the summer. You remember that our assumption was for stable markets that are relatively soft level between Q2 and the end of the year. This proved true in Q3 in North America, with even a slight recovery if you exclude the negative effect of Hurricane Helene in September. This is a bright spot, and you will see when we comment on the backlog that the prospect in this region remains healthy. But the story was different in Europe, where we experienced a further deterioration in most markets, especially in Central Europe and Northern Europe. This is due both to the macroeconomic environment, which is not good, and also to a specific photovoltaics effect as we continue to experience a double-digit decrease in this category, higher than the increase we had benefited from last year. And even though this segment is now quite small for us, it still has a meaningful impact on the year-over-year figures. Two remarks on this evolution. Firstly, it is totally market related and not Rexel related. We are facing this just like our suppliers, our customers and our competitors are facing it. And in this context, I see evidence of us gaining ground in most of our markets. This is not unexpected in soft volume moments like this one. As distributors providing the best added value, we tend to do better, and this is what is happening. Secondly, it looks like a temporary dip before recovery. I am cautious and certainly not giving any guidance for next year, but the feeling I get from customers and suppliers is not one of us entering into a deep downturn in our markets. And this makes total sense with the Central Bank starting to lower interest rates, which historically always had a positive impact on us. A positive indication from this perspective is that while the quarter was negative overall sales improved month after month over the quarter, and we were close to breakeven in September. In this context, and I am now commenting on Slide 4, I can tell you that our teams are all hands on deck on cost and margin control. They were prepared for that, and I am very happy with the way they have reacted. One metric I can communicate on is headcount. We are reducing headcount, in line with volume and will end the year probably even better than that, which is an incredible performance as in classical distribution economics, a part of your headcount are fixed. And we are doing that on a basis, which is quite optimized already as we are serving basically 40% more turnover than in 2019 with the same number of people. The reason we are able to do that is that we are taking the downturn opportunity, if I may say, to accelerate our transformation. We have been preparing for that, and there are several plans that we are activating to optimize even further our cost base. It is true in logistics, like in Germany. It is true in sales force organization, like in Austria. It is true in back-office optimization in several countries, and you will see more of that going forward. The sum of these actions should result in annualized structural savings of EUR 45 million, of which approximately EUR 15 million in 2024 and EUR 30 million in 2025. Restructuring charges are expecting to be close to EUR 30 million in 2024. These measures deepen the focus on efficiency that is embedded in our Power Up plan and will help enhance Rexel's resilience over time. So even though the guidance revision is moderate, even though it is 100% market related, I am not saying that I or the teams are happy with the figures, but I am quite satisfied with the way we are facing a less supportive market environment. And let me now hand over to Laurent to detail our Q3 sales, and I will return to comment on our outlook.

Thank you, Guillaume, and good evening to all. Let's start on Slide 6 with the different building blocks of our Q3 '24 sales performance. Our sales of EUR 4.8 billion were up 2.1% on a reported basis, a positive performance achieved thanks to our acquisition strategy, which contributed to plus 3.1% and offset the limited minus 0.7% evolution in actual day sales. The scope impact included the positive contribution of Wasco in the Netherlands and Talley and Electrical Supplies, Inc. in the U.S. And for full year '24, we anticipate the scope effect to be a bit lower to 2.5% based on already completed acquisitions with Wasco consolidated since September of 2023. And the current effect -- the currency effect stood at minus 0.3% in the quarter and is expected to be broadly flat for the full year, assuming spot rates remain unchanged. Slide 7 focus on the price and volume breakdown of our sales by product family and by quarter to give you a better idea of the dynamics we are seeing. The table allows us to highlight a few trends. First, our core ED business, including cable, representing close to 80% of the mix, is stable in volume and progressing in price notably helped by cable. This is a better performance overall than in Q2 '24. Second, the electrification markets remained challenging and deteriorated sequentially with a minus 2% contribution to same-day sales evolution in Q3 after minus 2% in Q2 '24. This was notably driven by lower volume and prices, which remained negative with sequential deterioration, especially on the PV segment. On Slide 8, you see the selling price impact and the breakdown of our sales evolution by geography. First, on pricing, as presented in the previous slide, selling price were down 0.4% in the quarter, and this can also be broken down between cable and noncable, as presented every quarter. So noncable selling prices, including electrification and core, stood at minus 0.8% in Q3 '24, reflecting deflation in solar, piping in North America and industrial automation in China. Cable pricing on the other side returned to positive territory at plus 0.4%, benefiting from the more favorable copper price. And by geography, we saw North America returning to growth at plus 0.2%, Europe remaining negative and the deterioration in APAC by minus 0.9%. I will detail Europe and North America in the next slides. And more specifically for Asia Pacific accounting for 7% of group revenues, China returned to negative territories, down minus 1.5%, due to a sequential deterioration in volume compared to Q2, notably with our industrial end market customer in solar, EV batteries and transportation. Selling price was still negative, but improved sequentially compared to Q2, thanks to a more normal level of inventory in the value chain. Moving to the Pacific. Performance is mixed between our 2 countries, resulting in slightly positive performance in Australia, more than offset New Zealand where the macro environment remains very challenging. Slide 9 focuses on our performance in Europe. Our Q3 '24 same-day sales were down 4.4% compared to the minus 4.5% in Q2 '24, reflecting a sequential drop considering the easier base effect we benefit from in H2 '24. It results from 2 factors. First, electrification has deteriorated in segments such as solar and -- specifically in Benelux. Second, our core ED business, including cable, deteriorated compared to Q2 '24 due to worsening macro condition with loss in volume, partly compensated by better pricing. And more specifically, let me highlight the key evolution of the quarter. And the quarter was negatively impacted notably by the DACH region and Benelux. The DACH region was down minus 8.3%, deteriorating the DACHs previous quarters. Germany and Austria were strongly impacted by the very challenging macro environment, notably due to the lower level of export to China and growing competition from Chinese manufacturer in the electrical vehicle industry, impacting both electrification and core activities. Benelux was down minus 11.2% and remained under pressure, despite an easier base effect. The quarter also recorded green shoots in France and in the Nordics. And indeed, in France, we continue to significantly outperform the market. It's also worth highlighting the growth in solar and the better performance in September after a more difficult summer. And in Nordics, we are back to positive territory, up 2.6%, improving sequentially, notably from an easier base effect on electrification. On Slide 10, we turn to our performance in North America, where same-day sales were up 0.2%, returning to positive territory. As in the first half of 2024, activity continued to be boosted by good backlog execution, with project activity up in double digits. And more specifically for our 2 countries, in the U.S., same-day sales took at plus 1.1%, with favorable trends in residential, broadly stable activity in nonresidential and a slight decline in industrial activities. And more specifically, the positive ED activity in industrial buildings offset the negative trend in industrial automation, which faced very difficult comps. And in addition, Talley did very well in the quarter, and the integration is well on track. Canada saw same-day sales evolution of minus 3.7%, explained by the negative momentum in industrial automation, impacted by a challenging comparable base effect and low level of activity in segments such as oil and gas, mining and automotive. And this is partly offset by good momentum in nonresidential, driven by large contractor in the public sector. And on Slide 11, as in previous quarter, we continue to enjoy a strong level of backlogs compared to pre-pandemic situation, despite the very high level of execution. Active segments include data centers, water -- wastewaters or entertainment. This gives us some visibility for the coming quarters. And let me now hand back to Guillaume.

Thank you, Laurent. The new environment we have faced in the last 3 months leads us to revise our guidance downward for the year, and I am now commenting Slide 13. At the end of July, we had already flagged that our leeway had diminished, and we have positioned ourselves at the low end of the guidance. With the recent evolution, we have to revise that and we now expect full year like-for-like sales to decrease between 2.5% and 2%, with a sharp contrast between North America and Europe, the former being more or less flattish for the year with positive volumes and the latter being mid-single-digit negative. This overall drop in sales translates into less profitability at EBITA level, and our best estimate is now to be around 5.9% with cost savings actions offsetting partially volume drop-through and margin pressure. On the cash flow side, we think that in this context, we will do better than our guidance, and we are upgrading the figure to 65% plus. Before I leave the floor to questions, I want you to finish on Slide 14 with a more midterm perspective on the results. First of all, to look at the past and to remember that the last 2 times, we were a negative sales evolution, we delivered EBITA margin of 4.2%. Being in a position to deliver this year close to 6% in a similar environment is a great proof of how Rexel is a different company today, and this is very consistent with what we have been saying all along. The self-help efforts implementing over the last 5 years are paying off. Looking into the future now, I'd like to take the opportunity to say that today's guidance adjustment doesn't change anything as to how we see the potential of the company going forward. It goes without saying, but it is better to say it. The same self help levels that we have activated over the last few years continue to have a lot of potential and will be used to climb the next step on our journey. And if anything, today's circumstances are an additional incentive for us to do it faster. With that being said, Laurent and I will now take your questions.

[Operator Instructions] The first question is from William Mackie with Kepler Cheuvreux.

A couple of things. First of all, thank you for the detail on the revision, the location of where it makes on. Broadly, if I'm using my simple arithmetic correctly, you're lowering the guide by around EUR 400 million of sales and around EUR 100 million of profit. So 25% loss contribution. So the question is, is that approximately right? So your working assumption is the lost contribution. And specifically, when we talk about the business development, have you seen any shift in gross margin or in the underlying business? That's the first question. The second relates to the cash flow upgrade. I see good cyclical trends in Rexel. Should we expect that is coming from inventory reduction? And if that's the case, where are the excess inventory in your view? And last question, which you may not answer, relates to your lessons that you have learned from the approach from QXO, I think they see an opportunity in North America, like you, to roll up the business and to apply more technology to the [indiscernible] in distribution. I note that your level of digital penetration fell in Q3, but what's happening there? And were there any lessons that you take away from that experience?

Okay. Thank you, Will. You were a little bit cut, but I will fill in the void and try to imagine your questions and give answers. The first one was, if I understand well, on drop-through and do we see any effect at gross margin level. A good way -- I'm not sure it's the right math to compare it to the previous guidance. But broadly, what we have seen compared to the profitability last year, very clearly, is a drop-through effect on volume very clearly. And this effect, since we are moving the guidance from, basically, 0% to minus 2% to minus 2.5%, it's obviously having a large impact on the profitability. On the gross margin side, what we have seen is also a negative evolution for basically 3 reasons. One of them compared to last year is the one-off effect of sequential deflation on certain categories of product on inventory. You know that it is a one-off effect that we flagged on the way up, but that we didn't flag on the way down because we felt it was more moderate than on the way up. So there was a little bit of that, especially in the first part of the year. The second thing that we are experiencing during the whole year is an effect of a delta between the inflation of the product, which is basically slightly negative at the end of Q3 and the inflation of our cost base, which is around 2.5%. So that has an impact, too, which is continuing into Q3 and Q4 with a price level, which is probably just a little bit lower than what we expected at Q2. And the last element is in select countries in Europe, we are seeing a little bit increased competitive pressure, but it's concerning mostly select countries in Europe. So that's what I would say on gross margin. Now the cash flow upgrade, the reasons for the cash flow upgrade is twofold. First of all, there is a small CapEx effect, which is the fact that since we are in cost savings mode, cost savings, it includes SG&A. It includes also CapEx in reality, which means that we have less projects. We are doing a little bit less, and that will have an impact at the end of the year in terms of the CapEx spend. But the bigger effect is, as you said, on working capital, and it's a little bit -- there is a little bit which is due to our efforts to reduce inventory. But there is also a lot, which is going to be a little bit mechanical. If you remember well in the way distribution works, if the end of the year is less good at the beginning of the year, you end up the year with usually less working capital because of mechanical effects. And so it's mostly due to that. In terms of inventory reduction, I understand your question, but there is no particular space that I would identify in which we would aggressively reduce inventory. We pay lot of attention in this effort to conserve cash to maintain also the service level to our customers, which means holding the right level of inventory. And if you remember, I was very constant in my previous calls to say that we hadn't increased the inventory that much. We always stayed around 60 days, and we feel it's the right level to be at overall. So not much to say on that. Now your questions about QXO, are there lessons to be taken from the approach of QXO and Brad Jacobs, first of all, the approach of QXO was to pay basically the price that we reached during the year -- the share price that we reached during the year. So it's not clear that they were planning to add much value to Rexel as it is today, probably more taking advantage of the moment in the cycle. Now in terms of the strategic thesis, from what I understand from Brad Jacobs, it's all about M&A and about technology, as you mentioned. In terms of M&A, we have the same mindset. So if anything, it gives us more incentive to continue to go in this direction. If -- in terms of technologies, there's no particular different vision of what should be done. But I have to say it pushes us even more to go fast on this topic of technology. Maybe in the past, we were very happy to be one, if not the leading distributor in terms of technology. And today, the way we are thinking after the approach of QXO is maybe it's not enough to be the best. Maybe we need to accelerate even more. So that's the way I would say it. But basically, in terms of strategic direction, it's not as if QXO had come with a totally different strategic direction. So from this perspective, the learnings are a little bit limited. I hope I answered your question.

The next question is from Martin Wilkie with Citi.

It's Martin from Citi. The first question I had was just on sequential trend that you've highlighted a lot of them in the call. But just to clarify, obviously, at the group level, you mentioned that the quarter got progressively better. It sounded like September back to 0%. And I think if the math is right, that's sort of what you imply for Q4. But just in terms of which specific markets were worse, it sounds like solar was definitely there. But just to clarify on industrial automation, was that just a base of comparison effect? Or did industrial automation also get worse in the quarter?

So look, the markets, which clearly show a negative sequential trend are mostly in Europe, and they are mostly Germany, Austria, and I would probably add to that Benelux a little bit and the U.K. So it's mostly Central and Northern Europe, which showed a sequential negative evolution. The rest, even solar, the reality that solar continued to drop, but we had anticipated that at some point, when we were hitting easier comparison base from 2023 into the figures, it would start to decrease, and it was not the case. So solar continues to drop, but it's not a trend in reality. When it comes to your question about industrial automation, yes, we had negative figures in North America and in China, and there are 2 different effects, I think. In North America, I would say there is a little bit of weakness of the U.S. industrial markets, as people are mostly waiting for the elections to start investing and to understand what the global economic context is going to be. So there is a little bit of that. I think at the OEM level, we had flagged an inventory effect in the past few quarters. But at the OEM level, what I hear is that we are very close from being over in terms of the inventory effect correction on that perspective. The more important effect that is particularly true for Canada, but also a little bit for the U.S., is that last year in Q3, there was a big change in terms of the availability situation with one of our very large manufacturers being able to deliver a big part of the backlog. So they made a dedicated effort in Q3 last year to push product. And therefore, we had a difficult base effect. So it's not specifically a market effect. It's more a comparison effect. So that's what I would say for industrial automation in North America. In China, the situation is a little bit different as the market continues to be weak, and maybe a little bit weaker than it was in Q2 sequentially. So the situation is slightly different in China, which is a smaller market for us. But in North America, I would say it's a little bit of market-related evolution in a wait-and-see situation, but a lot of comparison base.

That's really helpful. And if I could have a follow-up just on looking into next year. I know, obviously, you're not going to guide on 2025 at this stage. But it sounds like you've got EUR 30 million of the cost savings out of the EUR 45 million. Is there anything else that you could flag at this stage in terms of the phasing of synergies, so we can do with things like that, you can point at this stage that will incrementally benefit you in 2025?

In 2025, no, what we try to -- the most we can do in reality is to give you indications about what is completely in our hands. That's the reason why we flagged those actions, which are 100% self-help actions and on which it's relatively easy to say how much they are going to be worth next year. For the rest of the building blocks, which are very much about gross margin, sales evolution, et cetera, you'll have to wait a little bit more as we get more clarity into next year. What I can say also maybe is to give you an update on M&A to say, but Laurent already said it in his prepared comments, that the integration of our most recent acquisitions is doing very well. So if anything, it's going to deliver better than what we had anticipated at the beginning. But since we didn't guide on what it would be, I don't think it helps you very much in terms of modeling next year. So for the rest, it's going to be important to wait a few more months to give guidance into next year, especially because of one of the comments I made, which is that the situation is a little bit of a paradox because on one hand, you have the interest rates going down, both in North America and in Europe, which is always a good sign for our market, at least for the construction part of our market, which includes resi and non-resi. And on the other hand, you have some things that I would love to be able to call a temporary dip. I'm not completely sure about that, but you have a weakness in the market. So to reconcile that, I think a few more months are going to be important to see where the things are going.

The next question is from Daniela Costa with Goldman Sachs.

I have 3 as well, if its possible, but I ask one at the time. The first one, just wanted to go back to the comments you gave regarding the savings, the new savings that you're anticipating, the cadence of that and also the cadence of your sequential commentary during the quarter that each month has been better. So is it your margin downgrade mainly a downgrade of where you expected originally Q3 to be? And will you -- is that just mechanically what you're downgrading on the margin? Or do you think Q4 margin will still have a significant dampening impact? Just thinking about that.

If I understand well your question, no, it's an H2 downgrade, which means that I wouldn't go as far as to say Q3 was an exceptional event and then everything comes back to normal in Q4. I'm not sure it is the case. The weakness in the market that we have seen, the give -- especially in the geographies I was talking about in Central Europe and in Northern Europe, they give no particular sign to change. And as far as the electrification situation, which is the second big event we changed compared to our Q2 vision, I don't think that I have seen any particular rebound or evolution in the next few weeks. So it's really a downgrade, which is impacting both Q3 and Q4, if I understand well your question.

Yes. And I was alluding at that exactly. And then just second, what time of the year normally would you be negotiating the prices with suppliers? Would it be now, I guess? Have those things started? Do you have any visibility on prices into next year at all?

It's a little bit early to -- the thing is to enter into the details, we don't negotiate price increases directly with suppliers. There are 2 different negotiations taking place. One is about the rebate that we get to the public price increases and the other one is about price increases. What we start usually a little bit later in the year is to discuss the structure of the rebate and to discuss the volume objectives for next year. So that's mainly the first part of the negotiation. And then beginning of the next year, we will have visibility on where the suppliers are going to be in terms of their own list price evolution, which is something slightly different. So at this stage, it's very difficult for me to tell you what are the intentions of the suppliers getting into next year in terms of pricing. What I can tell you is what we have seen this year, which in reality is fairly consistent with what I had told you at the beginning of the year at 1 or 2 exceptions. In core electrical distribution, we are slightly positive, between 0% and 1%, which is, if I remember well, exactly what we had thought at the beginning of the year. What is more negative is, first of all, the electrification categories and especially the PV categories, where we have seen double-digit price decreases since the beginning of the year very consistently. And also a few commodities, especially steel-based commodities in the U.S. where things have gone proportionally to the price of steel in the U.S. basically. So this is the big driver and the main driver for the negative price evolution this year. So at this stage, I have no better insight than to tell you that for core electrical distribution categories, which is most of the suppliers that you are following. The best guess would be 0 plus, like this year. But it doesn't come from specific insight that I have from suppliers. It could be more, it could be less. It comes from the fact that this year was very consistent with that.

Got it. And final one, just slightly off the quarter. But I guess, we've been hearing a lot about taxation and budget and municipal cuts in France. Can you give us some light on how you think about that in terms of impact for your business?

So in terms of municipal cuts to start with, I don't think it's going -- it's very early. First of all, you have to understand the political situation in France. There is a government which proposes laws and -- but the government doesn't have a clear majority at the assembly, which means that between the proposals and the end result, there could be many differences. So it's a little bit early to comment on the project. Now in terms of the budget reductions in terms of reducing the level of investment of municipalities, I don't see any meaningful impact at this stage. I don't think it's going to be meaningful. The type of works that we see are usually not impacted that much by that. When it comes to the mechanical effect on taxation and on share buyback taxation, we are in the middle of evaluating what it means. It will be much more important and meaningful on the income tax rate in France than on the share buybacks taxation. The share buybacks taxation should be something around 2% to 3% of the share buybacks, if I understand well, the initial calculations that were made. But depending on what the end result is on net income, you could see a few percentage points increase in the overall taxation rate of the group going into next year. But it's a little bit early to have a stabilized evaluation of what it is because, once again, it's going to be discussed by every party in France, and we won't know for sure until the end of December.

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

I guess, I was just trying to reconcile the positivity around sequential improvement through the quarter and the comments you gave in respect to gross margin pressure, i.e. increased competitive pressure in Europe and also the continued deterioration of solar pricing. It doesn't sound like it's a particularly good environment, I guess, is where I'm coming from. So I'm just trying to think about how you described the customer conversations with respect to 2025. I'm just trying to reconcile the kind of positive comments versus what you then said in terms of gross margin pressure. I guess, that's where -- it's a question about why we should...

I lost you completely.

Sorry, the gentleman has been cut off.

Okay. By us or by himself?

His line just dropped, I'm afraid.

His line just dropped. I can answer his question anyway. And hopefully, he can listen to the record of the call. Let me be a little bit clear on the margin pressure we are talking about. The margin pressure we are talking about, once again, it's threefold. There is one effect, which is an effect which is mostly from the beginning of the year, which is a mechanical effect of negative categories in terms of pricing on inventory. We shouldn't call it margin pressure in reality. It's a one-off margin effect in reality. The second margin effect is the mechanical effect of gross margin inflating at a certain rate because of pricing and costs inflating at a different rate. And this is not typically a gross margin effect. It's also an SG&A effect. And the third one is in some select countries in Europe, which are very much impacted by the negative evolution of sales, namely Germany, namely the U.K., we are experiencing an additional pure commercial margin pressure due to additional competition. So that's really what we are talking about. And I want to make the difference between those elements because the first 2 are more or less mechanical and they don't have to do any -- they don't have anything to do with the market evolution. The third one is due to market evolution, but is limited to a few countries in Europe. So that's what I wanted to make clear.