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

Good evening, everyone, and thank you for joining us on such a short notice. I am here with Laurent Delabarre, our CFO, to comment on the acquisition announcement that was issued earlier today and answer any questions you may have. So as you have read, we entered into an agreement with Audax Private Equity to acquire GCG, a U.S.-based specialty infrastructure platform. This is the fourth acquisition of Rexel this year and also the most important one in a long time. But more importantly, we see that as an important strategic move for Rexel, and this is what I would like to detail before Laurent covers the financing of this transaction. So let me right away start on Slide 2 with the strategic why. This transaction is really at the heart of 3 transformations we have strived to push to make Rexel a high-performing company. First, it strengthens our position on markets and geographies that are a high priority for us. We are strongly reinforcing our U.S. footprint and leadership with solid growth potential, adding a platform of about $1.1 billion in sales. Following completion of the transaction, North America will represent for the first time, more than 50% of the group turnover. As a reminder, in 2021, this figure was 35%. We are also, and it's worth noting, more profitable today in North America than in the group in average, which makes this evolution globally a relative one. Also, you will see that GCG is positioned on fast-growing segments, which adds to the attractiveness. We are acquiring strong and diversified positions in markets such as data centers, grid modernization, infrastructure or defense, where investment is structural rather than cyclical. And for those following us, you know that our strategy since many years has been and will continue to be to focus our efforts on those particular submarkets, which are presenting the best acceleration opportunities. Being more exposed to those electrification megatrends makes us a faster-growing company and more resilient throughout the cycles, which we are seeing, by the way, in our results this year. And lastly, one particular feature, which makes GCG very attractive is that about 3/4 of its sales include a value-added product or service. And as you know, we have made this a key pillar of our Accelerate '28 strategy to strongly develop our ability to add unique value to our customers beyond the traditional distributor role and thus to foster stickiness and profitability. And GCG has developed very impressive capabilities, which will represent a step change in this direction. So in summary, the GCG acquisition ticks many key strategic boxes for us. And it is also a financially attractive transaction, and I am moving here to Slide 3. As you can see in the first box from the top, the acquisition will be accretive from year 1 despite the fact that there will be an equity component in the financing scheme, and I will come back to that. It is also value creative with a ROCE above WACC by year 3. And importantly, it's also accretive to our EBITDA profitability, our most followed KPI by more than 20 bps because of the comparatively high level of profitability generated by GCG's high-touch model. All of this is made possible by a high level of cost synergies, which comes from various sources, logistics and purchasing optimization, back-office optimization, use of Rexel's digital or AI tools. I'm not going to give any figures here, but what we have identified puts us in the high range of what we usually deliver in such acquisitions. And that is not even counting the potential cross-selling synergies, which we have decided not to include in our calculations, but where the potential is very important. As a consequence, the acquisition multiple is very reasonable for a business with this level of growth and profitability, less than 8x EBITDAaL. And here, I'm talking multiple post run rate synergies. And that obviously compares favorably to Rexel's own multiple, which is those days double digits. And so finally, we are financing this $1.4 billion EV in a disciplined way with a mix of cash on hand and debt for 2/3 and 1/3 of equity. By doing so, we will keep a healthy balance sheet and maintain a leverage by the end of 2027 around our midterm target of 2x. This is both a choice of caution at a time when geopolitical and economic circumstances remain a little bit uncertain and also a choice of ambition as we want to keep good margin for maneuver in a fast-growing market. So after this very long executive summary, let me get into what GCG is about, and I'm here on Slide 4. So it's headquartered in Chicago with in-depth presence across the U.S. territory and has close to 1,000 employees. It is expected to exceed $1.1 billion of revenue in 2026, achieving a compounded organic growth of about 11% annually since 2019 driven by the highly attractive end markets and secular megatrends that GCG's portfolio is exposed to. And on the left-hand side of the slide, we show you a split of GCG's revenue by end market that will be supportive to current Rexel positioning. It's a very balanced portfolio while adding strong exposure to the long-term trend without depending on one end market. And to pick a few, data centers, which account for 21% would reinforce our positioning in this industry and give us more access to the white space. Power and utilities as well as defense are also strong markets as they represent 18% and 11% of their revenues, and it will help Rexel open new doors. With regards to telecom at 10% of GCG revenue, it really complements what we built with our existing Talley platform. Given the value-added services and solution it provides in terms of profitability, GCG command an EBITDA margin premium that is expected to be at about 11% this year. Let's move to Slide 5, where we highlight GCG's strong added value addressing customers' most complex needs. So think about a contractor or an EPC building a data center or a substation today. Skilled labor is scarce and expensive, schedules are aggressive. Specifications are increasingly technical and mistakes on site are particularly costly. And GCG's answer is to move work away from the job site and into its own facilities before the material is shipped, and it does this at 3 levels. First, it engineers the solution upstream with the customer, design, specification, sourcing. That means GCG is involved very early in the project, often before the bill of material is finished. Second, it builds custom solutions, cable assemblies, harnesses, multiconductor builds, including complex low-volume runs that others wouldn't want to do. Third, it enhances standard product specification, striping, overmolding, cut-to-length, spooling. The customer receives something which is ready to install. And the result is that the customer saves time and labor and GCG becomes part of the project rather than just a supplier. And those relationships are much stickier and much less price driven, but more value driven. Let's make this concrete with 4 real customers' critical programs on Slide 6. In Power and Utilities, GCG supports a major energy provider on a 2-gigawatt build-out for hyperscale customers. And with its engineered solutions, installation takes about 60% less time than a standard duct bank. The customers have come back again and again, and the fifth project is underway and 5 more are identified. So the repeat business is what we value. In data centers, second example, a major EPC is running its fastest hyperscale program to date. GCG moves complex electrical assembly into its own prefab facility and equipment is powered up on site about 10x faster. And in a tight labor market, that takes the customer critical path out of risk. In naval shipbuilding, the relationship goes back 25 years, and GCG covers the full wire and cable requirement of a major shipbuilder and supplies ready to install material. The yard no longer needs inspection, storage or cutting waste. And last example, in utility scale solar, GCG delivers the full DC collection package on 2 projects at the same time. It is 4 to 8 weeks faster than usual and scarce field crews are freed up. The common thread here, GCG sells time, certainty and labor savings. And now if we move to Slide 7, I already commented on the last part on at length on the financial attractiveness of the operation and the value creation profile of GCG in my introduction. And I'd like to focus much more on the chart on the right, which puts this deal in perspective and shows that GCG is very consistent with how we have been trying to reshape the Rexel profile through M&A. The vertical axis shows the exposure to high-growth segments and the horizontal axis shows how much value added the business carries. And deal after deal, if you remember, we have moved Rexel up and to the right. And in parallel, we have refocused the portfolio on our core regions. GCG is a further step in that direction. It has the strongest exposure to structural growth markets and the deepest value-added content of any business that we have acquired recently. It follows the same logic as our previous deals at a larger scale. We will keep transforming the portfolio towards faster-growing markets and more value-added services. And Laurent will now explain how we are financing the deal while preserving our balance sheet and our capital allocation priorities. Laurent?

Thank you, Guillaume. Good evening, everyone. Let me detail the financing plan and our capital allocation strategy on Slide 8. Enterprise value stood at circa EUR 1.3 billion and will be financed through a mix of cash, debt and equity. About EUR 800 million will come from cash on hand and new debt. The debt financing is fully underwritten, so there is no financing risk to closing. Alongside this, we intend to raise up to EUR 500 million of equity through an accelerated book building subject to market conditions to preserve our credit rating as we don't want to stretch the balance sheet given the current macro environment. The equity amount is limited, and it is sized to keep leverage at around 2x net debt to EBITDAaL solid from '27 onwards. With that, we will maintain our well-balanced capital allocation strategy. We will keep pursuing self-funded value-creating acquisition, and we maintain our dividend policy with a payout of at least 40%. In terms of time line, closing of the GCG acquisition is expected by year-end '26, subject to customary regulatory approvals. Guillaume, back to you to conclude.

Thank you, Laurent. And so to conclude, let me come back to 3 or 4 points, which I find very important. First, we are acquiring a unique model. GCG is a value-added solutions provider, serving mission-critical applications with engineering depth and proprietary products. Assets like this are rare, and it is ready to scale with Rexel. Second, it strengthens our focus. The deal concentrates the group further on our core geographies and in North America in particular, at the heart of the data center, grid and electrification trends. And third, we do it very responsibly. The balance sheet stays robust. Our rating is protected, and we maintained a balanced capital allocation. Taken together, GCG gives Rexel a secure and accelerated path to our midterm financial objectives under Accelerate '28, and we are very excited to welcome the GCG teams to Rexel. So thank you for your attention, and Laurent and I are now happy to take your questions.

[Operator Instructions] The first question comes from Daniela Costa with Goldman Sachs.

I have 3 questions. They're fairly brief each, so I'll ask them directly here. First, can you talk a little bit more about the synergies? What is the amount of synergies? And how does it split revenues and costs? I might have missed it in the presentation. Second one, just can you talk about what's the peak to trough margin of the asset? I think you said obviously 11%, but we've been in a pretty good growth environment for those end markets. Just give us a historical idea when we're maybe sort of not at the peak of the cycle, what were their margins? And then the final thing, just can you comment on your buyback?

On what?

The buyback...

Okay. So synergies, what I have said is that -- I mean, I have not detailed -- I have not given a number in terms of synergies. But I have said that, first of all, and I want to be clear on that, in our calculation and in our evaluation, in particular of the multiple post synergies, we don't take into account revenue synergies. We think that those revenue synergies are important. But in our experience, the timing to unlock those synergies can depend very much from acquisition to acquisition, and we prefer to be cautious on that and not to take them in our calculation. So we are talking here only cost synergies. And what I have said, even if I have not given a number, is that what we have identified is in the high end of what we deliver usually in terms of percentage of sales. And we have done 26 acquisitions and you have a good example of what we have been able to deliver. Now in terms of what it is exactly that we are going to do, I mean, this is the typical optimization thing where, for example, they are going to be able to leverage our size in terms of back-office services, et cetera. We are going to be able to optimize logistics because of our footprint. We are going sometimes to optimize a little bit real estate. We will be able also to optimize purchasing in some cases and to leverage our size. So all those things. But so this is what mostly we are talking about in our calculation. Peak-to-trough margin, I think if I remember well, it's relatively stable. It's relatively stable. And even though you're right that the market has been relatively good over the last few years, it has been progressing, but not in a very meaningful way. I don't have a figure to give you. Laurent, I don't know if you have it, but it's been relatively regular. And the reason for that is that GCG is providing value-added, which makes at the end of the day, the business much less commodity oriented than what you would think about a typical cable distributor, for example. So Laurent, I mean, do you want to say anything on that?

To your point, there is not a big gap between the lowest and where they stand today.

And then share buyback, that's a good question, Daniela. Obviously, as we are going to do EUR 500 million or up to EUR 500 million ABB, we are going to discontinue share buyback for some time because it wouldn't make sense. It wouldn't be logical to continue to do share buyback in the same time as we are issuing new shares at a discount. But that being said, it's a discontinuation, which we will decide in due time to continue or not depending on the share price evolution.

And your main shareholders participating in the equity raise?

That's going to be the decision when the time comes. I mean they are going to be like any other shareholders solicited. I think we have written in the press release that the decision of the Board on the operation was unanimous.

The next question comes from William Mackie with Kepler Cheuvreux.

Congratulations on securing the deal. Yes, a couple of questions. But the first one would go to starting at the beginning. Could you give us a little background for the deal? I mean this is an Audax exit. So was it the deal orchestrated in a bidding environment? Or was it a selective process? How did you arrive at the conclusion that we see today, please?

It was in between. We were with -- in contact with Audax since many months. And I would even say, if I remember well, since more than a year to talk about what the options could be in terms of the exit of GCG. At the time when Audax started decided to consider an exit, they started a semi-competitive process where they isolated a few strategic buyers to organize a bidding contest between them. And that's a little bit the thing. But I guess the main point for me is that we were interested in this asset since a fairly long time. We felt that exactly for the reasons that I'm mentioning, the exposure to fast-growing markets, the reputation of the teams as well as the value-added components, it was something which would complement very well the portfolio of Rexel in North America. So I hope this gives a little bit more color to the acquisition.

Just glancing over the business, there is, at first sight, a lot of cable. To what extent is there a high material content related to plastics or copper in the business? And so how should we think about what you're acquiring and the 11% margin to the extent that it is a commodity pass-through as opposed to a value-added business-related model?

I think we have obviously looked in detail into that. And Nexus underlying copper sensitivity is substantially lower than the traditional cable manufacturer distributor. And we estimate if we do the math that the overall copper sensitivity of Rexel would increase by less than 2% from around 15% today to 17% after the acquisition. Also, in the past nature -- in the past, because of the nature of its business, and that's what I was explaining to Daniela, Nexus' profitability has proven very resilient to copper variations. And so finally, we overall estimate that the sensitivity to copper is relatively moderate compared to what you would imagine from -- if it was a commodity distributor. In an environment where we don't know where copper is going to go, but midterm, we feel that there is going to be -- it's going to be a market which is going to be more under tension than the opposite, which obviously doesn't rule out short-term variations. But long story short, we don't feel that the sensitivity to copper is that high.

Perfect. The last one. On the slides you mentioned the ROIC (sic) [ ROCE ] is going to exceed the WACC in year 3. Can you share with us the sort of ROIC (sic) [ ROCE ] that you expect to achieve on this plan? To what extent you've included synergy costs for realizing synergies, but ROIC (sic) [ ROCE ] will exceed WACC to what extent in year 3 in your central case business plan?

Yes. I mean it's a full business plan, including synergies, including cost synergies, obviously. Absolutely.

But okay. What level of WACC are you assuming?

What level of WACC? I think it's around 9%.

Yes, around 9% is the group WACC and we are above this figure in year 3.

The next question comes from Akash Gupta with JPMorgan.

I have a couple of housekeeping questions, and I was trying to find more information about GCG or they're also known as Genuine Cable Group. Maybe if you can talk about, do they manufacture raw wire and cable or operate solely as a value-added distributor and custom assembly provider?

They are only a value-added distributor. So they have what you would call something which would resemble a kind of manufacturing facility, but very similar to what we do already in our services business, which is very much assembling, cutting, striping, molding, but nothing which would be similar to what a cable manufacturer would do.

And do they only do cables or there are other product categories as well within GCG?

They do a little bit of concrete, they do a little bit of fiber optic cables. They do a little bit of PLCs, HMI and robotics, but a big part is all kind of cabling, yes.

And maybe last one. When we look at their cable portfolio, is it only low voltage? Or do they also do medium voltage? I think the picture you have in presentation looks more like medium voltage. But just wondering like when it comes to all the cable needs of data center, and I think you were previously more in low voltage. So could we see you can provide...