Rexel Sa Unsp/Adr

Good morning. This is the conference operator. Welcome and thank you for joining the RACCEL's half-year 2023 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Guillaume Texier, Group CEO. Please go ahead, sir.

Good morning to all of you and thank you very much for joining us today for this presentation of 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 the progress 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 EBITDA 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 three our strong start to the year with five key numbers. First, our reported sales stood at nearly 9.8 billion euros, up 7.5% versus the same period last year. Second, on the 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 EBITDA margins 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 242 million euros, up 4.7% versus the same period last year. And last but not least, our indebtedness ratios 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 four. 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 segments, which represent 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 continue to be strong, especially in Europe. The four categories that we have identified as directly impacted by electrification grew in Q2 at five times the pace of traditional electrical distribution, and they represent 22% of our direct sales. As a reminder, they consist in solar, EV charging stations, HVAC, and 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 analysis 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 were expecting in 2023 and it is quite comforting for the future. On the price side, we continue to record a positive contribution from non-cable-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 five, we look now at the financial side of the equation. Our profitability was very robust, with adjusted EBITDA 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 non-recurring items from inventory price inflation on non-cable 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 EBITDA guidance raised by 25 bits at the midpoint, fully in line with our Power Up 2025 goals, 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 2025 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 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 on slide 7 with a look at our overall Q2 23 sales performance. Our sales of 4.8 billion euros were up 2.8% on a reported basis and 6.2% on a same-day basis. These reported sales were impacted by an unfavorable foreign exchange effect of 2%, mainly due to the depreciation of the US 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 Bucklesmith, two specialists of industrial automation distribution in the US, as well as Trilec, the number three player in Belgium, and LTL in Canada. We now anticipate the full year 23 scope impact to be close to zero, assuming the consolidation of WASCO as of October 1st. 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 three 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 focuses specifically on volumes, which contribute 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 geography 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 non-cable products and minus 1.8% from cable products. Specifically on non-cable 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 2023 compared to Q1 2022. Indeed, copper price dropped to 8,500 USD per ton versus circa 9,500 USD per ton in Q1 2022. Slide 11 focused on our performance in Europe and illustrates how we captured the sustainable electrification trends. Our Q2 2023 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 contributions to that 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 Shui end market. Similar to previous quarters, residential was boosted by renovation and electrification effects, offsetting decreasing demand in the traditional ED business. Lastly, let me remind you that the integration of Trilac in Belgium is going well. We see energy at more than 5% of our acquired sales, a very high level reached by the teams, which both 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 cite the robust industrial demand driven by product reshoring and oil and gas segments, offsetting the negative trend in the residential markets. We are also very happy with the strong resilience of our commercial activity, leveraging the very diversified end markets as illustrated in our Q123 presentation. By region, we gain market shares 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 three 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 reverse MDA 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 EBITDA margin of 7.2%, up 16 basis points, excluding non-recurring items that benefited H1 2022. The progression from last year's reported adjusted EBITDA 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 stand 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 EBITDA margins stood at 7.9% and improved by 10 basis points from red-brick sales growth, suppliers' initiatives, and internalized actions on cost control, offsetting overall cost inflation. North America's adjusted EBITDA margins to that 7.6% and improved by 13 basis points thanks to high level of activity, synergies from recently acquired companies, and productivity gains, offsetting investments in people and OPEX inflation. In Asia-Pacific, adjusted EBITDA margin stood at 2.3% and is up 101 basis points on improved credit control, especially in China, with lower bad debts. On slide 15, we look at the bottom line part of our P&L and zoom in on financial expenses, tax rate, and recurring net income. financial expenses to that 76 million euros higher than last year's 52 million euros resulting from the rise in interest rates. It includes 26.7 million euros of interest on lease liabilities and pure financial costs of 49 million euros. The effective interest rates increased to 3.39% compared to 2% in 2022. For 2023, We anticipate pure financial expense of circa 100 million euros, excluding one-off and interest-lease liabilities in a context of rising interest rates and assuming current interest rate conditions remain unchanged. This excludes Wasco's financing, which would add around 25 million euros on a full year basis. In addition, interest-lease liabilities should be close to 55 million in 2023, excluding Wasco. Our income tax rates stood at 26.7%, similar to the 27.2% in 2022. For 2023 onwards, we confirmed our estimated of below 28%. As a result, recurring net income was €455 million compared to €471 million in H1-22, which had benefited from record high inflation tailwinds on non-cable products. Moving to cash flow on slide 22, we generate robust cash flow before interest and tax, reaching 242 million euros, 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 148 million euros and is notably related to the cash out of 2022 performance lean bonuses and will normalize in H223. Growth 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. On net financial investment, we have a cash out of 65 million corresponding to the net effect between acquisition costs and the cash received from the disposal of Norway. We paid €362 million in dividend related to 2022 results. We have bought back €50 million of shares this year as of mid-July. All this leads to a net debt level of €1.9 billion, close to last year's level, and a similar indebtedness ratio at 1.26 times. Let me turn on slide 17 to our balance sheet and liquidity picture. Let me remind you that we refinanced our two bonds in 2021 with two sustainability-linked bonds maturing in 2018. 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 1.3 billion euros of liquidity, including 0.9 billion euros in hand-drawn facility on our senior credit agreement and 0.4 billion euros 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 size it. Thank you for your attention, and we will 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 an update on the execution of our strategic power-up 2025 plan that we presented at our Capital Market Day in June 2022, one 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 one 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 envisioned 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 record high dividends. 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 two 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 three 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 seven automated distribution centers with the opening in H1 of a new one 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 five times the speed of the traditional ED 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 a combination of acquisitions, divestments, and share buybacks. In line with this, we have completed 30% of the 400 million euro 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 500 million euros in sales and we reached 480 million euros at the end of H1 of this year with the sale of Rexels activities in Spain, Portugal and Norway. And we are at the halfway mark in our ambition of making a transition that will add up to 2 billion euros in sales including the recently announced acquisition of Wasco in the Netherlands that I will present in the next two 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, two distribution centers in the Netherlands, and generated turnover of circa 550 million euros, 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 will allow Rexel to benefit from energy transition-related opportunities. With an EV of €485 million, the implied multiple stands at 9.2 times Wasco's EBITDA, or less than 7 times after full realization of the expected synergies, notably including cross-selling opportunities and logistics optimization. The transaction is expected to be accretive in year 1 to Rexel's adjusted EBITDA 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, the 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 a 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 immigrants 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 non-cable in the second part of the year. On the profitability side, we are happy with the action plan 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&R. 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 EBITDA 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 Mickens for his support and guidance to the company over the last seven 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 Agnès Touraine to succeed Yann Mickens. Agnès 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 NOMCO 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.

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