Rexel Sa Ord

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.

This is the conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one under touchstone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Martin Wilkie with Citi. Please go ahead.

Yeah, thank you. Good morning. 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 that inflation in many commodities and so forth is now beginning to ease off? So that was the first question. Thank you.

Okay. So on pricing, I would make a difference, first of all, between cable and non-cable. On non-cable categories and on most of the non-cable 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 on 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, PV panels. We talked about that before. Like also the ones, the products which have a high content in commodity, like conduits, for example, in the US, 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 price increases out, yes, it's going to be accepted. Yes, absolutely.

Thank you. And if I could have 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 US, you've done some deals in Europe. How are you thinking now about opportunities in terms of incremental acquisitions? Is the environment still accepting in terms of finding good value deals? Just understand how we should think about possible portfolio changes. Thank you.

When I look at the objective 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 had given as a guidance for acquisitions. We had said up to 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 discussed before, we see two 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 two years that we were able to actually deliver values 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 would 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. Thank you.

The next question is from Daniela Costa with Goldman Sachs. Please go ahead.

Hi, good morning. I have two questions as well, if possible, but I'll ask them one at a time. First, I just wanted to get your views in terms of going into the second half and into the beginning of next year. 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 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 address this.

Yeah, 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 mid-term. 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. In the second half, we will be hitting 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 rates that we had in the 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 your question, which is a good question.

Sure. Thank you. 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 be for you to start distributing for data centers and whether there is fits your category of like adjacencies that would be synergetic with your portfolio thank you you know that's part of the category 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, etc. When it comes to the heart of the electrical part of the data center, of the data comp 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.

Got it. Thank you very much.

Thank you.

The next question is from Aurelio Calderon with Morgan Stanley. Please go ahead.

Hi, good morning. Thanks for taking my question. I'll talk to you 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'd be helpful. That's the first question.

Okay, you know 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 a 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 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 show now in the slide, kind of offsetting the non-cable impact last year. So can you talk more about that operating leverage? What initiatives have you launched? Where are you seeing the most benefit from that kind of shift from pricing to operating leverage?

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 top line to the bottom line is very strong. So we have different action plans to make sure we can gain productivity through digitalization, through various initiatives to make sure that we can continue to grow volume-wise while keeping the cost base as stable as possible. 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, you know, 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 ones 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 handling the transactions, than the non-digital 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 additional productivity. So all of that is part of what we do to make sure to enhance our profitability. And what we are seeing today is the result of the combination of all of that. But there is not one 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.

That's great. Thanks very much, Guillaume and Laurent.

The next question is from Akash Gupta with JP Morgan. Please go ahead.

Yes, hi. Good morning, everybody, and thanks for your time. My first question is on these one-offs that you had last year on margins. So last year, we had first half positive pricing of 9% in non-cable, and you had 86 basis points and net one-offs. And this year, despite having 5.5% positive non-copper pricing, there is no one-off from this inflation. 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 number one.

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're 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 carry-over, not only due to carry-over, but mostly due to carry-over, 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 were important one-offs linked to that. But that's really the answer. There are no negative other one-offs in the picture, nothing hidden here. It's mostly the difference between year-over-year and sequential pricing.

Thank you, 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 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 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 levels are those ones. Manage inventory, negotiate with suppliers, negotiate with customers. And that's what we are doing.

Thank you.

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

Yeah, morning, Guillaume. Thank you very much for taking the question. 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, I just wanted to dig a little bit also into your comments around some of the faster growing markets. to high-profile electrification product lines like solar and EV charging, etc. Again, we've started to see evidence of consumers perhaps deferring these sorts of decisions given constraints on spending. Again, I wonder if you've seen any signs of that. Thank you.

On the momentum of 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. 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 US. But as a reminder, our exposure to new residential construction is overall at group level 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 renovation, which is a bigger exposure, here we are benefiting from the electrification trends. Overall, we see a very active market. Once again, this is not changing since Q1, so we continue to see that. And on the commercial construction side, as we mentioned, 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, etc., distribution centers, all of that is quite active. And a few or one 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 backlogs still to serve in this industrial automation category. So that's what I would say for the end markets. 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, the difficulty to hire remains here. And so the drive towards more automation in the US, in Europe, is something 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 opportunities that we see in the US 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 burnt 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 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, thank you. 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?

Yeah, Laurent, if you want to comment, maybe. Yeah, I mean, first, the recovery of the Chinese economy is a bit lower than expected in the second half. And also, we faced some bad debt issues 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 excluding the selectivity, the rest is doing quite fine. But in a global environment, that is a bit less positive than what we were expecting.

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

Yes, there is a couple of percent of decline in the product of the industrial automation, having a bit more inventory on the moment that the market is slowing down. So there is a bit more pricing discussion with our customer. But this should ease in the second half.

That's very helpful. Thank you very much.

The next question is from Phil Buller with Berenberg. Please go ahead.

Hi, good morning. Guillaume, the tone of the message sounds pretty upbeat. Obviously, it makes sense. Numbers are good and we're progressing very nicely towards the power-up plan. I guess the big surprise for many of us this year, perhaps even yourselves, is we haven't seen too much of a change in the demand environment, at least not on a broad-based level. So I just want to ensure we don't get complacent and I hear the message that at the group level things are looking good in aggregate and there are areas which are still very strong but are there any at least pockets where you are genuinely cautious on the near-term demand outlook that could move the needle and maybe coming at it from a different angle how much of your time today is spent preparing for a downturn or a grey skies scenario and how has that evolved over the past 12 to 18 months please

No, that's a very good question, Phil. You know, we are obsessed about the half-empty glass and we look at that probably as closely as you at all the individual segments to look at the signals and to be able to be very agile from this point of view. The reality today is, despite this obsession, I'm not able to paint a gloomy picture of the future, so I'm painting what I'm seeing today. But I can tell you that from an internal perspective, we are completely focused on that, and the allocation of my time and the time of the teams has changed quite a bit over the last 12 months, from being 100% focused on growth to something which is much more balanced and much more focused on efficiency and adaptation of our system. I mean, first of all, reading the signals to make sure that on each vertical, because, you know, as I said, it's not a uniform picture. It's a segment by segment. It's a sub-country by sub-country. So we absolutely need to be as close as possible to the market to read the signals and to not be caught by surprise by an evolution of the markets. And in the same time, to be as strict as possible in terms of cost control, efficiency, et cetera. And I think in the results of H1 and in the profitability of H1, you see a little bit the result of that, of this particular focus on being as efficient as possible and as negative as possible in our mindset, as protective of profitability as possible. So I can tell you that complacent we are not, for sure. And when it comes to the allocation of my time, I mean, my team could tell you that a lot of my time is spent discussing profitability, discussing efficiency to make sure, and discussing also reading the market and being as close as possible to the weak signals. But for the moment, things are going well, frankly, and so it's a good combination, being both focused on efficiency and enjoying a good market. That's great. Thanks very much.

The next question is from William Mackey with Kepler Chevreux. Please go ahead.

Good morning, Guillaume, Laurent. Thanks for the time. So I will direct my questions, one at strategy and one at guidance, on a clarification of the guidance. excuse me if I've missed it in many of your comments but could you provide an indication of your assumptions for the impact on margin development related to the reversal of the one-time gross margin impacts from pricing in your full year guidance and also the assumption around pricing in the full year guidance and then more on strategy and I wanted to ask about the opportunities for cross-selling. Post the acquisition of Wasco, you've highlighted the merger or the integration between plumbing and electrical disciplines around heat pumps and other areas. I'm just thinking more broadly across your distribution base in Europe. What opportunity is there to work on this growth vertical around heat pumps across your existing business above and beyond what you're going to target in the Netherlands. Thanks.

Okay, I will maybe let Laurent answer on the guidance. Laurent, about our profitability last year without the one-offs and our profitability this year without the one-offs, maybe? Yeah, the profitability last year without the one-offs, We said that we have around 70 basis points of one-off last year, so the full year is around 6.7-6.8% restated last year. And you have the guidance of this year, which is to be between 6.6 and 6.9. and our guidance was anticipating a bit higher level of OPEX than in 2022. That's why we guided on that level. Yeah, so last year without one-offs it was 6.7, I think. And here you have a profitability guidance of 6.66 to 6.9, so to answer very clearly. On strategy and on the opportunities to do cross-selling on HVAC and heat pumps, As I said, one of the reasons why we acquired Wasco in the Netherlands is that we see more and more electricians installing heat pumps and we see more and more plumbers getting into electricity because they install heat pumps. And so there are nice cross-selling opportunities, very clearly. We are seeing that also in other countries where we are quite exposed to the HVAC category. That would be the case in France, for example. Now, in other countries, you're right, it's more of an opportunity for us to get into the heat pumps business. It's not always that easy to do it organically, but we have plans to do that in almost each country where the heat pump opportunity is there, including, for example, France. including, for example, Germany. But that being said, you shouldn't expect, except for the Netherlands and France, you shouldn't expect a big defect, at least short-term, from those initiatives. The cross-selling takes a long time to do, except when you do it in a position. But yes, it's an additional opportunity for us. Thank you.

The next question is from Alistair Leslie with Societe Generale. Please go ahead.

Hi. Good morning, everyone. Thank you. Just think about the margin guidance. I was just wondering if you could update us on your, I suppose, four-year expectations for OPEX inflation, I think, relative to the 4% in H1, and perhaps with reference to any sort of color around wages and other CAPEX categories as well, if possible. And then, I guess, kind of in that as well, if there's any interesting sort of diverging trends between sort of Europe and North America around OPEX trends in H1, particularly around wage inflation. Thank you.

Jean-Paul, you want to answer this one? Yeah, so the price at this stage is, well, in our expectation, and the inflation on that is 5.3%. And we think that this level will be stable So today we have around 4% inflation in our OPEX in H1, and we also should stay about that level in H2 in terms of inflation. In terms of the rest, we have this operating leverage, so we have a couple of action plans to make sure that we can adjust to the level of activity on a country-by-country basis. So we expect on a full year basis an OPEX increase which will be maximum at the level of what we achieve in H1. Yeah, I think in terms of the wage inflation, it's been relatively homogeneous between Europe and North America, to be clear, and we expect it to continue. We don't see any big divergence between Europe and North America from this point of view. And if anything, in terms of OPEX growth, as Laurent just mentioned, we see a second half a little bit more favorable than the first half in terms of year-over-year growth of OPEX for several reasons, including the fact that the bulk of the inflation of wages is probably behind us.

Very clear. Thank you. Just a quick follow-up question, if I may, just on the short term. I was just wondering if you could comment on how Q3 has started in terms of growth, particularly, I suppose, as you're lapping those tougher cons in electrification.

No, yeah, it started well. I mean, it's very early in Q3, but it started well and really in line with no inflection compared to what I said and compared to the guidance and compared to what we saw in Q2. So it's a good start. Perfect, thank you.

The next question is from Eric Lamerie with TIC. Please go ahead.

Yes, thanks for taking my question. I've got two. First one, you just upgraded your 2023 guidance, but you didn't touch at all to your mid-term guidance, so you're already above the high end of the margin guidance range, and I was wondering when you could change or you could plan to change them to upgrade your mid-term guidance. And a second question, a more global question. I look at the difference in level of margin between APAC and the rest of the world. And do you see any reason why it should stay like that? And what you should do to raise the margin from APAC to the other regions' levels?

Thank you for the two questions, Eric. On the first one, the middle of the year is not the right moment to upgrade mid-time guidance. The guidance was from 22 to 25. You're right. You're right that in H1, we are above 7% without the one-offs. So we are above our mid-term level. That being said, I think for us internally, as for you externally, I think we would like to continue to show and to prove that we are able to stay there, which is what the guidance is saying basically. So before talking about a change of the mid-term guidance, I think we should talk about that again at the end of this year or at the beginning of next year. In terms of the impact profitability levels, the impact profitability levels are the mix of two things. It's the mix of China and India on one hand and Australia and New Zealand on the other hand. Australia and New Zealand, I'm quite confident that we have the action plans to bring them to a good level of profitability. There is no structural reason why it would be different. I think for China and India, we will continue to see a profitability level which is slightly below the average of the group, which is positive and which is bringing us a lot, strategically speaking. Because as you remember, our presence there is mostly on industrial automation, which is going to be a fast-growing market for both countries. I think mid-term, you should expect to continue to see them, those two countries, are slightly lower than the average of Rexel. But for Australia and New Zealand, we have the possibility and we have the plans to grade them to a very good level. Thank you. Thank you.

The next question is from Miguel Borrega with BNP Paribas Exxon. Please go ahead.

Hi, good morning, everyone. Thanks for taking my questions. I've got three. The first one, just in terms of the one-offs seen last year, how would you split them between regions, Europe versus North America? Just want to understand whether the margin decline in the first half of this year in North America was higher because there were more one-offs there last year.

Laurent, do you want to answer this one? Yes. So in H1, there was more pricing in North America than in Europe. slightly more more one-off in North America last year then then Europe because because of that and the second half was about the same as well okay thank you and then in terms of the price increases so far this year and maybe also touching last year

how would you split them between electrification versus non-electrification? I know you mentioned already some deflation in solar panels and cables, but then which product categories are seeing the biggest price increases?

Apart from the categories that I was talking about, which are commodity-driven and very limited in extent, for the rest of the categories, everything is relatively uniform. We have pricing quizzes. which are in the scope of 2-3%, something like that. So it's much more normal than last year. And the variations between the categories are not really meaningful. So when we talk about the other electrification categories, the BSM inverters, batteries, HVAC, industrial automation, that's a little bit, I mean, this is the order of magnitude we are talking about. No big variations there between the subcategories.

Great, and then a follow-up to that, what's the magnitude then for the deflation in solar panels and cables, if you don't mind me asking?

In solar panels, what we are seeing is, excuse me, what we start to see is some deflation around a bit more than 10%. Yeah, it's double digits, it's a low double digits, absolutely.

Okay, great. And then more of a big picture question. In terms of inventories, both for you and your competitors, would you say you are on an optimal level today? So no need to destock in the second half. And then also in terms of the industry, do you see some destocking going on within the distribution chain? So in other words, do you see pricing pressure also from competitors in order to push volumes?

No, I understand the question. I mean, first of all, as far as we are concerned, our inventory level, we are quite disciplined around the inventory level. And as we have commented before, it varies during times of the cycle, plus or minus two days out of 50 days, basically. So it doesn't vary much. And we are not in an overstocked situation, which we would need to decrease in the second half. So you're not going to see that. We are particularly cautious in inventory, especially at times when the overinflation is not there anymore. But that being said, you won't see any meaningful impact there. In terms of the overall chain, be them either at our customers or at our competitors, we see spot things here and there, but frankly I don't see a big trend in this direction. In terms of the competition and the price pressure it could create, You've seen the evolution of our profitability and of our growth margin in the first half. In the past, our experience in cycles has been that we are always quite able to maintain a very good level of growth margin, and that's what we experienced in the first half. So we are not seeing that. We are seeing in some categories in some regions here and there competitive pressure like we have always seen. It's always a situation. I mean, from time to time, a competitor is going to be quite aggressive on one category, et cetera, but nothing which would be out of the normal. That's very clear.

Thank you very much. Thank you.

As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, please press star and one on your telephone. Mr. Taxia, there are no more questions registered. At this time, I turn the conference back to you for the closing remarks.

No, thank you very much. I mean, a solid first half for Rexel, an upgraded guidance for the second half. And more importantly, we are very happy with the fact that we see our action plans delivering. So we have the ambition to deliver on the guidance and to continue to prove that we are able to be at a different level in terms of growth and profitability than what we were five years ago, which was the plan and which was what we announced at the capital market day. So we'll talk to you in October for the Q3 results and in February for the full results. Thank you.

Ladies and gentlemen, thank you for joining the conference. It's now over and you may disconnect your telephones.