Earnings Call: Q3 2019

Oct 17, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the Rexel Third Quarter Sales Publication. During the presentation, we will have a question and answer session. I I must advise you, the conference is being recorded today, Thursday, 17th October, 2019. And I'd now like to hand the call over to your speaker today, Laurent Delabar, Chief Financial Officer. Please go ahead. Thank you. Good morning, ladies and gentlemen, and welcome to our Q3 2019 sales call. I am with Ludovic Debayleur, our Head of Investor Relations. I will start by focusing on some key highlights, then take you through our geographical performance. I will conclude with the reaffirmation of our guidance And then hand the floor over to you for the Q and A session. Let's now start this presentation. So let me begin on Slide 3 with the key highlights of our Q3 sales. Rexel posted a good quarter in term of sales, which grew for the 12th consecutive period to reach more than EUR 3,400,000,000 supported by North America, European countries note the difference as well as China. This represents same day growth of 0.9% or 1.9% if we exclude the effect of asset disposals and turnaround measures. Indeed, the transformation measures we in Germany and Spain to refocus our business had an unfavorable 1% impact on our sales. While our growth was solid, it is lower than we saw in Q1 and Q2. This reflects 3 factors. 1st of all, lower industrial demand, especially in the U. S. And in Germany, Where we'll see shortly that we'll see shortly. Secondly, a more challenging base effect As Q3 of last year was our strongest quarter on a 2 year basis. And finally, an unfavorable corporate contribution of Minus 0.3 percent, reversing a positive plus 0.3 percent effect in the same quarter last year. So overall, I would say that this quarter demonstrates that our underlying business is resilient in an environment that became more challenging. On Slide 5, we take a closer look at our Q3 sales performance, which As you see on the graph on the top right hand side of the slide, represents our 12th consecutive quarter of same day growth. At €3,400,000,000 our sales are up 3.3% on a reported basis and up €0.9 on a same day basis. We benefit in the quarter from a positive currency effect of 1.7%, mainly thanks To the U. S. Dollar supposition versus euro, we also had a positive calendar effect of 1% while facing an unfavorable scope effect of 0.3% from our disposal of our Chinese business in Q4 of 2018. Concerning currencies and assuming spot rates remain unchanged, we expect now foreign exchange rate to have an impact of +1.7 on sales in full year basis. Concerning scope and taking into account previously announced disposals, The expected 2019 impact stands at minus 0.4%. Turning to Slide 6, You see that we posted sales growth in 2 of our 3 geographies. In North America, which account for 39% of our sales, Same day sales were up by 2.8%, mainly driven by Canada. In Asia Pac, accounting for 9% of our revenues, Sales were up 2.7%. In Europe, which represent 52% of our sales, same day sales were down 0.7%. This is due to last year reorganization in Germany and Spain and also reflect a slowdown in industry and continued uncertainty in the UK. Let's now look at our sales by geography, starting on Slide 7 with Europe. With sales of €1,700,000 Europe is down by 0.7% on a constant and same day basis in Q3. However, if you exclude the impact of branch closures in Germany and Spain, growth was 1%, demonstrating good momentum in key countries, Especially in our home market of France, which account for more than 1 third of our European sales, sales rose 3.3% With good momentum in the commercial and residential business, while growth in industry slowed. A particular highlight in France It's a strong growth of digital, which now represents over 17% of sales, up around 30% three-zero compared to the same period last year. In Germany, as mentioned previously, our sales reflect The slowdown in industry, and we are down 4.5%, restated from the closure of the 17 branches in end of Q3 of last year. However, we are encouraged by the solid fundamentals of our business following the reorganization of our C and I activity. The UK continues to be a difficult market and sales were down 10.6%, reflecting both the challenging conditions in the country As the Brexit deadline nears and our decision to be more selective to protect our margin. The drop also reflects the effect of the 28 branch closures, including 13 this year. We remain very vigilant in the UK and do not hold out further restructuring measures should the environment deteriorate further. Elsewhere in Europe, we saw very good trends, notably in the Benelux countries with strong 9.6% growth and also in Sweden and Switzerland. In North America, on Slide 8, we continue to see growth With contrasting trends between the U. S. And Canada. Overall, in the region, sales were up point 8 percent on a constant and same day basis, reaching €1,300,000,000 in the U. S, Representing 17.8 percent of our North American activities, same day sales were up 1.8%. The U. S. Sales growth in U. S. Has softened as a result of the slowdown in the industrial business, notably OEM, which was partly offset by maintenance. The sales performance also reflects a challenging comparable base of around 400 basis points over 2 years. Residential, on the other hand, grew in mid single digits in a broadly flat market, reflecting our investments in branches and in the sales force, which are clearly paying off. In Canada, we also saw continued momentum with growth of 6.3% driven by the commercial and industrial end markets. We have a solid backlog, so positive trends will continue in Q4. On Slide 9, we take a closer look at our performance in the U. S. By region. As you see on the slide, we had a contrasting performance with good momentum in the electrical distribution business in the Northwest, Southeast, Mountain Plains and California, while the industrial regions, notably the Midwest, recorded a slowdown. We round up our geographical overview on Slide 10 with Asia Pacific, Where sales were up 2.7% on a constant and same day basis to €306,000,000 Sales in Australia were up 1.5%, driven by industrial. Overall in the Pacific, Sales were up 1.2%. In Asia, sales were up 4.4% and up by a strong 7.6% in China. This was driven by a large project, while our underlying Chinese business was impacted by the trade war and was down in mid single digits. This large project will fade out in Q4. We saw particularly strong growth in India, up 19.9%, While sales in the Middle East dropped sharply due to the non repeat of a large contract in the Middle East that brought €6,000,000 in Q3 2018, And we anticipate a similar pattern in Q4 in Middle East. Before With our outlook, let me focus on Slide 12 on our cash generation, which is a priority for XL. As you know, we have set a full year 2019 ambition of free cash flow before interest and tax conversion of around 60%, which we confirm and which compares to 51.2% for 2018 on a pro form a basis. As a reminder, in calculating the conversion rate, it must be applied to EBITDA post IFRS 16 reduced by lease payments, which are disclosed on a separate line in the cash flow statement. Let me Also remind you that impact of IFRS 16 on free cash flow is very limited. On slide 13, we turn to our full year 2019 outlook. As mentioned in my introductory remarks, We are operating in a more challenging environment that has notably impacted our industrial business. However, we remain focused on reaching our 2019 financial targets, helped by selectivity measures and cost control. Consistent with our medium term ambition and assuming no material changes in the macroeconomic environment compared to Q3, We target for 2019 at comparable scope of consolidation and exchange rates 2% to 4% Same day sales growth, excluding an estimated unfavorable impact of 1% on 2019 from branch closure in Germany and Spain, A 5% to 7% increase in adjusted EBITDA and a further improvement of the net debt to EBITDA ratio. In conclusion, on slide 14, Rexel is entering the 2nd phase of its Perform and Transform strategy. After implementing our more customer, more SKU strategy, refocusing our business through asset disposal And restructuring our operations in key country, we are now accelerating the execution of our transformed phase. During the Rexel Expo that is being held in Paris, we will host a digital event tomorrow morning that will provide greater detail On how we are turning Rexel into a data driven company, leveraging the power of digital. We will notably share with you Through concrete examples, our web functionalities as well as the power of our analytical tools, which have already been deployed. We will look forward to seeing you there. Thank you very much for your attention, and I am now happy to take your questions. Thank I have three questions actually. I will go one at a time. The first one is really kind of around the guidance. The macro is slowing. We've seen U. S. ISM, European PMIs are down. I mean, arguably, you are still growing. But there are, I think, out there some concern regarding the guidance. So can especially on the So can especially on the EBITA side, can you explain to us how we bridge that? Is it selectivity? Is it the impact of countries with high margin in the mix. Is it digital? Where do you get the confidence that you can deliver in this slowing environment? That's my first question. Yes. Thank you, Lucie. As pointed out in my quote, we remain focused on reaching our financial targets. Obviously, the business has slowed down mainly in the industrial and of course as you have seen lead indicators have worsened. So yes, The environment has became indeed more challenging. In that context, we became also More agile. So we took some business activity measure to protect margin, especially in the U. S. With a large project where we had now floor margin, we start to adjust cost where needed. For example, again in the U. S, We have reduced the number of STE by around a bit less than 200 compared to the end of June and that was additional action not factored until that time. And on the other side, we have high margin countries such as France, Switzerland, Benelux that are developing Very well. So I would not say that the guidance is a given. But again, we are very focused and we have a lot Of actions that are ongoing. And as you know, we have some backlog on our project activity, especially in the U. S. That's quite good level and that will materialize into top line in Q4. But we are still in front of us 2 very, very large months, which are October And another moment for which at this stage, I mean, the 1st part of October Is in line with our expectation. Thank you very much for that. If I can just I have a follow on because we receive a lot of questions on the starting point on adjusted EBITA, Considering some of the restatement, FX variation, IFRS and so on, when we calculate your organic guidance On growth for adjusted EBITA, what is the starting point we should take considering what we know now on FX and scope for 2018, please? Yes. Thank you for your question. As you have seen in our H1 publication, We presented the 2018 adjusted EBITDA post IFRS 16, We stand at €640,000,000 that is a 2018 basis with 2018 average Interest rate in FX, if you factored into that our scope and currency Assuming spot rates, the additional impact is around €8,000,000 That is a starting basis for 2018. Final number is? It's EUR 648,000,000 something like that, yes, EUR 1,000,000. Okay. Thank you. And then just maybe kind of my last question around the selectivity initiatives. Can you maybe just help us to understand How much do you think it has impacted the top line, particularly in North America, if you have an estimate? Overall, it's not I would say probably 1% or 2%. I don't have any Detailed track of what the project we have not Done. But we know that on the large project side, We have been slightly more selective than we were before. And on the same time, I can see the impact where I can see some leverage on the commercial margin that has improved. So I know it has happened. The exact number on the top line Thank you. Your next question comes from the line of Zhai Chung. Please go ahead. Your line is open. Yes. Hi, Ji Chong from Citi. Thanks for taking my questions. I have a couple. First of all, just to clarify on the well, can we confirm on your latest Tali, on the number of branches for North America, please. I realize that you've stopped reporting them. Yes. We have opened 54 branches between 17 year to date June. And we have just opened one more in July. So again, we said that the full program to reopen a large number of branches. And 2 years ago, we had a program to reopen 100 branches. We said we will stop at Half of the program, maybe couple of 1, which are just tactical one, but we now want to focus more on our digital transformation. We believe at this moment of the cycle, it's not the right time to continue to add fixed cost. What is important is that these branches we have are ramping up, so they are contributing very nicely to the top line Of the U. S, especially at the moment where industry is going down. So the contribution on the Q3 top line of the U. S. Is 1.5%. Thank you. And overall, we have now 3 90 branches in the U. S. 90. Okay. Thank you. And then the second question is on so you to add on to the selectivity on To focus on profit and cash, was this one region in particular or a global effect? Just to confirm, please. No, it's global. I mean, on the protection of cash and the delivering of free cash flow, You know that the last 2 years, we had our strategy of more customer, more SKU. We have invested on inventory more than 200,000,000 You wrote on that. We accelerate transformation, especially in Europe with more cash out through our structuring. And we increased slightly the CapEx by around EUR 30,000,000 having a 1% top line Guidance on CapEx, all of that lead us to have a cash conversion between 50% and 55% free cash flow transformation of the EBITDA after lease into free cash flow. Now we want, as we pointed out in our We released early August to be back to at least 60% and that we are working on by making sure, I mean, the credit management It's very focused on keeping right DSOs and then it's tactical reduction of inventory, Especially where we can see some slowdown, so especially in the industrial region like Midwest. Got it. Thank you very much. Thank you. Thank you. Your next question comes from the line of Alfred Glaser. I was first wondering if you could give us some information on Pricing, excluding cable, how did pricing evolve in the group and in the main regions in Q3? And then 2nd, I wondered if you could give us some additional info on France, where you posted good numbers in Q3. How do you view demand and your revenues going into Q4 and maybe Q1 2020? Yes. Thank you, Alfred. So on the side of price, in Q3, We have Europe that is around slightly below 1% And North America, that is slightly above 1%. And the group is circa at 1%. It's a slight decrease compared to what we saw in Q2, especially in North America. Some Supplier have reduced their price. That then was factored onto the market. With respect to France, I mean, we see a Quite good resilience both in commercial and residential that are up in the mid single digit. So we think we are at the moment as we can see the same indicator as you on the dropout housing start. So clearly, renovation It's starting to offset part of the lower demand in newbuild. On commercial, Our team has done a good job and we gained a larger recurring project in the Paris area That will be rolled over Q4 and next year. So globally, the volume of activity is really Good in France. We still have this bottleneck on electrician manpower That is not boosting more our figures. And we still are also working strongly And grasping some project around Grand Paris. It's mostly infrastructure today, so we have not a large part of it, But it will gradually come and should help us probably second part of next year in a larger dimension. Okay. Thank you very much. Thank you. Thank you. Your next question comes from the line of Shrish Steve Madden, please go ahead. Your line is open. Hi. I have three questions. First question is what Structural cost measures can you do if growth continues to deteriorate? And second question is, would you expect a significant release of working In second half, if economy continues to slow, is there any upside to the FCF? Also, how would you get 5% to 7% EBITDA growth For FY 2019, what are the considerations for the bridges? That is how much is the underlying improvement versus easy comps? Okay. So well, as I've presented, Already in Q3, we have taken some measures. It's a review country by country as the dynamic may be different and Maybe different from one region to the other, especially in the U. S. So the first one, I mean, is Selectivity into all the flexible OpEx, we can by a management decision decide to reduce. Then in region where we have lower activity, as you know, in our distribution center, we have some temps. So we reduced The number of temporary workers. And then depending on the region also, we can adjust FTEs, so the number of employees. Depending on the country, it is quick or a bit longer, but that's what we have done already in Q3 in the U. S. So we adjust our flexibility on cost. And on the same time, especially in the U. S, we are very focused To be sure that where we are working, we are focusing on contract with the right level of margin to protect Our margin to be very cautious on what kind of product we are selling to be sure that afterwards it will go into the right Supplier rebate bucket. With respect to free cash flow On trade working capital, as you know, in the distribution business, when the slowdown is materializing, you've got an inflow In the working capital, as we are collecting at the same pace our receivable and being able To adjust our inventory, today it's a slowdown. It's not a massive drop, but yes, we are doing our homework To make sure that we will reach our free cash flow conversion guidance. Can you please repeat? And the 3rd question, sorry, I didn't get it very well, if you could repeat it? So what structural cost measures can you do if growth continues to deteriorate? Yes. So I pointed out, I mean, it's really as we said and as Patrick Saying very often, we will not close the branches. But again, we adjust the flexible cost. We Adjust the fixed cost and mostly the DST1, And we make sure that we can still boost the sales force to make sure we can Protect as much as we can the top line. And we believe that with all the good work and the penetration we are achieving In the digital world, we are now you know our digital sales in Europe are north of 20 5%. So it's 1 out of 4 sales that has done that. It creates a better stickiness With our customer base, so we believe that will also protect the slowdown of the business. And we see that we are really holding very well in the resin and commercial activity across the board. And it's Only I would say at this stage a first sign of slowdown and only focused on the industrial part. Thank you. Really helpful. Thank you. No further questions coming through on the line. Okay. Well, thank you very much for this session and for attending This presentation, I will be happy to meet most of you tomorrow at the Rexel Expo, Well, you will see concrete actions and seen what our Rexel has changed into a more digital and data driven work. So see you tomorrow, and have a great day. Thank you very much. Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect. Speakers, please stay on the line.