Earnings Call: Q3 2018

Oct 31, 2018

Ladies and gentlemen, thank you for standing by, and welcome to Rexel's Q3 9 Months 2018 Results Call. Before we begin, I must advise you that today's conference is being recorded and that all participants are currently in a listen only mode. The presentation today will be followed by a question and Answer Session. Now without any further delay, I'd like to hand the conference over to your first speaker today, Mr. Patrick Derain, CEO. Please go ahead. Good morning, ladies and gentlemen, and welcome to this presentation of Rexel's 3rd quarter and the 9 months 2018 performance. I am here in Paris with Laurent Delabain, our Group CFO. I will start with an overview of the key highlights and detail our performance by geography. Then Laurent will present our financials in the quarter, And I will then conclude and confirm our 2018 outlook. Obviously, after that, we will be very happy to take all your questions. I am very pleased to share with you the strong performance in Q3 9 months, Further proving that our strategic plan is delivering results and our transformation initiatives in several countries And notably in the U. S, we are making Rexel a stronger and more competitive company in its key markets. As you can see on Slide 3, XL sales and profitability improved in Q3. Our sales grew for the 8th Quarter in a row, reaching more than €3,300,000,000 This represents same day growth of 3.4%, The lower contribution from copper also and the impact of the transformation underway, this time in Germany and Spain. Concerning profitability, Our adjusted EBITDA grew more than 9%, with a margin increase of 22 bps on a comparable basis to 4.4%. This was achieved despite short term impact from transformation measures, which we have now fully implemented, as I say, in Germany and in Spain. Laying the foundation, all of this for improved profitability in coming quarters. Recurring net income was up by a strong 20% in the quarter. On Slide 4, we turn to our 9 months performance. Our sales of more than €9,800,000,000 were up 4.1% on a same day basis, rising in all three geographies in the period. Our gross margin was broadly stable at 24.6 percent 24.6%, which which is a solid performance in the current environment. Our adjusted EBITDA rose by 5.1% in the period, And margin at 4.4 percent was up 4 basis points on a comparable basis. It was driven by positive volumes and continued cost control, which more than offset the broad based inflationary environment and our investment in the future growth. Returing net income was up 15.3 percent at €240,000,000 thanks to a good operating results, Lower financial expenses through our 2017 active refinancing operations and lower taxes. As we improved our free cash flow before interest and tax by more than €37,000,000 to €56,600,000 in the 9 months' seat, demonstrating the strength of our model and confirming that we are returning to better cash conversion rates. Now let me bring you through our performance by geography. On Slide 6, you see that we posted solid same day sales growth up 3.4% in Q3 or 4.2% excluding Germany and Spain. All three of our geographies grew with accelerating growth in North America. In Europe, representing 53 percent of our sales revenue was up 0.8% on a high base effect with growth of 6 in Q3 last year. In North America, which accounts for 38% of our business, sales rose 7.3%. And in Asia Pac, which accounts for the remaining 9% of group sales, saw its revenue rise 3.3%. As you can see on the graph, if you look at our last 12 months sales on a running basis, we have added nearly €800,000,000 in additional organic sales, with all three of our geographies contributing. On Slide 7, if we focus on Europe. Sales in our biggest regions stood at €1,770,000,000 in the quarter, up 0.8% on a same day basis, up 2.3% excluding Germany and Spain under In our home market of France, which accounts for more than onethree of our European sales, Our revenue rose 0.8% on a high base effect. This growth was supported by good demand in residential and industrial markets. We are also seeing positive trends in several key countries, including Switzerland, Benelux, Sweden. Switzerland benefited from its strategy of focusing on project and grew by 7.4%. Benelux posted solid.6.8% growth with good momentum in Belgium, but also in the Netherlands. Sales in Scandinavia were up 3.5% with positive momentum in Sweden due to public spending in the North C and I business and also Norway. In Germany, with the closure of 17 branches in C and I in the north at the end of September, our network reorganization is now completed. It's over. We now have refocused our business on the more profitable industrial segment on a national base and in the south part of the country on the C and I, where we have a stronger footprint. As a result, sales in the country were down 10.9%, but up 0.4% excluding branch closures. In Spain, the 12 branch closures and the 4 mergers are completed and the logistic organization is expected to be finalized gradually over the coming months. Lastly, in the UK, sales dropped by 2.9%, mainly due to a lower business And mainly with 6 large C and I accounts and 30 branch closures. We remain focused on developing and strengthening our digital business and our sales Following the banner merger, we added 57 commercial reps since May as part of this evolution. On Page 8, let me be very pleased To share with you the effect of the digital strategy in Europe. 1 out of €4 is digitally transacted now. And we saw a strong boost of digital sales, which were up 14% on a same day basis in Q3. Digital penetration reached 23.5% in Q3, up 100 bps versus H1 of the same year and up by 2 70 bps compared with Q3 last year. The penetration rate improved by 240 bps in France and by almost 500 bps in Switzerland, the Netherlands and Sweden, which are already our most heavily For our countries at penetration rates above 40%, as mentioned in our FutureCall, digital is a clear driver and clear driver of profitability in Forman of the Future. Page 9. Page 9, North America. In North America, I'm very pleased to share with you that the sales grew by a strong 7.3% on a constant and same day basis. And when we look at greater detail of where we stand in our Transformation in the U. S. I'm pleased to report that our Q3 performance provides another demonstration that the approach in the U. S. Is producing results. Sales grew in high single digits for the 7th consecutive quarter at 8%, concerning regain ability to capture market growth and gain market share in specific regions. We are gaining market share. This is a major step for Rexel after years of market underperformance. Thanks to our regionalization strategy, we have gained 7,000 additional customers in the next 12 months, And we are seeing strong double digit growth in electrical distribution in 2 regions. In addition, our branch openings initiative has generated Additional sales of 1.8% in Q3. We have opened, as we speak, 44 new branches or counters since the launch of the plan in 2017, And we expect to be at around 50 openings by the end of the year compared to 60 initially announced As it seems, we are also focusing on regionalization construction. We confirm our expectation of a positive impact of 2 And quite importantly also to all of us, Canada sales were up 4.8 Driven both by mining and last week project, but also by very focused Sales organization by the 2 banners, which contributed for 2% I mean the Mining and Land Wind 2% of the 4.8% and the rest being the focus of our teams. Page 10 to complete the geography. Asia Pacific. In Asia Pacific, our sales were up 3.3% And this is what's count. 6.2% restated for the impact of the disposal in Q2 2018 of our Workrail Automation business In Australia, we posted a good underlying performance with growth up 3.5%, excluding the asset disposal, mainly by small and medium electrician customers. New Zealand also grew strongly with sales up 8.4%. In Asia, sales were up by a strong 8.1%. In China, despite a high base effect, sales were up 1.9%, reflecting Good underlying demand in Industrial Products and Solutions. We also saw a favorable dynamic in the Middle East and India, supported by a large project win in the Middle East and strong automation in India. This is the global picture in terms of regions. And now let me hand over to Laurent for the review of the financial performance. Thank you, Patrick, and good morning to all of you. On a reported basis, our sales were up 2.4% in the quarter As a result of the positive 3.4% same day sales growth and a positive calendar impact of 0.4%, partly offset by 2 unfavorable effects: scope for minus 0.7 percent, resulting from the divestments in Southeast Asia last year and currencies for minus 0.6 percent, mainly due to the depreciation of the Australian and Canadian dollars and the Swedish krona against euro, partly offset by the slight appreciation of the U. S. Dollar. Concerning currencies, we expect the foreign exchange effect to continue to ease over the year And our forecast, assuming spot rates remain unchanged, is an impact of minus 2.6% on sales in full year 2018. As shown on the chart on the bottom right hand side, we saw lower contribution from copper price at plus 0.3% in Q3. Based on current copper price, we expect now our copper contribution to go to minus 0.5% in Q4. On the bar chart above, you clearly see that the comparable base will become more challenging in Q4. On slide 13, you see our adjusted EBITDA bridge. Adjusted EBITDA was up 9.2% to €147,000,000 and margins stood at 4.4%. Our 22 basis points improvement in Q3 'eighteen on a comparable basis is explained by a 55 basis points volume and price contribution that more than offset the negative impact of investments for 27 basis points, while productivity gains largely offset cost inflation, notably from wages and freight. You should know that the low performance of Germany and Spain in the context of transformation had a negative impact of circa On Slide 14, We turn to our profitability by region. Overall, with adjusted EBITDA of €146,800,000 Our adjusted EBITDA margins stood at 4.4%, a 22 basis point increase coming from North America and Asia Pacific. In Europe, adjusted EBITDA margin was down 8 bps, impacted by Germany and Spain for minus 25 basis points. Restated from those 2 countries in transformation, our performance is very satisfactory, notably thanks to good cost control That is partly offset by a negative customer mix in Switzerland and a more competitive environment in Norway. North America adjusted EBITA margin grew 63 basis points to 4.7 percent, Thanks to volume growth and positive pricing contribution, especially in Canada, where we are proactively to prevent a margin impact from trade This action more than offset the cost inflation and the carryover effect of investments in people and branch opening. In Asia Pacific, adjusted EBITDA margin rose 63 basis points to 1.9%, thanks to volume and supplier concentration, offsetting the disposal of the Rockwell Automation business in Australia. Our corporate costs stood at €6,400,000 reflecting investments in digital and free cost control at HQ. On a full year basis, we We anticipate the normative level of spending at corporate debt level at around €35,000,000 In the 9 months, adjusted EBITDA stood at €235,000,000 up 5.1 percent. On slide 15, we look at the bottom line part of our P and L. Let's start with our reported EBITDA of €428,400,000 down 0.8 percent, including a one off negative corporate effect of €6,600,000 Other income and expense amount to a negative €53,500,000 including restructuring costs for €60,000,000 mostly related to reorganization in Germany and Spain. For the full year, we confirm that risk restructuring expense will be above the normative level at around €90,000,000 Our net financial expense improved to €75,400,000 reflecting a reduction in average Net interest rate on our gross debt to 2.81 percent as a result of the refinancing activities of last year. For 2018, we expect financial results to be around €100,000,000 assuming no major volatility in currency and interest rates. We also saw a drop in our income tax to €99,300,000 as we benefited from the positive impact of the U. S. Tax reform. Our effective tax rate stood at 35.8%, above our normalcy tax rate at 32%, owing to the restructuring expense in Germany and Spain, where before tax assets cannot be recognized. On a full year basis and taking into account this one off effect, tax rate should be close to 36%. Net income was €178,100,000 up 8.8 percent and our recurring net income was up 15.3 percent at €240,100,000 On Slide 16, we turn to our balance sheet, which we reinforced in the quarter with improved cash flow and working capital that results in lower net debt. Indeed, as you can see on the chart, our working capital improved by a little more than €50,000,000 Our free cash flow before interest and tax improved to an inflow of €56,600,000 from €19,300,000 in 9 months 2017. We confirm our objective to return in 2018 to a higher level of cash conversion versus 2017, demonstrating the strength of our model. Net capital expenditure was down to €58,800,000 from €77,600,000 in the same period last year. This includes the proceeds of the disposal of our Rockwell Automation business in Australia and our gross CapEx stood at €76,800,000 We now anticipate that our full year 2018 gross CapEx to be close to €110,000,000 versus the €130,000,000 previously. It corresponds to a net CapEx of close to €90,000,000 including the proceeds received from the disposal of our Rockwell business in Australia. Our net debt was reduced by €94,000,000 or 4 percent to €2,260,000,000 On slide 17, let's take a closer look at the breakdown maturities of our debt. The chart shows that we have no short term maturities on our bonds with no significant repayment before June 2023 and an average maturity close to 3.8 years. The active 2017 refinancing strategy is reflected in the average effective interest rate on gross debt, down 37 basis points year on year 2.81 percent. We also maintained strong financial flexibility with liquidity of around €1,000,000,000 at the end of September, including our onboard senior credit facility. Let me now hand over to Patrick. Thank you, Laurent. I will conclude this presentation with our outlook. We are clearly seeing the benefits of our strategic actions implemented In the U. S. In terms of logistic organization and branch effort expansion. Taking into consideration the performance of the 1st 9 months and expectations for the last quarter. We confirm our 2018 full year financial targets. As a reminder, we said in February that Trexel targeted at a comparable scope and exchange rate. 1, Sales up in the low single digits on a constant and same day basis 2, the mid to high single digit increase in adjusted EBITDA 3, for further improvement in our net debt to EBITDA ratio. Looking ahead, we remain totally focused on our key priorities: Investment in the U. S, IT and Digitalization every day, turnaround in Germany and execution of the divestment program. Thank you very much for the attention. And now we will be very happy to take all your questions. Thank you very much. Your first question this morning comes from the line of Andre Kukhnin from Credit Suisse. Please ask your question. Good morning. Yes, thanks so much for taking my questions. I've got a couple. Firstly, I have a question on stock levels in the System globally, how do you view your own inventory levels versus the end market's performance? And how if you could offer us an assessment of the broader industry. And in particular, in China, I guess that's where we've seen Most of the concerns in the industrial automation space of a volume slowdown and maybe inventories being excessive, but if you could give us a global picture that would be really great. 1st of all, I am like you, I'm reading a lot of things. And if I look at the numbers and our activity level right now. Globally, first, before China, The inventory level is not showing any change in the pattern in the main territories, countries And activity. And the mix of countries we are in are Just on the same trend as we have been experiencing in the beginning of the year. If this is The shorter view I can give you as an input. Regarding China, the one thing we know and we are focusing heavily On the automation, the wave and the need and the desire To grow in automation faster than ever before is there. And Whether it is for efficiency reasons, for wages inflation reason or for capacity or whatever Or to be more competitive, the wave is just enormous. The automation, globally speaking, whether it's in the U. S, in Europe and A lot in Germany or in China, the automation for the 4.0 industry trend is only at the beginning, obviously. We see that clearly. Just on China, you may see the growth at We have a very challenging base effect. We had a large project last year and last year and the same quarter we have something like Growth to 10% growth. So our underlying industrial business as explained by Patrick, Kilogram is very good in China. Got it. Thank you. And just on China specifically, ex that project, if we can even think about further sort of like for Like days effect, sales. Did you see any change in trend in industrial or broader in China as you went through the months of the quarter? No, not as we speak. Now we are not in the big project. Let's say distribution is always attached To medium sized company and the number of companies who are having new demand and coming to the wave of automation It's in its very early stages. Big projects, we are not in. And therefore, probably we don't see if there is any chance there. But for the medium to low end size company, we don't see any change. That's very clear. Thank you. And just if I may follow-up, my line broke up. When you talked about Germany and Spain transformational impact on margin, was it 16 or 60, six-zero impact? 16, 116 at group level. And if you take a look at the European perimeter, it's close to 30 basis points in Q3. Thank you. And you're wearing that inside adjusted EBITA, but offsetting it by own measures. Is that right? Yes. Great. Thank you very much to both of you. Thank you. The next question The question comes from the line of Lucie Carrier from Morgan Stanley. Your line is now open. Hi, good morning, gentlemen. Thanks I'll have 3 in total. The first one, I would like to come back to the momentum in North America because The comp base in the Q3 was more demanding than the second one and we are seeing a sequential acceleration. I'm just curious To understand what you are doing differently than your peers now in North America because you highlighted you have gained share. You're the only distributor in North America from what we can see on the industrial side actually having raising gross margin. So what are you doing differently? And how advanced do you think you are in what I would call the rehabilitation process in North America, this is my first question. Yes, Lucie, you're right. We do top line and margin, And that's a concern from day 1. And we are Selective on certain pockets because we could grow much faster by taking a lot of volume at low end. There is enough good volume to be taken. Therefore, we pursue the strategy of volume And Martin, there is something else also. We have improved our service level, and we are defending less Through low prices and we can now go into a positive pricing evolution, thanks to all the efforts which are now bringing fruits So that we are on a more constructive mode in the sales pattern than defensive mode. And this has an On the pricing structure. And thirdly, we grow with our partners. We have efficiency Full volume in our fixed cost base, whether it's logistic or absorption of certain fixed cost, Which increased the margin too. And the commercial margin and back margin all of it contribute also to the results. Yes, we but It's a clear choice. It's a conscious management, and we will continue to do so. I may add the branch opening, it's roughly 2% and what so it's helping the top line. And also we commented last And now everything is not to its full potential, But we are recovering compared to last year and we are back to positive growth with that supplier On the sales from that supplier. So that is helping us also. Taken over by EDB start to see the first effect, Not yet there, but compared to the decline of last year, we see the positive effect. Yes, I had another question. Here I am again. So my second question was more looking forward a little bit. You still have about 30 basis points impact on margin from investment in growth. You said, of course, that the German and then Spain Structuring would also be benefiting to the margin going forward. So and you have your pricing initiatives. So When how much do you think, first of all, that Germany and Spain can push up Your margin when we look at next year when everything is implemented. And when we think about pricing, cost inflation And investment for growth, do you expect to be able to continue that cost inflation we are seeing in certain countries specifically around labor? On Germany, we were able to do all the cutting, Closing the restructuring in a short period of time once we got the approval of all the authorities internal and external. So that I can tell you as we speak, it's done. What I'm saying is done is people are gone, branch are closed. And in doing so, we have eliminated the lowest margin business we were in, which was the C and I business in the north of Germany, which was also the most costly one for us to serve due to our lack of density, meaning we didn't have the right In order to be efficient in the C and I business in the north of Germany. In doing so, we have also closed part Let's say, local DCs, warehousing system, so that now we serve the global country For industrial products and only the south where we have a much better density for the non industrial. Therefore, what we see in terms of Improvements is a clear path of elimination of either too high cost or too low margin business In Germany. Therefore, yes, we expect to see with every month passing by the effect of When we have cut, but also the fact that we focused on industry, we expect to see growth And further improvement on this side. In Spain, it's a little bit different because Two steps in the restructuring. You have the closure of the branches with, let's say, loss making type of business. It's done or being done, but it's done. And we have to come the gradual evolution of the logistic network to support The remaining branches, which we'll call for gradual steps throughout the coming, let's say, next 2 quarters. But both will be will generate the equivalent of 30 bps Of improvement we wait for. And for next year, this restriction plan, from what we see today, Will give us an upside of circa 10 bps at group level. Sorry, Laurent, just to make sure I understood. So you're saying 30 basis points From German and Spain initiatives. And then the last 10 basis points, what was that about? No, no. 30s impact in Q3 in Europe, Edwin, because of Germany and Spain. The branch has been closing at the end of September, so we start to see the positive impact starting Q4. And when we look at next year, we consider that next year, the reorganization we have implemented both in Germany and Spain Should help us to circa 10 basis points on the EBITDA of the group. For the group? And How do you think about the ongoing impact from the investment, which are still about 30% a 30 basis point drag On the margin currently? Are we accelerating? Are we going to stay the same? Are we going to be continuing to invest but maybe at a slightly slower pace? It should say everything is not finalized. We are still in the middle of the budget session, but probably we will be Not higher than that, but in that ballpark. Okay. Thank you. We have programmed 2 different branches in the U. S. As we have commented. And there are a couple of other initiatives, especially in the digital that will continue over next year. Okay, understood. And then just my last question quickly on France. It was up 1% in the 3rd quarter, I think, on a comp of plus 9%. Just how do you see this market? Because when we hear Some of the other companies in the sector talking about French construction in France generally, they seem to point to deceleration. How do you see it from your standpoint because you're still on a high comp in positive territory? Well, all our customers today have good activity level. Quotations for the coming bonuses are good and solid. I read the numbers like you. I read the communicate of the others like you. The mix of our activity between, let's say, The vertical, the new housing starts, the original, the regionals, The new and the maintenance make us probably less sensitive than others to certain numbers. But in any case, we are doing fine right now. And for the coming months, I expect to stay at the same level of activity. It is true also that the model we have make us win some market share month after month. And the more customer, more SKU strategy continues to be This country, we apply it. And now the next wave is the growth in digitalization, which has Still a room for maneuver. We have a very good start this year, and we expect further growth in the coming year. Well, I'm used to you know where I come from. And I'm used to have a market here with a much more difficult environment. And therefore, I think we know roughly where, how and when to act. And so far, we have good returns. Thank you. Thank you. The next question comes from the line of Andreas Willi from JPMorgan. Your line is open. Yes, good morning. Thanks for your time. My first question is on your guidance for the full year, which you have left unchanged, Given we're already past 9 months now and where you stand after 9 months, do you see yourself Closer to the high end or closer to the low end in terms of your adjusted EBITDA growth target of mid- to high single digit for the year, given that this implies still quite of a big range for the implied Q4. Andreas, you know that personally, I would never answer this. Therefore, I give it to Laurent. No, but We're keeping a good momentum in Q4 despite, as you know, the more difficult bit effect. We see good trend in France and And the U. S, we expect the soft benefit from the savings from the country in transformation. But I mean, more or less, what we expect in Q4 is the same EBITDA growth as to what we had in the last two quarters. So you can do then your math on that basis. Thank you. And the second question on the branch restructuring in Germany and Spain. You helped us with the EBIT In Germany and Spain, you helped us with the EBIT impact. Maybe you can help us a bit with the top line impact Given that some of these branch closures happened during Q3, particularly in Germany, kind of what's the annualized effect in that sense that we should take into account now for the next three quarters until we kind of lap the comparison again? Yes. In Q3, the impact of Germany and Spain was minus 0.8% at group level And minus 1.5 at European level. And going forward, it will be globally EUR 260,000,000 less next year Spread over the 1st 3 quarters. Sorry, could you just repeat that? I didn't hear. You said it's 160 basis points? No, no, no. Yes, I don't have the percentage. But with the branch closing, we calculate precisely the impact On the top line in Q3, which is minus 0.8% in Q3 on our top line. And for next year, all the branch closing will have a negative impact of €160,000,000 for next year, €160,000,000 of sales decline. Yes. And that's basically for 8 months or so, given you Closed a lot of these branches in the second half? Yes, 9 months. Yes, to be precise. 9 months. Yes. Okay. Thank you very much. Thank you. The next question comes from the line of Sebastian Groote from Redburn. Your line is now open. Hi, good morning. I have two questions. First of all, I mean, just coming back on Germany, Spain, The impact on top line is about €25,000,000 in the Q3. You were guiding for an impact of 16 bps on the EBITDA margin, so that's about €5,000,000 So it's a 20% margin on those businesses, Which seems fair for gross margin, but do you account for any OpEx savings in that number? Maybe could we answer this one first? So the 16 basis points, just looking at the group With or without these two countries. So it's taking all the measure we Well, all what is factored in the Q3 on this. And yes, it's around €3,000,000 on the quarter. So €3,000,000 net on the quarter? Okay. And second question would be about next year. You are in the budget process. But if I look at next Europe is likely to have a tougher year than the last 2. Besides the expected benefits of the During our Germany and Spain, are there any plans you are ready to trigger to reduce OpEx in case demand weakens As the bidding permit suggests. There is always In our business, we look carefully at the activity level and the margins. What I will look first is that the inflation. What I will look immediately after is that the OpEx, The cost because the margin is dependent. It's unclear yet the level of inflation we will get I mean, I'm talking Europe here, and the U. S. Is a different exercise. But Given everything going up, whether it's wages and transportation and raw materials for Q1 That kind of stuff. We wait to know the kind of inflation we'll be facing that The one that we will pass in the pricing and the one we will face in our cost base. And this is what budgets are about. And at the end of it, we will adjust, should it be, We will adjust the cost base accordingly to defend the margin and the EBITDA generation. Thank you. And just the last one on the trade tariff. Have you seen any planned price Increase from suppliers, we've seen a large price increase in 'nineteen, but have you seen other suppliers Pushing for price increase following the tariffs. And do you have any impact from trade tariffs on your private label Business in the U. S. That could pressure the gross margin going forward? In the U. S, Private table or not private table, we will face directly or indirectly. Directly if it's private in force or indirectly if it's So many things are being made by U. S. Suppliers with partial or total, let's China made products that there will be a tariff impact, Which is just coming up gradually now and between now and the end of the year. And we expect Visible tariff effect on inflation in the coming months is definitely 1. Our policy is clear. It has to be passed 100%. There is no room for margin squeeze In such, let's say, major change, should tariff Materialize in what we have been reading. The day it comes, it will be automatically passed further down. That's great. Thank you. Thank you. The next question comes from the line of Peter Testa from 1 Investments. Yes. Hi. Thank you. Maybe just following on from that point. When you say 100% pass through, you think that your suppliers will pass it through to you purely just a tariff as a line item, so you pass it straight Drew, will it be passed through with the gross margin? And if you could give some view on how you think the sequencing of that will happen between your suppliers and your private label needs? Traditionally, when suppliers announce the price increase to us, We got a couple of weeks announcement that's very short term. And We know a biodata of XYZ this is coming to us and we got we have to make a revision The entire pricing construction to our installers or end users. And so that we don't Thanks, Hans. The margin squeeze between the customer pricing and the purchasing price. This time, the tariff is probably it's no longer, let's say, a standard inflation of 1% or 1.5 We may face major percentage and bigger percentages to face A different moment in time. This is what I call 100% passed further down to the customer, Meaning, if we get 10% on something just to pick up a number, the entire 10% will be transferred To the end user or the installer and so on. The difficulty in a market like this, this is the time by which The market will recognize this in making contracts, long term contract quotations with a certain time. And Because there is a shortage of installation labor right now in the U. S, people tend to make or to take jobs That will probably materialize in 4, 5, 6 months after. And We need to be sure and we already gave all instructions to everyone not to commit that kind of horizon, Not to commit to firm pricing because we know it's not going to be the case. The ability to get the right Pricing strategy and pricing management in such a changing environment require lots of managerial attention and In different ways of doing the business and everything has been already announced and passed and is our daily attention. So since the tariff numbers are more or less known, assuming that all goes ahead And given you know your private label, for example, supply chain, have you been preparing already your customers on that price increase? Have you been quoting for longer projects based On those new prices? Every day. And are the customers reacting in any way? Well, I will be frank with you. If somebody wants while they try to we have to give them dividends first of all And they don't have new year round order together. The second thing is they find somebody to who can skip it. I prefer to get the volume from this one, but this one will not last long. It's too big to Be able to be swallowed by anyone. And the good thing right now in the U. S, the demand is so high that I know you may lose 1 month, 2 months, but you recover immediately after because this is same punishment for everybody. And at the same time, Sati? Yes, please. Okay. But so therefore with your private label, are you looking Adjusting supply chains at all based upon tariffs, I mean, have you well, you probably looked at it. Have you been adjusting supply chains at all based upon The tariff flow to see whether you can improve your private label position visavis what it would be without changing? It's not it's limited what can be done on such a short term. There is prescription. They are technical specs. Very short term, you cannot adjust a lot. In the medium run, it could be Depending how much the tariff would continue having an impact on what. Commodities, you can. Non commodity item, impossible. 1st react in protecting the margin, then react in optimization, second step. Right. And then just a question on the copper price, which has been coming down, you had less impact in Q3. Do you have any sense on what the how we should account for the Copper price impact in Q4? No. Well, in full fairness, no, I don't. Maybe you don't Yes, at group level, based on current Copper price, we said that the impact on Q4 on the top line will be minus 0.5. Fine. Thank you. And last question is just on the gross margin North America and the improvement of the situation with ABB owning the GE business. Can you give some sense as to how you think that is helping the gross margin already or will help the gross margin going forward as they We'll have more modern and relevant products. No, maybe we have to split the things. Our improvement in gross margin is generically across All the sources because we work on our pricing and we grew and we work on getting better conditions, globally speaking. It happened comparative to last year. Last year, we were suffering heavily from the GEIS situation. We couldn't deliver. And obviously, when you don't get the products, there are 2 things happening. To keep the customer, you lower your prices or you Try to get it's almost low service, put prices down and create margin issues. With the ABB and it's not yet perfect, but the ABB effort significant efforts made To give, I mean, normal delivery pattern out of the Three factories, the 1 in Monterey, Mexico and the 2 out of the American plants. We are really in the We start to have visible output, better deliveries, which allow us to regain position at customer having a ex GIS, now ABB GIS product base. In doing so, we are less defending by lower pricing and we could sell, let's say, at standard normal conditions. This is what we meant by the restoration of GIS ABB doing the effort for GIS, which help us on that particular front. Therefore, I split the 2. You have the Gross margin and the pricing effort and you have what was taking us down, which now stand to be less sensitive to our results in the U. S. That's great. Thank you for the explanations. Thank you. The next question comes from the line of Rory McKenzie from UBS. Your line is now open. Morning, just two left from me, please. Firstly, you want to ask about, I guess, Following on the pricing pressure in Europe in cables and if there's any signs of that gross margin decline coming to an And then secondly, I was just wondering if you can make any comment at all about the current investigation in France, Even just an idea of the timing and when we can expect to hear more. Thank you. Laurent, you take the price in Cable? The Cable business impact in Europe is flat. In fact, we have a Capriculative effect in Germany and Austria, which affected Sweden and France. So yes, overall, no headwind at this stage. On the investigation, There is nothing new. I can only recall you that early September, rates were performed in the offices Of Rexel and the other of the industry, this investigation Conducted with the assistance of the French Competition Authority, this was the mechanism of price formation on the market distribution of electrical That's one thing. At this point, Rexel is not party to the proceedings and therefore is not aware of the practices that it might be accused of To be transparent. While information has been released in the press, it does not allow us to determine the offenses that Rexha could be accused of, And it's absolutely not possible to date to evaluate the degree of probability of Formal indictments being made against Rexel nor possible adverse judgment And by far not to evaluate the financial risk, which Rexel would potentially be exposed to. There is no significant change relating to the litigation since that moment. And Such as disclosed in the financial statements, we cannot there is no material impact on Lexel's financial position or profitability as we stand. That may last long. Understood. Thank you very much for the clarification. Thank you. The next question comes from the line of Martin Wilkie from Citi. Your line is now open. Yes. Thank you. It's Martin from Citi. Just a question on portfolio. If you could just remind us how much of the So exits or disposals has still to be announced. You've obviously downsized branches and so forth In Germany, you've done some other exits. From memory, I think you probably have €100,000,000 or so of sales still to be exited. But if you could just remind where we are on that? And also just in terms of the process, you've obviously had some decisions that were more branch closures as opposed to making sales. And how we should think about the remaining revenue that you will be exiting? Is there any is it all essentially zero profit revenue that you'll be giving out over the next sort of six or 12 months? And just how we should think about that in terms of group profits? Thank you. So before those process is going on, we still have yet some a bit more than €120,000,000 To exit, it is various businesses in various activity. It is quite a low margin contribution to the group at this stage. In some parts, it could imply branch coding, but all that It's in process and we expect to finish that, as we said in July, by the end of By the end of the 1st semester of 2019. And once you've got to that stage, Will you then be happy with the portfolio and we should be back to sort of business as usual, you could do small bolt on deals or Was that simply stage 1 and there'll be more to do beyond that? I mean, how should we think about the Rexel portfolio once you get to that mid 2019 level having cut your revenue by €800,000,000 or €1,000,000 by that point? Well, so far the portfolio The criteria for portfolio management was to get rid or sell or close weather activities or countries Where we didn't show conditions of success on, let's say, rather not even a year or 2 years or even longer terms. It was like correcting some elements of the portfolio, Which were really being negative and a burden on all of us, whether from cash flow, eating cash or from repo. Looking ahead of us, we will probably enter into more active what I call active portfolio management, meaning Acquisition on one hand and eventually, if something will be 1 year or 2 years less in the center of our activity, it Could be also divested, but it would be buy and sell. So far, it has been more correcting. And now we will go into an active Buy and sell, developing, acquiring, adding capabilities. It could be driven by skills. It could be driven by digital. It could be driven by market share. That is on the acquisition side. And on the selling side, it could be driven by a very good Very good return on an asset for which we see medium term, a more delicate future. We will go into a more re profiling of the activities to what will be long lasting and profitability increase on the medium term for our business. Okay. Thank you. Thank you. The next question comes from the line of Alfred Glaser from ODDO. Your line is now open. Yes, good morning. I first wanted to quickly get back on pricing. Maybe I missed it. I had a problem with my line. Could you just give us the pricing evolution excluding cable copper prices and for the group and by region? And Then I had a second question on digital sales. Yes. So pricing excluding cable It's a bit higher than in H1. In H1 2018, the price increase, H2L cable was 0.9 At group level, with loan 1 in North America and 0.1 in Europe. And in Q3, The group will go from 0.9% to 1.3%, with Europe going from 0.9% to 1.5% And North America from 1% to 1.6%. So we are starting to see a bit more inflation on our top line, Which is something that our industry likes a lot. Okay. Thank you. And on digital sales, you're making quick progress actually in revenues. Could you give us some indications where you expect to be at the end of this year in terms of digital revenues versus total revenues? And where you might be by the end of next year is your target of Doing 20%, 25% of your revenues in the short to medium term, is that still your target right now? Yes. We don't have so far. I will not guide on precise figures for next year. When we see All what it can bring to Europe, which is tracking the more than 20% Thanks. And what it brings in terms of contribution to the bottom line, we really want to continue to invest And we have not changed to our guidance to be as soon as possible around 25% at group level And the midterm of 35% to 40%. On that front, when I see certain B2B People in the business coming from, let's say, similar origin and we do more brick and mortar of the origin, I'm very pleased compared to them with the adoption efforts. Yes, there is in our old facts, there were some costs For allocating people to make the adoption happen. Then when I see the adoption rate happening right now and the transformation And the self generating acceleration that we start to see on that in the main countries and a few more to come, I start to be very confident in what we are doing so that we will participate in what I call the marine multichannel, Meaning the conventional and the digital field, and we see that happening more and more. That's probably I cannot give you numbers for next year, but the numbers you mentioned definitely we maintain as target. We'll be around 15% digital sales at the end of this year and we will crack. So it means we will crack the €2,000,000,000 digital sales At the end of this year, for sure. Yes, for sure already. Okay. Thank you. Thank you. The next question comes from the line of Andre Kukhnin from Credit Suisse. Your line is open. Thanks very much for taking my follow ups. Firstly, on the tariffs in the U. S, are you considering Stocking up ahead of that implementation with the pre tariff price products? No, it's so I would tell you one thing, it's coming too fast. And the pipeline is not able to I mean, For that, I mean, the machine in the U. S. Is absolutely at the max of what it can be done can be produced. And the demand is strong, but nobody can produce more I mean, that's a little bit the tricky part of the tariff that it might not benefit so widely To the U. S. Company in terms of capacity to load because they're already full. And even if we would like to, let's say, Reserve volumes and get things, nobody has an intention to do so. And tariffs will create inflation And the imports that they may create inflation on the internally produced and to be seen in the coming months, it would be interesting. Got it. Thank you. And could you comment a bit more on M and A pipeline in the U. S? So we thought you were getting more active on that front from kind of midyear or from earlier this year. Has there been Progress on that? Are you making more offers or speaking to more companies? Let's say, We are screening the market for certain targets in the regions where we are. Obviously, there are a few on the market right now, which We look like everybody else, but we are not making progress in this direction because they might not match Our criteria of already digitalized for part of it, having the franchise of Suppliers with whom we work in the other regions and kind of and we're not divert From the original strategy of region identification. There are Two things on the M and A front. 1, we look carefully at and we are a candidate for this is where we can be in the regions where we are It's the Rockwell Automation APRs. This is open, well known that where there is a good APR to be taken that Could complement what we have in Industry Automation. We will and we are candidates each time, okay? That's the only clear Pipeline, I could really openly say, if there is something that can come at any time, I will be on it. The rest, We are looking. We are screening. Sometime, we are getting a little bit closer. There is nothing very close In the coming months. You never know in this world, it could accelerate, But I don't want to create here an expectation on this. It's more that we were not active at all during the period of time, and we are Heavily interested in looking what could make sense. That's crystal clear. Thank you. And just final one, if I may ask, if I could be pain. Could you repeat that answer you gave on the pricing? We didn't get all the numbers down, unfortunately, because The line is a bit blurred. Yes. Yes. I will give it to you. So I am talking excluding cable. So for the group in H1, The price increase was 0.9 percent, of which 0.9 percent in Europe and 1% in North America. And in Q3, the group is at 1 plus 1.3 with plus 1.5 in Europe. North America is 1.6 and the difference is the decrease in price in Asia Pac. Great. Thank you again to both of you. That's very helpful. Thank you. We have no further questions at this time. Please continue. Well, if there is no more questions, first of all, I would like to thank all of you and each of you for The time you spent for the question you asked and hopefully, we Well, we will see you now, February 13. If I'm turning to my colleague to be sure that I'm right with the date, yes, please. Booked February 13 full year results next year. And in the meantime, I wish you a good Balance of the year, and thank you very much for your time and attention. Thank you very much. That does conclude our conference for today. Thank you all for your participation. You may now disconnect.