Ladies and gentlemen, thank you for standing by, and welcome to Rexel's Q3 and nine-month 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. To ask a question via the audio, you will need to press star and then one on your telephone keypad. If you do experience any technical difficulties during today's conference, please press star and then zero on your telephone keypad. Without any further delay, I'd like to hand the conference over to your first speaker today, Mr. Patrick Berard, CEO. Please go ahead.
Good morning, ladies and gentlemen, and welcome to this presentation of Rexel's third quarter and the nine-month 2018 performance. I am here in Paris with Laurent Delabarre, our Group CFO. I will start with an overview of the key highlights and detail our performance by geography. 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 and nine months, further proving that our strategic plan is delivering results and our transformation initiatives in several countries. Notably in the U.S., we are making Rexel a stronger and more competitive company in each key market. As you can see on slide three, Rexel sales and profitability improved in Q3.
Our sales grew for the eighth quarter in a row, reaching more than EUR 3.3 billion. This represents same-day growth of 3.4%, a satisfactory performance given the more challenging days effect, call it like this. The lower contribution from copper also, and the impact of the transformation on the way, this time in Germany and Spain. Concerning profitability, our adjusted EBITDA grew more than 9%, with a margin increase of 22 basis points on a controlled basis to 4.4%. This was achieved despite short-term impact from transformation measures, which 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 four, we turn to our nine-month performance.
Our sales of more than EUR 9.8 billion were up 4.1% on the same-day basis, rising in all three geographies in the period. Our gross margin was broadly stable at 24.6%, which is a solid performance in the current environment. Our adjusted EBITDA rose by 5.1% in the period, and margin at 4.4% was up four basis points on a controlled basis. It was driven by positive volumes and continued cost control, which more than offset a broad-based inflationary environment and our investment into future growth. Recurring net income was up 15.3% at EUR 214 million, thanks to good operating results, lower financial expenses throughout our 2017 active refinancing operations, and lower taxes.
We improved our free cash flow before interest and tax by more than EUR 37 million to EUR 56.6 million in the nine months, demonstrating the strength of our model and confirming that we are returning to better cash conversion rates. Let me bring you through our performance by geography. On slide six, you see that we posted solid same day sales growth at 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% of our sales, revenue was up 0.8% on a high base effect, with growth of 6.5% in Q3 last year. In North America, which accounts for 38% of our business, sales rose 7.3%. In Asia Pac, which accounts for the remaining 9% of group sales, saw its revenue rise 3.3%.
You can see on the graph, if you look at our last 12 months sales on a running basis, we have added nearly EUR 800 million in additional organic sales with all three of our geographies contributing. On slide seven, if we focus on Europe. Sales in our biggest region stood at EUR 1.77 billion in the quarter, up 0.8% on the same day basis, up 2.3% excluding Germany and Spain under re-engineering. In our home market of France, which accounts for more than one third of our European sales, our revenue was 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 and the large C&I business, and also Norway. In Germany, with the closure of 17 branches in C&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&I, where we have a stronger footprint. As a result, sales in the country were down 10.9%, but up 24% excluding branch closures. In Spain, the 12 branch closures and the four mergers are completed, and the logistic organization is expected to be finalized gradually over coming months.
Lastly, in the U.K., sales dropped by 2.9%, mainly due to lower business and mainly with six large C&I accounts and 30 branch closures. We remain focused on developing and strengthening our digital business and our sales force following the banner merger. We added 57 commercial reps since May as part of this evolution. On page eight, let me be very pleased to share with you the effect of the digital strategy in Europe. One out of four EUR is digitally transacted now. 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 basis points versus each one of the same year, and up by 270 basis points compared with Q3 last year.
The penetration rate improved by 240 basis points in France and by almost 500 basis points in Switzerland, the Netherlands, and Sweden, which are already our most heavily digitized countries. Four other countries have penetration rates above 40%. As mentioned in our Q2 call, digital is a clear driver of profitability in the future. 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. When we look at greater detail at 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 returns.
Sales grew in high single digits for the seventh consecutive quarter at 8%, confirming regained 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 last 12 months, and we are seeing strong double-digit growth in electrical distribution in key 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 the teams were also focusing on regionalization construction. We confirm our expectation of a positive impact of 2% on the full year.
Quite importantly also to all of us, Canada sales were up 4.8%, driven both by mining and large wind projects, but also by very focused sales organization by the two banners, which contributed for 2%. I mean, the mining and large wind contributed 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%, or, and this is what counts, 6.2% restated for the impact of the disposal in Q2 2018 of our Rockwell Automation business in Australia. In Australia, we pursued 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 the high base effect, sales were up 1.9%, reflecting good underlying demand in industrial product 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. 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 two unfavorable effects. Scope for -0.7%, resulting from the divestments in Southeast Asia last year, and currencies for -0.6%, mainly due to the depreciation of the Australian and Canadian dollars and the Swedish krona against the euro, partly offset by the slight appreciation of the US 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 -2.6% on sales in full year 2018. As shown on the chart on the bottom right-hand side, we saw a lower contribution from copper price at +0.3% in Q3.
Based on current copper price, we expect now our copper contribution to go to -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 EUR 147 million and margins stood at 4.4%. Our 22 basis points improvement in Q3 2018 on a comparable basis is explained by a 55 basis points volume and price contribution that more than offsets the negative impact of investments for 27 basis points, while productivity gains largely offset cost inflation, notably from wages and price. You should know that the low performance of Germany and Spain, in the context of transformation, had a negative impact of circa 16 basis points on our adjusted EBITDA margin in Q3. On slide 14, we turn to our profitability by region.
Overall, with adjusted EBITDA of EUR 146.8 million, our adjusted EBITDA margins stood at 4.4%, a 22 basis points increase coming from North America and Asia-Pacific. In Europe, adjusted EBITDA margin was down eight basis points, impacted by Germany and Spain for -25 basis points. Restated from those two 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. In North America, adjusted EBITDA margin grew 63 basis points to 4.7%, thanks to volume growth and positive pricing contribution, especially in Canada, where we act proactively to prevent any margin impact from trade tariff increase. This action more than offsets 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 cost stood at EUR 6.4 million, reflecting investment in digital and strict cost control at HQ. On a full year basis, we anticipate the normative level of spending at corporate level at around EUR 35 million. In the nine months, adjusted EBITDA stood at EUR 435 million, up 5.1%. On slide 15, we look at the bottom line part of our P&L. Let's start with our reported EBITDA of EUR 428.4 million, down 0.8%, including a one-off negative copper effect of EUR 6.6 million. Other income and expense amount to a negative EUR 63.5 million, including restructuring costs for EUR 60 million, mostly related to reorganization in Germany and Spain.
For the full year, we confirm that restructuring expense will be above their normative level at around EUR 90 million. Our net financial expense improved to EUR 75.4 million, reflecting a reduction in average net interest rate on our gross debt to 2.81% as a result of the refinancing activities of last year. For 2018, we expect financial results to be around EUR 100 million, assuming no major volatility in currency and interest rates. We also saw a drop in our income tax to EUR 99.3 million as we benefited from the positive impact of the U.S. tax reform. Our effective tax rate stood at 35.8%, above our normative tax rate at 32%, owing to the restructuring expense in Germany and Spain, where deferred 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 EUR 178.1 million, up 8.8%, and our recurring net income was up 15.3% at EUR 240.1 million. 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 EUR 15 million. Our free cash flow before interest and tax improved to an inflow of EUR 56.6 million from EUR 19.3 million in nine 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 EUR 58.8 million from EUR 77.6 million 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 EUR 76.8 million.
We now anticipate that our full year 2018 gross CapEx to be close to EUR 110 million versus the EUR 130 million previously. It corresponds to a net CapEx of close to EUR 90 million, including the proceed received from the disposal of our Rockwell business in Australia. Our net debt was reduced by EUR 94 million or 4% to EUR 2.26 billion. 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 bond, 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-over-year to 2.81%. We also maintain strong financial flexibility with liquidity of around EUR 1 billion at the end of September, including our on-broad 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 account expansion. Taking into consideration the performance of the first 9 months and expectation for the last quarter, we confirm our 2018 full year financial targets. As a reminder, we said in February that Rexel targeted at a comparable scope and exchange rate. 1, sales up in the low single digits on a constant and same-day basis. 2, a mid to high single digit increase in adjusted EBITDA. 3, a 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.
Now, we will be very happy to take all your questions.
Thank you very much. If you would like to ask a question, please press star and then 1 on your telephone keypad and wait for your name to be announced. If you would like to cancel your request, please press the hash key. Your first question this morning comes from the line of Andre Kukhnin from Credit Suisse. Please ask your question.
Good morning. Thanks much for taking my questions. I've got a couple. Firstly, I have a question on stock levels in the kind of system globally. How do you view your own inventory levels versus the end market's performance? 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. If you could give us a global picture, that would be really great.
First of all, I am like you, I'm reading a lot of things. 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. The mix of countries we are in are just on the same trend as we have been experiencing the beginning of the year. This is the shortened view I can give you as an input.
Right.
Regarding China, the one thing we know, we are focusing heavily on the automation. The wave and the need and the desire to go in automation faster than ever before is there. 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, the Industry 4.0 trend is only at the beginning of this case. We see that clearly.
Just on China, you may see the growth at B2B China at 1.9%, we have a very challenging basic effect. We had a large project last year, last year in the same quarter, we were something like close to 10% growth. So our underlying industrial business, as explained by Patrick, still remains very good in China.
Got it. Thank you. Just on China specifically, X, that project, if we could even think about further sort of like days sales. Did you see any change in trend in industrial or broader in China as you went through the months of the quarter?
No. 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 a new demand and coming to the wave of automation is in its very early stages. Big projects we are not in, and therefore probably we don't see if there is any change there. For the medium to low end and size company, we don't see any change.
That's very clear. Thank you. 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?
Sixteen, one, six at group level, and if you take a look at the European perimeter, it's close to 30 basis points in Q3.
Thank you. You're wearing that inside adjusted EBITDA but offsetting it by own measures. Is that right?
Yeah.
Great. Thank you very much to both of you.
Thank you. The next question comes from the line of Lucie Carpentier from Morgan Stanley. Your line is now open.
Hi. Good morning, gentlemen. Thanks for taking my question. I'll have three in total. The first one, I would like to come back to the momentum in North America because the comp base in the third quarter 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 are the only distributor in North America from what we can see on the industrial side, actually having raising gross margin. What are you doing differently, and how advanced do you think you are in what I would call the rehabilitation process now 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 one. 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 margin. 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. This has an effect on the pricing structure. Thirdly, we grow with our partners.
We have efficiency through volume in our fixed cost base, whether it's logistic or absorption of certain fixed cost, which increase the margin too, and the commercial margin and back margin, all of it contributes also to the results. It's a clear choice. It's a conscious management, and we will continue to do so. We had the branch opening, it's roughly 2%, it is helping the top line. We comment last year on the North with the GIS, and now everything is not to its full potential. We are recovering compared to last year, and we are back to a positive growth with that supplier, on the sale from that supplier. That is helping us also.
The taken over by ABB start to see the first effect, not yet there, but compared to the decline of last year, we see the positive effect. Lucie, you had another question?
Can you hear me? Yes.
Yeah.
I had another question.
Yes.
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 Spain restructuring would also be benefiting to the margin going forward. You have your pricing initiative. 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? 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, restructuring in a short period of time once we got the approval of all the authorities, internal and external. That I can tell you as we speak, it's done. When I'm saying it's done, it's people are gone, branch are closed. In doing so, we have eliminated the lowest margin business we were in, which was the C&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 densification critical mass in order to be efficient in the C&I business in the north of Germany.
In doing so, we have also closed part of, let's say, local DCs warehousing system, so that now we serve the global country for industrial product and only the south, where we have a much better density for the non-industrial. What we see in Germany improvement is a clear cut of elimination of either too high cost or too low margin business in Germany. Yes, we expect to see, with every month passing by, the effect of what we have cut. Also, the fact that we focus 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.
We have to come, the gradual evolution of the logistic network to support the remaining branches, which will call for gradual steps throughout the coming, let's say, next two quarters. Both will generate the equivalent of 30 basis points of improvement we wait for. For next year, this restructuring plan from what we see today, will give us an upside of circa 10 basis points at group level.
Sorry, Laurent, just to make sure I understood. You're saying 30 basis points from German and Spain initiatives. The last 10 basis point, what was that about?
No. 30 is impact in Q3 in Europe, the headwind because of Germany and Spain.
Yes.
The branch has been closing at the end of September, we start to see the positive impact starting Q4. When we look at next year, we consider that next year, the reorganization we have implemented both in Germany and Spain should help us of circa 10 basis points on the EBITDA of the group.
For the group. How do you think about the ongoing impact from the investment, which are still about 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 stay. Everything is not finalized. We are still in the middle of the budget session, probably we will be not higher than that, in that ballpark.
Okay. Thank you.
Still have some program to open branches in the U.S. as we have commented, there are a couple of other initiatives, especially in the digital that will continue over next year.
Okay, understood. Then just my last question quickly on France. It was up 1% in the third quarter, I think, on a comp of +9%. Just how do you see this market? When we hear some of the other companies in the sector talking about French construction and 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 months are good and solid. I read the numbers like you. I read the communique of the others like you. The mix of our activity between, let's say, the vertical, the new housing start, the horizontal, the regional, the new and the maintenance, make us probably less sensitive than others to certain numbers. 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 makes us win some market share month after month. The more customer, more SKU strategy continues to be positive in this country. We apply it. Now the next wave is the growth in digitalization, which has still room for maneuver.
We have a very good start this year, we expect further growth in the coming year. I'm used to, you know where I come from, I'm used to have a market here with a much more difficult environment. Therefore, I think we know roughly where, how, and when to act. So far, we have good results.
Thank you.
Thank you. The next question comes from the line of Andreas Willi from JP Morgan. Your line is open.
Good morning. Thanks for your time. My first question is on your guidance for the full year, which you have left unchanged. Given we already passed nine months now and where you stand after nine 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. I give it to Laurent.
We keep seeing a good momentum in Q4, despite, as you know, the more difficult base effect. We see good trend in France and the U.S., we expect the soft benefit from the savings from the country in transformation. I mean, more or less what we expect in Q4 is the same EBITDA growth as what we had in the last two quarters. You can do your math on that basis.
Thank you. The second question on the branch restructuring 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?
Yeah, in Q3, the impact of Germany and Spain was -0.8% at group level and -1.5% at European level. Going forward, it will be globally close to EUR 160 million less next year spread over the first three quarters.
Sorry, could you just repeat that? I didn't hear. You said it's 160 basis points.
No.
Million.
Yeah, I don't have the percentage, but with the branch closing, we calculate precisely the impact on the top line in Q3, which is -0.8% in Q3 on our top line. For next year, all the branch closing will have a negative impact of EUR 160 million for next year. EUR 160 million of sales decline.
Yeah, that's basically for eight months or so, given you closed all of these branches in September.
Yeah, nine months, yeah, to be precise.
Nine months.
Nine months. Yeah.
Okay. Thank you very much.
Thank you. The next question comes from the line of Sébastien Gruter from Redburn. Your line is now open.
Hi, good morning. I have two questions. First of all, just coming back on Germany/Spain. The impact on top line is about EUR 25 million in the third quarter. You were guiding for an impact of 16 basis points on the EBITDA margin, so that's about EUR 5 million. I guess a 20% margin on those businesses, which seems fair for gross margin, but do you account for any OpEx savings in that number? Maybe the timing didn't let you make any savings in this quarter. I have another question, but maybe could we answer this one first?
The 16 basis points is just looking at the group with or without these two countries. It is taking all the measure, all what is factored in the Q3 on this. Yeah, it's around EUR 3 million on the quarter.
EUR 3 million net on the quarter?
Yeah.
Okay. Second question would be about next year. You are in the budget process, but if I look at next year, Europe is likely to have a tougher year than the last two. Besides the expected benefits of the restructuring of Germany and Spain, are there any plans you are ready to trigger to reduce OpEx in case demand weakens as the building permits suggest?
There is always in our business, we look carefully at the activity level and the margins. What I will look first is at the inflation. What I will look immediately after is at the OpEx, at the cost, because the margin is defended. It's unclear yet the level of inflation we will get in the-- I'm talking Europe here, and the U.S. is a different exercise. Given everything going up, whether it's wages and transportation and the raw materials for Q1 and kind of stuff, we wait to know the kind of inflation we'll be facing, the one that we will pass in the pricing and the one we will face in our cost base. This is what budgets are about. 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. 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 lighting, but have you seen other suppliers pushing for price increase following the tariff? Do you have any impact from trade tariff on your private label business in the U.S. that could pressure the gross margin going forward?
Indeed. In the U.S., private label or not private label, we will face directly or indirectly. Directly if it's private import or indirectly if it's through the suppliers. Many things are being made by U.S. suppliers with partial or total, let's say, 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. We expect a visible tariff effect on inflation in the coming months, if definitely one. Our policy is clear. It has to be passed 100%. There is no room for margin squeeze in such a, let's say, major change. Should the 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 One 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 the tariff as a line item, so you pass it straight through, or it will be passed through with the gross margin? If you could give some view on how you think the sequencing of that will happen between your suppliers and your private label needs.
Well, traditionally, when suppliers announce a price increase to us, we get a couple of weeks announcement. They're very short-term. We know by a date of XYZ, this is coming to us, and we have to make a revision of the entire pricing construction to our installers or end users. That we don't experience a margin squeeze between the customer pricing and the purchasing price. This time, the tariff is probably no longer, let's say, a standard inflation of 1% or 1.5%. We may face a 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 is the time by which the market will recognize this in making contracts, long-term contracts, quotations with a certain time. 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 four, five, six months after. We need to be sure, and we already gave all instruction to everyone not to commit at that kind of a 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 a lot of managerial attention and discipline in different ways of doing the business. Everything has been already announced and passed and is our daily attention.
Since the tariff numbers are more or less known, assuming it 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 upon those new prices?
Every day.
Are the customers reacting in any way?
Well, I will be frank with you. If somebody wants, they try to. We have to give them the evidence, first of all. There is enough news around in order to gather the news. The second thing is they find somebody who can skip it. I prefer to get the volume from this one, but this one will not last long. It's too big-
No
to be able to be swallowed by anyone. The good thing right now in the U.S., the demand is so high that you may lose one month, two months, but you recover immediately after because this is same punishment for everybody.
Mm-hmm. At the same time Sorry, please.
Yeah. Please.
No. Okay. Therefore, with your private label, are you looking at adjusting supply chains at all based upon tariffs? 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 vis-a-vis what it would be without changing?
It's limited, what can be done on such a short term. There is prescription, there are technical specs. Very short term, you cannot adjust a lot. In the medium run, it could be, depending how much the tariff will continue having an impact on what. Commodities, you can. Non-commodity item, impossible. First react in protecting the margin, then react in optimization. Second step.
Right. 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 how we should account for the copper price impact in Q4?
No. In full fairness, no, I don't. Maybe Laurent.
Yeah. At group level, based on current copper price, we said that the impact on Q4 on the top line will be a -0.5.
Thank you. 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 will 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, 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. Obviously when you don't get the products, there are two things happening. To keep the customer, you lower your prices or you try to get it's almost a 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 normal delivery pattern out of the three factories, the one in Monterrey, Mexico, and the two out of the American plant, we are really in the disarray.
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, 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. I split the two. You have the gross margin and the pricing effort, you have what was taking us down, which now start 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, all. Just two left from me, please. Firstly, 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 end. Secondly, I was just wondering if you could 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 pricing cable?
The cable business impact in Europe is flat. In fact, we have a slightly positive effect in Germany and Austria, which offset Sweden and France. Overall, no headwind at this stage.
On the investigation. There is nothing new. I can only recall you that early September raids were performed in the offices of Rexel and other of the industry. This investigation, conducted with the assistance of the French Competition Authority, deals with the mechanism of price formation on the market of distribution of electrical equipment. 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. What information has been released in the press does not allow to determine the offenses that Rexel could be accused of. 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. Such as disclosed in the financial statements, there is no material impact on Rexel'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.
Yeah, thank you. It's Martin Wilkie from Citi. Just a question on portfolio. If you could just remind us how much of the exits or disposals has still to be announced. You've obviously downsized branches and so forth in Germany and done some other exits. From memory, I think you probably have EUR 100 million or so of sales still to be exited. If you could just remind where we are on that. Also, just in terms of the process, you've obviously had some decisions that were more branch closures as opposed to making sales. How we should think about the remaining revenue that you will be exiting. Is it all essentially zero-profit revenue that you'll be getting out of over the next six or 12 months? And just how we should think about that in terms of group profits. Thank you.
This process is going on. We still have, yes, a bit more than EUR 120 million 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 closing. All that is in process, and we expect to finish that, as we said in July, by the end of the first semester of 2019.
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? How should we think about the Rexel portfolio once you get to that mid-2019 level, having cut your revenue by EUR 800 million or so by that point?
Well, so far, the criteria for portfolio management was to get rid or sell or close whether activities or countries where we didn't show conditions of success on, let's say, whether not even a year or two 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 for cash flow, eating cash or for results. Looking ahead of us, we will probably enter in a more active, what I call active portfolio management, meaning acquisition on one hand, and eventually if something will be in one year or two years less in the center of our activity, it could be also divested. 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. On the selling side, it could be driven by a very good return on an asset for which we see medium term, a more dedicated future. We will go into a more reprofiling 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 Gfeller from Oddo. Your line is now open.
Yes, good morning. I first wanted to quickly get back on pricing. Maybe I've 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? I had a second question on digital sales.
Yeah. Pricing, excluding cable, is a bit higher than in H1. In H1 2018, the price increase excluding cable was 0.9 at group level with around 1% in North America and 0.9 in Europe. 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%. 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. On digital sales, you're making quick progress actually in your 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?
Yeah, we don't have so far, we'll not guide on precise figure for next year. When we see all what it can bring to Europe, which is tracking the more than 20% ceilings, and what it brings in term of contribution to the bottom line, we really want to continue to invest and accelerate in that field. We have not changed to our guidance to be as soon as possible around 25% at group level and midterm of 35% to 40%.
On that front, when I see certain B2B people in the business coming from, let's say, similar origin than we do more brick and mortar origin, I'm very pleased compared to them with the adoption efforts. Yes, there is in our OpEx, there were some costs for allocating people to make the adoption happen. 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 real multi-channel, 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.
It will be around 15% digital sales by the end of this year. We will crack the EUR 2 billion of digital sales at the end of this year.
For sure.
Yeah.
For sure, yeah.
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, I would tell you one thing, it's coming too fast. The pipeline is not able to. Never forget, I mean, the machine in the U.S. is absolutely at the max of what it can be done, can be produced. The demand is strong, but nobody can produce more than that. 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.
Right
even if we would like to, let's say, reserve volumes and get things, nobody has an intention to do so. Tariffs will create inflation on the imports, but they may create inflation on the internally produced. To be seen in the coming months, it will be interesting.
Got it. Thank you. Could you comment a bit more on M&A pipeline in the U.S.? We thought you were getting more active on that front from mid-year 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. I will not divert from the original strategy of region densification. There are two things on the M&A front. One, we look carefully at, and we are candidate for, this is where we can be in the regions where we are in the workplace automation RPA. This is open, well-known that where there is a good RPA to be taken that could complement what we have in industry automation, we will and we are candidate each time. Okay?
That's the only-
Right
clear pipeline I could really openly say. If there's something that can come at any time, I would be on it. The rest, we are looking, we are screening. Sometimes we are getting a little bit closer. There is nothing very close in the coming months.
No. Yeah.
You never know in this world, it could accelerate.
I don't want to create here an expectation unnecessarily. It's more that we were not active at all during a period of time, and we are heavily interested in looking what could make sense.
Just final one, if I may ask, if I could be a 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.
Yeah.
It's more fuller on, I guess. Yeah.
Yeah. I will give it to you. I am talking, excluding cable. For the group in H1, the price increase were 0.9%, of which 0.9% in Europe and 1% in North America. In Q3, the group is at +1.3%, with +1.5% in Europe. North America is 1.6%, and the difference is the decreasing 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 question, first of all, I would like to thank all of you and each of you for the time you spent, for the question you ask, and hopefully, we will see you now, February 13th. I'm turning to my colleague to be sure that I'm right with the date. Yes, please. Book February 13th, full year results next year. In the meantime, I wish you a good balance of the year. Thank you very much for your time and attention.
Thank you very much. That does conclude our conference call today. Thank you all for your participation. You may now disconnect.