Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Rexel SA (RXEEY, Financial) reported sales of EUR 9.6 billion in the first half of 2024, showing a 1.8% increase in Q2, driven by acquisitions in the US and Netherlands.
- The company achieved a solid adjusted EBITA margin of 6%, supported by productivity gains and cost initiatives.
- Rexel SA (RXEEY) posted a record free cash flow before interest and tax of EUR 335 million, representing a 53% conversion rate.
- The company's indebtedness ratio stands at 1.9x, providing ample financial flexibility.
- Digital sales continue to ramp up, reaching 31% of total sales, with Europe significantly above the group average at 43%.
Negative Points
- Sales in Europe were challenging, with a 4.5% decline in Q2, impacted by the electrification base effect and macroeconomic and political uncertainties.
- The company experienced a negative pricing effect of minus 1.5% in Q2, primarily due to deflation in solar panels, piping in North America, and industrial automation in China.
- Adjusted EBITDA margin in Europe decreased by 197 basis points to 6.1%, due to sales decline and higher exposure to deflationary solar activity.
- Rexel SA (RXEEY) anticipates financial expenses to rise to EUR 205 million for the full year 2024, due to increased gross debt and interest rates.
- The company remains cautious about end markets and does not expect any sequential recovery, particularly in Europe, due to ongoing economic and political uncertainties.
Q & A Highlights
Q: The first question I had was on pricing dynamics. Obviously, you've called out certain categories in electrification, which obviously we can see has been negative from industry data. But just generally, what do you see on pricing beyond those categories? Is that stabilized sequentially?
A: Overall, we had a pricing effect of minus 1.5% in Q2. That's entirely made of PV, cable, and piping in the US. The rest is basically very slightly positive if I take all the rest with some negatives, like, for example, industrial automation in China and the rest being broadly very slightly positive. What we are seeing in the market is exactly that. Apart from those three categories, the rest is stable. We don't see price increases for the second part of the year. The situation is depending on countries, but I would say, broadly stable sequentially.
Q: If I could have a follow-up just separately on North America. So a good performance there. Obviously, the backlog is helping you, and there are some categories in electrification that are quite strong in North America, but there is industry data where the general industrial cycle in North America is softening slightly. I was wondering if there are any parts of your industrial business that you are concerned about for growth during the second half? Or does that backlog support give you comfort going into H2?
A: In North America, you're right. We have quite a supportive backlog, but the situation is contrasted between the different categories. And I would say industry is one of the ones on which we have already seen in Q2, some kind of weakness, not a huge weakness, but if we compare to last year, the industrial category overall, which includes industrial automation, but also all the industry projects has weakened a little bit in North America over the second quarter. To the opposite segments which are very active are everything which is linked to infrastructure, including very good activity in water and wastewater, for example, or data centers. But I would say, we are already seeing a slight weakness in industrial activity in North America and especially in automotive, for example, oil and gas, et cetera.
Q: Clarifying on the guidance for margin this year, so the 6.3% to 6.6%, and you're guiding to the bottom end. You did 6%. Normally, you're sequentially up 30, 40 basis points in the second half. Can you comment to get to the bottom end of guidance, if it's not pricing, like you mentioned in the prior -- what do you see improving? Is it volume? Is it your self-help initiatives? How will you make it to the bottom end of the guidance?
A: First of all, as we mentioned in the first half, we had in the gross margin an effect which is linked to the negative inflation effect and especially on the categories that we talked about. And this one, we should be in a more stable pricing environment. Secondly, more importantly, we think that the self-help action that we have put in place in terms of productivity, in terms of gross margin optimization, will ramp up very clearly. We have plans in several countries of reducing the cost base further, which are going to kick in. And thirdly, in terms of top line growth because of the comparison base, we are going to be in a better environment. So nothing which has to do with any bets on sequential recovery in the market. But we feel confident that we can get to the 6.5% of overall profitability in the second half that we need to deliver the guidance.
Q: Following up on China. As you mentioned, you still have pricing pressure there, but you printed almost 9% growth. Do you see some sequential demand acceleration there, some restocking at clients? What are the underlying trends you're observing?
A: We had a sharp rebound in Q2, but mostly linked soft in Q1. There was a very high base effect the year before with the rebound after COVID. So the Q2 was easier in terms of base effect. Third, we are quite resilient in terms of end markets, doing quite well in urbanization, water, wastewater, food and bev and so on. And third, we are grasping market share through more services in industrial automation and opening also sales office. But the overall market is still very tough and the pricing environment still deflationary. And on that, we don't see any early sign of recovery for the second half. So mainly our self-help and base effect is helping us to grasp this Q2 performance.
Q: The three categories that you mentioned, solar panel, piping in North America and industrial automation in China, could you quantify how much of group share in first half came from these three product categories?
A: The total of the three categories, industrial automation in China, piping, cable -- without cable it's probably 5% to 10%. Yes, less than 10%, if you take those categories.
Q: On market share gains in Europe. Maybe if you can elaborate on where they are coming from? Are they coming from core electrical distribution or they're coming in the new areas of growth? And maybe if you can say what was the underlying market growth if we exclude the market share gains that you have seen in Europe?
A: The underlying market growth wouldn't be significantly different from what you saw in our results. We gained a little bit of market share, but I wouldn't say it would change materially the figures, maybe a few percent but not more than that. Now the second thing is where did we gain market share, I would say it's mostly on core electrical distribution products. I don't think that -- I mean it's always difficult to measure the market share gains because depending on the countries, you know that we have or we have not reliable information on what the market shares are, but I would say where we gained market share, we gained it mostly on core electrical distribution products, mostly thanks to our value proposition and the mix of digital, the mix of services, which help us do that. But I don't think it was specifically on electrification categories.
Q: I wondered if you could just dig a little bit into the different end-market developments in Europe, I guess, given that it was probably weaker than expected. I'm just trying to get a feel for the, I guess, sequential developments as you try and identify what it is that was weaker than expected. What are you attributing that to?
A: The one market which started in some countries, the early signs of a recovery is probably residential here and there. For the rest, for the nonresidential and for the industrial businesses, we were in a relatively weak situation. I think the global economical environment, coupled with the political situation in several countries, led to wait-and-see situation. And at this stage, it's very difficult to predict what Q3 and Q4 are going to
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
