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Edited Transcript of RXL.PA earnings conference call or presentation 13-Feb-20 9:30am GMT

Q4 2019 Rexel SA Earnings Call

Paris Feb 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Rexel SA earnings conference call or presentation Thursday, February 13, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Laurent Delabarre

Rexel S.A. - Group CFO

* Patrick Berard

Rexel S.A. - CEO, CEO of Europe & Director

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Conference Call Participants

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* Andre Kukhnin

Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst

* Andreas P. Willi

JP Morgan Chase & Co, Research Division - Head of the European Capital Goods

* Daniela C. R. de Carvalho e Costa

Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* Martin Wilkie

Citigroup Inc, Research Division - Director

* Sébastien Gruter

Redburn (Europe) Limited, Research Division - Research Analyst

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Presentation

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [1]

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Good morning, ladies and gentlemen. And just a few words about the fact that today, we will present the Rexel fourth quarter, the full year '19 performance. Laurent Delabarre, our group CFO, is with me. And we will do our best to make it as clear as we can. We will start with a look at the highlights of our Q4 and full year performance, by the way, which marks Rexel's third successive year of solid results.

I will also touch on the great progress we have made on key initiatives of the strategic plan for the future and -- for today and for the future. Laurent will detail our performance by geography and our financials in Q4 and the full year. And then I will come back and conclude with a look at our priorities and the outlook for 2020. After that, we will take all your questions, and be as explicit as we can.

Now let's start together. 2029 (sic) [2019], this is the third year, successive year, of solid results in line with the plan. And you can imagine that we are very satisfied with that. Now if you go to the next slide, in a nutshell, what does it mean, '19? First of all, obviously, you have seen it. 2019, we have achieved the guidance in a more volatile year than we expected. We've got the trade war with some unexpected effect and longer than we thought. It went from margin squeeze to rapid decrease in industrial demand in some key geographies: U.S., Germany and France.

We've got the up and downs around the Brexit-related issues with a certain subdued environment. These are a few elements of the volatility which we were facing, and I'm glad to say that we were able to do it by reacting fast to each of them.

Second, all the inflection of the business model initiated in 2017, which is -- may I repeat, so our organic development -- organic growth, has translated into further sales growth outperformance, earnings growth and value creation. We passed -- we crossed the line of the EUR 1 billion organic sales since December '16. And for me, it's a great achievement because it's like having added a large country to our activity, it's the equivalent of having added a Canadian activity of Rexel today. We got double-digit growth in EPS since '16. We' got the ROCE above the WACC for the first time in 5 years, which is, in terms of value creation, the indicator which we needed to reach and to continue to make grow. And obviously, we have, as promised, continued the improvement in our indebtedness ratio.

These are the metrics by which we would rate as being value creation, continued improvement and preparing the future from the net debt ratio that now we start to have. At the same time, we have generated strong free cash flow, and the free cash flow conversion at 62.5% after 2 years of investment in inventories and restructuring in turnaround countries has been reached, and we are back to the more historical numbers. At the same time, we have financed an increasingly data-driven journey, which has been already financed in the past and will be part of our 2020 and beyond execution. And obviously, we continue some active portfolio management. As you have read, we found an agreement to dispose of Gexpro Services in the U.S. as it has -- was signed in December.

If you take the full year '19 guidance achieved on the page after, on the slide that you are seeing now, to me, it's a continued growth in top line and growth in margin. It's not one at the cost of the other like previously; it's the 2 together. And this is the formula by which we continue and we work every day, generating profitable growth, which obviously results in an improvement in EBITA and also [monitoring] the recurring net income. At the same time, as I told you before, we have deleveraged by 20 bps improvement. And it is before the disposal of Gexpro Services, which would add a 10 bps reduction to our indebtedness ratio when it comes to the final closing.

On Page 5, on the slide, allow me to say and commend these 3 years of successful execution that I'm glad to say that organic growth was the right choice to make. But thanks to the team, and I thank them here in public, it was also a good execution. In doing so, it was a value creation with the ROCE coming above our WACC line. It's all execution measurements in same-day sales growth, in EBITA margin and in recurring net income. And it's also the indebtedness ratio coming down which allows us to prepare the future. During previous meetings, exchange, with all of you, we were talking about Perform & Transform.

In talking about the Perform, what does it mean? It means here, more than ever before, a leaner and more agile organization, but it's also the efficiency of our models as we have moved many bricks in the past. And here, you have the cost adaptation to offset industry slowdown in the U.S., which is an additional reactivity capabilities, where we had to gain service and benefits productivity to cope with what has happened in the second part of '19.

Efficiency of processes is a key matter for the future and for today, because we are reducing the product returns, reducing the claims with our customers, reducing the inventory obsolescence that may come from inadequate inventories. We are reducing the override by having a better pricing system. These are elements of the distribution, key elements of the distribution B2B company, where a lot of the efficiency is being produced. Obviously, this was something that came from many years of experience gathered, we have increased logistic productivity. Here, you have 2 examples through Sweden and Canada. But it's everywhere that we continue to improve the processes, the set-up, the automation in order to get this done.

More related to '19, the leaner back office through automation, back office automation processes, one of them being end-to-end solution like e-mail to EDI. And e-mail to EDI, for example, was a way to free up resources in order to reallocate them. And resource reallocation was not in the DNA of Rexel. We are starting doing it so that all the digitalization process is aimed at reallocating resources to where we have a better leverage out of it. And this is not just in certain countries, it's across the board. If you look at the automation in China, we have robots doing back office now tasks.

This is a good example of how we continuously manage our organization in order to bring the cost down and the allocation to the front, which brings me to now the front. And the front, this is -- as an example, how we wanted to be close to our customers to -- good for the customer stickiness. And in '16, we had no real measurement how good we were in our relationship to the customer. And you know the customer base is broad. It's 600,000 active customers around the world. They are unique. They are quite different. We needed to understand them. They are in different segments. The willingness to pay is not the same. The requirement for the service is not the same. Therefore, we needed to understand all this detailed approach. And in '19, we initially -- the Net Promoter Score measurement, which is a key driver of the process design and the efficiency by which we serve them, it's not a measurement that how good -- if they are pleased with us. It's also how cost-efficient we can be in order to serve the different demand. And in '19, it was so systematic, and we have an ongoing Net Promoter Score measurement so that now it comes live in 18 countries. And it's a key driver of our processes of today. And by the way, a fundamental piece of our digitalization of tomorrow.

And in 2020, it would be what we call full-fledged measurement, with also internal feedback so that we have a way by which we collected that in order to be like machine learning. It's an organization learning, and the machine learning capabilities because much more data being collected, it's also how to be a data-driven and still serving the customer and increase our Net Promoter Score, because we become a very, very customer-centric company, and less just relying on an efficient logistic capabilities.

How does it translate? You see it on Page 8. It translates also that the Transform journey, the Perform and the Transform when they will come together will be even more efficient. But here, you see already that the Transform is providing performance.

Now who would have said a couple of years ago that at Rexel, we would have every second in Europe and every 30 second in the U.S., a digital order? Who would have said a couple of years ago that we would [dispose] of 2 digital hubs, 1 in the U.S. and 1 in Europe, based in France, with 150 data and digital experts in order to cope with the data handling and the huge amount of data in order to make better decisions? I don't want to go around this EUR 2.4 billion digital sales, which is going up, almost 13% up. I just want to highlight for all of us that becoming a different company is now a reality when you look at all of this, because this is only a step. In certain countries, it's even more advanced. In others, it's catching up, but this is a direction to go. And we are leveraging machine learning, artificial intelligence to reduce customer churn. We have this solution deployed in 6 countries.

This year, it will enable to save up to EUR 30 million in annualized revenues. E-mail to EDI is 6 -- is live in 6 countries. It will be expanded to 9 and 30 -- and 73,000 digitalized orders are being passed through. And it frees up time and it increased quality because the machine don't create mistakes. And these are the change which are also behind the results of '19, and there are more to come, because as you can see, this is the beginning of this Transform which brings Perform.

Now this -- I will come back with more on this. For the time being, let's go back to the financial review of the year ended Q4, and I pass the word to Laurent.

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Laurent Delabarre, Rexel S.A. - Group CFO [2]

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Yes, thank you, Patrick, and good morning to everyone. Let's cover now the financial part of our performance. I will start on Slide 10 by commenting our full year sales performance before looking afterwards at our Q4 number.

Our full year sales stood at EUR 13.7 billion in 2019, up 2.8% on a reported basis and up 1.4% on a same-day basis. Restated from branch closure in Germany and Spain, same-day growth was significantly stronger at 2.4%. The calendar impact in the year was not [whole], while the scope effect was a negative 0.4%, resulting from the sales in late 2018 of our nonindustrial activity in China.

As shown on the right-hand side of the slide, since the start of 2017, Rexel has added more than EUR 1 billion of sales on an organic basis, with all 3 of our geographies contributing. That's a big number, as already commented by Patrick, equivalent to a country like Canada.

On Slide 11, you see the geographical breakdown of our sales, both in Q4 and in the full year. In Q4 2019 specifically, same-day sales were down 0.5% due to the lower industrial demand in key geographies. This can also be explained in part by the fact that we posted 12 consecutive quarters of same-day sales growth, so we start to face an increasingly challenging comparable base over time, as shown on the graph on the bottom of the slide. In addition, the last week of December was particularly low. But we were reassured by the early sales trends experienced in January 2020, gradually returning to a more normative level above 1%.

By geography, we posted growth of 0.3% in Q4 '19, both in Europe and in Asia Pac, while North America was down 1.8%, mainly due to a drop in the industrial end markets.

Let's now look at each region, beginning with Europe on Slide 12. Sales in our biggest region accounting for 54% of our sales, stood at EUR 1.9 billion in the quarter, up 0.3% on a same-day basis, mainly driven by France. Growth in our home market, which represents more than 1/3 of our European sales, was up by a very solid 4.6%, with good momentum in Project and HVAC segments.

We gained market share both in Q4 and in the full year. This growth reflects improved customer satisfaction as measured by gains in our NPS, enabled by increasing productivity and efficiency. Our digital initiatives were also a key contributor to growth. And digital now accounts for 18.8% of France sales, up from 14.5% 1 year earlier as we continue our evolution towards a data-driven company. We also saw positive trends in the Benelux countries, which grew by 3% in the quarter, while Scandinavia was down 2.5%.

In the U.K., sales dropped by 7.4% in a challenging market. Sales were also impacted by greater customer selectivity, accounting for roughly minus 4.2% and 11 branch closure, which accounts for minus 1.6%. Lastly, in Germany, sales were down 7%, mainly due to lower industrial demand. Activity in 2020 should benefit from the new leaner organization we have put in place, the better service configuration and the expansion of our customer base.

On Slide 13, we turn to North America, where sales stood at EUR 1.3 billion, down 1.8% on a constant and same-day basis. This reflects the divergent trends between regions in the U.S. and Canada. In the U.S., sales in Q4 were down 2.7%, due to a single-digit decrease in both the industrial and commercial end markets. Conditions were especially challenging in the Oil & Gas segment, which was down by 10%. The light commercial and residential end market, on the other hand, posted good growth, up high single digits.

We benefited from our investment in inventory, sales reps and branch opening or renovation. We opened 57 branches in 2017, '19. And branch openings had a positive impact of 1.1% in Q4 and 1.2% in a full year basis, in line with our targets.

In the U.S., we also announced in late December that we signed an agreement to sell our Gexpro Services business to Luther King Capital Management Headwater Investments. The activity we are disposing of represents around USD 260 million in sales and around 400 FTEs. With this sale, we are refocusing our U.S. activities on our core Electrical Distribution business. For your model, we anticipate the closing to take place in Q1 2020. And in line with our indication provided in the Capital Markets Day in '17, Gexpro Services profitability is above country level and stands at (inaudible) [7%].

On the other side, Canada saw good growth in Q4, up by 1.8%, driven by robust business with large commercial contractors and industrial customers.

On Slide 14, we take a closer look at our performance in the U.S. by region. As you can see on the slide, we had a contrasting performance, with -- it is very good momentum in our business in the Northwest and California, where the Proximity business performed strongly. Other regions, more industrial one, because it's declining sales in Q4 and lower demand, mainly as the consequences of the trade war.

We complete our geographic overview on Slide 15 with Asia Pacific, where our sales were up 0.3% on a constant and same-day basis and up by a strong 3.2% restated for a large project in the Middle East that boosted our Q4 '18 numbers. In the Pacific, sales were up 3.3% with a solid growth of 5.9% in Australia. This was driven by market outperformance in the residential market and good momentum in industrial EPC. This more than offset lower sales in New Zealand, mainly due to industrial and commercial markets.

In Asia, sales were down by 2.5% or up 3.2% restating from this Middle East project. China was up 1.2%, despite the more challenging environment. And India was up in double digits, supported by strong automation sales. This allows us to mitigate the negative contribution of this Middle East project.

On Slide 16, we turn to our full year profitability with our adjusted EBITA bridge. Adjusted EBITA was up 5.1% to EUR 685.1 million and margin stood at 5%. Our 18 basis point improvement in the full year on a comparable basis is explained by volume and productivity gains and the first benefits of our digital investment, which more than offset cost inflation and investments for growth. As you can see on the waterfall in greater detail, the 49 basis point for productivity gains, mainly extracted in Germany, Spain and U.K., more than offset our 34 basis point of cost inflation. The minus 25 bps from investment for growth is in line with our commitments and illustrates the acceleration of our transformation. Our priority is to further improve operating leverage while maintaining IT -- investments in IT and digital.

On Slide 17, we turn to our profitability by region. Overall, with adjusted EBITA of EUR 685.1 million in the full year, our adjusted EBITA margin grew by 5.1%, fully in line with our targets. The 18 basis points increase in margin comes from Europe, where adjusted EBITA margin was up 25 basis points to 6.1%. Gross margin improvement in France, greater business activity in the U.K. and positive country mix allowed us to offset the cost of our digital investment and, to a lesser extent, higher transportation costs.

North America's adjusted EBITA was stable at 4.4% as better pricing management was absorbed by our digital investment, cost inflation, the negative channel mix in Canada and higher average number of FTEs in the U.S. As you know, cost initiatives in the U.S. were initiated since midyear, resulting in a lower number of FTEs at the end of 2019 compared to the end of 2018.

In Asia Pacific, adjusted EBITA was down 6 basis points to 2.3%, reflecting lower profitability from a negative volume impact in New Zealand and investments in China to enter Tier 2 and Tier 3 cities. Our corporate costs stood at EUR 22.3 million, an improvement over the EUR 30.9 million in 2018, with higher reallocation to operation of corporate-hosted expense and lower corporate overheads. We anticipate corporate costs to be circa EUR 30 million in 2020.

On Slide 18, we look at the bottom line part of our P&L. Let's start with our adjusted EBITA of EUR 685.1 million, up 5.1%. Reported EBITA at EUR 677.5 million was up 7.1% year-on-year thanks to positive currency impact. Other income and expense amounted to a negative EUR 176.8 million, including restructuring costs of EUR 32.6 million, mostly related to the end of the restructuring in Germany and Spain and additional restructuring in U.K. and the U.S. as well as goodwill impairments in Norway, New Zealand, U.K. and in Finland for EUR 118.1 million. It also includes asset impairments related to our agreement signed to dispose of Gexpro Services and an export activity in Spain. For 2020, we anticipate restructuring cost to be close to a normative level around EUR 45 million to EUR 50 million.

Our net financial expense stood at EUR 165.3 million reflecting a reduction in average net interest on our gross debt to 2.62% as a result of our active refinancing activity. Excluding one-off and ForEx, our underlying financial expense stand at EUR 96.6 million versus EUR 97.7 million in 2018. On a similar basis and excluding one-off, we anticipate for 2020, our net financial expense to be close to EUR 90 million.

We saw a drop in our income tax to EUR 117.3 million, with an effective tax rate of 36.5%, impacted by the non-deductibility of our goodwill depreciation and asset impairment, offset by the release of the EUR 29.5 million tax reserve after a positive legal judgment. And for 2020, we anticipate a normative tax rate to be between 32% and 33%.

As a result, net income was up by a very strong 50.3% to EUR 203.8 million, and our recurring net income grew to EUR 341.2 million, up 7.5%.

On Slide 19, we turn now to our free cash flow statement. Over the year, our free cash flow before interest and tax was EUR 461.6 million, up a very solid EUR 110.3 million, mainly as a result of trade working capital management, which stood at 12.6% of sales versus 13% in 2018, thanks to better receivables and stable inventories. As a consequence, our conversion of EBITDA after lease into free cash flow before interest and tax stood at 62.5%, marking a return to our historical normative level. Please also note that net capital expenditure was EUR 116.5 million, with a CapEx-to-sales ratio of about 0.9% and circa 62% of CapEx related to IT and digital. Our net debt was reduced to -- by EUR 68.8 million to EUR 1.9 billion. As a result, our net debt-to-EBITDA after lease ratio stood at 2.47x as of December 30, 2019, down 20 basis points year-on-year. In 2020, we anticipate our free cash flow conversion to be closer to 65%.

On Slide 20, let's take a closer look at the breakdown in maturities of our debt. The chart shows that we have no short-term maturity on our bonds, with no significant repayment before 2024 following the 2017 and March 2019 refinancing. Our average maturity has been extended to 4.2 years from 3.8 years last year. Our debt can be split between securitization backed by our assets, bonds and a senior credit agreement. Our active financial management is reflected in the average effective interest rate on gross debt, down 18 basis points year-on-year to 2.62%. We also maintained strong financial flexibility, with liquidity of around EUR 1.3 billion at the end of December, including our ongoing senior credit facility, which was recently extended by a year. We also remain attentive to market opportunities to further enhance our financial structure.

On Slide 21, we present our proposed dividend for 2019 financial year to be paid in 2020. Rexel will propose to shareholders to increase the dividend by 9% to EUR 0.48 per share, EUR 0.04 higher than last year, payable in cash in early July 2020. This remains, of course, subject to approval of the annual shareholder meeting to be held in Paris on April 23. This dividend represents a payout ratio of 43%, in line with our policy of paying out at least 40% of our recurring net income. It offers a 4.1% yield based on yesterday's share price.

With this, let me now hand back to Patrick to discuss our 2020 priorities.

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [3]

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Thank you, Laurent. What about 2020? If you look at where we come from, we have spent a lot of time in solving performance issues.

And you remember that we had 2 ways of looking at our journey: addressing, focusing using resources, capital allocation to do the U.S. turnaround, to get some assets disposal, to do pricing and margin reestablishment, Germany and Spain turnaround, et cetera, et cetera; at the same time, we are paving the road to the future with some digitalization, robotization proof-of-concept, some data-driven attempts here and there in order to figure out what was the potential to have and write a different company profile.

2020 will be the year when Perform and Transform converge to become 1 action, and the performance comes -- and will come more and more from transformation, of which digital transformation is a key driver. And we will no longer split the Perform & Transform approach because the perform is the way by which -- the perform component is the way by which Rexel will generate the further performance increase.

If you go to the next page in shift in business model that we have initiated, we are now at the change because it has resulted in a different value creation model. We move, if I can say so, from a former logistic-heavy focused capabilities as a box mover toward a customer-facing with an enriched offer of services and solutions. And Rexel today, and you could look the same on the M&A-fueled model, and we have demonstrated that we're able to get a good organic growth, lasting development company. And we were more -- in many cases, below market growth. And now we try to reinforce, and we succeeded in many places, to reinforce how to capture attractive business and environmental megatrends, because it's a good business we are in.

Rexel today becomes a different company with a different mix of leveraging factors. Rexel of yesterday, as I said, was more logistic capabilities recognized, and depending on M&A to grow, but resulting also in fragmented DNAs, which was not the base by which we could go to digital because digital is global DNA. And we have changed that to the point that today, we are a customer-focused company with an enriched offer of solutions and services. We are increasingly data-driven and digital, reducing errors and inefficiencies; digital, reinforcing customer stickiness; digital, multiplying customer interfaces; and looking for personalized value creation at customers and with customers. We work hard at serving and capturing customers for what they need the most: reliability that we anticipate for them; safe innovation solutions; and adequate value and cost.

Now what does it mean for 2020? We will capitalize on one hand on the -- on our past, which should bring us -- which is on the Page 25, which would bring us self-help initiatives as well as get first results and improved profitability out of strategic initiatives.

If you look at the ramp-up of the branches, if we look at leaner organization in U.S., but also in Germany, but also now in the U.K., these are the self-help initiatives that will improve our profitable growth capabilities. At the same time, in the self-help initiatives, we have already developed in '18 and '20 what we are rolling out in many countries: artificial intelligence-assisted customer churn, which now is in the hands of thousands of sales rep; e-mail to EDI in the commercial back office, so that we are faster in order to transform without quality issues any e-mail into an automatic order processing capabilities now being rolled down in 6 countries and to be extended further. These are elements by which we will benefit in 2020 from internal developments that will help now getting more sales at profitable level.

On the strategic initiative capability side, it's all about serving the customer better with agile points of delivery, and we have now new proximity in our hands, both in the U.S., in France, and we will roll out further. We have the Track & Trace capability so that everybody can know at any time from a mobile in many countries and very soon around most of them, where is my order, when it should reach me and increase our service level without having to talk on the phone, without having to find out where it is, without having to have a customer -- and by the way, it relates to what I told you before, Net Promoter Score.

We have also new ways of improving our even very good models of today by entering into new area of excellence and deployment of branch assortment through artificial intelligence, helping the marketing to have exactly at every point what most of the customer needs, or getting the right pricing model through artificial intelligence predictability of the willingness to pay to be now introduced in Germany. And we use that data to switch from reactive to predictive sales actions, the next best offer. What is the customer should be proposed as the next best offer in order to increase our more SKU? You remember, more customer, more SKU. This is how to leverage artificial intelligence capability to reach the more SKU. And 84% of sales today are covered by customer churn at the end of next year. The rollout is fast, and I covered a lot on this.

Just to give you a good sense that what we have paved the road for start to be self-help, but also strategically a differentiator in the marketplace. We are de facto designing the next model in our most mature countries. France is an efficient model; Benelux is an efficient model; the Northwest in the U.S. has always been a very efficient model, and -- just to name a few. And we even these ones, we changed to the point of making them even more solid for the future. And obviously, in doing so, we leveraged the scale effect in the biggest country. And in doing so, we also get the set by which we will leapfrog the transformation in the country where we have paved the road by rationalization, closing branches or restructuration, like U.K. and Germany, and where we are bringing this new approach so that becomes faster, a very efficient contributor to our improved results journey.

Why do I tell you this? It's because if you look at the next one, France, it designed the next model. We have -- we talked a lot about our past in France, how solid it was and so on. We have seen that in 2019, they succeeded in having a good year above the market trends. Using AI to better predict customer needs, enhance customer satisfaction, increase customer stickiness are not just buzzwords. They are real ways of working. Data in the hands on a mobile, on a tablet, on a PC for everybody, making daily decisions compared to yesterday's efficiency, this is what is going throughout the organization. In doing so, we could also leverage new ways of doing business: containers in good locations, lockers with -- digitally managed, we got 24/7 pickup rooms. Now you have the numbers, it's 100, but obviously, it's only the beginning. There would be many more. And allow me to say that we also, in terms of software and services, if you remember the Energeasy Connect capabilities, we have sold in '19, 10,000 of them and we have reached the installed base of 25,000, which makes us a very, very -- probably one of the most distributed software and service management systems in the country.

And just to give you a sense for what's going on in such countries. On the U.S., obviously, on the page after, I'm so glad that with Jeff Baker and his team, we are able to roll out the best of what was developed, for example, in the former Platt, for the one who remember the quality of this acquisition, which now becomes a standard way of growing the Proximity business around the States. And we have done a lot on this. They work very hard at getting the right master data management system to make all of this compatible, which now we have a good base to foster sales force adoption of all analytical tools, Salesforce, Power BI, artificial intelligence tool, like the churn that I mentioned before. And the next 18 months, obviously, we will see a major efficiency upside through the Salesforce in the U.S., and I'm so glad also because we have invested as part of what you see in our investment, there are 50 data and data science people now in the platform in the West Coast, as much as we have on the other platform here in France. And therefore, we -- this company, Rexel, is working for the digital on 2 legs, 1 in the U.S., 1 in Europe, both exchanging, it's 1 company, it's 1 set. It's not 1 benefiting or not from the other, like in the past. We are a solid 2-legs company walking on this digital path, okay?

Now when it comes to a more difficult situation of the past, Germany and U.K. and we now choose that after the restructuration, the path was not to go in the conventional way. The path is to go by -- cross the digital bridge and leapfrog so that we enter automatically now, like some other countries have been doing in other businesses, leapfrog the conventional step and go to the digital way. Therefore, in Germany right now, we have changed the total executive committee in order to allow for that. We have leveraged analytical tools initiative deployed to improve internal efficiency. They are large users of e-mail to EDI. Deploy segmented artificial intelligence pricing model for further rollout in Europe. They are a place where we have tested a little bit outside. We have implemented there, and the proof-of-concept is being done there. And now it's being rolled out so that they could leverage their pricing -- artificial intelligence pricing adaptation capabilities. Just to show that conventional countries in the -- conventional in the footprint of Rexel, could become leaders also in the digital transformation.

United Kingdom. We have done the closure of the branches in '18 and '19. We have changed now the organization. We have an efficient new team, some with long experience outside of the U.K., of which the 2 leaders, 1 being the CEO which is the former Platt leader under Jeff Baker and has been the head of Northwest, has come to the U.K.; and also, the Commercial Director who had experience in Sweden. They went then to Australia, and then he has taken the challenge working with Edgar Aponte, the new CEO. He has taken the challenge to reconstruct fast the U.K. and then we use a lot of the digital capabilities, Track & Trace, digital sales through the rest of the web -- of the rest of the group and so on and so on. Therefore, I will not repeat that Germany expands into the U.K., because it will be a different set of capabilities, but they both leapfrog through the digital bridge.

Which brings me -- this is a snapshot to tell you why in 2020, we believe in having an outlook based on, first, we are in a good business. They are fundamentals that sustain the electrical equipment we are in, energy efficiency, IoT, safety norms, greater demand for carbon-free products, just to name a few, are really making the business we are in probably less cyclical than others because there is a sustainable demand growing every day in many usage and many sectors of the economy.

Second, we will continue to push and be ahead of the journey in our 2030 environmental road map, after 2020 objective achieved ahead of plan on the environmental performance. It's not something to comply with. It's an element of the DNA as much as we do digital on one hand, we do this on the other hand. It's a way of life. And I'm pleased to report on these numbers. They are the results of so many thousands of people of the -- our organization that they will continue to be managed in this way actively because it's another piece of the new DNA.

Capital allocation is also now becoming a standard way by which we look at the business: what is needed for the organic growth to fund the core business; what is to respect our shareholders through a dividend policy, predictable, solid, and as it has been described by Laurent? To maintain our view on acquisitions, like being very selective, fueling just for the purpose of being bigger and bigger, if it would not serve the digital path, the environmental path, we would not do. In other terms, I'm looking at focused digital M&A, or services, or digital capabilities and always respecting our other components. And obviously, we continuously, I think we have proven the case, to deleverage further. And whether it is done by better -- by the good management of our capital allocation or opportunistically, depending on the release of some assets non-strategic to our future, like Gexpro Services.

Therefore, the 2020 outlook, given the benefits from our initial digital investments strengthened our conviction that Rexel's evolution towards a data-driven company will reinforce Rexel's positioning and contribute to market share gains and margin improvement. That's the overall theme. And the priority will be to continuously improve our adjusted EBITA margin and free cash flow generation, notwithstanding the challenging environment, it's a fact, and while continuing to invest in digital transformation, it's a priority. And it's not an option. In this environment of low sales growth and with a more challenging base effect in H1, because of 2019, we target for 2020, at comparable scope of consolidation and exchange rates: a, an adjusted EBITA growth of between 2% and 5%; a free cash flow conversion of circa 65%; and further improvement of the indebtedness ratio. And the formula is written here. And that's how we are entering -- or we have entered into 2020, and that's by these lines and priorities that I have described before, that we will generate our results in 2020.

Now to be more explicit on this new DNA, new company, new data-driven and its expansion and rollout, and how do we get into -- beyond 2020 ambition, we will present during -- in the course of 2020 on our next Capital Markets Day.

I thank you for your time. We will now take all the needed time for your questions and in order to bring all the clarification you need. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Lucie Carrier.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [2]

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I have 3 questions, and I will go 1 at a time. The first 1 was actually more on the guidance. I see this year, you are not providing a top line guidance but speaking of a low-growth environment, but still targeting an EBITA margin expansion from, if I understand well the guidance. Can you maybe explain to us or maybe give us some of the building blocks on how we could potentially build from, let's say, no growth, maybe slightly negative growth or slightly positive growth to this margin expansion? Because historically, this is not what we have seen at Rexel. And you are still talking about more investments in digital. So are you able maybe to help us calibrate this? Or what gives you the confidence that, that can be achieved?

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [3]

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A good calibration would require a good top line vision, which is the only thing that nobody can bet on today. And therefore, where we had a lot of intensive discussion about the top line. And the top line can be ranging from below 0 to much better, and it depends on elements which are totally out of my capability to predict. And collectively, we are on this line. The only thing we are sure of is what do we have as a leverage, internal leverage, in order to work on our EBITA. We have the margin, we have the pricing, and we have the cost structure, and we have the prioritization of doing certain things or not, meaning all initiatives on pricing will continue. All further initiatives on costing, we are ready to take depending on how the business could be. All initiatives on getting more out of the data-driven company, eliminating errors, getting better assortment, getting the right price for everybody, getting the reduction of returns, the reduction of claims, we will continue because every day, they make our bottom line better and more robust.

In clear terms, should nothing come from the market, everything should come to match this guidance from our internal decisions and our further absolute priority to be a data-driven company, to have data-driven employee behaviors, to have data-driven stickiness to the customers, should it be done at having less of other choices.

I don't want to be paranoiac. If it would be more radical than anything has ever posted today, nobody can predict. But I'm ready to go for whether it's slightly negative or positive, because it will just be even forcing us more on the choice that we have been taking already in second half of '19, and we manage monthly with all our 25 CEOs of the world and that we have decided to be really acting along the line I have just mentioned to you.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [4]

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My second question was around Europe. And not so much on the EBITA margin, which is up, of course, but if we look at the gross margin, which is up quite sharply, actually, over 50 basis points, I was wondering if you could give us some color on what has driven this improvement. Is it actually really the impact of digital and the increased penetration of digital? Or is there other factors in place?

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [5]

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Laurent wants to comment on this.

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Laurent Delabarre, Rexel S.A. - Group CFO [6]

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No doubt, different elements. There are the [sales side] of our organization in Germany and [Spain], so there is a country mix inside. There are some supplier concentration, which drive for better, better pricing and better purchasing conditions. And we have also a couple of pricing initiatives in a couple of countries, which also help us to improve the front margin.

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [7]

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We feel that in the lower-performing country, going for the right way of acquiring market share in terms of mix, supplier concentration, it's not taking our customer at any cost. It's taking a customer that feed the supplier [massification], that allows to get better commercial margin. Around Europe, but even in the U.S., we have introduced a drop-through measurement by which an incremental sales should have a higher drop-through and contribution to the operating leverage. Management start to do this, to select, to develop, to gain using this as a lever so that we improve the bottom line.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [8]

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And just my last question was whether you were able maybe to comment on how you see the current consolidation in North America among some of your competitors. Is that something that you see as a risk? I guess from your comments, it's clear you don't really want to follow something similar, but how this is impacting your industry?

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [9]

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I would tell you, these last 2, Anixter and WESCO, knowing how often people have tried to marry us to WESCO and how often we have been looking ourselves at Anixter, and this factor -- and you remember the years where it was on the agenda, and everybody talked about it, it's obvious that there is always a minimum of good sense when these 2 comes together, but it will not take market away from us. They had potentially on that good reasons or bad reasons, I will not comment on this.

Will this affect us severely? No. First of all, the market has a huge potential for further consolidation. Second, they were big, big competitors, let's put it this way, separately, and they will remain competitors even they have combined. Given the fact that one and the other have different product offering, that putting them together or whether they were independently going to the same markets before will not change radically this.

There were a few other acquisitions in the U.S. where we look carefully at whether they could be a game changer. If somebody acquire another one, but these ones we couldn't anyway, would have -- because it would have been refused by the antitrust authorities, for example, is not a game changer. I don't see yet a game changer in all of this. Maybe it's because they are in also different market segments that I am in. We are heavy in industrial with the good and bad things. WESCO is -- could be there, but with different brands. They are not Rockwell, and where we have a Rockwell [API], they are not winning. So far, it is not yet, for us, a major game changer.

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Operator [10]

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Your next question comes from the line of Daniela Costa.

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Daniela C. R. de Carvalho e Costa, Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team [11]

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So I have 2. One, I guess, sort of following up on one of the prior questions regarding capital allocation and how shall we think about sort of -- you're very clear you want to delever. You've also raised the dividend a bit more this year. The balance between those 2 things and also your comment on there is still ample room for consolidation in the market, whether you have some leverage in mind on whether one gets more important than the other is my first question.

And the second question, would be very keen to hear a bit more regarding -- you've talked about all your digital initiatives. And one of the initiatives, I think, you've explained over the past has been there's more automated, smaller branches. And can you give us a little bit more color on like how you will roll out that? Where do we stand there? And how long will that take? And how will that impact financials going forward? A bit more on the medium-term perspective rather than necessarily on 2020.

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [12]

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Laurent, you take the first part.

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Laurent Delabarre, Rexel S.A. - Group CFO [13]

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Yes, yes, yes. On deleverage, we guide this out, to continue to deleverage. We want to be around 2x, which will be very soon. With the disposal of Gexpro Services, we gained 0.1x, so we'll be very close for that. So it means that in the near future, we would like to restart some M&A, dedicated M&A, especially on IT, digital. So the level is around, yes, around 2x. We don't think at -- with the cost of the money to date, that to go further below would mean something for us, and we prefer to invest the money. And in terms of dividend guidance, we stick to what it is today on the market. It's at least 40% of the recurring net income. What we have done this year is to have a dividend increase very close to the recurring net income increase.

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [14]

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To your question on digital. Digital is not a big bang. It's a DNA transformation with some steps that we have, obviously, different parts of the world to contribute to in the way we design, craft, before we roll out. Digital means, first, to be a data-driven company, which calls for data. Data, we have. Data, we have millions every day. And the question was what do we do out of it. Therefore, we first started by putting data infrastructure, data commonalities, data definition, and we will continue to have data people in order to structure all of this and make proper use of it.

This has been done in the last 2 years in many places. Remember the one when we commented to you the beginning of MDM in the U.S. In order to get 4 banners, having commonalities by which we could operate certain different ways of doing business than the banner. But the multi-banner regional approach, if this would not have been done, we would not have been able to restructure. This is just one good example. The data structure, once commonly brought to a way we can use them, address them, is a base that is already bringing things because it was allowing, for example, in U.S., a branch of a banner to benefit from having the access to the DC, product availability, of another banner. Otherwise, it would have been impossible. And some of the U.S. growth has been fueled by this efficiency. And this is why, for example, we have reached the point of no return and to get, at the same time, the best of every banner and the best of being a regional and more local company.

The next stage in data is what is our priority in order to make use of them. And for example, there is the management. Now it's not a revolution to say that Power BI by Microsoft is available to many people, but it's how people will use it. And when thousands of salespeople wake up every morning, take their mobile and know exactly the margin and the volume that they have done the day before and they will do -- they will have to do in the 3 days after, you become a really data-driven company, just to give you a minimum of an example the way it is being done now. And we have now probably half of the sales force around the world that can do this. And in the coming months is 90% that will be able to run.

And we changed, obviously, the rituals, because we changed the management rituals by which a branch manager or a regional director or even a banner director is driving the sales force. Now being a data-driven company, change also, making the company more reactive, being more, for example, as I said to Lucie before, margin-driven and being more profitable growth-driven, because it's nice to announce these things, but it's another thing to be able to drive it every day where it has to be done. And this is, for example, what has helped a lot in the course of '19 in the U.S., when the tariffs at the end of '18 created some margin squeeze 3 months later in different parts of the U.S. If we would not have reacted differently and say, let's go for drop-through and things like that, the results in '19 would not have been there, not in the same way, by far not. And this is because we became that company that we have been able to do this.

Now the next stage is something that we see now volume-wise and we are rolling out. This is use of data, use of interface to the users by putting intelligence, artificial capabilities, which are sometimes statistical predictive or sometimes very complex prediction in order to bring to the next level of efficiency. And the next level of efficiency, it means efficiency in the inventory, to bring the right product to the right place. And having 2,400 proximity selling points, and not one being exactly the same as its neighbor, requires that kind of excellence. It could be predictive, when -- with a customer, when do we detect that a customer could be going to another distributor, what we call here, in this presentation, the churn. And now we have thousands of sales reps receiving, on a very, very regular basis, the list of customers having a potential to churn, at which speed they should act on, and they are reinjecting the system the nature of the action that they are undertaking in order. And we measure, and the machine measures, how good the action was, whether the same customer remain a churn-able one or not.

And out of this, probably in the course of 2020, we will improve through machine learning how to now suggest at the root cause for which kind of an action. This is what I would call assistance to sell, assistance to time usage, assistance to priority for every sales rep. It's an assisted way, like you have in a car assisted driving capabilities. And here now, we have assisting selling capabilities. And this is the data journey. This is the AI journey, and this is what we are in.

Now where is it useful? It's not useful everywhere. But for the Proximity business, it is. The Project business will be something different. But the Proximity business, the -- what I have mentioned before, which is probably 60% or 70% of our daily operational business in most of the countries will be assisted by this.

Just to give you -- you asked for color. I give you color, flavor and potential results. Now the rollout speed, it's all about people adoption. And people adoption is never an easy journey. I mean I don't want to be the guy who will tell you, push the button and it works. No, no, no. It's creating case -- use case. And therefore, now we embark in our sales force, or next to the sales force, transformation directors, people who assist everywhere there is a blocking issue and so on. Now like we said, that always, 1/3 of the people like it immediately, 1/3 of the people learn how to use it efficiently and 1/3 are resisting. When it comes to resisting too long, then we may not need to have people pushing on the brakes of the car, and we will look for productivity efficiency, including certain decisions of living with the people who really make use of it and not living with people who would not do it. But it's a daily operational dimension I'm bringing in a color mode, but this is a determination by which I try to make this company more efficient.

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Operator [15]

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Your next question comes from the line of Andre Kukhnin.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [16]

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I want to come back to guidance first and to the answer you gave to Lucie's question. Am I -- would I be fair to interpret it as that you'd expect to grow at the bottom end of your guidance range 2% on EBITA in a slightly negative volume environment and to deliver the top end in the more positive? Would that be fair? And especially in the context of your -- one of your key supplier's guidance today of minus 1% to plus 3%, are we kind of in the right ballpark in interpreting this right?

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [17]

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No. If I would be sure it would be the low end, I would have written circa 2%, okay? If I would be sure, I would be between 4% and 5%. I would have written at the top end of around the 5%. There are many balls in the air which are not in my hands. If I would drive at something with a clear operating leverage and then confirm elements on the top line, obviously, I would be more precise. But I'm working hard at telling you everything we do, everything we can, everything we have invested in, everything of the self-help, everything of the past, everything that we can still initiate, will be made. And depending on the global activity so far today, given the condition, we could see a short-term [leeway]. This is the best guidance of being between a 2% and a 5%.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [18]

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Okay. Maybe I wasn't clear. This isn't an attempt to try to pin some kind of top line guidance on you. It's just more to get a sense of what the range of scenarios is behind the 2% and 5%. So I was thinking if you said kind of slightly negative, and that will be more consistent with the 2% and then more positive, consistent with the 5%, but maybe I'm indeed interpreting a bit wrong.

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [19]

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If I listen to you, you tell me if it's negative, is it more a 2; if it's a positive, is it more a 5. It's obvious that the more -- the less it is negative, the better it could be on the top line and kind of -- I count on my -- the only thing, let's be clear, I count on my best, given the activity of today, okay? If the world collapses, it's a different story. But then it's not only my story. I'm not -- given the existing condition, given what we have invested in and given the way we work and all the hypothesis that we have in action today for what it is in the -- in today's environment, could bring me between a 2% and 5%. And I cannot tell you at which end that would be, it would be easier for all of us. As a CEO of a company, to predict -- it's not that I want not to predict, I think it's courageous enough today to tell you that given the existing conditions, we could be between 2 and 5. I don't want to cover my a** by telling you if it's -- when it's minus 2, I am plus 2. I am telling you, today, if it stays as it is, we will be in this range.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [20]

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I appreciate that. And yes, this is just more of an attempt to get more idea of what was behind it. But if we get volumes -- if we put volumes aside, and if I kind of imagine the profit bridge for 2020, then from what you said, it sounds like you expect a positive price contribution, were the actions continue to take place. And then -- so the question, I guess, is that, yes or no?

And then secondly, on that balance of productivity versus cost inflation, would it be fair to expect that to be in a net positive for 2020 as well, given what we know now about the rates with different cost items and the actions you take? And then finally, the digital piece. I don't know if it's possible to weigh it up in terms of costs and benefits of what's being invested in the initiatives versus what they're yielding. But if it is possible, what was that balance in 2019? And what is it looking like for 2020?

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Laurent Delabarre, Rexel S.A. - Group CFO [21]

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Yes. It's Laurent, I would answer more specifically. Globally, already in 2019, the pricing environment is, at group level, up 1.7% with -- in Q4, excluding (inaudible) around 2% global price inflation. A bit less than that in Europe and a bit more than that in the U.S. So yes, we believe that the pricing environment will continue to be slightly positive. We will still face some cost inflation, salary and benefit, transportation costs. It's obvious. And we have a certain number of productivity initiatives. The net will not be a positive of this year, because this year was strongly driven by the bigger situation that we have done in end of '18, Germany, Spain, second half of '18. But we are still in an ongoing situation that have been performed last year that will continue to help us. But the balance will be -- it will be more balanced between cost inflation, productivity.

And for the investment for growth in the 25 basis points we have this year, there was still the last opening of U.S. branches we have performed in H1. And then we said that the 57 branches we have opened is the right setup. So this will not be there anymore. We will continue to invest in IT and digital. But probably, this amount will be between 20 and 25 basis points as it was this year, but fully IT, digital-driven. That's the kind of building blocks I can give you at this stage.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [22]

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That's very helpful. And if I may slightly just change gears, in terms of portfolio and further actions, are you -- can you say that you're done on kind of the existing portfolio? Or are there still considerations there across other countries? And then maybe a quick update on Spain as part of that, where you have taken a lot of action. And then on the other hand, in terms of potential acquisitions, the -- what I wanted to ask is whether you're seeing any evidence of your smaller competitors now starting to kind of feel the heat from having to invest in what you've been investing and building capabilities that you've built and, therefore, facing the choice of whether taking that on the chin or coming to combine with the bigger players that have already done it. So I just wondered if that's starting to happen or not yet.

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [23]

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The -- by the way, there is one piece of your former question that was not yet answered, which is digital yield, which I have not forgotten. Digital yield is a way by which there is more and faster yield on each element of the business chain, procurement, correct procurement, which could mean more adequate inventory by adjustments. The yield in pricing is definitely, in bps, up. The yield in supply chain efficiency, how not to have scrap returns. And even we return to a supplier, there is a cost associated with every line of return, every line of movement.

The yield of digital is eliminating, what I call, errors and pollution and increasing the customer satisfaction. Therefore, it helps on the margin side. It helps on the OpEx side. And it helps on the customer stickiness, which, by the way, we can measure, not just by Net Promoter Score, but by probably, medium term, lowering the churn, the churn [allowance]. And it's really bringing the business model to the highest level of efficiency with less people involved. And in a company like Rexel, there are hundreds of people leaving the company each year to go in retirement. And if we can take also advantage of productivity factors along these lines, obviously, we enter into a new productivity level. The only one which will remain at constant level is our external sales force. All the rest is a candidate for becoming more efficient.

Just to give you a feel for -- it's difficult to put a number behind each of them. We know that e-mail to EDI is directed to release of back-office people. But some of them we use for other tasks, which is more -- for example, the churn, follow up on the churn, so that they call the customer and so that the churn becomes a more active way by which we retain customers. But if some people are candidates for leaving the company at the same time, it becomes a direct element that goes to the bottom line. And obviously, in each of these digital initiatives, there is a potential for the 2.

When -- and because it was -- back to your first question, was -- now with the capital allocation, when it comes to acquisitions and so on. We know, we learn, that acquiring is easy. Integrating is costly. If there is a very good one in the digital world that would accelerate my digital transformation or my presence in servicing, servicing around the IoT, service in other things, that would be an add-on without having a lot of synergies, for which the money spent in the acquisition will make huge sense. If it is to acquire another me-too, not yet digitalized, having a restructuration of the supply chain, we have seen the movie many times. And size counts, but not at the cost of a very high restructuring capabilities in the conventional model. This is why I may stay cool. It's not that we don't have a vision. You see me very cool on many others concentration, unless we would see a real need for making a move, because there would be a change -- a game changer somewhere. And -- but that's the only -- and I have none on my agenda today, to be clear, of this game changer.

Given also the context of where we are today internally and the context of the market, what are the drivers of the sustainability of the demand in electrical equipment, if you go back to our slide on mega trend, and you will see that there are many things here, which does not come through an acquisition of me-too distributors. Now there are service companies. There are software companies. There are other players that could help us in this game, but less me-too.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [24]

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Very clear. And on your existing portfolio, that part of the question? And thank you for following up on the digital yield question.

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [25]

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Yes. I'm sorry, I forgot this part. Thank you to remind me. The initial portfolio commitment that we took, we did. Now this initial commitment, it does not mean it's done forever. When we say active portfolio, it's exactly what we are doing with Gexpro Services. It was a good company. It was doing a 7% EBITA, right? It's a USD 250 million to USD 260 million one, but it was not in the core strategically. Either we would have doubled, tripled and then we would have had to acquire, because -- and there is very little synergy because they had very, very few electrical products in their offering. Therefore, there was no rush to do it. But strategically, it was not in our core business, because everything I'm telling you, including the digital cost of transformation and everything else, has to apply to 1 business. Doing all -- all we are doing for the Electrical Distribution could not apply to Gexpro Services, all their parts, all their sets of data, all their suppliers, all their customers, more project-driven than flow business driven and so on and so on and so on. Therefore, all the investments made couldn't benefit to them, which was a clear reason why there's a moment, you say, "Why?" If they need to have a future and I need to make changes from them, it would require high level and intensity of evolution changes, but only for them. And right now, I'm making the EUR 13.7 billion sales of electrical products in a different -- and try to bring them to a different level of business elements, business components, digitally-driven, which couldn't apply to Gexpro Services. This is where it becomes an active portfolio component strategy, and there might be one coming in and others getting out. The coming in, I can tell you. When you are a Rockwell supplier, [API] owner in the U.S., there is always an active portfolio by which 1 day, you get [300 API] sold to somebody else, and you acquire another one. It's about technical capabilities that you bring together. Supposingly, somebody is willing to sell, and supposingly, you are eager to buy. But besides these 2 active API management system around Canada and U.S. has always been on the agenda. We don't make huge noise each time because it's just similar here and there, but that's the way to get better technical support in order to go into the [acquired API] logic. And this is also a subcomponent of an active portfolio management where we do it.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [26]

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Very clear. If I may, just 1 last very broad question on what your suppliers are doing in terms of moving into software for specification and life-cycle management. I wanted to ask whether that has yielded any change for you already in industrial automation products, where this started happening earlier and, I guess, is accelerating. And what you read from that into the more later moves in the building space in electrical products for buildings and what Schneider announced today but also with a couple of precedents as well, whether that will be different in buildings and what does it actually mean for you, given where you are in the supply chain?

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [27]

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The digital acquisition, so software. It's not digital. These are the software capabilities being acquired, whether it was in the past like AVEVA or whether it's today by Schneider, but there are similar moves being made by many others. It's a natural move, technical move, technology move of this industry. By the way, it could be for photovoltaic with energy efficiency component of electrification. It is true in the industry. Some are doing by their own developments, more like Siemens. Others are doing by acquisition, like we are seeing these days. We cannot not participate to it, but we need to participate not by doing the same, by playing our role in the value chain, by being complementary to. And the way to be complementary to is also in order to address components in the same way. In an Industry 4.0 approach, this is, for us, how to sell to our customers that capturing information, bringing to a device that bring them all, handle them all, put on the platform, whether it is the supplier platform, whether that we can use and we have commitment to use and we have ability to use and they let us use, in order to benefit from energy management system, software which we run, and then we restore the output to our own customers, which become an investment plan, which the customer will do with us so that we can provide the product in time and by steps. This is, for example, what we do in a few places in logistics centers. And we have started doing this on MindSphere with Siemens. At the other end, when we work with Rockwell and we have access, and we have the customer base we have access to, it's well-known that they ask a distributor to equip with skills and people who can really make software, diagnostic-equipped installed base diagnostics, run on the platform software, the SAP that they provide to all of us and by which we return to the customer with certain plans, improvement, depending whether it's budget under constraint, it's energy efficiency, it's security investment to be made. By the way, in the U.S., you could have (inaudible). Rexel is the most advanced of all the [API] distributors because we have 20% of our installed base, which is already prediagnosed. By the way, we share that with them. This is a result of 2019, and we are one of the most advanced, if not the most advanced, to broader in penetration of the software approach to our customer base. Now it helps also being a good partner to them because we represent their product and activity, but we use their software, and we use also their platforms if we are not equipped by ourselves. [You can easily imagine change], we can easily understand that when I was talking digital, there is also capabilities, human capabilities, understanding, interface to these companies that we need to adjust, and we are adjusting. And the 2 I have mentioned is just good examples. It's the same with Schneider. It's the same with others. I mentioned Siemens, Rockwell. I don't want to eliminate any, therefore, please, it's not exclusive. It's just a good example I want to bring to you.

If I tell you this, this is another shift by which the resilience of distribution. If you become a partner of this, it makes us long-term partner and more resilient. If we would just be a box mover, they don't need us as much as in the past. And there's not one pushing the other one out. I see that as complementary skills in order to be able to act, because the granularity of the customer base require efforts to be shared who does what. We have the granular -- access to the granularity. We have to have standard package by which we can use them in a granular mode and return in a centralized way in order to feed the investment of all the improvements, because it's more ongoing permanent improvement that customer needs.

Now when it comes to the construction world, and yes, I was more on the industry, the construction world is just at the edge, not the edge software approach, the edge at the beginning of the so-called BIM. And the BIM would change the industry or parts of the industry, because the BIM [articles], so to speak, and the BIM database will not be an SKU database. It will be function driven. You saw the function. And around this function, we aggregate components, which, at the end, become SKUs, but it's aggregated into a BIM object. Now we work at being supplier of BIM object, and in order to feed the software and the acquisition announced today is in this direction. And so that is part of the discussion we will have over the months and next 2 years because nothing is immediate. But it's done in a couple of weeks, and probably we will upgrade around with [Time Max] with this supplier, but it could be tomorrow with another one, how can we fit to the best? So that it is an increasing demand by which we will penetrate the market. This is the name of the game, to be in the market growth, market change and gain market share. That's also why having -- being prepared for, this is why our database, what I have mentioned before, the master data management basis and the data layers and all this infrastructure that we have put money into, will give us access to be a partner of such moves that the suppliers are making. And by the way, industry was at a certain stage. Building new construction or heavy renovation through contractors is a natural next step. Now there is more features in this one. There is the new construction. There is the repair mode. There is energy efficiency. There is the safety. It's done differently. But it will come also lower and closer to the multifamily homes or multi-housing buildings. And that's a natural move.

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Operator [28]

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Your next question comes from the line of Martin Wilkie.

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Martin Wilkie, Citigroup Inc, Research Division - Director [29]

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It's Martin from Citi. Just a couple of questions. The first one was you alluded that your branch sort of openings in the U.S. have now sort of reached the level that you want. I mean in the past, you've talked about the time for the branches to come up to sort of natural scale and profitability. In terms of thinking about how we see that improve over the next couple of years, does that give you a bigger benefit in 2021 than it does in 2020? So that was the first question.

And the second question was you mentioned on your holding costs that you reallocated some towards the divisions. Just to understand what was moving to divisions? What was the reason behind that? And what costs are still left in the corporate side?

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [30]

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The profitability of branch pattern that we gave you at the early stage of the development, and by the way, we had only a sample of branches, has proven to be right. Now some are faster. Some are longer. Statistically speaking, it's exactly the pattern. Now we have about 30 or -- but Laurent can be more precise than me on exactly the results. But at least I can tell you it was the right view. But Laurent, you can give more color.

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Laurent Delabarre, Rexel S.A. - Group CFO [31]

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Yes. Yes. This -- these holding costs are of 2 parts, what's called a [centralistic] costs, which are the transformation costs, mostly IT and digital. This one, we think that by utilizing the approach centrally, it's cheaper and more efficient and quicker than by developing it in each country, as explained by Patrick. So we have just European hub and the U.S. one. And on the European side, most of the costs are hosted centrally and they are now reinvoicing to the country. And in 2019, we reinvoiced more than in 2018, because we have onboarded more countries. And when we invoice the country, we have a kind of setup costs for AI solution, which explains that our reinvoicing was a bit higher this year than last year. The second pillar of this holding cost is the corporate overhead. I would say, the key (inaudible) function, we need to operate a group like ours. And on this, we have some productivity, digitalization at our level on the different function, and we were able to drive the cost a bit down this year.

And on the NBOs, 57 have been -- they will probably be adjusted by a couple, but no more big opening of branch. The first one from '17 are very close to maturity, but then we have the 2018 and 2019, which will continue to grow. It takes about, depending on the site, 12 to 18 months to break even and another 12 months to bring it to the average level of a big branch. So we still have -- it's part of our self-help, as disclosed by Patrick, for 2020.

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Operator [32]

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Next question from the line of Sébastien Gruter.

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [33]

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Just a question on below-the-line items. I see a EUR 24 million nonrecurring expense related to several items. You usually do not exclude those items from your adjusted EBIT. I appreciate the transparency on that. But when you guide for EUR 45 million to EUR 50 million restructuring charges, can we expect other nonrecurring expenses as well or this is it?

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Laurent Delabarre, Rexel S.A. - Group CFO [34]

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No. While this operating -- other operating expense is a line where we have different things that are not restructuring costs as such but are specific one-off, which, due to their size, are eligible to this other income and expense line in order to present a kind of more normative EBITA. So it is fully disclosed. It is disclosed in our financial statements. But we have couple of different issue in one of our country, which is New Zealand. There are also some severance costs in other countries. There is a true-up of a pension plan in the U.S. in 1 region and a couple of other things. Globally, the EUR 50 million we guide for is also including most of what is in this line.

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [35]

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Okay. And everything came in H2, there was none in H1?

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Laurent Delabarre, Rexel S.A. - Group CFO [36]

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The biggest came in H2, yes.

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [37]

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Okay. And a follow-up question was on China. You had a big project that boosted the performance of the country in 2019. Do you have in the pipelines such project that could help the top line also in 2020? Otherwise, we could see a significant drop of the Chinese business in 2020.

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Laurent Delabarre, Rexel S.A. - Group CFO [38]

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Well, this big contract was with a plane manufacturer and was close to the end in Q4 and probably, will have limited follow-up deliveries for 2020, but it is over. We have other projects in the pipeline, but nothing to be confirmed yet. So yes, we could have a base effect impact on the top line next year. But we are continuing to go there, and the industry is not slowing down so much yet. We are mainly on Tier 2, Tier 3 cities, but we are holding quite well, and we have different action plan for 2020. So we are quite confident for China. And on the coronavirus, none of our people have been injured. We have around 800 people in China, 50 in Wuhan. So far, they will gradually come back to work next week. And total China is only 4% of the group sales. So we, on that side, we don't feel we will be impacted so much.

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Operator [39]

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Your next question comes from the line of Andreas Willi.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [40]

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Two questions, please. The one -- the first one on the performance, H1 versus H2, in 2020. In 2019, we had quite a strong weighting towards H2, which you had signaled also early on. Do you expect a more balanced performance in 2020 in your base case? Or is there something we need to take into account when we look at H1 versus H2 profit growth?

And the second question on tax. With your kind of low 30s tax rate, you pay among the highest tax rate in the sector. We have seen some reductions in the U.S., in France and so on. Why is your tax rate quite a bit higher than most other companies? And is there any potential to improve that further?

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [41]

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Let me take the profile H1, H2, and Laurent, probably more adequate than me on the tax rate. The H1 last year was fueled by tariff increase in the U.S. pushed up demand, people trying to get the investment done, no recession yet in the industry, which came only after summer and no margin squeeze, which was corrected in the H2, so that the H1 level last year was really strong. And yes, we take into our own account, okay, and it's a good suggestion to take into account, that the top line in H1 this year do not benefit from the same support from the market because we are more starting the year ala H2 profile, industry demand at the level where we ended up the year, compared to something much more higher in the H1 previous year. And this fueled effect that have corrective action in the 6 months after, always come back somewhere in the middle also. How fast -- I meet a lot of people in the industry. Some are telling me, "Yes, yes, the industry demand is not bad. By the way, we do more quotation kind of stuff." But nobody knows really how fast it will come back to a more normalized level. There was a peak, there was a shove, there was a push, there was the tax reform in the U.S. that fueled investments. Once it's done, obviously, we have a little bit of a hold behind until it comes back to a normal level. This pattern, if it would be in a stable world, we would have some profile. Given the uncertainties on many other things, nobody commit anymore to when will come on a normalized level. Therefore, the gap between H2 and H1 is to be foreseen.

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Laurent Delabarre, Rexel S.A. - Group CFO [42]

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Yes. On the tax rate, when you take the average of our country, we are at 29%, which big contributors, such as France, that the tax rate will decrease next year, and we show it still at 34%. So that is [working] quite a lot. And then between the legal rates and the effective rates we have, every year, the impact of our goodwill impairments that have no tax benefit. So they are just increasing the effective tax rate because they are not deductible by definition. And this year, this has been offset by litigation -- very old litigation that we gained and for which we had a reversal of close to EUR 30 million. But just overall, because of that, every year, last year, the effective rate was 53%. Now it's 37%. But the legal from the country is 30%. That's why when we guide on a normative level, we are between 32%, 33%.

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Operator [43]

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(Operator Instructions)

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Patrick Berard, Rexel S.A. - CEO, CEO of Europe & Director [44]

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Well, I think -- first of all, I think if no more questions are coming, I would like first to thank you for your attention. Second, I really appreciated, through your questions, that we were able to explicit even more our view and what we are doing. And obviously, it will be always a pleasure either to meet you or to come together for further explanations, either on road shows, on specific meetings. And thank you, and have a good day. Bye-bye, in the name of all of us.