Statement from Patrick Berard, Chief Executive Officer:
“Rexel's sales growth in the third quarter accelerated for the fourth consecutive quarter, thanks notably to positive trends in France, the Nordic countries and the US. We are clearly seeing the benefits of our first strategic actions implemented in the US in terms of logistics organization and branch network expansion.
“Our gross margin and adjusted EBITA margin improved year-on-year despite cost inflation in the UK and costs related to investments in future growth in the US, as presented at our Capital Markets Day in February.
“Based on our performance over the first nine months of the year and our expectations for the last quarter, we confirm our full-year financial targets, with adjusted EBITA increase at the low end of the February guidance.
“Looking ahead, we remain focused on our key priorities: investment in the US, IT and digitalization, turnaround in Germany and execution of the divestment program.”
SALES
In Q3, sales were up 1.4% year-on-year on a reported basis and up 5.2% on a constant and same day basis, reflecting sequential improvement in all three geographies.
In 9m, sales were up 2.1% year-on-year on a reported basis and up 2.8% on a constant and same day basis
In the third quarter, Rexel (RXEEY) posted sales of €3,238.8 million, up 1.4% on a reported basis. On a constant and same-day basis, sales were up 5.2%, including a 1.5% positive effect due to the change in copper-based cable prices.
The 1.4% increase in sales on a reported basis included:
- A negative currency effect of €77.3 million (i.e. -2.4% of Q3 2016 sales), mainly due to the depreciation of the US dollar and the British pound against the euro,
- A negative net scope effect of €4.0 million (i.e. -0.1% of Q3 2016 sales), mainly resulting from the recent divestments in South East Asia,
- A negative calendar effect of 1.1 percentage points.
In 9 months, Rexel posted sales of €9,904.7 million, up 2.1% on a reported basis. On a constant and same-day basis, sales were up 2.8%, including a 1.2% positive impact due to the change in copper-based cable prices.
The 2.1% increase in sales on a reported basis included:
- A negative currency effect of €38.0 million (i.e. -0.4% of 9m 2016 sales), mainly due to the depreciation of the US dollar and the British pound against the euro,
- A negative net scope effect of €42.9 million (i.e. -0.4% of 9m 2016 sales), mainly resulting from recent divestments (Poland, Slovakia, Baltics and South East Asia), partly offset by the acquisition of Brohl & Appell in the US,
- A positive calendar effect of 0.1 percentage points.
Europe (54% of Group sales): +6.5% in Q3 and +3.7% in 9m on a constant and same-day basis
In the third quarter, sales in Europe increased by 3.8% on a reported basis, including a negative currency effect of €16.2m (mainly due to the depreciation of the British pound against the euro). On a constant and same-day basis, sales were up 6.5%.
Sales in most of Rexel's markets were in positive territory, supported by a broadly favorable environment and a favorable base effect.
- Sales in France (35% of the region's sales) were up 9.1%, with trends improving over the quarter in the three end-markets (residential, non-residential and industry);
- Sales in Scandinavia (13% of the region's sales) were up 9.4%, notably thanks to strong 15.5% growth in Sweden, where we gained market share in a favorable environment in the three end-markets.
- Sales in Germany (12% of the region's sales) were up 5.5%, mainly driven by the non-residential and industrial end-markets (notably cables, with a +3.2% contribution);
- Benelux (8% of the region's sales) posted solid growth, with Belgium up 7.3% and The Netherlands up 14.4%, thanks to sales of photovoltaic equipment (PV), contributing for 8.5% to growth in the quarter;
- In Switzerland (6% of the region's sales), sales were up 6.5%, mainly thanks to Rexel's strategy of focusing on larger projects in an environment that remains competitive.
However, sales dropped by 2.4% in the UK (12% of the region's sales) in a challenging environment related to uncertainty around Brexit.
North America (36% of Group sales): +3.3% in Q3 and +2.1% in 9m on a constant and same-day basisIn the third quarter, sales in North America were down 1.7% on a reported basis, including a negative currency effect of €50.6m (mainly due to the depreciation of the US dollar against the euro). On a constant and same-day basis, sales were up 3.3%.
- In the US (78% of the region's sales), sales were up 4.3% on a same-day basis, despite a negative 1.2% effect from hurricanes Irma and Harvey. The sales evolution was driven by:
- faster organic sales growth, especially in the Proximity business, with Platt and Rexel C&I up in the high-single digits, offsetting lower growth in the Project business, still impacted by the non-renewal of a wind contract with a large contractor and by disruptions in the supply chain of a large supplier;
- a continued improving trend in the Oil & Gas business, up 30%, contributing for 1.4% to growth in the US;
- a positive impact of 0.7% percentage points, attributable to branch network and counter expansion. At the end of September, 11 new branches have been opened, of which 5 in Q3 2017. For FY 2017, 17 branch openings (of which 4 Platt branches in California) and 20 Platt-like counters in Gexpro branches are forecasted, with a combined annualized sales contribution of around USD50m or 1.25% of additional sales;
- a favorable base effect (Q3 2016 was down 6.6%).
- In Canada (22% of the region's sales), sales were down 0.4% on a same-day basis, despite a better O&G business environment (up low to mid-single digit) mainly due to maintenance activity in the midstream market. This slight decrease is mainly due to a more challenging base effect. On a sequential basis, it is worth noting the absence in the quarter of large wind contract that boosted Q2 2017 sales (3.0% of the 5.3% sales growth in Q2 2017).
Asia-Pacific (10% of Group sales): +5.1% in Q3 and +0.6% in 9m on a constant and same-day basis
In the third quarter, sales in Asia-Pacific were down 0.1% on a reported basis, including a negative scope effect of €3.9m and a negative currency effect of €10.5m. On a constant and same-day basis, sales were up 5.1%, mainly reflecting strong growth in China and Australia, which offset South East Asia'spoor performance.
- In Asia (49% of the region's sales), sales were up 3.4%:
- In China (75% of Asia), sales grew by 9.6% on a constant and same-day basis, helped by favorable comps (-11.2% in Q3 2016) and reflecting increased sales of industrial automation products and solutions. It is also worth noting that the comparable effect will become less favorable in Q4 (-1.9% in Q4 16);
- In South East Asia (15% of Asia), sales dropped by 19.0%, mainly due to the O&G market that remains very challenging, contributing for -10% of sales evolution in the quarter.
- In the Pacific (51% of the region's sales), sales were up 6.8% on a constant and same-day basis:
- In Australia (82% of Pacific), sales were up 10.2%, mainly reflecting good momentum in the non-residential end-market (Proximity business);
- In New Zealand (18% of Pacific), sales were down 6.2% due to lower project sales.
PROFITABILITY
Continued improvement in gross margin: +18bps in Q3 and +8bps in 9m
Adjusted EBITA margin of 4.2% in Q3, up 17bps, and of 4.2% in 9m, up 9bps
In the third quarter, gross margin was up 18 bps year-on-year, at 24.1% of sales and opex (including depreciation) amounted to 19.9% of sales, stable year-on-year.
- In Europe, gross margin stood at 26.2% of sales, down 16bps year-on-year, mainly due to unfavorable cable margin contribution for -27bps, partly offset by the benefits stemming from supplier concentration across Europeand better gross margin, despite cost inflation, in the UK, thanks to Rexel's transformation strategy, which includes the move to one banner.
Opex (including depreciation) amounted to 21.1% of sales, improving by 39bps due to strict cost control.
- In North America, gross margin stood at 22.8% of sales. This represented a 76bps improvement year-on-year, coming from both the US (stronger margin in the Proximity business, supplier concentration and pricing strategy) and Canada (lower direct sales). This improvement was more than offset by opex (including depreciation) that increased by 91bps (to 18.7% of sales), impacted by investments in future growth in the US, including branch openings, counter resets, commercial actions and logistic initiatives.
- In Asia-Pacific, gross margin stood at 17.7% of sales. It represented a 18bps deterioration year-on-year, impacted by the poor performance in South East Asia. Opex (including depreciation) amounted to 16.4% of sales, improving by 41bps, mainly thanks to strict credit management.
- At Corporate holding level, opex amounted to €5.4m, compared to €7.6m a year ago, thanks to strict cost control. The normative level of spending at corporate level remains unchanged at around €30m per annum.
As a result, adjusted EBITA margin in Q3 stood at 4.2% of sales vs. 4.0% in Q3 2016, reflecting an improved adjusted EBITA margin in Europe (5.1% of sales vs. 4.9% in Q3 2016) and in Asia-Pacific (1.3% of sales compared to 1.0% in Q3 2016) offsetting the lower adjusted EBITA margin in North America(4.1% of sales vs. 4.3% in Q3 2016);
In the Q3, reported EBITA stood at €139.8 million (including a €4.0m positive one-off copper effect), up 12.0% year-on-year.
In the nine months, gross margin stood at 24.4% of sales, up 8bps year-on-year, thanks to North America (up 39bps at 22.5% of sales) offsetting the deterioration in Europe (down 5bps at 26.8% of sales) and Asia-Pacific (down 45bps at 17.9% of sales).
Opex (incl. depreciation) were broadly stable year-on-year at 20.1% of sales.
As a result, adjusted EBITA stood at €420.8m at 4.2% of sales, up 9bps year-on-year.
Reported EBITA stood at €431.8m in 9m (including a €11.1m negative one-off copper effect) up 11.9%.
NET INCOME
Increase of 22.6% in net income in 9m, mainly driven by lower net financial expenses
Operating income in 9m stood at €361.1 million, vs. €327.1m in 9m 2016.
- Amortization of intangibles resulting from purchase price allocation amounted to €14.3 million (vs. €13.7 million in 9m 2016).
- Other income and expenses amounted to a net charge of €56.4 million (vs. a net charge of €44.9 million in 9m 2016). They included €20.5 million of restructuring costs (vs. €32.4 million in 9m 2016). They also included charges, already booked in H1 2017, from goodwill impairment in Finland(€12.8 million) and loss on asset disposals and termination of business in South East Asia (€20.2 million), as previously disclosed.
Net financial expenses in 9m amounted to €90.8 million (vs. €114.1 million in 9m 2016). Both periods included charges related to refinancing operations:
- 9m 2017 included a net charge of €6.3 million, related to early redemption of the remaining outstanding USD330m from the Senior notes issued in April 2013;
- 9m 2016 included a net charge of €17.1 million related to (i) the early repayment of a €650m Senior notes issued in 2013 and maturing in June 2020 and (ii) the early repayment of USD170m (c. €150m) from the Senior notes issued in April 2013 and maturing in June 2020.
Restated for those net charges, net financial expenses decreased from €97.0 million in 9m 2016 to €84.5 million in 9m 2017. This largely reflected lower average debt year-on-year and lower average effective interest rate, thanks to the various refinancing operations. The average effective interest rate on gross debt decreased by 45bps year-on-year in 9m 2017 to 3.17% (vs. 3.62% in 9m 2016).
Income tax in 9m represented a charge of €106.7 million (vs. €79.7 million in 9m 2016), a rise of 34.0%, mainly reflecting a 26.9% increase in profit before tax. The effective tax rate stood at 39.5% (vs. 37.4% in 9m 2016).
Net income in 9m rose by 22.6% to €163.6 million (vs. €133.4 million in 9m 2016).
Recurring net income in 9m amounted to €208.2 million, up 11.0% year-on-year (see appendix 2).
FINANCIAL STRUCTURE
Net debt reduced by 6.3% year-on-year at September 30, 2017
In 9m, free cash flow before interest and taxwas an inflow of €19.6 million (vs. an inflow of €24.4 million in 9m 2016). This net inflow included:
- Net capital expenditure of €77.6 million (vs. €80.1 million in 9m 2016),
- An outflow of €353.5 million from change in working capital on a reported basis (vs. an outflow of €300.2 million in 9m 2016). On a constant and adjusted basis, trade working capital increased by 51bps as a percentage of the last 12-month sales, from 13.8% at September 30, 2016 to 14.3% at September 30, 2017, compared to a 100bps increase at June 30th, 2017. This increase reflected the rise in inventories to support a deeper and larger offer and the opening of branches/counters in the US, as presented at the Capital Markets Day.
At September 30, 2017, net debt stood at €2,353.3 million, down 6.3% year-on-year (vs. €2,511.0 million at September 30, 2016).
It took into account:
- €120.8 million of dividend paid early July,
- €77.3 million of net interest paid in 9m (€25.5 million paid in Q3),
- €91.3 million of income tax paid in 9m (€27.8 million paid in Q3),
- €97.7 million of positive currency effect in 9m (positive effect of €33.8 million in Q3).
OUTLOOK
Taking into consideration the performance of the first nine months and expectations for the last quarter, Rexel confirms its 2017 full-year financial targets, with adjusted EBITA1 increase at the low end of the February guidance:
- resuming organic growth, with sales up in the low single digits (on a constant and same-day basis) after two years of decline;
- a mid- to high single-digit increase in adjusted EBITA;
- an indebtedness ratio (net-debt-to-EBITDA, as calculated under the Senior Credit Agreement terms) of below 3 times at December 31, 2017.