Rexel US … Decent 2017 Performance, Hurt by GE; Committed to Platt Strategy

Rexel reported its 2017 and Q4 performance earlier this week. Overall they achieved good top line growth as well as strong margins at 24.5% resulting in strong 4.7% EBITDA … worldwide.  We’ll focus more on how they did in North America and the US.

Analyst call

And slides for the call can be found here.

• 3.2% Q4 increase in North America, and Rexel feels good about this as a “growth engine”. (Challenge is that this underperforms some of the distributors we commented on earlier this week and information from DISC.  Perhaps Rexel is not participating in the industrial growth? Or has a lower percent in wire / cable or perhaps in large project or has some geographic holes that preclude achieving national growth benchmarks?)
• North America is 34% of group sales.
  • Growth driven mainly by Canada, which was up 6.7% (So, Canada is up 6.7%, North America for quarter is 3.2% and for year is 2.4%.  What happened to the US! . Why the laggard?)
    • Strong oil & gas recovery as well as high single digit growth in commercial contractors due to projects and lighting.
  • 2.1% growth in US (reportedly tough Q4 comps due to disruption of a large supplier as well as low wind & power projects … wonder how the core C&I electrical business did which is historically Rexel whereas wind / power was Gexpro.)
    • Opened 17 branches and 18 counters in 2017.  These locations / updates contributed a 1.3% sales increase.
      • Generated $24M euros (not dollars) and projected for 62M euros in 2018.  Note, as of Feb 15, 1 euro = $1.25 USD.
        • Expect same number of openings (17 new branches) in 2018. (Key is getting the right people and becoming an employer of choice or providing extensive training for non-industry personnel.)
      • Have done 48 counter refreshes.  Committed to exporting the Platt model throughout network. Focused on increasing SKUs and more inventory / SKU.
      • Have “more sales reps” and changed “under-performers.”
    • (From a manufacturer viewpoint, flat performance as they are generating better results through others.  A consistency issue within Rexel? A local / regional planning and execution issue?)
    • Increased inventory by 2 days (10% increase in inventory) due to more branches and more inventory at reset counters and a “desire” for deeper / larger offering. (Which begs the question of how well is Rexel communicating these investments to customers, lapsed customers and prospects?  Once you’ve lost a customer, it is very difficult to win them back as there is more to the buying decision than price and availability.)
    • Digital (online / EDI, etc) is 7% of US sales.
  • North American gross margin was 22.5%, a 54 basis point improvement due to operations and pricing strategies as well as “proximity business” (perhaps counter? small customers?)
• Emphasized that US performance due to strategic implementation of logistic organization and branch network expansion. (We’ve seen Rexel promote merchandising and inventory investments in some locations. While good to see investment into counters, wonder if these counters were in “difficult” shape or the ROI as our clients are seeing counters represent a nominal percent of sales and either flat or declining.  While margins can be good at the counter, capturing GP$ is key. The Platt model (lots of branches) can work in the Platt market, but not every market is similar.)
• Worldwide, a 12% increase in IT and digital investments.  Rexel wants to increase digital / eCommerce. (Are US customers adopting at the desired rate? Note: New CMG research shows slow adoption, but positive movement overall from electrical buyers.)
• Key metric for Rexel … Net customer gain (Good metric, theoretically. Key is definition of a “new” customer as CMG believes needs to do a minimum of $X. Our experience is that this is a weakness for most distributors as many “salespeople” are account managers vs sales “hunters”.)
• Focused on increasing market share.
  

          Email me if you’d like a larger version or view Rexel’s earning slides

  Here’s Rexel’s US map showing new regionalization and their market share by geographic area … not shading (which means they need to grow at greater than the market rate … which didn’t do vs national US numbers. Perhaps did in some geographic markets?  Manufacturers may consider looking at Rexel regionally to see how performing.)

• Commented that they grew margin whereas other US distributors didn’t (Reason that others may have not, and the comparables would be WESCO, Anixter, maybe Graybar if they looked at SEC filing) is mix of business … and some markets that Rexel does not compete in (i.e. utility.)
• Have 68 people, worldwide, supporting their digital initiative. About $2B euros, out of $13.3B euros, 14.3%, via eBusiness (web, EDI, mobile, etc).  Percent is low in US and Canada.
• Using Net Promoter Score as a customer satisfaction metric (CMG believes this is a flawed metric for distribution as the key question is “would you recommend us” which, realistically, contractors won’t recommend to their competitors, nor does the metric highlight where a company needs to improve.  CMG offers a more discrete customer satisfaction initiative that calculates a customer satisfaction index (CSI) that can be measured across a company and among regions.)
• Want to be stronger in automation … Rockwell. (perhaps via acquisition?)

Feedback from analyst questions:

• Believe that new locations, that follow the Platt profile can achieve 5-6% profitability range when at full speed.
• Major issues with GE via Gexpro.  GE is / was a Gexpro customer but is purchasing less.  Commented that GE as a supplier has reduced (less demand from customers.  Begs the question of if Rexel is planning on continuing with GE and transitioning with ABB or actively seeking conversion … wholesale or regional or branch specific or migrate to another line they may have?). Commented directly “GE product range is old….don’t have the latest gear.”  GE has impacted Rexel to the tune of 1.7% higher … so growth would have been close to 5%. (Nice, honest answer.)
• Seeking M&A opportunities in the US

Some takeaways:

• GE is obviously hurting them in the US
• While 3.2% isn’t good, Rexel would have had industry performance if GE had been able to perform, so can say “market average.”
• Adding locations but it will be interesting to see how relevant the Platt model is throughout the country.  The Platt model is also more of a contractor model. The personnel aspect will also be interesting to see how they address.
• Indications of interest in M&A