Rexel S.A. (RXL) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 sales and H1 2020 earnings call. [Operator Instructions] I must also advise you, the call is being recorded today, Tuesday, the 28th of July 2020. I would now like to hand the conference over to your speaker today, Patrick Berard. Please go ahead.

Good morning, ladies and gentlemen, and thank you for joining us today. And welcome to this presentation of Rexel's second quarter 2020 sales and first half results. And next to me is Laurent Delabarre, our CFO. And both of us, we will bring you through the presentation and obviously, at the end, to answer any questions. We continue to operate in an uncertain and volatile environment, but as you will see, Rexel has also shown its resilience. All the investment we have made over the past 3 years in people, in inventories, in branch openings, in IT, in digital transformations, all has proven to be relevant and contributed to transform Rexel into a much more robust company, able to navigate the current turmoil without compromising its medium-term ambition. It was my goal. We always explained it, but until you are in the middle of a real crisis, you never really know. And now we know. And I will start this call explaining how we are adapting to the current environment and how we have managed to mitigate its impact. Laurent will bring you through the detail of our Q2 sales and first half financial performance. And then, I will conclude with a look at our immediate priorities and actions. And obviously, we will take all your questions. Now if I look at Rexel in the crisis, and if there would be one way to say it, agility and one company responsiveness. Under this agility and one company responsiveness, what does it mean? If you look at this slide, Slide 3, successfully navigating the turmoil, it means, first of all, protecting our people, protecting our customer, protecting our stakeholders. And across the group at every site, from branches to logistic to our headquarters, we have implemented all sanitary measures to ensure the health and safety of all employees and all our customers. We have put in place a strategy called Zero Covid at Rexel. And I am pleased to report that we have largely contained the first wave of this terrible pandemic and that we are gradually resuming normal working conditions, while remaining very vigilant and adapting to every situation. I would like to thank our team once again for their remarkable dedication in these moments and the way they are living through and with all these measures. Second, preserving the business continuity for our customers. We managed to be very quickly. We have been able to switch our operations online and at home, while at the same time maintaining a high level of customer service. We always kept a high level of delivery. This allowed us to preserve the quality of our customer relations. Third, we demonstrated a great agility and responsiveness, and as promised in our Q1 presentation, we maintained a very strong focus on OpEx management and free cash flow generation. This allowed us to reimburse at the end of June the senior credit line we had drawn down as a precautionary step in mid-March. And fourth, leveraging our digital investments. From an internal point of view, our enhanced digital tools, such as Power BI, enabled us to monitor the business in real time and take agile decisions. From a sales standpoint, digital sales reached almost 21% at group level in H1 and represented 31% of sales in Europe, a level never reached before by far and, as you can see, up 572 bps. And last but not least, throughout this crisis, Rexel operated as one company, one way of doing, one way of protecting the people, one way of preserving business continuity, one way to create agility and responsiveness. Nobody was out, one way of leveraging our digital investment. Nothing was forgotten, and sharing best practices and applying clear strict rules across the group. And I'm very proud of how the team responded, demonstrating that Rexel has become a robust company. What does it mean to be a robust company? Delivering robust KPIs in H1 2020 despite sharp sales drop in Q2. It means same-day sales in H1, minus 10.6%; but digital sales up, plus 7%. And as you can see, the key aggregates of this first half show that we managed to deliver robust KPIs, whatever the challenge was at the outdoor. We maintained the drop in sales, notably thanks to the strong online performance. Digital sales really came as a way to get -- to mitigate the outside world changes in the pattern, in the way they were purchasing. Gross margin was resilient at 24.6 points, down 36 basis points, and this drop was mainly due to an unfavorable country mix as our most profitable countries recorded significant drops. While, at the same time, the drop in volume directly impacted the amounts of rebates we anticipated to receive from our suppliers. Our adjusted EBITA margin stood at 3.3%, down 136 bps. This resilient performance is attributable to the major efforts we made to reduce the OpEx in Q2 by adjusting our cost base throughout the organization, either through internal actions or by taking full advantage of government measures, where there were some available. We managed to reduce salary and benefits by 19.7% in Q2, while our top line was down 17.7%. At the same time, we posted very strong cash flow generation at almost EUR 177 million versus an outflow of circa EUR 17 (sic) [ EUR 17 million ] in H1 last year. This enabled us to lower our net debt to EUR 1.69 billion, the lowest level since 2008. As a result, our leverage ratio was even better than last year at 2.59x EBITDA after leases despite the crisis. On the page after, we wanted to share with you the gradual recovery since mid-April, and recognizing through the curve that North America is lagging and lagging behind. When you look at these curves, we reached the worst in the first 2 weeks of April, when group sales were down 27.7%, and then we saw gradual recovery, quite uneven, to reach minus 5.6% in the first 2 weeks of July. This gradual recovery is largely driven by the residential market, while commercials recovery started later due to sanitary measures. Industry has been harder hit then with sharp and continuing drops in sectors such as automotive, aerospace, oil and gas. Europe saw the biggest fall and as much as 37% in early April, but has since gradually recovered as lockdown measures were lifted. Overall, in the first 2 weeks of July, sales are down 3.6% year-on-year despite very contrasting trends from country to country. France and Belgium have rebounded quite well, while U.K. and Southern Europe continued to be affected. North America has lagged behind, falling less at the start, but taking longer to recover. And we experienced very diverging trends from region to region. Pacific, overall trends were resilient with a low point at minus 19.2% before bouncing back to minus 0.7% in the first 2 weeks of July. Here, too, there was a clear difference between Australia that helped well through the crisis, while New Zealand felt the impact of a very severe lockdown. One thing -- if you go on Page 6, we have succeeded to navigate without compromising our midterm ambition, as shown on this slide. Despite the fall in activity, we have not closed branches during the crisis, first of all. This compare with 265 branch closure during 2008, 2009 crisis. And we believe our broad footprint will be a competitive advantage and allow us to benefit from the recovery. But the long-term patient rebuilt that we just had been finished in the U.S., we didn't want it to jeopardize. We are not done. It's all intact. We have adjusted restructuring, adjusted the OpEx, not given away the asset of the footprint. We also took the opportunity of the crisis to reinforce our relationship with our main suppliers. We have intensified, in content and frequency, the interaction with them. Our analytical tools make us the eyes and the ears of our suppliers in our markets, providing them with business intelligence to navigate the crisis and demonstrating our key role in the value chain. We continued investing for growth, notably in digital, in all 3 layers: Data, layer of transaction and layer of predictive, as well as we have continued progressing in automatized storage solution that plays for broad offer at the disposal of our customer with minimal time spent, enhancing efficiency and productivity. And we will not stop doing. We will continue. This also minimizes human interactions and improved safety condition in a COVID-19 context. Finally, we continued to favor social and environmental actions. For instance, we did not suspend any apprentice contract in France to protect youth employment, and we are revising transportation as we target carbon neutrality. On the Page 7, further crisis, we all saw changes. And in order to continue having the full benefits and the full support and engagement of our Board and therefore, for example, we held 9 exceptional short Board meetings since mid-March by enabling rapid decision-making and buying forward our measures. Our Board is experienced, diverse, international, with 80% independent members. Nearly half of our Directors, non-French. And we recently appointed Brigitte Cantaloube as an Independent Director, and so that we have reached full gender parity at our Board. And this Board worked in a very reactive way, fully supporting of us in these special phases. Let me also point out that our recent AGM, which was held behind closed doors due to the pandemic, it was decided to extend the age limit of the CEO to 70 years old from 68, previously. And I intend to use this period to continue the transformation that has put Rexel in a stronger position to navigate in turbulent waters. Now I will come back later. In order to go through Q2 sales and H1 financial review, I leave the floor to Laurent. And I thank you, all the employees, all the Board members, all the stakeholders for having reacted extremely well during this H1 period.

Thank you very much, Patrick, and good morning to everybody. I will start on Slide 9 where you see the geographical breakdown of our sales in H1, Q2 and June to share with you the latest trend of the quarter. Let's focus on Q2. Patrick has already commented on the overall trends on a biweekly basis, region by region. Let me remind you that same-day sales were down 17.7% in Q2, with minus 23% in North America, minus 16.7% in Europe, and minus 0.6% in Asia Pacific. In June, specifically, conditions remained difficult in North America with sales down 20.5%. Europe benefited from a gradual recovery and was down 6.9%. Asia Pac, for its part, was down 2.2%. On the next few slides, I'd like to show how our sales have evolved by region, starting with Europe on Slide 10. Europe sales were down 16.7% in Q2 with a particularly sharp drop in the first half of April, followed by a gradual, but steady recovery overall, reaching minus 3.6% in the first 2 weeks of July, with diverging trends from country to country. Let me highlight 4 key trends. First, we saw an imperfect V-shape performance in our most profitable markets, France and Belgium. Specifically for France, sales dropped up to minus 64% in the last week of March before gradually recovering, mainly as a result of positive momentum in the residential and industrial activities. Commercial business lagged in the recovery phase mainly due to sanitary measures in large projects and lower public expense, partly related, as you know, to the 3 months postponement of the municipal elections. The combination of business continuity offered to our customers and our digital offering translated into circa 2 points of market share gains in the first 6 months. Second, the countries that had light lockdown measures, namely the Netherlands and Nordics countries, posted a resilient performance. Nordic countries also benefited from good demands from utilities. Third, Germany remained positive throughout the crisis, notably thanks to the construction-related business and the limited lockdown. And fourth, Southern Europe and U.K. were particularly hard hit, and the rebound is slower. In the U.K. specifically, activity was hit by the lockdown until beginning of July and the continuing effects of Brexit. On Slide 11, let's have a look at the situation in North America. Sales were down 23% in Q2 in the regions, with a broadly similar performance in the U.S. and Canada. Overall, the drop was less severe than in Europe, but the pickup is less noticeable as well, with sales down circa 13% in the first 2 weeks of July. This is largely due to the stop and go measures from lockdown and to contracting performance in different regions that I will comment on the next slide. In Canada, sales dropped by 23.6% in Q2 on a same-day basis. Sales recovered since mid-May, driven by the western part of the country, notably helped by more positive downstream activity in oil and gas. In the U.S., on the next slide, we observed very divergent situations from region to region. As an illustration, the western part of the country, namely California and Northwest, were the first states to lockdown before gradually recovering. In regions like the Midwest or the Gulf, activity was largely impacted by depressed end markets such as automotive, aerospace and oil and gas. In the New York area, the pandemic impact has been significant, and we are adjusting cost and taking the opportunity to adapt quicker the organization. Overall recovery in the U.S. will, of course, largely depend on whether some regions see a second wave of lockdown. Finally, in Asia Pac on Slide 13, sales in the region were resilient at minus 0.6% in Q2, with sharply contrasting trends. China was hit by the pandemic earlier than other countries and also rebounded earlier and was up almost 14% in the quarter. However, much of this is due to a catch-up in activity, and we anticipate a lower pace of growth in H2. Australasia benefited from a relatively mild lockdown and was broadly stable at minus 0.9%. New Zealand and India were severely impacted by strict lowdown measures, with activity dropping between 80% to 100% in April before gradually picking up. On Slide 14, we take a look at our overall Q2 sales performance. Our Q2 sales of EUR 2.8 billion were down 17.7% on a same-day basis and minus 19.1% on a reported basis. Organic same-day sales growth was impacted by negative copper impact of minus 0.7%. Even so, copper price have recovered in the quarter. Sales were also impacted by a scope effect, as Gexpro Services was deconsolidated as of end of Feb. In the quarter, we benefited from the positive foreign exchange impact of plus 0.2%, and we now anticipate for the full year of 2020 currency impact to be circa minus 0.5%, assuming spot rates remain unchanged. On Slide 15, we turn to our profitability by region. Overall, with adjusted EBITA of EUR 199.3 million in the first half, our adjusted EBITA margin stood at 3.3%, down 136 basis points compared to last year, with the negative contribution in every geography. In Europe, adjusted EBITA margin was down 193 basis points to 4%, with a gross margin contraction of 60 basis points mainly due to negative country mix from France and Germany, negative customer mix especially in the Nordics and lower volumes leading to lower rebates. On the cost side, we have been reactive and agile in Q2 after having increased OpEx in Q1. I will come back more specifically on the measure initiative in every geography on Salary & Benefits when I will comment the evolution of the operating expense on Slide 18. In North America, adjusted EBITA margin was resilient, down 73 basis points to 3.2%, thanks to gross margin stability, notably through good pricing management. On OpEx, Salary & Benefits dropped more than sales. In Asia Pacific, adjusted EBITA margin decreased by 89 basis points to 0.8%. The gross margin contraction came mainly from negative country mix due to stronger growth in China and negative product mix in the Pacific. Here, too, we have been very agile and reactive in OpEx management. Lastly, our corporate costs stood at EUR 9.5 million, down by EUR 3.4 million compared to last year from lower project costs and partial unemployment measures. For the full year, we anticipate the corporate-hosted cost to be close to EUR 25 million. On Slide 16, we turn to our H1 adjusted EBITA bridge. Adjusted EBITA was down almost 37% to EUR 199 million, and margin stood at 3.3%, down 136 basis points. This can be explained by a negative volume and price contribution of 261 basis points resulting from the pandemic crisis. This was partly offset by cost discipline, which had a positive impact of 128 basis points from partial unemployment and internal measures. So the cost inflation was limited to 60 basis points and more than offset by structural productivity gains, mainly from last year's restructuring that contribute for 26 basis points in the half. Lastly, our investment for growth initiatives were reduced to the most critical areas, representing only 12 basis points. And we now anticipate circa 20 basis points impact for the full year. On Slide 17, we focus on the different actions we took to manage our operating costs. Overall, we succeed in limiting the increase in OpEx to 111 basis points as a percentage of sales, while our sales in the quarter were down 17.7%. By cost category, first, our fixed costs were stable as we managed to completely offset inflation through lease renegotiations, notably in the Pacific and in the south of Europe. Second, our flexible cost, mostly Salary & Benefits, decreased in Q2 more than sales, dropping by 20%. This is a result of the combination of making use of governmental measures in Europe to support salaries of furloughed workers and internal measures to control costs. I will detail this on the next slide. Our variable costs were down 10%, impacted by bad debt provisioning and delivery costs that cannot be made fully valuable in such a volatile environment. On the next slide, Slide 18, we illustrate how Rexel has demonstrated agility and reactivity in the face of this new environment using all available measures to quickly adapt the workforce to protect profitability. Overall, we have temporarily reduced workforce by [ equivalent ] balance of 4,000 full-time employees, a 16% reduction. By geography, in Europe, we have largely used flexibility offered by various governments, especially in France, Belgium, the U.K. In France, partial unemployment has been negotiated until end of August, and until end of October in the U.K. In North America, we have combined governmental and internal measures, which put in place temporary layoffs, mainly for logistics and transportation staff. We put in place absence no pay and furloughs for people working in our branch network. We put also in place salary reduction of between 10% to 20% for management and back-office functions. In Asia Pac, we put in place absence no pay policies in Australia and froze salaries in China. We also implemented more structural measures in some countries or regions as illustrated by the -- in the Northeast region in the U.S., in the U.K. and also in Germany. Lastly, the 20% cut in CEO and in the Board compensation was extended for 3 months. As a result, Salary & Benefits in Q2 have been cut by 19.7%, more than the 17.7% sales drop in actual days. On Slide 19, we look at the bottom line part of our P&L. Let's start with our adjusted EBITA of EUR 199.3 million, down 36.6%. Reported EBITA was slightly lower at EUR 192.3 million, down 39.9% year-on-year, reflecting the nonrecurring swing in copper price. Other income and expense amount to a negative EUR 482.5 million, largely due to a goodwill impairment of EUR 486 million, on which I will come back on the next slide. It also includes limited restructuring costs of EUR 1.9 million, as most of the workforce adaptation in H1 bore no cost. For the full year 2020, it's a bit early to provide a precise number as it will largely depend on the economic situation as well as the evolution of the pandemic and the level of government support. We will update you more precisely in our Q3 call, but at this stage, you can forecast restructuring costs of circa EUR 30 million on a full year basis. Our net financial expense decreased by EUR 31.2 million, mainly due to the EUR 21.8 million one-off cost of the bank refinancing that took place in H1 last year as well as the reduction in our effective interest rate, which is now at 2.43% versus 2.82% in the first 6 months of 2019. Excluding one-off ForEx and interest rate hedging impact, we now anticipate our financial costs to be close to EUR 87 million in the full year compared to EUR 96.6 million in 2019. Our income tax was up to EUR 79.9 million, with a combination of 2 one-off effects: a EUR 29 million release of a tax provision in H1 2019; and [ EBITA ] of EUR 33 million deferred tax asset depreciation in H1 2020. As a result, net income was negative EUR 439.8 million, and our recurring income stood at EUR 82.5 million, down 50.7%. On the next slide, let's detail the charge of EUR 486 million coming from goodwill impairments, mainly reflecting lower volume related to the COVID-19 crisis and higher WACC, as risk premium increased in the COVID-19 environment. Overall, despite this impairments, medium-term profitability at group level have not changed, showing that we will maintain our road map. This goodwill impairments from some various countries, including the U.K., U.S., Canada, Germany, Australia and Norway. Those countries carried historical high level of goodwill as just from the LBO step-up in '05 or from the Hagemeyer acquisition in '08. On Slide 21, we turn to our cash flow statement. We generated very strong cash flow in the half, reaching EUR 176.8 million, where reflecting, in part, the effort we made to manage working capital. This, compared with a slightly negative outflow last year in the period, which is traditionally negative, as you know, due to the seasonality of our business. This strong cash inflow translated into a high conversion rate of 77.7%. Concerning working capital, which is the main factor behind the cash flow improvements, the bulk of the evolutions come from trade working capital, which I will detail on the next slide. There was a smaller but significant contribution from non-trade working capital, as the reduced level of activity led to lower tax and to lower rebates receivables. Let me share a few details on the evolution of CapEx. It is broadly stable in the half, but most was incurred in Q1. In Q2, we reduced CapEx by EUR 9 million. Our strong cash flow performance, combined with the proceeds from the disposal of Gexpro Services and, to a lower extent, our Spanish export business, allowed us to significantly reduce net debt, which was down by nearly EUR 500 million to EUR 1.69 billion, the lowest level since '08. This led to a leverage ratio of 2.59x better than last year's ratio despite the crisis. Let me focus specifically on our cash generation on Slide 22. As we already mentioned in Q1, we have focused relentlessly on cash collection, as shown on the graph. We made strong effort to manage inventories to adapt to the abrupt drop in demand. Between March and June, inventories were down by about EUR 190 million, while trade payable were down by about EUR 130 million, which also contributed to the strong cash generation. We focused strongly, of course, on trade receivable, with particular emphasis on receivable monitoring, credit management and cash collection. As shown on the graph, our trade receivable were reduced by circa EUR 230 million between March and June. On Slide 23, we turn to our liquidity picture, which shows that we have no short-term issues. As of June 30, we have EUR 1.27 billion of liquidity, including the available cash and the undrawn facilities on the senior credit agreement. As you remember, at the start of the crisis, we draw down EUR 550 million from our EUR 850 million senior credit line as a precautionary step. Thanks to our efforts to preserve strong cash generation, we were able to more than offset the expected drop of our securitization receivable, which were down by a limited EUR 213 million. Given our debt maturities and debt reduction, we were able to quickly pay back this facility that was paid back end of June. As you know, we also decided to suspend the dividend payment this year, and this will result in a cash saving of EUR 145 million in H2. Our deleveraging efforts over the past few years have strengthened our balance sheet, and this is really an asset in the current environment. Let me conclude on Slide 24 by reiterating our capital allocation priorities, which we are maintaining unchanged despite the crisis. First, we will reaccelerate our digital journey and finance it through organic growth in order to continue our transformation. We anticipate CapEx to sales of -- around 0.9% of sales this year and a normative rate of around 1% in the medium term. Second, after an exceptional dividend cancellation this year due to the crisis, our dividend policy will resume in 2021 with a minimum payout of at least 40% of adjusted net income. The objective is to maintain a good balance between shareholder return and investments. Third, our priority is to focus on the deleveraging of the company, thanks to our free cash flow generation. Fourth, we will also consider targeted bolt-on acquisitions, with a priority in the digital space to acquire competencies and speed up our development and on some geographies, notably the U.S. Any acquisition, of course, will have to respect strict criteria to be completed. With this, let me hand back to Patrick for his concluding remarks.

Thank you, Laurent. Let's now look at our priorities going forward in an environment that remains obviously uncertain and volatile. It is -- one thing which we will not compromise on is our fundamentals with clear 5 priorities here. First and foremost, continue to preserve the health and safety of our employees and customers. We have done every day. We will continue to do every day. Second, continue to ensure business continuity. We have been able to adapt fast. We have learned a lot how to continue to do so even better, therefore, preserve business continuity under any circumstances. Third, focus on liquidity as our key performance indicator. All the company is really engaged behind that, and we will continue to do so every day. Fourth, protect the company and prepare it for the resumption of, let's say, more normal activity by focusing on gross margin, OpEx and cash management. Gross margin, OpEx, cash management, 3 pillars by which all our country BUs, entities are all driving the business every day, and this is the main focus to adapt to all these volatile situations. And fifth, continue the digital transformation through the systematic rollout of our digital capabilities. Even more through the crisis, we found reasons to do so to accelerate, to get the fundamentals in place if they were not everywhere, so that there is absolutely no delay in this transformation. As such, we will continue to act as one company. We realized through the crisis that we were able to act, to behave, and to have one way of facing the issue. For a company made of so many acquisitions, it's a real company. It's a one company with sharing best practices and -- like we never had before. On the Page 27, well positioned because we want to capture and we are well positioned for the new growth opportunities. There will be different plans after the COVID pandemic, some financed by big governmental heads, some are financed by the EU level, some come from different angles. And we want to be definitely part of the green recovery plans, the social responsibility and health and well-being plans, which will structurally increase, in any case, the electrical usage. Electrical usage will be more and more demanded in most of these plans. And as an illustration, the emergence obviously of electrical vehicles, but also of many other adoption like heat pumps, alternative energy increase and so on, in order to electrical products solving also a portion of the CO2 reduction emission. And I should not forget intelligent building solutions. Pandemic raised the need for social distancing, for making sure of lower propagation, and intelligent building solutions can be a major contributor to it as well as a recovery of the economy. And we will see -- in parallel, we will see a greater use of automation. It's also a way to social distancing and partial lockdown risks. And we see that in the lips of many people having to make their decision soon, and we will see this greater use, and we will be part of it. Our broad value proposition in product and solution position us well to seize these growth opportunities. And we are working closely with several suppliers to put innovation into the market around IoT, building automation and more. To better seize these opportunities, we have revamped our organization. Our organization will be more and more aligned with customer needs. We are increasing customer touch points without adding staffing and manning, but through lockers, for example; through automation in logistics, too; other solution and services to bring us faster and closer to our customer contacts and needs. We are also enhancing the competencies of our employees to increase their ability and prescriptive capacity, while building up the sales force of tomorrow. The sales force of tomorrow will be extremely important to influence on all these new choices. On Page 28, we will reaccelerate, there was a little bit of a put on hold in terms of mid-March when things came out, put on hold the few developments while seeing where -- how is it going, we zoom forward, how and how fast and the amount of money involved and kind of stuff. It's clear now that even more than before, we will accelerate this digital transformation road map. And we will not compromise on these 3 levels. The data and the uniformization of customer segmentation across Europe is almost finished. The uniformization of product segmentation to better address customer needs and optimized pricing is actively being done. All the transactional tools where EDI platform, track and trace, e-mail to EDI, digital customer invoicing, they have proven so valid, so needed, so accurate, so powerful. There is absolutely no doubt that this has been part of the solution throughout the crisis. It will be the solution for during and after the crisis. And therefore, Rexel easy, how to make sure that our processes vis-à-vis the customer totally facilitated by data handling, is allowing to have a much better coverage of their needs at a much lower costs. And all the predictive modules. Even if historical data storage were interrupted, we realized how important these predictive modules were and are now once we get out of the crisis even more and making rollout of branch assortment, readjust it right now rather than doing one by one, having a tool in order to get it done and adjusted. We had to restrain -- retrain the machine. We are retraining the machine. We have to improve. Yes, we are adjusting. We have the skills. We have the people. We have the capability. We have the tools. They are all valid. Same for customer churn. Same for the next best offer ready to be deployed, and we will deploy. And there was a short interruption. Nobody could make the test. There was nobody outside. We weren't even allowed to do so, but we have not forgotten how to get it even better. Therefore, all these modules are ready to be part of the solution for being more efficient, more agile, more customer-driven, even much more, let's say, lower cost for -- after the COVID. Now on Page 29, how do we see the situation? I mean, nobody has a clear view on where it was, how it could be. Allow me to be quite a little bit advanced in trying to make the shape of potential curve. You remember the precrisis level, the group, at minus 27.7%, it's a fact. It went down. Boom. Now, on the way up, you have seen the curves before. They are not of the same shape, same speed, same kind of. Right now, where are we? We are about to recovering at a minus 10% compared to where we were, okay? How is it going to happen? I don't know. But one thing I know, we are ready to take both bumpy road or any pockets of growth that would offset pocket of depression. We are ready to be more agile. And therefore, the question is, when do we cross the next line level in activity? Yes, everybody would like to know. But in fact, it's not the target. The target is continue to be more effective, even if it does not come back to the level of activity of before because we don't know, but we have to be prepared for lower, recognizing that automotive, aerospace, oil and gas, we remain under pressure and should not be opportunistic solution short term. It's only fundamental structural solutions that will help us making it happen. And therefore, where are we going to be in H2? We are reaccelerating the medium-term digital transformation road map. It's on its way, making digital multichannel and the backbone of the organization. We see an increase in number of customers that during the COVID became mono-channel. They want to become multichannel. They were digital channel, and they want to come back to multichannel. Fine. And here we are, and we know how to get it done right. Continuous rigorous management of gross margin, gross margin and gross margin. There is no volume price sensitivity to low margin. Therefore, gross margin, there is an OpEx. Let's chase any OpEx that is not directly needed in order to get the leverage on whatever the sales level could be. And free cash flow and liquidity, we have demonstrated we can generate free cash flow, and we will continue to demonstrate. We can increase this generation of free cash flow throughout the quarters. And also, we have our own KPIs and objectives. We manage by -- we don't manage by budget anymore. We manage by the next 6 months' phases because the budget for this year, obviously, was shaken up heavily, and therefore, we have set targets for the first half -- end of first half. We have demonstrated and they were shown to you. And now we have our targets for second half so that people reach their maximum. And, at least, you can count on us for managing the different components of the P&L in order to provide the max results that we can get out of this industry and our market positions. And I hope we have provided you with certain clarity on how we have responded to the unprecedented situation that we were facing, but also how we look at the future that we are facing. And as of now, Laurent and myself will be very happy to take your questions. Thank you.

[Operator Instructions] The first question we have today comes from the line of Daniela Costa from Goldman Sachs.

Sorry. There was plenty of noise. We didn't got anything. Okay.

The first question we have today comes from the line of Daniela Costa from Goldman Sachs.

I hope you're all well. I actually have 3 questions. I'll ask them one at a time. The first one is regarding -- you mentioned you've started some first structural measures. I think you mentioned the Americas and Asia. I was wondering if you could talk about the opportunity to turn more of the temporary savings into more structural savings as you walk into the second half in 2021, namely with the things that you talked about in automation, sort of what shall we expect there?

You want to put the 3? Or should I answer this one?

One by one.

One by one. Okay, on the measures. First of all, the measures are of different nature. You have -- in the adaptation, you have the measure that we were looking at everything that we could stop, put on hold, knowing we would have to restart, depending on volume. And they are the one that we decided that we could do differently and never restart. And the use of certain partners outside to do certain things that we could re-internalize the reduction, something -- a few things that we decided, okay, we don't need to do anymore, don't do it and so on. Meaning, you have a lot of management measures that when we thought it was suspending, it becomes suspendible and now it becomes non -- indispensable, and to the point that it becomes a structural change. And it's true in logistics. It's true in making everything more simpler, more shorter. This is what we call Rexel easy, but in a much more active way. In such, it has to do with spending outside of the company with partners or it could be internally, and so that we can reduce, for example, the temps, and use our people. We can reduce over time, and run very differently by a new shift system and different way of using the time available and optimization. All of these things we went through, which already lower some of the cost base. Complementary to it, obviously, due to volume, there was a lot of temporary measures of people benefiting from furlough, partial unemployment, Kurzarbeit, name it the way you want. And we all use in different places where they were. The question is, how much is only to face, let's say, a fall? And how much will come back? And how much will become structural at the end, depending upon the level of the comeback? Now obviously, a portion, due to the volume, came back because there is a minimum to be done proportionally. And by the way, in doing so, we have new productivity targets. We have the targets that we have increased so that, even in this phase, we maintained the pressure on how to be efficient. And it is obvious that part of it will not come back, and it becomes structural. Now we've already done several of them. We have done a portion of them. Depending on the market, they are more or less severe, and we are still uncertain exactly how much depending on the markets. But for example, I can tell you, without naming it in detail, that one region in the U.S. has already done. Even if people who are on furlough, a portion will never come back, has been told, and it becomes structural measures. And we are doing this, and we look at it every week, everywhere in order to come to new structural level compared to before.

In that spirit, that's why we have the 30 -- around EUR 30 million of restructuring costs allocated for H2.

Got it. And then in terms of the gross margin, as you said, sort of you had a negative mix in the gross margin, some of your best margin countries falling down sharply. On your slide, it looks like some of them have recovered quite nicely towards the end of the quarter. Do you expect -- could we go back to prior gross margin levels in the second half? Do you expect like a reversal of the mix?

Yes. What we say is that on the gross margin, down 36 bps. 1/3 is linked to the country mix, that obviously will come back. 2/3 is what we call the trading margin. The trading margin is down [ 0 of 3 ] blocks. The front margin, where you have the customer mix. For example, we have more direct customer in the U.S. than one coming to the branch, driving lower margin. We have also a product mix where we sell less of, for example, own brand toolings and things which are carrying high margin. So part of that will come back in the second half. Then we have the global relationship with our supplier with less volume. It's not a major part of our rebate, but we have a conditional rebates to volume. On the other side, during this period, we create a stronger stickiness with our suppliers who -- a lot of analytics. So there will be some discussion around that part, but that could decrease to some point. And the third, because of the sharp drop, we are a bit mechanically hit by the offshore and our inventory, and we are pushing out to make sure that we can get rid of that second half of the year. So I would say that, probably, a good half should come back quite quickly in H2. And the second part, we have to -- really to work strong on that.

Understood. And my final question relates to, I guess, sort of this point of working capital and on cash into the second half. Can we assume that you can continue to destock in the second half? Or would you have to get sort of working capital back? How should we think about the second half free cash flow basically compared to normal seasonality?

Well, first, I was very quite -- I was conservative in April on the cash flow of the half, and we pushed a lot. I mean, Patrick put a strict rule on replenishment simply called the 2 to 1 , so you can only replenish one when you sell 2 products. Such, we managed to drive inventory down, of course, helped by the better momentum on the top line than what we -- at first, on minus [ 27% ] month of April, we were anticipating for Q2. And then the good part of it is, while having a better top line, we get a very good cash collection from our customer. Most -- a lot of them helped by also this temporary measure, government subsidies, postponement of payments. So having even more receivable, we managed to cash a lot, and this give us a strong free cash flow generation in H1. All the measure we have taken will continue, and we will be very cautious also going into H2 on the inventory side. We believe on the customer side, probably the month of summer will be a tough one. So we are very, very cautious on that. And we expect today that our full year cash conversion should be probably very close to what we achieved at the end of H1.

We will also have the help of our digital tools in order to optimize the assortment, which we will use more in the future than in the past. And this assortment should bring us to really be even more closer to our pure exact needs. At the same time -- and yes, to your question, there is potential to go to a little bit lower level, better optimization and better adjustments and better turnaround. It was the first adjustment which was really brutal. And when it's brutal, we reacted brutally. And obviously, there is a lot of fine-tuning that has to be done after. I would like to add that in Europe, we don't face that. But in the U.S., the industry, it's not just Rexel, and probably Rexel, due to the complementary supplier that they do have with so far less than others, there are supply chain issues in the U.S. that make everybody try to keep on inventory certain special components, which cannot be easily supplied out of the Mexican factories of the key vendors. And therefore, there is a limit to how far we can go out, as long as people try to keep a minimum level of inventory should there be some more severe supply chain issue in the U.S., which is an unknown depending on the COVID in Mexico.

The next question today comes from the line of Lucie Carrier from Morgan Stanley.

I have 3 questions, and I will also go one at a time. The first one is more maybe a shorter-term question. Your exit rates or your starting rates in the third quarter are significantly better than what we've seen in a lot of other companies in the sector. And I was particularly looking at France, where I know you tend to have sometimes a bit more market intelligence. This is almost going back to flat now at the beginning of July. How much visibility do you have in terms of the sustainability of the momentum in France, i.e., are we talking just about a rebound post the lockdown? Or you are seeing genuine activity resuming? That's my first question.

The French market, which has been really severe and disciplined in the lockdown, didn't found an easy way out in the way we -- our customers could operate. Therefore, the exit went slow. And because how to cross on the job site, how to be more than -- without being more than 2 in a car to go to a job site, these were the conditions to operate until 10th of July. A little bit earlier than this, for most of them, but mid-June. Therefore, right now, what do we experience? There is, first of all, a catch-up effect of what has been delayed, slow or not done. And this effect is bringing us through the summer for sure. Therefore, what we see is close to normal. On the construction dimension, I leave the production -- the industrial side. And on the construction side and you see lots of job site just catching up because they need to be finished, need to be done. And this could bring us through the summer. Some company may work in August; some others, not. We know some will limit it so far, but it will be probably keeping the pace, the momentum through into September. And there's a similar effect in France. Even if the industry is not a very strong one, they stopped like everybody else. They restarted, that they will have to run through maintenance and kind of stuff, which I consider will be needed in the second half of the year. Therefore, we should go back to slightly lower, but no catastrophic level in industrial demand for us. It's different than an output of the industry to the world, okay, industrial products [indiscernible] to Rexel, which we are less dependent upon how many cars will be produced, but we are really dependent upon how efficient the automotive lines are working because they need electrical maintenance, that's where we are. And then, there is a third uncertainty, which should bring -- we should be ahead to the market. The mayor election happened the first 2 -- the day of the lockdown. Meaning, no community could really elect the mayor per se, and no mayor were really in charge of anything before early July when the second tour happened. Then they could regroup their conseil municipal, then they could be elected. And meaning, everything which the money and the spending and the budget that should have been voted in March, couldn't be now voted until now. And this now means how much will we spend for schools, for the swimming pool, for whatever, which is public buildings of communities, and this is still to come. Meaning, we suffered very, very, very low, and we are still suffering very, very low demand on that side. However, there is money for -- however, there are grants, there is money floating around, but the decision-making process, we're not [indiscernible]. And this, I expect to come, let's say, for September 1 choices, and I expect some demand to come by the end of the year, which will, for sure, help next year -- into next year. The uncertainty for me, what could it be in October, November, Jan, Feb. These are the 4 months where I don't know. But some of it is inevitably needed and will come out. Now when it comes to the construction, obviously, there is a construction of demand in the buildings -- for new buildings, commercial buildings. So far, there is a high need for residential buildings, even more after than before the COVID, people realize how comfortable it could be, how much they need to change in the housing, the way to be able to do remote working and kind of stuff. It's not just a long-term horizon. There is already a short-term demand for. Therefore, I don't see a depression that could be up and downs, but nothing severe in the next 18 months in the residential. And the big uncertainty is on the commercial building because the old ones, people didn't even came back to work in the old ways. We have to wait for the second half of the year to see how they will run, and what kind of a new demand. So far, there is not a lot of project going on, except outside of Paris -- Grand Paris, Olympic games and the rest, which so far is a driver for demand, and we are focusing on, like many other people. Yes. The market is not the worst market. The rest of Europe is probably -- I was surprised how residential building resisted in Germany. We may have a few surprise, positive and negative, but we are adjusting to it.

Just to extend, this is bringing me to my second question, a bit more long term. We've heard a lot of rumors there has been some preliminary information about the EU green recovery plan and renovation in buildings. I was hoping you can maybe give us some color in terms of how that could be possibly applicable to what you're doing in terms of product, but also in terms of type of buildings that you think could be applicable to this program?

Let's see, whether it's in France or outside of France, I will speak for Europe, but France, I know by heart. There is a huge demand for making existing buildings, commercial building. Let's say -- I could even say COVID-compatible. Allow me to say that it's a little bit here -- I mean, who wants to be compatible to the COVID. But because you need to reorganize differently, manage the lighting, manage the airflow, manage the access, manage differently and there will be a lot of -- it could be automatized. It could be a lot of controls -- data control buildings, intelligent buildings without being too smart, but just making life possible and so that they can have a better use of. We know it's feasible. We worked on it. We have solutions. We work with suppliers during the COVID, after the COVID. We have intensified which solution could apply to work for whom and what. Meaning, if there is a real support -- financial support, so that people go and invest in this, there should be a push for more, let's say, intelligent, data-driven, capturing information in order to work with this constraint of the COVID to become COVID-compatible. There is a business of making buildings COVID-compatible. And this is emerging. We worked on it. And it's needed. The economy needs it. And that's what we work on. And it's long term, but it's also -- it's not next year. It starts tomorrow. And the vast majority of building, thousands medium-sized building, 2,000-square meters to 8,000-square meter buildings, they are all under equipped for that. In the moment, there is a demand for energy efficiency, COVID-compatible and kind of stuff, this is becoming a demand. We work on it. We will be there.

Right. And maybe just my last question on digital. I appreciate maybe you cannot give quantitative comments on that. But if you think about your digital initiatives, and how they helped during the COVID crisis, can you maybe highlight a couple that were of particular help? And also, as I was looking in your CapEx or even the EBIT bridge, it seems that, even though you might have reduced a little bit some of the investments, you have continued to invest for growth during this crisis, especially on the digital, is that correct?

The one thing, first, nothing of what we invested got lost. It could have been, let's put it this way. When a crisis like this comes, you don't know how much you have spent in the past that go to the garbage, okay? Nothing is a wrong investment. Everything is valid. And when I say valid, it means everything is being restarted. Everything will be reused 100%, slightly modified. As I said before, for example, we have to retrain the machine when you do predictive stories like customer churn. Last week in March, every customer was churnable at minus 70%. And you don't need an algo. And I was really thinking, Jesus, maybe you have done all of this for nothing, Patrick, because at 70%, you don't need an algo. But guess what? A churn today -- my sales force is asking, I cannot go to customer more easily. I cannot go and share a coffee. I cannot go and say, hello, like this. It's me and shake the hands, but I need to know who is fragile, who I should give a call, who I should do things differently. Opposite to the past, my own sales force now is asking for, hey, when do we have a churn? The machine retrained so that we can work with it. It's a total shift in the way we will behave vis-à-vis also [indiscernible]. It's a fact. It's what has happened last week. Meaning, we will continue to maintain this, and therefore, I'm able to tell you nothing but last, first of all. Second, right now, the investments we are making, as I say, it's to retrain the machine, retrain the algo, work on the fundamentals. And the things which has happened during the last 4, 5 months, we have used a lot of time to unify the basis, customer segmentation, product segmentation, data streams so that everything could be put on one platform as European scale and leverage our initial investments. And when it comes to the payback, our initial investment will have a broader base, and it's not France, it's not Belgium. This is 80% of Europe will be able, by the end of the year, to use 100% of all the tools that we have already spent money for. And obviously, branch assortments. Branch assortment algorithm, which have -- which were in the early stage of become now even more needed. Which branch in Toulouse in the region of [ Airbus ] when there is no demand? Is the assortment the same as a branch in Paris when the Grand Paris will create a total shift in demand? And you take yesterday, they were close by. Tomorrow, they will be quite different. And here, we have all the tools so that we can adapt immediately. We can adjust on the job without creating over inventory, without creating obsolescence, without creating all this pollution that we hate in our accounts all the time. And this is where digital, we have a high leverage. Now yes, we will spend time, money, effort. We have maintained 100% of our digital teams. We have not reduced anything. As part of the structural changes, they are not the ones to be the negative in the structural changes. We are making other efforts on other fronts in order to maintain that. And I'm really, really glad customer churn is great. Branch assortment is great. All the predictive things, or track and trace of the webshop, such functionalities by which 100% where every bucket is where and how during the crisis. And you can tell the guy exactly by the minutes where you should get the goods received. These were elements quite decisive. We continue.

The next question today comes from the line of Supriya Subramanian from UBS.

Again, 3 from my end as well, and I'll stick to the pattern of going one at a time. Just the first one on working capital management and with the good sort of results in the second quarter. I remember back in the first quarter results, you had mentioned that the nature of products being sold was different with more products, et cetera, being sold to the health care end market, for example, versus the traditional product. So how are you able to navigate your inventory levels? And do you think -- do you see these sort of sales going back to the more normal product mix?

The inventory level in terms of normality, so to speak, of the mix, obviously, will be more adaptation -- regional adaptations where we were heavily dependent. I will take the example, again, Airbus in Toulouse or if you say automotive in certain region, in Germany and so on. There is a mix which is no longer the same in terms of proportion to serve the local market, okay? We are adjusting to it. Therefore, the normal mix of before in terms of value, number of SKU and the depths -- the widths and the depths of the inventory will not be the same. We are -- we have to -- we are driven by Net Promoter Score in order to make sure that the customer gets, this is our #1 function, therefore, we need to adjust all of this. It's a permanent effort. Obviously, sometimes it creates a little bit of obsolescence in the moment, you change the mix. This obsolescence will exist, some of it. Obviously, we are supported sometime for some products by the suppliers who understand and help us in the adjustments. Sometime we face and we have to take our own hit on, so to speak, okay? The hit could be, it takes longer to get rid of and the hit could be that some product keep on shelf and at the end, there is no demand for. We try to reduce this to the max. The size of the group allows this to be minimized, however, it could happen. And it's funded, by the way, of the margin erosion at the end of the day when it comes. Nevertheless, when I look at the number of days today, where we are compared to where we were the year before, we will continue to drive down our inventories in order to come to more normative numbers. The huge portion has been done, but they are still 4, 5, 6 days to go, depending on the countries. And it all depends about how fast the recovery comes. In the U.S., right now, it's a bit slower because when you're at minus 20 for 3 weeks in a region, then it goes up to minus 10, and then it goes down backwards to minus 25. It's quite delicate to what is the pro forma normative that we should have. In Europe, it's time to normalize in 80% of the country and we still have days to go, and we will use it, and we work on it. The digital branch assortment type of thing will help also. The more accurate is and less normative and little more fine-tuned, down to Earth, the assortment is the better. We can even reduce further. Meaning, there is still ways to go. On the other hand, fine-tuning takes longer than getting the big boat as we got, but we don't give up. By the way, I'm not sure there will not be another pandemic regional crisis here and there. And at the same time, I don't want to be overloaded by inventories. We all remember that when it happens mid-March, Europe was doing so fine that we were building inventories for significant growth. And when you get all the orders being delivered, and that a sudden, it falls down, it's not just vis-à-vis the previous year. It's vis-à-vis the one that we wanted to get to capture the growth. And this correction was huge to make. Let's say, this is gone, but I don't want to reenter into another kind of, let's say, to enthusiastic inventory build up before the sale. Therefore, we have enough to take an enthusiastic bump, if we would come in the market without having to add inventories, too.

Right. Right. Got it. And second one is on the digital sales, and you also again reported a growth, in fact, in sales through digital channels in this period. Do you think that the current environment has potentially -- of course, accelerated the shift into digital channels, for sure. But do you see a permanent shift in the change of customer behavior is more acceptable to use digital channels versus physical channels? And how much of this do you expect to continue maybe on a long-term basis and also eventually impact on profitability as well?

I was quite happy to see the 30% digital sales line, floating line that we crossed in Europe in the last month. COVID has accelerated. But without having done all the tools before, it would have been impossible, let's put it like this. What we saw is everywhere, we saw 8 to 10 points increase at the worst moment of the lockdowns, whether it was in Switzerland, in France or in other countries. We saw between 8 and 10 points of an increase, and we saw an increase in the number of existing customers becoming digital customers. We saw also new customers coming for digital. But the vast majority was existing customers becoming a digital customer. And when everything restarted in a more normal way, they became multichannel customer, meaning they didn't stay as pure digital, but they remain, meaning less -- a little bit less digital and little bit more branch-driven, recognizing the branch is more probably for different function than before. This is what we are looking in detail now because when it comes to the cost base of the future, depending upon what is the role of the branch, obviously, will depend certain of the cost structure elements. It's too early to say. There is a shift, but there is not a big bang. There is an optimization. It becomes really multichannel. The big bang, we will have to produce ourselves by changing the right OpEx and cost allocated to get this multichannel mix being run. But on the long term, there is no customer, not a single customer, which now is not interested. They are all interested by being a multichannel.

Great. Great. And --

Allow me to say, we gained probably 2 or 3 years of cultural adoption by 3 months of crisis.

Okay. Okay. And lastly, on the restructuring and cost savings. So you did mention that the EUR 30 million in 2H. Could you quantify potentially how much of savings you expect from this? Or even subjectively, do you see savings from the restructuring program enough or even more than offsetting the partial reversal of the short-term savings that you had taken in the second quarter?

We don't want to -- I mean, we have no visibility. So it's even that we don't want is that today, we know already, in some places, that we need to adjust, and we have implemented that. We started end of last year when we reorganized the Northeast region in the U.S. and, to a lesser extent, the U.K. So this is structural. And out of the 4,000 people that were reduced at the end of H1, we've got around 600 that were structurally down. So we need by pocket, by country, adapting. What we wanted to show you is the agility, by which we are monitoring the short-term with very low visibility. So we have a couple of plans that are -- or could be activated, depending on the outturn of the coming weeks. But it's too early to guide on what could be a full year impact on H2.

The one thing -- to support Laurent's point, the one thing that we are running with our managers is what if there would be 10% less in the U.S.? What if there would be x percent less in certain regions, market segments and all? We are running all these what ifs, looking at ourselves. This is not what if in theory, what if when we look at ourselves and what could happen here and there. It's only 1 month that we have a minimum of visibility of how it's getting operating, and -- but we are ready. And therefore, we are able, by all the simulations, we do ready to do these structural adjustments. Therefore, we're able to say with restructuring costs. As we have said before, we have enough to face the structural reorganization that may be of different shape, different nature, different timing in different parts of the world, but it's already going on. As you say, the 600 of the 4,000 are done. And every day, there are some of it being done here and there. And we cannot wait. It's a permanent adjustment -- structural adjustments because the first state was superb. And now we know we will be alone. We will be alone one day. And therefore, we face our own destiny and reality. And therefore, we do daily adjustments where it's needed. Vis-à-vis you, it's normal that we try to quantify and therefore, we have been able to quantify the wood tips of different scenario, and therefore, we can tell you the EUR 30 million, we should be able to do what's needed to do.