Rexel S.A. (RXL) Earnings Call Transcript

Good morning, this is the conference operator. Welcome and thank you joining the Rexel's Third Quarter 2022 Sales Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Guillaume Texier, Group CEO. Please go ahead, sir.

Thank you very much. Good morning, and welcome to this call to present Rexel's Third Quarter 2022 Sales. I'm here today with Laurent Delabarre, our CFO. And like always, we know you have a busy day with many calls, so we will make it short and to the point. I will do the highlights and the guidance, and Laurent will walk you through the details of our figure. So if I summarize, going to Slide 3, Rexel posted a very solid quarter, building on the first half momentum and even accelerating. We actually posted a record third quarter with sales of EUR 4.8 billion, up 16.3% on a same-day basis. And beyond the fact that this was our best-ever quarter in terms of sales in nominal terms, there are a number of qualitative reasons to be particularly satisfied with this performance. First of all, we saw growth across the board. This is true for our 3 end markets: residential, commercial and industrial, which all posted double-digit growth. And it is also true for our 3 geographies, which also all reported double-digit growth. And I'd like to highlight particularly North America, which recorded growth of 17.3% driven both by strong underlying demand, but also by our internal transformation. Secondly, while we are operating in an inflationary environment, our growth is volume-driven. Volumes contributed for about 750 basis points to our Q3 growth. And as we outlined at our Capital Market Day in June, this demonstrates that Rexel is positioned on growing market segments such as photovoltaic products, which benefits from the acceleration of spending on electrification. It also shows that we have become more agile, and able to seize opportunities to help our customers with end-to-end solutions in a labor scarce environment. Thirdly, we have operated well in Q3 in the continued inflationary environment I mentioned. We've been able to pass through to selling price, the overall rise in production cost on non-cable products in all our geographies, and pricing contributed 880 basis points to our Q3 growth. And lastly, also in line with what we presented at our CMD, we continue to see a ramp-up of our digital sales, which grew by 240 basis points, and account for 25% of our total sales. All of this combined allows us today to upgrade our full year guidance for the second time this year, as we will discuss later in the presentation. It's also a very strong confirmation of the strategic direction that we have started to implement through our plan for 2025. Slide 4 shows you the different building blocks of our growth. And as you can see, it is well balanced between organic growth and M&A, leading to 35.5% growth on a reported basis. As shown on the graph, organic same-day sales growth -- organic same-day growth reached to 16.3%, driven by the combination of volume and price that I described before. We also had a positive net scope effect of 10.7% of our Q3 2022 sales, or almost 8% expected in full year 2022. This is for me an opportunity to underline the contribution of our recent acquisitions, mostly Mayer, but also Horizon Solutions in the U.S., an automation business that we closed in July and Trilec in Belgium. Let me tell you that we are very happy with those acquisitions, about their timing and about also the way the integration is happening. There are excellent examples of the disciplined approach to M&A that we presented to you in June and they further strengthen our core electrical distribution positions. So after this short introduction, let me hand over to Laurent to detail our figures.

Thank you, Guillaume, and good morning to all of you. Starting on Slide 6, the bar chart shows that we continue to operate at high levels in terms of same-day growth with double-digit progression in each of our 3 quarters this year on top of high growth in each quarter in '21, making Q3 '22 the seventh consecutive quarter of positive organic development. Here too, we are displaying a very good balance between volume and price. The volume effect in Q3 was 7.5%, while the price effect on non-cable products was a strong 9%. We had a broadly neutral cable price effect in Q3 of minus 0.2%, reflecting the lower copper price in the quarter compared to the same period last year. Going forward, we believe we have entered into a more inflationary environment that will last and notably inflate product costs. This will support selling price on non-cable products. On Slide 7, you see the breakdown of our growth by geography. As Guill mentioned, we saw double-digit same-day sales growth in each of our 3 regions in Q3, accelerating compared to Q2 '22, and resulting in strong growth over 9 months. In North America, accounting for 44% of group sales, we posted growth of 17.3% in Q3 and 18.5% over 9 months. In Europe, representing 48% of group sales, we grew by 15.9% in Q3 and 13.2% over 9 months. And in Asia Pacific, Q3 saw a return to positive territory with growth of 12.7%. And over 9 months, growth stands at 5%. On the slide, we also see the breakdown by end markets in each geography, showing you that we have a different growth profile by region with a stronger emphasize on commercial in North America, residential in Europe and industrial in APAC, notably due to China. At group level, commercial represents 43% of our sales, industrial 30% and residential 27%. Moving to Slide 8. You see that the quarter recorded an acceleration in volumes, both at group level and in all 3 geographies, demonstrating our ability to fully capture rising electrification trends. For the group as a whole, volumes rose sharply with the contribution of 750 basis points to our Q3 growth after 60 basis points in Q2, reflecting favorable underlying demand, notably for energy-efficient solutions amid rising energy costs. We saw above group average growth of product category such as PV, EV or HVAC. This growth was driven by each of our 3 geographies. Volume in North America grew by 10.1% in the quarter, twice the Q2 '22 level of 5.1%, notably, thanks to growth acceleration in the project business, coupled with sustained demand in proximity activity. In Europe, volumes were up plus 5.7%, reversing a negative minus 0.5% in Q2 '22, and strong demand for electrification solution. And in Asia Pacific, volume expanded by 4.1%, a very sharp recovery after a negative minus 13.6% in Q2 '22. This was notably driven by the post-lockdown recovery in China. Volumes were also boosted by demand in commercial in Australia, a midlevel scarcity. Moving to pricing on Slide 9. Its contribution to same-day sales growth was 8.8%, entirely from non-cable products with a neutral impact from cable products. Specifically on non-cable products, the 9% effect is similar to Q1 and Q2 '22 despite lower expected carryover effects fully compensated by additional price increases during the quarter. It is indeed interesting to note that we passed additional selling price in the context of lower raw material price. This results from the overall inflation of production costs borne by our suppliers, which then need to be offset. In addition, looking at the graph on the right-hand side, you see that after 10 years, during which average price were up plus 1.2%, we have entered into an area since '21, and we anticipate that it will last. Moving to cable products. The absence of contribution in Q3 is directly linked to the lower copper price from circa USD 9,400 per ton in Q3 '21 to circa USD 7,700 per ton in [ Q2 ]. For Q4, assuming copper price remain at current spot price, we anticipate the contribution to turn slightly negative. Slide 10 focuses on the contribution of our 3 geographies to the group, plus 16.3% same-day sales growth. You have all the details in the press release on a country-by-country basis. So I'll just highlight the key evolution of the quarter. In Europe, Q3 sales were up plus 15.9%, accelerating compared to the plus 10.4% in Q2 '22 as a result of the acceleration in volumes contributing to 570 basis points, as mentioned previously. More specifically, growth was driven by overall market outperformance, a favorable base effect and our strong ability to capture the electrification trends with PV, EV and HVAC product families accounting for 12% of sales, growing by more than 80%. By country, we recorded strong momentum in Benelux, Germany, Nordics and Italy. In North America, we posted same-day sales growth of 17.3% in the quarter. More specifically, for the U.S., the 3 end markets grew at a similar pace. By region, the country benefited from strong overall growth in California, Mountain Plains and Gulf Central notably driven by oil and gas as well as robust growth in commercial. Our growth in pure industrial automation business identified at 1 growth segment during our Capital Market Day is up 20%. In Canada, the good performance was still driven by industrial end markets, and more specifically, oil and gas and mining activity. Finally, our high level of backlogs provide visibility in both countries. In Asia Pacific, sales were up 12.7% in Q3 '22, largely from the post-lockdown recovery in China and from good momentum in Australia, driven by robust commercial business. Let me now focus on Slide 11, on the acceleration in electrification trends that we have captured over the recent quarter with a focus on photovoltaic activity, which accounts for 7% of our sales in Europe. As illustrated on the graph, on the right-hand side, the sales growth has accelerated in recent quarters. It started, first, to accelerate in Europe on the back of growing energy issues. We anticipate this trend to follow in North America in coming quarters with the adoption of the Inflation Reduction Act. We have a unique value proposition to capture the boost in this growing segment. It includes, of course, the panels themselves but also the anti ecosystem of the solution with the inverters, the batteries of the protecting equipment. This can account for up to 30% of the price of the total solution. We have also developed a unique set of services in order to offer end-to-end solutions to our customers. Our value proposition includes energy audits we provide, strong sales expertise as well as dedicated logistic organization able to handle large items. As an illustration, we have adapted logistics facilities in most countries, including Germany, France, Sweden, the Netherlands and Finland. In this environment, the boost in sales growth is fostered by growing sustainability concern, the scarcity of energy, and also the accelerated payback from the rise in energy prices. Even on photovoltaic installation, the payback has been reduced from circa 9 years to up to 1 year in countries where energy prices have risen the most. On Slide 12, we see that we continue to have a record level of backlogs as illustrated by North America, France or China in an environment that remains constrained by product scarcity. It is interesting to note that in North America, we have maintained a stable backlog while sales growth accelerated in the project business. This illustrates the positive trend in those countries and give us some visibility for part of our business in the coming quarters. I'll now hand back to Guillaume for his closing remarks.

Thank you, Laurent. Before concluding, I would like to talk a little bit about the current environment we are seeing. And I know most of the questions will be about that rather than about past performance. First of all, to focus on the end of the year, as you read in the press release, and as you can see on Slide 14, we are upgrading our guidance for the second time this year. This reflects our strong performance since the beginning of the year, but also the belief that we will continue to benefit in Q4 from good tailwinds, such as our important backlog, especially in North America and also the electrification trends that Laurent was mentioning in Europe. And this is the reason why we are upgrading our full year targets for 2022, which should be another record year, and we now anticipate a comparable scope of consolidation and exchange rates, same-day sales growth of circa 12% versus 7% to 9%, which was the current -- or the past guidance. An adjusted EBITA margin of circa 7.2%, including 70 bps of nonrecurring items to be compared to the previous guidance of 6.7%, including 50 bps of nonrecurring items. And free cash flow conversion above 60%, which is unchanged. And going beyond this 2022 horizon, I would like, first of all, to remind you that now is not the time to talk about guidance in case you have questions about 2023 for the Q&A. But let me make, however, two general comments. The first one to say that we are at Rexel in the mindset to harvest growth while being prepared for anything given the level of uncertainty in the economy. So we have a growth plan, which we are implementing actively and with success up to now, as you could tell in the results. But we also have a plan B, which is much more focused on resilience, which we discuss and update continuously with the Rexel countries. And for the moment, really no warning sign. And to the opposite things are doing pretty well, as you can tell by the results, but we won't be caught unprepared. And the second thing I wanted to underline -- the second remark I wanted to make is illustrated on Slide 15. And it is to highlight the fact that many of the current trends, which are at play in the economy, which could be perceived as a macroeconomic negative globally also create opportunities for our business, and I think this is quite specific to our sector. You have seen, for example, how the price of electricity had created opportunities for us in photovoltaic systems, but also fuel sales, building automation or industry automation. So in a way, compared to what we said in the Capital Market Day, we are leapfrogging a few years in the natural evolution towards electrification. And the same is true when you look, for example, at a trend like labor scarcity or increased cost of labor, which are two trends accelerating in many economies in which we operate. Because of these trends, we see many customers paying much more attention towards their employees spend at times on and being, therefore, much more interested in two things. First, externalizing more services to us. And second, revisiting automation projects to save labor. So here again, a negative trend, which is an opportunity for Rexel. And finally, we know that material and product scarcity is also an important feature of today's environment. Obviously, it's a headwind for us and for our customers, and our backlog illustrates that. But it is also an opportunity to provide more added value to customers by suggesting alternatives. And it's instrumental in boosting certain sectors of the economy, we are largely exposed to like mining in Canada, one example. So once again, this is not the moment to discuss 2023. But let me say that in line with our 2022 guidance, we are confident about the rest of the year. And we see interesting midterm tailwinds materializing in an environment which remains globally uncertain. As a reminder, those trends are the same we had highlighted in June at the Capital Market Day, and amid which we have been working for several months. So we feel we are in a good position here. So I'm going to stop here our initial remarks. Thank you for your attention. And Laurent and I are now happy to take your questions.

[Operator Instructions] The first question is from Alexander Virgo with Bank of America.

I wondered if you could talk a little bit around inventory levels and stocking dynamics given your backlogs, the visibility that, that gives you. But given the broader customer trends and concerns, I guess, we have, particularly around residential construction markets. That would be my first question. And then I have a second one as a follow-up, please.

Inventories are -- I mean, first of all, inventories have been, during the last few quarters, relatively stable with a slight increase, which was due to the mechanical effect of replenishing inventories during the scarcity situation. They are now reducing. And they are 2 days below the level of September 2021, at approximately 60 days. And the reduction is effective both in Europe and in North America. So we see a slight trend down in terms of inventory. . And to come back to your question, you were mentioning residential. I'd like, once again, I mean, you know that, but to highlight the fact that our exposure to residential is relatively limited, especially in North America. In North America, which is a question I very often have, we have an exposure of like is highlighted in our slides of less than 10%. Laurent, do you want to mention -- to make additional remarks on inventory levels or on end markets?

Well, we are quite cautious, and we are reviewing our inventory level, so we had invested. And because of the scarcity, we have today more inventory at the end of June, and we start to engage with the country to reduce that gap. And we are now -- we have the first result having 2 days less than a year ago at the end of September. So that's I think a good trend.

Yes. I think overall, we are comfortable with the inventory level. We are very cautious about that. But I don't think it is an issue going forward. And your second question?

Okay. Great. And my second question is for Laurent. Your comment there on a sort of sustainable non-cable pricing environment and the support that, that would imply for your own profitability as well, I guess. Just wondering if you could expand a little bit upon that with respect to the moving parts, I guess? Where are you seeing the greater strength? Where you're seeing the risk of how many to give some of that back up?

I mean that was a question for Laurent. So I will let Laurent answer.

Yes. So as explained, I mean, we saw until now strong inflation on the top line coming from the rise in raw material price. And we see, at this moment, this effect slowing down. But offset by other line that continue to increase, which is the input cost from our suppliers. So salary and benefits, transport, energy costs, that will continue to sustain the high level of selling price.

Look, I mean right now, this is trade show season. So we spend a lot of time talking with our suppliers. And what I hear from them is that their own cost to buy is continuing to experience some inflation. And especially, as Laurent mentioned, the effect of labor inflation, the effect of energy inflation, especially in Europe, and the effect of all of that in their own supply chain because it also has an impact on the price of components. So from what I hear, there is a high degree of confidence about the fact that they will need to continue to increase price going forward. Where there is obviously a little bit more uncertainty is on the commodity part, especially on copper, where we know very well that if we look midterm, we are, I think, all in the industry persuaded that there is going to be difficulty to procure the adequate amount of copper, but that is midterm. And we know that short-term, those commodities are impacted by things like, for example, the overall demand in China, which are quite difficult to predict. So I would be much more cautious like I've said in the previous calls about the evolution of copper. I really don't know. But as far as a non-commodity pricing, which is the bulk of our business, we are quite confident that we are going to continue to operate in an inflationary environment backed by the cost situation of our suppliers.

The next question is from Martin Wilkie with Citi.

It's Martin from Citi. The first question, you talked about solar being potentially very positive for you. Could you talk about -- in the past, I remember a few years ago when solar was very strong in countries like Germany, in particular, there was a lot of volatility around installations to do with timing of incentives, these kind of things. And that caused a lot of challenges for Rexel at the time in terms of how to manage your cost base. Is that you know that solar is going to be consistently strong, and therefore, we don't need to worry about sort of big sort of ways of investment that come and go with incentives? Or how are you managing the growth in that market? And then I have a second follow-up after that.

That's a very good question, Martin. It's right that 10 years ago, solar was a shaky market for the distributors in general and for Rexel in particular. I think many things have changed in the solar environment. As you mentioned, 10 years ago, the rise or the bubble, let's put it this way, of solar was driven by incentives. And when anything is strongly driven by incentives, then you have issues about the timing of incentives, the government stopping the incentives, et cetera. Where the situation has changed a lot is that today, the payback without incentives of solar is becoming very competitive. I mean when you look at the average cost of production, including CapEx of electricity by solar, it is not completely competitive, which means that the calculation is not a calculation about, "Oh, am I going to get this preferred rate from the utility? Or am I going to get this government incentives?" But it's a pure economic calculation. So from this perspective, it is much more stable. And to this payback calculation, in general and particularly in Europe, companies and operators tend to add the argument of security of supply, which is obviously something which is a new trend, a new concern, which is probably going to be here to stay. So in terms of the underlying drivers of demand, I think things are much more stable. Then the second thing is about technical evolution. 10 years ago, we were at the early beginnings of the technological evolution of solar panels, for example, which means that you had improvement in the efficiency of the panels month-after-month, and this was also creating issues with distributors. Today, I think in terms of technology, in terms of overall pricing, it is a much more stable environment. So I think we are not talking the same market as the 1 we were exposed to 10 years ago. That being said, it's an emerging market. It's -- I mean not emerging, but it's a fast-growing market. And like any fast-growing market, we are cautious about what we do when it comes especially to supplier relationship, to inventory building and to credit management. So we put an additional amount of cushion, if it's possible to this specific business because we are always doing that for fast-growing businesses. But I think fundamentally, what you remember is not what is happening today.

Great. That's helpful. And if I could have a follow-up just on the business more broadly. I know you're obviously not going to talk about 2023 at this stage. But some parts of your business do have -- there is quotation work. I know, obviously, it's not firm, but it does give some indication. I mean you touched a little bit on it during your opening remarks, there's not been any sort of change in the end market. But are there any warning signs in any end markets where quotations have significantly fallen off a cliff or anything like that?

No. I mean not really. I mean where we have important backlog is mostly in North America, and North America happens to be the place where our business is doing extremely well with a good level of order intake. I mean you see that the backlog is stabilized because mostly the availability of materials is slightly improving. But that being said, the intake level remains quite high. And when we talk to our customers, which we did very systematically over the last few months, the degree of confidence in North America of... [Technical Difficulty]

Excuse me, this is the operator. I think the speaker line is on mute.

Hello?

Please go ahead, gentlemen.

Can you hear us?

Yes, please go ahead. Wilkie Martin is still on the line.

Okay. Okay. So Martin, did you hear my answer on photovoltaics? Yes, yes, you followed that.

You had a follow on...

Yes. Okay. So the second -- your second question, and I will repeat in case we were cut was about our backlog business. And what I was mentioning is that the main countries and the main geography where we have backlog business in North America. And in North America, we don't see any signs of negative trends in our backlog business. And to the opposite, what we see, first of all, is a strong intake in orders in our commercial and industrial markets where we can see a weakness, but you know that we are -- we have very small exposure in the residential part in North America, especially the new construction part in North America, but it is a single-digit part of our business. For the rest, the North American market is very active. So now at this stage -- and we made a survey of all of our -- I mean a big proportion of our customers in the last 2 months. And in North America, 90% -- almost 90% of them have an optimistic vision or neutral vision about the future. And in Europe, this proportion is slightly lower, but it's between 70% and 80%. So we are still in an environment, which is an environment of strong and sustained demand.

And if I could just squeeze in one more. Your guidance for the full year implies sort of mid-single-digit growth in Q4. Is it fair to assume that that's what you're seeing so far in October? Or is it too much to join those 2 numbers together?

On this calculation, I mean, Laurent, do you want to answer maybe?

Yes, yes. I mean we have been quite -- I would say, been quite cautious on the second half, and on the fourth quarter. And we have also a base effect on copper that will impact negatively the Q4. But we are a bit more than mid-single-digit in Q4.

Yes. I mean there is a copper effect, which is mechanical. For the rest, circa 12% for me means between 11% and 13%. And like always, we like to be on the cautious side. But we don't see any signs...

[indiscernible] changed in October or anything like that.

Excuse me, I didn't get you.

[indiscernible]

We don't expect that few metal [indiscernible] going forward. October is a good month.

The next question is from Akash Gupta with JPMorgan.

My first question is on the nonrecurring item in the margin guidance that you have upgraded from 50 basis points to 70 basis points. And we saw last year, it was 40. And given your comments on pricing, will it be fair to expect some of it lasting in 2023? Or shall we expect it to go 0 next year? That's the question number one.

On this, one-off is really the exceptional part we consider that in our business, we have a slight percentage of inflation that is recurring. So at this stage, we believe there will be a slight level of inflation next year. But...

But we are not going to get dragged into questions about next year. Good try. But in terms of -- I would come back to the answer I was making on the expectation on inflation next year. We think that overall, and for the big bulk of our market, we will continue to operate in an inflationary environment, like it's a little bit too early to tell how much, et cetera. But we think this inflationary environment is going to remain with us. So that's the only thing we can tell about that, I guess.

And my second one is on the share buyback. I mean you announced this in the CMD in June and since then we have seen very strong performance, and some of the drivers might continue for longer, which means that you may end up with higher cash generation than we thought before. Maybe two questions here. The first one is that on the timing of your share buyback, would you consider it front-loading given the share price hasn't reflected earnings dynamics? And secondly, could there be an upside on EUR 300 million total share buyback if the total cash flow in the next 3 years would be higher than what you were planning at the time of your Capital Markets Day?

No, I think on the share buyback, I would stick more or less to the guidance that we have given at our Capital Market Day for the moment. We consider that buying back share is something which makes sense. We still consider that the share price of Rexel is undervalued and it's a good deal. So that's the rationale behind that. In terms of the global amount, we have said we would do EUR 400 million between now and 2025. We are doing that based on opportunity, based on share price, based also on our cash situation and also based on how the market is doing in capital allocation. We continue to think -- if we come back to capital allocation that our first priority is to do smart M&A. We are -- as I mentioned, we are extremely happy with the acquisitions that we have made over the last year. If at some point, and I hope it's going to be the case, we generate even more cash than what we had anticipated, we'll have the discussion again with the Board. But at this stage, we stick with our plan. And in terms of timing, we give ourselves a little bit of freedom to juggle between the various constraints: one, being the cash; and two, being the opportunity in the market, but we are not going to announce in advance what we do. But as you mentioned, we did during -- we were quite active during the summer, and we bought back more than 1% of our shares, which is an additional evolution and an additional tailwind to EPS, absolutely.

And my final one is on your SG&A costs next year. I mean we saw in the quarter your digital sales grew quite sharply. Given the growth in digital, how do we see inflation there? Like, can you bring down your SG&A, especially employee cost, if the share of digital keep on rising in line with your expectations?

I mean, first of all, I mean, on SG&A -- 50% of our SG&A is approximately -- I mean, approximately is salaries and benefits. This year -- a little bit more than 50%. This year, we are seeing at the end of H1, around 2% of increase of salaries and benefits. At the end of the year -- because it's ramping up during the year. It's going to be more something like mid-single digit. Directionally, I would expect that to be also the case in 2023. But that being said, once again, let's wait until February to give more precise guidance on that. I think your answer is -- your question is the right one. Because of the rise of digital, we are more flexible and we are able to push more productivity. But that being said, it doesn't happen instantly. But clearly, the fact that we are much more digital than in the past compared to previous situations, makes us much more flexible and much more able to adapt our workforce quickly. So that's something which is a plus for us in terms of resilience, very clearly.

The next question is from William Mackie with Kepler Cheuvreux.

A couple of questions. Firstly, could you provide at least from your perspective, from within the confines of what you can, an update on your perspective of the judicial investigation and the process that we've reached today, and what investors might be able to expect at least or hope for in the coming months or quarters? The second is perhaps more conceptual. Rexel's business, I would think a lot of it is quite late in the construction-related cycle for residential and nonresidential. If we concentrate at least on Europe, and you look across the portfolio of your business, I don't know if you have that terrible catch phrase canaries in the coal mine, but earlier cycle products which might suggest that you're seeing a slowdown across some of the residential ex electrification, which is sort of a call out that we've heard from some competitors. So where are you in the cycle? And what should we expect in terms of the different timings of economic sensitivity across the business portfolio? And the last question is just on M&A. You've highlighted the success so far with Mayer and the other deals. What's the sort of pipeline like? Do you have a lot of targets which are close to going live?

Yes. Okay. So on the first one, on the judicial investigation, I think the only thing I can do is to stick to our press release from a few weeks ago. So as you know, we were placed under investigation. We have a bail to pay before or to constitute before January 15. We strongly believe that our case is very good, and we will make it prevail. In terms of next events, I don't expect anything until at least mid-2023. Those things take time. And so the next events from this point of view, wouldn't be before mid-2023, something like that. So it's difficult for me to elaborate much more on that, except the fact that we are very sure of our case and that the next steps are probably going to wait at least 2 quarters. Your second question was about the canary in the coal mine, which is a question that we often have also internally because, as I told you, we are both pursuing growth and happy that the electrification trends are here, but in the same time, obsessive about listening to the market and about being agile in case the market would turn. And that's exactly the reason why I was mentioning the fact that we survey our customers very extensively, very often to understand what they have in mind. And apart from what I was mentioning, for example, in the residential market in the U.S., which is relatively low -- relatively small for us, we see a tapering of the -- I mean if I try to strip out electrification, which is not so easy because we were talking about photovoltaics, but there are other categories like building automation, like HVAC, which are more difficult to strip out because you never know whether it's linked to an electrification trend or linked to a slowdown of the -- or if there is behind the slowdown of the economy, which is hidden by that. But that being said, when we try to do that we see a stabilization of growth at a high level in many European countries, but we don't see, at this stage, negative trends. But one thing I would highlight again, I mean you understood that from the presentation what is quite new, and what is quite interesting is the fact that the environment we are in is also accelerating very substantially. And I don't think it's something short term. I think it's really something which is here to stay, is accelerating the trend towards electrification, which is quite exciting from this point of view. So to answer your question, no, I don't have the canary in the coal mine dying somewhere in our closets. The underlying market as far as we can measure them by our customers and by anecdotal information is relatively healthy. Yes, it's plateauing, but it's not turning, it's not drastically turning, maybe because of the fact that we are not exposed very much to the high volatility markets. But that's the situation right now, so far, so good. In terms of M&A, we have a pipeline which is mostly focused on North America for two reasons. First of all, because it's a market which is not consolidated and where there are opportunities. And secondly, because it's a market where the economy is quite solid. I mean you've seen -- you've heard my comments about the backlog and about what we hear about the economy in North America, so we feel quite confident. So we have a backlog of small to midsized targets, nothing of the size of Mayer in the pipeline. We are quite cautious about what we are doing here because we are also conscious that the time in the cycle is, in theory, not the best time to buy. So we are cautious about the end market's exposure of what we are getting interested in, and in the strategic value and in the high quality of what we are buying. So we will continue to do some M&A. It's going to be mostly small and midsize, don't expect huge deals in terms of M&A. But that's where we are, and mostly focused on North America at this stage.

The next question is from Aurelio Calderon with Morgan Stanley.