Good morning, ladies and gentlemen. First of all, welcome to this presentation of Rexel's first half 2019 performance. Today, I am with Laurent Delabarre, our group CFO. I will start with a look at further progress we have made on the key transformational initiative on our strategic plan. We will highlight our half year performance and our performance by geography. Laurent will then detail our financials in H1, and I will conclude with our 2019 outlook. Then obviously, we will be very happy to take all your questions. Now let's start the presentation. If you go to page three, you see that we have successfully executed our strategic plan, and Rexel is on its growth path. Since the end of 2016, we have generated EUR 1 billion in incremental organic sales, and we have gained market share in our key markets.
This is a direct result of our more customer SKU strategy that I have already mentioned, an improved service level that we are reaching now to much higher than before, and which has led to an enhanced customer experience. In parallel, we have also accelerated our digital journey in key countries, as you can see from the numbers here, with digital sales now representing 17.2% of our total revenue. We have a ramp-up across Europe, which now the penetration level is now above 25% with strong progress in large countries like France. We now have seven countries in the world with digital sales above 30%. Thanks to this initiative of the last two years, we clearly became a leading digital player in the B2B distribution business, with between EUR 2 billion and EUR 2.5 billion of annualized digital sales.
Another source of satisfaction of our H1 performance is the early signs of recovery in Germany, which as you know underwent a significant restructuring last year. In H1, underlying same-day sales grew by 2.3% and profitability improved. These highlights are the result of the transformation journey we embarked upon more than two years ago, and they were enabled by a regained sense of confidence from all of our key stakeholders, customers, suppliers, and employees. This gives me the confidence in Rexel's continued recovery going forward. If you look with me at slide four, and on this slide, we look at the key highlights of our Q2 sales performance. Rexel posted another strong quarter, with sales growing for the 11th consecutive period to reach nearly EUR 3.5 billion, supported by North America and key European countries and China.
This represents same-day growth of 2.4% or de facto 3.8% if we exclude the effect of turnaround measures in Germany and Spain that had an unfavorable impact of 1.4% on our sales. This strong performance comes despite an unfavorable copper contribution in the quarter of - 0.2%, while corporate had a positive impact of + 2.7% in the comparable period last year. Our underlying business trends were solid. On page five, overall, we posted a good performance in this half year. Our sales at almost EUR 6.8 billion were up 2.7% on same-day basis. Our gross margin was up 11 basis points to 25%, which is a solid performance in the current environment. Our adjusted EBITA rose by 2% in the period to EUR 319 million, and margin at 4.7% was stable versus same period last year.
Recurring net income was up 9.6% at EUR 167.7 million, the highest level since 2014, thanks to good operating results and also helped by a favorable currency impact. This good H1 2018 performance came after I'm sorry, it's H1 2019 performance, came after two years of double-digit growth of our recurring net income, showing the payback of our initiatives. Free cash flow before interest and tax was an outflow of EUR 17.3 million, Laurent will explain this in greater detail shortly after. Look at page six. In the first six months of this year, we adapted rapidly to volatile conditions. The performance in all the more notable that we faced various headwinds. Indeed, we are operating in an environment that is more volatile than in previous years.
In addition to such technical effects as a negative calendar impact and copper contribution, which should be reversed in H2, assuming unchanged copper prices until year-end, we faced a number of external challenges. They include an unfavorable business mix, which was weighted towards lower margin project business, notably in the U.S. This at the expense of proximity business. B, trade tensions reflecting in tariff increases that could not be immediately passed on. C, cost inflation linked to wages and transportation in some markets, notably in the U.S. D, and of course, the continuing uncertainty in the U.K. regarding the Brexit. In the face of this complexity, Rexel demonstrated its ability to adapt quickly.
We took a number of measures, including reinforcing our focus on the proximity business in the U.S. towards the end of Q2, increasing our business selectivity in such markets as France and the U.K., and sharpening our focus on price increases in the U.S. These efforts allowed us to contain the impact from this more adverse environment and see a sequential improvement in EBITDA towards the end of the first half. On page seven, we expect the environment that I have mentioned to remain volatile, and Rexel will continue to show its agility to continue delivering solid results. On this slide, we believe that our repair journey is now nearly completed. We have taken all the necessary measures in our key markets and will not need to allocate further resources for branch openings, inventory buildup, or adding to the sales force.
The only exception I would mention is the U.K., where the uncertain situation surrounding Brexit may lead us to take further adjustment measures if need be. Going forward, we will focus on two main aspects. From an operational point of view, we are concentrating on improving our operating leverage through a number of actions. These include the implementation since Q2 of productivity measures to offset cost inflation in the U.S. and other key countries, a focus on the proximity business in our mix, continued efforts to enhance margins, and finally, reaping the fruits of the turnaround measures taken in such markets as Germany and Spain. From a strategic point of view, our priority is continuing our digital transformation through such measures as rolling out, in the U.S., the platform across the entire nation.
Introducing, across the board, new functionalities such as track and trace, email to EDI, and other tools to improve business operations in Europe, and deploying analytical tools to enhance the customer experience and further improve our productivity. The capacity to adapt that we demonstrated in the first half, the action plans we are deploying, and a more favorable calendar effect in H2, make us confident that we will deliver our full-year guidance. Let's go to page nine so that we can review by geography. On this page, you see that we posted sales growth in two of our three geographies. In North America, which accounts for 39% of our sales, same-day sales were up by a strong 6.8%. In Europe, which represents 52% of our sales, same-day sales were down 0.9%, with growth in most key markets, except Germany, where we are executing our turnaround plan.
In Asia Pac, accounting for the remaining 9% of our revenue, sales were up +3.4%, and they were up strongly in China, as we will see shortly. Let's look at each of the regions in more detail. In Europe, sales of EUR 1.8 billion. Europe is down by 0.9% point on a constant and same-day basis in Q2. If you exclude the impact of branch closures in Germany and Spain, which we initiated last year, growth was 1.7% up, demonstrating good momentum in key countries. In our home market of France, which accounts for 38% of our European sales rose +2.6%, with good momentum in our commercial projects, also in residential, and also in specialty businesses. We saw very good trends in most of our European countries, notably Benelux, up 12.1%, Sweden up 5%, and Switzerland coming back with up 1.6%.
In Germany, sales were broadly flat, restated for the closure of 17 branches in Q3 of last year as part of our plan to focus our operation on the industrial segment. Only the U.K. continues to be a difficult market, and sales were down 8.2%, but it reflects a conscious decision to be more selective to protect our margin and the effect of 30 branch closures, including 13 in the quarter. Let's move to page 11, which is North America. In North America, we continue to see strong growth, reflecting both the positive effect of our transformation action in the U.S. with a more regional customer-centric approach, as well as a robust activity in Canada. Overall, sales were up 6.8% on a constant and same-day basis, reaching EUR 1.35 billion.
In the U.S., representing 79% of our North American activity, we continue to outperform the market. Sales were up 7% on a challenging comparable base as we are cycling over four consecutive quarters of high single-digit growth. By end market, while commercial project and residential are up between 9% and 10%, the industrial business slowed down. Our past investment over the last 18 months in sales reps, inventories, branch openings, and branch refresh are clearly paying off, and we have added 54 branch openings since 2017, contributing for 1% of growth in this quarter. The returns on these various initiatives are in line with our expectation. I said earlier, the repair journey in the U.S. is now completed, and our focus is now on digital.
In Canada, we also saw good growth of 6.3%, driven by the industrial project and our initiative in our proximity business, where we have developed a core offer with key SKUs that we have rolled out nationwide. On page 12, if we take a closer look at how our regionalized approach in the U.S., now divided into regions, is paying off in terms of growth and market share gains, as you can see from the numbers and the arrows on this map. Our electrical distribution business is developing well in every region except in the Midwest. We are particularly happy to see double-digit growth in such region as California, Mountain Plains, and the Southeast. On page 13, when we move to Asia Pacific.
Asia Pacific, where sales were up 3.4% on a constant and same-day basis and 4.5% restated for the impact of the disposal of the Rockwell automation business in Australia at the end of April 2018. Also restated for the disposal, sales in Australia were up 2.1%, mainly driven by positive momentum in infrastructure and mining businesses, while residential and commercial are slowing down. In Asia, sales were up 7% and up 10.1% in China, thanks to a large contract that accounts for most of the growth in this country. We also benefited from our repositioning in the business on promising markets, and we are seeing good results. Asia was also impacted by the non-repeat of a large contract in Middle East that contributed EUR 6.7 million in Q2 2018, and restated for these two large contracts, Asia is up 4.4% in the quarter.
For more detailed information on our financial performance, let me now hand over to Laurent Delabarre, our CFO.
Thank you, Patrick. Good morning to all of you. Before getting into the H1 numbers, let me begin by presenting on slide 15 the main impacts of the IFRS 16 standard adoption, which deal, as you know, with commercial leases and came into force as of January 1st. It is our first publication under IFRS 16. For sake of comparison, we have also restated the full year 2018 numbers that have been reviewed by our auditors. Those restatements are presented in the note to the consolidated financial statement. As you will see, the impact are very similar to the estimates we presented at the time of our full year 2018 results. The IFRS 16 standards impact our P&L, our balance sheet, and to a lesser extent, our free cash flow statement. The main impacts are as follows.
It has a positive impact of 147 basis points on our EBITDA margin as we are taking away rent. It has a positive impact of 24 basis points on our adjusted EBITDA margins, which now stand at nearly 4.8% in full year 2018. The impact is, of course, lower than on the EBITDA as we are reincorporating higher depreciation. It has in 2018, an unfavorable impact of EUR 11 million on recurring net income due to the phasing effect that will reverse over time with the aging of the network of branches, as we currently have more financial expense than debt repayments. Concerning the balance sheet, we have introduced two new lines, the right of use and the lease liability. If the latter was to be considered as financial debt, our financial net debt would increase by EUR 933 million and our leverage ratio by 0.4x .
Let me remind you that our bank covenants exclude IFRS 16, the new standard has no impact on our bank financial flexibility and on our bank leverage ratio. Lastly, on free cash flow, the impact is unfavorable by EUR 6 million, on free cash flow before interest and tax, because financial leases were previously recognized in cash flow for financing activities and are now included in the free cash flow from operations. It's mainly a geography reclassification. On slide 16, we begin our H1 financial review taking a closer look at our Q2 sales performance.
At nearly EUR 3.5 billion, our sales are up 3.3% on a reported basis and up 2.4% on a same-day basis. We benefited in the quarter from a positive currency effect of 1.8%, thanks to the euro's appreciation versus the US dollars, while facing an unfavorable scope effect of 0.3%, and a negative calendar impact of 0.8%. This calendar effect will turn positive, as you know, in Q3 with a favorable impact, and it will have a favorable impact on our adjusted EBITDA growth in H2 2019. Concerning currencies and assuming spot rates remain unchanged, we expect foreign exchange to have an impact of + 1.7% on sales in full year 2019. Concerning scope and taking into account disposal announced at the end of 2018, the expected impact stands at -0.4% in full year 2019. As mentioned earlier, copper's contribution was unfavorable 0.2%, the third consecutive quarter with a negative copper effect.
Assuming stable copper price, H2 2019 would benefit from an improved base effect as the copper price stood at circa $ 6,150 per ton in H2 2018, compared to $ 6,950 per ton in H1 2018. On slide 17, we turn to our H1 adjusted EBITDA bridge. Adjusted EBITDA was up 2% to EUR 319.2 million, and margins stood at 4.7%. The stable EBITDA margin in the half year on a comparable basis is explained by the following elements: A positive volume and price contribution of 30 basis points resulting from all our operational initiatives. A - 10 basis point calendar effect on our adjusted EBITDA margin to be reversed in H2. Productivity gains, especially in Germany and Spain, and in U.K., partly offset by cost inflation, notably from wages and price. 24 basis points reflecting our investment for future growth, especially in IT and digital.
Please note that for 2019, as already mentioned, we expect our transformation in Germany and Spain to contribute to circa 10 basis points to the group adjusted EBITDA margin, with a higher contribution expected in H2 2019 than in H1. As explained by Patrick, our priority is now to focus on improving operating leverage, while maintaining investment in digital. On the right-hand side of the slide, we show that the adjusted EBITDA growth pattern in H1 2019 is similar to that of 2017 and 2018, excluding the calendar effect. In both previous years, H2 proved to be stronger than H1 in terms of adjusted EBITDA growth. As an illustration, our adjusted EBITDA grew by 3.1% in H1 2018, and by 9% in H2, with a less significant calendar impact in H1 of last year than this year. On slide 18, we turn to our profitability by region.
Overall, with adjusted EBITDA of EUR 319.2 million in the half year, our adjusted EBITDA margin stood at 4.7%, stable compared to last year, with slight positive contribution from North America and Europe offsetting Asia Pacific. In Europe, adjusted EBITDA margin was up nine basis points, thanks to the positive volumes in key countries, the gross margin improvement in Germany and France, partly offset by cost inflation, increase in IT cost and investment. In North America, adjusted EBITDA margin grew eight basis point to 4.1%, thanks to volume growth that more than offset the negative channel mix, tariff, cost inflation and investment in people. In Asia Pacific, adjusted EBITDA margin decreased by 69 basis point to 1.7%, with volume more than offset by the disposal of the Rockwell automation business in Australia, as well as cost inflation, especially in China and Asia.
Our corporate costs stood at EUR 12.9 million, unchanged versus last year, with our investment in IT and digital offset by lower corporate costs. For the full year, we anticipate the corporate hosted cost to be close to EUR 40 million, slightly higher than last year because of the central hosted IT and digital cost investments. On slide 19, we look at the bottom line part of our P&L. Let's start with our adjusted EBITDA of EUR 319.2 million, up 2%. Reported EBITDA was slightly higher at EUR 319.6 million, up 5.3% year- on- year, reflecting the non-recurring swing in copper prices. Other income and expense amounted to a - EUR 22.4 million, including restructuring costs for EUR 13.5 million, mostly related to the closure of a distribution center in the U.K. and additional reorganization costs in Germany, as well as intangible asset impairment in Finland for EUR 9.3 million.
For 2019, we anticipate restructuring costs to be close to our normative level of EUR 45 million-EUR 50 million. Our net financial expense increased by EUR 21.1 million due to the one-off cost of the bond refinancing that took place in early March. We benefit from a reduction in average effective interest rate of around three basis points to 2.81%. We also saw a sharp decrease in our income tax to EUR 32.6 million. Our effective tax rate of 16.6% is exceptionally low as it benefited from a release of a tax contingency following a positive legal judgment. In 2019, our normative tax rate should be close to 33%. Net income was EUR 163.9 million, up a very strong 70.6%, and our recurring net income grew strongly to EUR 167.7 million, up 9.6%, a positive achievement. Let's turn to slide 20 to our cash flow statement.
Our free cash flow before interest and tax moved from EUR 15.6 million in H1 2018 to - EUR 17.3 million in H1 2019, mainly due to the higher restructuring cash out this year, linked to restructuring costs in Q4 last year, and to the change in working capital due to payable. Please also note that in H1 2018, CapEx benefited from the inflow resulting from the disposal in Australia for circa EUR 20 million. Looking at our gross CapEx, that stood at EUR 55.9 million, up from EUR 48.5 million, with still 60% related to IT and digital. For the full year 2019, we anticipate our gross CapEx to be close to 1% of sales. As you know, our free cash flow is strongly marked by seasonality, with most of the inflow coming in Q4.
As a reminder, in 2016, our free cash flow before interest and tax was about - EUR 7 million in H1. In 2017, it was - EUR 77 million, and in 2018, it was nearly - EUR 5, restating from the one-off inflow from the disposal in Australia. In addition, the refinancing of the EUR 650 million bonds due 2023 cost us circa EUR 20 million in H1 2019. Lastly, our income tax paid increased to EUR 62.5 million in H1 2019 from EUR 24 million last year. I remind you that in H1 2018, it has benefited from a cash inflow from the refund of the 2017 income tax overpayment in France and the reimbursement following the decision related to the 3% dividend tax paid. Overall, the increase in EBITDA resulted in a slight improvement in our leverage ratio in the first half, which stand at 2.86x .
On slide 21, we took a look at the breakdown of our debt maturity. As I already mentioned in our Q1 call, we successfully refinanced our 2023 bonds with a EUR 600 million issued at 2.75%, maturing in June 2026. Our average maturity has been extended by around 0.7 year to about four years, with the bond refinancing and the recent securitization program renewed in Europe. This refinancing operation help us optimize our financial cost and mitigate the slight increase in short-term interest rates. We expect our recurring financial results 2019 to be slightly below EUR 100 million pre IFRS 16, assuming no major volatility in currency or interest rates. The IFRS 16 impact will add around EUR 45 million to our full-year financial charges. Let me now hand back to Patrick for his concluding remarks.
Thank you, Laurent. Let's go to page 22. We are adapting to become more agile, and we already did in Q2. More agile in an increasingly volatile environment. With our Repair Journey being now completed, Rexel's operational focus is on improving operating leverage, and our strategic priority remains more than ever to advance our digital transformation. As we told you during today's presentation, we expect H2 to benefit from a reversal of the calendar effect we saw in H1. This, combined with the continued execution of our action plans, put us on track to achieve our full-year guidance. Consistent with our medium-term ambition and assuming no material changes in the macroeconomic environment, we target for 2019 at comparable scope of consolidation and exchange rates 2%-4% same-day sales growth, excluding an estimated unfavorable impact of 1% on 2019 from branch closures in Germany and Spain.
A 5%- 7% increase in adjusted EBITDA and a further improvement of the net debt to EBITDA ratio. This ends our presentation, we give plenty of time now for your question. Thank you very much for your attention. Let's move to the questions. Hello?
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Otto, do we have questions?
Yes. The first question comes from the line of Daniela Costa. Please go ahead.
Hi. Good morning. I actually have three questions. I wanted to ask you first if you can give us a little bit more color on the payables, on whether that's something just related to the timing on how you pay your suppliers throughout the quarter or whether there's anything more structural we should read from there. That's question number one. My second question is also on the CapEx, on the slight increase on CapEx in the quarter. Can you talk us through how you will manage the CapEx if we go into a downturn, whether it's sort of a more structural increase in CapEx for digital and other initiatives, or whether you have some flexibility that you will consider there? My final question is regarding the 9% of sales you still have in Asia.
If you can remind us, sort of what are the strategic rationale for still having such a small position there? Understanding you serve some key suppliers there, but would not having that hurt your relationship with those suppliers in other regions? That would be it. Thank you very much.
Good morning, Daniela. Laurent speaking. I would take the payable one. We have a day less payable at the end of June. It's a mix of supplier and country, and there is no underlying structural trend behind that. Nothing specific. As I commented, our free cash flow, when you restate the impact of The Good Guys of the disposal last year, is where we expected to be at the end of June. On the CapEx side, on the level, we have a priority list of CapEx, so we are always able to adjust the less important one if some negative sign would appear. What we said is that we don't want to compromise anything around IT and digital. That is our key priority. We have a branch we set up and different things that could be deferred in case we would need to.
On the 9% of sales in Asia. We have done a lot of restructuring by which we choose to be present in the industrial segment and automation segments. In doing so, yes, we have abandoned more residential and certain commercial in the past, and commercial segments. In the moment we concentrate on this, we could benefit from, first of all, a local demand, but also our evolution towards more industry capabilities and into automation capabilities, including gaining certain contracts which make us, let's say, pretty strong on this segment. There is enough room and market share for us so that we could get these 9% sales. Far, this is working very well with our key suppliers underlying which we had already developed in the past, and we remain together for this focused strategy.
The next question comes from the line of Lucie Carrier. Please go ahead.
Hi. Good morning, gentlemen. Thanks for taking my question. I have also three question. The first one is on the U.S. specifically, still a very strong performance in the second quarter. As we stand now at the end of July, how much visibility do you have, I would say, to the third quarter, but mostly to the end of the year, in the U.S.? Do you think the outperformance versus your peers, which seems to be by a factor of one to two, can continue into the rest of the year? That's the first question. The second one is just a more mathematical question around the bridge. You had about 25 basis point impact on the margin from investment for growth. You said that you are pretty much finished now with the repair, as you were calling it.
Should we assume that this headwind is now into the second half, going to progressively or gradually disappear? My last question was around the free cash flow seasonality. Thanks for all of the color around the normal seasonality, considering the working day impact, which is more positive in the second half of the year, as well as what you're expecting in terms of momentum. Should we expect or possibly see the free cash flow seasonality to be even a bit stronger than usual in the second half? I think you've also mentioned a lot of the inventory initiatives were finished as well.
Thank you, Lucie, for your question. I will take the first two, and I will have Laurent helping me on the second and the last one. The U.S., the second quarter good sales level, we didn't took any special order or special magnitude. There is a fundamental trend by which we are continuing to grow. It's obviously some due to the past investment in the previous year that you see here happening in term of top line. It's also due a little bit to the fact, which was against us on the mix of business, due to the fact that certain threats on business components that tariffs would put in jeopardy has pushed certain customer to accelerate their project business as much as they could. The Mexican threat on tariffs and the second wave of the China has a little bit accelerated certain big project.
By the way, put on hold other things that will materialize in the second half of the year. This is for your first question. Therefore, to the end of the year, I continue to see good momentum, probably less major projects and more proximity business as we have invested in it. Also, when it comes to transforming into the operating leverage, I will privileged in order to materialize what I said before, the repair journey by putting more branches and investing in inventories and OpEx in people in order to address this. We are now having finished, and we are now going to try to get as much as we can from our past investments. To your second question, Laurent, you want to take it over?
Yeah. On the bridge, you are totally right, and that's what we call that the kind of repair journey were over. Adding more people, adding branches to the network, we came to a point where we think we are at the right level. Yes, you're right. Now what is important is to have a good flow-through and a good contribution of all this action into the performance of the country. What we call in our bridge, volume and price contribution, has to be increased in the second part of this year and next year, to partly or more than offset the investment for growth, that is in the bridge today at 24 bps. In that now we don't have any branch opening in the U.S., but we have IT and digital.
Probably this 24 bps on a full year basis would be close to last year, going to 30 bps, something like that. That's on the bridge.
Before you move to free cash flow, Laurent, let me be clear on this. It is a conscious decision beyond the mid-year statements and beyond the rest of the year to be done. That after three years of having done investments of different kind that we have expressed in the past, we privileged for the coming, let's say, probably two years. We privileged, A, the operating leverage stepwise throughout the time, and also the digital transformation. Because we have joined now the club of the people who have significant digital trading, and we want to grow and become one of the leading in that field. Meaning operating leverage and digital IT, but more digital than conventional IT, by far, much more.
These are the selectively only targets, which we are at a turning point right now, where it was repair in the past, in a conventional way, and moving to the operating leverage of what we have done in the past and the IT developments. I tried to make it now because you give me a chance, Lucie, to express that very clearly. Now, the free cash flow.
Yeah. On the free cash flow, you are right that the pattern is a strong cash flow generation in the second half. This year should be strong as well. You're right that we said that we are at a good level on the inventory, and we have even some country-specific cases where we are a bit over the level we anticipate at the end of June. We have action plan to correct number of days with specific targets, the level of inventory. So far, on the receivable side, the days are good and the collection is continuing in the right trend. We expect to have, yes, a strong free cash flow in the second part of the year. The target is to be close to 60% of cash conversion. The transformation of the EBITDA into free cash flow before interest and tax.
The next question comes from the line of Pierre Bosset. Please go ahead, sir.
Yes, good morning. I have three question. I just would like to come back to the slide page 17. I'm a bit puzzled by this stronger EBIT, EBITDA growth during the second half of the year because the basis of comparison is increasingly difficult. Where is it coming from? Is it because you get larger rebate from the suppliers, or how you can explain that? That's the first question. Second question is a follow-up of what you have said. The repair journey is now nearly completed. Going forward, what sort of operational leverage would you expect? Let's say if you have 1% operating growth, would you expect 10 to 15 basis point increase in EBITDA margin? My last question is on digital. Can you give us a little bit of a granularity on what is happening in the U.S.?
Is penetration of digital is increasing or not? What are your plan going forward? Thank you.
Thank you, Pierre. Maybe Laurent, you will take the first question.
Yeah.
The second half year.
For me, there is two question. The first part of the question is the H2. In the H2, compared to H1, we have various things that will help us. I already commented largely on the days impact, which would bring us roughly 2% more EBITDA growth compared to H1. We have the turnaround country, Germany and Spain. The impact will be greater in H2 than in H1, this should bring us 2%-3% growth. In H1, we suffered also from the copper price, which cost us roughly 1% of growth in H1. With the level currently we have, it should not impact H2. Of course, we have the ramp-up of our action plan that have more impact in H2 than in H1. That's the first answer comparing H1 and H2.
The second question for me is how you reach to do three times in a row a 9% growth in H2. That mainly because when you are in a top line growth momentum, you can materialize, let's say, after summer, some stronger negotiation with the supplier. You can reallocate purchase, and you grasp, in fact, additional rebates, that are the result of the work of the nine months. Of course, there is also the ramp-up of actions that are delivering usually more in H2 than in H1.
Thank you.
There is also the fact that we shared with our teams that they need to focus, also on the operating leverage. When I took over three years ago, remember I say, "I will take all the actions in order to repair, but I will invest in branches, in inventories, in people, in supplier concentrations, and in the service level, including transportation cost and everything." When you do this, obviously this is creating momentum. After years of going down, we have done it. There is a moment where obviously, as I told you and we shared many times with you, the community, and the question was, when do you turn to more operating leverage? Yes, we are turning to more operating leverage because this is a good time. We have done what we had to do.
We see also that we can now, we have the right setup in order to get the benefit of our actions. It's always a shift in the criteria by which we manage. It's always a shift in the way we get our people to focus differently on different elements. There is always a shift into what do you privilege in term of resource allocation on a daily base. I would not give you, because I would be foolish to have already today a full pattern of how much it would improve in term of basis points. Things could get faster or slower depending on many conditions. In the same way we are focusing on organic growth, we will focus on improving the operating leverage. That's at least the point I want to make clear.
This is also how we will see the H2 already confirming this beyond the calendar effect and beyond the copper variance vis-à-vis previous year, as we already mentioned. When it comes to your third question, the digital, it's part of it too, because focusing on digital does not mean to transform everything, but to make sure, especially in the U.S., that everything we have developed, and let me be very specific. We have now developed the total, what was available into the platform mode, available to be available to all of our sales reps, including the one in the other banners. Including the fact that it has to interface a different IT, different data layers, and all of this has been spent. It's behind us.
Now it's up to everybody as of this summer to start developing the web sales on a generic, using the new features and all is available in terms of web development still ahead of us. Obviously, the more we grow in digital, the better it will help also on the operating leverage at some point in time. It's a similar pattern than what we have seen in Europe. If you remember a year ago, you had very advanced countries, Switzerland, Belgium, just to name two, and we had big countries, much lower in web sales. France was one of them. France today is very accelerating full speed into the digital journey, and all our customers more and more are becoming omni-channel customers using the pattern of the brands, using the telephone, and using heavily the digital interface, whether it's an EDI or web.
We are entering into the same journey in the U.S. where every customer will continue to use our banners and branches. We use our telephone capabilities and our quotation plateau, and we use our web sales and EDI. Therefore, we enter into this phase. The speed at which things can materialize, the conditions are good. It's an adoption speed, which we have demonstrated in other places that it works. I think we know the recipe. We have the attention. We have the capabilities. This is where we go.
The next question comes from the line of Alfred Glaser. Please go ahead, sir.
Yes, good morning. I've had several questions. The first one is on your forecast, EBITA bridge. Could you detail a bit more, what kind of operating leverage do you see there? Can we go back to some kind of relationship between organic growth and margin evolution from now on? You said previously that this equation was no longer valid. Is it now valid again? To which extent should we integrate more negative elements coming from tariffs, less favorable mix and so on in the EBITA bridge, going forward? I had two other questions. One is on France. Could you give us some more insight on how do you see the market evolving growth in the underlying segments, residential, industrial, et cetera? My final question is on pricing. Could you give us the sales pricing by region in Q2, excluding copper price, please?
I propose that Laurent takes the forecast EBITA bridge. I will come for the tariffs in France, if you allow me.
Yeah.
He will take the pricing also. Maybe Laurent, you start.
On the bridge, on the first column, the volume and price, we ask and we challenge the country based on drop-through, which is to bring something north of 10% on any additional sales in a normal environment before any investment. That's the way we are challenged, and we can get more than that in some countries. The strong performer in EBITA can deliver far more in term of the drop-through on any additional sales. It's a mix of country, the way we are pushing the country to say, "As you are performing on a standalone basis, you need to deliver the maximum, and you will have the envelope for investment," which we discuss and follow a bit separately. In that, by country, there are some specific situation, Patrick will come back on the tariff one in the U.S.
On the key European countries, the high performer, they are delivering it very strong drop-through. It's more difficult, for example, in U.K. It's a mix of everything that flows into these 30 basis points. On the pricing globally, the environment is a bit more favorable in term of price inflation excluding cable than in Q1. Q1 was 1.6% for the group. We are 2%. By region, excluding cable, Europe is at +1% in Q2 compared to +0.7% in Q1. North America is at +3% in Q2, globally in line with Q1. It's a bit early in Q2 to see the second wave of tariff. I think it will impact more Q3. That's why there is not so much gap between Q1 and Q2.
Let me take over maybe France and the tariffs. The tariffs in the U.S., when they really materialized last year, we got the impact to be passed to the market in November and December. That's where we had to explain to every single customer, now prices are different because of the tariffs for the first wave. By the way, people started to react negatively by the end of February and in March when they saw that they had to pay the bills, and they were really seeing that there was a squeeze for them between their projects when they did the quotations and what they got when they had to pay their bills. Therefore, we were facing a wave of people asking for compensation, overrides, blocking, and there was a very intense market discussion, or discussion with the markets in the April, May moment.
At the same time, if you remember, there was a moment when the President of the U.S. decided that there could be a 5% each month for everything coming from Mexico, and he was also announcing the next wave of tariffs from China. For on $300 billion import from China. Probably because the threat on the Mexico one was really a major concern to everybody in the U.S., the pressure to follow the past one, the one of previous year, November, December, was a little bit released, and it was like restate, rebased, for the new one that was, by the market, more or less accepted where we were. The fact that the Mexican one didn't materialize, so far, and the threat is gone for the time being, has probably given some relief.
Given the China second wave of tariffs being announced and not being lifted up, we still wait from supplier how much this will be transformed into price increases to us, because some of them are still waiting which category and when and how by the administration. We expect this to come, if everything materialize that it was announced. I give you here the sequence of events by which we are living through this. Now, whether it comes or laws delayed or not, we have a clear strategy and a clear way of dealing with this. First of all, price increases to be passed. No squeeze allowance, no squeeze acceptance. There is also, that out of the first, we told every single customer, if you want projects to be signed, let's sign price adjustments for the future.
Yes, we can make quotations today, but this quotation are subject to price adjustments. Now, is it going to be easy if the second wave come? It's never. Therefore, we have to be cold blood on certain top line when it comes to it. Therefore, the drop-through and flow-through become a very important criteria for managing such period of time, that taking deals without flow margins just for the sake of the top line is not what we will pursue. It's not. It will always be looked at by the drop-through capabilities. This is how we are working. We adapted. It's our capability to react to something that we don't really manage, but when it comes, we have to take it into consideration. When it comes to your question about France, I'm reading two different indicators. So far, three things. It's still a good market in volume.
It's still good ahead of us because Grand Paris, Olympic Games on the horizon are creating very little for us today, but significant probably over time in the coming years because there will be construction. For the time being, it's more in the underground, but very soon it will be above the ground level, probably in a year time. It's enough as backlog and enough in the system so that we can bridge to this moment. Now, Paris does not make all of France, but in the moment, there is a strong demand, such a strong demand in the Île-de-France region. It gives a relief on the rest because the big guys will be busy with this, and there is enough good level of activity in the rest of the country. I don't expect a major issue from the demand side.
Industry is just positive, slightly above. Commercial building is slightly positive, and residential, it really depends by regions. It is collective residential which is sustained and to a high level. Only individual houses are a little bit down. Every six months, it may vary.
The next question comes from the line of Andreas Willi. Mr. Pierre, please press star one again, because you booked a question, but I lost it, so if you can call it again. Please go ahead, Mr. Andreas.
Yeah. Good morning. Just have a few follow-up questions. On your message on focus on operating leverage and maybe selectivity in some area, focus on the proximity business, and focusing on driving leverage now. What part of that is linked to where we are in the cycle and the environment that may be a bit weaker, and what is part of that is just because of the stage of your own development you're in? In light of that, also, if you maybe could comment on some trends you have seen in June, July, particularly in the U.S. and Germany, and industrial markets where we have seen some weaker data points. Lastly, on the U.K. ahead of the Brexit deadline, what are you doing in terms of inventories, preparation for that? I guess it's difficult for you to say what customers are doing.
We are a bit too far away from maybe that deadline.
On the operating leverage, we would have been, in any case, if not at the asymptote, having achieved the majority of what we wanted to achieve. It could have been six months earlier, it could have been six months later, but it was roughly the three years that I had mentioned when I took over. Or I given to myself, which was a little bit less when in February 2017, I was communicating the plan. Now, you never know before, what is the optimum time. By the way, we were lucky enough to have the U.S. economy up and not going down because it gave us the time to do all of this. I cannot say that it's independent. I would be foolish as a CEO to tell you that I don't look at the cycle. Now, the cycle is not over.
I don't know when the cycle will turn, but the cycle in the U.S. is not over, and there are things which continue to be under pressure. When I see the demand on both coasts or into South or in the Gulf, when I see how much it's booming due to the oil in the Gulf, due to on the West Coast. When I see the salary pressure, when I see people having to raise by $2 per hour, otherwise they cannot get the job done. When I see the pressure on unionized electricians' availability, where you have to wait for months to get guys to do the job, it tells me that the economy demand still create the tensions, that it's not yet the beginning of a cycle. A cycle can turn fast. There might be something that could happen.
I have no element to judge on disruption capabilities. For the time being, it's still strong. There is a moment, you were part and you remember that going digital is also a must for me. Making every customer omni-channel, digital and non-digital. The first phase was to be able to show to the world and to ourselves that organic growth could be done in the conventional way, prepare, we have invested also. Prepare the way to make them the digital customer of us as much as the physical customer of us, if I may say so.
That now the focus, despite I could have continued a little bit in the U.S. the usual way, it's a conscious decision to invest in digital because the operating leverage of the future, beyond focusing on good drop-through now, is also due to the fact that I need to have a critical mass in digital so that the future beyond one year or two is also in terms of operating leverage guaranteed by a different business model, where certain costs will be lower than today, and the digital attractivity of our solutions. Whether it's EDI, Punchout, email to EDI or more on the website with all the functionalities that made pure players extremely strong, that we have now, let's say, constructed in our system and made available to our customers.
The track and trace, where are the goods and when do they reach you out, all these service-driven capabilities will help the three years journey on operating leverage improvements. When it comes to Germany, yes, I'm like you. I'm reading the indicators especially on the industry. What we serve in the industry is related to maintenance, productivity. We are not in the outputs. What we serve is not volume driven by the German industrial customers. To the opposite, it's more their investments, investment in productivity, investment in safety. That so far we are less hurt than certain industry are showing signs of having less to produce. It doesn't mean at the level of investments where we are, which is not capacity-driven, that it does not materialize today as getting weaker. Long term, we are also prudent. We will see. Certain industries are not suffering the same way.
There is one thing of the automotive industry, it's another one when we are in fine chemistry, it's another one we are in food and beverages. The rebalancing around several of these segments is really helping us managing where to put our resources, qualify the industrial specialist in order to take the best of it. So far, so good. U.K., allow me to make with a little bit of a sense of humor. As much you know, please call me, because it's still very uncertain. The one thing I know, you know we have created a cluster with the head of, internally, with the head of Belgium and Benelux, Pierre Benoît, who has joined the Comex, so that he leads the U.K. effort into having an optimized footprint.
If the Brexit would create, let's say, a slowing down or reduction of the demand or maybe unbalanced demand by where we had to be, we would adapt, and fast. We are developing different plans, ready to go depending where it goes. Regarding big customers. Big customers with low margin, we are walking away if the margin are too low or if, therefore, we work from low margins. Therefore, our EBITDA will improve from, let's say, quality of the top line driven by the margin. Also, we have to take into consideration that some customer may, if the contraction of the market is becoming too big, that some of them, and I will never forget the Carillion case months ago, that potentially could become default customer, and we don't want to take that risk. If we could identify, we would walk away.
The prudence is probably the way we will approach the U.K. market until we have a better clarity.
The next question comes from the line of Supriya Subramanian. Please go ahead, ma'am.
Hi. Good morning, thank you for taking my questions. Most of them have been answered. Just have a couple of questions. One is around your digital sales, which has been growing quite nicely. Could you show some light on how you see that growth coming through in the next few quarters? Also, I think you've already touched upon this, but when would you start seeing the, let's say, the drop-through come through from the digital sales? It's now reaching the good threshold levels in quite a few countries of 30% of sales. How do you see margin improvement, let's say, coming through due to that? My second question is on the margin expansion from the branch closures or the restructuring in Germany and Spain.
Could you give some indication of how much of that contributed to the EBITA margins, how do you see that contribution coming through in the rest of the year? A last question on North America in terms of branch openings. Now we have at about 54 of the 100 branch openings of the medium-term target. How do you see that progressing? Do you expect further branch openings in the next two quarters, are we done for the year? Thank you.
Allow me to start by the last one. In every country of the world, and North America will have the same rule, we have regularly branch to close, branch to open. The total number of branch will not increase anymore. We have to close because bad location, because we are being asked to leave the premises or whatever, or good reason that we may decide the highway exit is not in the right direction anymore, whatever it is, we have to get out of there. Permanently during each year, we have to relocate some branches. The new thing in the light of the digital increase is that we will do it with lower footage, whether it's square meter or square foot, and very prudent on manning, how many people to do what.
All the evolution in North America or Europe or Asia will be on the same rule. Productivity on sq uare meter or sq uare foot, productivity per internal sales rep or counter people. In the moment we talk drop-through, it's not just a top line that you could generate by more customer, more SKU. It's also the way we manage this fixed asset, this fixed cost structure. Obviously over time, the more digital we progress, we will have to manage in a downward trend. There is no exception to it. The 54 branches, there might be one or two in the process of being started. May become 55, 56, could go back to 50, whatever. The 55, take a branch number of 54. This is the delta additional, and which has created the density in the places where we want it to be, and that's it.
I will also recall you, for the sake of the operating leverage of the future, that we have refreshed a higher number than these 54. We have done a renovation of, let's say, probably two times as many as these 54 of the existing previous buildings. De facto, we have probably 54 new and more than 100, I don't have the number in my head like this, but it's more than 100 fully refreshed, which is more than 50% of the total number of outlets we have in the U.S. that have been completely redone or opened brand new. I count on this now when I look at the drop-through. Now, your question of the drop-through is not just related to digital. Drop-through in conventional means, for me, that for every EUR 1 million top line, there is a minimum bottom-line contribution.
They are different per country, per where we are, but there is a minimum to be reached in order to improve their EBITDA contribution from the top line. It has also to do with the existing business. Here, the digital is coming into the party. Every country which is above 35% digital trading, that's what we have noticed in a few of them, roughly 30%, 35%, have all the growth more done by digital sales at lower operating expense than the previous 10. If you do 10% or 15%, you don't see any effect in our bottom line impact yet. There has to be a critical mass that we have measured in Switzerland in the past, in Belgium in the past, and that we measure in different places where we are at this level.
Therefore, I'm asking the large countries to improve, increase, and accelerate this, because when we will see this, then obviously there will be a major, another operating leverage improvements beyond the one that I have said that will happen anyway before that level. Margin, maybe Laurent you could take over.
Yeah. On Germany and Spain. In fact, the H2 last year in Germany and Spain was very low, so we have a quite positive base effect. When we looked at the 10 bps, 70% roughly will be in H2, and 30% was in H1.
Do we have a next question?
Yes. The next question comes from the line of Lucie Carrier. Please go ahead, ma'am.
Hi. Hello again. I didn't know I was going to ask another question, but as I have you on the line, maybe I just can follow up on something I'd asked earlier. Just for the bridge for the second half on EBITA, sorry to ask again, but were you saying that you expect the investment for growth to be a 30 basis point impact or higher than the first half? That was not very clear. I had some question coming in the meantime.
Yes. I say that the investment for growth will be higher than the 24 basis points, probably close to 30, and that the volume and good contribution of the country should be slightly higher than the 30 basis points we had in H1 through different action and measure we have taken during Q2, and that should start to materialize in the second part of the year.
Lucie, are you there?
Yeah, carry on, Lucie, you can talk now.
Yeah, sorry. Apparently, we all being cut out after you answered the question. Just to be clear, the net of volume price contribution and investment for growth, do you expect it to be higher in the second half than it was in the first half, because in the first half it was plus 6 basis points?
Probably it will be slightly higher.
Thank you.
Yeah.
I've got another question from the line of Pierre Bosset. Pierre, do you want to ask a question?
Yes, me again. Sorry. I have two questions. The first one, again, if the repair journey is completed, shall it mean that there will be no further major disposal or restructuring, maybe in Italy, for instance? Similarly, is there some room now for some specific M&A, maybe in the U.S. to increase your market share? That's the first question. The second question is on data analytics. Some months ago, you mentioned a software which can reduce the churn in your client base by predicting whether or another client will stop doing business with Rexel. Is it working well? In which country have you implemented that? With which sort of result? Are you going to roll out this software in a large number of countries? Thank you.
On the M&A and disposal. There is no taboo that if we have a disposal to make, whether locally or country, we would do. You have noticed in the past that everybody was predicted certain geographies were wrong. It could be sometimes very local within a country. Look at Germany, what we did in the North. It could be an activity-based. Look at China, what we did when we exited the residential. Therefore, allow me to say that we looked at it very analytically from a different standpoint and from a further down the road outlook. I think a distribution company like us will permanently review where to be, how to be, for what to be. There is some kind of an agility here. At least the choice for Rexel is really to create value.
If there is situation where there is no chance of creating value, midterm at least, and not 10 years. When I say midterm, it could be like three years, four years down the road. Obviously, I would take the necessary steps that could be this. On the M&A side, I keep saying to everybody, I will not go for market share gains by acquiring company exactly like we are. We have demonstrated that organic growth, more than EUR 1 billion gains, we can do by ourselves. We know how to. First of all, today, every time I'm looking at an acquisition of the conventional business, there are multiples which are, allow me to say, sometimes ridiculous and outrageously high when you think of the future. Therefore, I'm not a great fan today, unless there are very local good cases.
I'm not a great fan of spending resources at acquiring far too high multiple companies doing exactly the same, for which digital is not there or not enough, for which restructuring or IT conventional has to be redone and kind of things. The more digital we go, the more a qualified digital complementary business, whether it helps for the industry or whether it is for commercial building, I'm looking for. There are not so many, first. Second, where there are a few, they might not be for sale now, even if somebody would tell me everything is for sale. There's a time for everything and there are not so many of them. We look systematically at what would make sense for us to accelerate the digital journey. When it comes to your question about data analytics, we continue to make some developments.
You mentioned one, there are others. We continue to improve tests, get machine learning as much as predictive analytics, per se. In doing so, yes, we see the acceptance by the field, the branches, the sales reps, the inside sales. It's a long journey. When I say we will focus on digital, you have the digital transaction, and you have the internal way of working, and this is one that you have mentioned. We will take the time probably before Christmas for reviewing this and put some facts on the table, but everything I could tell you today would be too early in the process. Once I have real statistics, then I will come out and share.
There are no further questions at the time.
Well, if there is no further question, first of all, I would like to thank you for having taken the time. Thank you for your questions. Thank you for giving me and Laurent a good chance of explaining the why and the how and the direction we go. I hope to meet you very soon so that we can explore further down the road any further question you may have. In any case, thank you. For the one I would not see before the summer, enjoy your summertime and otherwise, let's see each other after this August month coming. Thanks a lot. Bye-bye.
That does conclude our conference for today. Thank you for participating. Participants, you may all disconnect. Speakers, please hold on the line so I can transfer you.