Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's Rexel Second Quarter and Half Year 2018 Results Conference Call. At this time, all participants are in listen only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press Star followed by one on your phone and wait for your name to be announced. I must advise you that this conference is being recorded today, Tuesday, the 31st of July, 2018. I would now like to hand the conference over to your first speaker today, Patrick Berard. Please go ahead.
Good morning, ladies and gentlemen. Welcome to this presentation of Rexel second quarter and first half year 2018 performance. Today I am with Laurent Delabarre, our Group CFO. I will start with an overview of the key highlights and the detail of performance by geography. Laurent will then present our financials in the quarter. I will then conclude and confirm our 2018 outlook. After that, we will be very happy to take all your questions. Let me say as an introduction, overall, Rexel posted a strong performance in Q2 and H1, further proving that all key elements of the strategic plan are delivering operational results and are making us commercially stronger. On slide three, you see that we are successfully executing our 2017 strategic plan as announced. Rexel is back on the growth path.
After four years of underperformance, Rexel is now steadily growing quarter after quarter since Q4 2016. With growth in all geographies, we are making advances in all pillars of the plan, with more customers, more SKU, and more digital sales, which now account for 15.7% of sales. Our key priority of turning around our U.S. operations through several initiatives, including the addition of people, more branches, inventory, as well as the adoption of our multi-banner regional organization, is showing solid achievements. This has translated into sales growth acceleration and operating leverage, with EBITDA margin at 70 bps in the quarter in the country. With these initiatives paying off in the U.S., we are now turning to addressing the last pocket of underperforming businesses in Europe, with a restructuring of activities and a new strategy focused on industry in Germany and a more regional approach in Spain.
Both of these initiatives are designed to improve profitability in those countries. Finally, our disposal plan is progressing. Laurent will tell you more about that later. The first half gives us confidence in further improvement over the year as well as in the medium term. We confirm our full-year financial targets as announced in February. Let's have a look at the highlights of Q2 and H1 starting on slide four. As you can see, Rexel sales and profitability improved in Q2. Our sales grew for the seventh consecutive quarter, reaching more than EUR 3.3 billion. This represents a same-day growth of 5.1% in Q2. Concerning profitability, while our gross margin is broadly stable, our adjusted EBITDA grew by more than 10% with a margin increase of 20 bps on a comparable basis to 4.8%. Let's look at our H1 highlights. Slide five.
Our sales of more than EUR 6.5 billion in the first half, were up 4.5% on a same-day basis, rising in all three of our geographies in the period. Our gross margin was stable at 24.8%, which remains a positive achievement in the current environment. Our adjusted EBITDA margin at 4.4% was down 5 basis points on a comparable basis, largely due to our investment in people and IT, as well as cost inflation, mostly our wages and freight in some markets. Recurring net income was up 13% at EUR 157.7 million, with a positive momentum in Q2 up 28%, thanks to good operating results, lower financial expenses through our active refinancing operations and lower taxes. We improved our free cash flow by EUR 94.5 million in the first half, demonstrating the strength of our model and confirming that we're returning to high cash conversion rates.
At the end of H1, we had positive free cash flow of nearly EUR 18 million before interest and tax. Now let's look at each of the geography. On slide seven, you see that we posted solid same-day sales and steady growth up 5.1% in Q2. All three of our geographies posted growth, and Europe and North America saw their growth accelerate in the quarter. In Europe, representing 55% of our retail revenue was up 4%. In North America, which accounts for 36% of our business, sales growth 6.5%. In Asia Pac, which accounts for the remaining 9% of group sales, saw its revenue rise 6.3%. As you see on the graph showing 10 quarters of same-day sales growth evolution, each region contributes quarter after quarter to growth, with Europe in positive territory since end 2016, North America and Asia Pac since the beginning of 2017.
Let's begin our geographical review on slide eight with Europe. Sales in our biggest region stood at EUR 1.86 billion in the quarter, up 4% on the same-day basis, marking a sequential improvement in several key markets. In our home market of France, which accounts for more than one-third of our European sales, our revenue was 3.7%, driven notably by the residential and industrial segments, which were both up in the mid-single digits. The efficiency of our business model allowed to capture market share. We are also seeing positive trends in notably key countries Scandinavia, Benelux, Switzerland. Benelux showed a solid 9.8% growth, with a successful recovery in the Netherlands, which is growing in strong double digits. Let me highlight that this performance followed the creation last year of a Benelux cluster, which was placed under the responsibility of our Belgium CEO, and it's showing good results.
Germany's transformation plan is progressing. We recently announced we are refocusing the business on the more profitable industrial segment on a national basis and on the C&I in the southern part of the country where we have a stronger footprint. As announced in June, we are closing 17 branches in the C&I in the north. The U.K., on the other hand, continues to be difficult, with sales down 4.2% in the quarter. A good part of the drop is related to four large accounts and to the temporary effect of our sales force reorganization, which continue to affect us in the declining market. On slide nine, let's focus on the digital strategy in Europe. We saw a strong boost of digital sales in Europe, which were up 16% on a same-day basis in the first half.
Digital penetration reached 22.5% in H1 versus 18.1% in 2015, with eight countries now above 25%. The profitability of the highly digitalized country is on average higher than group profitability. This growth was notably driven by France, whose penetration rate increased by 240 basis points in the first half to reach 13.1% of sales. We also saw solid growth in digital sales in several key markets, notably Netherlands, Switzerland, Finland. Lastly, note that the U.K. has onboarded on Hybris in Q4 2017, our common platform, in order to boost digital sales, which have strong upside potential. On slide 10, let me now turn to North America. In North America, we looked in greater detail at where we stand in our transformation.
As you know, when we presented our strategic plan in February 2017, we said that fixing our U.S. operation and undertaking initiatives to relaunch growth were a key priority for Rexel. 18 months later, we can say that the turnaround is well underway and is producing very positive results, and I would like to thank the team for their engagement. The combination of these initiatives, including additional headcount in logistics and sales reps, branch openings, and the implement of the regionalization strategy, all translating into strong top-line growth of 7.3% in the quarter, despite the remaining impact of our project business, which cost us 1.3%. That illustrates that we are now able to benefit from the favorable environment, which was not the case in the recent past. While we continue to win new customers, our branch openings contributed for 1.9% of sales growth in Q2.
Note that we have opened one new branch and three satellite counters in 2018, as we have been focusing on the regionalization strategy and are doing more branch refresh than initially anticipated, as we see a lot of value in this transformation. We will accelerate the branch opening in H2 and anticipate the number of branch and satellite counters openings to be close to 23 at the end of the year and circa 60 over two years. These initiatives should bring us around 2% of growth in 2018. We have also improved the level of service with more inventories in the organization. Our fill rate, which corresponds to the products we have on shelves when an order comes, has increased by 280 basis points to 96.9%. Thank you to the team. It's a great achievement, and it helps making customer happy.
Lastly, let me comment on the regionalization and what it brings to the organization. Each of the eight region is under the responsibility of one dedicated CEO, and we now leverage on our different banners to offer the best solution to our customers and avoid competition between banners with a better coordination. Every region is also responsible for its logistic organization, and we also expect productivity gains from this regionalization. Overall in North America, sales reached EUR 1.2 billion, up 6.5%, driven by both the U.S. and Canada. On slide 11, we complete our geographic overview with Asia Pac, where our sales were up 6.3%. The Pacific was up 2.1%, with growth impacted by the disposal of our Rockwell Automation business in Australia. Excluding that transaction, underlying growth in Australia remains strong, up in the mid-single digits with a good performance in residential and industrial.
Asia posted very solid 11.1% growth, with China up 3.4%, despite a challenging base effect, reflecting good performance in industrial automation. We also saw a favorable dynamic in the Middle East and India, supported by a large project win in the Middle East and strong automation sales in India. Let me now hand over to Laurent for the review of our financial performance.
Thank you, Patrick. Good morning to all of you. I will start on slide 13 with our sales numbers. Let me point out that we have restated our Q2 2017 number for IFRS 9 and IFRS 15, the new IFRS rules, resulting in a non-material 0.1% drop in sales to EUR 3.3 billion. On a reported basis, our sales were up 1% in the quarter as a result of a positive 5.1% same-day sales growth and a positive calendar impact of 0.6%, partially offset by two unfavorable effects, currencies for -3.6%, mainly due to the depreciation of the U.S. and CAD versus EUR, and scope for -0.9%, resulting from the divestment in Southeast Asia. Concerning currencies, we expect the foreign exchange effect to gradually ease over the year, and our forecast, assuming spot rates remain unchanged, is an impact of -2.7% on sales in the full year 2018.
As shown on the chart on the bottom right-hand side, we saw broadly stable positive copper price contribution in Q2 at 0.7% compared to Q1, but lower than in 2017. On the bar chart above, you clearly see that while accelerating sales, our top-line growth will benefit in Q3 from a reasonably favorable comparable base that will become more challenging in Q4. On slide 14, you see our adjusted EBITDA bridge. Adjusted EBITDA was up 10.2% to EUR 161 million and margins stood at 4.8%. Our 20 basis points improvement in Q2 2018 on a comparable basis is explained by a 55 basis points volume and price contribution that more than offsets the negative impact of investment for 25 basis points and cost inflation, notably wages and freight net of productivity gains for 10 basis points. On slide 15, we turn to our profitability by region.
Overall, with adjusted EBITDA of EUR 161 million, our adjusted EBITDA margins stood at 4.8%, a 20 basis points increase mostly coming from North America. In Europe, growth margins stood at 26.6%, down 37 basis points year-over-year due to a more competitive environment in Switzerland, the Nordics, and Germany, notably in the cable business. Positive volume in the quarter helped partly to offset cost inflation and growth margin erosion, which led to a three basis points drop in adjusted EBITDA margins. In North America, growth margin improved by 66 basis points to 23.1% thanks to better purchasing conditions and pricing initiatives in the U.S. Adjusted EBITDA margin grew 70 basis points to 4.5%, with volume growth more than offsetting cost inflation and the carryover effect of investments in people and branch openings.
In Asia Pacific, adjusted EBITDA margin was 60 basis points to 2% thanks to positive pricing in China and volume contribution, offsetting a competitive environment in Australia in the project business and the disposal of the Rockwell Automation business. Our corporate costs stood at -EUR 6.4 million and were EUR 2.7 million higher than last year, mainly because of additional investment in IT and digital, but also because of the non-recurring impact of long-term incentives. On a full year basis, we anticipate the normative level of spending at corporate level at around EUR 35 million. In the first half, adjusted EBITDA stood at EUR 288.2 million, up 3.1%. On slide 16, we look at the bottom line part of our P&L. Let's start with our reported EBITDA of EUR 287 million, down 1.8%, including a one-off negative copper effect of EUR 1.3 million.
Other income and expense amounts to a negative EUR 60.7 million, including restructuring costs for EUR 59.5 million, mostly related to reorganization in Germany and Spain. For the full year, we now state that restructuring expense will be above the normative level at around EUR 90 million. Our net financial expense improved to EUR 50.2 million, reflecting a reduction in average net interest rate on our gross debt to 2.85% as a result of active refinancing activity. We also saw a drop in our income tax to EUR 66.9 million as we benefited from the positive impact of the U.S. tax reform. Our effective tax rate stood at 39.9%, above our normality tax rate of 32%, owing to the restructuring expense in Germany and Spain, where deferred tax assets cannot be activated. On a full-year basis, and taking into account this one-off effect, tax rate should be close to around 36%.
Net income was EUR 100.8 million, up 4.2%, and our recurring net income was up 13% at EUR 157.7 million. On slide 17, we turn to our balance sheet, which we strengthened in the quarter with improved cash flow and working capital that resulted in lower debt. Indeed, as you can see on the chart, our working capital improved by almost EUR 71 million. Our free cash flow before interest and tax improved to an inflow of EUR 17.8 million from an outflow of EUR 76.7 million in H1 2017. We confirm our objective to return in 2018 to a higher level of cash conversion versus 2017, demonstrating the strength of our model. Net capital expenditure was down to EUR 32.1 million from EUR 53 million in the same period last year.
Please note that this includes the proceeds from the disposal of our Rockwell Automation business in Australia, and that our gross CapEx stood at EUR 50.4 million. We confirm that our full year 2018 gross CapEx should be close to EUR 130 million, which corresponds to a net CapEx close to EUR 110 million, including the proceeds received from the disposal of our Rockwell business in Australia. Our net debt was reduced by EUR 194 million or 8% to EUR 2.1 billion. On slide 18, let's take a further look at the breakdown in maturities of our debt. The charts show that we have no short-term maturities on our bonds, with no significant repayment before June 2023, and an average maturity of above four years. 2017 was a very active year in term of refinancing in order to capitalize on favorable market opportunities with the refinancing of two bonds.
More recently, at the end of January 2018, we refinanced our senior credit agreement and reduced the amount from EUR 982 million to EUR 850 million, as well as the related cost. Our net debt to EBITDA ratio stands at 2.9 times at June 30th 2018, down 42 basis points year-on-year. This active financial management is reflected in the average effective interest rate on gross debt, down 40 basis points year-on-year to 2.85%. For 2018, we expect financial results to be around EUR 100 million versus EUR 110 million previously anticipated, assuming no major volatility in currency or interest rates. Our interest rate should be below 3% in 2018. We also maintain strong financial flexibility with liquidity of around EUR 1.2 billion at the end of June, including our undrawn senior credit facility. Let's move to slide 19 with an update on our disposal plan.
Following detailed work in each country, we have updated our strategic portfolio review. As a result, we have revised the figure of sales to be disposed to EUR 650 million from EUR 800 million previously, including the downsizing of some activities in such country as Germany and Spain. The downsizing of activity, combined with disposals in Southeast Asia and Australia, represents EUR 530 million in sales. We expect the remaining disposal or downsizing of sales for EUR 120 million of sales to be completed by mid-2019. We confirm that the disposal plan will have a positive impact on adjusted EBITDA margin of 25 basis points once completed, unchanged from our previous target.
Please note that we usually discuss our sales and adjusted EBITDA numbers on a comparable basis, but after disposal and on a reported basis, it is interesting to note that our adjusted EBITDA margin is up circa 15 basis points already in the first half, showing the positive effect of the disposal plan executed in 2017, as we will get more out of our downsizing of Germany and Spain, as well as the remaining EUR 120 million in progress. Let me now hand over to Patrick for concluding remarks.
Thank you, Laurent. I can conclude now with the slide 20 and the outlook. We're continuing to execute on the strategy we presented last year. After starting to see positive results in the U.S., we are addressing the remaining pockets of underperformance in Europe, which should support our improved performance in the coming quarters. Our second quarter performance reflects the choices we made and their positive effects. This allows us to confirm our financial target for the full year as presented in February. Let me remind you that we target a constant scope of consolidation and exchange rates, sales up in the low single digits on a constant and same day basis, a mid to high single digit increase in adjusted EBITDA, and a further improvement in our net debt to EBITDA ratio.
Let me thank you for your attention. Now Laurent and myself are now ready to take your questions.
Thank you. As a reminder, if you wish to ask a question, you can press star one on your phone and wait for your name to be announced. Our first question comes from the line of Lucie Carriat. Your line is open.
Hi. Good morning, gentlemen. Thanks for taking my question. I will have three question, and I will go one at a time. The first one, Patrick and Laurent, I wanted to ask you about what you are seeing right now, in terms of current trading. Even though I know you don't have, of course, an order book, how do you think about the second half of the year in terms of development, and how does that fit with the guidance that you're confirming today? This is question number one.
Well, the current trading on the top line with the one we see is continue to be in line with what we have seen in sales per day, corrected for the, let's say, seasonality effect. So far, so good. It's true by region. Meaning, you can easily understand that North America continue to push and to boost. The European is also doing by the profile we had in the recent months. Therefore, it's very early. There is no change in the pattern.
Okay. Thank you. My second question was around the progress you've made in North America. There are two sides to the question. The first one is, when you think about what you have implemented so far and what we've seen already, would you say that most of it is now in the numbers or actually most of it is still to come? Just also in terms on the investment that you've been doing, I think you've mentioned 25 basis points of impact from investment. Part of it, I guess, is in North America in the second quarter. You are still continuing to invest. How should we think about the size of the magnitude of those investments for the second half?
On the first part of the question, which is, do we have almost everything that we should get? There are two pieces to the question. As you know, we suffered during a long time now, 18 months to years, but last year heavily of the GEIS underperformance, both as a supplier and as a customer. As a customer, nothing will change with GE, and it's not GEIS that way, GE as a group. As a customer, what's gone is gone and will not come back. The GEIS part now, ABB was given a green light to take over. ABB, from what I know, has taken very seriously and is putting a lot of effort in fixing in the shortest period of time. I have to give them the credit for taking very seriously, the restoration of the GEIS capabilities.
We expect, or I hope, we expect to see this energetic move to allow us to have some reverse in the trends of the past, probably into Q4 or by the end of the year. It's difficult for me to really tell you as of when, but yes, there is a lot if you think midterm, meaning including next year. Yes, there is an improvement to come on the Gexpro dimension, thanks to this GEIS restoration back to a normal pattern. In the longer term, when you think of ABB bringing technology beyond the disruption of today, we expect it also to continue to allow us to strengthen our performance in the one dimension which we have suffered from. Regarding the rest, not everything starting on the same day. We have branches who really started very early last year to come back to good performance.
We have others just recently done, whether it's a refresh, which is having good sales people, whether it's the inventory increase of last year, which gives us now a better result with customer and the confidence is back. Therefore, on the rest, we are not finished in terms of collecting more of the market share and more of the good market momentum than we see. Thirdly, yes, we will continue to invest where we decided to go in the refresh, in the lesser inventories than in the past, more in salespeople, quality of salespeople, and much more in sometime in regions where it's difficult to get good people right now, there is a shortage on the market. It takes a little bit longer, but we are going after good people in order to strengthen the momentum. Meaning, no, it's not the end in global terms.
Yes, I expect more to come. When we said in February 2017, it takes two years, it takes two years. Now, this being said, did I cover everything? No. Yeah, I think I did, Lucie.
Just if you could indicate possibly how much impact you expect from the investment for the second half, because I think in the quarter, there was 25 basis points, I think, or for all of your investments.
Lucie, if I would be so good, I should be a consultant, I would be richer than I am. Allow me to say, I expect good news, I cannot now. It would be a of a consultant.
In terms of magnitude of impact of these investments on your margin, i.e., the cost, you're not expecting a disproportional impact versus what we've seen over those two years, I guess.
Laurent Delabarre speaking. We should say about in the same magnitude as what we are experiencing so far.
Okay. Thank you. My last question was around digital. Thanks for adding the slide for Europe, because I think we hadn't seen it before. I'm not sure I fully got it when you were making the comment, but I understood you were saying the profitability of the online sales in Europe was above the standard profitability of sales in Europe. First question is, one, whether I understood well or not, and then secondly, whether you could explain why this profitability is higher for online sales and whether you think that this is something you could also roll out or expand further to the rest of the group.
When we decided to accelerate the digital, we do our best to even go further and faster, we didn't know at that time exactly as of when it will have an impact on the profitability. After an acceleration, when we reach, we see that every time we reach a 25% or above, we start in a country of digital sales, digital transaction. This is a minimum threshold, but once we are beyond that, we see an increase in profitability just by the fact that most of the growth is done at lower fixed cost needs and more variable. This is something that everybody with a study or above would measure. Therefore, it's clear that reaching 25% is the threshold, accelerating beyond. Now we start having statistically a decent profile as of when it has a direct impact on the EBITDA.
This is why we push, we push, we push. We will make no concession in term of digital efforts, digital acceleration. Everything we can turn, we will do.
Thank you.
It's also the stickiness of customers who find in Rexel the way to have the different interface to their needs. They have the brick and mortar, they have the people visiting them, they have the digital sales, the click and collect. They have the last mile delivery, whether they call or they click. We start being a true multi-interface to the customer, which create a higher stickiness. I think we can measure it, and it's probably an important moment in the time of our development.
Thank you very much.
Thank you. As a reminder, if you wish to ask a question, please press star followed by one on your phone. The next question comes from the line of Andre Kukhnin. Your line is open.
Yes. Good morning, everyone. Thanks so much for taking my questions. Can I just start with a follow-up on digital discussion you just had? The conclusion from this is that digital margins improve as you grow up the business on the existing fixed cost base. My interpretation was that at that 25% threshold is where the profitability across the lot turns in line with the broader region. Firstly, is that right? Secondly, when do you expect to hit that?
We have to be careful, Andre. I'm not sure I fully understand. You relate the 25% digital to cross the average profitability line by region. I'm not going that far. I misunderstood something.
You said that the highest digital penetration country is higher margin than I think it's a group average. In the answer to previous question, you said that profitability improves as the business grows up. I guess the question is, at what point does the digital margin equate to the traditional? With the 22.5%, where is it right now across the whole of Europe?
If I take the highest digital countries with enough experience to look back, when you reach something like 40% and above, the EBITDA contribution from the digital sales is higher than the average in the country. To get it done on the bigger platform, we have to bring all of them to this level, we are obviously trying to get this. We have a few countries, Switzerland, Austria, Belgium, where we can measure that while going in the range between 25% and 40%, you have an improvement of your global EBITDA. When you are above 40%, you have an acceleration of your EBITDA because of the digital penetration. Is it going to be the same everywhere? I'm not sure, because when this country did it, they were the first in the country to do it.
If everybody does it at the same time, we have to be prudent on these numbers, okay? The one thing which we will confirm, going digital is an effective way to strengthen our EBITDA, definitely. It is a way to strengthen our customer base and to reduce, or at least to get the growth without an over proportionally fixed cost requirement. If we depend on the countries, there are countries where we will accelerate the digital effort, and the first 10 points will cost us more than it will bring. Therefore, it is a speed issue. There are others where we are already at 40, and the next 10 points have a high leverage on the results. It is not linear. It is not linear, and I do not want to give an impression that because we go digital, it will be everywhere in the same proportion.
Got it. That is Yeah?
The speed, the group is at 15.7% in term of digital sales, and we said that Europe was already at 22.5% because we have very low digital sales in Asia Pac. All of that is growing at roughly 15% year-over-year. We will clearly reach the 25% very quickly in Europe.
Remember, we say more customers, more SKU, more digital. Digital accelerates, obviously, because once the setup is made, the fundamental bricks have been put together. It is an adoption by the market, and an adoption as an increase in speed in each of the market where we do this. There is a lag, preparation, we are ready for, get it done, functioned, and deliver the function. It goes with the more SKUs, too. It is difficult to tell you if it is digital, more SKU, and more customer, because at the end of the day, there is a chemistry between the three. When we say that at the beginning in Feb 2017, obviously, the more customers, this is the most easy to measure how many new customer, net customer do you gain. How less do you lose because we have produced the digital at a later stage.
Let's consider that the pillar of the strategy is the chemistry between the three, more customer, more SKU, more digital. That there is one thing in all the story. Now we are clear that this is a winning way of getting Rexel to a new stage. I don't want to give you more, but at least I can give you this confidence, me, as a CEO, that working on the three with all my team, this is a winning chemistry.
Thank you. That's very clear, and I appreciate the granularity of the answer and the broader perspective. A second question that was on Spain. Could you give us a bit more detail on what you're doing there with the more regional approach? I think we have a pretty good idea on what you're doing in Germany and U.K., so would love to have the same level of understanding on Spain.
Well, Spain, after all the recession that the country has experienced, because things had been shrinking during eight years, the model of having a central DC to serve are now more fragmented and low volume, does not match anymore because if you ship on 600 km from Madrid to Barcelona, the costs are far too high. We are going back to a set up by regions where you have a hub serving the local branches around. If the branches are more regional, we will densify by region, and some region having a lower demand will not have the same pattern for the focus. No more, no less.
Regionalizing it means we will close our 17 branches.
17, yeah. 17.
No, no. It's both, sorry. It's both. It's also in Spain. We will close 17 branches, and we had one national distribution center that we are going also to downsize to have a regional organization.
Right. That's actually similar in size to the German program.
The only difference, Germany is a strong industrial country, and we make a strong bet on the industry. By the way, it's more than a bet. This is where most of the growth is happening right now, and there is a lot to be done in that. We work really with good suppliers in the marketplace. Therefore, in Germany, the chemistry of going more industrial and less residential and focusing on residential in the south and not in the north, where we don't have the critical mass. Opposite Spain, there is less to be taken in the industry, for sure, but it's not the majority. It's more the housing and the commercial building or the residential dimension.
Got it. Thank you. Last, just a very quick follow-up on the profit bridge. I'm just curious to find out what that minus 20 basis points is in the stack of volume price and other contributions. The minus 20 basis points other.
Yeah. In fact, the 55 basis points is a net of 75, which is what is bringing directly from the volumes with the normative level of OpEx. 20 basis points is some kind of pocket of overruns we have in some countries. For example, we have some overruns in transportation costs in some geography. In other, we have a slight increase of the bad debt. We have a bit more of IT in another part. It's different pockets of additional expense that has been identified to serve this additional volume that are on top of the normative level of variable cost we need to serve that increasing volume of sales.
Right. That sounds quite one-off nature. I presume you don't expect that to reoccur in H2 or do you?
Well, it's the pocket we have identified, we are working on it. We start try to mitigate the impact, for example, on transportation, there is clearly a bit more pressure in some country. It will gradually reduce, it will still be there to some extent in H2.
Got it. Thank you very much for your time.
Thank you. Our next question comes from the line of Sebastian Grutter. Your line is open.
Hi. Good morning to all. First, I mean, on the disposal plan, you get for 25 bps margin improvement. You said you achieved 10 bps in H1 2018. Should we expect another 10 bps in H2 and 15 bps in 2019, incremental? Related to that, about Germany, because that is a quite sizable impact on top line from the German restructuring. How do you make sure that the fixed cost will be lower fast enough to protect the margins? Could we see a lag between the drop in sales and the drop in fixed cost in that country? I have a follow-up on Europe. Thank you.
First on the bps, it's a bit early to commit on what we will get in H2 and the program are currently in process. It's obvious that we will get something by all the mechanical reducing of cost, which is the branch closure from HQ cuts that are going to disappear. Yes, we have already 15 bps and we'll get additional in H2. I cannot be more precise at this stage on that field. On the Germany dimension, yes, less top line, but we are structurally also reducing the fixed cost by closing branches, by closing DCs, and by reducing headquarter cost. We take care to be sure that we are reducing the fixed cost base in order to improve the EBITDA for the remaining portion of the sales that we have selected to go through. Yes, your concern has been fully taken into consideration.
Yeah, the reduction will come from the closed branches by definition. On the rest, meaning the south part of Germany in C&I and the industrial sale are going well today.
Okay. I have a follow-up on the cost margin in Europe, which was under pressure. You mentioned Nordics, Germany, and competitive pressure there. Is it temporary, or do you think this impact will stay in the coming quarters?
Well, I think there are two effects. You have the effect of some increases, whether they were due last year to raw material, whether they were due to currency, which forced, in some places, the more imported goods to be for higher. A lot of margin squeeze were really visible in the business. Some at the installer side, some at the distribution side, and probably some which I cannot judge on the manufacturer side. At the same time, there is a mix between project and core business. We have seen a lot of project business in many parts because the acceleration is very often done by project types. The market picks up, it's what happens. The project business is always lower in margin
By the way, also, it always starts by cable. The cabling of a building happens before anything else. Cable is not the highest margin. Cable is the first sales level in a project. More project means more cable, more mix, which explains part of it. Some of the squeeze. About the squeeze, I expect, I wish, I hope that every raw material increase and every labor inflation increase and transport cost increase that everybody experience in most part of the world will be passed, and through the reference tariffs by the supplier, which is being used by the installer to make their quotation. It would be the total chain would get the price increases through. It's not yet fully visible. My experience of the past, when it's getting serious, there is no chance to escape. However, how fast it will materialize.
This is the dimension we work. We make our customer knowledge up. Don't make quotations without price increase clauses, because if raw material go through the roof or transportation and oil price and these things, to avoid a margin squeeze. It's a market dimension we have to live through. It's not forever. We have to take our portion of trying to resolve that. If not, we have to go to the cost side in order not to have a too much higher EBITDA impact. We watch closely and every month.
Okay, thank you.
Thank you. As a reminder, if you wish to ask a question, please press star followed by one. The next question comes from the line of Caroline Raoul. Your line is open.
Hi, this is Caroline filling in for Rory McKenzie at UBS. Just wanted to ask first about inventory days, which increased in Q2. I think probably largely due to the U.S., do you expect this to stabilize or improve throughout the second half?
The increase in the inventory days is because we had inventory, especially in the U.S., compared to last year with the ongoing opening of branches. In other geography where we want to put back some inventory in the branches because we feel we had not the right level of inventory. We have no particular issue at group level. Number of days has increased by 0.5 days, but it's under control, and we will manage that.
Thanks. Just on the EBIT growth, guidance for mid-single digit for the full year implies further acceleration in H2. Are there any regions in particular where we should expect some improvement?
Well, you have the mechanical effect of the reorganization we are implementing in Germany and Spain. You have the continued good momentum in some geography like the U.S. and Canada also, which will give us a very positive momentum for H2.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Lucie Carriat.
Thanks for taking my follow-up. I wanted to have your view on the French market. One of your supplier has reported also result this morning, and they were highlighting the fact that from their perspective, the French market hasn't been really recovering that much over the last few quarters. You have shown previously pretty good growth rate, a little bit slower in the quarter, and I was just curious to have your view on that, whether you think there is a slowdown of the market or maybe some kind of more seasonal impact or one-off impact that occurred in the quarter.
One thing is clear, the French market is better oriented than it was 12 or 18 months ago. There are a little bit bumpy, some days better than others for some of the reasons which are very local. Sometimes it's. I don't know if this is a good. Fundamentally, it's better oriented than it was. It's flattening a little bit right now, but there is no reason to believe, there is absolutely no indicator telling me that it will not remain at this kind of a level. Residential, whether it's new or it is renovation, there is always a balance between the two, and it depends to whom you talk, whether you get more people involved in the new or more people active from the renovation. We see that happening a little bit here and there. The non-resi is not the booming part, but it's not contracting.
It's still a 1%-2% growth year-over-year. The industry is also growing, not booming, again, because French industry is not a booming one, but lots of maintenance work, lots of productivity work, lots of safety work. A little bit of 4.0 Automation work. France is catching up with this kind of a trend. Now, some people would tell, and they told me they would tell you that, for example, the tax reform has not favored the new housing because this is on property tax, the ISF, ex ISF, which is now IFI. Yes, there is always a market reaction to people who will make a bet on this and not a bet on something else and would make a trade-off because the fiscal thing and fiscal that.
At the end of the day, we are about stable new housing start needed, which is in more than decent numbers compared. I remember 18 months ago where we were. I wish the market could stay like this. Now, have we over-performed? Let me say with a little bit of a sense of humor, it's not a decade that we are over-performing my competitors. Why should I stop? Yes, we take the most we can. France is important to you and it's important to me because this is a big business. We are also making our model evolving, the more digital, more punch out, different way of addressing the market. We are reinforcing the Ultra Plan.
The same chemistry that I have mentioned before for the U.S. and so on, we need to keep growing and maintaining and adjusting in France in order to take market share. By doing so, we may post eventually better performance than some people. No arrogance here, it's just adjusting to a reality, and the French market is not bad.
Thank you, Patrick.
Thank you. Our next question comes from the line of Pierre Boucheny.
Yes. Good morning to all. I have three questions, if I may. Maybe I will ask them one by one. My first question is a follow-up on your strategy in digital. How do you differentiate yourself from the other web competitors? What are you doing in term of maybe training, or what are you doing at least to keep some barrier to entry to your business?
I used to say when I was asked about Amazon, that we have to be as good as a few others and accelerate to be as good as. In term of functionalities, we are catching up gradually speaking with the fundamental functionalities that people like to see on the digital. It's more track and trace, click and collect. These are functionalities that once in the digital sphere you apply to our business, we are catching up. To make something which would be a differentiator, give you a rendezvous in one year. I think there are still more to overcome. The market adoption first on stand ard, like what I mentioned to you, has to happen. The market will then move to more sophisticated digital evolution, but it's not yet the case. The market is at the adoption stage.
The processes, the reliability of the information, our reliability of the delivery date, which sometime is not yet the case from the supplier who cannot give us reliable information about when which product would be made, is still lagging behind, but it's true for all our competitors too. We are at the forefront. Now, in some countries, we are doing a little bit more advanced chat mode, making sure that the innovation comes through the people and we animate chat, for example, in Belgium, which helps people to adopt new technologies faster. Is it something that is unique? No, but we are at the forefront again.
Okay. Thank you. My second question is a follow-up question again on inventories. You managed to have more inventories, especially in the U.S., but overall, during the first half of the year, you recorded an improvement in working capital requirement or less deterioration. Where is it coming from? Which country in particular?
It's coming from the accounts payable, because of the phasing of the way we reconstitute the increased inventory last year. We have on one side less payable at the end of 2017 than the year before, in terms of value, and those were paid in the first half last year and to a lesser extent this year. Because of that, we have an inflow on the payable part. It's coming mainly from the big country, France, U.S.A., Canada are the biggest ones.
Okay. I'm not sure to have understood everything, is it more securitization than before or it's not related?
No. It has nothing to do with securitization. Maybe I'm not clear enough. We are commenting on a variation of a variation.
Yes.
The cash flow statement is the differences between December and June position this year versus the year before.
Exactly.
The two starting points, one is lower this year than it was the year before. The endpoint, at the end of June 2018, in terms of volume of payable is a bit higher than last year because of the level of activity. That is why over the six months, we have a better impact this year than last year.
Okay. Fair enough. Yeah. Okay.
Yeah.
My last question is on the U.S. I understand that it will take two years to reach the position where you want to be. At the same time, there's been some further consolidation in the sector in the U.S., mostly led by CED or Crescent Electric Supply, for instance. Have you looked at some of the M&A transaction that occur in the U.S. over the last quarters? When do you think you'll be in a position to make a move in this direction?
All right. First of all, there are many rumors and very little which has materialized. Crescent is still not yet being acquired by somebody. It's on the market for now more than a year. Everybody looked at it, and from what I know, it has not yet been acquired by someone, unless I miss something. There are smaller than Crescent, which are also on the agenda, that everybody's looking at. There are three things. A, the municipal. There are people greening, and we have to be wide in that business. Second, there is a generation issue ahead of us without succession, which will force on some of an outcome for the next two or three years, and something must materialize there. Third, I would be very selective when it comes to us. I would be selective.
I would find the region where we are, I would not go in the region where we are not. It's something we said early, I will keep maintaining that dimension. Second, I want something, it has to be well-managed. I don't want to have another turnaround to do. Thank you for that. Thirdly, I'm looking for a proportion of digital and digital features already quite, let's say, as a standard or on the forefront of the market. Yes, we look at different candidates. So far, I have not found the magic potion. Therefore, we will continue looking into it. We should not forget another thing. We have committed to deleverage. In order to maintain the deleverage and do acquisition, we have to combat two things. A. Continue to do our divestment plan, to what we have just promised.
Second, I may have to go into a more active portfolio activity, which has nothing to do with the divestment plan, which has to do what is best to keep or to acquire versus not something else to keep. This is for 2019 and 2020 approach.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Andre Kukhnin. Your line is open.
Yes, hi. It's Andre from CS again. Thanks very much for taking the follow-up. It's just a quick one on the disposals program, 25 basis points impact positive on the margin. If possible, could you tell us where we are right now in that 25 and where you plan to be by the year-end?
What we said is that we are roughly at 15 at this stage, and we should be very close to the 20, I guess, something like that. I don't want to commit on precise figure. Again, there are bigger organization in process in Germany and Spain. That should contribute to the most part of the improvement in the second part of the year. By the mid-2019, you'll get this 25 basis point. We're quite confident on that.
Got it. That's very clear and helpful. Thanks very much.
Thank you. We currently have no other questions, but once more if you wish to ask a question, please press star one.
Well, if we are at the end of the question, I would like to thank everybody for having joined the call. Thank you for your question. Thank you for your attention. I hope we will have all of you on the next call after the Q3 is over. In the meantime, I wish you a good summer and vacation. Okay? Have a good time. Bye-bye. Thank you.
Thank you. This does conclude the conference for today. Thank you for participating. You may all disconnect.