Earnings Call: H1 2018

Jul 31, 2018

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Rexel Second Quarter and Half Year twenty eighteen Results Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Tuesday, 31st July, 2018. I would now like to hand the conference over to your first speaker today, Patrick Birrar. Please go ahead. Good morning, ladies and gentlemen. Welcome to this presentation of XL's 2nd quarter and first half twenty eighteen performance. Today, I am with Laurent Delabarre, our Group CFO. I will start with an overview of the key highlights and the details of performance by geography. Laurent will then present our financials in the quarter, And I will then conclude and confirm our 2018 outlook. After that, we will take 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 3, you see that we are successfully executing our 2017 strategic plan as announced, And Rexel is back on the growth path. After 4 years of underperformance, Rexel is now steadily growing quarter after quarter since Q4 2016 and 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 pockets 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, And Laurent will tell you more about it later. The first half gives us confidence in further improvement over the year as well as in the medium term, and we confirm our full year financial targets as announced in February. Now let's have a look at the highlights of Q2 and H1, starting on Slide 4. As you can see, Rexel sales and profitability improved in Q2. Our sales grew for the 7th consecutive quarter, reaching more than €3,300,000,000 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%. Now let's look at our H1 highlights, Slide 5. Our sales of more than €6,500,000,000 in the first half were up 4.5% on a 10 day basis, rising in all 3 of our geographies in the period. Our gross margin was stable at 24.8%, which remains a Our adjusted EBITA 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 of wages and freight in some markets. Returning net income was up 13% at €157,700,000 with a positive momentum in Q2, up 28%, thanks to good operating records, lower financial expenses through our active refinancing operations and lower taxes. And we improved our free cash flow by €94,500,000 in the first of demonstrating the strength of our model and confirming that we are returning to high cash conversion rates. At the end of H1, we had positive free cash flow of nearly €18,000,000 before interest and tax. And now let's look at each of the geographies. On Slide 7, You see that we posted solid same day sales and steady growth, up 5.1% in Q2. All three of our geographies, particularly in Europe and North America saw their growth accelerate in the quarter. In Europe, representing 55 percent of our sales revenue was up 4% in North America, which accounts for 36% of our business, sales rose 6.5 percent and in Asia Pac, which accounts for the remaining 9% of crude sales, soy 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 APAC since the beginning of 2017. Let's begin our geographical review on Slide 8 with Europe. Sales in our biggest region stood at €1,860,000,000 in the quarter, up 4% on a same basis, marking a sequential improvement in several key markets. In our home market of France, which accounts for more than 1 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, Street Cement. Benelux showed a solid 9.8% growth, With the 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 Verdelix cluster, which was placed under responsibility of our Belgium CEO and is showing good results. Germany's transformation plan is progressing, And we recently announced we are refocusing the business on the more profitable industrial segment on a national basis And on the Sienna in the southern part of the country, where we have a stronger footprint. As announced in June, we are closing 17 branches in the Sienna 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 For large accounts and to the temporary effect of our sales force reorganization, which continue to affect us in the declining market. On Slide 9, let's focus on the digital strategy in Europe. We saw a strong boost of digital sales in Europe, which With 8 countries now above 25%. The profitability of the highly digitalized country is on averaged higher than group profitability. This growth was notably driven by France, Group's penetration rate increased by 2 40 bps in the first half to reach 13.1 percent 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 unveiled on hybrid in Q4 2017 as a common platform in order to boost digital sales, which have strong appetite potential. On Slide 10, let me now turn to North America. In North America, we look in greater detail at where we stand in our transformation. As you know, when we presented our strategic In February 'seventeen, we said that fixing our U. S. Operation and undertaking initiatives to re launch growth were a key priority for Excel. 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 1 new branch and 3 platelet counters in 2018 as we have been focusing on the regionalization strategy and are doing more branch 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 plant like counters openings to be close to 23 at the end of the year and circa 60 over 2 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 one order comes, has increased by 280 bps to 96 0.9%. 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 8 regions is under the 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 1 point 2 €2,000,000,000 up 6.5 percent, driven by both the U. S. And Canada. On Slide 11, we complete our geobrasset overview with Asia Pac, where our sales were up 6.3%. The Pacific was up 2.1 percent with growth impacted by the disposal of our Rockwell Automation business in Australia. Excluding the transaction, underlying growth in Australia remained strong, up in the mid single digit with a good performance in residential and industrial. Asia posted very solid 11.1% growth with China up 3.4%, despite 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, and good morning to all of you. I will start on slide 13 with our sales number. Let me point out that we have restated our Q2 2017 number for IFRS 9 and 15, the new IFRS rules, resulting in an unlikely 0.1% drop in sales to €3,300,000,000 On a reported basis, our sales were up 1% in the quarter as a result of a positive 5.1% 10 day Sales growth and a positive calendar impact of 0.6%, partially offset by 2 unfavorable effects, Currency for minus 3.6 percent, mainly due to the depreciation of the U. S. And Canadian dollars versus euro and scope for minus 0.9 percent 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, with an impact of minus 2.7% on sales in the full year 2018. As shown on the chart on the bottom right hand side, we saw broadly stable relative 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 percent to €161,000,000 and margins stood at 4.8%. Our 20 bps improvement in Q2 2018 on a comparable basis is explained by a 55 basis point volume and price contribution that more than offset the negative impact of investment for 25 basis points and cost inflation, notably wages and fights, net of productivity gains for 10 basis points. On slide 15, we turn to our profitability by region. Overall, with adjusted EBITDA of €161,000,000 €61,000,000 Our adjusted EBITDA margins stood at 4.8%, a 20 basis point increase mostly coming from North America. In Europe, gross margins stood at 26.6 percent, down 47 bps year on year due to more competitive environment in Switzerland, the Nordics and Germany, notably in the cable business. Positive volume in the quarter held partly to offset cost inflation and gross margin erosion, which led to a 3 basis point drop in adjusted EBITDA margin. In North America, gross margin improved by 66 basis points to 23.1%, thanks to better purchasing commissions and pricing initiatives in the U. S. Adjusted EBITDA margin grew 70 bps to 4.5 percent with volume growth more than offsetting cost inflation and the carryover effect of investments in people and branch companies. In Asia Pacific, adjusted EBITDA margin rose 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 minus €6,400,000 and were €2,700,000 higher than last year, mainly because of additional investments in ICM 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 €35,000,000 In the first half, adjusted EBITDA stood at €288,200,000 up 3.1%. On slide 16, we look at the bottom line part of our P and L. Let's start with our reported EBITDA of €287,000,000 down 1.8%, including a one off negative corporate effect of €1,300,000 Other income and expense amounts to a negative €60,700,000 including restructuring costs for €59,500,000 mostly related to reorganization in Germany and Spain. For the full year, we now expect that restructuring expense will be above the normative level at around €90,000,000 Our net financial expense improved to €50,200,000 reflecting a reduction in average net interest rate on our gross debt to 2.85 percent as a result of active refinancing activity. We also saw a drop in our income tax to €66,900,000 as we benefited from the positive impact of the U. S. Tax reform. Our effective tax rate stood at 39.9 percent, above our normalcy tax rate of 32%, Going 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 €100,800,000 up 4.2 percent and our recurring net income was up 13% at €157,700,000 On slide 17, we turn to our balance sheet, which we confirmed 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 €71,000,000 Our free cash flow before interest and tax improved to an inflow of €17,800,000 from an flow of €76,700,000 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 €32,100,000 from €53,000,000 in the same period last year. Please note that this includes the proceeds We confirm that our full year 2018 growth CapEx should be close to €130,000,000 which corresponds to a net CapEx close to €110,000,000 including the proceeds received from the disposal of our Rockwell business in Australia. Our net debt was reduced by €194,000,000 or 8 percent to €2,100,000,000 On slide 18, let's take a further look at the breakdown in maturities of our debt. The chart shows that we have no short term maturities on our bonds with no significant repayment before June 2023 and an average maturity of above 4 years. 2017 was a very active year in terms of refinancing in order to capitalize on favorable market opportunities with the refinancing of 2 banks. More recently, at the end of January 2018, We refinanced our senior credit agreement and reduced the amount from €982,000,000 to €850,000,000 as well as the relative costs. Our net debt to EBITDA ratio stands at 2.9 times at June 30, 2018, down 42 basis points year on year. The effective 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 €100,000,000 versus €110,000,000 previously anticipated, assuming no major volatility in currency or interest rates. Our interest rate should be below 3% in 2018. We also maintained strong financial flexibility with liquidity of around €1,200,000,000 at the end of June, including our undrawn premier 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 disclosed to €650,000,000 from €800,000,000 previously, including the downsizing of some activities in such countries as Germany and Spain. The downsizing of activities combined with disposals in Southeast Asia and Australia, represents €530,000,000 in sales. We expect the remaining disposal or bank pricing of sales for €120,000,000 of sales to be completed by mid-twenty 19. 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 weeks 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 €120,000,000 in progress. Let me now hand over to Patrick for a second. 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. And 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 Q2 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. And let me remind you that we target at constant COP of consolidation and exchange rates, sales up in the low single digit on a constant and same 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. And now Laurent and myself are now ready to take your questions. Thank you. And our first question comes from the line of Lucie Carrier. Your line is open. Hi, good morning, gentlemen. Thanks for taking my question. I will have Three questions and I would 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. And 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 are confirming today? So this is question number 1. Well, the current trading on the top line, which the one we see, is continued 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. And it's true by region, meaning no well, you can easily understand that North America continue to push and to boost. And The European is also doing by the profile we had in the recent months. Therefore, it's very early, but there is no change in the pattern. Okay. Thank you. My second question was around the progress you've made in North America. And so 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? And just also in terms of the on the investment that you've been doing, I think you've mentioned 25 basis points of impact from investments. Part of it, I guess, is in North America in the Q2. You are still continuing to invest. I mean, 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 2 pieces to the question. As you know, we suffered during long time now 18 months to years, 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 GIS by the way, GE as a group, as a customer, what's gone is gone and will not come back. And the GIS part now, ABB was given a green light to take over. And ABB, from what I know, I've taken very seriously and is putting a lot of effort in fixing in the shortest period of time, And I have to give them the credit for taking very seriously the restoration of the GVIS capabilities. And we expect or I hope and we expect to see this energetic move to allow us to have some reverse in the trends of the past, probably in Q4 or by the end of the year. Now 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 JAKKSpro dimension, thanks to this The GEIS restoration back to normal pattern. And Even 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 started on the same day. We have branches that really started very early last year To come back to good performance. And we have others just recently gone, whether it's a refresh, Which is having put salespeople, whether it's the inventory increase of last year, which give 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. And thirdly, Yes, we will continue to invest where we decided to go in the refresh, in the Less in inventory than in the past, more in salespeople, quality of salespeople and much more It's 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. And yes, I expect more to come. And when We said in February 2017, it takes 2 years. It takes 2 years. And Now this being said, did I cover everything? No. Yes, I think I did, Luciana. 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 20 I think for all of your investments. Lucie, if I would be so good, I should be a consultant, Consultant and I would be richer than I am. Allow me to say, I expect good news, but I cannot. No, it's true. It would be a fair to say. But I mean in terms of magnitude of impact of those investments On your margin, I. E. The cost, you're not expecting like a disproportional impact versus what we've seen over the last few years? Laurent, we should say about it in the same magnitude as what we are experiencing so far. Okay. Thank you. And 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 stability of sales in Europe. So first question is, 1, whether this 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 extend further to the rest of the group? When we decided to Celebrate the digital and we do our best to even go further and faster. We didn't know at that time exactly as of when It would be it will have an impact on the profitability. Now after an acceleration and 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 the 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. And this It's something that everybody with that 30 or above would measure. And therefore, it's clear that reaching 25 is the Threshold accelerating beyond. And now we're starting 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 terms 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 Smile delivery, whether they call or they click, we start being a true multi interface to the customer, which create a higher 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. 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? So the conclusion from this is that Digital margins improve as you grow up the business on the existing fixed cost base. And my interpretation was that So at that 25% threshold is where the profitability across the lot turns So in line with the broader region. Firstly, is that right? And secondly, When do you expect to hit that? We have to be careful, I mean, 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. I was you said that the highest penetration digital penetration country is higher margin than I think you said group average. And then in the answer to previous question, you said that profitability improves as the business grows up. So I guess The question is at what point does the digital margin equate to the traditional? And where are you with the 22.5%, where is it right now across the whole of Europe? Well, if I take the highest digital countries with enough experience to look back, When you reach something like 40% and above, then 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, and we are obviously trying to get this. That we have a few countries, Switzerland, Austria, Belgium, where we can measure that while going in the range Between $25,000,000 $40,000,000 you have an improvement of your global EBITDA and when you are above $40,000,000 you have An acceleration of your EBITDA because of the digital penetration. Now is it going to be the same everywhere? I'm not sure because when this country did it, they were the 1st in the country to do it. If everybody does it at the same time, we have to Problems on these numbers, okay? The one thing which we will confirm, going digital is an effective way To strengthen our EBITDA, definitely. It's a way to strengthen our customer base and to reduce or at least to get the growth without an overproportionally fixed cost requirement. Now it will depend on the countries. Now countries where we will accelerate the digital effort And the first 10 points will cost us more than it will bring. Therefore, it's a speed issue. And there are others where we're already at 40 and the next 10 points at a high leverage on the results. That is not linear. It's 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's yes? And the speed the group That's 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, but all of that is growing at roughly 15% year over year. So we will clearly reach the 25% very quickly in Europe. Remember, we pay more customers, more SKU, more digital. And digital accelerates, obviously, Because once the setup is made, the fundamental bricks have been put together, it's an adoption by the market And an adoption as an increase in speed in each of the market where we do this. But there is a lag Preparation, we are ready for get it done, functions and deliver the functions. It goes with the more SKUs too. Digital, it's difficult to tell you if it's digital, more SKU and more customer because at the end of the day, there is a chemistry between the three. And when we say that at the beginning in Feb 2017, obviously, the more customers, this is the most easy to measure how many new customers, net customers But how less do you lose because we have produced digital at a later stage. Therefore, let's consider That the pillar of the strategy is the chemistry between the 3: more customer, more SKU, more digital. And that is one thing in all the story. Now we are clear that this is the 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 in me as a CEO that Working on the 3. With all my team, this is a winning chemistry. Thank you. That's very clear, and I appreciate the Granite of the answer and a broader perspective. Just second question was on Spain. Could you give us a bit more detail What are you doing there with the more regional approach? I think we have a pretty good idea on what you're doing in Germany and UK. So we'd love to have the same level Spain, after all the recession that the country has experienced because things had been shrinking during 8 years, The model of having a central DC to serve a now more fragmented and low volume does not match anymore because if you Ship on 600 kilometers from Madrid to Barcelona, the costs are far too high. Therefore, we are going back to a setup by regions Well, you have a hub serving the local branches around. And 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 focus For the focus, no more, no less. And regionalizing, it means we will close 17 branches and we had 17. No, no, no. It's both, sorry. It's both, it's also in Spain. We will call 17 branches and we have 1 national distribution center that We are going also to downside to our original organization. Right. So 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. And by the way, it's more than a bet. This is where the growth 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 growing 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, they Less to be taken in the industry, the shoe, but not the major, and it's more the housing and the commercial building or the residential dimension. Got it. Thank you. And the 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 bps are there? Yes. 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 and 20 basis points in 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 'eighteen and other parts. So different pockets of additional Extent that has been identified to serve this additional volume that are on top of the normative level of variable cost, We need to solve that increasing volume of sales. Right. And that sounds quite one off nature. So I Presume you don't expect that to recur in H2 or do? Well, it's the forecast we have identified. We are working on it. We'll start to mitigate the impact. But for example, on transportation, there is clearly a bit more pressure in some country. It will gradually reduce, but 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 Groote. Your line is open. Hi, good morning to all. First, I mean, on the The 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? And related to that, about Germany, because that is quite sizable impact on top line from the German restructuring. How do you make sure that the fixed costs 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. And I have a follow-up on Europe. Thank you. First on the EBIT, it's a bit early to comment 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 On HQ costs that are going to disappear. So yes, we have already 15 bps and we'll get additional in H2. I cannot be more precise At this stage on that silver. On the Germany dimension, yes, less top line, but we are structurally also reducing the fixed cost by closing We're also reducing the fixed costs 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. Therefore, yes, your concern has been fully taken Into consideration. Yes. And the reduction will come from the closed branches by definition. And on the rest, I mean, the south part of Germany In T and I and the industrial sales are going well today. Okay. I have a follow-up on the gross margin in Europe, which was The pressure and you mentioned Nordics, Germany and competitive pressure there. I mean, is it temporary? Or do you think this impact will withstand the coming quarters? Well, I think there are 2 effects. We have the effect of There are some increases, whether they were due last year to raw material, whether they were due to currency, which 1st, in some places, the more imported goods to be For higher end and a lot of margin squeeze were really visible in the business. Some at the installer side, some at the distribution side and probably some that we cannot judge on the manufacturer At the same time, it's The 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 and the market picks up, That's what happens. And the project business is always lower in margin. And by the way, also, It always starts by cable. I mean, the cabling of the building happens before anything And cable is not the highest margin. Cable is the 1st sales level in the project. And more project means more cable, more mix, which explains part of it. Some of the squeeze And some of it. About the squeeze, I expect, I wish, I hope That every raw material increase and every labor inflation increase and transport The increase that everybody experienced in most part of the world will be passed and through the tariff Reference tariffs by the supplier, which is being used by the installer to make the quotation. So that 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 a dimension we work, we make our customer knowledge of, Don't make quotations without price increase clauses because the raw material go to the roof for transportation and oil price and these things to avoid the margin squeeze. It's a market dimension. We have to look through. It's We have to take our portion of trying to resolve that. If not, we have to go to the cost side in order not We have a too much higher EBITDA impact. We work closely every month. Okay. Thank you. And the next question comes from the line of Caroline Raul. Your line is open. Hi. This is Caroline 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, but do you expect this to stabilize or improve throughout the second half? Yes. The increase in the inventory days is not because we had inventory, Especially in the U. S. Compared to last year with the ongoing opening of branches. And then in other geographies, where we want to put back some inventory in the branches, because we feel we have not The right level of inventory. So 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. And then just on the EBIT growth, so 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 origination we are implementing in Germany and Spain. And you have continued good momentum in some geography like the U. S. And Canada also, which will give us a very positive momentum for H2. Okay. Thank you. Thank you. Our next question comes from the line of Pierre Bossier. Sorry, Lucie Carreux. Hi. Thanks for taking my follow-up. Just 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. I mean, 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. Yes, 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 but 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. So residential, whether it's new or this is renovation, there is always a balance between the 2, 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 loan ready is not the booming part, but it's not contracting. It's still 1% to 2% growth year on year. And the industry is also growing not booming again because France 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, And France is catching up with this kind of a trend. Now some people would tell and they told me they would tell you For example, the tax reform has not favored the new housing because this is on property tax. The ESF, which is now in fee. But yes, there is always a market traction Turn to people who made a bet on this and not a bet on something else and we will make a trade off because of fiscal thing and fiscal debt. But at the end of the day, We are about stable new housing start needed, which is in more than decent numbers Compare, I remember 18 months ago where we were. I wish the market could stay on this. Now have we over performed? Let me say with a little bit of a humor, sense of humor, it's not a decade that we are over performing my competitors. Why should I stop? But yes, we take the most we can. And Yes. France is important to you and it's important to me because this is a big business. But we are also making our model evolving, the more digital, more punch out, different way of addressing the market. We are reinforcing the offer 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. And by doing so, We may post eventually better performance than some people, but no Just adjusting to a reality and the French market is not bad. Thank you, Patrick. Thank you. And our next question comes from the line of Thierry Bose. Yes. Good morning to all. I have Three questions, if I may. Maybe I will ask them 1 by 1. 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 terms of Maybe training or what are you doing at least to keep some buyer 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. And in terms 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. I mean, 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, I'll give you a rendezvous in 1 year Because I think there are still more to overcome. And the market adoption first On standouts, like what I mentioned to you, has to happen. And the market will then move To more sophisticated digital evolution, but it's not yet the case. The market is at the adoption stage. And the processes, the reliability of the information, our reliability of the delivery date, It sometimes is not yet the case from the supplier who cannot give us reliable information about when which product would be made. It's still lagging behind, but it's true for all our competitors too, that we are in 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 on 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 not coming. 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. And 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 one. Okay. I'm not sure to have understood everything, but is it more securitization than before or it's not No, no, it has nothing to do with securitization. Yes. Maybe I'm not clear now. 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. And the two starting points, 1 is lower this year than it was the year before and the end point 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's why over the 6 months, we have Better impact this year than last year. Okay. Fair enough. Yes. Okay. And so My last question is on the U. S. I understand that it will take 2 years to reach the position where you want to be. At the same time, there has been some further consolidation in the sector in the U. S, mostly led by CED or Crescents Electrical Supply, for instance. Have you looked at some of the M and A transaction that occurred in the U. S. Over the last quarters? And when do you think we'll be in a position to make a move in this direction? First of all, there are many Rumors and very little which has materialized. Crescent is still not just 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 missed something. There are smaller than questions, which are also on the agenda that everybody is looking at. But there are 3 things. A, The most people. There are people dreaming, and we have to be wise in that business. 2nd, there is a generation issue ahead of us, which will create Without succession, which will force on some of an outcome to for the next 2 or 3 And something must materialize there. And 3rd, I would be very selective when it comes to us. I would be selective. I would densify in the region where we are, and I would not go in the region where we are not. It's something we stayed early, and I will keep maintaining that dimension. 2nd, I want something not to be it has to be Well managed. I don't want to have another turnaround to do. Thank you for that. And thirdly, I'm looking for a proportion of beautiful and digital features already quite, let's say, as a standard on the forefront of the market. Yes, we look at different candidates. So far, I have not found the magic And therefore, we will continue looking into it. But we should not forget another thing. We have committed to deleverage. In order to maintain the deleverage and do acquisition, we have to come back to thanks Hey, continue to do our divestment plan to what we have just promised. And second, I may have to go into a more active portfolio activity in 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. And this is for 2019 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 CES 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 this stage, and we should be very close to the 2020, I guess, something like that. I don't want to comment on precise figure. Again, there are big organization in In process in Germany and Spain, and that should contribute to the most part of improvement in the second part of the year. But by the mid-twenty 19, you'll get this 25 basis points. We are quite confident on that. Got it. That's very clear and helpful. Thanks very much. Thank you. We currently have no other questions. 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. And I hope we will have all of you on the next call after the Q3 is over. And 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.