Earnings Call: Q1 2018

Apr 27, 2018

Ladies and gentlemen, thank you for standing by, and welcome to Rexel's First Quarter 2018 Results 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 the call is being recorded today, Friday, 27th April, 2018. I would now like to hand the conference to your first speaker today, Patrick Borard. Please go ahead. Thank you. Good morning, ladies and gentlemen. Welcome to this presentation of Rexel's Q1 2018 performance. Today, I am with Laurent Delabard, our Group CFO. I will start with an overview of the key highlights I detail our performance by geography. And Laurent will present our financials in the quarter, and Our Q1 performance is in line with our expectations. With same day sales growth in every geography, with strong cash flow generation and with stable recurring net income, We saw a solid performance in our 3 countries, notably France and in the U. S. Our numbers clearly show the benefits of the transformation actions and investment we have carried out in the past 18 months As part of the strategic plan we presented last year and demonstrate the robustness of our models. Now let's look in greater detail on Slide 3 with the key financial highlights of our Q1 performance. Our sales of almost $3,200,000,000 in the quarter were up 3.9% on a same day basis, Rising in all 3 of our geographies in the quarter. At the same time, Our gross margin was stable at 25.1%, which is a positive achievement in the current environment. As a result, our adjusted EBITDA margin at 4% was down 32 basis points, largely due to a lower absorption of our investment in People and IT as Q1 is seasonally a lower quarter in term of sales as well as cost inflation, Mostly of which is in some markets. Recurring net income was stable at €68,200,000 Thanks to lower financial expenses through our active refinancing operations and lower taxes. We improved our free cash flow by €88,000,000 in the quarter, demonstrating the strength of our model and confirming that we are returning To higher cash conversion rates. Now if you go to the next page, We have posted solid same day sales growth, Up plus 3.9 percent, all three of our geographies posted growth, all with a particularly strong performance in Asia Pac, And we saw positive trends in our leading countries. This was achieved despite a lower contribution from copper based cable prices. In Europe, representing 57% of our sales, revenue was up 2.8%. In North America, which accounts for 34% of our business, sales rose 3.5% and in Asia Pac, which accounts for the remaining 9% Of the group, it saw its revenue rise 12.9%. On the next slide, You see that this quarter was marked by an improvement in performance in several key geographies. In France and in the U. S, Improved pricing condition and supplier concentration resulted in improved gross margin. It is particularly satisfying to see that in the U. S, our strategy delivering results. Our new regional and multi banner organization implemented recently, I may remember you that it was implemented in December, He's also enhancing our performance, reinforcing our more customers, more SKU approach. We also saw a better contribution to sales and profitability from the other geographies. In the Netherlands, our strategic focus on Multi Energy resulted in a double digit increase in sales, Up 13.3 percent. And in China, we also improved margin, thanks to strong sales in automation. At the same time, we faced some headwinds in the quarter, notably the carryover impact of our investments in people and IT In a quarter that is traditionally lower in terms of sales, about half of our additional effects in the quarter are related to investment in digital and people to boost future growth. We also faced wage and cost inflation And so some country specific situations, notably a drop in sales in the UK and Norway, which we will detail in the next slide. Now let me go by geography, a little bit more detail. On Slide 7, let's start with Europe. Sales in our biggest regions It stood at €1,800,000,000 in the quarter, up 2.8%. As you see in the graphic on the slide, we saw growth in most countries With the notable exception of the U. K. Where sales were around 5.6% as a result of a combination of sales force reorganization, 13 branch closures and unfavorable weather conditions. In our home market of France, Which accounts for more than 1 third of our European sales, our revenue rose 3.8%, driven notably by the Residential and Industrial segments, Which were both up in mid single digits. The efficiency of our business model allows us to capture market growth. Scandinavia saw overall growth of 1.6%, reflecting the compressive performance between countries. Finland posted double digit growth of 15.2 percent and Sweden continued its strong growth with sales up 14%, Norway was impacted by the loss of large contract and adverse weather conditions. Switzerland posted solid 8.7% growth, thanks to solid momentum in the project business, I mean, a competitive environment. And the Benelux also grew strongly If you go to the slide after, North America. I'm very pleased to share that our sales growth of 3.5 percent to a little over €1,000,000,000 was driven by both Canada and the U. S. In the U. S, where sales were up 3.2%, we are clearly The benefit of the various initiatives we have put in place. We have gained more than 9,000 customers and recent branch openings are contributing 1.3 We are seeing the positive commercial impact of our new organization in net regions, Which we have been put recently under the sole responsibility of Jeff Baker, allowing us to reach more customers, Drive efficiency and increased collaboration between banners, which create opportunities to turn customers into multi banner accounts. In terms of end markets, residential is up in double digits and commercial is up in mid single digit. Industry saw a positive contribution from oil and gas, which was up 10% in the quarter. Our project business continued to be affected by lower wind and Our project with the large customer. Canada saw a strong acceleration with sales up 4.8%, Mainly driven by strong industrial sales, notably in Oil and Gas and Mining. Now let's complete our geographic overview with Slide 9 about Asia Pac, where our sales were up in double digit and reached EUR 284,000,000. Both sub regions showed solid growth. The Taxi FICC 1 was up 7.9% with growth in both Australia, Where all 3 end markets showed positive momentum, resulting in 9.4% sales growth and New Zealand, whose revenue rose 1.1%. Asia posted very solid 19.1% growth with China at 10.1% on the back of an excellent performance in Industrial Automation. We also saw a favorable dynamic in the Middle East and India supported by the last project win in the Middle East After that top line coverage by geography, Let me now hand over to Laurent for the review of the financial performance. Thank you, Patrick, and good morning to all of you. I will start on Slide 11 with our sales numbers. Let me point out that we have restated our Q1 2017 numbers for IFRS 15, The new IFRS rules related to revenue recognition, resulting in a nonmaterial 0.1% drop in sales to €3,300,000,000 On a reported basis, our sales were down 4.2% in the quarter as a result of 3 unfavorable effects. 3rd, currency has an adverse effect of minus 6%, Mainly due to the depreciation of the U. S. And Canadian dollar versus euro. 2nd, scope had a negative effect of 0.8 Resulting from the recent divestment in Southeast Asia. 3rd and finally, calendar had an impact In the quarter of minus 1.1 percent, largely because Easter came earlier this year. 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 3.8% on sales in the full year 2018. On a constant and same day basis, our sales were up 3.9%. Also, as shown on the chart on the right hand side of the slide, We saw a lower positive contribution from copper price this quarter of 0.8% versus 1.2% in the same quarter Last year and 1.6 percent in Q4 of 2017. As shown also on the chart on the right hand side, We expect the next two quarters to be reasonably favorable in terms of bill effects, while Q4 will be more challenging. On slide 12, we turn to our profitability by region. Overall, With adjusted EBITDA of €127,200,000 our adjusted EBITDA margin stood at 4%, A drop of 32 basis points coming from both Europe, North America and corporate costs, partly offset by an improvement in Asia Pacific. As shared by Patrick, our increase in OpEx can mainly be explained by the carryover effect of our investments Last year in people and digital in a seasonally low quarter in term of sales as well as some inflation in our wages and costs. In Europe, gross margin stood at 27.5%, stable year on year. The 25 basis point drop in adjusted EBITDA margin was due to wage and cost inflation in the region, lower volumes in UK and Norway And investments in people and IT, which offset strong operating leverage in France. In North America, Gross margin improved by 32 basis points to 22.8 percent, thanks to better purchasing conditions and pricing initiatives in the U. S, Especially in our Proximity business, while investing in people and in new branches. Our slight drop in EBITDA margin in the region That's revert to an OpEx increase related to higher freight costs and investments in our sales force in Canada, which offset solid operating leverage in the U. S. In Asia Pacific, we saw reverse movements. Gross margin fell 75 basis points due to phasing projects the Middle East and country mix with China growing faster than the rest of the region, our EBITDA margin was up by 35 basis points, thanks to better volumes and strict cost control. Our corporate costs were higher than last year, Mainly because of additional investments 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 €35,000,000 On Slide 13, we look at the bottom line part of our P and L. Let's start with our reported EBITDA of €125,400,000 down 13.4 percent, Including a one off negative corporate effect of €1,800,000 Other income and expense Amount to a negative €7,400,000 including restructuring costs for €6,800,000 We confirm our full year restructuring expectation of around €50,000,000 for 2018. Our net financial expense improved to €24,900,000 reflecting a reduction in average net interest We raised on our gross debt to 2.9% as a result of active refinancing activities As we will see later. We also saw a drop in our income tax to €28,000,000 As we benefited from the positive impact of U. S. Tax reform, our effective tax rate stood at 31.6% And we now expect our normative tax rate for 2018 to be around 32%, excluding any one off. Net income was €60,700,000 and our recurring net income was stable at €68,200,000 On Slide 14, we turn to our balance sheet, Which we strengthened in the quarter with improved cash flow and working capital that resulted in lower net debt. Indeed, as you see on the chart, our working capital improved by almost €103,000,000 Thanks to a phasing effect in inventory buildup in 2017 in France and in the U. S. Leading to lower payables. Our free cash flow before interest and tax improved to an outflow of €119,200,000 From an outflow of €206,700,000 we expect to return in 2018 to a higher level of cash conversion versus twenty 17, demonstrating the strength of our model. Net capital expenditure It was down to €23,100,000 from €25,500,000 in the same quarter last year. We confirm our full year CapEx should be close to €135,000,000 Our net debt reduced By €215,000,000 or 10 percent to €2,200,000,000 was also helped by a positive currency effect. On Slide 15, we take a look at our financing and liquidity situation. In early 2018, we refinanced our senior credit agreement, reducing its amount to €850,000,000 From €982,000,000 and also reducing the related costs. As shown on the chart And thanks to our active refinancing strategy in 2017, we have no debt maturities following due in 2018 I'm not significant repayments before 2023 with an average maturity of 4.3 years. As mentioned earlier, Our average interest rate on gross debt is 2.9%, which represents a drop of 33 basis points year on year. We anticipate our full year financial costs to be around €110,000,000 We also maintain strong financial flexibility We delivered liquidity of around €1,100,000,000 at the end of the quarter, including our undrawn tenure credit facility. I will now hand back to Patrick for his concluding remarks. Thank you, Laurent. Let me conclude on Slide 16 with our outlook. We are continuing to execute on the strategy we presented last year. Our Q1 performance reflect the choice we made and a lot of their positive effects. On the back of this performance, we confirm our financial targets for the full year as presented in last February. Let me remind you that we target a constant scope of consolidation and exchange rates: 1, Sales up in the low single digits on a constant and same day basis 2, the mid to high single digit increase in adjusted EBITDA 3, a further improvement in our net debt to EBITDA ratio. With this, we thank you for your attention, and Laurent and myself I'm now very happy and ready to take your questions. Thank you. Thank you very much. The first question today comes from the line of Sebastian Grootter. Please go ahead. Hi, good morning. First question on Europe. I understand the investment in digital, But should we assume they will keep going up in the coming quarters? Or are you satisfied with the current level? And also can't you accelerate the productivity Gents to offset this. And on this topic, can you update us on the turnaround plan for Germany? And what could be the impact on European margin if it's successful? That's the first question. Thank you. We will not decrease our investment in digital, whether it's Europe or non Europe central because it's fundamental for the strategy of the future. It's fundamental because we it's a chosen conscious decision to improve Our digital content, number of customers are digitally connected Thank you, Tuas and Antoine. Therefore, yes, it will continue throughout the year in terms of investment. Your question about Germany, Germany is in a turnaround situation. We are finalizing the detail of the portion on which we will debt, develop, Invest for the future and the portion where either for market condition or because of our existing starting point, We will not invest in the future. And we have a 10% market share in the country. We are rather strong in the south, but where we are the strongest is a strong industrial offering On which we decided to focus more heavily. Germany remains a large and attractive country For the business, the core geography for Rexel. Yes, we have some loss making businesses that we are currently addressing, And we have ongoing discussion with our big subset, if you are familiar with this practice. And this is why sometimes it takes longer than one could imagine. But We Germany is offering good market in industry, good partnership with These suppliers, and we are refocusing on this portion of the market. And how much of Germany is industry versus construction? Consider that industrial products Being sold to industry or to maintenance and so on. Therefore, industrial product is a good half of what we sell Good morning. And I have a follow-up on France. Certainly disappointing in Q1. I guess there is maybe some weather impact here as well. How has developed the quarter? And can you give us some Color on April in the 1st few weeks, are we still in this 4% gain of growth? I will tell you, France, everybody probably should take the numbers because especially in Q4, we had a very high growth rate, We shared because, yes, there is a good momentum. The market is good. We have the same footprint as in the last quarter. We have the same salespeople. We have the same customer. Nobody has become bad where it was good last quarter, let's consider. It continued to be good. It continued to be solid. But there are 2 things that, yes, there was a little bit of a weather and I didn't want to comment other people have done it before me. And we have positive sales numbers with residential Up 5.7 percent non resi lower and industry up 5.1 percent. At the same time, a conscious decision was made to privilege the quality of the growth And not to go for growth at low prices. There are projects in the country. They are places in the country There were some price battles, especially on the cable front, where we decided that It's good to go for long term profitable growth and not just for top line, which I could have done and we decided not to. And however, we serve our good customers in a very good way. And I do not worry at all about our activity in this country and the medium term profitability. As you know, this is a good profitable business and it continues to be and it does improve every day. Thanks, Edith. And we don't want to yes, we do not want to emphasize too much on the weather as it may be a bit an easy one. But it's clear that in France, in UK, in Norway and we refer to it in the U. S, we had some weather impact. There is also the phasing of the Easter being in March this year and all of that has A slight impact on the top line, and we see a good momentum in April on a catch up in some of the countries. And globally at group level, the weather impact is circa €8,000,000 on the top line. Thanks a lot. Thank you very much. The next question today comes from the line of Andreas Wehle. Please go ahead. Yes, good morning. It's Andreas. Thanks for your time. I just wanted to focus on the U. S. Market. If you could help us a little bit maybe with a Broader picture, what's going on there and specifically for you between Chexpro, which I guess was difficult and the rest of the business, which is pretty good. We've had some mixed results from peers. Wesco had very good growth, but a lot of gross margin pressure. Anixter had very poor results overall. How do you see the market overall in terms of kind of pricing, gross margins? And how much did GE Industrial I hit you again in the quarter compared to what it could have been without if you just look at it excluding that business. Thank you. First of all, thank you, Andreas. And first of all, let me make a comment which is not a cocoa, Rico I can share with all of you today That I feel very confident. I was confident in our actions, but I feel confident in the actions bringing results And what we have done and will continue to do and the continuous changes, including the management changes we have done, Are really getting every day more solid, customers more happy, our sales force more active, And we improved our service level, our relationship to the vendors. And so now there are a few situations, which you mentioned some of them. A situation which we still need to fix. Now globally, the regionalization It allows us to have a very effective much better support from our vendors because they are regionally organized. 2nd, we will benefit our customer. We'll start very early stage from they can become a multi banner. Meaning what they want to get from 1 banner, they could get an alternative from another banner or complementary from other banners, which In the more customer, more SKU will help. 1 of the banner, Jextro, obviously, by its profile of the past and Jextro GE So far less now from GEIS performance, which has been able in the last quarter To provide better supply chain than it was in the past. On the other hand, we suffer A lot of wood we already had in the last in Q4, but now we have in full probably for the first half of this year, Which is GE as a customer. GE as a customer, which is not GEIS, is down by 34%. Price, it's missing sales of €30,000,000 and it contributes to minus 1.6% of the total U. S. Sales, Okay. Absent this, because here as a supplier, we were able to reach plus 8%, Which contributes to 0.3% is up in the total sales. It's really GE as a customer with now The main issue. And it's an issue of a customer who has reduced its activity, its factories, its plants. And as a result, Being the 1st supplier to them, we have suffered from. And Now, GEIS is still in the process of being acquired by ABB and we wait the antitrust authorities to release in order to improve the JAKspro network Capability to sell, but as I'm telling you, at least short term, very short term, we get better Supply chain and availability of product by GE. But the big thing is GE as a customer. And yes, this is the only thing that really impacts GEEX PRO Today. Otherwise, the rest is really accelerating itself. And we have put the 8 regions recently Under one under Jeff Baker. We have opened 1 branch and we have made 2 flat line counters in the beginning of this year. We will do our plan as we have shared with you last year As long as we see that the benefit of the previous year and the carryover both in gross margin and as planned in the costing Match the scenario that we have shared with you, and so far, it is the case. Thank you very much. To the question, you had another element, I'm sorry, in your question. There was Price increase and gross margin in the U. S. There was a modest price increase Around 1.5% in the U. S. We work more on our own pricing And beyond that, in order to increase our margin and we use the rollout of a proximity model And the more and better service we provide in the branches to really improve our own profitability through our locally 1 by 1 By having an active pricing strategy beyond the price increase of the suppliers. Just to be complete, really. Thank you. It's on the right hand side. Thank you very much. The Next question today comes from the line of James Stittler. Please go ahead. Yes. Thank you. Good morning all. If you look at the headwinds that you saw in the quarter In terms of freight, in terms of cost inflation in France, how much of that was expected and built into your full year model? Also in terms of the another end market, which has been quite tough, could you talk a bit about what you're seeing in lighting? Any light at the end of the tunnel? And then just finally on wind in the U. S, I do believe you said last quarter that, that is now washing through, but you're still seeing headwinds. How long are we going to see these coming through your U. S. Results? Thank you. There is one thing on the horizon in term of costing that, yes, freight is not It's an inflationary component of our business. To the point that taking that seriously, probably One thing new to me new, I mean, I knew it was this, that we will probably adapt certain Either the freight charges or the freight cost to be charged to the customer for certain part of the freight is probably on the horizon, Not yet implemented, but the freight is going higher and faster. Now how much was in our model? Some was in it, let's face it. So far, it's a little bit more than we thought. And therefore, we are taking actions on the short term to avoid Having an issue on the front. On the other hand, we need probably to look into how much of the digital business that you do shipment, if you don't charge for the shipping then or you don't charge enough for the shipping that would be an issue. And therefore, Freight costs for us as for others, that will be the one which could be the standard one that For us, there should be special freight which has to be charged more systematically. We work on it, plus there is a model of the future, which would Reduce our freight by bringing the products closer to the customers so that customer would collect. There is a tendency In that but this is medium term, short term we had in our model and it has been a little bit higher than we thought. On the light, the lighting, Lighting beyond the fact that lighting is differentially due to the LED, it goes beyond that. It goes beyond the fact that we have reached the moment where the LED lengths And the replacement, as Richard speak now, we are going into less to be replaced. And for the one already installed, No replacement coming because of the length of life. There are still a few to come, certain Technology, especially in Europe, where the timetable tethers should be replaced by LED. But in the U. S, there is still a lot to be done, but the lighting is volume wise Not increasing a lot, price wise deflationary. And now it's all about lighting systems and solution. And we are participating to it. We have key vendors bringing solutions to the Light and Building Fair recently has It's all about connected lighting. It's all about lighting solutions, but the total industry has not yet set The price for how much to charge for a complete lighting solution, it's probably an element of the industry Well, we are no longer in the old model and not yet in the new model. It's probably a year where structurally, There is a lot to be fixed, and we participate to it. On one hand, we sell as much as we can, but we know that we have to bring Complete Solutions and brand new ones. And they are therefore, it's a sales and marketing to be put to the market. And lastly, I have a question on the wind in the U. S. Yes, it's a non renewal of the joint contract and that is an effect of minus 0.3% on the Q1 top line of the U. S. That will be a smooth of our time because we'll start to catch the bad effect in the coming quarters. Thank you. Thank you very much. The next question today comes from the line of Lucy Carrier. Please go ahead. Hi, good morning. And thanks for taking my question. I will have a couple. The first one is a follow-up on the previous question Regarding the investment impact from the margin, I understand that some of that impact is due to the fact that the Q1 It's typically quite a small quarter and we've also had less working days. So when we think of those impacts of investment During the rest of the year, are you expecting a similarly strong impact? Or in fact, you should have much better Cost absorption and the impact is kind of easing through the rest of the year. That's question number 1. Yes. Thank you, Lucia. I will answer on this one. Yes, We have the carryover of the investments we made last year and we continue to increase in Q1 2018. That It's on the quarter that, as you know, is the smallest of the year. So there is clearly an obstruction issue around that. So In the next quarter, this will be better absorbed by the top line. And basically, if you look at our decline in EBITDA of 30 bps, we can identify Couple of big building blocks. The first one is what we get from the additional top line That brings us an additional 40 bps on the EBITDA of this year. And then we have the impact of all the investments That is roughly the same amount, 35 to 40 bps headwinds on the EBITDA margin. Then we have the impact on the salary and benefits net of the couple of restructuring plan we have For 15 bps. And then we have the rest, which is a mix of specific Country situation, U. K, Norway, plus couple of one offs. We have a reversal of LCI bonuses last year, good guy last year that do not repeat. And all of that, the rest is roughly 20 bps. Okay. That's very helpful. So I understand that organically, Everything else kept equal just in terms of from your organic sales, the margin would have been up 40 bps. That's very helpful. My second question was around the guidance for EBITA specifically, adjusted EBITA. Can you maybe clarify the Starting point from which we should calculate the 5% to 10% EBITA expansion because I'm not sure Exactly where we start with the different restatement. And when you think of the bridge from this Q1 to kind of reach your objective, You may be pointed at the different element that you think are going to be a bit more positive to support you and if you see kind of a further risk. Well, the starting point is a comparable figure of full year last year, Which is the one that we put at the same exchange rate than this year and that we restate from the disposal of Southeast Asia. And when you put the plus and the minus, we are at €570,000,000 which is very close from the €580,000,000 We had end of last year. And the main component of the improvement we'll have in EBITDA is, of course, the traction on the top line Plus the various initiatives that will bring other profit, plus the fact that we have a couple of That will have a growing impact in the coming quarter to offset Some of the inflation we have in our cost, military and benefits. Thank you. And then my last question was just around the disposal program. I mean, I know you cannot necessarily give all information, but is it still on track to be finalized by the end of the year? It's still on track. We have a couple of tracks on the same moment. So It's nothing is binding. So it's too early to have some commitments. But so far, it is on track. Thank you very much. Thank you very much. The next question today comes from The line of Simon Tonneson. Please go ahead. Yes, good morning, everyone. My first question is just on the U. K. Obviously, growth rates have been there Quite slow for some time now and you've obviously flagged that the margin drag there. How do you see the remaining sort of 3 quarters as obviously comp starting to get a bit Easier still in the second quarter and whether you expect the second half to be sort of a similar weakness as I don't expect a lot from if anything from the market In terms of volume, because I don't see, let's say, a change in pattern From the demand side. On the other hand, Q1 was Hit by a few things. I'm sorry to put this because we should I don't want to use it as an excuse By far not, it's an element of life, but we had bad weather in the U. K. Early March that wasn't expected. And in the short Quarter, then if you have 1 or 2 day loss, obviously, you get immediately hurt by more than you thought, We should not repeat in the hopefully not in the spring summertime. And that would be I know that It's very sensitive. When a decrease in a decreasing market, when things like that happen, it gets it makes the shape even worse. This being said, we have done the restructuring. It's behind us. We are now in, let's say, on finalization, it's how much do we get from it? And the organization is done. The sales force is fully running in the combined way as we We said we get the vendor support and we are continuing, first of all, get growth more in certain Regions where they demand gain market share where we are low, that's the vendor support, which we do have And we will improve both in the concentration and in the margin we generate and where we would have a few Potentially loss situation, a branch here and there. Obviously, we will immediately take actions, up to what we have recently done, Closing 3 of them. On the total amount, it's not a major change, but this is how do we manage short term In a declining market in order to secure as much as we can the EBITDA. Thank you. And this is I would say, in UK, it's a bit early to have Result from that, but it was the last big country on which we put our common web shop, IBRIS, in the end of last year. So gradually and it's still a small figure, but we see some adoption of the disruption by our customer And this will help us in the next quarter, so. And yes. Thank you for this. And the second question just on your oil and gas related business. Been up again quite nicely. In the U. S. 10%, Canada up 9%. Can you just talk a bit more about the verticals that you're selling into here and how you've Seeing that developing and also whether you expect those sort of growth rates to continue as we move obviously into The latter part of this year. Well, first of all, we are we benefit from this in the maintenance of It's a single fast investment that these people have done. They're restarted. They're reopened. They increase And they need maintenance. We are not going to big projects. We are not going even if there are a few on the horizon, it's not the main thing. It could create a distortion of our activities, but we benefit from. Canada the Canada Canadian industry is more dependent than everybody thinks about it. And when oil and gas is up, we benefit in the oil and gas segment, but we're benefiting the industry SEER, more globally, automation and the rest. This is what's happening now. And in the U. S, yes, it has restarted. We have a few specialist branches, locations which are highly specialized and obviously they take their fair share of the market there. Houston is a good example, for example. But this do you have more to say Laurent? Yes. Canada is mainly on the midstream. In Canada, it's roughly 7% of our sales. In U. S, it is up and midstream and it is 6% of our sales. And overall, at group level, oil and gas is around 2.5% of sales. Appreciate it. Thank you very much, Paul. Thank you very much. The next question comes from the line of Alfred Glaser, please go ahead. Yes, good morning. A few questions. Could we start with price evolution? Could you give us the sales price evolution possibly by region excluding the copper effect, please? Yes. So the price evolution, excluding cable, At group level in the quarter, it's plus 1.2%. And by region, it is 1.1% in Europe, 1.6% in North America and flat in Asia Pac. All right. Thank you. And then I wanted to ask you on your guidance for this year. You indicated You plan to reduce the indebtedness ratio by the end of the year. And if I remember properly, at one stage, you said that you were targeting 2.5 times ratio. Is this still your target for this year? It has never been our target for It was a mid term target for the group. We didn't guide specifically on an indebtedness Because we want to and the Board has to have some flexibility in the case we could find bolt on acquisition, especially in the U. S. So based on what we have on hand, we said that we will deleverage compared to the level of 2.8% we had this year, But without any crystal figure. Okay. But assuming you don't do Any acquisitions? Do you think you could reach 2.5 times by the end of this year? It is too early, yes, but in that range, yes. Okay. And then a third question on your free cash generation. You said you would Chris, your cash conversion this year compared to last year. Could you give a bit more color on this? How exactly this is spreading into Improvement of operating cash flow and what would be the outlook for change in working cap this year? Well, globally, last year, it was at 56%, which is the ratio of the conversion of EBITDA into Free cash flow before interest and tax, and that was truly impacted by the increase in inventory we made last year. And we are at a point where we reached the right level, so it will just evolve with the top line evolution, so which we plan to be back to historical cash conversion, which are more between 60 we call cash conversion, which are more between 60% to 70%. And then there is yes, an impact Of the improvement in EBITDA through the guidance, you know, and also a good control on the working capital And probably a bit more CapEx than mature as well. Okay. Thank you. That's very clear. Thank you very much. Thank you very much. We have a follow-up question here from the line of Sebastian Grootter. Please go ahead. Hi. A question for Laurent, because you mentioned in the report that IFRS 16 will have could have a significant impact on the group financial situation. Could you give us some color on the expected P and L and balance sheet impact of this new norm you will adopt in 2019. Thank you. Yes. We have a very draft figure because everything is in process and We just elected for a tool to capture all our leads. And for me on an operational side, it will be also a good news To have a good grasp on how we are renewing our lease across and especially the branch Across the countries and on that side before coming to the accounting part, I think it will be a key lever because The Krita Morta is a winning combination. We believe strongly in the footprint of our branches, but It will be probably different branches, smaller in some area, bigger to close to big metropolitan area. So this tool will help us to capture any Renewal of lease, and we will have a more challenging debate with our country with that tool. Coming back to figure, It is important to note that in all our financing agreements, we have specific clauses whereby any accounting Evolution should be taken into account, especially on our leverage ratio. But from the preliminary A study we made, the impact on the debt is quite significant. It's around €800,000,000 Then we have a strong good guide on the EBIT Yes, because we have no more rent since we have we are carrying military assets. So it will be, yes, more than 100 bps positive impact on the EBITDA. And there will be an impact Positive impact on the EBITDA as well because you have the financial component of the lease that will now The financial charges. So it will be a couple of tenths of this. Everything is draft figure, But bad guy on the debt, very good guy on the EBITDA, good guy on the EBITDA. And at the end, it will have a slight negative impact on the leverage ratio of couple of turns we Thank you. And did you incur some costs due to the Negotiation IT in 2018 ahead of this application. Is it meaningful? No. Okay. No, because so far we don't so far it's mainly an accounting issue. It has No direct impact on the way we are looking at our IT contract so far. Okay. Very helpful. Thank you, Laurent. Thank you very much. We have a question here from the line of Andre Kukhn. Please go ahead. Good morning. Thanks so much for taking my questions, fitting in. Can I just firstly double check back to the profit bridge and the impact on margin in Q1 and how we can Take that forward through the year? So if we take the investment impact that you mentioned of 35 To 40 basis points, if we take that as €12,000,000 and run it as a quarterly run rate, would that be kind of a right way to think about it, While the others like salary and benefits of 15 bps should be the sort of 15 bps Per quarter as we go forward and obviously the others we can calibrate according to our top line assumptions. Am I in the right sort of framework of thinking here? Yes, the investment, there will be the phasing of our opening of branches. And with the guidance we give And the number that has been opened in Q1, it will be a probably investment will take a larger part. Inflation and restructuring with the phasing we have, I think it will be go slightly. The inflation impact will mitigate over quarter, whereby the investment one should probably slightly increase due to the branch opening. Thank you. So the branches openings, could you remind me how many did in Q1 out of the 20 that you planned for the year? Yes. Not significant, just one opening and 2 platform tours. But that's not Okay, great. Thank you. And apologies if it's been asked already, I got bumped off halfway through. But on the Middle East project phasing That impacted Asia Pac. Could you give more detail on just the magnitude of this? And if this is a Q1 effect, is that something that's Thanks, Aaron, for Leroy. Leroy, it's a large contract in the middle of the week that has a good impact on the top line. But as a great industrial one, it has it is at a lower margin. The cost to serve is also a bit lower, But it will run over a great part of this year. Got it. Thank you. And lastly, just a very broad question on the U. S. Construction cycle. Just would be really interested to hear how you view it at this stage and what you're hearing from your Suppliers and your customers in terms of sentiment and their kind of intentions and plannings, how they view it? Well, right now, first of all, from a customer contact standpoint, right now, there is no softening of any kind. They are project. They asked for many quotations. And by the way, Some of the people are really almost fully booked for the balance of the year in terms of job to be done. Therefore, we don't see short term slowdown. And In the regions where we are, we need to be I am not reflecting an entire U. S. Market. There are discrepancies by regions, but in the regions where we are and we make most of our business, we don't notice Slow down. We were hurt in the Northeast by weather conditions, but we were not hurt by lower demand. We can say that we don't we are not influenced by the trade war, especially the steel and aluminum. It has no direct impact. We don't Anything in China, we are purchasing and buying everything locally. And the other very important thing is the tax reform in the U. S. Giving a lot of money back to the company, and this will be invested probably in manpower, but also in productivity Tools and that is all the product we are selling. So on that side and we'll see through our Automation business that is posting quite interesting growth. Great. Thank you very much for your time. Thank you very much. We have another question here from the line of Tim Schulz Melande. Please go ahead. Yes. Hi. It's Tim Schulz Melande, Speck Hales at JPMorgan. I just had one sort of housekeeping question. You referenced GE And the change in demand, obviously, there are a lot of moving parts there. Just wanted to get your take. Is this a cyclical and therefore Temporary demand shift? Or is this something more permanent and more structural in perhaps the way GE is changing its purchasing decisions? Thank you. Well, Gie could answer better than me on what their I know where they reduced factories, closed factories, relocated, merged 2 into 1. Therefore, for me, it's not a short term aspect. For me, it's GE as a customer who will not come back to higher level. Now There could gain in certain businesses and we could benefit from as they grow, but really GE is a vast diversity of activities, and they have their own strategy. And they went through an entire Aviation plant, which has a manufacturing site and the main one is suffer from. This is when they stop activities or close down or relocate and put this, As I say, merging activities 2 into 1. And it's a re profiling of GE, Which for me make it a long lasting change in the demand. Therefore, we need to adjust ourselves. I take this for even, It's Quentin. It's like this. And nobody expected it to be done so quickly. A year ago, nobody was even talking about it. Now, G has its own strategy. We were an end supplier for certain products. Most of it was In the last 4 months of last year, and by the time we can compensate by developing other customers despite the 9,000 new customer, we have many dealers. On this particular Gxpro activity, this is where we registered the hit Got it. Very clear. Thank you very much. Thank you very much. Well, thank you First of all, for having been with us all day long. I would like to close with one comment. Looking at the first reaction after we issued the results this morning, I think there has been a little bit of misunderstanding potentially, which I would like to be sure it's not. When because everybody compared the 4% with the 4.3% of last year. For us, the 4% was our expectations, and it is our budget. And we knew we would have this. The 4.3% of last year had something to do with the base in 2016 and the 4% of this year Has to do with our reality of life. Therefore, I want to tell you that I feel being online with our expectation Because it was internally our plan, just to help you in measuring where we are. Thank you for your attention, all of you, and thank you for the quality of your questions. Thanks a lot. Have a good day. Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect. Speakers, please