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. If you'd like to ask a question over the phone at this stage, please press star then one on your telephone keypad. I must advise you the call is being recorded today, Friday the 27th of April, 2018. I would now like to hand the conference over to your first speaker today, Patrick Berard. Please go ahead.
Thank you. Good morning, ladies and gentlemen. Welcome to this presentation of Rexel's first quarter 2018 performance. Today I am with Laurent Delabarre, our Group CFO. I will start with an overview of the key highlights and detail our performance by geography. Laurent will present our financials in the quarter. I will then conclude confirming our 2018 outlook. After that, we will be happy to take all your questions. Our first quarter 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 key 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 three with the key financial highlights of our Q1 performance. Our sales of almost EUR 3.2 billion in the quarter were up 3.9% on a same day basis, rising in all three 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, most of which is in some markets. Recurring net income was stable at EUR 68.2 million thanks to lower financial expenses through our active refinancing operations and lower taxes. We improved our free cash flow by EUR 88 million in the quarter, demonstrating the strength of our model and confirming that we are returning to higher cash conversion rates. If you go to the next page, we have posted solid same day sales growth up +3.9%. All three of our geographies posted growth, with a particularly strong performance in Asia Pac. 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 cost margin. It is particularly satisfying to see that in the U.S., our strategy is delivering results. Our new regional and multi-buyer organization implemented recently, I may remember you that it was implemented in December, is also enhancing our performance, reinforcing our more customer, 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 resulting in the double-digit increase in sales up 13.3%, 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 term 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 saw some country-specific situations, notably a drop in sales in the U.K. and Norway, which we will detail in the next slide. Now let me go by geography. A little bit more detail. On slide seven, let's start with Europe. Sales in our biggest region stood at EUR 1.8 billion 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 down 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 one-third of our European sales, our revenue was 3.8%, driven notably by the residential and industrial segments, which were both up in mid-single digits. The efficiency of our business model allowed us to capture market growth. Scandinavia saw overall growth of 1.6%, reflecting a contrasting performance between countries. Finland posted double-digit growth of 15.2%, Sweden continued its strong growth with sales up 14%, while Norway was impacted by the loss of a large contract and adverse weather conditions.
Switzerland posted solid 8.7% growth thanks to solid momentum in the project business amid a competitive environment. The Benelux also grew strongly, with sales at 6.1%, mainly thanks to the Netherlands at 13.3%, thanks to our focus on the growing multi-energy segment. If you go to the slide after, North America. I am very pleased to share that our sales growth of 3.5% to a little over EUR 1 billion was driven by both Canada and the U.S. In the U.S., where sales were up 3.2%, we are reaping 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% in additional sales.
We are seeing the positive commercial impact of our new organization in eight regions, which we have been put recently under the sole responsibility of Jeff Baker, allowing us to reach more customers, drive efficiency, and increase collaboration between banners, which create opportunities to turn customers into multi-banner accounts. In terms of end market, residential is up in double digits, and commercial is up in mid-single digits. 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 power projects 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. Let's complete our geographic overview with slide nine about Asia Pac, where our sales were up in double digits and reached EUR 284 million.
Both subregions showed solid growth. The Pacific one was up 7.9% with growth in both Australia, where all three end markets showed positive momentum, resulting in 9.4% sales growth, and New Zealand, whose revenue was 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 large project win in the Middle East and strong automation sales in India. 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 non-material 0.1% drop in sales to EUR 3.3 billion. On a reported basis, our sales were down 4.2% in the quarter as a result of three unfavorable effects. First, currency has an adverse effect of minus 6%, mainly due to the depreciation of the U.S. and Canadian dollar versus euro. Second, scope had a negative effect of 0.8%, resulting from the recent divestments in Southeast Asia. Third, and finally, calendar had an impact in the quarter of minus 1.1%, 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, is 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% 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 base effect, while Q4 will be more challenging. On slide 12, we turn to our profitability by region.
Overall, with adjusted EBITDA of EUR 127.2 million. 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 investment last year in people and digital in a seasonally low quarter in terms of sales, as well as some inflation in our wages and costs. In Europe, growth margins 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 U.K. and Norway, and investments in people and IT, which offset strong operating leverage in France.
In North America, growth margin improved by 32 basis points to 22.8%, 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 is attributable to an OpEx increase related to higher freight costs and investment in our salesforce in Canada, which offset solid operating leverage in the U.S. In Asia Pacific, we saw a reverse movement. Gross margin fell 75 basis points due to a fading project in 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 EUR 35 million. On slide 13, we look at the bottom line part of our P&L. Let's start with our reported EBITDA of EUR 125.4 million, down 13.4%, including a one-off negative copper effect of EUR 1.8 million. Other income and expense amount to a negative EUR 7.4 million, including restructuring costs for EUR 6.8 million. We confirm our full-year restructuring expectation of around EUR 50 million for 2018. Our net financial expense improved to EUR 24.9 million, reflecting a reduction in average net interest rate 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 EUR 28 million 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 EUR 60.7 million, and our recurring net income was stable at EUR 68.2 million. 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 EUR 103 million, thanks to a saving effect in inventory build-up in 2017 in France and in the U.S., leading to lower payable. Our free cash flow before interest and tax improved to an outflow of EUR 119.2 million from an outflow of EUR 206.7 million.
We expect 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 23.1 million from EUR 25.5 million in the same quarter last year. We confirm our full year of 2018 CapEx should be close to EUR 135 million. Our net debt reduced by EUR 250 million, or 10%, to EUR 2.2 billion, 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 EUR 850 million from EUR 982 million, and also reducing the related cost. As shown on the chart, and thanks to our active refinancing strategy in 2017, we have no debt maturities falling due in 2018 and no 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 EUR 110 million. We also maintain strong financial flexibility with liquidity of around EUR 1.1 billion at the end of the quarter, including our undrawn senior 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, and our first quarter performance reflects 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 at exchange rates. One, sales up in the low single digits on a constant and same day basis. Two, a mid to high single digit increase in adjusted EBITDA. Three, a further improvement in our net debt to EBITDA ratio. With this, we thank you for your attention, Laurent and myself are now very happy and ready to take your questions. Thank you.
Thank you very much. If you'd like to ask a question over the phone today, please press star, then one on your telephone keypad and wait for your name to be announced. You can cancel the request by pressing the hash key. Once again, star, then one to ask your question. The first question today comes from the line of Sebastian Grutter. Please go ahead.
Hi. Good morning. First question on Europe. I understand the investment in digital. Should we assume they will keep going up in the coming quarters, or are you satisfied with the current level? Can't you accelerate the productivity gains to offset this? 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 it's a chosen, conscious decision to improve our digital content, number of customers digitally connected to us, and so on. Therefore, yes, it will continue throughout the year in term of investment. Your question about Germany. Germany is in a turnaround situation. We are finalizing the detail of the portion on which we will bet, 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. 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 frame, on which we decided to focus more heavily.
Germany remains a large and attractive country for the business. A core geography for Rexel. Yes, we have some loss-making businesses that we are currently addressing, and we have ongoing discussion with our [inaudible] if you're familiar with this practice, and that is why sometimes it takes longer than one could imagine. Germany is offering good market in industry, good partnership with key suppliers, and we are refocusing on this portion of the market.
How much of Germany is industry versus construction?
Consider that industrial products being sold to industry or to maintenance and so on. Industrial product is a good half of what we sell today.
Okay. Another follow-up on France. Slightly 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 and the first few weeks? Are we still in this 4% gain, of course?
I will tell you. France, everybody probably, if you take the numbers, especially in Q4, we had a very high growth rate. Yes, there is a good momentum. The market is good. We have the same footprint as in the last quarter. We have the same [test people]. 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. There are two things that, yes, there was a little bit of a weather, and I didn't want you to comment. Other people have done it before me. We have positive sales numbers with residential up 5.7%, non-resi lower, and industry up 5.1%. 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, there are places in the country, where there were some price battles, especially on the cables 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. 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 a lot.
We didn't want to emphasize too much on the weather, as it may be a bit an easy one. It's clear that in France, in U.K., in Norway, and to a lesser extent in the U.S., we had some weather impact. There is also the phasing of the Easter being in March this year. All of that has a slight impact on the top line. We see a good momentum in April on a catch-up in some of the countries. Globally at group level, the weather impact is circa 8 million EUR on the top line.
Thanks a lot.
Thank you very much. The next question today comes from the line of Andreas Willi. Please go ahead.
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 of what's going on there, and specifically for you between Gexpro, 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 pricing, gross margins, and how much did GE Industrial Solutions 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. First of all, let me make a comment which is not a cocorico comment, but which is a real fundamental one. For the first time, 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. 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 improve our service level, our relationship to the vendors. Now there are a few situations, which you mentioned some of them. There are a few situations which we still need to fix now.
Globally, the regionalization allows us to have a very effective, much better support from our vendors because they are regionally organized. Second, we will benefit our customer. We start very early stage from they can become a multi-banner, meaning what they want to get from one banner, they could get an alternative from another banner or complementary from other banners, which in the more customer, more SKU will help. One of the banner, Gexpro, obviously by its profile of the past and Gexpro GE, suffer 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 what we already had in Q4, but now we have in full, probably for the first half of this year, which is the GE as a customer.
GE as a customer, which is not GEIS, is down by 34%, plus it's missing sales of EUR 30 million, and it contributes to a -1.6% of the total U.S. sales. Okay. Absent this, because GE as a supplier, we were able to reach +8%, which contributes to 0.3% up in the total sales. It's really GE as a customer who is now the main issue. It's an issue of a customer who has reduced its activity, its factories, its plants, and as a result, being the first supplier to them, we have suffered from. Now, GEIS is still in the process of being acquired by ABB, and we wait for the antitrust authorities to release in order to improve the Gexpro network capability to sell. As I'm telling you, at least short term, very short term, we get better supply chain and availability of product by GE.
The big thing is GE as a customer. Yes, this is the only thing that really impacts Gexpro today. Otherwise, the rest is really accelerating in sales. We have put the eight regions recently under Jeff Baker. We have opened one branch, and we have made two Platt 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 benefits 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. 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 a 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 system beyond that in order to increase our margin. 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, one by one, by having an active pricing strategy beyond the price increase of the suppliers. Just to be complete, really.
Thank you.
It's Andreas, I'm sorry.
Thank you very much. The next question today comes from the line of James Tytler. 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 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? 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 freight is 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, but we will probably adapt certain of the 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. The freight is going higher and faster. 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 end, we need probably to look into how much of, for example, the digital business that you do shipment.
If you don't charge for the shipping, or you don't charge enough for the shipping, that would be an issue. Therefore, freight cost for us, as for others, that will be the one which could be the standard one that could be for us, and 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 should reduce our freight by bringing the products closer to the customers so that customer would collect. There is a tendency in that, This is medium term. Short term, we had in our model, and it has been a little bit higher than we thought. On the lighting. Wow. Lighting, beyond the fact that lighting is deflationary due to the LED, it goes beyond that.
It goes beyond the fact that we have reached the moment where the LED length and the replacement have reached its peak. 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 tells us should be replaced by LED. In the U.S., there is still a lot to be done, The lighting, it's volume-wise, not increasing a lot, price-wise, deflationary. Now it's all about lighting systems and solution. We are participating to it. We have key vendors bringing solutions, too. The Light + Building fair recently has shown that it's all about connected lighting, it's all about lighting solutions.
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 where 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 end, we sell as much as we can, but we know that we have to bring complete solutions and brand new ones, Therefore, it's a sales and marketing to be put to the market.
Lastly, there was a question on the wind in the U.S. Yes, the non-renewal of the wind contract, and that is an effect of -0.3% on the Q1 top line of the U.S. That will be smoothed over time because we'll start to catch the base effect in the coming quarters.
Thank you.
Thank you very much. The next question today comes from the line of Lucie Carriere. Please go ahead.
Hi, good morning. Good morning, 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 on the margin. I understand that some of that impact is due to the fact that the first quarter is typically quite a small quarter, and we've also had less working days. 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.
Thank you, Lucie. I will answer on this one. We have the carryover of the investment we made last year, and we continue to increase in Q1 2018. That is on a quarter that, as you know, is the smallest of the year. There is clearly an absorption issue around that. In the next quarter, this will be better absorbed by the top line. Basically, if you look at our decline in EBITDA of 30 basis points, we can identify a couple of big building blocks. The first one is what we get from the additional top line that bring us an additional 40 basis points on the EBITDA of this year. Then we have the impact of all the investments that we've roughly, the same amount, 35 to 40 basis points headwinds on the EBITDA margin.
The impact on the salary and benefits, net of the couple of restructuring plans we have for 15 basis points. 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 LTI bonuses last year, good guy last year that do not repeat. All of that, the rest is roughly 20 basis points.
Okay, that's very helpful. I understand that organically, everything else kept equal just in terms of from your organic sales, the margin would have been up 40 basis points. 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%-10% EBITA expansion? Because I'm not sure exactly where we start with the different restatement. When you think of the bridge from this first quarter to kind of reach your objective, can you maybe point out at the different elements 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. When you put the plus and the minus, we are at EUR 570, which is very close from the EUR 580 we had end of last year. The main component of the improvements we have in EBITA is, of course, the traction on the top line, plus the various initiatives that will bring other profit, plus the fact that we have couple of restructurings that will have a growing impact in the coming quarter, to offset some of the inflation we have in our cost, mainly salary and benefits.
Thank you. Thank you. My last question was just around the disposal program. 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 nothing is binding, so it's too early to have a firm commitment, but so far it is on track.
Thank you. Thank you very much.
Thank you very much. The next question today comes from the line of Simon Torrance. 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 factored the margin drag there. How do you see the remaining three quarters as obviously comps 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 the first?
I don't expect a lot from, if anything, from the market in term of volume, because I don't see a, let's say, a change in pattern from the demand side. On the other hand, first quarter was hit by a few things. I'm sorry to put this because I don't want to use it as an excuse by far. No, it's an element of life. We had bad weather in the U.K. early March that was unexpected. In a short quarter, if you have one or two day loss, obviously you
You get immediately hurt by more than you thought, which should not repeat, hopefully not, in the spring and summer time. I know that's very sensitive in a decreasing market, when things like that happen, it makes the case even worse. This being said, we have done the restructuring. It's behind us. We are now in, let's say, on finalization. It is how much do we get from it? The organization is done. The sales force is fully running in the combined way as we said. We get the vendors' report. We are continuing, first of all, get growth more in certain regions where there is demand, gain market share where we are low, get the vendor support, which we do have, and we will improve both in the concentration and in the margin we generate.
Where we would have a few potentially lost situation, a branch here and there, obviously, we will immediately take actions up to what we have recently done, closing three of them. On the total amount is not a major change. 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. The second-
I would say on U.K., it's a bit early to have result on that, but it was the last big country on which we put our common webshop, Ibis, in the end of last year. Gradually, and it's still small figure, but we see some adoption of this webshop by our customer, and this will help us in the next quarters. Yes.
Thank you for this. The second question, just on your oil and gas-related business. It's been up again quite nicely in the U.S., 10%, Canada up nine. Can you just talk a bit more about the verticals that you're selling into here and how you've seen that developing? Also, whether you expect those sort of growth rates to continue as we move, obviously, into the latter part of this year?
First of all, we benefit from this in the maintenance of existing or past investment that these people have done. They restart sites, they reopen, they increase. They need maintenance. We are not going to big project. 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. The Canadian industry is more dependent than everybody thinks about this. When oil and gas is up, we benefit in the oil and gas segment, but we benefit in the industry also more globally, automation and the rest. This is what's happening now. 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. But this.
You have more to say Laurent?
Canada is mainly on the midstream, in Canada, it's roughly 7% of our sales. In U.S., it is upstream and midstream, it is 6% of our sales. Overall, at a group level, oil and gas is around 2.5% of sales.
Appreciate it. Thank you very much, both.
Thank you very much. As a reminder, to ask a question, please press star then one on your telephone keypad. 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. The price evolution, excluding cable at group level in the quarter is +1.2%. By region, it is 1.5% in Europe, 1.6% in North America, and flat in Asia Pac.
All right. Thank you. I wanted to ask you on your guidance call for this year. You indicated that you plan to reduce the indebtedness ratio by the end of the year. 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 this year. It was a midterm target for the group. We didn't guide specifically on an indebtedness ratio because we want to, on the board, ask you to have some flexibility in the case we could find a bolt-on acquisition, especially in the U.S. 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 precise figure.
Okay. 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, but in that range, yeah.
Okay. Then a third question on your free cash generation. You said you would increase 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. That was strongly impacted by the increase in inventory we made last year. We are at a point where we reached the right level, so it will just evolve with the top-line evolution. Which we plan to be back to historical cash conversion, which are more between 60%-70%. 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. Probably a bit more CapEx than last year as well.
Okay. Thank you. That's very clear. Thank you very much.
Thank you very much. Once again, as a reminder, it's star then one if you would like to ask a question over the phone today. We have a follow-up question here from the line of Sebastian Grutter. Please go ahead.
Hi. A question for Laurent, because you mentioned in the report that IFRS 16 could have a significant impact on the group financial situation. Could you give us some color on the expected P&L and balance sheet impact of this new norm you will adopt in 2019? Thank you.
Yeah, we have a very draft figure because everything is in process, and we just elected for a tool to capture all our leases. And for me, on an operational side, it will be also a good means to have a good grasp on how we are renewing our leases across, and especially the branch, across the countries. On that side, before coming to the accounting part, I think it will be a key level because the click and mortar is a winning combination. We believe strongly in the footprint of our branches, but it will be probably different branches, smaller in some areas, bigger close to a 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 in all our financing agreements, we have specific clauses whereby any accounting evolution should be taken into account, especially on our leverage ratio. From the preliminary study we made, the impact on the debt is quite significant. It is around EUR 800 million. Then we have a strong good guy on the EBITDA because we have no more rent, since we are carrying utility assets. So it will be, yeah, more than 100 basis points positive impact on the EBITDA. There will be a positive impact on the EBITA as well, because you have the financial component of the lease that will now be a financial charging. So it will be a couple of tenths of basis points.
Everything is draft figure, bad guy on the debt, very good guy on the EBITA, good guy on the EBITDA, and at the end, it will have a slight negative impact on the leverage ratio of couple of terms. We still have to fine-tune the figure.
Thank you. Did you incur some cost due to the renegotiation IT in 2018 ahead of this application? Is it meaningful?
No.
Okay.
No, because 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. Once again, star one to ask a question. We have a question here from the line of Andre Kukhnin. Please go ahead.
Good morning. Thanks very much for taking my questions, fitting me 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. If we take the investment impact that you mentioned of 35-40 basis points, if we take that as EUR 12 million 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 basis points, should be the sort of 15 basis points per quarter as we go forward? 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, with the guidance we give and the number that has been opened in Q1, it will be probably the investment will take a larger part. Inflation and restructuring, with the phasing we have, I think it will go. The inflation impact will mitigate over quarter, whereby the investment one should probably slightly increase due to the branch opening.
Thank you. The branches openings, could you remind me how many you did in Q1 out of the 20 that you planned for the year?
Yeah. Not significant. Just one opening and two Platt counter. That's not a mathematical approach you should have. I mean, it's a phasing. We have sites. We know where we go, and we'll do what we said.
Okay, great. Thank you. 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 going to carry on for a little while?
No. It's a large contract in the Middle East that has a good impact on the top line, as a great industrial one, it is at a lower margin. The cost to serve is also a bit lower, it will run over late part of this year.
Got it. Thank you. 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 have project, they ask for many quotations. 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 a short-term slowdown. In the regions where we are, I am not reflecting an entire U.S. market. There are discrepancies by regions, in the regions where we are, and we make most our business, we don't notice slowdown. We were hurt in the Northeast by weather conditions, we were not hurt by a lower demand. We can say that we are not influenced by the trade war, especially the steel and aluminum. It has no direct impact. We don't source anything in China.
We are purchasing and buying everything locally. The other very important thing is the tax reform in the U.S. is giving a lot of money back to the company. This will be invested probably in manpower, also in productivity tools, that is all the product we are selling. On that side, 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 Andreas Pulver. Please go ahead.
Yeah. Hi, it's Andreas Pulver, Specialist Sales 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, sort of 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, GE could answer better than me on what their future plan are. I know where they have reduced factories, closed factories, really delocated, merged two into one. For me, it's not a short-term aspect. For me, it's GE as a customer who will not come back to a higher level. They could gain in certain businesses, and we could benefit from if they grow. Really, GE is a vast diversity of activities, and they have their own strategy, and they went through an entire restructuration plan, which has a manufacturing site, and the main one is a software firm. This is when they stop activities or close down or delocate and put this, or as I say, merging activities two into one. It's a reprofiling of GE, which for me, make it a long-lasting change in the demand. We need to adjust ourself.
I take this for granted, it's like this. Nobody expected it to be done so quickly. A year ago, nobody was even talking about it. GE has its own strategy. We were a main supplier for certain products. Most of it was run in the last four months of last year. By the time we can compensate by developing other customers, despite the 9,000 new customer, we have many deals on that particular GE Gexpro activity, this is where we registered the hit.
Got it.
We need to compensate.
Got it. Very clear. Thank you very much.
Thank you very much. There are no further questions. Please continue.
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 a misunderstanding, potentially, which I would like to be sure it's not. Everybody compared the 4% with the 4.3 of last year. For us, the 4% was our expectation, and it is our budget. 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. 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.
I 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 stay on the line.