Good day, and welcome to the Schneider Electric Half Year 2019 Results Conference Call. Today's conference is being recorded. The speakers on today's call are Jan Pascale Triquare, Emmanuel Babble, and Ames Bala. At this time, I would like to turn the conference over to Mr. Amaz Bala.
Please go ahead, sir.
Well, thank you, operator. Good morning to everyone. A big welcome to Schneider Electric's 1, 2019 results. The press release and the presentation are on the website. I'm sure you've seen them already.
To share them with us today, our Chairman and CEO, Jean Pascal Trequhar and deputy, CEO and CFO, Emmanuel Babaud. We'll go through the presentation in two parts and then we'll make sure there's enough time for Q and A. So with that, let me hand over to Jean Pascal.
Well, thank you, Amit. Good morning to all of you. Course, I'm very happy to be, with you today and to share a strong set of results and perspectives as we go forward into 2019. And without further ado, I'd like to move on and go to my part of the presentation. And then, of course, M and L will take over for The financial detail of what I will highlighted, I will have highlighted in the first part.
So moving on to to transition from the Capital Market Day, remind you that we have positioned Schneider over the years. In 2 major business, Energy Management And Industrial Automation, which combine into digital solutions for energy management and automation solutions for efficiency, answers and ability. On all of those business, serve the 2 major transition of the beginning of the century that our customers are facing 1,000,000,000 energy transition, the other one being industry 4.0. And we've done that deployment into those 2 base is very focused on 4 end markets, building, IT, infrastructure on industry. So when we look at H1, This strategy, this positioning is delivering fully.
Our two business are growing. Our two businesses are profitability expanding. So energy management, more than 1,000,000,000 in H1, growing organically by 7% profitability expanding. Industrial Automation growing by 1% 1,000,000,000. Those two business combine into a total business of more than 1,000,000,000 growing by more than 5 percent, 5.4%, while the profitability is reaching 14.8% margin expanding by 70 bps above the top of the guidance that we had given at the beginning of the year on margin growing, in fact, double digit organically more than 10%.
So if I look at the headlines, of financial redlines of the first half. It's about strong revenue growth, sustained profit momentum, and strong shareholder focus, which if you take a longer view, put us exactly in the right trajectory to deliver on our ambition to increase the profitability of the company by repositioning it by 200 bps over the next 3 years. So strong revenue growth, I said it, 5% revenue organic growth, 5.4% organic revenue growth, supported by the main pillars of our strategy. A continuous growth on our products, shorted on the largest network of partners in the world, plus 4%. But then our gross booster starting with services plus 8%.
Software up double digit. It's about AVEVA, our sister company in the field of software, but not only AVEVA. There is everything that we do in software in the rest of Schneider. Digitization, mostly powered by EcoStruxure, which is growing above the group average And although it's not strictly rated by growth, we are working on the 4 pillars of our strategy, which is better systems, executing better on projects on equipments. On there, the priorities about profitability.
And once again, we improved the profitability by 100 bps in H1. 2nd element is working on the profitability of our growth, making sure that these growth drops through into profitability. So adjusted EBITA growing by close to 11% Adjusted EBITA margin progressing by 70 bps, again, above the top of the guidance given at the beginning of the year. Adjusted net income also growing double digit. And this should take longer view to performance over 4 years.
It's an increase of the margin by 330 bps organic and 230 bps reported, which again puts us right on track or right on track to achieve our ambition of 200 bps of improvement. In terms of margin by 2021. Finally, our focus on shareholderizing 1 of the great achievements of this 1st alphys cash flow generation which confirm the signature of the financial results. Cash flow multiplied by more than 2 respects to last year At the same time, we deliver on our commitments, share buybacks that we started after the vote at the AGM, 80,000,000 just started but more so a combination of acquisition, a milestone for acquisition of Larsen Toubo, which is the approval of the CCI, the competition commission of India, but also a continuous work on disposals with Pelco on the US panels that we are dragging on what we are doing in automation in the U. S.
And at the same time, remember that 2018 had been landing a few very important acquisition for us on both AVEVA in software on ASCO in Secure Power delivering double digit growth in H1, not to mention that IG X AO is scoring a very honorable 8% in the field of design software. So moving on to go into the detail of our strategy. You remember that our strategy is very simple. It's about more products, more services, better systems and more digital. We are launching each one more than close to 60 new products.
A few examples here in the field of automation in the field of energy management. Most services, again, 8% growth. You remember that there is a lot of potential short behind services, we have barely tracked 40 percent of our installed base, serving less than 10, so we keep growing there. On it's not only about break fix services. It's about using digital to increase the value of those services.
One of the example is the deployment of asset advisor, which is an analytic on BASF plants, which help them doing predictive maintenance and it is a combination of our edge control together with analytics as well as an example of billing adviser deployed in the University of Iowa, helping customers to reduce their operating costs on doing their, again, predictive maintenance. And better systems really on a focus on cross selling, systematic cross selling on better project execution or bundle execution on leveraging more and more our partners as we engage into those systems. Digital, of course, is a big part of our strategy on another first half or another half of contribution to growth. More advisers that means more modules of software that plug into the data of our products. You have, for example, Sierra asset on the management, that means assets digitally connected to our cloud for the account our customers, 2,400,000 assets connected at the end of H1 accelerating in terms of growth plus 40% And of course, we've been already quite public about the launch of Exchange, which is our marketplace connecting users, connecting assets, connecting developers on connecting integrators, which keeps developing since its official launch in Hanover, in April.
So more than 45,000 registered users, 23 communities, 200 apps developed by, partners of Schneider or ecosystem stakeholders on the base of EcoStruxure. And then strong performance in software. So of course, AVIVA has been one of the most striking, successes in the industrial software in the world, not only really delivering a strong performance, but joining the FTSE 100 in H1, then it's not only that. It's IGx AO I spoke about it with a growth of 8%. It's about us acquiring the rest of our smart grid operation, that, that we have developed, which is, which has been qualified by analysts as one of the best software suite for smart grid in the world on energy services project gaining more and more traction.
What we see today is that level 2 and level 3 is controlled on software levels of EcoStruxure are growing, of course, faster than the group. Few example, I won't dwell on them. They are well documented on our, on our, on our website. But while one example is what we do in a major people in the Middle East where we automate the all power distribution together with the whole building control system to a low for our customers to have a much better reliability, which of course is a paramount value in a hospital, but also energy efficiency on predictive maintenance to avoid power tejas. Singapore, Mariana Bay Sands, which is one of the biggest CASino on Entertainment Center, flagship place of a landmark of Singapore, where we are helping Marina Basin's manager better on the Alberta Center, which, of course, is very critical.
Argentina Buenos Aires, with modernization and digitization of transportation, which is always an issue in very large metropolis where digitization brings savings on maintenance and savings on energy. And finally, what we do in hoisting shop in Bao gong and Wu gong in China in a very demanding industrial environment, bringing 10% productivity. Always marker of Schneider is our commitment to sustainability on the objective we give to ourselves in the field of sustainability So this is completely reported and detailed, at the end of the first half and we are above our targets. I would say it's a big commit of Schneider, of our network, on ecosystem of partners, suppliers, on all of our customers to work together on that subject. Which entails, by the way, or a lot of recognition in multiple dimension.
1 of, the one we are the proudest is is that continuous progress with Gardener in the field of supply chain recognizing particularly our achievement in digitization of supply chain making it very pragmatic, very economically profitable and to the service of the operators of our factories now that new generation of digitization being deployed in more than 60 factories in the group and some of you have been visiting some of those sites in the past month. So now going in a little bit more into detail, and Emmanuel will drill even 1 level more in into the detail of what we see in the business performance of H1 electrification, which is a leading franchise very bad geographically, as you can see here, growing, delivering another stellar first half for half of the year, 7 percent organic growth, an EBIT margin that 17.6, improving by 80 bps organically. And what we see is a strong growth across the portfolio across end markets and regions, but with a very strong contribution of North America, which is of course our first market on a market where we have a deeply rooted presence on a solid presence, which is executing on a strategic plan over the years fixed several years before.
So I think we are getting market share there. Asia Pac still has a very strong engine, very well balanced between China, East Asia, and on India. The data center segment which is one of the applications we serve is growing strongly in large but also in small installations as well as edge installations. We are registering a high single digit order in industrial segments in cross setting together with what we do in Industrial Automation. One of the recurrent strong points of what we do here is our performance in homes, small building, on electrician sector, you know, the plugs, sockets, what goes into the basket of the accretion, which once again is growing mid single digit, up across all regions Commercial Industrial Building remains strong on benefit from what I illustrated a bit earlier in the hospital segment in Middle East of that integration between electrical distribution, electrification, automation, power automation on building control, total building control, ASCO delivering double digit growth, which is really promising after 1 year in the company on services coming as a strong support of our growth across technologies up high single digit.
When we look at H2, while it remains very positive commercial and industrial building remaining with a great outlook across geographies, Our unique and integrated energy management offer completed of automation is, is re supporting our continuous growth in data centers. Residential, as I said before, has been growing mid single digit for now, some years on the remains a very strong point of developments reported by the launch of many new offers On infrastructure, on industry remain well oriented for us as we grow cross selling between what we do in automation and especially with the acceleration of late cycle and electro intensive industries as we go forward. Looking geographically, so the red means a proportion of the turnover done in every region, the green means the growth. You see that once again, we benefit from our balanced geographical exposure, here, very strong of North America. The only, a negative point here is Mexico in Bus Energy Management And Industrial Automation.
Rest of the world all good except Middle East Russia being stable due to sanctions, but the rest is, is growing. Particular satisfaction for us is to see South America back to growth and development after many years of more difficult situation. Europe, really good, being a solid engine of growth, which, for all the Europeans is motif of satisfaction and pride after many years of, of more difficult situation. The only negative here is that you see is France, But France is mostly due to utilities, I mean, to repositioning on the utility market. The rest, construction residential industry on infrastructure is doing very well.
Asia Pac, very balanced across geographies. Now, going into industrial automation, it has been a bit more tamed in H1. After if you remember, fantastic 2018 on especially the first half of twenty eighteen, but they are the rebalance thing of our portfolio, which is if you want to simplify 50% on discrete automation on 50% of continuous process is working very well. We are for you. So organic growth at 1% adjusted EBITA margin 17.6% even with a more, with a lower gross progressing by 30 bps in terms of profitability.
So again, we benefit from the balancing of our portfolio The demand in process on hybrid market is continues to be positive with double digit orders growth. Some of the projects have been phased outside of H1 into H2. So that has impacted a bit, a bit Q2, especially especially in North America. We have a slowdown in the discrete, on the specialty machine manufacturer which is traditional strong point of, of Schneider. The US activity in panel has been sold in Q2, which is a good a good thing.
Then we have a good, we keep progressing in developing the joint value proposition between Aviva and the Schneider team on the cross selling is working very positively for both companies. How at the same time, services are also there, again, a strong support to growth for industrial automation. As we expect to continue in H2. At the same time, we see more projects coming for real and for execution and for bidding. From our order book in process on hybrid industry.
And there, we benefit from the unique combination of what we do in automation in Conforce as well as what we do in software with Aviva principally. So with that, we go into more detail about the geography, while North America 21% negative in, in H1 really impacted by Mexico on another part, which is a base of comparison. That we had in 2018, particularly in some process automation projects. Rest of the World positive except Middle East, which is a concern together with energy management, Europe doing well across geographies in an environment impact by a discrete automation softness on Asia Pacific impacted by a flat market in China. But growing in India in South Korea, South Korea, the other negative impact is really, is really Japan.
Which has been suffering in H1 in Industrial Automation. But overall, the whole portfolio growing on profitability, developing and encouraging signals at the level of hybrid and continuous process. With that, that concludes the overview and I'm handing over to Emmanuel who will enter into more detail.
Indeed. Thank you, Jean Pascal. Good morning, everybody. Great to be with you to comment our H1 numbers. And we're going to start of course, by digging a little bit more on our sales.
So our sales reached 1,000,000,000 in the first half. It's a 7.2 percent growth. We benefited from a positive Forex impact almost 2% and close to 1000000 positive. That's largely coming from the dollar appreciation versus the euro. Now, when we look at the full year, we are staying with this vision of 1000000 to 1000000 positive, that means that we expect Forex to remain positive on the top line on the second half of the year.
When we look at the impact at the level of the margin, the adjusted EBITDA margin, we are flagging an expected impact around minus 10 bps at the last communication, it has proven to be a bit more negative than what we thought in H1. At minus 30 bps. Now we expect a better H2 in that regard and we are now looking at the bracket between minus 10 and minus 20 bps negative impact coming from Forex on the adjusted EBITDA margin. So scope impact is very limited that the last few months of Aviva and the beginning of the impact of the disposal of Palco and the US panel. And then when you look at the growth by region, what the great news is that there growing and quite nicely.
I mean, we are ranging between 3% to 9% growth in this H1, which shows our capacity to really see the growth wherever it is in the world and benefit from the strengths of our portfolio. Most impressive growth of course is North America, 9% actually in Mexico, and I will elaborate on that has been even more down, so that in that the U. S. Is flying higher in H1 than the 8.8% that you have here. Great news coming from Asia Pacific, 5.7%.
We know that there were question mark at the beginning of the year on the growth in China, actually China has posted another nice quarter of growth in Q2 and is growing around the average of Asia Pacific, but China is not the only country growing in the region. You have India. You have Australia and you have many countries in Southeast Asia, which are doing overall well. Rest of the world, at almost +4 percent growth, you're going to see it's a mixed bag with some country doing well. Jean Pascal commented great see South America accelerating Africa doing well.
It's more difficult in Russia and in the Gulf. And then Western Europe, which is, I would say, where we were expecting Western Europe, but it's good to see that it's still a kind of a not stable growth at almost 3%. And you will see that mini geography actually did relatively well in the H1. Well, precisely, we wanted to elaborate a little bit between energy management and industrial automation on what we are seeing by region. And starting with an energy management, the North American number obviously stands out.
I mean, plus 12% And then you can expect that the US was even above, this, this average. It shows the quality of the growth, which is really coming from the fact that all green, all lights are green, really, in H1, in the U. S. So we are growing in the residential business. We are growing in the commercial and industrial building.
Data center has been good, but we we have also some good infrastructure contribution and ASCO's cost is a big satisfaction. So that's great to see North America as that level. Asia Pacific at +7 percent has also done a very good X1. I talked already about China and the very nice performance. Globally in construction and with a very nice project here again in infrastructure.
India, despite election time, are not that favorable for the country, delivering high single digit, and I talk about many countries in Southeast Asia and Australia doing well for energy management. Rest of the World, plus 4%, dynamic growth, South America, Africa, Central And Eastern Europe, And really here, it's about Middle East on utility market. Sorry, so the Arab utility market Middle East globally down and CIS down also, which have been more difficult but good to see that the pluses are significantly bigger than the few headwind that we have. Western Europe at +3 percent here again, you know, always quite mark on what's going to grow or not in Western Europe. And as you can see, in fact, we have apart from France, many big market doing very well on energy management H1.
I mean, I could mention Italy, the Nordics, Germany, but even the UK, despite the uncertainty around Brexit, doing well, and that has been a nice contributor to the growth for the first half. Moving now to the Industrial Automation Performance. It's a bit more contrast that at the end of the day, you can see that 3 out of the 4 regions are actually growing, and the only negative year is North America, And in fact, when you look at the U S, the U S have been stable. So it's really Mexico because of the uncertainty that we've all seen which has been really down. U.
S. Stable. And in fact, the underlying trend is even more positive because we had some very icons in the Process Automation business in Q2 in the US last year, we are indeed seeing a Discrete Automation business that is slowing down, notably with the OEM, but we see a positive underlying trend for post automation and that should really show up in the 2nd part of the year. Rest of the world nicely, positive and here, we see both actually discrete and processed growing in the region Western Europe is positive and good to see that France, Germany, Spain and UK have been growing. So that certainly is a success that we are facing in our targeted segment.
And I couldn't mention food and bev, pharmaceutical, or water and water treatment. And on Asia Pacific, China stable because of OEM, many other places in the end market have been growing, India nicely growing, and Japan was really the negative part of the picture in this first half. Moving to the priority, Jean Pascal, a reminder of the priority. Product 1st 4% where we know that as we progress through the economic cycle, it's normally not favorable for the product. Well, we still managed to grow a nice 4% which show, I think, the strengths of the innovations, the differentiations, the strengths of the breadth and the depth of the portfolio, which managed to grow even when the environment is less favorable.
System growing at 8% that was expected. The cycle is progressing. We know that as we go for mid lead cycle and market progressing, it's coming with more system. The good news as you have seen is that we are improving the margin on system as we grow this business at a stronger pace. And then last but of course, not least, services and software almost close to the double digit growth.
We elaborated already on the very strong performance on software, but good performance on services as well. And we are really progressing on the coverage of the installed base and on developing the different type of services among our customers. Now, beyond the top line, let's move at the analysis of the very nice progress that we've made on the margin and it starts of course with the gross margin. It's another period of nice growth for the gross margin moving from 39.1percentto39.4percent and here really you have 2 big driver for the growth. The first one is the one that you would expect productivity, which is contributing plus 1.1 percent of gross margin.
That has been delivered despite negative impact coming tariff. Inflation is still there and we have been under pressure with some of the supplier renegotiating under pressure in the middle of last year. Still there. So it's still an impediment, I would say, to generate the full potential on productivity. We expect that the old 2019 is going to be, difficult in that respect.
And as already shared with you, I think we are looking at 2020 for a new acceleration on productivity. The very nice, powerful driver here is, of course, the net price, which is contributing 80 basis points to the gross margin improvement and it's a fantastic combination of the success of all our actions on price. I mean, look at the impact of 115,000,000 positive close to 2% of positive impact on the transactional. That's really the carryover and the positive holding up to price increase. That we delivered already in the 2nd part of 2018.
On top of that, of course, we are held by less unfavorable evolution of raw mats, which even turned a bit positive. Now, when we look at the 2nd part of the year, we're going to keep pricing up, but the environment on inflation has changed a little bit. So still price up, we don't expect it's going to be at the same level as in H1. And on raw material inflation, we believe that it's going to stay positive and we see exactly what is the magnitude of the positive number. On the mix and now I'm turning to negative things that was expected 60 basis points negative.
It's a natural evolution through the cycle More system, even if we improve the marginal system, they have mechanically a negative impact on the mix, plus a few negative contribution coming from the evolution by geographies. Then you have the usual negative, we keep increasing our R and D effort and innovation. It has a negative impact on the gross margin and we still have labor inflation. Then the ForEx minus 0.3. I mentioned the fact that we expect a better ForEx environment for margin in H2.
And then on the other negative year, that's largely taking from some technical risk and depreciation of inventory that we have had to book in H1. Good to see once again the trajectory, I think it's really important to see the consistency and the continuation of what we are doing. We've been growing, if you just look at H1, 240 basis points, the gross margin over the last 5 years, And that's really showed the fact that progressively we bring more innovation, more digital, more differentiation, more added value, to the customer. You add that, you know, better environment for pricing. And I think we probably did better than many of our peers in that respect, plus still good productivity.
And then of course, last but not least, we are working on portfolio optimization. That is really what is driving this very nice progression through the last 5 years. So moving now to below the gross margin, which is reaching 1000000000 That's of course about SFC Management. And as you know, we know SFC Management for us. We don't see that as a cost.
Most of this SFC are really the investment that are making for the future, whether in digital, in skilled of people, in capacity to grow services in marketing. And we have this game of investing for the future, but at the same time, we contain the growth of the SFC at a lower growth than the top line to generate an improvement of the SFC on sales ratio and it's quite a nice organically 50 bps on this period with good productivity that we generate on, our SFC. We shared the ambition to accelerate that over a 4 year period, but of course, we have started in H1. That gives an adjusted EBITA of almost 1,000,000,000 at 1,000,000,000 it's up almost 11%. The margin is up at 14.8 percent organically 70 basis point And the good news is to see that the two businesses have been nicely contributing to this margin improvement.
No, I want to give a 2 minute lecture, on IFRS 16. I want to be very short and I don't want to burden you with that, but you know that we have this impact and I want to make sure that everybody understand what's the impact of IFRS 16. So this new accounting norm, is telling us that now we have to book the long term lease as an asset and the liability. So we are taking this lease, mainly the rent, you know, for all our offices and some plants, as both an asset and the liability for roughly 1,000,000,000. Then what the norm is telling us that that means that you delete the rent that we are paying and you replace it by amortization of the asset that you have been booking in the balance sheet and that is generating a 10,000,000 net positive on the adjusted EBITA.
Then you book the cost of the debt, the new debt that you have, the 1,300,000,000 in the financial income, and it's a cost of 20 1,000,000. So that means that the next, the net impact as you can see on the net income is absolutely marginal, it's 1,000,000, And then you have the impact on the free cash flow because as you work the free cash flow deducting the amortization, what you've been amort amortizing is added if you want to the free cash flow and we have a positive contribution of 1,000,000. Of course, we will be more than happy to provide more color on IFRS 16. If after this very short expose, lecture, there is some question mark. Moving now below the adjusted EBITA and probably a couple of lines on which I would like to draw your attention.
The first one is the a negative amount of 346,000,000 on other income and expenses. This negative amount was expected when we announced a PELCO disposal with told you that's coming with a loss up to 250,000,000. It's a bit below that eventually, but on top of that, We have some impairment of R and D, some one off impairment and the traditional cost linked to M and A and integration. Grossructuring is absolutely in line with the expectation and what we shared with you as the last capital market day. No specific comment on, amortization of intangible.
One word maybe on, financial cost. 1 1,000,000 it would have been 1,000,000 negative only without the IFRS 16. I think we see now gradually period after period, the decrease of the cost of our debt and probably the most symbolic thing is that a couple of weeks ago We've been issuing for the first time, of course, in Schneider history, the 1st bond, 6 year maturities, slightly lower than 6 year, with a negative fixed rate negative 4 basis points. So, we are being paid today to borrow on this kind of 5 to 6 year maturity And of course, if that continues, that means that we can expect the financial cost line to keep decreasing. Income tax is absolutely in line with expectation and we continue to guide to a 22% to 24% range for the year.
This continued operation is not material. And equity investment in minorities. In fact, the number is more or less the same, but you have 2 diverging element. On one side, the profit of Delixier keep going up. Therefore, the positive year keeps going up with a very great performance of Dalishi.
And then of course, the Avedva profit are also going up and here we have to give back to the minority shareholder, the share that correspond to their minority stake. That given net income of 9 1,000,000 marginally down 3%. Actually, without the one offs that I commented, we are growing the adjusted net income by 10%. And the adjusted earning pressure 11%. I would say absolutely in line with the adjusted EBITA.
The other very good news this H1 is of course the very strong cash flow generation. I think we guided at the beginning of the year on the fact that we had some significant expectation for cash flow generation for the year. Good to see that we have a good start in that respect. It's of course start with the growth of the operating cash flow. We kept the capital expenditure under control.
There is a little bit of increase on the R and D CapEx and also some investment on capacity, but we absolutely stick to here something which is going to stay around 3% of revenue. So there is absolutely no change in the model and the good news here is that we manage on the working capital to have a much more control growth in H1, you know, that traditionally you grow the working capital inventory receivable in H1 and we decrease it in H2. Well, this year versus last year, we had a better management and the capacity to better control notably our inventory. So that gave a free cash flow before IFRS 16 north of 700 with the IFRS 16, 837,000,000 and show the quality of the earning in H1. Dividend, no surprise.
Acquisition, it is a net between the few acquisitions that we have made us or Aviva in the first one, in the first half, and the PELCO disposal Then on the net capital increase, that's the share buyback. And then in FX and other, you have the IFRS 16 impact, the Forex impact on the debt for the part and what we decided to pay on our pension deficit. That gives a debt of a 1,000,000,000 at the end of H1. And of course, as always, we expect part of the cash flow generation for the full year to be skewed towards the 2nd part of the year. Here, just to show that, you know, beyond the FY 'sixteen, That's really a record for cash flow generation in H1.
And I think that was important to highlight it. We've been also very disciplined in capital allocation. You know that we got the approval for the LNCD, and we expect the closing in a few months whether towards the end of this year or beginning of next. We've been making some a nice software acquisition with Alpiq and we've been taking full ownership of the ADMS software. So software for the smart grid We took a majority stake when we made the Telvent acquisition in 2011 and now we have 100% ownership.
So we'll fully consolidate that business in the coming periods. Good news to see that the most recent acquisition are great success and they are growing double digit in Q2. And on the disposal, we have already achieved 1,000,000,000. So, you know, versus a 1,500,000,000 to 2,000,000,000, it's just the beginning of course, but we clearly have started the journey and we expect to do more in H2 and in the coming quarters. That finishes my presentation.
Glad to you, Jean Pascal. Short pause on Schneider White, which is a product you see here, which is a core of our automation system on noticing that this is a forecasted temperature today in Paris, which shows some globalization of temperatures with Hong Kong or convergence of temperatures. And now moving on to the fully a target where we are upgrading our targets. What we see that in North America, we continue to see a favorable environment, especially we integrate that H2 has a more demanding base of comparison in energy management in automation, what we see that process remains positively oriented, while discrete automation markets remain soft. In China, we see a continuing OEM soft demand, but we see growth in the field of construction, infrastructure and parts of industry.
Though we think that construction could be a little bit more moderate in the next coming quarters. We expect Western Europe to keep growing at a moderate pace. And we expect also some new economies to perform well, especially in Southeast Asia and India, while some regions like Russia and the Gulf remain, challenge. So this, looking at all of this, on, on being really attached to keep in the trajectory of the 200 basis points margin ambition for the next 3 years. So that's the improvement that we want to score.
We increase the guidance, wanting the EBITA to grow between 6 to 8% organic. And we do that by prospecting a growth at the top of the guidance in terms of organic growth 4 to 5. So shrinking the internal there on, targeting also the upper half of the margin improvement target from 20 to 50 bps, prospected at the beginning of the year. So that concludes the presentation. We are now, of course, open for Q and on Amit will lead this session.
Sure. Thank you. I think just before we set it up for Q And A, just a quick reminder that we have the date in the calendars on the screen now. So we have the road shows coming up. A couple of points to highlight.
1, we will have an update on sustainability topics in September and then followed up by our Innovation Summit as well. So with that, let's open it up for Q And A. I'm sure there's a there's a list, which is already there. We'll take we'd like to request that we'll have one question per person and then we come back if time permits. So with that, let's open it up to the first question, please.
Thank you.
You. We'll now take our first question from Andre Kukhnin of Credit Suisse. Please go ahead.
About any changes in channel behavior, in the second quarter? Did you see any, stocking decisions from your distribution partners that affected performance or any indications of that And also if I just may follow-up on your comment on China construction that you expect that may moderate Could you just share with us some color on why you're seeing that at the moment? Thank you.
Yes, Andre. On the attitude of channels, we are exiting 2018, which was an year of accelerating growth. Actually, I think it was an year of kind of transition from low growth years to, much more consistent growth. So we've seen not in a systematic manner because I think distributors are becoming very professional and we are really working with them to do that so that we optimize the whole supply chain between the 2 of us. But we've seen in some places, some selective destocking, to because they had been really stocking a lot last year on, on running after sales increases.
So we've seen at the beginning of the year some selective destocking happening on re adjustment of stock. Which is absolutely normal when you have those variations in this case, but nothing fundamental. What I would say also that we probably, we had mentioned in the Capital Market Day that we see more and more digital interaction, which is positive for all trade because that means we get more shared access together with our distributors. Each of us bring in added value, to our customers on being able to work much better together on on our on our common customers. Speaking about China, well, we one common sense observation is that we are comparing to high base of comparison.
Of course, we've seen a little bit more softness on the residential side but still a very strong business or sustained business in everything, which is commercial and industrial. Well, but the first reason is also to consider that we are now comparing to high levels. But still, we see, market, which is solid on keeping on developing.
Our next question will come from Andreas Willey of JP Morgan. Please go ahead.
Sterling Manuel and Amit. My question is on the automation growth, particularly on process automation, you highlighted double digit order growth. Which still looks very strong given that market also has, maybe slowed a bit. Could you give a little bit more information where coming from is that a couple of large orders are more broad based and which industries are still driving that? And on the other side, on greet automation, have you noted a big change in kind of June, July versus what was before?
Or is this just a kind of a more steady slowdown that we have seen before already?
So, Andreas, thank you for that question. I really, what what I was mentioning before is that we have, we have made a lot of strategic movements in the past years to balance our portfolio between discrete and, process and therefore reinforcing our position at the crossroad of those 2 sectors in hybrid automation. On, on really, I'm really happy we did it because it's in that kind of period that it's really important. So we see softness at the level of Discrete Manufacturing, which is really a collateral of the trade tensions. I mean, many of the customers need more capacity, but they are waiting to see where they have to put that capacity.
Would they be Americans? Would they be Chinese on, of course, Southeast Asia is probably benefiting today of that time of uncertainty. But this is pushing down on, on discrete automation. On process automation, frankly, the key industries which are, reinvesting or restarting projects are the typical oil and gas chemical but it's a broader base. I mean, we saw, we see also usage of our, of our technology in wastewater, which is developing all over the world.
In, M and A, we're speaking about that in hybrid places like CPG or so, which are using that broad thing. And I wouldn't say it's a bit of very large projects, which is not the typical positioning of Schneider, but it's more a broad base of smaller on medium projects, which we have been working on for long term. This industry has been not investing for quite long period. And you know that if you don't invest in oil and gas to make an example, then you will, your capacity would so far. I see also the industry really working on digitization and from that point of view, having Avila as a partner in engaging together is really important because In those times, people are looking at efficiency, preventive maintenance are all struggling to find enough competencies on the shop floor So everything we do in asset performance management, also our digital tools to help the operators is more productivity on very simply in many cases helping to find people that they can't find physically in countries where they're full employment, not always the right level of preparation of competencies.
So we see the order book fitting. It's quite balanced on the, we've seen some phasing to H2 because Comms says that politically the world is particularly serine at the moment. But at the end of the day, those projects are here on, on the should we should start bidding as we go forward.
Right. Thanks Andreas. We'll take the next
question.
Not so I wouldn't be singling out June. I think pretty much, a consistent quarter.
All right. We take our next question, please.
Our next question will come from Ben Guglou of Morgan Stanley. Please go ahead.
Well, thank you for taking the question and morning everyone. I guess sort of 2 kind of interrelated questions coming back to China, what how are you seeing different end markets evolve in industrial automation. Are there any particular areas of strength or weakness? Where do you see what's best and what's worst if you like at the moment. And I guess just stepping back more bigger picture Jean Pascal, what is your impression or what is your view around the longer term effect on the automation business of the trade tension?
How significant do you see this being over the next 6 to 12 months?
Yeah, Luke, Ben, when you look at China, there is a market, on on at the end of the day, 6% growth on such a large economy is not a small number, actually, because that number is applied to a larger, on larger economy. I think one of the strengths of Schneider is to have defined our strategic play a long time ago on we are everywhere in execution of our strategy. So the all teams are trained to cross setting market coverage, coverage of secondary cities, coverage of smaller customers who are looking for digitization. So one of the strengths we have and we've been developing during that if you remember, our Capital Market Day, the scale period, remember, build a portfolio, integrate on scale. That we are fully focused on a very consistent execution.
So In China, when, what you see that is one of the largest economy of the world in physical terms, probably in many sectors, a lot economy of the world, which is developing systematically, which has over time become more self centered on its consumers, on its domestic economy and creating its own space of exports around the Belt And Road, And we've been participating or immersing ourselves with many partners there again, the characteristic of Schneider, which is that we operate preventative with partners local partners is helping tremendously. So, what we see is that the places which are developing the most in China are the places linked to process there again or linked to infrastructure where we combine electrification. Or energy management on automation into integrated solutions. It's not completely industrial in some cases, but it's actually a place that is using massively, industrial automation. No need to remind you because you know, very well, Schneider that we are not exposed to automotive.
By choice, which is probably an industry, which has, which has suffered. Now when you speak about the long term effects of the trade tensions, or it pushes China to more somewhere self reliance, vertical integration, and that pushes a lot of local industrial development. On this couple with a general push of a country to digitization on digitization, which is adapted to local needs. That bodes well with our multilocal model whereby we develop a lot of our industrial offer in China for China. So I think short term, they're going to be softness, or they're going to be a bit of slowdown, not everywhere, not in infrastructure, not in process industry.
Actually, is that that balances what we do. We see good development of Avelica also in China benefiting from the introduction of on the credibility of, of Schneider. If you position yourself to and you get a longer view, what is happening. It's probably reinforcing the industry of China and that will create opportunities.
All right. Next question please.
Our next question will come from Simon Toffen of Berenberg. Please go ahead.
Yes, good morning, John Pascuttling, Monroe and Hamit. One question on energy management in North America. You obviously stated the favorable environment. It's been, I would guess, the sort of stand up performer in the first half with of the growth rates you've seen in Q1 and Q2 here. How sustainable is it really for sort of the second half?
I mean, we're looking at high single digit growth in the industrial segment, leading indicators are obviously pointing in a sort of slightly downward trajectory here. Do you think X Comp effect that the underlying development is sustainable in the second half? Or do you think we're going to see a clear moderation here in the second half? Thanks a lot.
Look, I mean, we give plenty of information in our presentation and we spoke about Emmanuel just spoke about it. We have a very strong presence in the U. S. On the North America. In energy management.
This is our 1st region. This is the place where we developed from very strong franchise, like SquareD, on APC. We are really a local player with developed products in America for North America. On the, on we are really connected to the market. When we look forward and I said it before and I think it was reiterated by by Emmanuel while the base of comparison is becoming more demanding, but we see substantial strengths in the fundamental market.
So Commercial And Industrial Building Data Centers. Data Center is a bit more volatile because you have some larger projects which are distorting the curve of billing on delivery, invoicing on delivery, but globally, it's a strong place where we keep we keep developing and also cross selling into infrastructure. So you've seen that this year we signed an agreement with Carlisle to work together on green infrastructure, on retrofit of infrastructures. That will not impact this year in terms of direct impact. That would be more next year.
But that's very promising on quite illustrative of what we do more and more in, in North America. Do we do more and more micro grids also? We do in, more and more consulting, to energy supply, which is more immaterial on on, when I see material, it's very material that's benefit for the customers, but it's digitally powered consulting on this outflurry of new services, on new software, digital capabilities that we are developing North America. North America is facing one good problem to have. Which is shortage of labor for many of our customers.
And when you think about it, energy management is a vastly unconnected space respect to what we have in industrial automation, and we propose at Schneider on this originated from the U. S. PowerLogic PMI, if you remember, between Canal and the U S, the world leading set up of solutions for connecting electrical distribution on connecting to a set of analytics. And these are all the business that we are developing with customers who face a need for efficiency very practically because they have to do more while having less people available, to employ.
All right. We'll take the next question.
We will now take our next question from Gail De Bray of Deutsche Bank. Please go ahead.
Yes. Thank you very much. Good morning, everybody. I have actually 2 quick questions, please. The first one is about current very low interest rate environment and the increased probability that it will remain like this for longer.
So I guess the question is, how does that change your capital allocation strategy and willingness to add more financial leverage to the company? So that's question number 1. And then question number 2 is about India, given the expected integration of LNT in the next few months, perhaps could you give us a bit more granularity on the market trends in India and how you're getting prepared to the integration process of L And T in particular?
So, actually, Gail, to take the first one, of course, on the low interest rate environment. So, yes, one could share the view that indeed it's probably yet to stay at least for a while. I don't think it changes the way we are looking at, capital allocation. We may consider that is probably the time to increase the duration of our debt. So, you know, probably to keep building debt with a long maturity, which is strengthening the balance sheet But I would say at the end of the day, we want to retain a very strong balance sheet.
We just leverage, which we've been doing quite consistently, for the past few years, but it doesn't mean that we're going to become more aggressive on putting more debt in the balance sheet.
All right. Again, on India, while still the process is not closed, Schneider and Nelson to war are 2 separate companies. Competitors or there is no, integration whatsoever, happening there. What we are keeping on doing on Schneider's side is to consider India as thing so that it becomes the 4th hub of Schneider. So, integrative of a lot of R and D, which we have been doing is weekly, but we have been really beefing up on reinforcing in all sectors.
Don't forget that India is really talented and very strong in software in digital and digitization. So it's from all those point of view, those are great markets for us. On the on prepare for when the operation is closed, the best way to integrate, Los Angeles. Don't forget also is that we have been living together on, on, on meeting each other on the market somewhere in real life. For the past many years that Schneider has been in India.
So, we know each other's company. So it doesn't prevent us from thinking But today, principle is very simple. It's 2 separate companies still. The deal is close.
And just to compliment on the trend of the market, I mean, you've seen that despite, as I said, election time, we've been growing both for energy management and industrial automation. And we think that H2 could be even better actually now that elections are, behind and that there is obviously some stability so that bodes well. And I think that the last IMF report was forecasting 7.2% of growth for next year in India with a slight acceleration versus this year. So clearly seems to be well oriented
What's striking also in India is that India being a continent with such large populations and such specific needs it uses more and more diverse technologies or different technologies on the fact that we are extremely low cold air, inclusive of everything from R and D to manufacturing 2 network suppliers that will be amplified by, Lawson was very exciting for the future.
All right. Next question, please.
Our next question comes from James Moore of Redburn. Please go ahead.
Yes, good morning everyone. I've got some questions on growth. You saw a slowdown in your organic sales growth in software, I think, from 12 to 6 from the first quarter to the second and from systems from 10 to 6. Is that just driven by the basis of comparison or have you actually seen some sequential slowdown in the underlying trends in those businesses as well?
On software, I would leave that question, to Javier, because there's been, there are the center of gravity of what we We do here for what we do specifically at Schneider. We keep launching new advisors, new modules, new services, somewhere some don't work with AB test and we develop, but it has been a good story. Don't forget that in software also as we go to more subscription, there is some pressure in around time speaking for what we see at Schneider due to the business model, while our presence on the market is re increasing. On the systems, frankly, I'm not sure I relate completely to what you say because we knew at this year in 2019 would be more dense in systems and services, which is happening when we reported it. The great news is that I think we've worked hard and sometimes it's been really hard for us on the professional execution on our system that we are putting some pressure on margin.
And we see systems on services growing, But at the same time, profitability is improving, which means that gradually, not gradually, but we are now on top of the way to execute on systems, which in our jargon are projects on electrical equipment. So expect us to be selective on what we do on projects, but clearly as a cycle is moving to more late cycle parts, it's more dense in projects, on there, the quality of execution, on the quality of the setup is, is really important. One thing that I want to mention but we mentioned it during our CMD, in this process of improving the execution of projects, we leverage more and more network of partners on as shoot them, to the execution of projects. So this is where the network of partners we develop around products is really helping to do projects in a more efficient manner and in a more local manner.
All right.
Thank you, James. We take the next question.
Our next question comes from Alastair Lesley of Societe Generale. Please go ahead.
Hi. Good morning. Just a question on mix and the EBITDA bridge and your comment there on expecting to have an increased negative impact in the second half. I was just wondering if you could help us calibrate that increase a little bit will it be materially different to the first half? I think that actually came in a little bit better than I expected.
And I was just wondering if there's anything specific coming out of the backlog that would significantly move that mix line in H2?
Thanks, Alastair. No, I mean, of course, I won't give you a number. I think we wanted to highlight the fact that as we keep progressing through the cycle, we do expect system to keep contributing more and more to the growth. And therefore, it's not so much that we have something coming from the backlog issue that we expect the share if you want of a system in the growth to increase. So that's why we think that it is likely to have a more negative impact, even than what we've seen in H1.
I think that was in line with our expectation So therefore, it's not coming as a surprise. I just insist again on the fact that it's very good news to say that beyond the fact that they're increasing their share, we are also improving the margin on system. And then we expect a continuation on the mix, probably of a negative impact in H2 as well.
Thanks, Alastair. Next question.
Our next question comes from Alexander Virgo of Bank of America. Please go ahead.
Hi, thanks very much. Good morning, everyone. I just wanted to come back quickly to the service and software. Momentum, I suppose, and how that looks into the second half? I mean, putting aside your software growth specifically given that that is being driven by Aviva, it still looks like service has slowed quite materially from Q2 to Q1.
So perhaps you can just give us a little bit more color around what exactly is driving that given it's the bigger part of the 2 components in software and service still, I think. And how that looks like in the second half we're facing some quite tough comps as well, I think, in terms of that second half. So just trying to understand a little bit more the moving parts if we can't talk about software, perhaps we can talk about service?
Well, services is a larger part of that compound, to a very large extent. If you remember that services are 12 to 13% of our total turnover, So that's, on, on it has been growing on the, I am very proud of what you've done there, especially because that was very small in the portfolio of Schneider only 10 years ago. So it has been a gradual and most of it has been organic, like investing deploying people on proposing added value to our customers. There again, what I was saying on the problem of our customers to find the right competencies to replace some existing competencies, to retrofit their installation because more and more what we address is brownfield. So we have to upgrade has really contributed a lot to the development of services.
On the services, it's just the beginning of the journey. So we are very systematic in making sure we engage with our customers. We deploy enough filled service technicians on the market. We do it in the right conditions of safety because these are business where you go on the side of the customer, and you have to be very disciplined in the way you address it. And I, we stay very committed to keep growing that.
With the same momentum in the next coming months on years. Again, I think we just have only 10% of our installed base. So there is still space for developing everywhere in the world. On the other hand, we want to associate our partners to the journey. So, combining our two strengths together to accelerate the development.
All right. I think in the interest of time, we'd probably take 2 more questions. So maybe let's go with the next one.
Our next question from William O'Fignal of UBS. Please go ahead.
Hi, good morning. Thank you for taking my question. Guillermo Peigneau from UBS. I guess Emmanuel, you alluded to the 80 bps that that you gained on the gross margin driven by net pricing. And I was wondering whether you could give a little bit more granularity as to whether that expands and when is it getting at the best point during the year?
Should it be over the course of the next two quarters? And then a follow-up on growth, I guess, when it comes to data centers, could you give us a little bit of granularity whether they the energy management and energy management, the growth versus data centers growth in the quarter, I. E. Was growing more or less And I guess, you're also referring to the comparables that you were referring before and large order intakes in the past. Thank you.
So on the 80 basis points, understand your question was when did it materialize? That's I think that's really it has been a performance, I would say, through the H1 quite consistent. So months after months, we have seen that all the action that we had taken largely around the middle last year and you have seen the impact in H2 of 2018, where still, you know, sticking to the wall and that means that we've increased price and We managed to stick to that and month after month we're delivering. Now we know that this wave of price increase is of course, now coming to an end. So you're going to start to have the same impact as the basis of comparison.
We've launched new price action, but as I said, not necessarily at the same level, in H1 and that we keep doing So as I said, I still expect an H2 positive on price. But I'm just saying it is likely to be at a lower level than what we've seen in H1.
Just to take on, don't don't forget that beginning of the year, we put together medium voltage, low voltage, power on, everything which is power automation on, we start to see the positive effects of the fluidity, the superior fluidity created between the teams in a sector where our customers want full solution. So that is helping and that will keep helping. Data centers, as you remember, ITs roughly 15% of our group exposures, so a bit more for for energy management, but it's only one of the segments we're addressing on, of course, in H1, it was still growing faster than the average of the group, and it should be the case for the many years to come because as we could explain, during the Capital Market Day, we see IT as 1 of the fastest consumption growing, in the field of electricity on energy management. And this is a place where our value proposition, the completeness of what we have to offer, Our geographical coverage is probably, of course, second to none, that has been since AP since 2007 joining the group. On building more blocks, we have built, a capacity, which is more integrated than any other player on the market on this of course on a completely global scale in an industry, which is looking for global players.
Because they are by nature more global. But it's only one of the segments we are serving, which also very nice dynamics, as we said, in some end user industrials growing the cross selling with our customers on construction, also a commercial industrial building. And we'll keep, not to mention something that is to come, later in the history, which would be more electric mobility that will impact more and more the field of electrical consumption.
Well, thanks Guillermo. Let's take one last question. Operator.
We will now take our final question from Pasi Rizvi of RBC Capital Markets. Please go ahead.
Hi, good morning. Thanks for the question. There was one last thing, it was again on pricing actually. I think historically you helped us understand a bit more the geographical spread of how that price actions worked. If you could maybe give us some comments on that to help us then maybe put some of the growth numbers top line growth numbers into context to get a feel for how much of that is pricing?
And then also whether the pricing actions you're proposing now, whether the spread is similar, whether you're targeting different geographies?
Yes, well, on pricing, frankly, where we always say it on, I know it was a matter of debate last year. As we said, we are probably too slow to start last year because we are so focused on growth and serving our customers that probably in some places, we could have been certainly faster and be combining the right pricing with the right gross. But at the end of the day, what happens is often what happens at Schneider. There is a cycle time get the prices for, and this is what we see again, that it took some time to, where with a chain of distribution integration and get them through and get the stock through. But at the end of the day, we cover the inflation that we are suffering with, with price on even more.
But I would say it's more, it's across the board. It's across the geographies. But it's more than just pure pricing. It's been more selective about references that we are probably not priced properly. Some applications where We offer the customer huge benefits and we can share better the value of, of it on working on the simplicity of what we have to offer to our customers, which is really an area of progress as we keep going forward.
But summarize, I mean, what we had started last year and there was a bit of skepticism is happening and there is a kind of hysterosis or delay in pricing to take place on that new industry of Shneilog because we operate with a lot of partners on a lot of things on the pricing across the line, but it's more than pricings about the way we market, we segment, and we bring value to our customers.
Well, all right. Then I think we're at the end of the webcast now. I just want to thank everyone for your time. The team is available for further questions. And of course, we all look forward to seeing you in the coming weeks months.
Thank you very much.
Thank you. Thank you. Bye.
This concludes today's call. Thank you for your participation. You may now disconnect.