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 Jean-Pascal Tricoire, Emmanuel Babeau, and Amit Bhalla. At this time, I would like to turn the conference over to Mr. Amit Bhalla. Please go ahead, sir.
Well, thank you, operator. Good morning to everyone. A big Welcome to Schneider Electric's H1 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, Chairman and CEO, Jean-Pascal Tricoire, and Deputy CEO and CFO, Emmanuel Babeau. We'll go through the presentation in two parts, and then we'll make sure there's enough time for Q and A. With that, let me hand over to Jean-Pascal.
Well, thank you, Amit. Good morning to all of you. Of course, I am very happy to be with you today and to share a strong set of results and perspectives as we go forward into 2019. Without further ado, I’d like to move on and go to my part of the presentation, then, of course, Emmanuel will take over for the financial detail of what I will have highlighted in the first part. Moving on to a transition from the Capital Market Day, remind you that we have positioned Schneider over the years in two major business, energy management and industrial automation, which combine into digital solutions for energy management and automation, solutions for efficiency and sustainability.
All of those business serve the two major transition of the beginning of the century that our customers are facing, one being the energy transition, the other one being Industry 4.0. We've done that deployment into those two business, very focused on four end markets, building, IT, infrastructure, and industry. When we look at H1, this strategy, this positioning is delivering fully. Our two business are growing. Our two business see their profitability expanding. Energy Management, more than EUR 10 billion in H1, growing organically by 7%, profitability expanding. Industrial Automation growing by 1%, EUR 3 billion.
Those two businesses combine into a total business of more than EUR 13 billion, growing by more than 5%, 5.4%, while the profitability is reaching 14.8%, margin expanding by 70 basis points above the top of the guidance that we had given at the beginning of the year, and margin growing, in fact, double digit organically more than 10%. If I look at the financial headlines 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 basis points over the next three years.
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 product, shouldered on the largest network of partners in the world, + 4%. Our growth boosters starting with services, + 8%, software up double digit. It's about AVEVA, our sister company in the field of software, 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. Although it's not strictly rated by growth, we are working on the fourth pillar of our strategy, which is better systems, executing better on projects and equipment. There, the priority is about profitability, once again, we improve the profitability by 100 bps in H1.
Second element is working on the profitability of our growth, making sure that this growth drops through into profitability. Adjusted EBITDA growing by close to 11%. Adjusted EBITA margin progressing by 70 basis points, again, above the top of the guidance given at the beginning of the year. Adjusted net income also growing double digit. If you take a longer view to performance over four years, it's an increase of the margin by 330 basis points organic and 230 basis points reported, which again, puts us right on track or well on track to achieve our ambition of 200 basis points of improvement in terms of margin by 2021. Finally, our focus on shareholder. I think one of the great achievements of this first half is the cash flow generation, which confirms the signature of the financial results. Cash flow multiplied by more than two respect to last year.
At the same time, we deliver on our commitments, share buybacks that we started after the vote at the AGM, EUR 80 million just started, but more so a combination of acquisition, a milestone for acquisition of Larsen & Toubro, which is the approval of the CCI, the Competition Commission of India, but also a continuous work on disposals with Pelco on the U.S. panels that we are drag on what we are doing in automation in the U.S. 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, are delivering a double-digit growth in H1. Not to mention that IGE+XAO is scoring a very honorable 8% in the field of design software. Moving on to go into the detail of our strategy, remember that our strategy is very simple.
It's about more products, more services, better systems and more digital. We are launching H1 more than close to 60 new products. We have a few examples here in the field of automation, in the field of energy management. More services, again, 8% growth. You remember that there is a lot of potential behind services. We have barely tracked 40% of our install base, serving less than 10%, so we keep growing there. 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 EcoStruxure Asset Advisor, which is an analytic on BASF plants, which help them doing predictive maintenance.
It is a combination of our edge control together with analytics, as well as an example of Building Advisor, deployed in the University of Iowa, helping customers to reduce their operating costs on doing, there again, predictive maintenance. On 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 advisors, that means more modules of software that plug into the data of our products. You have four examples here. Asset under management, that means assets digitally connected to our cloud for the account of our customers, 2.4 million assets connected at the end of H1, accelerating in terms of growth + 40%.
Of course, we've been already quite public about the launch of Exchange, which is our marketplace connecting users, connecting assets, connecting developers, and connecting integrators, which keeps developing since its official launch in Hanover, in April. More than 45,000 registered users, 23 communities, 200 apps developed by partners of Schneider or ecosystem stakeholders on the base of EcoStruxure. Strong performance in software. Of course, AVEVA 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. It's not only that, it's IGE+XAO, I spoke about it, with a growth of 8%.
It's about us acquiring the rest of our smart grid operation that we have developed, 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 at level two and level three, which is control and 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 website. One example is what we do in a major hospital in the Middle East, where we automate the whole power distribution together with the whole building control system to allow for our customers to have a much better reliability, which of course is a paramount value in a hospital, but also energy efficiency and predictive maintenance to avoid power outages.
Singapore, Marina Bay Sands, which is one of the biggest casino and entertainment center, flagship place of, a landmark of Singapore, where we are helping Marina Bay Sands manage better on their data center, which of course is very critical. Argentina, Buenos Aires, with the modernization and digitization of transportation, which is always an issue in very large metropolis, where digitization brings savings on maintenance, on savings on energy. Finally, what we do in steel shops, in Baogang and Wugang in China, in a very demanding industrial environment, bringing 10% productivity. Always marker of Schneider is our commitment to sustainability and the objective we give to ourselves in the field of sustainability. This is completely reported and detailed, at the end of the first half, We are above our targets.
I would say it's a big commitment of Schneider, of our network, an ecosystem of partner suppliers, and all of our customers to work together on that subject, which entails, by the way, a lot of recognition in multiple dimensions. One of the ones we are the proudest is that continuous progress with Gartner in the field of supply chain, recognizing particularly our achievement in digitization of supply chain, making it very economically profitable to the service of the operators of our factories. That new generation of digitization being deployed in more than 60 factories in the group, some of you have been visiting some of those sites in the past month. Going a little bit more into detail, Emmanuel will drill even one level more into detail of what we see in the business performance of H1.
Electrification, which is a leading franchise, very balanced geographically as you can see here, growing, delivering another stellar first half or half of the year, 7% organic growth, an EBIT margin at 17.6%, improving by 80 basis points organically. 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 and a solid presence, which is executing on a strategic plan over the years fixed several years before. I think we are gaining market share there. Asia PAC still has a very strong engine, very well balanced between China, East Asia, and 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 high single-digit order in industrial segments, in cross-selling together with what we do in industrial automation. One of the recurrent strong points of what we do here is our performance in home, small building, and electrician sector, the plugs, the sockets, what goes into the basket of the electrician, which once again is growing mid-single digit up across all regions. Commercial and industrial building remains strong and 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, and building control, total building control. ASCO delivering double-digit growth, which is really promising after one year in the company.
Services come in 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 really supporting our continuous growth in data centers. Residential, as I said before, has been growing mid-single digit for now some years and remains a very strong point of development, supported by the launch of many new offers. Infrastructure and industry remain well-oriented for us as we go 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, the red means the 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 performance of North America. The only negative point here is Mexico in both energy management and industrial automation. Rest of the world, all good except Middle East, Russia being stable due to sanctions. The rest 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 motive of satisfaction and pride after many years of more difficult situation. The only negative here is that you see is France. France is mostly due to utilities, to repositioning on the utility market. The rest, construction, residential, industry, and 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 fantastic, if you remember, fantastic 2018 and especially the first half of 2018. There, the rebalancing of our portfolio, which is if you want to simplify 50% on discrete automation and 50% of continuous process is working very well. We are just in that transition moment from one part of the portfolio to the other one. Organic growth at 1%, adjusted EBITDA margin 17.6%, even with a lower growth progressing by 30 basis points in terms of profitability. Again, we benefit from the balancing of our portfolio. The demand in process and hybrid market continues to be positive with double-digit orders growth. Some of the projects have been phased outside of H1 into H2, that has impacted a bit Q2 especially in North America.
We have a slowdown in the discrete, on especially machine manufacturers, which is a traditional strong point of Schneider. The U.S. activity in Panel has been sold in Q2, which is a good thing. We keep progressing in developing the joint value proposition between AVEVA and the Schneider team, and the cross-selling is working very positively for both companies. At the same time, services are also there again, a strong support to growth for industrial automation. As we go and look forward, we see more softness into discrete markets that we expect to continue in H2. At the same time, we see more projects coming in for real and for execution and for billing from our order book in process on hybrid industry.
There, we benefit from the unique combination of what we do in automation, in controls, as well as what we do in software with AVEVA, principally. With that, we go into more detail about the geography, while North America, 21% negative 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 constant together with energy management. Europe doing well across geographies in an environment impacted by discrete automation softness. On Asia Pacific, impacted by a flat market in China, but growing in India, in South Korea. The other negative impact is really Japan, which has been suffering in H1 in industrial automation.
Overall, the whole portfolio growing on profitability, developing on encouraging signals at the level of hybrid and continuous process. With that concludes the overview, and I'm handing over to Emmanuel, who will enter into more details.
Indeed. Thank you, Jean-Pascal. Good morning, everybody. Great to be with you to comment our H1 numbers. We're going to start, of course, by digging a little bit more on our sales. Our sales reached EUR 13.2 billion in the first half. It's 7.2% growth. We benefited from a positive Forex impact, almost 2% and close to EUR 220 million positive. That's largely coming from the dollar appreciation versus the euro. When we look at the full year, we are staying with this vision of EUR 300 million-EUR 400 million 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 were flagging an expected impact around - 10 basis points at the last communication.
It has proven to be a bit more negative than what we thought in H1 at - 30 basis points. We expect a better H2 in that regard, and we are now looking at a bracket between - 10 and - 20 basis points negative impact coming from Forex on the adjusted EBITDA margin. The scope impact is very limited at the last few months of AVEVA and the beginning of the impact of the disposal of Pelco and the U.S. Panel. When you look at the growth by region, the great news is that they are all growing, and quite nicely. We are ranging between 3%-9% growth in this H1, which shows our capacity to really seize 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, Mexico, and I will elaborate on that, has been even more down. That means 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 marks 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. 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% growth. You're going to see it's a mixed bag with some countries doing well. Jean-Pascal commented great to see South America accelerating, Africa doing well. It's more difficult in Russia and in the Gulf.
Western Europe, which is, I would say, where we are expecting Western Europe, but it's good to see that it's still a kind of noticeable growth at almost 3%. You will see that many geographies actually did relatively well in the H1. Precisely, we wanted to elaborate a little bit between energy management and industrial automation on what we are seeing by region. Starting with energy management, the North American number obviously stands out. +12%, and here you can expect that the U.S. was even above this average. It shows the quality of the growth, which is really coming from the fact that all lights are green, really, in H1 in the U.S. We are growing in the residential business. We are growing in the commercial and industrial building.
Data center has been good, but we have also some good infrastructure contribution, and ASCO, of course, is a big satisfaction. That's great to see North America at that level. Asia Pacific at + 7% has also done a very good H1. I talk 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, which were not that favorable for the country, delivering high single digit. I talk about many countries in Southeast Asia and Australia doing well for energy management. Rest of the world, + 4%, dynamic growth, South America, Africa, Central and Eastern Europe. Really here it's about Middle East on utility market. Sorry, Saudi Arabia on utility market, Middle East globally down, and CIS down also, which have been more difficult.
Good to see that the pluses are significantly bigger than the few headwind that we have. Western Europe at +3%. Here again, always question mark on what's going to grow or not in Western Europe. As you can see, in fact, we have, apart from France, many big market doing very well on energy management in H1. I could mention Italy, the Nordics, Germany, but even the U.K., despite the uncertainty around Brexit, doing well. 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 contrasted, but at the end of the day, you can see that three out of the four regions are actually growing. The only negative here is North America. In fact, when you look at the U.S., the U.S. have been stable.
It's really Mexico, because of the uncertainty that we've all seen, which has been really down. U.S. stable. In fact, the underlying trend is even more positive because we had some very high comps in the process automation business in Q2 in the U.S. last year. We are indeed seeing a discrete automation business that is slowing down, notably with OEM, but we see a positive underlying trend for process automation, and that should really show up in the second part of the year. Rest of the world, nicely positive, here we see both actually discrete and process growing in the region. Western Europe is positive and good to see that France, Germany, Spain, and U.K. have been growing. That certainly is a success that we are facing in our targeted segment, and I could mention food and bev., pharmaceutical, or water and water treatment.
On Asia-Pacific, China stable because of OEM. Many other places in the end market have been growing. India nicely growing. Japan was really the negative part of the picture in this first half. Moving to the priority, Jean-Pascal reminded us of the priority product first 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 strength of the innovation, the differentiations, the strengths of the breadth and the depths 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, late 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. 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 install base and on developing the different type of services among our customers. Below the top line, let's move at the analysis of the very nice progress that we've made on the margin, and start of course, with the gross margin. It's another period of nice growth for the gross margin, moving from 39.1%- 39.4%. Here, really, you have two big driver for the growth.
The first one is the one that you would expect, productivity, which is contributing +1.1% of gross margin. That has been delivered despite negative impact coming from tariff. Inflation is still there, and we have been under pressure with some of the suppliers renegotiating under pressure in the middle of last year. That's still there. It's still an impediment, I would say, to generate the full potential on productivity. We expect that all 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. It's a fantastic combination of the success of all our actions on price.
Look at the impact, EUR 115 million 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 second part of 2018. On top of that, of course, we are helped by a less unfavorable evolution of raw mat, which even turn a bit positive. Now, when we look at the second part of the year, we're going to keep pricing up, but the environment on inflation has changed a little bit. Still price up. We don't expect it's going to be at the same level as in H1. On raw material inflation, we believe that it's going to stay positive, and we'll 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 point negative.
It's a natural evolution through the cycle. More system, even if we improve the margin on system, they have mechanically a negative impact on the mix. A few negative contribution coming from the evolution by geographies. You have the usual negative. We keep increasing our R&D effort and innovation. It has a negative impact on the growth margin, and we still have labor inflation. The Forex, - 0.3%. I mentioned the fact that we expect a better Forex environment for margin in H2. On the other negative here, 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 five years. That really shows the fact that progressively, we bring more innovation, more digital, more differentiation, more added value to the customer. You add that, better environment for pricing, and I think we've probably did better than many of our peers in that respect, plus still good productivity. 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 five years. Moving now to below the gross margin, which is reaching EUR 5.2 billion. That's, of course, about SFC management. As you know, SFC management for us, we don't see that as a cost.
Most of these SFC are really the investment that we are making for the future, whether in digital, in skills of people, in capacity to grow services, in marketing. 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 nice organically, 50 basis points on this period with good productivity that we generate on our SFC. We share the ambition to accelerate that over a four year period. Of course, we have started in H1. That gives an adjusted EBITA of almost EUR 2 billion at EUR 1.96 billion. It's up almost 11%. The margin is up at 14.8%, organically 70 basis points.
The good news is to see that the two businesses have been nicely contributing to this margin improvement. Now, I want to give a two 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 the impact of IFRS 16. This new accounting norm is telling us that now we have to book the long term lease as an asset and a liability. We are taking this lease, mainly the rent for all our offices and some plants, as both an asset and a liability for roughly EUR 1.3 billion.
What the norm is telling us, that that mean that you delete the rent that we are paying and you replace it by an amortization of the asset that you have been booking in the balance sheet, and that is generating a EUR 10 million net positive on the adjusted EBITA. You book the cost of the debt, the new debt that you have, the EUR 1.3 billion, in the financial income, and it's a cost of EUR 20 million. That means that the net impact, as you can see on the net income, is absolutely marginal. It's EUR 7 million. You have the impact on the free cash flow, because as you work the free cash flow, deducting the amortization, what you've been amortizing is added, if you want, to the free cash flow, and we have a positive contribution of EUR 434 million.
Of course, we will be more than happy to provide more color on IFRS 16 if after this very short exposed lecture, there is some question mark. Moving now below the adjusted EBITA, probably a couple of lines on which I would like to draw your attention. The first one is the negative amount of EUR 346 million on other income and expenses. This negative amount was expected when we announced the Pelco disposal. We told you that's coming with a loss up to EUR 250 million. It's a bit below that eventually. On top of that, we have some impairment of R&D, some one-off impairment, and the traditional cost linked to M&A and integration. Restructuring is absolutely in line with expectation and what we shared with you at the last Capital Market Day. No specific comment on amortization of intangible. One word maybe on financial cost.
EUR 140 million, it would have been EUR 120 million negative only without the IFRS 16. I think we see now gradually, period after period, the decrease of the cost of our debt. 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 first bond, six year maturity, slightly lower than six year, with a negative fixed rate, negative four basis points. We are being paid today to borrow on this kind of five to six year maturity. Of course, if that continues, that mean that you 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%-24% range for the year. Discontinued operation is not material.
Equity investment in minorities, in fact, the number is more or less the same, but you have two diverging elements. On one side, the profit of Delixi keep going up. Therefore, the positive here keeps going up with a very great performance of Delixi. Of course, the AVEVA 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 give a net income of EUR 993 million, marginally down 3%. Actually, without the one-offs that I commented, we are growing the adjusted net income by 10% and the adjusted earning per share 11%. I would say absolutely in line with the adjusted EBITA. The other very good news of 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, 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&D, CapEx, and also some investment on capacity, but we absolutely stick to here something which is going to stay around 3% of revenue. There is absolutely no change in the model. 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.
Where this year versus last year, we had a better management and the capacity to better control, notably our inventory. That give a free cash flow before IFRS 16 north of EUR 700 million with the IFRS 16, EUR 837 million, and show the quality of the earnings in H1. Dividend, no surprise. Acquisition, it is a net between the few acquisition that we have made, us or AVEVA, in the first one, in the first half, and the Pelco disposal. On the net capital increase and the share buyback, and in FX and other, you have the IFRS 16 impact, the Forex impact on the debt for the U.S. dollar part, and what we decided to pay on our pension deficit. That gives a debt of EUR 6 billion at the end of H1.
Of course, as always, we expect a large part of the cash flow generation for the full year to be skewed towards the second part of the year. Here, just to show that, beyond the IFRS 16, 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 L&T deal, 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 nice software acquisition with ALPI, 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, they are growing double-digit in Q2. On the disposal, we have already achieved EUR 0.3 billion. Versus the EUR 1.5 billion-EUR 2 billion, it's just the beginning, of course. We clearly have started the journey, and we expect to do more in H2 and in the coming quarters. That finishes my presentation. Back to you, Jean-Pascal.
Short pause on Schneider Wiser, which is a product you see here, which is the core of our home 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. Now moving on to the full-year target, where we are upgrading our target. 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 is that process remains positively oriented, while discrete automation markets remain soft. In China, we see a continuing OEM soft demand, We see growth in the field of construction, infrastructure, and parts of industry. 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. We expect also some new economies to perform well, especially in Southeast Asia and India, while some regions like Russia and the Gulf remain a challenge. Looking at all of this, on being really attached to keeping the trajectory of the 200 basis points margin ambition for the next three years. That's the improvement that we want to score. We increase the guidance, wanting the EBITA to grow between 6%-8% organic, and we do that by prospecting a growth at the top of the guidance in terms of organic growth 4%-5%, so shrinking the interval there. On targeting also the upper half of the margin improvement target from 20 to 50 basis points prospected at the beginning of the year. That concludes the presentation.
We are now, of course, open for Q and A, and 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 dates and the calendars on the screen now. We have the roadshows coming up. A couple of points to highlight. One, we will have an update on sustainability topics in September, and then followed up by our innovation summit as well. With that, let's open it up for Q and A. I'm sure there's a list which is already there. We'd like to request that we'll have one question per person, and then we come back if time permits. With that, let's open it up to the first question, please.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to ask questions. We will now take our first question from Andre Kukhnin of Credit Suisse. Please go ahead.
Good morning. Thanks so much for taking my question. Could I ask about any changes in channel behavior in the second quarter? Did you see any kind of stocking decisions from your distribution partners that affected performance or any indications of that? 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.
Yeah, Andre. On the attitude of channels, we are exiting 2018, which was a year of accelerating growth. I think it was a year of kind of transition from low growth years to much more consistent growth. 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 two of us. We've seen in some places some selective de-stocking, because they had been really stocking a lot last year on running after sales increases. We've seen at the beginning of the year some selective de-stocking happening on readjustment of stocks, which is absolutely normal when you have those variations in this case, but nothing fundamental.
What I would say also that we had mentioned in the Capital Market Days 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 bringing added value to our customers on being able to work much better together on our common customers. Speaking about China, one common sense observation is that we are comparing to high base of comparison, of course. Still very strong business or sustained business in everything which is commercial and industrial. The first reason is also to consider that we are now comparing to high levels. Still, we see a market which is solid on keeping on developing.
Thank you very much.
Thanks, Andre. We take the next question.
Our next question will come from Andreas Willi of JP Morgan. Please go ahead.
Yeah, good morning, Jean-Pascal, Emmanuel, and Amit. My question is on the automation growth, particularly on process automation, you highlight the 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 that's coming from? Is it a couple of large orders or more broad-based, and which industries are still driving that? On the other side, on discrete automation, have you noted a big change in June, July versus what was before, or is this just a more steady slowdown that we have seen before already?
Andreas, thank you for that question. Really, what I was mentioning before is that 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 two sectors in hybrid automation. I'm really happy we did it because it's in that kind of period that it's really important. We see softness at the level of discrete manufacturing, which is really a collateral of the trade tensions. 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? Of course, Southeast Asia is probably benefiting today of that time of uncertainty. This is pushing down 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. We see also usage of our technology in wastewater, which is developing all over the world. Emmanuel was speaking about that in hybrid places like CPG also, which are using that broad thing. 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 and medium projects, which we have been working on for a long time. This industry has been not investing for a quite long period, and you know that if you don't invest in oil and gas to make an example, then your capacity would suffer.
I see also the industry really working on digitization, and from that point of view, having AVEVA as a partner in engaging together is really important because in those times, people are looking at efficiency, preventive maintenance. They are all struggling to find enough competencies on the shop floor. Everything we do in asset performance management, also our digital tools to help the operators, is more productivity and very simply, in many cases, helping to find people that they can't find physically in countries where there is full employment, not always the right level of preparation of competencies. We see the order book filling. It's quite balanced, and we've seen some phasing to H2 because can't say that politically the world is particularly serene at the moment, but at the end of the day, those projects are here, and we should start bidding as we go forward.
Right. Thanks, Andreas. We take the next question.
Change in June?
Change in June. Discrete. Change in June in Discrete.
Not, 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 Uglow of Morgan Stanley. Please go ahead.
Well, thank you for taking the question, and morning, everyone. I guess sort of two kind of interrelated questions. Coming back to China, 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? 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 sort of six, 12 months?
Yeah, look, Ben, when you look at China, there is a market, and at the end of the day, 6% growth on such a large economy is not a small number, actually, because that number is applying to a larger economy. I think one of the strengths of Schneider is to have defined our strategic play a long time ago, and we are everywhere in execution of our strategy. All teams are trained to cross-selling, market coverage of secondary cities, coverage of smaller customers who are looking for digitization. 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, is that we are fully focused on a very consistent execution.
In China, what you see is one of the largest economy of the world, in physical terms, probably in many sectors, the largest 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 export around the Belt and Road. We've been participating or immersing ourselves with many partners there. The characteristic of Schneider, which is that we operate prevalently with partners, local partners, is helping tremendously. 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 and 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 suffered. When you speak about the longer-term effects of the trade tensions, while it pushes China to more self-reliance and vertical integration, that pushes a lot of local industrial development. This coupled with a general push of the country to digitization, and digitization which is adapted to local needs, that bodes well with our multi-local model, whereby we develop a lot of our industrial offer in China for China. I think short term, there are going to be softness or there are going to be a bit of slowdown, not everywhere, not in infrastructure, not in process industry. Actually, that balances what we do.
We see good development of AVEVA also in China, benefiting from the credibility of Schneider. If you position yourself and you get a longer view on 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 Toennessen of Berenberg. Please go ahead.
Good morning, Jean-Pascal, Emmanuel, and Amit. One question on energy management in North America. You obviously stated the favorable environment. It's been, I would guess, the sort of standup performer in the first half with the growth rates you've seen in Q1 and Q2 here. How sustainable is it really for sort of the second half? 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 ex 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, we give plenty of information in our presentation. I spoke about it, Emmanuel spoke about it. We have a very strong presence in the U.S., and in North America in energy management. This is our first region. This is the place where we develop from very strong franchise like Square D and APC. We are really a local player. We develop products in America for North America, and we are really connected to the market. When we look forward, and I said it before, and I think it was reiterated by Emmanuel, while the base of comparison is becoming more demanding, but we see substantial strengths in the fundamental market. Commercial industrial building, data centers. Data center is a bit more volatile because you have some larger projects which are distorting the curve of billing and delivery, of invoicing and delivery.
Globally, it's a strong place where we keep developing. Also cross-selling into infrastructure. You've seen that this year we sign an agreement with Carlyle to work together on green infrastructure, on retrofit of infrastructures. That will not impact this year in terms of direct impact. That will be more next year. That's very promising and quite illustrative of what we do more and more in North America. Do we do more and more microgrids also? We do in more consulting, to energy supply, which is more immaterial, when I say immaterial, it's very material as benefit for the customers, but it's digitally powered consulting. On this, are a flurry of new services and new software digital capabilities that we are developing in North America. North America is facing one good problem to have, which is shortage of labor for many of our customers.
When you think about it, energy management is a vastly unconnected space with respect to what we have in industrial automation, and we propose at Schneider, and this originated from the U.S., PowerLogic, PMI, if you remember, between Canada and the U.S., the world leading setup of solutions for connecting electrical distribution and connecting to a set of analytics. 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 take the next question.
We will now take our next question from Gaël De Bray of Deutsche Bank. Please go ahead.
Yes, thanks very much. Good morning, everybody. I have actually two quick questions, please. The first one is about the current very low interest rate environment and the increased probability that it will remain like this for longer. I guess the question is, how does that change your capital allocation strategy and willingness to add more financial leverage to the company? That's question number one. Question number two is about India. Given the expected integration of L&T 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&T in particular? Thank you.
[Happy], Gaël, to take the first one, of course, on the low interest rate environment. One could share the view that indeed it's probably here 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 it's probably the time to increase the duration of our debt. Probably to keep building debt with a long maturity, which is strengthening the balance sheet. I would say, at the end of the day, we want to retain a very strong balance sheet, with a standard leverage, which we've been doing now quite consistently for the past few years. It doesn't mean that we're going to become more aggressive on putting more debt on the balance sheet. No.
All right. Gaël, on India, while still the process is not closed, Schneider and Larsen & Toubro are two separate companies, competitors. There is no integration whatsoever happening there. What we are keeping on doing on Schneider side is to consider India as one of our key countries, really on keeping on investing so that it becomes the fourth hub of Schneider. Integrative of a lot of R&D, which we have been doing historically, 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, in digitization. It's from all those point of views, those are great markets for us. On prepare for when the operation is closed, the best way to integrate Larsen & Toubro.
Don't forget also is that we have been living together and meeting each other on the market somewhere in real life, for the past many years that Schneider has been in India. We know each other's company, so it doesn't prevent us from thinking. Today, principle is very simple. It's two separate companies till the deal is closed.
Just to complement on the trend of the market. You've seen that despite, as I said, election time, we've been growing both for energy management and industrial automation. We think that H2 could be even better actually now that election are behind and that there is obviously some stability, so that bodes well. 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. Clearly seems to be well oriented.
What's striking also in India is that India being a continent with such large population and such specific needs, it uses more and more diverse technologies or different technologies on the fact that we are extremely local there, inclusive of everything from R&D to manufacturing, to a network suppliers that will be amplified by Larsen & Toubro is 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 six from the first quarter to the second, and from systems from 10 to six. 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?
Look, on software, I would leave that question to AVEVA, because they are the center of gravity of what we do here. For what we do specifically at Schneider, we keep launching new advisors, new modules, new services. Some work, some don't work. We 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, I'm speaking for what we see at Schneider, due to the business model, while our presence on the market is really increasing. On the systems, frankly, I'm not sure I relate completely to what you say because we knew that this year in 2019 would be more dense in systems on services, which is happening, and 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. We see here systems and services growing. At the same time, profitability is improving, which means that gradually, not gradually, we are now on top of the way to execute on systems, which in our jargon are projects on electrical equipment. Expect us to be selective on what we do on projects. Clearly as the 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 really important.
One thing that I want to mention also, we mentioned it during our CMD, in this process of improving the execution of projects, we leverage more and more our network of partners and associate them to the execution of projects. 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 Alasdair Leslie of Societe Generale. Please go ahead.
Oh yeah, 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 just wonder 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. I was just wondering if there's anything specific coming out of the backlog, that would significantly move that mix line in H2. Thanks.
Thanks, Alasdair. 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. Therefore, it's not so much that we have something coming from the backlog, it's just that we expect the share, if you want, of System in the growth to increase. 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. 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.
We expect a continuation on the mix, probably of a negative impact in H2 as well.
Thanks, Alasdair. Next question?
Our next question comes from Alexander Virgo of Bank of America. Please go ahead.
Hi. Thanks very much. 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. Putting aside the software growth specifically, given that that is being driven by AVEVA, it still looks like service has slowed quite materially from Q2 to Q1. 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 two components in software and service still, I think. 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. 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%-13% of our total turnover. It has been growing. I'm very proud of what we've done there, especially because that was very small in the portfolio of Schneider only 10 years ago. It has been gradual, and most of it has been organic, like investing on deploying people and 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 of what we address is brownfield, so we have to upgrade, has really contributed a lot to the development of services. On services, it's just the beginning of the journey.
We are very systematic in making sure we engage with our customers. We deploy enough field service technicians on the market. We do it in the right conditions of safety because these are business where you go on the site of the customer, and you have to be very disciplined in the way you address it. We stay very committed to keep growing that, with the same momentum in the next coming months and years. Again, I think we just serve only 10% of our installed base, so there is still space for developing everywhere in the world. There, again, we want to associate our partners to the journey, combining our two strengths together to accelerate the development.
All right. I think in the interest of time, we'll probably take two more questions. Maybe let's go with the next one.
Take our next question from Guillermo Peigneux of UBS. Please go ahead.
Hi. Good morning. Thank you for taking my question, Guillermo Peigneux from UBS. I guess, Emmanuel, you alluded to the 80 basis points that you gain on the growth 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? A follow-up on growth, I guess, when it comes to data centers, could you give us a little of granularity whether the energy management growth versus data centers growth in the quarter, i.e., was it growing more, less? I guess, also referring to the comparables that you were referring before and larger intakes in the past. Thank you.
Take the first one, and then the second one.
On the 80 basis point, I understand your question was when did it materialize? I think it has been a performance, I would say, through the H1, quite consistent. Month after month, we have seen that all the action that we had taken largely around the mid of last year, and you have seen the impact in H2 of 2018. We're still sticking to the wall, and that mean that we've increased price and we managed to stick to that, and month after month, we're delivering. We know that this wave of price increase is, of course, now coming to an end. 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.
As I said, I still expect an H2 positive on price. 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 forget that beginning of the year, we put together medium voltage, low voltage, secure power on everything which is power automation. 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 solutions. That is helping, and that will keep helping. Data centers, as you remember, IT is roughly 15% of our group exposure, so a bit more for energy management, but it's only one of the segments we are addressing. 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 one of the fastest consumption growing, in the field of electricity on energy management.
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 APC in 2007, joining the group on building more blocks. We have built a capacity which is more integrated than any other player on the market. This, of course, on a completely global scale in an industry which is looking for global players because they are, by nature, more global. It's only one of the segments we are serving. We see also very nice dynamics, as we said, in some end user industrials, growing the cross-selling with our customers on construction, also, commercial and industrial building.
We'll keep, not to mention something that is to come later in the history, which will 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 Wasi Rizvi of RBC Capital Markets. Please go ahead.
Hi, good morning. Thanks for the question. There was one left for me. It was again on pricing, actually. I think historically you've helped us understand a bit more the geographical spread of how that price actions worked. If you could maybe give us some comment on that to help us then maybe put some of those top-line growth numbers into context to get a feel for how much of that is pricing. Whether the pricing actions you're proposing now, whether the spread is similar or whether you're targeting different geographies.
Well, on pricing, frankly, while we always said I know it was a matter of debate last year, and as we said, we are probably too slow to start last year because we are so focused on growth, on serving our customers that probably in some places we could have been certainly faster and be combining the right pricing with the right growth. But at the end of the day, what happens is often what happens at Schneider, there is a cycle time to get the prices through. This is what we see again, that it took some time to work with the 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 price on even more.
I would say it's across the board, it's across the geographies, but it's more than just pure pricing. It's being more selective about references that were probably not priced properly. Some applications where we offer the customer huge benefits, and we can share better the value of it, and 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. Summarize, what we had started last year, and there was a bit of skepticism is happening, and there is a kind of hysteresis or delay in pricing to take place. That's new in the history of Schneider because we operate with a lot of partners on a lot of things on the pricing across the line. It's more than pricing.
It's 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 IR team is available for further questions, and of course, we all look forward to seeing you in the coming weeks and months. Thank you very much.
Thank you.
Thank you. Bye.
This concludes today's call. Thank you for your participation. You may now disconnect.