Rexel SA

PAR:RXL

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Rexel's First Quarter 2018 Results Call. [Operator Instructions.] I must advise you the call is being recorded today, Friday, the 27th of April, 2018. I would now like to hand the conference over to your first speaker today, Patrick Berard. Please go ahead.

[Patrick Bérard, CEO, Europe GM & Director]

Thank you. Good morning, ladies and gentlemen. Welcome to this presentation of Rexel's first quarter 2018 performance. Today, I am with Laurent Delabarre, our Group CFO. I will start with an overview of the key highlights and detail our performance by geography, and Laurent will present our financials in the quarter. And I will then conclude confirming our 2018 outlook. And after that, we will be happy to take all your questions.Our first quarter performance is in line with our expectations, with same-day sales growth in every geography, with strong cash flow generation, and with stable recurring net income. We saw a solid performance in our key countries, notably France, and in the U.S. Our numbers clearly show the benefits of the transformation actions and investment we have carried out in the past 18 months as part of the strategy plan we presented last year and demonstrate the robustness of our model.Now, let's look in greater detail on Slide 3 with the key financial highlights of our Q1 performance. Our sales of almost EUR3.2 billion in the quarter were up 3.9% on a same-day basis, rising in all three of our geographies in the quarter. At the same time, our gross margin was stable at 25.1%, which is a positive achievement in the current environment. As a result, our adjusted EBITDA margin at 4% was down 32 basis point largely due to a lower absorption of our investment in people and IT as Q1 is seasonally a lower quarter in term of sales, as well as cost inflation, mostly of which is in [some] market.Recurring net income was stable at EUR68.2 million thanks to lower financial expenses through our active refinancing operations and lower taxes. We improved our free cash flow by EUR88 million in the quarter, demonstrating the strength of our model and confirming that we are returning to higher cash conversion rates.Now, if you go to the next page, we have posted solid same-day sales growth, up plus-3.9%. All three of our geographies posted growth, all, with a particularly strong performance in Asia-Pac, and we showed positive trends in our leading countries. This was achieved despite a lower contribution from copper-based cable prices. [In] Europe, representing 57% of our sales revenue, was up 2.8%. In North America, which accounts for 34% of our business, sales rose 3.5%. And in Asia-Pac, which accounts for the remaining 9% of the group, we saw its revenue rise 12.9%.On the next slide, you see that this quarter was marked by an improvement in performance in several key geographies. In France and in the U.S., improved pricing condition and supplier concentration resulted in improved gross margin. It is particularly satisfying to see that, in the U.S., our strategy delivering results. Our new regional and multi-[indiscernible] organizations implemented recently, I may remember you that it was implemented in December, is also enhancing our performance, reinforcing our more customer, more SKU approach.We also saw a better contribution to sales and profitability from the other geographies. In the Netherlands, our strategic focus on multi-energy resulted in the double-digit increasing sales, up 13.3%. And in China, we also improved margin thanks to strong sales in automation. At the same time, we faced some headwinds in the quarter, notably the carry-over impact of our investments in people and IT in a quarter that is traditionally lower in term of sales. About half of our additional OpEx in the quarter are related to investment in digital and people to boost future growth. We also faced wage and cost inflation, and so some country-specific situations, notably a drop in sales in the U.K. and Norway, which we will detail in the next slide.Now, let me go by geography a little bit more detail. On Slide 7, let's start with Europe. Sales in our biggest region stood at EUR 1.8 billion in the quarter, up 2.8%. As you see in the graphic on this slide, we saw growth in most countries, but with [a] notable exception of the U.K., where sales were down 5.6% as a result of a combination of sales force reorganization, 13 branch closures, and [unsure road] weather conditions.In our home market of France, which accounts for more than one-third of our European sales, our revenue was 3.8%, driven notably by the residential and industrial segments, which were both up in mid-single digits. The efficiency of our business model allowed us to capture market growth. Scandinavia saw overall growth of 1.6%, reflecting the contrasting performance between countries. Finland posted double-digit growth of 15.2%, and Sweden continued its strong growth, with sales up 4.5%, while Norway was impacted by the loss of a large contract and adverse weather conditions. Switzerland posted solid 8.7% growth thanks to sudden momentum in the project business amid a competitive environment. And the Benelux also grow strongly, with sales up 6.1% mainly thanks to the Netherlands, up 13.3% thanks to our focus on the growing multi-energy segment.If you go to the slide after, North America, I'm very pleased to share that our sales growth of 3.5% to a [level] over EUR1 billion was driven by both Canada and the U.S. In the U.S., where sales were up 3.2%, we are clearly seeing the benefit of the various initiatives we have put in place. We have gained more than 9,000 customers, and recent branch openings are contributing 1.3% in additional sales. We are seeing the positive commercial impact of our new organization in eight regions, which we have been [put] recently under the sole responsibility of Jeff Baker, allowing us to reach more customers, drive efficiency, and increase collaboration between [banners], which create opportunities to turn customers into multi-banner accounts.In terms of end markets, residential is up in double-digits, and commercial is up in mid-single digits. Industry saw positive contribution from oil and gas, which was up 10% in the quarter. Our project business continued to be affected by lower wind and power project with a large customer. Canada saw strong acceleration, with sales up 4.8%, mainly driven by strong industrial sales, notably in oil and gas and mining.Now, let's complete our geographical review with Slide 9, about Asia-Pac, where our sales were up in double-digit and reached EUR284 million. Both sub-regions showed solid growth. The Pacific one was up 7.9%, with growth in both Australia, where all three end markets showed positive momentum, resulting in 9.4% sales growth; and New Zealand, whose revenue rose 1.1%. Asia posted very solid 19.1% growth, with China up 10.1% on the back of an excellent performance in industrial automation. We also saw [indiscernible] dynamic in the Middle East and India, supported by a large project win in the Middle East and strong automation sales in India. After that top line [indiscernible] by geography, let me now hand over to Laurent for the review of the financial performance.

[Laurent Delabarre, Group Chief Financial Officer]

Thank you, Patrick, and good morning to all of you. I will start on Slide 11 with our sales numbers. Let me point out that we have restated our Q1 2017 numbers for IFRS 15, the new IFRS rules related to revenue recognition, resulting in an [indiscernible] 0.1% drop in sales to EUR3.3 billion.On the reposted basis, our sales are down 4.2% in the quarter as a result of three unfavorable effects - first, currency has an adverse effect of minus 6% mainly due to the depreciation of the U.S. and Canadian dollar versus euro; second, scope had a negative effect of 0.8, resulting from the recent divestments in Southeast Asia; third, and finally, calendar had an impact in the quarter of minus 1.1% largely because Easter came earlier this year. Concerning currencies, we expect the foreign exchange effect to gradually ease over the year, and our forecast, [assuming] spot rates remain unchanged, [is] an impact of minus 3.8% from sales in the full year 2018. On a constant and same-day basis, our sales were up 3.9%. Also, I've shown on the chart on the right-hand side of the slide, we saw a lower positive contribution from copper price this quarter of 0.8% versus 1.2% in the same quarter last year, and 1.6% in Q4 of 2017. As shown also in the chart on the right-hand side, we expect the next 2 quarters to be reasonable favorable both in terms of base effect, while Q4 will be more challenging.On Slide 12, we turn to our profitability by region. Overall, with adjusted EBITDA of EUR 127.2 million, our adjusted EBITDA margin stood at 4%, a drop of 32 basis points coming from both Europe, North America, and corporate costs, partly offset by an improvement in Asia-Pacific. As shared by Patrick, our increasing OpEx can mainly be explained by the carry-over effect of our investment last year in people and digital in a seasonally low quarter in term of sales, as well as some inflation in our wages and costs. In Europe, gross margin stood at 27.5%, stable year-on-year. The 25 basis points drop in adjusted EBITDA margin was due to wage and cost inflation in the region, lower volumes in U.K. and Norway, and investments in people and IT, which offset strong operating leverage in France.In North America, gross margin improved by 32 basis points to 22.8% thanks to better purchasing conditions and pricing initiatives in the U.S., especially in our proximity business, while investing in people and in new branches. Our slight drop in EBITDA margin in the region is attributable to an OpEx increase relative to higher freight costs and investment in our sales force in Canada, which offset solid operating leverage in the U.S.In Asia-Pacific, we saw reverse movements. Gross margin fell 75 basis points due to a phasing project in the Middle East and country mix, with China growing faster than the rest of the region. Our EBITDA margin was up by 35 basis points thanks to better volumes and strict cost control. Our corporate costs were higher than last year mainly because of additional investments in IT and digital, but also because of the nonrecurring impact of long-term incentives. On a full-year basis, we anticipate [a normative] level of spending at corporate level at around EUR35 million. On Slide 13, we looked at the bottom line part of our P&L. Let's start with our reported EBITDA of EUR125.4 million, down 13.4%, including a one-off negative copper effect of EUR1.8 million. Other income and expense amount to a negative EUR7.4 million, including restructuring costs for EUR6.8 million. We confirm our full-year restructuring expectation of around [EUR15] million for 2018.Our net financial expense improved to EUR24.9 million, reflecting our reduction in average net interest rate on our gross debt to 2.9% as a result of active refinancing activities, as we will see later on. We also saw a drop in our income tax to EUR28 million as we benefited from the positive impact of U.S. tax reform. Our effective tax rate stood at 31.6%, and we now expect our normative tax rate for 2018 to be around 32%, excluding any one-offs. The net income was EUR60.7 million, and our recurring net income was stable at EUR68.2 million.On Slide 14, we turn to our balance sheet, which reflects [indiscernible] with improved cash flow and working capital that resulted in lower net debt. Indeed, as you see on the chart, our working capital improved by almost EUR103 million thanks to a phasing effect in inventory buildup in 2017 in France and in the U.S., leading to lower payables. Our free cash flow before interest and tax improved to an outflow of EUR119.2 million from an outflow of [EUR206.7] million. We expect to return in 2018 to a higher level of cash conversion versus 2017 [indiscernible] as a strength of our model.Net capital expenditure was down to EUR23.1 million from EUR25.5 million in the same quarter last year. We confirm our full-year 2018 CapEx should be close to EUR135 million. Our net debt reduced by [EUR215] million, [of] 10%, to EUR2.2 billion, was also helped by a positive currency effect.On Slide 15, we take a look at our financing and maturity situation. In early 2018, we refinanced our senior credit agreement, reducing its amount to EUR850 million from EUR982 million, and also reducing the [indiscernible] cost. As shown on the chart, and thanks to our [key] refinancing strategy in 2017, we have no debt maturities [fall in] June 2018, and no significant repayments before 2023, with an average maturity of 4.3 years. As mentioned earlier, our average interest rate on gross debt is 2.9%, which represents a drop of 33 basis points year-on-year. We anticipate our full-year financial costs to be around EUR110 million. We also maintain some financial flexibility, with liquidity of around EUR1.1 billion at the end of the quarter, including our undrawn senior credit facilities.I will now hand back to Patrick for his concluding remarks.

[Patrick Bérard, CEO, Europe GM & Director]

Thank you, Laurent. Let me conclude on Slide 16 with our outlook. We are continuing to execute on the strategy we presented last year, and our first quarter performance reflect the choice we made and a lot of their positive effects. On the back of this performance, we confirm our financial targets for the full year as presented in last February. And let me remind you that we target at constant scope of consolidation and exchange rates - one, sales up in the low single digits on a constant and same-day basis; two, a mid- to high-single digit increase in adjusted EBITDA; three, a further improvement in our net debt to EBITDA ratio. With this, we thank you for your attention, and Laurent and myself are now [ready] to have -- very happy and ready to take your questions. Thank you.

[Operator]

[Operator Instructions.] Sebastien Gruter.

[Sébastien Gruter, Research Analyst]

First question on Europe. I understand the investment in digital, but should we assume that we keep going up in the coming quarters, or are you satisfied with the current level, and also, [can't you] accelerate the product [indiscernible] to offset this? And on this topic, can you update us on the turnaround plan for Germany and what could be the impact on European margin if it's successful?

[Patrick Bérard, CEO, Europe GM & Director]

We will not decrease our investment in digital, whether it's Europe or non-Europe, Central, because it's fundamental for the strategy for the future. It's fundamental because it's a chosen, conscious decision to improve our digital content, number of customers [indiscernible] digitally connected to us, and so on. Therefore, yes, it will continue throughout the year in term of investment.Your question about Germany in a turnaround situation, we are finalizing the detail of the portion on which we will [that] develop and invest for the future, and the portion where, either for market condition or because of our existing [starting] point, we will not invest in the future. And we have 10% market share in the country. We are [rather] strong in the South, but where we are the strongest is a strong industrial offering on which we decided to focus more heavily. Germany remains a large and attractive country for that business, [the culture] [indiscernible] for Rexel. Yes, we have some loss-making businesses that we are currently addressing, and we have ongoing discussion with our [indiscernible], if you are familiar with this practice. And that is why sometimes it takes longer than one could imagine. But Germany is offering good market and industry, good partnership with key suppliers, and we are refocusing on this portion of the market.

[Sébastien Gruter, Research Analyst]

And how much of Germany is industry versus construction?

[Patrick Bérard, CEO, Europe GM & Director]

Consider that industrial products being sold to industry or to maintenance and so on, therefore industry or product is a good half of what we sell today.

[Sébastien Gruter, Research Analyst]

And I have a follow-up on France, [certainly] disappointing in Q1. I guess there is maybe some weather impact here, as well, or as developed the quarter. And can you give us some color on April in the first few weeks? Are we still in this 4% gain of cost?

[Patrick Bérard, CEO, Europe GM & Director]

I will tell you, France everybody should take the numbers, because especially in Q4, we had a very high growth rate, which had -- because there is a good momentum, the market is good, we have the same footprint as the end of last quarter. We have the same [indiscernible]. We have the same customer. Nobody has become bad where it was good last quarter, [indiscernible]. It continued to be good. It continued to be solid. But, there are 2 things, that yes, there was a little bit of weather, and I didn't want it to comment. Other people have done it before me. And we have positive sales numbers with residential, up from 5.7%, non-resi lower, and industry up 5.1%. At the same time, a conscious decision was made to [privileged] the quality of the growth and not to grow for growth [indiscernible] prices. There are project in the country. There are places in the country where there were some price battles, especially on the cables front, where we decided that it's good to go for long-term profitable growth and not just for top line, which I could have done, and we decided not to. However, we serve our good customers in a very good way, and I do not worry at all about our activity in this country and medium-term profitability. As you know, this is a good profitable business, and it continues to be, and it does improve every day.

[Laurent Delabarre, Group Chief Financial Officer]

And we do not want to emphasize too much on the weather, [as is maybe a good time] [indiscernible]. But, each year that [indiscernible] in U.K. in [indiscernible], and it's very [standard] in the U.S. We had some weather impact. There is also the phasing of Easter being in March this year, and all of that has a slight impact on the top line. And we see a good momentum in April on catch-up in term of the country. And globally, at group level, the weather impact is in [indiscernible] [EUR8] million on the top line.

[Operator]

Andreas Willi.

[Andreas P. Willi, Head of the European Capital Goods]

Just wanted to focus on the U.S. market, if you could help us a little bit maybe with a broader picture what's going on there, and specifically for you between Gexpro, which I guess was difficult, and the rest of the business, which is pretty good. We've had some mixed results from peers, Westcott, very good growth but a lot of gross margin pressure. [Annex] had very poor results overall. How do you see the market overall in terms of pricing, gross margins, and how much did GE Industrial Supply hit you again in the quarter compared to what it could have been without if you just look at it including that business?

[Patrick Bérard, CEO, Europe GM & Director]

First of all, let me make a comment which is not a [indiscernible] comment, but it would [achieve] the real fundamental one. For the first time, I can share with all of you today that I feel very confident. I was confident in our actions, [and I feel] confident in the actions bringing results. And what we have done, and continue to do, and the continuous changes, including the management changes we have done, are really getting every day more solid, customers more happy, our sales force more active, and we improve our service level, our relationship to the vendors, and so on. Now, there are a few situations, which you mentioned some of them. There are a few situation which we still need to fix. Now, globally, the regionalization allows us to have a very effective, much better support from our vendors because they are regionally organized. Second, we will benefit our customer. We'll start, very early stage, from they can become a multi-banner, meaning would they want to get from one banner, they could get an alternative from another banner, or complementary from other banners, which in the More Customer, More SKU will help. One of the banner, Gexpro, obviously by its profile of the [past], and Gexpro, GE, suffer less now from GE IS performance, which has been able in the last quarter to provide better supply chain than it was in the past. On the other hand, we suffer a lot of what we already had at the last -- in Q4, but now we have in full probably for the first half of this year, which is GE as a customer. GE as a customer, which is not GE IS, is down by 34%. For us, it's [missing] sales of EUR30 million, and it contributes to minus 1.6% of the total U.S. sales, okay? Absent this, because GE as a supplier, we were able to reach plus-8%, which contributes to .3% up in the total sales. But, it's really GE as a customer who is now the main issue, and it's an issue of a customer who has reduced its activity, its [indiscernible], and as a result, being the first supplier to them we have suffered from. And now, GEIS is still in the process of being acquired by ABB, and we'll wait for the Antitrust Authorities to release in order to improve the Gexpro network capability to sell. But, as I'm telling you, at least short-term, very short-term, we'll get better supply chain and availability of product by GE. But, the big thing is GE as a customer. And yes, this is the only thing that really impact Gexpro today. Otherwise, the rest is really accelerating in sales, and we have put the [eight] regions recently under one, under Jeff Baker. We have open one branch, and we have made 2 [indiscernible] counters in the beginning of this year. We will do our plan that we have shared with you last year. As long as we see that the benefit of the previous year and the carry-over are both in gross margin and as planned in the [cross-team] match the scenario that we have shared with you, and so far it is the case.

[Patrick Bérard, CEO, Europe GM & Director]

To the question -- you had another, and I'm sorry, in your question there was a price increase, and gross margin in the U.S. There was a modest price increase, around 1.5% in the U.S. We work more on our own pricing system, [being on that], in order to increase our margin. And we use the rollout, our proximity model, and the more and better service we provide in [indiscernible] to really improve our own profitability through our locally, one-by-one, by having an active pricing strategy beyond the price increase of the suppliers, just to be complete with you. It's [indiscernible], I'm sorry.

[Operator]

James Stettler.

[James Edward Stettler, Managing Director]

If you look at the headwinds that you saw in the quarter in terms of freight, in terms of cost inflation in France, how much of that was expected and built into your full-year model? And also, in terms of another end market which has been quite tough, could you talk a bit about what you're seeing in lighting? Any light at the end of the tunnel? And then, just finally on wind in the U.S., I do believe you said last quarter that that is now washing through, but you're still seeing headwinds. How long are we going to see these coming through your U.S. results?

[Patrick Bérard, CEO, Europe GM & Director]

There is one thing on the horizon in term of costing that's -- yet freight is not -- it's an inflationary component of our business, to the point that [indiscernible] seriously, probably one thing new to me new. I mean, I knew it was this, but we will probably adapt, certain of either the freight charges or the freight cost to be charged to the customer for certain part of the freight is probably on the horizon, not yet implemented. But, the freight is going higher and faster. Now, how much was in our model? Some was in it, let's face it. So far, it's a little bit more than we thought, and therefore we are taking actions on the short-term to avoid having an issue on the front. On the other hand, we need probably to look into how much of, for example, the [indiscernible] business, that you do shipment. If you don't charge for the shipping, then -- or we don't charge enough for the shipping, that would be an issue. And therefore, freight costs for us, as for others, there will be the one which could be the standout one that could be for us, and that should be special freight, which has to be charged more systematically. We work on it. [Indiscernible] is the model of the future which should reduce our freight by bringing the products closer to the customer so that customer would collect. There is a tendency in that, but this is medium-term. Short-term we had in our model, and it has been a little bit higher than we thought. On the light, the lighting, wow, lighting beyond the fact that lighting was deflationary due to the LED, it goes beyond that. It goes beyond the fact that we have reached the moment where the LED length and the replacement has reach its peak. Now, we are going into a -- less to be replaced, and for the one already installed, no replacement coming because of the [matter of life]. There are still a few to come, certain technology, especially in Europe, where the timetable tells us should be replaced by LED. But, in the U.S., there is still a lot to be done, but the lighting, it's, volume-wise, not increasing a lot, price-wise, deflationary. And now, it's all about lighting systems and solution, and we are participating to it. We have key vendors bringing solutions to the light and bringing the fair recently has shown that it's all about connected lighting. It's all about lighting solutions. But, the total industry has not yet set the price for how much to charge for a [indiscernible] lighting solution. It's probably an element of the industry where we are no longer in the old model, end up getting in the new model. It's probably a year where structurally there is a lot to be fixed, and we participate to it. On one hand, we sell as much as we can, but we know that we have to bring complete solutions and brand-new ones, and therefore it's certain that marketing -- to be put to the market.

[Laurent Delabarre, Group Chief Financial Officer]

And lastly, there was a question on the [wind] in the U.S. Yes, there were non-renewal of GE Wind contract. I mean, that is in effect of minus 0.3% on the Q1 top line of the U.S. That will be as most of our [indiscernible] will tough to catch the base effect in the coming quarters.

[Operator]

Lucie Carrier.

[Lucie Anne Lise Carrier, Vice President]

The first one is a follow-up on the previous question regarding the investment impact on the margin. I understand that some of that impact is due to the fact that the first quarter is typically quite a small quarter, and we've also had less working days. So when we think of those impact of investment during the rest of the year, are you expecting a similarly strong impact, or in fact you should have much better cost absorption, and the impact is kind of easing through the rest of the year?

[Laurent Delabarre, Group Chief Financial Officer]

Thank you, Lucie. I will answer on this one. We have the carry-over of the investments we made last year, and we continue to increase in Q1 2018. That is on a quarter that, as you know, is the smallest of the year, so there is clearly an [indiscernible] from [the issue] around that. So in the next quarter, this will be better absorbed by the top line. And basically, if you look at our declining EBITDA of 30 bps, we can [identify] couple of big building blocks. The first one is what we get from the additional top line that bring us an additional 40 bps on the EBITDA of this year. And then, we have the impact of all the investment that we've roughly -- the [set amount] 35 to 40 bps headwinds on the EBITDA margin. Then, we have the impact on the salary and benefits net of the couple of [indiscernible] plan we have for 15 bps. And then, we have the rest which is a mix of specific country situation, U.K., Norway, plus [indiscernible] of one-off. We have a reversal of the [NTI] bonuses last year, or [indiscernible] that did not repeat and all of that. The rest is roughly 20 bps.

[Lucie Anne Lise Carrier, Vice President]

So I understand that, organically, everything else kept equal just in terms from your organic sales, the margin would have been up 40 bps. My second question was around the guidance for EBITDA, specifically adjusted EBITDA. Can you maybe clarify the starting point from which we should calculate the 5% to 10% EBITDA expansion? Because I'm not sure exactly where we start with the different restatement. And when you think of the bridge from this first quarter to reach your objective, can you maybe point at the different element that you think are going to be a bit more positive to support you, and if you see kind of a further risk?

[Laurent Delabarre, Group Chief Financial Officer]

Well, the starting point is a comparable figure of full-year last year, which is the one that we put at the [same action] rate than this year, and that we restate from the disposal of Southeast Asia. And when you do the plus and the minus, we are at 570, which is very close from the 580 we had end of last year. And the main component of the improvement we'll have in EBITDA is of course the traction on the top line, plus the various initiatives that will bring other profit, plus the fact that we have couple of restructuring plan that will have a growing impact in the coming quarter to offset some of the inflation we have in our costs [indiscernible].

[Lucie Anne Lise Carrier, Vice President]

My last question was just around the disposal program. I know you cannot necessarily give all information, but is it still on track to be finalized by the end of the year?

[Laurent Delabarre, Group Chief Financial Officer]

It is still on track. We have a couple of tracks on the same moment, so it's -- nothing is binding, so it's too early to have a [indiscernible] commitment. But, so far, it is on track.

[Operator]

[Simon Tonison].

[Unknown Analyst]

My first question is just on the U.K. Obviously, growth rates have been quite slow for some time now, and you've obviously flagged the margin drag there. How do you see the remaining 3 quarters as obviously comp starting to get a bit easier still in the second quarter, and whether you expect the second half to be of similar weakness as the first?

[Patrick Bérard, CEO, Europe GM & Director]

Yes, I don't expect a lot from -- if anything from the market in term of volume, because I don't see, let's say, a changing pattern from the demand side. On the other hand, first quarter was hit by a few things. I'm sorry to put this, because we should -- I don't want to use it as an excuse, [but I found out] it's an element of life, but we had bad weather in the U.K. early March that was unexpected, and in a short quarter, then if you have 1 or 2 days off, so obviously you get immediately hurt by more than you thought, which should not repeat in the -- hopefully not in the spring and summer time. And that would be -- I know that's very sensitive when a decrease -- in a decreasing market, when things like that happen, it make the case even worse. This being said, we have done the restructuring. It's behind us. We are now in, let's say, finalization, how much do we get from it. And the organization is done. The sales force is fully running in the combined way, as we said. We get the vendors' report, and we are continuing, first of all, get growth more in certain regions where there is demand getting market share where we are low, [indiscernible] vendor support, which we do have, and we will improve both in the concentration and in the margin we generate, and where we would have a few potentially loss situations, a branch here and there. Obviously, we would immediately take actions [up to], which we have recently done, closing 3 of them. On the total now, and this is not a major change, but this is how do we manage short-term in a declining market in order to secure as much as we can the EBITDA.

[Laurent Delabarre, Group Chief Financial Officer]

And U.K. [indiscernible], it was [a reason] from that, but it was the last [indiscernible] [fee] on which we put our common Web shop [indiscernible] in the end of last year. So, gradually, and it's still a small figure, but we see some adoption of this Web shop by our customer, and this will help us in the next quarter or so, and year.

[Unknown Analyst]

And the second question, just on your oil and gas-related business, it's been up again quite nicely in the U.S., 10%, Canada up 9%. Can you just talk a bit more about the verticals that you're selling into here and how you've seen that developing, and also whether you expect those sort of growth rates to continue as we move obviously into the latter part of this year?

[Laurent Delabarre, Group Chief Financial Officer]

Well, first of all, we benefit from this in the maintenance of [indiscernible] past investment that these people have done. They're [reached] onsite. They're reopened. They increase, and they need maintenance. We are not going to big project. We are not going -- even if there are a few on the horizon, it's not the main thing. It could create a distortion of our activities, that we benefit from. The Canadian industry is more dependent than everybody thinks about this, and they went out and [gather these up]. We're benefiting in the oil and gas segment, but we benefit in the industrial [indiscernible] more globally, automation and the rest. This is what's happening now. And in the U.S., yes, it does [indiscernible], [so it's restarted]. We have a few special branches, locations which are highly specialized, and obviously they take their fair share of the market there. Houston is a good example, for example.

[Patrick Bérard, CEO, Europe GM & Director]

You have more to say, Laurent?

[Laurent Delabarre, Group Chief Financial Officer]

Yes, Canada, it's mainly on the midstream. I mean, Canada, it's roughly 7% of our sales. In U.S., [indiscernible] up [by] midstream, and it is 6% of our sales. And our goal at our group level oil and gas is around 2.5% of sales.

[Operator]

[Operator Instructions.] Alfred Glaser.

[Alfred Glaser, Analyst]

Could we start with price evolution? Could you give us the sales price evolution possibly by region, excluding the copper [indiscernible], please?

[Laurent Delabarre, Group Chief Financial Officer]

Yes. The price evolution, excluding cable, at group level in the quarter is plus 1.2%, and by region, it is 1.1% in Europe, 1.6% in North America, and flat in Asia-Pac.

[Alfred Glaser, Analyst]

And I wanted to ask you, on your guidance for this year, you indicated you plan to reduce the indebtedness ratio by the end of the year. And if I remember properly, at one stage you said that you were targeting 2.5 times ratio. Is this still your target for this year?

[Laurent Delabarre, Group Chief Financial Officer]

It has never been our target for this year. It was a mid-term target for the group. We didn't guide specifically in that ratio because we want to -- and the goal [indiscernible] to have some 50 [indiscernible] locations we could find both on an acquisition, especially in the U.S. So, based on what we have [onlines], we said that we will deleverage compared to the level of 2.8 we had this year, but without any precise year.

[Alfred Glaser, Analyst]

But assuming you don't do any acquisitions, do you think you could reach 2.5 times by the end of this year?

[Laurent Delabarre, Group Chief Financial Officer]

It is too early, but in that range, yes.

[Alfred Glaser, Analyst]

Then a third question on your free cash generation. You said you would increase your cash conversion this year compared to last year. Could you give a bit more color on this, how exactly this is spreading into improvement of operating cash flow and what would be the outlook for change in working cap this year?

[Laurent Delabarre, Group Chief Financial Officer]

Well, globally last year it was at 56%, which is the ratio of the conversion of the EBITDA into free cash flow before interest and tax. And that was truly impacted by the increase in the inventory we made last year. And we are [indiscernible] we reached the right level, so it would just [evolve] through the top line evolution, which we plan to be back to historical cash conversion which are more between 60% to 70%. And then, there is less impact of the improvement in EBITDA through the guidance you know, and also good control on the working capital, and probably a bit more CapEx than last year, as well.

[Operator]

[Operator Instructions.] Sebastien Gruter.

[Sébastien Gruter, Research Analyst]

A question for Laurent, because you mentioned in the report that IFRS 16 could have a significant impact on the [indiscernible] situation. Could you give us some color on the expected P&L and balance sheet impact of this new norm you will adopt in 2019?

[Laurent Delabarre, Group Chief Financial Officer]

Yes. We have a very [indiscernible], because everything is in process, and we just selected [for a tool] to capture all our [indiscernible]. And from an operational side, which will be also good news to have a good grasp on how we are renewing these across, and especially the branch, across the countries. And on that side, we [indiscernible] into that continued part. I think it will be a key lever, because to keep them off-target, we need a combination. We [did this] strongly in the footprint of our branches, but it would probably different branches, the smaller [indiscernible] close to the metropolitan area. So this tool will help us to capture any renewal of [fleet], and we will have a more challenging debate with our country [with that tool]. Coming back to [figure], it is important to note, in all our financing agreement, we have a specific clauses whereby any accounting evolution should be taken into account, especially on [indiscernible]. But, from the preliminary study we made, the impact on the debt is quite significant. It's around EUR800 million. Then, we have a [indiscernible] on the EBITDA because we have no more rent since we are carrying -- carry assets, so it will be more than 100 bps positive impact on the EBITDA. And there will be a positive impact on the EBITDA as well, because you have the financial components of the lease that will now be financial charges. So it will be a couple of tenths of bps. Everything is [indiscernible], but [bad guy] on the debt, very [good guy] on the EBITDA, [good guy] on the EBITDA, and at the end, it will have a slight negative impact on the leverage ratio of couple of [turns] that we [levered] to [factor in] this year.

[Sébastien Gruter, Research Analyst]

And did you incur some cost due to the renegotiation IT in 2018 [indiscernible] application? Is it meaningful?

[Laurent Delabarre, Group Chief Financial Officer]

No. No, because of how we don't -- so far, it's mainly an accounting issue. It has no direct impact on the way we are looking at our IT contract so far.

[Operator]

[Operator Instructions.] Andre Kukhnin.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Can I just firstly double-check, back to the profit bridge and the impact on margin in Q1 and how we can take that forward through the year, so if we take the investment impact that you mentioned of 35 to 40 basis points, if we take that as EUR12 million and run it as a quarterly run rate, would that be kind of a right way to think about it while the others, like salary and benefits of 15 bps, should be the sort of 15 bps per quarter as we go forward, and obviously the others we can calibrate according to our top line assumptions? Am I in the right sort of framework of thinking here?

[Laurent Delabarre, Group Chief Financial Officer]

Yes. The investment, there would be the saving of our opening of branches, and with the guidance we give and the number that has been opened in Q1, it will be a positive investment. We'll take a larger part inflation in what we're [doing] with the phasing we have. I think it will be -- grow slightly. The inflation impact will mitigate over quarter, whereby the investment one should probably slightly increase due to the branch opening.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

So the branches openings, could you remind me how many you did in Q1 out of the 20 that you plan for the year?

[Laurent Delabarre, Group Chief Financial Officer]

Yes, [indiscernible], just one opening, and 2 [indiscernible], but that's not the mathematical approach you should have. I mean, it's a phasing. We have sites. We know where we [grow], and we'll do what we [said].

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

On the Middle East project phasing, that impacted Asia-Pac. Could you give more detail on just the magnitude of this, and if this is a Q1 effect? Is there something that's going to carry on for a little while?

[Laurent Delabarre, Group Chief Financial Officer]

No, it's a large contract in the Middle East that has a good impact on the top line. But as you [indiscernible], it has -- it is at a lower margin. The cost itself is also a bit lower, but it will run over [late] part of this year.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Just a very broad question on the U.S. construction cycle, just would be really interested to hear how you view it at this stage, and what you're hearing from your suppliers and your customers in terms of sentiment and their intentions and plannings, how they view it.

[Patrick Bérard, CEO, Europe GM & Director]

Well, right now, first of all, from a customer contact time point, right now there is no softening of any kind. They have project. They ask for many quotations. And always some of the people are really almost fully booked for the balance of the year in terms of job to be done. Therefore, we don't see short-term slowdown. And in the regions where we are, it will be -- I am not reflecting an entire U.S. market. There are discrepancies in our regions. But in the regions where we are and we make most of our business, we don't notice slowdown. We were hurt in the Northeast by weather conditions, but we were not hurt by lower demand.

[Laurent Delabarre, Group Chief Financial Officer]

We can say that we are not infirmed by the trade war, especially the steel and aluminum. It has no direct impact. We don't source anything in China. We are purchasing and buying everything locally. There is a very important [thing here], the tax reform in the U.S. is giving a lot of money back to the company, and this will be invested probably in manpower, but also in productivity tools, and that is also product we are selling, so on that side. And we'll see to our automation business. That is positing quite interesting growth.

[Operator]

Timm Schulze-Melander.

[Timm Nikolaus Schulze-Melander]

You referenced GE and the change in demand. Obviously there are a lot of moving parts there. Just wanted to get your take. Is this a cyclical, and therefore sort of temporary demand shift, or is there something more permanent and more structural in perhaps the way GE is changing its purchasing decisions?

[Patrick Bérard, CEO, Europe GM & Director]

Well, GE could answer better than me on what their future plan are, where they have reduced factories, closed factories, relocated, merged 2 into 1. Therefore, for me, it's not a short-term aspect. For me, it's GE as a customer who will not come back to higher level. Now, there could gain in certain businesses, and we could benefit from as they grow. But really, GE is a vast diversity of activities, and they have their own strategy, and they went through an entire restructuration plan, which has a manufacturing site and is the main one we [indiscernible] from. This is when they stop activities, or close down or relocate and put this -- as I say, merging activities, 2 into 1. And it's a reprofiling of GE, which for me make it long-lasting change in the demand. Therefore, we need to adjust ourself. I take this for a given, it's granted. It's like this, and nobody expected it to be done so quickly. A year ago, nobody was even talking about it. Now, GE has its own strategy. We were a main supplier for certain products. Most of it was run the last 4 months of last year, and by the time we can [indiscernible] say that developing other customers, this [part of] the 9,000 new customer we have made in the U.S. on this particular [GX Pro activity], this is where we registered the hit, and we need to compensate.

[Operator]

Thank you very much. There are no further questions. Please continue.

[Patrick Bérard, CEO, Europe GM & Director]

Well, thank you, first of all, for having been with us all day long. I would like to close with one comment. Looking at the first reaction after we showed the results this morning, I think there has been a little bit of misunderstanding, potentially, which I would like to be sure it's not. Well, because everybody compares the 4% with the 4.3% of last year. For us, the 4% was our expectations, and it is our budget. And we knew we would have this. And the 4.3% from last year had something to do with the [indiscernible] in '16, and the 4% of this year has to do with our [indiscernible]. Therefore, I want to tell you that I feel being online with our expectation because it was internally our plan, just to help you in measuring where we are.Thank you for your attention, all of you, and thank you for the quality of your questions. Thanks a lot. Have a good day.

[Operator]

Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.