Rexel SA

PAR:RXL

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Rexel Second Quarter and Half-Year 2018 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, the 31st of July, 2018. And I would now like to hand the conference over to your first speaker today, Patrick Bérard. Please go ahead.

[Patrick Bérard, CEO, Europe GM & Director]

Good morning, ladies and gentlemen. Welcome to this presentation of Rexel's second quarter and first half-year 2018 performance. Today, I'm with Laurent Delabarre, our Group CFO. I will start with an overview of the key highlights and the details of performance by geography. Laurent will then present our financials in the quarter, and I will then conclude and confirm our 2018 outlook. After that, we will take -- we will be very happy to take all your questions. Let me say as an introduction, overall, Rexel posted a strong performance in Q2 and H1. Further proving that all the elements of the strategic plan are delivering operational results and are making us commercially stronger. On Slide 3, you see that we are successfully executing our 2017 strategic plan as announced, and Rexel is back on the growth path. After 4 years of underperformance, Rexel is now steadily growing quarter-after-quarter since Q4 2016 and with growth in all geographies. We are making advances in all pillars of the plan with more customers, more SKU and more digital sales, which now account for 15.7% of sales. Our key priority of turning around our U.S. operations [ channel ] initiative including the addition of people, more branches, inventory as well as the adoption of our multi-banner regional organization is showing solid achievements. These are translated into sales growth acceleration and operating leverage, with EBITDA margin up 70 bps in the quarter in the country. With these initiatives staying [ up ] in U.S., we are now returning to addressing the last bucket of underperforming businesses in Europe with a restructuring of activities and a new strategy focused on industry in Germany and a more original approach in Spain. Most of these initiatives are designed to improve profitability in this country. Finally, our disposal plan is progressing, and Laurent will tell you more about it later. The first half gives us confidence in further improvement over the year as well as in the medium term, and we confirm our full year financial targets as announced in February. Now let's have a look at the highlights of Q2 and H1, starting on Slide 4. As you can see, Rexel's sales and profitability improve in Q2. Our sales grew for the seventh consecutive quarter reaching more than EUR 3.3 billion. This represents a same-day growth of 5.1% in Q2. Concerning profitability, while our gross margin is broadly stable, our adjusted EBITDA grew by more than 10% with a margin increase of 20 bps on a comparable basis to 4.8%. Now let's look at our H1 highlights. Slide 5. Our sales are more than EUR 6.5 billion in the first half. We are up 4.5% on a same-day basis, rising in all 3 of our geographies in the period. Our gross margin was stable at 24.8%, which remains a positive achievement in the current environment. Our adjusted EBITDA margin at 4.4% was down 5 basis points on a comparable basis, largely due to our investments in people and IT as well as cost inflation, mostly are weighted and [indiscernible] into markets. Recurring net income was up 13% at EUR 157.7 million, with a positive momentum in Q2 up 28%, thanks to good operating results, lower financial expenses through our active refinancing operations and lower taxes. And we improved our free cash flow by EUR 94.5 million in the first half, demonstrating the strength of our model and confirming that we are returning to high cash conversion rates. At the end of H1, we have positive free cash flow of nearly EUR 18 million before interest and tax. And now let's look at each of the geography. On Slide 7, you will see that we posted solid same-day sales and steady growth at 5.1% in Q2. All 3 of our geographies pretty close and Europe and North America show their growth accelerate in the quarter. Europe representing 55% of our [ achieved ] revenue was up 4%. In North America, which accounts for 36% of our business still rose 6.5%. And in Asia-Pac which accounts for the remaining 9% of group sales, [ for which ] revenue rise 6.3%. As you see on the graph showing 10 quarters of same-day sales growth evolution, each region contributes quarter-after-quarter to growth. with Europe, in positive territories since end '16, North America [ and Asia-Pac ] since the beginning of 2017. Let's begin our geographical review on Slide 8 with Europe. Taking our biggest region stood at EUR 1.86 billion in the quarter, up 4% on a same-day basis, marking a sequential improvement in several key markets. In our home market of France which accounts for more than 1/3 of our European sales, our revenue was 3.7% driven notably by the residential and industrial segments, which were both up in the mid-single digits. The efficiency of our business model allowed us to capture market share. We are also seeing positive trends notably key countries, Scandinavia, Benelux, Switzerland. Benelux showed a solid 9.8% growth, with a successful recovery in the Netherlands, which is growing in strong double digits. Let me highlight that this performance followed the [ transition ] last year of the Benelux cluster, which was placed under the responsibility of our Belgium CEO and it's showing good results. Germany's transformation plan is progressing and we recently announced we are refocusing the business on the more profitable industrial segment on a national basis. And on the C&I in the southern part of the country where we have a stronger footprint. As announced in June, we are closing 17 branches in the C&I in the north. The U.K. on the other hand continued to be difficult, with sales down 4.2% in the quarter. A good part of the drop is related to 4 large accounts and to the temporary effect of our sales force reorganization, which continue to affect us in a declining market. On Slide 9, let's focus on the digital strategy in Europe. We saw strong growth of digital sales in Europe, which was 16% on a same-day basis in the first half. Digital penetration reached 22.5% in H1 versus 18.1% in '15, with 8 countries now above 25%. The profitability of the highly digitalized country is on average higher than group profitability. This growth was not only driven by France, group's penetration rate increased by 240 bps in the first half of -- in the first half to reach 13.1% of sales. We also saw solid growth in digital sales in [ other ] key markets, notably Netherlands, Switzerland, Finland. Lastly, note that the U.K. has onboarded on Hybris in Q4 2017 [indiscernible] in order to boost digital sales, which have stronger outside potential. On Slide 10, let me now turn to North America. In North America, we looked in greater detail at where we stand in our transformation. As you know, when we presented our strategic plan in February '17, we said, that fixing our U.S. operation and undertaking initiatives to relaunch growth were our key priority for Rexel. 18 months later, we can say that the turnaround is well underway and is producing very positive results, and I would like to thank the team for their engagement. The combination of these initiatives, including additional headcount in logistics and sales reps, branch openings and the implement of the regionalization strategy, all translating into strong topline growth of 7.3% in the quarter, despite the remaining impact of our Project business, which cost us 1.3%. That illustrates that we are now able to benefit from the favorable environment, which was not the case in the recent past. While we continue to win new customers, our branch openings contributed for 1.9% of sales growth in Q2. Note that we have opened 1 new branch and 3 [indiscernible] counters in 2018 as we have been focusing on the regionalization strategy and are now doing more branch refurbs than initially anticipated, as we see a lot of value in this transformation. We will accelerate the branch openings in H2 and anticipate the number of branch [ and plant-like counters ] openings to be close to 23 at the end of the year and circa 60 over 2 years. These initiatives should bring us around 2% of growth in 2018. We've also improved the level of service with more inventories in the organization. Our [ shelf ] rates which corresponds to the products we have on shelves when an order comes, has increased by 280 bps to 96.9%. Thank you to the team, it's a great achievement, and it helps making customers happy. Lastly, let me comment on the regionalization and what it brings to the organization. Each of the 8 regions is under the responsibility of one dedicated CEO, and we now leverage on our different banners to offer the best solution to our customers and we want competition between banners with a better coordination. Every region is also responsible for its logistic organization, and we also expect productivity gains from these regionalization. Overall in North America, sales reached EUR 1.2 billion, up 6.5%, driven by both the U.S. and Canada. On Slide 11, we complete our geographical review with Asia-Pac, where our sales were up 6.3%. The Pacific was up 2.1%, which [ closely ] impacted by the disposal of Rockwell Automation business in Australia. Excluding that transaction, underlying growth in Australia remains strong, up in the mid-single-digit with a good performance in residential and industrial. Asia posted very solid 11.1% growth with China up 3.4%, despite challenging [ base effect ], reflecting good performance in industrial automation. We also saw a favorable dynamic in the Middle East and India as reported by a large project win in Middle East and strong automation sales in India. Let me now hand it over to Laurent for the review of our financial performance

[Laurent Delabarre, Group Chief Financial Officer]

Thank you, Patrick, and good morning to all of you. I will start on Slide 13 with our sales numbers. Let me point out that we have restated our Q2 2017 number for IFRS 9 and 15, the new IFRS rules, resulting in a nonmaterial 0.1% drop in sales with EUR 3.3 billion. On the reported basis, our sales were up 1% in the quarter as a result of the positive 5.1% same-day sales growth and a positive calendar impact of 0.6%, partially offset by 2 unfavorable effects: currency, for minus 3.6% mainly due to the depreciation of the U.S. and Canadian dollar versus euro, and scope for of minus 0.09%, resulting from the divestments in Southeast Asia. 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 2.7% on sales in the full year 2018. As shown on the chart on the bottom right-hand side, we saw very stable positive copper price contribution in Q2 at 0.7% compared to Q1 was lower than in 2017. On the chart above, we clearly see that while accelerating sales, our top line growth will benefit in Q3 from the originally favorable comparable base that will become an option in June in Q4. On Slide 14, we see our adjusted EBITDA bridge. Adjusted EBITDA was up 10.2% to EUR 161 million, and margins stood at 4.8%. Our 20 bps improvement in Q2 '18 on a comparable basis is explained by a 55 basis point volume and price contribution that more than offset the negative impact of investments for 25 basis points and cost inflation, notably [ vegies and fries ] net of positivity gains for 10 basis points. On Slide 15, we turn to our profitability by region. Although adjusted EBITDA of EUR 161 million, our adjusted EBITDA margin stood at 4.8%, a 20 basis point increase mostly coming from North America. In Europe, gross margin stood at 26.6%, down 37 bps year-on-year due to more competitive environment in Switzerland, Nordics and Germany, notably in the cable business. Positive volume in the quarter helped particularly to offset cost inflation and gross margin erosion, which led to a 3 basis points growth in adjusted EBITDA margins. In North America, gross margin improved by 66 basis points to 23.1%, thanks to data purchasing commissions and pricing initiatives in the U.S. Adjusted EBITDA margin grew 70 bps to 4.5% in volume growth more than offsetting cost inflation and the carryover effect of investments in people and branch openings. In Asia Pacific, adjusted EBITDA margin was 60 basis points with 2%, thanks to positive pricing in China and volume contribution, offsetting a competitive environment in Australia and the Project business, and the disposal of the Rockwell Automation business. Our corporate costs stood at minus EUR 6.4 million and were EUR 2.7 million higher than last year, mainly because of additional investments in IT and Digital that was slow because of the nonrecurring impact of long-term incentives. On a full year basis, we anticipate the nonmaterial level of planning at corporate level at around EUR 35 million. In the first half, adjusted EBITDA stood at EUR 288.2 million, up 3.1%. On Slide 16, we look at the bottom line part of our P&L. Let's start with our reported EBITDA of EUR 287 million, down 1.8%, including a one-off negative copper effect of EUR 1.3 million. Other income and expense amounts to a negative EUR 60.7 million. Increasing restructuring costs of EUR 59.5 million, mostly related to reorganization in Germany and Spain. For the full year, we now state that the restructuring expense will be above the normative level at around EUR 19 million. Our net financial expense improved to EUR 50.2 million, reflecting a reduction in average net interest rate on our gross debt to 2.85% as a result of [ actively ] financing activities. We also saw a drop in our tax -- in our income tax to EUR 66.9 million as we benefited from the positive impact of U.S. tax reform. Our effective tax rate stood at 39.9%, above our normative tax rate of 32%, owing to the restructuring expense in Germany and Spain, [ additional ] tax assets cannot be activated. On a full year basis, I'm taking into account these one-off effects. Tax rate should be close to around 36%. Net income was EUR 100.8 million, up 4.2% and our recurring net income was up 13% at EUR 157.7 million. On Slide 17, we turn to our balance sheet, which we confirm in the quarter with improved cash flow and working capital that resulted in lower debt. Indeed, as you can see on the chart, our working capital improved by almost EUR 71 million. Our free cash flow before interest and tax improved to an inflow of EUR 17.8 million, from an outflow of EUR 76.7 million in H1 2017. We'll confirm our objective to return in 2018 to a higher level of cash conversion than of 2017, demonstrating the strength of our model. Net capital expenditure was down to EUR 32.1 million from EUR 53 million in the same period last year. Please note that this includes the proceeds from the disposal of our Rockwell Automation business in Australia, and that our growth CapEx stood at EUR 50.4 million. We confirm that out full year 2018 growth CapEx should be close to EUR 130 million, which corresponds to an net CapEx close to EUR 110 million including the proceeds we will receive from the disposal of our Rockwell business in Australia.Our net debt was reduced by EUR 194 million or 8% to EUR 2.1 billion. On Slide 18, let's take a closer look at the breakdown maturity of our debt. The chart show that we have no short-term maturity on our [ branch ], with no significant repayment before June 2023, and an average maturity of above 4 years. 2017 was a very active year in term of refinancing in order to capitalize on favorable markets opportunities, with the refinancing of 2 [ brands ].More recently, at the end of January 2018, we refinanced our Senior Credit Agreement and reduced the amount from EUR 982 million to EUR 850 million as well as [ other income ]. Our net-debt-to-EBITDA was stands at 2.9x at June 30, 2018, down 42 basis points year-on-year. This active financial management is reflective in the average effective interest rate on gross debt, down 40 basis points year-on-year to 2.85%. For 2018, we expect financial results to be around EUR 100 million, EUR 110 million presently anticipated, assuming no major volatility in currency or interest rate. Our interest rate should be below 3% in 2018. We also maintain strong financial flexibility with liquidity of around EUR 1.2 billion at the end of June, increasing our ongoing [ senior ] credit facility. Let's move to Slide 19 with an update on our disposal plan. Following detail work in each countries, we have updated our strategic portfolio review. As a result, we have revised the figure of sales to disclose to EUR 650 million from EUR 800 million previously, including the downsizing of some activities in such countries as Germany and Spain. The downsizing of activities, combined with disposals in Southeast Asia and Australia, represents EUR 530 million in sales. We expect the remaining disposal of downsizing our sales for EUR 120 million of sales to be completed by the year 2019. We confirm that the disposal plan will have a positive impact on adjusted EBITDA margin of 25 basis points, once completed, unchanged from our previous target. Please note that we usually discuss our sales in adjusted EBITDA numbers on a comparable basis, but that's a disposal and on the reported basis, it is interesting to note that our adjusted EBITDA margin is up circa 15 bps already in the first half, showing the positive effect of the disposal plan executed in 2017, as we will get more out of our downsizing of Germany and Spain as well as remaining EUR 120 million in [ projects]. Let me now hand over to Patrick for concluding remarks.

[Patrick Bérard, CEO, Europe GM & Director]

Thank you, Laurent. I can conclude now with the Slide 20 and the outlook. We are continuing to execute on the strategy we presented last year. And after starting to see positive results in U.S., we are addressing the remaining forecast of under performance in Europe, which should support our improved performance in the coming quarters. Our second quarter performance reflect the choices we make, and their positive effects. This allows us to confirm our financial targets for the full year, as presented in February. And let me remind you that we target at constant scope of consolidation and exchange rates, sales up in the low single digits on a constant and same-day basis; a mid- to high single-digit increase in adjusted EBITDA; and a further improvement in our net-debt-to-EBITDA ratio. Let me thank you for your attention. And now Laurent and myself are now ready to take your questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Lucie Carrier.

[Lucie Anne Lise Carrier, Vice President]

I will have three questions and I will go one at a time. The first one, Patrick and Laurent, I wanted to ask you about what you're seeing right now in terms of current trading. And even though I know you don't have, of course, an order book, how do you think about the second half of the year in terms of development and how does that fit with the guidance that you're confirming today? So this is question number one.

[Patrick Bérard, CEO, Europe GM & Director]

Well, the current trading on that top line, we feel what we see is -- continue to be in line with what we have seen in sales per day, corrected for the, let's say, seasonality effect. So far so good. And it's true by region. Meaning, no -- well you can easily understand that North America continue to push and to boost. And the European is also doing by the profile we had in the recent months. Therefore, it's very early on, but there is no change in the pattern.

[Lucie Anne Lise Carrier, Vice President]

Okay. My second question was around the progress you've made in North America. And there are 2 sides to the question. The first one is, when you think about what you have implemented so far and what we've seen already, would you say that most of it is now in the numbers or actually most of it is still to come? And just also in terms of on the investment that you've been doing, I think, you've mentioned 25 basis points of impact from investment, part of it, I guess, is in North America in the second quarter. You are still continuing to invest. I mean, how should we think about the size of the magnitude of this investment for the second half?

[Patrick Bérard, CEO, Europe GM & Director]

On the first part of the question, which is, do we have almost everything that we should get. There are 2 pieces to the question. As you know, we suffered during long time now 18 months, 2 years, but last year heavily of the GEIS underperformance both as a supplier and as a customer. And as a customer, nothing we change, with GE and it's now GEIS by the way, as a group, and the customer was gone -- is gone and will not come back. And the GEIS part now, ABB was given green light to take over. And ABB from what I know, are taken very seriously and is putting a lot of effort in fixing in the shortest period of time. And I have to give them the credit for taking very seriously the restoration of the GEIS capability. And we expect or I hope, and we expect to see this energetic move to allow us to have some reverse in the trends of the past, probably in Q4, or by the end of the year. Now, it's difficult for me to really tell you as and when, but yes, there is a lot if you think midterm meaning, including next year, yes, there is an improvement to come on the Gexpro dimension. Thanks to the GEIS restoration back to normal pattern. And in the longer-term, when you think of ABB bringing technology beyond the disruption of today, we expect it also to continue to allow us to strengthen our performance in the 1 dimension, which we have suffered from. Regarding the rest, not everything started on the same day. We have branches that really started very early last year to hope -- to come back to good performance. And we have others just recently gone, whether it's a refresh, which [ adding correct ] people, whether it's the inventory increase of last year, which give us now better results with customer and the confidence is back. Therefore, on the rest, we are not finished in terms of collecting more of the market share and more of the good market momentum that we see. And thirdly, yes, we will continue to invest where we decided to grow in the refresh, in the -- less in inventory than in the past, more in safe people, quality objectives and much more sometime in regions, where it's difficult to get good people right now. There is a shortage on the market. It takes a little bit longer, but we are growing our first good season in order to strengthen the momentum. Meaning no, it's not the end in global terms. And yes, I expect more to come. And when we said in February 2017, it takes 2 years, it takes 2 years. And now, this being said, did I cover everything, no? Yes, I think, I did Lucie.

[Lucie Anne Lise Carrier, Vice President]

Just if you could indicate possibly how much impact you expect from the investment for the second half, because I think in the quarter there was a 25 bps, I think, or for all of your investments?

[Patrick Bérard, CEO, Europe GM & Director]

Lucie, if I would be so good, I should be consulting -- a consultant and I would be richer than I am. Allow me to say, I expect good news, but I cannot -- no, it's too -- it would be a blanket assumption...

[Lucie Anne Lise Carrier, Vice President]

But I mean in terms of magnitude of impact of these investments on your margin, i.e. the cost, you're not expecting like a disproportional impact versus what we see over the last few years, I guess?

[Patrick Bérard, CEO, Europe GM & Director]

Laurent, you should say about the segment with regards as what we are experiencing there so far.

[Lucie Anne Lise Carrier, Vice President]

Okay, thank you. And my last question was around digital. Thanks for adding the slide for Europe because I think we hadn't seen it before. I'm not sure I fully got it when you are making the comment, but I understood you were saying the profitability of the online sales in Europe was above the standard profitabilities of sales in Europe. So first question is, one, whether I understood it well or not, and then secondly, whether you could explain why this profitability is higher for online sales and whether you think that this is something you could also rollout or expand further to the rest of the group?

[Patrick Bérard, CEO, Europe GM & Director]

When we decided to accelerate the digital, and we do our best to even go further and faster, we didn't know at the time exactly as of when it would be -- it will have an impact on the profitability. Now after an acceleration and when we reach, we see that every time we reach 25% or above. We start in a country of digital sales, digital transaction, this is minimum threshold, but once we are beyond that, we see an increase in profitability just by the fact that most of the growth is done at lower fixed cost needs and more viable. And this is something that everybody with 30% or above would measure. And therefore, it's clear that reaching 25% is a threshold, accelerating beyond. And now, we started in statistically a decent profile of, as of when it has a direct impact on the EBITDA. This is why we push, we push, we push where we make no concession in terms of digital effort, digital acceleration. Everything we can turn, we will do. It's also speaking of customers who find, in Rexel, the way to have the different interface to their needs. They have brick-and-mortar, they have the people visiting them, they have the digital sales, the click and collect, they have the last mile delivery whether they call or they click. We're starting a true multi interface to the customer, which create higher stickiness. I think when we can measure it, and it's probably an important moment in the time of our development.

[Operator]

[Operator Instructions] Our next question comes from the line of Andre Kukhnin.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Can I just start with a follow-up on digital discussion you just had. So the conclusion from this is that, digital margins improve as you grow up the business on the existing fixed cost base. And my interpretation was at that 25% threshold is where the profitability across the lot turns in line with the broader region. Firstly, is that, right? And yes, secondly, when do you expect to hit that?

[Laurent Delabarre, Group Chief Financial Officer]

We have to be careful, Andre. I'm not sure I fully understand. You relayed the 25% digital to cross the average profitable line by region, I'm not going that far or I misunderstood something.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

You said that the highest penetration, digital penetration country is higher margin than I think you said group average. And in the answer to previous question you said that profitability improves as the business grows up. So I guess, the question is, at what point the digital margin equate to the traditional? And where you -- with the 22.5% where is it right now across the whole of Europe?

[Laurent Delabarre, Group Chief Financial Officer]

Well, if I take the highest digital countries with enough experience to look back, when you reach something like 40% and above, then the EBITDA contribution from the digital sales is higher than the average in the country. To get it done on the bigger platform, we have to bring all of them to this level, and we are obviously trying to get this. But we have a few countries Switzerland, Austria, Belgium where we measure that why it's growing in the range between 25% and 30% an improvement of the global EBITDA and when you're above 40%, you have an acceleration of your EBITDA because of the digital penetration. Now it didn't have to be the same everywhere, I'm not sure, because when this country did it, they were the first in the country to do it. If everybody did it at the same time, we have to be prudent on these numbers, okay. The one thing, which we will confirm, growing digital is an effective way to strengthen our EBITDA definitely. It's a way to strengthen our customer base and to reduce or at least to get the gross [indiscernible] proportionally fixed cost requirement. Now if we depend on the countries, and our countries where we will accelerate the digital effort and the first 10 points will cost us more than it will bring. Therefore, it's a [ speed show ]. And the others where we are already at 40 and the next 10 points have a high leverage on the results. That is [ currently ] now, it's [ currently ] now and I do not want to give an impression that because we go digital, it will be everywhere the same proportion.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Got it, that's -- yes.

[Laurent Delabarre, Group Chief Financial Officer]

The group is at 16.7% in terms of digital sales, I would say that Europe as well was already at 22.5% because we have very low digital sales in Asia-Pac. But all of that is growing at roughly [ 16% ] year-over-year. So we will clearly reach the 25% variable equity in Europe.

[Patrick Bérard, CEO, Europe GM & Director]

But remember, we can -- more customers, more SKU, more digital. And digital accelerates, obviously because once the setup this makes, the fundamental bricks have been put together, it's an adoption by the market, and an adoption as an increase in speed in each of the market where we do this, but there is a lag preparation, we are waiting for, get it done, function and deliver the function. But it goes with more SKUs too, digital it's difficult to tell you if it's digital, more SKU and more customers because at the end of the day there is a chemistry between the three. And when we say that at the beginning in FY '17, obviously the more customers, it is [ not ] easy to measure how many new customer, net customer you gain, but how less do you lose because we are producing digital at a later stage. Therefore, let's consider that the pillar of the strategy is a chemistry between the three, more customer, more SKU, more digital. And that -- [ it's not 1 thing ] in all the story. Now we are clear that this is a winning way of getting Rexel to a new stage. I don't want to give you more, but at least I can give this confidence as a CEO that working on the street with all my team, this is winning chemistry.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Thank you, that's very clear. And I appreciate the granularity of the answer and the broader perspective. Just the second question, it was on Spain. Could you give us a little bit more detail on what you are doing there with the more regional approach, I think we have pretty good idea of what you are you doing in Germany and the U.K., so I'd love to have the same level of understanding on Spain?

[Patrick Bérard, CEO, Europe GM & Director]

Spain, after all the recession that the country has experienced, because things have been shrinking during the ages. The model of having a central [ DC ] to serve now more fragmented and low-volume, does not match anymore because if you ship on 600 kilometers from Madrid to Barcelona, the costs are far too high. Therefore, we are going back to setup by regions where you have a hub, serving the local branches around. And if the branches are more regional, we will identify by region and some regions having a lower demand will not have the same pattern for the focus, no more no less.

[Laurent Delabarre, Group Chief Financial Officer]

And organizing, we will close 17 branches and we had...

[Patrick Bérard, CEO, Europe GM & Director]

17.

[Laurent Delabarre, Group Chief Financial Officer]

No, no, no. Sorry [indiscernible] we record 17 branches and we have 1 national distribution center that we are going also to downsize to have original organization.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Right. So that's actually similar in size to the German program?

[Patrick Bérard, CEO, Europe GM & Director]

Yes, the only difference Germany is a strong industrial country. And we make a strong [ bet ] on the industry. And by the way, it's more than the rest. This is where the growth -- most of the growth is happening right now and there is lot to be done in that. We work heavily with good suppliers in the marketplace. Therefore, in Germany, the chemistry of going more industrial and less residential, and focusing on the residential in the south and not in the north where we don't have a critical mass. Opposite strength, there is less to be taken in industry, for sure. That's not the major [ priority ] and it's more the housing and commercial building or the residential dimension.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Got it. And then last, just a very quick follow-up on the profit bridge. I was just curious to find out what that minus 20 basis points is in the stack of volume price and other contributions, the minus 20 bps other.

[Laurent Delabarre, Group Chief Financial Officer]

Yes, in fact the 55 basis points is a net of 75, which is what you bring in directly from the volumes, with a normative level of OpEx and 20 basis points is some kind of pocket of [ overruns ]. We have in some countries, for example, we have some [ overruns ] in transportation costs in [indiscernible] in other, we have a slight decrease of the bad debt, where this is more IT and other parts. So this is different buckets of additional expense that has been identified to solve this additional volume that are on top of the normative level of variable cost. We need to solve that increasing volume of sales.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Right. That sounds quite one-off nature, so I presume you don't expect that to recur in H2 or you do?

[Laurent Delabarre, Group Chief Financial Officer]

Well, the projects we have identified, we are working on it. We'll start try to mitigate the impact, but for example, on transportation, it's clearly a bit more pressure in some countries. It will gradually reduce, but it will still be there to some extent in H2.

[Operator]

Our next question comes from the line of Sébastien Gruter.

[Sébastien Gruter, Research Analyst]

First one, on the disposal plan, you gave for 25 bps margin improvement. You said you actually had 10 bps in H1 '18. Should we expect another 10 bps in H2 and 15 bps in '19 incremental? And related to that, like in Germany, which is a quite favorable impact on topline from the German restructuring. How do you make sure that the fixed cost will be lower fast enough to protect the margins? Could we see a lag between the drop in sales and the drop in fixed cost in that country? And I have a follow-up on Europe.

[Laurent Delabarre, Group Chief Financial Officer]

First, on the bps, it's a bit early to comment on what we will get in H2 and our program is currently in process. It's our view that we will get something by all the mechanical reducing of cost, which is the branch closures from H2, costs that are going to disappear. So yes, we have already 15 bps and will get additional, in H2, I cannot be more and more precise at this stage on that.

[Patrick Bérard, CEO, Europe GM & Director]

On the Germany dimension, yes, less top line, but we are structurally also reducing the fixed cost by closing branches, by closing [ DCs ] and by reducing headquarter costs. We are -- we take care to be sure that we are reducing the fixed cost base in order to improve the EBITDA for the remaining portion of the sales that we have selected to go to. Therefore, yes, your concern has been fully taken into consideration.

[Laurent Delabarre, Group Chief Financial Officer]

Yes, and the reduction will come from closed branches by [indiscernible]. And on the rest, [indiscernible] of Germany, in Chennai and industrial sales are going well today.

[Sébastien Gruter, Research Analyst]

Okay. I have a follow-up on the gross margin in Europe, which was under pressure and you mentioned Nordics, Germany and competitive pressure there. Is it temporary or do you think this impact will withstand the coming quarters?

[Laurent Delabarre, Group Chief Financial Officer]

Well, I think there are 2 effects. You have the effect of some increases whether they were due last year to raw materials, whether they were due to currency, which forced, in some places, more imported goods to be for higher end. And a lot of margin squeeze were really visible in the business. Some at the product side, some the distribution side and probably some which are going to [ show up ] on the manufacturer side. At the same time, a mix between projects and [ true ] business. We have seen a lot of project business in many parts because of the acceleration is very often done by project type and the market picks up, this is what happens. And project business is always lower on margin. And by the way, also it's always starts by cable. I mean, the cabling of the building happens before anything else. And the cable is not the highest margin. Cable is the first step level in the project and more project means more cable, more mix, which explain part of it. Some of the squeeze and some of it. About the squeeze, I expect, I wish, I hope that every raw material increase and every labor inflation increase and transportation cost increase, that everybody experience in most part of the world will be passed to tariffs -- [ result ] tariffs by the supplier, which is being used by the installer to make the application. So that it would be the total chain would set the price increases through. It's not yet fully visible. But my experience of the past when it's getting serious, there is no chance to escape. However, how fast it will materialize. This is the dimension that we work. We make our customer knowledge [ up ], don't make quotations without price increase [ closes ] because if raw material go to the roof or transportation and oil price and these things, to avoid the margin squeeze. It's a market I mentioned, we have put it through. It's not forever, we have to take our portion of trying to resolve that. If not, we have to go to the cost side in order not to have too much higher EBITDA impact. We watch closely and every month.

[Operator]

[Operator Instructions] And the next question comes from the line of Caroline Raul.

[Caroline Tinsley Raul]

This is Caroline filling in for Rory McKenzie at UBS. Just wanted to ask first about inventory days, which increased in Q2 I think probably largely due to U.S. but do you expect this to stabilize or improve throughout the second half?

[Laurent Delabarre, Group Chief Financial Officer]

Yes, the increase in the inventory days. It's not because we add inventory especially in the U.S. if we compare to last year with ongoing opening of branches. And then in our other geographies where we want to put back some inventory in the branches because we feel we have not the right level of inventory. So we have no particular issue at group level. Number of days has increased by 0.5 days, but it's under control, and we will manage that.

[Caroline Tinsley Raul]

And then just on the EBIT growth, so guidance for mid-single digits for the full year implies further acceleration in H2. Is there any regions in particular where we should expect some improvement?

[Laurent Delabarre, Group Chief Financial Officer]

Well, you have the mechanical effect of the [indiscernible] we are implementing in Germany and Spain. And you have the continued good momentum in terms of geography like the U.S. and Canada also, which will give us very positive momentum for H2.

[Operator]

Our next question will come from the line of Lucie Carrier.

[Lucie Anne Lise Carrier, Vice President]

Just I wanted to have your view on the French market. One of your supplier has reported also results this morning and they were highlighting the fact that from their perspective the French market hasn't been really recovering that much over the last few quarters. I mean, you have shown previously pretty good growth rate, a little bit slower in the quarter. And I was just curious to have your view on that whether you're seeing a slowdown of the market or maybe some kind of more seasonal impact or one-off impact that occurred in the quarter?

[Patrick Bérard, CEO, Europe GM & Director]

One thing is clear, the French market is better oriented than it was 12 or 18 months ago. There are a little bit bumpy some days better than others for some of the reasons, which are very local. Sometimes I don't know if this is the group, but fundamentally it's better oriented than it was. It's flattening a bit right now, but there is no reason to believe there is absolutely no indicator indicating that it will not remain this kind of a level. So residential, whether it's in new or this is renovation, there is always a balance between the 2 and it depends which [ one is at the top ] whether you get more people involved in the new or more people active from the renovation. We see that happening little bit here and there. The nonresi is not the booming part, but it's not contracting. It's still 1% to 2% growth year-on-year. And the industry is also growing, not booming, again, because French industry is not a booming one, but lots of maintenance work, lots of productivity work, lots of safety work, little bit of [ forward deal ] automation work. And France is catching up with this kind of a trend. Now, some people would tell and they told me they would tell you that, for example, the tax reform has not favored the new housing, because this is on property tax, the effect -- [ ESS ] which is now [ increasing ]. But yes, there is always a market traction to people who made bet on this and not a bet on something else and would then make a trade off because the fiscal thing and fiscal -- but at the end of the day, we are about stable. New housing [ start ] needed, which is in more than decent numbers compared to, I remember 18 months ago where we were. I wish the market could stay like this now. Have we over performed? Let me say with a little bit of humor, sense of humor, it's almost a decade that we are over performing our competitors, why should I stop? But yes we take the most we can and there are -- France is important to you and it's important to me because this is a big business. But we are also making our model evolving, bit more digital, more open chart, different way of addressing the market. We are reinforcing the offer trend. The same thing is true that I mentioned before for the U.S. and so we need to keep growing and maintaining and adjusting in France in order to take market share. And by doing so, we may post eventually better performance than some people. But no urgency here, it's just adjusting to a reality and the French market is not that.

[Operator]

And our next question comes from the line of [indiscernible].

[Unknown Analyst]

I have three questions, if I may. Maybe I will ask them one by one. My first question is a follow-up on your strategy in digital. How do you differentiate yourself from the other web competitor? What are you doing in terms of maybe '20 or what are you doing at least to keep some value to entry to your business?

[Patrick Bérard, CEO, Europe GM & Director]

I used to say when I was asked about Amazon, that we have to be as good as a few others and accelerate to be as good as. And in terms of functionalities, we are catching up, gradually catching, with the fundamental functionality that people like to see on the digital. It's more track and trace, click and collect. I mean, these are functionalities that once in the digital sphere, you apply to our business, we are catching up. To make something, which would be differentiated, [ video rendezvous-ing ] in 1 year. Because I think there are still more to overcome. And the market adoption first on stand downs like what I mentioned to you, has to happen. And the market will then move to more sophisticated digital evolution that it's not yet the case. The market is at the adoption stage. And the processes, the reliability of information, our reliability of [indiscernible] which sometime is not yet the case from the supplier or we cannot divest reliable information about when this product will be made is still lagging behind, but it's true for all our competitors too. But we are at the forefront. Now in some countries, we are doing a little bit more advanced chat mode, making sure that innovation comes through, the people -- and we animate chat for example, in Belgium, which helps people to adopt new technologies faster. It is something that is unique, [ now ] that we are on the forefront again.

[Unknown Analyst]

Okay, thank you. My second question is a follow-up question again on inventories. You managed to have more inventory especially in the U.S., but overall, the first half of the year, you recorded an improvement in working capital requirement or less [ evaluation ]. Where is it coming from, which country in particular?

[Laurent Delabarre, Group Chief Financial Officer]

It's not -- it's coming from the accounts payable because of thinking of the way we reconstitute the increased inventory last year. We have on 1 side less favorable at the end of 2017 than the year before in terms of value. And also we have paid in the first half last year and to a lesser extent, this year and because of that, we have an inflow on the payable part which coming mainly from the big country France, U.S.A., Canada, probably [ just 1 ].

[Unknown Analyst]

Okay. On [ 2 half ], understood everything. But is it more securitization than before or it's not...

[Laurent Delabarre, Group Chief Financial Officer]

No, no, no. it's got nothing to do with securitization. Yes, maybe I'm not kind of -- we're commenting on the valuation of the valuation. So that could take time [indiscernible] alternative between December and June position this year versus the year before. And the 2 starting points one is lower this year than it was the year before. And the endpoint at the end June '18, in terms of volume of digital, a bit higher than last year because of the level of [ payable ]. That's why, over the 6 months, we have a better impact this year than last year.

[Unknown Analyst]

Okay, fair enough, okay. And sir, my last question is on the U.S. I understand that it will take 2 years to reach the position where you want to be. At the same time, there has been some further consolidation in the sector, in the U.S. mostly led by [ CD ] or [ cache ] electrical supply, for instance. Have you looked at some of the M&A transaction that occurred in the U.S. over the last quarters and when do you think you'll be in a position to make a move in this direction?

[Patrick Bérard, CEO, Europe GM & Director]

Right. First of all, there are many rumors and very little, which has materialized. The [ question ] is still not yet being required by somebody on the market for more than a year. Everybody looked at it. And from what I know, it has not yet been acquired by someone unless I missed something. There are [ smaller than question ], which are also on the agenda that everybody is looking at. But there are 3 things. A, the multiple. There are people dreaming. And we are to be wise in that business. Second, the generation issue ahead of us, which will create without succession, which will force on some of an outcome for the next 2 or 3 years. And something that's materialized there. And third, I will be very selective when it comes to us, I would be selective. I will identify the region where we are, and I will not go in the region where we are not. It's something we stated early, and I will keep maintaining that dimension. Second, I want something not to be -- it has to be well managed. I don't want to have another turnaround to do, thank you for that. And thirdly, I'm looking for a proportion of digital and digital features. It's already quite, let's say, as a stand out for on the forefront of the market. Yes, we look at different candidates. So far I have not found the magic potion, and therefore will continue looking into it. But we should not forget another thing, we have committed to deleverage, in order to maintain that deleverage and do acquisitions, we have to come back 2 things: A, continue to do our divestment trend to what we have just promised; and second, I may have to go into a more active portfolio activity in -- which has nothing to do with the divestment plan, which has to do, what is best to keep or to acquire versus not something else to keep. And this is for 2019 and 2020 approach.

[Operator]

Our next question comes from the line of Andre Kukhnin.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Just a quick one on the disposals program, 25 basis points impact, positive on the margin. If possible, could you tell us where we are right now in that 25 and where you plan to be by the year-end?

[Laurent Delabarre, Group Chief Financial Officer]

What we said that we are roughly at this stage, and we should be very close to 20, I guess, something like that. I don't want to commit on precise figure. Again, they are big organization in process in Germany and Spain, and that should contribute to the most part of the improvement in the second part of the year. But by year 2019, we will get this 25 basis points. We are quite confident on that.

[Operator]

We currently have no other questions. [Operator Instructions].

[Patrick Bérard, CEO, Europe GM & Director]

Well, if you are at the end of the question, I would like to thank everybody for having joined the call. Thank you for your questions. Thank you for your attention. And I hope, we will have all of you on the next call after the Q3 is over. And in the meantime, I wish you all a good summer and vacation. Okay, have a good time. Bye-bye. Thank you.

[Operator]

This does conclude the conference for today. Thank you for participating. You may all disconnect.