Rexel SA

PAR:RXL

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's half year 2019 results conference call. [Operator Instructions] I must advise you that this conference is being recorded today, the 30th of July 2019. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Patrick Berard. Please go ahead, sir.

[Patrick Berard, CEO, CEO of Europe & Director]

Thank you. Good morning, ladies and gentlemen. First of all, welcome to this presentation of Rexel's first half '19 performance. Today, I am with Laurent Delabarre, our Group CFO. I will start with a look at further progress we have made on the key transformational initiative on our strategic plan. We will highlight our actual performance and our performance by geography, Laurent will then detail our financials in H1, and I will conclude with our 2019 outlook. And then obviously, we will be very happy to take all your questions. Now let's start the presentation. If you go to Page 3, you see that we are successfully executing our strategic plan. Rexel is on its growth path. Since the end of '16, we have generated EUR 1 billion in incremental organic sales, and we have gained market share in our key markets. And this is a direct result of our more customer SKU strategies that I have already mentioned and an improved service level that we are reaching now to much higher than before, and which has led to an enhanced customer experience. In parallel, we have also accelerated our digital journey in key countries, as you can see from the numbers here, with digital sales now representing 17.2% of our total revenue. And we have a ramp-up across Europe, which now -- the penetration level is now above 25%, with strong progress in large countries like France. And we now have 7 countries in the world with digital sales above 30%. Thanks to this initiative of the last 2 years, we clearly became a leading digital player in the B2B distribution business with between EUR 2 billion and EUR 2.5 billion of annualized digital sales. Another source of satisfaction of our H1 performance is the early signs of recovery in Germany, which, as you know, underwent a significant restructuring last year. In H1, underlying same-day sales grew by 2.3%, and profitability improved. These highlights are the result of the transformation journey we embarked upon more than 2 years ago, and they were enabled by a regained sense of confidence from all of our key stakeholders, customers, suppliers and employees. This gives me the confidence in Rexel's continued recovery going forward. If you look with me at Slide 4 and, on this slide, we look at the key highlights of our Q2 sales performance. Rexel posted another strong quarter with sales growing for the 11th consecutive period to reach nearly EUR 3.5 billion, supported by North America and key European countries and China. This represents same-day growth of 2.4% or de facto 3.8% if we exclude the effect of turnaround measures in Germany and Spain that had an unfavorable impact of 1.4% on our sales. The strong performance comes despite a nonfavorable copper contribution in the quarter of minus 0.2% while copper had a positive impact of plus 0.7% in the comparable period last year, so our underlying business trends were solid. On Page 5., overall, we proceeded good performance in this half year. Our sales at almost EUR 6.8 billion were up 2.7% on a same-day basis. Our gross margin was up 11 basis points to 25%, which is a solid performance in the current environment. Our adjusted EBITA rose by 2% in the period to EUR 319 million, and margin at 4.7% was stable versus same period last year. Recurring net income was up 9.6% at EUR 167.7 million, the highest level since 2014, thanks to good operating results and also helped by a favorable currency impact. This good H1 '18 performance came after -- I'm sorry, it's H1 '19 performance came after 2 years of double digit growth of our recurring net income, showing the payback of our initiatives. Free cash flow before interest and tax was an outflow of EUR 17.3 million, and Laurent will explain this in greater detail shortly after. Look at Page 6. In the first 6 months of this year, we adapted rapidly to volatile conditions, and the performance in all-in the monitorable that we faced various headwinds. Indeed, we are operating an environment that is more volatile than in previous years. And in addition to such technical effects as a negative calendar impact and copper contribution, which should be reversed in H2, assuming unchanged copper prices until year-end, we faced a number of external challenges. They include A, an unfavorable business mix, which was weighted towards lower-margin business -- lower-margin project business, notably in the U.S., and these at the expense of Proximity business. B, trade tensions, reflecting in tariff increases that could not be immediately passed on. C, cost inflation linked to wages and transportation in some markets, notably in the U.S., and D, and, of course, the continuing uncertainty in the U.K. regarding the Brexit. In the face of this complexity, Rexel demonstrated its ability to adapt quickly. We took a number of measures, including reinforcing our focus on the Proximity business in the U.S. towards the end of Q2, increasing our business selectivity in such markets as France and the U.K. and sharpening our focus on price increases in the U.S. These efforts allowed us to contain the impact from this more adverse environment and see sequential improvements in EBITA towards the end of the first half. On Page 7, we expect the environment that I have mentioned to remain volatile, and Rexel will continue to show its agility to continue delivering solid results. On this slide, we believe that our retail journey is now nearly completed. We have taken all the necessary measures in our key markets and will not need to allocate further resources for branch openings, inventory buildup or adding to the sales force. The only exception I would mention is the U.K., where the uncertain situation surrounding Brexit may lead us to take further adjustment measures if need be. Going forward, we will focus on 2 main aspects. From an operational point of view, we are concentrating on improving our operating leverage through a number of actions. These include the implementation since Q2 of productivity measures to offset cost inflation in the U.S. and other key countries; a focus on the Proximity business in our mix; continued efforts to enhance margins; and finally, reaping the fruits of the turnaround measures taken in such market as Germany and Spain. From a strategic point of view, our priority is continuing our digital transformation through such measures as rolling out in the U.S. the Platt tools across the entire nation, introducing across the board new functionalities such as track-and-trace, email to EDI and other tools to improve business operations in Europe and deploying analytical tools to enhance the customer experience and further improve our productivity. The capacity to adapt that we demonstrated in the first half, the action plans we are deploying and a more favorable calendar effect in H2 make us confident that we will deliver our full year guidance. Now let's go to Page 9, so that we can review by geography. On this page, you see that we posted sales growth in 2 of our 3 geographies. In North America, which accounts for 39% of our sales, same-day sales were up by a strong 6.8%. In Europe, which represents 52% of our sales, same-day sales were down 0.9%, with growth in most key markets, except Germany, where we are executing our turnaround plan. In Asia Pac, accounting for the remaining 9% of our revenue, sales were up plus 3.4%, and they were up strongly in China, as we will see shortly. Now let's look at each of the region in more detail. In Europe, sales of EUR 1.8 billion, Europe is down by 0.9 points on a constant and same-day basis in Q2. However, if you exclude the impact of branch closures in Germany and Spain, which we initiated last year, growth was 1.7% up, demonstrating good momentum in key countries. In our home market of France, which accounts for 38% of our European sales, sales rose plus 2.6% with good momentum in our commercial projects, also in residential and also in specialty businesses. We saw very good trends in most of our European countries, notably Benelux, up 12.1%; Sweden, up 5%; and Switzerland coming back with up 1.6%. In Germany, sales were broadly flat, restated for the closure of 17 branches in Q3 of last year as part of our plan to focus our operation on the industrial segment. Only the U.K. continues to be a difficult market, and sales were down 8.2%, but it reflects a conscious decision to be more selective to protect our margin and the effect of 30 branch closures, including 13 in the quarter. Let's move to Page 11, which is North America. In North America, we continue to see strong growth, reflecting both the positive effect of our transformation actions in the U.S. with a more regional customer-centric approach as well as a robust activity in Canada. Overall, sales were up 6.8% on a constant and same-day basis, reaching EUR 1.35 billion. In the U.S., representing 79% of our North American activity, we continue to outperform the market. Sales were up 7% on a challenging comparable base as we are cycling over 4 consecutive quarters of high single digit growth. By end market, while commercial project and residential are between 9% and 10%, the industrial business slowed down. Our past investment over the last 18 months in sales reps, inventories, branch openings and branch refresh are clearly paying off, and we have added 54 branch openings since 2017, contributing for 1% of growth in this quarter. The returns on these various initiatives are in line with our expectation. I said earlier the repair journey in the U.S. is now completed, and our focus is now on digital. In Canada, we also saw good growth of 6.3% driven by the industrial project and our initiative in our Proximity business, where we have developed a core offer with key SKUs that we have rolled out nationwide. On Page 12, if we take a closer look at how our regionalized approach in the U.S., now divided in a region, is paying off in terms of growth and market share gains as you can see from the numbers and the arrows on this map. Our electrical distribution business is developing well in every region, except in the Midwest. We are particularly happy to see double digit growth in such regions as California, Mountain Plains and the Southeast. On Page 13, when we move to Asia Pacific. Asia Pacific, where sales were up 3.4% on a constant and same-day basis and 4.5% restated for the impact of the disposal of the Rockwell Automation business in Australia at the end of April 2018. Also, restated for the disposal sales in Australia were up 2.1% mainly driven by positive momentum in infrastructure and mining businesses, while residential and commercial are slowing down. In Asia, sales were up 7% and up 10.1% in China, thanks to a large contract that accounts for most of the growth in this country. We also benefited from our repositioning in the business on promising markets, and we are seeing good results. Asia was also impacted by the non-repeat of a large contract in Middle East that contributed EUR 6.7 million in Q2 '18. And restated for these 2 large contracts, Asia is up 4.4% in the quarter.Now for more detailed information on our financial performance, let me now hand over to Laurent Delabarre, our CFO.

[Laurent Delabarre, Group Chief Financial Officer]

Thank you, Patrick, and good morning to all of you. Before getting into the H1 numbers, let me begin by presenting on Slide 15 the main impacts of the IFRS 16 standard adoption, which did, as you know, we've come up for leases and came into force as of January 1. So it is our first publication under IFRS 16. For the sake of comparison, we have also restated the full year 2018 numbers that have been reviewed by our auditors. Those restatements are presented in the note to the consolidated financial statements. As you will see, the impacts are very similar to the estimates we presented at the time of our full year 2018 results. The IFRS 16 standard impacts our P&L, our balance sheet and, to a lesser extent, our free cash flow statement. The main impacts are as follows. It has a positive impact of 147 bps on our EBITA margin as we are taking away run-through. It has a positive impact of 24 basis points on our adjusted EBITA margin, which now stands at nearly 4.8% in full year 2018. The impact is, of course, lower than on the EBITA as we are reincorporating higher depreciations. On the other hand, it has, in 2018, an unfavorable impact of EUR 11 million on recurring net income due to the saving effect that will reverse over time with the hedging of the network of branches as we currently have more financial expense than debt repayment. Concerning the balance sheet, we have introduced 2 new lines, the right-of-use and the lease liability. The latter has to be considered as financial debt. Our financial net debt would increase by EUR 933 million and our leverage ratio by 0.4x. Let me remind you that our bank covenants exclude IFRS 16, so the new standard has no impact on our bank financial flexibility and on our bank leverage ratio. Lastly, on the free cash flow, the impact is unfavorable by EUR 6 million on free cash flow before interest and tax because financial leases were previously recognized in cash flow for financing activities and are now included in the free cash flow allocation. So it's mainly a geography reclassification. On Slide 16, we begin our H1 financial review taking a closer look at our Q2 sales performance. At nearly EUR 3.5 billion, our sales are up 3.3% on a reported basis and up 2.4% on a same-day basis. We benefited in the quarter from a positive currency effect of 1.8%, thanks to a euro appreciation versus the U.S. dollar, while facing an unfavorable scope effect of 0.3% and a negative calendar impact of 0.8%. This calendar effect will turn positive, as you know, in Q3 with a favorable impact, and it would have a favorable impact on our adjusted EBITA growth in H2 2019. Concerning currencies and assuming spot rates remain unchanged, we expect foreign exchange to have an impact of plus 1.7% on sales in full year 2019. Concerning scope, and taking into account disposals announced at the end of 2018, the expected impact stands at minus 0.4% in full year 2019. As mentioned earlier, copper contribution was unfavorable at 0.2%, the third consecutive quarter with a negative copper effect. Assuming stable copper price, H2 2019 would benefit from an improved base effect as the copper price stood at circa USD 6,150 per ton in H2 2018 compared to USD 6,950 per ton H1 '18. On Slide 17, we turn to our H1 adjusted EBITA bridge. Adjusted EBITA was up 2% to EUR 319.2 million, and margin stood at 4.7%. The stable EBITA margin in the half year on a comparable basis is explained by the following elements: a positive volume and price contribution of 30 basis points relating from all our operational initiatives; a negative 10 basis point calendar effect on our adjusted EBITA margin to be reversed in H2; productivity gains, especially in Germany and Spain and in U.K., partly offset by cost inflation, notably from wages and price; and 24 basis points reflecting our investments for future growth, especially in IT and digital. Please note that for 2019, as already mentioned, we expect our transformation in Germany and Spain to contribute to secure 10 basis points to the group-adjusted EBITA margin, with a higher contribution expected in H2 2019 than in H1. As explained by Patrick, our priority is now to focus on improving operating leverage while maintaining investments in digital. On the right-hand side of the slide, we show that the adjusted EBITA growth patterns in H1 2019 is similar to that of 2017 and 2018, excluding the calendar effect. In both previous years, H2 proved to be stronger than H1 in terms of adjusted EBITA growth. As a demonstration, our adjusted EBITA grew by 3.1% in H1 2018 and by 9% in H2, with a less significant calendar impact in H1 of last year than this year. On Slide 18, we turn to our profitability by region. Overall, with adjusted EBITA of EUR 319.2 million in the half year, our adjusted EBITA margin stood at 4.7%, stable compared to last year, with slight positive contribution for North America and Europe, offsetting Asia Pacific. In Europe, adjusted EBITA margin was up 9 basis points, thanks to the positive volumes in key countries, the gross margin improvements in Germany and France, partially offset by cost inflation, increasing IT costs and investment. In North America, adjusted EBITA margin grew 8 basis points to 4.1%, thanks to volume growth that more than offset the negative channel mix, tariffs, cost inflation and investments in people. In Asia Pacific, adjusted EBITA margin decreased by 69 basis points to 1.7% with volume more than offset by the disposal of the Rockwell Automation business in Australia as well as cost inflation, especially in China and Asia. Our corporate costs stood at EUR 12.9 million, unchanged versus last year, with our investments in IT and digital offset by lower corporate costs. For the full year, we anticipate the corporate costs to be close to EUR 40 million, slightly higher than last year because of the French IT and digital cost investments. On Slide 19, we look at the bottom line part of our P&L. Let's start with our adjusted EBITA of EUR 319.2 million, up 2%. The profit EBITA was slightly higher at EUR 319.6 million, up 5.3% year-on-year, reflecting the nonrecurring swing in copper prices. Other income and expense amounted to a negative EUR 22.4 million, including restructuring costs for EUR 13.5 million, mostly related to the closure of a distribution center in the U.K. and additional reorganization costs in Germany as well as intangible asset impairment in Finland for EUR 9.3 million. For 2019, we anticipate restructuring costs to be close to a normative level of EUR 45 million to EUR 50 million. Our net financial expense increased by EUR 21.1 million due to the one-off cost of the bond refinancing that took place in early March. Overall, we benefit from a reduction in average effective interest rate of around 3 basis points to 2.81%. We also saw a sharp decrease in our income tax to EUR 32.6 million. Our effective tax rate of 16.6% is exceptionally low as it benefited from a release of a tax contingency following a positive legal judgment. In 2019, our normative tax rate should be close to 33%. As a result, net income was EUR 163.9 million, up a very strong 70.6%, and our recurring net income grew strongly to EUR 167.7 million, up 9.6%, a positive achievement. Let's turn to Slide 20 to our cash flow statement. Our free cash flow before interest and tax moved from EUR 15.6 million in H1 2018 to minus EUR 17.3 million in H1 2019, mainly due to the higher restructuring cash-out this year linked to restructuring costs in Q4 last year and to the change in working capital due to payables. Please also note that in H1 2018, CapEx benefited from the inflow resulting from the disposal in Australia for circa EUR 20 million. Looking at our growth CapEx that stood at EUR 55.9 million, up from EUR 48.5 million, with still 60% related to IT and digital, for the full year 2019, we anticipate our growth CapEx to be close to 1% of sales. As you know, our free cash flow is strongly marked by seasonality with most of the inflow coming in Q4. As a reminder, in 2016, our free cash flow before interest and tax was about minus EUR 7 million in H1. In 2017, it was minus EUR 77 million. And in 2018, it was nearly minus 5%, restating from the one-off inflow from the disposal in Australia. In addition, the refinancing of the EUR 650 million bond due 2023 cost us circa EUR 20 million in H1 2019. Lastly, our income tax paid increased to EUR 62.5 million in H1 '19 from EUR 24 million last year. I remind you that in H1 2018, it has benefited from a cash inflow from the refund of the 2017 income tax overpayments in France and the reimbursement following the decision related to the 3% dividend tax paid. Overall, the increase in EBITDA resulted in a slight improvement in our leverage ratio in the first half, which stands at 2.86x. On Slide 21, we took a look at the breakdown of our debt maturity. As I already mentioned in our Q1 quarter, we successfully refinanced our 2023 bond with a EUR 600 million issued at 2.75% maturing in June 2026. We have no debt repayment before June 2024, and our average maturity has been extended by around 0.7 year to about 4 years with the bond refinancing and the recent securitization program renewed in Europe. This refinancing operation help us optimize our financial costs and mitigate the slight increase in short-term interest rate. We expect our recurring financial results 2019 to be slightly below EUR 100 million pre IFRS 16, assuming no major volatility in currency or interest rate. The IFRS 16 impact will add around EUR 45 million to our full year financial charges. Let me now hand back to Patrick for his concluding remarks.

[Patrick Berard, CEO, CEO of Europe & Director]

Thank you, Laurent. Let's go to Page 22. We are adapting to become more agile, and we already did in Q2, more agile in an increasingly volatile environment. With our repair journey being now completed, excess operational focus is on improving operating leverage, and our strategic priority remains more than ever to advance our digital transformation. As we told you during today's presentation, we expect H2 to benefit from a reversal of the calendar effect we saw in H1. This, combined with the continued execution of our action plans, put us on track to achieve our full year guidance. Consistent with our medium-term ambition and assuming no material changes in the macroeconomic environment, we target for 2019 at comparable scope of consolidation and exchange rates 2% to 4% same-day sales growth, excluding an estimated unfavorable impact of 1% on 2019 from branch closures in Germany and Spain; a 5% to 7% increase in adjusted EBITA and a further improvement of the net debt-to-EBITDA ratio. This ends our presentation, and we give plenty of time now for your questions, and thank you very much for your attention. Let's move to the questions.

[Operator]

[Operator Instructions] The first question comes from the line of Daniela Costa.

[Daniela C. R. de Carvalho e Costa]

Actually, I have 3 questions. I wanted to ask you first if you can give us a little bit more color on the payables on whether that's something just related to the timing on how you pay your suppliers throughout the quarter or whether there's anything more structural we should read from there? That's question number one. My second question is also on the CapEx -- on the slight increase on CapEx in the quarter. Can you talk us through how you will manage the CapEx if we go into a downturn, whether it's sort of a more structural increase in CapEx for digital and other initiatives or whether you have some flexibility that you will consider there? And my final question is regarding the 9% of sales you still have in Asia, and if you can remind us sort of what are the strategic rationale for still having such a small position there. I understand you still have some key suppliers there, but would not having that hurt your relationship with those suppliers in other regions? That would be it.

[Laurent Delabarre, Group Chief Financial Officer]

Yes. I will -- Daniela, Laurent speaking. I will take the payable one. We have a day less payable at the end of June. It's a mix of supplier and country, and there is no underlying structural trend behind that, so nothing specific. And as I commented, our free cash flow, when you restate the impact of the organic disposal last year is where we expect it to be at the end of June. On the CapEx side, on the level, we have a priority list of CapEx, so we are always able to adjust. The last important one is some side -- a negative side with a peer. What we said is that we don't want to compromise anything around IT and digital. That is our key priority. But then we have a branch we set up and different things that are -- that could be deferred in case we would need to.

[Patrick Berard, CEO, CEO of Europe & Director]

On the 9% of sales in Asia, we have done a lot of restructuring, by which we choose to be present in the industrial segment and automation segment. In doing so, yes, we have abandoned more residential and certain commercial in the past in the commercial segment. In the moment, we concentrate on this. We could benefit from, first of all, local demand, but also our evolution towards more industry capabilities and into automation capabilities, including gaining certain contracts, which make us, let's say, pretty strong on this segment, and there is enough room and market share for us so that we could get the 9% sales. So far, this is working very well with our key suppliers on underlying, which we have already developed in the past and will remain together for this focused strategy.

[Operator]

The next question comes from the line of Lucie Carrier.

[Lucie Anne Lise Carrier, Executive Director]

I have also 3 questions. The first one is on the U.S. specifically and still a very strong performance in the second quarter. As we stand now at the end of July, how much visibility do you have, I would say, to the third quarter, but mostly to the end of the year in the U.S.? And do you think the outperformance versus your peers, which seems to be by a factor of 1 to 2, can continue into the rest of the year? So that's the first question. The second one is just a more mathematical question around the bridge. You had about a 25 basis points impact on the margin from investment for growth. You said that you are pretty much finished now with all your -- with the repairs, you were calling it. Should we assume that this headwind is now into the second half going to progressively or gradually disappear? And then my last question was around the free cash flow seasonality. Thanks for all of the color around the normal seasonality. But considering the working impact, which is more positive in the second half of the year as well as what you're expecting in terms of momentum, should we expect or possibly see the free cash flow seasonality to be even a bit stronger than usual in the second half? And I think you've also mentioned a lot of the inventory initiatives were finished as well.

[Patrick Berard, CEO, CEO of Europe & Director]

Thank you, Lucie, for your question. I will take the first 2, and I will have Laurent helping me on the second and the last one. The U.S. the second quarter good sales level, we didn't take any special order or special magnitude. Therefore, there is a fundamental trend by which we are continuing to grow. And it's obviously some due to the past investment in the previous year that you see here happening in terms of top line, but it's also due a little bit to the fact which was against us on the mix of business due to the fact that certain threats on business components that tariffs would put in jeopardy has put certain customers to accelerate their project business as much as they could. The Mexican threat on tariffs and the swing on way of the China has a little bit accelerated certain big projects, which, by the way, puts on hold other things that will materialize in the second half of the year. And there is also -- this is for your first question. And therefore, to the end of the year, I continue to see good momentum, probably less major projects and more Proximity business, as we have invested in it, which also, when it comes to transforming into the operating leverage, I will privilege in order to materialize what I said before, the repair journey by putting more branches and investing in inventories and OpEx and people in order to address this, we are now having finished and we are now going to try to get as much as we can from our past investments. To your second question, Laurent, you want to take it over?

[Laurent Delabarre, Group Chief Financial Officer]

Yes, yes. On the bridge, you are -- to tell you right, and that's what -- we call that the kind of retail journey we're over. So adding more people at the branches to the network. We tend to a point where we think we are at the right level. So yes, you're right. Now what is important is to have a good flow-through and a good contribution of all these actions into the performance of the country. So what we called in our reach of volume and price contribution has to be increased in the second part of this year and next year to partly or more than offset the investment for growth that is in the bridge today at 24 bps. In that now, we don't have any branch opening in the U.S., but we have IT and digital. And probably, this 24 bps on a full year basis would be close to last year, so going to 30 bps, something like that. So that's on the bridge.

[Patrick Berard, CEO, CEO of Europe & Director]

Before you move to free cash flow, Laurent, let me be clear on this. It is a conscious decision beyond the mid-year statement, and beyond the rest of the year to be done, that after 3 years, of having done investments of different kinds that we have expressed in the past, we privilege for the coming, let's say, probably 2 years. We privileged, a, the operating leverage step-wise throughout the time and also the digital transformation because we have joined now the club of the people who have significant digital trading, and we want to grow and become one of the leading in that field, meaning operating leverage and digital IT, but more digital than conventional IT by far much more. These are the selectively only targets, which we are at a turning point right now where it was repair in the past in a conventional way and moving to the operating leverage of what we have done in the past and the IT developments. I try to make it now because you gave me a chance. Lucie, to express that very clearly. Now the free cash flow?

[Laurent Delabarre, Group Chief Financial Officer]

Yes. On the free cash flow, you are right that the pattern is a strong cash flow generation in the second half. This year should be strong as well. You're right that we said that we are at a good level on the inventory, and, yes, even some country-specific cases, where we are a bit over the level, we anticipate at the end of June. So we have action plan to correct a number of days with specific targets. There's the level of inventory. So far on the receivable side, the data are good, and the collection is continuing in the right trend. So we expect to have just a strong free cash flow in the second part of the year. And the target is to be close to 60% of cash conversion. So the transformation of the EBITDA into free cash flow before interest and tax.

[Operator]

The next question comes from the line of Pierre Bosset.

[Pierre Bosset, Head of French Equity Research]

I have 3 questions. First of all, I just would like to come back to the slide, Page 17. I'm a bit puzzled by the stronger EBITDA growth in the second half of the year because the basis of comparison is increasingly difficult. So where is it coming from? Is it because you get larger rebate from the suppliers? Or how you can explain that? That's the first question. So second question is a follow-up of what you have said. The Repair journey is now nearly completed. So going forward, what sort of operational leverage would you expect? Let's say, if you have 1% organic growth, would you expect 10 to 15 basis point increase in EBITDA margin? And my last question is on digital. Can you give us a little bit of granularity on what is happening in the U.S.? Is penetration of digital is increasing or not? And what are your plan going forward?

[Patrick Berard, CEO, CEO of Europe & Director]

Thank you, Pierre. On -- maybe Laurent, you will take the first question.

[Laurent Delabarre, Group Chief Financial Officer]

Yes, there is -- 2 questions. And the first part of the question is the H2. And in the H2 compared to H1, we have various things that will help us. I already commented largely on the day impact, which would bring us roughly 2% more EBITDA growth compared to H1. Then we have the turnaround country, Germany and Spain. The impact will be greater in H2 than in H1, so this should bring us 2% to 3% growth. Then in H1, we struggled also from the copper price, which cost us roughly 1% of growth in H1. And with the level currently we have, it should not impact H2. And of course, we have the ramp-up of our action plan that have more impact in H2 than in H1. So that's the first answer, comparing H1 and H2. Then the second question for me is how you reach to do 3x in a row a 9% growth in H2. On that, mainly because when you are in a top line growth momentum, you can materialize, let's say, after summer, some stronger negotiation with a supplier, you can reallocate purchase and you grab, in fact, additional rebates that are the result of the work of the 9 -- that 9 months. And of course, there is also the ramp-up of actions that are delivering usually more in H2 than in H1.

[Patrick Berard, CEO, CEO of Europe & Director]

There is also the fact that we shared with our teams that they need to focus also on the operating leverage. I mean when I took over 3 years ago, remember I say I will take all the actions in order to repair, but I will invest in branches, in inventories, in people, in supplier concentrations and in the service level, including transportation cost and everything. When you do this, obviously, this is creating momentum after years of going down. We have done it. And there is a moment where, obviously, as I told you and we shared many times with you, the community, in saying, and the question was when do you turn to more operating leverage. Yes, we are turning to more operating leverage because this is a good time. We have done what we had to do. We see also that we can now -- we have the right setup in order to get the benefits of our actions. It's always a shift in the criteria by which we manage. It's always a shift in the way we get our people to focus differently on different elements. There is always a shift into where do you privilege in term of resource allocation on a daily base. I would not give you because I would be foolish to have already today a full pattern of how much it would improve internal bps. Things could get faster or slower depending on many conditions. And in the same way we are focusing on organic growth, we will focus on improving the operating leverage. And that's, at least, the point I want to make clear. And this is also how we will see the H2 already confirming that beyond the calendar effect and beyond the copper variance vis-a-vis previous year, as we already mentioned. And when it comes to your third question, the digital, it's part of it too because focusing on digital doesn't mean to transform everything but to make sure, especially in the U.S., that everything we have developed. And let me very specific. We have now developed the total what was available into the Platt mode available -- to be available to all of our sales rep, including the one in the other banners, including the fact that it has to interface to different IT, different data layers, and all of this has been spent. It's behind us. Now it's up to everybody as of this summer to start developing the web sales on a generic using the new features. And all is available in terms of web development still ahead of us. And obviously, the more we grow in digital, the better it will help also on the operating leverage at some point in time. And it's a similar pattern than what we have seen in Europe. If you remember, a year ago, you had very advanced countries, Switzerland and Belgium, just to name 2. And we had big countries much lower in web sales. France was one of them. France today is very accelerating full speed into the digital journey, and all our customers more and more are becoming online channel customers using the pattern of the branch, using the telephone and using heavily the digital interface, whether it's an EDI or web. We are entering into the same journey in the U.S., where every customer will continue to use our banners and branches, will use our telephone capabilities and our quotation plateau and will use our web sales and EDI. Therefore, when we enter into this phase, the speed at which things can materialize, the conditions are good. It's an adoption speed which we have demonstrated in other places that it works. I think we know the recipe. We have the attention. We have the capabilities. This is where we go.

[Operator]

The next question comes from the line of Alfred Glaser.

[Alfred Glaser, Analyst]

Yes. I've had several questions. The first one is on your forecast EBITDA bridge. Could you detail a bit more what kind of operating leverage do you see there? Can we go back to some kind of relationship between organic growth and margin evolution from now on? You said previously that this equation was no longer valid. Is it now valid again? And -- but to which extent should we integrate more negative elements coming from tariffs, less favorable mix and so on, in the EBITDA bridge going forward? And then I had 2 other questions. One is on France. Could you give us some more insight on how you see the market evolving growth in the underlying segments, residential, industrial, et cetera? And my final question is on pricing. Could you give us the pricing -- sales pricing by region in Q2, excluding copper price, please?

[Patrick Berard, CEO, CEO of Europe & Director]

I propose that Laurent take the forecast EBITDA bridge. I will come for the tariff and France, if you allow me, and then he will take the pricing also. Maybe, Laurent, you start.

[Laurent Delabarre, Group Chief Financial Officer]

Yes. On the bridge, on the first color, on the volume and price, we asked -- we challenged the country based on drop score, which is to bring something north of 10% on any additional sales in a normal environment before any investment. So that's the way we have challenged, and we can get more than that in some countries. The strong performer in EBITDA can deliver some more in term of the drop score and any additional sales. So it's a mix of country, but the way we are pushing the country, to say, as you are performing on a stand-alone basis, you need to deliver the maximum and then you will have the envelope for investment, which we discussed and follow a bit partly. In that by country, there are some specific situation, and Patrick will come back on the tariff one in U.S. And on the key European countries, the high performers, they are delivering at very strong drop-through, then it's more difficult, for example, in U.K. So it's a mix of everything that flows into these attributes.On the pricing globally, [ December ] months is a bit more favorable in terms of price inflation, excluding cable, than in Q1. Q1 was 1.6% for the group, and we are 2%. And by region, excluding cable, Europe is plus 1% in Q2 compared to plus 0.7% in Q1. And North America is at plus 3% in Q2, growing in line with Q1. It's a bit early in Q2 to see the second wave of tariff. I think it will impact more Q3. That's why there is not so much gap between Q1 and Q2.

[Patrick Berard, CEO, CEO of Europe & Director]

Let me take over maybe France and the tariffs. The tariff in the U.S. when they really materialized last year, we got the impact to be passed to the market in November and December. That's where we had to explain to every single customer now prices are different because of the tariffs for the first wave. And by the way, people started to react negatively by the end of February and in March when they saw that they had to pay the bills, and they were really saying that it was a squeeze for them between their projects when they did the quotations and what they got -- when they had to pay their bills. And therefore, we were facing a wave of people asking for compensation, overrides, blocking, and there was a very intense market discussion or discussion with the market in the April, May moment. And at the same time, if you remember, there was a moment when the President of the U.S. decided that there could be a 5% each month for everything coming from Mexico, and he was also announcing the next wave of tariffs from China and for -- on $300 billion imports from China. And probably because of threat on the Mexico one was really a major concern to everybody in the U.S., the pressure to -- the past one, the one of previous year, November, December was a little bit released, and it was like restate, rebased for the new one that was by the market more or less accepted where we were. The fact that the Mexican one didn't materialize, I mean, so far, and the threat is gone for the time being, has probably given some release. And given the China second wave of tariffs being announced and not being lifted up, we still wait from supplier how much they will -- this will be transformed into price increases to us because some of them are still waiting, which category and when and how, by the administration. But we expect this to come if everything materialized as it was announced. I give you here the sequence of events by which we are living through this. Now whether it comes or loss, delayed or not, we have a clear strategy and a clear way of dealing with this. First of all, price increases to be passed. No squeeze allowance, no squeeze acceptance. There is also that out of the first, we told every single customer if you want projects to be signed, let's signed price adjustments for the future. And yes, we can make quotations today, but this quotation are subject to price adjustments. Now is it going to be easy if the second wave come? It's never. Therefore, we have to be cold blood on certain top line when it comes to it, and therefore, the drop-through and flow-through become very important criteria for managing such period of time, that taking deals without flow margins just for the sake of the top line is not what we will pursue. It's not, and it will always be looked at by the drop-through capabilities. This is how we are working. We adapted. It's our capability to react to something that we don't really manage, but when it comes, we have to take it into consideration. When it comes to your question about France. I'm reading like 2 different indicators. So far, 3 things. It's still a good market in volume. It's still good ahead of us because Grand Paris, Olympic Games are on the horizon are creating very little for us today but significant, probably, over time in the coming years because there will be construction. For the time being, it's more on -- in the underground. But very soon, it will be above the ground level, probably in a year of time. And there is enough backlog and enough in the system so that we can bridge to this moment. Now Paris does not make all of France, but in the moment, there is a strong demand, such a strong demand in the Île-de-France region. It gives a relief on the rest because the big guys will be busy with this. And there is enough good level of activity in the rest of the country. I don't expect a major issue from the demand side. And industry is just positive, slightly above. Commercial building is slightly positive. And residential is really depend by regions. It's collective residential, which is sustained and to a high level. Only individual houses are a little bit down. But every 6 months, it may vary.

[Operator]

The next question comes from the line of Andreas Willi. [Operator Instructions].

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

Just have a few follow-up questions. On your message on the focus on operating leverage and maybe selectivity in some area, focus on the proximity business and focusing on driving leverage. Now what part of that is linked to where we are in the cycle and the environment that may be a bit weaker? And what is part of that is just because of the stage of your own development you're in? And in light of that, also, if you maybe could comment on some trends you have seen in June, July, particularly in the U.S. and Germany and industrial markets where we have seen some weaker data points. And lastly, on the U.K., ahead of the Brexit deadline, what are you doing in terms of inventories, preparation for that? I guess it's difficult for you to say what customers are doing. We are a bit too far away from maybe that deadline.

[Patrick Berard, CEO, CEO of Europe & Director]

On the operating leverage, we would have been, in any case, if not at the asymptote, having achieved the majority of what we wanted to achieve. It could have been 6 months earlier. It could have been 6 months later, but it was roughly the 3 years that I had mentioned when I took over. And even to myself, which was a little bit less when in February '17, I was communicating the plan. Now you never know before what is the optimum time. And by the way, we were lucky enough to have the U.S. economy up and not going down because it gave us the time to do all of this. And I cannot say that it's independent. I would be foolish as a CEO to tell you that I don't look at the cycle. Now the cycle is not over. I don't know when the cycle will turn, but the cycle in the U.S. is not over. And there are things which continue to be under pressure. When I see the demand in both coasts or in the South or in the Gulf, when I see how much it's booming due to the oil in the Gulf due to the -- on the West Coast; and when I see the salary pressure, when I see people having to raise by $2 per hour, otherwise, they cannot get the job done; when I see the pressure on unionized electricians availability, where you have to wait for months to get guys to do the job, it tells me that we are still -- the economic demand still create the tensions that it's not yet the beginning of a cycle. Now a cycle can turn fast. There must be something that could happen. I have no element to judge on disruption capabilities. For the time being, it's still strong. But there is a moment, and you were part, and you remember that going digital is also a must for me, making every customer omnichannel, digital and non-digital. Therefore, the first phase was to be able to show to the world and to ourself that the organic growth could be done in the conventional way and prepare, and we have invested also, prepare the way to make them the digital customer of us as much as the physical customer of us, if I may so, so that now the focus despite I could have continued a little bit in the U.S. the usual way. It's a conscious decision to invest in digital because the operating leverage beyond of the future, beyond focusing on good drop-through now is also due to the fact that I need to have a critical mass in digital, so that the future beyond a year or 2 is also in terms of operating leverage guaranteed by a much -- by a different business model, where a certain costs will be lower than today and the transform -- and the digital attractivity of our solutions, whether its EDI, PunchOUT, e-mail to EDI or more on the website with all the functionalities that make pure players extremely strong, that we have now, let's say, constructed in our system and made available to our customers to track and trace where are the goods and when do they reach you out and all these service-driven capabilities we had the 3 years' journey on operating leverage improvements. And when it comes to Germany. Germany, yes, I'm like you. I'm reading the indicators on the -- especially on the industry. What we serve in the industry is related to maintenance, productivity. We are not in the output. We are not in the -- what we serve is not volume-driven by the German industrial customers. To the opposite, it's more their investments, investment in productivity, investment in safety, that so far, we are less hurt than certain industry are showing signs of having less to produce. And it does not mean, delivering investments where we are, which is not capacity driven, that it does not materialize today as being -- getting weaker. But long term, we are also prudent where we see. Certain industries are not suffering the same way. There is one thing of the automotive industry, and it's another one when we are in fine chemistry, and it's another one we are in food and beverages. The rebalancing around several of these segments is really helping us managing where to put our resources, qualified industrial specialist in order to take the best of it. So far, so good. U.K. Allow me to make with a little bit of a sense of humor. As much you know, please call me because it's still very uncertain. The one thing I know, we are -- and you know we have created a cluster with the head of -- internally with the Head of Belgium and Benelux, Pierre Benoît, who has joined the COMEX, so that it leads the U.K. effort into having an optimized footprint. And if the Brexit would create, let's say, a slowing down or reduction of the demand or maybe unbalanced demand by where we had to be, we would adapt and fast, and we are developing different plans, ready to go, depending on where it goes. Regarding big customers. Big customers with low margin, we are working away if the margin too low or if -- therefore, we work from flow margins. And therefore, our EBITDA will improve from, let's say, quality of the top line driven by the margin. And also, we have to take into consideration that some customers may -- if the contraction of the market is becoming too big, that some of them, and I would never forget the carry-on case months ago, that potentially could become default customer, and we don't want to take that risk. If we could identify, we would walk away. Through prudence -- and the prudence is probably the way we will approach the U.K. market until we see -- we have a better clarity.

[Operator]

The next question comes from the line of Supriya Subramanian.

[Supriya Subramanian, Equity Research Analyst of Industrials]

Most of them have been answered. I just have a couple of questions. One is around your digital sales, which has been growing quite nicely. So could you show some light on how you see that growth coming through in the next few quarters? And also, I think you've already touched upon this, but when would you start seeing the, let's say, the drop-through come through from the digital sales because it's now reaching the good threshold levels in several -- quite a few countries of 30% of sales? So how do you see margin improvement, let's say, coming through due to that? My second question is on the margin expansion from the branch closures or the restructuring in Germany and Spain. Could you give some indication of how much of that contributed to the 1H margins? And how do you see that contribution coming through in the rest of the year? And a last question on North America in terms of branch openings. Now we have at about 54 of the 100 branch openings of the medium-term target. How do you see that progressing? Do you expect further branch openings in the next 2 quarters? Or are we done for the year?

[Patrick Berard, CEO, CEO of Europe & Director]

On the -- allow me to start by the last one. In every country of the world, and North America will have the same rule, we have regularly branch to close, branch to open, but the total number of branch will not increase anymore. We have to close because of bad location, because we are being asked to leave the premises or whatever -- or good reason that we may decide, the highway exit is not in the right direction anymore, whatever it is, and we have to get out of there. Permanently during each year, we have to relocate some branches. The new thing in the light of the digital increase is that we will do it with lower footage, whether it's square meter or square foot, and very prudent on manning, how many people to do what. And all the evolution in North America or Europe or Asia will be on the same rule. Productivity on square meter or square foot, productivity per internal sales rep or count of people because in a moment, we took drop-through, it's not just a top line that you could generate by more customer more SKU. It's also the way we manage this fixed asset -- this fixed cost structure that, obviously, over time, the more digital will progress, we will have to manage in a downward trend. There is no exception to it. The 54 branches, there might be 1 or 2 in the process of being started, may become 55, 56, could go back to 50, whatever. But the 55, take branch number, or 54, this is the delta additional and which have created the density in the places where we want it to be. And that's it. I will also recall you, for the sake of the operating leverage of the future, that we have refreshed a higher numbers than this 54. We have done a renovation of, let's say, probably 2x as many of these 54 of the existing previous buildings. De facto, we have probably 54 new and more than 100, I don't have the number in my head like this, but it's more than 100, fully refreshed, which is more than 50% of the total number of outlets we have in the U.S. that has been completely redone or opened brand new. And I count on this. Now when I look at the drop-through. Now your question of the drop-through is not just related to digital. Drop-through in conventional means, for me, that for every million top line, there is a minimum bottom line contribution. And they are different per country, per where we are, but there is a minimum to be reached in order to improve our EBITDA -- their EBITDA contribution from the top line. But it has also to do with the existing business. And here, the digital is coming into the party. Every country which is above 35% digital trading, that's what we have noticed in a few of them, roughly 30%, 35%, have all the growth more done by digital sales at lower operating expense than the previous 10%. If you do 10% or 15%, you don't see any effect in our bottom line impact yet. There has to be a critical mass that we have measured in Switzerland in the past, in Belgium in the past and that we measure in different places where we are at this level. Therefore, I'm asking the large countries to improve, increase and accelerate this because when we will see this, then obviously, there will be a major -- another operating leverage improvements beyond the one that I have said that will happen anyway before that level. Margin. Maybe, Laurent, you could take over.

[Laurent Delabarre, Group Chief Financial Officer]

Yes. On Germany and Spain. In fact, the H2 last year in Germany and Spain was very low. So we have a quite positive base effect. So when we looked at the 10 bps, 70 will be in -- 70%, roughly, will be in H2 and 30% was in H1.

[Operator]

The next question comes from the line of Lucie Carrier.

[Lucie Anne Lise Carrier, Executive Director]

I wasn't -- I mean I don't know I was going to ask another question. But as I have you on the line, maybe I just can follow-up on something I had asked earlier. Just for the bridge for the second half on EBITDA, sorry to ask again, but were you saying that you expect the investment for growth to be a 30 basis point impact, so higher than the first half? That was not very clear, and I had some question coming in the meantime.

[Laurent Delabarre, Group Chief Financial Officer]

Yes. Yes, yes, we need to -- I said that the investment for growth will be higher than the 24 basis points, probably close to 30, and that the volume and good contribution of the country should be slightly higher than the 30 bps we had in H1 through this transaction and measure we have taken during Q2. And that should start to materialize in the second part of the year.

[Patrick Berard, CEO, CEO of Europe & Director]

Lucie? Are you there?

[Operator]

Yes, carry on, Lucie. You can talk now.

[Lucie Anne Lise Carrier, Executive Director]

Yes. Sorry. Apparently, we are all being cut out after you answered the question. So just to be clear, the net of volume-price contribution and investment for growth, do you expect to it to be higher in the second half than it was in the first half? Because in the first half, it was plus 6 bps.

[Laurent Delabarre, Group Chief Financial Officer]

Then it's -- probably, it would be -- it will be slightly higher, yes.

[Operator]

I've got another question from the line of Pierre Bosset. Pierre, did want to -- do you want to ask a question?

[Pierre Bosset, Head of French Equity Research]

Yes, me again. Sorry. I have asked 2 questions. The first one, again, if the Repair journey is completed, shall it mean that there will be no further major disposal of restructuring maybe in Italy, for instance? And similarly, is there some room now for some specific M&A maybe in the U.S. to increase your market share? That's the first question. And the second question is on data analytics. Some months ago, you mentioned software which can reduce churn in your client base by predicting whether or not the client will stop doing business with Rexel. Is it working well? And in which country have you implemented that with sort of result? And are you going to roll out this software in a large number of countries?

[Patrick Berard, CEO, CEO of Europe & Director]

On the M&A and disposal. There is no taboo that if we have a disposal to make whether locally or country, we would do. But you have noticed in the past that everybody who has predicted certain geography were wrong because it could be sometime very local within a country. Look at Germany, what we did in the North. It could be an activity based. Look at China, what we did when we exited the residential. And therefore, allow me to say that this is -- we looked at it very analytically from a different standpoint and from an outlook, further down the road outlook. I think a distribution company like us will permanently review where to be, how to be or what to be and be -- there is some kind of an agility here. And at least, the choice for Rexel is really to create value. And if there a situation where there is no chance of creating value, midterm, at least -- and not 10 years, when I say midterm, it would be like 3 years, 4 years down the road, then obviously, I would take the necessary steps that could be this. On the M&A side, I keep saying to everybody I will not go for market share gains by acquiring company exactly like we are. We have demonstrated that organic growth more than EUR 1 billion gains we can do by ourselves. We know how to. And first of all, today, everybody -- every time I'm looking at an acquisition of the conventional business, there are multiples which are, allow me to say, sometime ridiculous and outrageously high when you think of the future. And therefore, I'm not a great fan today. Unless there are very local good cases, I'm not a great fan of spending resources at acquiring far too high multiple companies doing exactly the same for which digital is not there or not enough, for which restructuring or IT conventional has to be redone and kind of things. On the other hand, the more digital we go, the more qualified digital complementary business, whether it helps for the industry or whether it is for commercial building, I would really -- I'm looking for. But they are not so many, first. And second, while there a few, they might not be for sale now even if somebody would tell me. Everything is for sale, but there is a time to everything, and there are not so many of them. But we look systematically at what would make sense for us to accelerate the digital journey. When it comes to your question about data analytics, we continue to make some developments. You mentioned one. There are others. We continue to improve, test, get machine learning as much as analytics, predictive analytics, per se. And in doing so, yes, we see the acceptance by the field, the branches, the sales reps inside sales. It's a long journey. When I say, we will focus on digital, you have the digital transaction and you have the internal way of working, and this is one that you have mentioned. We will take the time, probably before Christmas, for reviewing this and put some facts on the table, but everything I could tell you today would be too early in the process. Once I have real statistics, then I will come out and share.

[Operator]

There are no further questions at the time.

[Patrick Berard, CEO, CEO of Europe & Director]

Well, if there is no further question, first of all, I would like to thank you for having taken the time. Thank you for your questions. Thank you for giving me and Laurent a good chance of explaining the why and the how and the direction we go. And I hope to meet you very soon so that we can explore further down the road any further question you may have. In any case, thank you. And for the one I would not see before this summer, enjoy your summertime, and otherwise, let's see each other after this August month coming. Thanks a lot. Bye-bye.

[Operator]

That does conclude our conference for today. Thank you for participating. Participants, you may all disconnect. Speakers, please hold on the line so I can transfer you.