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Edited Transcript of DIE.BR earnings conference call or presentation 28-Aug-19 4:00pm GMT

Half Year 2019 D'Ieteren SA Earnings Call

Brussels Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of D'Ieteren SA earnings conference call or presentation Wednesday, August 28, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arnaud Laviolette

D'Ieteren SA - CFO

* Francis Deprez

D'Ieteren SA - CEO

* Pascale Weber

D'Ieteren SA - Head of Financial Communication

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Conference Call Participants

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* David Vagman

ING Groep N.V., Research Division - Research Analyst

* Matthijs Van Leijenhorst

Kepler Cheuvreux, Research Division - Analyst

* Nathalie Debruyne

Banque Degroof Petercam S.A., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the D'Ieteren 2019 Half Year Results Conference Call. I'll now hand over to Mr. Francis Deprez, CEO. Sir, please go ahead.

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Francis Deprez, D'Ieteren SA - CEO [2]

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Thank you very much and also a very big welcome from my side to all of you at the occasion of the publication of our Half Year Results 2019. I actually have assisted that all of the analyst calls in the last couple of years, where you may not have heard my voice or not have heard it very much, but I was there.

For me this is a little bit of a special analyst call because this is the first one I have the honor to host as CEO of D'Ieteren group. As you know, I've been nominated by the Board of Directors of D'Ieteren on July 1. And it is for me, at the same time, a great honor and a great source of energy to be able to direct and guide the D'Ieteren group for the years to come.

I'm equally happy to welcome here all of you together with my copilot, who is sitting physically on my left side, copilot of the executive committee, Arnaud Laviolette, CFO, that you know all very, very well. And of course, he is not only a super expert in finance, he also knows intimately the house and all its activities. My partner in crime, if you like, and we work together hand-in-hand.

Personally I've actually been with D'Ieteren exactly this week 3 years, and when I think back and reflect back on why I joined D'Ieteren, and I do the same exercise today, my motivations are actually, more than ever exactly the same. First, I joined the group because I'm really excited to work with a team and colleagues that are just plain fantastic. And secondly, I joined because I do think it's a unique opportunity, together with the seventh generation, Nicolas and Olivier, to be able to write a new and exciting new chapter in this very long history of D'Ieteren for the years to come, to shape it, to write it, really exciting.

In the last 3 years, I've gotten to know D'Ieteren as a very warm, human-centric company, deep anchored traditions, absolutely built in 214 years or so, with clear strength in each of the activities. I mean Belron is really just a mind-bogglingly strong service-oriented company. I think many companies and sectors can just be jealous about what Belron is doing. D'Ieteren also has a commercial tenacity, which I find very, very appealing and the clever branding at Moleskine with relatively limited means have been able to build a strong brand over the years.

So lots of assets and positive things in our activities, but still a lot of potential. And I see it as my ambition, as our ambition, together with Arnaud and the whole team, to maximally deploy that potential of the activities, and also the resources that we have in the group and that you know that are not so insignificant to also fully use those. I want a robust and a really excellent and even more successful D'Ieteren that is strongly rooted in the past, but also with wings oriented towards the future. And what it takes, is first of all, it takes, of course, that each activity develops itself and keeps developing itself. I think we have been able to show last week still with Belron with a not unimportant acquisition that the daughter company, Safelite, has been able to do in the U.S. It shows that Belron continues to develop itself.

Also D'Ieteren also is reinventing itself, the Magellan project, we'll talk about it later, they have just finished the exercise and are launching implementation, have identified lots of new, both growth and profit-generating opportunities, pretty exciting. And also Moleskine continues to move in new product categories, digital applications, beyond, let's say, the traditional notebooks that you all know.

So existing activities develop themselves further and yes, we do have a relatively sizable cash reserves that we, of course, want to use to extend our family of businesses. We are a family businesses, but we are also a family of businesses, and we do want to extend that family, and it is my role to ensure that our search to extend the family is focused on those sectors that interest us the most, one; two, to make sure that our team and our approach is consistently organized toward that; and three, that we have the necessary discipline to the investment criteria that we have and that are clearly defined and to stick to those. We are not in a sprint here, we are more in a long-distance run and those of you who are joggers or runners know that both in the energy level, and having a good control of your breath is important in a long-distance run.

So just a couple of few introductory words, sorry about that I could not leave the occasion to do that today. But I suggest you go into media address around to H1 numbers. I will do a short intro and then hand it over to Arnaud to go in deeper into some of the activities, and we will split that between the 2 of us.

On H1 results, there's really I would say 3 key messages. At the very highest level, we're actually very excited by the very strong Belron results of H1 '19. And in particular, because we believe that a significant part of those results are structural, and they're not just onetime lucks or pure market-driven progresses. It's quite structurally. So it puts us in a positive perspective.

Second, in those parts where we did not see growth and there are parts of Belron in Europe, for instance, where we have volume declines, there's parts of D'Ieteren also where we've seen declines, also in Moleskine. But what puts us -- let's say, what gives us some confidence in the future is that the bottom line numbers have been quite resilient in -- even in those areas, regions and businesses where volume declines were there. The eurozone and Belron, they've continued to really do well despite the volume declines.

Important D'Ieteren Auto, we know that the car market in Belgium has slightly gone down. We have also delivered somewhat less cars. Nevertheless, they've really done a good job on the margin side. And even Moleskine with B2B where we knew we're going to have less than last year, we had a very high jump on that in H1 Q 2014 -- 2018, sorry, even there they had good development on the margin. So that's the second key message.

And the third key message, I would say, that's free cash flow in the first half year has been quite strong, mainly thanks to Belron, plus EUR 60 million in free cash flow, and also Auto plus [EUR 40 million] in free cash flow.

So these 3 key messages really, let's say, give us the confidence to confirm our guidance. We have, as you know, upgraded our guidance after Q1 to at least 25% increase in PBT group share. We confirmed that guidance with an additional caveat that within the activity of Belron, where we have talked about plus 30% at least, we now raised that to plus 70%, given where we are in H1, and the outlook that we have for the rest of the year.

So these are really the key messages of the H1 results. And of course, not to forget to mention that we had a second press release as you may have discovered in your inboxes that we do launch a share buyback program of EUR 150 million and we'll have a bit more details on that in a minute as well.

So before handing the details on the Belron side, overall sales on Page 3, as you can see after all 2.3%. That growth comes entirely from Belron, plus 8%, whereas Moleskine and D'Ieteren were down 2% to 3% respectively.

On Page 4, the uplift in bottom line has been even more significant, adjusted operating results jumped 35.1%. These are by the way pre IFRS 16 numbers all that we're showing here. And we can talk about that later if you have questions on that. The plus 35% also comes entirely from Belron with a slight decline in both the absolute Moleskine number and D'Ieteren Auto number. And the KPI that we always use for our guidance, so the adjusted PBT group share is plus 25.3% in the first 6 months of the year also entirely coming from Belron, with slight declines in Auto, Moleskine and other being the combination of the corporate and the real estate activities.

With that I suggest to hand over to Arnaud to give us some insights on the story of Belron on H1.

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Arnaud Laviolette, D'Ieteren SA - CFO [3]

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Thank you, Francis. So yes, I'm delighted to present those outstanding results for Belron. As you mentioned, it's based on strong organic growth for the group even in a context of declining volumes in a lot of our markets, and even on the consolidated level, we have served 1% less consumer in VGRR than last year. But notwithstanding that, we've been able to increase the sales by 8% and 5.1% organically. It's mainly driven, that growth, by North America, and especially the U.S., where you will see in the table that North America has grown organically by a little bit more than 12%, while eurozone and rest of the world have experienced a decrease in top line in very, very tough market circumstances with declining volumes in the markets, sometimes double-digit in some of our key markets.

But thanks to gaining market share in a lot of countries, we've been able to compensate for that and on top of that, we have been able to enjoy structural tailwind of highs, it's in fact the mix effect essentially of the windscreen, which creates a positive price environment, thanks to the complexity of the windscreen, thanks to the various model mix that we have.

On top of that, as we can see, the ADAS calibration has increased quite substantially. As we speak, approximately 10 out of 100 windscreen replacements needs ADAS calibration, which is yielding interesting revenue for us and which we are expecting to continue in the future.

We also increased the sales, the attachment rate of value-added products. Those are wipers, batteries, water repellent that we sell, while providing the service for changing or repairing the windscreen, and the attachment rate is now at 18% coming from 12% last year.

And on top of that, we have had some positive tailwind of currencies with U.S. dollar, Canadian dollar and Sterling improving vis-à-vis the euro.

You'll remember that the last years we had sometimes some fault or issues with Belron who is very strong in -- well, solid sometimes strong and top line growth, but translating into a milder conversion in terms of trading profit or in terms of EBIT. And this year, we -- or this first half, and we are expecting that to continue, we've improved on all the dimension of the P&L, increased the gross margin, increased the direct labor -- or improved the direct labor cost in percentage of sales. Same for all the other cost line of the P&L. So this top line growth plus very tight control on the cost, and in some area we are pending still more, because we want to gain share and so on has led to a very, very strong pull-through with what we call the trading profits. So before the ELTIP impact, the adjusted trading profit increasing substantially by 68% and leading to a margin, close to an EBIT margin of 12%.

So there is very strong performance for the first half of the year, which is really the best side of the year, but we're expecting good performance, such performance to continue for the rest of the year.

Even in the markets like eurozone and rest of the world where we experienced negative headwinds from the markets, we have been able to improve the performance. And on top of that, we, for the last year, because it's the last year of the 3-year plan, we have been booking an ELTIP charge for the management incentivization plan of close to 23% and that will stop by 2020. So we expect the total charge for the year to be at least of EUR 45 million.

Then if I look at the pre-IFRS results -- IFRS 16 results, I mentioned you the number of consumers. So in total, the number of consumers is declining by 2%, but the decline is more important in claims management, an activity we have essentially in the U.S. and Canada because we stopped some activity over there. But in terms of VGRR customer, pure VGRR customer, we declined by 1% on aggregate.

I have mentioned the operating profit. The net financial costs have increased because we've increased our debt in the course of the Q4 2018, and so that has led to higher financial charge and our adjusted PBT is going strongly, thanks essentially to the increase in operating profits. And we mentioned here at the detail, one of the detail, that the ELTIP charge to be remembered.

We have some adjusting items in the PBT. As you really know, we are hedge accounting for the fair value of the fuel hedge that have had an impact of EUR 3.4 million. We have continued to amortize some brands and customer contracts for EUR 2.9 million, and we have booked a gain, an impairment of goodwill, this time in Italy because that -- we believe that the prospective of Italy, even if the performance of Italy was relatively good in the first half of the year, we believe that future performance could deteriorate, and so this is why we have, in fact, impaired fully the goodwill we have in Italy. And then we have other costs, which are viewed as onetime for the restructuring in some countries, France with the former Maisoning called Carglass Maison, in Belgium, where we kind of merged the former CARe Carglass Carrosserie with the classic Carglass, in Portugal and Spain, where we improved the footprint or the structure of the footprint. And then we have experienced a few losses on disposals of the smaller countries that we've announced end of last year and beginning of this year.

In terms of cash flow, as mentioned by Francis, in fact, the impact on group share for D'Ieteren of the positive free cash flow generation of Belron, but once again, it's a significantly higher EBITDA. We are close to the EBITDA of the full year of last year. It's lower CapEx partially due to a real deep scrutiny on the CapEx program, but also the fact that we have a little bit frozen the IT expenditure, as we speak, in order to have a new plan there. And then we have had a negative swing in working capital for the first half of the year, and we expect that to recuperate some of that swing. So a strong cash flow generation.

You'll remember probably that when we set our KPIs and target for Belron, we mentioned at some point that we wanted to generate at least EUR 200 million of free cash flow, and we are, for the first half of the year, in the good trajectory.

Leverage has been decreased, decreased to 3x net debt to EBITDA at the 30th of June, 2019. We are still expecting some progress in the second half of the year. This is before the acquisition we've done in the U.S. that we've announced last week. But we've paid that with the cash we had on hand. And the debt, yes, has increased versus the first half of last year because we issued the EUR 400 million TLB, term loan bond, during the fourth quarter of 2018.

In terms of latest developments, we had announced last year that we have a plan to improve the performance. It's a plan which is based really on acceleration of some commercial initiatives and some transformation of the business in mastering better the cost basis, and it starts to deliver some interesting results, as you've seen.

We continue to make some progress on our service extension. We have not made any significant acquisition on that front, but we continue to better master, develop our new activities there. And with a clear focus on profitability until the year-end. We have continued to divest or carve out and franchise some of our activities, especially in Greece and Hungary.

And then we've announced last week, as you know, the acquisition, which is -- financially, it's not a super-large acquisition, but strategically it's important. It's the second largest player, integrated, well-organized player in the U.S. It's 20x smaller than Safelite in the U.S., but significant presence, and we are delighted to welcome them into the Safelite-Belron family.

The outlook, as we said, we maintain the guidance in terms of top line, and it will normally be easier comparison with Europe in the second half.

And we believe that we can achieve at least 70% growth in our PBT group share -- adjusted PBT group share for the full year, and once again, thanks to top line growth and initiatives on the fuel efficiency initiatives, the need to Fit for Growth.

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Francis Deprez, D'Ieteren SA - CEO [4]

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Great. Let me continue on D'Ieteren Auto. Key messaging on D'Ieteren Auto are, first of all, we are a declining market this year, minus 7.4%, and despite the fact that we have been able to increase slightly our market share to 22.04%, we have, of course, delivered somewhat less vehicles, minus 2.3%. This translates in both a slightly lower sales, minus 3.1%, and a lower operating result, minus 8.1%.

Our guidance overall for auto is still to be broadly stable. I think we had guided before, improved slightly. We mention now as broadly stable, and given where we are today and our outlook for the second part of the year.

Market-wise, the minus 7.4% and that's excluding registrations of less than 30 days, so the official Febiac numbers, they are, of course, a tough comparison to last year. You may remember last year, we had a couple of artificially overcharged months in the market overall, given the anticipation of WLTP. So quite some brands and so on offloaded stocks on the one hand, customers wanted to buy before there was uncertainty and so on. So there was a bit of a -- there was a tough comparison that led to almost a record H1 last year in '18, and so, comparing H1 '19 with that is a tough order.

We do see quite a split between the business and the consumer segments. Business segment, slightly up, 0.8%; consumer segment down significantly, 13.2%, driven by uncertainty linked to fiscal regime, the fact that we don't have elections and don't have government yet may have contributed partly to that. But overall, there are uncertainties around the regulation governing usage and ownership. And as I said, the market share was slightly up.

The first 6 months of '19, 310,000 vehicles compare quite to the year 2016 almost, if you look at the chart at the bottom of Page 16. We do anticipate the second half to be a bit less than 2016 because the number we had, I think, announced at the beginning of the year is a market of around 520,000 vehicles I think is the number we had in mind at the beginning of the year, and we are more or less still around those same lines today.

Market share reflects the success of SUVs. Volkswagen remains the market leader even if they went down a little bit in the market share. It's mainly the SUVs, T-Cross and T-Roc that go very well. There are, of course somewhat smaller SUVs, those.

Audi, stable at market share. A good drive on the Q3, the Q8, e-tron, the A1.

Škoda, nice jump in market share. Continued support from the Kodiaq and the Karoq, but also the Octavia this year and the new Scala helped reach those higher market shares.

SEAT, actually for the first time since a while, above 2% market share. Continued success of the Arona, but also the Tarraco, which is new helped there.

Porsche it's had a tougher first 6 months of the year, and as you may know, Porsche does have an impact on us, both at the import and at the retail level right away. In market share, Porsche went down for 2 reasons: one the 911, which had been launched quite successfully, we just don't have the right speed of delivery from the factory to be able to offer the number of 911s we could actually sell in the Belgian market; and at the same time, there's a couple of hybrid cars, in particular within Panamera and within Cayenne, that have actually fallen above the threshold that you need to qualify for a fiscally attractive CO2 emission. They are not part of that anymore, and it's something we noticed that the customers therefore sometimes optimize fiscally, and then they move to a BMW, God forbid, or some other brands to do so.

SUV, overall remains good. 18.28% is the number we had in H1 within our brands, and so we are quite happy with that.

Now of course, the lesser market translates in lesser deliveries, lesser sales and lesser sales revenues in -- also in euros. And the 8.1% drop in bottom line can be mainly explained by, on the one hand, the Porsche effect, which is there. We don't think it's structural at all. It's more linked to those delivery issues, as I mentioned. And also at retail, yes? Retailers in Belgium, in general, but also the retail that we own have therefore seen lower profits in H1. It has been partially offset by good results at imports. So despite the lower volumes imported, a good job in -- on the margin side.

We did have a somewhat higher inventory write-downs. This is more linked to a change in accounting we had in '18 that we don't have any more in '19. And therefore, the comparison makes it a little bit difficult. And I said the comparison overall was actually quite difficult results, given the differences and the things that are showing up. That's the main point on the profits.

I think Page 19 shows you the main tables around that. I highlight just the 4.4% versus 4.2% margin that we've reached, so somewhat lower than last year, but still a relatively good number. And the share in adjusted net profits of JVs and associates, that's, of course, mainly VDFin, which you can find back in there. And that has a good progress versus last year.

Cash flow vise and net debt wise, our cash flow did increase in Auto mainly through working capital. We can see it in the table at the bottom of Page 20, from minus EUR 45 million to plus EUR 16 million, so a delta of almost EUR 60 million. Now this is also partially a timing issue. As you make the picture end of June, the trade and other payables rose with a significant number and so, despite the fact that we had actually inventory increases also at the end of June, trade and other payables increase somehow compensates for that and explains the higher -- the better numbers on working capital.

Now the inventory did go up. Why? There's a little bit of anticipation of the commercial vehicle WLTP, which we -- so the small version, I would say what happened last year, we have now this year in small and light commercial vehicles. And there have been -- also been, and those of you who may have flown into Brussels and looking down the parking lots on [Air Sweds] we had massive deliveries in May and June, lots of cars there, and by the time these cars find their way through dealerships, from dealerships to the customers, it takes a couple of months. And so the picture of end of June did show a somewhat abnormal high level of inventories.

Now combined with effect of working capital with somewhat lower EBITDA and somewhat increased CapEx and you get to the numbers of the table that I have at the bottom of Page 20.

What are the latest developments at Auto, to close the chapter on Auto? As you know, we have announced before the summer our intention to carve out D'Ieteren Auto from the D'Ieteren SA legal setup. This is a discussion that is ongoing now with the social partners of cars and will take its course before this then can be formally decided and so on.

It is our intention to do this carve out between the group and D'Ieteren Auto, and then D'Ieteren Auto has also the intention to carve out parts of its activities to allow for a more logical organizational setup around D’Ieteren Car Centres, around some of the Porsche Centres in Brussels and Antwerp and around EDI, which is the almost new start-up, I would call it, of the electric services company linked to D'Ieteren's of people buying an electric car will have the ability to immediately also buy the charging equipment required, and have it installed in their garages at home or at work, and be able to use also public electric charging equipment and so on. And so this is a new business area that's being developed and that will also be put into a separate legal entity.

Other latest development, not unimportant, is the Magellan project, I talked about it. It's a -- it actually covers both a more operational aspect of -- from good to great in each of the businesses of D'Ieteren Auto, it has actually potential to unlock still some additional EBIT potential going forward. And this exercise has clearly identified that, and the implementation of that is on its way. At the same time, a couple of new growth initiatives in vehicle-related services that we are either fully launching or exploring and piloting for the years to come. So quite exciting things there.

Lab Box that you already know and has been active for a while by now had a very busy first year of the -- first half of the year. The former Pikaway app which is launched commercially under the name Skipr, is a mobile application that I all recommend you to download if you are in Belgium. It basically allows you to find the most appropriate travel or mode of transportation between 2 locations in the country combining either private, public transportation, car sharing, bicycles, what have you, (inaudible) has really gone live I would say in the course of the first half of '19.

CarASAP has been a small acquisition, kind of a professional Uber in the Brussels region, where companies can basically use it as a kind of limo service, if you like, using highly qualified and prescreened drivers and their cars into an easy to use digital platform.

Poppy, it has been active for a while in Antwerp. It's now also active in Brussels since a couple of months as we've acquired or taken over from Zipcar former Europe Car daughter, their activities in Brussels, and as you drive or move around Brussels, you will start seeing the red Poppy cars as well.

In Antwerp we actually have complemented the cars now also with steps, scooters and bikes, and so it's becoming a real multi, let's say, mobility shared player, and we're the first in Europe with that.

And last but not least, Lizy being a kind of a digital dealer, if you like, for small and medium companies to allow them to lease mainly newer or almost new cars, I would say, in a very easy-to-use way. Quite close to our core business, but actually an exciting digital activity.

And last but not least, on the dealer acquisition side, the market areas we have been consolidating for a while and those that we own ourselves in Antwerp, we still have a couple of dealerships that we wanted to make deals with. We have done that now, and Thuy are mentioned at Page 20 and Vanden Bergh on Page 21.

What does this all mean for Auto looking forward to the -- at year-end? We do want to slightly work on the market share as we have been doing in a market that overall, we do expect will be less than last year. So it will be down with 5%, 6%, 7%. The comparison should be easier in H2 given that H2 was not good at all last year. It was very good in H1 but actually quite tough in H2. We had a drop of 10.9% in our brands, in H2, so we do not anticipate that at all at this time around. And the combination of those 2 therefore will lead to this overall statement.

In terms of adjusted PBT, group share, broadly stable, is therefore our guidance at this point in time.

And there's a couple of product innovations that I will not go into detail here for you as information.

And then for Belron -- for Moleskine sorry, I hand over back to Arnaud.

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Arnaud Laviolette, D'Ieteren SA - CFO [5]

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Thank you, Francis. So for Moleskine, it's really a tale of 2 quarters with the first quarter being very [cash flow] with a large decline in our B2B activities segments leading to a decline of 14.7% during the first quarter in terms of sales, but we recovered quite nicely during the second quarter with an increase of 9.3%.

All-in-all, it has led to a decline for the first half top line of 2.2%. And there are some sign of -- positive signs, even if we are declining because our main channel, which is wholesale, has been increasing or growing by 7.5% across nearly all the regions. And we see strong momentum in some countries there.

B2B, once again, it's -- the decline reflect the absence of large orders during the first quarter and the first half of the year. We are expecting to recover part of that delay in the second half of the year.

Retail remains tough. It remains a tough environment for us. We've continued to prune the network. We declined by 2 net stores; you know we closed 6 stores, we opened 4. We still remain not happy about the performance over there, and we continue to take actions in order to improve the performance.

And in e-commerce not totally satisfactory performance. We encountered some issues in terms of fulfillment and technical issues with our partner, and we are addressing that as we speak.

In terms of profitability, you know that Moleskine is a very high gross margin business. So any loss in sale translates quite rapidly into the bottom line. On top of that, we continue to invest in direct OpEx, in personnel in order to prepare for the growth in the second half. So it was a little bit of a squeeze effect for the first half of the year with a net loss of EUR 2.6 million. Last year, we had profit, but partially explained by the fact that we have recognized some deferred tax assets for Moleskine during the first half of last year. We improved quite significantly the performance at the end of the semester with a very strong June, and we're expecting momentum to improve in the second half of the year.

In terms of cash flow and net debt, there again, EBITDA is down versus last year. We are still preparing the second half of the year, so this is why the working capital and stock inventory are higher. CapEx remains totally under control and tax paid are minimum. The net interest paid declines a little bit because we decline -- we decreased slightly the net debt of the group.

I have not mentioned the impact of IFRS 16 for Belron. And I mentioned it here. For Belron, the impact in terms of EBITDA is a little bit more than EUR 140 million on a full year basis. And the impact on the net debt -- on net to gross debt is around EUR 640 million. And for Moleskine the impact of IFRS 16 on full year EBITDA is just below the EUR 8 million, and the impact on the net financial debt on gross debt due to the recognition of the right-of-use is EUR 34 million for the full year.

We continue to launch new products, that's part of the DNA of the company. We launched The Backpack collection -- bag collection, which is encountering nice success. And we have also developed new apps, one showed here is the Action one, which helps to better manage the flow of activity for customers.

The outlook for 2019, we have not changed the guidance. We still believe that we can achieve double-digit growth at constant currency for the adjusted PBT group share. And we are expecting sales to accelerate in the second half of the year, with some initiative in the wholesale channels, improving substantially the performance in B2B. And the classical seasonal uplift for retail and e-commerce.

Then let's move to the other segment, which is where we regroup the cost of the corporate or real estate activities, and the cost of the gallery. They are nothing really significant to mention, slight increase but it's temporary in the corporate cost and some administrative taxes, but this should be temporary.

And then some adjusting items with a capital gain on the sale of a property for EUR 6.5 million and then an EUR 11 million -- EUR 11.6 million provision taken on the value of a contingent liability we have with CD&R, which is related to the disposal of the 40% stake in Belron.

If I look at the debt levels within core activities and you see here pre-IFRS 16 and post-IFRS 16. Auto remains totally underleveraged. Here, there is no or hardly any debt at the level of that segment. Belron, we communicated a net debt level before IFRS 16 with EUR 1.5 billion of net debt. Moleskine pre-IFRS, EUR 291 million, but this includes a loan provided by (inaudible) of EUR 168.3 million and for the other segments, we still have plenty of cash with a little bit more than EUR 1 billion.

So the guidance, as mentioned by Francis initially, we are not changing the guidance. We are confirming the 25% expectation that we'll increase by 25% the adjusted PBT group share. And we are expecting a strong improvement in the Belron performance. Stable performance in Auto segment, and improved performance in Moleskine.

Then a word on the share buybacks. We have announced today the share buyback program of EUR 150 million. This represents a bit more than 6% at the current share price. It represents a bit more than 6% of the share capital of D'Ieteren.

As mentioned before, we have plenty of cash. We are still looking actively at putting that cash at work. It takes some time and is a function of debt position and in function also of favorable cash generation for the coming quarters and years, we believe that it is timely to proceed with the share buyback.

The intention is that we'll cancel those shares, and we start the share buyback in early September. And we expect in function of what we have alluded to buy with the provision of the safe harbor. We are expecting the program to last 16 months. It can be shorter, it can be longer but that's the average duration we are expecting it to last. And we can, we have flexibility to terminate, suspend or postpone the program if we deem it appropriate. So we have some flexibility there, and we will appoint an independent service provider with a discretionary mandate in order to have the safe harbor provision there.

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Francis Deprez, D'Ieteren SA - CEO [6]

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Well, thank you, very much, Arnaud. I think we have covered with this both the overall picture and some details on the activities, and I suggest we open the floor to questions at this stage.

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Questions and Answers

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Operator [1]

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We have one first question from Mr. Matthijs Van Leijenhorst from Kepler Cheuvreux.

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Matthijs Van Leijenhorst, Kepler Cheuvreux, Research Division - Analyst [2]

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The first question is, if you look at the margin development at Belron, it's north of 10% already. Do you believe this is a sustainable margin?

And the second question is could you give some color on the landscape in Europe? Why -- what is happening to Europe? Why is it down year-on-year? And I'm referring to Belron.

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Arnaud Laviolette, D'Ieteren SA - CFO [3]

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Okay. Thank you. Matthijs, thank you for the question. The first question on the sustainability of the margin, yes, we believe that north of 10% is sustainable. We are happy about the development. But as I mentioned, we have got a program where we hope to continue to improve and make it really sustainable the performance above the 10% trading profit or EBIT margin.

Then about the landscape, in Europe, you must remember that 2018, we had a very tough winter in some of our countries. And some exceptional events also in some other countries in Europe, and we had a very mild winter. And this explained the big drop in volumes in the market in the 3 largest countries in Europe, being U.K., Germany and France, where the drop in volumes of the market, if not a drop of all volumes, is double-digit.

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Operator [4]

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We have another question from Mr. David Vagman from ING.

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David Vagman, ING Groep N.V., Research Division - Research Analyst [5]

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First maybe on the group target for the group. So the guidance for this year, actually, you've decided to leave it unchanged, while actually increasing quite significantly the target for Belron or the target or the guidance for Belron. Can you come back on just explaining just the dynamic what is explaining the unchanged guidance for the group?

And then secondly if you can -- maybe it's too early, but if you could comment on your long-term, let's say, expectation for Belron in terms of profit, EBIT, CAGR but also free cash flow generation. So it seems like you're going to reach quite a few of your targets very early. So if you're planning to update us on these long-term targets anytime soon?

And then third last question, on the Belron -- on the share buyback, let's say, is it -- is there a plan like to, let's say, repay to -- in term of -- in the form of share buyback the extra cash generation of Belron, is it going well -- is this how we should think about the, let's say, deleveraging of Belron?

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Arnaud Laviolette, D'Ieteren SA - CFO [6]

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Thank you, David. On the group guidance, we -- when we mentioned plus 25% for the group and plus 30% of Belron, we probably have been too cautious for Belron. And yes -- well, you could say, but that would be a little bit awkward to say plus 7 (technical difficulty)

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Operator [7]

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Ladies and gentlemen, thank you for holding. The conference will start shortly.

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Francis Deprez, D'Ieteren SA - CEO [8]

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I think we are back on the call. Can people hear us? I think we are, and we should just continue the answer that we were formulating to the question of David.

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Arnaud Laviolette, D'Ieteren SA - CFO [9]

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Yes, so David, yes, that we're cautious on the Belron project since we are not reviewing drastically the guidance for the other activities. Slightly for Auto because we had expected when we made the first announcement, a slight increase in profitability, and now we say flat more or less. For Moleskine, no change in guidance. And yes, Belron we could have been a bit more, maybe not courageous, but optimistic. And we confirm that 70% is the minimum growth that we're expecting for that activity.

On the long-term expectations of Belron, it's still early days. We get some strong confidence that -- as I mentioned for the other answer I've given, that we can sustainably maintain the performance of both 10% trading profit margin or EBIT margin. It's probably not the right moment to do a full review of the ambition there, but we'll do that in due time, probably during the Investor Day that we'll do at the end of the year or beginning of next year.

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Francis Deprez, D'Ieteren SA - CEO [10]

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For the extra cash (inaudible)?

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Arnaud Laviolette, D'Ieteren SA - CFO [11]

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And for the share buyback, we've got a big pot of cash. It's difficult to find attractive -- in terms of valuation, we see a lot of attractive products, but the valuation are not always fine. And we believe that investing EUR 150 million of our extra cash into our own shares is a very solid and good investment. And we are hoping, expecting our activities, not only Belron, to continue to deliver strong free cash flow. And so this gives us more confidence that EUR 150 million is not something that we spent, but we invest and that we will have more means in the future to continue for or hunt for new activity.

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David Vagman, ING Groep N.V., Research Division - Research Analyst [12]

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And if I can just have a very quick follow-up. On the guidance for this year for 2019, is there something that we are missing? Let's say in the -- I mean a risk also potentially in H2, because so -- let's say, you have keep Moleskine, and let's say Auto, the guidance unchanged. You increased significantly Belron and in the end, the group guidance stays unchanged. Is there a -- I don't know at the holding level or also I don't know, maybe macro headwinds that you want to reflect? Because it's, let's say, mathematically speaking, it seems like it's not completely logical. Maybe it's a bit art to...

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Arnaud Laviolette, D'Ieteren SA - CFO [13]

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And I can tell you it works that way. It was maybe not perfectly working the way we announced it initially.

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Francis Deprez, D'Ieteren SA - CEO [14]

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After Q1.

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David Vagman, ING Groep N.V., Research Division - Research Analyst [15]

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In Q1 -- you mean after Q1?

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Francis Deprez, D'Ieteren SA - CEO [16]

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Yes. But we don't anticipate any special effect or so in H2 that would influence a mechanical calculation.

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David Vagman, ING Groep N.V., Research Division - Research Analyst [17]

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Yes. You don't feel like a slowdown, let's say, I don't know, like in miles driven or some here in the U.S., or -- especially in U.S. actually there was no -- in the latest development that you've seen?

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Pascale Weber, D'Ieteren SA - Head of Financial Communication [18]

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David, we reported 25% growth in the first half. And we forecast 25% for the full year. So in the second half, we still expect the same growth as in the first year.

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Francis Deprez, D'Ieteren SA - CEO [19]

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Exactly.

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Operator [20]

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We have another question from Nathalie Debruyne from Degroof Petercam.

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Nathalie Debruyne, Banque Degroof Petercam S.A., Research Division - Analyst [21]

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First of all, Francis, congratulations for your appointment as CEO, although you've been there for years, but well. Yes, I might just be a tiny bit annoying because first of all, I'm going to follow-up on David's question regarding the guidance. Because if I do the maths, what doesn't match actually is on the corporate cost side because we've seen a much higher cost in the first half. So that means that for the full year, we should expect like strong double-digit growth in terms of corpo costs. What's going to happen in H2? But if I do the calculations, I get to at least EUR 15 million corporate costs for the full year. And also, is it like you managed to maintain the full year guidance for Moleskine by just stating double-digit because double-digit, I mean, it could be 10% and it could be 20%. So is it like early 2019, you were more banking on 20%, and now more on 10%? That would be my first question. And If I can I raise the second one afterwards, that would be appreciated.

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Francis Deprez, D'Ieteren SA - CEO [22]

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Corporate costs?

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Arnaud Laviolette, D'Ieteren SA - CFO [23]

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So for the corporate costs, we are not expecting any deterioration in the corporate costs for the second half of the year. We are even expecting lower costs in the second half of the year than the one in the first half of the year for the reasons I've mentioned.

And for the combination, in fact of our guidance, yes, we have slightly adjusted downwards, but still double digits on Moleskine, but no big change on corporate. Auto, I have mentioned, we have reviewed downwards, and Belron we will -- we keep continuing that will grow more or less at the same pace as the one we've experienced during the first half of the year.

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Nathalie Debruyne, Banque Degroof Petercam S.A., Research Division - Analyst [24]

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Okay. No, for Belron I get it, but then again, the corporate costs. So are you saying that the corporate costs in H2 this year are going to be somewhat similar to H2 last year?

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Arnaud Laviolette, D'Ieteren SA - CFO [25]

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Yes.

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Nathalie Debruyne, Banque Degroof Petercam S.A., Research Division - Analyst [26]

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Okay. Right. That's helpful. Okay. And then, yes, perhaps a last question that would be again on Moleskine because the way we see that it's somewhat volatile, retail is a bit challenging. So just wondering about the long-term potential. Do you still see the same long-term potential that you were seeing back when you acquired it? Or do you see the situation is much more complex? And that you have to adapt your strategy there?

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Francis Deprez, D'Ieteren SA - CEO [27]

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Absolutely, we still believe in the long-term potential as we have at the time of the acquisition. If I look at the short term, the one number that does bode well is the wholesale increase of 7.5% across the regions. Now you do have more volatility -- you do have some volatility in wholesale because it does make a difference. In terms of the larger geographies, you may have a couple of larger customers and when they change their order cycle or their order cycle takes either -- goes a bit faster, goes a bit slower, you can immediately have an impact of couple of million up and down even at the quarter level. It's a bit less of course in H2, at the half year level, but still, the ordering cycles are not always stable between the years.

And volatility is additionally present in B2B and that we knew between '18 and '19, but we actually have no indications at all on the contrary that B2B because of the sudden volatility that you do have there and there were large deals in there that the potential of it would be somehow changing. So we continue to believe in good potential in B2B.

The direct channels, e-commerce and retail, are of course -- have some executional challenges that we may not have anticipated as they were when we bought it. Yes. So there are some additional challenges around retail and around e-commerce. And of course, we're focusing with the management very hard on solving those.

In retail, it's not only a combination of pruning the network, which Moleskine has then started to do, and as you see, we have a bit less shops than before, we have more shops in travel mall, travel retail locations, which typically do better than in shopping malls or in just main street locations. But still, the like-for-like growth of a shop also depends on execution, on consistent execution at the shop floor, and that is something where a more wholesale-driven company from the past is also learning as they go. And so this is something where I do think this is going slower, and it's more difficult than we thought. But I think having the right mix of direct channels strategically makes sense. We have to find the right mix, yes, between bricks and mortar on the one hand and online on the other hand. But long-term, we have full potential on paper on the one hand, and on non-paper, and I think both on paper and on non-paper, there's lots of exciting things going on, and we are confident that they will be pursued consistently.

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Nathalie Debruyne, Banque Degroof Petercam S.A., Research Division - Analyst [28]

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Okay. Okay. Get it. And you more or less answered my question, my next question, it would be around retail. Like would you say today, again, still that it is for the long-term strategic to maintain a retail network because for travel retail, I understand it very well. I mean, when I go to the airport, I -- you can see that these shops are doing pretty well. But for the others in the street, yes, that's a bit my question, how committed are you to retail? And how strategic is that, to maintain that network or perhaps optimize it with fewer shops and stick to travel retail, for example, or so? Is that a question that you're raising and discussing with management?

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Francis Deprez, D'Ieteren SA - CEO [29]

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Absolutely, we have very intense discussions on retail with the management. I don't think the answer will be necessarily the same in every region. You have to realize that in some countries like China, just to give one example, there is no wholesale or hardly any wholesale in China. And so you either rely very much on the Alibabas of this world, yes, and we do of course. But if you want to complement that, having strong physical presence does make a lot of sense, and if there is no wholesale, the physical presence can only come from a shop-type concept.

Now the good news is that in China the typical cost to operate a shop are a lot lower. So it's a lot easier to get to a breakeven in China. But for the answer on retail in China will for sure be different than in the U.S. where, given the large geographic spread of the country, trying to have shops in every city doesn't make any sense at all. Already today, we are mainly somewhat in New York and a bit in San Francisco, LA and that's about it. And so we do reflect about what do you want to achieve really with retail, yes? And I think part of discussion is that this retail is, of course, a sales channel. At the same time, it's also a bit of a display for your new products and the products you may not necessarily always find easily in the wholesale channels. And it's also a way to have a customer experience, which is a bit more the Moleskine way than in other channels that you do not control.

So there are multiple roles to play, but still, finding the right balance is important and the last thing we want to do is create a big retail network that is just from a profit point of view does not make any sense and this is definitely not the intention.

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Nathalie Debruyne, Banque Degroof Petercam S.A., Research Division - Analyst [30]

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Okay. So we should not on balance expect more stores openings in the future or at least in the medium term?

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Francis Deprez, D'Ieteren SA - CEO [31]

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As I said, the answer will be somehow be different region by region. Well, how does it add up in the exact numbers? To be honest, this is an ongoing discussion with management.

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Operator [32]

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We have another question from Mr. Matthijs Van Leijenhorst.

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Matthijs Van Leijenhorst, Kepler Cheuvreux, Research Division - Analyst [33]

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Yes, me again. The first question again on Belron. If you look at the leverage, it's around 3x. What is a sustainable leverage target for Belron?

And on top of that, since you are running in a highly profitable business in Belron, with EBIT margins north of 10%, is there any risk that an insurance company walks in and says we want to have part of the margin. Is there any risk?

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Arnaud Laviolette, D'Ieteren SA - CFO [34]

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Okay. So on the leverage what is a sustainable level of leverage? We are very, very, wary of the current level, and we are very play safe historically. And it will be essentially a question of perspectives, prospects of the company. We will always err on the safe side. We receive proposals from banks that we are not listening to in order to leverage more the company, but in function of the prospects of the free cash flow generation, we can agree at some point in order to increase the leverage, in order to grow back in safe territory, and we view this, the 3x, as a safe territory.

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Francis Deprez, D'Ieteren SA - CEO [35]

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And maybe on the insurance side, I mean, first of all, being north of 10%, if we benchmarked Belron versus other the stress services companies, we do feel, I mean there's many of them, that manage to have sustainably above 10% margins, and so we see no immediate reasons why that shouldn't be possible for Belron either. And it's by the way, one of the motivators and examples that drives Belron to actively work on that.

At the same time, insurance, of course, when we go to insurance or the Belron people go to insurance, we have a total package in what we try to offer to them and then we are always saying, well, if you work more or this and that way at Belron, there will be overall advantages for you, and price is one element in that equation, but it's not the only element in that equation. As of course, also volume is also element, if I just take the ADAS example, doing a proper job on calibration of ADAS is also in the interest of an insurance company, and I think they do understand that doing such a calibration does also cost something, and there's also a service against that.

So there are multiple elements you can use in your story towards insurance where it doesn't necessarily mean that because you make a margin of more than 10%, they say, "Oh! I should have part of that." As long as they have a real benefit from working more with Belron, or let's say, the fact that it's U.S., they will be happy to do so and it will be a win-win for both sides. So it's not at the detriment of, it can be win-win for both.

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Matthijs Van Leijenhorst, Kepler Cheuvreux, Research Division - Analyst [36]

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Okay. As a follow on -- or no, not really a follow-on but regarding Auto, if you look at the working capital, how do you see the second half of the year? Also taking into account that we will have this new regulation for the light commercial vehicles? Should we see a reversal or?

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Arnaud Laviolette, D'Ieteren SA - CFO [37]

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Inventory levels are quite high, as we speak. We're expecting a better -- well, it's not that easy because it's not always under our control. As mentioned by Francis, sometimes the factory are delivering vehicles that we cannot deliver to a client because our clients are not ready to receive them. And that is especially the case in fleet. Sometimes the delivery program does not match with these multiple clients. And that has been the case in -- during the first half partially, and so we are expecting to better balance that during the second half of the year, and so to have a positive impact on the full year.

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Francis Deprez, D'Ieteren SA - CEO [38]

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I mean the commercial vehicle is really on a lot smaller volumes than in passenger cars. So you really do not see the same effect as last year, you're talking of a lot smaller dimensions here. And at the same time, I mean, part of that stock is at the import level, part of that stock is at our retail level that we own. And so the time lines that allow us to destock or to deliver are a little bit different, but none of those 2 would have an impact that it would structurally be at very different inventory levels at the end of this year versus last year. We don't have strong indications on that. That's a small point in time.

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Operator [39]

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We have another question from Mr. David Vagman from ING.

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David Vagman, ING Groep N.V., Research Division - Research Analyst [40]

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I've got a couple of more questions. First on -- let's say on free cash flow generation both for, let's say, Belron and in Auto. On Belron, you had a very strong free cash flow generation for already in H1. Are there particular elements we should have in mind in H2, which would slow down the progress that you've made in free cash flow generation? So that's for Belron.

And then to come back on Nathalie's question on the free cash flow generation for Auto. So I'm a bit surprised that we -- yes, indeed that we don't have more of an inflow from -- let's say a decrease in inventories. Let's say a sharper improvement in working capital this year. So should we expect this to happen in the next year? Yes, so that's -- this is a bit like, let's say, my first question.

And then last on the -- EBITDA, like the sequence of your profit generation. It seems to me like your comparison base was tougher last year, while it is actually becoming easier in H2. So that's something I'm a bit -- again, I'm coming back to the guidance, the 25% increased guidance in adjusted PBT. What makes it so, let's say, tough for in H2, to not do better in the performance and gross profit growth than what you've done in H1?

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Arnaud Laviolette, D'Ieteren SA - CFO [41]

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Maybe for the figure -- the first questions on free cash flow generation, we are expecting Belron to continue to generate strong free cash flow during the second half of the year. As I mentioned, there was a negative working capital impact during the first half of the year. It's too early to assess that impact for the full year. But I am not expecting a deterioration on that front, okay? And as the business should continue to fare well, the free cash flow profile will be at least as positive as during the first half of the year. Not expecting any big increase in CapEx too, so relatively positive on that front.

For Auto, as mentioned, the issue is more on inventory, and it is really related to the massive WLTP -- post WLTP deliveries at the end of 2018 continuing into first half of 2019, and we are trying to swallow that and progressively improve the flow on that front. Still early days to really have an opinion, but I'm expecting a decline in inventory compared to the high-level basis of this year, except if at the end of the year again, the factories are delivering volumes that we were not expecting. But normally, if it is controllable, it should be lower.

Then you had a question on profit generation?

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Francis Deprez, D'Ieteren SA - CEO [42]

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The profit generation I think in Auto for H2…

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David Vagman, ING Groep N.V., Research Division - Research Analyst [43]

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No that was for the group actually. Yes, that was for the group level, it's on the guidance, adjusted PBT guidance of 25% this year, and you did 25% in H1. And I'm just looking a bit at H2 last year, and I do see that the -- let's say, it seems to me like the comparison base is actually a bit easier.

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Arnaud Laviolette, D'Ieteren SA - CFO [44]

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Well, in Auto, we do expect it to be bigger than last year, that's true. And I also expect very different trajectories in Moleskine and in Belron compared to last year for H2.

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Operator [45]

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We have no other questions.

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Francis Deprez, D'Ieteren SA - CEO [46]

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All right. Well, in that case thank you all very much for taking the time to be here. I'm sorry that we had a little bit of disappearance for a minute and a half there. So wishing you all a great evening, and looking forward to talking to you next time. Bye-bye.

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Operator [47]

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Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.