Ladies and gentlemen, welcome to the Signify earnings call, Q2 and half year 2019. For the first part of this call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. During the Q&A session, we kindly ask you to limit yourself to one question and one follow-up so that each participant has the opportunity to ask a question. I would now like to give the floor to Robin Jansen, Head of Investor Relations. Mr. Jansen, please go ahead.
Thank you, Sarah, good morning, everyone, and welcome to the Signify earnings call for the second quarter results 2019. With me are Eric Rondolat, CEO of Signify, and Stéphane Rougeot, CFO. In a moment, Eric will take you through the second quarter business and operational performance. Stéphane will tell you more about the financial performance in the second quarter. Eric will end today's presentation with the key takeaways for first half 2019 and the financial outlook for the year. After that, we will be happy to answer your questions. Our press release and the related slide deck were published at 7:00 A.M. CET this morning. Both documents are now available for download from our investor relations website. A full transcript of this conference call will be made available as soon as possible on our investor relations website. With that, I will now hand over to Eric.
Thank you, Robin, and good morning, everyone, and thank you for joining us today. Let's go to slide four with the main elements of our performance in the second quarter. Comparable sales declined by 6.1% due to lower levels of activity, most notably in Europe. We also faced some country-specific developments in a few markets that are non-recurring, which I will discuss in more details later. Our LED-based sales increased on a comparable basis by 0.2% to 77% of sales, and our installed base of connected light points increased from 47 million in Q1 to 50 million in Q2 this quarter. We continue to make good progress in reducing our cost base. Excluding the impact of currency movements, our adjusted indirect cost decreased by EUR 37 million, or 60 basis points as a percentage of sales.
As a result, our adjusted EBITA margin improved by 60 basis points to 9%, including a 20 basis points positive impact from currencies. Our net income improved by more than 70% to EUR 50 million. Finally, our free cash flow amounted to EUR 121 million, which include the positive impact of EUR 17 million from IFRS 16. This high amount of free cash flow in the second quarter is mainly driven by a higher income and also by the phasing of payables and receivables at the end of the quarter. We estimate that this phasing impact represents around half of the free cash flow for the second quarter. Let's now move to slide five, where you can see a snapshot of the financial performance of our growing profit engines, LED professional and home. Comparable sales growth of our growing profit engine was -2.3%.
We experienced a lower level of market activity, most notably in Europe, and we were impacted by non-recurring developments in Saudi Arabia and India, namely in professional. Our growth platforms, Connected Systems, IoT Platform Services, Horticulture, Solar, and Li-Fi, show solid momentum with increasing project wins, most notably in Horticulture and Solar. The adjusted EBITA margin of the growing profit engines improved by 200 basis points to 8.5%, with all three business groups contributing to this improvement. Let me now provide you with more details for each of our three growing profit engines, starting on slide six with LED. Comparable sales declined by 1.8%. LED lamps delivered a solid performance while LED electronics continued to be impacted by lower customer demand, most notably in Europe. In LED lamps, we continue to see a slowdown of price erosion on a sequential basis.
The adjusted EBITA margin improved by 140 basis points to 12%, mainly as a result of ongoing procurement savings and lower indirect costs. On the next slide seven, you can see some of the business highlights of this quarter for LED. We launched several LED products in markets around the globe, starting with our universal fit T-LED, which is now available in the U.S. and Canada. This new product is compatible with any ballast, making replacement of fluorescent tubes easier than ever before. In China, we launched the flagship dual-zone ceiling luminaire. This new luminaire combines distinctive patented industrial design with dual-zone technology, allowing for both uplight and downlight simultaneously. In Europe, here we launched best-in-class drivers for linear applications. The luminaire addresses the increasing demand for sustainable lighting, as it has a very low power consumption in standby mode and built-in metering and diagnostics.
Let's now move on to professional on slide eight. Comparable sales declined by 5.6% due to a lower level of market activity in Europe, most notably in countries like Germany, Italy, and the Nordics, while the Americas and China delivered a robust performance. The CSG in Q2 also reflected the negative impact of some non-recurring events, of which the SASO recertification in Saudi Arabia and elections in India, which represented the vast majority of this impact. Excluding the impact of the non-recurring events, we estimate that the CSG of prof would have been around -1.5%. This effect is expected to partially reverse in H2. Within our end-user segments, we notice softening demand for public and outdoor projects, most notably in Europe.
For the second half of the year, we have secured a solid order backlog and project pipeline, most notably in the Middle East and in facade lighting in China, while we anticipate Europe to remain soft. The adjusted EBITA margin of Professional improved by 40 basis points to 8.8%. Procurement and indirect cost savings more than offset the negative impact of price and mix. The mix was negative due to lower market activity levels in Europe. There are a couple of business highlights that we would like to bring to your attention on slide nine. First, I would like to highlight the progress we're making on leveraging lighting infrastructure to enable connectivity. In the past quarter, we introduced Trulifi, which provides the fastest commercially available LiFi system.
This new range comprises Trulifi-enabled luminaires, providing wireless connectivity at speeds of up to 150 Mbps over large spaces, such as meeting rooms and office floors. The Trulifi range also includes a fixed point-to-point system which speeds up to 250 Mbps, which basically is acting like a wireless cable, ideal for connecting devices. We know that Li-Fi solves also reliability and security issues encountered with radio frequency wireless systems. Additionally, we continue to make good progress in our growth platforms. For instance, in solar, we realized our first solar street lighting implementation in Western Europe by installing Philips SunStay streetlights in a park in Seville, Spain. This installation underscores both Seville's commitment to sustainability and also our own. Let's now turn to slide 10. Home reported an increase in comparable sales of 19%.
We enjoyed a strong performance in Europe, driven by robust demand for our new connected offers. The adjusted EBITA margin of -7.8% represents a substantial improvement compared with last year. The level of profitability in the second quarter reflects low fixed cost absorption and relatively higher cost to prepare for the high season in the second semester. For Home, we would also like to share a couple of business highlights with you on slide 11. In the second quarter, we added Bluetooth offering to the Philips Hue ecosystem, further strengthening our smart home lighting offer. This new Bluetooth offering enables direct light control from a smart device. It was launched in the U.S. and Canada at the end of Q2 and will be launched in Europe in H2. More Bluetooth-enabled product will be introduced later this year and into 2020.
We also added Lutron to the Friends of Hue program. Lutron introduced a smart dimmer in the U.S. that fits over legacy wall switches. It is fully compatible with the Philips Hue system and can be set up in the Philips Hue app. This way, it allows consumer to control their Hue lights directly from the wall using the existing switch points. Let me now move to our cash engine, Lamps, on slide 12. Comparable sales decreased by 20.3%. We believe that this decline is lower than the market decline, resulting in continued market share gains. The adjusted EBITA margin remained solid at 19.5% as a result of ongoing indirect cost reductions. Next to our focus on organic growth, we have also announced two acquisitions to accelerate in key growth areas. Let's now turn to slide 13.
We announced this morning that we have agreed to acquire 51% stake in Klite Lighting, one of the leading providers of high-quality, cost-efficient LED lamps and luminaire based in China. Klite Lighting has been one of our main suppliers of LED lamps and luminaires for many years. Next to what they sell to us, they generated around EUR 250 million in sales to thirds in 2018, serving global customers, including global brands, major do-it-yourself, and retail customers. With this transaction, we will bring additional scale and innovation power to Klite Lighting, allowing it to generate further cost efficiencies and enhance its product development, including connecting lighting offerings. This will strengthen Klite Lighting's position to serve branded and private label customers with innovative and cost-efficient product. It will allow us to deliver cost-efficient innovations to customers faster, including connecting lighting offers.
Overall, this transaction reinforces our position in the supply chain of LED lamps and luminaire market and will enable us to capture value from the growing private label segment. On slide 14, we highlight an acquisition we made in the second quarter. We have expanded our business in agricultural lighting by acquiring two market leaders in the design and manufacturing of animal-centric lighting systems. ONCE a company based in the U.S., and iLOX, a company based in Germany. These tailor-made lighting systems improve the quality of life for livestock, for example, by reducing the stress of animals, which leads to healthier and enhanced production for the farmer. Both companies have solid relationships with key customers and a well-established sales organization in the United States and also in Europe.
Through this acquisition, we accelerate our business development cycle compared to organic growth, generate growth in the nascent and rapidly expanding market for animal-centric lighting. We get access also to a strong intellectual property and solid installed base. On the next slide 15, I would also like to take a moment to update you on the integration of LiteMagic, an acquisition we made about a year ago in China. LiteMagic offers a complementary portfolio of luminaires and control system for the mid-segment of the city facade lighting market. The integration went very well. We achieved the targeted sell and portfolio synergies by developing an offering for around 25 countries outside of China. LiteMagic generated double-digit sales growth in the first half of 2019. Cost synergies are also well underway. Bill of material reduced as per our objective, and we have identified opportunities to improve productivity further.
We have also reduced working capital, which was 8% better than planned. As part of the post-merger integration, we successfully completed the integration of people within 100 days after the acquisition and IT and reporting readiness within one month. The total PMI costs were 25% less than budgeted for. This is what I wanted to cover regarding the business and operational performance. I will now hand over to Stéphane, who will tell us more about the financial performance for the second quarter of 2019.
Thank you, Eric, and let me now turn to page 17, where you see our usual adjusted EBITDA bridge. As you can see, the adjusted gross margin as a percentage of sales decreased by 20 basis point to 37.7% in the second quarter of 2019, and that includes a positive currency effect of 20 basis point. You can also see that the impact of price on the gross margin was very similar to last quarter and is largely offset by the ongoing savings on the cost of goods sold. As far as the indirect cost base is concerned, it decreased by EUR 37 million compared to the second quarter of 2018 when you exclude the impact of Forex.
Finally, what we see based on the current spot rates at the end of June 2019, the currency impact on the adjusted EBITDA margin for the third quarter would be around -40 basis points. Then for the fourth quarter, it would be positive, leading to an overall impact on the full year 2019 of around -30 basis points. Overall, lower than what we had in the first half of the year. If you turn to the next page, you can see the evolution of our indirect cost base. As you know, we've taken a lot of initiatives, and they resulted in EUR 37 million of currency comparable indirect cost savings in the second quarter of 2019 compared to a year ago. It represents an 8% reduction year on year. The Forex negatively impacted the adjusted indirect cost base by around EUR 9 million.
We are quite satisfied with the evolution of our indirect cost base since now the beginning of 2017, as you can see on the right-hand side. We show the development of our indirect cost on the last 12 months basis, and we've been able to reduce the indirect cost base by EUR 425 million over a two-year period, which is a reduction of 280 basis points as a percentage of sales. Eric will tell you more about that. Let's now take a look at working capital in the second quarter of 2019 on slide 19. Compared with the same period of last year, the working capital decreased by EUR 191 million and amounted to EUR 503 million at the end of June, which represents 8% of sales.
The decrease compared to June 2018 included the impact of the phasing of payable and receivable that we talked about earlier during this call and which we estimate represents around EUR 60 million of the working capital reduction at the end of the quarter. Overall, the working capital performance reflects our continued focus on improving working capital since several years. Let's now take a closer look at our net debt position on the following slide, page 20. Our net debt increased by EUR 76 million compared to the end of March 2019, and that's mainly due to the distribution of our dividend of EUR 164 million during the quarter. Next to the profit we generated in the quarter and also the change in working cap that I have just mentioned, you can see the other items in the bridge that had an impact on our cash and therefore on our debt.
The net CapEx was EUR 27 million in the quarter, and the net change in provision was EUR 24 million. Next to that, we paid EUR 26 million for tax and interest. All in all, as you can see, our net debt position amounted to EUR 865 million at the end of Q2, which represents a net leverage ratio of 0.9x adjusted EBITDA. Let me now hand back to Eric for the final part of the presentation.
Thank you, Stéphane. Let's move to slide 22, where you can see a snapshot of the performance of the growth profit engines in the first half of the year. While the CSG was -0.7%, their profitability increased by 200 basis points year on year, with each business group contributing to the improvement. They account for 60% of our adjusted EBITA in the first half of 2019, which is a significant step up compared with the previous years. Let me now briefly zoom in on the overall performance of H1 on slide 23. Despite lower levels of market activity in certain geographies, we have been able to improve our adjusted EBITA margin by 70 basis points to 8.4%, which includes a negative impact from currencies of 60 basis points compared to the first half of 2018. We are satisfied with the continued savings on procurement and indirect cost.
As you can see, our currency comparable indirect cost decreased by EUR 77 million or 120 basis points as a percentage of sales compared with the first half of 2018. We had a significant underlying improvement in our free cash flow in the first half of 2019. Also, when excluding the positive impact from IFRS 16 and the phasing of payables and receivables that we have commented previously. Before I move to our outlook for 2019, I would like to give you an update about our Road to Excellence, our five-year transformation journey on slide 24. Our Road to Excellence program helps us to transform at a fast pace, achieving unequaled customer satisfaction and organizational excellence. As part of this journey, we have introduced the Project Horizon.
This company-wide project includes a significant number of cross-company opportunities that will further strengthen our execution capabilities and is expected to drive top-line growth, reduce our cost base, and free up working capital between now and the end of 2020. For example, we are leveraging in an external insight to optimize pricing. We reduce the complexity of the product portfolio, which will result, among others, in improved portfolio profitability. We are also optimizing our receivables and payables policy while using local and global best practices, which has already started to result in working capital reductions. In addition, we have a strong focus on improving our execution capabilities and organizational health. We are developing a culture centered around speed, collaboration, and accountability with the aim to achieve higher employee engagement and increase our effectiveness and efficiency in execution. With that, let me now move to the outlook.
We reconfirm our outlook for 2019. We expect our growing profit engine, LED professional and home, combined to deliver a CSG in the range of 2%-5%. Our cash engine lamps is expected to decline in the range of 21%-24% on a comparable basis. For total Signify, we aim to reach an adjusted EBITA margin in 2019 within the target range of 11%-13%, as set at the time of the IPO in May 2016. We continue to expect a restructuring P&L charge of between 1.5%-2% of annual sales. Free cash flow, excluding the positive impact of IFRS 16, is expected to be more than 5% of sales. With that, I would like to open the call for question, which Stephane and I are happy to answer.
Thank you. Ladies and gentlemen, we are now ready to take your questions. We kindly ask you to limit yourself to one question and one follow-up so that each participant has the opportunity to ask a question. If you wish to ask a question, please press zero one on your telephone keypad. That's zero one on your telephone keypad. Our first question comes from the line of Benjamin Szekeres from Goldman Sachs. Please go ahead. Your line is now open.
Hi. Good morning, Eric and Stéphane. Thank you very much for taking my question. I've got a question on your acquisition of your stake in Klite Lighting, and then a follow-up on capital allocation. Firstly, I know that you've mentioned that you expect this to deliver some cost efficiencies. It could help capture growth in the private label segment. I guess what I'm trying to gauge is whether you see this more as a top-line driver or perhaps something that, in the future, will help you improve margins by optimizing your cost base. In relation to this, if you could quantify any of the benefits or impacts that you might expect from this, that would be much appreciated.
Yes. Good morning, Benjamin . Let me take it with a bit of distance first. At the beginning of the transition of the lighting industry moving to LED, we were mostly outsourced, especially when it comes to LED lamps. We now see that the market and the environment has stabilized in terms of development of new technologies and new components. We felt that we had to strengthen our control over the end-to-end supply chain. You have to see behind this acquisition, a fundamental strategic move in how we perceive the competitive landscape. We had to do that combining and joining forces with a company that we know that has very high level of quality and also capacities to design and to innovate around the offers that are not only LED lamps, but LED lamps and also LED luminaires.
It will be both bringing top line and margin since we want Klite Lighting to continue to sell to its customers. Klite Lighting has a vast portfolio of existing customers, private, but also private label customers that have been very loyal to them over the years. That has to continue, and that has to expand.
We also believe that we are, with our own sales forces all over the world, reaching also different types of customers and private label customers. We think that now having that association with Klite Lighting will allow us to be, as Signify, even more competitive in front of those private label customers. Moreover, we're going to be able to develop technology together with a company which is basically ours, and especially around connected lighting. As you can see, there are a lot of different elements behind this acquisition that are fundamentally strategic.
Some of them are about development of technology, some others about driving top line to external customers and to our customers, and also an increase of the margin moving forward or at least this will be a positive driver for the margin as we will have less stack-up margin buying from a supplier, because that supplier basically becomes our own company. I hope that have been, Benjamin, quite exhaustive in my answer, but there are many different aspects behind the acquisition of Klite Lighting.
Thank you very much. Yeah, that's great. I appreciate the color. My follow-up would be on your capital allocation. Ahead of 2Q, you've mentioned that you would be looking at M&A. Depending on that, you might explore other avenues, for instance, maybe potentially returning cash. How do you think about that now that you've announced this stake in Klite Lighting?
Yeah. Benjamin, of course, our capital allocation policy has not changed, and we still aim at returning money to our shareholder through our dividend, and that generally takes around half of our free cash flow. It's 40%-50% of our net result, and it's generally around half of our free cash flow. We have always said that we want to use the rest of the free cash flow to fund non-organic opportunities that will help us to strengthen the growth and the profitability profile of the company. If we do not find those opportunities, of course, we would return money to shareholders, which we have done a lot over the last two years. Now you notice that we have stepped up on the non-organic opportunities.
We've announced three since the beginning of the year, two that are relatively small and one which is larger, like Klite Lighting. We're going to continue to look for non-organic opportunities that fit our strategy, and we've been very clear on the acquisition criteria and areas. In the course of the second half, depending on the pipeline that we have, we will figure out at the end of the year what we do with the rest of our capital.
Thank you very much.
Thank you. Our next question comes from the line of Andreas Willi from JP Morgan. Please go ahead. Your line is open.
Hi, good morning. Eric, Stéphane, and Robin. It's Akash for Andreas this morning. I have two questions, please. My first one is a follow-up on Klite, and I'm wondering if you can give some indication of how much Klite sales is coming from Signify and how much from your competitors in LED and professional businesses. Then I have a follow-up.
When we are talking about EUR 250 million, it is sales to third parties. That is excluding the sales from Klite Lighting to Signify. Within these EUR 250 million, we are not specifically commenting at this point in time how much they are selling to other lighting companies. When we did the acquisition, it's because we believe that we can further expand that part like we do with OEMs all around the world, and this is something that is totally taken into account in our post-merger integration plans.
Thank you. My follow-up is on visibility for projects that you have in China and Middle East in second quarter. Are these projects in Professional signed off, and is it in the backlog or still risk depending on the macro?
Yeah. When we're commenting on these projects is because they are orders on hand. These are orders that we have. They are in the backlog. Effectively, we're talking here about quite important project in Middle East and Turkey and, well, specifically in Saudi on road and street, that we have already taken the orders and some also quite substantial projects in China in façade lighting. Also as a result of the acquisition that we did a year ago in China of LiteMagic. That has been a very successful integration so far, and that is generating a lot of fruits on the revenue side. These projects are already in the backlog.
Thank you.
Thank you. Our next question comes from Lucie Carrier from Morgan Stanley. Please go ahead, Lucie, your line is open.
Hi. Thank you very much. Good morning, gentlemen, for taking my question. The first question is more, I guess a bit more conceptual, but it seems that the organic growth or rather the organic decline for the past few quarters seem to have accelerated compared to what we had seen at the beginning of the listing and also what was expected at the time of the IPO. At the same time, the margin is also quite nicely improving. I was just wondering, are you on top of the different cost initiative you are having? Do you also have kind of on the background, more selectivity around sales, maybe dropping products which are low margin, and which of course maybe would accelerate that organic decline but sustain the profitability. That's my first question.
Yes. Good morning, Lucie. I think when you look at the pattern in terms of organic decline or organic growth, yes, it has worsened. I think it is also to be linked to the degradation of the end markets, which we are not the only ones to feel, I think many other companies are commenting in the same way. We've seen lately, China, starting in mid or the second quarter of 2018, and then Europe at the back end of 2018 and continuing to be slow in the first part of this year. I think degradation of the end market for us, has two consequences that the conventional, well, is declining a bit faster and LED is growing a bit slower.
This is how I would, from a conceptual standpoint, as you've mentioned it, would comment the pattern and the trends at the level of the top line. Are we pruning products that are not profitable from a gross margin standpoint? Not really. We have an action part of our Project Horizon, which is to look very selectively at how we price our offers to make sure that they're well-priced on the market. We are not systematically pruning, having a negative impact on the top line, but a positive impact on the margin. That's not something that has a material impact on our growth.
Thank you very much for that. The second question I had was maybe a follow-up on professional. Can you maybe help us to understand what has happened precisely in Saudi and India, in the second quarter or more generally in the first half? You mentioned, the division is down 5.6%, but without that would be minus one and a half. Either how big are those two geographies now for you? Maybe on the other hand, how much decline did you see in those geographies specifically? It seems like a big delta for countries which historically hadn't necessarily been the majority of the business.
Yeah, I think that's a good question. Lucie, look, let me put it this way. First of all, my bad, I've made a mistake. It's not - 1.5, it could be -1%. If you net from non-recurring impacts that have happened in Q2, and that will be partially reversed in the coming quarters. Let me now zoom a little bit more on the two that you have mentioned, which is Saudi and India. India, I will start with that one. It's about the elections in India, and before elections happen, there is a slowdown, especially on the public segment. This is what we have experienced in India before the elections that have taken place in Q2. That was also to be compared with the Q2 2018, that was extremely dynamic in India.
These are the two fundamental elements to understand when it comes to India. Let's go to Saudi. Saudi, it's a difficult story in the short term, but a very positive story in the longer term. Let me explain what happened there. Basically, the regulation entity in Saudi has decided that products in the lighting industry and many products touching not only Prof but mostly Prof for us because we are very skewed towards that business group in Saudi. That entity has asked for a recertification of the products in order to be able to sell them. That has happened at the beginning of Q2. The point is that to recertify the products, it takes between two and a half to three months because the tests that have to be made are taking a reasonable amount of time.
We need to do those tests only in authorized laboratories. At the same time, there is a bureaucratic process that we have to follow in terms of getting the accreditation. Basically, at the end of that process, you are getting a number, and that number has to be put on the label of your products. What happened is that all that process took time in such a way that no companies could sell on that market during that period, which is mostly Q2. It had an impact and quite a massive impact on our sales because it touches a very big part of the portfolio. This is what has happened in Q2, but we see this as a positive event moving forward because in Saudi, those certification are enforced on the market, which is a very positive thing.
We are the most advanced on that market, managing the recertification. We believe that it will generate further positive sales for SASO. This is why we are saying that impact could be partially reversed in the upcoming quarters. This is what we had to face for Q2. A negative impact in Q2, but we believe positive impact in the coming quarters. We expect that some of the actors on the market in Saudi today, which are working more in an informal way, are going to have problems to continue selling. It's market share that we can potentially take on SASO, but also probably on other businesses too.
I'm a bit long answer for that one, but it needs to be well understood this is what happened in India and this is what happened in Saudi.
Thank you very much. I'll go back in the queue.
Thank you. Our next question comes from the line of Joseph Zhou from Redburn. Please go ahead. Your line is now open.
Hello, Eric and Stephane. Thank you for taking my questions. I have two. First, on your global businesses. I noticed that it has been declining for six quarters and at something like -3%. I understand within that you have the licensing income as well as products and brands managed globally, for example, the Luceplan. Can you give us some color on that? What has been driving the decline, and what can we expect going from here? My second question is on the savings. If I look at your indirect cost savings and in terms of the year-on-year change of indirect cost as a percentage of sales, has slowed this quarter. You cut the 70 basis points compared to something like 200 basis points in the last three quarters. I think the program from last year is coming to the end of its cycle.
Given that it seems like you have a new program coming up, the Road to Excellence program, should we expect the indirect cost savings to re-accelerate in the second half, which gives you the confidence for the full year margin guidance?
Joseph, let me take those two questions. On the global businesses, you're right, there's been a slight decline. The CSG in the second quarter was down -1.5%. For the first six months, -1.3%. It's relatively limited. Now you're right, it's licensing and a few other global businesses that are not sold and going through our various regions. It's not only licensing. In some of the businesses, you can have some projects. Also in licensing, you can have some contracts. There is not much to read into that slight decline for those global businesses. On the savings, we are of course still quite satisfied with the reduction that we've seen on the indirect cost since the beginning of 2018.
Still in the first and second quarter, now you're right, the overall amount compared to what we had seen in the second part of 2018 is lower. We've taken a number of actions, and continued to look at all the optimizations, including, as you mentioned, through the Horizon program. Indeed, we expect that we will have a further acceleration in Q3 and in Q4. As you know, for us, the ability to optimize our cost base and take many actions as some of the ones we have mentioned on the Horizon page, is critical to our ability to get to the right competitive cost base. Yes, that's completely core to not only what we've done in 2018, but what we continue to do in 2019 across the company.
Okay, great. Thank you. Just very quickly, maybe on the global businesses. What was driving more? Was it licensing income declining or is the products declining?
That we don't disclose the specific businesses and what's happening in those businesses, so I can't give you any more specifics here.
Okay, fine. Thank you.
Thank you. Our next question comes from the line of Peter Olofsen from Kepler Cheuvreux. Please go ahead. Your line is open.
Good morning, gentlemen. I wanted to come back on the Klite Lighting acquisition as I struggle still a bit with the strategic implications. First of all, I understand that one of the objectives is to bring additional innovation power to Klite Lighting and then grow this EUR 250 million in third-party revenues. Would that then not reinforce the competition for your own brands then? Maybe a bit more color on that. The second part of my question, as you mentioned already, is that so far you were mostly outsourced. Is this really a change in policy and could we see additional steps in you taking on board more of the manufacturing? Should we really see this as an exception and that you still follow a more asset-light business model?
Yes. Thank you, Peter. Good morning. Well, let's go back to Klite Lighting. Competition exists anyhow. We will not stop competition. By making that investment of 51% of Klite Lighting, we are probably also controlling a major part of the market since this entity will be producing offers branded Philips and with the Signify brands, but also will be selling products to other companies. It has to be seen as something fairly similar to what we do in the LED electronics, the driver or the LED module type of the business. That's a strategy that we have been very successful to implement on that front. Why? These customers that are not Signify are gonna be benefiting from many things.
Cost-efficient offers that are innovative, offers that are IP compliant. That business is large, which is the sales of this product outside of Signify, and it needs to continue. That's one of the strategic rationale doing that acquisition. At the same time, there's another fundamental element, we realized that after implementing a strategy that was mostly outsourced, which was very beneficial when we started the transition in the LED lighting era, we needed now to have more control over the supply chain and suppress a margin stack-up at the level of our suppliers. Are we going to go in additional insourcing steps? There's nothing really forecast of that nature at this point in time. I think this is a major step that we have done today, on which we are going to build for the future.
I hope, Peter, that I have been able to clarify a bit more the strategic aspect behind that acquisition.
Yes, you did, Eric. Thanks. Maybe a quick follow-up on Home, where you mentioned a strong performance in Europe. I assume North America is still the largest market for your Philips Hue product. Could you shed some light on the performance in that region?
Europe is also very large for the Home business. Europe has been outstanding in performance when it comes to Home. North America has been according to expectation, but below the performance of Europe for Q2.
Thank you.
Thank you. Our next question comes from the line of Ji Cheong from Citi. Please go ahead. Your line is open.
Hi, Ji from Citi. Thanks for taking my questions. First one, just to confirm that given that you've confirmed your guidance for your non-lamp businesses organic growth at 2.5% for the year, and given what we've seen so far, just wondering what gives you the confidence for the acceleration of growth in the second half in order to meet this target? Is it just from the recovery expected from professional or am I missing something here?
Ji, good morning. What we said in terms of guidance is 2%-5%, and there are a few elements behind that, probably three elements. The first one is that we have commented on non-recurring elements in Q2 that will be partially reversed in Q3 and Q4. This is one. The second element is linked to the base of comparison. If you look at the performance of the growing profit engine in H1, it was +2% in comparable sales growth in 2018, but it's -2.4% in the second half of 2018. We are going now to be compared to a lower base.
The third element is about some of the projects that we have already taken orders from, especially in the professional part of the business, and we're talking about Saudi and we're talking about China namely, but also in the LED part of the business where we have secured and we have the orders, quite substantial project in North America, selling to some important retailers there. This is why we confirmed the guidance that we had given from 2%-5% on the growing profit engines.
Got it. Just as a follow-up on Home. Can you update us on what kind of pricing trends you're seeing in regards to your Hue products? Has there been any changes seen in the competitive landscape in this segment?
Our pricing for Hue has been quite stable. The competitive landscape is evolving more towards Wi-Fi offers. We think that we still have a very strong position in the Zigbee part of the market. This is why we have done basically two things. The first one is the acquisition of WiZ, which has a fabulous ecosystem, Wi-Fi based, and we believe that in the longer run, there will be two existing ecosystem for smart, connected home lighting, which is Zigbee on one hand, and Wi-Fi on the other hand. The second thing that we have also done lately, and we have announced that innovation to the market in Q2 in Canada and the U.S., and it will be next year in Europe, which is direct light control for our Hue offers. Meaning that you can access now a Hue lamp directly from your smartphone.
What is also beautiful from a technology standpoint is that if you reach one lamp, then you will be able to reach also the other lamp through a Zigbee channeling medium. Now our offers include a dual chip, which is Zigbee and Bluetooth, and it makes the access and the direct access to our lights extremely reliable. The beauty of the offer that we have developed is that you can start.
With an app that helps you to control directly your light via your smart device, phone or tablet. Whenever you want to move to the full ecosystem adding a bridge, this app will give you a direct bridge to the other app that helps you to have access to the broader ecosystem. As you can see when it comes to home, pricing has been quite stable as you are concerned, and the competitive landscape is evolving and we evolve with that competitive landscape, bringing a Wi-Fi offers to the market, but also Bluetooth direct light communication for Hue.
Thank you very much.
Thank you. Our next question comes from the line of Marc Hesselink from ING. Please go ahead. Your line is open.
Yes, thank you. Coming back on Klite Lighting. I still try to calculate a bit on what the impact will be. If we take into account that this is, if I'm right, one of your key suppliers before the acquisition. Is it then fair to assume that the internal sales, that the sales going into Signify are at least similar to the third-party sales? If that is the case or any other amount, what kind of impact does it have on your cost base? How much of those costs do you take out? Maybe then for the future, is it also a possibility to move some things that you go to other suppliers, that you move that to Klite Lighting and therefore taking out some extra cost.
Hey, Marc, let me give you a little bit of insight here, although we don't communicate specifically on the financials of the deal. Yeah, we've mentioned the external sales because this is what we are going to include in our accounts. They will have an impact on our total sales and especially here on BG LED. Then, the supply currently between us and Klite Lighting will be eliminated. Now, of course, we can't give you any specific amount, but it's substantially smaller than the external sales of Klite Lighting, so it's nowhere near that amount. When you think of the synergies, Eric mentioned the margin stack-up. From that standpoint, of course, there's going to be benefits from us in terms of financials.
We will bring scale, and probably more scale to Klite Lighting as we grow and expand in LED lamps, in LED luminaire, and also in connected offerings. That's going to add scale. From that scale, there's going to be in Klite Lighting also more efficiency. They have room to expand. There's going to be more manufacturing efficiency. There's going to be more bill of material efficiencies. There is a meaningful amount of synergies that we believe in the coming years we can bring to Klite Lighting. That's going to help the overall financials on their side and therefore also to some extent on our side and also through our investment.
The last element I will mention is that when you look at the impact on our financials and on the bottom line, of course, this will be accretive as of the first full year, which is 2020. That will bring additional net profit and therefore EPS accretion as of year one. Of course, we can't give you any more specifics, financial elements, but this is again, a transaction which not only from a strategic standpoint, but also from a financial standpoint is positive for the company.
Okay, thanks. As a follow-up then coming back on that capital allocation question, you have the revenues of outside of EUR 250 million and then something on top that's growing internally. What kind of note to just assume for argument's sake is around one time, that doesn't leave any room for other capital returns for the remainder of the year, or am I missing something there?
As I said earlier, middle of the year like that, especially after what we've done in terms of acquisition, is not the right moment to discuss capital allocation. We'll discuss that with the board at the end of the year on the basis of the overall free cash flow of the year and also on the basis of the pipeline evaluation, and that will be the right moment to come back and talk about what we do with our capital.
Okay. Thank you.
Thank you. Our next question comes from the line of Peter Reilly from Jefferies. Please go ahead. Your line is open.
Oh, good morning, gentlemen. I've got two questions, please. Firstly, can you help us understand what's happening inside your working capital? You talked about phasing of payables and receivables. As far as I can work out, you're just paying your suppliers more slowly. You've had a big increase in your payables, a big cash inflow from payables. Maybe you can explain whether that my understanding is correct. Secondly, on lamps, you're going into the second half with much more difficult comparables because of the surge last year. Maybe you can help us understand what you think is going to happen to organic growth in the second half of the year and where the market is going. You've been talking about growing or shrinking less rapidly than the market by gaining share in a diminishing market.
Maybe you can help us understand where you think the market's going on an underlying basis, ignoring the halogen issues that are distorting the effects in 2018 and 2019. Thank you.
Yeah, Peter, let me take the first one on the working cap. It's pretty simple. As you know, and as we have mentioned, talking about Horizon, optimizing working capital and improving AR and AP and the payment terms with our customers and with our suppliers is very important for us, and we've done that for a few years, but we believe that we can do more. We've initiated a number of actions to improve those payment terms. However, I must say the impact on Q2 is not yet very visible, but it will come later. What we've done also, Peter, is that we've looked at how to optimize also the payments of the company. Like many companies, in the second quarter, we've moved from paying our suppliers every day and having payments done every day, to payments done through a payment factory three times a month.
One of those payment runs, out of the three payment runs, the last one is on the last day of the month. It happens that this quarter, the last day of the month were the weekend. It has happened in the past. It was the case also at the end of March. It was the case, I believe, also at the end of 2018. Sometimes the end of the month or the end of the quarter happens to be on the weekend. In that case, the wire transfer is shifted to the following day. Previously, it could have an impact, but it was more limited. Of course, it has an impact on our payable, but it has also an impact the other way on the way customer pay us, and sometimes we only receive the money the following day.
Here, because we've changed the payment runs, there was a higher amount of payables that were supposed to be done or that were scheduled to be done on the last day of the quarter. Because it was a weekend, it shifted to early July. Because that was temporary, we wanted to be very clear in our communication that out of the overall working capital reduction and out of the payables, part of it was temporary and was just a shift to the other quarter. By the way, again, as I've mentioned, it has impacted payables and in a more important way than receivables because of those payment runs. We were also impacted on the receivables side because some of our customers, we were supposed to collect on the 30th of June, and we collected only on the 3rd of July.
That is the very concrete explanation for the phasing of receivable and payable. Again, we have estimated the amount to be around EUR 60 million. That is shifting from Q2 to Q3. If you take out those EUR 60 million, as you have mentioned, it's still a free cash flow generation for the second quarter of EUR 60 million or EUR 61 million, which is a strong performance. Again, it reflects everything that we are doing to improve our working capital. I hope it clarifies for you, Peter.
Yeah. No, that's very helpful. I was wondering what was going on. Can you estimate what the full year impact is going to be? How much of your full year cash flow target comes from the change to your working capital arrangement?
No. What I've just described is temporary because of the payment happening on the weekend. It's going to reverse because, again, we've made those payments at the beginning of July. It's very temporary to the end of the second quarter. We've looked at the end of Q3 and the end of Q4, the last day is not a weekend, the payments from our customers will happen totally normally. There's not going to be any impact on the whole year. The impact we expect on the whole year is everything that we are doing to improve payment terms in general, whether it's with our suppliers or with our customers.
Yeah. That's very helpful. Thank you.
Peter, let me take the second question on lamps. If you look at the performance at the end of H1, we had -19%. We guided between -21% and -24%, taking into account the fact that we have a high compare for the second semester, and especially in Q3, because this is when the halogen ban in Europe did take place in 2018. Yes, we are forecasting a higher decline, a more important decline in the second semester for the lamps business, and specifically in Q3, remaining in the guidance that we have given, which is between -21% to -24%. At this point in time, if you look at where the market is going and what is the market dynamic, we believe that the market is declining more, between -25% to -30%.
If you were also listening to other companies that are still operating on that field, you will see that their performance is substantially degraded versus ours when it comes to the comparable sales growth. Our objective in that business is very clear, declining, but declining less than the market and continuing to increase our market share. We have now about 1/4 of the worldwide market on that business, and we continue to expand on this. Where is the market going in the longer run? It's always something which is difficult to assess. We see at one stage that there will be a remaining portion of that business since some customers in specific geography are still requiring, and will still be requiring these products. We have still ahead of us probably a few quarters of continuous decline.
That's very helpful. Thank you.
Thank you. Our next question comes from the line of Alok Katre from Societe Generale. Please go ahead. Your line is open.
Hi. Alok Katre from Societe. Thanks for taking my questions and the detailed answers previously. Two questions that I had, both focusing on the growth. Firstly was, if you could just talk a bit about how, let's say the things that our sales developed through the quarter ex the lamps business, did you exit the quarter at a higher rate of sales than you went into it? Is that also partly behind the confidence in the second half of the year? Eric, you talked about the comps, the project pipeline, et cetera, but is this also part of how the quarter developed, let's say? The follow-up question really is a bit on India. I know the elections obviously caused a bit of a slowdown pretty much in multiple end industries.
Just wondering what gives you the confidence that things, let's say, are or will improve in the second half of the year because the news flow on the ground suggests growth is actually decelerating than accelerating? Just wonder how much of the growth or how much of the reversal that you hope is actually linked to the macros versus just specific projects being signed off. Thanks.
Yes. Good morning, Alok. Let me take the questions one by one. Let's review more the process on how we are forecasting the business performance over the upcoming quarters. Basically, at the end of each quarter, we have, by markets, what we call performance reviews and forecast reviews, where we would go quite granular by market, by business, understanding what has happened in the previous quarter and forecasting what's going to happen in the upcoming quarters. After this is done with all our geographies and all our businesses, we use another methodology, which is based on statistics and looking at the data in order to try to have another way to look at the performance and another way to look at the forecast moving forward.
At the end of the day, we try to take a reasonable, pragmatic, but not over-optimistic assumption, neither over-pessimistic assumption on the top line in order to try to gauge where the company is going, understanding that from a geographical perspective, as you understand, but also from a business perspective, we have a lot of different trends and different happenings. When that is done, we confirm a forecast, which is pretty much the basis of us confirming today our guidance. It's difficult to define the trend and run rate at the beginning and the end of the quarter because the quarter is not a good measure of analysis of the performance on the longer run. Many things can happen during a quarter, and it's a too short time to define absolute trends.
Quarter- after- quarter, we can, and this is what we use basically when we do our more statistical analysis. You have also mentioned it, I'm not going to say it again. The analysis that we have made on the growing profit engine, and which I have been describing previously with three different elements, is what make us say that we are confirming today our guidance for the full year on the top line. When it comes to India, I think you're right. We see that some of the structural elements underlying the dynamic of the economy of the Indian territory are slowing down a bit, but it's still a country which has very decent GDP growth. What has also to be noticed is that we are historically very strong India. We are the market-leading company in all our businesses.
When there is a downturn, we feel it, but we also benefit from the growth and the expansion of that economy, and we're quite confident about being able to do that. We have in India also some specific offers being developed. It's a country where we are close to be totally vertically integrated. Most of what we sell in India, we also produce in India, so we're very short cycle there. We are confident in our capacity to extract value and the max we can from greater India territory. Market slowdown is effectively there, but we believe that there's a GDP growth, and we should benefit from it.
Okay. Thank you.
Thank you. We are now approaching the end of the call. We will now take our last question from the line of Lucie Carrier from Morgan Stanley. Please go ahead. Your line is open.
Oh, hi. Thank you very much for taking my follow-ups. If I could go back, and sorry for that, but could go back to Klite Lighting, please. I guess my question is, we've seen notably in Europe and last year, actually in North America, before the tariff were put in place, that there was some form of loading of new Chinese product from new Chinese players, especially on the trade channel, including on the luminaire side. When we looked at this, a lot of those Chinese company had been third-party providers for existing or established luminaire companies, Western luminaire companies, and they were now selling into the trade channel.
My question is: Is there a specific reason why you're not taking this Klite company 100% into your ownership to prevent this company to maybe at some point also go on their own to some extent, notably on the private label, and disrupt, as we have seen to some extent, some of the price structure in the industry? That's my first question.
Lucie, what you say is true. We've seen that trend and we've commented on it a few times. Why not 100%? Because this is an association. We want Klite to continue doing the business it does, which is selling to private label customers, normally it's big private labels, but also to other OEMs. That part of the business has to continue, while at the same time, we will bring also volume and we will bring more volumes to Klite to continue further improve its cost dilution and also developing with them innovation, especially on smart lighting and connected lighting. We believe that we're going to have more weapon and more cost-efficient offers to also be able to face the trend that you have described previously.
We have reacted also to that trend by providing what we call B brand offers, position lower than the Philips brand, with a very specific aim to be able to stop these competitors to enter in our markets. To a given extent, I think that we're starting to be quite successful in North America in doing so. In Europe, it's more in the making. We believe that strategy is a winning one. Having Philips and a B brand positioned at the right level, while at the same time, getting more control on the supply chain end-to-end and being a bit more integrated, which will help us to achieve the right level of cost, to increase our margin, but also to be able to freely discuss about technology and bring new technology to Klite to make it even more successful.
There's one element that I've commented during the call which is also very important related to Klite. This is a company that will be benefiting from our intellectual property position, meaning that it will have a distinguished advantage versus some other companies that you have mentioned that may not be fully IP compliant. We believe that's also, for the future, a tremendous advantage that Klite will have.
Just if I understand well, I guess in the terms of your partnership or collaboration with Klite, there is also specific barrier to prevent the company to have some form of activity which could be detrimental to you and to your portfolio. Am I understanding this correctly or?
Lucie, with 51%, basically, we are consolidating Klite. The EUR 250 million sales to third parties, while at the same time, we also basically deciding with them on what is the strategy.
Okay
to go to the market. The beauty of it is that we had discussions with them, as you can imagine, before making that commitment on both sides, and we are perfectly aligned on the strategy moving forward. We believe that for them and for us, it's a winning strategy.
Understood. Just my last question quickly. You're talking more and more about horticulture, Li-Fi, solar. Today as well, you've made this acquisition in the animal-centric lighting. Are you able maybe to give us a sense roughly of how much of sale is that now for the company, all of these new businesses?
When we talk about agriculture, it is horticulture, but also animal-centric lighting. For animal, we talk about chickens, we talk about swine to a lesser extent, but we talk also about fishes. The vast majority of that business is on horticulture today. We strongly believe in animal-centric lighting. I think that business has got a very clear purpose, moving forward, which is to help to solve one of the issue that the world is going to have in the years to come, which is about food security. All these different initiatives that we are putting in place are somewhat helping to solve that equation. When you look at that business today, it's already quite substantial. We know we're not specifically indicating its size, and within that business, horticulture is clearly the most developed.
Would come what we do for chicken lighting and then probably fish lighting. The perspectives ahead and the potential to do better, to do more, to generate and create value on those businesses, is seen by me a very, very interesting perspective for Signify moving forward.
Horticulture, 10% of sales, maybe less than five? We cannot have even an indication?
That's a good try, Lucie.
All right. Fair enough.
We don't do that.
Thank you.
Thank you very much. I would like to return the conference call to the speakers.
Thank you, Sarah. Ladies and gentlemen, thank you very much for attending today's earnings call and for taking part in the discussion about our results. If you have any additional questions, please do not hesitate to contact the IR team. We're very happy to answer your questions. Again, thank you very much and enjoy the rest of your day.
Ladies and gentlemen, this concludes today's conference call. Thank you very much for attending. You may now disconnect your lines.