Earnings Call: Q2 2019

Jul 26, 2019

Ladies and gentlemen, welcome to the SignifAI Earnings Call Q2 and Half Year 2019. For the 1st 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 I would now like to give the floor to Robin Janssen, Head of Investor Relations. Mr. Janssen, please go ahead. Our earnings call for the second quarter results 2019. With me are Eric Rondolas, CEO of SignifAI and Stefan Roger, CFO. In a moment, Eric will take you through the second quarter business and operational performance. Stephane will then tell you more about the financial performance in the second quarter. Eric will end today's presentation with the key takeaways for first half twenty nineteen 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 am 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 4 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 nonrecurring, which I will discuss in more details later. Our LED based sales increased on a comparable basis by 0.2% and to 77% of sales. And our installed base of connected light points increased from 4 7,000,000 in Q1 to 50,000,000 in Q2 this quarter. We continue to make good progress in reducing our cost base, excluding the impact of currency movements, our adjusted indirect costs decreased by 1,000,000 or 60 basis points as a percentage of sales. As a result, Our adjusted EBIT 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 percent to 1,000,000. And finally, our free cash flow amounted to 1,000,000 which include the positive impact of 1,000,000 from IFRS 16. And this high amount of free cash flow in the second quarter is mainly driven by 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 5. 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 minus 2 3%. We experienced a lower level of market activity most notably in Europe, and we were impacted by nonrecurring developments in Saudi Arabia. And India, namely in professional. Our growth platforms, connected systems, IoT platform services, Horticulture, solar and LIFI, show solid momentum with increasing project wins, most notably in horticulture and solar. The adjusted EBITA margin of the growing profit engines improved by 100 basis points to 8.5 percent with all three groups, business groups contributing to this improvement. Let me now provide you with more details for each of our 3 growing profit engines, starting on Slide 6 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, Slide 7, 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 tea led, which is now available in the US 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 lumenier, this new lumenier combined distinctive patented industrial design with dual zone technology, allowing for both applied and down light simultaneously. And then in Europe, here, we launched best in class drivers for linear applications. The luminaire address is 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 8. 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 nonrecurring events, of which the SASO re certification in Saudi Arabia and elections in India, which represented the vast majority of this impact. Excluding the impact of the nonrecurring events, we estimate that CSG of ProF would have been around minus 1.5%. This effect is expected to partially reverse in H2. Within our annual segments, we noticed 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 facet 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 to enable connectivity. In the past quarter, we introduced True LifeI, which provides the fastest commercially available LifeI system, This new range comprises true LIFI enabled luminance providing wireless connectivity at speeds of up to 150 megabits per second over large spaces such as meeting rooms and office floors. The true life fire range also includes a fixed point to point system, which speeds up to 250 megabits per second, which basically is acting like a wireless cable, ideal for connecting devices. And we know that LIFAL 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 Phillips since they street lights in a park in Seville, Spain, the installation underscores both sales commitment to sustainability and also our own. Let's now turn to Slide 10. Home reported an increase in comparable sales of 19%. So we enjoyed a strong performance in Europe, driven by robust demand for our new connected offers. The adjusted EBITA margin of minus 7.8% represents a substantial improvement compared with last year. The level of profitability in the 2nd quarter reflects low fixed cost absorption and relatively higher cost to prepare for the high season in the 2nd semester. For whom, I 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 Phillips HU 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. And more Bluetooth enabled product will be introduced later this year and in 2020. We also added Luton to the friends of you program. So Luton introduced a smart dimmer in the U. S. That fits over legacy wall switches it is fully compatible with the Phillips hue system and can be set up in the Phillips hue app. This way, It allows consumer to control the hue lines directly from the world 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 2 acquisitions to accelerate in key growth areas. So let's now turn to Slide 13. We announced this morning that we have agreed to acquire 51% stake in KLIGHT, 1 of the leading providers suppliers of LED lamps and Luminers for many years. Next to what they sell to us, they generated around 1,000,000 in sales to firms. Into 'eighteen, 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 K Life, allowing it to generate further cost efficiencies and enhance its product development, including connecting lighting offerings. This will strengthen Skylight'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 elidelamps 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. So we have expanded our business in agricultural lighting by acquiring 2 market leaders in the design and manufacturing of animal centric lighting systems. Once a company based in the U. S. And ILOCS, a company based in Germany. This 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 central centric lighting. And we get access also to a strong intellectual property and solid installed base. On the next slide, Slide 15, I would also like to take a moment to update you on the integration of Light Magic, an acquisition we made about a year ago in China. So light matching offers a complementary portfolio of luminaires and control system for the mid segment of the CityFast satellite 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. Latin Magic generated double digit sales growth in the first half of twenty nineteen. Cost synergies are also well underway, bit of material reduced as per our objective, and we have fire opportunities to improve productivity further. We have also reduced working capital, which was 8% better than plan. And 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 1 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 Stephane who will tell us more about the financial performance for the second quarter of 2019. Yes. 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 points to 37.7 percent in the second quarter of 2019. And that includes a positive currency effect of 20 basis points. You can also see that the impact of price on the gross margin was very similar to last quarter and is largely offsetting is as we offset by the ongoing savings on the cost of goods sold. As far as the indirect cost basis concern, it decreased by 1,000,000 compared to the second quarter of 2018 when you exclude the impact of ForEx And 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 negative 40 basis points And then for the fourth quarter, it would be positive leading to an overall impact on the full year 2019. Of around minus 30 basis points, so 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 1,000,000 of currency comparable indirect cost savings in the second quarter of 2019 compared to a year ago and it represents an 8% reduction year on year. The ForEx negatively impacted the adjusted indirect cost base by around 1,000,000. And we are quite satisfied with the evolution of our indirect cost base since now the beginning of 2017, as can see on the right hand side. We showed the development of our indirect cost on the last 12 months basis. We've been able to reduce the indirect cost base by 1,000,000 over a 2 year period. Which is a reduction of 280 basis points as a percentage of sales. So we continue to execute many initiatives in order further decrease the indirect cost base. And 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 191,000,000 and amounted to EUR 503,000,000 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 1,000,000 of the working reduction at the end of the quarter. Overall, the working capital performance reflects our continued focus on improving working capital since several us. Let's now take a closer look at our net debt position on the following slide, page 20. Our net debt increased by EUR 76,000,000 compared to the end of March, 2019. And that's mainly due to the distribution of our dividend of EUR 164,000,000 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 1,000,000 in the quarter. And the net change in provision was 1,000,000, And next to that, we paid 1,000,000 for tax and interest. All in all, as you can see, our net debt position amounted to 806 1,000,000 at the end of Q2, which represents a net leverage ratio of 0.9 times adjusted EBITDA. Let me now hand the first half of the year. Increased by 200 basis points year on year with each business group contributing to the improvement. They account for 60% of our adjusted EBIT in the first half of twenty nineteen, 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. So 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. So we are satisfied with the continued savings on procurement and indirect cost. As you can see, our currency comparable indirect cost decreased by 1,000,000 or 1 120 basis points as a percentage of sales compared with the first half of twenty eighteen. We had a significant underlying improvement in our free cash flow in the first half of twenty nineteen, 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 give you an update about our road to excellence our 5 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 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 and external insight to optimize pricing. And we reduce the complexity of the product portfolio, which will result among others in improved portfolio profitability. We're 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. So we reconfirm our outlook for 2019. We expect that we're growing profit engine, LED professional and home combined to deliver CSG in the range of 2 to 5%. Our cash engine lens is expected to decline in the range of 21% to 24% on a comparable basis. For total SignifAI, we aim to reach an adjusted EBITA margin in 2019 within the target range of 11% to 13% as set at the time of the IPO. In May 2016. We continue to expect a restructuring P and L charge of between 1.5% to 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 Thank you. A question. And our first question comes from the line of Benjamin Zekaus from Goldman Sachs. Please go ahead. Your line is now open. Hi, good morning, Gary, Acastafan. Thank you very much for taking my question. I've got a question on the on your acquisition of your stake in K Lite and then a follow-up on capital allocation. But 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. But 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. And 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. So let me take it with a bit of distance first. So, you know, 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. So we felt that we had to strengthen our control over the end to end supply chain. So you have to see behind this acquisition, a fundamental strategic move in how we perceive the competitive landscape, and 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 Elidelands, at Elidelands and also Elideluminaries. It will be both bringing top line and margin since we want KLA to continue to sell to its customers Kline 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 set sources all over the world, reaching also different types of customers and private label customers. And we think that now having that association with KLite 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 collected lighting. So as you can see, there are a lot of different elements behind this acquisition that are fundamentally strategic. Some of them are that 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, you know, stack up margin, buying from a supplier because that supply basically becomes our own company. So I hope that have been Benjamin quite exhausted in my answer. But there are many different aspects behind the acquisition of KLIGHT. Thank you very much. Yes, that's great. I appreciate the color. And my follow-up would be on your capital allocation. Ahead of 2Q, you've mentioned that you would be looking at M And A. And then depending on that, you might explore other avenues for instance, maybe potentially returning cash. So how do you think about that now that you've announced this stake in in KLIGHT? Yes. So Benjamin, of course, our capital allocation policy has not changed. And we still aim at returning money to our shareholders through our dividend and that generally takes around half of free cash flow. I mean, it's 40% to 50% of our net result, and it's generally around half of our free cash flow. And 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 profitability profile of the company. And if we do not find those opportunities, of course, we would return money to shareholders, which we have done a lot about the last 2 years. Now you noticed that we have stepped up on the non organic opportunities. We've announced 3 since the beginning of the year, 2 that are relatively small and 1, which is larger like K Lite. So 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. And then in the course of the second half, depending on the 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. Our next question comes from the line of Andreas Willey from JP Morgan. Please go ahead. Your line is open. Yeah. Hi. Good morning. Eric Stifman 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 KA light sales is coming from SignifAI and how much from your competitors in LED and professional businesses? And then I have a follow-up. So when we are talking about 250,000,000 it is sales to 3rd parties. So that is excluding of the sales from, Kelai to signify. And within this EUR 250,000,000, we are not specifically commenting at this point in time how much they are selling to other lighting companies. But when we did the acquisition is 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 taking into account in our post merger integration plans. Thank you. And my follow-up is on visibility for projects that you have in China and Middle East in second are these projects in professional signed off? And is it in the backlog or still risks depending on the macro? Yes, when we're commenting on these projects, it's because they are orders on hand. So these are orders that we have. So they are in the backlog. Effectively, we're talking here about quite important project in Middle East, Pan Turkey, and well, specifically in Saudi on Rawdon Street that we have already taken the orders and some also quite substantial projects in China in facade lighting. It also as a result of the acquisition that we did a year ago in China of light Magic. So that has been a very successful integration so far. And that is generating a lot of fruits on the revenue side. So these projects are already in the backlog. Thank you. Thank you. Our next question comes from Lucia Carrier from Morgan Stanley. Please go ahead, Lucy. 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 seems 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. And at the same time, the margin is also quite nicely improving. I was just wondering, I mean, are you on top of the different cost initiatives 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. So that's my first question. Yes. Good morning, Lucie. I think the, when you look at the pattern in terms of organic decline, 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 and to feel, I think, many other companies are commenting in the same way. And 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 1st part of this year. So I think degradation of the end market for us has 2 consequences that the conventional while it's declining a bit faster and LED is growing a bit slower. So this is how I would, from a conceptual standpoint, as you've mentioned, it would command the pattern and the trends at the level of the top line. Now are we pruning products that are not profitable from a gross margin standpoint? Not really, we have an action part of our horizon plan, which is to look very selectively at how we price our offers to make sure that they are well priced on the market, but we are not systematically pruning, you know, 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 the what has happened precisely in Saudi and India in the second quarter or more generally in the first half because you mentioned, I mean, it's down the division is down 5.6 percent, but without that would be minus 1.5%. So either how big are those 2 geographies now for you? Or maybe on the other hand, how much decline did in those geographies specifically because it seems like a big delta for countries, which historically hadn't necessarily been the majority of the business. Yes, I think that's a good question, Lucy. Look, let me put it this way. So first of all, My bad, I've made a mistake. It's at minus 1.5%. It could be minus 1%. If you net from nonrecurring impacts that have happened in Q2, and that will be partially reversed in the coming quarters. But let me now zoom a little bit more on the 2 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. And this is what we have experienced in India before the elections that have taken place in Q2. And that was also to be compared with a Q2 2018. That was extremely dynamic in India. So these are the 2 fundamental elements to understand when it comes to India. Now let's go to Saudi. So Saudi, it's a difficult story in the short term, but a very positive story in the longer term. So 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 a proff, but mostly proff for us because we are very skewed towards that business group in Saudi. So that entity has asked for a recertification of the products in order to be able to sell them. And that has happened at the beginning of Q2. The point is that to recertify the product it takes between 2.5 to 3 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. And at the same time, there is a bureaucratic process that we have to follow in terms of getting the accreditation. So 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. So 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. So it had an impact and quite a massive impact on ourselves because it touches a very big part of the portfolio. Now this is what has happened in Q2, but we see this as a positive event moving forward because in Saudi, those certification are unfixed. On the market, which is a very positive thing. We are the most advanced on that market, managing the recertification And we believe that it will generate further positive sales for profit. This is why we are saying that that impact could be partially reversed in the upcoming quarters. But this is what we had to face for Q2. So a negative impact in Q2, but we believe positive impact the coming quarters. And we expect that some of the actors on the market in Saudi today, which are working more in an informal way going to have problems to continue selling. So it's market share that we can potentially take on, profit, but also probably on other businesses too. So I'm a bit long answer for that one, but it is to be well understood. This is what happened in India, and this is what happened in 2017. Thank you very much. I'll go back in the queue. From the line of Joseph Su from Redburn. I have to 1st, on your global businesses, I noted that it has been declining for six quarters and at something like minus 3%. And I understand within that, you have the license income as well as products and brands managed globally, for example, the loose plan. And can you give us some color on that? What has been driving the decline? And what can we expect going from here? And my second question is on the savings And if I look at your indirect cost savings and the year on year change of indirect cost as a sales has slowed this quarter. You cut the incentive bids compared to something like 200 bps in the last three quarters. I think the program from last year is coming to end of its cycle? And given that it seems like you have a new program coming up with the low to excellent program should we expect the indirect cost savings to reaccelerate in the second half, which gives you the confidence for the full year margin guidance? Yes. So Jason, let me take those 2 questions. So on the global businesses, You're right. There's been a slight decline. The CSG in the second quarter was down minus 1.5 and for the 1st 6 months, minus 1.3. So 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. So it's not only licensing. In some of the businesses, you can have some projects also in licensing, you can have some contracts. So there is not much to read into that slight decline for those global businesses. On the savings, yes, we are, of course, still quite filed with the reduction that we've seen on the indirect cost since the beginning of 2018. And still in the first and second quarter, now you're right. The overall amount compared to what we had seen in the 2nd part of 2018 is lower We've taken a number of actions and continue to look at all the optimization including, as you mentioned, through the Horizon Program, And indeed, we expect that we will have a further acceleration in Q3 and in Q4. And 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. So 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. Great. Thank you. And then just very quickly, maybe on the global businesses, what was driving more? Was it licensing income declining or it's the products declining? So 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. 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 acquisition, as I struggle, still a bit with the strategic implications So first of all, I understand that one of the objectives is to bring additional innovation power to KLite. And then Crowed is SEK 250,000,000 in 3rd party revenues. But would it, that then, not really 40 competition for your own brands then? And maybe a bit more color on that. And the second part of my question, as you mentioned already, is that so far, you were mostly outsourced Is this, yeah, really a change in policy? And could we see additional steps in you taking onboard more of the manufacturing? Or should we really see this as an exception and that you still yeah, follow a more asset light business model. Yes, thank you, Peter. Good morning. Well, let's go back to KLite. Competition exists anyhow. So we will not stop competition, but by making that investment of 51% of KLite, we are probably also controlling a major part of the market since this entity will be producing offers branded Philips and with the SignifAI brands, but also will be selling products to other companies. So it has to be seen as something fairly similar to what we do in the LED electronics, the driver of the lead module type of the business. And that's a strategy that we have been very successful to implement on that front. Why? Because these customers that are not signify are going to be benefiting from many things. Cost efficient offers, offers that are innovative, but also offer that our IP compliant. So that business is launch, which is the sales of this product outside of SignifAI, and it needs to continue. That's one of the strategic rational doing that acquisition. At the same time, and 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 need it now to have more control over the supply chain. And suppress a margin stack up at the level of our suppliers. Now are we going to go in additional, in sourcing steps. Well, 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 and on which we are going to build for the future. So 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 quick follow-up on the home. Where you mentioned a strong performance in Europe, but I assume, North America is still the largest market for your Philip View product. So could you shed some light on the performance in in that region? Europe is also very large for the home business. But Europe has been outstanding in performance when it comes to home. Northern 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 Shitong from Citi. Please go ahead. Your line is open. Hi, gee from Citi. Thanks for taking my questions. First one, just confirm that given that you've confirmed your guidance for your non land businesses organic growth at 2.5% for the year and given what we've seen so far, So 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 additional or am I missing something here? Sushi, good morning. What we said in terms of guidance is 2% to 5%. And there are a few elements behind that, probably 3 elements. So the first one is that we have commented on nonrecurring elements in Q2 that will be partially reversed in Q3 and Q4. So this is 1. 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 plus 2% in comparable sales growth in 2018, but it's minus 2.4%. In the second half of twenty eighteen. So we are going now to be compared to a lower base. The 3rd 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 LE part of the business where we have secured and we have the orders, quite substantial projects in Northern America, selling to some important retailers there. So this is why we confirm the guidance that we had given from 2% to 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 few products? And has there been any changes seen in the competitive landscape in this segment? So our pricing for Hugh 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 parts of the market. So this is why we have done basically 2 things. So the first one is the acquisition of WIS, which has a fabulous ecosystem, Wi Fi based. And we believe that in the long run, there will be 2 exist thing ecosystem for smart connected home lighting, which is Zigbee on one hand and Wi Fi on the other hand. And the second thing that we have also done lately, and we have announced that innovation to the market in Q2 in Canada and the United States, and it will be an issue in Europe, which is direct light control for our few offers, meaning that you can access now a Humam directly from your smartphone. And what is also beautiful from a technology standpoint is that if you reach one land, then you will be able to reach also the other land through Zigbee channeling medium, meaning that 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. And 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. So as you can see, when it comes to home, pricing has been quite stable, a few is 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 you. Thank you very much. Thank you. Our next question comes from the line of Mark Hesselink from ING. Please go ahead. Your line is open. Yes, thank you. Coming back on, on, on Kaelite, I still try to calculate a bit on what the impact will be. If we take it to account, this is, if I'm right, one of your key suppliers, before the acquisition, So is it then fair to assume that the internal sales that the sales going into SignifAI are at least similar to the 3rd party sales? And if that is the case or any other amount, what kind of impact does it have on your cost base? So how much of those costs do you take out and maybe then for the future? Is it also a possibility to move some extra some things that you go to other suppliers that you move that to K Lite and therefore taking out some extra costs. Hey, Mark, let me give you a little bit of insight here, although we don't communicate specifically on the financials of the deal. So, yeah, we've mentioned the external sales because this is what we are going to include in our accounts, and they will have an impact on our total sales and especially here on BG LED. And then what supply the supply currently between us and K Lite 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. So it's nowhere near that amount. When you think of the synergies, Eric mentioned the margin stack up. So from that standpoint, of course, there's going to be benefits from us in terms of financials. Then we will bring scale and probably more scale to KOLID as we grow and expand in LED lamps in Lead Lumiere and also in connected offerings. That's going to add scale. And from that scale, there's going to be in K Lite also more efficiency. They have room to expand. There's going to be more manufacturing efficiency. There's going to be more build material efficiencies. So there is a meaningful amount synergies that we believe in the coming years, we can bring to K Lite, and 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. So, 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 1st year 1st full year, which is 2020, and that will bring additional net profit and therefore, EPS accretion as of year 1. 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. And then as a follow-up then on the coming back on that capital allocation question, have the revenues of outside of $250,000,000 and then something on top that's going internally? Would that imply that, I mean, what kind of note will I have to just assume for argument's sake 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? So 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 ofization, and that would 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 Riley from Jefferies. Please go ahead. Your line is open. 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. So you've had a big increase in your payables, a big cash inflow from payables. So maybe you couldn't explain whether that my understanding is correct? And then secondly, on lamps, you're getting into the second half with much more difficult comparables because of the surge last year. So 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? Because you've been talking about growing or shrinking less rapidly than the market, I gaining share in a diminishing market. So maybe you can help us understand where you think the market's going on an underlying basis ignoring the halogen issues that are distortion the effects in 2018 2019? Yes, Peter, let me take the first one on the working cap. So it's pretty simple. As you know, and as we have mentioned, talking about Horizon, optimizing working cap 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. And 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 payment of the company. And like many companies, we've moved from in the second quarter, we've moved from paying our suppliers every day and having payments done every day. To payments done through our payment factory, three times a month. And one of those payment runs out of the 3 payment runs the last one is on the last day of the month. It happens that this quarter, the last day of the month, where the weekend. And 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. So sometimes the end of the month or the end of the quarter happens to be on the weekend. And in that case, the wire transfer is shifted to the following day. Previously, it could have an impact, but it was more limited. And of course, it has an impact on our payables, 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 payable that we are supposed to be done or that we are scheduled to be done on the last day of the quarter. And because it was weakened, it shifted to early July. So 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 payable, 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 payable and in a more important way than receivable because of those payment trends, but we were also impacted on the receivable side because some of our customers, we were supposed to collect on the 30th June, and we collected only on 3rd July. So that is the very concrete explanation of the phasing of receivable and payable. And again, we have estimated the amount to be around 1,000,000 that is shifting from Q2 to Q3. Now if you take out those 1,000,000,000, as you've mentioned, it's still a free cash flow generation for the second quarter of 1,000,000 or 1,000,000, which is a strong performance. And again, it reflects everything that we are doing to improve our working gap. I hope it clarifies for you, Peter. Yes, that's very helpful. I was wondering what was going on. And can you to make 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, here, what I've just described is temporary because of the payment happening on the weekend. It's not going to have and it's going to reverse because, again, we've made those payments at the beginning of July. So 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. So the payments and the payments from our customers will happen totally normally. So 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 with our suppliers or with our customers. That's very helpful. Thank you. So Peter let me take the second question on Lance. So if you look at the performance at the end of H1, we had minus 19%. We guided between minus 21 and minus 24, taking in account the fact that we have a high compare for the 2nd semester and especially in Q3. Because this is when the halogen ban in Europe did take place in 2018. So yes, we are forecasting a higher decline, a more important decline in the 2nd semester for the Lambs business and specifically in Q3 remaining in the guidance that we have given, which is between minus 21 to minus 24. So 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 minus 25% to minus 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 hours when it comes to the comparable sales growth. So 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 4th 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 we'll still be requiring these products, but we have still ahead of us. Probably a few quarters of continuous decline. Thank you. Our next question comes from the line of Alokatra from Societe Generale. Please go ahead. Your line is open. Hi. Alok Katri from SocGen. Thanks for taking my questions and detailed answers previously. Two questions that I had, both focusing on the growth. Firstly, was if you could just talk a bit about I mean, about how, let's say, the things are sales developed through the quarter, ex the lamps business, I, did you exit the quarter at a higher rate of sales and you went into it? And is that also partly behind the conference in the second half of the year, Eric, you talked about the comps, the project pipeline, etcetera, but is this also part of how you of how the quarter developed, let's say. And the follow-up question really is a bit on India. I know, the the elections obviously caused a bit of a slowdown, you know, pretty much in multiple, industries. But I'm just wondering whether, you know, what gives you the confidence that, you know, things, let's say, are are in or will improve in the second half of the year because the news flow on the ground suggests growth is actually decelerating than accelerating. So just wonder how much of the growth or how much of the reversal that you hope is actually linked to the macros versus, you know, just specific projects being signed off? Thanks. Yes, good morning, Alex. So let me take the questions 1 by 1. But 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, Then 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 a optimistic assumption, not 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, you know, the trend and run rate at the beginning at the end of the quarter because the quarter is not a good measure of analysis of the performance on the long run. Many things can happen during a quarter and it's a 2 short time defined absolute trends. But quarter after quarter, we can. And this is the way, and this is what we use basically when we do our more statistical analysis. So you have also mentioned it. I'm not going to say it again. So the analysis that we have made on the growth profit engine and which I have been describing previously with 3 different elements is what make us say that we are confirming today our guidance Aguidance for the full year on the top line. When it comes to India, so I think you're right. We see that some of the structural elements underlying the dynamic of the economy of the Indian territory slowing down a bit, but it's still a country which has a very decent GDP growth. What has also to be noticed is that we are historically very strong in India. We are the market leading company in all our businesses. When there is a downturn, we fill 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 that integrated. Most of what we sell in India, we also produce in India, where we're very short cycle there. So we are confident in our capacity to extract value and the max we can from the greater India territory. Market slowdown is effectively there, but we believe that there's a GDP growth and we should benefit from it. Thank you. We are now approaching the end of the call. We will now take our last question from the line of Lisa 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 Place, 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 floating of a 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 a third party providers for existing or establish Luminaire Companies, Western Lumina Companies, and they were now sitting into the trade channels. So my question is, is there a specific reason why you're not taking the scale outcome a 100% into your ownership, to prevent this company to maybe at some point or so 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. So, Lucy, what you say is, is true. We've seen that trend and we've commented on it a few times. So why not 100% because this is an association. We want K Lite 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'll bring more volumes to KLIGHT, to continue further improve its cost dilution and also developing with them innovation, especially on smart lighting and connected lighting. So 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. Now we have reacted also to that trend by providing what we call B Brand offers in a position lower than the Phillips 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've been and we're starting to be quite successful in Northern America in doing so. In Europe, it's more in the making, but we believe that that strategy is a winning one. So having Phillips and a B brand positioned at the right level, while at the same time, getting more control on the supply chain and 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 Kli to make it even more successful. There's one element that I've commented during the call, which is also very important related to K Lite. 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 compliance. So we believe that's also for the future, a tremendous advantage that KALIGHT will have. So just if I understand, well, I guess in the terms of your partnership or collaboration with KLite, there is also specific, I would say, a specific barrier to kind of prevent the company to have some form of activity, which could be detrimental to you and to your portfolio. Am I understanding this correctly? But you see, with 51%, basically, we are consolidating K Life, so the million sales to third parties well at the same time, we also basically deciding with them on what is the strategy to go to the market. Now 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. And we believe that for them, and for us, it's a winning strategy. Understood. Just my last question quickly. I was, you're talking more and more about Otisulture, LIFI 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 service are now for the company? All of these new businesses? So when we talk about agriculture, it is horticulture, but also animal centric lighting. And for animal, we talk about chickens, we talk about swine, to a lesser extent, but we talk also about, fishes. So the vast majority of that business is on horticulture today, but we strongly believe, in animal centric lighting. I think that business has got a very clear purpose, you know, moving forward, which is to have to solve one of the issues that the world is going to have in the years to come, which is about food security. And all these different initiatives that we are putting in place are somewhat helping to solve that equation. So when you look at that business today, it's already quite substantially. We know we're not specifically indicating its size. And within that business, a healthy culture is clearly the most developed, then would come what we do for chicken lighting and then probably fish lighting, but 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 SignifAI moving forward. In Otisultura, 10% of sales, maybe less than 5 we cannot have, even an indication? That's a good trial, let's see. I don't fair enough? Thank you very much. And 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. And 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.