Ladies and gentlemen, welcome to the Signify earnings call, Q1 2019. For the first part of this call, all participants will be in listen-only mode. Afterwards there will be 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. Good morning, everyone. Welcome to Signify's earnings call for the first quarter results of 2019. With me are Eric Rondolat, CEO of Signify, and Stéphane Rougeot, CFO. In a moment, Eric will take you through the first quarter business and operational performance. Stéphane will then tell you more about the financial performance in the first quarter. Eric will end today's presentation with our financial outlook and conclusion. 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. Good morning, everyone. Thank you for joining us today. Let's go immediately to slide four with the main elements of our performance in the first quarter. Comparable sales declined by 3.3%. LED-based sales increased by 3.6%, now accounting for 73% of our revenues. We continue to make good progress in reducing our cost base. Excluding the impact of currency movements, our adjusted indirect cost decreased by EUR 39 million, or 170 basis points as a percentage of sales. As a result, LED, Professional and Home improved their margins in the quarter, while lamps was able to sustain its margin above 20%. Overall, our adjusted EBITDA margin improved by 80 basis points to 7.8%, despite 130 basis points of negative impact from currencies. Our net income, as you can see, more than doubled from EUR 20 million last year to EUR 44 million.
We are also pleased with our free cash flow of EUR 55 million for the first quarter, which was EUR 44 million higher than last year when excluding the EUR 17 million positive impact from IFRS 16. I propose that we now move to slide five, where you can see the usual snapshot of the financial performance of our growing profit engine, namely LED, Professional and Home businesses. Overall, our growing profit engine showed positive comparable sales growth of 1.1%, which was mainly driven by solid performances in Home and LED. The adjusted EBITDA margin of our growing profit engines improved by 210 basis points to 6.7%, with each business group contributing to the improvement despite currency headwinds. The growing profit engine substantially improved their free cash flow compared with last year, were able to more than compensate for the decline in free cash flow in lamps.
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 0.2%. LED lamps showed a solid performance while growth in LED electronics slowed down in Europe. We continue to see price erosion slowing down on a sequential basis, and the adjusted EBITDA margin improved by 230 basis points to 11.9%, mainly as a result of procurement savings and lower indirect cost. On the next slide seven, you can see some of the business highlights for this quarter for LED. Let me zoom on the launch of TrueForce Urban in Europe, which is a lamp that we use to replace conventional high-intensity discharge lamp.
They not only create a pleasant and safe atmosphere in outdoor environments with LED retrofit, but they're also easy to install, create 80% energy savings with a payback period of less than two years. Another innovation that I would like to highlight for this quarter is the launch of the world's smartest outdoor LED driver, which enables Connect Ready and connected outdoor lighting. The driver has a low inrush current due to IntelliStart, a driver-integrated feature which is enabling a maximum number of light poles on a single circuit breaker. This driver also features integrated energy metering with an accuracy of 1%. In addition, it allows high surge up to 10 kilowatts, specifically designed for tough environmental conditions. Let's move on now to Professional on slide eight.
Comparable sales declined by 1.5% due to a lower level of market activity in Europe and China, partly offset by a solid performance in the Americas. The adjusted EBITDA margin remained stable at 5.3%. Continued indirect cost savings more than offset the negative impact of currencies and mix. The mix was negative due to lower market activity levels, specifically in Europe. There are a couple of business highlights that I would like to bring to your attention on slide nine. Let's start with Prime Delica. We enable that customer to grow healthier and safer crops for 7-Eleven customers in Japan. Through research, we helped Prime Delica to develop an optimal light recipe to increase vitamin levels and the nutritional value of lettuce. This ensures the vertical farm facility in Japan a year-round supply of high-quality lettuce, spinach, and coriander, while reducing up to 90% on water consumption.
Increased automation also resulted in reducing time from seeding to harvesting from 70 days to 39 days. A second innovation that I would like to highlight is that we let our customers experience light before they buy it with our virtual reality app. Customers can now step into a virtual world to visualize how lighting can transform their fashion store. Very accurate 3D rendering enable retailers to immerse themselves in a virtual fashion store and see firsthand how lighting can make shop windows more dynamic to attract shoppers' attention and draw footfall in the store. It enables retailers to sample different lighting design and find the right lighting for their store. Let's now turn to slide 10 and talk about Home. Home reported an increase in comparable sales growth of 24.4%.
This was on the back of a low comparison based in the U.S. in the same period last year, while we experienced strong demand for connected offers in Q1 2019. The adjusted EBITA margin of -6.1% represents a substantial improvement compared with last year and includes a significant negative impact of currencies. For Home, we would like to share a couple of business highlights that you see on slide 11. We're especially proud of Hue's contribution to the 11 iF Design Awards that we won earlier this year. First of all, we won an award for the redesigned Philips Hue App 3.0, which enables users to control and personalize their lighting. Also, four of our connected luminaires also won iF Design Awards. I also want to highlight that we launched the Gentle Sleep and Wake feature.
This provides users the ability to use voice commands with Google Assistant and to activate sleep and wake light effects using the Philips Hue functionality. It represents the very first integration of the Philips Hue Sleep and Wake Up feature with a digital assistant platform. Let me now move to our Cash Engine lamps on slide 12. Comparable sales decreased by 17.9%. We believe that this decline is lower than the market decline, resulting in continued market share gains. The adjusted EBITA margin remains solid at 20.5% as a result of ongoing indirect cost reduction. Let me now turn to slide 13 to briefly talk about the acquisition of WiZ Connected. As you know, in the past years, we have successfully developed our smart lighting Zigbee-based offer, the Philips Hue for the Home. It has been market-leading from the very beginning till now.
Additional technology platforms based on Wi-Fi have emerged in the past quarters, and we believe that in the long run, these two platforms, Zigbee-based, Wi-Fi based, will occupy complementary spaces on the market. We therefore decided to invest to be present in both. WiZ Connected, based in Hong Kong, has successfully developed the WiZ Wi-Fi based smart home connected lighting ecosystem, which is currently offered in Europe but also in the U.S. This acquisition enables us to expand our connected lighting offer for the Home and reach a larger customer base, which will strengthen our leadership position in connected lighting. 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 first quarter of 2019. Stéphane, to you.
Thank you, Eric. Hello, everyone. Let's now turn to page 15, where you can see the adjusted EBITA bridge. As you can see here, the adjusted EBITA gross margin as a percentage of sales decreased by 90 basis points in the first quarter compared to last year. As we mentioned in the press release, that includes a negative currency effect of 140 basis points. You can see also that the impact of price on the gross margin was lower than in the preceding quarters, and is almost fully offset by the ongoing savings that we manage in our cost of goods sold. The indirect cost base has decreased by EUR 39 million compared to the first quarter of 2018, outside of the Forex effect.
Overall, on the profitability, we had a negative Forex impact, which was mainly caused by the adverse swings in several emerging market currencies, like Indian rupee, Indonesian rupiah as well, Chinese renminbi, and also the stronger dollar. Based on the spot rate that we have seen at the end of March, we expect that the currency impact on the adjusted EBITA margin for the second quarter is going to be much smaller, probably around -20 basis points. We also confirm that for the full year of 2019, at this stage, we see a negative Forex impact of around -50 basis points. Looking at our cost, which as you know is a very important area of focus for the company.
We've taken a lot of initiatives in 2018 and also at the beginning of 2019, as you can see, we are still able to reduce in a meaningful way our cost. That has resulted in a EUR 39 million currency comparable indirect cost savings in the first quarter. This is an 8% reduction year-on-year. The Forex had a negative impact on our adjusted indirect cost base by EUR 6 million. As you know, we continue to find, develop, and execute initiatives across the whole company to further decrease the indirect cost base. Let's now take a look at the working capital in the first quarter of 2019. I am on page 17. If you compare to the end of March 2018, the working capital has actually decreased by EUR 25 million and is now amounting to EUR 587 million, which is 9.3% of sales.
That improvement was mainly driven by the level of inventory, which is lower compared to a year ago, and also by higher payables. If you exclude the impact of currencies, our working cap as a percentage of sales has actually improved by 20 basis points compared to the first quarter of 2018. Finally, let's take a look at our net debt. If you exclude the impact of IFRS 16, which is EUR 259 million and is now accounted in the net debt, our net debt without that impact has improved and reduced by EUR 59 million compared to the end of 2018. Of course, we generated a profit during the first quarter. We also benefited from the changes in the working capital that I have just mentioned. You can see also the other item in the bridge that impacted our cash and therefore our debt position.
Our CapEx was EUR 10 million in the quarter, lower than a year ago, and the net change in provision was EUR 16 million. Next to that, we paid also EUR 23 million for taxes and for interest. As mentioned by Eric, our free cash flow in the first quarter was positive EUR 55 million. At the end of the quarter, our net debt position, including the addition of due to IFRS 16, amounted to EUR 789 million. Let me now hand over to Eric for the final part of the presentation.
Thank you, Stéphane. Let's move to slide 20 to discuss the outlook. We are basically confirming 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% to -24% on a comparable basis. For total Signify, we aim to reach an adjusted EBIT 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 questions, which Stéphane and I are happy to answer.
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 01 on your telephone keypad now. That is 01 on your telephone keypad. We have the first question from the line of Daniela Costa from Goldman Sachs. Please go ahead, Daniela. Your line is now open.
Good morning. My first question, and then I'll ask the follow-up after. Can you update us in terms of your commentary last quarter regarding capital allocation, the likelihood of M&A versus buyback?
Yes. Good morning, Daniela. We would make the exact same comment as what we said previously. Our capital allocation policy is looking at different priorities. The first one is to grow the business. The second one is to eventually return money to the shareholders. The third one is to improve the balance sheet. We haven't changed. What we say is we're looking for opportunities for growth. If they materialize in line with our strategy, and you know that we have a very selective strategy when it comes to M&A, we do it. If not, normally middle of the year, we would announce additional measures looking at the other priorities. Nothing changed from what we said in Q1 for the full-year results.
Okay. Thank you. My follow-up on Home. Can you give us some commentary on sell in, sell out visibility towards the rest of the year in terms of the confidence of maintaining this double-digit growth going forward? Thank you.
Thank you, Daniela. First of all, we are happy in Q1 to be able to confirm that what we experienced in the back end of 2017 and the beginning of 2018 has been resolved. We have a much better visibility, especially in the U.S., in our major customers on selling out an inventory position. You see that the business has grown globally. We are comparing ourselves in Q1 to a lower base last year. Nevertheless, we see that despite that, there is a growth potential for that business, especially in the connected offers. Not only lamps, but also luminaires. We have developed full family of products around the Hue platform. We see a very good traction in Q1. We believe that this is going to continue during the year.
The base will change over time, but we see a good and positive traction for that business moving forward.
Thank you.
Thank you. Our next question comes from the line of Lucie Carrier from Morgan Stanley. Please go ahead. Your line is now open.
Hi, good morning. Thanks for taking my question. The first question I had was around the visibility you have on the professional business. I was hoping you could comment a little bit on the orders or tendering activity you are seeing there, maybe specifically on Europe, considering that it seems to be quite important for your mix. Then I'll have a small follow-up. Thank you.
Yes, good morning, Lucie. When it comes to professional, I would say the vast majority of what we invoice during the quarter, we take also the orders during the quarter. We don't have a backlog, which is significant. Sometimes we have big projects, whenever they're really material, we announce it. The visibility that we have ahead in terms of backlog is not that important. Nevertheless, if we go back to Europe, yes, we had a slowdown in Europe in Q1, we already had experienced it in Q4. It is also illustrated by the fact that our LED electronics business in Europe has also slowed down. We see that there's a whole market contraction there. Look, we hear as much as you do what economists are saying, they see a potential rebound in H2. We will see.
When it comes to professional, the way we also look at the business, Q1 and Q3 are high compare, Q2 and Q4 are more modest compare. When you look at the business quarter after quarter, is also how we need to look at it to understand, be able to assess rightly the performance.
Thank you. My second question is, helpfully, you're giving us all of the details around the adjustment for IFRS 16. You are saying you're expecting a positive impact of EUR 10 million on adjusted EBITDA for the full year. I was just wondering how much it was in the first quarter 2019, if any.
Yes, Lucie, this is Stéphane. Yeah, there was some impact. Approximately one-fourth of the EUR 10 million is relatively evenly spread. The impact on EBITDA is because part of the lease now is accounted as financial interest. That's why it's moving below the adjusted EBITDA line. Overall amount for the year is EUR 10 million, so you can assume a bit more than EUR 2 million for the first quarter.
All right. Thank you very much.
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 Stéphane. Thank you for taking my questions. I have two. First, it's encouraging to see price pressure has eased again this quarter. Could you perhaps elaborate to what extent this is U.S. trade tariffs driven, and to what extent this is what you see more structurally, perhaps with LED approaching price parity with traditional products and ongoing industry consolidation?
Yes, good morning, Joseph. Important question. I don't think it is linked to the U.S. trade situation at this point in time. We see a worldwide trend of a lot of aggressivity on price. It's on LED lamps. It's also on LED luminaires. Is it structural? I am not too sure. I think that at this point in time, there's much less that we can extract from the cost because the industry has been bringing the bill of material quite down, in the past quarters and years. We see effectively aggressivity there. On our side, what we're doing is that we are segmenting our offers, meaning that we go from lower to higher functionalities, segmenting clearly the offers with different prices, and trying to also specify at the end users in order to make sure that the right offer are selected for the right application.
We are fairly confident on our strategy. It's true that there is still price pressure. Now, the price pressure has declined in the past quarters, as we have said, but it is still there. We're still growing in volume, in unit of products, especially on LED lamps. It's true that there is price pressure. We're fighting against it, and I think we have the right weapons.
Okay, thank you. Second, we have seen a good level of cost savings in the last three quarters compared to the first half of 2018. To what extent has this been driven by higher procurement savings versus footprint optimization savings? Also, do you expect the same level of productivity going forward as well, which I calculate is about 3.5% of sales?
Yeah. You're right. Q1 has been a good quarter. When you look at the bridge and you compare the impact of price and the impact of cost of goods or savings, as I said, it's almost neutralized. Of course, we've taken action since now several quarters or even more than that on our footprint, and we will continue to do so on the lamps business, but also on the cross business and to a lesser extent, electronics. It's partly related to that. Procurement is also core to what we deliver in terms of profitability improvement, and it's a mix of negotiation and price
Our teams are spending a lot of time with suppliers to make sure we extract as much as we can. It's also the innovation, concept, design, everything that we do in order to reduce the cost of goods sold and the bill of material. The teams are really achieving a lot on that front. We're going to continue to do that, so I cannot give you specific indications. Yes, there is still more that we can extract, in the way we design our products and in the way we negotiate and get savings from our suppliers.
Okay, thank you.
Thank you. Our next question comes from the line of Martin Wilkie from Citi. Please go ahead, Martin. Your line is now open.
Thank you. Good morning. This is Martin from Citi. The first question is on your indirect cost savings. You are still above 31%. You are targeting to get to below 29% for the year. Just if you could give us some idea as to the pathway to how you get there. Is it going to be quite second half weighted? Also, it seems that some of these savings so far have been in LED and Professional. Should we expect some of the benefits later in the year come in the other divisions? Just a little bit more color on how we should see those savings. Thank you.
Yes, Martin. On the percentage, of course, Q1 being a lower quarter in terms of top line and absolute value, the percentage is always higher in Q1 compared to later quarters, especially the second half of the year. You can totally expect that, especially in Q3 and Q4, this is where the percentage is going to go substantially below the 30%. That's why overall for the year, we expect a reduction compared to 2018. That's one element. Looking at it by division, every division and every organization is looking at how to optimize cost, how to generate savings, how to bring efficiencies. It's the case in LED, it's the case also in Prof, but people in Lamps and also in Home are doing that.
We do that while at the same time making sure we still invest, because we have a lot of growth opportunities, and we need to invest for those growth, both in terms of innovation, but also in terms of marketing, in terms of sales. We do that in Home. We do that also in Professional, and to some extent, also in LED. You'll continue to see the benefits, and they generally flow across most of the business group, even though it's not even, as you mentioned. More to come here and many actions that we've been taking also in the first quarter, and that we'll continue to take in Q2 and later.
Thank you. I've got a follow-up just specifically on Home. I appreciate the Home margin is very seasonal, obviously lower in Q1. It sounds like there was a very big currency impact in Q1 as well. Is the Q1 performance consistent with your 5%-8% target for the year?
Let me answer in the following way, Martin. We still believe that we are going to be in the 5%-8% range at the end of the year, despite that negative performance in Q1. That is one part or one answer to the question. The other one is that the performance in Q1 was a bit lower than what we expected. And we have mentioned a significant currency impact that is impacting the bottom line at this point in time. For a business which is generating EUR 115 million on a given quarter, we should expect in the longer run or in the midterm run, the business to generate better than what we have done in Q1.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Marc Hesselink from ING. Please go ahead, Marc. Your line is now open.
Yes, thank you. The guidance to get to 2.2%-5% organic growth for the growth divisions. If you had 1% in the first quarter, I understand that the currency impact that comes with it is not impacting this part at all. How do you make that move from that 1% to go into the range of 2%-5%? Is that predominantly in Prof, or maybe on some of the other divisions as well?
Marc, the detracting element I would say in Q1 was more Prof in Europe, as we have mentioned previously. If you move along the year, you will see easier base of comparison across the quarters. The more we go, the easier the base is going to be. Before this earnings call, of course, we have our reforecast for the whole company. When we look at the plans that we have until the end of the year in all divisions, we believe that the guidance that we have given is totally achievable.
Maybe to clarify, so it's more easily comparable base or it's also that you expect to get some extra traction in the market?
It's both. In the markets, we don't know. Let me be clear. When you look at the global world estimates, they have been brought down in terms of growth. We see that in all the regions. We've seen clear headwinds in China starting from the second semester last year. Europe, it has started in Q4, and all that continues in Q1. We think that the level of traction that we have on the end markets today is not fabulous. We'll see if things are changing during the year. We have initiatives
In order to find what we call the new growth platforms. It's in systems, it's in LED trade products, where we have clear actions that we are implementing at this point in time, also in specific activities like horticulture, like solar, like Li-Fi, or 3D printing. We are also lining up different type of actions in order to get on growth. All that I've been mentioning previously is really touching the growth engines. We believe that we have the tools to achieve more growth during the year.
Great. Thanks. Then follow up is actually on the adjusted EBITDA in the other division. Quite a step up in the quarter. Could you explain what it is and what we should expect for the coming quarters?
Yeah, sure, Marc. Let me take that one. Yeah, Q1 was EUR -27. We're usually around EUR -25. Of course, every quarter can be a little bit different. You can have a few one-off elements, I don't think you should read any structural evolution or structural increase of the cost there. As you probably know, in that BGO there, we have a mix of corporate costs, but also central R&D and innovation. As we have mentioned, we are continuing to invest also in those growth platforms. That is also reflected here. Looking ahead, you should not expect that the number in BGO there is going to increase.
Okay. The EUR 25 is a good run rate?
Yeah, on average. Every quarter can be a little bit different, yeah, ballpark, this is the right order of magnitude.
Okay, thank you.
Thank you. Our next question comes from the line of Leo Carrington from Credit Suisse. Please go ahead. Your line is now open.
Thank you. Thanks for my question. In the lamps division, the decline, perhaps headcount was lower than I expected and lower versus your full-year guidance. What do you attribute this to?
Well, we are declining less than the market decline. That's a fact, and we continue to gain market share. Now, you would maybe remember that in 2018, that business only declined by 11% in Q3 on the basis of the halogen ban. We are going to face a very strong compare in Q3, and we believe that this is when the 17%-18% decline that you see now will probably get closer to what we have given in terms of guidance.
Okay, thank you. In terms of the margin, were there any mix effects that you would point to that contributed to the margins? As usual, a footprint effect helping maintain margins where they are?
Leo, you're talking about lamps?
About lamps specifically, yes.
Yeah. Quarter after quarter, you can have some mix elements because depending on the activities that we sell more or less within lamps, we can have some shifts. Nothing major. It's still an adjusted EBITA margin above 20%, pretty much in line with what has happened in the past quarters. Nothing really specific in Q1.
Okay, thank you. I'll get back in the queue.
Yeah, thank you.
Thank you. Our next question comes from the line Wim Gille from ABN AMRO Bank N.V. Please go ahead. Your line is now open.
Yes, good morning, Wim Gille. If we look at the past couple of quarters, we basically see that the cost savings that you are reporting are materially above the restructuring charges that you are facing. How should we look at that? Is that you become more efficient, or should we be seeing that kind of the current cost savings are also kind of the effects of previous restructuring charges, i.e., that with a decline in restructuring charges in your P&L, that we should also see the cost savings coming down gradually over time? That was my question. Thanks.
Yeah. Wim, first, the restructuring charge that we take in our books every quarter, as you say, is disconnected in terms of timing from when the savings are coming. Number 2, it's not just related to the cost below the gross margin. Part of that restructuring charge is also for the restructuring that we do on our manufacturing footprint, which is above the gross margin. It's hard to really connect the two. Now, when we reduce cost, I'm talking here about non-manufacturing cost below the gross margin, part of it can be people-related because we are becoming more productive, more efficient, or because we let people go in one region and hire in lower cost region. In that case, there is a restructuring attached to it.
Also a number of the actions that we are taking to reduce costs are not necessarily leading or requiring restructuring. It can be, for example, reducing the real estate footprint and therefore the amount of lease that we pay. You cannot really track from the restructuring charge that we take what is the savings that we generate. Yes, a lot of the savings are actually non-restructuring related and are about just being able to spend less money, and it can touch many type of cost lines.
Would you say that you have enough of this kind of low-hanging fruit left for you to continue the, let's say, transit cost reductions for the coming, let's say, two years?
Well, I'm not sure I would call them low-hanging, because at some point after several years, I'm not sure exactly where they hang. What is for sure is that when you look at the cost structure of the company and where we are right now, which is 31%, or on a full year basis, around 30%, we're still above the benchmark, and we're still above where we believe we should be as a company. It's related to the amount of cost that we have. It's also related to the amount of revenue that we generate. We have indicated that our goal is to bring that further down. We believe there are further opportunities. We've put in place many actions, programs in order to tackle that and bring more productivity, more efficiency, take out costs.
We've done that in 2018, and we continue to do that in 2019. Again, difficult to qualify how easy it is to do, but that's what we have to, and what the whole company is also focused on.
Thank you.
Thank you. Our next question comes from the line of Alok Katre from Societe Generale. Please go ahead. Your line is now open.
Hi. Thanks for taking my questions. First one is just on Professional. Flagged strong growth in the U.S., which is kind of positive commentary after some time. We're just wondering why is that still not reflecting in the margins and profits at Professional, in a way. Is it just the cost structure in the U.S. which is still challenged, or is it the product specs and the mix in the U.S. which is not sort of as favorable, or just simply a case of the volume leverage in Europe more than outweighing what you get in the U.S.? That is what I was trying to understand in the context of how important Professional is in a way to get to the targets. That was my main question, and then I'll do the follow-up.
Alok, on Prof overall and in terms of profitability, yes, the improvement trend that we have seen on the top line has translated into an improvement on the profit side in the U.S. We totally see that. Overall for the business group, because of the lower performance in Europe, which is a higher profitability region for us, the overall mix was negative, and we could not benefit fully from the improvement that we saw coming from the U.S. That's part of the reason. Also remember that in the margin evolution year-over-year of Prof of 10 basis point improvement, there is a negative FX effect that is also quite substantial. That also contributes to the fact that the margin didn't really improve as much as it should have given everything that we are doing. It did improve in the U.S.
Sure. If Europe's still challenged, just wondering in a way how the mix needs to evolve in a way to get to those targets. Europe's probably still a tough market environment, right?
Europe is still a tough market environment. Once again, I said that in Prof, the compares are high in Q1 and Q3. They're a bit more favorable in Q2 and Q4. Once again, I would come back to the answer I've given previously. We have plans in trade, in systems, horticulture, solar, to find new growth opportunities in all territories. That's also the case in Europe. It's true that in Europe, we are also, since our strong leadership position in that geography, we have also to see how the economies evolve.
Okay. Fair enough. The follow-up that I had was a bit on the non-manufacturing costs. Clearly, thanks for the explanations on the H&A side of things. I was trying to sort of look at the R&D spending as well, the adjusted R&D, that's come down quite a bit, quite substantially over the last several quarters now. I was just trying to reconcile that with the new growth avenues you've talked about, which then would suggest you need a bit more of investments. What's the confidence you can extend to us that the investment in the future pipeline is not being, let's say, deferred, even if temporarily? The R&D costs going down is a bit surprising in a way, not as percentage of sales, but in absolute EUR numbers as well.
Yes. Question understood, Alok. This is part of something that we had described in the past. We had a very strong plan in order to improve the efficiency of our R&D, in order that for a given amount spent, we would be delivering more. This is something that has taken place in the past 3 years, and we still have today very concrete plans in order to push that further. Which basically helps us to continue to be extremely innovative, which helps us to continue to deliver ideas and patents, which also helps us to bring to the market very innovative offers and also new offers and adapt existing offers while spending less. This is a totally conscious move that we are doing. It's not hampering our innovation capability at all. We are capable to do today the same, if not in some cases more with less.
Okay. There's no formal target, correct, for R&D by sales?
Don't remember having heard that.
We haven't given any specific guidance on that. You've seen it declining over the past years, but we have not so far given a target on this.
Okay. Thank you.
Thank you. Our next question comes from the line of Alexander Virgo from Bank of America Merrill Lynch. Please go ahead. Your line is open.
Thanks very much. Morning, Eric. Morning, Stéphane. Just a quick clarification on what's actually driving the growth in the U.S. Forgive me if I missed that earlier on, but a couple of your peers, I think, have talked about the U.S. being weaker and projects being deferred. Obviously, it's been a fairly mixed environment for the last 12 to 18 months. I wondered if you could just elaborate a little bit more on what you're seeing in the various components of your U.S. business and why that gives you the confidence as you look forward over the next nine months, I suppose. Thank you.
Yes, Alexander, good morning. We're seeing the same thing. We're seeing the early signs of a cooling of the construction market, which has been quite dynamic in the past quarters. We're extracting today also a lot of growth in the U.S. on the distribution and stock and flow parts of the business, which was not an area where we were strong previously. We have built up the adequate offers and connected to the right customers in the right fashion in order to get a fairly good level of traction on that side. On the product side of the business, and big product, it's true that it's quieter than it used to be, but we extract also our growth from the other parts of the business.
Thank you very much.
Thank you. We are now approaching the end of our call, we will take our last question from the line of Joseph Zhou from Redburn. Please go ahead. Your line is open.
Yes, thank you for taking my follow-up question. Just on Professional, you talked about U.S. margin being better led by growth. What about the other regions, Europe and the rest of the world? How have the margin progression been year-on-year?
Joseph, the margin progression has been satisfactory in all the regions. We were specifically mentioning U.S. or Americas. When we grow, as we said previously, our P&L is very leveraged. Immediately when we grow, it brings positive impact on the bottom line, that is what we have experienced in Q1 again. The other regions are doing fine. We know also how to maintain margin when the volume are lower than expected. We have done that over the past year, we still can do that now.
Okay. Thank you.
Thank you very much. I would now like to return the conference back to our speakers.
Thank you, operator. 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 don't hesitate to contact the IR team. We're 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, and you may now disconnect your lines.