Earnings Call: Q3 2018

Oct 26, 2018

Ladies and gentlemen, welcome to the SignifAI Earnings Call Q3 2018. For the 1st part of this call, all participants will be in a listen only mode. And afterwards, there will be a question and answer session. So that each participant has the opportunity to ask a question. Thank you, and good morning, everyone, and welcome to the SignifAI earnings call for the third quarter results 2018. With me are Eric Rondelat, CEO of SignifAI and Stefan Hojo, CFO. In the moment, Eric will take you through the 3rd quarter business and operational performance. Stefan will then tell you more about the financial performance in the third quarter, and Eric will end today's presentation with our financial outlook and conclusion. After that, we will be happy to answer your questions. A press release to relate to slide deck was published at 7 am Cet this morning. Both documents are now available for download from our Investor Relations website. A full transcript of the conference call will be made available as soon as possible on our Investor Relations Web side. With that, I will now hand over to Eric. Thank you, Robin. Good morning, everyone, and thank you for joining us today. I propose that we go immediately to Slide 4 with the main elements of our performance in the third quarter. Comparable sales declined by 3.2% due to a high base of comparison in the third quarter of 2017. And more challenging market dynamics in several geographies. As you see, we continue to make good progress in reducing our cost base Excluding the impact of currency movements, our adjusted indirect costs decreased by EUR 58,000,000 or EUR 206 50 basis points as a percentage of our sales. As a result, all business groups, except home, were able to improve their margin in the quarter. Overall, our margin, therefore, improved by 150 basis points to 12% despite a negative currency effect of 60 basis points. And we're also pleased with our free cash flow of 1,000,000, which is significantly higher than the minus 1,000,000 reported last year. Despite the following facts, we had a 1,000,000 higher restructuring payments this quarter, At the same time, the cash flow in Q3 2017 included EUR 21,000,000 of real estate proceeds. The improvement in free cash flow was mainly driven by a reduction in working cap, sustainability, is core to everything we do and we are therefore pleased with our recent achievements and recognition we've received on this front. We have achieved carbon neutrality for our business in the United States and Canada. We have been an industry leader in the DoGen Sustainability Index for the 2nd year in a row. And Sustainalytics moved us up to the industry leader position in a group of 43 electrical equipment companies. Let's now move to Slide 5, where you can see a snapshot of the financial performance by business group. A solid comparable sales growth performance in lamps and LED electronics was offset by a high base of comparison, most notably in professional home and LED lamps and more challenging market dynamics. In the last column, you can see that Lance, LED And Professional significantly improved their margins despite currency headwinds. Let me now provide you with a bit more details for each of our 4 business groups, and let's start on Slide 6 with Lamb's. Our comparable sales declined by 11%, which is better than the previous quarters, driven by high sales ahead of the halogen bulb ban in Europe that came into effect on the 1st September, a solid performance in consumer lands such as CFLI and HID outdoor and certain specialty lighting categories such as digital protection. We estimate that the conventional lands market continued to decline faster than our lands business in the third quarter, and we have continued to gain market share. Lam's delivered a very strong margin at 24.6%. This is that 500 basis points higher than last year, and it is driven by the exceptionally strong CSG performance and lower indirect cost. Let's now move to LED on Slide 7. Comparable sales declined by 1.9%. The comparable sales trend in LV Electronics continued to improve while the CSG of AD lamps reflects a high relatively high base of comparison and a soft level of activity with retailers in Europe and also in the U. S. Also, LED Land faced an ongoing shift to private label most notably in North America and a more challenging environment in China. All in all, the adjusted EBITA margin improved by 100 and basis points to 12% as a result of continued improvement in procurement savings and lower indirect cost. Which was partly offset by price erosion, which we also see slowing down. On the next slide, slide 8 You can see some of the business highlights of this quarter's LED. Let me zoom in on the launch of our Intrack Ready Master ConnectLEDitude. So its networking technology enables wireless integration with a variety of control devices such as sensors and switches, through dimming, occupancy sensing and daylight harvesting. These tubes deliver 50% more energy saving. Thanks to the Master Connect technology. This offer works seamlessly with interact pro, our intuitive dashboard and app, which brings additional benefit to our customers through connected lighting. In the third quarter, we also launched an innovative controller for outdoor luminaires, So this controller that you see on the slide adds connectivity and sensing to outdoor luminess and allows customers to remotely install a very accurate on and off switching and dimming scheme that can then be easily controlled with the use of a smartphone. The settings can be saved in a profile that can then be applied to all the nearby luminaires to quickly and easily create a virtual group with the exact same behavior. Let's now move on to Professional on Slide 9. Comparable sales grew by 0.4% on the back of a high base of comparison in the third quarter of 2017. Seth performance also reflected a lower level of market activity, most notably in Europe and China and a slowdown in medium to large sized projects in the U. S. Adjusted EBITA margin continued to improve with an increase of 130 basis points to 11.7%. Mainly driven by lower indirect costs. There are a couple of business highlights that we would like to bring to your attention on the next slide, Slide 10. For example, this quarter, we launched Interactive Spitality, which enables hotel guest personalize lighting, control the temperature and make room service request at the touch of a button. The smart system also let's hotel staff know if a room is occupied and help them to respond quicker to guest requests providing useful information to improve the guest experience, optimize operations, and save energy. The first commercial implementation of the smart system takes place at the Swiss Hotel, in Stanford, in Singapore, which has more than 12 hundred rooms. Another highlight this quarter is that Navigant ranked us as the world leader in smart street lighting. Navigating the estimates the global market for smart street lighting to be worth 837 $1,000,000 in 2018. They expect that annual smart street lighting revenue will grow to nearly $8,300,000,000 globally by 2027. Presenting CAGR of almost 30%. Let's now turn to Slide 11 at home. So Home reported a decline in comparable sales of 1.4%. This was mainly due to a high base of comparison as retail partners in the U. S. Started to build up inventories in the third quarter of last year. We have been able to bring the home business back were more normalized performance, which resulted in a sequential improvement of the sales level and the comparable sales growth. We improved the profitability of home versus the preceding two quarters, driven by a substantial increase in the gross margin bring it back to a more normalized level and by adapting the cost base. We do see that the competitive landscape for the smart home is intensifying with more offerings for the overall smart home category. Being brought to market, which is attracting more players who are going after a share of wallet. Given the breadth and depth of our product offering, our high clock speed of innovation and the recent success of the launches like the View Outdoor, we remain very confident on the growth and margin potential of our connected lighting offering for the home. Also for home, we would like to share a couple of business highlights that you will see on Slide 12. One that I would like to call out is that we have launched a new Phillips few products for the bathroom the living room and the garden during EFA 2018, which is the world's leading trade show for electronics and home appliances. For example, we introduced, Phillips hue play, which is a compact highly versatile bar that you can position in a variety of ways to create a truly immersive lighting experience. It provides an indirect light effect and can sit horizontally or particularly next to your TV or be mounted behind as a backlight. Furthermore, we have introduced a new Luminess for Dining such as the Phillips hue white and color ambiance, ANSYS and flourish. Our Phillips U Outdoor light strips are the latest addition to the newly launched Phillips U Outdoor Ranch. This is what I wanted to cover regarding the business and operational performance. I will now head over to Stephan who will tell us more about the financial performance for the third quarter of 2018. Good morning, everyone. So let's turn to Slide 14 where you can see the adjusted EBITDA bridge. As you can see here, the adjusted gross margin as a percentage of sales decreased by 90 basis points in the third quarter of 2018, and that was mainly due to a negative currency effect of 50 basis points and also a high comparison based versus the third quarter of 2017. The impact of price on the gross margin was lower in the 3rd quarter than in the 2nd quarter and also the 1st quarter. And it continues to be largely offset by the savings that we get on the cost of goods sold. And also the positive impact of these savings is increasing as you can see here in the 3rd quarter compared to Q1 and Q2. Overall, the Forex has negatively impacted the adjusted EBIT margin by 60 basis points again. And that's due to adverse swings in currencies like Indonesia and in peso and also the rupee in India. Finally, as you can see, we have continued to reduce our cost base in the third quarter with cost savings amounting to 1,000,000, excluding the ForEx impact. Let's turn now to Page 15 and take a closer look at the evolution of our adjusted gross margin. As indicated, the gross margin decreased by 90 basis points and was 39.1% in the third quarter. And that was mainly due to Forex effect and also a high comparison base, as you can see in the graph. Last year, we reached almost a whole time high at 40%. In Q1 and Q2, which you can see on the bottom of the graph, The change compared to last year was mostly due to lower sales which, as Eric mentioned, we have returned to a more normalized level in Q3, hence, the much smaller gap compared to last year beyond Forex effect. On the next page, on the cost savings, you can see the quarterly evolution of our indirect cost savings since last year. As you know, we've mentioned several times the multi year transformation program that we are executing in order simplify our organization and reduce our costs, also to improve the customer service and quality, to be more efficient, to capture the benefits of our scale and also to save costs so that we can continue to invest in growth. In the third quarter, all these initiatives resulted in a EUR 58,000,000 of currency comparable indirect cost savings. And that represents 11% reduction year on year. And you can see here that the amount of quarterly savings continues to improve sequentially Year to date, we have lowered our indirect cost base by EUR 209,000,000 compared to 2017. If you take out the ForEx effect, it's a reduction of EUR 142,000,000. We've continued to implement those initiatives in the 3rd quarter through also further delayering and headcount reductions. And we have actions in place to continue streamline our processes, consolidated our footprint, reduce our real estate cost reduce also our indirect material spend and simplify also the portfolio, which will continue to bring us savings moving forward. Let's now turn to the working capital, on Page 17. If you compare to the same period of last year, the working cap has actually decreased substantially by EUR 220,000,000 and amounted at the end of September at EUR 659,000,000, which is 10.1% of sales. So is a 240 basis point reduction. This improvement was driven by a substantial reduction in accounts receivable by EUR 188,000,000 and also a reduction in our inventories by EUR 140 1,000,000 compared to the end of September 2017. As a percentage of sales, you can see on the right that inventory is reduced by 100 basis points and reached 15.2% at the end of the third quarter. You remember, we it was very important for us to really better manage our inventories throughout the year. This is what we have done at the end of Q2 and again, at the end of Q3, and you will see that it explains the last part of the free cash flow improvement this year compared to year. Let's now take a closer look at our net debt position. On the next page, slide 18, our net debt has increased by EUR 49,000,000 compared to the end of June. And that is mainly due to the repurchase program that we have executed since the end of July. We have bought 4,200,000 shares in the open market for an overall amount of 9 1,000,000 in the quarter. If you look at the free cash flow on the left part, next to the profit that we have generated, We had the positive impact of working capital, which I mentioned earlier. And you can also see a few other items that impacted our cash and therefore, our debt position CapEx was EUR 18,000,000 in the quarter. And the net change in provision was EUR 57,000,000. This quarter, we made a contribution of EUR 30 dollars or EUR 26,000,000 to our pension fund in the U. S. In order to reduce the liabilities and also to lower future interest expenses. This contribution was a little bit lower than what we originally anticipated. We thought we would make $50,000,000 like last year, but we reduced it as we saw the better than anticipated equity returns within the U. S. Pension funds. Next to that, we paid million for tax and interest. All in all, this increased our net debt position to 1,000,000 at the end of the 3rd quarter. On the back of a strong free cash flow of 1,000,000 during the quarter, which is substantially higher than the minus 1,000,000 free cash flow recorded in Q3 2017. Year to date, our free cash flow is EUR 57,000,000 higher than last year, Despite the fact that last year, our free cash flow included a significant amount of real estate proceeds And also this year, we had a significant higher amount of restructuring payment compared to last year, year to date. Let me now hand back to Eric for the final partial presentation. Thank you, Stephan. Let's move to the last slide of the presentation, slide 20. To discuss the outlook. So as market conditions have become more challenging in several geographies, we expect our comparable sales growth in the second half to be as similar to the first half. However, taking into account the solid progress in cost savings, we remain confident that we'll be able to improve the adjusted EBITA margin from 9.6% in 2017. To the lower end of the 10 to 10.5 percent range in 2018. Based on the prevailing spot rates at the end of September 2018, the currency impact on the adjusted EBITDA margin is a is expected to be around 50 basis points for Q4 as well as for full year 2018. On the cash side, We continue to expect to generate solid free cash flow into 2018, which is expected to be somewhat lower than the level in 2017 due to higher restructuring payments as indicated at the start of the year. P and L restructuring costs for the year, I expect it to be around EUR 155,000,000 when also taking into account the cost related confident about our longer term strategy. We continue to invest in growth in innovative offers despite a more challenging macro economic environments and to capture the strategic opportunity of smart and connected lighting. With that, I would like to open the call for questions with Stefan, and I are going to be very happy to answer. We kindly ask you to limit And we have a question from Dennis Stincomayo from Goldman Sachs. Please go ahead. Your line is open. Yes. Good morning, Eric. And Robin, Stefan. And my question first on your comments regarding the softer microeconomic environment. You've mentioned softness in LED, you've also talked about the softness in the U. S. And in Europe. What in your view, what's driving this and what's your outlook for this in 2019? Yes, thank you, Denis. Just so let me try to recap the way we have experienced the Q3 situation from macroeconomic standpoint. The new elements in Q3 are Europe that was much softer than in the previous quarters. By the way, when you listen to what's being said by other companies, I feel that they see the same the same trend. Nevertheless, when we compare ourselves, to others in Europe, we believe that we do substantially better. Now we always have to understand that when you look at our numbers, in terms of comparable sales growth, they always include one part, which is about one third of what we do, which is declining. When you look piece by piece and you compare what is comparable towards others, even if we see a market in Europe, which has less that used to be, we believe that we do substantially better. What we have experienced also in Q3 is a softer market in China. The way we do business in China is multi fold, but we have a big part of the business, which is going through distribution, which is going very granular in all the different provinces of the country. We have found that for these customers that have different sizes, but many of them are small companies. Their access to cash was more difficult than previously. And that's the trend that you start to see in China at a broader scale. It reminds me also what happened at the time in 2014 when that market contracted also and we felt the same type of impact. Now we reacted extremely well, I believe, on that market. By making sure that we were strengthening. We're very stable in our commercial policy, not giving extra payment terms and making sure that the inventories of our channel were well positioned which we didn't do that well back then into a 14. So I think we've learned a lot and we're managing the situation, I believe, fairly well. But we see that market also contracting. In the U. S, less of a new factor, but what we have experienced in that small to midsize projects are softer in general and the link to another phenomenon is that in some cases, the scarcity of truck drivers there's a scarcity of people who can manage projects, even the situation of the employment in the U. S. So it's a kind of a different situation. What we also see in the U. S, is the market for stock and flow, you know, basic products. That market is still fairly dynamic, but this is not where we are the most involved. We are more involved in projects done in stock and flow for products. So we have felt also that impact. Now it's very complicated for me to tell you where this is coming from. What you can see as well as I see it myself is an overall intention in the commercial exchanges between the continents in the past quarters. The tariffs probably are not helping neither and we see, yeah, contractions in market that we that we had not seen previously. Thanks very much, Eric. And then a follow-up question on the home division specifically. It's now been three quarters of negative growth, negative adjusted EBITDA. When do you expect this to come back? What are the level of inventories you've previously mentioned you'd had a lot more granular day terms of inventories at your U. S. Retailers. I wondered if you could comment this. And more specifically, you have also mentioned intensifying competition. Now the Philips 2 product offerings, a price that at much higher price points than a lot of your than a lot of your products in the other division. Now we'd introduce competition. Is there risk that might have to cut pricing and this will ultimately also dilute and comparable sales growth in 2019 and you'll not be able to reach level if previously reached? Okay, a lot of questions. Let me try to take them by one after the other one. So first of all, the performance of home in Q3 is radically different than the performance of home in Q1 and Q2. It's pretty much in line with what we expected in terms of having that business to return to more normalized levels. In Q1 and Q2, even if we don't disclose specifically the numbers, but the gross margin was extremely heavily impacted. For many different reasons that we've mentioned previously. In Q3, and the margin has come back to normalized levels. And that's a very, very good news. The second point is that the costs for that business that we're following basically the investment that we had done last year were very high at the beginning of this year. We've been able also to somehow, especially at the end of the quarter, to have costs that are now also coming back to normalized levels. So when you look at the P and L, of home in Q3, it is showing a clear improvement versus Q1 and Q2. From a growth perspective, we are comparing ourselves to the high base. The story of home is that The 1st semester, the comparable sales growth is impacted because there is inventory at our retailers and you need to have that inventory to go down before you can resume sales. I think that was done or mostly done at the end of H1. Now going to H2, your sales pick up again, but then you are comparing yourself in terms of comparable sales growth to a high base. Which is explaining also the negative growth. Now you've picked up something important that we're also mentioning We have in Q3 bought some studies on the smart home market, not only smart lighting, smart home market, And we've learnt a few things. And we've confirmed it also concerns some things that, that we thought. So let me try to give you a bit of a recap there. So first of all, you have 3 very important angles. And the first one is, yes, it's an attractive market and you get more offers coming for smart lighting. Now when we look at what we offer, with Phillips you at this point in time, we are still unequaled. Now let me tell you, we are not complacent at all, but when we look at what we have on the table and all the innovation that we bring again in Q3, We're still ahead of the pack, but there are a lot of new offers coming on the market. That's number one. How do we fight against that? Differentiation, use cases, you know, bring to the consumers and understanding of what can be done with the platform that we are selling to them. The second point is our retailers. And what we see also is the willingness of retailers to have a more spread turnover for the smart lighting against many different competitors. We see also that happening. So how do you mitigate these factors? Well, it's also by increasing your number of channels and getting different reaches to the market, which we are putting in place. 3rd, what we also see is that the smart home, more general, beyond smart lighting, is moving in very different directions. And you had in the past quarters, a lot of new offers brought to the market with a lot of advertising, specifically on security. So if you are a consumer today and you dedicate 100 to your smart home, before you had probably less choice and maybe at the share of wallet of smart lighting was a bit bigger than what it is today, given the fact that many more offers are coming on the market coming from very, very different type of industries. Once again, This is a temporary situation where the market needs to stabilize. We need to see what are the offers that are there. And we are intensifying in Q4 our advertising and promotion. So on your point, will that mean that we're going to see a direct impact of that on our margins? We don't believe so. We're continuing to invest in innovation. We continue also to bring costs down to that business. And we will adapt our commercial policy, if need be, but not at the detriment of margins. Sorry, I was a bit long, but I think on home, it may be probably an extensive explanation given the fact that you asked one overall question, but there were a few questions within your question. Thanks, Eric. Yeah, no worries. Thank you. Our next question comes from the line of Peter Olofsen from Kepler. Please go ahead, Peter. Your line is open. Yes, sir. Good morning, gentlemen. I wanted to ask you about the LED segment. Could you maybe shed some more light on the comparable sales growth? That you're seeing for the LED bulbs on the one hand and LED electronics on the other hand? And is there a meaningful difference in margins between the two segments And then I have a follow-up, please. No meaningful difference in margin. As we've always said, I think this is still valid. We see a sequential improvement of the convertible sales growth of LED electronics. And we see a more challenged comparable sales growth on the LED bulb side coming from let me try to be simplistic coming from two areas: Northern America private label, So we've been losing market share on the consumer LED lamps business to private label. And also, I've talked about Chinese market previously. That's a very important market for us. And we've seen also challenging market conditions for adding lamps in China. So if I look at the overall comparable sales decline, that it's then LAD builds declining and electronics growing. And but could you maybe quantify that? What kind of decline and growth should we think of? Look, I think if you take into account what you've just said, that teleelectronics is growing and that it is likely declining, you're right. We don't want to give you specific numbers for obvious reasons there. Okay. And then I have a follow-up on tariffs imposed by the U. S. Could you maybe quantify the headwind that you foresee going into 2019? And could you also talk about your plans to mitigate some of these impacts? Is it mainly increasing prices? Or other other measures that you can take, like adjustments to your supply chain? Yes, very important question. So last time when we talked, I did speak about 19,000,000 a full year impact. As you know, there was list 1, list 2 and list 3, which is now confirmed. But at that time, least 3 was a 10%. It moved to 25%. So that brings our full year impact to $39,000,000. And of course, List 3 will start as of the first of January 2019. So $39,000,000 will be the full year impact for us. If you look at the impact ongoing in 2018, we estimated that it's going to be around $7,000,000. Now we don't see that really as headwind, we're compensating for it. And we do it in 2 different directions. So the first one, increasing price where need be, but also trying to find the right adapted offers, rework on supply chain and purchasing in order to try to accommodate cost to that new reality as much as we can. So it's really a global effort, not only increasing prices, but making sure that that impact will be a neutral for us. Okay. That's helpful. Thank you. Thank you. Thank you. Our next question comes from the line of SvenBio from UBS. Please go ahead, Sven. Your line is open. Yes, thank you for taking my questions. First one would also be a follow-up question on the dynamics on the LED bulk business. I think my previous understanding was that the LED valve business was also a bit weaker in Europe. And if that was the case, curtail has been a kind of a temporary negative effect from the halogen ban because everybody kind of stocked the halogen bulbs before they are forbidden and that has maybe temporarily had a negative effect on the LED parts. That would be the first. We had exactly the same reasoning as yours. And then we went and investigated if that had had a real impact and a big impact. And I have to tell you that we don't have a disappointing time documented proof that the fact that many of our customers had to buy more hallo gen bulb had a real impact on the LED boat sales. So that's why we're not mentioning it because we don't have documented proof that it was so. From the first analysis that were made by our teams. It may have had an impact, but it's a limited one. The LED parts sales were indeed also a bit weaker in Europe in Q3. What we've seen in Europe, as I've said previously, we've seen that the European markets in general have had much less traction in Q3 than in the previous quarters. So that also concerns the EBITDA Okay, good. Thank you. And second question, just on Professional, you also mentioned that obviously tough comps had a negative impact the growth rate, but now in Q4, it's getting even tougher. So should we be expecting a negative growth rate then for Q4? Well, in Q3, it's a growth in for professional 0.4% on the basis of a strong compare. Yeah, we've grown above 11% if I remember well in Q4 last year. So of course, we have a very strong compare in Q4. We'll see, we're not specifically guiding on a quarterly basis per business on the growth. But we're confident on the way the P and L is managed on professional in order to continue the improvement that you have seen so far. Okay. Thank you, Eric. Thank you. Our next question comes from the line of Mark Hessling from ING Please go ahead, Mark. Your line is open. Yes. Thank you. Firstly, on the Halloween ban and the impact, so clearly had a positive impact, but Could you give a bit more detail on how much of impact that was? And also how that will go into the next quarters? Will that be then that you have some extra decline in the organic growth because of, because of that front loading? And then also maybe on the margin side on on that impact. So when you look at the improvement that we've experienced in CSG comparable sales growth in lamps, it doesn't all come from Allogene. And let me put it this way. There is an impact, which is directly linked with Allogene, but not only, we've also mentioned that we have seen great performance, in consumer lamps, and namely in CFLI, in some parts of the world. And that has sequentially improved the CSG. Now we all saw, we're comparing ourselves with the Q3 last year in Lambs that were probably the highest decline for the year, above 20%. So you have a different a lot of different elements that you need to take into account when you look at the performance from a growth perspective when it comes to land. In the next quarters, of course, we're going to get less halogen sales that we used to have. So that part of the business will have a negative impact on our growth profile, but we also need to take into account that Allogene was not a mainstream technology for us. We were selling reasonable volume, but that's not for us, the biggest technology. So it will have an impact in the coming quarters on the growth, but we believe It is manageable. Once again, we don't look specifically at what happens during the quarter. We look that on a longer perspective. That's the way we manage we manage that business. The good thing as we always do when the business goes, And we're only talking about halogen in Europe, meaning that we still sell halogen in the other parts of the world. But when the business comes down, which is the which is going to be the case in the in the following quarters, the costs have gone because we have already adapted our industrial base. From a margin perspective, so what is important to understand and let's me first Zoom at the company level and then go to lamps. What makes the performance in the company in Q3 in terms of operating margin. It's the performance on costs. And that performance on cost on indirect cost is also having a positive reflection in all the different businesses. And that's also the case, in lands, which is amplified by the fact that the comparable sales growth is much better than the previous quarters. And I have to also be better than what we originally expected. So from a margin perspective, we keep the guidance that we had given on land, even if Some of you may feel it's a bit conservative. We said above 16. But look at what we've done in the past, I think we're capable to do the same after the halogen band. So this is the way we manage that business and we are and we are we're fairly comfortable. So to cut the long story short, in the next quarters, yes, there's going to be an impact on, of the hydrogen ban on the top line. But we believe that on the margin, we have been able to compensate by reducing the cost already. Okay, thanks. That's clear. And then the other question is on your guidance of free cash flow somewhat from what lower. And last year's around to EUR 400,000,000, consensus for this year at the EUR 300,000,000. Hopefully, that's still the real estate in last year. Can you give a bit more color on what you mean with somewhat lower? Is that the 300,000,000 consensus? Is that something that you see as in that range? Hey, Mark, this is Stefan. Yes, so let me elaborate a little bit on that. The reason why we give the guidance that won't cash flow as as you highlighted is the fact that last year in 2017, we had in particular a few things that we don't expect to happen again this year. You've mentioned real estate, which last year was around 1,000,000 positive impact. And we knew that in 2018, we wouldn't have that much sales proceeds a much lower amount. So that's the main reason why we knew it would be difficult to deliver the same amount of free cash flow, which was north of EUR 400,000,000. The second reason is that we have a substantial amount of restructuring this year in terms of cash out and more than last year and mentioned that year to date and with the case for the full year. And therefore, for those reasons, it was challenging for us to deliver that same amount of free cash flow. Now we've indicated somewhat lower to show that it's not going to be material and drastic reduction. And we're still looking for a substantial free cash flow, but not at the same level. Of course, I cannot give you anything more specific at this stage. What's very important for us on top of the value of the free cash flow that we generate is also to avoid what has happened in 2017, where essentially all the free cash flow were generated in Q4 for the reasons we discussed a few quarters ago. And from that standpoint, where we are today at the end of September is a much better situation. We are already free cash flow positive. And then we still expect a very strong 4th quarter, not as high as last year. Of course, we also have entering into a quarter, a lower level of working cap, But Q4 is also very important like every year in order for us to deliver that guidance. Okay. If I understand correctly, if I just take like the number of last year, I take out the real estate and I take out stretching and then I add something because you're underlying business improving. That's the good way of thinking about it? Yes. Yes, to some extent, but again, our goal, as you know, free cash flow for us is very important. So what happens, whether we have real estate sales, whether we make a contribution to the U. S. Pension, which we did last year and which we are doing again year, whether we spend more restructuring. For us, this is not an excuse to deliver a weak free cash flow. Now are the numbers always the same every year? No, obviously. But for us, delivering a strong and solid free cash flow in 2018 is very important. We are in a good position at the end of September and Q4 is important and we are working to make sure we deliver that free cash flow for the year 2018. Okay. Thank you. Thank you. Our next question comes from the line of Leo Carrington from Credit Suisse. Please go ahead. Your line is open for your question. Good morning. Thanks for taking my question. On indirect costs, we've obviously seen very good momentum through this year in terms the absolute savings amounts. Do you think you'll be able to continue this acceleration in savings into Q4? And can you also remind us on how you see the trajectory for 2019 as well? Yes, sure. So on the cost side, yes, we are quite pleased with the effect of all the initiatives that we are taking and the fact that there is an increase sequentially, of course, very good. Now we've never given any indication with that respect. What matters to us looking forward, if you look at Q4, overall costs generally in Q4 are always higher than Q3, because it's a higher quarter also. In terms of activity, but still we expect a substantial reduction of our cost compared to the fourth quarter of last year. Not going to qualify how big it's going to be compared to the trend we've seen so far, but we're still going to continue to do that. As you have noticed, year to date, we have already delivered a reduction without ForEx of 1,000,000 And of course, we expect on a full year basis that the overall amount of reduction is going to be higher than that. So further reduction to come in Q4, Now we're looking at 2019, and looking at what is it that we can do to continue take out cost, but it's not just about reducing the cost, optimizing our footprint, reducing the FPs. It's also about making sure we optimize our cost structure in order to be able to invest and make room for the areas where we want to spend more money, either in terms of technology or in terms of commercial activities and marketing activities. So there is a lot that we are working on right now to make sure we continue the good trend that we've had in 2018 into 2019. There will be, of course, a carryover effect. So a lot of the actions that we have taken in Q1, in Q2, in Q3, and again, in Q4, aren't going to have an impact in Q1, Q2 and Q3 next year, but there is more on which we are working while at the same time making sure we have a home to invest and support the growth opportunity that we see across our businesses. Okay. That's very clear. And as a follow-up, can I ask In Professional, you mentioned the slowing trends in Europe and China, as well as the sort of tricky trends in mid and large sized projects in the U? S, would you say your commentary reflecting the broader market or just your main addressable segment in the market and whether you've actually seen a loss of share in the remaining segments where maybe you're not so strong? Yes. I think the comments that we're making are felt by other companies. I don't think this is something that we only see. I probably would agree with your underlying comment, which is that if we take specifically the U S, on the stock and flow, which is product moving type of business. When I look at our performance compared to others, I think we're losing market share there. But otherwise, when I look at the situation in Europe, which has been mentioning, you know, on professional specifically, when we listen to what others are saying, we're doing substantially better So here, we're not choosing market share on the country. I think that we are, we are improving our position. In China, more complicated situation. This is a Q3 phenomenon. We're studying it more in details We when we talk about market share, the view that we have is 1 quarter before. So for this, I will, I will, I don't have a clear view at this point in time probably would be able to comment better by the end of the year. Our next question comes from the line of Peter Riley from Jefferies. Please go ahead, Peter. Your line is open. Hello, good morning. Can I just take you back please to the outlook for the LED lands business? Understand you don't want to give a number, but you've had, I think, 2 or maybe three quarters now where any of your lamps has been in decline. And we've talked before about whole issue of the business becoming mature and then rolling over. Do you think you've now reached or past the peak of the LED replacement land business and we're now going into the decline phase on a value basis, even if there's some volume growth because of the continuing rising penetration of private label? So I don't think that we have highlighted that any plans have been in decline in the past. Three quarters, but that doesn't really matter. Let me try to go directly to the question. We are approaching the moment when that market will start to decline or regionally when you were looking at what people studying the market had said it would be peaking in 2019 or 2020. It may happen a bit before that. I think that we see though at this point in time, it's not specifically that phenomenon. I think it's more a contraction in some markets. At this point in time, where we see a global microeconomic and a global commercial environment, which is a bit, which is a bit tougher, but we could be in a situation where at the start of that of decline of the market of LED lamps non connected, be anticipated versus the original forecast that were after 2019. Now, Peter, there's another way to look at it. If we put together, LED lamps connected and non connected, the market that looks very differently. It so happens that the way we have organized our business, we have the non connected parts in LED and the connected part in home. Now if we look at the market of LED lamps, more holistically, putting together the non connected and the connected one. It is again, you know, a different view that probably will not show the same type of growth because we see a very positive growth of the market of connected lamps. But your question, I don't think it is happening now, a decline of non connected elite lamps. But it may be happening a bit faster than what the original forecast were. We're looking at it at this point in time. There's a lot of factors to be taken into account. I don't think that we are there yet. Okay. Thank you. And if I can ask a follow-up on the U. S, project business? You've been saying for some time now that the small and medium size has been relatively soft. And I know you're big and outdoor lighting in the States although you don't give us an actual size of the business. Can you talk a bit more about what's happening in the outdoor project business, whether you just think there's some soft periods you're going through or whether maybe a lot of projects have been done now, a lot of street lights have been replaced and maybe the market is not saturated, but maybe the conversion rate is slowing. So maybe you can help us understand the trends there, please. Yes. But I think what you say is true. We are more involved than we are stronger in outdoor than indoor. And that's the case also in the U. S. The projects that we are talking about are effectively mid to, well, small to midsize to big size projects. And we have seen since the beginning of the year, that market was softer in the U. S. For many different reasons, not so much, because that market is saturated, if we do, an analysis of all the streetlight posts that you have on the planet, which is maybe above 300,000,000, we thing that more than 15% of that is LED yet. So that is a big perspective of what could be ladified moving forward. Now I don't have the precise percentage for the U. S, but I would say Okay. Let's extend it because a few projects have taken place. And let's say that 20% of the streetlight poles highly defined in the U. S, that is a huge perspective for future projects. But at this point in time, for many different reasons and the one that we have seen in Q3 will be different than before. It's that sometimes there's a shortage of labor to be able to manage the project. And that part of the market has been slowing down, I would say, regularly across quarters, sometimes for different reasons, but we see the same pattern. That's very helpful. Thank you. Thank you, Peter. Thank you. Our next question comes from the line of Wim Hulu from ABN Please go ahead. Your line is now open for your question. Yes, good morning. My first question would be on on home. Can you run us through what's happening in the channels, what you see in terms of sell out And in association to that, so moving into kind of the holiday selling season, do you think that connected light will also become a major part of the Black Friday selling activity or advertising activity in the U. S. So that will be my first question. And then my second question would be on the ambition that you have set per division in terms of margins do you still feel comfortable with those 2020 ambitions that you have, or would you say that a bit of fine tuning is an order in 1 or 2 of them? So when we talk about home and the channels, so let's go back to the U. S, because this is where your question lies. So we are seeing in Q3 a lower sellout than in the previous quarters. I'm not going to come back to what I've said previously, but I've mentioned 3 different elements that explain that. More offers, retailers wanting to also have more offers. And other type of industries beyond lighting and specifically security, doing a lot of advertising and coming with many offers to the consumer. Now we still believe that this is a dynamic market We are participating to Black Friday. We are moving up on our advertising activities, and we still believe that in Q4, it is going to be a dynamic business. So we are launching new offers as I've said it previously in many domains, more functional type of lights, in bathrooms, in living rooms, extending new outdoor. We've seen a very positive traction on new outdoor. By the way, we are the only company, which is offering that breadth of Wallace and I mean, outdoor, no other company has done it yet. So I think we still very well positioned, but we need also to adapt to a market which is changing and evolving. When it comes to our margin ambitions and then not for 2020, they are for 2019. And at this point in time, when you look at the progression of the company, back in Q2, we confirmed our guidance for the year, for the operating margin for the whole company, you see that now at the end of Q3 and year to date, we are in a position where we are above last year in terms of operating margin at 9.2 percent. And we're confirming that the company is going to achieve the guidance that we gave for the year but being at the low end of the interval that we give, that was between 10 to 10.5. Then that positions us well to be able to do the next transition to the guidance in 2019. And do a calculation that I've done myself. You look at the impact of home, which is not a good performance. For 2018 for all the reasons that we have mentioned previously. So if you look at that business, it's going to have a very negative impact on our all profitability for 2018. Let's imagine We're working hard on that, that we are going to have a good home business in 2019. So we will not have the negative impacts that we had this year. If you do just that and you look at the improvement that should come just from that business, being fully normalized, you will see that that brings us already very close to the mid term guidance that we have given for the company overall in operating margin. So that's just a proxy. To show that what we have given at the time, at the time of the IPO, which seemed very ambitious by many is something which is going to be at reach, especially after the performance in 2018. As a consequence, if we reach the objective for the whole company in 2019, we also believe that we are well positioned to do that for the individual businesses. I think we are already there for labs. We are already there for LED. We have a great progression for professional that need to continue to materialize in Q4 and next year. But if you book the progression of profession in the past 2 years, after the Saudi situation 3 years ago, that was a bit more complicated for us, has been according to expectations. And for home, we said 5% to 8%. At this point, in time, we have no reason not to maintain that because we believe that's what home should be able to deliver. I would say in a inter bracket clean year without what we have experienced in the H1 this year. We are now approaching the end of the call. We will now take our last question from the line of from Societe Generale. Please go ahead. Your line is open. Hello. Your line is open. If it is muted on your side, could you please unmute yourself? Hello. Yeah. Are you able to hear me clearly now? Yes. We do. Yep. Hi, thanks for taking my question. Alok Katre from SocGen. Firstly, in terms of a follow-up, non manufacturing costs, obviously, you've seen some really good reductions in the year to date. Just wondered, if you could just explain how much have you realized in the P and L versus how much have you achieved in terms of the actions I. E, how much is pretty much in the bag but yet to hit the P and L in the coming quarters versus, let's say, your original target of producing non manufacturing costs by about 4 percentage points of sales. So that was a follow-up. And then my main question really is just stepping back and saying clearly, you're struggling with, in terms of growth in its macros, different factors. But if you look at the next couple of years or so, what can you do and what are you sort of planning to do in terms of getting the sales up how confident that you are you that you can do this given the macro situation, that exists? It's clearly, I guess, if the market believe in your longer term EBIT improvements and cash flow, you need to see some sales improvement, if not massive. Thanks. Yes, maybe, look, let me take the first one on NMC in direct cost. So if you look at Q3, with the million that we have delivered, this is 28.7% of sales. And that is a substantial reduction 230 basis point compared to last year as a percentage of sales. So we're really heading now much closer where we should be in terms of the target we give, which is between 25% to 29% of sales. If you look at year to date, the 1st 9 months, we're at 30.9 percent, which is 140 basis point reduction despite the lower sales. And again, as I've mentioned, we expect moving forward in Q4 and later to continue to benefit from the actions that we have engaged and also to benefit from new actions that we are engaging. Now to your question, how much is already in the bag? Compared to what is in the P and L. As I've mentioned, there is a carryover effect that is going to continue to impact us favorably in Q4 and in at least in the 1st part of next year and to a lesser extent later in 2019. But again, we are not stopping and every quarter throughout the organization, we find opportunities. This is really how the overall company is now geared up And therefore, there is more to come. And yes, we are comfortable that we're going to get now into the range that we gave in terms of NMC as a percentage of sales, and we are pretty satisfied with the speed and the progress that we are making on that front. So I'm not gonna be able to give you a very quantified answer on how much in the bill, how much is to come. But yes, for sure, there is more to come. Sure. So you should be pretty much close to the 27 on a full year or let's say at the midpoint, which is 27 on a full year basis in 2019. Is that pretty much based on whatever actions you've taken so far? Or like you said, do you need a bit more new actions in Q4 or Q1 next year to sort of reach there? So, yeah, I guess it's a nice try to make me give another guidance on NMC for 2019. Unfortunately, I'm not going to do that. But what matters to us is really the dynamic and how much we're improving and will further improve in 20 in Q4 for sure. Okay. Right? 2nd question, Alok, on the most strategic viewpoint, after the IPO, we had basically including 2 16 4 years, to continue the turnaround that we had started 3 years before that, which is basically changing 90% of the portfolio of the company and creating 2 new business models. And we had the objective in 2019 to bring the company to a level where we would be double digit profitable. And we would have repositioned our businesses in the right way, meaning smaller but well managed, lab's business, an LED business, that would be double digit profitable. And then the clear 2 new profit pools for us, as we described them at the time of the IPO and even 4, which are home and professional. I think that we've done that turnaround and that's the most important thing for us and we're very, very focused on achieving that guidance that we gave, for 2019. Now are we struggling with growth? What we need to understand is that when you look at the comparable sales growth of SignifAI You need to take into account that only one third now, but much more before of our business is made of a business, which is declining, double digit and a business, which happens to be the most profitable. So having been able to increase our profit despite that was part of the challenge. If you look at the other activities, despite lamps, they are growing. So we creating weapons for the future. And these weapons are what you see today. But also what we are preparing for the future. So you may have heard that talk about multicultural, we talk about solar, we talk also about LIFI. We were the 1st company in the world to fully commercialize and offer LIFI for offices. That offer has been launched at the end of the 1st quarter Worldwide. We start to have projects and pilots all over the world. This is picking up extremely well. So we are also preparing the growth for business, which is declining on our overall portfolio and the other businesses relaying with the growth of the overall growth of the company. That's what we said should happen. Now we will give in the course of 2019 a new guidance for the years to come. And this is where we're probably going to be a bit more precise on all these different dimensions. Thank you very much and I would like to return the conference call to the speakers. 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 Investor Relations. We're happy to answer your question 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