Earnings Call: Q2 2018

Jul 27, 2018

Ladies and gentlemen, welcome to the SignifAI Earnings Call Q2 and HY 2018. For the 1st part of this call, all participants will be in a listen only mode and A session. 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. Good morning, everyone, and welcome to the SignifAI earnings call for the second quarter results 2018. With me are Eric on the CEO, Signifai and Stephane Roger, CFO. In a moment, Eric will take you through the second quarter and first half year business and operational performance. Stefan will then tell you more about the financial performance in the second quarter, and Eric will end today's presentation with the 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 am Cet this morning. Both documents are now available for download from our Investor Relations website. The 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 the call to Eric. Thank you, Robin. Good morning, everyone, and thank you for joining us today. I propose that we go straight to Slide 4 with the main elements of our performance in the second quarter. Our comparable sales declined by 3.4% due to a weak performance in home, challenging market and competitive conditions in some geographies, as well as a global scarcity in certain electronic components. Total LED based sales increased by 4 point 7%, now representing 70% of our sales. We made good progress in reducing our cost base, adjusted currency comparable indirect costs decreased by 1,000,000 or 150 basis points as a percentage of sales. As a result, all business groups, Overall, our margin of 8.4 percent was 100 basis points lower than last year, which was mainly due negative currency effect of 80 basis points. Our cash flow situation was better than last year when excluding 1,000,000 of incidental real estate proceeds back into 2017. Now let's move to Slide 5, where you can see snapshot of the financial performance by business group. In a nutshell, solid sales growth in professional was offset by line in Lamb's home while LED delivered stable comparable sales in the quarter. In the last column, you can see that Lance LED And Professional improved their margin despite currency headwinds. But let me now walk you through each of our business groups, starting on Slide 6 with Lambs. Comparable sales declined by 16.4% we estimate that the conventional lands market continued to decline faster than our lands business in Q2, which has resulted in continued market share gains. As you can see, lands delivered a very strong margin at 21.2%, This is 50 points, 50 basis points higher than last year and driven by lower indirect costs. Ongoing procurement saving and increased productivity more than offsetting adverse currency effect. Let's now move to LED on Slide 7. Comparable sales in ID was flat year on year on the back of a high cooperation base and a more challenging market condition in certain geographies like Spain, Canada, and the UK. In LED lamps, we see that volumes are gradually converging to market growth, while price erosion continues to slow down. In LED Electronics, the comparable sales trend improved in the quarter following several quarters of lower demand from our OEM customers. The adjusted EBITA margin improved by 10 basis points to 10.6% as a result of continued improvement in procurement savings and lower indirect cost, which was partly offset by price erosion and currency effects. On the next slide, slide 8, you can see some of the business highlights for this quarter for LED. So let me zoom in on the launch of the MyCare LED bulbs in Asia. So part of the design of these bulbs are inspired by sunflowers, The bulbs use our patented interlaced optics technology that reduces glare by 35%. It results in uniform light that is more comfortable on the eye. Furthermore, we launched a new innovative product in India, which is, as you can see, the Fannie T Bolt, Indian consumers indicated that they prefer a linear from factor because of a better light spread and the decorative look, which is perceived to be more premium. Let's now move to Professional on Slide 9. So we are pleased with the overall performance of Professional. Comparable sales increased by 3.6% despite more challenging market conditions in some geographies and scarcity in certain electronic components globally. Europe and the rest of the world remain robust. In Europe, the UK market remains very difficult and in countries like Italy and Spain market activity slowed down due to political uncertainties in the rest of the world. India delivered a strong performance and Saudi Arabia showed sign of improvements limiting the impact on CSG to 60 basis points for the quarter. In the U. S, we saw an improvement in the comparable sales trend compared to preceding quarters while Canada faced challenging market conditions. The adjusted EBITA margin increased by 70 basis points to 8.4%, which was mainly driven by lower indirect costs, partly offset by more challenging pricing environments. Now let's move to Slide 10, and there are a couple of business highlights that we would like to bring to your attention. For the professional business. For example, this quarter, we won the next phase of the world's largest Horticulture LED lighting project at Agro Invest in Russia. So Agro Invest is doubling the size of its greenhouse to the equivalent of 100 soccer pitches. The quick payoff of the 1st phase that we started to install last year together with a clearly visible improvements in the crop yields of this tomato grower resulted in the expansion of their investment in Phillips green power LED top lighting and inter lighting. In addition, we are pleased to tell you that we launched the interact pro offer, which is bringing IoT connected lighting to Small and medium enterprises through leveraging our hue architecture, which we're using on the consumer side. Another highlight this quarter is the acquisition of Light Match technologies in China, a small site acquisition, which is strengthening our position in the very attractive Chinese facade lighting market. I propose that we now turn to Slide 11. So home reported a decline in comparable sales of 5.9% to remind you of the situation. Inventory levels at our main U. S. Trade partners were too high at the end of 2017 as we indicated back in April. And that we would need most of Q2 to further wind down the inventories to more normalized levels. In the course of Q2, inventory levels had indeed returned to more normalized levels, in the USA. As a result, sales growth in home systems in the U. S. Improved versus the preceding quarter, especially towards the end of Q2. Sellout continue to show strong double digit growth. The lack of top line performance impacted profitability due to under absorption of fixed costs and investments in growth since Q2 of last year. Also for home, we have a couple of business highlights that we would like to share with you on the following slide, which is Slide 12. On that, I would like to call out is what is that we strengthened the position of Phillips you as the world leading system for the home by launching the U. Outdoor range in the U. S. And Europe extending key features and functionality to any outside area. All the products are designed for outdoor use and easy to install through the plug and play system. The products include both hue white and hue white and color ambiance ranges. The products have a cooler temperature range of 2200 to 6500 Kelvin and feature as usual, the famous $16,000,000. In addition, we updated the Phillips you up to its 3.0 version. And we also introduced our Philips View Ranch to our customers in Indonesia, Malaysia, and also Thailand. This is what I wanted more about the financial performance for the second quarter of 2018. Let me now turn to Page 14 and take you through the adjusted EBITDA bridge. So first, when you look at the adjusted growth margin as a percentage of sales. It decreased by 200 basis points in the second quarter of 2018 compared to a year ago. This is mainly due to a high comparison base. The second quarter of last year was one of the highest, in terms of gross margin. And that's particularly true in lamps. And also, we had a weak performance in home, particularly due all also to the low leverage and low level of revenues. We continue to generate procurement savings and also improve our productivity And this was offset, of course, by continued price erosion and also by currency effect. Overall, Forex negatively impacted the adjusted EBITDA margin by 80 basis points. And that was due to adverse swings in currencies such as the Indonesian rupee, the Argentinian peso, Indian rupee, the U. S. Dollar as well. And that was offset, but only partially by the favorable impact of the Chinese renminbi. You can see also that we have significantly reduced our indirect cost base in the second quarter with savings of EUR 46,000,000, excluding the impact of ForEx. On the next page, Page 15, let's take a look at the indirect cost base evolution. You can see a very sharp reduction. Compared to a year ago in percentage of sales because there is of course a little bit of a ForEx impact, we came down from 31.1 percent, to 31.1% compared to 32.3%. So a material reduction, 120 basis points. It's also a material reduction when you look at the indirect cost savings in absolute value without ForEx minus 1,000,000. This is minus 8% of our base without Forex. And this is the result of the multi year transformation program that we have engaged in order simplify our organization and to be more cost competitive. All these initiatives allowed us to generate those million savings compared to last year. And we are continuing on the very good trajectory that we had in the first quarter where we reduced our indirect cost by EUR 38,000,000 on a currency comparable basis. Of course, Forex also contributed to the lower cost base by an amount of 1,000,000, pretty close to the one we had also in the first quarter. On the next page, you can see more details on how we are driving our cost down and how we are simplifying our organization, both what we've done in the first half, but also what we are working on and what we have engaged in order to deliver further cost reduction in the second half. For example, when you look at the first half in terms saw a reducing headcount, especially in transversal and support functions. And also, we are taking actions such as reducing the number of contingent workers, which have been reduced by 80%. With respect to processes, we are improving the way we do shipments in order to reduce costs. We have optimized also our online portal in order to have touchless ordering, which have increased by more than 50% in the first half in many markets. So a lot of improvement from the process standpoint which allow us to be simpler, leaner and at a lower cost. We are also working on the footprint, especially in terms of real estate, in terms manufacturing footprint, warehousing footprint, but also office footprint. Office space is being reduced. We are consolidating. We are doing subleases. If you look at the whole year, we expect to have a reduction of 14% of our office space at the end of the year compared to a year before. And we are also offering certain activities in a number of functions like finance, like HR and like IT activities. In generic materials is also an area where we are spending a lot of time to control both demand, but also price through supplier negotiation. And in the first half, we have reduced our indirect material spend by more than 10% year on year compared to 2017. And finally, we are working also a lot on everything that relates to our product portfolio, how we can use platforming in order to improve the competitiveness of our products, also our speed to market in terms of innovation. Simplify the portfolio, look at the health of our portfolio in the various business group. This is leading to a lot of SKU reduction that has but also in the first half and will continue in the second half. So many actions that have supported the reduction of 1,000,000 in the first half and will contribute to a further improvement in the second half. As some of the cost savings that we have had have come earlier than we had previously expected. And we now expect the absolute savings to be more evenly spread between the first half and the second half. However, when we look at it as a percentage of sales, we expect that the magnitude of the savings is going to be bigger than in the first half. Let's now look at working capital in the second quarter of 2018. So compared to the same period last year, our working capital has decreased by EUR 95,000,000 and it now represents 10.5% of sales. This is an improvement compared to the 11.2% of sales that we had in at the end of the second quarter of 2017. And that's mainly driven by lower receivable and also by in absolute value of our inventories by EUR 73,000,000. When you look at the inventories, they stayed flat year on year at fee 3.3% at the end of the second quarter, same level as the end of last year. However, currencies had a negative impact. And when you look on the currency comparable basis, the inventories decreased by 40 basis points. Also, we managed our inventories in a much more efficient way than in the second quarter of last year in order to avoid the spike that happened last year in the second quarter and also to some extent in the third quarter. As you may remember, last year, we had an increase of 210 basis points of our inventories between the end of March the end of June on a same currency basis. This year, the increase between the end of March the end of June is limited to 70 basis points. And that has contributed to a significant improvement in our free cash flow from working capital compared to the second quarter of 2017 as we will see in a minute. Turning to the next page, slide 18, you can see our net debt level increased by 250 1,000,000 compared to the end of the first quarter. This is mainly due to our dividend distribution that happened in the month of May for 1,000,000. Next to the profit that we have generated during the quarter, the change of working capital that I've just mentioned, you can see also the other ends in the bridge that impacted cash and therefore our debt position. We limited CapEx to an outflow of EUR 22,000,000 in the quarter. Next to that, we had about EUR 28,000,000 that we paid for cash and for interest. And finally, we also repurchased shares for our long term incentive plan. This all in all led to an increase in our net debt position to EUR 688,000,000 at the end of the second quarter level that is pretty close to the level we had at the same period last year. Let me turn now to Page 19 and our capital allocation policy. We continue to expect to generate a solid free cash flow in 2018. Which will enable us to maintain a financing structure that is compatible with a investment grade profile. In terms of cashew, since the beginning of the year, as I have mentioned, we've paid a dividend of EUR 171,000,000 on the 29th May. We've repurchased shares for EUR 71,000,000 in February by participating to the share disposal of our main shareholder. We've used 1,000,000 to reverse shares to cover performance share plans, and that was completed in the second quarter. We intend moving forward to contribute to the reduction of our U. S. Pension fund deficit by an amount of $50,000,000 in the third quarter, which is the same amount as we did last year at the same period, and that we reduced our liabilities and also future interest expenses with respect to pensions. We announced the acquisition of Life Magic Technologies. The closing is in the third quarter, it's a small size acquisitions, as mentioned, by Eric. And finally, when we take into account our cash flow generation. Also our financing financing structure and the belief in our long term prospect of our business, we've decided to increase the amount allocated for share repurchase in 2018 from 1,000,000 to 1,000,000. As a consequence, we will repurchase additional shares for up to EUR 229,000,000 in the remainder of 2018. Either in the open market or potentially by participating in a share disposal by our main shareholder should it happen. To conclude and you can see this on the right hand side, when you look at 2017 with a free cash flow generation of EUR 403,000,000, we have allocated EUR 464,000,000 of capital mostly toward our shareholders. With this additional share buyback program that we have just announced, we will allocate in 2018 an even higher amount of capital to our shareholders. To a magnitude of over 1,000,000. This and this is despite a free cash flow that will be somewhat lower than in 2017. This will likely take our average leverage ratio slightly above one time at the end of the year. And that reflects our confidence in our free cash flow generation in 2018, but also beyond and our objective to maintain a sound financial structure while keeping the flexibility to seize non organic opportunities, which may arise. Let me now hand back to Eric for the final part of the presentation. Thank you, Stephan. Before I move to the outlook, let me briefly zoom in on the performance for H1 as we normally do. So on slide 21, we provide a snapshot of our LED based sales. Which grew by 5.3 percent to 1000000000 in the first half of this year. So in the left chart, you can see that our LED base sales grew at the CAGR of 24% since 2013. As a result, nearly 70% of our total sales is now LED based compared to 26% back into a third In the pie chart, it is also interesting to see that professional represents half of total LED based sales and is growing by 10%. Let's now move to Slide 22. So despite a declining top line, we have been able to keep our margins stable in the first half of twenty eighteen if we exclude the negative effects of 60 basis points. This one may this was mainly driven by the strong progress we made in cost reductions that we have talked about before. And excluding the real estate proceeds in H1 2017, We also improved our free cash flow in the first half of twenty eighteen as better cash management enabled us to offset lower profit contribution. Let's move that to the outlook on Slide 23. So given the slow start of the year in home, more challenging market and competitive dynamics in some geographies as well as a global scarcity in certain electronics components, we have decided to revamp ourselves outlook for 2018. So we expect our sales growth performance to improve in sales growth for the EBITA margin from 9.6% in 2017 to 10% to 10.5% in 2018, albeit at the lower end of the based on the prevailing spot rates at the end of June to 2018, the currency impact on the adjusted EBITA margin would be in the range of minus 30 to minus 50 basis points for full year 2018 and minus 50 to minus 70 basis points, specifically for Q3. On the cash side, we expect to generate solid free cash flow into 2018, which is expected to be somewhat lower than the level at the start of the year. P and L restructuring costs for the year are expected to be around EUR 155,000,000 when also taking into account the cost related to the company name change. And for Q3, we expect P and L restructuring costs to be around 1,000,000. With that, I would like to open the call for questions, which Stephane and myself are happy to answer. Ladies and gentlemen, we are now ready for questions. And we have a question from Andreas Willi from JPMorgan. Please go ahead. Good morning, Eric and Stefan. I have a main on the outlook, in terms of maybe you can help us a bit to better understand where the margin improvement in the second half comes from maybe also on a divisional basis, if you compare to last year's margin. You already said cost savings should be similar. It doesn't seem to be a big improvement in FX. So it probably has to be operational or top line driven. Maybe could help us a little bit to better understand that? And then the second question on home, if I understand you correctly inventories are now relatively in line. So assuming inventory changes in the market, again, the business should grow similar to the sellout in the second half the year, but we still have to compare against H2 last year where you probably grew about 20 points above the sellout Is that the right way to look at it that we basically whatever we assume the sellout is, we then just have to adjust for the fact that the base was inflated by around 20%. Thank you. Thank you Andreas. Good morning to you. Let me start with the second question. I think you have summed up very well. So let me now tell you what happened in Q2 and the way we see the second semester So the performance in home was lower than expected in April and May. And improving according to what we had imagined in June. So the trend that we are seeing on the selling in is positive throughout the quarter, but not for the full quarter given a weak April and a week, May. So we should now that the inventories have been repositioned. We are in specifically the United States with the big retailers, we were talking about the average inventories is between 8 to 10 weeks down. So that's continued to go down. So we expect now to sell more, and that's already what we have seen in June. But of course, we will be comparing ourselves as you have rightly said it to a higher comparison base last year. So you've mentioned a 20%. We have done a specific and very precise calculation on that, but you should not be too far. On the first question about margin improvements in the second half, maybe I can take it more holistically and maybe then Stephan can go into more details by businesses. So the way we operate, we give a target for the whole organization for the year. And that target is also given by quarter. Of course, the target that we give for the full year is pretty much in line with the guidance that we are giving to the market. If you look at where we sit at the end of H1, which is 7.7% in adjusted EBITA we are in line with the slow start of home was not integrated at all, as you can imagine, in the original plan. Also, we are taking a ForEx assumption, which is based on the Forex in September of the previous year. This is the moment where we do the target settings. So we had to decide on the ForEx level. And what we take is September of the previous year. As you see, there was a negative ForEx impact during the 1st semester that we also had to compensate. We always said that the name of the game for us in order to continue to spend on the profit margin would be less on the gross margin and more on the cost. And as we can see, we've been able on the cost to do substantially more than what we had originally planned to be at the end of the 1st semester in line with our plan. But our plan doesn't stop at the end of H1. The plan continues in H too. And on the basis of what we have been demonstrating that we could adjust and maintain the level of performance that we were aiming at in H1. We believe that we have the resources and we have the plan, very detailed plan to do that in H2. But I can now ask Stephanely to give a bit more flavor of where and in which businesses is going to come. Yes, Andrea. And of course, without giving any guidance per division, because we don't do that. When you look at the first half, we have improved our adjusted EBITDA margin in each of the 3 division lamps, LED and professional. And of course, only home as mentioned by Eric has been low and of lower than expected. On home, we don't expect that to happen, of course, in the second half. So that's going to make a significant improvement compared the first half. When you look at the first, the other divisions, we believe that with the improvement in the sales trend that we expect in the second half compared to the first half. And more importantly, with the reduction of cost we have engaged. Compared to last year, we believe each of those divisions is going to be able to deliver an improved adjusted EBITDA. In the second half compared to the second half of last year. As you saw lamps, including in terms of sales, is trending well. And therefore, from that standpoint, we think compared to the second half of last year, we should be able to improve the adjusted EBITDA margin. LED, we've been generating quite a number of efficiencies and improvements. And even in the first half on the back of a limited growth, we've been improving the margin. We believe that can continue in the second half year on year. And finally, cough is growing. And we expect also in the second half continue to improve the adjusted EBITDA margin the same way we've done it in the first half. It had improved by 190 basis point. And we believe we can also improve in the second half the adjusted EBITDA margin of course. That's what makes us confident about our capacity to improve the overall adjusted EBITDA margin in the second half and to reach the guidance that we have given in terms profit although probably more in the low end. Our next question comes from the line of Lucy Karriya from Morgan Stanley. I will ask first the first one. You you've been mentioning component shortages as a more recent headwind. And I was wondering if you could quantify the impact of this headwind for the 2nd quarter and how we should think about potentially this challenge for the rest of 'eighteen and into 2019? And also if you can give us some color on which components you're exactly referring to? That's question number 1. Yes, good morning Lucy. So we're talking about NLCCs and MOSFETs basically registers. So these are the 2 critical components that we wanted to highlight. Basically, when you look at those components, we saw tension on the market at the very back end of on 2016, but it was totally manageable with our suppliers at the laterals of the lighting industry. We are managing big volumes. So we had a clear visibility with our suppliers on when they would deliver. At the end of May 2018, that visibility went down drastically and even from our key suppliers for these components. And it is a global shortage worldwide at this point in time. So we are having a visibility, which is now very narrow because it's week after week that we get an indication of what would be the available quantities of the components for us. We are working on that with those new conditions, understanding that we are trying to change components when it can by changing the design of the products. We have also been buying components on the open market. So that's increase is also our cost because when you buy components on the spot market, you can buy them at a factor x of what would be the normal cost. But we are trying with an absolute priority to deliver our customers. We are not giving a specific indication of by how much this will impact us in 2018, but that's one of the elements that make us revise at this point in time, our guidance for the full year, I think that we will not be growing for the full year, even if we are going to improve our growth trend in the second half. As far as 2019 is concerned, I think it too early to tell. I've given you the very short visibility that we have, but we're working on it and not only trying to get allocated, a lot of these components because we have a strong buying power, but we're also looking at what we can do from a design standpoint in order to be less depending on them. We cannot totally eradicate our dependence on those components because we don't have alternatives in some cases. But whenever it's possible, we try and do it. Thank you very much for the color. My second question was related to your lens business. I know Hydrogen is a small technology for you, but I was just wondering if you are seeing a little bit of a pre buy or if you benefited a little bit of some pre buy in the 2nd quarter and if you're expecting also some in the 3rd quarter ahead of the European ban that is going to start in September, I believe? Yes, we see some somewhat already in Q2, some of the 3 orders for the final orders and that will continue in Q3 and potentially also in Q4. The ban is related to production. So we are stopping our plant in the middle of September as per the requirements, but we could continue to sell some of the inventories that we have been building up for customers or until Q4. We don't think it's going to go beyond that, but a little bit in Q2 and the major part will be in Q3. And in Q4. The way this works, we know the customers, we know the quantity that they want. So it's really a planned sequence in order to make sure that they can buy the very late and final production. Thank you. Thank you. Our next question comes from the line of Alexander Virgo from Bank of America Merrill Lynch. Please go ahead. Thanks very much. Good morning, Eric. Good morning, Stephan. I wonder if you could talk a little bit about developments in the U. S. Business. In Professional in particular. You talked about sequential improvement, I think, there in the quarter one of your peers has talked about improving conditions. So I wonder if maybe you could talk a little bit about the a little bit more detail about the developments there. That's my first question. Yes, good morning, Alexander. So that's effectively what we have said our U. S. Business for professional has been on an improving trend in Q2. So we see also some of the positive market improvements that you're talking about, especially when it comes to, I would say that the middle part of the business in terms of stock and flow and projects, we see an improvement there. We also see at the lower end of the scale, still a very aggressive competition landscape on the low end products for the commoditized offers in the luminary space. This is not where we are in the majority of our business is not there, but we see that on the market. But yes, improvement trend. Where we a bit disappointed in Q2 is on the performance of the systems part in the U. S. That has been somehow quite below our expectation. But overall, market condition are improving in one part of the business, but we should not forget the fact that it still stays very competitive in the low end part of the luminaire commoditized offers. Okay. Thank you. And then my question follow-up to that, just your comments around pricing. You talked about more challenging pricing conditions, and I think that was in particular reference to the U. S. And proff. How should you talk a little bit about breaking out that 1,000,000 headwind you showed in the bridge? Presume it's all LED and proff, or mostly LED and proff, but just wondered if you could give us a little bit more color to the trends in Q2? And then as you look forward Sure. Let me take that one. When you look at the price impact, every quarter, you're right. Overall, the order of magnitude we've seen since a year ago is in the range of $80,000,000 to $100,000,000. And it can vary a little bit from 1 quarter to the other. And of course, the contribution of each division is becomes a bit different. As we have mentioned, LED, we are seeing the price pressure lowering. And when you look at the impact in absolute value of last year, this quarter, it's lower. And that reflects the slowdown of the price decrease that we are seeing in particular in LED lamps and it continues. Now, yes, in proff, as a reflection of the comment made on the competitive market landscape and in the U. S, but not only, we are seeing more price reduction on both. And finally, on home, it especially in the second quarter and to some extent in the first quarter, some of the implications of the U. S. Inventory situation at the end of 2017 led to some price elements. They are not recurrent, but they also contribute to the overall pricing impact of the second quarter. I'm not going to comment about the second half of the year. It's a little bit difficult to predict what can happen on those areas. But for sure, the trends that we have seen our confirmation of what we have mentioned about the last few quarters in the various divisions. That's very helpful. Thanks very much. Hey, Alexander, maybe just to compliment on what we're doing, because you were right, it's not only on Pro, it's on Pro, and it's also on LED. And I would say more specifically on LED lamps. And it's not only in Northern America. It's also in Europe. So we see overall price pressures on the low end offers. What is important is what we do against that. So we don't only price down, we are really segmenting our offers at this point in time, and this is valid in LED and also in profit. In the following fashion. And once again, when I talk about that, I'm probably more simplistic than what the reality is, but I would explain it like that. You can imagine that you have 3 different level of offers. You have a high end, which is going to be the offers that would embark connectivity. You have the mid end, which is probably most of the time, not connected, but very complete offers, very well adapted to end user segments, both in the HDLAN Fund and also in professional luminance. And then you have also the low end, which are more simpler offers, you know, high run We are clearly segmenting our offers at this point in time along these guidelines where we have 3 different levels. And as a company, as signify, we are present in different fashion with different commercial policies, different types of support that we give to our customers in those 3 different segments. So it's very important to understand that there's a trend that has been coming to the market for so a few months now, we are facing it and we are answering it with dedicated offers, very specifically positioned in the three different areas that I've been mentioning. So that is that has been starting now for 2 months. So we are expecting to see also the fruits of that strategy but it's being implemented and we have been quite fast to answer to these new market requirements. That's very helpful. Thanks very much, Harry. Thank you. And our next question comes from the line of Martin Wilkie from Citi. Please go ahead, Martin. Your line is open. Thank you. Yes, it's Martin from Citi. So the first question is just again on pricing. We saw during the quarter some of your U. S. Competitors, I think at least 3 of them, including the largest announced list price increases during the quarter. Now I know that list price increases don't always translate into actual price increases. But is that something that you are seeing gaining traction? I know some of those announced increases were due to inflation and potential tariff pressure as well, but if you could talk a little bit about, are the industry in general looking to raise pricing in the U. S. In the fixtures business? Well, what we have to it was 6% price increase. It's not on the full portfolio. To be also totally clear. It's some very specific offers. As an actor on that market, whenever we had to price up, we also did it. Now if your question is, is it a general trend that all the prices are going up in the industry and that's all the active pricing up. That's not something that we see at this point in time. We've seen that specifically in the U. S. On some very particular SKUs, but we would say that as a general situation, they still press erosion on most of our businesses worldwide. Thanks. And if I could just have a question on home as well. As part of that inventory normalization at the, at the retails in the U. S, was there any meaningful discount you needed? Or I mean, obviously, it's been a big volume option for you. I think last quarter, you said that there hadn't even to be any sort of write downs or big discounting to to clear out that inventory, just if you could comment, was that a factor this quarter or has it been relatively clean from a a price discount perspective? Relatively Quinn, a clean as Q1. Thank you. Our next question comes from the line of Daniella Costa from Goldman Sachs. Please go ahead, Daniella. Your line is open. Hi, good morning. My question sort of relates to your 2019 target, the 11% to 13%. And I mean, given what you seem to be outlining for 2018, it sounds correct me if I'm wrong with that the second half twenty eighteen margin improvement mainly comes from indirect costs rather than gross margin, how shall we think about the bridge now from the 10% to 10.5% of 2018 to 11 to 13% in 2019. Is the delta then in 2019 given the uncertainties that sort of around the market improving that purely indirect cost base? And if so, sort of, can you talk us into details on the actions for next year, the incremental actions for next year. That's basically my question. So two, good morning, Danilo. Two important things. So we said when we entered this year that the margin expansion will come less from gross margin and more from cost. So that's a defined strategy. If you look at after the IPO, we had basically 2 phases. The 1st phase was margin expansion and repositioning the businesses, where they needed to be, which is basically, you know, lamps lending, increasing its profitability, being well positioned, doing the same with LED and being close already at the end of 2017 or what was the guidance for the mid term and that was done. And then repositioning home and professional in a growing trend, not only from a top line perspective, but also from a bottom line perspective. The second part of the business being well positioned is clearly growing on one hand, which is not going to happen this year, but also reducing costs. And most of the margin expansion has to come from cost reduction. This is what we see in H1 this year. This is what we would see in H3 2. And this is also what we have in the plan for 2019. Now when we compare 2018 to 2019, we're going to have a 2018 with a home business, which is not performing in a clean way and in line with its potential. So 2019 will be a year when we will not have the drawback that we had, at the beginning of 2018 given the situation in the U. S. Hence, we'll have also, if you compare to 2018 versus 2019, a margin expansion, which is also going to come from a much cleaner performance of home versus what we're experiencing in 2018. And if I may follow-up on your commentary on home and home bidding cleaner and better in 2019, what have you done in terms of from the learning of what has cycle, slow business. What actions have you taken? So we have something that we didn't have previously. Every week, we all get, and I'm getting myself the information on the inventory position of our main customers the selling out data and also the selling in data. So we now have a much better visibility on what their inventory looks like. And to give you another hint in the past, in a few weeks, one of our customers, not one of the biggest ones, but had a high level in inventory, and they were ordering more. And we went to that customer and we said, we don't think that you should order more, at this point in time, your inventory is balanced and unless you have clear plans, we believe that it would be wiser, not to order more. So they listen to us, we made a plan and they effectively brought their orders down. And this is now something that we do and we have the visibility. We know how to do that and we are doing it. Thank you very much. Thank you. Our next question comes from the line of Peter Riley from Jefferies. Please go ahead. Your line is open. Good morning. Two questions, please. Firstly, on the balance part of NED, NED overall, obviously growth is at 0. I'm assuming, judging by the commentary that the electronics grew and the lamps business was modestly down. Can you talk about the trends in lamps And you also talk about growth trending towards the market growth. What particular market growth are you talking about there? Is it the overall lands growth or LED lamps maybe you could help us understand the trends there please? And then secondly, after the first quarter home performance, you made a very strong statement saying your confidence on the long term growth and margin potential absolutely unchanged. Is that a statement you're still happy to make today? Yes. So Peter, let me maybe take the first one on Leadlands. So yes, you're right. Based on the comments we've made regarding the overall business group, yes, we had growth in LED electronics. So by definition, let lands, well declining. When you look at the second quarter of 2017, you can see that the business group had grow pretty significantly. We're talking about 17% or 18% year on year. So that was actually 19%. So that was a high comparison base. And in that quarter, actually, Leadlands had grown even more than that because we started to see softness on the electronic side. So that compares to a very high quarter against which it's, of course, much more difficult to grow. Now We have also seen, especially in the number of markets, and we've commented on that previously, especially in North America, continued movements to our private level. And that is, of course, impacting the overall sales that we have. Now as you saw from our presentations, we participate to that. We participate to Biggs in private label. We win bids in private label that has an impact, of course, on our volumes, also on the overall sales and this is positive. But of course, it's something that we have started in the course of last year. We've seen also some price competition continuing also on Netherlands, in particular, in China. So those trends also contribute to the what we have seen and what we have delivered in terms of the revenue evolution for Leadlands in the second quarter. When you look forward, Q3 and Q4 of 2017 were a much lower base of comparison. Especially on Lead electronics, but also on Netherlands. And so that's why we have also confidence about our capacity still to grow in terms of BG LED moving forward. When it comes, Peter, to the midterm, yes, we clearly confirm our confidence in the guidance that we gave. And for the following reason, what we're building structurally in the company is strong, it sound, totally in line with the strategy that we had indicated at the time. And sometimes people look at the company and they say where the company was born at the time of the IPO maybe, officially, but the strategy that we are implementing in the lighting business is something that we are doing for the past 6 years. Moving a company that was, in majority, conventional to a company, which is today, 70% ADBASE, and which has more than doubled its profitability during the transformation. So this is what we are doing. And I think that structurally, we're bringing the company to adapt to the market challenges. Now if you ask me, in the past 6 years, a lot of things are happening. Why? Because during that disruption and that the transformation brings, a lot of things are happening. So the name of the game is how we fake this situation and what we implement in order to adapt to a very specific market conditions. So we're talking about at this point in time at the low end part of the offer, competitive pricing and we see that in many geographies, we're facing it. So we are adapting our strategy to that trend very specifically and we know exactly what we're doing and we're implementing it as fast as we can. So for me, the name of the game is are we structurally building the company to win in the future? And are we adapting sufficiently quickly to what happens functionally on the market. I would then say yes to those two questions. Now, but it's perfect. Maybe we could do things a bit better sometimes. But directionally, when you look at what we've been doing in the long term, clearly, the strategy is being implemented and it works. So yes, we confirm our confidence in the mid term guidance. Our next question comes from the line of Sven Maier from UBS. Please go ahead, Sven. Your line is open. Yes, thank you and good morning from my side. The first question relates is a follow-up question on the U. S. And obviously, we've been seeing a leading indicators for U. Construction doing quite well for some time. And we always had this disconnect on the lighting side, which was a bit mysterious. So my first question on this would be do you have any new insight on why this disconnect and why it isn't really improving? That would be the first. Sven, I don't have any new insights. And what I've said previously, I think there are different factors that have all happened, not always at the same time, and but sometimes there are effects were had to be taken into account simultaneously. So we have the following things. First, I think that the first wave of electrification in the US was a very fast one, especially on the luminess side on the professional part of the business. It came a bit later on the land side. But on the luminess side, it came it came sooner faster and quite stronger at the time where the market was also extremely dynamic in the construction non res. So there was a lot of there were a lot of conversions happening. And probably that, at one stage, the market slowed down a little bit. I think from a 4% to 5% growth to a more 2% each growth. And we saw our business also slowing down due to the market slowdown, but also due to the slight that there were a lot of anticipation done on the LED side. Then came with the situation and the political situation in the U. S. At one stage, a lot of uncertainties that And that's the way we commented. I think it was, if I remember well, at the back end of 2016, at the time, And we said that we see that our customers are not making decisions as fast as they used to when they were to do an investment. And then you had the 3rd wave, the way I would call it, which is very competitive pricing. From Asian competitors on the lower the lower end part of the market, which took by surprise. And we need a few months to be able to find the ways to answer to this. But I would say that those 3 different elements have happened in our industry and probably created a kind of a disconnect from the PERCIL and the real dynamic growth of the construction non res market in the U. S. So that's the way I explained. I'm not saying that I have all the truth, but with all the elements that we've gathered, Those are the 3 main elements that all came at different moments, sometimes overlapping, but that's the way we see it. And some of the Asian competitors you're mentioning also looking to buy their way up into the industry. So what do you think is the risk of that trend that has so far been limited on the low end is spreading also to the other segments eventually? I sit in 2 different ways. In every risk, you have an opportunity. If you you buy your way through, then you do an acquisition. If you do an acquisition, you get a market share, you get an access to the market, but you also get costs. And that it's much more difficult to stay from a long distance and then ship containers on the shore of a given continent without being involved with feet on the ground. So I think it's a very different model. So I would expect that if that happens that when you have caught and when you have feet on the ground, you need to have a kind of a different strategy, which is not only volume for totally commoditized offer, but you need also to invest in the market. On the other hand, that may happen, but also with slightly different truths when it comes to pricing and also positioning. But as we speak, and as I was saying previously, what is extremely important in that industry is our capacity to adapt to whatever is going to happen. Tomorrow because what happened yesterday, we already have adjusted. So we'll see, we'll see Zven, but I see risks and opportunities. The other question I had, if I may, was just relating to the LED tariff situation. And how much headwind do you factor into the guidance and how you see yourself impacted because of those tariffs? At least, I mean, if you look at what would be the impact in, on a full year basis, list 1 and list 2, it's about 6,000,000. List 3, which is not totally decided yet will be about $13,000,000 full year. So if you bring that together, it's about $19,000,000 full year. But they are tariffs, so we would compensate, you know, with pricing. Thank you. Our next question comes from the line of Mark Esselink from ING. Please go ahead. Your line is now open. Yes, thanks. My first question is, you split out the improvements for the second half of the year in the margin improvement. Could you also do that similarly for the for an organic growth. I think therefore also the big difference will be in the home segment. Can you give directionally for the other businesses? And my second one would be a follow-up on the gross margin side. You talked about the price pressure. Can you also talk about the cost side of the gross margin? I think in the past, you could really offset a lot of the price pressure, but now also would you comment on the scarcity of components? Do you expect to be able to offset that as well? Thanks. Yes. So maybe on the on your first question, which is about sales outlook for the second half. And we've been a little bit cautious here. What we've indicated, as you know, is that now for the whole year, we don't expect that we will be able to grow. But however, we believe that in the second half, our CSG will be better than in the first half. Now why that? Yeah, for sure, home should be better, although the second of last year was somewhat inflated because we sold a lot to our U. S. Retailers and it's not going to happen by the same order of magnitude. But still, we expect that it will be better surely than the first half. On lands, I don't think there is much here to come in. The trends have been better what it used to be. And as per the comment made on the halogen, then probably Q3 and Q4 should continue in that trend. I mentioned that on LED, the first half overall was low, but also on the back of a strong first half of last year and the whole first half of last year was 17% growth year on year. Now the second half is of twenty seventeen is lower. So I think we should be able to do better than the first half. And finally, we'll see what happens on Pros. We had a high second half last year on growth, including some projects. We may not be able to deliver as much, but again, we will see and we believe we will continue to grow for sure in the professional area in the second half. Now on the margin side, yeah, the price reduction continues and we are able some extent to offset it with the negotiations that we're having on the bill of material and also on the productivity and efficiencies. But not as much as in the past. As we have mentioned, a lot of the adjusted EBITDA margin improvement is now much more coming from indirect cost reduction than from gross margin improvement. And I don't think from that standpoint that the second half should be different. Again, we expect, especially as a percentage of sales, we expect a year on year improvement on the indirect cost that's going to be higher than what we had in the first half. In the first half, we have 90 basis point improvement as a percentage of sales compared to the first half of twenty seventeen. And we clearly believe that we can do more in the second half compared to the second half of twenty seventeen. Okay, thanks. And maybe just a clarification on that comment that you say, okay, the second half will be better. Does it on organic growth? Does it imply that you expect to be positive or just better than the minus that we've seen in the first half? So what we said in our revised guidance is that we expect to be better than the first half, so better than the minus 3.4%. We haven't commented whether we would be positive or not. We don't exclude that we would be positive, but it's not again the core of our guidance. Okay. Clear. Thanks. Thank you. We're now approaching the end of the call. We will now take our last question from the line of Nigel Van Putten from Anthony. Please go ahead. Your line is open. I have a follow-up on a couple of the points I've been raised before, mainly towards growth. So I mean, you're doing a tremendous job on structurally improving the business? Taking out a lot of costs. But of course, the absolute improvement and the margins depends on the top line. So if you look towards 2019 in your internal modeling, do you assume a return to growth to reach the margin guidance? Hello, good morning, Nigel. We're not squeezing you in. Believe me. No, look, we haven't given any specific guidance for 2019. So we don't want to do it now. Now when you look at the different components of the business, we have a declining part, which is becoming smaller by the day because it's declining, strong double digit. So that brings the company very naturally in, in a growth dynamic. So we will see whenever the time comes and it's going to be probably at the end of Q1 or when we do the results for the full year. So around February next year, we'll give the guidance for 2019. Okay. Just to be clear that, that could differ from the medium term, because I've understood that the medium term was actually 2019. Yeah, the midterm was 2019. What we said is that after the midterm, we would see the company growing at market rates. And we established at the time that it was between 3% to 4%. Right. Yes. Got it. And maybe a quick follow-up on the lamps business doing very well in terms of the margins. Is that all internal measures taking out costs? Or is there also maybe a more positive mix shift? I mean, some of the more professional lamps, I guess, has a higher margin are you seeing maybe a change in the market to your benefit, when comparing back to when issued the guidance for longer term dams of around 16% extending north of 20. So is that all cost or is that maybe structural shifts in the Well, there are if philanthropy said there are 2 elements. We've said that when the business reduces, you have different technologies and the technologies that are reducing or declining less than the average are the technologies where we have the highest margin. So you have a natural positive mix impact on the margin when that business declines. Then you have another element that also needs to be taken into account, which is a plus for lamps and a negative for home. You know, the way we allocate some of the central costs in the organization of some of the shared costs also on the commercial side are based on the targets that we give at the beginning of the year. So basically businesses on the basis of the target get allocated, from cost. Which means that the businesses that are doing less than what was originally in the Target get in proportion more cost and the businesses that are doing a bit better than the targets on the top line in proportion are getting less cost. I would not make any secret that at this point in time, Lance is doing slightly better than what was their original target. So that's also improving their operating margin. Right. And then maybe the last one, you said before it's another question, next year you're going to have a clean home. So, I guess, towards that margin target. But then, to make your point on that being the bridge towards 2019, you don't have to assume, again, these LEMS margins to at least threat. Sort of at these levels. Otherwise, maybe the improvement in home is offset by a decline in land. So again, this year, obviously, better than is that something you're also taking into account towards next year? When we gave the guidance, once again, and maybe we were guilty not to change it, but we said above 16% because this is I could not say anything else at the time of the IPO because already when I said above 2016, nobody believed me. So, So we said above 16. I think that the lands business is already trending well. We are not surprised, but the levels they're at. And we think that performance of that business, we will continue to make things happen. So we're very, very comfortable, and this is what leads us also to confirm the guidance for the mid term 2019 between 11 to 13 for the company. Clear. Thank you very much. Thank you. Thank you very much. And I would like to return the conference call to the speakers. Okay, thank you. Ladies and gentlemen, thank you very much for attending today's earnings call and for taking part in the discussion about the results If you have any further questions, please not hesitate to call Ambio Serena, and we're happy to take your questions. And again, thank you very much and enjoy the rest of the day. Ladies and gentlemen, this concludes today's conference call. Thank you very much for attending. You may now disconnect.