Earnings Call: Q3 2017

Oct 19, 2017

Ladies and gentlemen, welcome to the sliding earnings call Q3 2017. For the first part of this call, all participants will be in listen only mode and afterward there will be oxygen and answer session. Please note that Mr. Johnson, please go ahead. Good morning, everyone, and welcome to the Phillips Lighting Earnings Call for the first quarter 2017. With me are Eric Grondela, CEO, Philip Slyding and Stephane Hugeot, CFO. In the moment, Eric will provide an update about our business and operational performance after which the fund will take you through the third quarter financial performance. Eric will then tell you more about the outlook for 2017. Beth, we will be happy to answer your questions. Our press release and the related slide deck were published at 7 am CET this morning. Both documents are now available for download from our Investor Relations website. A full transcript of this conference call will be made available as soon as possible on our Investor Relations Web slides. With that, I would like now to hand over to Eric. Thank you, Robin. Good morning, everyone, and thank you for joining us today. I propose that we go straight to slide 4. So in line with our objectives, we achieved a positive comparable sales growth in the quarter, Cooperable sales increased by 1.3% for the first time in our transformation, the growth of LED and connected systems and services more than offset the decline of our conventional businesses. Total LED based sales increased by 22% and now represents 68% of total sales compared to 56% in the same period last year. Europe delivered levels growth with the continued solid performance, except in the UK and Ireland. The America and Saudi Arabia continued to be impacted by challenging market conditions, Overall, our operational profitability continued to improve with LED and connected lighting systems and services substantially contributing to this performance. As a result, the adjusted EBITA margin increased by 15 basis points to 10.5% in the quarter. Net income more than doubled from 1,000,000 last year to 1,000,000 this quarter. Free cash flow was minus 1,000,000 in the quarter compared to 1000000 in the same period last year, working capital increased as an improvement in our growth profile and a buildup in home ahead of the high season in the fourth quarter led to higher inventories. In addition, inventories increased in several geographies where sales were softer than initially anticipated. Free cash flow also included a contribution of 1,000,000 to the company's pension fund in the U. S, which was partly offset by proceeds related to the sale of real estate of 1,000,000. I propose that we go to slide 5, where you can an overview of the financial performance by business group. NDC, professional and home significantly contributed to the overall comparable sales growth performance, 10 basis points for LED, 380 basis points for professional and 220 basis points for home. Overall, as already mentioned, the adjusted EBITA margin improved by 50 basis points and we are pleased to see that once again all business groups are delivering in line with strategic objectives. This becomes even more evident when we move to slide 6. So this actually the contribution of each business group to the overall profitability improvement as you can see increasing profitability particularly for professional and to a lesser extent for LED and home, more than offset the decreasing profit contribution of land as its size continues to shrink. Let me now quickly walk you through our business group starting on Slide 7. Comparable as in land declined by 20.2 percent, partly reflecting a high base of comparison in the third quarter last year, We estimate that the conventional IT market continued to decline faster than our lands business in the 1st 9 months of the year which has resulted in continued market share gains. Despite the high decline in top line, Lance has been able to sustain a high level of profitability at 20%. This is 110 basis points lower than last year due to the sales decline that we are partly offset by procurement and productivity and savings. Let me now move to a review of the next slide, comparable sales, immediately increased by 14 point 3% driven by significant union growth, which was partly offset by lower selling prices and stronger growth in more affordable products. Growth was primarily driven by LED lamps, while growth in LED electronics slowed down. All regions contributed to the growth, although countries with highly lead penetration rates, again, showed lower growth rates, of course. The adjusted EBITDA margin improved by 10 basis points to 10.7% in Q3, driven by operational leverage and procurement savings, offsetting cost reductions and mix impact. Let's now move on to professional on Slide 9. In professional comparable sales increased by 7%. This solid growth performance does not reflect any contribution from a larger project we are working on in the U. S. That we already talked about in previous occasions. While production of our products and systems for this project is progressing according to plan B and customer has decided to change the installation schedule which has delayed revenue recognition. Systems and services were the fastest growth driver in the third quarter, Performance in Europe and the rest of the world remains strong while market conditions in the United States continued to be soft in particular for small to medium sized projects. Market Commission in Saudi Arabia continued to be challenging and again, impacted comparable sales growth by 300 basis points in the quarter. The adjusted EBITDA margin improved by 3 80 basis points to 10.1 percent, driven by operational leverage, mix improvements and also cost reductions. Restructuring costs amounted to 1,000,000 related to the ongoing rationalization of the manufacturing footprint and indirect cost reductions. Now turn to Slide 10 and home. So, Ram showed an acceleration in sales growth and an improvement in profitability in the third quarter comparable sales growth 28.1 percent was driven by significant growth in home systems and by solid growth in all regions. Demand for Phoenix few home lighting system continued to increase significantly because of our continued market penetration and our strong partnership with the makers of recently introduced voice activated smartphone devices. To support the growth of the Phillips to offering investments in innovation, marketing and supply chain continued and are expected to drive growth in the fourth quarter and beyond. The adjusted EBITDA margin increased by 220 basis points to 1.4% in the quarter This was driven by operational leverage and a continued focus on product cost innovation. All in all, Home remains on track to become profitable a few year basis in 2017, excluding the 15,000,000 real estate gain in the 2nd quarter. So this is what I wanted to cover regarding the business and our operational performance. I will now hand over to Stephane who will tell us more about the financial performance for the third quarter of 2017. Yes, thank you, Eric. Let me now turn to Page 12 and look at the adjusted EBITDA bridge. So when you look at the gross margin, we saw again the we saw the positive impact of volume and mix And we also continue to deliver significant productivity and procurement savings as you can see. Which has the overall gross margin as a percentage of sales to further improve by 30 basis points compared to the first quarter of 2016. We also continue to work on our indirect costs, which decreased by 1,000,000, while we made additional investment to support our growth And finally, we benefited slightly from favorable currencies except on our adjusted EBITDA. Turning to our cost base on page 13. You can see here the year on year evolution of our adjusted indirect cost base, which was 31% in the 3rd quarter 2017, which is 40 basis points lower than December of last year. As you know, we have designed a detailed multi year plan to significantly lower our indirect costs in particular on selling expenses on IT, on real estate, finance, HR. We continue to implement these plans and all you call production initiatives that we have launched, and we achieved during this quarter compared to last year a 1,000,000 reduction. That this reduction, again, is after some additional investment that we are making in order to support our growth in particular in own systems. In addition, as mentioned earlier, we benefited from the favorable impact of current CTA division also on our cost base. Which reduced the indirect cost by 14,000,000 level. If we look at the EBITDA, we have a real estate gain of 1,000,000 related to LEMS. Furthermore, like I did also last quarter. I'd like to give you an update on our restructuring charges that support our cost reduction actions both above and below our gross margin. In the 4th 9 months of 2017, we recorded 1,000,000 of restructuring charges. For the remainder of the year, like we said at the end of July, We expect restructuring charges to be in the range of $80,000,000 to $19,000,000. And that brings, for the full year, the restructuring charges for the year to be in the range of 1,000,000 to 1,000,000. And that's in line with the guidance we gave, which is between 1.5% and 2% of sales. So these restructuring charges expected to be booked in the 4th quarter are mainly related to the further optimization of our manufacturing footprint, especially in lamps and also the continued reduction of our cost base across our businesses and across our functions. Let me now take a closer look at the working capital evolution in the third quarter. So overall, in absolute value, the working capital at the end of September increased by 1,000,000 compared to a year ago. It represents 11.9% of sales, which is an increase of 70 basis point, compared to a year ago. We ended the quarter with higher inventories compared to the end of June. And as mentioned by Eric earlier, that reflects, well, the improvement of our growth profile overall as a company and also the buildup of inventory, especially in home, ahead of the high season in the fourth quarter. In addition, our inventories increased in certain geographies where we had anticipated higher sales in the third quarter. And finally, when you look at this trend in working capital and the impact of free cash flow, this is a very different trend, of course, compared to last year when working capital was lowered in the third quarter as the company was still experiencing negative growth. In the fourth quarter, we do expect substantial reduction in inventories and marginally in working capital as this is the higher quarter in terms of sales. Let's look now on Slide 15 at the net debt evolution. At the end of the quarter, our net debt is 1,000,000 above the end of June. If you look at the free flow in addition to the profit that we generated in the quarter and the impact of the increased working capital that I just talked about You can see some of the elements that impacted our cash and therefore our debt position. Net CapEx was 1,000,000 positive because it includes the favorable impact of the real estate transaction for 1,000,000 The change in provision of 1,000,000, many relates to the contribution to the U. S. Pension fund that we did for 1,000,000, I. E. $15,000,000. In the quarter, we also paid 1,000,000 for the tax sales and interest. And then outside of the free cash flow, you can see here the share repurchase, the buyback for about 1,000,000 to cover the obligations that we have under our API performance share plans. And that leaves us with a net debt position at the end of September of 1,000,000, which includes our cash position of 605,000,000 at the end of September. Let me now turn to Eric for the last part of the presentation. Sure. Thank you, Stefan. Let's now move to slide 17 and, let's move to the outlook. Achieving comparable sales growth in the quarter, is an important step in the improvement of our growth profile. We're also on track to improve the overall adjusted EBITA margin by 50 to 100 basis points. And for home, to be profitable for the full year in 2017. Please note that this is excluding the million real estate gain in home in the second quarter of this year. In addition, we expect to deliver a strong free cash flow in the fourth quarter based on the substantial reduction in inventories. So with that, I would like to open the call for questions, which Stephane and myself are very happy to answer. Thank you. And the first question comes from the line of Andreas Willie with JP Tortue. Please go ahead. Your line is open. Good morning, gentlemen. My main question is on the inventory that you discussed on the call as well, of the increase, if you could break that down, how much is in that sense, good inventory because you see the strong demand in Q4 and home and what's the amount of excess inventory in LED where you couldn't sell as many as you had expected and what's the impact on Q4 in terms of selling out these excess bulbs? Should we expect a negative impact on margins in terms of price reductions or discounts or be sold instead of basically buying new ones during Q4? Okay, sure. Thanks, Andreas, for the question. So let me try to take it by piece. I think Eva has would not give exact productions. I would tell you what is in the inventory build out. So, first of all, there is an increase on the home business as we had targeted not only an increase in Q3, which has materialized, but we also have anticipated a strong increase in Q4 for that business and in general, for the consumer business of Finsights in Q4 is a strong quarter. So I would say that this inventory is built up to prepare for future higher sales. So this is also the translation, but when you have a big change in the gross profit side, you know, with a business overall home that was growing at 28% in Q3. It does consume working capital, and we need to be able to build the inventory to, to tackle the demand. Which, if you remember well, we were not doing so well last year, and I think that we missed opportunities. So we didn't want that to happen. Into a 17. Now let's move to other businesses and let's move to LED. When you look at the performance of LED in Q3. The performance in heavy lumps is pretty much in line with expectation maybe a bit lower as we were very aggressive also on that business and we had started to build up inventory, as we said previously, you know, at the end of Q2. So the demand that we're forecasting in Q3 and now also coming up in Q4, where we were surprised is with, the lower demand that we experienced on the LED electronics part of the business. And this is where we had build up inventory and not only in finished goods, but also in components because This is a business where we are not totally outsourced. And the demand there was lower than what we had anticipated. Let me give you a very specific example. In the U. S, selling OEM or to linear manufacturers, we've seen that the demand was much lower than we had anticipated and the market that was far softer, especially when we're selling to big OEM, there's still more dynamic. We're selling to smaller sized customers. So this is what we experienced on that business. There's no real impact either on margin that we see on this inventory buildup. Most of it, I would say, is outsourced. And that is not outsourced it's felt so much in finished goods, but also a fairly sizable amount in compartments. So I hope that this answers your question on the answer. Yes, that's very clear. The follow-up question, if I look at your professional business, which had an excellent quarter, Europe probably needs to grow somewhere in the mid teens, which is maybe five times what the market grows. Could you maybe give some more comments around where you're gaining share? Are these some larger projects? Is this kind of subtle digit growth in Europe sustainable? Thank you. So let me give an overall comment, not only about Europe, what we are very pleased to see is the 2 steps transformation really happening. So, the first step is about from converting the business to LED. And the second step is in moving to connected lighting. What we've said previously in the closings that we had been investing ahead of the curve on consumer business, but also on professional business in order to build the right weapons that would help us to be also a leading player in the connected lighting space. Mainly, what we've done on the professional part of the business, we have invested in technology because when we sell connected lighting systems, all the technology is ours, we have been investing in new sets force new capabilities in all of the markets where we operate in order to be able to sell directly to end users in a complicated systems. And we have also invested in entities, 8 around the world that we call system centers that do not need a quotation but also the delivery of the project. When we reviewed, in the last week, the performance in the different markets, we realized that these investments are starting to pay off, they come to a level of maturity that is satisfactory and this is bringing the sales of connected lighting systems and services up. This has been particularly the case in Europe where we have been strong on products, but also very strong on connected lighting systems and services. We are touching 3 major end user segments. So historically, we've always been good in what we would call the outdoor application. So this is still the case. But also now with the newly announced interact Office offer, we see that we are also successful in office and industry, but also in retail and hospitality. So we see that this trend is really coming to to, to completion. And as I was saying, I think we only scratched the surface. The potential in connecting is really, really strong moving forward. Thank you. And moving on to the line of David Voss with Barclays. Please go ahead. I have one please on connected lighting solutions, acuity in its recent report mentioned that it's, it's now installed 90,000,000 square feet around 8,000,000 square meters in its collected lighting solution offering. Wondering if you could give us a sort of a similar number as to where Phillips is at this moment in time. Question would be just on the U. S. Professional Business also. If you could give an update on how the margin improvement in that particular bit of the business is going. It strikes me that perhaps we've made a bit more progress there too. So, but confirming that would be helpful. Thank you so much. Sure. Maybe we're not always using the same metrics For us, the metric that we use, which is very speechful and I think it is an unequaled number in the lighting industry at this point in time, is to measure the number of light points that we have connected across all the sectors. And all the unusual segments, including, you know, consumer and professional. And at the end of September 2017, we had connected 26,000,000 light points worldwide in all the different segments. When you know that, 26,000,000,000 is the existing number of light points today on the planet it gives you an idea of the potential that we have, moving ahead. Sorry, Eric, if the line just broke up a little that's 1,000,000 as of the end of Q3 versus 1,000,000,000 of total light points globally? Yes, absolutely. Would you be able to give us a sense of how that's moved between Q2 and Q3 so that 26,000,000 number? Yes, I can tell you how it moved between the end of last year where we were at 1,200,000,000 And at the end of this quarter where we are at 26,000,000. So, you see that there's been a big, big increase in the course of 2017. On Israel as professional, business. So we are continuing to see we have said it repeatedly, you know, in the previous quarters in the construction non residential market, for small-two medium sized project, the market being soft with a renewed intensity, competitive intensity, So this is a market which is pretty much better at this point in time and the signs of weakness are continuing. We don't see that this rebounding anytime soon. This is a situation that we are facing since a few quarters. At the same time, we are continuing in that environment in the achieving the plan that we have in terms of improvements on many different fronts. So that is not deterring in any way, our resilience carry the plans that we had ahead. But that's the situation of that market, specifically in the U. S. Now there is another side or bigger project, which is dynamic, there is another side, maybe less on the professional side, but on the consumer side, which is also moving up quite fast. I just wanted to highlight because we said that, you know, whenever we did the introduction that we also, specifically in the US, professional market starting in Q1, we continued in Q2, talking to me about maybe projects that we had taken and that we would be invoicing in Q3 and Q4 and potentially also Q1 next year. I just want to make sure and highlight that in the performance of professional that you have in front of you, there is no contribution of that project So we have not been able to recognize the revenue in Q3. And this has nothing to do with the project itself or our contribution to it on the country, we are totally in line with whatever we had to deliver in terms of production. So we are absolutely ready and on time. It's just that the end user customer has decided to postpone installation And then, as a consequence to this, the revenue recognition is also postponed. So I just wanted to make that clear because we were pretty much telling you that this will be recognized in Q3. It hasn't been so far. That. Where is the client now in terms of the delays? Have they now made up their mind and do they want it in Q4 or in Q1 next year? Can you shed some light on that? Yes, I would, you know, we are in daily contact. At this point in time, we don't know exactly because we have a contractor in between us and the end users. So we are discussing that, we don't know yet. You know, we have also now a period, in the US, it's going to be a winter. So, you know, installing in winter is not is using so we get what is in the mind of the customer at this point in time. So I cannot, I cannot really comment, but we are invoicing and we are being paid, but we don't recognize the revenue at this point in time. Thank you. And next quarter in line is Alexander Verdel from Bank of America Merrill Lynch. Please go ahead. Your line is open. Thanks very much. Good morning, everybody. So first question, I guess, I wondered if you could just break down the margin improvement in professional for us. Maybe you just give us a sense for how much of it is the related to the cost the structural cost reduction particularly, how much of it from operational leverage, pricing headwinds presumably isn't offset Any indication on the granularity of that breakdown you could give would be very helpful? Yes, sure, Alex, Stefan here. Let me give you a little bit of direction here without, of course, being specific visit, we don't provide those breakdown by business. One of the large hardware, of course, has been the the increase and the operational leverage, and here for sure in costs, we've seen a higher than a usual, a high than before the effect that is very positive. So that is driving overall the operational leverage that is leading of factories and that has a positive effect on the P and L. That's one element The second one is that as mentioned by Eric, and we've seen in Q3, again, a significant level of activity in systems, and therefore growth. And as you will know, systems carrier, higher margin. So from that standpoint, the mix effect of selling more system than products has also contributed to the margin equipment. It's not something new. It was the case already before, but for sure in Q3, it has helped, and that's the strategy that we are pursuing. Number 3, cost reduction, yes, for sure, across our various geographies for now several quarters. We've taken actions to reduce our cost manufacturing costs used for example in Q3 last year, a significant restructuring charge we took in the P and L that was for manufacturing sites in professional. And over the last four quarters, we have actually closed those sites. And then also on indirect cost, across the pandemic and possibly are also bringing down the cost. So it's really those 3 elements that are driving the improvement in the margin. Okay. That's very clear. And then just as a follow-up question, if I just take a quick look at your, the LED growth for the group, you quoted at 22%, LED growth the divisional growth obviously is only 14, but because LED as a division is much, much smaller overseas relative to the rest of the group, it implies pretty meaningful growth for professional, again, given home is small in relative terms. With respect to growth in LED and professional. Would it be right to assume that your growth in LED in professional and I guess related to the systems comment you just made, must be north of 25% to 30% year on year. Is that the right sort of number to think about? We're not indicating those types of numbers. Now What you write is that the growth of home, LED is substantial and probably higher than the growth of professional LED, which is also above the average. Okay, that's helpful. Thank you. Thank you. And moving on to the line of Alok Katre with Societe Generale. Please go ahead. Your line is open. Hi, thanks for taking my questions. I just had one follow-up, connected lighting systems just to give us a sense of, you know, how much growth we are getting out of out of that? And also, Pablo, if you could just remind me of the connected light points at the end of 2016. I didn't catch that number as well as to follow-up and then I'll come to my question. Yes. We had communicated one time ago at the time of the IPO that the twenty nineteen systems and civilian was 10% of the overall opportunity business. It has grown since then. As, you know, that part of the business has grown much higher than the average. We estimate in the year at this point in time around 18% to 20% of the position business. And number of connected light points, at the end of 2016? At the end of 2016, we had connected, and that's not only on the provisioning side, the provision and consumer either 22,000,000 light points. 22. Okay, okay, great. And at the end of September, this year, it's 26,000,000. Okay, okay. Fair enough. Thanks. And then just on how are you positioned on the input side. I'm just thinking about the input costs and then the cost savings within the bridge, obviously, the decline in non manufacturing costs is quite modest yet. So obviously one is when should we expect an acceleration over here? It's still on track for 2018. And then how are we positioned on the input cost side? Where, you know, we're hearing about, you know, risers in chip prices coming out of China. So it'd be great if we'd clarify on that. Thanks. Yes. So let me take the, the first part on the manufacturing cost. Sorry, are you, you saw in the first two quarters of the year, because of the sales decline, as a percentage of sales, we are still able the same quarter of the previous year. Now Q3 is a much better trend. We are below quarter of 2015 in percentage by 40 basis points. 12,000,000 is, of course, a significant amount. Now, as I mentioned, it includes also the fact that we have increased our spent in the middle of the rest to support the growth, especially in home systems. So as you can see that overall R and D cost in absolute that you are higher in Q3 this year than in Q3 last year. So we are also investing to support the growth Now we expect more cost dilution per quarter than the $12,000,000, but it doesn't come only exactly linear way, every quarter. But the role, yes, the programs that are in place are tailor than design to deliver more than that because as you know, the goal is that we reduce our manufacturing cost as a percentage of sales and we go to a range which is anywhere between 25% to 29% of the next 2 years. So there is more to come and part of the restructuring charges that we are taking also address those items Now, on the on your for the part of the question on components and the bill of material, we've still been able to extract quite a large amount of savings in that area across all the various business groups We've seen, of course, a bit of tension on some of the components side in terms of pricing, but nothing that is changing the trend of the bill of material saving that we've had over the last few quarters. Thank you. And moving on to the line of Lucy Katier with Morgan Stanley. Please go ahead. Your line is open. Hi, good morning gentlemen. Thanks for taking my question. The first one is actually on the LED division. It looks like maybe the growth, you spoken about the price being a bit of a headwind, but when we look at the overall bridge for EBITA, it doesn't seem that the price pressure overall at least for the group was significantly higher than the previous quarter, but the operating leverage of course on the margin in LED since you have been quite weak. So I'm just trying to understand how we should think about the development of the earnings profile in this division. Going forward as it seems that the margin is a little bit stalling here? Yes, I think you're right in your analysis. So the price pressure has not been drastically higher than before. I think we're capable in that business still to hold on the gross margin. And if we connect that to the previous question of dialogue, I think that, now to see higher operational leverage. It will also come from our capacity to reduce our overall manufacturing costs because each business depending on their share of our revenue is also allocated some costs from the whole sliding base cost. So, yes, this is something that, that we have in mind and that we are working hard on. The cost and the cost of the company as a whole is a subject that we are tackling at this point in time with the highest level of, of priority to bring it down. Thank you. The second question I had was regarding the comments you made around the LED electronics business, which had come much softer than than you were expecting. I just wanted to understand that in a bigger context of the demand for this type of product, which are typically led by luminaire's manufacturers and kind of bigger licensing system. Should we read, I mean, do you think it was more of a one off maybe something seasonal or should we read a little bit more into it because typically if customers are not buying control of the electronic, it means we probably don't plan to actually manufacture the Lumenia. So how should we think about that, please? It's directly linked effectively. If it is done by drivers, it means that they probably are not going to sell them in health. Now, just to correct one other thing that you have said, it's not only linked to big, lighting system offers. You know, it's linear in general, including also Liena that would go into systems. But you're right. The fact that less drivers or less to add to modules are being sold by us. It means that, our customers are selling less Now it depends on the geographies. We see, at this point in time, a trend specifically in Northern America in that, we don't think it's going to be only, you know, a quarter issue. It may last a bit longer. So just just to follow-up on that, so you kind of implying here that you expect potentially the North American limited business as a market to continue to be a little bit weaker considering the trends we're seeing in electronics for a bit of a longer term? And this is pretty much consistent to what we've said on and on that we were seeing, you know, the non residential small to medium sized project market being served in the U. S, that's a confirmation of it. Thank you. And moving on to the line of Peter Olofsen with Kepler Cheuvreux. Please go ahead. Your line is open. Good morning. I had a question about the Home Systems business. So basically the growth that you are showing is what you're selling into the channel. What are you seeing in terms of retail sellout? Are you seeing a similar growth there? Or have your retail partners been building up inventory as well ahead of the Q4 demand? And then I have a follow-up on the LED segment. So, yes, the numbers that you see at the selling in number The sellout has been extremely fainted. And at this point in time, given the growth of that business, also at our customers. There's very little time to have in between inventories to be built because this is an extremely mainly dynamic environment and the sellout is very strong too. Okay. That's helpful. And then on the LED segment, how big is the electronics part within that segment? Electronics is slightly, below 50% to that business. Okay. So it's pretty sizable within the total. Thank you. And moving on to the line of Daniel Acosta with Goldman Sachs. Please go ahead. Your line is open. Hi, good morning. I wanted to go back to the free cash flow point. Can you comment whether you think you will be positive in 2017 on free cash and also what do you think is a normalized working capital to sales level for this business? And the flat growth? And then I have a follow-up quick one. So I will stay, I will take the first part of the question, which is the easiest one and I will leave the other ones to stay on. Yes, we would be positive in free cash flow for 'seventeen. Yes. And so, Daniel, to your for the comment on whether we see any material evolution in our working cap percentage and should we change about what it was before. But fundamentally, no, of course, when you are in the period of time, you go from decline to growth the whole percentage on the quarterly basis can become a little bit different. Also, as you understand, when you have accelerating growth, especially in some businesses on here and referring to home system, when we measure inventory as a percentage of last 12 month sales. It doesn't really show what's coming, so it increases with the percentage. But fundamentally, our working capital as a percentage of sales as a company, even when we return to work, should not be fundamentally different from what it's used to be. And we're not going to go backward compared to the improvements and reduction that we had turned over the last 2 years. And following up on the positive free cash in 2017, shall we look at Q4 from the prior years has an indication or given growth is potentially much better now it should be essentially lower than that and pension contributions. Can you comment whether those are going to continue? So let me take a few of the pension part. So we said we would contribute $150,000,000 of the 3 years. So for this year, we're not going to make any additional contribution, but we will make further contribution in 2018 2019. And as a is we reduce, of course, our liability by the segment out and also on some of the P and L and premium cost that we are paying. And then on the fourth quarter, we are expecting a strong free cash flow and a strong reduction of working capital in the fourth quarter and inventories. Plenty mental resources. Thank you. Moving on to the line of Peter O'Reilly with Jefferies. Please go ahead. Your line is open. Good morning. I've got two questions please on trends in NEV and Lambs. Firstly on LED, I'm interested in the mix you talked earlier this year about and also last year about the U. S. Market moving more towards some value, really quite a rapid rate in 2016. I get impression that's now happening in other parts of the world. So maybe you could talk about the overall mix and whether you see this trend continuing for quite some time? And then secondly, on Lance, think if my memory is correct in 'sixteen, the market fell more further than anticipated, which is one of the reasons for the margin being so strong 17 looks like the market is starting to fall faster than you anticipate, and you've got strong growth coming through NDD. Looking slightly further out, I mean, is the risk that the lamps business actually started to decline at a faster rate because it's been cannibalized more rapidly by LED. So what can you tell us about the the trend is developing in the, the Land's business, please? Sure. Thank you, Peter. On the first question regarding L. D. So the, our EDD business group is, as we've said repeatedly, you know, integrating 2 different businesses. The LED lamps and the LED electronics. So we've talked about the LED electronics, they're giving a bit of flavor of what we see happening in the world with a market that has softened, and we gave very specific example, in the U. S, which is our biggest market for that business. When it comes to LDD Lumps, what we see, we see that in the markets where LDD have already penetrated above 50%. We see that the growth for belly dance is smaller, and this business is growing slower than in other geographies where the penetration is not as much. So let me give you an example. There are countries in Europe at this point in time. When we are already selling for In which case, we see the growth of the LED lamps, being slower than in other countries, like probably, you know, growth, countries where the penetration of HD lamps in the overall lands market is much more reduced. So that has to be taken into account when we look at the overall growth pattern of our business. Of course, we continue to innovate and see to bring new price to the market and new features but that's a reality that we also have to face. When it comes to lamps, I would, I would trade it in the same way as you did, probably that in 2016 we were expecting, a faster decline than what actually happened. In 2017, it's true that we believe that the market is declining faster the estimate that we have is between 23% to 25%. So with the decline, which is around between 'eighteen to 'twenty, we are doing better than the market decline. And this is the prime objective of that business. It is to gain market share and to be the last thing in mind. So this is actually happening, and we are making this happen. Could we see the ramps decline faster in the future? Well, there are clearly some technologies that are going to be banned at least in Europe to start with integrating, which is halogen, And what we also see, we also see that the cannibalization, especially on the consumer business, for the technology that's compact for us from France is, at this point in time, happening quite fast because the price is already averaging also the price points of contact flows from Trans. So all of these factors that we need to take into account we still believe that we should be around the same, level of decline maybe on the higher end of the range, we said 15% to 15% to 20%. But this is something that we monitor. And once again, in the land business group. The main objective for us has always been to reduce costs before the volume come down. And, as you can imagine, we're looking at that, on a very regular basis to see how we need to adapt our close base depending on how we see the volume going down. So this is a very, very dynamic, which exercise that we have to make in a declining environment. Thank you. That's very helpful. If I can just come back on the LED lands business, I think you said in the prospectus that you thought the market would peak in volume terms at about 2020 and then go into decline because you have longer lifecycle longer lifetime therefore a lower replacement rate. Is that still your view that 2020 is the volume peak or given a relatively more rapid towards LED, maybe the volume peak is all in that. Yes, we are keeping the same view It was between 2019 to 2020. But this is when you look at the market of non connected LED lamps, If you were looking at that market in a different way and saying, okay, it's not only about non connected land, it will show about the simple connected land, so the wide connected land. And if you add to the market of land, they connect, and if you add also to that market, part of what is going to cannibalize the non collected Eighty labs, which is, the, what we call the lg liminal, the liginal, the function ones, then we believe that that market has the potential to grow beyond that point. But otherwise, you can strictly talking about non connected evidence, we are pretty much always on the same time horizon in terms of market peak. And the LED lamps in the LED business, they're all non connected because they get reported in home and in professional or are they missing something there? Yes, you're right. At this point, you've done the Avon Connected. Thank you. And moving on to the line of Marcus Link, ABN Emerald. Please go ahead. Your line is open. Thank you. My first question is on the also on the free cash flow. On the provisions, you talked about the pension 1. Also some other provisions that changed, then you will have the restructuring charges in the final quarter. I'm not sure if that's already also cash out in the same quarter. Can you talk about what you're going to see in provisions in the coming quarter below so in the coming years? And my second question is is on Saudi Arabia, still a very big impact, if I'm going to start it like a bit early over a year ago. So I was actually expecting that it would ease off a bit in the year on year comparison. So can you talk about what's what's still further deteriorating in that in that market and what is the outlook there? Let me take the 1 on the free cash flow and the provision. First, when you look at Q3 for further comparison to last year, is quite different, as you said, this year, there is the impact of pension, which was met last year. And also the other thing is that last year, as you said, the net provision movement was positive 7,000,000 rule. And this is because we took last year a large restructuring charge during the quarter, which of course, was not cashed out during the quarter, hence the positive impact on the provision. This, what was the case this year. Now in the fourth quarter, we expect to take a significant amount in restructuring as of charge. We will not spend the cash on that charge during the quarter. This is cash that we've spent in 2018 and probably also some of those initiatives in 2019, but it will hit the P and L, but not the free cash flow in the fourth quarter Moving forward, again, we've said that overall and again in 2018 2019, we expect to look P and L charges in the range of 1.5% to 2% of sales so that we tackle the optimization of our manufacturing footprint especially in the Lens area and then later on that amount will go down and we are still on track for that. To answer your question on KSA, I would echo what you have, what you have said the impact has been worsening in Q3. We should expect and we should have expected also in Q3 an impact closer to what we have seen in Q1 and Q2. There's, very specific thing that has happened in Q3, where we have really continued to apply our reviews of prudence on that market, especially when it comes to credit management. So there's a very specific issue that I cannot comment on in Q3, but the normal trend should be what we have experienced in Q1 and Q2. Okay, that's clear. Maybe as a short follow-up on the provision on the year on year comparison, is the change in provision except for the Is that a net inflow or outflow? When you say year on year? Yes, for the full year, for the full year. Oh, for the full year, based on what we will take in the fourth quarter, that should be an inflow meaning. We're going to book more provision that we would cash out. Thank you. And moving on to the line of David Fracman with KBC Securities. Please go ahead. Your line is open. Thanks. Good morning. First question on the lead business and particularly on the lead electronics. So you've been saying that the electronics were lower. Could you kind of tell us, I think I didn't hear correctly, like the breakdown in sales in the lead division between lead lamps and lead electronics and maybe then give us some indication on the impacts of the weaker electronics on the margin for the division because I guess the electronics is higher margin. Then actually second question on the professional margin. Could you give us a very rough indication of the trends not maybe the absolute level that the trends in margin between Europe and US and maybe the key I say, so the Arabia impact on margin? So let's start with, BLS. So as I have said previously, And when you look at the overall LED business group, you know, slightly less than half of that business group is LED electronics. There's no substantial impact in terms of mix between the two businesses when you reconsolidate the global at the global business group level. For PROS, the margin in Europe is above average and the margin in US is below average. The impact of KSA on the margin has been quite substantial. We didn't disclose it, but it has been quite substantial also in Q3. And then to come back on Europe and the U. S, maybe the trend understand that Europe is above average, but as for instance, Europe has been improving faster than US given the the difference in, in the market conditions? Well, we see a positive trend in that business in terms of margin due to 2 factors. And this is valid in Europe as much as it is so valid in the Americas, which is that when we said a many billionaire, we said it's at a higher margin than a conventional linear. And whenever we said systems, which is the path, which is growing, You know, the fastest in that business, it also trends at a higher margin than adding engineers. So the combination of the growth of early billing hours as well as connecting lighting systems and services is having a positive impact on the margin and this is valid in Americas as much as it is valid in Europe. Yes, thank you. We now take the last question from the line of Tim Schultz Melanda with JP Morgan. Please go ahead. Your line is open. It's Tim Schulzman on the specs side. Thank you for taking my question. It was really just a clarification. Eric, I think you talked about this large U. S. Project where you said that you are invoicing and you are being paid, but you're not recognizing revenue. So the question is really two parts, just, A, that seems slightly strange situation. If you could just provide a bit of clarification. And number 2, that would suggest that that project has not been a material influence on your working capital and cash flow metrics in Q3. Could you just confirm that? So let me confirm all the elements. So yes, it has an impact on our cash flow. As it stays, you know, since we have produced the goods in inventory, so it has material impact on the cash flow. So, that's 1. 2nd, the way the contract is basically, done in the following fashion. So we have to produce against some different schedules. Whenever we need those schedules, we are invoicing. And then there is after the invoicing delay in order for us to be paid. And all that is happening exactly according to plan. Now, The revenue recognition or the transfer of title of the product was linked to the start of the installation and their product being taken by the installers to start the installation. And as this is not happening, according to the accounting rules that we have to follow, we cannot recognize. Okay, very clear. And could you give us some scaling of how significant a contribution that was into the Q3 working capital, please? We cannot do this for obvious reasons. I'm sorry, Tim, but if we highlighted starting in Q1, continuing in Q3, that we had, been able to get a substantial project, you know, the substantial was also to be able to, guide you towards the fact that this is something which is quite sizable for fixed pricing. Thank you very much. And with that, I would like to return the conference call back to the speakers. Alright, ladies and gentlemen. Thank you very much for attending the call and for taking part in discussion about our results. If you have any additional questions, Peter, do not hesitate to contact and rescue relations, and we are happy to answer your questions. Ladies and gentlemen, this concludes today's conference call. Thank you very much for attending. You may now disconnect your lines.