Hello and welcome to the Signify fourth quarter and full-year results 2021. Throughout the call, all participants will be in listen-only mode, and afterwards there'll be a question and answer session. Please note this is limited to one question plus one follow-up. Today, I'm pleased to present Eric Rondolat, CEO, Javier van Engelen, CFO, Thelke Gerdes, Head of IR. Please go ahead with your meeting.
Good morning, everyone, and welcome to Signify's earnings call for the fourth quarter and full-year 2021. With me are Eric Rondolat, CEO of Signify, and Javier van Engelen, CFO. During this call, Eric will first take you through the highlights of the year, after which Javier will review the company's financial performance and the fourth quarter. Eric will then review the full-year 2021 and close with the outlook for 2022. After that, we will be happy to take your questions. Our press release and presentations were published this morning at 7:00 A.M. Both documents are available for download from our investor relations website. The transcript and conference call will be made available as soon as possible on our investor relations website. With that, I will now hand over to Eric.
Thank you, Thelke . Good morning, everyone, and thank you for joining us today. Let's start with some highlights on the full-year 2021 results. Let's go to slide four. In 2021, we continued to improve the growth profile of Signify as our connected lighting sales grew by 21% to EUR 1.4 billion. Our growth platforms grew by 19% to EUR 326 million. Combined, they now represent 25% of our sales. We also delivered our eighth consecutive year of EBITA margin expansion and achieved a 90 basis points improvement in 2021. Our transformation has happened as our two digital divisions now contribute to over 80% of sales, profit, and also cash. Our Brighter Lives, Better World 2025 sustainability program is off a very good start in 2021.
I am proud to see our progress towards our commitment and to double our positive impact on the environment and society. In 2021, our team adapted to unexpected challenges but relentlessly kept focus on the execution of our strategy. This recipe led us to deliver against all our objectives for the year, putting us on track to achieve our midterm objective with a comparable sales growth of 3.8% for the year, an adjusted EBITA margin improvement to 11.6%, a strong free cash flow generation of 8.9% of sales, and this enabled us to reduce our debt by EUR 350 million, lowering our leverage from 1.7 to 1.4 times.
In line with our capital allocation policy, we will propose to pay a cash dividend of EUR 1.45 per share over 2021. Let me now hand over the presentation to Javier, who will discuss about our fourth quarter performance.
Thank you, Eric, and good morning, everyone. I have the pleasure to present our quarter four results starting on page six. Sales in Q4 reached EUR 2 billion with an adjusted EBITA margin of 13.2% and a free cash flow of EUR 257 million. We increased the install base of connected light points from 92 million in Q3 to 96 million at the end of Q4. LED-based sales represented 83% of total sales. Normal sales increased by 6.9%, with comparable sales up by 4.5%. Adjusted EBITA increased from EUR 251 million in Q4 2020 to EUR 265 million in Q4 2021.
EBITA margin remains strong at 13.2%, a 20 basis point decline versus Q4 2020, as a 70 basis points lower gross margin versus a high base in 2020 was largely offset by operating leverage. Net income increased by 24% to EUR 170 million, driven by a higher income from operations and lower net financial expenses. Finally, free cash flow was EUR 257 million or 12.8% of sales. Now let's move on to our divisions, starting with Digital Solutions on slide seven. Digital Solutions delivered a strong Q4 performance with comparable sales growth of 11.2% and an adjusted EBITA margin of 14.1%. The double-digit comparable sales growth was driven by strong underlying growth in many markets and a solid contribution from Cooper Lighting.
Adjusted EBITA margin improved by 260 basis points to 14.1%, benefiting from operating leverage and from price and sales mix more than offsetting higher costs of raw materials, components, and logistics. The business highlights from our Digital Solutions division on slide eight illustrate the continued progress we are making in servicing the needs of our professional customers. The two middle projects, Akinox and El Dorado Airport, illustrate the continuous demand for connected lighting. Today, though, I'd like to highlight a significant UVC project in Taiwan, showing our commitment to health and well-being and the ongoing relevance of UVC disinfection technology amid a fourth phase of infections. Restaurant chain TTFB in Taiwan has installed UVC disinfection upper air luminaires in the dining areas and battens in the kitchen of 34 of its restaurants.
The upper air devices in the restaurants are switched on from prior to guests arriving in the morning until the restaurant closure. In the kitchen areas, the battens are used during the afternoon break from 3 to 5 P.M. and after working hours in the night. TTFB is looking at extending UVC disinfection across another 100 restaurants. The fourth highlight shows the progress different countries in Europe are making as they transition towards using more renewable energy sources. We provided over 100 Philips SunStay streetlights to 10 municipalities in Italy. The lights ensure safe and secure roads after darkness by harnessing the power of the sun and limiting the use of electricity from the power grid, thereby showcasing our commitment to both climate action and safety and security. Let's move on to the next division on slide nine.
In the fourth quarter, the Digital Products division grew comparable sales by 1.6% with an adjusted EBITA margin of 15.5%. On the sales side, LED electronics and Klite had a particularly strong performance. Connected home sales were stable despite both the high 2020 comparison base and supply chain issues that impacted product availability in 2021. Adjusted EBITA margin reached 15.5% versus a record base of 18% in 2021. While pricing and mix compensated the increase of material cost and logistic cost, a stronger Chinese renminbi negatively impacted gross margin. Also, our increased growth investment in both R&D and marketing could not be fully diluted due to supply chain shortages. Slide 10 shows a few business highlights from the Digital Products division, all illustrating our commitment to innovation. Let me highlight two of these.
Just as with our professional customers, I'd like to start with our commitment to health and well-being, as UVC disinfection devices are also more relevant than ever for our consumers. In Q4, we launched the UVC disinfection air cleaner in the Netherlands, South Korea, Australia, Indonesia, Thailand, Vietnam, and Japan. This device deactivates more than 99% of viruses and bacteria in an average size room in about three hours, making it easy, easier than ever before, for people to disinfect the air in their homes. It's easy to use and has an automatic switch off timer, a silent mode, and an indicator light that lets you know when the product is active. As the UVC light source is shielded by a casing, it's safe to use around people, animals, and plants.
Another highlight is how we help our customers in North America to accelerate the replacement of fluorescent lighting with this new Type B CorePro TLED range. This range levers up to 55% energy savings, making it the natural replacement for fluorescent tubes. Its double end connection also makes it very easy to do the rewiring and installation. On top of that is the most affordable Type B LED tube in the range. Moving on to slide 11. Conventional Products comparable sales declined by 11.4%, thereby continuing to outperform the market. Adjusted EBITA margin reached 16.9%, a decline of 200 basis points versus Q4 2020, mainly driven by negative operating leverage. On slide 12, we visualize the adjusted EBITA bridge for total Signify.
Compared to Q4 2020, the adjusted EBITA margin decreased by only 20 basis points to 13.2%, basically as pricing momentum accelerated, and we were able to fully offset higher cost of goods with price and sales mix. In more detail, we have a positive volume contribution of EUR 22 million. Positive pricing impact accelerated versus Q3, and together with positive mix effect, more than offset both structural and transitory cost increases. A net effect was a positive EUR 23 million, a clear acceleration versus Q3. Indirect cost increased by EUR 15 million from increased investments in future growth. Finally, FX had an adverse impact of EUR 14 million, mainly from the appreciation of the Chinese renminbi. On slide 13, I'd like to zoom in on our working capital performance during the quarter.
On an absolute basis versus Q4 2020, working capital decreased by EUR 63 million to EUR 250 million, or from 4.7% to 3.6% of sales. The lower year-on-year working capital was mainly the result of higher payables, more than offsetting higher inventories from both longer order lead times and increased safe stock levels. Finally, on slide 14, you can see our net debt evolution. At the end of December, our net debt position reduced to EUR 1.16 billion, thereby reducing our net leverage ratio from 1.8 to 1.4 times. This reduction was mainly driven by the EUR 257 million free cash flow generation in the fourth quarter. In line with our commitment, we also repaid EUR 350 million of debt in the fourth quarter.
Overall, we remain well on track to deliver on our commitment to reduce our leverage ratio back to 1x EBITA by the end of 2022. With this, I would now like to hand over to Eric for the full-year 2021 performance.
Thank you, Javier. Let's go to slide 16. In 2021, Digital Solutions and Digital Products further increased their contribution to our business, now reaching 87% of our sales, 82% of adjusted EBITA, and 85% of free cash flow, driven by innovation in energy efficient and digital lighting technologies that have generated substantial growth over the past 10 years. I would like now to discuss the performance of connected lighting and our growth platforms in more details. We go to slide 17. Connected lighting grew by 21%, driven by demand for our consumer brands, Philips Hue and WiZ, and our professional systems brand Interact. Our growth platforms, agriculture lighting, solar lighting, UVC and 3D printing grew by 19%.
Together, they now represent 25% of our sales and an important part of our growth in 2021. The soon addition of our latest acquisition, Fluence, will further strengthen our growth and the growth of our growth platforms. I would now like to spend a moment on the 2021 supply chain developments, on slide 18. As you can see, component supply lead times have substantially increased even more so on the active component side. We have reached an unequaled number of level four escalations. This led us to redesign products and find alternative sources of supply in record times. At the same time, logistics disruptions have hampered our capacity to deliver our customers because of container shortages and congested ports. This led us to look for multimodal transportation solutions.
We have seen our distribution centers' replenishment lead time reach an all-time high, while goods in transit and back orders sharply increased. We had to increase our levels of inventory to deliver our customers under these conditions. Overall, we are remaining cautious on the supply chain situation, and based on the most recent trends, we are expecting continued logistic issues in H1 2022, with improvements in H2 2022. For components, we are expecting to see further and continuing improvements in H1. Looking at the three divisions in more details, we go to slide 19. Digital Solutions had a comparable growth of 3.4% as the division faced a slower recovery throughout the year, driven by continued lockdowns and a high exposure to component shortages. Demand picked up in the second half of the year with a particularly strong fourth quarter.
The division improved its margin by 110 basis points, reaching 11.3%, mainly driven by operating leverage and indirect cost savings. Digital Products achieved a comparable growth of 8.8%, particularly driven by the strong demand of our two connected home brands, Philips Hue and WiZ. The division improved its margin by 90 basis points, reaching 13.8%, driven by operating leverage and positive price and mix, which more than offset higher input costs and investments in marketing. Conventional Products had a comparable sales decline of only 6.9%, driven by the low base of previous year and continued market share gains. The division improved adjusted EBITA margin by 70 basis points, mostly driven by indirect cost savings. Next, I would like to discuss our sustainability performance on slide 20.
We have now completed the first year of our Brighter Lives, Better World 2025 program, making significant progress towards doubling our impact on the environment and society. By the end of 2021, the cumulative carbon reduction over our value chain was 60 million tons, which puts us on track in achieving our 2025 target. Circular revenues increased to 25%, driven by a further expansion of serviceable professional luminaires and the continuous stable contribution of consumer luminaires and circular components. This also puts us on track for the 2025 target of 32%. Brighter Lives revenue were 27%, which means that we are making good progress towards the target of 32% in 2025.
Finally, the percentage of women in leadership position was 25%, stable compared to last quarter, but slightly below our 2021 intermediary goal to reach the 2025 target of 34%. In Q4, we launched the Powering Inclusion Series, which aims at increasing the awareness of our leaders and people managers on how to foster inclusion. We are very proud that S&P Global Corporate Sustainability recognizes our sustainability commitment and has ranked us in the top 1% in the electrical component and equipment category. We are included in the Dow Jones Sustainability World Index now for the fifth consecutive year. We ranked first for four years and second one year last year. These achievements reaffirm our commitment to leadership in sustainability. Another important highlight is the intended acquisition of Fluence announced in December, as shown on slide 21.
We reached a definitive agreement with ams OSRAM to acquire Austin, Texas-based Fluence for $272 million on a cash basis. This will strengthen our agriculture growth platform in North America and will enable us to capture the full potential of the U.S. market for bio-based crops to which cannabis belongs, and also non-biobased crops, building on our strong existing European footprint. We expect the global market for agricultural lighting to grow by more than 20% per year to $1.6 billion in 2024. The acquisition adds Fluence complementary technology and market segments to our existing horticultural lighting operations. The transaction is expected to close in the first half of 2022, subject to regulatory approvals and other conditions.
To wrap up our discussion for the full-year 2021, let's move to slide 22 and to discuss our intended capital allocation for the year. For 2021, we will propose to pay a cash dividend of EUR 1.45, subject to shareholder approval at our AGM on May 17. This is in line with our capital allocation policy to pay an increasing annual cash dividend per share year on year. We also expect to achieve a leverage ratio of reported net EBITDA of 1x by the end of 2022, including the cash outflow from the intended Fluence acquisition and cash inflows from our operations and the continued rationalization of the company's real estate portfolio. In addition, we will continue to invest in organic and inorganic growth opportunities in line with our strategic priorities.
In line with the 2021 to 2023 guidance, given our capital market day, we are providing an outlook for the year. I guess this is on the next slide. As we continue to actively navigate through the gradually improving components and logistics environment, we are expecting a comparable sales growth in the range of 3%-6% to continue the adjusted EBITA margin improvement of up to 60 basis points and a free cash flow generation in excess of 8% of sales. We are confident that we will manage the external volatility with the same agility as we demonstrated in the past two years. The fundamentals of our business remain stronger than ever, driven by the ever-growing need for energy efficient and digital lighting technologies.
With that, I would like to open the call for questions, and both Javier and myself are happy to answer.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Please limit yourself to one question and one follow-up question. Our first question is from George Featherstone of Bank of America. Please go ahead.
Hi. Morning, everyone, and thanks for taking my questions. Firstly, I wondered on the order book, if you could break it out by composition, firstly in terms of contribution from deferrals due to supply chain issues and then also underlying demand. Then comment on which divisions are seeing the strongest order book growth.
Yes. Good morning, George. On the order book, you may remember that, at the end of Q3, beginning of Q4, we stated that, you know, we had something like 90% plus, in terms of additional order book compared to Q4 in 2020. If you now project this at the end of Q4 and the beginning of Q1 in 2022, we have a backlog, an order backlog, which is 67% bigger than what it used to be at the same period last year. You know, as when we started Q4, this is good for the intended sales that we have to expect in Q1. Now, the nature of this backlog is also better in terms of quality, because that backlog in order has seen a substantial reduction.
We're not disclosing this number, but a substantial reduction of the overdue orders. It is a backlog that has continued to perform because we're getting more demand, but we have been able to deliver to our customer a lot of the overdue orders. That's extremely positive. When you look at the dynamic, we probably had more increase in the backlog in Q4 on Digital Products than Digital Solutions. We had, you know, some issues to deliver on Digital Products, especially on the connected businesses, because they require, you know, a lot of components. You know, to cut a long story short and to give an idea, I mean, we have a lot of inventory, for instance, of light strips.
The light strips go with the HDMI box, but we have a big shortage of HDMI box. At the end of the day, the shortage of HDMI box is preventing us from selling, you know, the light strips. The backlog increased in that fashion quite substantially in Q4. At the end of the day, it's 67% more than what we had in Q1 last year. It's a backlog which is much better in terms of quality, and it has increased a bit more in Digital Products than Digital Solutions.
Thank you very much. Just a follow-up on something else you said on the connected lighting revenues. I think normally you do break this out by Digital Solutions and Digital Products. Could you just give us the share of each from the EUR 1.4 billion of connected revenues, please?
Yep, George. You will verify that. I think at one point we were at EUR 1.135 billion in 2020. We are at EUR 1.375 billion in 2021. That's a great progression of 21%. The proportion is that we have about EUR 600 million probably on Digital Products, and the rest will be Digital Solutions. Roughly EUR 600 million on the side of Digital Products and the rest is Digital Solutions.
Excellent. Thank you very much.
Thank you. Our next question is from Lucie Carrier of Morgan Stanley. Please go ahead.
Hi, good morning, gentlemen. Thanks for taking my question and congratulations on a strong finish of 2021. The first question I would have is trying to think a little bit between the different components of your portfolio in terms of growth. I think you mentioned that between connected lighting and your growth platform this is now about 25% of sales, and that has been growing 20% in 2021. I'm not sure whether the 20% is organic or all in. Regardless, that suggests that the rest of the business, 75%, was not growing at all or even declining if the 20% is organic.
My question is, when you kind of project yourself in the future, do you think you can maintain that 20% pace of growth for that group of business, i.e., the connected and the growth niches, or that 20% we are seeing now potentially at some point, you know, because of the comp effect maybe, will be slowing? What does that tell us for effectively the combination of that and the drag of the remaining 75%, which doesn't seem to be really growing despite the comp effect, which was quite easy this year?
Good morning, Lucie. Well, if you take into account 25% of sales, which is connected and growth platform, they have generated about EUR 240 million of growth. I think for the whole group, we are around EUR 350 million of growth for the full-year, meaning that the rest is also growing by EUR 90 million. But in this EUR 90 million, you need also to take into account conventional, which has been declining by EUR 50 million. If you have the growth platform contributing to EUR 240 million of the overall growth in absolute value, you have the rest of the business contributing also by EUR 140 million roughly, to offset the decline of conventional.
It's not only the growth platform that are growing, it's also the other business and you know, because you know very well the company that we've been declining now for many, many years in Conventional. Now you know, if I take a different perspective and I look at where we are compared to 2019, the consumer-based businesses, you know, whether they are connected or not, are at a 100% index, meaning that we have gone back at the end of 2021 to where we were in 2019 for our consumer-based businesses. Now, if you look at Digital, the Digital Solutions division specifically, we are at 89%.
This is where we have a big reservoir of growth, coming up, in 2022 and 2023.
Thank you, Eric. I understand the point you're making on the growth profile, but the number I was mentioning was also including your connected lighting, which you said was connected lighting plus the growth platform was 25%. As in your slide, you said that combo has grown roughly 20% this year. If 25% of the business have grown 20%, 75% hasn't been growing or has declining for it to produce 3.8%. I think this is my point. I'm just trying to understand whether that 20% pace of growth for the combination of connected lighting and the growth platform businesses is something that you see as sustainable because the 75% seemingly hasn't been growing.
Yeah. In the 75%, you take also the conventional part of the business, which is declining. I'm saying that if those 75% you take out the conventional part of the business, the rest is also growing less than connected and growth platform, but it's also growing. Now, let's go back on the first part of your question. Do we see a sustainable growth potential of the connected lighting business and growth platform? Yes, we absolutely do. If I look at these businesses, even during the crisis, they had a much better performance in terms of growth than the rest of the business.
Okay. That's very helpful. Thank you very much. My second question, I wanted to kind of a little bit ask on the profitability of the business. We've seen a big kind of a jump in terms of profitability in Digital Solutions in the fourth quarter. Just wanted to understand a little bit, how we reconcile that versus also the guidance you have provided. Do we think that the 14% you have kind of published now in the fourth quarter is something, you know, sustainable or something that can be normalized? And in light of that, obviously the guidance that you know given for 2021 maybe comes a little bit below consensus expectations. Is it a case of, you know, a mix shift that maybe prevents you from pushing further?
Maybe the 14% we saw in Digital Solutions is maybe not the normalized level.
Thank you, Lucie. Javier van Engelen here. Hope you're doing well. Let me just answer those two questions separately. First of all, the improvement we see in quarter four on Digital Solutions, the important part for us is that, first of all, in the quarter, we have this offset from pricing and mixed with cost of goods. One of the concerns, as you know, throughout the year, is the ability for pricing versus cost of goods. If you look at the bridges we have on the total company, that also portrays Digital Solutions. The first positive message is from a margin stability point of view, the offset of pricing versus increase of cost inflation is happening.
Now, in terms of further dilution of cost and what's driving the margin in Q4, obviously the growth of Digital Solutions at more than 11% also has a significant impact on dilution of cost. And that basically drives the margin improvement of about 260 basis points year-on-year. So that explains the change. Now, you know also from history that typically our quarter four in the company is a high sales quarter, which has a disproportionately lower NMC percentage. So the improvement is there. But to assume that Q4 rates is what you go forward, I think it's pushing a little bit because Q4 typically is always a very high margin quarter. Linking that to the 2022 guidance, we don't believe that we're below expectations. We come from, what?
Seven to eight years of continued EBITDA margin progress. The 90 basis points we have delivered in 2022 is probably more than what many people had expected. We've been able to grow, we've been able to offset across a total year pricing and cost of goods and get the synergies on the overhead. Assuming that we can continue growing at that pace, probably pushing it a bit, and as we said, up to 50 basis points improvement in 2022, allows us to continue on that trend of making sure we price, we manage cost of goods, and we dilute our overheads by sales. At the same time, we also want to reinvest in growth opportunities, right? We want to invest in those areas, and Eric just talked about it.
We still believe there's significant potential to keep on growing our growth platforms and connected. As we've also said last year, we're gonna drive synergies, we're gonna drive cost savings, but also with the objective to invest in growth. With all of that together, improvement up to 50 basis points for 2022, I think would be yet another year over the ninth year of consecutive EBITDA margin improvement in what we all know are difficult circumstances. I hope that answers your question.
Yeah, thank you very much. I was just referring to consensus expectation. I will go back in the queue.
Thank you.
Thank you. Our next question is from of Daniela Costa of Goldman Sachs. Please go ahead.
Hi, this is Eva following Daniela's questions. My question is around can you give us some color on your 3%-6% organic guide on how much is like pricing there versus volume? And any color on how you see those within like Digital Products versus Digital Solutions? Thank you.
Look, we have given the 3%-6% guidance, you know, after completing the process that, you know, we complete every time we finish a quarter. We have a reforecast for the upcoming quarters and with the reforecast for the full-year. First, an element of context. What is included in that forecast is the assumption that we're gonna continue to see an improvement on the component shortage side. We have imagined that we will still be hampered in H1, but we would be going back to close to normality or normalcy by the end of the first semester on the component side.
We have also assumed in that guidance that we will still see some disruptions on the supply chain side, which is, you know, containers availability and congestions of ports until the end of the year, but starting to see an improvement in the second semester. If this is actually happening, we believe that the 3%-6% is where we should be as a company. Whether we're gonna be at three or whether we're gonna be at six will depend, you know, on the same thing as we've said, and I think we rightly said it in 2021, which is the disruption caused by COVID-19.
You know, if markets are being locked down, if ports are being stopped from operating, you know, all the unfortunately now usual things that we've seen in the past year. We believe there's still volatility and uncertainty in 2022, and that is reflected in our guidance. Now, if you look at Digital Products, we are at 100% level compared to where we were in 2019. Digital Solutions is at 89%. We still believe that we have a higher reservoir of growth on the side of Digital Solutions rather than Digital Products to go back to historical levels. Okay, just a follow-up question on that. I can see you in your page 12, you have EUR 27 million mix effects and the bridge. What products are contributing to it more?
Is that Digital Products or Digital Solutions?
Yeah. If you look at our portfolio, you're right that the impact we have, and you also see from the margin impact on Digital Products that we're more exposed to the Chinese RMB. So the FX impact is more skewed towards Digital Products. That's also why the margin is-
Sorry, I mean the mix impact.
Mix impact. Sorry, I understood FX. Excuse me.
Yeah.
Mix impact happens now across. It was in the previous quarter, it was more on the DDP side. We now see it both on Digital Solutions and Digital Products.
Which one of them contribute a bit more if that's okay to ask?
Let me see if there's any significant difference if you look at the flow. They're roughly equal, Danya. Sorry. They're roughly equal.
Thank you.
In terms of their contribution.
Yeah. Thanks.
Thank you.
Thank you. Our next question is from Joseph Zhou of Redburn. Please go ahead.
Hi. Good morning. Thank you for taking my questions, Eric and Javier. My first question is about the costs headwind that we're seeing. It seems to have eased from Q3 which to me was a slight surprise given that Q4 is seasonally the highest sales season as well. How should we expect the shape of it going forward into Q1, Q2, et cetera? Do you expect the costs headwind to continue to ease or shall we expect differently?
Yeah. Thanks, Joseph. Good morning. Look, it's true when you look at the bridge, you see that we have year-on-year a slightly different impact. That doesn't mean that in absolute it's necessarily different, but if you look at Q3, we also broke down what was structural cost versus transitory cost. We have seen an increase relative to last year. We've seen both slightly less. We're still very cautious. It's true that there's been some peak rates, for instance on logistics freight, which have now come down a little bit, but they're still relatively high, or they're still very high compared to historical averages. We have had slightly less amount of spot buys that we needed to do also because Eric has talked about component shortages where we have seen a slight improvement.
In that sense, we have seen some improvements. On the other hand, the watch out really stays also the energy prices that have increased in Q4 more. We still believe that also going forward there will be the continued prices, the cost price pressure. It will become slightly easier comparable because we'll start comparing Q1, Q2 versus the increases we saw coming in throughout the year in 2021, and therefore also the pricing offset will continue pushing that. Yes, there's still pressure, but let's assume that the comparable base will slightly become easier, and we don't think we'll have that kind of escalation in 2022 like we had at the beginning of 2021, especially also on the logistics side.
Okay. Thank you. That's very helpful. My second question is about your Digital Products division. I understand that it still has some component shortage issues and which hits on the mix and the margin. You also have higher investment. There are three parts really. One is as your customer and what do you see the inventory level is at for the connected home product? Secondly, I get it that you may have some Philips Hue lighting products, for example, out of stock for Q4, if I understood correctly. Why did you increase the marketing spend in Q4 which was reflected in a negative EUR 15 million in their cost savings number?
Also within that, the EUR -15 million, or actually, if we talk about the increase in investment, can you break it down by R&D versus SG&A for Digital Products? Just roughly, you know, is it more due to R&D or SG&A? Thanks.
Yes. Good morning, Joseph. The inventory of our customers is at a low level at this point in time in that business. That business, you know, especially the connected part of our consumer business, which is, you know, Philips Hue and WiZ, was very, you know, hampered still in Q4 by component shortages. You know, we were depending on components or very dependent on components for these businesses. When you look at the performance in Q4, it's still a decent performance that needs to be fueled by pull actions, and that's what we do on the marketing side. We have adapted them from what we originally thought, you know, they're still there and they are mostly SG&A.
There is another type of cost, which is also impacting that business in Q4, which is not only about, you know, the tactical actions that we do to pull the market during the quarter, but it's a more longer term investment that we have done over the past years. On our digital platforms, you know, our direct connection to customers. We have a portal which is very well made, by the way. If you go there, we're improving it on a regular basis. It's now available in many countries. We still need to invest in that platform to make it, you know, special and different from the other ones. There's also some investment that you see in Q4 linked to that initiative.
All right. Thank you, and congratulations on delivering your FY 2021 guidance, by the way.
Yeah. Thank you, Joseph.
Thank you. Our next question is from Marc Hesselink of ING. Please go ahead.
Yes, thank you. I actually would like to talk a bit more on the supply chain again. When I recall, I think you also did something on the redesign of the products. How you see the improvement, maybe structurally, you have put a lot of focus on getting better visibility of the supply chain. I think you also did some work on redesign. Is that a big impact on the supply chain, and does that give you even more comfort that indeed those issues will start to become less over the course of 2022?
Yes, Marc, you know, this is something that we start to see because we also listen to what others are saying, and we believe that we have seen an improvement on the side of the components that many other companies haven't seen so far. Yes, I believe that the redesigning of our products to take into account components that are more readily available on the market has helped us. The fact that we have also redesigned some of our architectures to get more suppliers, you know, capable to supply the same components which we didn't do in the past. You know, we were mono-sourced in some very specific components. We increased our number of suppliers capable to deliver on these components.
You know what is quite interesting is that we could do that in the space of three to four months when you know we would have believed in normal times that to replace such a component it was minimum one year to a year and half . I think we've been finding the right processes in order to go very fast changing those components to more readily available components or to other suppliers. I think in hindsight that has certainly helped us in Q4. It will continue to help us in 2022. You know there's one specific component. Well in itself it's not a big amount that we purchase every year but its impact on our capacity to deliver is huge. You know in
I know already that in Q1, we have activated another source of supply, and that other source of supply will help us to have the amount of components we need in Q1. That's an example where probably, you know, these actions of redesigning that we took early on and that we managed, you know, quite swiftly are going to help us. You've also talked about better visibility. Well, what we've done is that we've booked capacity at our suppliers in the midterm. I would say for the vast majority of the critical components, we have a booked capacity for the full-year of 2022 and 2023. It's not the case for all, but for most it's the case.
Yes, Mark, that has certainly helped the end of the year, and it should help also 2022.
you also been less dependent on the spot market?
Well, I think in Q4 we still have been quite dependent on spot market, especially on what we have invoiced, because what you invoice in Q4, very often the components were bought, you know, at the beginning of Q4 or in Q3. We're still doing it, but I see us doing it less and less in the space of 2022. You may know also that just for the anecdote, the cell that we have created of people that do only that has been very efficient because now we have other companies asking us to use the service of that platform to buy components. We've also been reselling components, you know, to others that needed them.
That has been a very exciting happening in all the complexity and the challenges of 2021. Directionally, yes to your answer to your question.
Okay, clear. The other small follow-up there was on the real estate, which you mentioned, which is going to have an impact on the net debt and I guess also on the free cash flow. Can you talk a little bit about the magnitude of that? We've seen in the past that sometimes some years it was quite a significant amount. Do you have visibility on that?
Look, we have some level of visibility, but we cannot disclose anything that has not been really firmed up in terms of contracts. As you know, every year we look at the portfolio as we've also done in 2021. For the visibility and for 2022 is we expect that there might be one or two transactions which are slightly bigger of size. Once they are concluded and signed off, we'll communicate those. As we've also mentioned in our press release, they will come at least to partially compensate some of the acquisitions we're doing. We're gonna have to for a bit of patience. We'll disclose them as soon as we sign them. We have the visibility on them, but we'll disclose them when we have them firmed up.
That's also included in your free cash flow guidance?
Yeah. We guide all in, so that's what we say because there we've got the free cash flow includes also the outflow Fluence.
Basically, it's also now what we got on the more than 8% is including both effects.
Okay, very clear. Thank you.
Thank you. Just as a reminder, if you wish to ask a question, please press zero one on your telephone keypad. We have a follow-up question from Lucie Carriat of Morgan Stanley. Please go ahead.
Oh, hi, good morning again. Thanks for taking my follow-up. One was on the working capital. If I'm correct, I think you're ending the year with payable days around 165 days. It's about five and a half months. How should we think about that into 2022? Do we risk to see a bit of a reversal in 2022 from that number? 'Cause that seems quite extended for your supplier to not get paid for so long.
Thanks, Lucie, for the follow-up question. Now, we can debate about the numbers. I don't think your 160 days is correct. We judge that it's gonna be close to under 20 days. If you look at our payment terms in terms of three months, 90 days end of month, plus the benefit we have from sourcing from China, we believe that has been also for the last couple of months sustainable. We're nowhere close to the under 60 days that you're mentioning. From a sustainability point of view, we've seen that, in terms of we were slightly lower in the past. We've integrated Cooper to get on our payment terms. As I said, we have the benefit of Klite sourcing, and that brings us to that level, which we believe is sustainable.
In absolute terms, if you look at the absolute payables, yes, we expect that they will come down, obviously, because we come from a strong quarter, and therefore in Q1 specifically, we believe that cash flow for next year will be more under pressure as inventory for all the good reasons of goods in transit, but also making sure we have components on stock will stay relatively high. We're gonna take the absolute number of payables will come down. The days will roughly stay where they are. Therefore, we also expect that in the phasing of next year, Q1, Q2 will be more stretched in terms of cash flow than the second half of the year.
Thank you. The 165 is versus cost of goods sold, not sales. My second follow-up was around the Fluence business. Could you maybe make some indication around profitability? Historically, I mean, when it was owned by Osram, it was a little less profitable than, you know, your level here at Signify. Is it still the case? And if not, you know, how quickly do you think you can bring it to the Signify level or even higher?
Yes, Lucie. We think effectively it might be, you know, on paper at this point in time, slightly lower in terms of profitability to the business that we have, you know, our horticulture business, which is based in, you know, mostly in Europe, even if we sell in the whole world. Now with Fluence, we're acquiring a business which is this time based in the U.S. and for the whole world. One will sell under the Philips brand and the other one under the Fluence brand. At this point in time, yes, Fluence is slightly below in terms of profitability.
We think that, you know, looking at the back office costs, you know, the G&A and also the optimization of purchasing and procurement, that we can bring them very quickly at the right levels and generate, you know, the right amount of value creation, understanding that that deal is really a growth deal. You know, our objective in acquiring Fluence is to have, you know, another company that will reinforce our growth platforms with a clear growth objective over the coming years.
Thank you very much.
Thank you. We have another follow-up from Daniela Costa of Goldman Sachs. Please go ahead.
Thank you. Hi. Actually just following up on Fluence. What impact on synergy are you expecting on Fluence, and how big will you expect your overall exposure to horticulture after the acquisition? Thank you.
Well, I mean, the synergies are gonna be mostly back offices, G&A, as I've said, and procurements. Once again, you know, that's the value creation principles and the business plan that we're establishing for Fluence is really based on growth. This is a company that has been growing extremely well in the past years. You know, I think we've indicated a turnover around EUR 145 million. Our objective is to support fully that entity, for that entity to continue to grow strong double digit as it has done in the past. Synergies there will be, but as I've answered to Lucie, probably more to improve profitability. Otherwise, the number one objective is to grow further.
Now, we have already stated that our growth platforms are, you know, at the end of 2021, around EUR 326 million. So if we add roughly EUR 130 million from Fluence, you know that we are now in the EUR 450 million. Of course, horticulture is the biggest part of that number and will continue to impact very positively the growth of our growth platforms.
Thanks. That's very helpful.
Thank you. Our last question is from Marc Hesselink of ING. Please go ahead.
Oh, yeah, thanks. I also had a follow-up question on Fluence, the market growth that you're projecting. We saw very strong growth markets in cannabis in the U.S. until now, but probably they are slowing a bit. What are the opportunities in other geographies and how can you leverage it? Is there also maybe a possibility to leverage some of the products in other product categories?
Yes, Marc. Fluence is not only involved in, you know, making products that help the crop of cannabis to grow, but they're also involved in what we call non-bio-based, you know, plants, you know, vegetables, fruits. They are developing themselves extremely quickly in that direction too in the U.S. and also beyond the U.S. At the end of the day, if you take a bit of distance, you see that we're gonna have two entities, one based out of Europe, one based out of the United States, primarily, you know, operating on their markets where they have already a very strong market share, but also selling worldwide. What we see is in general, the horticulture market growing and growing nearly everywhere.
That's the case, you know, for non-biobased, but also for biobased. If you just take another viewpoint, you have 70 countries at this point in time that have legalized cannabis for medicinal use and 19 that have done it for recreational use. If you look at the U.S., the U.S. is part of both categories and has been growing extensively in the past years, which, you know, explains why Fluence, you know, has also benefited from this market growth. Now, for us, it's not only about biobased, it's biobased, non-biobased. We use the same technology, and we have now the possibility to grow very strongly in the two fundamentally important economies in the world, you know, Europe on one hand and the U.S. on the other hand for this business.
Is it the right way to think about it that if Germany maybe is moving up to legalizing that is a big incremental opportunity for you? Or is that the wrong way to look at it?
No, it's the right way to look at it. If there are more countries and we see to the trends having more and more countries legalizing cannabis for medicinal use, which is also in line, you know, strategy of, you know, investment in areas that bring, you know, additional health to the world. Yes, this will benefit us for sure.
Okay. Clear. Thank you.
Thank you. There are no further questions, so I'll hand back over to our speakers.
Ladies and gentlemen, thank you very much for attending today's earnings call and for taking part in the discussion about our results. If you have any additional questions, please do not hesitate to contact Philip or myself. Again, thank you very much and enjoy the rest of your day.