Earnings Call: Q4 2020

Jan 29, 2021

Ladies and gentlemen, welcome to the SignifAI 4th Quarter and Full Year Results 2020. I would now like to give the floor to Telica Gerdes, Head of Investor Relations. From Sketas, please go ahead. Good morning, everyone, and welcome to SignifAI's earnings call for the Q4 and full year are in the range of results 2020. With me are Eric Rondola, CEO of SignifAI and Javier von Engelen, CFO. In a moment, Eric will briefly touch are on the key operational and financial takeaways for the full year 2020. Javier will then follow with a review of the company's performance in the Q4, after which Eric will give you some more details on the full year 2020 to then end today's presentation will be conducting an outlook for 2021. After that, we will be happy to take your questions. Our press release and the presentation were published at 7 am this morning. Both documents are available for download from our Investor Relations will be available as soon as possible on our Investor Relations website. And with that, I would now like to hand over Eric? Thank you, Telkka. Good morning, everyone, and thank you for joining us today. I propose that we go immediately to Slide 4 with the key in operational and financial takeaways for the full year 2020. LED based sales represented 80% of total sales compared to 79% in the previous year. We increased the installed base of Connected Lightpoint to €77,000,000 illustrating once again the growing interest for this essential part of our business. Have adjusted EBITA margin increased by 30 basis points to 10.7 percent and we further decreased our cost by 9.1 percent or 166,000,000. As we did in 2019, we continue to focus on structurally improving our working capital and together with our profitability improvement and the consolidation of Cooper Lighting and K Lite. This allowed us to generate solid free cash flow of €817,000,000 On January 13, we announced an extraordinary dividend of €1.35 per share and in addition to this, we propose to pay a regular cash dividend of €1.40 per share over 2020. In addition, we also reduced our debt by 350 have €1,000,000 lowering our leverage from 2.7 times to 1.7 times, which is in line with our commitment. We also have made steady progress with the integration of Cooper Lighting and Klight. Both acquisitions are delivering synergies ahead are off plan. And finally, we are very pleased to have successfully completed our Brighter Labs Better World 2020 Sustainability Program, including the achievement of carbon neutrality for all our operations across the world. We have now embarked on a course to double our positive impact on in the Environment and Society by 2025. And with this, I will now hand over to Javier, who will discuss the company performance for the Q4 2020. Thank you, Eric, and hello to everyone. It's my are pleased to present our Q4 2020 results this morning. You will see that while our Q4 is traditionally our strongest in the quarter, our Q4 2020 results are a further testimony of our robust financial profile in still adverse are in the market conditions. On Slide 6, we highlight that installed base of connected Lite Pointer increased by 8% from 71,000,000 in the 3rd recorded to $77,000,000 in quarter 4. LED based sales represented 82% of total sales. Total sales reached €1,900,000,000 an increase of 18% over 2019 reflecting the consolidation of Cooper Lighting. As illustrated on the right, comparable sales growth still declined by 5.9%, yet it showed a sequential improvement from minus 8.3% in the 3rd quarter and minus 22.5% in quarter 2. This improvement was mainly driven by our digital products division and by early signs of recovery in both China and in some parts of Europe. Adjusted indirect costs were down are €18,000,000 or 3.9 percent excluding FX effects, changes in scope and provisions for the reimbursement of employee contributions. As shown on the right, adjusted EBITDA margin increased by 20 basis points to 13.4% on a strong base of quarter 4 2019. This was mainly driven by gross margin improvement. Have a strong quarter. Net income increased by 39.4 percent to €137,000,000 driven by a higher EBIT and a lower effective tax rate contributed to a onetime non cash tax benefit resulting from the revaluation of deferred tax assets. Finally, free cash flow further increased from a high base of €308,000,000 last year to €332,000,000 this year. This as a result of profitability growth and a continued structural working capital improvement. Let me now provide you with more details for each of the divisions, starting on Slide 7 with Digital Solutions. LED based sales accounted for 89% of total sales and connected base sales represented 22% of total sales. Nominal sales increased by 27.3% as a result of the consolidation of Cooper Lighting. Comparable sales declined by 10.2% compared to a minus 22.4% in quarter 2 and a minus 11.2% in quarter 3. With the professional segment in many of our markets, such as the Americas, parts of Europe and Southeast Asia will still remain impacted by the COVID-nineteen pandemic. Including Cooper Lighting, adjusted EBITDA margin at 11.5% remained robust despite the top line decline, even if it was declining by 60 basis points on a very strong 2019 basis. On Slide 8, you can see some of the business highlights, demonstrating the acceleration we are driving in key growth areas like connected lighting, disinfection and solar. Let me just single have 2 of them. 1st, illustrating our commitment to health and well-being, the installation of 31 UVC disinfection upper air luminaires at Supermarket Edeka Clausen in Hamburg, one of several installations of UVC disinfecture open air luminaires. These luminaires effectively disinfect the air and provide both customers and staff with a layer of protection with an extra layer of protection are experiencing the risks associated with the UVC disinfectant chamber to disinfect small objects and shared devices such are in the handscamps. 2nd, our global partnership we reached with Honeywell. By combining our respective areas of will further improve productivity and well-being in offices. What we are adding is some of our lighting systems and software, including Interact Office, NatureConnect and UVC disinfection lighting to Honeywell's health building solutions. Will support the need of any building and future specific solutions for premium commercial buildings, airports, hospitality, healthcare, education, retail or Stadia sectors. We are we already developed and deployed integrated offerings at some customers. Moving on to Digital Products on Slide 9, showing a strong top line and margin performance during the quarter. Share of connected base sales grew to 30%, up from 21% in the 3rd quarter, again reflecting a strong performance of the category. Comparable sales showed a +2.5 percent sales growth, driven by robust performance in the consumer are in the connected home category, where we benefited from good sales momentum in a seasonally strong quarter. Adjusted EBITDA improved by 2 30 basis points to 18%, reflecting the positive impact of cost dilution from comparable sales growth, the positive mix effect of Connected Home sales and gross margin expansion. On Slide 10, you can again see some business highlights of the division, showing our continued investment in consumer centric innovation as the market shifts to integrated Luminess. Let me again highlight just 2 of them. Let me start again with our commitment to health and well-being, are expanding our UVC portfolio, both on a product level as well as geographically. We have launched the UVC disinfection box in China and Indonesia to further strengthen our UVC disinfection product offering to consumers. Will be able to effectively disinfect viruses and bacteria from small objects such as keys, cell phones, toys, household items in a matter of minutes depending on the application. The The box contains a reflective stainless steel interior designed to reach any surface of the objects and it allows for multiple objects to be put in the box are at the same time. It's equipped with a built in sensor that automatically switches the box off when the lid is opened. Are still in UVC. I want to quickly touch on UVC disinfection desk clamp, which we highlighted previous quarter. This product is now available in more countries in Asia, was introduced in several countries in LatAm and is also available to customers in Europe via Amazon. A second highlight, we further expanded the LED lamps portfolio with the launch of the radial lamp, differentiating the shapes of what we offer. This product with a high average selling price provides an output of 2,100 lumen at 20 watts, resulting in a higher efficacy of of 105 lumen per watt. This product is suitable for both wall and ceiling applications. It was launched on Amazon and soon acquired have a 5 star rating and is now also featuring in the top 100. It's appreciated by retailers where we have received multiple repeat orders. Let's now turn to Slide 11 to discuss the performance of conventional products. As a result of the relatively strong performance within a declining market, we estimate that we continue to gain market share, driven by the successful continuation of our last company standing strategy. Similar to Q3, comparable sales decreased by between brackets only 11.6% in quarter 4, supported by strong demand for UVC and Horticulture Lighting. Adjusted EBITDA margin increased by 160 basis points to 18.9%, driven by adjusted indirect cost savings, higher productivity and the positive effect of a lower top line decline. Let's go to Slide 12, you can see the adjusted EBITDA bridge for total SignifAI. Despite the high adjusted EBITDA margin in Q4 last year, were able to still improve our adjusted EBITDA margin by 20 basis points to 13.4%. The negative impact of lower volume and price erosion was fully offset by cost of goods savings. Anticipating your questions on pricing, we have seen a continued slowdown in the price erosion of LED lamps and electronics. At the same time, we have been able to lead price increases in parts of our portfolio is also in anticipation of component supply shortages and raw material price increases. Adjusted indirect cost decreased by €3,000,000 in the quarter with overall ForEx impact and on the adjusted EBITDA was a negative €12,000,000 Finally, scope and other includes $29,000,000 positive impact of Cooper Lighting Consolidation, Which takes us to Q4 working capital on Slide 13. When we include sales of Cooper Lighting and Klight on a 12 months pro form a basis, working capital improved by 130 basis points to 4% will be available on the call. Trade and other receivables as a percentage of sales were used by 220 basis points were up to 16.9 percent when including the sales of Cooper and KA Light on a 12 months pro form a basis. And finally, on Slide 14, we take a close look at our net debt evolution. Net debt decreased by €340,000,000 are mainly driven by strong operational profitability and improvements in working capital. Next to this, you can see the other items in the bridge that impacted cash and thus our debt position. Net CapEx was €27,000,000 in the quarter. Next to that, we paid €29,000,000 for tax and interest. Other includes cash used for derivatives, acquisition, new lease liabilities, have dividends to minority shareholders and FX effect on cash, cash equivalents and debt. All in all, on net debt position at 2020 year end amounted to €1,275,000,000 This resulted in a reduction of our net leverage are expected to be a result of the reduction in our net debt to 1.2 times at the end of September to 1.7 times at year end, which keeps us well on track will deliver on our commitment to reduce our leverage back to 1x multiple by the end of 2022. With that, let me now hand back to Erik for highlights of the full year 2020 and the outlook. Thank you, Javier. Let's turn to Slide 16. So despite the 2020 headwinds, Digital Solutions and Digital Products significantly improved profitability and free cash flow. Have a combined EBITA margin increased by 90 basis points in 2019 to 11 contributed to the improvement. They contributed 79% to our total adjusted EBITA in in 2020 compared to 70% a year ago, and they contributed 82% to free cash flow in 2020 compared to 70 were sent in 2019. As a result, our dependence on the conventional products business has further decreased. I propose that we move now to Slide 17. So in summary, the COVID-nineteen pandemic impacted are fully year 2020 top line, while margins were resilient. Digital Solutions achieved an EBITA margin improvement of 20 basis points and despite a CSG decline of 14.4%, the EBITDA margin expansion was are driven by gross margin expansion and the consolidation of Cooper Lighting as well as synergy realization. Digital Products delivered an EBITDA margin improvement of 2 10 basis points. CSG declined by 8.3%. The top line was not as were severely impacted as we saw strong resilience of Connected Home sales. And finally, our Conventional Products achieved a solid free cash flow of €188,000,000 or 19.9 percent of sales, while declining less are in 2019. On Slide 18, you can see the evolution of our indirect cost savings. In total, we lowered our indirect cost base by €166,000,000 And if we adjust for FX and scope, adding €361,000,000 coming from scope effects related to the Cooper Lighting and Kallite acquisitions, we ended with a total adjusted have a very strong impact on the overall performance of the business. I would like now to zoom in to our sustainability performance as shown on Slide 19, please. Yes. So as mentioned earlier, we are very pleased with the of our 2020 sustainability targets. So first, in terms of sustainable revenues, 84.1% of our revenues were sustainable in 2020 already exceeding our 2020 target of 80%. We sold 2,900,000,000 LED lamps cumulative since are at 2015, meaning that we overachieved the €2,000,000,000 target by 46%. And regarding the sustainability of our operations, we achieved the following targets. We became carbon neutral this year in all our operations across the world. We achieved our target of 0 waste to landfill are at 100% of our sites. We also want to assure a safe and healthy workplace for our employees. So we achieved our target of less than 0.35 in TRC, further decreasing it by 31% compared to in Q4 2019, we achieved a TRC of 0.22. 99% of our risk suppliers have been audited well ahead of our 2020 targets of 90%. In September 2020, we announced that we embarked on a course to double have a positive impact on the environment and society by 2025 with the following ambitions: doubling the pace at which we achieved a 1.5 degree scenario of the Paris agreement, doubling our circular revenues to 32%, doubling will be able to provide revenue to 32% and doubling the percentage of women in leadership to 30 are at the forefront of our efforts related to sustainability, we have been recognized as industry leader in the Dow Jones Sustainability Index for the 4th consecutive year and we have been included in CDP's prestigious A List have for climate change since the IPO. Let's now move to slide 20 to discuss our intended capital allocation for 2021. On January 13, we proposed an extraordinary dividend of 1.3 €5 per share, around €170,000,000 which is in line with the dividend proposal for 2019 that was withdrawn as a precautionary measure in Q2 2020. For 2020, we propose to pay have a cash dividend of €1.40 per share to be paid in 2021, reflecting our commitment to pay an increasing annual dividend per share. This represents a dividend yield of 4.1% over the closing price of December 31. Both dividends are subject to shareholder approval at the AGM on May 18. So in line with our commitments to an investment grade rating, we also announced our intention to repay a minimum of 3 €50,000,000 of debt in 2021. And finally, I would like to turn now to the outlook for 2021, which is on Slide 22. So given the ongoing nature of the pandemic, we remain cautious about the market developments in in 2021, but at the same time, we are confident in our ability to adapt to external challenges as we demonstrated it through 2020. For 2021, we are expecting positive comparable sales growth, the level of which will depend on the recovery pattern in our markets. With EBITDA margin objectives of 11% to 13%. We have already launched structural cost adaptation plans aiming at making our central organization leaner. Through these measures, we are aiming to bring our indirect cost to the benchmark are in the mid term. Free cash flow following 2 years of significant structural working capital improvement is expected to exceed 8% of sales. As guided for the midterm, this includes a higher initial With all that, I would like now to open the call for questions, which Javier and myself will be happy to answer. Will be available. Thank you. Ladies and gentlemen, we are now ready to take your questions. Okay. Our first question comes from the line are Martin Wilkie at Citi. Please go ahead. Your line is open. Thank you. Good morning. It's Martin from Citi. The question is really just a clarification on your margin guidance. You talk about progress towards the midterm target. But just to clarify, do you think you can get inside or above 11%? And in terms of the uncertainty around that, is it largely linked to the volume outlook, as you mentioned, still uncertain because of the pandemic. Thanks. Yes. Good morning, Martin. It's exactly what have said we expect to further improve the operating margin, but there's still a level of uncertainty on the end markets. I mean, you see it as we see it, feel a lot of volatility. Now depending on the opening of the open markets, we think we can do more or less are on the top line, but also on the bottom line. So it's directly linked to our capacity to grow the company. And just as a follow-up, in terms of other moving parts, you mentioned about pricing in raw materials and so forth. Is that going to get worse as the year progresses? Or do you feel that the price increases that you put through can offset any ramp up that you've seen in steel and other electronic costs and things like that? So what we see is that at this point in time, there is There's a shortage because with the pandemic at the level of the industries that were are generating and extracting raw material and also some of the other manufacturing industry of components, they underinvested or they didn't continue to invest, let me put it this way, because of the crisis. And as one part of the business, especially on the consumer side, in connected products, as we see a step up in demand, The chain and the whole supply chain was not ready. So we have been seeing increase in raw material, shortage some components. We don't believe that this will last over the full year Because we see now these industries resuming their investment in the specific domains, now the issue is if you want to increase your capacity in chips, I mean, you cannot do that in the space of 2 weeks, which is probably more 6 months. So we believe that moving forward, in these different manufacturing industries will be able to go back to the required level in order to supply the demand. But we have probably a lifetime here of about, yes, maybe 6 to 8 months where they need to rebuild capacity. So in the meantime, we have recorded increase in raw material and we have already taken measures from a pricing perspective to be able to maintain our gross margin. So that has already been implemented in all the countries where we operate with different schedules, but it's all already done. Okay. Thank you very much. Thank you. Our next question comes from the line of Andreas Willi of JPMorgan. Please go ahead. Your line is open. Yes, good morning, everybody. Thanks for the time. I would like to follow-up from what Martin just asked because on the margin target, I'm still not 100% clear what you exactly want to say with the guidance when you say progress towards the target range, given you were very, very close already to that target range in 2020. So if you just could explain again what the thinking really is. Is the minimum 11% for 2021 or not? And then on the raw material cost question follow-up, could you give a bit more information, particularly for the Digital Solutions business? What the important raw materials are? What the percent of sales is there and the price increases you think you have to make as a percentage point to keep these gross margins are flat in 2021. Thank you very much. Thank you, Andreas, and good morning to you. We are at 10.7% at the end of 2020. The lower end of the range that we have given for the midterm is 11%, which is 30 have a basis points more, so this would be exactly the same progression as the one that we have done in 2020 if we were achieving the bottom end have been following us for many years, so you know that our P and L is also very sensitive to the top line, but we've been also demonstrating that we can still improve 7 years in a row The profit even when the company is declining. Now what we are indicating is that we will further progress and improve are operating margin, the extent of which will directly depend on what we can extract in terms of top line. So you've seen the progression in the past years. I mean, you can count depending on when the top line is going to be on the progression that can be are similar for 2021. When it comes to Digital Solution, it's the metals, in the aluminum, copper, the plastics are also touched in terms of raw material price increase. And what about the steel exposure, particularly for outdoor lighting? Yes, that's also another metal where we have a substantial exposure, not only for outdoor because we use also are still in indoor fixtures. Yes, we have an exposure to steel also, but we are at this are in time operating the necessary so it's not only price increases because you know that we have have regular negotiation sessions with our suppliers. During these negotiation sessions, normally we can extract cost and And probably that this year, we may not be able to extract costs. Maybe our costs are going to be stable. So we're going to do what's necessary at the level of will be in the next quarter. Thank you very much. Thank you. Our next question comes from the line of Lucie Carrier of Morgan Stanley. Please go ahead. Your line is open. Good morning, everyone, and thanks for taking my question. I was hoping maybe you could give us some indication around current trading and kind of related to that, How are you thinking in terms of growth scenarios, I would say, for your 3 division, considering that you haven't kind of given a range for the group in terms of growth, how should we think about the potential of recovery in the three businesses? Yes. Good morning, Lucie. Current trading maybe not, but I can give you a view of how we see at least the Q1. I think we need to navigate on a short horizon at this point in time and maybe also the Q2. So what we see today from a geographical perspective, and then I will talk more about the divisions. But from a geographical perspective, we are seeing a recovery in China, and we already experienced that in Q4. And China was very severely hit for us in the first wave. Also, our manufacturing plants in China, this is where we also we're doing the first step of integration of Klight and our factories had to stay closed for have a few months, so the start has been very difficult in China during the first wave. We think that China today doesn't really have a second wave, divisions. If we go to Europe, Europe has seen sequential improvements over the quarters, and Q4 has shown a very different pattern by business. We had a very strong consumer business and we had a professional business still impacted are subject to the pandemic. Now if we try to project on the country of China, which we see on have a path of recovery also moving forward. We are more cautious when it comes to Europe because you have seen as well as we do we believe, partly if not completely Q1. So cautious in Europe, especially when it comes to the Professional business. What we've seen, we've seen that projects were delayed, new projects were not really coming to life because of the situation that we are facing are here probably with a slight difference between South and North Europe, South Europe being more touched are in the northern part of Europe. Now let's go to the states. So the states were not touched at the beginning of the crisis, but we have seen softness in U. S. On the Professional side since, I would say, the middle of Q2 and has continued throughout. You see what is happening also in the States and the statistics of the pandemic. And we think that at that geography will be probably also affected in Q1 and maybe also partially in Q2. So we're seeing ahead a 1st semester, which is still traveled, and Indonesia, which are also big, big geographies for us because the pandemic is hitting very hard in ASEAN also. So we see a troubled 1st semester and we expect that with the measures that are being taken at this point in time when it comes to vaccination and so on that we should be able to see light at the end of the tunnel and have a better H2, but the situation is very volatile. The vision the visibility we had 1 month ago is different than the one we have now and probably it's going to be different from the one that we're going to have 1 month from now before everything stabilizes. So in a nutshell, we see a good China, a recovering Europe, are recovering in U. S. But with maybe a bit of a longer time lag. And from our businesses from a business perspective, much stronger on the consumer side of the business is what we see moving forward then on the professional side. Thank you. And then my follow-up maybe on that. How much visibility do you have in terms of whether your distributors and distribution channels have restocked? And How much that restocking or move you may have seen at the end of 2020 is kind of matching underlying demand at the moment? Consumer side, the level of inventories are quite low and probably even more on the consumer side because of the extra demand. There has not been a massive restocking. I think a lot of our distributors have also taken the advantage, so called, of the crisis to be able to destock. So the stock in the channel today is, if we compare to the average we had previously, it's still at a much lower level. Thank you. Thank you. Our next question comes from the line of Daniela Costa of Goldman Sachs. Please go ahead. Your line is open. I'll start with one and then do a follow-up. But I wanted to understand if you could give us a little bit more color on exactly how many UVC sales you had and what do you have in terms of the pipeline also based on the capacity increases you had done? And related to that, if you have seen in terms of inquiries about UVC, any changes post the vaccines. Yes. Good morning, Daniela. So on UVC, let me confirm a are going to be discussing a few things. So first of all, we're not giving a specific number for our UVC business for competitive reasons. We've explained that already. But what we said during Capital Market Day is that all these new growth platforms business were amounting to about 250 are 1,000,000 and they're growing a bit or substantially more than the average. Now let's go back to UVC. We have indeed a capacity today, which on the sales of light sources. So that has always been the case and it's clearly continuing. We have seen an expansion of our sales to the consumer to consumers. So we have released many products like a disinfection box, which is the size of a small microwave where basically you can detect small objects. I mean, we're talking about keys, phones, toys, things of that nature, we have started to sell in Asia at this point in time, and we see a good traction there. We mentioned there. We talked about also the desk plant for consumer usage with sensors that would avoid the and the lamp to be turned on whenever there is a human presence. That has done very well when we launched it in Asia are in the Middle East and now we are selling it in Europe. On the Professional side, so we have a lot of wins, but it's a much longer commercial cycles because we really need to educate a lot of customers, which is probably a hurdle to start the business, but it's a good hurdle to have when the business is started because it's going to be also complicated for competition to be able to do it. It needs a very good understanding of the technology and it's rich. And this is what we have trained our sales force centrally and locally at doing, but we see still inquiries and the funnel is growing with wins in different type of environment, especially on the retail environment. We talked about a very interesting one, which is Edeka, a German retailer, where basically we sold that around 30 upper air disinfection luminaires in its food retail shop in order to provide to their consumers a safe and a clean space. So that is also happening. Have the inquiries gone down after the vaccine? Well, not really. We don't see that. The way we are positioning the UVC technology at this point in time, it's not only for COVID, it's in general to make sure that the spaces are clean and we think it will survive the pandemic because this pandemic will leave sequenced in our behavior. So, so far, we haven't seen that the traction was going down because of that. But we understand on the professional side that needs a lot of education and a lot of efforts to get to a sale, but it's progressing. Thank you. And I wanted to follow-up on the margin, but more in understanding the margin range, the 11% to 13%. In the CMD, You had a slide with the bridge on the margin where the starting point was 10.2% to 10.6% for 2020, and then you would pay 50 basis points of the employees feel solidarity afterwards. You've obviously already paid that 50 basis points and even the base was higher than the 10.2% to 10 are probably more like 11.2 if you adjust for the solidarity. So you have a much higher starting base. You seem to be comfortable that you're going ahead of planning the Cooper synergies. Your medium term growth views medium term have not changed And that you're confident that you will preserve the raw material to pricing mix to keep the gross margin flat. So why is the Under the Q1, the Q1 of 2019 is still appropriate if the base was so much higher. What's the incremental headwind that has come? Or is it just, Yes, just understanding sort of if that view doesn't change given the base change. Daniela, Xavier here. Thanks for the question. It's obviously a question that we've also carefully looked at. And if you refer back to the Capital Markets Day, go back to the dynamics we explained there. We indeed talked about range of 11.13. And if you look at the internals, how we were going there, we said there's a change in dynamic on how we're going to be able to increase profit margin over time. We basically said it in the past, it was a lot of gross margin driven and cost are savings driven and then we talked about the future, which was mainly going about dilution through top line and maintaining gross margin. This is where I think still out there what Eric said before, that's where we are also looking for 2021, 2022 and why our gross margin progress is very much linked to our top line growth. And as we said, that's where there's still a couple of scenarios. So yes, we have good news, and we think that despite all the circumstances, we'll definitely keep on improving. But that improvement will, to one extent, have less dependency on gross margin. As we just talked about, the dynamic of pricing raw materials shortages and in our pricing dynamics, I think, holds us good for a stable gross margin, which means that therefore the margin progress is going to come more through the dilution of the top line and then some of the cost savings will be kicking in more only about the second half of the year. So are we perhaps a bit more cautious? Perhaps we are. We see the dynamics especially on the raw materials happening, we hope to compensate those. So perhaps we're slightly more cautious in view of what we see in terms of both raw material price increases and also more uncertainty on the market, but the direction is still very clear. The margin is still there, Evolent, 11% to 13 and Eric talked before that. Obviously, if you look at our year on year progress, you can expect us to keep on seeing a similar progress and hopefully get to within the range when we see the top line coming up. Thank you. Thank you. One moment. Our next question comes from the line of Joseph Hsu of Redburn. Please go ahead. Your line is open. Hello. Thank you for taking my questions. Hi, Eric. Hi, Javier. And My first one is a very quick follow-up, which is on the inventory level really. I think you have had very strong are sales in Philips Hue and other connected lighting products. And what is the inventory level like in the channel for that And do you think the strong sales can sustain into the coming year? Do you see any headwinds or tailwinds going into 2021? Good morning, Joseph. The inventory level is low in our at our retailers for the connected home business. The development we've seen in the sales at the back end of the year has consume a lot of the inventory. So if you look at the historical levels that these retailers had, it's much lower at this point in time, which is a good sign of the sales moving forward. Now the way we position our offers for the long term, you need to understand that we have very well segmented the market, we believe so, with the position of Q and the position of Wizz, which is the smart home connected offers that we have invested in, especially with the Wi Fi technology, and basically they are covering the market, targeting different categories and different segments of consumers and both offers have found are very pleased with the progress we had with Wizz that was are quite strong in 2020. So these offers are very well positioned from a consumer target perspective. And we see them growing in the future because what has also happened during the pandemic is a much higher level of education and a much level higher level of understanding from the consumer base about the connected offers. And those connected offers are really helping to develop the business because they offer so many use cases for the consumer that has been an accelerated learning about Connected. So our base has increased. And you know that for our business, it's The acquisition of new customers, but it is also increasing the pace. When you buy, for instance, Philippe Hue, and this is what we see. We see that when consumers enter in our platform, they can enter with 3 or 4 light sources and that average number of light source per customer is increasing. So what we have done during the pandemic, we've not only done that, but we've also increased our bridge penetration, which will link to also future sales. So yes, we're quite positive on this business also moving forward. Thank you. That's very helpful. And then next, I wanted to ask about your partnership with Honeywell. And being hearing a bit more about this partnership? Yes, Josef. Well, we had a long standing relationship with Honeywell, were basically we also found between the two companies a common approach when it comes to productivity and healthy workspaces. So we are both moving in that direction. And then What we decided to do with Honeywell is to bring our connected lighting system in their technological environment. So you can imagine a building being made of 4 verticals. One is AGAC, another one is Fire, third one would be Security and the 4th one is Lighting. And Honeywell has the capacity to manage at a high level all of them. And what we want to do with them is to bring to them and to their global ecosystem the lighting part from the light and the software, Interact office in office spaces in order to be able are working to offer a complete ecosystem. So we're working also with Honeywell at the technological level between our software platforms, but we have basically it goes through APIs. So a lot of information from our system, Interact Office can be brought up to the higher level system of Honeywell. Let me give you just a very simple explanation. Our system is knows the presence and the motions in the rooms. So that's an information that we can send at the higher level at the level of the Honeywell platform for them to decide whether they're going to activate at HVAC are not in those rooms. So things like that are currently being made. What is interesting also is that The philosophy is technical, but also with a purpose. We want together to make workspaces healthier and Workspace is more productive. There is in this agreement and we have started to work on projects together also a strong move towards including health features as UVC lighting, upper air disinfection are in those spaces. So basically, we are playing the role of have the connected lighting functions in a global Honeywell environment. This is totally part of our strategy. I think we also talked about that, Joseph, at an earlier stage. Our strategy is not to go beyond lighting. Our strategy is to stay in lighting, but in lighting, we want to do everything up to the system. And then we can connect to higher level system that are doing more than lighting, and we do that in the professional space. Honeywell is a good example. I would say we also do that in the consumer space, where our connected platforms would be are totally and seamlessly connectable to Amazon, to Google, to Apple, to Smart thing of Samsung and to Ocean Connect, of Huawei. So at the end of the day, we are connecting to high level platforms. And we do that both in consumer Thank you. Our next question comes from the line of George Featherstone at Bank of America. Please go ahead. Your line is open. Good morning, everyone, and thanks for taking my questions. First one would be, for free cash flow this year, would you expect to make any further working capital improvements that would be a tailwind to free cash flow? Good morning, George. Javier here. Look, good question. You've seen our performance in the last 2 years. We've made some have structural improvements in terms of all the elements of working capital. So if you look at the last 2 years, the cash we've generated through optimizing inventories in days also receivables, especially as we worked on overuse has been very important. And our payables also with the integration of Cooper and K Lite, which have generated significant cash flow, has really helped us in the last 2 years to get to a percentage, which today we think is already a pretty good percentage. So are we expecting to see more benefits? We are working on that, but for sure, it will not be to the same extent as what we've seen in the last 2 years. Have also indicated that therefore the 12.7% of sales that we have achieved in 2020 is not what we expect to see going forward. We do expect to be above 8%, which is still a healthy number compared to where we came from. The areas of opportunities that we still see is, I think that as we keep on digitizing, I think there are still opportunities to further look in the inventories. On receivables, we have really gone down to a level of overuse, which is are extremely low, even if you look at it in a pandemic situation where more customers are having potential problems. So some improvement to come. We think so, But not to the extent of what we have seen in 2019 2020. That's great. Thanks for that. And then I guess linked to that with the cash flow improvements that you've seen and the deleveraging that's happened from a capital allocation perspective, M and A seems to be now part of the agenda again. What are the key areas on a from product and portfolio perspective that you'd look to kind of to get involved in that from an M and A perspective? M and A will only consider bolt on M and A at this point in time, priorities on deleveraging as you mentioned it. Have a question and answer session. We have 3 domains. 1 is Luminar Companies that would come for consolidation in are in the marketplace where we want to increase our market share, and that's 1. 2nd, technologies around systems and services that would be complementary to ours. And what we've done also in the past, thirdly, is digital business models that would help us to improve, for instance, our online sales, things of that nature. So these are the 3 domains where we would look. Okay, great. Thank you very much. Thank you. Our next question comes from the line of Sven Vier. Please go ahead. Your line is open. It's Sven from UBS. Two questions from my side. The first one is on Digital Solutions. You already and regarding the revenue outlook you gave, you already mentioned, obviously, the impact of the pandemic, and that should obviously gradually eased during the year, but I was more curious how you reflected the non resi starts that were quite weak throughout last of the year and the impact of that, that probably will increasingly have an impact. Do you think the reopening and this one will balance each other out in the course of the year. That's the first one. Sven, So the non resi construction is about 50%, is impacting 50% of our sales. And if you were going are going to be more into details, I think it's 15% for the new and 35% for the refurbishment market. So we have seen that market effectively, diversely impacted depending on the final end segments, but it has been impacted and you know it's a market that has some inertia are going down, but also some inertia going back up. You need the whole supply saying you have to be back in place, you need people to make finally the decisions of investments. So we think that We need to have a stable economy for a few months, if not a few quarters before this actually resumes to historical levels. It is 50%, but it's also only 50% of our business, then if you were making the counts, you have probably around 26%, which is are depending on the infrastructure investments and public and the rest about 24%, is around residential and consumer. So at the end of the day, we're depending on many different end segments. But Yes, we see that part of the business quite hit, and I think it's going to take a bit of time before it goes back to historical levels. Okay. Thank you. Okay. Thanks for that, Erik. And the second one is on the EBIT bridge and the indirect costs, and I think you were mentioning that if you exclude the reimbursement, the indirect cost was down €18,000,000 in Q4. It was down €22,000,000 in I was just wondering, if I'm not mistaken, part of the reimbursement you booked already in Q3. And I was just wondering if of the €22,000,000 adjusted was also adjusting for that or would it have been even higher? So really kind of getting a sequential of the year on the underlying indirect costs and what do you think is the outlook for 2021? Yes, Sven, I'll take that one. You've looked So you're absolutely right. If you compare the 2018 that we have for the adjustment also for the repayment, there was indeed a smaller part also in Q3, which the $22,000,000 did not include. So if you do sequential improvement, would indeed see that we go from slightly above 22%, probably closer to 30% to the 18%. If you look at the sequential improvement, therefore, what you've seen is that we had indeed at the start of the year higher savings also with the flow through of 2019. As we go in the second half of the year also with higher volumes in the second half of the year, we see that, that savings has come down, as you said, sequentially from the MAP30 to 18 if you put on a comparable basis. As we've talked before, decline we've seen is not been sufficient in order to compensate for the total top line decline. Therefore, the percentage has come up and therefore, we have special in the financial savings programs coming into 2021, we've already started enacting and we start communicating those. Understood. Thank you, Javier. Thank you. And our final question comes from the line of Mark Hesselink of First question, could you elaborate on the impact from the closed offline channels and more towards online? Is your market share in online are better than it is in offline and is also brand value more important in the online channels versus the offline channels? Good morning, Marc. Look, I would not be able to answer on the market share your things have been so volatile and developing so much lately. But what we see online and offline, our position, especially in connected and smart connected home, is worldwide very strong. And I think if we look at offline and online, there should not be a major difference in terms of market share there. The brand It's very important for the consumer business, I would say both online and offline. I don't see a major difference. What we what is interesting is, I believe, that in online, you can create a brand are faster, but you need also to resources and you need to do a pool and you need to do an investment, which is higher in order to get are interested in the market. So this is what we're doing at this point in time. We have basically an approach and I'm going to focus on the consumer business of 2 brands, Filiq and Wiz. And we are are creating a very strong market pool. So in these businesses, we don't invest in promotions or things of that nature. We really invest in creating in the market. So there's a these are business with high gross margin. So part of the cost to run this business is to create awareness. And we see at this point in time that we can go faster online in terms of creating a brand and having recognition, But we also need probably to invest a bit more than what we would have to do offline. But from a market share standpoint, look, I'm I'm going to keep the answer like that. Maybe Telkoy will have a closer look at it, but I would say that we have a strong market share worldwide, and I don't think I see I don't see a major difference between on and off line. Okay. That's clear. And final short one, your pension and medical deficit, do you have an update on that? I see. Let me take that one, but again, let's take that offline. But in general, the biggest pension deficit that we were looking at was the U. S. One. In the last year, we've looked at the deficit and we had always a target to be between 90 are 100%, and we've reached that. So at this point in time, we feel comfortable with the accruals we've taken and the reserves we have for funding that deficit, and that's the most important point in our numbers. Okay. Thank you. Thank you. And I'd now like to return the conference call Ladies and gentlemen, thank you very much for attending today's earnings call and for taking part in the Q and A. If If you have any additional questions, please do not hesitate to contact Philip or myself. We are happy to take your questions. And again, thank you very much and enjoy the rest of your