Ladies and gentlemen, welcome to the Philips Lighting earnings call for Q1 2018. For the first part of this call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. During the Q&A session, we kindly ask you to limit yourself to one question and one follow-up, so that each participant has the opportunity to ask a question. I would now like to give the floor to Robin Jansen, Head of Investor Relations. Mr. Jansen, please go ahead.
Thank you. Good morning, everyone, and welcome to the Philips Lighting earnings call for the first quarter results 2018. With me are Eric Rondolat, CEO of Philips Lighting, and Stéphane Rougeot, CFO. In a moment, Eric will take you through the first quarter business and operational performance. Stéphane will tell you more about the financial performance in the first quarter, and Eric will end today's presentation with our financial outlook and conclusion. After that, we will be happy to answer your questions. Our press release and the related slide deck were published at 7:00 A.M. CET this morning. Both documents are now available for download from our investor relations website. A full transcript of this conference call will be made available as soon as possible on our investor relations website. Before handing over the call to Eric, I would like to remind you of the following.
As of the first quarter of 2018, Philips Lighting reports and discusses its financial performance based on the recently announced portfolio changes to further align the organizational structure with the strategy. In addition, we've made changes to the allocation methods of centrally managed costs and to the threshold for other incidental items as adjusting items when presenting certain non-IFRS measures, such as adjusted EBITDA. In March, we published a detailed overview of these changes and the effect these changes had on prior year financials. This update can be found on and downloaded from our investor relations website. With that, I will now hand over to Eric.
Thank you, Robin. Good morning, everyone. Thank you for joining us today. Let's go straight to slide four. The first quarter of 2018 marks a soft start of the year as indicated previously when we announced our full-year results. This was mainly due to a weak performance in Home, and most notably, in the U.S. However, the other three businesses delivered solid performances. Total LED sales increased by 5.6% and now represent 68% of total sales, compared to 61% last year. Looking at our margin, it was 50 basis points lower than last year with an improvement in lamps, LED, and professional, offset by Home. We have also made good progress on the cost side with a 13% reduction in our indirect cost base. I am pleased with our free cash flow performance after a strong fourth quarter in 2017.
Excluding the real estate proceeds of EUR 19 million, our free cash flow was higher than last year. Let's move now to slide five, where you can see the financial performance by Business Group. If we look at Comparable Sales Growth, LED and Professional delivered positive growth. Lamps also did well as it continued to decline less than the overall conventional lamps market. However, in Home, sales declined in the quarter, which I will explain in more detail in a couple of minutes. When we look at the profitability, you can see that Lamps, LED, and Professional all improved the adjusted EBITA margin, and we are especially pleased with the margin improvement of 310 basis points in Professional. The adjusted EBITA margin of Home dropped sharply, mainly due to lower fixed cost absorption and investment in growth since the first quarter of 2017.
Let me now walk you through our Business Groups. On slide six, we are starting with Lamps. Comparable sales declined by 17.6%. We estimate that the conventional lamps market continued to decline faster than our Lamps business in Q1, which has resulted in continued market share gains. Despite the decline in top line, Lamps has been able to sustain a high level of profitability at 21.2%. This is 80 basis points higher than last year and driven by procurement savings, productivity, and lower indirect cost. Restructuring costs amounted to EUR 17 million in the first quarter and are mainly related to the announced closure of our Halogen factory in Aachen, Germany. Let me now move to LED on slide seven. Comparable sales increased by 3.6% on the back of a relatively high conversion base as the LEDs experienced a strong start of the year in 2017.
Growth in LED lamps remained robust with volumes gradually converging to market growth while price erosion is reducing. LED electronic sales were flat due to lower demand by OEMs, particularly from tier 1 customers. The adjusted EBITA margin improved by 110 basis points to 9.6% in the first quarter due to lower price erosion, mix improvement, and lower indirect costs. Let's move on to Professional on slide eight. In Professional, comparable sales increased by 3.2%. Performance in Europe and the rest of the world remained solid when market conditions in the United States continued to be soft, in particular for small to medium-sized projects. In that part of the market, the stock in flow business, we continue to see increased competition, specifically from low-cost producers, which results in increased price pressure.
In Saudi Arabia, market conditions continue to be challenging, and it negatively impacted us and our CSG by 220 basis points. The adjusted EBITA margin improved by 310 basis points overall to 5.2%, mainly driven by operational leverage, reduction of factories, and lower indirect cost. Let's now turn onto slide nine, and let's talk about Home. Home reported a negative Comparable Sales Growth of 6.4%. Let me provide a bit more detail on what caused this decline. We had a very strong growth in home systems in the third and fourth quarter of 2017. Together with our trade partners, especially in the U.S., we had even higher expectations compared to what was actually delivered. We realized that this had led to a high level of inventories at our trade partners. This resulted in lower sales in the first quarter to allow for inventory reductions at these trade partners.
This low level of sales impacted our profitability in a material way in the first quarter, as we were not able to fully absorb fixed costs, especially given the investment in growth since the first quarter of 2017. We are undertaking a set of actions to improve performance over the coming quarters. We continue to broaden our product offering, diversify our distribution coverage, and increase our marketing activities. Our view about the long-term growth and margin potential of connected systems for the home has absolutely not changed because of the performance in Q1. We are confident that the action I just talked about back on a solid growth path, which will also improve its profitability. Taking everything into account, we expect sales also to be affected in Q2, but to return to normalized levels in the second half of the year for home.
As a result, we expect home to return to profitability in the second half of the year and to be around breakeven for the full year. This is what I wanted to cover regarding the business and operational performance. I will now hand over to Stéphane, who will tell us more about the financial performance for the first quarter of 2018.
Thank you, Eric, and hello, everyone. Let me now turn to page 11, where you can see the adjusted EBITA bridge. The adjusted gross margin, when you look at it as a percentage of sales, decreased by 110 basis points in the first quarter compared to last year. That was mainly due to a lower sales level. Our price erosion, we saw it declining and slowing down, and it was partly offset by ongoing procurement savings, although at a lower level that we previously saw. When you look at the indirect cost, we improved by EUR 38 million, excluding currency effects, strong performance there. And finally, we had negative impact from Forex effects. This is due to the further devaluations of currencies, like the Indian rupee, the Indonesian rupiah, Argentine peso, and Canadian dollar in particular.
These devaluations were not able to offset the favorable impact that we continue to see from the Chinese renminbi and to some extent, also the US dollar. Let's now turn to the next page on indirect costs. You can see on this slide the year-on-year development of our adjusted indirect cost base, which was 33.2% in the first quarter of 2018. This is a 60 basis point reduction compared to the same period of last year, despite also the lower sales. And we clearly see the impact of the many cost reduction initiatives that we implement across the company. This enabled us to achieve EUR 38 million of savings in indirect costs without the Forex effect. And overall, we have reduced by 13% our indirect cost base compared to a year ago. Of course, Forex positively impacted the adjusted indirect cost base by an amount of EUR 35 million.
We continue to implement our multi-year transformation initiatives in order to simplify our organization, be able to improve our customer service and quality, be able to be more efficient, to capture also scale benefits, and be able also to reinvest in growth. We expect these initiatives to allow us to continue to reduce our indirect cost base over the coming quarters and to reach a level of indirect costs at or below 29% by 2019. Let's now take a look at the working capital of the first quarter on the next page. Here again, another strong performance in the first quarter. When you compare with the same period of last year, the working capital decreased by EUR 105 million, and it was EUR 612 million at the end of March, and that represents 9% of sales in the first quarter of 2018.
This improvement compared to a year ago is mainly due to lower receivable, where we had a very good collection activity in the first quarter, and also a reduction in the inventory of EUR 25 million. As a percentage of sales, our inventories increased slightly by 30 basis points. After a very sharp reduction of our working capital and a strong free cash flow in the fourth quarter, this is another solid working capital performance in the first quarter. It allowed us to improve our free cash flow compared to the first quarter of 2017 if we exclude the real estate proceeds of EUR 19 million that we benefited last year. Turning to the next page 14 on net debt. You can see that our net debt level increased by EUR 68 million compared to the end of 2017.
Of course, next to the profit that we generated during the quarter, and also the change in working capital that I have just mentioned, you can see here the other items in the bridge that impacted our cash and therefore our debt. Our net CapEx was EUR 21 million in the quarter, which is a bit lower than last year, and we've been very tightly managing our CapEx. Change in provision was EUR 5 million, and next to that, we paid EUR 40 million for tax and interest. We also repurchased shares from Royal Philips for an amount of EUR 71 million as part of the fourth sell-down, which took place at the end of February. All in all, this increased our net debt position to EUR 435 million at the end of the first quarter of 2018. Let me now hand back to Eric for the last part of the presentation.
Thank you, Stéphane. Let's turn to slide 16. To summarize, as we indicated in January, Q1 marked a soft start of the year. This is mainly due to a weak performance in Home, while at the same time we continue to improve profitability in the other three businesses. We also made good progress in reducing our indirect cost base, and we improved our underlying free cash flow after a strong fourth quarter. With respect to our outlook, we aim to deliver positive Comparable Sales Growth for the full year on the basis of a strong second half. Next to that, we aim to improve our adjusted EBITA margin from 9.6% to 10% to 10.5%, and we will continue to focus on cost reduction initiatives.
Based on that, we expect to generate solid free cash flow in 2018, which is, as well, already flagged in January, expected to be somewhat lower than the level in 2017 due to higher restructuring payments. Restructuring costs for the year are expected to come at the high end of the targeted range of 1.5%-2% of sales if we take into account the costs related to the company's main change. For the second quarter, we expect the restructuring costs to be at a similar level as we have seen in Q1. With that, I would like to open the call for questions, which Stéphane and I are happy to answer. Thank you.
Ladies and gentlemen, we are now ready to take your questions. We kindly ask that you limit yourself to one question and one follow-up so that each participant has the opportunity to ask a question. If you do wish to ask a question, please press zero one on your telephone keypad. That's zero one on your telephone keypad. Our first question comes from the line of Daniela de Carvalho of Goldman Sachs. Please go ahead. Your line is now open. Sorry, please bear with us one moment. We seem to be having a technical issue. Mr. de Carvalho, please bear with me one moment. Please, you can now go ahead and ask your question. Mr. de Carvalho, you may go ahead and ask your question. Please go ahead.
Yes, we hear you, Daniela.
Hi, it's Daniela here, actually, from Goldman. Sorry. I have one question and one follow-up. To start up on the question on your point about keeping the guidance on the 10%-10.5% and talking about sort of indirect cost savings accelerating in the second half. I think if one sort of does the maths, roughly you need EUR 100 million incremental EBITA this, the next three quarters versus what you had last year, to make up the low end of your guidance. Can you talk through what you see on indirect costs and then why you're confident on that to keep the margin guidance where it is? I'll start with this, then I ask the follow-up.
Yeah, sure, Daniela, let me take that one. Yeah, we've always said for the last few quarters that the reduction of our indirect cost is a core part of our outlook and a core part of our guidance for 2019. We have taken a lot of actions as we have commented, a solid achievement. If you take into account also the Forex effect, we are at EUR 17 million, more than EUR 17 million reduction. Very clearly, the trend is there for us to be able to deliver, as you mentioned, above EUR 100 million reduction. We're going to continue that every quarter, and we indicated at the beginning of the year that we expected that the trend would even increase in the second half as we see even higher impact of everything that we have started towards or implemented towards the end of 2017 and also in the first quarter.
Yes, that's a very important element of the outlook and of the guidance midterm.
Okay. It would be good to have a bit more detailed color on that. Anyway, I'll move to my follow-up question. On your confidence on organic growth guidance for this year, and Eric mentioned just in his speech that this was counting on an acceleration in the second half. How much visibility do you have on this? Is there a large project
Good morning
is there something that gives you the confidence?
Good morning, Daniela. As you can imagine, we looked at that very specifically. We did a re-forecast in detail in the past weeks. What we see at this point in time, we see that Q2 will still be affected by Home. I can go into more details later down the track about the situation there and why I'm saying that. We see a very strong Q3, and we see a strong Q4 on the basis of a few things. The ongoing improvement in the businesses, you see that the other three businesses are performing well and according to their strategic objectives. We believe that Home will resume also its performance on growth in Q3 and very much so in Q4. We have also the Halogen ban in September. As you know, after the 15th of September, we basically cannot produce anymore.
We can still sell our inventory, we cannot produce anymore. There will be stock building by our customers from the Halogen ban. That will have an impact on the sales in Q3. We have, in some regions of the world, and specifically Saudi, as much as I don't see any improvement in the underlying trend in the economy of Saudi. I was there a few weeks ago. We have secured some projects, three projects of interesting project with very selected customers. As you know, one of the very important element for us in Saudi is to get paid. We're very selective in the businesses that we take. Quite important project that we believe are going to improve our position there, and in H2.
The visibility that we have at this point in time is still a Q2, which is going to be affected, a very strong Q3, and a good Q4.
Thank you. Our next question comes from the line of Alok Katre of Societe Generale. Go ahead, your line is now open.
Hi. Thanks. My follow-up just on the guidance side of things. If you could just talk through, particularly at Business Group Home, in terms of how the quarter sort of shaped up as well across the months. Because clearly you've been sort of obviously flagging that this destocking still continues in the second quarter as well. Maybe, what is the confidence behind, let's say, this return to normal levels of growth? When we think normal, I mean what sort of normal levels of growth we should see, because this is really very volatile. Then the other question, of course, in terms of main question was, could you just talk a little bit about the U.S. and professional markets over there? Any signs that you're seeing in terms of recovery at all? Because none of your peers are any particularly positive on the U.S. lighting market.
Maybe if you just talk about the dynamics over there, that would be great. Thanks.
Sure. On Home. Let me try to go back in time and explain why we are there and how we see that business moving forward. There were a lot of expectations in Q4, and if I zoom specifically on the U.S., because this is where the major impact is. We have to understand that for Home system business, the U.S. is a big proportion of that business worldwide. We are selling to important trade partners, important retailers, online, offline. They had a plan to grow extremely aggressively, in Q4. We followed them with their plans. The way we follow, well, we make sure that we have the available products. As you can remember, that's one of the issue we had in 2016 when we didn't have enough products available.
I think they wanted also to make sure that in 2017 they would not have any shortage in terms of products. That probably has not happened. They had big plans. We supported them in marketing activities. We realized that they would not make their plans, but you are making the inventory for Q4 basically in September and October, and partially in November. That was done. We realized because October was very strong, November was very strong. December was strong, but less. Then in January started to be very soft. We analyzed a bit more the situation at that point in time. This is why we came at the end of Q4 when we announced our full year results, we said that the quarter would be soft.
Going into more detail, because once again, we have different customers that we are talking to, and they were very different situations with the inventories that were for that specific business. We are talking about Home systems, inventories going between nine to 18 weeks. Which, to give you a hint, a healthy inventory in the trade is around eight weeks. They had built that inventory. Our number 1 priority in Q1 was to make sure that inventory would reduce, and to be also very specific, and that is also one part of your question. The selling out in Q1 for those customers has been good. It has been, again, a strong double-digit selling out. The selling out is there. There is another element. Q4 is 2 times in volume Q1.
When you have an overshoot in Q4 and you build up inventory, then it takes a big proportion on what your business is in Q1. This is, in a nutshell, what has happened. What makes us confident? First of all, there is no structural issue on that business. The offers are there. We continue to innovate by bringing to the market a full connected offer, not only for the inside of the home, but now for the garden, which was much awaited by customers that were asking us when we would be able to provide a compatible offer for the outdoors. Hue Outdoor is going to be launched in Q2. That is one thing. The second thing is, the selling out is healthy.
It is going to take a bit of time so that inventories are back into a healthy position, and we see the business continuing to grow. To give also another hint, we made a lot of investments for the growth plan that we had last year. You have a carryover effect also on the investment that you have done during the year. All that is happening in Q1 on the base of a lower top line, it does not help the bottom line as you have seen it. I am going to be very frank and direct. I am not satisfied and happy by the performance we had in Home. It is probably a bit worse than what we had imagined when we talked to you last time.
Nevertheless, I'm confident on the potential of that business moving forward, and this is the plan we have in order to recover. That business needs to grow double digits in order to be profitable. That's what we see happening, and especially in the second half of the year.
Okay, thanks.
Sorry. It was a bit of a long answer, but on the U.S. Prof.
No, that's okay.
Sorry, I was a bit long on Home. I think this deserves some explanations. Let me now answer your question on U.S. Prof. Do we see any sign of recovery on the market? The answer is no, not in Q1. We still see the same trend on the project that are low to mid-sized. What we've seen also in Q1 as a negative trend is the market and the public market, especially when it comes to road and street, which is a big part of what we do. We are very much oriented towards the outdoor part of the portfolio in the professional part of the business. We've seen that market slowing down in Q1.
Nevertheless, when we look at the performance of our professional business, it of course includes the performance that we have in the U.S., and you've seen that we're growing not only the top line, but we're also growing very healthily the bottom line, in line with the plans that we had originally by 310 basis points for Q1.
Is that sort of we should think about that as more Europe sort of led, how sustainable should that growth profile sort of be? I'll leave it there. Thanks.
Europe has been consistently strong except U.K. and Ireland. China has been very strong as well as the rest of the world. I would put aside, of course, Saudi that I've already talked about.
Okay, thanks.
Thank you. Our next question comes from the line of Martin Wilkie of. Please go ahead. Your line is now open.
Yeah, good morning. Thank you. Martin at Citi. Just the first question, coming back to the inventory in the channels, I mean, obviously, a big volume impact there. Do you take any inventory risk in terms of pricing? There were some discounts that we saw at certain retailers on the Hue products running up to Christmas, I just wanted to work out if the impact you had was purely on the volume side or if you also retained some pricing risk on the inventory that is in the channels. The second follow-up question, you mentioned you need to grow at a double-digit rate. You also said that the sell-out is healthy in the quarter. Even though you're going to see an ongoing drag in Q2 as it de-stocks, is the sell-out still at the double-digit rate that you need to get to in the second half?
Thank you.
Yes, absolutely. Let me start with the second question. Yes, we need to continue to see a double-digit sell-out. With marketing activity, we are also helping that sell-out, and that's the way we work with these big retailers. On your first question, there's no specific risk which is retained in the pricing of the inventory that these customers have built up. That's not the way we work.
Okay. It's purely a volume impact from your perspective?
Absolutely.
Okay. Thank you.
Thank you. Our next question comes from the line of Alexander Virgo of Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Thanks very much. Morning, gents. I wondered if you could just do a little bit more on home. Forgive me for going back to it, could you maybe characterize how much of Q4 growth was therefore inflated? It sounds to me like the 54% growth in Q4 was probably over or unreflective of the underlying demand. Perhaps just talk a little bit about the visibility, I guess, your comment at the end there in previous explanation about being a little bit weaker than you had expected. It sounds to me like it got a lot weaker than you expected. I just wonder if you could talk about the visibility that you have on that.
On your first question, it's a very difficult thing to say, at this point in time, because it depends on many different factors and many different customers. I don't have any concrete answer. Also it depends on the dynamic that you see in the upcoming quarter. There's one element which is very important to consider, which I've already talked about. Q4 is 2 times Q1 in general. There was an expectation from these customers, to go much beyond what has already been achieved and which was a great growth, if you look at our growth in Q4. They decided to go for the big game, let's call it like that. We had plans to achieve it didn't happen. Now, materially, we don't have a very precise number to give. Our visibility on the matter was in the following way.
We understood that October was strong and November was very strong. December was a bit weaker. That was the first hint. We looked into it, the beginning of the year was also soft. On the back of a lot of different festive activities around the world, there was still some traction there. We realized that we would be facing a softer situation in Q1. At the end of Q1, I would say at the end of January or beginning of February, we started to investigate and go back to our customers to understand what actually was going on. I can give you more precise examples. Some of those customers are online, it's easier, but the offline, they have thousands of retail points, we need to have the information of what was going all over the place.
On a very specific case, when you look at our customer, they had a very strong smart home business in Q4, pretty much in line with what their target was. The lighting piece was not. They didn't proactively come to us telling us, "Hey, there's something happening on the lighting business," overall, the smart home business was moving in the expected direction. The lighting piece was lower than expectation. It took us probably after the beginning of February, close to 4-5 weeks, to really go into the details and have a good evaluation of what was going on. This is what happened. We discovered it moving in the quarter. Now, as I've said before, I'm not happy about it. I think we should have seen that faster. That's the message that was given to the teams.
If we have from this situation an important learning, with hindsight is when we have businesses that don't go well or businesses that go too well, we need to equally watch both of them. Probably that our attention was more on other businesses that needed improvement than on the Home. I would say the Home System, part of the business that was flying at this point in time. This is how the events occurred all along the quarter.
Okay. Thanks, Eric. Maybe just as a follow-up then, when you talk about Q2 being still affected and growth normalizing in the second half, would it be fair to assume that the business at Home will still decline in Q2, or would it be more flattish? Then obviously you've got a meaningful step-up in Comparable Sales Growth in the second half, 45% and 54% respectively, Q3 and Q4. You're talking double-digit growth on those comps. Is that right?
Yeah. We don't see Home declining in Q2. We see Home growing in Q2, but not at the level that we originally in our target.
Okay.
Thank you. Our next-
There will be an improvement in Home Q2 versus Q1, but still not at the level where we believe that business needs to be.
Thank you.
Thank you. Our next question comes from the line of Sven Weier of UBS. Go ahead. Your line is now open.
Thank you, and good morning from my side. My first question is actually on the LED component part of the business and where you are also supplying other people. Is your observation that maybe the destocking that you saw from your customers there has now come to an end and has normalized? That would be my first question.
On the LED electronics, the situation that we see is still a very soft market when it comes to our tier 1 customers. Namely, to cut a long story short, the big luminaire manufacturers. On the other hand, we had a stated goal to develop also our business strongly to tier 2 and tier 3 customers. If I'm simplistic, these are the smaller luminaire manufacturers. What we see, we see that we have, from still a lower base, a very dynamic growth when it comes to those tier 2 and tier 3 customers. We are enjoying much less growth than originally expected on the tier 1 customers. That's the situation. We haven't seen any improvement in Q1 versus what we did experience in the previous quarters, and this is what we had guided for. It has continued basically in Q1.
Is that also because of more competition from lower cost competitors? Is it just purely related to the softness in the market?
I think, Sven, this is a very good question. I believe there's a bit of both. Certainly that we see new low-cost entrants on the luminaire side of the business, which are challenging, probably established and historical players and coming with fully integrated luminaires, meaning that you have not only the luminaire, the LED engine, but also the driver, what we call components in it. That has an impact on the original way of doing business. We're looking very specifically at that situation today. We're doing a lot of strategic deep dives to understand what's happening on the market and who are the involved actors. We are preparing a set of action initiatives in order to be able to intervene when and wherever necessary. This is something that we're looking at this point in time.
If you ask me today without being able to give you a very clear indication in terms of quantitative information, I believe there's a bit of both. Market softness on one hand, but also some of the market share taken at the low end of the market by new entrants in the LED luminaire space.
Mm-hmm. The second follow-up question I had was on your LED chip procurement. Where you are the tier 1 customer to your suppliers. Has your behavior changed there? How is your stocking situation on LED chips? Do you feel you can destock yourself? How do you see pricing evolving at the moment? Because there's been some talks about price reductions from the Chinese suppliers, for example. I see that spreading also to the suppliers like Lumileds. That would be my second question. Thank you.
On the chip side, you have two different situations. You have the high power, which has shrunk quite a bit compared to what it used to be a few years ago. You have medium power LEDs and also low power LEDs, which are taking the biggest part of our procurement volume at this point in time. I think we have worked fairly well on the management of our suppliers when it comes to chip manufacturers. We are concentrating our volumes on some strategic suppliers, working with them not only on a pure customer to supplier base, but also co-designing with them in order to be able to achieve together some of the desired performance that we believe we need to be able to compete and bring promise to our customers. We're doing that quite well.
We are still enjoying, at this point in time, price decrease on the chips, much less than what's happening previously. Doing two things. First of all, co-designing and making sure that we have the right product for us, then committing on volume to those customers. Also by selecting them very sharply based on the capabilities for the different applications that we need. That's one part of the business that runs pretty well. At the same time, we have a big volume to sell. We are an important actor, and that helps us to have the right supplier base for that very specific part of our bill of material.
Mm-hmm. There's no change on your behalf in terms of your procurement, that you have slowed it down or any change on your procurement behavior in general?
No, on the contrary. If you look in volume, this is still going up
Okay. I was just wondering as a side effect maybe of the slower business elsewhere, that this could have happened. Thank you for that.
No worries. Thank you.
Okay, our next question comes from the line of Peter Riley of Jefferies. Please go ahead and ask your question.
Good morning. I've got one and a follow-up, please. Firstly, on your LED business, the growth rate continues to slow. I know some of that is the LED electronics, but can you tell us if all countries are still showing growth in LED lamps, or whether any of those markets have become mature and started to shrink? Secondly, on the follow-up, you mentioned that your U.S. professional business, a lot of it is road and street. Do you know what the penetration is now of LEDs and the installed base for streetlights in the U.S.? I guess it's going up fairly rapidly. My assumption is at some stage that reaches maturity, and then you have a very long period when the market is very soft. Maybe you could talk about those two issues, please, and help us understand the trends.
Sure, Peter. Thank you. When it comes to the LED business, so the LED business has got two components, as you know. One is LED electronics, less than half of the business, and the other one is LED lamps. LED electronics is flat, as I've mentioned it before. LED lamps is growing in Q1, and we have to put that in perspective of the high base of comparison in Q1 2017 and specifically, in region of Asia. To mention India, in a way, we were taking big projects in terms of LED lamps. We knew that the base of comparison, and this is what we also highlighted in the previous announcements, would be strong for LED lamps. Now, we see LED lamps growing in all the countries where we operate. I would say there may be one specific example.
Otherwise, we see still LED lamps are growing in all the geographies. Of course, as we've mentioned before, in markets where the penetration of LED is high, we see less growth than in the markets where the LED penetration is lower. In Northern Europe, we have less growth in LED because the penetration rate is much higher than you would have in some emerging countries that have been moving to LED later. That's the same comment as we have said previously. On the professional side of the business. Look, I'm going to give you at the top of my head statistics on street lighting. We believe that between 15%-20% max of the existing street light poles on the planet have been updated with LED energy-efficient lighting.
We count, but it's an old statistic, Peter, so maybe it has evolved, but at the top of my mind, we talk about 300 million light poles on the planet, and probably 15%-20% of them in mature countries as a max, have moved to LED. You see the potential is still extremely strong and high. When you talk about connectivity, it's even less. It's probably less than 3%.
Do you have that number for the U.S.? The reason I'm asking is obviously the U.S. professional business has had problems. My guess would be that the penetration is much higher than 15%-20% in the U.S., and therefore, you get to a stage relatively soon where the market actually starts to go into decline. Because when you get to, I don't know, over 70% or 80%, then clearly the market's going to be a lot smaller. Do you know what the penetration rate is in the U.S.?
No, Peter. I don't know it at the top of my mind. My guess is that it's certainly lower than Europe. I would not share that view. I think that there's a lot to do still in the U.S. when it comes to street and road lighting. I see that the conversion there is now happening, it hasn't been as fast as what we've seen in Europe.
Okay. Thank you.
Thank you. Our next question comes from the line of Peter Olofsen of Kepler Cheuvreux. Please go ahead. Your line is now open.
Thank you. I have a question on the pricing trend and the cost of goods sold trend, because I think they are largely linked. In the press release, you mentioned that the price erosion is slowing. Is that mainly in the LED segment, or do you also see it in other segments? It seems that the cost of goods sold reduction is getting more moderate. Can you confirm it's indeed becoming more difficult to reduce the bill of material? Thank you.
Yeah. Peter, let me take that one. On the price reduction, indeed, I think we've mentioned that already in Q4, but in Q1 we have also seen on the LED lamp side, a slowdown of the price decrease. We see that continuing, and we expect this to continue, and I think we've mentioned that a few times. When you look at the bridge and the overall price effect, it's still relatively high. We've seen in professional, some increased price pressure. The slowdown of price reduction in LED has been unfortunately somewhat compensated by some higher price reductions that we have seen, especially in the professional. Going to the cost of goods sold, which includes bill of material and productivity. Yes, in Q1, the overall amount that we have saved is lower than what we used to save every quarter.
I think we have always indicated that, especially in LED, as we see less volume growth, and also as the technology matures, there will be less savings extracted from the bill of material. That's going to come pretty much in sync also with the lower price reduction. This is exactly what we see happening. Now, in Q1 is always a bit of a lower quarter when it comes to overall bill of material savings compared to the other quarters. Finally, because of the low volumes, that affected our overall productivity. Where we usually enjoy some positive productivity effect, here there were some negative productivity effects. That explains why that one is a bit smaller compared to what we used to have.
Okay. Maybe to clarify what you said on professional, that there's a bit more price erosion than you saw before. Is that mainly on the lower end? Is that due to imports from Asia into Europe and the U.S., or what's driving that?
Yes. First, we pretty much see that on the lower end product range in the LED, of course. We believe pretty much driven as well by the Chinese imports or Chinese players acting on those markets, and we see it a distance more in the U.S. than in Europe.
That's helpful. Maybe a follow-up on home. You said that your trade partners saw their overall smart home business in line with expectations in Q4, but that the lighting part fell short. What conclusion do you draw from that? Do you need to better educate the end consumer about the benefits of your product? Will you have to adjust pricing? What's the implication from that shortfall of lighting within the overall smart home category?
There are two conclusions. The first one is, I think that their objectives for the lighting was extremely ambitious and in retrospective, too ambitious. That doesn't mean that lighting didn't sell. We sold a lot and they sold a lot, but they had even higher expectations. We saw not all of them. I was really mentioning one very specifically. What we also saw is that in Q4, a lot of offers came on the market for smart home and security in smart home. I believe that as much as they didn't reach their objective, that was a very high one. For lighting, they probably sold more than what they had expected in security for the smart home. These are the two learnings from what happened.
Just to be clear, we cannot talk about an actual shortfall in the lighting business because the growth was really high. It's just that they had even higher ambitions.
Okay, thank you.
Thank you. Our next question comes from the line of Marc Sleenhoff of ING. Please go ahead. Your line is open.
Thanks for taking my questions. I have a question about prof. You mentioned the three larger contracts kicking in in the second half. Can you give us an indication, if you will, then reach double-digit growth in that division? Can you perhaps give a bit more detail on how we should think about the growth and margins in prof in the second half? That's my first question.
Marc, we're not specifically commenting by business and such a specific guidance for the year. You look at the improvement trend of prof. We want to continue to move that business towards the guidance that we have given for the midterm. We believe that that business will see a strong Q3 and again, a good Q4. We are not specifically giving number by business and by the year. As you can see, the trend in Q1 is positive, and we continue to be positive on that business for the upcoming quarters.
To be fair, on Q1 you see a bit of a slowdown in the trends, and you mentioned also some softness in the U.S. public market. Somewhere to achieve your at least 0% Comparable Sales Growth, there should be some acceleration in the Prof business. Perhaps you can give a bit more color on why we should see an acceleration of growth in Prof in the second half, and how sizable those projects roughly would add to the growth.
The way I look at it, Marc, is in the following fashion. We're growing in Q1 above 3%. We still have a negative impact of Saudi. It is also a business which has a component which is declining, which is the conventional part of the professional business. Despite that, we're growing. I think that's a reasonable level of growth for that type of business. While at the same time, which is extremely important to us, we are improving on the bottom line. It's an improvement of 310 basis points. We have to look at it quarter to quarter. We were expecting, and we're expecting not only Q1 but also H1 to provide an improved performance from a bottom-line perspective. This is what is happening in Q1. This is why we see this as being a good start.
I agree on the margin, I'm more referring to your guidance on your top line, at least 0, while we see the trend in home. Somewhere we need some compensation. The trend, to be fair, although conventional down, as you say, we're still growing. The trend came from, say, mid-to-high single digits to say low single digits. There have been some clouds arising on the public side. There should be some compensation then from something else to make you comfortable with your full year guidance on the top line. That's why I would like to have a bit more color on what we can expect for Prof in the second half of the year. What you see in terms of-
Yeah, Marc, we're giving a full year guidance on the company. We're not giving it by businesses. I've explained the mechanism that we have when it comes to the top line, we need to have a compensation of the decline of lamps with the other businesses. We need a strong home. We need a good LED and we need a good professional. When that doesn't happen because one of the cylinders is not really delivering what's expected, then we have issues, and this is what we've seen in Q1. Once again, the plan that we have, and I'm going to come back to that, and we are not giving a clear indication by businesses because we don't do this, but it's still somewhat an impact in Q2, a very strong Q3 and a strong Q4.
This is what we see and what makes us believe and remain confident in the outlook that we have given from a top-line perspective, which is that the company will be growing in 2018.
Maybe a follow-up. Can you give us also the impact from FX on your EBITDA margin in Q1, what the exact impact was from Forex on the EBITDA margin?
Yes. As you saw from the bridge, it's EUR 13 million. When you take into account negative EUR 13 million, I explained on that page that it was largely related to a lot of the currency devaluations compared to last year. When you look at the sales impact, it was EUR 120 million. When you look at the margin, it was 30 basis points. It means if we had been at the same Forex, the margin drop compared to last year would have been 20 basis points, Forex added 30 basis points.
Very clear. Very good. Thank you very much.
On the line of Wim Gille of ABN AMRO, please go ahead. Your line is now open.
Yes, good morning. Wim Gille, ABN AMRO. I got two questions indeed. You indicated that the sell out in the channel in Home was double digits, but that is still kind of a very vague statement compared to the north of 30%, 40% that you generated in sales in the last quarters. Can you be a bit more specific what the sell out in the channel was in the fourth quarter of last year and in the first quarter of this year to give us a bit of a feeling on where the underlying market really is? The second question that I have is on the restructuring charges. You had quite a bit of restructuring charges in the first quarter. I think it was EUR 47 million. Sorry, EUR 43 million. You indicated that you expect a similar amount in the second quarter.
Can you give us a bit of feeling where we should end up for the full year?
Yes. Let me take the sell-out question, and Stéphane will take the restructuring one. Let us not talk about Q4, but let us talk about Q1 because this is what matters, linked to the reduction of inventory. The sell out that we see at our customers at this point in time is very close to the number that you have stated.
30%-ish?
Yeah, you said 30%-40%.
Okay, thank you.
Thank you. Our next question.
Wim, sorry, just to answer your question on restructuring, Wim. As you saw, we took EUR 39 million in the first quarter. That will happen in the second part of the year, but we took the charge in Q1. Then there was a few other charges that we took related to our cost reduction programs. We've indicated, Eric mentioned that in the presentation, that we expect in Q2 to book in our P&L a restructuring amount, which is probably around the same level as in Q1. Then for the whole year, we intend to be around the same level in absolute value compared to last year in terms of P&L impact. That is within the range of the 1.5%-2%.
It means that in the second half, compared to last year, we will have less restructuring charge, because a lot will have been booked in Q1 and in Q2. This is what we see at this stage, with effect to restructuring.
Okay, just to be completely clear, what was the number of restructuring charges in 2017?
It was EUR 126 million.
All right. Thank you very much.
Thank you very much. We will now go to our last question from the line of Andreas Willi of J.P. Morgan Cazenove. Please go ahead. Your line is now open.
Good morning, gentlemen. Just a quick follow-up question on Home. Is there a technology shift happening in the market in terms of, we've seen some competitors launch connected lighting products that don't need the bridge, that are simpler with fewer functionality, where you directly link the bulb to basically the Wi-Fi and your app on the phone, and you don't need a bridge, but obviously you then don't have some of the capabilities as well. Is that a shift within the market to kind of simpler connected lighting that's impacting the business as well? Then the second question on Home. I assume most people that buy the Home product and download the Hue product and download the app, shouldn't that allow you to give a very almost kind of day-by-day tracking of what's happening in terms of real end demand?
I'm a bit surprised it basically took until March to see the full extent of the slowdown given that the product should be connected to your app when customers actually buy and install them.
Yeah. Morning, Andreas. Let me answer to the two questions. It is not a major technology shift, meaning that the whole market goes towards direct and easier connectivity directly with the phone. We see it, and we see it more important in Asia than in Europe. We think that this is a trend which is more acute in this part of the world. We are working on it. We also believe that the direct connection to the phone, and it is a Bluetooth connection, has got advantages and drawback. It seems effectively simpler, but it means that you systematically need to use your phone in order to activate your lighting. While at the same time you are more limited in terms of functionality that you can drive out from the system. Let me give you a very specific hint and something that we believe in.
We believe that, at one stage, people do not want to systematically rely on the smart device, whether it is a phone, whether it is a tablet, to modify the light settings. This is why we have also battery-less switches. This is why we have motion sensors that are helping in terms of making sure that whenever you want to have a scene in your kitchen, you do not need to go back to your smart device and activate it. You can activate it pushing on the switch. You have programmed the scenes, and then you can activate them simply. Moving forward, we believe that the less we can use technology to have the lighting to adapt to whatever you want to do, is the right trend. It is not a technology shift. It is another need from the customers, and we are seriously looking into it.
We think that it is not one or the other, it is probably both. What we have started to do, with the solidity of the architecture that we have, because what we need to understand is that you have the bridge, and on one side it is an open API that allows third-party app developers to create apps, and that has been a big part of the success. On the other side of the bridge is the wireless connectivity to the lamp and the possibility to command all the lamps. That architecture is very solid because it is flexible on one side and quite rigid on the other side, protecting against security issues. I think it is going to be the coexistence of both, and we do not see a major technology shift from that trend at this point in time, and we are looking into it.
It is impossible for us, through the Hue app, to do what you are suggesting. We do not know where people buy anyway, it is not because they have a product that it actually indicates where that product was bought. It depends where people actually connect the product, and we do not have this type of intelligence at this point in time that would be able to very precisely indicate where products are bought and where they are installed. We do not do that. Where you are right is that we should have seen that earlier. The only way for us to have been able to do that and see the trend earlier was to be closer to our customers, and especially the big ones that I have been mentioning, getting information on their inventory situation.
Once again, this is a learning, that could not be done digitally through the app. We should have been closer to these customers to understand the trend quicker. That's a fact.
Thank you very much for your time.
Thanks.
Thank you very much. I'd now like to return the call to our speakers.
Thank you very much, operator. Thank you everybody for attending the call and for your questions. We're looking forward to the following interaction in the coming months. Have a nice day.
Ladies and gentlemen, this concludes today's conference call. Thank you all very much for attending. You may now disconnect your lines.