Earnings Call: Q4 2017

Feb 2, 2018

Hello, ladies and gentlemen, and welcome to today's Phillips Whiting Earnings Call for Q4 and full year 2017. For the 1st part of this call, All participants will be in listen only mode and after there will be a question and answer session. Please note And at this stage, I'd now like to give the floor to Robert Janssen, Head of Investor Relations. Ms. Janssen, please go ahead. Thank you, sir. Good morning, everyone, and welcome to the Phillips LIGHTING Earnings Call for the 4th Quarter and Full Year Results 2017. With me are Eric Wondala, CEO of Phillips Leiteng and Stefan Roger, CFO. In a moment, Eric will start with a welcome and introduction, after which Stefan will take you through the 4th quarter financial performance. Eric will then tell you more about the highlights for full year 2017 and we'll end today's presentation with the outlook and conclusion. After that, we will be happy to answer your questions. Our press release and the related slide deck were published at 7 AM CET this morning. Both documents are now available for download from our Investor Relations website. A full transcript of this conference call will be made available as soon as possible on our Investor Relations website. With that, I will now hand over to Eric. Thank you, Robin. Good morning, everyone, and thank you for joining us today. I propose that we go straight to Slide 4. So first, I'm very happy that we have been able to deliver on all our financial objectives in 2017. So first, we not only returned to growth during 2017, but we achieved comparable positive sales growth for the full year. We increased our operational profitability by 90 basis points to 10%. And we also delivered a free cash flow of 1,000,000. Each of our business groups has made a good progress during the year and delivered a strong performance. I am particularly satisfied with the performance of Professional And Home, which delivered strong growth and profit improvement specifically in Q3 and Q4. Finally, we have also progressed on our strategic directions. Sales from systems and services are now above 1000000 and increased 51% in 2017. All in all, we are making good progress to achieve our strategic goals and our midterm financial objectives. And on this journey, we continue to invest in growth of opportunities, provide a return to shareholders and optimize our balance sheet. Now let me now hand over to Stefano, we'll tell you more about the highlights for Q4 2017. Yeah, thank you, Eric, and good morning, everyone. So on page 6, you can see an overview of the financial performance for the company and also by business group. You can see our comparable sales increased by 3% and that's been driven by the growth of LED and connected lighting systems and services, which is in line with our strategic priorities. The overall lead based comparable sales grew by 19% and then now represent 68% of our total sales, which is EUR 4,500,000,000. The adjusted EBITDA margin improved overall for the company by 120 basis points to 10.9% in the 4th quarter. And Connected lighting systems and services substantially contributed to this performance. The margin in Lambs includes a one off impact that is noncash of 120 basis points as we have adjusted the calculation method for our inventory valuation. And without that effect, the margin in LEMS was relatively stable compared to a year ago. Let me now turn to the next page, page 7, which shows the contribution of each business group to the overall profitability improvement. You can see, the material increase of the profit for professional and for home, which was driven by their CSG as well as but their margin improvement has more than offset the negative profit contribution of Lam's NLED. On the next page, you can see the adjusted EBITDA bridge When you look at the gross margins, the volume and the mix positively contributed to the margin, And we continue to deliver also a significant level of savings from productivity and from procurement. Our adjusted gross margin as a percentage of sales has improved by 10 basis points compared to the fourth quarter of 2016. You can also see that the indirect cost has improved by EUR 20,000,000 and that, that is, of course, after the incremental investment that we make in order to support the growth. And we also benefited from favorable currency effect although in parallel, we had last year a positive OBI, which we didn't have this year. Let me now quickly walk you through the performance of each of our business groups, starting with Lambs on Page 9. You can see the CSG, which declined by 18.4%. That's pretty similar to the previous quarters. We estimate that the overall market for conventional lighting continued to decline faster than our lands business in 2017. And therefore, We've been able again to gain market share in conventional lands. Despite the decline in top line, Lamb has been able to sustain a high level of profitability at 7.3%. Again, that includes the negative impact of 120 basis points I mentioned earlier. And if you exclude that negative one off impact, the margin was at 18.5%. And we were again able to offset lower sales with the savings we get from procurement, from productivity and from cost reductions. We also booked a P and L restructuring charge in the fourth quarter of EUR 43,000,000, which relates to the announcement of the further downscaling of our facility in turnout. And the Lambs business is going to continue to proactively rationalize its manufacturing footprint as it has done for now several years. Let me now turn to the LEB business on Page 10. The comparable sales in LED increased by 5.1% and that's been driven by a continued double digit volume growth, which was partly offset by lower selling prices and also stronger growth in more affordable products. The LeadLamps business continued to show robust growth in the 4th quarter. And following the trend that we have seen in the third quarter, we saw a further slowdown of the growth in Lead Electronics due to lower demand by our OEM customers in particular in the Americas. All the regions contributed to the growth, although some countries in Europe showed a more moderate sales growth as they had 10.4% in the 4th quarter. And this is due to the lower volume growth in Lead Electronics and also overall lower fixed cost coverage, while the overall gross margin for LED remains solid. Let's move now to the professional business. On the next page, Page 11. As you can see, the comparable sales increased by 11.2% and all the regions contributed growth. Systems And Services, of course, was again the fastest growth driver in the 4th quarter. Our performance in Europe and in the rest of the world continue to be very solid and the comparable sales trends in the U. S. Has improved compared to previous quarter. As we are benefiting from all the initiatives that we have taken. And also from the contribution from a large scale project in the U. S. That we've talked about on numerous occasions. The market conditions in Saudi, as you can see, they have remained challenging and they still impacted our comparable sales growth by 330 basis points in the 4th quarter. From a margin standpoint, the adjusted EBITDA in hooves by 5.30 basis points and reached 12.2%. And this is due to a higher level of sales and therefore operational leverage. The rationalization of the manufacturing footprint that we had implemented compared to last year and also continued cost savings. We booked in the 4th quarter a restructuring charge of EUR 8,000,000 as we continue to rationalize the drawing footprint of our cost business and also take actions to reduce indirect costs. Let me now turn to the home business on Slide 12. A very strong growth in the 4th quarter at 37% compared to the fourth quarter of 2016. And Home was profitable for the full year. So a very strong achievement. The growth in the 4th quarter was driven by very strong growth in the We saw the demand for, Phillips, you continue to increase significantly. And largely the result of the continued focus on innovation that we have, also the partnership that we have, especially with makers of voice activated smart home devices. And the performance was also enabled by the additional investment that we have made throughout the year in order to scale up this business and support its growth. Improved by 680 basis points and reached 8.5% in the 4th quarter as we had much higher sales and continue to generate procurement saving. Let me now talk to you about our cost reduction actions on Slide 13. You can cent of our sales in the 4th quarter. This is 160 basis point reduction compared to the fourth quarter of 2016. As we talk to you on a regular basis, we continue to implement all the cost reduction initiatives that we have launched. And that has allowed us to achieve EUR 20,000,000 savings in indirect cost. Of course, that amount after the incremental investment that we are making to support our growth in particular in Home Systems. ForEx also favorably impacted our indirect cost base by EUR 22,000,000. And as you know, we are implementing a large scale and multiyear number of transformation initiatives in order to simplify the organization and improve not only customer service quality, but also be more efficient, capture, make sure we can capture the benefits from larger scale. And overall reduce costs so that we can still invest in order to support the growth. On the next page, you can see a bit more details about those cost reduction initiatives. As we've talked to you many times, the benchmark suggests that the indirect cost in the industry should range in the range of 25% to 29% of sales And this is the goal that we have. For that, as you know, we are implementing and managing a lot of cost reduction initiatives. And at the same time, making sure we can continue to invest. And you can see on the right hand side, a number of those initiatives, they relate to the process optimization footprint reduction, both in terms of industrial, but also in terms of real estate simplification of our organizational structure, simplification of the product portfolio continuing to optimize our sourcing strategy, there are many initiatives happening across the company. And this is what is driving the cost reduction that you saw in 2017. And there is more to come in 2018. Overall, we expect that the benefits of these initiatives will be even more visible in the second part of 2018 and in 2019. Finally, let's spend a minute on the work capital performance in the fourth quarter of 2017. As you can see on a quarter to quarter basis, the working capital has increased by 1,000,000. And at the end of 2017, it amounts to 1,000,000. This is 8% of our sales. This improvement was mainly driven by the significant reduction in our inventories. And also a very good level of collection of our receivable in the fourth quarter This high level of working capital reductions in the 4th quarter also reflects the seasonality of our business as we have a high level of sales from September to December and a much lower level of activity in the first quarter. On a year on year basis, our working capital decreased by EUR 105,000,000, which was mainly driven by significantly lower level of receivable and also the benefit of favorable FX rates. Despite the sharp reduction in inventories that we had in the 4th quarter. We ended the year 2017 with inventories as a percentage of sales, which were 80 basis points above the end of 2016. Finally, let's take a look at the net debt position on Slide number 16. You can see compared to the end of September, our net debt level decreased by EUR 342,000,000. Next to the profit that we generated during the quarter and also the decrease in working cap that I just mentioned There are also a number of other elements that impacted our cash and therefore our debt. Our CapEx was 1,000,000 in the quarter, We also made a positive change in our provisions of EUR 21,000,000 because we added more provisions to our restructuring. We paid 1,000,000 for tax and interest and there were also a number of other free cash flow items. Finally, as you remember, we repurchased shares from our main shareholder for an amount of 1000000 as part of the sell down executed in November. That gives us a net debt position of 1,000,000 at the end of 2017 and a net leverage at 0.5 times, which is similar to the level of the end of 2016. Before I hand back the call to Eric, let me take the opportunity to update you on our tax situation. The tax reform in the United States had a slight positive impact on our tax charge as we have in the U. S. Position of net deferred tax liabilities. This was compensated by a negative impact of the tax reform in Belgium, which has lowered its tax rate and where we have a net position of direct tax assets. The net of those 2 tax reforms is quite limited overall for the company. At the in 2017, our effective tax rate was 29% And this is a significant reduction versus 2016. And in 2018, we expect the impact of the changes on the ETR to be relatively neutral. And therefore, we continue to expect the ETR to be in the high 20s, excluding the impact of any potential nonrecurring items that could happen in the year. So that closes the review for the fourth quarter. And let me now turn to Eric for the full year. Thank you, Stephan. I propose that we flip to Slide 18. So overall, we achieved substantial progress and a solid performance in 2017. Comparable sales increased by 0.5%, which is a significant improvement versus the comparable sales decline of 2.4% in full year 2016. Total comparable LED based sales grew by 19% and they now represent 65% of total sales compared to 55% last year. Our adjusted EBITA margin increased by 90 basis points to 10%, driven by significant margin improvements in LED, professional and home. Excluding a real estate gain in the 2nd quarter, our adjusted EBITA margin improved by 70 basis points to 9.8%, which is in the middle of our guidance range of 50 to 100 basis points for the full year. Our solid free cash flow was the result of lower receivables, separation costs, net CapEx and interest paid partly offset by higher inventories. Free cash flow reached EUR 403,000,000 or 5.8 percent of sales. This included a EUR 42,000,000 contribution to Philippe Sliding Pension Fund in the United States, and real estate proceeds of million that we have already talked to you about. Let me now move to slide 19, where we show the comparable sales growth and adjusted EBITA margin per business groups 182017. So the adjusted EBIT margin in lamps benefited from proactive rationalization of the manufacturing footprint our productivity and procurement savings. In LED, we achieved comparable sales growth of 13 point 8%. Volumes were higher due to lower selling prices and stronger growth in affordable products, The adjusted EBITA margin increased by 80 basis points to 10.2% driven by continued operational leverage, procurement savings and innovation. And we are now already in the margin guidance range that we gave for the mid term that we gave for 2019. In professional, comparable sales increased by 4.6%, driven by robust growth in Europe and the rest of the world. Market conditions in Saudi Arabia remain challenging, impact impacting full year comparable sales grew by 240 basis points. The performance in the United States was impacted by soft market conditions, particularly for small to medium sized projects. The adjusted EBITA margin improved by 200 80 basis points to 8.2 percent, driven by operational leverage, procurement savings, cost reductions and a positive mix impact. Let's move to Home. Home had comparable sales growth of 26.5 percent driven by sustained growth in both home systems and home luminaires as a result of the continued focus on innovation, and the investment made to scale up this business. Adjusted EBITA was positive in 2017 and amounted to 5.2% of sales driven by operational leverage and procurement savings. Excluding the impact of a real estate gain in the second quarter, The adjusted EBIT margin was 3.1 percent exceeding our objective to become breakeven for the full year. On the next slide, slide 20, you can find the build up of our adjusted EBITA. What you can see on this slide is that the adjusted EBITA continued to increase, while the profit drivers are shifting. The graph shows that Lance's contribution to the adjusted EBIT is reducing and is more than compensated by the profit increase from all the business groups. In the fourth quarter of 2017, Lambs contributed 32% of the overall adjusted EBITA that was generated by the 4 business groups while in 2016 is still accounted for 64% of adjusted EBITA. Finally, looking at Q4 2017, it is worth noting that for the first time, professional is our largest profit contributor Let me now walk you through our strategic priorities and proof points into 2017 on our next slide. Our priority to optimize cash from conventional products to fund growth was supported by an increase of our free cash flow as a percentage percent of total sales in 2016 to 65% in 2017. This clearly underlines our priority to innovate in LED products commercially and technologically throughout the market. We also continued to lead the shift to systems and to capture adjacent value through services business models. As a result, sales related to connected systems and services for consumers and also for professional grew by 51% and represented more than 900,000,000 sales in 2017. Sales in professional systems and services amounted to around EUR 650,000,000 and Home System represented close to EUR 300,000,000 in sales. So we are pleased with our global leading position in connected lighting. And by the end of 2017, we had already installed 29,000,000 connected light points. An improvement of us in our ambition to be our customer's best business partner locally leveraging our innovation capabilities our diverse product and services offering, our strong market position and global reach. We continue on our operational excellence improvement journey. The increase of 90 basis points of our adjusted EBITA margin is testimony to that strategy priority. We successfully managed to reduce our indirect costs based by 1,000,000, while investing to support our growth. Let's now take a closer look at our achievement in sustainability on the next slide. So you may remember that we have 6 targets in sustainability. So let's review them briefly. Sustainable revenues, 77% of our revenue was sustainable in 2017, which is a reduction of 0.6% due to a stricter 2017 definition, heading to our 2020 target of 80%. We sold 1.2 1000000000 LED lands cumulative from 2015, which is an improvement of 53% compared to last year. In line with our objective to deliver more than 2,000,000,000 LED lamps by 2020. We so target to be carbon neutral by 2020, we reduced our CO2 emission by 20% in 2017. 100% of our site should be 0 waste to landfill by 2020. In 2017, we reduced our waste to landfill by 26%. So we want to assure a safe and healthy workplace for our employees. This is extremely important for us. Our total recordable cases declined by 18% in 2017. Finally, we have achieved also a sustainable supply chain as 95% of our risk suppliers have been audited already achieving our 2020 targets. My propose that we move to Slide 23, to remind you of our capital allocation policy, and what we have done on this front in 2017. So as said, we delivered a solid free cash flow of 403,000,000 euro in 2017. This enabled us to maintain a financing structure that is compatible with an investment grade profile. Reflected in a stable net leverage ratio of 0.05 times. In terms of cash uses, we paid a cash dividend of 1,000,000 in 2017. In addition, we repurchased shares for an amount of $307,000,000 by participating in share disposals by our main shareholders and to cover obligations arising from our long term incentive performance share plan and other employee share plans. Next to this, we contributed 1,000,000 to the U. S. Pension fund, which reduced our liability is and future interest expenses. And we considered various small to medium sized acquisition opportunities that resulted in the acquisition of small technology bricks that complements our organic innovation. Let's now move to the next slide to talk about our intended capital allocation in 2018. So we are proposing to pay a cash dividend of 1.25 and to be paid in 2018. This represents an increase of 14% compared to 2016 and a payout ratio of 45%. We intend to repurchase shares for an amount of up to EUR 150,000,000 in 2018, by still participating in share disposal by our main shareholders. Next to that, we intend to repurchase shares to cover obligations arising from our long term incentive performance share plan and other employee share plans. This will leave us capacity to continue to make acquisitions in professional luminaries, technology for systems and service capabilities. Let me now turn to our outlook and conclusion. So on Slide 26, you can find our outlook for 2018. So we aim to deliver positive comparable sales growth for the full year with a soft start of the year. Next to that, we expect a further improvement of our adjusted EBITDA margin to 10% to 10.5%. We continue to focus on our cost reduction initiatives and expect to benefit from higher savings as of the second half of twenty eighteen. And in line with previous guidance, we expect a restructuring P and L charge of between 1.5% to 2% of annual sales. Finally, We expect to generate solid free cash flow in 2018, but we know that the level will be somewhat lower than what we deliver in 2017. Because we expect higher restructuring payments in 2018. These higher restructuring payments relate to initiatives to improve our cost base on the manufacturing side as well as on the indirect cost base. So the free cash flow will be lower, but we do not expect the material decrease compared to 2017. And the last point that I think is also important to share with you regarding 2018 is that following the deconsolidation from Royal Phillips, we intend to announce our new corporate name in continue to use the Phillips brand for our products as we have a brand license agreement for the coming decade. Let's now turn to Slide 27, where we show our progress made on achieving our 2019 adjusted EBIT margin targets of 11% to 13%. In the period, 2013 to 2017 we have improved our adjusted EBITA by margin by 360 basis points to 10%, which means that we are on track to achieve our midterm margin targets. Professional continued to implement its strategy focused on the development of ledilumina sales, fast growth of systems and services, and the continued rationalization of its cost structure. This supports our continued ambition to increase the adjusted EBITA margin to 11% to 14% by 2019. Our performance in LED illustrates the benefits of our strategy focused on innovation and operational leverage, This enabled us to already reach the lower The strategy for home focuses on consumer experience and innovation, leveraging our strength in connected lighting systems for the home, This should enable home to continue to generate double digit sales growth and reach an adjusted EBITA margin in the range of 5% to 8% by 2019 compared to 3.1% in 2017 excluding the nonrecurring real estate gain in Q2 2017 that we have already commented to you earlier on. This also reflects the continued investments necessary to scale up our home systems business where we see a very large market opportunities in the coming years. In length, finally, the performance reflects the successful implementation of our last man standing strategy to continue to extract value from the conventional business. This supports our objective to maintain an adjusted EBITA margin of at least 16% until 2019. With that, I would like to open the call for questions. And of course, Stefan and myself, I'm going to be happy to answer. Thank And we have a question from Andreas Willie at JP Morgan. Please go ahead. Your line is open. Good morning. Good morning, gentlemen. I got 3 questions, please. The first one on the European luminary Industry and potential consolidation opportunities. What's your view on on being a driver of potential consolidation here. The industry remains relatively fragmented. Many players struggling. Some of them are officially for sale. Some of them may be. So what's your view on the kind of a roll up strategy in professional in Europe? Second question, on the, the LED electronic slowdown. Obviously, some of your competitors see the same. What here is just weaker demand in the lighting industry from the customers relative to commoditization, price pressure, maybe Asian competitions or in terms of market share in that business, if you could split that a bit. And the last last question on 2019, the 11% to 13% margin range target range, it's a relatively large bracket, could you maybe give some sensitivity, what do you assume for the economic performance and company specifics at the low and the high end of that? Range. Kind of what needs to happen for you to be at the 13, which will be a material step up in 2019 over the 10 to 10.5 of 2018, which obviously looks quite ambitious. Thank you. Yes, thank you, Andreas, and good morning to you. On the European markets, while we've been enjoying a very strong level of performance throughout the full year of 2 17. And frankly speaking, this is directly linked to the very rigorous and in the unsuccessful implementation of the strategy, which is to continue to have a very granular access to the market when it comes to products with very strong established channels, while at the same time developing the capability, from a quotation from a delivery and from its sales standpoint on the systems and services part of the business, which is growing in the vast majority of the segments that we have targeted in Europe. So as you mentioned it, we see that the market is moving, but the market of lighting and the different competitors in our industry have been evolving in the past 4 years. We have always said that as the market leader, we are a natural consolidator. Are we going to be actively looking at consolidating the European market, I would say no, I don't think it's that fragmented it, by the way, when you look at the 3 big geographies, the way we describe the market in general, we can say that probably the Americas, you know, is the most consolidated market that we have, then would come Europe But there where the fragmentation is more important is in Asia and the rest of the world. And this is where we have started in previous occasions to try and consolidate the market. So we are a natural consolidator as the leader. We will not push for it. But we will see and we will study if opportunities are coming. When it comes to LED electronics, so this is something that was started a few quarters ago, but that has strongly materialized in Q4. And specifically in Americas. And that's a big part of the business. America is a big part of the business for us in LED Electronics. And we've seen from our customers there that they were planning and they were having less volume and less business, which has impacted us directly as their supplier. Now very difficult to say, you know, how long this is going to last. We are not hopeful to see the trend being reversed in Q1. So we are vigilant on that part of the business and and not too optimistic in the short term. And maybe I'll let Stephane take the third one. Sure, Andreas. So on the midterm guidance, the 11% to 13%. So well, of course, it's a little bit early to say where we think we're going to land. And it's going to depend also on a few things. So number 1, you've mentioned the economic or macroeconomic conditions. Yeah, for sure, they impact us. However, as you know, we have a broad presence. And therefore, when some areas are not that strong, and we've seen the case, for example, in Saudi, which impacted us quite materially for the craft business and also overall. We are generally able to offset by better market conditions elsewhere. And for us, for example, Europe, China and also in the rest of the world, it's been pretty good. How things are going to evolve in the future? Of course, it's difficult to say, but I think this is something that is also helping us And clearly, we are not counting on a general large, positive macroeconomic environment overall. More importantly, there are things that are within our control, our cost reduction actions. Those one, I guess, the speed at which we implement them could lead us to reach either more the bottom or more the top end of the guidance. Especially taking into account the level of investments that we decide to make to support our growth. Because of course, we save cost and reduce our NMCs, but at the same time, as you know, we invest. If we see that the potential on some areas and I'm thinking in particular in terms of systems or in terms of home systems require even more investment, we may decide to dedicate more money and that would affect also the level that we reach within the guidance, but that would be also because we see more growth opportunity. And the 3rd element is going to be obviously the level of growth that we see for the company, which of course will help us dilute the cost. So those elements are the ones which we see will lead us towards more the bottom or the top part of the guidance. So there is a sensible business case that you can have 250 bps margin improvement in 2019 over 2018. While doing 50 bps or 0 to 50 bps in 2018 over 2017. It just seems like a huge step change that you think that you believe is a possible outcome in 2019? Yes, we do. I mean, we have a plan. We do systematically a plan over the coming 3 years. We strongly believe that a big part of the improvement of our profitability has to come from our capacity to reduce our cost base, as Stephan has mentioned. And Andreas, we have very granular plans in many different domains in order to further reduce our non manufacturing cost and in many, many different areas. These plans take sometimes in some geographies a bit of time to come to completion. This is why we have also stated that we would start to see the benefits on some in the second half of twenty eighteen, but this also means that they will impact full year 2019 where we expect to have, quite a fair amount and a big impact of those plans. So this is why you see that step up between the objective that we give to ourselves in 2018. Versus the midterm target in 2019. Okay. We now go to the Thank you. Good morning gentlemen and thanks for taking my question. I will have 3 questions. I will take them one at a time. The first question I have was around the dynamics in the free cash flow. And I was wondering if you could give us a bit more granularity on the various contribution of the different businesses because your free cash flow is down in 2017. But you are mentioning that the contribution as percentage of sales for a lens is actually significantly higher. So I'm just trying to understand how the free cash flow has evolved for the other businesses, for the other division and how should we think about that as we look into next year considering that you may not have as well necessarily as much real estate gain than you had this year. So that was question number 1. Yes, sure. So, Lucie, you're right. What we've mentioned on Lance is also partly due to real estate because we had 2 of the real estate gains and therefore cash impact that related to the lands business. So that also explains, but it's not only due to that, even without those impacts, still the cash yield of the land business has improved as a percentage of sales. Then the other businesses have also improved their contribution to free cash flow And this really has been driven by the overall profit improvement. And then more fundamental by the overall working capital, especially in the fourth quarter where we had a lot of actions taken. The inventories have helped to some extent, but as you saw compared to last year, we still end up with higher inventories because now we are growing. And so we need to have a higher level of inventory to support the growth. But more importantly, we've done a lot of actions to collect and reduce the receivable and reduce the revenues. And that's really impacting all the businesses because this is really driven by our markets. Just maybe before I go to the second question for me to understand if the contribution from Lambs has increased that significantly from real estate, but also other factors, but your free cash flow is down year on year. I mean, how much really the other businesses has improved their contribution? Yes. So look, we don't provide the amount by business. Of course, in absolute value, you I guess, you appreciate that the Lambs free cash flow is lower. So the comment we've made in the strategic priorities is as a percentage of sales, but the absolute value for Lance is lower given the magnitude of the decrease of the sales. And also the profit. So yeah, the other businesses, of course, have improved their cash flow generation. Okay. Understood. The second question I had was around the professional business in the U. S. And First of all, I remember that in the third quarter, you had delivered on that large contract, but you were not able to book the sales and you had booked it in the free cash flow. So I was wondering if in the 4th quarter, is that that you booked 2 quarter of or the equivalent of 2 quarter of sales? Are you the sales you couldn't book in the 3rd quarter and the sales you actually delivered on the fourth quarter. And so I was wondering how much if you could maybe give us a bit more information on how much that's a U. S. Contract, large contract has been kind of contributing to the momentum. And of course, as you are looking at the trend in LED Tronix, which are typically a leading indicator for the Lumiere business, how you are thinking about that generally? Yes. So on the on the large scale contract, it doesn't exactly work that way because we don't really generate on this type of contract like quarterly revenues. What has happened as you understood is that there's been a change of title that happened in the fourth quarter. And that was the triggering element from an accounting standpoint that allows to do the revenue recognition. And we thought it would happen earlier, but it happened only in the fourth quarter. So we were able to book all the revenues related to that project in the fourth quarter. As you know, we had already delivered most of the products towards the end of September. And we had started to collect to invoice and also to collect the money. On the impact of that large scale project, I think that's something that we have mentioned in the call. When you look at the proff CSG performance and when you look at the proff adjusted EBITDA increase compared to the fourth quarter of 2016. We said that the vast majority of those improvements are not related to that large scale project. So yes, it has made a contribution but the vast majority has been done And my question around the outlook for kind of North American pneumonias or more generally in light of what you indicated for electronics? Well, we've seen and we've indicated that the market softness started at the back end of 2016. It continued in 2017. As I was saying answering to a previous question, we are not too optimistic for the beginning of 2018. Those signs of softness, are remaining at this point in time. Now directionally, we are optimistic. We think that there should be that they are positive signs when it comes to the U. S. Economy. I think we are well positioned. We believe that even if the market has been probably less dynamic in the past quarters that we are not losing market share, in U. S, so which is a good position to be. So the efforts that we've done all along the years are paying off. And we believe that we're going to grab the opportunity that are rising in that region in the coming quarters. Thank you. And my last question was around the underlying kind of profitability. It seems you have about 1,000,000 of provision release this year. I was wondering how much of these provision release were kind of benefiting the adjusted EBITA this year and whether maybe because the provisioning at your parent company back in the days was maybe too conservative, whether you expect further release kind of going forward? At this stage? Yes. Well, that's a good point. Well, it has nothing to do with adjusted EBITDA because those provision release are related to restructuring. So as we book restructuring provision, then when we use cash out to pay for the restructuring, then we reduce the provision. The restructuring is booked outside of the adjusted EBITDA. So there is no such impact, and therefore, the adjusted EBITDA doesn't benefit from those releases of provision. And again, I don't know, the comment on the previous provision, I guess, is probably not relevant. We just provision what we have to do and when it's really, it's really but Okay. So none of them have benefited the adjusted EBITDA? Nope. No. Okay. Before we go to the line of David Voss at Barclays. Could I please remind all participants that if you are asking questions, could you please limit yourself to one question and one follow-up per round. And, David, over to you. The one question I'll ask is on, on free cash flow. There's clearly been a few, one offs or non repeating items in 2017. And I suspect there will be again some in 2018. Just so that we're all the same level. Could you just run through what was unusual in 2017 and then also, help us understand what happened, what will happen in 2018 on those unusual items alone. So we can sort of construct a like for like bridge between 20172018. Thank you. Yes. Sure, David. Let me try to clarify this a little bit for you. So when you look at 2017, what we've indicated is that we benefited in 2017 from proceeds of real estate sales. The overall amount is around 1,000,000 that benefited free cash flow. In 2018, it's still a bit difficult to predict. We probably will still have some of some related proceeds, but we don't anticipate it's going to be for the same magnitude. Number 2, U. S. Pension, as you know, we contributed an additional 1,000,000 to reduce the U. S. Pension deficit in 2017. And we intend to do the same in 2019 sorry, in 2018. Finally, restructuring, which we called out the outlook. We spend every year, relatively meaningful amount of take a charge and then we spend in terms of cash and meaningful amount, with respect to restructuring. And we decated at the time of the IPO that the restructuring P and L charge until 2019 would be in the range of 1.5% to 2% of sales. Because this is the period of time where we have a significant downscaling of our lamps manufacturing footprint. And then after that, it would go down between 0.5% to 1% of sales. This is the P and L impact. Of course, the cash out is never happening exactly at the same time as the time where we book the restructuring. And for example, here in 2018, We expect and we don't know yet exactly what's going to be the amount, but we expect the amount to be higher than what we have spent in free cash flow in 2017. And that's why we've called that out to explain why the free cash flow the year 2018 will be somewhat lower than what we had in 2017. Again, we don't expect a material decrease, but we expect it's going to be a little bit lower. Okay. Thanks. That's quite helpful already. I was just wondering if we could scale some of your more qualitative comments there you know, what does not materially lower exactly mean and what is, restructuring that is somewhat higher? Are we talking about 10,000,000 to 50,000,000, or is it more than 1000000 to 1000000 range? And also perhaps as a follow-up, that I might ask straight off by how much would you say is your working capital at the end of 2017 still elevated versus where you would expected on a normalized basis? Thank you. Yes. So we're not going to give a quantitative and specific guidance on the free cash flow. So we've try to give a sense of how we see the free cash flow evolving in 2018. And of course, then we will see how things go during the year. When it comes to working cap, 8% at the end of the year is lower than at the end of 2016 overall. Of course, that there was also a benefit from the FX evolution in the fourth quarter, which helped the working gap and to some extent, the sales, but the sales were on the full year. So that's relatively low. We think that we can further improve the inventory, which have gone up during the year. And although we've reduced them in the fourth quarter, it's still a bit on the high side. So we think we have opportunities there. Then on the on the collection side, we've done a lot of work and quite an improvement there, especially on the values. We believe there are still opportunities. So we believe overall working cap is still something where we can tracked and do better now as we grow. And I think we've indicated that several times the working cap, which was releasing a lot of cash until 2016, is not an area where we're going to be able to release cash because again, we are growing and that consumed some cash, and that's going to happen, especially as we continue grow. Now again, we are working on each and every item to see how we can limit that and still find ways to optimize. Fair enough. Thank you so much. We are now over to the line of Martin Wilke at Citi. Please go ahead. Thank you. Good morning. It's Martin at Citi. Just coming back to the differing fortunes of electronics versus the professional business Obviously, you flagged the slowdown in OEM sales in electronics. But if I listen to you correctly in professional, doesn't sound like you think you're gaining share in the professional business. And again, it doesn't sound like your strong revenue growth in professional is exclusively driven by these large projects. I'm wondering why your professional growth is seemingly so much better than, other OEMs and what your electronics business might point to if we can understand, is that a product mix? Is it regional mix just a little bit as to why you seem to be different than some of your peers if you don't think you're taking share? Morning, Martin. I I I don't remember having said that we're not taking share. I think we believe that we do take share of that business. So what are the different ingredients I think that on one part of the business, which is the product side, we have extensively review the portfolio and not only moving to LED, but also moving to products that have a Connect ready feature in themselves. And this is a trend that we have stepped on a few quarters ago and that we're going to continue to pursue in the future. So that's on the product side. There, where we I think I'm making the difference at this point in time is on the connected systems and services, which require 1st, a strong innovation capability and we are doing that organically, you know, we didn't acquire, you know, major technological bricks. We acquire small and technological bricks for system that complement what we are doing. So we work quite fast and very focused on developing not only the light source, not only the fixture, not only the control element and the software that are building our architecture, but we did all that seamlessly. So if you look at the portfolio of fleet slicing today, Yes, you will find products. You will find also connected products, but you will find full architectures from the light source up to the software by, customer segments that are very dedicated and plug and play installable. And that's a very clear differentiation. So we very often talk about city touch, but TTitouch is not only a software. It's software. It is a control device, you know, connector knows and very specific outdoor lighting fixtures that are completely and seamlessly integrated in the architecture. And I could tell you that we do the same, in retail, we do the same in hospitality, we do the same in industry, we do the same in offices. So we have been over the years, building up these capabilities and these technologies, but that's not all. You need to have Salesforce that can sell it And we have created unusual sales forces in all the countries where we operate. Well, at the same time, you need also to have entities that can quote and then deliver. And these are the same as system centers that we've talked about. We have 8 of those all over the years. So that investment was done ahead of the development of the business, which has also materially impacted the cost of that business in the past years. But I think that we are now reaping on what we have shown. Though that's one, so you know, the the part of the question linked to the professional business. Now when it comes to LED electronics, which is basically the drivers and the LED modules, yeah, we're seeing and that's also a reflection of the performance of other manufacturers industry. A slowdown and it has impacted our business as a supplier. While that business is also growing internally, when we can for our own use, drivers and electronics. Thank you. That's helpful. And just clarify one point there. It sounds like from an R and D perspective or an investment perspective in terms of these connected lightings, you've already had the and spending there and you're now benefiting from it. Is that the right conclusion that we shouldn't see a big incremental step up in terms of R and D or things like that? For these features because you're already investing in them just to understand sort of the R and D profile? Thank you. Yes, you're absolutely right. We will not see a step up. I will continue to invest, but we will not see a step up because we've done that already. We now go to the line of Peter Olofsen at Kepler Cheuvreux. Good morning, gentlemen. First question on home and then a follow-up on the free cash flow. Sorry. Could you please speak a little louder, Peter? Hard to hear you. Yes. I had a question first on the home. You're looking for 5% to 8% margin by 2019. Looking out a little bit longer term, how would you look at margins in this segment relative to the LED segment given that, well, there's probably a higher level of differentiation than in standard LED bulbs. So would you expect margins in home to eventually meet or even exceed any of these excess margins? And then on the free cash flow, specifically on the seasonality, in 2017, we saw a meaningful increase in working capital in Q2 and Q3. And then a reversal in Q4, will you see a similar pattern in 2018? Okay, Peter. I will take the first question and Stefan will take the second one. On home, so when we look at the performance of the business, netting the impact of real estate, it's 3.1 percent at the end of 2017. 528 is a substantial improvement in the midterm, which is 2019, taking into account that we believe, as Stephan has said, that that business has a fabulous potential ahead and that we are going to continue to invest. As we have done in the past years, we strongly believe that that business need an investment from a marketing standpoint, internally, but also externally to pull the market. Now, are we going to stay there? We're not going to stay there and we believe that there's a potential forward and we will give clear indication when time comes. Yes. And Peter, on your question on seasonality, yes, this is something which we are working on because we're trying and we would like to smoothen the evaluation of working cap. 2017 was a little bit particular because as I mentioned, I think in the third quarter call, it was a year where we shifted from decline to growth. And of course, the management of inventory when you go through those changes is a bit more complicated. And that has led us at the end of Q2 and at the end of Q3, especially on LED and also on Home Systems, to have higher inventories than what we believe we should have had. So we've worked on it. We've told you at the in October during the call that in Q4, we would take action. We've done that and we are fine now. For 2018, yeah, for sure, we would like to avoid or limit those variations, they're still going to be seasonality because as you see from the numbers, Q3 and especially Q4 in absolute value are the highest quarters in terms of sales. So by definition, the level of inventory at the end of June and also at the end of September is higher. Now, yeah, we're going to manage this in a way where the magnitude of the changes at the end of to and at the end of Q3 are going to be more limited than what we had in 2017. Okay, thank you. Right. We now open the line of Daniela Costa at Goldman Sachs. Hi, good morning. I actually have only one question left now, but you've mentioned that the IPO time that your shorter dollar and shorter remedy, and that especially the shorter dollar would get a more significant has LED penetration progressed. Can you help us sort of quantify what we should see from that in 2018 given the movement we have seen in those currencies, which has been pretty significant. Yes. Daniella, so yes, you're right. We are short in dollar and especially short in renminbi. Actually, the to LED leads to an increase of short to remedy not to dollar, and because we sourced in China. And as we go EBITDA And Home System, there is more outsourced rather than internally for you. So it's really more renminbi than dollar. For 2018, well, for sure, it's extremely difficult to anticipate. The rates given what they are today, yeah, if the rates stay exactly where they are today, clearly the impact on sales is negative and that would affect our nominal sales. But we know that from a cost of goods sold and also to some extent, the rest of our cost structure would benefit from those rates. Now we have no idea how things will evolve during the year 2018, especially for the dollar and for the renminbi So it's frankly way too early to give any indication here. But just to clarify on your comment that you are sure those currencies So on an EBIT bridge impact, we should see a positive amount if currencies stay where they are. Is that fair to say? Probably, yeah, I would say a small positive impact. We are now over the line of Sven Vaier at UBS. Sven, please go ahead. Your line is open. Yes, thank you. The first question is just on the one off effect you mentioned for the lands business. Which I think I haven't really fully understood yet. Does it mean that the Q1 to Q3 performs was overstated on the margin and what was the was there any group margin impact from that? Yes. So let me clarify that one. So UICP is the way we value internally the inventories when they are transfer from factories to the market. And so we need to eliminate the profit inside the these inventories. That has always been done. But in the fourth quarter, we've reviewed the methodology and the estimates in order to harmonize and with the same way between the various business groups and those simplify the way it's done. And that has led to a small impact. So if you look at group level, the impact is overall 1,000,000. So it's extremely limited. And when you look at the contribution to each business group, it's pretty minimal. The only one for which there is a little bit of an impact is the land business, as we highlighted, which is negative by about EUR 5,000,000. And then the other ones are positive by 1 1,000,000. So it's pretty minimal. On the land business, to your question around Q1 to Q3, this is really a one off reevaluation of the provision on inventory. It happened to take place in Q4. It could have taken place in Q3 or in Q2. It doesn't change the profitability of the business. It's just the impact of that provision on inventory and the way it was valued. So it happened in Q4, has a one off impact in Q4, doesn't change the profitability for the past of course and doesn't change the profitability moving forward. And then maybe a follow-up question. When you said you expect a soft start to the year, does that re forward to the usual seasonal slowness or do you also expect a softer year on year starting in Q1? Well, when we look at year on year, we have a strong base in Q1 2016. So let me explain business by business. When you look at Lance, Q1 was the lowest decline rate. Into 2016 for the full year. LED was the strongest growth quarter in 2016. While we still expect in 2017 for LED, so at least in Q1, still a soft market when it comes to LED electronics. We haven't talked too much about it, but on the LED lamp side of the business, we have seen a very solid double digit growth, which was expected all throughout the year and we see that also continuing in the 1st part of 2018. Now we expect professional to continue to perform. And when it comes to home, We have to remember also that home in Q1 last year, this is when we realized that the year could be better than what we had planned for. We had a lot of demand from customers. This is when we decided to invest to increase our production capacity. But in Q1, we had basically to empty our our inventories and had a fairly strong Q1 in, in home. At the same time, home growing, but with a lower proportion as a participation to the overall for you has less impact on the overall growth of the company. So in our projections and in the forecast that we have done in the whole company that we've done in January, yeah, we see a soft Q1. Thank you. To the line of Alexander Virgo at Bank of America Merrill Lynch. Please go ahead. Thanks very much. Morning, gentlemen. I guess one just to finish off then. The growth in professional ex Saudi looks like it was 14%. And I guess the question is really just how sustainable or sort of normalized level, we should expect that to be in light of the comments you've just made notwithstanding your comparatives, etcetera, as you move through the year. 14 is a very good number. I wonder if you can shed a little bit more light on how that should progress through the year? I think effectively it's a good number. It's a very high number. We don't see that as a normalized growth level. What we said, we said at the end of the midterm period that we would see that business growing slightly above market rate. So if we gauge that the market growth is between 3% to 4%, 3% to 5%. We see ourselves growing slightly above that. That would be in our view, given the size of the business at this point in time, the penetration of LED already, what we see as as a normalized rate. Now what is interesting and important in that business, we've given you the information as we do at the end of every year of how much systems and services is accounting for. So it's 650,000,000 for professional, growing at a strong double digit rate. And that has also to be taken into account in your modelization of the business. That's very helpful. Thanks very much. That presumably that business is a higher margin as well, is it? It's a higher gross margin, absolutely, yes. Okay. The, penultimate question for today is from the line of Mark Hesterlink at ABN AMRO. Please go ahead. Your line is open. Yes, thank you. My question is on the the guidance for organic growth, positive comparable sales growth. Can you talk about the differences between the divisions? I think a conventional is pretty stable over the year. But I think we saw a strong decline in the organic growth in LED lamps, a professional strong increase and also in home strong increase. How do you see those different categories adding up to the comparable sales growth for the group? So we still expect a decline of the conventional parts of the business. We gave at the time of the IPO guidance between a 15% to 20% decline. We believe that we should be again, in 2018, in the higher parts of that range for Lance. We still see growth for LED. So if we try to disconnect from what we've seen recently happening LED electronics parts of the business. We have been enjoying a strong double digit growth in the LED lamps part of that business, we believe also that when we see that in a lot of countries, we are selling already more LED lamps, then conventional lamps, gradually, the growth of the LED lamps are going to be closer to the market growth rate, which is mid single digit type of growth So we see still growth for LED in 2018, but somewhat lower in aggregate than what we have seen in 2017. What at the same time that business becomes quite big also because we close to reaching we're close to reaching 2,000,000,000 So we already talked about a professional in the previous question, and we still see home growing a healthy double digit in 2018. Okay. Thanks. And my follow-up question is on, you were helped by the big contract. Is that what do you see in your sales funnel, your expectation there? Are there those kind of big contracts upcoming for share or maybe that visibility is even longer than this year? Well, it is, you know, it's a very dynamic funnel that we're managing. And we are effectively, at this point in time, looking at different opportunities of pretty sizable contract. Now, you know, they need to come to completion. Those big contracts are always a little bit long when it comes to the commercial incubation and for the customers to make up a final decision. Then when the decision is made, we have to deliver quite quickly. So, look, we will inform in due time whenever we think that there are such type of contracts that we need fly out to you. We don't do it every time because we are gaining contracts every day. So we don't always flag it, but we do it when we believe that the size is substantial and that it needs to be taken to account by you guys. Okay. Thanks. Okay. Our ultimate question for today is from the line of Alok Katre at Societe Generale. Have 2 follow ups actually. 1, there's been a lot to talk about BG Professionals in the U. S. Now could you just confirm what the contribution from the last project was in 4Q? And is there anything remaining in first quarter? I guess not. But I mean, are you talking 3 or 4 percentage points professional growth? That's part 1. 2nd, did you see any positive growth in the U. S, given what we've heard from some of your peers Number 3 are used following the tax reforms. Are you seeing greater visibility from customers? In terms of their willingness to restart small projects, say even in like 4 to 6 months' time. And of course, helps your component business as well at some point. So that's my first sort of follow-up, 3 part. 2nd, it's interesting to sort of see that the component business is now already close to a third systems and services business is now already close to a third of your professional division. I think the 1,000,000 LitePoint figure that UK would suggest something like a 10 percentage point unit growth versus 2016. But just wonder how we should think about the sales, it mean, are we seeing more complex installations? And therefore, should we be thinking about accelerating sales growth versus what we've seen so far? And is this really the differentiator for Phillips, lighting's professional business going forward across the world? Thanks. Thanks a lot. So many different questions there. When it comes to BG Prof, in the U. S. So, we're not going to give the size of of the large scale project that we are talking about. It impacted positively the numbers for Americas, as you can see, in Q4. Apart from that, we believe that we are performing, at market So we have been in the past years working a lot on our performance for BGProF in the Americas and we believe that this is clearly paying off. When it comes specifically about the self sketch project, there will be another invoice to come whenever the commissioning of the project is being done, but we don't know when that is going to take place. It's a much lower number than the first recognition of that project that we did that we did in Q4. We believe that the tax cuts in U. S. I'm going to probably provide some additional dynamics in the market and we will do our best to capture it whenever it comes. Systems and services, We've always said that this will be a new profit pool for Philip Sliding. Now I never discount the product side of the business. And you need to understand that we are extremely focused also on the product side of the business where we are bringing innovations to the market we are bringing also connect ready products to the market. And we think that we're going to enjoy also growth on that front. So it's not only about systems and services. Now it's very true that systems and services are up is providing a great growth opportunity as we had said it. If you look at strategically, the lighting industry, we believe that there are 4 transitions. The first one is to move to LED. This one is well engaged. The second one is to move to systems. And this one has started, but there's still a fabulous potential ahead. We're talking about 29,000,000 light phones that we have connected, but there are 26,000,000,000 light points on the planet at this point in time. So yes, it's growing. It's profitable and we think there's a fabulous business ahead. The third part of the transformation is services, which is just starting at this point in time, And then moving forward in 5 to 10 years from now, I will talk about light as a language. So as you can see, we see a fabulous potential ahead, but true that at this point in time, systems and services is at the center of the big growth that we enjoy and we still believe we're going to enjoy in the quarters. Question on today's call. Gentlemen, can I please pass it back to you for any closing comments at this stage? Okay. Thank you, operator. Ladies and gentlemen, thank you very much for attending the call and for taking part in the discussion about our results. If you have any additional questions, please do not hesitate to contact Investor Relations. We're happy to answer your questions. And again, thank you very much and enjoy the rest of your day. This now concludes the call. So thank you all very much for attending, and you may now disconnect.