Earnings Call: Q1 2017

Apr 21, 2017

Ladies and gentlemen, welcome to the Phillips Lighting Analyst Conference Call Q1 'seventeen. For the first part of this call, all participants will be in listen only mode and afterward there will be a question and answer session. Please note that you are limited to 1 question and a follow-up question per round. I'd now like to give the floor to Arun Layinars, Head of Investor Relations. Mr. Layinars, please go ahead. Good morning, everyone, and welcome to the Philips Analyst Conference Call for the first quarter 2017 results. With me are Eric Romela, CEO of Phillips Leitin and Stefan Goujo, our CFO. Eric will give you an update about our business and operational performance for Avasti Farm, who will go through the financial performance of Q1 2017. Then Eric will tell you more about our outlook for 2017. We will end today's conference with a Q And A session with Eric and Stephane will be able to answer your questions. With that, with that, I will hand over to Eric. Thank you, Yaron. Good morning, everyone, and thank you for joining us today. I propose that we move straight away to slide number 3. So this part of the year for FacilitiesAT team was consistent with our 2017 outlook. And gold. Comparable sales growth improved compared to the previous quarters at minus 0.8%. As stated, Europe and the rest of the world delivered growth, while the Americas was impacted by an accelerated decline in conventional lighting, and softer market conditions. Business group, LED And Home achieved double digit growth, driving LED based sales growth, around 19% and these businesses are now representing 61% of total sales for Philip Siting in Q1. Operating profitability continued its gradual improvement trajectory with an adjusted EBITN margin in Q1 of 8.4%, an improvement of 100 and 30 basis points versus the same period last year. We also reported improvement of net come from 14000000 to 1000000. And our free cash flow improved by 1000000 in the period to 1,000,000, and we are positive from a free cash flow standpoint in Q1. In the 1st 3 months of 2017. We returned 1,000,000 to our shareholders by participating in the share disposal by our main shareholder as previously indicated, totally in line with the capital allocation policy previously explained. Let's move to slide 4, where you can see an overview of the financial performance by business groups. So each business group contributed to the improvement of the adjusted EBITDA margin, all performing in line with their strategic objectives. I would like to mention that the adjusted EBIT in total increased by 1,000,000. And our business group LED professional and home. As you can see, have more than compensated the decline for lab in absolute value. Let's now move to our 4 business groups and we start and with Lance on slide number 5. Comparable sales have declined by 17.9% and due to the technology transition to LED lighting. Overall, we believe that land declined less than the market for In the Americas, we noticed an acceleration in the rate of decline of conventional loans. The adjusted EBITDA margin improved by 206 see basis points to 22.9 percent. This includes, again, on the sale of real estate if we exclude that specific gain, the margin would have been 20.9%. This performance is in line with our adjusted EBITA margin last year, reflecting the successful implementation of our last man standing strategy. I propose that we move to the next slide and talk about our LED business group. So in Q1, we saw comparable sales growth up 16.7%. Volumes were effectively higher due to the continued class erosion and mix impact but all regions contributed to the growth, although we noticed, once again, that countries with low LED penetration rates showed higher growth. Our comparable sales trend in Northern America improved compared to the second half of twenty sixteen showing the benefits of the measures that we have taken in the previous quarters. These measures include different type of initiatives, expanding and diversifying our distribution coverage, intensifying our marketing pool activities and market based product innovation. Adjusted EBITA margin improved by 360 basis points to 9.2% driven by operational leverage, procurement savings, which more than offset price reductions as well as mix impact. Excluding incidentals during the quarter, the margin for our LED business group structurally improved by 290 basis points. On Slide 7, we see that professional showed 2.5% comparable sales growth in Q1. View ops and the rest of the world showed growth Saudi Arabia, but is still impacted by difficult market conditions over performance was less affected than what we experienced in 2016. Excluding the impact of Saudi Arabia, professional would have achieved a comparable sales growth of 3.8% as you see on the graph. The Americas had a soft quarter, but the order backlog improved during the period. This includes larger projects, which will be executed and invoiced later in the year. I just EBITDA margin of 2.1 percent showed an improvement of 110 basis points. And despite some write downs on bad debt, Saudi Arabia, although to a lesser extent than what we experienced previously. So excluding the impact of the incidentals, the adjusted EBITDA margin improved by 280 basis points, driven by procurement saving, higher production efficiency and mix improvement. As previously said, we will continue to focus on improving our growth profile, which will become clearly visible in the second half of this year. Now let's turn to Home, which achieved profitability in the first quarter of 2017. Our comparable sales growth show a significant improvement at 20.6 percent, supported primarily by the Home Systems business and all markets contributed to that growth. Home posted an adjusted EBITA of 1,000,000 in the first quarter. The adjusted EBITA margin grew from a negative 9.7% last year to a positive 2% this year. This was primarily driven by sales growth, structural cost reductions that we implemented into 2016 operational leverage and procurement savings. The performance of home illustrates the success of our connected lighting system strategy. I will now hand over to Stephane who will tell you more about the highlights of Q1 and 2017 from the financial standpoint of Stephane Fouizio. Yes, thank you, Eric, and good morning, everyone. Turning to next page, Page 10, you can see here the evolution of our adjusted EBITDA. Like in previous quarters, our performance was driven by the continued improvement of our gross margin. Which increased by 200 basis points and also the continued implementation of cost reduction programs across the company. When you look at the gross margin, we were again able to improve our productivity to deliver procurement savings and also to benefit from a positive volume and mix impact. Unlike in previous quarters, this allowed us to more than offset the price declines. Our indirect costs were flat year on year and on the next page, we will provide you a bit more details. And overall, we also benefited from favorable currency effect on adjusted EBITDA. On the next page, we show you the year on year development of our adjusted indirect cost base. Which was 33.7% of sales in the first quarter of 2017, which compares to 33% a year ago. So first, we had a negative impact from currency movement, which increased our cost base by 1,000,000. Also, the first quarter of last year was positively impacted by a pension gain of 1,000,000, while in the first quarter of 2017, we had an additional month of brand life and fee with a negative impact of 1,000,000. And finally, as you can see, we continue to implement our cost reduction actions and we achieved 1,000,000 of savings on indirect costs compared to last year. We see further cost reduction opportunities that should result in savings in selling expenses, high and other internal overhead like finance, HR And Real Estate, and we are working on those opportunities. Moving to the next page on working capital, page 12, Working capital decreased year on year by 1000000 and reached 1,000,000 at the end of the first quarter. This represents 9.8% of sales and this is an improvement of 180 basis points compared to a year ago. So this reduction reflects the sustained improvement that we have achieved throughout the year of 2016. The year on year improvement was driven largely by a reduction of our receivable in the first quarter. Our inventories, as you can see on the right side, as a percentage of sales reached 13.8% which is about the same level as last year. And finally, moving to free cash flow and net debt, We ended the quarter with a net debt of 1,000,000, which is an increase of 1,000,000 compared to the end 2016. During the quarter, as mentioned by Eric, we generated million of free cash flow. This is a significant improvement compared to the minus 1000000 in the first quarter of 2016. Which, as I remind you, included a million cash out for pensions But still overall in the first quarter of 2017, there was a significant improvement in free cash flow. Which was driven by our increased profitability, lower cash outflow on working capital compared to the first quarter of 2016 And finally, a reduced net CapEx as a consequence of real estate gain and that has been partly offset by higher interest and higher taxes. Finally, as you see here in participation in the sell down by our main shareholder, the 3,500,000 share that we acquired in this transaction will be canceled in the second quarter. I will now hand over to Eric who will tell us more about the outlook for 2017. So when it comes to the outlook for 2017, I mean, we are once again committed to what we said before. We see a further improvement, though, adjusted EBIT and margin, approximately around 50 to 100 basis points for the full year of 2017, which is in line with our medium term outlook to gradually improve the adjusted EBIT margin to 11% to 13% for the role of in its lifetime. We also have indicated that we will deliver solid free cash flow, while remaining committed to our ambition to return and to positive comparable sales growth. In the course of this year. And with this, we are more than happy, myself, and Stephan to answer you. And our first question comes from the line of Daniel Acosta with Goldman Sachs. Please go ahead. Your line is open. Hi, good morning, everyone. I would like to ask 2 things. The first thing to get your views in terms of how your market share has evolved in the various divisions, whether you've seen any market share gains anywhere. And then the second thing, just on the point of the SG and A on manufacturing cost reduction that you talked about, I guess a lot of the transitional agreements with Royal Phillips are sort of come to the period of being close to seizing now. When should we expect to start to see a more meaningful impact from a non manufacturing cost reductions in the P and L? Thank you. Yes. Good morning, Daniela. Thanks for the questions. So let me take the first one and Stephane will answer to the second one. Market sales are only available to us 1 quarter after the ongoing quarter because we need to to get, to get the numbers and have sometimes to analyze them. But if we look from a distance, at the prediction that we're doing by specialists on market growth. We believe at this point in time that with a decline of -17.9 percent in our lands business. We believe that we are declining less than the market, which was forecast to decline far above 20% So this is we believe a good news, which is also consistent with what we have been experiencing last year. Man standing is to be able to capture the market share that others would leave on the table when they exceed the market and you may have heard again, you know, in Q1 announcements that some companies are not investing as much as they used to. In the conventional parts of the business. When it comes to the AZ, so we have, I would say, gone back to the place where we want it to be in terms of growth, understanding that for that business would probably a lot more than twice bigger the next competitor, this level of growth is healthy for us as we see it. We believe that in the geographies where we operate, we are it's not stable in also increasing our market share and we definite actions as we have said it previously on different fronts, you know, in order to recoup on the growth rate and increase the growth rate versus what we had experienced last year. So there are 4 dedicated actions on that business that are coming now to show benefits, especially in Q1. When it comes to professional. I believe that we are taking market share in Europe and the rest of the world The market is clearly declining in U. S. But when I look at the performance on some of the other competitors, we may be slightly losing market share in the small, to medium sized projects when on the other hand, I believe that on the on the market of bigger projects, we have done a clear inroads in Q1, we have been securing major projects in terms of order intake. So they don't show in our invoicing pattern at this point in time. And they will be invoiced later in the year probably in Q3 and Q4. Home, we're growing 20.6 percent as we've been taking market share there and especially in the home systems business, which has been performing at high levels in Q1, but pretty much in line with what we experienced also in 2016. So even as Benoit, we cannot be digital on market share because we don't have the information yet. I think that the overall trend is positive. Yes. Yes, Daniela, to your second question about SG And A And Non Manufacturing Cost Well, first, as you know, this is something that we've been doing for a while without taking into account whether it will be independent or not. And in 2016, We communicated on the fact that we reduced our cost by a bit more than 1,000,000, and we reached 31.7% of sales. So of course, when you look at the first quarter, because it's a lower quarter in terms of sales, the percentage is higher, hence the 33.7% And I think we have indicated several times that in terms of our target, we see opportunities to reduce the amount of NMCs as a percentage sales and we gave an indication based on a number of benchmark that we should be probably in the range of 29% or even below So there is room here to continue to reduce and improve as a percentage of sales. We have actions in place and the cover of select SG And A, finance, etcetera. And those actions are providing results. And we will see further impact in 2017, but also in in 2018 2019. This is a 3 year plan and we are executing that plan. Thank you very much. And moving on to the line of Martin Wilkie with Citi. Please go ahead. Your line is open. Hey, good morning. Thank you. It's Martin from Citi. I'm just a couple of questions going back to the U. S. That you mentioned a month ago that you've, you've taken some share in larger projects and the backlog improves in the quarter. And perhaps you can let us know how much of the U. S. Business is backlog driven versus a book and bill business just to give us some sort of sense as to how important that backlog will be for driving growth later in the year? And secondly, I would interesting point that you made that you're losing market share in some smaller projects. Obviously, you've been putting efforts into rebuild relations with agents and specifiers to improve the U. S. Business. Has that struggled? Is that part of the reason or do you think it's project sorry, product driven or perhaps some color as to why you think you've been struggling with some of those smaller projects in the U. S? Thanks. So when the it's not a business that has been so far pretty much influenced by the backlog, but it so happens that in Q1, we have taken projects that are, you know, from a turnover standpoint, pretty material So this is why we are calling it. So that's specifically for Q1. So it's been so much the case, you know, in the past quarters. And as I said previously, we, forecast to invoice this project in Q3 in majority and also a little bit in Q4 this year. We're not commenting specifically on sizes, but as we have done repeatedly and we've been very consistent, whenever we talk about something that we believe that it's solid back, which is material. On the smaller business front, I think it's particularly linked to Q1. And when you look at, the local association, in the U. S, they have been stating very clearly that the market of luminaires after 6 years of positive dynamics would shrink in 2017. That's what we have started to see in Q4. And it has continued in Q1. And I think in Q1 is the expectation of the actors on the market was that the growth would be slightly higher. So I think the competitive situation in Q1 was very, very tight. And this is why I think that We have a lost market share given that specific situation in the U. S. In Q1 when I look at our structural improvement from the business. They are there. They are paying off the probably Q1 surprised the market in terms of market dynamic for those smaller sized projects. And the competitive intensity was probably a bit stronger during that quarter. This is why I made that comment. Thank you very much. And moving on to the line of Lucy Kaier with Morgan Stanley. I have one first question is actually a follow-up on the Professional business. Can you give us a sense of how the margins dynamics have evolved between your 3 key region, I. E, North America, rest of the world and Europe. So we can kind of get maybe an insight on your progression there. So that's question number 1 and I'll have a follow-up after Lucy, we're not specifically commencing on the margin for the businesses by regions, but let me put it this way. The good sign of the performance in that business is Q1 is first of all, an improvement of the operating margin versus last year of 110 basis points. If we take into account that we had positive incidentals last year, the structural improvement is around 280 basis points. If you were to imagine that we would be able to reconnect that improvement on quarter to quarter, for the professional business that gives you any indication of the potential performance and margin increase of that business all along to 'seventeen and that's pretty much in line with the guidance that we have given in the medium term. Now what we see also is that all the regions for the year, I believe I'm going to be contributing to that improvement. And my second question would be around your raw material exposure. And I was wondering whether you could comment on that in regards to the recent inflation we've seen in classic prices metals also we know that the prices of energy chips is still declining but maybe to a slower pace than before So I was just wondering how are you managing normally that inflation around potential to kind of procurement materials and whether you had done actually a component pre buy at the end of last year because we've seen that as some of the manufacturers when they had started to see raw materials going up? So we are I mean, some of the key raw materials that we are using in our products are effectively metal plastics, also optics that we use quite extensively. It's true that we see more tension on the price of raw material into a 2017 than previously. That's also the case on the for the cheap manufacturers. For us, we're working on a daily basis. On opportunities for procurement savings. So we had a plan with our suppliers for the full year. And we're monitoring that as we speak with regular, negotiations depending on the type of community we're talking about that that can take place on a quarterly basis. What we are doing at this point in time, we see we are trying to understand what could potentially be the impact of this raw material price increases on our bit of material and anticipated to make sure that that is integrated in our plants to continue to optimize the gross margin. So it's a very, very structured approach that we have, which is led by our procurement head. And this has been functioning well in the past when we could reduce substantially our bill of material. We still believe that we're going to reduce substantially the bill of material with the view we have to the, in 2017, even if we do it a bit less than in the previous years. At the end of the day, we will also do what we have to do commercially in front of the market and manage prices to make sure that the gross margin continue to be optimized. So this is muscles and reflexes that we have been, you know, he was in quite a lot in the past years and we're continuing that we're extremely attentive. We only maybe in some very specific cases, we would have, both components in advance in very, very specific long lead time components, but it's not something that we do commonly and on a regular basis, we have discussion with our suppliers and we build the plan with them for the upcoming rolling 4 quarters and that's the way we proceed. Much. And moving on to the line of Andreas Willie JPMorgan. Please go ahead. Your line is open. My first question is on the home division, which is doing very well, you've reached a breakeven target. At the time of the IPO, you haven't if I had a longer term ambition there going for first for that breakeven level, maybe you could flesh out a little bit what you see as a longer term or medium term margin potential, particularly given the solid growth or very strong growth you now see there. And then I come back with a follow-up question. Yes. Thanks, Andreas. Nice talking to you. So we But are we pleased to see the developments of the home business? If we talk a bit about the history of that business and we decided to invest extremely heavily in the past, 3 years on that business to develop home systems. And at this point in time, we see a very, very positive traction. At the time of the IPO, if you remember, you know, the credibility on that business in terms of performance was not there. So we indicated that we were seeing the business breakeven in 2017 as one of the first steps we wanted to commit to. When you look at the performance and the trajectory, we were positive in Q4. Last year, we were also positive if you aggregate Q3 and Q4 last year. And we also positive in Q1. So we're clearly moving in the right direction and we believe that that business will be positive will be breakeven and maybe more than breakeven for the full year. So we will see the trend in the upcoming quarters. And if need be, we will try and articulate, better, you know, a mid term objective for that business, but not an point in term of less. We are very, very focused on continuing our journey, which is to make sure that that business becomes positive for the full year of 2017. Thank you. And the follow-up question, what's your explanation for why the U. S. Luminaires market declines in an environment of reasonable GDP growth and solid non residential construction growth. Is it pulled forward replacement and refurbishment on the energy efficiency argument over the last few years and And is there a risk we could see something similar in Europe as well, maybe in a couple of years then some of that refurbishment cycle just kind of lapse tough comparables. Yes, that's a very good point. I mean, we investigated this quite extensively. So let me put forward what we came up with. So first of all, I think that the situation in Europe and the U. S. Is fairly different. I don't see that as a direct link to refurbishment cycle when you see the rate of penetration of LED in the Northern American market. I mean, there's still a fabulous potential ahead. And here, I'm talking about construction non res a lot about indoor and type of applications. So there's still a fabulous potential ahead. What we have seen in the past month is we believe that customers have financial capabilities But probably that at this point in time, given the uncertainty of the landscape, they would refrain to do the investment now and probably leave it for a later stage. That's the best time to wrap and come up with after all the discussions we had with our team there. It's not a lack of need and financial resources, but it's probably, you know, waiting and a bit of the expectation, a bit of cautiousness because of the uncertainty of the global environment that's the best answer I can come up with at this point in time. Thank you very much. And moving on to the line of Finn Vyer with UBS. Please go ahead. Your line is open. Yes, good morning. Two questions from my side please. The first one is on your EBIT bridge and the 1,000,000 improvement in the adjusted EBITDA. I mean, some 9,000,000 from FX, low double digit from real estate. How do you see those factors developing in the rest of the year? Do you still see further real estate transactions and what would be the currency impact if rates wouldn't change? And the second question is just simply, what was the impact of the real estate in the incidentals on the cash flow in the first quarter? Yes. Yes, since so, looking at the bridge, first of all, in terms of currency, you're right, 1,000,000. We've seen a strengthening of the dollar. This is helping us with more sales than purchases in dollar in particular. Also an impact of the renminbi, difficult to predict for the whole year. There may be some further gains, but again, it's extremely difficult because we there is quite some volatility in the currency. So we will figure out on that one. With respect to real estate, the, of course, it's important for us, especially in our month standing strategy to make sure we can monetize all our assets and part of it is real estate. And so We have a number of real estate assets and we constantly look for either restructuring and improving their performance and profitability. Or for monetizing those assets. That's what we've done in Q1, and we've been working on that one quite a bit. We haven't disclosed the overall amount, but if you look in the appendix of the press release on the P and L, the other income is 1,000,000 and the vast majority is the real estate gain. And by the way, the free cash flow impact is more or less the same. And as we have disclosed in the business group performance, most of the gain is in lamps and you have most of the rest is in LED and we've been transparent on the, on those impacts. So that's the order of magnitude. Whether there's going to be more in the course of the year, of course, we don't know and it's too early to say, but any way we can find to monetize assets and generate value for the company, of course, we will do so. And every time we do it, we will disclose it. Thank you very much. And moving on to the line of David Busch, please go ahead. Your line is open. Good morning gents. Thanks for taking my questions. The first one please on pricing. I note that pricing as a percentage of sales has gone down or has come much more negative, both sequentially and year on year. If you can comment on that, please. And then the second question would be kind of following on the previous question around expectation around real estate and other incidentals. Just to confirm, when we look at the guidance for 50 to 100 points of improvement in the margin, just how much incidental is already in there? Mean, I can calculate around 20 basis points just coming from the Q1 effect. Can you confirm that that's it or is there more come in the rest of the year? Thank you so much. Yes, let me start with the last one. That's an easy one. Yeah, you're right. So million on a full year basis, about 20 basis points. And that one, of course, when we gave our guidance a couple of months ago, that sale was going on and you're never sure you're going to close, but we assume that that would be part of what we have in 2017. So that those 20 basis points are are part of our guidance. This is also why we give ranges, you know, those 50 to 100 basis points. So your question is there more to come again, as I answered before, we don't know and they are maybe, and we will, of course, disclose. Now of course, if there is anything that's really meaningful that may affect our guidance, But then at that point of time, and if it happens, we'll tell you if it has any, but not on our guidance, but at this stage based on what we've done want, there is no impact and no reason to change our guidance for this. Then to your question on pricing, so you're right. There's still a pretty material impact of price decline. You can see here, 1,000,000, but as a percentage of sales, it's a bit lower. We've seen a bit less price decline in some areas, especially in LED and especially in electronics. As you remember, every time we comment on price us. It's also related to not only volume, but also raw material tension and what we can extract out of bill of material. And when we extract less, we know that as an industry, it means also the price decline is going to lower. I guess this is what you see here. Of course, it's a combination of many trials evolution within our product portfolio. But overall, that that's how we interpret that slightly lower price decline as a percentage of sales compared to previously. What it means for the future, of course, we don't really know. What matters to us is to make sure that we can generate as much as possible bit of material savings and productivity improvement in order to be able to be competitive on the market to reduce prices on the market position and to increase volume. That's how the overall model works. Thank you very much. And moving on to the line of Alexander Virgo with Bank of America Merrill Lynch. Please go ahead. Your line is open. A couple of questions. Just I wonder if we could come back a little bit on professional. If you ex the Saudi drag, then you're growing that business at about 4% underlying. Just wondered if we can sort of take that as a run rate despite the declines in North America for the balance of the year? Is that something that we can see sustained as presumably your the drag from KSA ends up being de minimis in the second half? And then the second question, just on conventional margins, the lamps margins, underlier exit, the real estate gain, I suppose you're doing about 21%, again, is that something that we can see as sustainable for the balance of the year? Or any comments you can make around, that would be great. Thank you. So on the first question Alexander, So for Kees, what we said from a top line perspective is that we believe that the market will still be impacted throughout the whole year. But once again, much less than what we had experienced in 2016. So this is what happens in Q1. It's only a bit more than 100 basis points impact. And it was close to 400 basis points impact in the whole 2016. I'm going to be very honest, I'm not extremely optimistic on, the case and market moving forward. But, the impact will be of a magnitude that is not going to be worse than what we experienced in Q1. That's our projection. We're not giving indication or outlook on how we see the business is performing. But what I can tell you is that in Q1, we've seen a very positive trajectory in Europe and also in the rest of the world. And we've already commented, you know, the situation in the U. S. Now from a more general standpoint, Yes, we are positive on what we see happening in professional in Q1. And we will have additional positive use from a top line perspective, as I've mentioned this before, in the bigger size projects, that have been building our order intake in Q1 in Americas and that we will invoice later down the road during 2017. On your second question about Lance, So 20.9% performance in terms of adjusted EBITA margin is pretty much in line with what we Experian to as an average for the full year of 2016. So we continue to manage that business. We believe in an optimized way. Could it be at that level slightly lower? You know, this is what we are aiming at for the full year and this is what we have said previously. In all cases, we imagine a performance between 16% 20% and probably closer to the higher interval of that range. Okay, very clear. And if I could just follow-up on LED growth, obviously 17% in organic terms in Q1 versus last year, you've seen some pretty meaningful acceleration from the low double digit growth in the back half of the year. Again, can we think about that in the same context of, I suppose, seasonality for the rest of this year. I think Q1 was only about 22%, 23% of the total number last year. So any comment you can make around the sustainability of that growth rate would be very helpful. So we when we experienced in Q2 last year, a downtrend in the performance of Alibaba, we're very clear that we're working on it. And we've been defining for that business very clear and dedicated 4 actions in terms in order to be able to improve our growth rate. It took a little bit of time to see that happening, but we see that in Q1. I would tell you that, I'm quite optimistic on when it comes to that business for the rest of the year, but we need to thoughtfully and extremely regularly continue to implement, you know, the action that we have started to implement, we also know and we also know that, The 2nd semester for that business will be an easier compare than it was the case in Q1, because we started to have a lower growth rate for that business in Q2 last year. So with all these elements, I think that gives you an understanding of where we could end up, but we are, you know, working on old cylinders on that business to continue to maintain our position and gain market share. Very helpful. Thank you very much. With Societe Generale. Please go ahead. Your line is open. Hi, thanks for taking my questions. I have a couple as well. Firstly, just following up on the market development in the U. S, but perhaps talk a bit over Europe as well. In the U. S, I mean, you sort of mentioned that the market you sort of lost a little bit of market share on the small and mid sized projects perhaps because of more competitive dynamics. I mean, is is it something that you expect to continue through the rest of the year? Because I guess the expectations at least from some of our peers are a bit more, sanguine now than perhaps they were at the beginning of the year. So is it something where you should see a bit of easing of those dynamics in the U. S. On the mid and small projects And then perhaps you could talk a little bit about Europe as well from a professional perspective, because it's probably the 2nd quarter where you've seen a bit of growth there. So that was the first. And then the second one was just looking a bit stepping back and looking a bit at the capital allocation policy. You have a dividend and the buyback that you're sort of executing. But if you look at inorganic growth opportunities, just wondered how should we think about those and any priorities over there, such as any regional gaps that you would like to fill or are there any product lines within software lighting controls that you're sort of thinking about as well? Any comments there would be useful? Thanks a lot. So let me take the three questions. So first of all, we need a confirmation of this, but I think that what experience in terms of competitive dynamics because the market, the further market softness surprised competitors on that market. I see that really as a Q1 situation and not something that will last in the coming quarters. Europe showed substantial growth in, in the professional business and in most of the countries where we are operating and playing on the full spectrum. Not only LED offers that have to fund extremely well, but also moving up to lighting, connected systems. And we've seen interesting gains in most of the unusual segments that we are serving in in Europe. If you look at the global level of Phoenix lighting, lighting, systems and services for professional, is again performing at a very strong double digit level. So these are the good news for Europe and also globally when it comes to lighting systems and services. When it comes to our capital allocation policy, I would say that if you were looking at the priority order, so the first one would be to invest inorganically in future growth opportunities. Number 2 would be to return money to the shareholders. And number 3 would be eventually to de level. Now when it comes to M and A, we are 1, very clear and second, extremely strict. We do acquisitions if we have the management bandwidth because doing acquisition takes a lot of, management attention order to make sure that we don't only close or sign a deal but we post merger integrated in the right way. At the same time, we need also to have the right target in front of us. And we've said from the very beginning that if those two conditions are not there. We will not proceed with acquisitions and we will go with our priority number 2. And this is what we've done. What we've commented at the end of last year. Now there is a clear set of priorities when it comes to our M and A strategy. It will be mostly bolt on acquisitions And we would be looking in linear companies in order to improve or increase our market share in some parts of the world. Will eventually acquire some specific criminal technologies that we may not have. Otherwise, the 2 other areas for M and A are technological bricks systems. It can be controlled devices as you've mentioned or any other type of technological breaks that would complement our system architecture. And thirdly, capabilities and also platforms food services. So at this point in time, Alok, let me probably give some more color to this. We have been in those three domains, listing potential target that could be interesting for us. We have shortlisted share them. And we are working as companies have to be doing it on a regular basis on opportunities for inorganic growth. But these will be activated whenever we not only have the right target, but we have also the capability to properly integrate them. Thanks a lot. Thanks. Thank you very much. And moving on to the line of Nigel from to ING. Please go ahead. Your line is open. Hi, good morning. Most of my questions have been answered. But I have one follow-up on the pricing environment for LEAPLAN specifically with LEAP packages seemingly stabilize or continue to stabilize. Do you think the market will remain rational? I think Stephane just mentioned in that. But do you think that maybe smaller Asian players perhaps will also adjust their pricing accordingly? And then as a follow-up, do you still or continue to believe you have a sustainable advantage in terms of your cost base due to scale economies and, on the fur on, especially the purchasing footprint. Hi, Nigel. Thanks for the question. Look, I don't want to look in place on neither would I want to look arrogant. But at this point in time, in that business, we're probably twice bigger. Than the number 2 on the market, which will be much bigger than some of the Asian companies that you're mentioning. And our profitability in Q1 is above 9% when probably the number 2 may still break even if not negative. So we have a real advantage when it comes to not only the size, but also the profitability of that business. If there is less potential to extract costs, we believe that the market price will decline less We also believe that we are in a better position than others at this point in time given our size that our profitability also and to be able to, manage prices and try to extract value also from a differentiation, segmentation, all the offers, bringing further innovations to the market as we have done it repeatedly. But I don't know if you, if you have heard and if you read, that we have, once again, launched on the market 2 very interesting innovation, 1 in the domain of inventory or the master lead, T5, which is a one to one replacement for existing fluorescent lamps. And on the other side of the spectrum, the candle caled lamp and as well as white lamp, part of the Q family, which was very expected by the market. So wherever we bring those to the market, it has a very positive effect on our businesses in general and mainly the LV business. So that's the way we see it. We don't see so far irrational behaviors and frankly speaking, well, it's not going to come from us anymore. Anyway. Can I squeeze a quick follow-up on the outlook then? Because I think in this call, you said most of it will come from cost containment, but also to build materials. Two questions, please. Firstly, I'm just trying to understand why the real estate gains are included inside your adjusted EBITDA performance according to the perspective, it says that adjusted EBITDA is a measure of the underlying performance of the business. So maybe you can explain why a real estate gain is a measure of underlying performance? And then secondly, on professionally, you've talked about having additional revenues in the third quarter because you'll be building the large you're currently booking. Can you talk about any potential margin impact? I would imagine these are quite competitive projects. So will we see a negative margin impact when we get the additional coming through in the third quarter? Thank you. Yes, let me take the first one, Peter. So on real estate gains here, we are just applying data in policy, that has been applied always and is consistent with the one of Hawaiian Phillips. And since we are still consolidated, of course, we need to apply this And there is a very clear rule, which is every, gain like this that is below 1,000,000 is of the OBI. And when it's above 1,000,000, then it's below the OBI. To us, it doesn't really matter because at the end, we disclose them. We want to make sure we understand and we share the real underlying performance So even if they were included like it's the case here in the adjusted EBITDA, we make sure that on a global basis and by division, you have a view of what is the true, the true underlying impact. So that's the way we live. But for the rest, we just apply the accounting policy the way it is designed and applied within the Royal Felipsco. For the U. S. Project, Guido, for the that we have commented. So these projects are, you know, connected lighting systems and then margin is above the average. Thank you very much. And the next question is coming from the line of Lucy Karier with Morgan Stanley. Please go ahead. Your line is open. Hi. Thank you again for taking my question. I just had one actually 2 follow-up. One follow-up on what you just said about the U. S. Projects in Professional. You said they were above average margin. Maybe I didn't get it your responsibility, but do you mean above average margin of professional, above average margin of the group or above the average margin of your professional business in the U. S? Above all of them. So Yes. So pretty much above the average margin of the group. Yes. So I will answer to the question of Guido. We will see a positive impact on the margin and the operating margin of professional coming from this project. Whenever we invoice them. Okay. And just one, which is kind of more arithmetic. It seems that the touring this quarter was maybe a bit less than what was expected in consensus. I just wanted to ask how we calibrate kind of restructuring expenses for this year and maybe she can give some indication around the phasing? Yes, so on calibration and especially on the quarterly basis, that's a very difficult question to answer because as you can expect, it's really based on specific actions in every business and when it's decided and implemented. So we have a plan for the year, but then the real execution and when it takes place exactly is not can always change. It's difficult to predict by quarter. That's why this quarter, it was only 1,000,000 of charge. Then on a full year basis, We've always given a clear indication that we believe that the spend is in the range of 1.5% of sales 1.5% to 2% of sales. This is the overall charge that we took in 2016. And this is what we believe we will take also in 2017. And again, it's all based on very specific actions. And then for the savings, Look, we don't communicate specifically on savings for each of our restructuring initiatives. Generally, we look at them and we ensure that there is a payback that in the range of anywhere between as low as 1 year. And depending on the country, sometimes it can be more than 2 and sometimes a to 3 years. But that's the way we approach it and we look at it and take those decisions. And then there are some other things that we do as we finalize those restructuring is monetize the value of the assets like we've done here in real estate. So that's the role approach we have on the restructuring. Thank you very much. And there are no further questions in queue. And with that, I would like to return the call to the speakers. Yes, thank you, ladies and gentlemen. Thank you for very much for attending the call and for taking part in the discussions about our results. You have any additional questions, please don't hesitate to contact our Investor Relations. We are happy to answer your questions. And again, thank you very much, and enjoy your day. Ladies and gentlemen, this concludes today's conference call. Thank you very much for attending. You may now disconnect.