Earnings Call: Q4 2016

Jan 23, 2017

Ladies and gentlemen, welcome to the Phillips Liding Analyst Conference Call. Questions. I would now like to give the floor to Yero Lainar, Head of Investor Relations. Mr. Lainar, please go ahead. Yes, thank you. Good morning, everyone, and welcome to the Phillips Lighting Analyst Conference Call for Fourth Quarter and Full Year 2016 Results. With me are Eric Romela, CEO of Philip Sliding, Stefan Roger, our CFO and Renee Franshagen, board member business group leader of our business of Lance. Eric will give a brief introduction followed by Stephan, We will go through the highlights of Q4 2016, then Eric will tell you more about the highlights of 2016 and our outlook for 2017. We will enter this conference with a Q and A session with all three gentlemen. We will be available for to answer your questions. With that, I would like to hand over to Eric. Thank you, Yaron. Good morning, and thank you very much for joining us today. So it's good to have you on the call today. Let's go to Slide number 3. So in 2016, our businesses performed in accordance with their strategic objectives, despite as we've mentioned them challenging conditions in some markets. We are pleased with a significant increase in profitability and solid free cash flow in our 1st year as a standalone company. And these results also mark a continued progression to achieve our strategic goals and medium term financial objectives. More than ever, our team remains focused on the opportunities ahead and is committed to meeting the needs of our customers, renovation, while we execute concrete actions to fan, who will tell you more about the highlights for Q4 2016. And stay on the floor with yours. Yes, thank you, Eric, and good morning, everyone. I'm not now turning to page 5 and you can see here the overall overview of our financial performance for the group and for our business groups. As you can see here, the comparable sales growth has declined by 3.2% for the quarter, which is mainly due to lamps. And we also had still the impact of some remaining macroeconomic for some of our markets. You also see that each business group has contributed to the improvement of the adjusted EBITDA, and also to the improvement of the adjusted EBITDA margin. And finally, overall, for the group, the adjusted EBITDA increased by 18.2 percent and reached 1,000,000, and the margin improved by 190 basis points and reached 9.7%. Turning to Page 6, you can see here the adjusted EBITDA bridge Like in Q3, our improvement in adjusted EBITDA has been driven by a continued improvement of our gross margin. With an increase of 170 basis points and also the continued implementation of our cost reduction programs across the company. The improvement of the gross margin as a percentage of sales was driven by the our ability to compensate the price decline, by operational efficiency, procurement savings, again, that we are able to secure and also by the increased productivity that we have in our manufacturing Outside of our gross margin, we have also continued to optimize and to reduce our cost base with a particular focus on SG And A. And despite additional costs in the fourth quarter of 2016 that we didn't have last year like the brine licensee, we've been able to reduce the cost base And actually, we took 1,000,000 out of our cost base in the 4th quarter. So this performance in the 4th quarter is consistent with what we have achieved in previous quarters, and it demonstrates our ability to take out the boom and also below the gross margin. Let me quickly walk you through our 4 businesses on Slide 7. You can see that Lambs improved its margin by 430 basis points, with the ongoing cost rationalization and despite a decline in sales. As said, the sales declined by 18.5 percent, it's been driven, of course, by the technology transition to LED lighting. Overall, when you look at our CSG in the second half of twenty sixteen, this is minus 15.6% and it's very similar to what we saw in the first half 2016. We've been able to further improve our adjusted EBITDA margin to 19.1% and again, This is a result of the ongoing work done on the manufacturing footprint, on procurement savings and also on the overall improvement of our industry productivity. We took in the 4th quarter a million restructuring charge so that we can continue to rationalize our stock footprint. Finally, you should note that, again, we've rationalized our business portfolio in Lens and we've successfully divested the cinema business in North America. Moving to LED on Page 8. You can see that the sales growth in the fourth quarter is similar to what we saw in Q3 at 11.3%. We saw robust volume growth in the fourth quarter. And as you know, we consistently get significant pickup on savings which allow us to reduce price and in turn, this is what fuels the volume growth. In previous quarters, we talked about the softer performance in North America and discontinued in the fourth quarter. Accordingly, we have taken a number of measures. Including the expanding and BBS defining our distribution coverage in the Americas. Intensifying also our marketing activities and finally, continue to push market based product innovation. In terms of our profitability as we had the positive impact of procurement savings and also increased volumes This more than offset the negative impact of price reductions, and so we managed to increase our adjusted EBITDA margin significantly by 320 basis points, and we reached a margin of 12% in the 4th quarter. Moving to Slide 9 and professional, we saw this quarter was stabilization of sales increased by 0.1% compared to last year. And this despite continued difficult market condition in Saudi, In the graph, you can see that the situation in Saudi Arabia impacted our CSG materially during the year, and we show you the difference with or without the impact of Saudi Arabia. Actually, if you exclude Saudi Arabia, we grew every quarter And for the fourth quarter of growth without Saudi Arabia would have reached 3.6%. Overall, we had a good level of activity and also growth in Europe in professional and on a comparative sales basis in the Americas were stable. We increased our adjusted EBITDA margin in the 4th quarter by 30 basis points, It was mainly driven by the savings we continue to generate in procurement. The efficiency we have in our production and also some mix improvement. As we said more LED and more system and services. These are structural improvements and they allowed us to more than said the negative impact of our business in Saudi Arabia, which is due to lower activity and also some write down on bad debt. Moving to our home business, which was profitable in the fourth quarter. You can see that our sales continue to grow. At 8.8% with all our markets contributing to growth, which has been supported by the home system business. Oomba stood at EUR 3,000,000 profit in the fourth quarter. This is, of course, the result of higher sales, but this is also the impact of the significant cost rationalization measures that we have implemented in 2016. And also the continued savings in our beloved material. Let me now briefly focus on some of the financials for the quarter. And first, our working capital. On Page 11, you can see that working capital as a percentage of sales improved by 180 basis points year on year. This is a tremendous performance, and we have now reached a working capital that to the end of 2015. As importantly, you can notice from the graph that we have actually achieved this year on year reduction consistently quarter after quarter. So we ended the year of 2016, with working capital needs, which are structurally lower. This improvement, as you can see on the right of the slide, was mainly driven by our focus on inventories, which represent at the end of 2016, 12.5% of sales. This is a reduction of 70 basis points compared to the end of 2015. And in absolute value, Our level of inventory is 1,000,000 lower than the end of 2015. And same as for the overall working capital, we have had a consistent performance throughout the year, and all our businesses have contributed to this achievement. As said, you can see now that our working capital level is structurally lower, and we will continue to focus on an efficient management of this work in Japitalum. Finally, turning to free cash flow on Page 12, you can see that in the fourth quarter, we generated 1,000,000 of free cash flow. This was primarily driven by the improvement in profitability and by the sharp reduction of our working capital and inventories. The comparison to 2015 is not relevant because following the separation from Royal Phillips, we now incur several cash charges, which were not applicable in 2015, in particular, the brand license fee, a higher interest since we had our new financing structure in place at the time of the IPO. And also higher taxes as an independent company and some separation costs, which impacted us in 2016. And despite these new additional charges, we generated in the 4th quarter, the high level of risk free cash flow. As a consequence of the robust free cash flow generation, we ended 2016 with a net debt up 1,000,000. This is a matter of reduction compared to the level of net debt at the time of the IPO It gives us a very healthy financial structure with $1,000,000,000 of cash and the net debt to adjusted EBITDA leverage of 0.5 times. So this is what I wanted to cover regarding the last quarter of 2016. And I will now pass the mic to Eric, who will tell us more about the highlights for the full year of 2016. Many thanks, Stephan. And let me now turn to Slide 14. So overall, we delivered a solid performance in our 1st year as a stand alone company, sales declined by 2.4% on the comparable basis showing an improved trend compared to 2015 despite challenging macroeconomic conditions in some markets. Our adjusted EBITA margin increased by 180 basis points to 9.1% in line with our medium term path, our gradual improvement with each business group contributing to the increase. Our solid free cash flow was the result of improved profitability and strict cost capital as Stephan has already outlined. And this was offset by 1,000,000 of cash outflows following the separation. Related to the brand license fee, separation cost, pension derisking, interest payments and taxes. Let me now walk you through our strategic priorities and our proof points into a 16, which is on the next slide. So our priority to optimize cash from conventional products to fund growth was by an improvement of our free cash flow as a percentage of sales focus by 12% in the year. Our LED share increased from 40 3 percent of total sales in 2015 to 55% of total sales in 2016. Underlining our priority to innovating LED products could and technologically to outgrow the markets. Our priorities to lead the shift to systems and to capture adjacent value from new services business models, we're both supported by a strong increase in sales of 51%. In our professional systems and services business and by a fast growth in the home system sales. The growth rate increased by 40% very specifically for our home systems business. An improvement of, our delivery liability measure has also driven an improvement of our customer Net Promoter Score, which has improved by 3% for the year and 2016. We have focused on improving also our operational excellent as part of our strategy and the increase of 180 basis points of our adjusted EBITDA margin. Is it testimony? To that strategic priority. We successfully managed to reduce also our indirect cost base by 96,000,000 the euro. Let's move now to the next slide where basically we are showing our total LED sales, and we're showing that they grew from 1,000,000,000 in 2013, to close to 4,000,003,900,000,000 in 2016. In the left chart, you can see that our total LED sales grows with the CAGR of 28% and now 55% of sales is coming from LED for the full year in 2016. In the chart on the right, we show that 39% of our total LED sales come from our business group led, 49% from professional and 12 cents from home. In each business group, we saw double digit comparable sales growth in LED in 2016. Our next slide gives a zoom on our indirect cost base that has been reduced by 6,000,000 in 2016 and are now representing 31.7% of sales. So this, of course, includes a brand license fee of 1,000,000 following the separation from Royal Phillips. While indirect cost savings primarily came from a reduction of SG And A. And we see further cost reduction opportunities, of course, as we've said many, many times, that should result in selling expense savings, high dimensionalization and other internal overhead saving, for example, in finance, HR, but also in real estate. By business groups in more detail, and I will immediately start with blanks on Slide 18, you know, for the full year. So for the full year, we saw a decline of 15.8% in comparable sales due to the transition from conventional to LED lighting, the adjusted EBITDA margin has an improvement of 400 basis points, mainly driven by a lower than anticipated sales decline, and an efficient manufacturing footprint rationalization and productivity and procurement savings. Restructuring costs for that business amounted to $37,000,000 and were primarily related to ongoing rationalization of the manufacturing footprint. The number of manufacturing site has been reduced from 45 in 208 to 16 by the end of 2016. In that business, active management of our business portfolio has also led to 3 successful divestments during the year, the ceramics, the cinema business and the cost business and special glass businesses. We sustained efficient working capital all throughout, as we have said previously. And overall, that performance supports our medium term guidance to maintain our adjusted EBITA margin at least at the level of 2015, which is about 16%. Now let me move to the LED business on the next slide. Comparable sales had increased by 16.1 percent due to robust volume growth with procurement savings enabling continued price reduction The comparable sales churn in the Americas started softening in the second quarter. Some countries in Europe showed slower sales growth due to high LED penetration, right, while the rest of the world continued to deliver robust growth. We continued our strict focus on innovation in LED, 2016, we introduced many innovative products since switch, which is a new LED door branch with multiple light setting, Other examples can be the Dubai land that we've commented quite extensively today. But also, we introduced the Phillips green power LEDs and flowering lamp, which is the next generation energy efficient evidence for horticulture. And at the point least, we also developed a high limit and the alternative for popular high wattage CFLI bulbs, these LED retrofit knobs, which put out up to 3000 lumen and feet existing fixture and luminaires are available not only in Asia, but also in Latin America. We have improved for that business, the adjusted EBITA margin by 290 basis points, driven by operational leverage, a natural procurement saving and innovation. We saw a material work capital improvements in 2016. Overall, our performance in LED illustrates the benefit of our strategy, which is focused on innovation and operational leverage. While we're on track, we believe to achieve a margin of 10% to 12 percent in the medium term. Now let me move now to the professional business on Slide 20. Our comparable sales declined by point a 5% for the full year. So we have some market condition, namely in Saudi Arabia had an impact of 107 1,000,000 on our performance, which is an equivalent to 410 basis points and negative contribution and to the comparable sales growth. Growth in the Americas was offset by softness in some European countries. The systems and services business continued to grow rapidly with comparable sales growth of 51% for the full year. Our adjusted EBITDA margin remained stable despite the negative impact of 160 basis points from Saudi Arabia. Which you can see here on the slide is amounting to 47,000,000 Restructuring charges mainly relate to a simplification of our business structure, the reduction of indirect cost and footprint resinization in the specific case of the professional business. To give you some examples of innovative projects that have been working that we've been working on in 2016. Let me talk to you about the following. We have installed nearly 90,000 connected streetlights in Jakarta by using our Phillips City touch streetlight system. We also implemented Phillips Power over Ethernet technology for connected sustainable lighting, which made the Skyscrapher tove ngropla, the smartest office building in Madrid. We also adopted connected lighting in the stadium of VFL, Volkswagen, Germany, which is the 1st German football club and to use our connected LED line thing. We are so sorry for that business robust working capital improvements, And we have the initiatives in place to improve the margin of that business the operating margin of that business to 11% to 14% in the medium term. Now let me move to our last business group, which is home on the next slide. So here, comparable sales growth of 11% has been driven by the growth in both home systems and home luminance due to the continued focus on innovation. We saw fast growth in home system sales. The growth rates increased by 40% in 2016 at previously. We became profitable in the second half of twenty sixteen, and our adjusted EBITDA margin improved significantly due to the benefits from sales growth and restructuring efforts. Some of the innovative projects we have delivered in 2016 are Philipio was a debut partner with Google's new voice activity, speaker, Google Home, making it the 1st connected lighting system that is used with all leading smart home platforms. Philippice you and the voice of Germany and started working together to expand the light effect of a battleground and live shows to German living rooms, introducing an app that also viewers with a Phillips few and system and the color of the launch to bring the effect of the show directly into their homes. We introduced the Phillips 2 motion sensor, very important and very successful offer for us during the year, enabling motion control, of the connected lighting system. Our performance, for the home business confirms our strategy to focus on consumer experience and leveraging our strength in connected lighting systems. We had also for that business a solid working capital performance in 2016, overall, we strongly believe that we are on track to become profitable for the Von business in 2017. Let's look now at the next slide, which is about sustainability. It's a very important subject for us, and we wanted to communicate to you how we performed in 2016 when it comes to the 6 targets that we had in our sustainability program. 1st, sustainability revenue, 78% of our revenues were stable in 2016, which is an improvement of 6% compared to last year and close to our 2020 targets of 80%. The sale of 2,000,000,000 eligible loans. So we sold to date 6128,000,000 LED lamps in 2016, which is an improvement of 44% compared to last year. We target to be carbon neutral by 2020, which further reduced our CO2 emissions by 39% in 2016. 100% of our sites should be zero waste to landfill by 2020. So this is basically a new KPI that we have introduced. This is why we have no base of comparison. But in 2016, 26% of our side had 0 ways to landfill. So we are progressing according to the target. We also want to assure a safe and healthy workplace for our employees total recordable cases declined by 24% in 2016. And we have a sustainable supply chain objective 100% of our risk suppliers have already been audited. So we have already achieved on that specific element of the performance to 20 targets. So these were our highlights for 2016. So I would like now shortly to move to the next topics which are about our outlook for 2017. So, 3 clear distinctive elements in our outlook. So to start with, we see further improvement of our adjusted EBITA margin of approximately 50 to 100 basis points in 2017. This is in line with the medium term outlook to gradually improve our adjusted 8 pay margin to 11% to 13% for the whole of Phoenix flight thing. We will again be committed to continue delivering solid free cash flow in 2017, while despite market uncertainties, we are cautious, but remain committed to our ambition to return to positive comparable sales growth in the course of the year. Now let me move to the next slide to talk about our capital allocation policy. 1st, we will continue to generate free cash flow, and we will manage our financial ratios to maintain a financing structure, which is compatible. With an investment grade profile. This is extremely important to us. In terms of cash uses, we will pay out annual regular cash dividends within 40% to 50% of continuing net income. And we will continue disciplined management of balance sheet liabilities. We will return additional capital to shareholders as well as consider sizing nonorganic opportunities primarily through small to medium sized acquisition. So this is something that we had repeatedly said to all of you, but we wanted to materialize in writing and officially our capital allocation policy. So I propose now that we move to the next slide and the last slide, so it was a bit long, but it's about an important subject, which is about our dividends. So We propose to pay a dividend of per share, which basically reflects a payout of 52%, which slightly exceeds our guidance range. But we also consider returning an additional capital of up to $300,000,000 in the period 2017 to 2018 primarily by participating in share disposals by our main shareholder. So once again, decision that we are making both on the dividend payout And the fact that we are going to return additional 300,000,000 to the shareholders in illustration of our confidence in our capacity to to generate free cash flow. With that, I want to thank you for your attention. And I'd like to open the floor for questions. And as we answer them, I will also, of course, invite Stefan to contribute. Please press 1 on your telephone keypad. That's 1 on your telephone keypad. To ask a And our first question comes from the line of Andreas Willie with JP Morgan Casanova. Please go ahead. Your line is open. Good morning, Eric. Good morning, Stephan. My first question is on Saudi Arabia. You provided a lot more disclosure there in terms of the big negative impact in 2016. Maybe you could give some more indication what if that was basically, just operating leverage in the weak market and what were the write downs in 2016 And if you look out to 2017, what do you see in the market overall? And how do you assess the remaining credit risk there? Should we expect this basically to be a positive contribution in 2017 in the bridge against the weak 2016 Yes. So we have been commencing on a regular basis about Middle East and Turkey, and we thought that the end of the year, given the materiality of the impact of what has happened in that market, we needed to outline very specifically the situation in Saudi. So it is mainly affecting the professional business. And it's basically for us, from a top line perspective, a loss of around $107,000,000 $47,000,000 on the bottom line. As you know, Andreas, when it comes to the bottom line, there are 2 components to it. One component is the fact that we have lost bottom line because we didn't get the top line. And additionally, you also have the accrual that we have decided to take for bad debt as we were not being paid according to the policy that we had decided to put in place So we were, as we've said previously, very strict and rigorous in the way we did this. And, I would say that starting 2016, Q1 2016, we decided and be very rigorous in stopping, making business with customers that were owing us money and overdue. So we should, for that reason, maybe expect further impact on negative accruals maybe in Q1, but not in the following quarters. Could there be releases of the existing provisions that we have taken so far We believe so in the course of 2017, but given the visibility that we have at this point in time, it takes extremely difficult to tell you when and if ever it's going to happen in 2017. From a growth perspective, we do not forecast that specific market in Saudi to be streaming dynamic in 2017. But surely, we are starting from a much lower base. You've seen the degradation of our performance in 2016. So it will surely not have the same impact than the one that it had in 2016. So for that, I tried to be quite complete on the subject. I hope I've been answering to your question. Yes, thank you very much. And the follow-up question on cash flow for 2017, maybe you could help us a little bit on on working capital CapEx or any other specific items we should take into account when we look at 2017, maybe some provision overhang from the restructuring you've taken. Is there anything specific we need to take into account when we when we estimate 2017 cash flow particularly, is there a further working capital improvement expected and or have you reached now relatively kind of stable level? Thank you. Sure. No problem. For this, Vanessa, we'll let Stephane answering. Sure. So yes, on the yes, you saw that in 2016, there was a very strong performance overall in terms of free cash flow and in especially on working capital. As we highlighted in the presentation, these are really structural improvements. So we've reduced the level of working capital level of inventory, and that's been the case across the businesses. Of course, given these very strong performances, I don't think we should make expect such level of reduction every year. What is important for us is to continue to manage very efficiently our working capital and we will do so in 2017 and beyond. With respect to the other items, CapEx, as you saw in 20 16, we are very much under control and we don't anticipate here any material evolution in 2017. And with respect to restructuring, we've been very clear booked in terms of the shaft that we take and then in terms of the cash out, there's been cash out in 2016 and there will continue to be cash out in 2017, but nothing here that will materially differ on their impact of free cash flow. Thank you very much. Very helpful. And we are moving on to the question from Mark in Wilkie with Citi. Please go ahead. Your line is open. Good morning. It's Marshall Wilkie at Citi. Just a question on the NMR us, we saw one of your competitors being quite cautious on the U. S. Professional market talking about a slowdown perhaps around the election in North American Professional. And just in terms of how the quarter progressed for you there, did you see something similar? Did you see a sort of slowing area in the quarter and that's beginning to reaccelerate. Just if we get some more color around that North American business and just generally as you look to rebuild the profitability of Genlight, just how that performed in the quarter? Thanks. We have seen a second semester, which was softer in our Northern American professional business than the 1st semester. Indeed, At, I would say, at the beginning of August, until the back end of November, we felt that the market was as softer than it used to be. And we've seen in the course of December, that market picking up again, we're following basically our order intake on a daily basis and that gives us quite a good understanding on how the market is moving up and down. But we felt that Goodly for us for 2016, in Northern America, we've been improving our professional business, both in top and bottom line. We're not there yet. We know it. So we are continuing our efforts to bring that business up and that's going to be, once again, one point of attention and focusing 2017. Okay, thank you. And can I ask a follow-up question unrelated on the dividend, higher than I think most people were expecting it and as a payout above the 40% to 50% target range? In euro terms, do you see this as a level you'd want to sustain or should we read into it that the dividend is higher because the free cash flow was temporarily? Or in euro terms, do you think this is essentially a level you'd want to sustain and build from? Well, let's take one step one after the other one. We thought that given our performance, we could proposed, a dividend of 1.1 per share, which is indeed the payout ratio, which is slightly above the interval that we had defined at the time. We want to have over the years, dividend policy and that, of course, has also been taken into account and when we've made that decision. Okay. Thank you very much. Thank you very much. And moving on to the line of Lucy A Carrier with Morgan Stanley. Please go ahead. Your line is open. Hi, good morning, Gary. Good morning, Stefan. The first question I have is actually on the lens business. It seems that the decline in this specific quarter was actually more pronounced than what we've seen throughout the rest of the year. And I was wondering whether there was kind of increasing pressure on the prices or whether that was really volume driven. And on that basis, also what was your assumption for the evolution of that business in 2017. So that was question number 1. At the end of the day, I said, you know, a quarter doesn't make a trend. If you look at that business in H1 and H2, the decline has been fairly similar And it's a business, which is declining by 15.6% for the full year. So this is the way we look at it, we are not specifically alerted what has happened in Q4, and it also depends on the base of comparison of of last year. What we see for ramps is that the business has declined at a rate, which is lower than what the people that we're doing, estimates and predictions on that market, we're highlighting. So We are quite happy with the performance and we believe we have taken market share in the Lambs business in 2016. But let's not take to the quarter looking for of 2016. The tone moving forward. Thank you. And just in terms of the follow-up, I was just wondering if you could give us a bit more color regarding your raw material setup for 2017. And the reason why I'm asking is because we've seen metal prices, plastic prices increasing towards the end of 'sixteen. And we also hear from some of the manufacturers of LED Chips and packages that the price decline is not as pronounced as before. So I'm just, I would like to have some details about your procurement as we go into 2017. Yes, that's a good question. Our first estimate is that effectively, as you mentioned it, the cost opportunities in 2017 may not be as pronounced as they have been in the past, but which also will probably have a positive from the price and we will see our price, it was less than it was the case in the past. So we are monitoring this as we speak. And you offer us, there's a very stretch connection between or very tight connection between cost and prices. So we are monitoring this as we speak. And I would confirm what you have just said that we believe that costs are going to decline less in 2017 than it was the case previously. Thank you very much. And moving on to the line of Nigel from Putten, ING. Please go ahead. Your line is open. First off, thank you for providing more clarity on the returns to shareholders. Immediately a question. Obviously, why have you sort of set you would limit yourself to up to $300,000,000 in share buybacks. I mean, if cash generation continues to be strong and looking at the current net debt balance, would there be a possibility to do more? Let me, let me step on 21, if that's fine. Sure, Nigel. So when we prepare all this and thought about what should be our policy in terms of return to shareholders in addition to the regular dividend. We took into account the overall financial structure of the company. So we looked at the level of cash that we need to operate the business, I mean, as a global company, in many countries, We also look at the level of net debt that we need in order to properly fit in our investment grade profile. And based on this, we thought that 1,000,000 was the right amount over the period 172018. And then when you're looking at that amount in addition to the dividend, I think that's really nice return to shareholder, especially for a company that has been on the market for the 1st year. Yes. No, obviously, that's calculates to about almost 20 percent of your market cap currently. Perhaps then as a follow-up, could you give us the building blocks towards that $300,000,000? So what is the operating cash you would need on on sort of a regular basis and what will be the net debt for your investment rating? On the net debt investment rating, we think that one times leverage of one times adjusted EBITDA is the right level. So more or less And that's what we want to have in terms of financial structure. And then for the rest, in terms of free cash flow, don't really look at it that way. We look at what is the free cash flow that we expect to generate, given everything that we are doing in terms of our sales, in terms of our profitability, in terms of working capital. And that's what we take into account. And then based on all these elements and including, by the way, of course, the level of cash that we need to maintain in order to operate, that's how we've defined that 1,000,000. Thank you very much. And moving on to the line of Dennis Dinkl Mayer, excuse me, Goldman Sachs, Please go ahead. Your line is open. Hi, good morning. It's actually Daniel Acosta here from Goldman Sachs. But my first question, can you now that you've reached profitability for the first time in home, can you give us some light on how do you see the potential level of profitability medium term for this business? That would be my first one and then I have a second one. Okay, good morning. For the home business, given also the track record in the past years, we had a clear first step, which is to make sure that in 2017, the business goes back to profitability. As you've heard, we were profitable basically in the second half of twenty sixteen. Which we believe is a good entry point in 2017 to achieve the outlook that we had given at the time. So we believe that once we have reached a positive operating profit on that business, there is some margin up. And I propose that we wait first to achieve what is our first commitment to then be able to evaluate a bit better, what could be the potential in the medium term. And then given you outlook. We want to proceed one step after the other one. And our first and fundamental first achievement in that business is to return to positive profitability, while we invest also a lot in the home systems part of the business as well as home immunoires to grow these businesses further. Okay, thank you. And can I follow-up on the indirect costs to sales, even pre, the Brent Life I guess there's still several of your peers that do a level which is much lower? Can you talk a little bit about the concrete that you're doing there? And ultimately what is your ambition in terms of level there? Okay. Just hold on one second. Yes, sure. Well, first, if you look at what we've done in 16, of course, from a headline number, taking out the impact of brand licensing, you can see 1,000,000 which is close to 5% reduction. Actually, it's more than difficult that takes into account inflation impact across our various businesses. So actually the real reduction that we have achieved is, of course, higher than 1,000,000. And we have plans across our various activities and functions in order to deliver a continuous improvement on those cost reductions. That includes a lot of work being done on what would call G And A. So call it IT, which has contributed quite a lot in 2016 and has also some contribution to bring in the coming years as we become a standalone company and as we rationalize all the whole IT systems. It's the case also for a more additional functions like finance and HR, and we are working on each of these functions, based on benchmark, so that in the next 2 to 3 years, we reduce their cost as a percentage of sales and that brings down the overall cost and therefore generates some savings. And finally, we are also working on our selects in order to maintain the investment we need to do in order to support our growth in terms of activation, in terms of promotions, in terms of sales force, of course, but at the same time, be able to optimize them in our various markets and also globally. And finally, in terms of LNG, As you saw, we had R and D in the range of 4.5% of sales. We make sure that we optimize and reduce LND, especially in the businesses that are declining. And that also, we maintain the level of investment in order to support the and support the growth in our wholesale businesses. We are able to set messages to complement that we see the rest of the industry being between 25% to 29% in terms of indirect costs. So we are not where we need to be. We know that and we have outlined plans planned to be able to get there. Now 2016 is also a special year because of the brine license fee, which has impacted us. And we've also mentioned previously that we were hit by provisions for bad debt, which are also integrating in our cost base. Thank you. Thank you very much and moving on to the line of Alok Katri with Societe Generale. Please go ahead. Your line is open. Hi, Alok Katre from SocGen and thanks for taking my questions. Just one follow-up really, just on the growth side. I mean, you had heard some commentary on the North American market, but perhaps you could sort of You talked a little bit about the different geographies and the different divisions and the moving parts within those as we look into 2017. And What are the pluses and minuses as we look towards your ambition of returning to positive growth during 2017? So that would be particularly great. And especially if you talk a little bit about Europe. So that's my first and then I have a follow-up. Thanks. Thanks a lot. Talking about provisions on the world economy at this point in time is probably a big challenge. So I'm questioning all the time on a hard way all the changes that have already happened in the U. S. And the changes that can also potentially happen in other regions of the world. It's extremely difficult to predict. What I'm just saying is that, as a company, we think we have shown our capacity to adapt to whatever comes at us. Now if you want to have a closer look at Europe. So I think we have been performing in Europe on the LED based activities in general. We've seen on LED business group, which is LED lamps and LED electronics, that we continue to grow in 2016, but The growth of EDLAN specifically was also impacted by the fact that we start to have higher level penetration in some countries of Europe, but that's pretty natural. Once, LED becomes shooting the major part of our business where they also will start to have a growth which is in line with the overall market growth. On the other hand, not only specifically in Europe, but it was also the case in Europe, we've seen a lot of dynamic on the systems and services parts of the business, which it's for anecdotal, but we that we have indicated also in Q4. The win in Spain in Madrid for Torre, Auropa, which is basically considered to be the smartest building in the University of Madrid. Where we have with our alliance with Cisco being able to deliver a full powered over Ethernet lighting system in conjunction with Cisco, who's providing the digital ceiling for that business. So if it wins of this type, have been happening in 2016. And we believe that this is a market which will also have a positive traction in 2017. Great, thanks. And then just a follow-up in terms of the margin questions, it's just wonder how you're positioned on the U. S. Side in terms of costs and input input costs versus local, locally sourced components and services. The reason why is all those noises that we are hearing from the new administration around the tax regime changes. So I just wondered to get a sense of how you're positioned there? Sure. So when it comes to the Pex regime, first, we're very pragmatic We have the taxes that we have today. If ever, anything's changed, anything changed in the future, we see know how, would eventually need to adapt to upcoming challenges. Now we are sourcing in Northern America and we have manufacturing activities in Canada, in the U. S, and also in Mexico. And all these industrial and manufacturing implementations have a reason to be, and they generally serve beyond their own geography. Even people ask that sometimes, but the manufacturing additives that we have in the U. S, are serving also beyond the U. S. In the Americas. First, is it fair to then assume that there's, if we do see those sort of tax changes then, it should still be pretty okay for you guys. I mean, all reasonably quick to adapt. I think we will surely mix extremely quick to adapt, as we have demonstrated that we could do that in the past, but once again, these are very hypothetical talks. Of course, we're looking at it, but we need things to be more concrete. And if ever they happen, I mean, be sure that we will adapt and adapt quickly. Thank you very much. And moving on to the line of Peter Olofsen with Kepler Cheuvreux. Please go ahead. Your line is open. Good morning, gentlemen. Question on pricing. Looking at the EBITA bridge, it seems that pricing was a little bit more negative than what we saw in the previous two quarters. Is that entirely due to the LED segments, or if you're seeing some increased price pressure in some of the other segments. And then I have a follow-up on one of the earlier questions on procurement. If I look at the cost of goods sold reduction in the last three quarters, it has been between $120,000,000 $140,000,000 One of your earlier answers seem to suggest that it might not be sustainable at that level. But do you think it will be in excess of $100,000,000 per quarter in 2017, is that still a doable figure? So I will let, thank you so much for the question. I will let Stephane answer to the first one and maybe start on the second one and I could definitely continue. Yes, Peter, on the pricing, as you can see from the bridge, 1,000,000 for flowing absolute value is higher than Q3. Q3 was 100 and and 1,000,000. However, as you know, in Q4, we have a substantially higher level of sales If you look at it as a percentage of sales, actually, it's a little bit higher, but it's not a major change. And then when you look at the various businesses, we haven't seen in Q4 any pricing trend up pricing evolution that is materially different than what we had seen so far. Of course, if you look at it product by product, that can be some difference. But again, overall, in terms of our pricing trends, no major change compared to what we had seen in Q3. On the cost of goods sold, of course, we're not going to comment specifically about 2017. As mentioned by Renee, yes, we saw some prices from prices for materials having less decline than what we had. However, as you probably know, we negotiate and we manage our pricing with our suppliers in the for the upcoming year. In the last few quarters of the previous year. So we have secured also some decreases for the course of 2017. And then based on how those prices will evolve in the course of the year where we see what is the impact that I mentioned by Eric guys also linked here with the end price. Yes, absolutely. Just a small compliment. It's very difficult for us to because, you know, this is the aggregation of so many different elements to be able to tell you precisely where we're going to be. What is very important, though, is what you also see on the side and on which we've been able to deliver consistently over the past quarters and years, which is whatever is eroding in terms of price. And we are confident that we're going to be able to do that, again, in the future and into 'seventeen. Okay. Thank you. And moving on to the line of Fin Vaier UBS. Please go ahead. Your line is open. Yes, good morning. Just one question on my side is just focusing on Loomi led if you could remind us what the procurement volume was from Lumilets last year? And if you see that relation changing now that majority has been sold, if you're purchasing terms or any kind of agreements are impacted by the disposal? Thank you very much. Yes, no problems then. What we've said previously is that basically 50% of our volume in the past of our LED need was purchased from Lumilets. And on the other side, 50% of what limits what's selling to the customers was going to Phoenix lighting. So that's the type of ratio we were looking out previously. And we will see how they evolve in the future. I don't have a clear visibility on that at this point in time. What is sure is that our policy does change. We need suppliers, reliable suppliers, to bring towards the technology. And we need also suppliers with which we can co innovate in order to bring to the market, the latest innovations that is a clear a lever for differentiation for us. And that's also the role that Luminess play, not only a supplier, but also a partner that we can co innovate with. So that relationship stays and it's maintained for the future. But it was fair to say it gives you also more flexibility to join with others? No, I don't think we were hampered to work with others. So once again, our suppliers need to be competitive in order to work with us. And that's the case for Limiles and that's the case for others. So it's not that you know previously, we were hampered and that we're going to be free to do more with others. I mean, the policy in itself doesn't change much. Whenever we can extract competitiveness because we work with suppliers who bring to us competitiveness mean, we do it. And that's the case of Lumilets and that's the case of the others. We never had to work with Lumilets add the detriment of our own competitiveness. And could you share with us what your LED procurement volume actually is in euro terms? Would you share that with us? I'm sorry, Ben, these are information that, that we're not disclosing. Okay. Thank you very much. Thanks. Thank you. Thank you very much. And moving on to the line of Mark Hesselink, ABN AMRO. Please go ahead. Your line is open. Yes, thanks. My first question is on LED. In the past, you're talking about the medium term growth of around 15%. And how you're a bit below that and mainly because of the price erosion. Is that something that structurally changed now or is that because we reached a maturity level in the European market? So let me highlight the nature of the performance of our Edibley business in 2016. So we had a stronger 1st semester in terms of growth, then the second one overall still delivering double digit growth. And I would say that we look at the performance in 2016 to try to understand where it can go into 'seventeen, you have the following factors. First, we have been indicating since Q2 that we had a softer performance in the U S. Which was linked to a very specific situation on that market that was touching 1 of the specific go to market we have in United States. Since that time, we have put in place corrected actions in order to improve our performance in that specific region. So the actions have been put in place. They are being implemented, and we believe that in the course of the end of Q2 and maybe the 2nd semester, they will probably deliver some fruits. The second point that is important to understand when it comes to the performance of the LED business group is what you have mentioned. It will the price erosion, but also extremely important. And that's the sale element that needs to be well understood. We've commented on it already in the past quarter. It's the mix impact, meaning that in 2016, we are selling more lands of a lower value. The essential, LED lamps, which is also a sign that the market is also moving towards LED lamps given the price points. So that also has affected our top line in 2016. So if we look at the prospects, making sure that the actions that we have implemented in the U. S, are going to deliver fruits. That's one. Maybe given trend we see today on procurement, we believe that we may see less across erosion in 2017. And we are already starting with a mix base, which is different in 2016 or for 2017. And when it was when we started 2016, So these are elements that need to be taken into account when it comes to trying to assess what the growth of of LED is going to be in 2017. But we still believe that that business will deliver a strong growth in 2017 and will be leading the way when it comes to growth. Thanks. That's clear. And the follow-up is on the margin. So you're guiding for just EBITA margin improved between 50 basis points and 100 basis points. Looking at the mix, so it's all probably down the impact from the Lambs Division. So that it implies that professional probably the big upside in that mix. You already talked about sort of the Arabia being positive. What else is there that's gonna push up the margin in the professional? So let me first take the question from a general standpoint and see if I want also to complement. When you look at the performance in 2016, so we are talking about 180 basis points. If you also correct that number from the brand license fee, which was not in our numbers in 2015, We're talking about roughly 2 points, but 2.30 basis points improvement into 2016. So when we were questioned on how we were seeing our capacity to achieve our midterm targets, And we were very often asked whether we would be back end loaded or not. And we always said, no, we're going to do an important part of the insurance early on. And this is exactly what we have delivered on in 2016. And we see further potential for improvements, we think it's going to come from all the businesses, what to say, at least the LED, the home and the professional business, growth is one element which will help to dilute cost and to create operational leverage, while at the same time, yes, the further improvement or the thin continued improvement in our Northern American operation, specifically for the professional business, is also a clear lever. I don't know if Stephan wants to add a few things. Yes, maybe just to your comment on ProF, as you saw, we gave the figures without the impact of Saudi so that actually you can see the structural improvement that we are doing in terms of the profitability of cost It has been driven by 2 fundamental elements that we expect to continue in 2017. The mix That business is growing driven by LED and driven by system and services, and that is improving and having a positive mix impact on the division and therefore, on the adjusted EBITDA. And number 2, we are taking measure to rationalize our cost base, especially when it comes to manufacturing, you saw what we did, for example, in France in 26 team. We are having actions across the globe on our operations in professional. And this is also helping both above the gross margin and below the gross margin to improve our profitability in that business. We did it in 2015 and we intend to continue to do it in 2017. Okay, clear. Thank you. Thank you very much and moving on to the line of James Stettler, Barclays. Please go ahead. Your line is open. Yes, good morning and thank you for taking my question. If you could talk a bit LED growth, where was the market growing in 2016? And you talk about, obviously, rising penetration. Can you talk about where we are in terms of as your aggressive world in terms of penetration rates? So it's, it's not the business in general, it's the LED business group. LED lamps and electronics that you want to know. Correct, yes. Yes. So basically, we've seen, as we've mentioned previously, less growth than what we expected in Northern America for the reasons that we have already commenced. In Europe, we've seen a growth that was slightly below what we had expected specifically in Q2 and to give an extent in Q3. Also led by the fact that those markets starts to be quite penetrating and then I'm going to come to the second part of your question later down the track. We have a new up, I believe, so reacted by looking at very specifically our go to market and find also new routes What we have discovered is since the LED lamps for the consumers specifically when the price points are coming down, they open new channels. And we need to make sure we are also present in those new channels to drive our top line growth. So I think that has been well done, particularly in Europe, And we've also seen some positive outcome of the action that were implemented already in Q4. When it comes to the 2 other geographies that we're looking at. So specifically Greater China and the rest of the world, the units we call growth markets, we've seen a sustained, a consistent strong double digit growth in all these regions. So that's to give you an understanding of how our growth has been spread over the geographies and the continents into 2016. In terms of penetration, So we have the highest penetration rate at this point in time in Europe, then followed by the Americas, and Greater China and the growth markets and the rest of the world are at this point in time. At a lower penetration rate, which is also explaining why they're differentially, grow more. Can you give us any numbers on those penetration rates? Well, it's very difficult to say because, well, first of all, we're not specifically disclosing well at the same time. It really depends on the market. So I can talk to you in Europe at large. Because that's really the case. And if I go to Northern Europe, we probably see higher penetration rates, then it is the case in the southern part of Europe. Or I could give you another indication is that at this point in time, we sell more LEDs and unconventional in that specific part of the business in holiday lands in Germany. So all the countries that they own dynamic, but Europe as a whole has a higher penetration rate. Thank you. As there are no further questions, I would like to return the conference call to the speakers. Okay, ladies and gentlemen. Thank you very much for attend the call and for discussing our results. If you have any additional questions, please don't hesitate to contact the 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