Earnings Call: Q2 2016

Jul 22, 2016

Of Results 20 16 Analyst Conference Call and Webcast on July 22, 2016. At this moment, All participants are in listen only mode. After the presentation there will be an opportunity to ask questions. Please note that this call will be recorded and is also available after the webcast on this website of Philip Slicing. I would now like to hand the conference over to Mr. Yaron Laners, Head of Investor Relations. Please go ahead, sir. Thank you, and once again, welcome to the Phillips slide in analyst conference call for the 2nd quarter results. With me are Eric Rondola, CEO of Philip Laitin, and Renee Von Schrofen, our CFO. We will start with an update on business and operational performance by Eric Ronlain, followed by the financial performance by Renee Franschoten. After that, there will be an opportunity for you to ask questions. I would like now to hand over to Mr. Wunderland. Thank you, Yaron. Thank you for all of you to join us today. So let me start by giving you a global view on our performance for the quarter. So first of all, we saw our LED base sales activities grow by 25% in the quarter and then now are representing in Q2, 53% of what we are selling. We were also pleased to post a 7th consecutive quarter of year on year improvements in operational profitability, while our net income of $57,000,000 is not directly comparable in 2016 versus 2015. And in the Q2 2016, it does include separation cost and Brent's license fee. When you look at the numbers, taking a bit more distance, you see the intake in terms of the adjusted EBITDA at 9.3% and the stabilization at comparable sales growth level around minus 1.4% for the 6 1st month of the year. I would like to remind that So we see that we are improving on our growth profile. This slide is to express the fact that we are with my team at this point in time focusing on improving in a continuous way in line with our strategy. So our strategy, by businesses, is the following one. In lands, we know that we are declining and the decline that we have experienced in Q2 of around 17% is in line with our expectations. But we also said that for that business we had to at least maintain its profitability. And as you can see in Q2, at the other end of the table, we are not only maintaining, but we are improving our operational profitability by 270 basis points. The 3 other businesses: LED, Professional And Home strategically have to grow and they're growing and they also have to improve on their profitability. And you see that in Q2, this is also what is happening with an improvement of 5.50 basis points for LED 110 basis points for professional at 850 basis points for home. So that's an important, you know, iceberg view on how our business are trending versus their strategic objectives. Now let me run you through more details about each of these businesses. So we've said it 17% decline for the conventional lamps business. This is pretty much in line with our expectation and directly due to the transition from conventional lighting and to LED lighting. The performance in terms of operating margin is solid because we are confirming the performance that we had in Q1 above 20% which is also substantially above what we achieved last year. Here again, manufacturing footprint rationalization, mix procurement savings and productivity savings, has played a key role in achieving that performance. I want also to mention a successful divestment. This is we have to divest some of our activities in this declining market. And our ceramic operation in the Netherlands was very successfully divested during the quarter. Moving to Indeed. We've seen here a double digit growth. We also have very good margin progression. So the sales grew double digit slightly lower versus last year than what we experienced, for instance, in Q1. And it's mainly Americas related. In all the other regions we enjoyed, robust growth. The operating margin progression of 5.50 basis points is linked to procurement savings and operational leverage that have been offsetting price erosion. But as you can see, from 5.6% in Q1 to 8.4% in Q2 or from 2.9% in Q2 last year to 8.4% in Q2 this year. So once again, We are delivering according to what we had said. This is a business that we want to see growing, top and bottom line. Just to mention of a very interesting offer that we have been launching on the market in Q2. So it is called CORPro LNB Plc. But it really means that this is the first ever AD replacement for compact fluorescent lamps in the professional market And the good thing is that it's just we just can click the LED lamps in lieu of the compact fluorescent lamps. We don't need to change the ballast and we gained 60 percent in energy efficiency. We believe that they are around 150,000,000 of these lands in Europe, ready to be converted. Moving to Professional. So we've delivered growth and we've delivered margin improvement. And I'm happy to say and to confirm once again that after having been growth neutral, in Northern America in Q4 after having grown in Q1, we again confirmed that we are growing in Q2 that business has positively contributed to the growth of the professional business in Q2. This was partially offset by the decline in Middle East and Turkey, which is due to difficult market condition, I think we had already talked about that in Q1. We've seen again an impact of that region on that business in Q2. The operating margin has improved driven by operational leverage on one hand and also procurement saving. So it's good to see that despite the difficult market condition, in Middle East that business has been able to improve top line and bottom line. A very interesting project that we did take during Q2. So we have to move to Dubai. The company's smart world has decided to build their HQ there. Under the approach of an intelligent building and that made the choice to use a feed citing power over Ethernet connected Office lighting combined with the Cisco digital silic framework. And in this specific, building will be able to offer the people working there, enhanced working condition, as well as more productivity. Home to finish our 4th business, has first shown a very strong comparable sales growth of 14.3 percent. And, I would say to start with that both consumer luminaries as well as home systems are growing in Q2 2016. That growth has translated to the bottom line because we've seen here again an improvement of our bottom line, although it is still negative, we've seen improvement from minus 16.4% in Q2 2015 to minus 7.9% in Q2 this year. In this business, we have also taken in Q2 important steps towards rationalizing our footprint. So we've closed the factory that we had in This is what I wanted to tell you regarding not only the business at large, but also our individual business groups. What I propose now is that we go into more details about our financial performance. And for this, I have Ronet with me who will guide you through some financial information. Thank you very much, Eric. I'm trying to give you a little bit of flavor of things on the financial side, which we are very important. So some of our key KPIs and where we manage the business if we look at profitability, we focus 1st and foremost on adjusted EBITDA. And you can see here that our on an absolute value, our EBITDA went up from 139 to 161 And you see here also the individual components affecting that. Volume, has a positive impact of 33,000,000 across 3 of our businesses, particularly that profit and home. But of course, you can anticipate that the lands declining rapidly has a negative impact in this context. If you then look at price, we are confronted always with price erosion but this was particularly important for the BG Net, which basically accounts for more than half of that price erosion with price erosion in the other business groups, quite modest and in line with historical trends. We always try to compensate these price erosions with gains on the cost of goods sold, and you see that we do that 108 compared to 113. And this is a combination of very strong procurement savings and productivity across the board applicable for all the business groups. Again, most of the gains in an absolute sense are for the BG lead. Also, they are compensating the price erosion in that BG. Compared to last year, we didn't pay a brand license fee, and that has an impact of 10,000,000 And you see that we compensate that by savings elsewhere, a touch more 11,000,000. Last element, which explains the decline or a little bit of a decline is an impact of currency minus 0.5 percent point. Let me then zoom in on something else, which we find very important. That's our indirect cost. Or sometimes we call them also and then see nonmanufacturing cost. As SG and A and R and D together. If you look at the amount we spent on that in second quarter of 2015, it was $575,000,000. We now have an amount of 5.55 that decline in an absolute number is explainable by the impact of currencies, so $20,000,000, down. And then you see the impact of 2 things bringing it back to 5 55,000,000. That's a 1,000,000 extra Brent license costs, which were not applicable in 2015, compensated by, on a like for like basis, savings on other items. If I then go to working capital, also here you see, working capital historically has always a little bit volatile over the year. We see that we have always a low working capital and low inventories at the end of the year that builds up and then goes down again. But we have made quite a lot of progress. And let me first look at inventories in limiting that increase. And of course, we have to increase because we are slowly preparing for a high season in September, October November, but we see that the inventories are significantly lower than last year, 250 basis points, but also, the increase is the pattern is more stable. If I then go to the left hand side of this, graph, you see that that's also applicable to working capital which now makes up 12.2 percent of sales, and that was 15% of sales in 2015. Also here, a more stable Patrick, let me hasten to add that didn't impact our supply performance, also our supply performance is at very high levels and higher than last year. If I then compare the cash flow of second quarter of 2016 with the 1 in 2000. 5th, with the first quarter, you see that we make a big improvement here. Cash flow, free cash flow is 1,000,000. And you see, and I explained already, that's the impact of the lower cash outflow from working capital provisions and also our net CapEx is very well controlled. With the new finding structure, we have a higher interest payments in the second quarter, and we have higher taxes, but still relatively low because we benefit from, yes, tax credits we have also related in a number of countries where we took some restructuring Another important point is, is that we have separation costs, $15,000,000, a payout. And of course, they were there already in 2015, but in 2015, they were reported under Royal Phillips and not under lighting. I also hasten to add and you're all aware of that, but it's a big amount in the first quarter of 2015. We paid out $45,000,000 to derisk our EUS pension situation. And the last thing I want to point out is that our net debt at the end of Q2 is 795. So we have been quite good in generating good cash flow where do we see our currency exposure? You see that where our sales are on the left hand side, 29% denominated in euros, 26% in euros, Chinese currency, 7% and then a large back bucket of all kinds of currencies. And you see that then the impact on sales overall is minus 4.6% on the adjusted EBITDA, I already pointed it out earlier in the slide $70,000,000, which reflects 0.5%. It's not new. We have not changed our hedging policy, but you see we catch 100% of committed foreign exchange transactions and also we anticipated transactions we cover in buckets depending on how far out they are. I think that concludes my contribution to this presentation. Okay. Operator, I would like to ask you to open the lines for the Q and A. Thank you, sir. Your questions will be answered in the order that they are received. Just a moment please for the first question. Our first question today is from Mr. Svenwei, UBS. Go ahead please, sir. Your line is open. Yes, good morning. Thanks for taking my questions. A couple of questions, please. The first one is on your U. S. Professional lighting performance, if I understood you correctly, your sales momentum did also improve there sequentially. If you could just give us an update here, on the project inquiries that you see and also the measures that you have obviously taken over the last years how they pay off specifically. Now the second question is on the LED growth rate. You pointed to the slowdown here a little bit in Q2. Now the comps are getting a bit tougher also in the second half. Are you foreseeing any special promotions here to ramp that growth rate up again or what's the kind of guidance for the second half? And then just to housekeeping questions, I was wondering the interest line, should it stay like that as in Q2? And currency impact if the rates stay as they are, will it be similar also in Q3 and Q4? Thank you very much. Thank you very much for your questions. So let me start with a U. S. Professional. So it is a good thing that after all the fixing is that we had to do over the past years, we now confirmed that we are in the mode where we are going back to growth. So we are not anymore in a situation where we need to turn around the business, but we need to rip on what we have shown. And this is what was again confirmed in Q2, where we've grown and that business, in Northern America is profitable in Q2. So the amount of actions that we deploy on that market, we're looking at different aspects delivering our customer on the end to end chain in time simplifying the portfolio and making sure that our sales force as well as our agents, we're coping and we're learning the new catalog to be able to be efficient in place in that market as well as in all the other ones, Salesforce that are dedicated to end users and we'll see also the funnel of projects in Northern America and the Americas in general growing quarter by quarter. On the LED growth rate, we have many different actions ongoing to be able to grow further. And let me start to tell you that we see in the coming quarters growth, which is going to be slightly higher than what we have experienced in Q2. So how do we grow that business? It's not only about in a making promotion, but it's also bringing to the market new offers that are innovating. And I was giving the information of, you know, editing or pro. So we've done it for we've done this for, compact fluorescent plants, but we've also done a similar exercise launching on the get also new products that are going to replace halogen lamps in the hospitality segments. So we need to make sure that our innovation machine brings to the market on a regular basis, month a month offers that are going to be game changers in their environments. So this is the way we have grown successfully the LED business so far. And as you can see, a lot of people talk about commoditization, but it's not commoditizing. We continue to grow And we grow profitably because we have also a quite healthy increase in the profitability for that business in Q2. We have highlighted and I will finish with this. That there was a slower uptake for LED lamps in Americas in Q2. This is true. We have also to understand that for that business, we are comparing ourselves to a very to a high Q2 2015 because we launched new offers and promotions in that same region at that point in time. But we see us improving in the coming quarters once again. Maybe for the other questions, I will ask Renee to answer. Yes, thank you very much about the question about the interest expenses in the second quarter. Of course, there are a number components in that. Some of those components will continue to affect our results throughout the year. I have to think about for the pensions that will not match change in the next quarters, but there is one specific element, which I want to point out, which affected our Q2 results We in the whole separation, we had temporarily, some loans from Royal Phillips So we also had to pay on those loans interest. On the other side, there were loans from us to Royal Phillips But the currency mix was not favorable for us. We bought particularly in high interest currencies, and going forward, that will no longer be, applicable. So that will go down. The second element of foreign exchange, we give now a We have no further guidance on how a foreign exchange will develop at this moment in time. I will ask you, Arun, Landers, to later on, gives you a little bit more guidance. I can only tell you what that impact was in, in the second quarter. Are we will come back with what the impact will be on the basis that interest rate will stay the same, which is never the case, of course. Thank you very much. Well, thank you for your question. The following question is from Mr. Peter Olsen. From Kepler Cheuvreux. Go ahead, please, sir. Your line is open. Good morning, gentlemen. A couple of questions. First on capital allocation, Could you talk about M and A? We haven't seen much in terms of M and A in recent years. But as you are no longer fully owned by by Phillips, might that change? And and if so, what will will be your priorities in terms of segments or regions. And then on some of the segment developments, starting with, with Lambs, looking at the adjusted EBITA margin development during 2015, the margins were lower in the second half than in the first half. Is that normal seasonality? And should we see something similar And then for the home business, it seems that the sales growth accelerated a lot in Q4 last year. Could you explain why that was? And looking at the upcoming Q4 So clearly, the the the the comps will be more difficult. Should we look for a slowdown by Q4 this year. And then my final question relates to procurement The cost of goods sold was down something like 113,000,000 in Q2. How sustainable is that, should we look for 100,000,000 plus in in in savings also in in coming quarters? Thank you. Thanks for your question, Teta. Let me start with the capital allocation and our M and A strategy. So we've been saying very clearly that the main part of our story is an organic story. But we also, with the cash that we're generating, looking at some acquisition in some very specific fields. And we are very precise that it needs to be totally in line with our strategic intent. And our objective is to continue focusing on the lighting business also through our acquisition strategy. We see 3 potential avenues for future acquisition. So one avenue could be the acquisition of Luminaire company that would come, you know, for consolidation on the market, as the market leader, we would probably look at it. Or we would also look at, acquisition of technological bricks for systems and also capabilities and platform for services, totally in line with our strategy, which is to move from products to products connected lighting systems and services. In all cases, we are anticipating that these acquisitions would be, bolt on and from a small to medium size. So this is you know, what we have said all along and we confirm it. On your second question about the conventional business, And the margin, that was lower in the second half than in the first half, the years do not always look the same. So we are starting off a very good start in the 1st 6 months of the year. At the level of operating margin, which is what we had guided for. We said that we would be maintaining that level. So we are not confirming that this level of 20% will be maintained over the coming quarters. But what we can say is that compared to our historical level we will be at least on par, if not better. When it comes to home, there is a seasonal pattern in the home business. Q4 has been historically a high quarter for the consumer business because you have a few, evens during that quarter, Christmas being one of them where consumers would spend more than what they spend in average for the previous quarters. So we can expect again, to have a Q4, which will be higher in 2016 than the previous quarters. So it's true that there is a strong base of comparison, but it is also true that quarter that the fourth quarter is a high quarter. We experienced the growth in the home business that we had guided for at the time that we had anticipated. I think it's a strong growth, which is, once again, not only consumer luminaries, it's also home systems. And, we believe that going to be able to keep that trend line. Maybe, from my side to comment a little bit on procurement. If you go back, we have, really in the last periods have a strong record of procurement savings. There is no reason to believe that will go down very quickly. We have visibility going forward. The trend is strong. That will continue. For the short term. Of course, we don't know how that will develop further out, but for the foreseeable future, direct foreseeable future, that trend will continue strong. Okay. That's helpful. Maybe one final question. On the LED segment, could could you talk about the the the pricing trend for LED bills as well as the the pricing trend for LED chips, and whether the the differences between these two, how that affects the gross margin development? Well, Peter, on the LED, chiefs, I will not really comment because that's not our business. On the on the LED bolt. So we see, again, in Q2, a price erosion. That we have, to, fight at 2 different levels. So first, by making procurement saving. And Ronne has just talked about it. We've seen that that performance has been strong because we have more that offset the price erosion with the productivity savings that we have done on the bill of material. And also by launching to the market, you know, new offers, as I was describing before, that are a game changer and that have the fast mover advantage. Now if I look at that business now in, in fact, your terms, these profitability, the operating margin is improving in Q2 and to above 8% with a 15% growth. So from a dynamic standpoint, if we confirm that we own the same trend line as what we have described, in the previous quarters for that business. But there is still a price erosion in LED lands business that we are and fighting with new offers, giving us a game changer advantage and a strong productivity on bill of material. Okay, thank you. Thank you, Peter. Next question, operator. Our following question is from Mr. David Foss of Barclays Capital. Go ahead, please. Your line is open. Good morning, gentlemen. A couple of questions from my side, please. First of all, if we look at the cash flow, could you give us a rough indication of what division is or how that splits up by division? And secondly, if we look at your professional business, clearly, it much improving in terms of both, sorry, margins and growth, but the growth still lacks your main competitor acuity in the U. S. By quite something, I would have guessed from the numbers you've printed. Could you comment on that development and how particularly how quickly you you would think you can catch up with, with acuity, which I I believe is your should be your ambition? And then finally, on the license income, you have a fairly substantial a suite of licensees, some 600, if I'm not mistaken. Could you just shed a bit of light off just how much revenue you generate through that part of your business, please. Thank you very much. Thank you for your question. Let me comment you first on the cash flow, payer business. We provide only cash flow numbers for the whole of Phillips Lighting. The only thing I can say on the individual businesses that, most of most or nearly all of our business contribute to cash flow. And mainly, a complementary element that is important to understand. Of course, we have a conventional business, which is profitable and cash generative, but the cash which is generated by that business in absolute value since that business is declining is also reducing. And as our cash flow is well positioned, so you understand that the other businesses are also not contributing positively to the love of cash flow that we have in absolute value coming from the conventional business to position us at, in a good position in Q2. So what we're losing from the international business is compensated by the other businesses. You've asked the question, David, on the business. So, yes, the growth today is 3.8%. We have stated that, it is having a favorable impact from the growth we have in Northern America but we also have to take into account that we are being at this point in time. It's again in Q2 the case as it was in Q1 impacted by the difficult market conditions that we are experiencing at this point in time in the Middle East and Turkey region. And this is impacting us not only at the bottom line level, but also at the top line level. So we are in that business having a high penetration of the LNDs products as well as connected lighting systems and services, which are growing strong double digit. So, our objective is to continue performing, improving and driving the growth of that business worldwide. Income is concerned, the numbers that we are getting from the licensing program that we have been putting in place are affected by business. So they are fully integrated in the performances by business that we are reporting, but we are not David, at this point in time, giving a very specific disclosure on that amount. Okay. Thank you very much. Just following up on the professional question then, could you remind us, just how that business splits up in terms of geography so we can, you know, perhaps better picture that, that Middle East dynamic there? So we let's say that America is substantial part of the business, but probably that's the split that we have is fairly consistent with the overall split we have for the lighting businesses in general across geographies. Middle East is quite material. We did an acquisition a few years ago. Increase our participation to that market. So we've grown substantially there. It's one of the relevant markets for the professional business. Okay. And then if I may, one more on the cash flow. I understand your comments around the relative decline of the cash contribution from the Lambs business and then being offset by the rest of the divisions, but would it be would it be correct to assume at this point in time that, you know, the the FCF split roughly follows the, the contribution of of profit, or is that, is that the wrong way to think about it? Profit is an important element of cash flow. And I think that's the kind of detail, we provide Okay. Thank you very much. Thank you. The following question is from Ms. Daniella Costa of Goldman Sachs. Go ahead please. Your line is open. Thanks for taking my question. Good morning. So I have three questions as well. The first 2 which are interrelated, but One you mentioned in the statement that you have you're confident that you will see sort of turn around in growth somewhere during the year. Can you comment basically by by by business days where you're more confident in in that turnaround, basically, what drives that statement? And related to that, what are sort of what have you been seeing in terms of market share or any areas where you're particularly gaining market share that or recovering market share? And then the final thing, just on the pensions, do you foresee any sort of further top ups being needed at some point. Thank you. Thank you. When it comes to growth, so the growth of unit sizing is the combination of the decline of conventional and the growth of the LED based activities. So in a nutshell, in Q2, conventional declining by around 17% and the LED based activities going by 25%. That still, after its combined, brings a negative growth of minus 1.5%. What we're looking at is the growth in the 1st 6 months of the year compared to last year So in the 1st 6 months of the year, we have declined by minus 1.4%. When we declined for the full year 2015 by -3.5. So what we see is when the proportion of the conventional business in our overall portfolio is declining, our growth profile is also improving. This is why we have said and we have confirmed that we see, given that mechanism that's finished lighting as a whole, will go back to growth in the course of 2016. When it comes to market share, we cannot really comment on the market share in Q2 because we don't have the elements, but I can give you directionally an indication of what we saw in Q1 and not to enter in too many details, but we saw in Q1 an improvement of our market share on the conventional side of the business and a market share that was stable on the LED part of the business. Maybe then a response on your question on pensions. We have done a major de risking exercise in the first quarter. Where we paid out 1,000,000. That is important for the U. S. Situation. But we don't anticipate another derisking exercise. So we stick with the other guidance as before. If at all, I would anticipate a somewhat lower outflow for pension costs. Operator, please the next one. The following question is from Mr. Ben Oglo from Morgan Stanley. Go ahead please, sir. Oh, good morning. Thanks for taking the question. I I had a couple. First of all, on the price figure, that you give in your margin bridge, the 108,000,000, roughly 6% of sales. Can you give us a frame of reference? Can you give us an idea of how how that pricing number trended over the last year or so. What what what I'm interested to know is is that Gary, is is that normal, or is it is it higher or lower than what we've seen in the in the recent past? Yeah. That was question number 1. Question number 2, I don't know if it's related. When I look at the Americas growth, it had put me the LED growth, it's come down from 29% in the 1st quarter to 16% in the 2nd quarter is that deceleration? Can can you give me a sense of how much of that is simply volume or whether there is a a deterioration? Is this related to price as well, particularly in the Americas. So that was question number 2. Question number 3 is just on the free cash flow. I think we're all struggling to to figure out, what free cash flow may be this year. I don't know if you're able to give any any kind of guidance, if if not giving specific guidance on free cash flow, can you talk about working capital you've had an 80,000,000 working capital outflow in the first half. Should we expect with normal seasonality does that fully reverse in the second half? Yeah. Let me first ask, Compeka on the pricing. If you look at price erosion, the trends in price erosion are also relatively stable over time doesn't necessarily mean that every quarter is exactly the same. It goes per a little bit up and a little bit down, but it's roughly in the same bandwidth So very limited, for lamps, a little bit higher for profit and, of course, also the trends in LED seem to be relatively stable. So there is not a major fluctuation in this context. Okay. So this sort of 6% level is is this sort of normal level that we could think about each quarter roughly? I think it's affected, of course, by the mix. Okay. Yep. On, on free cash flow, we give no explicit guidance for, the remainder of the year. I would like, however, to make some comments, which I've said before, you have to appreciate that particularly, in the early bits, we see some volatility in working capital and provisions as well because of the separation going forward, we will manage our working capital well, and I highlighted how we do that and particularly on inventories. With the breakup and particularly, the fact that our 2015 numbers are an addition of basically what lighting was in the past and a share of the IgA need cost the payables position, is still something which also shows some volatility. And we have guided that over medium term, we will have a improvement, of our working capital very steadily but very limited. Can I just follow-up on on that question specifically? I mean, really, I think it correct me if I'm wrong, but at the time of the the IPO, I think the expectation was that working capital could be slightly positive, nothing significant, even in the current year, we've had an 80,000,000 outflow in the first half. Are you saying that we may not be able to be positive on working capital over the course of 2016? I I I think I have to repeat what I I said. We didn't don't give short term guidance on cash flow in 2016 from the days of working capital. Okay. And then on the other question on LED growth? Yes. I'm coming to that one, Ben. So first, let me rephrase the question. You said 28 to 15 for Americas. The 28.8 percent to 15% growth in Q1 and Q2, respectively, for the overall. LED business. And what we have seen is that in the 15% number for Q2, we see a robust growth in all geographies except, Americas where we have seen a slower uptake in Q2. Also linked to the fact that the Q2 2015 for that specific geography was a high quarter because we launched an offer at that time, which had a lot of traction on the market. Now we're working to go back to higher level of growth in the coming quarters in that business. There's a dual contribution of pricing because we still see price erosion on that business worldwide. And I would say not more the Americas than in the rest of the world and probably even a bit less in Northern America than the average. And of course, you have another very important component, which is the volume, illustrating the overall growth double digit growth of 15% of that business Next question Mr. Phillips Scolter of Kempen And Co. Go ahead please. The first question is around your net debt level. In the prospect, as you said, you were going to be floated with a net debt of about SEK 950,000,000. You now come out as SEK 800,000,000. Can you help us explain how you actually get to that much better number. And the second question is on the UK, are you able to share with us your total exposure to the UK in terms of sales? And the third question is actually, I'm interested in your progress on, let's call it, your separation costs, but actually more the underlying process setting up your own IT system. Can you update us a little bit on where you are when you expect to finalize that and how you maybe look at the operational risks potentially associated with that? Shall I first answer the question on net debt? You know that we IPOed at the end of of May. And at the end of May, all the transactions with the mother company, Royal Phillips, were such we're moving all the bits that at that moment in time, we had a net debt of 9.50 The conclusion then, of course, is that if you go to, the end of June where we are a little bit below, 700, sorry, 800 that in that period, we generated cash to bridge that. On your question, Philip, regarding the Brexit and our exposure in the UK, now we are not giving specific and detailed figures about our exposure by geography. What I can say is that we don't see after the Brexit, a direct impact on our business at this point in time, as team of lip slicing, we are adapting to whatever macroeconomic situation we find in front of us. And I can tell you that we've been in UK for many, many years. And we are very committed to continue to support not only the businesses that we have in the UK, but also our customers there. On the IT system, since February 1, we have our own IT system. And I would say that already, from February 1st, we are, you know, working with our IT systems as a stand alone company. There were a few, temporary service level agreements between real Phillips and us because we could not move all the applications, day 1 and, all these application and all these TSLs will be closed in February 2017. And we are closing them as we speak at the expected speed. If not, even faster than what we had anticipated. So that's happening as we speak and it has been it has been very positive outcomes. So at this point in time, we already have our IT system. So we don't anticipate any issue, any operational issue because we are already operating on our platform. We just need to finalize a few satellites application that are still being shared with where it finished. And as I've said, we're going to be totally on our own in February 2017. I would like to add that we're making a lot of progress on the front of the IT system by simplifying the modules and the applications that we are using because on top of the operational objective that we can expect from the IT systems, we know also that we have a fantastic opportunity to reduce our cost of IT moving forward and starting in 2016. Right. Can I briefly follow-up on that? Because how does that compare to your previous guidance of the 1000000 to 1000000 in separation costs, especially related to IT system. It sounds like you're actually already almost done with that, while the level of costs has actually been quite moderate. We repeat our guidance for separation costs for the year of about 60. And we guided that also for the third quarter, So you will see that a lot of the things and the cost impacts will take place in Q3 and Q4 that relates particularly not on applications but on, yeah, how do you say separated, where the systems are running on. Serve. But we confirm basically our separation level indicated before for the year. Okay, operator may I ask you for the next question? For questions or remarks. Our next question is from Mr. Martin Wilkie of Citi. Go ahead please. Your line is open. Yeah, good morning. It's Martin from Citi. Just coming back to the North American market and particularly in professional, we can see the organic growth for the division as a whole. I'm and you and it sounds from your comments that, North America was better than the, the 3.8 for the, division overall. If I look at some of your competitors in North America and some third party sources, essentially all the data suggesting the market is growing at probably a high single digit rate. I wonder if you could just say whether or not you you agree with that or not. And and do you think that the period of losing market share, which I think continued really into last year. Is that now done? Do you think you've you've sort of stabilized at those levels, or are you even beginning to take back some of that share that you've lost over the past 5 or 6 years? Thank you. Yes, Martin. On the Northern American market, what we see we see the non residential construction still being, dynamic, probably not at the levels that we've experienced. In the past years, but still quite dynamic. And we believe that we are benefiting, and we will continue to benefit from that market dynamics. In terms of market share, we see us taking back market share in some specific parts of the market. And I would give you one specific element because we've studied that in-depth in we did that in the outdoor part of the business, we are taking back some market share. So we are growing. We are profitably in Q2 for the Northern American Professional business, and we start to see some pockets of end user markets where we are gaining back some share. And when we think about the the cost of doing that and and the margin, the potential in North America. Obviously, one of the fears that people might have about regaining market share is that you have to do that through price or you have to ratchet up r and d substantially to to drive new product development. If you just talk a little bit about how you see the ability of the North American business moving. I mean, kind of, essentially, it expand as you're going through this rebuild of your market share. Yes, that's a very important point. What we're seeing at this point in time is that, while we go back to to growth. Our gross margin, hence, our profitability is also moving in the right direction. So there are a lot of things that we've done to adjust our P and L and our costs, the reality of the market. And now that we are growing, we have a direct leverage of the growth on the bottom line. But I tell you it's positive. We know where we're going. We know how we're positioning our offer and we can extract gross margin, enhanced operating margin. Okay. Thank you. Thank you. You. Our next question is from Mr. Peter Riley of Jefferies International Limited. Go ahead, sir. Your line is open. Good morning. I'm just trying to understand the trends better at the Professional business. In the first quarter, you had a million profit from selling receivables back to your partner in GLC. Can you tell me, was that 1,000,000 was that profit booked inside at your adjusted EBIT. It looks like there's another 1,000,000 in the second quarter. And in the previous year, did you actually take a charge for writing off those receivables just want to understand the year on year trend. Let me just think about it. I'm seeing that I think it was in adjusted. Yeah. Because that was clearly a one off benefit just by selling some sort of benefits. So professional profits in the first half of the year were actually lower than the previous year if you back out the, the gain from selling the receivables? And did you actually have a profit or did you take a chance of selling the receivables in 2014? So was it a million swing sort of a 12 positive in the first half? And then a 12 negative in the other first half of last year? No. Our next question is from Mr. Nigel Van Putten of ING. Go ahead please sir. Hey, morning. I have a follow-up on the growth mechanism for the second half of the year. You're saying, as always, that as the conventional lamps shrink, the growth for the group should improve, and I understand that and the mechanics behind it, only if I sort of assume a sort of stable top line trend for the BG Lamps division. So I guess my question is does it imply that you're not seeing acceleration of the conventional lamps decline in the second half of the year versus the first half? Well, it's the mechanism requires 2 things. That we decline in the conventional, but that we also grow in the LED based activities. As we've grown in Q2 by 25%. So this is the combination of those 2 mechanisms, that should normally lead us to a positive growth in the course of 2016. So we need to look at those 2 elements, not only the decline of conventional, Now are we anticipating a higher decline in the second half for conventional? We've always said that we believe that the rate of decline of conventional should be between 15% to 20% for for the year. So let's see what it leads us. But in any case, we've shown that we have the means to adapt the company to make sure that that goes in the right direction, whatever the decline is. All right. Thanks. And then one follow-up on indeed the BG LED growth. Would it be fair to assume that, the electronics growth versus the lamps was a bit more positive, more in line with the LED Luminaire? Growth trend or is, or is that not the case? Well, given the slower uptake that we had in, Americas in Q2 in LED lamps, probably what you think is right for Q2, but it would not be right in general. Okay. Thanks. Next question is from Mr. Alok Katra of Societe Generale. Go ahead please. Your line is open. Hi, thanks for taking my questions. I have one on the bad debts side. I'm looking at your release, it suggests that you actually had a write off of bad debts in Middle East and Turkey in the second quarter of this year. So I just wanted to clarify whether there was a write down, meaning write off of receivables this quarter and just in the context of the GBP 12,000,000 was referred to by Peter Riley earlier. So we can just confirm that. And then the follow-up, just on in terms in terms of the growth side of things. On if I look at if you look at your broad picture, well, traditional lamps sales decline accelerated, primarily the lamp sales growth has slowed. And I know there's there's this, comparable effect and so on. But clearly, is this something that we should also then expect in the second half of this year in terms of the muted growth just because the comparables there are, quite, quite strong. Just just LED versus conventional at the group level as well? And then how does that tie in with the expectation for return to positive growth sometime in 2016? Let me answer you'll be about the provision for bad debt. There is no relationship with the 12,000,000. I think that's something totally different. We provided for bad debt in the first quarter and we provided for bad debt in the second quarter. Could you give us the magnitude roughly, on the bad debts? We don't give ex asset numbers per a couple of millions. Okay. And not 2. Sorry. Let's say a couple of 1,000,000 write down of bad debts in 1st and second quarter. And that was offset by, let's say, 12,000,000, right back our collection on those bad debt that you had, seen. So we're talking essentially The 12,000,000 was nothing to do with debt. The 12,000,000 was by the sale of some of our stock. And then just on the growth? Yes, the growth. So let me comment that when we look at at the growth, I like also to look at it on a 6 month basis. So when we look at conventional lamps, we declined probably a bit less than what's expected in Q1, it was minus 14.5%. We are on minus 17%, which is in line with what expect for that business. But let's look at the average of the decline of that business in the past 6 months, that's probably a better proxy. Looking at what happens quarter after quarter. And you can see on the slide that we've shown also that the pattern in terms of decline is not regular. When it comes to LED, I believe that we have to aim at seeing in the coming quarters growth rates slightly above 20%, due also to the fact that we are now starting from a much bigger base. So this is a business which is, in already sizable and which is increasing double digits. So we see also the overall growth in percentage coming down when we build up the strongest size for that business. Mean that the let's say the growth rate that you're seeing just now should fade a bit more in the second the year. So I'm just trying to square that with the expectation that, you will see positive growth rates at some point in 2015, perhaps more in the back half. Yes. If you take back the numbers that we have shown for the global of lighting, we see that our growth, that is improving with time. So if I take Q1 2015 and Q2 2015, we were around minus 4. Q3 2015 and Q4 2015 we were around 3. And Q1 2016, Q2 2016, we are around minus 1.4 So we see that improvement happening gradually. So we need now to see what is going to happen in the second half of the year, but we are forecasting another improvement This is what strengthened our confidence that we have the potential to go back to growth in the course of this year. Okay, thanks. Thank you. Our next question is from Mr. Mark Hasselink, ABN AMRO. Go ahead, please. Your line is open. Yes, thank you. There are actually two items where I think you're running well ahead on your IPO guidance. That's the gross margin. And the margin in conventional lamps. Can you talk about if that's indeed also ahead of your own expectations? What you expect on both of them going forward. Yes. Thank you very much. If you see, and I think we have said that before, of course, in lands, we know that the decline, the structural decline is coming. So we have prepared ourselves, for that decline. And because we have taken the preventive actions we benefit in lands from, basically our ability to take our style early and to keep on driving procurement savings, and of, productivity gains. Another important element of course is that particularly the decline is not even across the board. It tends to be a little bit steeper, in consumer and a little bit less steep in on the professional side, particularly on the professional side, We hold better market position. And in general, the margins are accretive compared to the rest although I hasten to add if you make 20 percent profitability on an adjusted basis, every way you slice and dice the business in labs, it's these are good profitability numbers. Okay. Thanks. Sorry. We couldn't hear you entirely. Yeah. So in the, in the gross margins for the group, I think there are a lot of moving parts there, like, is LED in, in, in professional performance being higher margin conventional and the other way around for the lens business. Yes. In general, of course, if you want to comment on the gross margin in LEDs, Of course, they're also stronger because we benefit that there is price erosion in that area, but we benefit from procurement savings, which are steeper. And leveraging the size of the business. Okay, clear. A very follow-up on the, on the left market on earlier questions. So you explained that, you expect to have stable market shares, also price erosion relatively similar than we have seen before. So then there is more limited growth in the LED volumes in general for the market. Can you give an explanation of what are you seeing, why that is the case? Sorry, can you rephrase the second part of your question? Yes. So you have the LNG markets, you're explaining that, you expect to have stable market share. You see that you say that price erosion is stable over the last few quarters, but still we see now the growth rates on my organic level coming down. Is that what's the main reason for the volume decline of the less volume growth in the market or did the market grow being less than it was before? Just maybe to Greg, I didn't say that we expected a stable market share. I said that we have seen that our market share was was stable in Q1. Then the dynamic of that market is linked to the replacement of conventional by LED lamps and also by, you know, the innovation that we are launching on the market in terms of LED lamps and have given some examples that are providing a very energy efficient replacement to conventional lamps. So all that is driving the LEDs business. Of course, there is price erosion. What we have said as far as price erosion is concerned is price erosion is directly linked to a cost improvement potential. And as you have seen, we are able to more than offset price erosion with the productivity we do on the bill of material. So you have a direct link between what the technology enables in terms of cost saving versus the price erosion as we are the leader on that business the world and we have more volume than others, we believe that we are faster than other to capture those cost and potential, which help us to have a position and a price position on the market that helps us to lead and to continue generating profits. So there's still a strong dynamic when it comes to the LED based activities. I was just mentioning previously that since our business is also growing in terms of size and adds that the market is more penetrated by LEDs. Probably that the growth rate is coming down slightly, but it's still double digit. Okay, that's clear. Thanks. Thank you. The next question is from Mr. David Flatman, KBC Securities Mr. Flagman, you can ask one question and one follow-up question. David Wegmann from KBC Securities. So one question on the gross margin. Could you very roughly indicate a split up the gross margin improvement on a divisional basis and a stated update between procurement versus efficiencyproductivity. And then a follow-up question on the Professional Luminor. If you could indicate what kind of of target you have in terms of profitability for the U. S. And whether it comes, it should come from sales or cost savings? On on on gross margin, we give an overall number and we give profitability per business. We don't provide, gross margins per business. I'm afraid, so I can't answer that first question of course. And between procurement and the gross margin improvement, whether it comes from more from procurement than say things done efficiency productivity or? Yes, I can give you a little bit of guidance there. Of course, procurement is a major factor. But also in our older areas in just sheer productivity, we also improve. So we improve in all areas. Okay. It's not more one than the other? I think procurement is a a strong pillar. Okay. Thanks. Your second question about professional luminance, when I look at the U S, today the objective is growth. And by growing, we see all the different elements of the P and L improving accordingly. So of course, we have an objective in terms of profitability on that market. But our main objective is to grow quarter after quarter and we see the whole P and L benefiting from the growth. Next question is from Mr. Akash Gupta of JPMorgan. Mr. Gupta, one question and one follow-up question. Go ahead. Your line is open. Yeah. Hi, good morning. I just have only one question. And that is on, if you look at 2016, then it is finally year of 4 Royal Phillips 3 year plan where I believe various layers of management incentive wise to deliver on the margin target. Now coming back to lighting, can you please talk about, from your side, how much of the margin improvement that you have seen in second quarter is coming from the measures that they have that you have taken as part of that career plan. And, also, if you can talk about how, your involvement in career plan, like, is the management management below, and I would say tier 2tier3management if they are incentivized as part of this 3 year plan? Thank you. So we have seen a margin improvement. And as we've said it previously, this is our 7th consecutive quarter of year on year operating margin improvement. So yes, it's part of the longer term or the strategic plan that we're doing every year that we were doing every year and it's in flatting and that we're going to continue doing in Phillips slanting moving forward. So we have a 3 year plan. And then we have yearly, objectives, and we manage that as I guess many other companies are doing it. So I could not say that specifically the margin improvement is coming from 3 year plan. The margin improvement is coming from the objective that we set to each other, of course, on a 3 year basis, but also on an annual basis, depending on how we see the evolution of the environment. But as far as philippe's lighting is concerned, we have during the IPO process given an indication and an outlook on the midterm So we have now to build at the level of infighting, a long term incentive plan, which will take into account some of these objectives that we have in the medium term to be able to incentivize, you know, management on the achievement of these objectives. And that will happen, you know, probably at the beginning of 2017, where we will define long term incentive plan for digitizing. Our final question is from Mr. Piefer Olsen of Kepler Cheuvreux. Mr. Olsen, one question and one follow-up question. Your line is open. Go ahead. One question, actually. Could you shed some light on the revenue trends in China? I think it was down quite significantly in 2015, but what are you seeing in 2016? We have improved greatly in China. China is also a country where you see a clear difference between the conventional part of the business, which is declining and probably declining above average and a very dynamic LED and connected lighting and services business, which is also growing. So you would see in China a very similar pattern than what you see worldwide in terms of growth dynamic. But if we talk about what happened after 14 and during 2015, I think we are now moving and we are over. We've made the changes that needed to be changed in China. And we are back in a normalized situation with dynamic growth on the LED connected and lighting systems and services. Thank you. Thank you. Okay. Operator and people also on the call. I would like to thank you a lot for your interesting questions. And if you have any follow-up questions, please don't hesitate to contact me happy to answer your questions. Thank you a lot. Ladies and gentlemen, this concludes the Philips lighting 2nd quarter 2016 analyst conference call. And webcast on July 22 2016. You may now disconnect your line. Have a nice day.