[Foreign language]
Good afternoon, ladies and gentlemen. As you see, we've just closed the doors, which means we're now ready to make a start on our annual general meeting of shareholders. Before I declare the meeting open, I would just like to sort a couple of practicalities out. Firstly, of course, a very warm welcome to this, our first annual general meeting of Philips Lighting shareholders. Today's meeting will take place in Dutch, and you can hear an interpretation in English using your headset. In order to make sure things run smoothly, it was possible to answer questions in advance, and as far as possible, we will address questions raised in advance when dealing with the relevant agenda item.
If you wish to speak, could I please ask you to go to one of the microphones dotted around the room. Please do give us your name and say who you are representing, if anyone. Please do keep your interventions short and pithy. You may speak Dutch or English as you wish. When questions are asked in the room in the course of the meeting, we will do our best, of course, to give a satisfactory answer. It may sometimes be possible, of course, that we aren't always able to put our hands on all the information we need in order to answer your question satisfactorily there and then. If this arises, we will note this and add any additional information in the minutes of the meeting or else get back to you in some other way.
In order to make sure that things run smoothly, I may need to restrict speaking time or the number of questions asked. You can follow today's meeting live on the internet using an audio webcast. There is also an audio recording being made for minuting purposes. May I ask you, please, to make sure your telephone is on silent. Please do not make any photographs, recordings, or films. I'll come back to the voting process in due course when we come on to actually cast our votes. I now therefore declare today's general meeting of Philips Lighting N.V. shareholders open. I'd now like to introduce the members of the Board of Management. Eric Rondolat, our CEO, on my right. René van Schooten behind me. Next to him, the CFO of Philips Lighting, Stéphane Rougeot, who is on the agenda today for consideration as for nomination of Board of Management.
Other members of the Supervisory Board, Frans van Houten, Rita Leene, and behind me, Kees van Lede and Abhijit Bhattacharya, also with us today. To the side of the room, we have today's meeting secretary, Jaap van den Berg, and the notary public, Maarten van Alphen from De Brauw. Oscar Jonker is here representing our external auditor, Ernst & Young. Well, now it gives me great pleasure to invite the Chief Executive Officer, Eric Rondolat, to give us his presentation. Eric will be speaking English, and you can hear the interpretation in Dutch using the headsets if you wish. Eric, go ahead, please.
Ladies and gentlemen, welcome to the first Annual General Meeting of Philips Lighting. This meeting for us is another very important milestone since we successfully listed a year ago. When I look back, I am extremely proud of the dedication that our employees around the world have shown in 2016, continuing to transform Philips Lighting while delivering a solid performance in our first year as a standalone company. Let me give you a few details about our 2016 performance. First, we saw healthy increases in Net Promoter Scores from both our customers and our employees, which I will explain in detail later in that presentation. Despite difficult market condition, we continued our track record of performance improvement with a significant increase in profitability. Full-year operating profit margin increased by 180 basis points to 9.1%, as you can see on the slide.
Free cash flow was solid at EUR 418 million. Comparable sales, still negative, showed an improved trend compared to the year before. Our balance sheet is sound and looking forward will allow us to support the business as well as to consider value-generating bolt-on acquisitions. We are proposing today a dividend of EUR 1.10 at the higher end of our payout ratio. Let's now turn to the first quarter of 2017. We continue to increase our operational profitability and free cash flow compared to the first quarter last year. Our comparable sales growth improved in comparison to previous quarters, and this was driven by double-digit growth in our business groups, LED and Home, and a return to growth in Europe and the rest of the world, despite, once again, ongoing challenging conditions in some markets.
These results reinforce our confidence that Philips Lighting is well-positioned to achieve its medium-term goals, but also its 2017 outlook. Let me talk to you about the outlook for this year. We continue to expect further improvement in our operating profit margin by 50 to 100 basis points and a solid free cash flow. While we are cautious given global economic uncertainty, we do remain committed to our ambition to return to positive comparable sales growth in the course of the year. Let me now describe more broadly our competitive positioning. Philips Lighting has a unique position with an integrated offering, including LED electronics, lamps and luminaire, as well as lighting systems and services. We today employ 34,000 people worldwide in 70 countries. Innovation is at the very core of what we do, as we invest around 5% of our sales in R&D every year.
We are the global lighting leader. We are leading in conventional, LED and connected lighting, as well as we are, at this point in time, more than twice the size of our next competitor. Today, we contribute to shape the lighting industry, moving into the Internet of Things. Our market is transforming quite fast, as you may have heard, and it's an attractive market, currently worth more than EUR 65 billion, with an expected growth of 2% annually. It is, however, undergoing radical transformation, driven by three mega trends that are shown here. The first one is that the world needs more light, as populations move from rural to urban areas. Second, the world needs more energy-efficient lighting, as conventional technologies continue their rapid decline and are replaced by energy-efficient LED lighting.
Third, the world needs more digital light, as lighting is one of the leading carriers for connected objects in the Internet of Things, with a very high demand for connectivity. All of this is creating for us interesting opportunities. In order to capture these opportunities, we have been systematically, rigorously executing a clear strategy over the past three years. In 2016, we made substantial progress on our six priorities. Let me go through them briefly. Despite a planned market decline, our conventional product business continued to deliver an improved free cash flow of 12% of sales. Our total LED-based sales grew at an impressive rate of over 20%, to represent more than half of our sales in 2016. Once again, we introduced breakthrough innovations.
Our investments in cloud-based software platforms, Power over Ethernet fixtures, indoor positioning technology, and consumer-based personalized lighting systems have enabled us to grow our professional systems and service sales by 51% and maintain our leadership position in connected lighting. We also implemented structural measures that resulted in a 13% improvement of our service to customers. We also continued to optimize our industrial footprint and to simplify our ways of working to increase our speed and agility in support of operational excellence, reducing in doing so our cost by EUR 96 million in 2016. This performance, and I would say our performance in 2016, illustrated the benefit of our continued focus on innovation. We invested approximately 5% of our sales in R&D, generating the most extensive portfolio of patents with strong innovation capabilities in Europe, in North America, and also in Asia.
As you can see, we are leveraging our R&D capabilities and scale, not only to compete and lead, but also to shape the lighting industry. Let's move now to employee engagement, which is a very important dimension for all of us. Becoming standalone provided an incredible opportunity for us to define why we exist as a company through our purpose, but also defining which values we want to live for in the company. We have engaged employees from across the organization to define our values. I would say that at Philips Lighting, we put the customer first. We are always greater together by collaborating across teams to build on our strength and diversity towards our shared goals. We want to be a game changer by innovating to set ourselves apart and continue to lead the market.
We have a real passion for results by working smarter and faster to deliver excellence. I want also to mention that we have strongly reaffirmed that at Philips Lighting, all of us always act with integrity. In 2016, we are recording the strongest-ever evolution of our employee Net Promoter Score, with a level of participation above 75%. We strongly believe that we are on the right track to create a unique environment in which people enjoy working, learn, and also achieve together. Sustainability lies at the heart of our business. Through our dedicated program, Brighter Lives, Better World, we set very ambitious targets for sustainable revenues as well as operations. On the revenue side, 80% of our offers will be sustainable by 2020, while we will sell over two billion LED lamps in the period from 2015 to 2020.
On the operations side, we are committed to becoming carbon neutral by 2020, and further commitments would also include our work towards zero waste to landfill, a zero-injury workplace, and auditing and training all of our risk suppliers. As you can see in the slide behind me, we have greatly progressed on these commitments in 2016, leading the way to a more sustainable future. As I said in my opening, we have an exceptional history of innovation and global market leadership. If I take a bit of distance, I would say that this started 125 years ago with our founders, Frederik and Gerard Philips. The world at that time was being transformed by the coupling of two technologies, the incandescent lamp, and the growing footprint of electrification. It was a revolution that would change everything, and Philips took its place at the very heart of it.
Today, we stand at the brink of another revolution, one also made possible by the coupling of technologies. We are seeing the embedding of connected LED lighting into the Internet of Things. This, too, has the potential to change everything. We happen to be a 125-year-old company that can make a difference in the world of today by becoming the lighting company for the Internet of Things. In my closing, I would like to offer a word of thanks. On behalf of the board of management and the leadership team, I extend our sincere thanks to all our employees for their commitment and dedication, which enabled us to achieve so much already in 2016. I would also like to thank our customers for their continued trust, which is motivating us on a daily basis.
I would like to thank our shareholders for the confidence that they have shown in our business and their ongoing and permanent support for our strategy. Today, more than ever, we believe that we are uniquely positioned to unlock the extraordinary potential of light for brighter lives and a better world. Thank you for your attention.
Thank you, Eric. Detuche Bra. Of course, Mr. Rondolat's presentation is closely connected to the next agenda items when we talk about the remuneration policy in 2016, the dividend, and the financial statements. For that reason, I would like to suggest that we deal with all these agenda items together. First, going through the presentations on them. After we've heard the presentation, including the Ernst & Young external auditor, we then go on to address discussion after agenda item 4, and then we would move on to agenda items 5 and 6. I would suggest, please, that you postpone asking any questions until we reach that stage in the agenda. After, we can move on to the voting items of the agenda. I'd now like to move on to agenda item 2, implementation of the remuneration policy in 2016.
Again, I will give the floor to the Chairman of the Remuneration Committee, Kees van Lede. He will be telling us about how the remuneration policy worked in 2016. Kees, please. Ladies and gentlemen, shareholders, you've seen all this, of course, in the annual report, it'll all be a bit repetitive. I would just like to remind you of what the gentlemen involved earn. There are no ladies involved at the moment. I'll run down how this worked in terms of their pay conditions and what was achieved. What you see on the slide are the figures, I'm sure they're familiar to you from the annual report. EUR 850,000 for Mr. Rondolat, EUR 550,000 Mr. Rougeot, and Mr. Van Schooten EUR 525,000. That's their base salary. In addition to that, there is an annual bonus. It's called the incentive.
In addition to that, on the right-hand column, there's also a long-term incentive. This is fully in line with current market conditions. The salaries are determined on the basis of investigation of comparable responsibilities. We look at the median. It's not quite the same as the mean average, but it's sort of middle point. The same applies to Mr. Rougeot's and Mr. Van Schooten's responsibilities. Here you have the base salary plus the annual bonus, the incentive, if any. There's a minimum. You won't be surprised to hear the minimum is 0. They have a target. If they meet their target, there's 1 figure, and if they exceed the target, then they have the maximum. If they meet all their targets, Mr. Rondolat gets 80% of his base salary, Mr. Rougeot and Mr. Van Schooten get 60%.
If they meet all their targets, amply exceeded them, all those figures, 80, 60, and 60 are doubled, 160, 120. There's a further long-term component. We're talking about how we'll deal with that in the future in a moment. What this means is in terms of shares, which are conditionally allocated, in other words, they only actually get these shares if all conditions are met. If that happens, Mr. Rondolat could get 100%, Mr. Rougeot and Mr. Van Schooten could get 80%. That's the base package. If we go for the next slide, please. I'd like to see how the gentlemen performed and what they therefore earned this year. Regarding the annual incentive, what you see, you see 2 columns, the 2 right-hand columns. Let's look at the very right-hand column first.
See how well they scored vis-a-vis their targets, 151%, 131%, 179% of target. You might consider that you'd rather like the figures for punctuality figures for the Dutch Railways than they used to run on time at all. You can now see, originally these figures were for Royal Philips, as it now is, we made an adjustment for Philips Lighting. In addition, for Mr. Rougeot, he wasn't with us all year, we had to make an adjustment to reflect that. If you now look at what they achieved in terms of their targets, you have 151%, 131%, and 179%. Bearing in mind what I said a moment ago, they've had different jobs to do in the past. They had different base salaries in the past. The eventual payout was 114.6% to Mr. Rondolat, 78.6% to Mr. Rougeot, and 99.8% for Mr. van Schooten.
If you want to know exactly how those figures are calculated, Mr. Palman can tell you more about it. After the meeting, I'm sure he'll be happy to explain it to great more detail over a drink. Thank you very much. As we said, I would like to invite any questions to be postponed until we reach agenda item four. We'll now move on to agenda item three, explanation of the policy on additions to reserves and dividends. For this purpose, I'll give the floor to our CFO, Stéphane Rougeot, who will tell us about the reserve and dividend policy and our dividend proposal. Stéphane will speak English, you can hear him in Dutch using your headsets if you so wish. Stéphane. Just a brief explanation on these topics.
Sure. Thank you, Arthur, good afternoon, ladies and gentlemen. Let me start first by sharing with you some of the characteristics of our capital structure and its evolution in 2016. The first important point to note is that our level of cash at the end of the year amounted to slightly over EUR 1 billion. We have a gross debt of EUR 1,381,000,000. Of course, that includes the debt that we established at the time of the IPO. That debt includes a term loan of EUR 740 million, as well as a term loan of $500 million. Both loans have a remaining tenure of four years. They will mature in May 2021. Under these loans, as usual, we have a financial covenant on our net leverage. The covenant is established at three times.
As you can see here, our net leverage at the end of the year, on the reported EBITDA, was 0.5 times, well below the financial coverage of our loans. On top of our cash available, we have also additional liquidity, via a revolving credit facility that has been put in place at the time of the IPO of EUR 500 million. That revolving credit facility has not been used, we don't intend and plan to use it in the near future. If you sum it all and you look at the net debt evolution, our gross debt minus the cash, you can see here on the right side that we have consistently decreased the level of net debt since the time of the IPO.
We ended the year at EUR 341 million on the 31st of December 2016. That reflects the significant free cash flow generation of the company during the year. Turning to the next page. Let's talk now about capital allocation, because, as we know, we continue to exercise a very strict financial discipline in the way we generate, but also in the way we use our cash. In terms of the cash that we generate, we are committed to managing our financial ratios in order to maintain a financing structure that is compatible with an investment grade profile, which is the financing structure that we have today and which we want to continue to have. That includes, of course, a disciplined management of our balance sheet liabilities.
In terms of our cash uses, on the right-hand side, we will continue to invest in our business. We also aim to pay out an annual regular cash dividend. We will also consider some additional capital returns to shareholders, as well as seizing some non-organic opportunities, as we've said already, primarily focused on small to mid-size acquisitions. Looking now at how we implement effectively that capital allocation policy, on the next page. Let's talk first about the dividend and then the additional shareholder return. Our dividend policy reflects, as I mentioned earlier, the profitability of the company and also our cash generation. We intend to have a stable return component for our shareholders, while at the same time continuing to invest in our business and keep the right financial flexibility.
That means that we aim to distribute an annual cash dividend within 40%-50% of our continuing net income. This year, in 2017, we will distribute our first dividend based on the 2016 financials. We propose to pay a dividend of EUR 1.1 per share. As you can see here, this means a dividend payout of 52% of our continuing net income. For further years, we want to have a consistent dividend policy. Of course, that has been taken into account when we have decided on this proposal. In addition, given the level of cash on our balance sheet at the end of the year, we have also indicated that we would return capital of up to EUR 300 million to our shareholders over the year 2017 and 2018, by the way of participating to further sell down by our main shareholder, Royal Philips.
As you know, we participated in the first sell down made by Royal Philips in February for an amount of EUR 82 million, which represents 3.5 million shares, which we acquired at a price of EUR 23.4. We've completed the consolidation of these shares over the last few days. This is why our current share capital now amounts to 146.5 million shares compared to 150 million shares previously. In April, a little bit less than a month ago, we also participated for EUR 101 million in the second sell down by Royal Philips. We acquired, again, 3.5 million shares at a price of EUR 28.8 per share. We also intend to cancel these shares. That concludes my presentation on our capital allocation policy, on our reserves, and on our dividend. I would like now to give the floor back to the chairman. Thank you.
Thank you, Stéphane. Any questions you may have in the light of Stéphane's presentation may be made as part of agenda item four. I'd now like to move on to agenda item four, financial statements 2016. To start off, just a couple of comments regarding the annual report of 2016. The annual report, including the financial statements, was available for inspection at the company office and was published on the corporate website in late February. It contains a report on the course of action of Philips Lighting in the past year. As you've seen, we have had a single volume, including financial statements and sustainability reporting. The IFRS rules were applied for the financial statements. I'd also point out that at the time of the IPO, the general meeting of shareholders nominated Ernst & Young as external auditors for 2016 up to and including 2019.
The financial statements now before you, therefore, have been audited by Ernst & Young. Ernst & Young is represented in the room today by Oscar Jonker. He's responsible for the auditing activities. He will give you a brief run-through of Ernst & Young's auditing activities, and Ernst & Young's declaration can be found in the annual report. Any questions that you have for him should be put to him via me as usual. I'll now give the floor to Oscar Jonker. Hello. Well, chairman, thank you very much. Thank you for giving me the opportunity to shed some light on our auditing activities today. My name is Oscar Jonker. I'm from Ernst & Young accountants, and I am what's called the legal auditor for Philips Lighting N.V.
We were able to approve Philips Lighting's financial statements on 2016, also able to approve the sustainability report, which is included in the annual report. I'd like to run through the auditing activities that we undertook and the main points for our attention. As we've already pointed out, this was the first financial statements for Philips Lighting. It's also the first time that Ernst & Young carried out this auditing activity. There was a lot of stuff to learn, a lot of additional work gathering information about the organization and looking indeed at the audits carried out by the previous auditor. We started right back in 2015. I was sitting in a number of discussions with management in order to acquire knowledge. There were all kinds of conclusive talks with the previous auditor.
We carried out an extensive review of all the paperwork produced by the previous auditor, and this enabled us to build up a picture of how they'd carried out their auditing activities. In addition, we were closely involved in the separation of Philips Lighting from Royal Philips, and we gave a statement assessing the first quarter figures for 2016, which were also used in the public flotation prospectus. All the know-how we acquired during those activities provided input for our auditing plan, which we agreed with the audit committee and management in July 2016. Materiality, as you can read in our auditor statement, was EUR 17 million. This is based on the pre-tax result, corrected for a number of non-recurring items. Any discrepancies over EUR 900,000 were also discussed with the audit committee. As group auditor, we of course are responsible for all activities all around the world.
We don't only operate from the Netherlands, we've got local teams as well. At central level, we determined the scope of the activities for each group component, and our local teams were then instructed on the type and depth of work they were to carry out. We're talking about roughly 30 component parts in 10 countries. In addition, we were in close contact with the local teams using teleconferencing, and we also visited the main locations at least once, sometimes several times. As I said earlier, this is the first time. It's called an initial audit, we call it. It's the first time we dealt with Philips Lighting, and this is an important point for us to focus on.
Other important key audit matters, as we say, as you can see in our auditor statement, were changes in the organization, including the separation of the company, two, valuing goodwill, third, taxation provision, and fourth, revenue recognition. In our auditor statement, you can see how we address each item on my list. Because Philips Lighting are still consolidated by Royal Philips, well, they were in 2016, part of our auditing activity involved reporting to the Royal Philips auditor. I'm talking here about the financial statements themselves, but also the whole landscape for the company's internal audit. I can assure you that we came up with no findings of any significant difficulties when assessing the internal audit of the company. As part of our audit activities, we had weekly contact with the company.
In addition, we discussed our findings with the CFO, management, and the audit committee every quarter. We spoke to the audit committee five times in the course of the year, once per quarter, starting from the second quarter, once in December, in order to give them an update of the audit situation, and a final conclusive discussion in February, in order to talk about the financial statements and our conclusions regarding those. We also spoke to the audit committee without management being present, and we also had frequent contact with the chairman of the audit committee, aside from the actual formal meetings. By way of conclusion, I would say that we successfully concluded the first audit year in Philips Lighting. Thank you, partly to the teams who worked together in a constructive spirit, and also because everyone kept very much in line with the timetable.
I hope this sheds some light on our external auditing activities at Philips Lighting. It now gives me great pleasure to return the floor to the chairman. Thank you, Oscar. Well, ladies and gentlemen, this now brings us to the discussion. Any questions from the floor on any of the items that we have currently discussed under agenda items one to six? Who would like to take the floor first? I'll just make a list. Keep your hands up while I make a list of you all. Okay. Can I start with the gentleman here on the third row? Please go to one of the microphones.
Thank you very much for giving me this first round.
Please can you tell us your name?
My name is Henk Rings. It's the first time for me as well with this company. I've never had an opportunity before. Everything's completely new. We have to get to know each other, I think. Nevertheless, I have two issues I would like to discuss with you, and the first concerns the relationship you have with the large Philips, the big Philips, because we're the small Philips, I could say, as Philips Lighting. Let me conclude that I see some officers of the large Philips in the supervisory board, and that they remain our majority shareholder, even if they keep selling off their interest at stake in Philips Lighting. In that light, I would like to have a clarification. Who takes the final decisions? Are that the gentlemen facing me in the auditorium?
Are decisions still taken by the supervisory board of the major Philips? We have many things in common, including the brand name. In the future, we'll have two separate companies using the same brand name. Who does it belong to? Do you discuss the scope of use of the brand name? Are you paying any money to the other Philips for using their name? Another question, is there some kind of line of authority with the other Philips? When the interests would go astray, would be at odds, would you be receiving any orders from Philips? To which extent Philips Lighting is free to take its own decisions? That's a whole list of questions that may turn out very important at any given point in time. I don't know why or in what context.
It's hard to predict. Still, my question is to give me an explanation about the current relationship. Is it simply a shareholder who can vote against resolutions at the AGM, or is it a larger player trying to influence this company? A second topic, very obvious. Obviously, there is a major transition in the field of lighting in the world. In Europe, the old-fashioned lighting systems have simply been prohibited. The world is larger than Europe, and you still have many countries that are using outdated systems of lighting. Do you think they're also moving to a system where light bulbs will be prohibited by governments? What about national competitors in countries such as India or Russia or Brazil? I think that there are still local competitors offering all kinds of old-fashioned light bulbs. What can we do with those competitors?
Is that a matter of patience because they are not ready to go into the production of the LED lighting systems? Should we acquire them to acquire their brand names, and then using our technology and our knowhow to transform their factories producing local systems, making that you will be major suppliers in countries such as Russia? What is our view on the rest of the world in terms of this transformation and the speed of the transformation? If we look at the internal organization of Philips Lighting, I have another question. How are you going to organize this within the company? Latvia may be growing rapidly, but other countries may be growing in LED. What about such existing companies? Are you going to shut down factories where, for instance, incandescent lamps are produced or not? Are you going to lay off staff or not?
How are you going to carry out the transition in an appropriate way if you're only going to be producing LED lighting systems? What if you're producing only LED systems? A decrease of 18% is a lot, meaning that eight years down the road, you'll be producing no incandescent lamps anymore. I think that's enough. I hope this gives you some ground for interesting information I could receive. Obviously, this was simply an invitation to share more with us about the operations of the company, the things that are on your minds. I hope that I was right in my guesses about the issues that you table at your meetings as a board. Very curious to have your answer.
Thank you very much. You kept saying we, talking about us when you talk about yourself. Henk Rings, you said was your name. You didn't say who you were representing, but you spoke rather as if you're a member of Philips staff. Is that right? You gave that impression. You're shaking your head. You're not a member of staff. Okay. You kept saying we and us. That's what it was.
Well, you see, this invites me to give an explanation. When I become shareholder of a company, I try and create this feeling of belonging, of we, us, a team. That's what you want to show as leadership of a company. We are the best company. That's not always true, but it's something you certainly must radiate. I only own a couple of shares, so the company doesn't really belong to me, but I would like to generate the feeling that it also belongs to me a little bit, including the other shareholders. You raised the issue yourself. That's my explanation.
Yes. Thank you very much. Yes, I understand your point of view. You had two questions. I'll start off with your governance question. I'll try to give you a reply to that myself. Regarding the switchover from incandescent bulbs to LED, I'll invite Eric Rondolat to answer you. What you see here today at the Supervisory Board are two people who have management positions, the CEO and CFO, in fact, at Royal Philips. That is what was agreed at the time of the IPO as very clearly established that that would be the case, both regarding the role and responsibility of these individuals and also the time period that those would pertain. One of these individuals will be leaving as soon as the Philips share has gone below 30%, and the other one has gone down 15%.
It's absolutely unambiguous position, and you will be dealing with one or two members of Royal Philips in our Supervisory Board. Regarding their actual responsibilities, it's quite clear, it's legally established what they have to do. You also are familiar with appointments that may be proposed by the works council and so on. Here you could say someone might be put forward as a candidate by a particular organization. Once you are a member of the Supervisory Board, you then work in the interests of the company whose board you serve on. In other words, you take off all your other hats as soon as you enter the Supervisory Board room, you are then a member of the Philips Lighting Supervisory Board, end of. The same applies to all the other members of the Supervisory Board at Philips Lighting.
To make sure there's no misunderstanding, the law is also quite clear. We have three independent members and two not independent. Again, the law stipulates what happens if one is when you have more than 10% of the shares in the company, you are deemed to be non-independent. Then there are clear rules on who is allowed to speak on what. Taking dividends, for example. The more dividend we pay out to Royal Philips, the more Philips benefits, of course. To make sure there is no difficulty, we discuss the issue without those two individuals. They can't speak, and they can't join in the decision. The responsibilities are clearly demarcated. Who makes the decision? The Supervisory Board, as any other Supervisory Board does. Regarding the brand. Yes, again, this is quite clear.
We have got the name of the company and the brand name of the products. Regarding the corporate name, it must change within 18 months after the Philips share has gone below 50%. That happened, in fact, last month. What was it? 20th, 21st of April? That is when Philips reduced its holding just under 50%, and at 18 months from that date, Philips Lighting must take a new name. That is what has been agreed, and that is what is going to happen. Regarding the product brand names, Philips, well, at the time of the IPO, it was agreed that the brand name could continue for 10 years, subject to payment of a fee. That is a predetermined fee, and it can then be extended twice for a 5-year period each. So absolute maximum for 20 years after the IPO, Philips Lighting may continue to use the brand name.
That, I think, covers the main points of your first question. I think I have answered everything. Now I will give the floor to Eric for the second part.
Effectively, you are describing what is a major transition in the lighting industry from a technological standpoint. If you remember the numbers, last year, 55% of what we sold was already made of LED-based activities. If I put that in perspective of how much we have sold in Q1 of 2017, it goes to 61%. A big part of that transition has already happened. We are more than halfway through the transition. Now to your question, is it only the mature countries or the countries of Europe or the developed countries? It is not the case. It is happening everywhere for a simple reason. If you take an incandescent lamp at this point in time, it would consume 98% more than its LED equivalent. So when you move from an incandescent lamp to an LED lamp, you do 98% of energy savings.
Many governments have decided to ban the incandescent technology, and we are counting today something like above 45 countries all over the world, pushing their consumers and their professional people in their boundaries to go to energy-efficient technologies. We had the ban of incandescent. At the end of 2018, we will have the ban of another technology, which is halogen. We see that the conventional technologies that are the less energy efficient are progressively banned, and I would say this is a trend that we see worldwide, although I would agree with you that probably in Latin America and in Africa, it is not coming that quickly. At the end of the day, we believe that there will still be some conventional technologies that are going to remain. Mainly fluorescent tubes, because an equivalent in LED is still being produced at a much higher cost.
We see a lot of time still and many years to come when conventional technologies are still gonna be there. Our strategy is to be, for this technology, the last standing man. The last company that is gonna be able to offer to its customers conventional technology. As you can imagine, we also had to adapt, according to one of your question, our industrial footprint. Historically, we had many factories producing conventional technology, we had to close some of them, it's indicated in the annual report, in order to follow the market trend.
Thank you.
Okay. Thank you, Eric. We'll
Okay, now next question. I see a hand at the back of the room. Yes, please go ahead.
Good afternoon. Thank you for your hospitality today. My name is Smids, and I am speaking on behalf and thanks to 45,000 investors of the Dutch Association of Shareholders, VEB, and I have a proxy for about 10,000 shares today. Recently, I spoke with an experienced former analyst. He said that when companies are relinquishing some business units, you have to be very careful, to the exception of Philips, join the company blindly because in the past we have seen this with ASML and NXP. Also, we have seen it with Philips Lighting. In the first month, we have seen a fantastic development of the share price. We should always wonder whether the initial share price was too low, but that's something for the AGM of Philips. My first question will be about results. Not bad.
Mr. Rondolat already explained that the policy of Philips is that before 40% and 50% of the net profit is paid out to shareholders. This year we already saw 50%. You were above the range, in other words. Philips Lighting has been put into the market as a dividend share. Therefore, we may assume that the nominal value of the share and of the payout will remain equal or will grow. My question is whether the payout ratio shouldn't be expanded, or do you think it will be within the 40%-50% bandwidth next year? A second question about dividend, if you allow me. This concerns the investments in R&D. You present yourself as an innovative player, a company where a lot is happening in the field of lighting.
You see that the investments in R&D have slightly decreased over the past years. I understand that it's a percentage of revenues, but still my question is whether you do not see more opportunities in the field of research and development. Couldn't you spend more on R&D instead of paying out to shareholders by means of dividend or buyback programs? I have a third question, if I may. I think it may be worthwhile raising it now, not coming back later. This is about the LED business unit. We have just seen that LED lighting uses now the strategy called last man standing. LED is at the same time your market of growth.
Still, the annual report speaks about price erosion that you suffer from reducing prices. It was explained before that this was related last year to the product mix. Cheaper LED lamps were selling well, and the more expensive ones were not. I understood that in Q1, that trend has changed. My question is the following. Can you give any guidelines or guidance rather for shareholders to understand your future product mix? In other words, how can we forecast this price erosion? Can you tell me what the effect of the price erosion is given the high prices for raw materials that you have forecasted yourselves? Thank you.
Okay. Thank you very much. The three questions. Let's start with the dividend. Of course, I could make a cheap comment and say, well, if our profit shoots up, then of course our dividend can also come into 40%-50%. That was an easy one. Anyway. Stéphane.
First in the discussion that took place at the time of the full-year results, together with the board Oh, I probably need to press here. Okay, sorry. At the time of the full-year result, the discussion that took place with the board took into account not only the results of the year but also the expectations for the future. We decided, and the proposal for the board was to set the level of the dividend at €1.1 per share. Of course, this is a little bit higher than the top end of the range. At the same time, it also allows, especially if we consider future improvement in the net result, it allows to maintain at least the value of the dividend in absolute value while staying in the range moving forward.
That's how it's been designed, and that's how we're looking at the dividend evolution in the future.
Okay.
The second question, the options. Yes, R&D. Would it not be possible to put significantly more money into R&D rather than into share buybacks and what have you? Yes, of course, that's always one of the first questions that crops up at management meetings. Can we grow the business further? Eric, I think you'll be able to make a couple of comments on an appropriate percentage for R&D.
Yes. Thank you for the question. We believe that at this point in time, we have an adequate ratio of how much we spend in R&D. If you put that in perspective of other lighting players, we clearly put a much larger amount than other players in that field. R&D has also helped us to grow a business, our LED business, which is in 2016, more than half of what we're selling from a few hundred million EUR in 2011 to more than EUR 4 billion
Today. We are really feeling the growth of the growing part of the portfolio with the adequate amount of R&D. Now, we are doing two very important things when you look at the R&D itself. We are improving the efficiency of our R&D processes, which means that we want to be able to develop more with the same amount of money. This is an initiative that we have started three to three and a half years ago, and which is showing a lot of very positive results on the way we manage our projects, being able not to open too many projects in parallel, and to finish these projects much quicker than we used to.
Something else that we have done, which is also ensuring us that we put the right amount of money on the table when it comes to R&D, is that we clearly direct the money that we spent in R&D on the activities where we believe there is a huge growth potential. I would tell you that at this point in time, if you look at the conventional part of the business, we still spend a bit of money in R&D there, basically quality, value, and generating, but not developing new offers. There's a lot of money in percentage of the turnover, which is put on the other businesses that have a higher potential to grow. This is the way we manage R&D, and I think we have progressed a great deal in the past years.
Eric, perhaps, moving straight on, an answer to the follow-up question regarding LEDs, price erosion, volume growth, mixed impact. Could you shed some more light on that?
You've used the word, at least that's the translation that was given, suffer from price erosion. We did not really suffer from price erosion, but price erosion is impacting our top-line growth. What we've said is that last year it was not only the price erosion, but it was also the mix impact. Let me explain. We sold in 2016 compared to 2015, for me to be a bit simplistic, many more LED lamps that are at a much lower unit cost. We have sold in quantity of products a fair bit more, but that has not been fully translated to the top line because of this mix impact and this price erosion.
What we see effectively in Q1 is a different trend, which is also linked to very specific action that we have conducted in that business in the last six months of 2016 to drive growth back up. We were around 12%-13%, and we are back to close to 17% in Q1, and this is due to very dedicated action that we did put in place. We also believe that since we are starting on a different base, that mix impact will have overall in 2017, less impact than it had in 2016. Price erosion is a reality when you have a technology which is offering a lot of potential for cost downs. If you look at the history of our LED business and specifically LED lamps, it's been many years of double-digit price erosion.
That will have a stop moving forward since there's less money that can be extracted from technology. We're seeing at this point in time, some raw material, plastics, some going up. We see that there will be probably a reverse trend compared to what we've seen previously. For us, it's all good because we've been able to increase our gross margin when pricing were going down because costs were going down. I think we're going to be able to do the same, if prices stabilize or slightly go up in the future.
All right, Eric, thank you very much. Sarek. I saw a gentleman here over on my left-hand side. Yes, if you'd like to go to one of the microphones, please.
Thank you, Chairman. My name is Taverna. I represent the Association of Shareholders for Sustainable Development, VBDO. We haven't met before in this setting, let me therefore introduce our association. We are an association of investors made up of larger investors, pension funds, and other retail and private shareholders. We haven't met before. Otherwise, you would have known that we usually start with compliments, I will do this also during this meeting. Mr. Van Houten and Bhattacharya already know the game. We think your annual report is excellent. Let me start by stating this. Why? Because it is an integrated report, not simply a compilation report, but on the way to an integrated report. We're also very happy, by the way you discuss the sustainability or non-financial aspects.
Something else we are satisfied with is the fact that Ernst & Young, EY has given a verification of the same level or the same standard as the verification of financials. Sometimes at other shareholder meetings or in annual reports, this can be different. We are very content. In that light, however, we are disappointed to see that the presentation of the strategic goals for 2016 and also 2017 doesn't reflect these elements. De facto, there's only reference to financials, and the impression therefore is that financials dominate. Therefore, our suggestion is that when presenting strategic information and your management targets, you should also include a minimum of one or two sustainability targets. A first question. One of the key elements in the report, one element you report on is what you call sustainable revenues.
They are important because they are also reflected in the remuneration report, or at least they are reflected in the decisions on remuneration. That means that this is a key KPI. It is not clear to us, however, and maybe this is misreading, but we don't think it is, what exactly you understand as sustainable revenues. It may be difficult to explain, and I hope you will not be obliged to give us too much detail. In another case, you might expand more on this in a future report, but at least you may address that issue in your answer if possible. A second question, and once again, this deserves a compliment. We see that the sustainability targets for 2020 have already been achieved. Talking once again about sustainable revenues, but also about 100 suppliers being audited.
Our question is whether the 2020 targets in these fields may have to be adjusted upwards given the fact that they may have been too low, or that you have been running so successfully that you may lift the targets to another level. That was my second question. Number three. One element of sustainability is what we call the circular economy. We now know it is pointless to produce something in order for it to end up on the dump, because nowadays, waste is a commodity. You write about this design for the circular economy, and you refer to design rules in this respect. The annual report doesn't tell us much about these design rules.
Given the fact that Philips Lighting is referring to this specifically, we would be interested to know more about this, maybe in a future annual report or at another occasion, if possible. I have one last question, but maybe I will have to use a second term. Mr. Chairman. It's a brief question.
Please go ahead now, we'll see whether we answer it now or later on.
Yes. This concerns the following matter. An important issue for us is what we call living wages. This concerns the wages, not of the higher levels of management, but of those people working somewhere down the supply chain in one of the sourcing countries, possibly working for Philips. Do you have any policies and any instruments in place to effectively check the application of living wages two or three tiers down the supply chain?
Okay. Thank you very much. Interesting questions. Thank you also for your kind words regarding the annual report, both the content and the combination of topics. I think we are well on track in coming up with an integrated report, although not everyone is quite on board with what that actually means. Anyway, we are on the right track. You think that, we think it too. Disappointing that the strategic objectives for 2020 have not been closely defined. We are aware of this issue, we will certainly take your points on board, we'll look into how we can address it in the future, should it be in the annual report or elsewhere. We'll certainly take your point on board. Next, the definition of sustainable revenues. We could get very bogged down in a debate on defining that.
I think the simple way of putting it is that you must have a significantly better product, at least 10% improvement. For example, 10% better energy consumption or some other measurable improvement. That's basically what we mean when we say sustainable revenues. If you need any further detail on that, I hope that Eric will be able to address it and also the question regarding the circular economy. Go ahead, please.
Yes, sure. Basically, this is what the chairman is saying. We look at the offers that we have, and they are declared sustainable when they bring a positive impact, which is more than 10% versus the previous offers or the minimum established legal standards. One of the metric that we also can look at currently is how much energy efficiency offers are bringing compared to the minimum standard that are being applied or previous offers. It takes also other dimensions. The question that you asked were about the targets, saying that, are those targets sufficient? If we talk about sustainable revenues, we've moved from 72% in 2015 to 78% in 2016, with the objective to be at 80% in 2020. What we need to understand is that this is benchmarked every year. We are not in a stable environment.
offers are looked at every year, and they are defined sustainable or not. We believe that with the changing perimeter of these offers, this is rather a challenging objective for 2020. When it come to suppliers, you are right, we did put a specific emphasis on analyzing who are our risk suppliers and going and audit 100% of them. We gave to ourselves the objective of 90%, but we did 100. This is a very conscious move that we're doing at this point in time. As the industry is transforming, we need also to adapt our supplier base. By adapting our supplier base, we want to make sure that we are focusing on the right suppliers, and they adopt also the same sustainability criteria as we do. There's a conscious move there to be already on target when it comes to our suppliers.
The next question was about circular economy. What do we understand by that? There are two different levels. The first one is recyclable material, and the other one is also circular business model. We want to make sure that we use in our offers, material that we are going to be able either to revive at the end of the life cycle or that we're going to be able to recycle in a proper manner. It's about defining modular offer, optimizing them, and making sure that they can be upgraded. There's a conscious move and a conscious process when we develop a product that we look at the materials that we use, trying to embed as much as we can, the materials that I've just talked about.
From a business model standpoint, we have also established business models. I can talk openly about what we've done not so far from here at Schiphol Airport, where basically all the lighting that has been put in place in the late renewal of the airport is made of circular offers. Which means that these offers, after a given number of years, they can be taken out and given a new life. They were specifically designed for that. As you can see, when we talk about circular economy, it's at the level of the components that we use, but also the business models that we do put in place. I think that you had maybe the last question, Chairman, which is about wages and how we manage the supply chain.
You may have seen effectively in the report, which is quite exhaustive that we have done, that when it comes to our suppliers, we have pointed out that there were an issue when it comes to wages. It's not so much about underpayment, but it is more about administrative issues. When we have audited these suppliers, we've realized that the way that they are counting the number of hours was not always consistent. We've also realized that sometimes their employees were working extra hours and they were not paid extra money. For us, when people are working over the normal number of hours, they should be paid a bit more. This is things that we are seeing when we do the audits.
Whenever we do the audits and we see those non-compliances, we point them out, then we train the suppliers in order for them to become compliant. If you want just an idea in terms of metrics, we have been auditing on a yearly basis 100 suppliers. When you look at our ratio of compliance, it went from 63 on 100 to 91 on 100. We're doing these audits, and we see an improvement.
Okay. Thank you, Eric. Who else would like to take the floor? Looking around the room. Someone there for the second time around. Anyone want to take the floor for the first time? Yes, at the front here. I'll come on to the other speaker in a moment.
Mr. Chairman, my name is Bohm. I have a question about cybersecurity. You have a risk clause that looks into cybersecurity and also cybercrime. We read that you have suffered attacks from cybercriminals, but that so far, this has not led to any significant damages. There have been damages apparently, but I suppose insurance covers this because your insurance paragraph also mentions the word cyber. My question is whether you are insured for all these kinds of cybercrime. Well, so far, no significant damage. However, that may happen in the future. Does this mean that you are vulnerable for cybercrime? As the market leader you claim to be, there are all kinds of companies that would love to know everything that's happening within Philips Lighting, and they would like to know other corporate things as well.
My question is this: Is this on top of the list of topics of the audit committee of the supervisory board, or does the supervisory board treat this issue in another way? Then another question about the metrics from the financial statements. This is about tax-related losses, that you have not registered any losses for EUR 400 million, I think, EUR 417 million. Then EUR 148 million because you're not quite sure you're going to make up for this. Well, the compensation term is very long. You are right about that. In the light of eternity, it isn't much if things do not materialize. My question is: Where are these losses generated? We find them under old issues. Does this concern the Netherlands or foreign operations? What's the origin?
Thank you very much. I think I'll give the floor to Stéphane to answer both your questions in just a moment. First, something from me, though. You were asking whether cybersecurity and cybercrime were on the supervisory board's agenda, and I can assure you, they most certainly are. This very morning, in fact, we spent three-quarters of an hour or an hour to talk about cybercrime together. Let's be quite clear in our minds about this. This is a topic which will be with us forever. Year in, year out, we're going to have to do everything we can to stay one step ahead of the criminals. Of course, as soon as you take a step forward, the crime will catch up with you. Yes, we can never solve the problem, but it's always on our agenda. Now, regarding fiscal losses, Stéphane, go ahead, please.
Sorry. Sure. As you saw from the financial statements, there are a number of losses that have accumulated. Some of them we know we can recover based on our various business plans. Therefore, on that basis, we have decided and reviewed with the auditors to activate the tax aspect related to those losses. Then there are a number of activities or countries where, based on the reasonable assumptions of our businesses, we think it's gonna take too long, or there are limitations that prevent us from activating those losses or the tax aspect to those losses. You're right, the amount is EUR 417 million. This is an asset, of course, which we have not activated, that could become activated if we see that we have opportunities to generate more profit in those areas. This is not about the Netherlands.
This is in other countries and various type of businesses. Of course, we are reviewing this on a regular basis to make sure that if some of our businesses in some geographies are doing better or if tax regulations are evolving, we are able then to activate those assets and use them moving forward. That's how we are approaching it. Again, it's been looked at very carefully internally and with our auditors. To your first question around cybersecurity. For sure, there are insurance related to some of the impact of those risk, which we have taken. More fundamentally, it's about how the company is managing cybersecurity in general. As mentioned by Arthur, this is something that is being reviewed at the audit committee and at the board level.
Within the company, we have set up a dedicated function in charge of the intelligence, in charge of the governance and the processes, and in charge also of the reaction to those cyber risk. It's now up and running and working very closely with all the other functions and businesses within the company. We are taking this subject internally very seriously and of course, reporting and reviewing it with the board of directors.
Thank you, Stéphane. Any further requests for the floor? Apart from Mr. Smids? No, nobody else. Okay, go ahead then, please. Mr. Smids for the second time
Thank you, Mr. Chairman. I still have some questions about the liabilities or receivables rather. You have indicated your wish to break off relationship with those customers that pay too late, and I think that is a very good position. The reason was partly your write-down in Saudi Arabia, and the negative impact can be seen by anyone in the financial statements. My question about this is the following. You see a list of old receivables in the statements. Does this concern only Saudi Arabia, and are they for more than six months beyond the date? You have 3 categories in the report. The second category concerns claims that are paid between a month and six months, and then you have a third category beyond six months. Saudi Arabia, was it more than six months too late in payment?
I also noted that the second category, you have customers who, after the expiration of the term of payment, still have not paid between one and six months. That category has grown by about 17% in the course of the past year. How can we reconcile this with your intention to break off relations with badly paying customers? Could you enlighten us on this matter, please? Another question for those who like these matters. This is about cash flow and particularly the working capital. This has come down significantly, which is particularly related to a decrease in stocks in the past years. Can you comment on this, please? What is the reason, and why did you see this as an appropriate thing now and not last year, for instance, to reduce your stocks, I mean? That brings me to goodwill.
You have dedicated a considerable text to this in your annual report. The auditor has raised the issue. I have a question to him later on. EUR 1.9 billion on goodwill is on the balance sheet, which is about 25% of all your assets. The major part of this is related to the professional division. You carry out sensitivity analyses on an annual basis to see whether any profit can be generated from goodwill towards the future, and you see that the headroom is very limited. 2%, the auditor says, which is very little. That is almost moving towards a write-down. We see that you have adjusted the discount rate. You have the column showing that you go from 15.1 to 13.9. It's a bit of a technical discussion, but because of these adjustments, you didn't have to do a write-down.
You do not comment on the reasons for adjusting the discount rate, or I may have not noticed it. I would like to have some more comments from you on this matter. In general, you see a headroom of 2%. That usually leads to discussions. Why are you in such small margins? Why haven't you chosen to simply depreciate the goodwill? Maybe the auditor can comment on the sensitivity discussion and the discussions they generate with the audit committee. He may want to discuss this in a bit. Cybersecurity, it was just mentioned, and I think it's a very appropriate topic. It's very good you give so much attention to this. I would like to mention the IT systems.
You say in your annual report that until February, you still were using the Philips IT systems, and that up to the first of June or July, some service-level agreements still exist. I assume you still use old Philips systems. The question is the following. You claim that as of the first of July, you will disconnect the two IT systems. Is that timeline still in place? The other question, does that mean that Philips Lighting is completely disconnected from Philips in terms of IT? How did this process go, and what is the related cost? Because the indirect costs of Philips Lighting are relatively high compared to peer companies. My question is whether this led to higher costs. A question to the auditor.
This is how he assessed the IT infrastructure in the light of the standalone scenario and how he evaluated this in the report.
Okay.
Right. Thank you very much. I think that pretty much all the questions are for Stéphane to address.
Sure. Let's start with your question around the account receivable. As you see in the financial report, at the end of 2016, account receivable were almost EUR 1.5 billion. Out of the EUR 1.5 billion, you have a bit more than EUR 1.3 billion that are current, which means no overdue, no payment issue. About EUR 160 million where customers are late in paying. A large part of them are late by a few weeks. Of course, we manage this together with the sales organization to make sure we get paid. In some countries, and you refer to Saudi Arabia, of course, we face macroeconomic situation where, like many other companies, we are not being paid, and therefore we put in place payment plans.
As we put in place payment plans, of course, the level of overdue, the account receivable is still counted in the level of overdue, but we still believe that in many of those cases we can be paid. We also constitute a provision under IFRS rule, and that provision is very clear and constituted according to rules reviewed together with EY. You've seen actually a decrease of the provision compared to 2015, and also generally a decrease of the level of late payments compared to 2016. There has been a lot of work done inside the commercial organization to ensure that we collect our money on time. Now, again, it happens in some places and with some customers that we are paid late.
In KSA, it was a specific case, and it led to a provision which impacted our results, and for the rest, it's generally purely timing related, and we get paid. Of course, you always face situations in countries where you don't get paid, but we don't see any significant impact aside of KSA. That's with respect to your question regarding account receivable. On inventory, you're right. There has been a significant reduction of inventory throughout the organization and overall. The level has been reduced consistently in every quarter for the last two years, and we believe we can continue to do so. It's through mainly the management of our supply chain and how can we improve and reduce the level of inventory that we need in our various entities, both in terms of factories, but also in terms of commercial entities.
There's been a lot of work and transformation done here in order to improve and reduce, and that has contributed to the improvement of our working capital and to the generation of free cash flow. That's something on which the company has paid a lot of attention and engaged a lot of actions. Your next question was on goodwill. The total goodwill for the company is, I think you've mentioned EUR 1 billion, it's actually EUR 1.9 billion. Most of it is related to Professional and as you probably know, is related to past acquisitions done largely in the years 2008, 2009. We are reviewing, as per the IFRS rules, every year the business plan of that cash generating unit.
Based on that business plan, we are assessing whether the recoverable value of that cash generating unit is consistent and aligned with the value of the goodwill or higher. What we've seen so far, including at the end of 2016, is that based on our projections, we believe we can recover more than the value. Now you're right, the amount of the gap is much smaller and is limited, EUR 50 million, as you've mentioned. The discount rate has been reviewed, but again, in line with the calculation for the discount rate that have been made that take into account the level of risk, the level of interest rates which have gone down. All this has been reviewed with formulas that has been checked together with EY, and that has been done again, and you can see this in other companies as well.
With respect to your question, whether should we have taken an impairment or not, the reality is that looking at the business plan for that cash generating unit, there was no reason to take an impairment, and we believe we can recover more than the value of the goodwill. That's how we've performed the goodwill analysis at the end of the year, and we will continue to perform it every year. I think you had a question on the IT split. On the IT split, a lot has been done in 2016 and at the beginning of 2017. We are not yet completely disconnected from the systems used by Royal Philips, but a lot of the activities in IT have been disconnected and are being standalone. Again, there are still a number of areas where we are still connected and relying on the Royal Philips systems.
We are preparing all the plans in order to be disconnected in the next few months. All this has been governed through a transition agreement that has been established at the time of the separation, all the costs have been clearly identified at the beginning. They are actually counted in the adjustment. This is what we call separation cost to a large extent. The cost of IT are part of our fixed cost and non-manufacturing cost. We believe that as we finalize the separation and we do the full disconnect, we will probably be able to further improve and therefore reduce the level of our cost in that area. That is work that is going on right now in the context of the disconnection.
Thank you very much, Stéphane. I conclude from this that the first two of your questions for the auditor have already been answered. That is to say, was goodwill discussed? Can the auditor agree with the management conclusion? Yes, those two have been dealt with. The last question, I will ask Mr. Jonker to take the floor to tell us about his involvement in separation. Yes. Thank you for your question. As I said earlier when I made my presentation, we've been closely involved in the splitting, both the organizational split and also the IT split. We brought our IT people on board to look into it. What was important from our point of view was to see which systems were being completely hived off from Royal Philips. What were Lighting's own systems and what about the service level agreements and so on?
Would they be properly valued by? That's what we examined, that's what we focused our auditing activities on, we came up with a satisfactory reply to that.
Thank you.
Thank you very much. Are there any further questions for the floor at this point in the meeting? Mr. Smits again.
Yes. If you like, I would ask some questions to the auditor about the write-downs, particularly in Saudi Arabia. To which extent has his audit taken place? Has it been full scope, which I could imagine when something like this happens, such a write-down, certainly given the fact that this was a very old receivable. Another question to the auditor that is not related, but concerns the same person, and this concerns the risk related to pension liabilities. The report refers to this as follows: After the split, the pension liability may be different than indicated in the group financial statements. My question is what his conclusions at this moment are, and then we may want to come back to the SLAs referred to by the auditor and also by the CFO.
The statement was that the SLA and the systems would be completely decoupled in the month to come. Does that mean that there has been a delay? Nothing wrong with that, but I would like to have this confirmed because the intention was to have a full split of the systems by July, and that then all the SLAs would also have lapsed.
Okay. Perhaps we can take these in reverse order. Stéphane, if you could start off by dealing with the SLA. In other words, was the 1st of June a firm deadline? Was there a delay? Would you say no, it's an ongoing process, some things were done before that date, others were done afterwards? Also, perhaps you can make a comment regarding pension commitments. After that, we'll ask the auditor to add anything he may wish to.
On the IT, well, first let me just clarify. Our IT system, even though on some parts we are relying on the Royal Philips system, this is our own system which we control, which we manage. Again, we are doing the full disconnect in order then to be completely standalone. With respect to the timing, this is pretty much in line with what we had planned. There is nothing that is materially different in terms of timing and in terms of deadline compared to the plan that was set up at the beginning. You always have a few areas that can be slightly different from what we thought in terms of timeline, again, nothing that is material and nothing that is very different from what was planned initially.
On the pension, I think your question was that the separation for the pension was something that had to be assessed and confirmed. Actually, when you look at the figure at the end of 2016, where we have a net liability of EUR 602 million, with about EUR 1.3 billion of overall obligations, the difference between being assets. All this has been completely reviewed country by country, this is the exact situation post the separation.
Mr. Jonker, could you tell us anything about the full scope, Saudi Arabia, et cetera? Anything you may want to add on pension liabilities. Yes. Your question was about accounts receivable in Saudi Arabia. Yes, a full scope audit was carried out in Saudi Arabia. We do keep quarterly tabs on that. We visited the location and did some work there at central level. Yes, we have kept a close eye on that. Pensions. Well, these were examined together with our actuarial specialists in line with the contracts underlying them. There's not a great deal I can add to what Stéphane has said on that front.
Okay. Thank you.
Okay. Thank you very much. I think that brings us then to the end of the questions for the time being. Yes, I can't see anyone in the room asking for the floor. I think that after that discussion, we could now move on to voting on a number of voting items. Before we do that, though, I would like to ask the notary public to tell us some points. He will tell you how the voting system works and lead you through the voting. Thank you, Chairman. We'll start off with a couple of formal points. At the beginning of the meeting, represented or present at today's meeting was 121,965,747 shares, which means the same number of votes. In terms of the number of shares issued in the company on the registration date which are now entitled to vote.
This is therefore 83.25% of all capital issued, which is present or represented at today's meeting. Prior to the meeting, shareholders were entitled to cast their vote by e-voting or some other form of proxy passed on to the independent notary. The notary is Cindy Smit. Cindy Smit is at Zwartbroek Notarissen. She's at the meeting today. The votes that she received will be included into the electronic votes cast at today's meeting and will all be totaled up together and incorporated in the final report. I'd now like to walk you through the voting procedure. I think most of you are already familiar with it, but it's still worth running through. Could you please take your voting handset and insert your voting card into it with the arrow facing towards you and downwards. If all is well, you will then see your name on the screen.
When we proceed to the vote, the options will appear on your handset screen. If you don't see anything on the screen, please raise your hand and someone will come to your assistance. You can leave your voting card inside the handset all through the meeting if you wish. In order to vote, you press one, two, or three. To vote in favor of a proposal, you press one. To vote against, you press two. If you wish to abstain, you press button three. The screen will show the vote you have cast, and if you make a mistake, you can change your vote by simply voting again. It is your last vote which counts. After voting is complete, the outcome will be shown on the screen at the front of the room, and I will then tell you the percentage of votes in favor.
The full voting results will be published on the corporate website, of course, will also be in the minutes of today's meeting. Chairman, that's it. Okay. Thank you very much, Martin. We can now proceed to the vote itself. Is everyone ready? Okay. First voting item today is a proposal to adopt the financial statements of 2016. Voting is open. Please cast your vote now. This is agenda item four. Press one, two, or three as you wish. One in favor, two against, and three to abstain. If you're having any difficulty, please raise your hand. Voting is closed. You can see the outcome on the screen. Votes in favor, subject to rounding, 100%. Thus, we see that the proposal has been approved. Thank you very much. I therefore conclude that the proposal has been adopted and that the financial statements of 2016 have been duly adopted.
We'll now move on to the next agenda item, agenda item five, the dividend. The proposal for the dividend of 2016 is EUR 1, EUR 0.10 per ordinary share, payable in cash. The notary. Voting is open again. Please cast your vote. Voting is closed. Wait for a moment. The results will appear on the screen. Again, you see the results on the screen. Votes in favor, 99.9%. I therefore conclude that the proposal has been adopted and that the dividend has been approved. We can now move on to agenda item six, discharge of the members of the Board of Management and the Supervisory Board. This is therefore a double item. We have two points to vote on. The first is discharge members of the Board of Management in respect to their duties performed in 2016. Voting is open. Please cast your vote. Voting is closed.
The results will appear on the screen in a moment. There they are. There you see the vote has gone clearly in favor. I therefore conclude that the proposal has been adopted, and the members of the Board of Management have therefore been discharged. We now move on to agenda item 6B, proposal to discharge the members of the Supervisory Board in respect of their duties performed in 2016. Ladies and gentlemen, the vote is open. Please cast your vote now. Voting is closed. The results will appear on the screen in a moment. We see that the vote has gone in favor of the proposal. Okay. I therefore conclude that the members of the Supervisory Board have been discharged in respect to their duties in 2016.
Ladies and gentlemen, the next agenda item is the composition of the Board of Management. In particular, nominating Stéphane Rougeot as a member of the Board of Management. It goes without saying that the annotated agenda addresses this issue. The Board of Management is to be enlarged with someone who will take on the position of CFO. This is an important point in 2016, and the Supervisory Board is therefore delighted to see that Stéphane Rougeot started work as CFO at Philips Lighting on the 21st of September 2016. You have had a chance to get to know him today. We've heard him speaking today and answering your questions. The Supervisory Board has discussed the issue with the Board of Management and has come up with a binding proposal to nominate Stéphane Rougeot to the Board of Management for a period of four years.
Here, I refer you to the annotated agenda for more information regarding Stéphane as a candidate. Does anyone wish to take the floor regarding the nomination of Stéphane Rougeot? No. In that case, we can proceed to vote on agenda item seven, proposal to nominate Stéphane Rougeot as a member of the board of management. Voting is open. Please cast your vote now. Voting is closed. The results will appear on the screen in a moment. There we are. You can see a clear majority in favor of the proposal. Thank you. We therefore conclude that the motion has been adopted, and that Stéphane Rougeot has thus been named as a member of the board of management. Stéphane, congratulations. We move on to agenda item eight, composition of the supervisory board.
In the supervisory board, we've recently been looking at the membership of our organization, and we heard that Mr. Kees van Lede wishes to step down at the end of this year. It's of great importance, in addition, to note that Philips wishes to continue divesting from Philips Lighting. As you know, we've seen the first step towards that in February this year. In April, Royal Philips reduced its interest in Philips Lighting to about 40% of its shares at issue. The supervisory board therefore takes the view that it is a good idea to nominate two new members to the supervisory board. We are delighted to report that Jill Lee and Gerard van de Aast are available for nomination to the supervisory board, and the reasons why we propose those two individuals are set out in the annotated agenda.
Each of these appointments would be for a four-year period. First, I'll give Jill the floor and then Gerard. Jill will speak English. Jill, the floor is yours.
Thank you. Thank you, Mr. Chairman, for giving me the chance to introduce myself. Good afternoon, ladies and gentlemen. I'm Jill Lee. I'm very honored to be given the opportunity to be nominated onto the supervisory board of Philips Lighting. Let me introduce a little bit about myself. I have spent 30 years of my career in the business fields of power automation, electronics, and telecommunications, working for companies like ABB, Siemens, and Tyco Electronics in the past. In terms of my professional training, I'm trained in accounting and business administration, and I have led management functions and CFO functions, talent and diversity management, as well as leading global strategic programs. I am currently, since 2011, on the board of Sulzer Ltd., a Swiss company. I am presently also the chairperson for its audit committee.
In terms of geography, I've worked eight years in China, covering China and North Asia. I've now spent five years in Europe, working in Germany and Switzerland. I'm still residing in Switzerland. Before then, I was in Singapore. It's my home country, Singaporean, and during that time, I covered Singapore, ASEAN, and parts of Asia Pacific. Very happy and looking forward to have this opportunity to serve Philips Lighting on the supervisory board, and I certainly hope to have your trust and confidence in this appointment. Thank you.
Thank you very much, Jill. Now I'll give the floor to Gerard van de Aast. Gerard, please. My name is Gerard van de Aast. I'll be turning 60 this year. I've been involved in management at a number of companies such as Reed Elsevier, VolkerWessels, and most recently, Imtech. I've worked and lived in Germany, the U.K., and the U.S., and of course, the Netherlands. Currently, I'm not involved in any active management role, but I have a number of supervisory board positions. One is that I am the chairman of the supervisory board at the Dutch Railways. I'm also a member of the supervisory board for a number of smaller companies. It's an honor for me to stand before you today. Thank you very much. Thank you very much. Are there any questions or comments on these two proposed nominations?
I can see no hands up, which means we can proceed to the vote. Oh, I beg your pardon. There is a hand up. Mr. Smits, please.
Thank you, Mr. Chairman. The next time I will raise my hand a bit higher. First of all, my appreciation that both the nominees are present here. That's certainly not always the case, so my compliments for their presence here. You will not be surprised to hear that I have a few observations about the appointment of Mr. van de Aast. As you said yourself, he has joined Imtech under very difficult circumstances in February 2013. A bit earlier that, he became the CEO of the company, finding nothing but a story, I heard one day. Since then, he has raised EUR 1.1 billion with shareholders, and in August 2015, this led to the largest bankruptcy of a listed company in many years. Currently, the curators are investigating this course of affairs with Imtech, meaning that Mr. van de Aast, or the receivers rather, are currently conducting an investigation.
He certainly is under investigation at the moment, although far from being found guilty. I wonder how you have looked into this in discussing his nomination. My second question is, why you still chose Gerard van de Aast while in the long run, this will generate or require more attention while the Supervisory Board of a company such as Philips Lighting would like to focus on other matters than this investigation. If you would allow Gerard van de Aast to address this, I would like to ask him why he wasn't more reluctant to act until the moment when it became clear that he has nothing to answer for in the Imtech case.
Okay. Let me just say something by way of response. It is indeed the case that Imtech did go bankrupt, this was most painful, particularly, of course, in the Netherlands, because as you said, it was the largest bankruptcy that we've ever experienced in the Netherlands. If we talk about who may be to blame, whether Gerard van de Aast may have anything to answer for, let me reply. Imtech went bankrupt despite his efforts rather than because of what he did. We all know, of course, that shortly after he joined Imtech, weeks after he joined, it emerged that the pleasure park in Poland, if I could call it that, there was basically hardly any project involved. There were people being paid for it.
It's partly thanks to him that all this came to light, they had to give it everything they had in order to plug the gap. I don't think it was a purely Polish issue. I think that the German organization had also been rather economical with the truth. Gerard van de Aast did everything he possibly could to keep the show on the road. Everyone knew how very difficult it was, had to seek finance more than once, that did look at one point as if it might work against the odds. In the end, it was not to be. One might interpret what you said, although you didn't say it. One might interpret the situation as being that he got his hands on some large amounts of money. I'd like to say that accusation would not be fair. You didn't make the accusation yourself.
I'd just like to make sure there's no possibility of anyone getting that impression. Kees van Lede is sitting next to me, he was Chairman of the Supervisory Board, he was very closely involved in this process. We already knew Gerard van de Aast from a distance. He's been on the scene for a very long time, members of the Supervisory Board took the view that Gerard van de Aast is a highly honorable, dedicated, vigorous manager, Kees van Lede was able to confirm that, he will be a great addition to our Supervisory Board. Perhaps I could just sketch out the process here. We went off looking for two members of the Supervisory Board. We thought, which kind of profile do we want them to have, aside from the average, the classic profile? What in particular did we want?
Well, we were looking for one person with a general management background, an ex-CEO, to cut a long story short. We wanted another member with a financial background. One of them preferably a Dutch citizen, the other preferably from another country. One preferably a man, the other preferably a woman. This clearly led us to two streamlined profiles, a male Dutch ex-CEO and a female non-Dutch financial expert. We invited Gerard and Jill. Gerard very quickly came to the top of the list of Dutch citizens. Kees van Lede was able to tell us a great deal about him. Unanimously, and without hesitation, we decided to put Mr. van der Aast at the top of the list. Now, we're not alone in this because the Dutch government has also appointed Mr. van der Aast to chair the supervisory board of Dutch Railways.
Now, as you said, there is currently investigation underway, as always happens after a bankruptcy. Here again, one might get the impression that Mr. van der Aast might find himself in the dock accused of misdeeds. No. Everyone who is familiar with the story, everyone who's involved in it, is simply asked to tell the investigation what they know. That is Mr. van der Aast's role. He's certainly not in the dock. Now, this may take up an awful lot of his time. One might fear that he wouldn't be able to dedicate the relevant amount of time and effort to his role on the Philips Lighting supervisory board. We really don't think that's going to happen, no. Along with other people, he will have to provide additional information to the inquiry, but that's it. I think that I've given you a full enough picture.
I don't think it would be worth asking Mr. van der Aast to respond in person. I hope you can understand my point of view.
Yeah. Well, some comments, if I may. First of all, I would like to compliment you with the loyalty you're showing towards Mr. van der Aast, the support you're showing to him. Mr. van der Leeden worked together with Mr. van der Aast, but Mr. van der Leeden obviously didn't remain member of the supervisory board of Imtech up to the date of the bankruptcy. Mr. van der Aast was already a member of the supervisory board of the railway company. We had some observations back at the time because he needed all this time for Imtech. We indeed didn't claim that Mr. van der Aast is guilty of the bankruptcy. He wasn't just an employee of Imtech, he was the number one. He was the CEO. He was the person that's writing the annual report 2015.
Imtech, they are saying Imtech is now in order, we can work towards the future. We raised EUR 1.1 billion from shareholders, and I am 100% sure that Mr. van de Aast would have want things to go differently. The reality is that there was a bankruptcy and that the money evaporated. The issue is not for him to lose lots of time and energy if the investigation of the receivers would lead to anything. It is a standard procedure, I agree, but still, the question is what the Philips Lighting supervisory board will do when one of the supervisory directors would be in the news a lot with unpleasant topics. You may be asked questions about the nomination you have made today. I think that the turmoil may create more problems than you would like to see as Philips Lighting.
I am not saying that he is not suitable, but the question is this, bearing in mind the existence of other suitable candidates, why take this additional, let us say, one liability? Thank you.
The reply is more or less what I already said. Of course, we were aware that some comments would be made. I imagine that you are very much in the picture. Some people are less well informed than you are, and some people will simply join the hue and cry. We were aware that might happen. Mr. van Lede was not a member of the supervisory board at the time of the bankruptcy. That does not mean he was not able to vouch for Mr. van de Aast's abilities. As I say, we sincerely and unanimously decided to put him at the top of our shortlist. If that means that we will have to explain the situation a few more times in future, we, or rather I, as the supervisory board chairman, will be happy to do so. Thank you very much for your input.
Can we now proceed to the vote? First, agenda item 8A, nomination of Jill. Thank you, Chairman. Voting is now open. You can now cast your vote. Voting is closed. The results will appear on the screen in a moment. There it is. We see that the voters have gone in favor of the proposal. I therefore conclude that the proposal has been adopted and that Jill E. has now been nominated as a member of the supervisory board. Congratulations, Jill. We move straight on to agenda item 8B, nomination of Gerard van de Aast. Ladies and gentlemen, the vote is now open. Please cast your vote now.
The voting is now closed.
Voting is now closed.
The results are on the screen.
The results will be on the screen, and I see the required number of votes in favor has been cast. I therefore conclude that the proposal has been approved, and I'm delighted to see that the percentage of voters in favor has cast a slightly different light on the discussion a moment ago. Gerard van de Aast has now therefore been nominated as a member of the Supervisory Board. Gerard, congratulations. We can now proceed to the next agenda item, agenda item nine, remuneration of the Board of Management. Here, there are two aspects of the remuneration. One is a proposal to amend the annual cash incentive, and the other is an approval of the long-term incentive plan for the Board of Management. Here, these are two separate voting items. You can see a full explanation of the proposal in the annotated agenda.
Now I'd like to give the floor to the chair of the Remuneration Committee. Kees, please shed some light on this. Well, ladies and gentlemen, I'm sorry to burden you with this issue once again, there we are. We need your approval, actually two adaptations, I would say. You received some information at the time of the IPO, we can start off. Could I have a slide on the screen, please? Next one. That's it. Good. That's what I wanted to show you. Well, what you see here are proposals for the annual plan. Short-term bonus, if you will. You will remember from my words at the beginning of today's meeting that Mr. Rondolat can get 80% of his base salary in the light of target achievement, the other members of the Board of Management can get 60%.
There's no negative figures, the absolute maximum is at the level I explained earlier. Our suggestion, for the sake of clarity, is, if you accept it, that the Supervisory Board could look at one particular year and have the option available to it to take the parameters listed into account when assessing the short-term bonus. In other words, not just sales growth, adjusted EBITDA, and free cash flow, as it was this year. Depending on the requirements and events in a particular year, the Supervisory Board might say, "Oh, this year we've really got to focus on working capital," in which case, working capital could be an indicator for bonus assessment. If we have any other reason to think the return on capital is not being satisfactorily supervised, we would want to consider ROCE as an indicator.
Our question then to you, as has happened in other companies with the approval of the shareholders, we would like to take these, what are these? Six parameters and select from those each year. Next slide. For 2017, we did decide to do that. Thus, we looked on the financial front, growth in sales, the EBITA on the yield side, on the cash flow side. As you know, I'm very, very keen on having cash flow all the time. Free cash flow. Those were our quantitative objectives. In addition, we have 20% personal assessment. That is assessed, as always, in discussion between the Supervisory Board and the relevant member of the Board of Management. There's a sort of school report, if you like, produced at the end of the year with a mark attached. There we are.
That, in a nutshell, is a proposal that we should have the option of six parameters. This year, we are using the same parameters as we used in previous years. Any questions on this? Does anyone wish to ask a question or make a comment on this? Yes? Go ahead, please.
My name is C from Amsterdam. Good afternoon, Mr. Chairman. Does this mean that every year at the AGM, we will be given these transparent overviews of the components of the incentive plan? Will you comment on this annually? Will you make this public annually? Or is this happening only this year?
Not as such, no. I don't think we would have any difficulty in observing this transparency in the future. We say, well, this year we've got these six parameters, we'll say, these are the parameters we chose. We won't give you the figures, but we'll say what parameters were used. I think we would have no difficulty observing that level of transparency.
Thank you.
We can now proceed to different Oh, I beg your pardon. There's another question. Mr. Smids, please.
Thank you, Mr. Chairman. Remuneration is not exactly my preferred topic, and I will not discuss the levels, but I would like to speak about the rationale, because this method, I would call à la carte. It's a little bit surprising. My question is, at what point do you make your choice? You have to do it before the start of the financial year, and then at some point of time, you have to forecast the issues that will be relevant for the coming year. When do you do this? Secondly, there was reference through transparency in the previous question. Is it possible for you to carry out scenario analysis on what would have happened to the remuneration if you would have selected other parameters? Transparency of the supervisory board, and in particular of the remuneration committee, is something important.
I think that the shareholders could have some kind of control on the process, and therefore, there must be some kind of accountability, which could be this scenario analysis.
Well, yes. It goes without saying you'd carry this exercise out before you embark on the new year. I don't think I need to say anything more about that. Not from my point of view, anyway. It would be a nonsense if you changed courses in midstream and said, "Let's switch over to different indicators and get a different outcome." No. Let me put it this way. I take the view that a remuneration committee is not a pocket calculator, which just has to do lots of arithmetic on the basis of agreements. No. You've got to really assess the situation, and you've got to use your judgment. I'll say a bit more about that when we come on to talk about the long-term incentive in the light of a question we had earlier regarding environmental objectives.
Every year you have to look and see whether your work is meaningful and is in the interest of the company, and is it also meaningful in terms of quantitative issues. You do that before the start of the year. The remuneration committee assesses this, which is then put before the supervisory board. It happens upstream. Do we use scenario analysis? I think that's, well, it's a bit trendy, isn't it? Again, what you try to do is to get a view of whether the factor determining behavior actually has contributed to the success of the company. Thus, if you say, "this year we need to focus on issue A or issue B," then you can use that parameter.
Of course, then at the end of the day, it's up to the supervisory board to attach figures to that new parameter so that it will give equivalent outcomes to the other parameters. In other words, you don't suddenly end up with double the bonus of the members of the board of management simply because you use a different indicator. Yes, perhaps I could just add here. There might be a misgiving if a company makes a unilateral decision to focus on only one indicator, maybe on the sales growth, that could lead to improper behavior. Why don't we look into this every year? We're looking at this fine list of excellent parameters, and in the coming year, we're going to look at growth, volumes. We're going to look at free cash flow and profits. You're also going to look at a number of non-financial indicators.
The risk then that you simulate wrongful behavior and live to regret it, I think it is very small. You're dealing here with accumulated learning. We can see what happened last year, and we might be able to say, "Maybe in the coming year, it might be a little bit better to look at this parameter rather than that parameter," repeating past mistakes.
My apologies for banging on. Look, you're asking for quite a mandate. More specifically, can you explain why this year selecting free cash flow as a criterion, for instance, and not working capital, for instance? Why do you want to have the freedom to move from three to two parameters? This is a flexibility you're asking for. We have to vote on this, and I think we deserve a full answer on this matter.
I hope that this company is reasonably confident in the judgment of the supervisory board members. Indeed, we are legally obliged to act in the interests of the company. If a choice is made which is different from a particular year, then in the light of today's transparency decision, we would also explain why that is. I certainly can't say why. There may well be a year when we say, "We're only going to look at two indicators this year," or maybe four. The idea is to avoid tying our hands where we have a system where, just to follow on from the chairman's example, you might say, "At conclusion that sales growth as a parameter is leading to perverse incentives." If you identify this problem, you must be able to respond immediately and adjust your systems accordingly.
Clearly, that is the price flexibility you want to have. Can you explain to me why this year, free cash flow is better than average working capital? Why did you select one metric and not the other? You want flexibility, I would like to know why you picked one and not the other.
Well, we can already take this flexible approach if you vote for the second proposal over the first one. Essentially, we're saying we've got a plan, and as currently standing, we've got sales growth, EBITDA, and free cash flow. That will stay in place. For next year, we would like to have the option of picking some indicators out of the longer list. We would be acting with continuity. All we're doing at the moment is asking your opinion. If you vote in favor, it's possible that the other parameters might be deployed in 2018. I think that it probably won't happen. That's my hunch.
Well, I have to conclude that you cannot express to this meeting that you cannot explain why you selected one or the other.
I repeat, we are going for consistency. You know, from the IPO paperwork, prior to 2016, the parameters were comparable sales growth, earnings before interest and tax, and free cash flow. Those were the ones. At today's meeting, we're asking your opinion. Indeed, we are asking you to authorize the supervisory board to change the list of indicators in future. If you do give your approval, it's possible the supervisory board might do that in 2018. Personally, I think we probably won't, that's a different story. For this year, we said, would we prefer to have comparable sales growth or a return on capital? This year we didn't do it because we wanted to keep things consistent.
Mr. Chairman, thanks to Mr. Van Lede for the answer. This is too formalist an answer. He wants to have flexibility, freedom between components. He cannot explain why he would select one component and not the other. I regret this. This is why the VEB will vote against this issue.
When Mr. Van Lede introduced this issue a moment ago, he said free cash flow is always an important aspect of this exercise. That's very much in the foreground. Another point we didn't go into so explicitly, supposing we had to turn to the AGM every time we wanted to use a different parameter because we thought it was important. Well, we meet in May. That's too late. You've got to decide in December or January at the latest. I note that you're going to vote against. After the meeting is over, perhaps I could invite the gentleman to brainstorm with us on the difference between working capital and cash flow. I'd like to proceed to the vote. Ladies and gentlemen, the voting is now open. Please cast your vote. The voting is closed.
The results will appear on the screen in a moment. Here they are. You see that the proposal has been approved by the required number of votes. I, therefore, conclude that the proposal has been adopted. The proposal regarding the cash incentive as set out in the annotation to agenda item 9A has been adopted. We can now move on to agenda item 9B, long-term incentive. Ladies and gentlemen, I mentioned this earlier this afternoon as well. Can I have the next slide on the screen, please? You can see here what levels we're talking about. CEO, 100%. The other members of the board of management, 80% of their base salary. Second point is that unlike lower levels of the organization, we're only talking here about conditional granting of shares. Conditional. That is the whole point. That's what we're talking about here.
The conditions are tied to performance measures. There are three performance measures. You can see them on the right-hand side of my screen. 40% is TSR, total shareholder return, 40% free cash flow, 20% sustainability. All of us are delighted to see sustainability really taking up a significant share there. I'll come back to all this in due course. Some free cash flow I don't need to talk about, it speaks for itself. Relative total shareholder return. This is the increase in share price if we assume that dividends are reinvested. We won't bother about the exact details of the calculation. Let's move on to the next slide. Let's see who our peer group are. We had extensive debates about who our peer group should be.
Peer group means a group of companies which any person considering investing in Philips Lighting might also consider investing, comparable companies. We came up with this group on the slide. As you see, 15 of them, and we also have a reserve list with four more. The reason why we have a reserve list is that sometimes a company might be taken over, so someone might need to be dropped from the list. On the right-hand side of the slide, you can see when we pay what. If Philips Lighting comes up at the relevant level on the graph, you can see the amount which will be paid out. Now the next slide. We've now got the lighting long-term incentive plan. This company really is striving to do more than just talk about environmental objectives. We want to see quantitative objectives here.
Of course, it's always very difficult to do this. We've come up with the following objectives. They've already been discussed earlier this afternoon. We check whether they have been met or not. Our first speaker said the sustainable revenues, 78% of that was achieved. Now I'd just like to repeat what I said earlier. The Supervisory Board and the Remuneration Committee, in particular, isn't a pocket calculator. We have to use our judgment as well. Here you can see a classic example of a level which is most certainly to be discussed at the Remuneration Committee to decide whether this should remain in place or whether it should be adapted. The further you drift from typically quantitative indicators, the more this is the case. This is the slide as it currently stands.
This is what the company is working on, and everything I say will be subject to constant review. I hope that was the last slide I had. Yes, that is our proposal. Does anyone wish to take the floor? Any questions or comments? There's a hand we know well at the back of the room. Mr. Smids, please.
Thank you, Mr. Chairman. Once again, a critical and difficult question. I hope it's the last one, and otherwise, we can go dancing if you want me to make up. Indeed, TSR. First question, you look at TSR, and then you make a classification comparing with the 14 peer companies of Philips Lighting. My question is this: you speak about the relative TSR. Does that mean that in the unimaginable case that still may happen when the Philips Lighting TSR would be negative but less negative than the peer group, that still a long-term remuneration, a long-term bonus might result? The second question, which is not a question but an observation, and this concerns the ranking you just showed. We saw that managers have moved from the 10th place in 15 are already given a 60% bonus.
If you look in terms of marks, if you have 3.5 out of 10, you already get some pocket money. When I had the 3.5 out of 10 in my school results at school, I wasn't given any bonuses. I think that is a bit too easy. I think if you really outperform, you deserve a bonus. If you're part of the lower third of the spectrum, you don't really deserve a performance bonus. That concludes my remark. Thank you.
Well, your question wasn't exactly unexpected. The question now then is, if the results are negative, do we still pay out a bonus if we are doing least badly? Well, according to this system, imagine that everyone is losing loads of money, but we lose a bit less than the others. You might still find that, yes, in fact, you are doing best. That's why I keep repeating that the supervisory board, and in particular the remuneration committee, use their judgment. If this situation arises, I think it is extremely unlikely that we would come up with a bonus. The formula, you're quite right. You look at the ranking. If you do better than the others, everything is falling apart everywhere, but we're falling apart less than everybody else. Yes, then you could say I've got the right to my shares.
The shares wouldn't be worth anything, of course. I repeat, all these things are nonsense unless you apply your common sense to them. Second comment. Here I say I do fully understand your point of view. There are two points to be made here. Whether we like it or not, this is the way the market works. That's my first point. Perhaps I could just add a little aside that may be slightly different in the English-speaking world, parts thereof. Second point, we are starting off from a Royal Philips plan, and it's really too early in the day for us to say we're going to call a halt to it. This is the thinking behind our choice here.
Allow me to add, I know you to be critical of high remunerations, so let me be very clear about that. Let me say it like this, it's surprising to use TSR as a standard, meaning that the interests of managers and shareholders are linked together. If TSR would be negative, still there would be a reward. Something's twisted there, and I hope you share that view as somebody who is against excessive reward.
As I said, I do understand your concerns. With these gentlemen at the tiller, I'm sure the situation will simply not arise.
Well, an observation for the minutes rather than a question. Obviously, I'm very satisfied, as I just said, to see that sustainability targets are part of the long-term component of the remuneration plan. We are disappointed to see that such a high part of remuneration is variable. We think this is rather Anglo-Saxon. We do not support this, and this is why VBDO will vote against, although we support the content of the plan.
Okay. A valid comment, which we respect and will duly minute. Thank you. If no one else wishes to take the floor, then we can proceed to the vote. The voting is now open. Please cast your vote now. This voting is closed. The results will appear on the screen in a moment. Here they are. I note that the required number of shares in favor has been cast. I therefore conclude that the proposal has been adopted, and that the long-term incentive plan for the Board of Management, as set out in annotated agenda item 9B, has been approved. We can now move on to agenda item 10.
Ladies and gentlemen, this agenda item authorizes the Board of Management, A, to issue shares or grant rights to require shares, and B, restrict or exclude preemptive rights to shares, subject to the conditions set out in the annotated agenda. These are two separate voting items, and we will be voting on them separately. The proposal is to grant an authorization for 18-month period to run from today. The first authorization is a 10% of issued capital, plus an additional 10% of issued capital in the case of mergers, acquisition, or strategic alliances. For both such management board decisions, the Supervisory Board's approval would always be required. These points are normal issues for publicly quoted companies. I imagine you don't need any further clarification, does anyone wish to take the floor with a question or a comment? The floor is open, if so.
I can't see anyone raising their hand. I suggest we move swiftly on to the vote on agenda item 10A. Ladies and gentlemen, the voting is open. Please cast your vote now. Voting is closed. The results will appear on the screen in a moment. Here they are. I see that the required number of votes has been cast in favor of the motion. I therefore conclude that the proposal has been approved, and we can now move on to agenda item 9B, authorizing the Board of Management to restrict or exclude preemptive rights. Agenda item 10B, ladies and gentlemen. Please cast your vote now. Voting is closed. The results will appear on the screen in a moment. Here they are. I see that the required number of votes has been cast in favor of the proposal.
I therefore conclude that the proposal has been adopted. We will move on to agenda item 11. This agenda item is authorizing the Board of Management to acquire shares in Philips Lighting N.V., subject to the conditions set out in the annotated agenda. The authorization is proposed for a period of 18 months and is restricted to 10% of the shares at issue, plus an additional 10% for share repurchase programs for the purpose of reducing capital. Any decision to proceed to such a purchase requires the authorization from the supervisory board. This is a normal point for publicly quoted companies. A similar authorization enabled Philips Lighting to purchase 7 million own shares in Royal Philips and Royal Philips reduced its lighting share to approximately 40%.
This is in line with the proposal of Philips Lighting to return EUR 300 million to its shareholders in the period of 2017 to 2018. Would anyone like to take the floor on this issue? No. In that case, we can proceed to the vote on agenda item 11, authorizing the Board of Management to acquire shares in the company. Ladies and gentlemen, the vote is now open. You may cast your vote now. Voting is closed. The results will appear on the screen in a moment. Here they are. I see that the required number of votes has been cast in favor of the proposal. I therefore conclude that the proposal has been adopted. We will move straight on to agenda item 12, authorizing the Board of Management to cancel shares subject to the conditions set out in the annotated agenda.
This would be a cancellation of shares held by the company or purchased by the company in accordance with agenda item 11. In as much as these are not used for share-based remuneration or any other obligations. This, again, is a normal authorization granted to publicly quoted companies. Does anyone wish to take the floor on this? It seems not. Let us proceed to the vote. Ladies and gentlemen, the vote is open. Please cast your vote now. Voting is closed. The results will appear on the screen in a moment. Here they are. I note that the required number of votes has been cast in favor of the proposal. I therefore conclude that the proposal has been adopted. We can move on to our last agenda item, which is any other business. Who would like to take the floor for any other business?
Yeah.
Yes, go ahead, please. Bit of a walk to the microphone.
My name is Peter van den Berg. I've worked with Philips for 38 years, 25 in lighting. I am a member of the board of the Association of Retired Philips Officers. So far, the expenses of our association have been borne by Philips. Now, a split has taken place. There has been a split into two thirds for Royal Philips and one third for Philips Lighting. Royal Philips has accepted two thirds, Philips Lighting has not accepted to pay this one third. This has an effect for the federation, the association and its members. My question is why? What's behind this? Eric or Stefan?
Eric or Stefan? Be my guest. I'm not in the picture about this, otherwise I'd be answering myself, of course.
Look, we don't have any specific explanation. I'm not aware about the issue. We're going to take it back with us. We will probably give a formal answer later down the track. Because I am not aware.
It is a result of negotiations between one of our members and your company. I don't know the name who did it.
Let us.
You can find it out.
Yeah, let us take it home, review it, understand it, so that we can go back to you.
Okay. I'm waiting for your answer then. Thank you very much.
No worries. Thanks.
Okay. Thank you, Mr. van den Berg. Anybody else wish to take the floor? Any questions or comments? No, no one has raised their hand, so I conclude that no one wishes to take the floor. We therefore come to the end of today's Annual General Meeting of Shareholders of 2017. Thank you all for coming. When you leave the room, please hand your voting cards and voting handsets in. Please join us for a reception. Is it just outside or is it downstairs? I wish you all a pleasant journey home. Thank you. Goodbye.