Earnings Call: Q2 2021

Jul 23, 2021

Hello, and welcome to the SignifAI Second Quarter and Half Year Results 20 21. Throughout the call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. Today, I'm pleased to present Eric Rondelat CEO Javier Van Engelin, CFO Helke Gerdes, Head of IR. Please go ahead with your meeting. Good morning, everyone, and welcome to the SignifAI earnings call for the Q2 2021. With me are Erik Rondola, CEO of SignifAI and Javier van Engelen, CFO. As usual, Erik will touch on the key operational and financial for the Q2 2021. Javier will then focus on a review of the company's performance in the 2nd quarter and highlights of the first To close, Eric will end today's presentation with the outlook and the closing remarks. After that, we'll be happy to take your questions. Our press release and presentation were published at 7 o'clock this morning. Both documents are available for download from our Investor Relations website. The transcript of this conference call will be made available as soon as possible on our Investor Relations website. With that, I will now hand over to Erik. Thank you, Telkur. Good morning, and everyone, and thank you for joining us today. So let's start on Slide 4 with the key operational and financial takeaways for the Q2 of 2021. We increased the installed base of Connected Light Points from €83,000,000 in Q1 to €86,000,000 at the end of Q2. This further illustrates the growth of our Connected Lighting activities. I would like to highlight that the EUR 86,000,000 that I've just talked about still Exclude the 2,000,000 connected light points of Telensa, the U. K.-based street lighting company we recently acquired. This acquisition completed on July 1. LED based sales represented 82% of sales, up from 80% in the same quarter of last year. In the Q2, we saw an acceleration of the pace of recovery led by our Consumer, Connected Lighting offers and our growth platforms. We achieved €1,600,000,000 in sales, representing a nominal growth of 9.6 percent and a comparable sales growth of 14.1%. As expected, our sales growth was hampered by ongoing constraints, in particular component shortages and logistics at increased from the EUR 50,000,000 We disclosed at the end of Q1 to €85,000,000 at the end of Q2. These supply shortages have more than strongly affected our Digital Solution and Digital Products divisions. Adjusted indirect costs decreased by 130 basis points to 30.6 Percent of sales, adjusted EBITA margin increased by 190 basis points to 10.9 percent, driven by gross margin expansion and operating leverage. And net income slightly increased to €82,000,000 And finally, free cash flow was €104,000,000 including an increased investment in future growth. On the next slide, We will discuss the performance per division. Let's start with Digital Solutions on Slide 5. And comparable sales increased by 12.6%, which reflects a sequential improvement on the back of a low comparison base. Sales growth was affected by extended lockdowns in some of our markets like India, ASEAN, Canada and also supply constraints. Adjusted EBITA margin improved by 110 basis points versus last year, up to 10.7%. This was supported by operating leverage and procurement savings. On Slide 6, you will find some of the digital solutions division. The first illustrates our commitment to food availability and our target of doubling our Bridal Labs revenue to 32% in 2025. In the Nordics, where fruits and vegetables are still largely imported, there are now 2 more companies that are using our Philips Green Power LEDs and GrowWise control system. Control over the light spectrum and lighting levels helps to stir the quality of the crops and boost the yield of both companies. It also helps them to predict growth levels So they can optimize production to match demand during the season. The first customer is Lufgada in Sweden, Which is expanding its growing area from 2,500 square meter to become one of the Europe's largest vertical farms. At full capacity, the vertical farm can produce 60 tons of lettuce every month, the equivalent of around 1,000,000 bags of salad. The second customer is Millio Garnierit, which operates Norway's largest greenhouse. They will now be able to grow tomatoes and peppers all the year round. The customer also has the ability to dim the light levels when there is sufficient daylight to ensure even light levels throughout the day and lower energy consumption. Together, These companies contribute to reducing the food mile for consumers in Sweden and also in Norway. As part of our commitment to health and safety and doubling our bradilized revenue, we also continue to provide our customers around the world with protection UVC Disinfection Lighting. In the Netherlands, we helped 2 theaters to welcome back guests, performers and employees With peace of mind by installing almost 100 upper air disinfection luminaires in total. We also installed 2 upper air luminaires at the Comenius School in Brandenburg, Germany. This disinfects the air above the head of the students and teachers, so classes Continue without interruption. Other customers include a store of retailer 2 Dot Market in Lombardy, The first retailer in Italy to provide its shoppers with this kind of service, we also installed UVC at multiple smaller restaurants in Hong Kong, a coffee chain in Korea and a large number of metro carriages in Singapore. Now let's move to Digital Products on Slide 7. And we see that it continues to show a strong sales performance as well as a further year on year improvement of the adjusted Comparable sales grew by 20.4%, mainly driven by continued strong consumer demand and for our Connected Home category. Also in Digital Products, the growth was hampered by components and container Shortages. The adjusted EBITA margin was 12%, an increase of 2 70 basis points over last year. This improvement was driven by Solid year on year gross margin expansion, higher contribution of Connected Home Lighting, careful balancing of pricing versus cost and also operating leverage. The next slide, Slide 8, shows a few business highlights from the Digital Products division, all illustrating our commitment to customer driven innovation. First, all Philips Hue And Wi's products will be compatible with a new standard called meta, which enables smart home devices to interact with each other. The next highlight illustrates how disinfection remains relevant. In Q2, we introduced the Philips UVC Mini disinfection box in Europe, providing consumers With an additional layer of protection against viruses and bacteria, this mini box can disinfect smartphone, keys, money, watches in just 8 minutes. It is so small that it is perfect to store or take on the go for instance when you travel. It is also equipped with the USB C port, so it can easily be charged through, for instance, a power bank. Lastly, I'd like to highlight how we are helping our customers to switch from conventional to LED lighting. So we launched TrueForce LED high base luminaire to serve as a quick and easy LED replacement for HID lighting. This provides installers with a fast, easy and hassle free installation. It also offers energy saving of 65%. Germany based Ipsen installed this TruForce LED high bay luminaires at its production facility in Clever With a lot of success and great benefits. Moving on to Slide 9 To talk about Conventional Products, which grew 4.7 percent on a comparable basis, while increasing adjusted EBITA margin by 110 basis points to 18 0.6%. The Conventional Products division has proven its resilience during the quarter delivering positive growth for the first time in years. While benefiting from a broad based market recovery, we saw traction across most segments, most notably in Horticulture. The adjusted EBITA margin increased to 18.6%, driven by continued pricing discipline and operational efficiencies. Moving to Slide 10, I would like to talk about UVC, its applications and the innovations which we have brought to market. It's now roughly 1 year ago that we launched our first UVC products older than lamps, which have been part of our portfolio for more than 35 years. As it becomes more accepted that COVID-nineteen infections occur mostly through the air, We have seen unprecedented demand for UVC Air Disinfection. We launched products in 9 different groups With over 20 product families, our products see their application in all segments ranging from retail to hospitality, from offices to industry And from Medical Care to Homes. We realized over 850 projects with many more in the pipeline. Overall, the COVID-nineteen pandemic has led to a growing awareness of airborne viruses and bacteria And the need for disinfection. And there is a large business opportunity for UVC in the aftermath of COVID-nineteen. We will continue to launch new applications while educating both customers and regulators on the benefits of this technology. Next, I would like to discuss the Q2 performance of our Bright Alliance Better World 2025 program. In the Q2, we continued on the journey to achieving our ambition of doubling our positive impact on the environment and society in 2020 We achieved a cumulative carbon reduction across our value chain of 33,000,000 tonnes, which makes us Ahead of track for the 2025 target of 340,000,000 tonnes. This reduction was driven by an accelerated shift to energy efficient Connected LED lighting in the first half of twenty twenty one, decreasing our carbon emission in the use phase. Our Circular revenues increased to 28% versus our 2019 baseline of 16 percent, while we set ourselves a target of 32% in 2025. This increase was mainly driven by our strong portfolio of serviceable luminaires and further expansion of our 3 d printing footprint. Bridal Labs revenue were 25%, which is Progressing nicely towards our 2025 targets of 32%. We had customer wins, which included quality of light, eye comfort products, Horticulture Lighting and UVC disinfection Lighting, which I've already talked about, and they all contributed and contributing to our Brad Labs revenue. We're also on track to reach our 2025 target for the percentage of women in leadership position of 34% as by the end of the 1. It already increased to 25%. This quarter, we also received further A recognition for our leadership in sustainability, Sustain Analytics ranked us 1st in our industry and in the top 5% of the ESG risk ratings universe. Let me hereby hand the presentation over to Javier, Who will discuss the 2nd quarter financial performance and the highlights for the first half of twenty twenty one. Thank you, Erik, and hello, good morning to everyone. Moving to Slide 13, where we visualize the adjusted EBITDA bridge for SignifAI. Versus quarter 2 2020, adjusted EBITDA margin improved by 190 basis points to 10.9%. This improvement was driven by higher sales, which provided us operating leverage improved sales mix, which is mainly attributable to strong demand for Connected Lighting offers. In addition to sales mix, our gross margin also benefited from a careful balancing of price versus cost. Indirect cost as a percent of sales improved by 130 basis points driven by operating leverage. At constant FX, Indirect costs increased by $42,000,000 versus the 22 Q2 base that included $30,000,000 of employee contributions and government subsidies. Finally, ForEx had an adverse impact of about €8,000,000 On Slide 14, we take a closer look Our year on year working capital performance. Working capital improved from 6.1% of pro form a 12 month sales in Q2 2020 to 4% of sales in Q2 2021, evidencing the structural improvements made during the last 12 months. The year on year improvement is mainly driven by the combination of higher payables and lower receivables, offset by higher inventories as we ramp up for a stronger Second half of the year. On the next slide, you can see our net debt evolution. At the end of the same period last year, following the 1st months Of Cooper integration, our net debt to EBITDA ratio stood at 2.4x. By the end of the Q1 of 2021, we managed to lower €4,000,000,000 translating into a net leverage of 1.7x. The increased debt and net leverage was mainly due To the 2 dividend payments last quarter with a total value of €292,000,000 and the purchase of treasury shares to cover obligations arriving Employee share plans. This was partially offset by the quarter 2 free cash flow generation of €104,000,000 On top of the purchase of treasury shares, other include derivatives, acquisitions, new lease liabilities, dividends to minority shareholders and FX Impact on cash, cash equivalents and debt. Overall, we remain well on track to deliver on our commitment to reduce our leverage ratio back one times by the end of 2022. Finally, please allow me to share a few highlights related to our total one. Over the first half of twenty twenty one, we achieved a comparable sales growth of 8.4%. While the growth was on the back of a first half twenty twenty that was strongly affected by COVID, it's worth noting a couple of points. Our top line growth was driven by continued strong traction in our Consumer segment, our Connected Systems and Growth platforms as well as a resilient performance on conventional products that declined by only 1.2%. Digital Solutions is Also showing increasing pace of recovery, particularly in the Q2. Overall, the plus 8.4% growth was achieved in the midst both of a continued and new government interventions and of a challenging supply environment with shortages of both components and transportation containers. The adjusted EBITA margin improved by 2.30 basis points in the first half of twenty twenty one compared to 2020, from 8.5% in 2020 to 10.8% in 2021. At the end of the first half, The margin was 10% ahead 10 basis points ahead of the adjusted EBITA margin of 10.7% we achieved for the full year 2020. Even as we invest in continued top line recovery, free cash flow of €272,000,000 over the first half was slightly higher than last year, with positive contributors being higher profitability and a structural improvement in working capital. With that, I would like to hand it over back to you, Erik, for the final part of the presentation. Thank you, Javier. Let's turn to the last slide, Slide 18 for the outlook for 2021. So an easing of lockdowns overall, although the The situation remains volatile in some parts of the world, in particular with the emergence of new virus variants, which may lead to renewed Lockdowns in fall or winter. In addition to this, we expect supply chain constraints to continue to persist In the second half of twenty twenty one, we are confident that the measures that we have taken will help us to counter those challenges and deliver our guidance for the year. We therefore confirm the CSG of 3% to 6% for the full year 2020. In addition, we continue to expect our adjusted EBITA margin to be in the range of 11.5% to 12.5% for the year. Taking into account also the high EBITA margin base of last year, we expect a stable margin development in Q3. We also continue to expect free cash flow to exceed 8% of sales. And with all that, I would like to open the call for questions, which Javier and myself will be happy to answer. Thank If you wish to withdraw your question, you may do so by pressing 2 to cancel. Our first question comes from the line of Martin Wilkie from Citi, please go ahead. Yes, thank you. Good morning. It's Martin from Citi. The question was with your own Pricing and how you're seeing inflation items, and I appreciate there's a lot of moving parts inside this. When we look in your earnings bridge, it looks like pricing Is more negative than it was in the Q1, but I realize it's a basic comparison effect, but also you've managed to offset that in your cost So productivity. Just to understand a bit more about the underlying price dynamics, what you've seen with raw materials, how you've offset that? Just so you can give us a bit more color on how you're And then Eric can complete at the end if need be. Look, pricing, as you know, is a complex dynamic. And as we said before, Pricing is how we look also at margin management, and I think that's the way to look at some of the bridges that you've seen. So Let's take a step back. When we also talked about pricing in the past, what we've said is we see increasing trend in raw material cost. We see inflationary trends. First question is we see 2 kind of trends. We see an underlying inflation trend that is now trending up, but we see also short terms of spots by And those happen at prices which are significantly higher, and we can come back to that in a second. What we have been doing is we have indeed increased price increases to the market. We have left a bit of agility also to the markets to on the timing of the increases of the pricing also as we saw the cost of goods, The pace of which they were coming through our P and L. When you go to the bridge that you've seen in the presentation deck, your observation is I think the key one where you see that Pricing is offset by cost of goods, so we have a balance between both. And that's what we always manage. We're going to manage our gross margin By ensuring that pricing is offsetting the cost increases, and that's if you look at our sequential improvement or our sequential gross margin versus quarter 1, you see that we're holding that Table. If you compare versus year ago, you still see the increase in gross margin, which is driven by continued cost savings that we see and we have generated in the first half, Which again has given us a bit more flexibility on the agility of price increases to manage that margin. So that's how we manage pricing in the market in general. If you look at trends, There I would say there's no change versus what we've talked last time. We see indeed a continued Low level of, I would say, structural pricing erosion. It's still there, but it's at the lower levels than what historically is. We see the inflation coming, what we call structural inflation from raw materials that we will think will persist and for which we will take Pricing as that comes through the P and L. And then there's what we call for now, let's call it more the speculative Increases on components where there's clearly an element of spot buy markets where people are making some money On the detriment of others. And there let's be clear, there's some material, some components that we buy at 10 times, at 20 times the price, but even 40 times And sometimes more. And these are smaller components that we want to buy to secure our customer service that we at least can service our clients. For those ones, we don't necessarily price it because we think that's a short term effect that we have. Again, what we target to do is to balance with pricing the cost increases we see. We The cost increases we see. We as we see it in Q3 and Q4. And we believe that we'll probably also, there again from a price implementation point of view, continue our strategy to compensate that through pricing in the market. But we do believe there's going to be continued pressure there from a costing point of view. I think these are the key components we see in the market. That's great. Thank you very much. And the next question comes from the line of Daniela Costa from Goldman Sachs. Please go ahead. Hi, good morning. Wanted to ask three questions, if that's possible. First, just starting on conventional, obviously, there's a comp, I guess impact and you get to positive growth, but you were pretty upbeat on your commentary about disinfection and specialty lighting. So How do you view conventional going forward? Can it actually continue to grow? Or you still think it will eventually Decline and the negatives will offset the new positive opportunities you spoke about. And then the second Question is regarding whether you can give us an update on Cooper Synergies, how much they contributed for the result in digital solution, Are they fully captured? What's still left there? And then final question just on if you could help quantify on the digital products Deceleration basically or the lower than consensus head growth. How much you think was the hit from delayed revenues Because of the supply chain, I think you quantified it in 1Q. If you could help us think about the number and when does that come back in terms of your planning? Thank you. Sure. Good morning, Daniela. On conventional, it's a 4.7% growth on the very low base of Compression because we declined by 25% for the same quarter last year. So I think we also need to take into account The base of comparison and nevertheless when you see the dynamic in that business, it was pretty much helped by horticulture That was driving at a much higher level than the average of that business. Particulture is one of the focused Growth platform that we have and we've been very successful in the past quarters with that business in line with our strategy. Now moving forward, it's still a business that has its foundational historical Activity is declining. We need to let the dust sets this is going to lead us, but probably With UVC and also horticulture, they're going to be able to Impact positively what we've seen as a historical decline for that business. Now when it comes to UVC, Where we are growing more today and this is why I won't talk that we have developed. So we're growing more at this point in time In the applications for the consumer business, but also for the professional business that we have developed lately and we saw A very positive level of traction. I've highlighted also small project, but in many different places of the world for many different applications. So The growth of UVC will be mostly probably in digital products and the digital solution than in conventional in the future. Update on Cooper. Cruising very well in line with what we had developed previously, Synergies that we have already generated and we continue on our road map are also happening. But Cooper was impacted As I would say, digital solution in general by both the shortage in containers, but also the shortage In different types of components. When it comes to digital products, well, It's 20% plus. I think we compensate nearly fully the decline of last year. You need to understand that In well, I know and I know that you know that very well. In Digital Products, you don't only have the consumer business, which is trending extremely well and that has continued. It's not only about the connected offer, which had a smashing performance in the quarter, but it's also about other businesses. We are selling To professional customers on the LED lamp side and we are also selling to OEMs and these are professional customers. And I would say that these It's follow more the trend that we see on the professional market rather than the trend we see on the consumer side of things. What is very important for me is that that business continues to deliver the value according to our strategy guidelines 1. With a steep increase of 2 70 basis points of the operating margin for the quarter. Now when you talk about the operating margin and there were a lot of expectations, but we have to take also into account that Q2 Was positively affected last year by what we call the VULA, the voluntary contribution of our employees and it's probably around the 300 basis points. So basically, we have if we want to compare like for like to add close to 300 basis points of additional improvements Versus Q2 last year. So I would say, well, we're close to 600 basis points of improvement from a profitability standpoint. For a Quarter, that has never been historically very high for digital products. So at the end of the day, the top line, Daniela, is probably Also to be taken into account with the variety of businesses we have within that division and from a profitability standpoint, I think the top line is translated to the bottom line with an increased like for like close to 600 basis points. And the next question comes from the line of George of America, please go ahead. Good morning and thanks very much for taking my questions. My first one would be on Professional. I wondered if you could give us Some more color on the regional performance, particularly in key markets like the U. S. And Europe and China and just how that has changed quarter on quarter? So good morning, George. When you look at Okay. I'm going to talk about the Professional Business and Digital Solutions because Professional Business also includes some other activities that I've just mentioned in Digital Products. What we see, if we take a bit of distance from a macro perspective, we saw a continued recovery In China. So we've seen a regular improvement on the Chinese market and that's the case not only On the consumer side, it's also the case on the professional side of the business. We have seen in Recovery of in Q2 versus Q1, I would isolate Canada, because Canada had very severe lockdowns that impacted substantially the performance Of the Professional part of the business, the business is very sensitive to the lockdowns in general. We've seen a slight degradation in Europe at the back end of the quarter with more tension Linked to the COVID-nineteen crisis and lockdowns in that region. And when it comes to You didn't mention it, but it's quite important. The other markets in a way we're also very involved in the rest of the world, we had A degradation of the performance and the recovery linked to the fact that India, Indonesia and the ASEAN countries went into very severe Lockdowns. Now what is very exciting in the professional part of The business and Digital Solution is that our connected lighting part of the business is growing very healthy and strong Double digit. And what we see also is that the growth platform, so the activity that we had listed As having a potential to grow higher than the average are actually growing much higher than the average. 1? I would not be always satisfied with what I see because we're quite Demanding, but at this point in time, I see that some of the activities that we have started to develop a few years ago Are now really, really paying off in terms of growth traction and contributing to the growth of the Professional business. And customers, just let me give you maybe more of an illustration of this. 1? We had to talk to customers about energy efficiency 10 years ago. I think that's totally taken into account now. And People understand that with connectivity, we go to higher level even of energy efficiency. Let's take the example of a warehouse. In a warehouse, we can save up to 80% of the energy cost linked to lighting with connected Lighting. And when you know that the warehouse is 20 fourseven lighted, that's quite important. But at the same time, and this is what customers now are looking for, We can do in a warehouse many more things with lighting. We can optimize the shop floor. And we can also Improve the safety and security condition and improve the productivity of people at work. And I think what was a very difficult message probably 7 years ago is now more and more listened to. And we have customers with which we start to equip all their sites With Connected Lighting. And that's a trend that we were waiting for and which is clearly happening at this point in time. So I've selected warehouses because It is also an end user segment that has been quite dynamic during the crisis and providing us with interesting growth opportunities. Okay. Thank you very much for that. My second question would be around the fact that we've seen recently that the UK has introduced The bans on halogen and fluorescent lighting. Do you think other markets will follow suit near term? And where do you see the greatest opportunity for legislative change like this? So the ban on the Allogene has been in place in Europe for a few for 2 or 3 years now, Not in the U. S. Yet. For us that's not the major technology that we have in our portfolio Of conventional? So basically, when that stops, it's an opportunity to grow on the LED side and that's transfer of activity we've done over the past 8 to 10 years, so we know how to do this. On Fluorescence, So there's still we still need to wait a little bit. So that's a big that's still a big category for us, part of The overall conventional business, so there's no clear intention at this point in time To have it to stop in the short term, I think we're talking about potentially 2023. I mean, we're ready for whatever We'll come and we know how to transfer one conventional activity to the rest. For conventional and especially tubular, It's very difficult to find that would be priced in a competitive This is why probably this is lasting a bit longer than the rest. But whatever may come, we're ready to adapt To new requirements from a scope perspective. Okay. Thank you. And my final question would be on the Supply chain impact that you mentioned, I think, was €85,000,000 revenue headwind for this quarter. Can you give us some indication as to what you expect Q3 and perhaps the second half of the year as a whole? And also will you make up this lost revenue as we go through the year? So the revenue is not lost. At this point in time, it's a revenue which is Deferred. That's what we have seen. At the end of Q1, it was €50,000,000 at the end of Q2, it's €80,000,000 So if you look at it, €5,000,000 So if you look at it, it is an improvement because we finished with €50,000,000 at the end of Q1 And those EUR 50,000,000 were invoiced during Q2 and we only added EUR 35,000,000 during the Q2 period. So that's not a business that we lost. It's a business that is just shifting. 1? At this point in time, we've done many things. So we're not only getting Closer to many of our key suppliers, I'm doing that myself. We're seeing today volume commitments not only For the second half, but we're also giving a volume commitment by family of products and sometime we go down to the SKU For the full year of 2022. We have also put in place A special sale of procurement people in order for them to go also on the spot market and Because as Javier said previously, we find components on the spot market at a much higher price. There's a bit of speculation around the situation today. And what we're doing now so extensively, we are redesigning. So we Towards a bill of material made of components that are going to be more readily available. So this is an ongoing adaptation that we have been doing and our R and D teams are working a lot on redesigning to adapt To be clear, at this point in time, we're working on different level of simulations for Q3 and Q4. We think that it's not going to go away as quickly as we thought. When I told you in Q1 that I thought that we will be through in the 2nd half, I think it takes obviously a bit more time because the supply chain has been Taken by a crazy bullwhip effect, the problem that we have is that some people would ask for more than what they need Because of the shortages, but if everybody does that it creates an even more problem in the supply chain. So what we're doing with our customers with our suppliers at this point in time, we give them our inventory in total transparency of the products that are integrating The component for them to know that we're not overstocking and that also gives us sometimes a bit of an edge against others. So there's a lot of things that are being done. We're also trying to see if for some specific suppliers, we can invest for them in capacity in order to be able to block That capacity for us. So we're extremely creative. Now George, look, we are working on Q3 and Q4. We're not giving specific 1? As far as this is concerned, it's a very volatile and moving situation, but I believe that we're going to be still Impacted in the second half, I see an improvement that we expect in the second half also. Okay, great. Thank you very much. And the next question comes from the line of Mark Hesselink from ING. Please go ahead. Yes. Thank you. I have two questions. The first one on the consumer connected lighting. I think the last call, you elaborated that you see a lot of first time buyers and that you expected them to have return orders At the latest stages. Is that a trend that you're seeing? And then secondly, you did a small acquisition in street lighting. I could imagine the street line is really very much linked to all the Green Deal initiatives. Do you see that coming through? And what are your expectations there For the year for this year, next year and the coming years? Thank you. Yes, Marc. Good morning. Thanks for the questions. On the consumer connected, yes, we have a strategy which is now Proven more and more robust, which is that we are investing in 2 ecosystem, one which is With the one which is Wi Fi, one which is ZigBee and the other one which is Wi Fi because we believe that the market will be made of the 2 different trends. That positioning has proven to be very successful because we're growing very fast in both. Q is, of course, a very complete Ecosystem that we have created with a lot of applications indoor, outdoor entertainment. We do so many things there. And We were talking strategically about that business not too long ago and we were looking at the competitive landscape. And if you want Too much that offer tomorrow that we have been developing and innovating in the past 7 years on. I mean, there's a lot of work to be done and we know that we cannot be equaled on the portfolio of offers that we And the ecosystem that we have created for that offer in the space even over a few years. This is an offer which is extremely well positioned. And as you said, during the crisis, a lot Of consumers are going online and they're looking at refurbishing or improving their homes and we have benefited from that. But when we benefit from a customer who's entering in our ecosystem, we also benefit from the fact that we know they're going to come back and buy more. You don't equip your house fully in one go. You go step by step. So answering in the system, it is for us A quasi certainty that we're going to have new buys. This is what is happening at this point in time. But what is even more interesting on that category is the added education or the accelerated education that the crisis Has been doing so we see now many consumers that would have gone To that type of products, much later already being into it and investing in the category. Once again, one? Marc, what is important to consider is if we're touching theoretically close to 100% of the consumers with our non connected Consumer offers, we are not even touching 5% of the consumer base in the connected smart home category. So there's a fantastic potential ahead. Telenza was acquired additional capability in smart cities And all the development that we have done there, you know that we have been very strong and probably leading With our Interac City applications all over the world, I think we have close to 2,000 project Worldwide, no, in different type of environments and cities with our cloud based Street lighting control and monitoring software. But what Telenza is bringing is bringing another technology which is more based on RF and ultra narrowband That we don't have, which is very much applicable for cities and spaces with very high density of light points. So I think that with that acquisition, we are completing our catalog and we have now a very comprehensive catalog touching every type Of application. And of course, as you have mentioned it, this is also very important for us on the eve of The development of a lot of projects linked to the Green Deal in Europe, But also to a given extent in the States when it comes to the renewal of infrastructures And Road and Streetlights. We have already started to see not specifically with Stelanza, but A project that we have won in the South of Europe under the banner of the Green Deal and we see a renewed traction On the quotation, and we think that we're going to see the first important wins probably at the back end of The beginning of next year. So this is something which is really happening. I think there has been a tightening at the European level of the application where this is going, and we You have very attractive traction there. I was instantly talking to the markets when we do our forecast For the year just last week. And we see already some traction of the Telenza newly Quad and our local organization working together. Telenza is a provider of software and nodes. So they provide the software and the nodes and the rest of the organization providing the Luminess. So there's a fabulous synergy potential here, taking into account that Telenza has been very successful and already connecting 2,000,000 Streetlight points all over the world. Okay. Thank you. And the next question comes from the line of Lucie Carrier from Morgan Stanley. Please go ahead. Good morning, gentlemen, and thanks for taking my question. I have a few of them. I will go one at a time. I wanted to come back to the comments you were making earlier between pricing and cost reduction. I appreciate the cost reduction is very, very strong. But I think where I guess I struggle a little bit maybe to understand Is why you are not keen to kind of raise the pricing a little bit more, because you could The benefits on both sides, the cost reduction and on the pricing, which could, on one hand, boost the top line and also is it tend to be close to 100% drop through. So I'm not sure I was fully understanding the fact that you were kind of favoring the cost savings versus the pricing and not both at the same time? Thank you, Lucie. I'll get back to Same question, and I'm going to go a little bit back to the answers even before. As you know, pricing is a difficult or it's a complex dynamic. We have different effects playing in the market from historical price erosion to short term tactical things that we are doing in terms of spot buying and then the underlying trend. As we said at the beginning of the year, pricing process is one of the ways to look at indeed compensating what we see as cost increases. And we also said at the beginning of the year that we will be looking at the phasing of the cost increases as they come through our inventories and then take quoting pricing to offset that. We're still in an environment where we're also looking at a growing top line. So we want to have a careful balancing act Between pricing and cost increases in order also not to jeopardize the recovery of the business. We also see in the market that as we look at price Implementation, it takes a bit more time also with back orders, that it takes a bit more time to get those implemented. So there's no lack of willingness Price it through, but I think we've been playing a careful balancing act between the 2, and I think that's a smart way as we clearly accelerate Probably from the lower volume in the COVID year. In the second half of the year, as we expect There the cost increases to move more towards the inventory. We expect to have more implication of that cost in the second And we'll have more pressure to further price up in the markets, so again to maintain and protect our gross margin. So it's not I understand your question on yes, but if we do, then we look at other, but it's not a univariable. We don't look at it as a univariable element. We want to manage our gross margin carefully as we move forward. And therefore, we try to be agile on the pricing as we have a read on the cost increases coming through. Understood. Thank you for the explanation. My second question was around the sustainability and specifically across the supply chain. Thank you for providing us all of the details of how you performed versus your target. But I was just curious to understand 1. As we kind of look a little bit more granularly in terms of ESG and sustainability, how your suppliers or kind of incentivize Around sustainability of their own operation and their own facility, how much control do you have on that? How much visibility do you have on this? Especially because you have a lot of third party suppliers and also third party manufacturing? Yes. Good morning, Lucie. So if I understood well the question you talked about the SG profile Of our suppliers at this point in time. So you know that we have audits that we do regularly On what we have called our risk suppliers, but it's about 250 key suppliers and we audit them regularly On the basis of their ESG criteria, I would say that typically the first time we do the audit Compared to what our requirements, they would be complying around 30% to 40%. We put in place recommendations. They go up To 80% to 85%. And after the 3rd time, they are above 95%, and that's what we want to see them doing. At this point in time, As we are already carbon neutral Scope 1, Scope 2, we have on climate change, Integrate fully Scope 3. If it does integrate fully Scope 3, it means that it does integrate what we sell 1. And how we improve the footprint of our customers, but also the supply chain, including our suppliers. And you've seen the results that we are ahead of our objective. Our objective is to do what the Paris agreement asks As to comply with, in 10 years, but in 5 years. So go 2 times faster. So our suppliers are at this point in time Engaged in this dimension of ESG and we are very careful making sure that They are complying fully to these things. So we have a bit of time ahead of us. But we work already with suppliers now for Quite a while and they're used to working with us and to our demand on that side. Now this being said, what we experienced on the supply chain at this point in time is an unprecedented disruption, we're trying to make the best of it on all fronts. But we are not disengaging from our ESG commitment also towards What our suppliers have to do. Thank you very much. And I guess my last question was to see a little bit the evolution of The growth initiatives you were mentioning at the Capital Markets Day, I remember at the time it was about 20% of sales. You've spoken now about very strong growth in UVC and Horticulture. I just was wondering kind of What's the share of those growth initiatives or now kind of representing for the group? Yes, Susie, we will comment about that at the end of the year as we normally do. But I can tell you one thing. I've been here for quite a while now. We had to go through the whole very complicated substitution Tuvalides, that was a very, very big undertaking for the company. What I see happening and pretty much in line With what we've described at the Capital Market Day, the growth profile of the company is shifting. On first, the Connected Lighting part of the business, because this is from far The biggest part, €1,100,000,000 at the end of last year. The traction is fabulous. And I'm not only talking about The consumer and the smart home part of the business, which we know is also being helped at this point in time By the COVID crisis. But on professional applications, I see a very, very good level of traction. And Technology that we have been developing over the past 5 to 7 years, that's the case on what I was commenting previously on the consumer side of the business, but I would tell you it's the same on the professional side of the business. The full architectures with software with control devices And adapted fixtures for different types of end user segment. That's something that takes a lot of time to build. And we have that. It's ready. It's available. I would say ready for sale. And we see now a very strong level of traction. I give you an anecdote in When we said to warehouses and I go back on the example I was talking about previously To George, I think. So basically, we equip warehouses and those warehouses are rented by warehouse companies to their customers. And we had a customer experiencing when renting the space Our lighting. And when they went to another rented warehouse, they said to their To their supplier, hey, you should put the same lighting as the one we had previously. So Estelle, tell us what you've done because this is what my customer wants. So and that level of traction, we didn't have that previously, because Connected Lighting doesn't only bring In unprecedented levels, it brings additional collateral benefits. And we've talked a lot about this, but this is the first time that I see really This having a very good not only level of understanding at our customers, but a very positive traction. In line with what we had said at the time of the Capital Market that is really happening. We'll give probably more indication on the sizes of those as we do normally at the end of the year. That's the way we do it. Thanks for your questions. Thank you. And the next question comes from the line of Joseph Xu from Redburn. Please go ahead. Hi. Hello, Eric and Abhi. Thank you for taking my questions. And I have 2. But before that, can I just clarify on your outlook comments? And did you mention Q3 margin progression will be stable or did I misheard that? No, you didn't. You heard very well like usually, Yes, Joseph. Look, at the end of the day, we looked at the performance in Q2. And we've seen that the consensus was slightly higher than the performance, not by much, but slightly higher. But I think we have to take into account that Q2 was also positively impacted by What I mentioned, the voluntary participation of our employees. So at the end of the day, if you net the Q2 performance From that, if we are growing by 190 basis points in Q2 like for like, it's more like 4 90 basis points, which I think not many companies are striking at this point in time in terms of improvement of the operating profit, especially When last year we also improved the operating profit versus 2019. So we thought that given the situation And the forecast that we had done, we could guide also maybe a bit more on how we see Q3. And we're comparing ourselves to a high base last year and we see the performance in Q3 and operating margin in Q3 this year being stable versus last That's what we have in our plans at this point in time. So you heard very well, Joseph. Yes. And maybe can you give us an idea on maybe Q4 As well, do you expect also that kind of stable developments year on year given the sufficient withdrawal maths? So what we have we've given already the information of Q4, which is basically in the guidance, which is between for the full year between $11,500,000 to 12 Now Q4, Joseph, will be linked to a few things. So we have And let me explain to you the way we work at SignifAI. So when we have at the end of the last month of the quarter the results, We of course consolidate the results worldwide. And then we have before the results announcements What we call our performance review where we built the forecast for the end of the year. And that has happened last week where basically we have Most of our markets and divisions and functions coming to us and telling us How they see? The end of the year. So we take those numbers in. We listen to them. We correct some when we believe we need to correct it upon what they tell us. And after we've made the consolidation, we take into account Macro risks that we see on the market or big opportunities and we decide how we factor them In the overall forecast. And the forecast that we established last week is telling us that We see probably a stable performance from operating margin in Q3. But the forecast that we have at this Also derisked from another the risk that we see and the volatility that is existing On the market is leading us to comply with the guidance we gave last time. Q4 Can go in many different directions. If the COVID-nineteen is under control And the economies are opening. We can see a Q4 being very positive For us, because the market demand is there, if there were not lockdowns and the market demand is also there, If there were not that level of component shortages, which is also touching part of our connected businesses. So they could grow Even higher than what they're growing at this point in time. So I think there's still a little bit of uncertainty on Q4, which is also what we have transmitted In our outlook. But you have the message for Q3. And for Q4, it will depend on the severity of the lockdown. Yes. Thank you very much for the clarification. And then comes my questions about the Pricing versus raw mat dynamics. And it sounds like it's a timing issue given that you have some of a lead time When pricing hits the inventory as well as the raw map impact. And so if I look at the next couple of quarters, so should we Basically, broadly expect kind of a positive pricing impact, but on the other hand, a kind of a negative cost savings impact. And for the remaining quarters, do you still expect for days To net effect to be net 0? Or do you see it being more negative? So let me maybe rephrase what has been said by Javier. At this point in time, We can look at the individual components of the gross margin or look at the gross margin as a whole. What we do at this point in time, Josef, we look at the gross margin as a whole. And you've seen that our gross margin is stable, close to 40% in the past quarters. And that's what we are fighting for. What we can say that is that in Q2, we don't have the full impact of the cost And we don't have the full impact of the price. But we're managing both in such a way That we try and maintain the gross margin. This is really what we are doing at this point in time. You can understand that It's difficult to completely plan it. Let me give you an example. I have to deliver and for me the number one priority is to deliver our customers. That's what I'm saying to everybody within the company. We absolutely need to do whatever we can to deliver our customers in a situation of shortages. So I have this great deal on horticulture And we are missing components. We can buy components on the spot market and those components are going to be 30 times more expensive Than what we would buy normally. So the question, are we buying, are we not buying? It's not a question for me. I'm buying. I absolutely need to deliver my customers. Is that going to have an impact on the gross margin? Maybe for that business, but the gross margin for that business is accretive. So at the end of the it's a combination of so many different things. Our eyes and the eyes of all our people in the market are on the gross margin. And the gross margin is a combination of 2 things: the impact of a cost increase and also Our price increase. You need to know that the price increases have been largely communicated to the markets. Now You communicate a price increase from a tariff lease price and then you decide to gauge where you want to be positioned With the additional discounts that you are doing, but that gives us a lot of flexibility to adapt. That's the message that is given our teams at this point in time, this is what we have in the plan that I was communicating to you about just a few minutes before, which is the forecast we do for the full year. So that's the way we manage it. And I'm just paraphrasing what Javier has been saying. Yes. And thank you. My final question is on something as As longer term, I mean, one of your competitors targets through cycle gross margin of 42%. And I understand your gross margin is currently around 39% on your rolling term loan. So can you Do you have a what is kind of your ambition when it comes to the gross margin, not necessarily but kind of Beyond intermediate to longer term. And also, if you don't want to put a number, maybe you can give us Some color on the divisional gross margin profiles and where you see the biggest potential for improvement? Well, Joseph, probably you I mean the company that you're talking about doesn't have exactly the same activities as we do have. There's quite an important impact in between the activities. But let me tell you, if you ask me where Around 40%, 30 9%, 40%, I'm fine. If that can help us to be competitive to grow, That's the main objective. The main objective of the company after having nearly finished a very complicated transition It's about growth. If we get that level of margin and we grow, we can you know that we have an operating leverage. We've proved that in the past. That's going to help us to grow while at the same time improve our operating margin to do what to reinvest in the business. At this point in time, we have also taken with Javier and the team a very strong strategic decision, which is to invest And quite substantially, if we mention it, it's because it's substantial in digitalization and digitalization and digitalization, it's around 3 axis: Our offers, our processes and our customer interfaces. I can tell you on one specific example, which is The way we go to market for SmartHome Connected, we have tremendously improved and grown The percentage of our sales that are done through our own portal, which is improving many different elements, The gross margin in one go, the connection to the consumers on the other hand, but also our cash performance. So at the end of the day, We have to work in parallel of that disrupted environment and finalizing the transition. We have also to invest In longer term avenues that are going to be bringing growth to the company and create value. But for me gross margin where it is given our mix is not a bad position to be in. Growth is the fundamental and key objective to signify. Okay. Thank you. I will now hand it back to the speakers for closing remarks. Ladies and gentlemen, thanks for joining today's earnings 1. Thank you all and for taking part in the discussion about our results. If you have any additional questions, please do not hesitate to contact Philip or myself. We're happy to answer all your questions. And again, thank you very much and enjoy the rest of your day. This concludes the conference call. Thank you all for attending. You may now disconnect your line.