Signify N.V.
Q1 2021 Earnings Call Transcript

Published: 2 May 2021

[Operator:]

Hello and welcome to the Signify First Quarter Results 2021 Call. Throughout the call, all participants will be in listen-only mode and afterwards, there will be a question-and-answer session. Just to remind you, this conference call is being recorded. I'll now hand the floor to our speakers. Please begin your meeting.

[Thelke Gerdes:]

Good morning, everyone, and welcome to Signify's Earnings Call for the First Quarter 2021. With me are Eric Rondolat, CEO of Signify and Javier van Engelen, our CFO. In a moment, Eric will briefly touch on the key operational and financial takeaways for the first quarter 2021. Javier will then follow up with a review of the company's performance in the first quarter, after which, Eric will end today's presentation with the outlook and closing remarks. After that, we will be happy to take your questions.

[Eric Rondolat:]

Thank you, Thelke. Good morning, everyone, and thank you for joining us today. So let's start on Slide 4 with a key operational and financial takeaways for the first quarter of 2021. So, we increased the installed base of connected light points to EUR83 million from EUR77 million in Q4 in 2020, further illustrating the growth of our connected lighting activities. LED-based sales represented 82% of total sales compared with 79% in Q1 2020. Our first quarter performance illustrates the execution of our strategy as we report growth driven by our connected businesses and growth platforms. We achieved EUR1.6 billion in sales representing a nominal growth of 12% and a comparable sales growth of 3.2% driven by our connected businesses, the recovery in China, as well as an improved performance in most of Europe, India and the Middle East. Our adjusted indirect cost decreased by 120 basis points to 31% of sales while our adjusted EBITDA margin increased by 290 basis points to 10.8%, driven by gross margin expansion, SG&A efficiency and operating leverage. Net income increased from EUR27 million to EUR60 million and our free cash flow increased EUR168 million from EUR122 million in the previous year driven by profitability, and working capital management. On the next slides, we will discuss the performance per division. Let's move immediately on Slide 5 to discuss the performance of digital solutions. So LED-based sales in digital solutions were at 92% of the whole division sales. Aluminum sales increased by 24.1% as a result of the consolidation of Cooper Lighting in March last year. Comparable sales declined by 1.8%, which was driven by headwinds from component shortages, continued lockdown in Americas. We also saw a recovery in China, the Middle East, India and a bunch of recovery across Europe. The adjusted EBITDA margin was solid at 9% at 230 basis points increase versus last year, which was driven by continued gross margin and cost management. On Slide 6, you will find a few other business highlights from our Digital Solutions division, which show our continued progress in servicing our provisional customers. Let me focus on some of them. So, the first highlight I'd like to discuss is the partnership we reached with the NHL across North America. We will support more than 4,800 ice rinks transition to sustainable connected lighting, thereby improving their carbon footprint while reducing energy consumption and operational costs.

[Javier van Engelen:]

Thank you, Eric, and good morning to everyone. Let's go to Slide 12 where we discuss the adjusted EBITDA bridge for total Signify. The adjusted EBITDA margin improved by 290 basis points to 10.8%. This performance was driven by the following drivers. First, higher sales, which also helped us dilute our cost base in combination with number two, an improved sales mix, which is mainly attributable to the strong connected home sales. Continued softening of price erosion, largely offset by price increases that were implemented during the quarter to compensate for inflation of raw materials and components is a third driver. Next, an improvement of our cost of goods sold may be related to development activity gains achieved throughout 2020. Following by indirect cost increase by minor, only EUR4 million. The next element in scope and other changes related to the consolidation of Cooper Lighting in March last year, which added EUR17 million to our adjusted EBITA. And finally, Forex had adverse impact of round EUR3 million. Let's now take a look at Q1 working capital on slide 13. When we include sales of Cooper Lighting and Klite on a 12-month pro forma basis, working capital improved by 260 basis points to 3.5% of sales in Q1 2021. This is the result of sustainable structural improvements across receivables, payables and inventories. Other working capital items added EUR48 million to our working capital at the end of Q1 2021. On the next slide, Slide 14, we discuss our net debt evolution. We started the year with a net debt position of EUR1.27 5 billion and a net debt EBITDA ratio of 1.7. At the end of March, our net debt position stood at EUR1.141 billion translating into net debt-to-EBITDA ratio of 1.4. This reduction was mainly driven by the strong operational profile and the continued improvement in working capital.

[Eric Rondolat:]

Thanks, Javier. Let's move to Slide 16 where before we move onto the outlook, I would like to discuss a significant potential that some of the green economic recovery plans which we are seeing globally, hold for the lighting industry. So the European Union agreed upon the European Green Deal, with a total green growth and recovery budget of EUR1.8 trillion to be spent during the period 2021 to 2027. So with proposal for projects being filed as we speak, the first impact on the EU Green Deal is expecting the second half of the year and initiatives are expected to extend towards 2027. This drive for a green and digital recovery creates a significant business potential in all of our business segments to tap into this, we launched at Signify the Green Switch program, which is aimed at helping local governments allocate their funds wisely. So, we have already seen some local governments create what we would call Green Deal inspired projects of which we would like to highlight two wins in the first quarter - one in Poland, where we will install a 9,000-connected streetlight bonds; and another one in Netherlands, which is focused on the sustainable lighting in homes where we supplied 300,000 LED lamps to 35,000 households in the Municipality of Amsterdam.

[Operator:]

Thank you. Our first question comes from the line on George Featherstone of Bank of America Please, go ahead, your line is open.

[George Featherstone:]

Hi, good morning, and thanks for taking my questions. My first one would be in terms of the ready market. How would you compare demand levels to pre-COVID? And also in terms of what you've seen in Q2 so far, how would you characterize the demand?

[Eric Rondolat:]

Yes, good morning, George. I would say in general, it's very complicated to say what is pre-COVID, what is post-COVID because COVID is still ongoing. What we have seen nevertheless is a very strong traction on our consumer business compared to the professional business which is still pretty much hit by lockdowns all around the world. Nevertheless, what we see - and it's pretty much based on the comparison we had with Q1 last year. We're still recovering China, but from a very low base. We see a good performance in Europe and especially the northern part of Europe. Comparing to a base, which is a bit better, but still, there were a lot of Europe had the back in 2020. And when it comes to the Americas, well, Q1 2020, they had not entered in the crisis and they are at this point in time. So we see a market which is a bit softer. So there's direct connection, as we've said, on and on between the lockdowns, the economic traction and our professional business. The consumer business has moved to online much faster as we commented also in the previous experiences strong traction, which is also the result of - well, partially the result of what you see in in the performance of our digital products business.

[George Featherstone:]

Thanks for that. And may I return to the U.S. market - there's been more positive commentaries on some of the other non-residential construction exposed industrials companies recently. What are you seeing in terms of activity levels and projects activity on the tendering side, particularly in digital solutions in Cooper?

[Eric Rondolat:]

So you had, George, an additional phenomenon in Q1, which is the weather conditions in the U.S. that have paralyzed our supply chain during one and-a-half weeks, because it happened in places where we have factories - Cooper has factories there. So that has also an impact on the performance in Q1. Now what we see, we saw that there was a higher level of traction on the undifferentiated products' stock and flow. This is not where we are the strongest. We are stronger in the specified part of the business. Now, what we see, we see a clear renewed traction in projects listing. So the positive thing is that we've seen along the quarter a progression - a positive progression after January and February that were quite soft. So, we see that market rebounding, we look at the economic forecast of 6% to 7% growth GDP for U.S. for the full year and I think we will benefit from that. But once again, we are comparing the U.S. to reasonably a strong quarter of Q1 2020 compared to the other geographies that had already entered the crisis. So when we take a bit of distance, we see that the businesses and the connected part of the business has been performing extremely well in the U.S. in Q1 and the prospects are from an economical standpoint I believe are good. We see also a first sign of attraction of the incentive plan, especially when it comes to infrastructure, and I would say street lighting - connected or non-connected - but we see a lot of projects being thought of by many municipalities when it comes to street lighting. And that's a direct consequence of the incentives that have been - or that are going to be voted.

[George Featherstone:]

Thank you for that. My final question would be clearly as a company, you've made significant steps on ESG and now more ambitious targets to 2025, and we're seeing an increase in focus on these areas from other companies as well. In terms of your own customers, is there any sense that increasing focus from them on ESG is driving demand for Signify? Particularly within the LED and connected lighting offers?

[Eric Rondolat:]

I would say yes, but it's beyond that. I think it's commonly understood that LEG and connected bring a substantial level of energy efficiency. And this is part of the reasons why there was such a transfer from one technology to the other one. You should take some distance, you realize that it didn't take more than eight years to go from one technology, which was close to 100%, to another technology, which is now close to 100%. So, we've moved from 80% conventional to 80% LED. That's understood by customers in general. Now, when we bring other elements to the picture, which are also fundamentally serving sustainability - and I'm not only talking about energy efficiency, I'm talking about workspace optimization, I'm talking about improving the productivity of people at work, I'm talking about improving safety conditions in industrial workspaces, whether they are manufacturing plants, or warehouses - so, all these elements start now to be taken into account by customers who have had the right level of education on LED and now they're getting another level of understanding and knowledge about what are the additional benefits that our systems can bring beyond energy efficiency. So, this is something we are very much stressing and very optimistic because we see customers more and more understanding it. We're talking about customers at this point in time where basically, they look at the optimization of the usage of this shop floor and the productivity of the people in that same space and the increased safety condition, as the number one reason to move to connected lighting. And of course, they're getting on top of that with the energy efficiency. So all these elements are now much more vivid. We were talking about that, we've been talking about that for many, many years. But that's the right moment where we see a great traction, a great understanding from our customer base and that's, frankly speaking, not only reassuring, but it's good to see because all these elements are conducive to improving sustainability.

[George Featherstone:]

Great, thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Andres Willi at JP Morgan. Please, go ahead. Your line is open.

[Andreas Willi:]

Good morning, Eric, good morning, Javier. I have two questions, please. The first one is if you could help us to better-understand the price cost dynamics. It sounds like that was not a material headwind or tailwind in Q1 looking at your guidance for the full year. Is it right to assume that you imply or expect to continue to basically offset some of the price increases particularly in digital solutions for raw materials? I mean price increases. Is that the base case for your expectations for the year? And what will be the price increase that you need in digital solutions just to mechanically offset the impact of steel and other materials for the year? And the second question on digital products. Maybe you could give us some indication on the business performance for connected home lighting versus the rest in that business and to what degree connected home lighting you have seen restocking and kind of stay-at-home consumer spending versus underlying traction for that technology? Maybe where are we in that business relative to kind of the normalized trend line we have seen in recent years? Thank you very much,

[Eric Rondolat:]

Great. Good morning, Andres. I think Javier, you can take the first question? I'll take the second one.

[Javier van Engelen:]

Yes. Andres, good morning. Javier here. On the pricing cost equation, we'll go back to what we also said in previous calls, is we separate two dynamics that we see in the market. Number one, we always talk about the ongoing price erosion. And again in this quarter, we have seen that the underlying price erosion is again further softening. So we've seen that trend happening in last year and we see the same trend continuing in Q1, where there seems to be more discipline and rigidness of the people to not tank prices on the basic business. Then the second part of the question is what do we see with the temporary impact we see on increasing raw materials and as you've observed, then you can also see it in the bridge we have. Yes, we have been able to compensate price increases on inflation of materials by our price increases in the market. The impact on Q1 is relatively small on both because it takes a bit of time for the cost increases to move through inventory and our price increase in the market are also getting implemented as we speak, which means that in Q1, it was compensating each other, so we're able to maintain gross margin for that basis. And in the full year we expect that we will have the capacity still not to have a negative gross margin impact on the inflation of raw materials and our price increases. Having said that, and you see that from the bridge we have on Page 12, we still have an underlying improvement year-on-year on gross margin and that's because of the cost savings that we have generated in 2020, which are now carrying through in 2021. That's where we still get the benefit of. So, you see basically that we have a significant improvement in gross margin in Q1, counting on those cost savings at within 2020 while at the same time, we have minimized the impact of inflation of raw materials through the price increases we've taken. You've also asked about the amount of pricing we take? We're not specific on how much exactly we take by division, but it's in the low teens, in the low single digit and we expect that at this point in time, that's holding in the market. And again, as - I think to be able to manage gross margin on a continuous basis properly on that side.

[Eric Rondolat:]

Andres, on your second question, let's zoom on digital products. So you have on one side the consumer business, which is performing strongly and the professional part of the portfolio, which is not only the drivers, but also LED lamps that are going to the professional market that are performing at a much lower level in terms of growth. Now, we've been very happy to see that not only the connected part of the business, also, the non-connected part of the business has built on extremely well in Q1 and also in the past quarters, not only in terms of top line, but also in terms of contribution to the profitability. But it's true, that we're enjoying strong double-digit performance in the connected part of the business. So, this is the story that you heard for many years when we embarked on the connected lighting journey, we invested a lot upstream, we've created an ecosystem that is extremely robust with Hue. We've added users and we see that both platforms are really performing extremely well. From a top-line perspective, they're creating also a strong operational leverage on the bottom part of the P&L and they are a strong contributor to the performance of digital products. So, this is a continuous trend from what we experienced in the past quarters. No, restocking has not really happened because in these businesses also we saw shortages of components. So basically, we could potentially have sold more if we had the capacity to produce on these businesses. So, restocking has not happened yet.

[Andreas Willi:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Daniela Costa at Goldman Sachs. Please, go ahead. Your line is open.

[Daniela Costa:]

Hi, good morning. Thanks for taking my questions. I have two things. I wanted to first ask you about the working capital, that's 3.5% of sales, really a very low number compared to a lot of industrial companies. And it's been decreasing for a while. Can you talk us through particularly at this point in time, the sustainability of that, as we go into continuing shortages of components? And then just maybe a reminder of what exactly operationally did you change to achieve that? And why is that sustainable? That's the first question. Then the second one, I'll ask after maybe.

[Javier van Engelen:]

Good morning, Daniela. Javier here. Good question and something that of course, we've been looking at very carefully as we get back to growing business on making sure our working capital is structurally taken down. Let me again refer back to what we said at the end of Q4. We had made - and I think I referred to that. There was the same question or sustainability of the lower levels. We ended up last year with the working capital at 4.8%, which has come down from the beginning of the year, last year of about 7%, close to 8%. We already then talked about sustainability of that because we have specifically worked very strongly on receivables, especially in terms of also bad debt. And we also have a strong track record on payables. The variability we often see is on the inventory level. But I've mentioned already then that we thought that that level where we ended up last year would be sustainable going forward. So, as we look at the working capital in Q1, we're now at 3.5%, which indeed is a further structural improvement. I would say that in terms of payables and receivables, we are at a level which I think is really sustainable going forward. And I think there's perhaps still a little bit of improvement that we can make, but that we're at good levels. On inventory, as I said before, is going to be a little bit give-or-take this year and depending on the capacity, yes, not to rebuild stocks. I think the 3.5% is a level where depending if shortages continue to happen. I think that again, the level we reach the end of last year where kind of now trending, is sustainable going forward. If volume really picks up, there should be further efficiencies in rotation of our stocks. Perhaps compensated partially by a bit of a stock buildup and recovery from where we are today. But fundamentally, we do believe that we are at this 4% or 3% levels that I think structurally, we can maintain. And if all goes well and volume picks up, there might be further efficiency in the future going forward.

[Daniela Costa:]

Thank you. Very clear. And then my second question relates to your commentary that you're already seeing some concrete orders from stimulus and you mentioned two large ones on street lighting. And I wanted to ask you, how much of that is basing on your 3% to 6%? Is it significant within that or not?

[Eric Rondolat:]

No, it's marginal at this point in time. We see really the uptake of this, Daniela, happening in the second half of the year for the European Green Deal. I think it's going to really have an impact at the back end of the year and it's not a yearly plan. It's going to extend between 2021 to 2027. And then we believe that depending on how fast things can be voted in the U.S., that we will have an impact on the U.S. side as the U.S. side is interesting, because we've been able to measure a bit more concretely what it means for the lighting market. We believe at this point in time until further notice that it can be additional business around EUR3 billion to EUR4 billion for the lighting industry from the EUR2.3 trillion that we're talking about at this point in time. And that will extend between the beginning of 2022 and 2031. So I would say it's marginally in the numbers at this point in time. But we see the buildup.

[Daniela Costa:]

Sorry, was it three to EUR3 billion to EUR4 billion U.S. only? Or global?

[Eric Rondolat:]

No, EUR3 billion to EUR4 billion for the U.S. part?

[Daniela Costa:]

Okay, got it. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Lucie Carrier of Morgan Stanley. Please, go ahead, your line is open.

[Lucie Carrier:]

Good morning, everyone and thanks for taking my question. Actually, I have just a couple of follow ups on the question that were already asked. The first one was around the digital solution. I was curious to know if you could help us understand what you are seeing actually in your backlog at the moment in this area? How much it has increased versus what you're expecting for the second half in terms of growth to pick up?

[Eric Rondolat:]

Good morning, Lucy. There are two ways to look at the backlog. First, there's a part of the backlog which has been a push from Q1 to Q2 because we could not deliver. Because of shortages of components, because of the fact that in the U.S. the supply chain was basically paralyzed for a week and-a-half, because of climate condition and also because of something else, which is the shortage of containers. It seems trivial, but it's a reality. In the ports of China and also the ports of the U.S., we have difficulties to find at this point in time containers to route our products. So, when you look at all these different elements, they have an impact on the quarter of about EUR50 million, so that EUR50 million that we could have invoiced more if we had had the capacity. You should translate that in terms of points of growth, it's about three percentage points. So this is what has moved from Q1 to Q2. Now, when we look at our European funnels and our funnel in the U.S. or in China, they have been building up along the quarter. This is why we are optimistic in the rebound of that business, to a given extent in Q2, but certainly in the second half of the year where we believe that the easing of lockdowns and the return to a more normal type of activities and economic attraction should have this business on top of the various incentive that we have just talked about. So, that's why we are hopeful for Q2, but also very much for the second half of the year.

[Lucie Carrier:]

Thank you, Eric. And an I guess that brings me to my second question, which is also a follow up. But how should we think about the growth in digital products from here? Because arguably, the complex during the first half was not overly demanding and we are possibly approaching what I would call maybe the peak work from home type of demand and you were just sort of suggesting yourself we are going to see a reopening of the economy and people having more mobility. So, how should we think about that part of the business as we go towards the rest of the year?

[Eric Rondolat:]

So, we're looking into this quite extensively and you see, because that's a very important point. And basically the question that we asked to where we said the following one, is that positive traction on the consumer side linked to the fact that people are staying more at home, and will go away when we go back to a more normal way of operating across the planet. Now, we've looked into details about what people are buying at home during the pandemic and this is the position that we are taking. So what we believe is that refurbishing, renovating homes and doing it ourselves is something that will continue after the crisis. I think that people have understood and consumers, homeowners have realized that equipping their home, making it a joyful, a pleasant place to be, is something important that we have learned during the crisis and that will be kept moving forward. So, there are different studies that we have read that are hinting at this. The second element is yes, people will spend more money maybe on travels, going on holidays, which they haven't done as much as they used to because of the pandemic. And we believe that what will suffer more in the purchasing is not the home improvement area in general, but more some of the big spending that people have done during the crisis - a lot of appliances, where both TVs, appliances that are quite costly and I think this is where we believe that they will be less spending. Now, the other elements that on our connected businesses, what is important for us to see is the home penetration. Because we know that when we penetrate new homes, then there is a natural extension that happens all the time. So, let's say that people would start with three connected objects and we see that over time, it goes from three to five, from five to eight and we know that that dynamic is a real one and we've experienced and witnessed it in many different ways and forms. So this is where path of the spending will reduce, but we still believe that do-it-yourself and home renovation will continue and will benefit from it on top of the fact that we have penetrated homes that will serve the ecosystem .

[Lucie Carrier:]

Understood, thank you. And maybe my last question was around the working capital. There was very clear, the explanation, I think on rent receivable and the reduction of bad debt. But when we look at the payable, that has improved very, very strongly from 2019 and that was also coincidental with your acquisition of Klite. So, I was just curious to understand maybe what happened there because the terms have been really almost double in terms of how long they have been extended. So, can you maybe help us understand a bit more what's on the table, and whether there is more to come from there as well?

[Eric Rondolat:]

So, you may remember, we see that we indicated at the time that we had a project that was called Horizon and that project had many different objectives. But basically, it was at improving, growth, performance and profitability, but also cash. And we carried probably two and-a-half years ago, some dedicated actions, and namely, on payables in order to improve our performance there. So, there's a strong contribution to the results you see today, a link to that project. Now, you mentioning Klite. Klite has also brought a positive contribution to payables. Since their payables, performance were, I would say better in average than what we had at the group level and we used that performance to try and extend much more at group level. So, it's not only Klite, it's a consequence that happened at the same time. Because it happens globally for the group of it before and Klite was also a positive contributor. Now when you look at our working capital as a whole, we used to be close to 11% at the time. I'm talking about four to five years ago. Now, we are 3.5%. We've been reducing gradually over the years. So it is structural. What we do is clearly structural. Another approach that we have is that we look by geography. Every country has an objective in terms of working capital. And depending on where they sit, we decide to take structural actions like localizing more of the production to have offers or components that stay for a very long time on the boat and so on. So, there are very structural action that are being made. Probably also maybe to complete on the payables, Cooper, yes, you're right. Javier is giving me a little sign. Yes, I think that Cooper has also been a contributor because when we acquired Cooper, we moved Cooper very quickly to our payable terms that were more favorable. So yes, that's probably another element that we're explaining the improvement on payables.

[Lucie Carrier:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Joseph Zhou at Redburn. Please, go ahead, your line is open.

[Joseph Zhou:]

Hi, Eric. Hi, Javier. Thank you for taking my questions. I'll go one at a time. And firstly, I wanted to ask about the components of the shortage situation you have alluded to kind of the impact in H1 and the less impact in H2. How confident are you on the improvement in the second half? And when do you expect the situation to be normalized based on your arrangements with the suppliers? And what are your arrangements with the suppliers?

[Eric Rondolat:]

Good morning, Joseph. Very, very tense situation on the supply chain side for us in Q1. So, on the component side, it's many different components. We're talking about electronic components in general, semiconductors, but also passive components. When I talk about semiconductors, it's microcontrollers, most sets as sensors. So, you see it touches a fairly big part of what we are selling to our customers. What we have seen, we have seen the supply chain that was basically taken by surprise, because many of the companies had not only not invested, but they had reduced their capacities with a crisis and then you had some industries at the automotive industry that came with very high level of demand. So, they had not only to put back some of the reduced capacity in place, but they had to extend capacity. In these types of industries, if you want to extend your capacity, it basically takes between six to nine months. So, there is a lead time which is linked to near the physical capacity that these companies have to extend their own production outputs. What we see, we see that in Q1, let me give you very specific numbers. We have put a dedicated team in place worldwide and we are following about 300 suppliers on a daily basis. We have at this point in time, 180 components that are what we call at the escalation level four, meaning that they are followed by one member of the leadership team, namely the Chief Operations Officer. He follows himself what happens on 180 components. If I was looking at that number one week ago it was 130. So, we are not there out of the woods, but we have put in place a very strong team that I have to admit, has managed the situation far beyond our original expectations. Also our sheer volumes and the historical connection we have with our suppliers is also weighing very positively in that situation. So probably in a crisis like that one, we are doing better than the average of the other companies. Now, what we have done, we have taken more long-term commitments, on procurement. And we see gradually that the capacity is being rebuilt. We believe that Q2 will still be impacted. We should see improvements and strong improvements in the second half of the year and I think we should be through in the first semester of 2022. But when you bring the supply chain down and then you need to very quickly readjust and put it back in place, it takes a bit of time, especially on those components that require very specific machines and very specific automated processes to be able to drive production. So, this is where we are. We're working on it, we're very well organized and we could deliver more than what we originally expected in Q1 even if we have to leave three percentage points of growth on the table and push through Q2.

[Joseph Zhou:]

Thank you, Eric. It's very great color. And my second question is on the various agreeing stimuli across the board, and mainly the of the American jobs plan and the European renovation wave. So, we are at the earlier phase of that, but in terms of your early discussions with the customers, what kind of advertising do you see for that is there for connected lighting? Are we going to see a lot of the renovation projects purely focusing on kind of a LED renovation? Or do you think people would do the connected lighting at the same time?

[Eric Rondolat:]

I think the advantage of connected is, if you can save 50% to 60% moving from conventional to LED, you will increase this 50% to 60% to 70% to 80% with connectivity. So, connectivity clearly brings an additional potential in terms of energy saving and this is what our customers now understand more and more. But connectivity brings us with other elements that are conducive to sustainability at large, which is optimizing the workspace or optimizing the usage in the industrial environments. It is also helping when it comes to safety conditions, it improves the productivity of people in their work environment and all these elements are conducive to bringing more sustainability to the workplace. When we look at the incentive programs, I think that they are targeting many different fronts. It's not only energy efficiency, which is clearly targeting climate action, it is also clean energy. And we believe very strongly in solar. Solar has got one peculiarity. It's not that it's renewable, it's not only that it's it can be used in a decentralized fashion. And we believe that the right way to also to avoid losses to do it in a decentralized fashion. So, we have developed a lot of offers when it comes to solar lighting and we think that those incentives are also going to bring investments in these directions. And then you have circularity, you have food security that we have talked about in few towns, which I think are also targeted clearly by the Green Deal in Europe. And I think also to give an extent, we're going to be able to move some of the investments in Northern America, in the U.S. on these other elements. Now, what we see in Europe, which is an initiative we have taken at Signify, we've called that the Green Switch. So it's basically a repository of specified solutions for lighting that we bring to the attention of local governments so that the local governments, they not only have an understanding of the fund that are available for them, but they also can find some existing reference and some specification about the technology and the solutions that we bring with our lighting system that can help them to develop projects that are very loyal to the intention of the Green Deal in Europe. And we see positive traction there that governments come to us, they ask us for advice, and we help them to specify future projects.

[Joseph Zhou:]

Okay, thank you very much.

[Operator:]

Thank you. Apologies for the slight delay there. Our next question comes from Martin Wilkie of Citi. Please, go ahead, your line is open.

[Martin Wilkie:]

Yes, thanks. Good morning. It's Martin from Citi. Obviously, a lot have been covered already. But one question I had was on UV-C and obviously, you've shown a product in the presentation this morning. Just to get some sort of sense of how you see that developing now that lockdowns are hopefully beginning to lift and vaccine taking effect. We have seen some small municipality and cities talking about putting UV-C into government buildings to prevent the spread of COVID. Is that still an attractive market for the remainder of this year? Just some sort of sense as to how you see that progressing as the vaccine penetration picks up. Thank you.

[Eric Rondolat:]

Yes. Good morning, Martin. Look, we see our business still growing in UV-C, to a lesser extent than last year with it really exploded at that point in time. We see also a different pattern in the portfolio that we are selling. Last year, it was mostly light sources and we increased our capacity to be able to deliver the required products by our customers in 2020. And also now that it's continuing to grow in 2021, that production capacity is serving those customers. But what we see now in our portfolio is that we are sending also more of the finished products. Finished products on the consumer side where if you remember in the past quarters, we had developed a desk, a lamp table UV-C that can be used at home. And we have highlighted for this quarter and other disinfection books, the small objects. And we see on the consumer side, a very positive traction. Now, on the professional side, we have also developed new offers and was also indicating that that's what we have in our own offices, which is added infection and it takes a bit longer in terms of commercial incubation, because customers need to be educated on a UV-C, which carries a risk, if you're expose. But in the solutions that we bring to the market, there's absolutely no risk of exposure, but it requires some education. Now, for us, we think it's less of a sprint and more of a marathon. There are some countries at this point in time that are putting law in places. So, let me give you an example. In Hong Kong, if you have a restaurant, you need to have I think the volume of air that you have in your restaurants to be renovated, six times in a limited amount but I'm not too sure. But anyway, there are some condition of that nature that are law enforced and there are different ways to do it. And what I said at this point in time in Hong Kong, of course, you can have your air to circulate through conduits and ventilation, but you can use also UV-C. So we see at this point in time very strong traction in that specific market and to equip the restaurants with air disinfection. We have other solution that we have brought to the market that have a fantastic level of traction, which is completely closed enclosure. So, it takes a bit more time to disinfect because they're closed but we see also very good traction on that side. So, our point is we need to continue to educate the market, because at the end of the day when we talk about UV-C and having spaces cleaned of viruses and bacteria, is something that goes beyond COVID-19. I mean, there's one thing that we learned from that crisis is that infection is always possible. So, if we show that the spaces which can be crowded, where there can be a lot of people, these spaces are cleaned from viruses and bacteria, this is something that I think we're going to learn from the crisis. Once again, it's more marathon than a sprint and we see continued traction even if the emphasis on our portfolio has moved from component, now to finished products.

[Martin Wilkie:]

That's great. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Rajesh Singla of Societe Generale. Please, go ahead, your line is open.

[Rajesh Singla:]

Yes. Hi, good morning and thanks for taking my question. This is regarding the indirect cost as a percentage to sales. So, we still have like around 31% of sales as an indirect cost, which is comparable to - which is substantially higher than the industry average of 25% to 29% as you have communicated in the past. So can you throw some light on the delta between where industry number comes from? Like 25% to 29% and where our number of 31% . The difference is like 400 basis point and what we can do to close this gap and improve our margins further from here?

[Eric Rondolat:]

Yes, good morning, Rajesh. Looking at the average in Q1 is a bit to our detriment, because Q1 is normally our worst quarter. In terms of top lines, this is where as a percentage, of course, we have the highest percentage. Now, what we looked at is companies were more on the lamp side and companies that are more on the luminaire side. So, if you take companies that are more on the lamp side, their non-manufacturing cost services will be around, 25-ish. And if it's companies that are more luminaire side, their non-manufacturing costs as a percentage of sales will be more around, I would say 29%, 30%. So, this is where these 25% to 29% came from. We knew that historically, because of the separation and the way it was done, from Royal Phillips, we would have a high percentage of cost, which we substantially reduced in the past despite having a declining top line. So, when you look at the history of the company and how this was managed, we managed to bring it down. And in 2019, we were at 19%. And by the way, in 2019, in Q1, we're very close to where we are in Q1 now. So, I think we are on the right track to go back into that interval. Now, we've communicated last quarter that we have launched a cost reduction program already last quarter. And we had recently this week, the agreement - there is a process in Netherlands and we have to go through a works council and this was approved, so now it's going to be implemented in the rest of the year and it is unfortunately, but necessarily. So touching 600 jobs worldwide for as Signify and we are also really targeting the jobs in the central part of the organization. The philosophy that we want to have in the company ; a headquarter and put a maximum number of resources in the operating part of the organization. So, basically what we're doing, we have that action plan which is now being put in place, which is going to reduce quite substantially our cost in order to put us back into that interval, which is a clear objective for us. So, we had a very, very strong use of cost reduction. In the past year after the IPO, we reached the 29% and then we had the 2020 situation. But I think we're starting the year in a very promising session and with what we have on the cost reduction program coming up for the rest of the year, we should be very well-positioned.

[Rajesh Singla:]

Thank you and maybe one more question on your M&A strategy, given that the leverage ratio is now looking more comfortable and probably we would be well back on track to the historical low number by next year. So, are you scouting for any M&A opportunity, given the current very favorable environment for M&A targets because of bottom of the pyramid in the industry, probably would be suffering because of all the issues that we are seeing in the market? So, are you thinking of scouting for more M&A opportunities in the near term?

[Eric Rondolat:]

Well, we are looking at opportunities but we do that in general. For us, there are two conditions. As I say all the time, we need to be ready and let's also agree that we had to do the Cooper integration. I don't think it's done, I don't think it's finished. I would like to judge the way we actually have integrated Cooper Lighting three years after it actually has been done. So, for me at this point in time, we offer great start, but we still have to be very vigilant in order to complete that integration. We have moved the IT systems in the past week. So, that was a big, big milestone, which is basically to move of the SAP instance that Cooper had under the intern IT landscape to ours. As you can imagine, this is a very, very touchy exercise that has been done in the past week and flawlessly so far. It's not without issues, but issues that we've fixed within the hour. So the team have done a fabulous job there. So we're not totally out of the woods when it comes to the integration of Cooper Lighting. So first, we need to be ready and second, we need to find strategic opportunities that we believe are in-line with our strategy. So, there are some cases that can be interesting in the future. So we'll see because they need to become available for acquisition and we need to be fully ready to integrate them. But no, but we of course are looking at opportunities.

[Rajesh Singla:]

Thank you. Thank you very much.

[Operator:]

Thank you. And as we've run out of time for questions at this point, we're going to end the Q&A session and I'll hand back to our speakers for the closing comments.

[Thelke Gerdes:]

Ladies and gentlemen, thank you very much for attending today's earnings call 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 are happy to answer your question. Again, thank you very much and enjoy the rest of your day.