July 28, 2023
Signify CEO Maintains Optimism Despite 8.6% Sales Dip
Image Credit: CNBC Europe
CEO Eric Rondolat highlights aspects of strength amid market uncertainty, factory layoffs and customer destocking
Signify, the world's largest lighting company, today announced its second-quarter 2023 results for the period ending June 30, revealing both positive and negative aspects of its performance in a challenging market landscape. In the written release and during this morning's earnings call, CEO Eric Rondolat commented on the company's financials, highlighting areas of strength and cautioning against uncertainties that continue to impact global markets.
The company's Q2 2023 performance included notable highlights and low points. Sales of EUR 1,644 million ($1,808.4 million) were reported, with a nominal sales decline of -10.5% and a comparable sales growth (CSG) of -8.6%. LED-based sales continued to represent 84% of total sales, showcasing the growing demand for energy-efficient lighting solutions.
Signify maintained positive free cash flow of EUR 88 million ($96.8 million). The company's effective supply chain management and working capital measures contributed to this achievement, and it is expected to be at the higher end of the 6-8% range. Additionally, Signify showed progress in its sustainability program, "Brighter Lives, Better World 2025," by being on track to meet various emission reduction and diversity targets.
Declining sales and net income
Sales through the first six months of 2023 compared to the first half of 2022 were down 8.3% to EUR 3,322 million ($3.65 billion).
There were also challenges in company profits. Signify reported a significant drop in net income, which decreased from EUR 248 million ($272.8 million) in Q2 2022 to EUR 45 million ($49.5 million) in Q2 2023. The company's adjusted EBITA margin also declined by 120 basis points to 8.3%, mainly due to under-absorption of fixed costs, particularly within the Digital Products division. Moreover, Signify faced increased net debt and declining equity, which could raise concerns about its financial risk.
Signify lowered its full-year adjusted EBITA guidance to a range between 9.5% and 10.5%, down from a previous range of 10.5% and 11.5%.
Reduction in workforce
There has been a decrease in full-time employees from 35,407 at the end of Q2 2022 to 33,181 at the end of Q2 2023. Signify reported that the year-on-year decrease is mostly related to a reduction of factory personnel due to lower production volumes.
Customer destocking
During the Friday morning earnings call, Signify executives explained that the company has seen substantial destocking on the OEM business due to component crises and procurement of alternate products by customers. Rondolat predicted that most of the destocking should be over, although the process may take longer on the OEM side of the business.
Eyeing U.S. Infrastucture Business
In the context of digital solutions and connected lighting Rondolat shared:
"We've seen a slightly declining but still positive office and industry segments. Here the projects are either happening or there is a delay but the projects are still there and they're firm. And where we have seen relatively bottom growth and that I would say is not only in the USA with the IIJA (Infrastructure Investment and Jobs Act), it's not only in Europe with the Green Deal, but it's also in other countries in the world where we see a similar incentives being brought to the market in order to develop energy efficient solutions and make the country more sustainable."
Increased net debt and declining equity
Compared to March 2023, the net debt increased by EUR 108 million to EUR 1,439 million ($1.58 billion). Total equity has decreased to EUR 2,853 million ($3.14 billion) from EUR 3,053 million in Q1 2023, primarily due to dividend distribution. The net debt/EBITDA ratio has worsened year over year, increasing to 1.9x in Q2 2023 from 1.7x in Q2 2022. This could imply slightly increased financial risk for the company.
Sustainability goals progress
Signify has continued to make significant strides in its sustainability program, "Brighter Lives, Better World 2025". The company is on track to reduce emissions across its entire value chain by 40% against the 2019 baseline, double the pace required by the Paris Agreement. The firm has been able to maintain circular revenues at 29%, moving towards the 2025 target of 32%. The company has also seen an increase in Brighter lives revenues to 28%, on track to reach the 2025 target of 32%. The firm's diversity efforts also appear to be working as the percentage of women in leadership positions has improved to 30%, making strides towards the 2025 target of 34%.
Business forecasting and margin guidance:
The company expresses caution regarding its top-line due to a lack of visibility and market volatility. Potential negative performance in Q3 is predicted due to market conditions, but they have shown comfort with their bottom-line performance, citing a resilient gross margin.
CNBC interview
In a Friday morning CNBC interview, Rondolat acknowledged the softer demand in consumer and construction markets and expressed caution regarding the Chinese market's recovery. Despite these challenges, Rondolat maintained confidence in Signify's gross margin, which saw a significant increase of 220 basis points over the past year. He highlighted the company's success in extracting costs from the cost of goods sold, positioning it well for future growth.
Rondolat emphasized the company's focus on innovation and growth potential, despite acknowledging uncontrollable factors in the broader Chinese economy. He also remained optimistic about the second half of 2023, expecting it to be more favorable than H1, driven by improved margins and supply chain conditions as well as a comparison to a weaker-than-usual H2 2022.
The road ahead
Looking forward, Signify plans to announce a new product integrating security with lighting in the consumer channel later this year. The company expects the horticulture segment to recover towards the end of the year, and it anticipates moderate improvements in pricing in the upcoming quarter.
Signify is expected to announce the company’s executive leadership plans in early 2024. In 2020, two months after the company acquired Cooper Lighting for $1.4 billion, Signify renewed Rondolat's contract for a four-year term that will expire at the company's next Annual General Meeting, expected to occur in May 2024.
