Stung by a surprise downturn in the fourth quarter, Signify today took the unusual step of withholding sales guidance for 2023, as CEO Eric Rondolat cited ongoing economic uncertainty related to the war in Ukraine and other global volatility.
The world’s largest lighting company earlier this month warned that, contrary to prior expectations, sales would decline in the quarter ending Dec. 31. Today it reported that sales indeed fell by the recently anticipated 8.8% on a comparable basis, to €1.98 billion, which also marked a drop of 1.5% on a nominal basis from €2.01 billion in the same quarter a year earlier. Net income for the quarter tumbled 49.5% to €86 million from €170 million. The company said margins were hit hard by inflation, including energy prices.
Similar to when it flagged the decline two weeks ago, Signify cited “a further deterioration of the Chinese market due to COVID-related disruptions, a weaker indoor professional business, continued softness in the consumer segment, and lower growth in the OEM channel than anticipated,” as reasons for the drop in sales.
China’s COVID surge hit the Eindhoven, Netherlands–based company in several ways. Not only did markets stall and supply chains sputter, but at one point, over 75% of employees had the virus at Signify’s lamp and luminaire manufacturing company Zhejiang Klite Lighting Holdings Co., Ltd., causing production to stop, Rondolat said on a web call with analysts.
As LEDs Magazine previously noted, the slowdown in indoor professional sales is alarming, given that the office lighting market has been a strength. Rondolat said that while certain infrastructure strands performed well, companies are delaying construction and retrofit activity in nonresidential real estate such as offices and retail.
The company did not provide an update on the sales of horticultural products and services, which slowed down in the third quarter, or on UV-C products, which has been a troubled area. LEDs hopes to follow up on these businesses.
The surprise nature of the quarter’s slump left Signify too wary to provide a specific sales outlook for 2023.
“Looking ahead, we expect volatility to persist in the first half of 2023 and our performance to improve in the second half,” Rondolat said. “While top-line growth will be difficult to predict, our key priority in 2023 will be to improve profitability and return to a free cash flow level in line with previous years.”
Adjusted EBITA margins for the quarter were 10.2% and for the full year 2022 were 10.1%; free cash flow was 5.9% of sales at the end of the year. Signify expects 2023 adjusted EBITA margins to be between 10.5% and 11.5%, and for free cash flow to be between 6–8% of sales.
In response to an analyst’s question on the call, CEO Rondolat elaborated on the vicissitudes that are making it hard to call whether sales will rise or fall, let alone to what extent.
“When we look at the potential volatility … we really come up with very different types of results, which can be negative, which can be positive,” he said. “It depends. If the world goes into a situation where the war is ending in Ukraine, if we get the consumer segment and environment which is less recessive than it is at this point in time, if we have an ease on inflation — specifically, the price of energy — then we will surely expect to have a positive growth.
“If things are continuing the way they are, and eventually degrading a bit more, then it’s going to be much more complicated….So at the end of the day, what we see in front of us at this stage, is a very high volatility on the end market that can turn one way or another way…That’s why we said the priority will be to recover what we have lost in operating margin, and to also rebuild our cash position in 2023.”
Rondolat concluded, “If we see clearer in the coming quarter, we may be more assertive and give a direction. But we are not in a position to do that at this point in time.”
The Signify boss repeatedly referred to energy efficiency — currently a high priority in the global economy — as an important driver in the sales of LED technology and services, known for cutting energy consumption. Some industry observers believe that a pending September European ban on fluorescent lighting will supercharge the sale of LED products; Rondolat did not specifically mention that.
Quarterly comparable sales and income fell across all three sectors: Digital Solutions (the professional business), Digital Products (consumer, including the Hue and WiZ lines), and Conventional (non-LED). The comparable sales decline in those three divisions were, respectively: 5.8% to €1.1 million; 12.9% to €661 million; and 11.4% to €203 million. In the same order, income from operations fell 30.2% to €70 million (Digital Solutions); 28.6% to €78 million (Digital Products); and 88.4% to €4 million (Conventional). While adjusted EBITA margins fell across the board, Digital Products had the highest margin of the three, at 14.1% compared to 9.7% for Digital Solutions and 12.9% for Conventional.
For the year 2022, comparable sales across the company nudged up by 1.2%, to €7.51 billion from €6.86 billion in 2021. Net income jumped by 31%, to €532 million from €407 million. On a segment basis for the year, Digital Solutions comparable sales rose 7.8% to €4.23 billion, while income from operations was up 25.2% to €256 million from €205 million. Digital Products comparable sales fell 3.8% to €2.47 billion while income fell 16.3% to €265 million. Conventional comparable sales fell 12.6% to €793 million while income plunged 61.9% to €60 million.
The company also provided a number of positive updates on its sustainability and equality goals. LEDs will report on some of these separately.
MARK HALPER is a contributing editor for LEDs Magazine, and an energy, technology, and business journalist ([email protected]).
*Updated Jan. 30, 2023 8:42 AM to specify nominal sales drop for comparative figures.
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