More than a year ago, Signify CEO Eric Rondolat described the company’s push into the ultraviolet C-band disinfection application as a “marathon,” not a sprint. To that end, Signify has noticed some flagging UV-C products in its germicidal UV race.
The company has reevaluated UV-C products aimed at eradicating the SARS-CoV-2 virus from surfaces, Rondolat told analysts on a call to discuss overall second-quarter financial results on Friday.
♦ UPDATE: On the analysts’ call, Rondolat used the term “obsolescence” to refer to both certain UV-C and horticultural lighting products. Since the original publication, through its spokesperson Signify has explained that this concept refers to “an accounting treatment, referring to charges/write-downs Signify took on some surface-oriented UV-C products. These accounting write-downs reflected the shift in demand towards upper-air disinfection devices as knowledge of the COVID-19 virus progressed and it became clearer than most transmission is through the air. … When inventory levels are higher than the current visibility we have on demand, our accounting rules mandate that we take a partial obsolescence provision. The provision is a write-down of part of the value of our inventory. It recognizes that part of our inventory might not be sold if demand does not recover, or will take longer to sell.” Signify’s spokesperson reiterated that the obsolescence does not refer to a discontinuation of any products. LEDs Magazine apologizes for any confusion. ♦
The “obsolescence” of surface-oriented products contributed to a “substantial” decline in gross margins for the quarter, Rondolat noted, pointing out that other factors were inflation including the rising cost of energy, ongoing supply chain difficulties, COVID-19 lockdowns in China, the strengthening of the Chinese renminbi*, and the further treatment of conventional horticultural lighting products under such financial obsolescence conditions, as efficient LEDs grow more popular under energy pricing pressures.
Signify adjusts EBITA guidance
For the quarter ended June 30, overall company revenue was €1.84 billion, marking a 5.1% increase in comparable sales over the second quarter of 2021. Some of the increase came from price increases amid global inflation.
While net income grew 203% to €248 million, Rondolat chose instead to focus analysts’ attention on “a gross margin decline of 290 basis points, which is quite substantial.” Adjusted EBITA margin tumbled to 9.5% from 10.9%, leading the company to revise its adjusted EBITA margin guidance for the year downward to between 11% and 11.4%, whereas it had been forecasting continued improvement. Adjusted EBITA itself slipped 0.5%, to €174 million from €175 million, while overall EBITA rose 150% to €340 million from €136 million.
Looking past the surface
In the early days of the COVID outbreak, Signify launched a portfolio of 12 UV-C product families aimed at deactivating the virus in air, on surfaces, and on objects. UV-C had been proven to deactivate SARS-CoV-2 at specific dosage.
But over the ensuing two years, LEDs Magazine suggested several times that sales did not seem to be living up to expectations. About eight months into the initiative, Rondolat characterized the market as “an education”. A few months later, nearly a year after the June 2020 launch, he conceded that the UV-C business is “less of a sprint, and more of a marathon.”
Last October, Signify reassessed its approach to the disinfection market. While the company has not stopped supplying UV-C light sources to OEM manufacturers, Signify had found more demand shifting to its own finished GUV products.
Then, last Friday, Rondolat revealed that the company saw a drop in demand for surface-oriented UV-C products.
“When we started the UV-C business, we were targeting surface and air,” he said. “In hindsight, the business is more geared towards air disinfection. There’s 10,000 times more infection that comes from air than from surfaces. We had products that we developed for surface that were declared obsolete.” The “obsolescence on two very specific businesses” (the other being conventional horticultural lighting products) contributed to the 290-basis-point margin hit, Rondolat told one analyst. [Editor’s note: See update above on the accounting definition of obsolescence as it refers to the Signify portfolio and financial results.]
In retrospect, it’s no coincidence that when signs of liveliness began picking up in the UV-C stable, they came from the air disinfection portfolio, such as when Signify sold into a Taiwanese restaurant chain and the Munich school system earlier this year.
Rondolat did not provide an update on overall UV-C sales or indicate whether the third category of GUV products — those aimed at objects — has been a viable one. LEDs has requested more information.
Meanwhile, Rondolat gave an upbeat account of how soaring energy prices are sparking renewed interest in energy-efficient LEDs and LED services. LEDs will report on this and other insights from the second-quarter call separately.
*Editor’s note on currency: The official name of China’s currency is the Renminbi (RMB); some readers may be more familiar with the use of “Chinese Yuan” (CNY), which is the principal unit of account for the currency (Source: Investopedia).
MARK HALPER is a contributing editor for LEDs Magazine, and an energy, technology, and business journalist ([email protected]).
Updated Aug. 5, 2022 1:35 PM EDT for correction of "obsolescence" terminology and clarifications regarding Signify product portfolio status.
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