As Signify dips again, analyst wonders how long this can go on

Still persevering through an endless business transformation aimed at becoming a lighting-based digital services and data company, a dogged Signify today reported yet another quarterly profit decline, raising questions about whether it will ever truly recover from the industry’s travails despite the unflagging determination of CEO Eric Rondolat.

Adding to the uncertainties, Rondolat cautioned that a prolonged occurrence of the China-originated coronavirus could disrupt financial results. The company’s supply chain, customer base, and employee roster have a significant presence in the country, where the government has curtailed businesses’ activities in an effort to fight the outbreak.

Whether or not the health crisis affects operations, Signify also revealed that last week it quietly began restructuring, shifting activities out of what had been four business groups into what will now be three core units. The existing LED, Professional, Home and Lamps groups will be chopped and changed as the Digital Solutions, Digital Products, and Conventional Products divisions.

Although Rondolat and outgoing chief financial officer Stéphane Rougeot said that the regrouping was focused on getting closer to customers rather than on cost cutting, some analysts read it as part of an ongoing cost reduction scheme.

Above all, it represented the latest concerted initiative aimed at eventually spinning Signify out of the same financial quagmire that has slowed the lighting industry in general now that it can no longer profit from simply selling bulbs, luminaires, and their replacements. The long life of LEDs has obliterated that now-bygone business model. Hard as most companies such as Signify are trying, they have yet to replace the old practices with something that yields steady positive results. Signify’s LED-based sales make up 78% of its revenue today, compared with 26% in 2013.

Signify’s fourth quarter ending Dec. 31 was a trying one, as the company reported that net income fell 17.3% from the same quarter a year earlier, to €98 million ($108.4M) from €119 million ($131.6M). While sales for the quarter ticked up by 1.4% to €1.75 billion ($1.94B) from €1.73B ($1.91B), comparable sales actually declined by 4.2%.

The tally for the full year 2019 had a slightly better feel. Net income inched up 2.3% to €267M ($295M) from €261M ($289M), although sales fell 1.8% to €6.25B ($6.91B) from €6.36B ($7.03B), and comparable sales declined 4.6%. The company cited “continued rigorous implementation of cost reduction initiatives,” which helped explain how it profited in the face of declining sales. The company’s adjusted EBITA improved by 0.03% to 10.4%, an increase that was not as high as its originally anticipated 11‒13% range, but which met the company’s lower expectations, reset three months ago.

Although Signify had enjoyed a run of three consecutive quarterly profits, a downturn in the third quarter and now again in the fourth has returned it to a familiar scenario of declines, raising questions as to whether Signify, and the lighting industry in general, will emerge from the financial woods.

“When does the lighting industry, generally speaking, turn the corner and — excluding the (traditional) lamps business — post proper growth?” Morgan Stanley analyst Lucy Carrier asked CEO Rondolat on a conference call and webcast this morning.

“It’s a very good question, and it’s of course on our mind,” Rondolat replied. He pointed out that the areas which Signify has identified as its “growth engines” — things like digital services, Internet of Things lighting, home and commercial smart lighting, and LED products — would have to grow 6% to offset the 20% declining trend of traditional, non-LED lighting products.

Noting that the growth engine declined about 0.3% this year and 0.7% in 2018 following growth of around 5% in 2017 and 10% in 2016, he painted the flattening as “stability” that followed an earlier “period of growth.”

He attributed the flattening to “a clear market degradation” that has affected the entire lighting industry. He also observed that Signify “is weathering it better than competitors,” noting that the company has staked out technologies and presence in important growth lighting areas like agriculture, Internet-connected professional environments, solar, 3-D printing, and Li-Fi.

“So when you talk about growth for the future, you need to have different platforms now and for the future,” Rondolat said. “These growth platforms are growing, but at this point in time, we are facing challenging and volatile market conditions.”

In a fresh maneuver to energize growth, Rondolat said the new business structure of three divisions will make the company more responsive to customers.

CFO Rougeot concurred. “The objective is not about streamlining and flattening the organization,” said Rougeot, who is leaving the company on Mar. 1, having served in his current role since September 2016, a few months after Signify spun off from Royal Philips, one of many mile markers in its ongoing transformation. “It’s about being more customer centric, being quicker on the execution. Of course if there are benefits and ways for us to streamline, we’ll do that, but that’s not the intention.”

In the restructuring, all of Signify’s consumer-oriented products will become part of Digital Products. That includes Hue, which has been on its own in the Home group, as well as WiZ Connected, the company Signify acquired to add Wi-Fi to its stable of connected home offerings. WiZ and other consumer-oriented products have been residing in the LEDs division, not in home. Other products in the Digital Products division will include LED lamps, luminaires, drivers, and other electronics, all aimed at the professional, OEM, and consumer markets.

The new Digital Services division targets the professional market with luminaires, lighting systems, and services, including the collection, sale, and analysis of data that can be used to improve operations of a building or other premises.

It’s not clear how much overlap the two digital divisions might have in luminaire offerings.

Conventional Products will sell non-LED lamps.

Cost reductions continue to include measures such as headcount reduction and supply chain efficiencies. The company’s headcount actually increased recently as it completed acquisitions of companies including WiZ, China’s Zhejiang Klite Lighting Holdings Co., Ltd., and agricultural lighting firms Once Inc. and iLOX.

Overall headcount stood at 32,005 at the end of the fourth quarter, up from 28,144 at the end of the third.

In the US, Signify expects to close its acquisition of Eaton’s Cooper Lighting Solutions this quarter.

Meanwhile, in response to an analyst’s question over how the coronavirus might impact Signify, Rondolat noted that the company’s first priority is looking after employee health in China, and taking measures such as issuing masks, hand soap, and antiseptic gel to help prevent the spread of the virus.

On the business side, he noted that Signify is closely monitoring inventories, which could be affected by the Chinese government’s directive for businesses to remain closed in an extended New Year holiday period.

“We’re looking at the supply chain in many different ways,” Rondolat said. Noting that the company had already started building inventory ahead of the normal holiday period, he added that Signify is now closely monitoring it.

“We’re also looking at the possibility of supplying not exactly the product which is needed, but an equivalent that we would have in our inventory.”

Signify is also examining the state of critical supplies “that may be affected by a prolonged situation in China,” he said. “I have to say that at this point in time it’s very difficult to very precisely indicate any type of impact, because as you can imagine, it’s going to be very different if people resume work on the 14th of February as it is forecast at this point in time, or if this lasts much longer, weeks or even months longer.

“But we’re looking at all the possibilities to find alternative sourcing if ever we were not able to get the products coming from our own factories, or our suppliers’ factories in China.

“We are active every minute at this point in time to try to evaluate what we do with existing inventories, and what we do with supplies, in order be affected as little as possible. We will know better in the coming weeks, and if need be, we will respond accordingly.”

In a general statement on Signify’s overall corporate outlook for 2020, the company noted, “For 2020, Signify aims to achieve a further improvement in the adjusted EBITA margin and to deliver a free cash flow of at least 6% of sales. This outlook excludes the announced acquisition of Cooper Lighting Solutions. An update on the outlook will be provided after the closing of the Cooper Lighting Solutions acquisition, which is expected in Q1 2020, as previously indicated.”