Signify Nv Ord

Hello and welcome to Signify second quarter and half year results 2023. Throughout the call all participants will be in listen only mode and afterwards there will be a question and answer session. Please note this is limited to one question plus one follow-up. Today I am pleased to present Eric Rondola, Javier Van Engelen, Telka Gerdes. Please go ahead with your meetings.

Good morning, everyone, and welcome to Signify's second quarter 2023 earnings call. With me today are Eric Gondola, CEO of Signify, and Javier van Engelen, CFO. During this call, Eric will take you through the second quarter highlights, after which Javier will present the company's financial performance. Eric will then come back to discuss the outlook for the remainder of the year. And after that, we will be happy to take your questions. Our press release and presentation this morning. Both documents are available for download from our investor relations website. The transcript of this conference call will be made available as soon as possible. And with that, I will now hand over to Eric.

Thank you, Telco. Good morning, everyone, and thank you for joining us today. So let's start with some highlights of the second quarter 2023 on slide four. We continue to face softness in the consumer indoor professional and OEM channels and the recovery of the Chinese market was slower than we originally anticipated. On the other hand, the outdoor professional and professional connected lighting businesses saw positive traction. Gross margin was strong thanks to price discipline and effective COGS management. Our fixed cost did not keep pace with the overall volume decline. Our digital product division was most exposed to these challenges while digital solutions showed more resilience. Supply chain lead time reduction and working capital improvement measures supported free cash flow performance. On the next slide, slide five, we see signifies overall Q2 performance. Our installed base of connected light points increased from 117 million in Q1 to 190 million at the end of Q2. LED-based sales were 84% of our total revenues. Nominal sales in Q2 were €1.6 billion, translating into a nominal decline of 10.5% and a comparable sales decline of 8.6%. The adjusted EBITDA margin decreased to 8.3% versus 9.5% in Q2 last year. We continue to improve our gross margin as we benefited from positive pricing, as well as effective measures to reduce the cost of goods sold. As seen in Q1, the top line decline resulted in an under absorption of fixed costs, which mainly impacted our digital products division, while the digital solutions and conventional products divisions both demonstrated operating margin resilience. Net income came at in at 45 million euros compared to 248 million in Q2 last year. Finally, pre-cash flow was 88 million euros, mainly due to a lower cash outflow from working capital helped by improving supplier lead times. As a reminder, Q2 last year included a non-operational gain and cash proceeds from the disposal of real estate Assets of €184 million in the net income and €194 million in free cash flow. Let's now move on to our division, starting with digital solutions on slide 6. Nominal sales in Q2 were €974 million, with comparable sales showing a decline of 5.7% against a high comparison base of 11.6%. in Q2 2022. During the quarter, the outdoor segment and especially the public segment continued to grow, but we faced a more challenging indoor professional business and softness in agriculture lighting as high energy costs continue to put pressure on the yields of our customers. We are pleased with the adjusted EBITDA margin of 10%. an improvement of 50 basis points from last year, which is mainly attributable to gross margin recovery from lower cost of goods sold and continued price discipline. On the next slide, slide seven, I would like to discuss a couple of business highlights of our digital solution division. We upgraded the lighting of two scanline ferries. We installed 3D printed fixtures made of 55% of recycled polycarbonate materials. In addition, the lighter materials resulted in 28% CO2 emission savings during transportation. We also retrofitted all 1,800 light points of the Dublin Port Tunnel with Philips insert trays. we developed a plug-and-play kit consisting of new gear and LED trays that could be used to retrofit each fixture at the site in just five to six minutes. This was the lowest CO2 footprint solution as it avoided transportation back and forth to and from the factory and also as we were able to reuse components of the old fixture including the entire housing. The project was part of the high-risk government's energy efficiency plan and was partially funded by the European Green Deal. Let's now move on to our next division, digital products, on slide eight. In the second quarter, the digital products division saw a comparable sales decline of 12.1%. This was mainly driven by continued weakness in the consumer-connected segment, the OEM business, and top-line weakness of our Chinese K-Light business. The adjusted EBITDA margin was 6.9%, a decrease of 370 basis points impacted by lower fixed cost absorption due to the volume reduction. Next, on slide 9, I would like to talk to some business highlights of digital products. We launched a new home monitoring technology in WiZ. The home monitoring technology combines lighting and security in an integrated approach as lights sensors and cameras can be combined to detect motion and prevent and deter intruders. The new smart home monitoring with indoor camera is the first of many home monitoring products to come. We are also planning to expand home monitoring into Philips Hue this year and will make more announcements after the summer. We have introduced new ultra-efficient A-class LED outdoor lights for both plug-in and solar applications. These new lights offer a durable and energy efficient performance and can generate energy savings of up to 50% versus previous LED lights. Let's move now to slide 10 and talk to conventional products. Overall, we are pleased with the execution of our last company standing strategy, fully offsetting the cost pressure we were facing last year and bring our margins back to the historical levels. The comparable sales decline of 15% this quarter still reflects a strong pricing carryover effect, which will reduce over the course of the next quarters, gradually bringing the comparable sales performance to the underlying volume decline. The adjusted EBITDA margin recovered to 20.5%, an improvement of 500 basis points versus Q2 last year as headwinds we saw in 2022 have turned into tailwinds, namely energy, transportation costs, and forex. Next, I would like to discuss our sustainability performance on slide 11. We remain on track to reduce emissions across the entire value chain by 40%. driven by our leadership in energy efficient and connected lighting solutions, which significantly reduced emissions during the use phase. Circular revenues remained stable at 29%, on track to reach our 2025 targets of 32%. The main contribution was from serviceable and upgradable luminaires, including the first serviceable horticulture product, FAMINI. Brighton Labs' revenues increased to 28%, also on track to reach our 2025 target of 32%. This was driven by the performance of Cooper's tunable products supporting the consumer well-being portfolio and by the continued strength of our safety and security portfolio. Finally, the percentage of women in leadership positions continued to improve to 30%, on track to reach our 2025 target of 34%. This was mainly due to the acceleration of hiring practices for diversity across all levels. On slide 12, I would like to describe our new virtual power purchase agreement contract. So together with Hynek and Nobian and Philips, we secured a renewable electricity guarantee from the Mutkalampi wind farm in Finland. This 10-year agreement will deliver 330 gigawatts hour of renewable electricity per year to the consortium. This is the equivalent of the electricity required to power 40,000 households and helps to avoid over 230,000 tons of CO2 emissions per year. The facility helps power our operational electricity usage in Europe, excluding Poland, for which we already have an existing agreement in place. But with this new facility, we now cover nearly all of our operational electricity use in Europe. I would like now to head over to Javier, who will discuss our financial performance in more details.