Signify Nv Ord

Good morning, everyone, and welcome to Signify's earnings call for the fourth quarter and full year 2023. During this call, we will start with Javier's review of the company's financial performance in the fourth quarter. And after that, Eric will discuss the full year 2023 performance outlook and provide an update on our recently announced restructuring program. After that, we will be happy to take your questions. Our press release and presentation were published at 7 o'clock 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 hand over to Javier.

Thank you, Telke. Good morning, everyone, and thank you for joining us today. Let me start by diving straight into our quarter four results, starting on page four. We increased the installed base of connected light points from 121 million in Q3 to 124 million at the end of Q4. LED-based sales represented 87% of total sales. Nominal sales in Q4 were 1.7 billion euro, translating into a nominal decline of 12.3% and a comparable sales decline of 7.7%. The Q4 sales performance was impacted by continued weakness in the consumer, OEM and indoor professional lighting businesses. Adjusted EBITDA margin came in at 12.1%, an increase of 190 basis points versus 10.2% in Q4 last year. The main driver behind this improvement continues to be gross margin expansion, thanks to effective cost of goods sales management and a positive sales mix. Net income came in at 59 million euro compared to 86 million in Q4 last year. The year-on-year decrease is mainly due to the increase in restructuring provisions, which was partially compensated by lower financial expenses and lower income tax. With regards to the restructuring cost, these amounted to 83 million in this quarter, reflecting the provisions related to the recently announced restructuring cost reduction program. Finally, we delivered €295 million of free cash flow in the quarter. Now let's move to our divisions, starting with digital solutions on slide five. Nominal sales in Q4 were €1 billion, with comparable sales at minus 2.9%, as continued strength in professional systems and services was more than offset by softness in indoor professional and horticulture lighting. The adjusted EBITDA margin did increase to 12.4%, an increase of 270 basis points, mainly driven by continued gross margin recovery. On the next slide, slide six, I would like to discuss a couple of business highlights of our digital solutions division. We won the prototype phase of the US Department of Energy's prestigious L-Prize competition. Our winning prototypes were the Generation Flex modular luminaire and the Interact Next Gen scalable connected lighting system. The Generation Flex modular luminaire prototype combines cutting edge materials and adaptable 3D printing concepts with energy efficiency and optics that deliver flexibility, reduce energy consumption, and still deliver an exceptional quality of light. The Interact Next Gen connected lighting is a simple scalable wireless solution that provides businesses with all the tools and intelligence they need to go beyond basic energy savings tactics that interface with existing building systems that reduce operational expenses and that improve occupant experience all within a single platform. The second highlight is the creation of a new version of the classic Copenhagen street lamp made out of bio polyethylene The material does not compromise on either durability, appearance, nor functionality, yet it reduces the carbon footprint by more than half compared to the old aluminum fitting. Let's now move on to digital products on slide seven. In the fourth quarter, the digital products division saw a comparable sales decline of 9.4% as we continue to see weakness in the consumer and OEM segments. Consumer connected improved sequentially. The adjusted EBITDA margin decreased by 80 basis points to 13.3%, mainly as a result of underabsorption of fixed costs, partially offset by a positive sales mix effect. Moving on to slide 8 for the business highlights of digital products. We introduced the WIS A60 filament ultra-efficient smart bulb, the most energy-efficient smart bulb. It consumes 40% less energy than standard LED and connected LED light bulbs and can act as a motion sensor through its embedded SpaceSense technology. We launched the new Philips RADIE auto-linkable ultra-efficient solar lights. These lights are automatically linked together and light up simultaneously when triggered by motion. These solar lights can light up your outdoor space for up to six nights on one single charge. Then moving on to slide 9 and conventional products. Comparable sales declined by 29.6% in the fourth quarter, in line with expectations as a structural decline of the business was exacerbated by the fluorescent bands in Europe. The adjusted EBITDA margin increased by 440 basis points to 17.3%, driven by gross margin recovery Excluding one-offs related to higher provisions, the underlying adjusted EBITDA performance would be close to 19%, which is in line with the underlying adjusted EBITDA performance in previous quarters. Moving on to our adjusted EBITDA breach for the fourth quarter on slide 10. Overall, our adjusted EBITDA margin improved by 190 basis points from 10.2% in Q4 2022 to 12.1% this year. with a 340 basis points structural gross margin recovery only partly offset by the negative impact of volume decline. In more detail, sales mix contributed with a positive 130 basis points. Pricing impact was a negative 80 basis points. The year-on-year cost decreases in raw materials and logistics had a positive effect of 290 basis points. The volume decline impacted adjusted EBITDA margin by a negative 200 basis points. Indirect costs were neutral on the adjusted EBITDA margin. And finally, the currency effect was slightly positive with 30 basis points and other had an impact of 20 basis points. On slide 11, I'd like to zoom in on our working capital performance during the quarter. Compared to the end of December 2022, working capital reduced by 103 million euro or by 50 basis points from 7.4% to 6.9% of sales. Inventories decreased by €311 million from around €1.4 billion at year-end 2022 to below €1.1 billion at year-end 2023, mainly as a result of improving supply chain lead times. Long lead times had led to an inventory build-up which peaked at €1.7 billion in Q3 2022. Throughout 2023, we have gradually been reducing this position, and we see potential for further reductions in 2024. Receivables reduced by €90 million due to both our efforts to minimize overdues and due to the lower year-on-year sales level. Payables were €320 million lower, being the logical consequence of driving down our inventories, while structural payment terms remained largely unchanged. Finally, other working capital reduced by €21 billion. As lead times continue to normalize, we continue to see further potential to reduce our working capital back to historical levels of low to mid-digit percentage of sales. I would now like to hand over to Eric for the full year 2023 performance update.

Thanks, Javier, and good morning, everyone. So let's go to slide 13. In 2023, our connected lighting and growth platforms contributed 30% to total sales, driven by a strong performance in the professional connected segment, offsetting weaker consumer connected sales. Nominal sales declined by 10.8% to 6.7 billion euros, including a Forex impact of minus 3.3%, mainly due to the depreciation of the US dollar and the Chinese yuan. Comparable sales declined by 8.3% for the full year, mainly due to weakness in consumer OEM and indoor professional, while outdoor professional lighting remained resilient throughout the year. Adjusted EBITDA came at 670 million euro. The adjusted EBITDA margin of 10% was broadly in line with 2022, as the gross margin improvement of 240 basis points was offset by an under-absorption of fixed costs due to the lower volume. Net income decreased to 215 million euros, mainly due to lower adjusted EBIT A, higher adjusted items and financial expenses, partly offset by lower income tax expenses. Please note that net income in 2022 included the one-time gain on the disposal of non-strategic real estate assets of 184 million euros. And finally, you know, free cash flow increased 586 million euros or 8.7% of sales, mainly driven by a lower working capital. Moving on to slide 14. Digital solutions and digital products contributed 91% to sales, 83% to adjusted EBITDA, and 88% to free cash flow in 2023. thereby showing a linear progression versus 2021. At the same time, the strong operational improvements we achieved for the conventional business this year in 2023 led to an increase in its adjusted EBITDA and cash flow contribution compared to a challenging 2022. Looking at our three division mode details on slide 15, Digital solutions had a comparable sales decline of 5.4% against a high base of comparison of 7.8% growth in 2022. While we continue to see strong demand and market share gains for connected professional systems, we were facing some headwinds for indoor professional and agricultural lighting. The adjusted EBITDA margin improved by 70 basis points, reaching 10.7%, mainly driven by gross margin recovery. Digital products had a comparable sales decline of 10.5% due to the continued weakness in the consumer and OEM businesses. The adjusted EBITDA margin declined by 230 basis points to 9.7%, mainly due to a negative impact from lower volumes. Conventional products, so a comparable sales decline of 18.4%. The adjusted EBITDA margin improved by 600 basis points to 20.6% for the year. as we recovered a gross margin thanks to price increases and cost management. These actions helped us to bring the margin back to historical levels following the pressure of higher energy and transportation costs in 2022. Next, I would like to discuss our sustainability performance on slide 16. We completed the third year of our Brighter Lives, Better World 2025 sustainability program and made continued progress towards achieving our goals of doubling our positive impact on the environment and society by the end of 2025. We are on track to reduce emissions across the entire value chain by 40% against the 2019 baseline this is driven by our leadership in energy efficient and connected led lighting solutions which significantly reduce emissions during the use phase our circular revenues increased by one percentage point to 33 percent surpassing already the 2025 target the main contribution was from serviceable luminaires with a strong performance from both consumer and professional Brighter Lives revenues remained at 31% on track to reach the 2025 target. The percentage of women in leadership position remained at 29%, slightly off track. We are continuing our actions to increase representation through focused hiring practices for diversity across all levels and through retention and engagement action to reduce attrition. In the fourth quarter, We also received several external recognitions for our leadership in sustainability. We were included in the Dow Jones Sustainability World Index for the seventh consecutive year, and we achieved the Ecovadis Platinum rating for the fourth consecutive year. Let's now move to slide 17 to discuss our intended capital allocation for the year. So for 2023, we will propose to increase the cash dividend to €1.55 from €1.50 in 2022. This is subject to shareholder approval at our AGM that will take place on May 14th. It represents a total cash dividend of €196 million and a yield of 5.1% over the year-end share price of €30.32. I would like to remind you of our capital allocation policy. We aim to pay an increasing annual cash dividend per share year-on-year. We remain committed to maintaining a robust capital structure and investment-grade credit rating in line with this commitment, since I expect to further deliberate its growth depth and reduce its US pension liabilities in 2024. We will also continue to invest in organic and inorganic growth opportunities in line with our strategic priorities. After these priorities have been met, we will look at other ways of returning excess cash to shareholders. Let's continue with the outlook on slide 19. So for 2024, we expect an adjusted EBITDA margin improvement of up to 50 basis points, including the first benefits from the announced restructuring program. The free cash flow generation of 6% to 7% of sales, including an incremental and non-recurring negative impact of around €150 million related to the restructuring program and the reduction of our US pension liabilities. Let me now provide you with further details on the new customer-centric organization structural cost reduction plans that we announced on December 1st. So this is on slide 20, you can see the new organizational structure. So after the major transformation we achieved in the past and over the past decade, we announced that we are taking the next step by organizing our company around four vertically integrated businesses. Three of these will focus on customers. The professional business, which will offer LED lamps, luminaires, connected lighting systems and services to customers in the professional segment. The consumer business will offer LED lamps, luminaires, and connected products to customers in the consumer segment. The OEM business will offer lighting components, and to the industry. The fourth, the conventional business will be dedicated to conventional lighting. In the past 10 years, we have been organized with a clear focus on processes and also on improving processes. This structure served us well as we transitioned from 74% conventional lighting in 2013 to 85% of LED lighting today. The new model will increase accountability by giving the new businesses end-to-end P&L responsibility from offer development to manufacturing and sales and marketing, enabling simpler process alignment and execution. In addition, by reallocating resources and reducing centralization, we are simplifying our structure and reducing our non-manufacturing costs by over 200 million euros. These changes to our organization and the cost restructuring program will be implemented through 2024 with the majority being achieved by Q2. The implementation itself is subject to proceeding with the signifies social partners overall around 1,000 people will be impacted, representing 7% of our non-manufacturing cost population. The plan will affect people in 37 countries with still ongoing negotiations for 28 social plans. We will only be able to implement the new structure fully After having concluded negotiation with our social partners, at that point in time, we will report under the new structure and provide comparable financials. But for Q1 financial results, we report the financials at group level as we normally do. We'll report the sales level and comparable sales growth for the four new businesses. And if the discussion with our social partners are finalized before the end of March, we will start reporting fully under the new structure, including adjusted EBIT A for each of the businesses. If not, the profitability by business will be disclosed as of Q2. Now, with regards to the 200 million of cost savings, approximately two thirds of the savings expected to come through in full year 2024 and the remainder in 2025. This means that the non-manufacturing cost level for the full year 2025 is expected to show a 200 million euros reduction against full year 2023. Now, let me go to the restructuring costs. So the restructuring costs related to the new organizational setup and cost measures are split across 2023 and 2024, of which the majority was already taken at the back end of 2023. Most of the cash outflow, however, will occur in 2024. And as stated in the press release, we're expecting an incremental cash outflow of approximately 150 million euros, which breaks down into 100 million due to the incremental impact of restructuring in 2024, and 50 million reduction of our US pension liabilities. And with all that, I will hand back to the operator for Q&A.