I was reading the Signify Q2 earnings report and was, quite frankly, confused.

The company had just come off its Capital Markets Day where it is trying to communicate its strategy and, presumably, sway analysts that it is a good investment … a company with a turnaround plan that will generate stock appreciation.

We know that analysts were not impressed as evidence of a 15% decline in the stock price.

Signify Stock Performance – Capital Markets Day to Q2 Earnings … $18 to $16 to $14

And now this quarterly report which generated another sell-off round with the stock continuing to plummet.

Signify Stock Performance – After Q2 Earnings … $16 to $14

Was Signify’s Q2 Earnings Report “Bad”?

Much depends upon how you define “bad.” Sales were down 3.6% overall. Yes, that is worse than our Q2 Pulse of Lighting report but Signify is global and involved in many lighting segments whereas the Pulse of Lighting is focused on the US electrical distribution market.

Signify is involved in:

• OEM, which by definition will be challenged unless the company wins market share as, if lighting is flat globally, what drives OEM growth?
• Lamps, and the Consumer market, were down. Again, expected as how frequently are people buying lamps anymore given LED longevity.
• Europe … enough said about this market. Lighting manufacturers have told us that there is no growth in this market … and it is why they are investing into the US.
• China? Large market. Extremely price competitive. Preference for Chinese products.
• India … maybe. It was highlighted during the Capital Markets Day as a growth opportunity

And then we have North America.

Signify’s Earnings Call Problem

The problem was the presentation. Very dour. Lacked any geographic discussion. Didn’t relate to the Capital Markets. Shared no detail.

It reminded me of Wesco from years ago. Wesco had an investor relations issue. The analysts would listen on the calls, but the calls lacked granularity and a level of transparency. In a word, they were nebulous and not overly informative.

I know that Wesco’s IR (investor relations) department commissioned a research company to confidentially solicit input from the analysts. The analysts rated the company on a number of attributes and shared observations. Lo and behold, the earnings calls became more informative. The company still needed to perform but the analysts received better quality information. They didn’t feel that they were being “handled.”

Signify has an analyst problem. It’s not hard to solve. Share pertinent information o that they can share an informed analysis and stop worrying that competitors will learn something … they already know it.

What was said on Signify’s earnings call?From the transcript and the presentation,

• As Tempelman shared that there is a “mixed market environment” and that they “started to implement the strategy introduced at the Capital Markets Day” (in reality, they probably started in early Q2, if not a little sooner. Further, “mixed market conditions” should be considered the status quo. For a global company, hoping for improvement everywhere is not realistic. Further, there is nothing on the horizon that, from a broad geo-economic perspective, is going to drive the commercial construction or the consumer markets. “Winning,” for Signify, will come down to 1) taking share and 2) if they are committed to Connected Lighting, a focused demand generation initiative to get buyers to allocate funds to this capability as the channel, inclusive of retailers, will only ride this wave rather than them investing to create it.)
• Build Portfolio
  • Professional projects continued to grow in the US where “we are outperforming the markets.” (but no results were shared. Further, if projects are to drive the business, this means that they need to win frequently versus Acuity because the market size, and frequency, of lighting projects is not increasing. So, the question becomes, how do you take share in the lighting project market, especially when the lighting activity is small to mid-sized projects?)
    • Globally, this business declined 2.5%
    • Gross margin is 40%, and this is globally. Acuity reports theirs at 46%, but they are US focused
  • Stock and flow, across most geographies, especially Europe, is weak (which is expected given SKU reduction, distributor de-stocking due to SKU reduction, business, and timely shipping. And there is significant competition in this space … at least in the US.)
  • Consumer business. They tried to explain issues relating to connected lighting and retailer delays in sell-out and corresponding retailer de-stocking due to lack of demand. (This sounds like a demand generation issue. What percentage of consumers, in each geographic area, want connected lighting and are willing to spend a premium for it. Further, do they want it at the lamp level or at the lighting controls / wall box level.)
    • Overall, Consumer was down .2% globally
  • Harvest Portfolio
    • More commoditized businesses (and remember, Genlyte is considered to be in this category.)
    • OEM faces challenges, especially lamp manufacturing.
      • The OEM business was down 12%.
        • This will be a long-term challenge and, if they decide to sell it, it probably won’t yield their desired amount, and they would also need to have an ongoing supply agreement with the acquirer.
      • Focused on price optimization with more coming.
    • Total sales were 1.33 million euros with a sales decline of 3.6%, globally.
    • The company’s EBITA margin declined 3% and they had some reasons, probably the biggest was increased costs tied to material and other inputs.

Answers to Analyst Questions

• Signify is seeking to generate $180M euros over two years in “savings” tied to restructuring. Started some, expect more in 2^nd
• There were questions about achieving EBITA goals or if the company should do a guidance reset. Signify responded that they have confidence due to projected improved topline, gross margin resilience, and benefits from cost-savings. (Reading between lines, business needs to grow, quickly, and we need to take share / stem losses. What was left unsaid is there is no room for an error in execution, globally.)
• Signify sees a slower demand for stock and flow in the Professional side (or are they losing share as there are many companies that serve this space and are “distributor and contractor friendly.” Can Cooper afford to not capture more share here? Can Genlyte (depending upon their focus.)
• Lots of questions regarding pricing and cost structure. Much of the responses relate to need for price optimization or tied to product mix. The OEM margin is low due to KLite.

The answers to many analyst questions seeming were somewhat evasive, almost like Signify either didn’t know or didn’t want to share. It did not project confidence to the analysts, who tend to focus on operational and financial questions to gain insights to support their modeling for stock price projections.

Take Aways

It is hard to say were Signify is succeeding and, especially from an analyst viewpoint, where to have confidence that the company can achieve its stated goals. Where is it having success?

The global aspect, and a desire to serve all markets, may be the biggest hinderance to the company. While having OEM internally could be of value (vertical integration), the performance drives the company down.

From a US perspective, the call inferred that Signify has had reasonable performance, but is it taking share? Is business flat / down? (and remember, the company goal is flat to 1% in 5 years (but versus “what”?)

From a distributor perspective, or even a rep / lighting agent perspective, there was nothing informative or inspiring from the call. Distributors and reps / lighting agents are reliant upon the information they receive from Cooper Lighting and Genlyte and then evaluating that themselves based upon their confidence in the management teams and feedback from the market.

At the global level, perhaps Signify corporate could benefit from considering Wesco’s investment and be a little more informative.

And here’s a tale of two stocks …

Signify stock vs Acuity Since Signify’s Capital Markets Day