SFFYF - Signify N.V. (PHPPY) Q2 2023 Earnings Call Transcript

2023-07-28 07:39:05 ET

Signify N.V. (PHPPY)

Q2 2023 Earnings Conference Call

July 28, 2023 3:00 a.m. ET

Company Participants

Thelke Gerdes - Head of Investor Relations

Eric Rondolat - Chief Executive Officer

Javier van Engelen - Chief Financial Officer

Conference Call Participants

Daniela Costa - Goldman Sachs

Akash Gupta - JPMorgan

Sven Weier - UBS Frankfurt

Tim Ehlers - Kepler Cheuvreux

Martin Wilkie - Citi

Joseph Zhou - Redburn

Marc Hesselink - ING

Jacqueline Healy - Bank of America

Presentation

Operator

Hello, and welcome to Signify's 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 Rondolat, Javier Van Engelen, and Thelke Gerdes. Please go ahead with your meeting.

Thelke Gerdes

Good morning, everyone, and welcome to Signify's Second Quarter 2023 Earnings Call. With me today are Eric Rondolat, 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 [technical difficulty] this morning. Both documents are available for download from our Investor Relations Web site. The transcript of this conference call will be made available as soon as possible.

And with that, I will now hand over to Eric.

Eric Rondolat

Thank you, Thelke. 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 a positive traction. Gross margin was strong thanks to price discipline and effective and COGS management. Our fixed cost did not keep pace with the overall volume decline.

Our Digital Products division was mostly exposed to these challenges, while Digital Solutions showed more resilience. And supply chain lead time reduction and working capital improvement measures supported free cash flow performance.

On the next slide, slide five, we see Signify's overall Q2 performance. Our installed base of connected light points increased from 170 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 EBITA 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 €45 million, compared to €248 million in Q2 last year. And finally, free cash flow was €88 million, and mainly due to a lower cash outflow from working capital, helped by improving supply 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 divisions, starting with Digital Solutions on slide six. And 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 EBITA 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 Solutions division. We upgraded the lighting of two Scandlines ferries. We installed 3D-printed fixtures made of 55% of recycled polycarbonate materials. In addition, the lighter materials resulted in 28% CO2 emissions saving during transportation. And we also retrofitted all 1,800 light points of Dublin Port Tunnel with Phillips insert trays. We developed a plug-and-play [kit] (ph) 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 Irish 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 Klite business. The adjusted EBITA margin was 6.9%, a decrease of 370 basis points, impacted by lower fixed cost absorption due to the volume reduction.

Next, on slide nine, I would like to talk through some business highlights of Digital Products. We launched a new home monitoring technology in WiZ, and 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 a new UltraEfficient 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% just as previous LED light.

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 EBITA margin recovered to 20.5%, and improvement of 500 basis points versus Q2 last year, as headwinds we saw in 2022 have turned into tailwinds, namely energy, transportation cost, 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 remain stable at 29%, on track to reach our 2025 targets of 32%. The main contribution was from serviceable and upgradeable luminaries, including the first serviceable horticulture product family.

Brighter Lives 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 wellbeing portfolio, and by the continued strength of our safety and security portfolio. Finally, the percentage of women in leadership positions continue 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 HEINEKEN 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. Between this new facility, we now cover nearly all our operational electricity use in Europe.

I would like now to hand over to Javier who will discuss our financial performance in more details.

Javier van Engelen

Thank you, Eric, and good morning to everyone on the call. Let me dive straight into the key financial highlights on slide 14 where we are showing the adjusted EBITDA margin bridge for total Signify. As you can see on the slide, our adjusted EBITDA margin decreased from 9.5% in quarter two 2022 to 8.3% this year. The combination of volume decline and fixed cost under-absorption impacted the adjusted EBITDA margin by a negative 3.4 basis points -- percentage points.

In line with previous quarters, a large part of this was offset by the combined positive margin, impact of mixed pricing and cost of goods selling. More specifically, continued pricing discipline contributed by a positive 1.1 percentage points while year-on-year cost decreases in raw materials and logistics also contributed to the positive 1 percentage point.

Currency FX did not play a big role on adjusted EBITDA margin level. The negative contribution of 20 basis points was mainly related to the depreciation of emerging market currencies which are fully offset through price increases in their respective markets in order to maintain gross margin.

On slide 15, I would like to discuss our working capital performance during the quarter. Compared to the end of June 2022, working capital reduced by €143 million or from 10.5% to 8.9% of sales. Inventories decreased by €347 million as a result of improving supply chain lead times and inventory discipline. Receivables reduced by €189 million due to both our efforts to minimize or reduce and due to the year on year sales level. Payables were €422 million lower, coming down to more normalized levels while at the same time we are driving down inventories. As lead times further normalized, we continue to see the potential to further reduce our working capital to historical levels of low- to mid-single digit percentages of sales.

On slide 16, I would like to briefly summarize our first-half 2023 performance. Overall, we saw comparable sales decline of 8.9%. This is on the back of two years of strong recovery from COVID. While we continue to see a strong performance and market share gains in outdoor professional lighting, comparable sales growth was impacted by weakness in indoor professional lighting, and the consumer, and OEM segments. Towards the first-half 2022, the adjusted EBITDA margin declined 140 basis points. While the first-half of 2023 benefited from gross margin improvements. This was more than offset by the negative impact of fixed cost under-absorption.

First-half, free cash flow was back to positive driven by working capital improvements from lower inventories and improved accounts receivable. At the end of the first-half, our net debt to EBITDA ratio was 1.9 times, slightly above the 1.7 times at the end of the first-half in 2022. Please note though that 1.7 multiple last year was positively impacted by the disposal of non-strategic real estate assets in quarter two last year.

And with this, I am handing it back to Eric for the outlook and some closing remarks.

Eric Rondolat

Thanks, Javier. Let's conclude with the outlook on slide 18. As stated in our press release this morning, we are continuing to face challenges in some of our end markets. The continued economic softness has led us to apply caution in our outlook for the full-year, and adjust our adjusted EBITA margin guidance to 9.5% to 10.5%, from previously 10.5% to 11.5%. At the same time, we are well-positioned in terms of free cash flow generation as we started to benefit from improving supply lead times, and effective working capital measures. We now expect free cash flow generation to be at the higher end of the 6% to 8% range.

We have begun implementing structural measures to adapt our cost structure to the market environment. These measures will enable enhanced performance and a stronger focus on growth opportunities.

This concludes our presentations for today. Javier and I are now happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question today comes from Daniela Costa of Goldman Sachs.

Daniela Costa

Hi, good morning. Thank you for taking my questions. Maybe just -- I'll ask two, and I'll do them one at a time. Just on the first one, can you comment a bit on pricing, and obviously COG seems to be down but pricing is up as well. What are you seeing in terms of the competitive landscape given the volume situation? Do you expect to maintain positive pricing for the foreseeable future, maybe you can address that one first?

Javier van Engelen

This is [technical difficulty], Daniela. I'll take the question on. As we've always talked in the past, if you go back to the whole pricing topic, our focus really has been on managing gross margin as a whole. And we've seen, in the last couple of quarters, that we've been able to bring our pricing or at least to bring pricing to the level that allows us to bring our gross margin back to 39%. Obviously it has been disproportionate, I would say, on the conventional segment where the impact of the headwinds last year of cost were bigger than on other divisions. When you now look at the adjusted [EBITA] (ph) margin bridge, we see that we still have about 110 basis points year-on-year positive impact on top of some cost savings.

And I think we are now well-positioned from a margin point of view the recovery we were last year. If you think about what's happening on pricing dynamics in the market from a competitive point of view, we still expect that there will be a little bit of tail being in the next quarters for the pricing that we've taken, again especially also on the conventional side. We believe pricing levels are probably now reflecting the cost of goods that we've seen in the market. So, at this point in time, from a gross margin, we believe that we are at a good place, also a pricing point of view.

Now, they will probably be some pressure here or there on specific elements if there is a bit of volume to be gained, but at this point in time we're seeing competition still acting, I would say, reasonably, and in line with the economic reality of some inflation still happening, and pricing therefore being [not as stable] (ph).

Daniela Costa

Thank you. And maybe a follow-up for you as well in terms of inventories and working capital, and you seem to still have quite a bit of room to potentially de-stock further. What prevented a further unwind during 2Q? And I guess your guidance probably implies you expect that to unwind more strongly to the second-half, if you can comment on the dynamics there on the inventory normalization?

Javier van Engelen

Yes, [actually] (ph) -- and I'll take that also. First of all, I think the first-half -- working capital in the first-half cash flow signals that we've, I would say, turned the corner from last year, where the first-half, if you exclude the one-time item of real estate that last year was negative, this year back to positive, which shows the turnaround of an inventory increase last year, to taking inventories down this year, which has been a key focus area. You're right, Daniela, it is -- typically, you would know that our second-half of the year from a cash flow generation point of view is stronger.

You know that in the first-half we still build up inventories for a stronger second-half from a sales point of view. By the end of the year, we normally [build] (ph) down inventories as the first-half of the next year is obviously slightly lower than the second-half of this year. So, yes, we expect further release of cash flow in the second-half, and therefore also the guidance, where we now target more the upper side of the range. What basically are the key drivers? Number one, continued reduction of lead times, so we've seen lead times coming down.

We have to make sure that we keep on pushing those lead times with the suppliers to make sure those lead times are shortened and that we also, in our own internal systems, reflect those. And then the indent we would automatically start adjusting itself. And that's what we expect also in the second-half. When we talk to our suppliers these days, we don't only talk about cost savings, we also talk about lead times because we know that has an important impact on the cash flow that we generate. I would say the second question is going to be the visibility on economic development and volume developed in the second-half.

So, there is still a lot of variability out there as we've been seeing that the economy was not recovering as fast. Of course, we have been slightly optimistic on our sales, we have to recover on that. So, reliability of the forecast for the second-half and lead time reductions are the two elements that will then help us to bring our inventories further down to the end of the year, and as such also help us to deliver the guidance to the upper end of the cash flow guidance.

Daniela Costa

Maybe I can ask a follow-up on there on the point of reliability on the forecast and just how you're thinking about the forecasting for the second-half on volumes. I know you don't have explicit guidance, but you do have a margin guidance. Is that -- so, what's the lower and the upper bands based on in terms of growth?

Eric Rondolat

Yes, good morning, Daniela. Look, we've been, at the beginning of the year, cautious on the top line for two reasons. One is the lack of visibility, and still the volatility in some markets on the way they respond to macroeconomic events. And the second element is also a very distorted base of comparison. And I would say, you can go back one year, you can go back two-year, when you look at Q3, Q3 was reasonably strong last year in terms of growth. But you also, compared to Q1, Q3 that was very weak because this is at the specific moment where we could not find the components to deliver our customers. So, you have a base effect which is not [engageable] (ph).

When we look at the end markets, and that's the way we try to think about growth, we expect the Chinese market specifically to show some signs of rebound in H2. And that's what we have also in our plan, something which we haven't seen so far. So, we expect it to have the first signs in Q1, we expected a better Q2, it has not happened in China. And if you look at the macro indicators of construction on non-residential and residential construction, the focus has been brought down, and they are negative for the full-year in China. So, there is a question mark on China, and whether we're going to be also capable to focus on the growing part of the business and allocate our resource where there is a potential growth.

So, when we see the second-half, to answer also to your question, we see probably a negative performance in Q2. And we have a better compare in Q4, but it will also depend on the end market. So, we're really cautious on the top line at this point in time. But we probably are more comfortable on the bottom line since the gross margin has been quite strong and resilient, as Javier has explained. Now, we are 220 basis points above where we were in the same quarter last year. You will see that the gross margin was also weak in the second-half in 2022. So, this is where we're also going to make a difference.

Daniela Costa

[Technical difficulty]

Operator

Our next question comes from Akash Gupta of JPMorgan.

Akash Gupta

Yes, hi, good morning, everybody. My first question is on the cost saving actions. When I look at your headcount I see it's down about 3% quarter-on-quarter, and more than 6% year-on-year. So, if you can talk about when -- or have you already see benefit of this lower cost or is it something that would be more incrementally a margin driver for the second-half? And are there any other cost-saving actions as well that you are looking to pull for supporting the margins in the second-half? That's question number one.

Eric Rondolat

Yes, good morning, Akash. When we look at the headcount, the way we report it, we need to be mindful of the fact that it's a lot about the headcounts we have in the manufacturing plants, and that fluctuates quite strongly with the volume, especially in Mexico, where we don't have the possibility to have temporary workers. So, basically, when the volume goes up and down, we need to recruit, and then we need to let people go, and this is why those numbers are quite inflated. Otherwise, if you look at the attrition, our attrition is pretty much in line with the average.

Now, we have started to take cost measures of different types and of different natures which are tactical cost measure in order to adapt to the lower top line. And that has happened in many different places in the group. We will start to see some of the benefits of those, I believe, in the second-half. But we also think that we need to take structural measures, in line with what we've done in the past, which is continue to shrink the central part of the organization in order to resource and to allocate resource in the operating part. So, that's a movement that we have started many, many years ago.

We think that, at this point in time, in order to go back into the 25% to 29% bracket that we had given for our non-manufacturing cost, and we believe this is where we need to be, we are going to have to put in place some measures that will allow us to go back into that tranche. So, the measures have already been taken for some of them, they're tactical. Now, we're thinking about more structural measures for the future that will potentially impact a little bit '23, but probably mostly 2024.

Akash Gupta

Thank you. And my follow-up is on exchange rates. Clearly, in the second quarter it was not that major driver, but when we look at the depreciation in Chinese yuan, how shall we think about FX in the bridge in the second-half? Thank you.

Javier van Engelen

Yes, I'll take that one, Akash. Look, if you look at exchange rates, fundamentally what you're mentioning is that's clear, right? At this point in time, in the first-half of the year, the euro has strengthened against, let's say, mainly the dollar and the RMB. When you look at the FX dynamic, what you clearly is we see a positive impact as we are short on the Chinese RMB, we see, in general, a positive impact on our total profitability from the weakening of the RMB. As you know, it's still one of the currencies in our revised hedging policy that we still hedge against.

So, part of the benefit [you also weigh] (ph) because of the hedges that we take just automatically going forwards but, in net, it's still a positive. That basically is compensated a little bit by being long on some other currencies. And then the only thing which is left for this quarter which is different than last year also is some erosion of emerging market currencies. As explained also last time, is we do have an FX on those kind of emerging, and we're talking about Egyptian pound, we talk about Pakistan, we talk about Argentina, we talk about the Turkish lira, those markets are used to devaluation or inflation pricing.

So, in those markets, we do get a slight negative in terms of exchange rates, but we manage those markets on a gross margin basis. So, they are used to price and for devaluation of the currency, and that's how we track those. So, net-net, I would say that that impact of FX flow this quarter is about zero. The slight negative on the bridge is compensated by pricing in those markets with devaluing currencies. But for the balance of the year, again I am not going to speculate on what happens with exchange rates because the best thing I can do is look at today's spot rate. That dynamic, I think, will roughly be the same.

We're going to see still, at the current rates, at the relative weakness of the RMB will still give us some tailwind, but the same dynamic on emerging market currencies. The one thing that will help us a little bit further in the next quarters is, last year; we talked to you about our hedging policy and revision of the hedging policy. That hedging policy, in the second-half, should give us a little bit of a tailwind as we have unwound some -- all the exchange rate hedges we had. So, if anything, we currently expect a slight tailwind from exchange rates in the second-half of the year, whereas last year, again it was a significant negative.

Akash Gupta

Thank you.

Operator

Our next question is from Sven Weier of UBS Frankfurt. Please go ahead.

Sven Weier

Yes, good morning. I have two questions. The first one is a follow-up on the margin guidance range. And I was just wondering if the revenue outcome is the only main factor that defines the range or what other main items have you assumed in the range? That's the first one. Thank you.

Eric Rondolat

Yes, good morning, Sven. It's basically the margins -- the gross margin, and the costs, and the top line, so it's the three components. So, the way we looked at it, there is still a possibility, we believe, to be well-positioned in operating margin for the full-year, but we need two ingredients. We need the top line to be where we estimated and we expect it to be. And then we need to be able also to adapt our cost base. If that happens, I mean we'll be able to be well-positioned into that bracket. But we need to act very quickly on costs whenever the top line goes down. And this is what we have been lagging in doing this year. We always expected the market to be better.

And as that has not come, we are a bit late on adjusting the cost compared to what we do normally. Now, it is in place. The plans are being developed, and this is going to happen. For the end of the year, it will be mostly still tactical, but it will be taking effect in full-year in 2024. So, the [elements] (ph) that we've looked at is the top line and the cost, we believe that the gross margin will remain strong. So, it's just in that equation of our cost coverage by the top line.

Sven Weier

Okay, thank you. And the second question I had was just on where you see your clients on the stocking; whether you think the de-stocking is done? And whether you see or whether you assume in your guidance range any kind of restocking at some point in the second-half? Thank you.

Eric Rondolat

Sven, we have seen, in order of magnitude, very strong destocking on the OEM business. Basically, when the crisis of component broke out at the time, we believe that many of our customers, as the products were not available, made a lot of procurement of different type of products in different parts of the world, so they are receiving these products in the first-half of 2023, and they end up having a very high level of inventory. And we've seen a major destocking in the OEM channel. So, that's one.

On the consumer part of the business, we have seen a further destocking lately. We believe that they are at a level where it should normally remain now stable. And the biggest part of the decline on the consumer market was more linked to the market for us, not so much through the destocking, although there's been still a little bit of destocking. We haven't seen that on the professional side of the market. There was not so much destocking there. Now, moving forward, destocking is completely linked to the dynamic of the end market. So, I think if the end market holds, we should be done with most of the destocking that has already happened.

I don't know on the OEM side of the business. It may take a bit longer for our customers to be able to lose their available stock, so we may have some more remnants on the OEM channel. But I think on the consumer and the rest of the professional market, it should be done if the end markets remain at the level at which they are now.

Sven Weier

Clear. Thank you, Eric.

Operator

The next question today comes from Tim Ehlers of Kepler Cheuvreux.

Tim Ehlers

Yes, good morning, everyone. Thanks for taking my question. So, the first one is related to Digital Solutions. Can you maybe add some flavor there how connected lighting was performing in comparison to the normal lighting solutions?

Eric Rondolat

Yes, Tim, what we have seen in the professional business and Digital Solution, we've seen a pattern that was also a pattern that we started to see in 2020, when the crisis broke, which is a relatively weaker than the average retail and hospitality segment, with less investments by the customers. We've seen slightly declining but still positive office and industry segment. Here, the projects are either happening or there is a delay, but the projects are still there and [they're firm] (ph). And where we have seen relatively important growth, and that I would say is not only in the U.S.A. with the IGA.

It's not only in Europe with the Green Deal, but it's also in other countries in the world where we see similar incentives being brought to the market in order to develop energy-efficient solutions and make the country more sustainable. Lately, we have been launching our Green Switch in a country like Indonesia. So, when we talk about connected lighting, we've seen a good performance in office and industry, but mostly in public infrastructure outdoor type of businesses, where we offer not only the lighting but also the controls, and we also offer the software which is monitoring and controlling the installation.

Tim Ehlers

Okay, clear. Thanks for that. And then a follow-up question to Digital Solutions. You mentioned that horticulture was somewhat soft still in Q2. Do you expect a recovery there towards the end of this year or do you also see or expect some visible impact going forward from horticulture?

Eric Rondolat

Yes, horticulture has double negative impact to the performance at this point in time because the performance last year was extremely strong. And the performance last year was extremely strong especially in Q3. And the way this business works is that the decisions are made in the second quarter of the year for the projects that are going to be then implemented in Q3 and Q4. So, we had a high compare in 2022 with a business that was running extremely well. And this year, given the price of energy, and still the price of energy in Q1 and Q2, the projects that we normally are able to capture on that business were not implemented by the customers.

So, we see it's a season that is missed because of the high energy costs, and that will not be recovered in this year. Of course, with the price of energy going down, our customers now have better return on investments, and we will see that business going back to a different level of normality in 2024. But it's going to be very, very tough in 2023. It has impacted our performance and the performance of Digital Solutions quite substantially in Q2, and we believe that is going to be pretty much the same in Q3.

Tim Ehlers

Okay, thanks for that. And then one last question regarding the weakness in the consumer segment, can you pin that to a geography? So, you mentioned, I remember, in Q1 that you were, yes, not that happy with the development in China from the consumer business. Is that still the case or is that a trend you see in other geographies as well? Maybe if you could add some light there that would be great.

Eric Rondolat

Yes, Tim. And let me look at it geographically and from a business standpoint. So, what we see today, so we take a proxy -- we have two proxies, which is one is the residential construction market, which is down in forecast for the full-year in U.S., China, and Europe, and forecasted to be negative in those three regions for the full-year. We look also at another indicator, which is the home equipment investment, and this all down, and this is also a good proxy for us for our product. So, at the end of the day, we have these macro elements that tell us that the market is not recovering in dynamic to what is linked to our lighting industry and to what we sell.

Now, if I go back to your question and I give it a different spin and I talk to the businesses, what we have seen, we have seen that our business and our connected consumer business, here we have two brands, Philips Hue and WiZ, that business was very, very impacted, and probably more so than the non-connected part of the business, and more Hue than WiZ. WiZ, which is operating from a lower base and still had a decent level of performance, but not the Hue side, and we are looking at this point in time at the market, we are looking at what's happening at the level of our competitors to see how we need to position that offer.

Positioning is bringing value and highlighting the value that that business has in terms its uniqueness in that ecosystem. But also, bringing to our consumer connecting market what we call home monitoring. And this is the association of security and lighting which has already been launched on the WiZ side. And which will be announced at the end of the or after the summer in our Hue offer. And here the idea is also to be able to use security for lighting and lighting for security. It's not security for security. Meaning that you can imagine that you have your home and there is an intruder. Then, all your lights are going to turn flashing red. Why is that interesting? Because sound alarms cannot be heard from a distance as they are really kept inside the house. But, the light can be seen from a long distance.

At the same time, the cameras and the security can be used for lighting because cameras in the home can detect movement and can then activate lighting at the same time. That's innovation that we bring the market. Our cameras are going to be first one to be end to end encrypted, so both iOS and Android. So, the market and the consumer market has been slow and even more slow on the connected part of our offers. And that's valid worldwide.

Tim Ehlers

Okay. Yes, thanks for that, Eric.

Operator

Our next question is from Martin Wilkie of Citi.

Martin Wilkie

Yes, thank you. Good morning. A couple of questions from me, thank you, the first one is on Klite, could you call it out as totally weakness in these two products. Just to understand the fact, the same reason as China being weaker than expected, but I know also Klite sells globally through private label and so forth. Just to understand little more about what drove that Klite weakness. And then second question was just on the side, you actually got this new brand. You talked about raising connected lighting. How does that fit with the Hue products? And I relate to what we sale, from the outside, it looks like there is an overlap. I am just trying to understand how you are positioning those two sets of products. Thank you.

Eric Rondolat

Good morning, Martin. Klite is pretty much the same story on the consumer market, selling also to other customers. A big part of what we do in Klite is to sell to other lighting companies or to brand labels for retailers. So, we have seen the same softness as what we see on our part of the business, on the part of the business of big retailers that are brand labeling, or other lighting manufacturers. The positioning of WiZ and Hue is the following. So, Hue is operating with Zigbee and Bluetooth communication protocols. But, we believe and this why we did the move at the time, there is another market which is based on Wi-Fi and Bluetooth, and that market of Wi-Fi and Bluetooth -- there are some markets in the world, especially in Asia that are very very Wi-Fi oriented, was not captured by Hue.

So, we positioned WiZ which is basically having a different communication protocol; Wi-Fi and Zigbee in order to capture that market. It's like you have cars and they have different types of engines. It's a bit the same case. Here, we have two offers. Those offers go to the same market or destination. But, they have two different communication engine. And we see that that complementarity is necessary because when we are operating in a market where both Wi-Fi and Zigbee are accessible to the market and are wanted by the market, then with two offers we can segment much better our approach. And so far, Hue has been growing and WiZ has been growing handsomely, which is not the case this year given the market condition. But, that combination for us works pretty well.

Martin Wilkie

Okay, thank you.

Operator

Our next question is from Joseph Zhou of Redburn.

Joseph Zhou

Well, hi, thank you for taking my questions. And my first question is related to your other line in the report and has gone quite lot this quarter. I think normally run rate is something €18 million - €19 million a quarter. But, this quarter it's [€29 million] (ph). Can you get us some color as it why that line has gone up? And what do you expect for full-year and going forward? Thank you.

Javier van Engelen

Hey, good morning, Joseph. I'll take that question. Just taking a step back to the other, when we look at the segment reporting, we try as much as possible to put all the cost to divisions to get a real sense of profitability of divisions. And we try to minimize keeping cost in other. So, what we keep in other as you remember is some central cost that we do not allocate whether that is central function or [indiscernible]. And typically, you are right that cost is between, I would say, €20 million-€25 million a quarter that we have.

In the first-half of the year, what we [indiscernible] bucket is some adjustments on accruals taken the previous year. So, if we take a provision for commissions or provisions for rebates or provision on variable compensation at the end of 2022, at the beginning of 2023 if there is any variation on the actual payments versus what was calculated, that's stays in other because we don't allocate that back to divisions.

Now when you look at the difference last year versus this year, what you see last year that some of provisions that we made at the end of 2021 ended up with the slide, release of provisions at the start of 2022. This year when we take the same exercise, we had to add. So, the provisions were slightly lower than what the actual came in. And that explains a swing of about €10 million year on year. We had a release of about €3 million last year, €7 million kind of incremental cost this year. So, that explains the swing. From a forward looking point of view, as you correctly say we expect these kind of to be normalized at about €20 million to €25 million per quarter, which would be the run rate that we have. But the year-on-year is just because of closing out of provisions of the previous year.

Joseph Zhou

Thanks. That's very clear. And then also your release, you have mentioned you have begun to implement some structure measures. And can you maybe talk a bit about it? What these actions are? And also, whether the labor inflation has been a big challenge for you?

Eric Rondolat

Yes, good morning, Joseph. The labor inflation was something that we had to do in view of the inflation. So, we did it. It was totally integrated in the plan. When you come to structural measures, I have already answered to the question. We will -- whenever we can talk about it in more details, we will do so. But you need to remember probably two things that are fundamentally important the way we manage our cost. First, we manage our cost as a percentage of sales and we need to be between 25% to 20%. That's one. Second, our philosophy when it comes to our cost structure, is to have a lighter central part of the organization to be able allocate cost in the operating part. I think these are two fundamental things that we are systematically following when it comes to the cost reduction aspects. And that's what we are going to have to do now to adjust and [indiscernible] sales.

Joseph Zhou

Okay, thank you.

Operator

Your next question comes from Marc Hesselink of ING.

Marc Hesselink

Yes, thank you. First question is actually trying to look at your medium-term guidance of the adjusted EBITDA margin between 11% and 13%. Is it still the goal to get back into that range taking all the cost measures that you take? And, do you need to go back to growth to get to that level again?

Javier van Engelen

Yes. Good morning, Marc. Yes, the mid-term guidance was for the end of the year. So, we had to correct it as you have seen in the past quarters. Now, for us just a matter of realigning the organization to a different level of reality, so, we have not given mid-term guidance at this point in time. I think we'll probably have our Capital Market Day sometimes in the coming quarters where we will give an indication of what is the potential of the company moving forward. But, certainly that the potential that we have is higher than the guidance we have given for this year for the all the reasons that we have explained.

But moving forward readjusting to the reality of what we have in front of us. Allocating resources where we have growth potential. You know we have a lot of horizon 3 businesses. Namely, LiFi, bright side for the extension of 5G network where we see a lot of potential moving forward. So if the underlying question is, is there a better potential performance than the one that we are guiding for for this year? Yes, for sure. In the medium term, we should be able to continue to expand and trade value on the bottom line.

Marc Hesselink

Okay. Thanks. And, my second question is what are you seeing on market share? Maybe taking into account what the current inflationary environment, do you see clients down trading?

Eric Rondolat

No, when we look at the market share, it's complicated because of all the different swings that we have seen in the [compares] (ph). What we would say at this point in time is that when we look at the details of the segments we operate in, they can be slight differences. But, we would see it in the following way. We believe that in Europe and especially on the professional side of the market, we are gaining share in a complicated environment. We think that in the U.S. especially because the market has moved a lot towards the stock and flow part of the business, we have slightly lost market share. When it comes to China, it's a bit more complicated because the swing there has been quite substantial. But I would say that we are stable to slightly losing. And in order to do that, we look at the companies that are listed. And we look at their performance in 2019. And we compare in absolute terms. And we compare their performance 2019 to their performance in 2022 in the beginning of 2023 and we compare to ours. I mean that's the best way to do it.

In the OEM business, we believe that we have also worldwide taken market share when we look at the other companies that we can compare with and that are listed because that's the only way to get reasonable and accurate numbers. Now, I can go into more details because behind these global views, we are going to see that in the professional markets in general, we are gaining share on the public part in the [indiscernible] investments. We are slightly losing share on [autism] (ph) industry, and we are stable on retail and hospitality. So when we go into more detail, they are different type of colors that we can give. But, that's the way we look at competition and market share. Taking a base which is stable and looking at where we are today and where our competitors are today compared to the base.

Marc Hesselink

Very clear. Thanks. Maybe just a small follow-up on the consumer side, do you see any down-trading there?

Eric Rondolat

No, not massively at this point in time, what we see happening is on the connective part of the market, we see some offers that come at a lower price. But, that's not specifically circumstantially. No link to the situation that we see today that has been happening since many, many years when the market is attractive and developing [indiscernible] is coming. But no specific and massive down trading there.

Marc Hesselink

Okay. Thank you.

Operator

Our next question comes from Jack Healy of Bank of America.

Jacqueline Healy

Hi, thanks. Good morning. Thanks for taking question. Just wanted to expand actually on the previous one to push you a little bit on the down-trading, so, consumers trading to switching from higher value high margin products to lower value products potentially, so, you mentioned already that connected lighting and consumer softened, but LED lamps grew, is that an example of consumers trading down? And then, is there any difference in terms of region? Do you see any difference in North America versus Europe, for example? Thanks.

Eric Rondolat

Yes. So, let me go a little deeper on that one. So, what we have seen during the crisis is that consumers were basically -- and let me give you some, we're keeping their jobs so they were making savings, part of the savings were going to equipment, home equipments, and we have been affected a lot from that trend, especially on the connected part of the business. So, if you look at the connected part of the business, it had a fabulous performance over a few years. So, we started from a really high point.

Now, when we look at consumers today, consumers today are putting less of the money in home equipment goods. They are probably investing more money in traveling, in holidays which they could not do for two years in a row. When that specific situation is happening, and it will include on its inflation, there is a little bit of down-trading on the connected part of the market. But we see customers going for lower cost offers and less to premium brand offers. So, this is why we need to wait for the position. Also, we are seeing that for the longer term the ecosystem that we offer is very strong. We just need to make sure that when customers make the choices they note and they don't compare connected bulb to a connected bulb. So, there is probably at this point in time a really bit of down-trading where consumers would go less to higher value product and more followers of new product, but we believe it's just something which is happening at this point in time, and it's not a longer term trend.

Jacqueline Healy

Okay. And any difference between North America and Europe in that?

Eric Rondolat

I would say, the markets where we've been very, very strong in connected lighting, U.S., we can say; Benelux, we can say, [indiscernible]. We see that's on pretty much in all those markets, where our market share is very strong.

Jacqueline Healy

Okay, thank you, very clear.

Operator

And that is all the time we have for questions today. I would therefore like to hand the call over to Thelke Gerdes for any additional or closing remarks.

Thelke Gerdes

Ladies and gentlemen, thank you very much for joining our earnings call today. If you have any additional questions, please do not hesitate to contact Philip or myself. And again, thank you very much, and enjoy the rest of your day.

Operator

That does conclude the Signify second quarter and half-year results 2023 conference call. We thank you all for your participation, and you may now disconnect.

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Signify N.V. (PHPPY) Q2 2023 Earnings Call Transcript