Signify N.V. (LIGHT) Earnings Call Transcript

Hello. Welcome to the Signify Third Quarter 2026 Results Conference Call, hosted by As Tempelman, CEO; Željko Kosanovi, CFO; and Thelke Gerdes, Head of Investor Relations. [Operator Instructions] I would now like to give the floor to Thelke Gerdes. Ms. Gerdes, please go ahead.

Good morning, everyone, and welcome to Signify's Third Quarter 2026 Earnings Call. With me today are our CEO, As Tempelman; and our CFO, Željko Kosanovi. As will start with an update on our strategy and key business developments. Željko will then walk you through our financial performance before -- as returns to the call for the outlook and closing remarks. Our press release and presentations are available on the Investor Relations website. The transcript of this call will be made available shortly after. And with that, I would like to hand over to As.

Thank you, Thelke, and good morning, everyone. Thank you for joining us today. Now this third quarter results really, I think, show the progress that we are making in executing our strategy that we introduced at Capital Markets Day back in June. We strengthened profitability sequentially quarter-on-quarter, supported by pricing and cost actions, while the end markets actually remained quite challenging. Now we introduced the portfolio split of build and harvest. The build and harvest portfolio split and the specific playbooks for performance areas give us a much better visibility now and are really helping us to take more targeted action. So we are making progress in harvest. And I would say in build, there's still considerably more work to do. So let me comment on both, starting with harvest, the Gen Light, our -- 1 of our North American business is in turnaround, and that turnaround is progressing well. costs have already come down. We are simplifying the product portfolio and also significantly reducing the number of SKUs. And of course, that then translates into improved profitability. On the OEM side, turnaround too. That turnaround is also on track with another sequential improvement in profitability. We've lowered the cost base in OEM and positive pricing is also supporting gross margins despite continuous market softness. Earlier, we also announced at Capital Markets Day that all portfolio options remain open for our OEM business. So meaning we either divest, we partner or we keep and optimize. And to support this optionality and this flexibility, we have decided to separate the OEM business and make it stand-alone. So in fact, a carbon and we expect that carbon to be completed in the second half of next year. That might sound like a long time, but it's actually quite complex. So while we do this, we will, of course, continue to improve the operational performance of that business. Then moving to Klite. Our manufacturing business in China, where we have the same optionality. So we either divest or we keep -- it's already partnered. It's a joint venture setup. And -- while we are improving operational performance in Klite, we are actively exploring divestiture opportunities with the parties involved. Too early to conclude on that, but it's actively going on. Now turning to the build part of the portfolio. India remains a powerhouse for signified in lighting, contributing both to growth and profitability. And we also see opportunities to use our brands and our distribution power to expand into adjacent categories. And fans were our first step, and I'll come back to that in a moment. Now Professional Europe, a large business requires a turnaround. We got to be honest and face that the performance over the past 3 years has not met our expectations. Market conditions have played a key part, but we've also not been adapting fast enough. And under new leadership, we will rightsize the organization and strengthen our execution capacity in key countries and powering really our local country teams operating close to the market, close to customers. And this will yield significant cost savings and improve competitiveness. And with these changes underway, I mean, 2027 will be a transitionary year for Europe because these changes take some time. Moving to another about build businesses, Consumer, our priorities are growth and productivity. So we are investing in customer acquisition to grow connected our offer while maintaining profitability in the harvest area. So we are also putting in place an additional cost reduction program for consumer. We will reinvest part of the savings in growth and both operating leverage and lower indirect costs will drive profitability up. And finally, I do want to mention that we are reviewing our R&D spend. Actually, that is about to be completed and we are sharpening our investment priorities and taking cost out, significant cost out of our R&D spend to improve returns on R&D. And those returns need to come through -- need to really come through in sales from innovation and in lower cost products. That's how we target our R&D. It needs to lead to more revenue, more profitability. And as a reminder, about 40% of our R&D costs actually relate to product redesign and value engineering. So this is about -- not just about innovation. So these are the actions that we are taking to turn the strategy into better performance. We have clear priorities for each part of the portfolio, and we are happy to take your questions on it. Now then we wanted to share a few examples, as we always do. Let me illustrate the capabilities we have in professionals. You see here on the slide, and you also saw it on the opening slide when we started the call, it concerns the project in Romania and where we bring an iconic landmark to life by combining architectural luminaires, lighting design and controls in 1 integrated lighting solution. And we deliver this project with our local partner, Luxon, and multiple lighting solutions illuminate the facade, the roof line, the dome and all the architectural details. I think it's a really cool project. And a good example of the value we bring to complex projects through technology, application expertise and very important, our partners. The next step example I wanted to share is winning with adjacencies in India. I referred to it earlier. Our fans business shows that we can build on our local strength to grow beyond just lighting. We entered India's EUR 1.4 billion fans market in 2021 under the Ecolink brands, local brands. In '24, we stepped up our focus on design-led innovation in brushless direct current fans and so-called BLDC, DC, verses direct current fans and these motors make fans more energy-efficient and quieter than conventional alternatives. So it was a real opportunity to get in the market with this new technology. We have supported the business with brand investments, including advertising and digital campaigns, sponsorship on the India and in-store activities. And -- you see it works. France sales grew 61% in just the first 9 months compared to last year across more than 11,000 retail outlets. So this is a very good example, I think, of how we can use our distribution and brand capabilities and product innovation to develop adjacent business. And it gives us also a foundation as we assess further opportunities in India. Now moving to the sustainability side. And of course, our Brighter Lives, Better World 2030 program. We continue to see progress against the 4 measures in our program. Year-to-date, revenues from products and solutions that deliver benefits beyond illumination, i.e., beyond lighting, reached 36.3% of sales. So that's well on track towards our 2030 target of 41%. Our LED products sold under the program have contributed cumulative energy savings of 12 terawatt hours and the annualized reduction in our portfolio of carbon emission intensity reached 11.1%. And all these things are important in the context of large-scale electrification going on in the world. Signify Circle revenues reached 21.8% of Professional Europe sales. That program is very much targeted towards Europe -- on Europe towards 27.5% targets for 2030. So basically, all 4 measures are on track. We're also very proud that we have again received [ Ecofrotas, ] platinum rating. -- for the seventh consecutive year with a record score of 88 out of 100. So placing us in the top 1% globally, and that is very much where we would like to be. Now with that, I will hand it over to Željko to discuss the third quarter financial performance. Željko?

Thank you, As Tempelman. Good morning, everyone. I will now walk you through the third quarter financial results. Starting on Slide 9 with the group results. So sales were up EUR 1.267 billion with a comparable sales decline of 3.4%. We achieved positive pricing across all businesses while demand in our end markets remained weak. Adjusted EBITDA was EUR 145 million, giving an adjusted EBITDA margin of 10.6%. This includes a net benefit of EUR 28 million from U.S. tariff refunds equivalent to 210 basis points of margin. Excluding the net tariff refund benefit, our adjusted EBITDA margin was 8.5% compared with 6.1% in the second quarter and 9.7% in the third quarter last year. Gross margin strength and cost reductions supported underlying profitability while the lower sales in Consumer continued to weigh on the performance. Free cash flow increased to EUR 118 million from EUR 71 million last year, supported by working capital improvement and tariff refunds. Moving to Slide 10 on professionals. So the Professional business delivered a resilient underlying profitability in a still challenging market. Sales were EUR 921 million, with a comparable sales decline of 1.5%. Project activity remained resilient in the U.S. and the rest of the world, while stock and flow continued to face soft demand across most geographies. Agricultural lighting performed strongly during its high season. Adjusted EBITDA was EUR 215 million with a margin of 12.5%. This includes a 200 basis point net benefit from tariff refunds. Excluding this benefit, the margin was 10.5%, stable compared with last year. So gross margin expansion and fixed cost reductions fully offset the impact of lower volumes. Turning to Consumer. Sales were EUR 283 million, with a comparable sales decline of 5.3%. The decline was mainly driven by lower connected sales partly offset by some growth in luminaires and in media. Within collected, sales continued to be affected by retailer destocking in response to the elevated inventory level carried since the start of the year as retailers reduce these inventories, their orders remained below underlying consumer demand. Importantly, this is not the full picture of consumer demand. Huge sell-out grew at mid-single-digit rate year-to-date and we continue to gain market share, growing ahead of the connected lighting category. So we are working closely with retailers to bring ordering pattern into closer alignment we sell out and reduce the volatility between quarters. Adjusted EBITDA was EUR 19 million with a margin of 6.8%, including a 230 basis point net benefit from tariff refunds. Excluding these benefits, the margin was 4.5%. So the decline primarily reflects the lower profitability from Connected thereby reducing fixed cost absorption. As previously mentioned by us, we are taking targeted actions to improve productivity and reduce the fixed cost base while continuing to invest selectively in customer acquisition and innovation. So these actions are expected to support the business over time with a sizable part of the additional cost benefit coming through in 2027. Going now to OEM on Slide 12. So OEM continued to face soft markets, particularly in the U.S. and Europe. Sales were EUR 88 million with a comparable sales decline of 6.7%. Strong pressure remains on volume. However, we achieved positive pricing in the third quarter. Adjusted EBITDA increased to EUR 5 million with a margin of 5.9%, compared with 4.7% last year and 4.6% in the second quarter. Gross margin expansion and the benefits from our cost reduction actions more than offset lower volumes. There was no material benefit from tariff refunds for the OEM business. So the execution of the turnaround plan of our OEM business is on track, lowering the business cost base and sequentially improving the structural profitability. Now in conventional, sales were EUR 67 million, with a comparable sales decline of 1.2%. Specialty Lighting continued to grow, partly offsetting the structural decline in general lighting. We continued to outperform the decline in general lighting markets, supported by strong price discipline. Adjusted EBITDA was EUR 14 million with a margin of 21.3%, including a 550 basis point benefit from tariff refunds. Excluding this benefit, the margin was 15.8%. Gross margin expansion supported solid underlying profitability against a high prior year comparable. We remain focused on disciplined pricing and cost management while carefully managing the structural of the business. Turning to the year-on-year margin bridge. So the adjusted EBITDA margin increased by 90 basis points to 10.6% including the 200 basis point net benefit from tariff reference. Excluding this benefit, the margin was 8.5%, below the 9.7% reported last year. Lower volume reduced the margin by 100 basis points. Price and mix combined contributed a positive 80 basis points. We achieved positive pricing across all 4 businesses, reflecting consistent price discipline and helping to offset higher bill of material costs. Lower cost of goods sold contributed a further 70 basis points. Together, these effects provided 150 basis points of support. Within cost of goods sold, however, we saw different dynamics. We faced higher bill of material cost as expected from raw material and components, but also energy and transportation. Our procurement teams mitigated a significant part of this exposure through sourcing actions. This was more than compensated by the effect of productivity improvement on other manufacturing and supply chain costs, and also lower tariffs compared to last year as mitigation measures took effect. Indirect cost reduced the margin by 40 basis points as higher incentive accruals and other cost increases -- not an offset the cost savings that were achieved. I will provide more detail on our indirect costs in the next slide. Currency had a negative impact of 100 basis points mainly driven by the appreciation of the Chinese yuan against the euro. Other items had a further negative impact of 30 basis points. So we do recognize that the progress we are making in our cost reduction program is not always immediately visible in our reported indirect costs. So we want to provide some additional clarity on the underlying developments shown on Slide 15. First and foremost, our cost reduction program remains on track. We delivered EUR 37 million gross savings in the third quarter bringing the total for the first 9 months to EUR 98 million. Overall, this corresponds to a reduction of salaries and wages of approximately 10%, consistent with the evolution of the workforce during this period. Within the third quarter, these savings year-on-year were more than offset by the effect of higher EPO employee incentive accruals to ops, the salary inflation and other cost increases. The largest offset of EUR 25 million related to employee incentive accruals was especially pronounced and unusually pronounced in Q3. This is due to the unfavorable employee incentive accrual comparison reflecting, on 1 hand, a true increase of accrual this year compared to, on the other hand, the true-up releases in the prior year. Salary inflation added EUR 9 million and other costs, including outbound transportation agent commissions and advertising and promotion added a further EUR 11 million. Currency and other items increased to EUR 4 million. As a result, the adjusted indirect cost in the third quarter increased by EUR 4 million year-over-year to EUR 451 million. Looking at the first 9 months on the right-hand side, adjusted indirect costs decreased by EUR 51 million to [ EUR 1.256 billion, ] driven by the gross cost reduction of EUR 98 million. So overall, the savings from the execution of our cost reduction program are coming through, and we are on track to reach the fully realized run rate with further specific construction being implemented in different performance areas, in particular in professional Europe and consumer as outlined earlier. Let me conclude now with working capital. Working capital was EUR 331 million at the end of September, equivalent to 6.1% of sales. This represents a year-on-year improvement of EUR 169 million or 230 basis points, mainly driven by lower inventories and receivables. Our continued focus on working capital improvement supported our free cash flow of EUR 180 million in the quarter alongside the benefit of tariff reference. With that, let me now hand back to As for the outlook and the closing remarks.

Thanks, Željko. Indeed, what about the outlook. So indeed, the market conditions right remain quite challenging. You see the professional Europe under pressure. I mean particularly on the public side, the sort of the municipalities spent on outdoor lighting, it's a weak market. but also in residential in the U.S., we see some weakness, and we see that back in our daily order intake. Now we're still be seeing what happens around Thanksgiving and Christmas on that. And then the consumer comparable where we had quite a few weeks of stock up last year also makes it a bit tough. So this means that altogether, we expect that fourth quarter sales growth to be in line or slightly below the third quarter. So that's our best estimate for now. And against this background of sales market, we confirm our full year adjusted EBITDA margin guidance at the higher end of the 7.5% to 8.5% range. And that is, of course, including the tariff refunds received through the third quarter. If you would exclude those, we would be at the lower end of this range, but still with it. The progress we have made in reducing our indirect cost base is expected to support the bottom line profitability in the fourth quarter, of course, as our cost program reaches its full run rate by the end of the year. Our free cash flow guidance remains unchanged, 6.5% to 7.5% of sales. So we are making progress in harvest, and we are taking further actions to our performance needs to improve in our build portfolio. Our priorities are clear. I would summarize them as executed turnarounds, reduce costs and invest selectively in growth. We remain focused on these actions within our control, a lot of self-help to improve performance and build a stronger and more focused Signify. I think this concludes our remarks, and we would like now to start the Q&A session and hand it back to the operator please.

[Operator Instructions] Your first question comes from Ines Lefranc from Goldman Sachs. .

I just wanted to ask about the free cash flow guidance. given you've increased your margin guidance on the back of tariff refunds, why haven't you increased the free cash flow guidance?

Thank you for the question. So the -- As just said, we confirm and maintain the free cash flow guidance. Now when you look at the profile of our free cash flow in the fourth quarter, core and that's the higher concentration of the cash in the quarter. So there is no specific element related to the tariff. First of all, organic does not include any further direct funds in the fourth quarter and we have not qualified specifically the tariffs in , but we do confirm the guidance for the full year.

The next question comes from Adam Parr from Rothschild & Co.

Can we talk perhaps a little bit about price mix and any detail here would be very helpful. So at the group level was if we disaggregate price and mix was mix positive. And if we look at price by the division, perhaps without putting any numbers to them exactly, -- could you perhaps help us reach the divisions in terms of highest to lowest pricing in the quarter? Because I know you said that price/mix was up. So pricing was positive in all businesses, but any ranking help would be very appreciated.

Yes. Indeed, Adam, I can say a few words there. Price mix was positive across the group. And like you said, Adam, achieved in all 4 businesses. And overall, I think better pricing in areas where we have higher differentiation and more concentration and worse in areas that are more commoditized and more fragmented. So if I translate that for you, I mean, professional pricing was slightly positive, strongest in India and Rest of World and Europe lagging, yes, particularly stock and flow. Consumer pricing turned positive overall, good progress in Europe and Rest of World, OEM also across all regions. And then conventionals, of course, where we have a lot of a lot of discipline and a lot of pricing power. So there also pricing remained positive. So -- by geography, I would say Europe remains the most competitive market, although pricing has eased versus last year. So -- and in the U.S., I would say pricing remains positive. But what we have seen is, and that might be due to the fact that you see some of these price refunds coming into the market. We don't see the same pricing discipline in the U.S. as we saw in the previous years and quarters. So their margins are clearly under pressure, particularly in the stock and flow. So that is something that is worth highlighting. We'll see how that plays out in the coming quarter.

The following question comes from Max Yates from Morgan Stanley.

I just wanted to ask about your EBIT bridge because it's quite unusual to see you being able to get price when your COGS are coming down. So you talked about obviously your rising input costs but those were being offset by some of your supply chain actions. So I guess I was just trying to understand, do you think you can continue to see this trend where effectively your kind of aggregate cost of goods sold are coming down and you're able to keep pushing up price because normally, we've seen when your costs come down, your price comes down as well and you said that you have to give it back to competitors to remain -- give it back to customers to remain competitive. So just sort of how sustainable you think that trend is anything particularly outsized did in that number? Or can that continue for the next few quarters?

Yes. Thank you for the question. You're totally right. I think as I mentioned, this is -- so as we always indicated, we do manage the gross margin as a whole and you have many, many dimensions at play. So it's true that what we've seen is -- and that's what we have been driving and anticipating is to adapt and to recalibrate the price positioning also in line with what we see happening in the bill of materials. So the bill of material inflation is impacting. However, it's fair to say that it is really a tremendous job done by our procurement team to really contain and mitigate to the extent possible the effect and the timing of the dose cost impact in the phasing. So that also is the time also to have the full price through. At the same time, I think you have 1 element, which is, of course, a bit of a consequence of the way the increase on the tariffs last year compared to this year where we see an easy because we've been taking a lot of measures to reduce the exposure. I offer adapt the exposure. So that's coming through as a positive element year-over-year in our cost. And third, and this is a key element also that is relevant for the way we are executing our turnaround strategy in some of the performance there, where we are reducing the fixed cost base, so the supply chain manufacturing, which is an element that is very important to support, for example, the continued improvement of profitability in OEM. So on that third part, it's really self-help execution and cost resizing, which is not dependent, and this is helping us in the overall gross margin management to see, as you indicated, an impact that more than offsets the effect of the raw material or the bill of material inflation. So we keep doing with a lot of agility to make sure that overall to your question on how sustainable it is. I think gross margin in resilience work is a very important element. So we've been driving that across very volatile, very dynamic period, and we expect to be able to continue to do that in the coming quarters in a very structural manner.

But I think I really think that this is an area of outperformance, and we can be proud of that the market out there is still inflationary, right? I highlighted last time that we had this increasing tightness on components and semiconductors that has not gone away. We don't expect supply chain disruptions, but clearly, it is inflationary. So we've managed it very proactively. We invest in stocking, we do capacity reservation, but we also do the value engineering. So that all justifies price increases in terms of our competitive positioning, but if we manage our Boman Cogswell at out, that helps profitability.

No, I guess -- look, I mean, I guess it's just interesting because like I think if I asked you 9 months ago, and you said, how are we going to get margins up I think you would have told me we're going to try and keep gross margins flat and then we're going to take out indirect costs with EUR 180 million cost savings, and therefore, we'll get SG&A leverage. And in fact, what's happening in your business is your indirect cost saving will be wiped out by other stuff and your gross margins are going up, so your margins are moving up sequentially. So I guess it's a slightly different mix of sequential margin expansion than I think we would have expected. . And then I guess that raises the question over whether you can keep expanding gross margins because it actually looks like the indirect costs are not really coming down, they're being offset by other stuff. The cost savings being offset by the stuff. So I guess that's why I'm curious because it seems much more important for your margin expansion with gross margin expansion that I would have originally.

Yes. No, I understand the way you look at the dynamics you want to call it a bit Željko on the topic of indirect costs because I don't want to leave you with the impression that, that is all white out. Actually, we are structurally improving the profitability of the company where we do them in very cost.

A few clarification on the gross margin expansion. I think if we look at it, of course, normalizing the effect of the of the tariff refund, we would be around 40%. So let's say, slightly improving, but it's not a major exposure. So it's quite consistent with what we indicated, right, stable on the back of a comparison base that was strong. So maintaining close to the 40%, I think that's the gross margin stability that we have indicated. Then at the same time, on the structural growth savings that are coming out of the of the cost reduction program that we have launched. That's also coming through. And as you indicated, and that's I think a very, very unusual element that comes with the effect of how the annual incentive accrual plays out. I think typically, it would not be a very material element. The annual incentive overall represents less than 5% of the total indirect cost. But in any given quarter, in particular in the third quarter, when you have, on 1 hand, a comparison of a release that was under the true-up last quarter or last year in Q3 versus an increase then the combined effect of that. takes away a big part, let's say, in the record, a big part of the actual savings that have been realized. So just to be clear, gross margin stable cost reduction happening as per the plan. So I think this is what's been in line, in fact, with what we had indicated, as we said, 9 months ago.

Just 1 very quick thing, which also doesn't make very much sense to me is your currency in your EBIT bridge is still heavily negative and it's turning positive on your sales. So how long is that going to be a point drag to EBIT and we're now seeing positive currency on the top line. Should we expect that to go away in the coming quarters? .

I think it's always a very compact, but trying to keep it very simple because this is a decentral point the weight of the Chinese in our bill of material and cost of goods sold is significantly higher than if you look at the sort of the basket of the mix of currencies in our top line is obviously very different. And that's the main element why you see the appreciation of the Chinese yuan compared to the euro, the U.S. dollar has been quite significant. We have a hedging mechanism about ForEx and brings the benefits. But you still have -- I mean it's basically another flavor of material inflation, if you like, which is fully taken into account in the way we manage the gross margin. So to your question, the relation between our FX on top line and on EBITDA is different mainly due to the effect of the weight of the Chinese yuan but this is fully managed anticipated and incorporated on how we drive our gross margin management as we commented on earlier.

The next question comes from Rajesh Patki at from Barclays.

Please check if I understood it right, the actions you're taking in the Consumer division, are those expected to deliver incremental cost savings of the ongoing EUR 180 million plan?

Yes, Rajesh, just the short answer to that is yes, that is correct. So what we -- what you saw in the past is that when the top line came down, we had to reset our indirect cost, and we did that company-wide. And the last kind of corporate program we did was the program of the EUR 180 million cost takeout, which is on track, and we have the full savings bank run rate end of the year. So that's that program. On top of that, we are now taking much more focused actions in the performance areas where we see productivity improvement opportunity. So I mentioned Pro Europe, where we will take out a significant amount of cost but equally on consumer, we will drive productivity up and that comes also with cost savings. Part of those cost savings, we will reinvest in new product innovations and acquisitions of new households but also some of that cost savings will find its way to the bottom line. So that is, indeed, to your answer, yes, that is on top of the EUR 180 million that we communicated earlier.

And how should we think about the net impact from this from a profitability perspective?

Yes. So we are still working through all those productivity increase. But what I can say at this point is not going to be insignificant. But of course, once we have the numbers and the plans in the more advanced states, and then we will share that with you as well. So -- so we can make that commitment in the performance areas where we make productivity improvements. We will get back to you about the magnitude of that and also how that affects profitability. So it's a bit early to call numbers on that today.