Signify Nv Ord

Hello, welcome to the Signify 3rd Quarter 2025 Results Conference Call, hosted by us, Templeman, CEO, Selko Gosanovic, CFO, and Telga Gerdes, Head of Investor Relations. For the first part of this call, all participants will be in listen-only mode, and afterwards, there will be a question-and-answer session. If you wish to ask a question, please press key pound 5 on your telephone keypad. Please note that you're limited to one question and a follow-up per round. I would now like to give the floor to Delta Gerdes. Ms. Gerdes, please go ahead.

Good morning, everyone, and welcome to Signify's earnings call for the third quarter of 2025. With me today are us, Templemans, Signify's CEO, and Zeljko Kosanovic, Signify's CFO. I would first of all like to welcome us to his first earnings call as Signify's new CEO. During this call, us will take you through the third quarter and business highlights. After that, you will hand over to Zeljko, who will present the company's financial and sustainability performance. Finally, us will return to discuss the outlook for the remainder of the year and share some first reflections and priorities. 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 you.

Thank you, Telke, and good morning, everyone. Thank you for joining us today. As Stelke said, this is my first earning call in this role and I look forward to this engagement with you this morning. Now, I joined the company six weeks ago at a time when the markets are indeed very challenging. So let's begin with some of the key market developments I have observed over the third quarter. Firstly, we see the ripple effects of tariffs as Chinese overcapacity is redirected from the US to Europe and other regions, and this is creating additional price pressure, especially in the professional trade channels in Europe and Asia, where competition has intensified. Secondly, in our professional business, we also see continued softness in important European countries, such as France, the Netherlands and the United Kingdom, and increasingly also in the US, where demand is slower or has been slower than expected in the third quarter. And this is especially the case for the public sector projects with government funding. And thirdly, in our OEM business, we see further compression of demand and continued price pressure, particularly in Europe as well. And this has been, again, intensified by the increased imports of Chinese components, putting pressure on the market for non-connected. However, I'm glad to say the market also presents opportunities that fit our strategy well. Our growth in connected and specialty lighting and particularly in consumer is very encouraging. The consumer business grew in all major markets and was particularly strong in India. And this strong performance of consumer was boosted by the expansion of our U portfolio and I'll cover that in a bit more detail a little later. Now, overall, connected and specialty lighting grew by high single digits across both the professional and consumer businesses. And worth mentioning is also our agricultural lighting business that delivered a strong seasonal performance, helping to offset some of the weaker areas of the portfolio. So overall, if I would have to summarize, this quarter underlines the resilience and growth potential of our connected and specialty lighting and the price pressure on the more commoditized products in the traditional trade channel. Now, let me move to an example that illustrates how our connected solutions are creating value for our customers and wider communities. I mean, despite the challenges in the European public sector, there are still great projects. And one of them is presented here. We just completed a street lighting project for the municipality of Montbartier in France. And the local municipality set out to modernize its public lighting with the goals of improving safety, enabling remote maintenance in a sustainable, cost-efficient way. and by implementing our SunStay Pro Solar luminaires that are fully integrated with our connected lighting management and the Signify Interact platform. And this all-in-one solar-powered solution allows the municipality to optimize luminaire runtime, control the systems remotely and significantly reduce energy costs while addressing environmental impacts. So it's a great example of how solar and connected technologies come together to support energy transition goals while delivering meaningful benefits for customers and communities. And we hope to see a lot more of that going forward. Let me move to the second example, the second highlight. I talked about it earlier, the exciting new portfolio expansion that supported the strong third quarter performance of our consumer business. And I just installed the Philips Hue system myself, and I have to say I've been super impressed by it. It's a really cool product. And Hue is truly the leading connected lighting system for the home with a very strong brand and a loyal, growing customer base. And the launch in September exceeded our expectations, creating strong demands with excellent execution, including well-managed availability on our e-commerce sites. And among the new innovations was a new feature that transformed existing Ulights into intelligent motion sensors that respond to movements. So really this way, you know, we continue to extend the role of U beyond illumination in our customers' home to integrating security, entertainment, and intelligent lighting. And also worth mentioning, we introduced the new essential range that introduces U to customers at a more accessible price range. So these are some highlights, and with that, I'll hand it over to Zelko, who will continue to cover the financial performance of the quarter.

Zelko. Thank you, As, and good morning, everyone. So let's start with some of the highlights of the third quarter of 2025 on slide 8. We increased the installed base of connected light points to 160 million at the end of Q3 2025 from 136 million last year. Nominal sales decreased by 8.4% to 1 billion and 407 million euros, including a negative currency effect of 4.5%, which was mainly related to the depreciation of the US dollar. Comparable sales declined by 3.9%. Excluding the conventional business, the comparable sales decline was 2.7%. This is reflecting the continued weakness in Europe's professional business, and a softer demand in the US. In addition, the OEM business saw further demand compression and continued price pressure. The adjusted EBITDA margin decreased by 80 basis points to 9.7%. We sustained a robust gross margin, particularly in the professional and in the consumer businesses. but we at the same time saw headwinds in the OEM business and conventional, which I will address later in the presentation. Net income decreased to 76 million euros, reflecting a lower income from operation, as well as a higher income tax expense, as the previous year included one-off tax benefits. Finally, free cash flow was 71 million euros. I will now move to our four businesses, starting with the professional business on slide 9. Nominal sales decreased by 6.8% to 928 million euros, reflecting lower volumes and a negative FX impact of 4.6%, mainly related to the depreciation of the US dollar. Comparable sales declined by 2.1%, driven by different dynamics. First of all, we saw a softer than anticipated US market. Europe remained weak, especially in the trade channel. And these developments were partly compensated by the continued growth of connected sales in most geographies and also a strong performance in agricultural lighting during the peak season for this segment. The adjusted EBITDA decreased to 97 million euros with an EBITDA margin sustained at a robust level. of 10.4%, however, contracting by 40 basis points compared to last year, mainly due to the lower sales. The business maintained a solid gross margin, which expanded sequentially, but contracted slightly against the high comparison base in the previous year, and we also retained strong cost discipline. Moving on to the consumer business on slide 10, The positive momentum we saw in the first half of the year continued and strengthened in the third quarter, supported by sustained demand across all key markets. Nominal sales decreased by 1.1% to 301 million euros, reflecting a negative currency impact of 4.8%, partly offset by the underlying growth. Comparable sales growth was 3.7%, driven by the continued success of our connected portfolio, particularly Philips Hue and the recent new product launches, as was highlighted by us a few minutes ago. We also saw a further acceleration of online sales, particularly through our own e-commerce websites. Our consumer business in India also continued to deliver strong performance, particularly in luminaires, further contributing to the segment's overall growth and profitability. Adjusted EBITDA increased to 27 million euros, while the margin expanding by 150 basis points to 9.1%, supported by a robust gross margin and operating leverage. Continuing now with the OEM business, on slide 11, as anticipated, performance deteriorated in the third quarter. Nominal sales decreased by 26.1%, to 93 million euros, while comparable sales declined by 23%, driven by lower volumes and the persistent price pressure in non-connected components. The impact of lower orders from two major customers highlighted in previous quarters continue to materially affect the top line. Price pressure continue to be intense in this market as in the previous quarters. And overall, we are also seeing a further weakening of the market demand, especially in Europe. Adjusted EBITDA decreased to 4 million euros with the margin contracting to 4.7%, mainly reflecting a gross margin decline due to the volume reduction and price pressure. Looking ahead, we expect market conditions to remain challenging with limited recovery in demand in the near term. And finally, turning to the conventional business on slide 12. Performance in the third quarter was broadly in line with expectations, reflecting the ongoing structural decline in this part of the portfolio. Nominal sales decreased by 25.3% to 76 million euros, impacted by lower volume and a negative currency effect. Comparable sales declined by 21.5%, consistent with a gradual phase-out of conventional technologies across most regions. The adjusted EBITDA margin decreased by 230 basis points to 17%. This was mainly driven by a lower gross margin, which was impacted by temporarily higher manufacturing costs as we are rationalizing our manufacturing sites. Let me now dive into the financial highlights on slide 13, where we are showing the adjusted EBITDA bridge for total signifier. The adjusted EBITDA margin decreased by 80 basis points to 9.7% due to the following developments. The negative volume effect was 70 basis points, reflecting the decline of our OEM and conventional businesses. The combined effect of price and mix was a negative 170 basis points, reflecting the further stabilization of price erosion trends across our business. As mentioned, we see higher the effect of price erosion in some parts of the business, such as OEM and professional Europe, but also a positive pricing in the US. Cost of goods sold overall has a neutral contribution year over year this quarter, with four main elements within that. First, we continue to deliver a strong bill of material savings across all businesses. in line and even slightly higher than in previous quarters, which was including an accelerated price negotiation savings. Second, the overall manufacturing productivity was impacted specifically in the OEM business by significant volume decline and in the conventional business by temporarily higher manufacturing costs as a result of the site rationalization mentioned earlier. There are also one of elements that impacted cost of goods sold positively last year, but did not repeat this year. And finally, the cost of goods sold in the third quarter included the effect of incremental tariffs, which were mitigated through pricing action and are therefore neutral on the total gross margin level. The indirect costs improved by 130 basis points on adjusted EBITDA margin level, reflecting the continued cost discipline across our business. Currency had a negative effect of only 10 basis points as we limited the effect of FX movements on our bottom line. Finally, other had a positive effect of 40 basis points and related mainly to the outcome of a legal case. On slide 14, I'd like to zoom in on working capital performance during the quarter. Compared to the end of September 2024, working capital increased by €20 million or by 70 basis points from 7.7% to 8.4% of sales. Within working capital, we saw the following developments. Inventories decreased by €70 million. Receivables reduced by €52 million. Payables were €156 million lower. And finally, other working capital items reduced by 13 million euros. The increase of the overall working capital ratio is mainly driven by two factors. The ramping up of consumer ahead of the peak season and the impact of the top line compression on the OEM inventory churn. Now, before I hand it back, I would like to touch on our progress toward our Brighter Lives, Better World 2025 commitments. Starting with greenhouse gas emissions, we are ahead of schedule to meet our 2025 goal of reducing emissions across our entire value chain by 40% compared to 2019. That's twice the pace required by the Paris Agreement. Next, on circular revenues, we reached 37% this quarter, well above our 2025 target of 32%. The biggest driver here continues to be serviceable luminaires within our professional business. where we're seeing strong adoption across all regions. When it comes to Brighter Lives revenues, the part of our portfolio that directly supports health, well-being and food availability, we increased to 34% this quarter, up one point from last quarter, and again, above our 2025 target. Both our professional and consumer businesses are contributing strongly here. And finally, on diversity, the percentage of women in leadership positions remained at 27% this quarter. While that's below where we want to be, we are continuing to take concrete steps to improve representation from more inclusive hiring practices to focused retention and engagement efforts to help us reach our 2025 ambition. So overall, we are making good progress with strong momentum in most areas and a clear focus on where we still need to accelerate. I will now hand back to us for the outlook.

Thank you, Selko. So moving on to the outlook. Based on the softer than previously expected outlook, particularly for the professional business in the U.S. and further demand compression in the OEM business, we are updating our guidance for the full year 2025 as follows. So we expect comparable sales growth of minus 2.5 to minus 3% for the year, which is equivalent to minus 1 to minus 1.5 CSG excluding conventional. And as a result of this lower expected top line, we are also adapting our adjusted EBITDA margin with a guidance to 9.1 to 9.6%. And finally, we expect our free cash flow to land at around 7% of sales. That's on the outlook. Now, I wanted to share a few reflections and talk a bit about the priorities as I see them going forward. Almost eight weeks into the role now. Let me do that. There is a lot to be proud of at Signify. I mean, we have very committed, capable professionals, a really impressive world-class innovation engine and a strong culture of cost and capital discipline that continues to serve us very well. At the same time, we are also clear about the difficulties that we face as a company. The lighting market remains very challenging. Growth has been lacking and the performance has been volatile. So coming in, I see the following immediate priorities. First, to outperform in what is a very tough market. So we must focus on commercial and supply chain execution. We need to manage price pressure, continue to win in the connected and the specialty lighting and close efficiency gaps. We also need to maintain strict control and capital disciplines to enhance our profitability and cash flow. And I will make sure that discipline, we will stay with that going forward. Secondly, we can and we should be clearer about our strategic intent and our strategic objectives. And therefore, we are planning to review our strategy. We will organize a capital markets day towards the middle of next year. where we will provide clarity on our portfolio, on how we deliver durable growth and on capital allocation. And thirdly, as key enablers, we will focus our R&D resources and continue to invest in accelerating digitalization and AI adoption. Now, 18 months, the company launched a new operating model that we will not change and we will fully leverage to its full potential. And at the same time, we will start shifting the culture from products to a more market-led mindset and approach. And from what I've seen so far, that by addressing these priorities, I'm confident that we will set up Signify for future success. And with that, I'll hand it back to the operator to facilitate the question and answer session.

Thank you very much. Ladies and gentlemen, we are now ready to take your questions. If you wish to ask a question, please press key pound five on your telephone keypad. Please remember that you are limited to one question and a follow-up per round. Our first question comes from Daniela Costa from Goldman Sachs. Please go ahead.

Hi, good morning. Hope you can hear me well. Thanks for taking my question. I will ask one and then the follow-up. I just wanted to ask on your early thoughts in terms of the OEM business. We seem to be mentioning intense pricing pressure, lost some customers. Do you see this as more structural or more cyclical when you look at it? Was that anything to do with what prompted you to talk about reviewing the portfolio, I wonder?

How do we see the OEM business going forward? Well, first of all, we saw the impact of the loss of two specific customers. That was quite significant. That also is explaining a large part of the drop we saw. That of course will go away after a year. But going forward, we expect that current conditions will continue to be challenging, both in terms of demand as well as the price pressure. But it's too early to call what exactly that will look like in the next year.

Thank you. And then just following up on the topic of tariffs, I mean, in the release there weren't too many references to it, but I was just wondering if you could give us a little bit of what is happening on the ground, given the U.S. market was highly dependent on Chinese imports, on lighting, what sort of the inventory attitude you've seen at distributors? Has there been any restocking of Chinese products? Could this be impacting what you are seeing? in the market right now, and ultimately, as you look medium term, if the tariffs stand, do you see them as a positive or a negative for Signify? Is it an opportunity to gain market share and put prices through, or also you are very dependent on Asia, and it's not really, we shouldn't see it this way, just a little bit more color there would be very helpful. Thank you.

Yeah, good morning, Daniela. So maybe to give a bit of a update and in summary on what we see. So first of all, I think in general on pricing, the scale players have generally taken price increases to the extent that was needed. Our price adjustment on the Signify side were generally in line with the market and we also saw that prices increase are sticking. now overall we've been able in the third quarter like we did in the previous quarter and we expect to be able to continue to do so to successfully mitigate the tariff increase with pricing so with a slightly positive impact on the on the top line for our us business and the neutral impact on on the bottom line so overall the strategy we have set up and of course all the uh activities that we have taken on the on the supply chain side to uh to adapt and to reduce the exposure or to optimize uh our cost our cost base and our sourcing i think are really being executed uh really exactly in line with our plan so there we are basically uh implementing what we haven't seen and of course we continue to maintain the agility to adapt moving forward depending on the how the situation will evolve but overall slightly positive on top line, neutral on the bottom line, and implementation in line with our strategy.

Thank you. So you don't see it as a market share grabbing opportunity or something a bit more structural medium term is just a pass-through?

Look, the answer on that would be probably we should go more in detail depending on the portfolio. Of course, what we are doing in the different portfolios is to find a balancing act between prioritizing market share gain where we do see opportunity and where we are extracting opportunity. those opportunities very clearly while protecting the margin so i think it's really uh at the more granular level let's say that this is going to be a different answer but overall is to make sure that we can absolutely take take advantage and we have seen clear example where we've been able to do so while uh protecting the the profitability uh as as i just mentioned so this is actually been a strategy and we're seeing that of course, evolving depending on the landscape of tariffs that has also been changing quite a bit over the last few months.

Thank you very much.

Thank you, Daniela.

The next question comes from Martin Wilkie from Citi. Please go ahead.

Yeah, good morning. Thank you. It's Martin from Citi. Just coming back to the overcapacity being redirected from China that you referred to, just understand where we are in that process. And obviously, we hear a lot about China's anti-inflation drive to reduce overcapacity across other industries. We probably hear more about markets like solar, batteries, things like that. But is there a reduction or an anticipated reduction in Chinese overcapacity, or is that something that you expect to remain like this for the foreseeable future?

Thanks Martin for the question. So indeed we look also at all the export statistics and what is happening with the trade flows and indeed what we see is that you see some of the decline in terms of trade flows from China to the US, seeing kind of an equal amount of quantities landing in the rest of the world and in Europe. And that does cause some additional price pressure. To your question about, hey, do we expect that, how sustainable is that? In China we see that that is kind of flattening out, that price erosion. And, well, whether we see a significant consolidation in the Chinese market is still to be seen. So I wouldn't want to conclude anything on that at this point.

Thanks. And just related to that. about your first impression of industry dynamics, and it sounds like we might get a lot more detail at the Capital Markets Day next year, but when you consider, you know, what's happening with Chinese competition, but also, you know, as you pointed out, you have some great connected products and so forth at Signify. What are your first impressions of Signify's competitive position, and in particular, the most around the business to address some of these competitive challenges?

Yeah, so there you really need to, Martin, you need to really go deeper. What I see is that on the professional side, we play in many, many segments. And each segment has kind of its own dynamics. And equally, you know, if you look at the business by trade channel, you know, the dynamics around projects is very different than the competitive dynamics around the more traditional and online trade channels. So we need to make very explicit in our strategy, and we will do that at Capital Markets Day, about where we want to focus our efforts and what is the portfolio that we want to build going forward. So that clarity will be created there.

Thank you.

The next question comes from Akash Gupta from JP Morgan. Please go ahead.

Yes, hi, good morning, and thanks for your time. My first one is on North America, so maybe if we can zoom in on U.S. business a bit. One of your U.S. competitors, they reported kind of flattish revenues in U.S. lighting, professional lighting. While you are talking about softness in the quarter, which was weaker than what you expected, maybe if you can provide some color on what do you see in various categories in professional channel. And I think you did talk about some weakness in public side. So maybe if you can talk about where do you see growth, where you don't see growth in North America professional. And is there any loss of market share that we should be aware of? So that's the first one.

Yeah sure, good question and indeed the US market, I mean year to date we are growing in the US. We had expected more of the US market in the third quarter but that was not as high as expected. So we saw more flattish pattern. Now the two key messages on the US market, I think, and you mentioned them yourself, one is that we see project activity is softening, and that is particularly driven by public sector projects. Will that change in the fourth quarter? That is to be seen. It's not that we lost projects, to your question around market share, but we see more of delays, right? So there's clearly a delay there. And then there's the trades channel where, you know, there we see quite tough competition, particularly on the lower end of the product portfolio. So to your question about how are we performing in that context, so I think it's fair to say that we are on par with markets when it comes to professional projects. We are outperforming when it comes to connected and agricultural lighting, and we are probably a bit below par when it comes to the trades and do-it-yourself channels.

Thank you. And my follow-up is on organic growth guidance. So for this year, you are now guiding minus 1 to minus 1.5, excluding conventional. And year-to-date, we are at minus 1.0. So that would imply that for Q4, you have the best expectation is flat organic growth. I think you already said consumer, not consumer, sorry, OEM is going to be a bit weak in Q4. But maybe if you can tell us about the moving parts for both professional and consumer in Q4 that we should be aware of. And also on the growth, how much of this is also driven by price mix compared to, let's say, simply lower than previously expected volumes? Thank you.

Yeah, good morning, Akash. So maybe to give a bit of color on the, as you said, the building breaks on the dynamic of the top line, the fourth quarter. So first of all, if you look at consumer there we see, as we mentioned, a strengthening momentum and we expect this to continue and we have confidence on the momentum to continue with a strong Q4. Of course, this is the highest and the strongest order for that business. The conventional business also is more predictable. Now, to your question, I think the the two areas where we see the most challenges and where we've looked of course at the different scenarios. Professional business, so this is trade as mentioned in both US and Europe and also the public sector in general, as well as your own business. What is reflected in the guidance is the translation of what we see out of those scenarios or what could evolve. in the fourth quarter, in the continuity of our third quarter trend. So as we said for the U.S., it's softer than what we had previously anticipated, but it's basically a softening of the momentum that will remain resilient in many parts of that business. Now on the price, maybe looking back, what we've observed across all our businesses is stability in the pricing trends. of the last quarters. However, with more price intensity clearly in the non-connected part for the OEM business and also definitely in the trade part in Europe and also to some extent in the US. Look, in terms of the price dynamic, it's not a price and mix dynamic. Of course, the mix will be impacted by a portfolio mix, but overall, no major change. And I think the software or the update of the guidance is fundamentally driven by volumes. And as we said, mostly linked to professionals in the U.S. and OEM. Thank you.

The next question comes from Chase Coughlin from Van Lamschot Kemper. Please go ahead.

Hi, good morning all, and thank you for taking my questions. My first one regarding the conventional business,

You, of course, talk about rationalizing a little bit more, which might have several quarter impacts on profitability. Could you just elaborate a little bit on the exact plan there? How much more can you rationalize? For example, how many facilities are you operating at the moment, and what will that be in a few quarters?

Okay, look, yeah, the line was not totally right, but if I understood, and please correct me if the question, it's about the further rationalization of our manufacturing in conditions. So look, yeah, we've been, I mean, consistently over the last few years in the driving, I think we used to have over 30 factories, now down to three. So we've been doing interactively adjusting the manufacturing base, and we have a clear line of sight and a clear roadmap. to do so, of course, as I indicated earlier, in the process of doing so, then you do have adjustments that you need to really manage in the manufacturing process. So this is where we see temporarily some headwinds or higher manufacturing costs in the process and in the transition of doing so. But I think we have a very clearly established roadmap to drive that further to the extent that is required to recalibrate the supply chain of that business, which we have been doing consistently over the last few years and for which we have again a clear roadmap for the coming years. Again, in that business, as a reminder, we have three parts. The general lighting or the conventional general lighting part of conventional, which is of course the part that is decaying at the faster pace. We have the digital projection piece, which has a line of sight, let's say, of another few years with very specific customers being served and we have the specialty lighting which has within that growth opportunities and that of course has a different roadmap of evolution in the future and that will of course as we go along see those pieces being bigger in the overscale of the conventional business.

Yeah, maybe just to add to that, I spent some time with the conventional team and I was actually very impressed with that multi-year roadmap that is really nicely faced with clear milestones and signposts to bring that business, harvest that business to the best extent possible. So I think the team is doing an extremely solid job on that. And so the question, is there more to go after? Yes, so we are now single-digit plants, but we also know how the trajectory will look like going forward.

Okay, that's very helpful. I hope the line is a bit more clear. Now, just on my second question, my follow-up, As you spoke about, yeah, capital discipline is one of the priorities going forward. And I'm curious on, you know, we're seeing net debt year over year increase. Earnings are, of course, coming down at the moment. Can I get your thoughts on the ongoing shared buyback scheme? Is that something that you think should be continued going forward? Or do you have any, let's say, preferences for capital allocation elsewhere?

Well, it's not that we don't have a capital allocation now, and I'll leave it to Selco to comment on that. But my promise was more around, hey, coming into this role, you talk to customers, partners, colleagues, but of course also to investors. And I think what many investors rightly so ask for is, hey, what is your roadmap to sustainable growth? you know, what about your footprint and your portfolio, but also what about your capital allocation going forward. And I think we owe you that clarity and we will include that in the capital markets today, mid next year, likely June.

Okay, perfect. Thank you very much, gentlemen.

The next question comes from Wim Giller from ABN and Odo BHF. Please go ahead.

Yes, a very good morning. My first question is around Nexperia. Obviously there's a lot of turmoil around this company at this point in time in terms of supply and given that both Nexperia as well as you guys are at Philips, are there any connections left there in terms of supply chain and should we be looking into this in relation to your business? And the second question is, can you be a bit more specific around, let's say, the market share that you are looking at in the United States in terms of volumes? In particular, when I compare the performance of Acuity versus you guys, and if I then take into account that a large part of the market used to be Chinese, which are no longer welcome there, I would have expected a bit more clarity on kind of your ability to win markets in terms of volumes in the US. Thank you.

Yeah, maybe first on your question on Nexperia. So Nexperia components are used in some Signify products. However, we do not anticipate a material impact to our supply in the near term. It's a very limited impact and mostly in the OEM business. And also at the same time, we do have an active and proactive supply chain risk management. So we continue to monitor the situation and we always consists constantly review all the alternative sources so that has allowed us to in this specific case also to apply with a lot of agility the required mitigation and yeah I think overall I think we are we are seeing limited impact and we do have and the teams have been able to of course very very fast adapt and mitigate and that's part of the strategy we have of you know proactive supply chain risk management and multiple sourcing uh to to uh to be prepared for those kinds so the limited impact for us in the near term

And then on the U.S. question, are we keen to grow market share in the U.S.? Of course we are, but we need to make sure it's on strategy, right? So on the project side, clearly we are doing well and we aim to continue to grow. I mentioned that we are probably a bit below par in the trade channel, and that is also where you see that dynamic indeed of the Chinese products. We are adding, you know, products into our portfolio that better fit that trade channel. So indeed, you know, we see opportunities in the US to continue to grow our markets.

Thank you very much. And then lastly, in terms of your priorities at the last slide, you also mentioned that you're looking to rationalize your portfolio. Are we then talking about significant chunks in terms of sales that you might exit or divest or whatever? Or is this more fine-tuning around the edges and it should not have a major impact on sales?

Let me just emphasize, Wim, that at this point I say we are reviewing our portfolio. Don't read that as rationalizing because it's too early for me to say, hey, we're going to cut this or add that. That's too early. Now, that said, I mean, I think ultimately the portfolio choices should follow your strategy. So what we'll do is we will create clarity about what is the narrative for the company, where do we want to go, you know, on a three, five year horizon. If this is the company we want to build, then these are logical steps to take in terms of portfolio. And you should not only think line of business level there, but also around, hey, we are currently present in over 70 countries. We play in many different segments. But indeed, we also need to create clarity around how the different lines of business hang together and how we want to take that forward. So the answer is it's a review and all is included. I don't want to exclude anything at this point, nor do I want to create false expectations given where we are today.

Thank you very much.

The next question comes from Mark Hesseling from ING. Please go ahead.

Thank you. The question is actually two things related, both one on gross margin and one on the OPEX. So I think given what you said before, it's likely that the lower gross margin versus the first previous quarter is here to stay or maybe even increase, the pressure will increase a bit. In the quarter itself, in third quarter, you really offset that by significantly adjusting your SD&A cost. Is that also the way forward, that when the gross margin remains under pressure, that you will take more action in your short-term SD&A cost?

Yeah, thank you. Good morning, Martin. Thank you for the question. So I think, first of all, on the dynamic of the gross margin, what's very important to to see in the dynamic, and as you said, comparing to, I think we had seven consecutive quarters with a margin gross margin above 40 percent which typically would be you know on on the higher end of the what we indicated as an entitlement i think when we look at professional and consumer business in the last quarter and as we expect moving forward we continue to see a very robust gross margin so the let's say the uh the sequential decrease you know to 39.5 is entirely linked to the two headwinds i was mentioning earlier first on the oem business so there is there clearly the implications of the magnitude of the decline we see in the OEM business on the manufacturing productivity. So this is really linked to the OEM business. And second, the temporary or transitory increase of headwinds on the manufacturing cost base of the conventional business, which we do expect to normalize by mid of next year. So I think in the dynamic of the gross margin, very clearly, Very strong professional, very strong consumer. When we look, of course, at the dynamic for Q4, consumer having its strongest, it's the strongest quarter. And that, of course, will have a positive sequential implication on the evolution of the growth margin. So I think the dynamic on those two key pieces of the business remain very strong and remain very much in line. Actually, we even saw sequential expansion of the growth margin in the professional business quarter over quarter and a very limited growth. let's say, decrease compared to last year, which was a very high comparison base with some one of the elements. So look, the trajectory of a gross margin remaining very strong. The two specific elements which are impacting on the OEM business linked to the volume and on the conventional business, which is more transitory. Now to your question on the evolution of the SG&A or the cost base, the indirect cost. As we indicated earlier, we are of course driving and further driving the optimization, making sure that we are deploying the investments needed to support the execution of our strategy. And this is what we are seeing clearly delivering on the connected parts and the specialty part of the business. And then, of course, at the same time, continuing to optimize and to adjust where needed, where we do see the most challenges. So I think this is a combination of those two elements that you see in the dynamic of our indirect cost base and that we expect to move forward. But the most important point is really the robustness of the gross margin, absolutely sustained and confirmed for consumer and professional.

Okay, clear. Thanks. And then maybe on the capex, because also last quarter and this quarter the capex is a bit higher than last year. Is it a bit of timing or is there a reason why capex would be increasing a bit?

So there within the capex, I think you have on the tangible part of capex, it's a limited but it's more linked to some of the intangible product developments. So there we do have some, but again, the magnitude, I think it remains on a relatively low base, right? The business remains, you know, with a very low capex intensity. So you're right, we've seen sequentially some increase, but this is linked mostly to capitalized developments, you know, in innovation R&D and also in the digitalization part.

Okay, clear, thanks.

The next question comes from Elias Neu from Kepler Schiphol. Please go ahead.

Yes, good morning, everyone. I was just wondering on your other segment, which has seen strong momentum over recent quarters, but in the current quarters seen a sequential decline in sales. Could you just perhaps give us some what is driving this, and how would you expect this to develop going forward?

Maybe what is included in others is linked to the ventures business and we do have one specific venture that has been developed and positioned on the connected consumer space in China. And as you mentioned, we've seen a very strong momentum. I think this venture is continuing to perform very well. However, there was some I think a favorable contribution or propelling drivers coming also from the subsidies that were deployed in China that were supporting an accelerated level of growth in the last quarter, which has normalized as we've seen in the third quarter. So this is the main element behind, but this is one of the ventures that is seeing a very successful traction and very well positioned in one part of the Chinese market, which is overall challenging, but that's one part of the market that has a good dynamic and indeed the translation of that has been lower in the last quarter compared to the previous quarter, but still substantially growing year over year.

The next question comes from Sven Weyer from UBS. Please go ahead.

Good morning and thanks for taking my question. It's just one and I think we've discussed a lot about relative performance of Signify against other lighting players. I'm more curious about the relative performance of lighting within construction against other construction segments. And we're obviously seeing quite a bit of an underperformance here of lighting against other segments in the last couple of years. I guess my suspicion has always been around the renovation side that you see the kind of lagging effect of a higher LED installed base and longer replacement cycles, which I think has kind of been a bit denied by the company. I was just wondering if you're also aiming for the capital market stay to provide us more color on that very point, because I think it could be an important point to get a sense when does that kind of underperformance potentially start to phase out and provide us more visibility on that item. That's my question. Thank you.

Yeah, thanks, Sven, and it's important so that we always start with market, not ourselves. And indeed, I think the market is at the final wave of gratification, if you want, but we are not at the end of it just yet. So you still see that then having an impact, I guess, on the lighting sector in comparison with other construction related sectors. On your question, will we create some clarity? Yes, I think we'll create some clarity about how we see the harvesting roadmap for conventionals, but also how we see the market when it comes to leadification. And also where we see the growth opportunities, because clearly, you know, beyond the hardware, we see then, of course, a lot of growth in connected and that presents us with good opportunities as well. Short answer is yes, Sven, we will come back to that.

And so you agree that this could be a factor that you especially see on the renovation side out of the longer replacement cycles? Would you agree that this could be potentially one of the drags relative?

Maybe what I can say when we look at the dynamics of the market, how it translates, because we of course have leading indicators that are to understand exactly what you are pointing out. In short, I think the way the The market, of course, renovation is the most important piece of our exposure. I mean, we are higher, our indexation to the renovation is higher than to the new build in the professional non-residential space. So to your question, I think when you look at the different dynamics market per market, I would say the answer to your, or at least the conclusion you're taking is not the one that we would have, so I would understand that this has to be probably better articulated on how we see it forward, and we'll take note of your comment, but that's not what our analysis would indicate, at least with the data we have. Thank you both.

We have time for one last question. And it comes from George Featherstone from Barclays. Please go ahead.

Hi. Morning, everyone. And thanks for just taking this final question. It's just about the caps allocation and coming back to some of the questions you've had already. Cash on the balance sheet is down about 35% year-over-year. Free cash flows down 40% year-over-year on a year-to-date basis. You're obviously now guiding for lower cash generation ahead. How concerned are you about these trends and do you plan to take any proactive actions to conserve cash given the weaker market trends that you talked about already? Thank you.

Yeah, thank you for your question. So first of all, if you look at the, as part of our capital allocation policy and priorities, I think we've been very clear and that's what we've been driving. consistently also the past year to ensure and to sustain a strong capital structure, a strong balance sheet and a level of leverage that is supportive to an investment grade rating sustain. So when we look at our leverage year over year, it has slightly decreased, so it's in line with what we expected. We have just completed, as was communicated also, our refinancing. with now a longer channel for the 325 million that was at maturity in the last quarter. When we look at the dynamic of cash generation versus the implementation of our capital allocation policy defined for 2025, I think there is no change or no concern To your point, because we look at, we are well on track on the execution of our share buyback program. We are able to define the priority supporting growth as we intended. So look now, I think the dynamic and the the adjustment that we have indicated are not leading to a correction on the overall equilibrium, let's say, on the cash generation versus cash utilization that we define in our policy for 2025. So no major change there.

Okay, thanks. And just specifically on the buyback, do you intend to complete that? I mean, I think it's on the guidance, you're giving us an up to 150 million. Is your intention to go all the way to 150 million at this stage? Thank you.

So for now, we are well on track with the plan for the year. And yes, we are intending to complete as what was committed again in our capital allocation policy, which still fits totally with the plan we have defined. So there we are on track and expect to complete as was indicated. So in short, we have given a clear capital allocation policy for implementation in 2025, and we are executing to it consistently and expect to do so for the rest of the year.

Okay, thank you.

Thank you. And with that, I will now turn the call back over to Delphicardus for any closing remarks.

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 us. And again, thank you very much and enjoy the rest of your day.