Hello. Welcome to the Signify third quarter 2026 results conference call hosted by As Tempelman, CEO, Željko Kosanović, CFO, and Thelke 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 pound key five on your telephone keypad. Please note that you are limited to one question and a follow-up per round. 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 Kosanović. 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. With that, I would like to hand over to As.
Thank you, Thelke, and good morning, everyone. Thank you for joining us today. 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. 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. We are making progress in harvest, and I would say in build, there is still considerably more work to do. Let me comment on both, starting with harvest. Genlyte, one of our North American businesses, 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. Of course, that then translates into improved profitability. On the OEM side, that turnaround is also on track with another sequential improvement in profitability. We have 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. Meaning we either divest, we partner, or we keep and optimize. To support this optionality and this flexibility, we have decided to separate the OEM business and make it stand alone. So in fact, a carve-out, and we expect that carve-out to be completed in the second half of next year. That might sound like a long time, but it is actually quite complex.
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. We either divest or we keep. It is already partnered. It is a joint venture setup. 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 is actively going on. Now turning to the build part of the portfolio. India remains a powerhouse for Signify in lighting, contributing both to growth and profitability. We also see opportunities to use our brands and our distribution power to expand into adjacent categories. Fans were our first step, and I will come back to that in a moment. Now, Prof Europe, a large business, requires a turnaround.
We got to be honest and face that the performance over the past three years has not met our expectations. Market conditions have played a key part, but we have also not been adapting fast enough. Under new leadership, we will rightsize the organization and strengthen our execution capacity in key countries, empowering our local country teams operating close to the markets, close to customers. This will yield significant cost savings and improve competitiveness. With these changes underway, 2027 will be a transitionary year for Europe because these changes take some time. Moving to another of our build businesses, consumer. Our priorities are growth and productivity. We are investing in customer acquisition to grow connected, our Hue offer, while maintaining profitability in the harvest area. 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 cost will drive profitability up. 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 investments priorities and taking significant costs out of our R&D spend to improve returns on R&D. Those returns need to really come through in sales from innovation and in lower cost products. That is how we target our R&D. It needs to lead to more revenue, more profitability. As a reminder, about 40% of our R&D costs actually relate to product redesign and value engineering. This is not just about innovation.
These are the actions that we are taking to turn the strategy into better performance with clear priorities for each part of the portfolio, and we are happy to take your questions on it. 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 slides when we started the call. It concerns a project in Romania and where we bring an iconic landmark to life by combining architectural luminaires, lighting design, and controls in one integrated lighting solution. We deliver this project with our local partner, Luxen, and multiple lighting solutions illuminate the facade, the roofline, 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 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 brand, a local brand. in 2024, we stepped up our focus on design-led innovation in brushless direct current fans, so-called BLDC. DC, brushless direct current fans. And these motors make fans more energy efficient and quieter than conventional alternatives. 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 Indian Premier League, and in-store activities. And you see it works. Fans sales grew 61% in just the first nine months compared to last year across more than 11,000 retail outlets. 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 four measures in our program. Year to date, revenues from products and solutions that deliver benefits beyond illumination, beyond lighting, reached 36.3% of sales. That's well on track towards our 2030 target of 41%.
Our LED products sold under the program have contributed to cumulative energy savings of 12 terawatt-hours, and the annualized reduction in our portfolio 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 Prof Europe sales. That program is very much targeted towards Europe, on Europe, towards 27.5% target for 2030. Basically, all four measures are on track. We're also very proud that we have again received the EcoVadis platinum rating for a seventh consecutive year with a record score of 88 out of 100. 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. Good morning, everyone. I will now walk you through the third quarter financial results, starting on slide nine with the group results. Sales were at EUR 1,367,000,000 with a comparable sales decline of 3.4%. We achieved positive pricing across all businesses while demand in our end markets remained weak. Adjusted EBITA was €145 million, giving an adjusted EBITA margin of 10.6%. This includes a net benefit of €28 million from U.S. tariff refunds, equivalent to 210 basis points of margin. Excluding the net tariff refund benefit, our adjusted EBITA 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. Going to slide 10 on Professional. The Professional business delivered 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 EBITA was EUR 115 million, with a margin of 12.5%. This includes a 200 basis points net benefit from tariff refunds. Excluding this benefit, the margin was 10.5%, stable compared with last year. 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 strong growth in luminaires and in India. Within connected, sales continued to be affected by retailer de-stocking in response to the elevated inventory levels carried since the start of the year. As retailers reduced these inventories, their orders remained below underlying consumer demand. Importantly, this is not the full picture of consumer demand. Hue 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. We are working closely with retailers to bring ordering pattern into closer alignment with sell-out and reduce the volatility between quarters. Adjusted EBITA 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%. 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. 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. 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 EBITA 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. 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 12.2%. 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 EBITA 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 decline of the business. Turning to the year-on-year margin bridge, the Adjusted EBITA margin increased by 90 basis points to 10.6%, including the 210 basis point net benefit from tariff refunds. 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 + 80 basis points. We achieved positive pricing across all four 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 costs reduced the margin by 40 basis points as higher incentive accruals and other cost increases more than 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.
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 nine 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 employee incentive accruals, true-ups, 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 one hand the true-up 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 costs by EUR 4 million. As a result, the adjusted indirect costs in the third quarter increased by EUR 4 million year- over- year to EUR 451 million. Looking at the first nine months on the right-hand side, adjusted indirect costs decreased by EUR 51 million to EUR 1,356 million, driven by the gross cost reduction of EUR 98 million.
Overall, the savings from the execution of our cost reduction program are coming through, and we are on track to reach the fully annualized run rate entry in 2027, with further specific cost action being implemented in different performance areas, in particular in Prof 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-over-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 118 million in the quarter, alongside the benefit of tariff refunds. With that, let me now hand back to As for the outlook and the closing remarks.
Thanks, Željko. Indeed, what about the outlook? Indeed, the market conditions remain quite challenging. You see the Professional Europe under pressure, particularly on the public side, so the municipality spend on the outdoor lighting, it's a weak market. Also residential in the U.S., we see some weakness, and we see that back in our daily order intake. We're still to be seen what happens around Thanksgiving and Christmas on that. Then the consumer comparable, where we had quite a few weeks of stock up last year, also makes it a bit tough. 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.
Against this background of sales and market, we confirm our full year Adjusted EBITA margin guidance at the higher end of the 7.5%- 8.5% range. That is, of course, including the tariff refunds received for the third quarter. If you would exclude those, we would be at the lower end of this range, but still within. The progress we've made in reducing our indirect cost base is expected to support the bottom-line profitability in the fourth quarter, and 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%- 7.5% of sales. We are making progress in Harvest, and we are taking further actions where performance needs to improve in our Build portfolio.
Our priorities are clear. I would summarize them as execute the 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.
Thank you very much. Ladies and gentlemen, we are now ready to take your questions. If you wish to ask a question, please press pound key five on your telephone keypad to enter the queue. Please remember that you are limited to one question and a follow-up per round. The first question comes from Ines Lefranc from Goldman Sachs. Please go ahead. Your line is now open.
Hi. Thank you very much for taking my question. I just wanted to ask about the free cash flow guidance. Given you have increased your margin guidance on the back of tariff refunds, why haven't you increased the free cash flow guidance, too? Thank you.
Yeah, thank you for the question. As, As just said, we confirm and maintain the free cash flow guidance. When you look at the profile of our free cash flow in the fourth quarter, of course, it is the usual seasonality. We have a higher concentration of the cash in the fourth quarter. There is no specific element related to the tariff. First of all, our guidance does not include any further tariff refunds in the fourth quarter, and we have not qualified specifically the effect of the tariff within the guidance, but we do confirm the guidance for the full year.
Very clear. Thank you.
All right. The next question comes from Adam Parr from Rothschild & Co. Please go ahead.
Hi there. Thanks for taking my question. Can we talk perhaps a little bit about price mix, and any detail here would be very helpful. At the group level, if we disaggregate price mix into price and mix, was mix positive? If we look at price by division, perhaps without putting any numbers to them exactly, could you perhaps help us rank the divisions in terms of highest to lowest pricing in the quarter? Because I know you said that price mix was up. Sorry, pricing was positive in all businesses, but any ranking help would be very appreciated. Thank you.
Yeah, indeed. Adam, I can say a few words. The price mix was positive across the group, and like you said, Adam, achieved in all four businesses. 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. If I translate that for you, professional pricing was slightly positive, strongest in India and rest of world, and Europe lagging, yeah, particularly stock and flow. Consumer pricing turned positive overall, good progress in Europe and rest of world. OEM also across all regions. Then conventional is, of course, where we have a lot of discipline and a lot of pricing power. So there also, pricing remained positive. By geography, I would say Europe remains the most competitive market, although pricing has eased versus last year.
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 U.S. as we saw in previous years and quarters. So their margins are clearly under pressure, particularly in the stock and flow. That is something that is worth highlighting. We'll see how that plays out in the coming quarter.
Thanks. That is very helpful. Thank you for the detail.
The following question comes from Max Yates from Morgan Stanley. Please go ahead.
Thank you. Good morning. I just wanted to ask about your EBITA bridge, because it is quite unusual to see you being able to get price when your COGS are coming down. You talked about, obviously, your rising input costs, but those were being offset by some of your supply chain action. I guess I was just trying to understand, do you think you can continue to see this trend where effectively your aggregate cost of goods sold are coming down and you are able to keep pushing up price? Because normally we have seen, when your costs come down, your price comes down as well, and you essentially have to give it back to competitors to remain. Give it back to customers to remain competitive. Just how sustainable you think that trend is. Anything particularly outsized in that number or can that continue for the next few quarters?
Yeah. Thank you for the question. No, you are totally right. I think, as I mentioned, and this is, as we always indicated, we do manage the gross margin as a whole and you have many dimensions at play. It is true that what we have seen is, and that is 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. The bill of material inflation is impacting. However, it is fair to say that, and this 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 those input cost impacts or in the phasing. That also gives time also to get the full price through.
At the same time, I think you have one element, which is of course a bit of a consequence of the way the increase of the tariffs last year compared to this year, why we see an easing, because we have been taking a lot of measures to reduce the exposure, why also adapt the exposure. So that is coming through as a positive element year-over-year in our COGS. 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 area, where we are reducing the fixed COGS base, so supply chain manufacturing, which is an element that is very important to support, for example, the continued improvement of profitability in OEM.
On that third part, it is really self-help execution and cost resizing, which is not dependent on. 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 dealing with a lot of agility to make sure that overall, to your question on how sustainable it is, I think gross margin resilience for us is a very important element. So we have been driving that across very volatile, very dynamic periods, and we expect to be able to continue to do that in the coming quarters, in a very structural manner.
Yeah. And I think, Max, 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 have this increasing tightness on components and semiconductors. That has not gone away. We do not expect supply chain disruptions, but clearly it is inflationary. So we manage that 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 BOM and COGS well, like Željko laid out, that helps profitability.
No, I guess it is just interesting because I think if I had asked you nine months ago and you said, "How are we going to get margins up?" I think you would have told me, "We are going to try and keep gross margins flat, and then we are going to take out indirect costs with our EUR 180 million cost savings, and therefore we will get SG&A leverage."
And in fact, what is happening in your business is your indirect cost saving all being wiped out by other stuff, and your gross margins are going up, so your margins are moving up sequentially. So I guess it is a slightly different mix of sequential margin expansion than I think we would have expected. And then I guess that raises a 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 are being offset by other stuff. I guess that's why I'm curious, because it seems much more important for your margin expansion with gross margin expansion than I would originally.
Yeah. No, I understand the way you look at the dynamics. You want to comment a bit, Željko.
Yeah
Now we're on the topic of indirect costs, because I don't want to leave you with the impression that that is all wiped out. Actually, we are structurally improving the profitability of the company by reducing indirect costs.
Yeah. A few clarification on the gross margin expansion. I think if we look at it, of course, normalizing the effect of the tariff refund, we would be around 40%, so let's say slightly improving, but it's not a major expansion. 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 had indicated. At the same time, on the structural gross savings that are coming out of the cost reduction program that we have launched, that's also coming through. As you indicated, and that's I think a very, very usual element that comes with the effect of how the annual incentive accrual true-up 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, and particularly in the third quarter, when you have, on one 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 our indirect costs, a big part of the—
Okay
structural savings that have been realized. Just to be clear, gross margin in line, stable, cost reduction happening as per the plan. I think this is quite in line, in fact, with what we had indicated, as you said, 9 months ago.
Okay. Just one very quick thing, which also doesn't make very much sense to me, is your currency in your EBITA bridge is still heavily negative, and it's turning positive on your sales. How long is that going to be a point drag to your EBIT? We're now seeing positive currency on your top line, should we expect that to go away in the coming quarters?
Look, I think it's, of course, a very compact, but try to keep it very simple because this is the central point. The weight of the Chinese yuan on our bill of material and cost of goods sold is significantly higher than if you look at the sort of basket or the mix of currencies in our top line is obviously very different, and that's the main element, right? We see the appreciation of the Chinese yuan compared to the euro or the U.S. dollar has been quite significant. We have a hedging mechanism that works and brings the benefits, but you still have an 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.
To your question, the duration between our FX on top line and on EBITA is different mainly due to the effect of the weight of the Chinese yuan on our bill of material. This is fully managed, anticipated, and incorporated on how we drive our gross margin management as we commented on earlier.
Okay. Thank you. Thank you very much for the time. Thank you.
The next question comes from Rajesh Patki from Barclays. Please go ahead.
Yes, good morning. Can I please check if I understood it right? The actions you are taking in the consumer division, are those expected to deliver incremental cost savings off of the ongoing EUR 180 million plan?
Yes, Rajesh, the short answer to this is yes, that is correct. What you saw in the past is that when top line came down, we had to reset our indirect cost, and we did that company-wide. 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 banked to run rate end of the year. 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. I mentioned Prof 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. That is indeed, to your answer, yes, that is on top of the EUR 180 million that we communicated earlier.
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. What I can say at this point, it's not going to be insignificant. But of course, once we have the numbers and the plans in the more advanced stage, then we will share that with you as well. 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 then affects profitability. But it's a bit early to call numbers on that today.
Right. Lastly, can you talk about what you are seeing as the key bottlenecks for executing the harvest part of your strategy?
When it comes to harvest key businesses like lamps, we are managing that very well. Both the brand strength as well as our distribution brand, actually, that business is performing even above our own expectations. When it comes to the divestments, well, I indicated before, we have three assets that we said we have all options open. I can take them one by one. The first one is OEM. In OEM, we said we could either partner, divest or keep. In any case, no regret, we will improve the performance of that business, and that is happening. We saw sequential improvement of profitability. Now, you have to imagine that we work in 50 countries with a Signify country setup, and all those business lines are part of that integrated Signify setup.
If you actually want to divest that business, you first need to carve it in from the bigger Signify corporate infrastructure. That is what we are currently going through. That means that you need to create own legal entities, that you have to run it on its own IT system with its own services, its own functional support, and all that. We are working through that, and that is all but straightforward. While we are doing that, in the course of 2027, we will then proactively engage market and see whether there is better owners for the business. If we do not find that, then we will keep optimizing it ourselves. That is the trajectory for OEM. On Klite, our Chinese manufacturing plant, that is where we already have much more of a standalone setup.
We do not have that same kind of carve-out or carve-in challenge that we have on the OEM side. But there we have to deal with partners and also the limited buyer universe in China for such an asset. I am confident we can conclude at some point, but we need to continue conversations for now. Then on the conventional specialties business, and I want to highlight that it is not all conventional. Our conventional business, you saw it is performing well for us. We are managing that decline very proactively, and profitability is at a very good level. But the conventional business exists of the general lighting business and then the specialties lighting business. We have said all options are open for the specialty lighting business. There you need to think about purifications and other applications beyond lighting. That business has grown last two quarters.
That is a business that is not declining and where market consolidation could make a lot of sense. That we are also preparing as a kind of standalone setup in the course of next year. Then we will also explore market opportunities for that. So that's where we are in terms of our harvest, Rajesh. I hope that answers the questions and gives all of you a bit more insight about where we are at.
Thank you very much. Very clear.
The following question comes from Chase Coughlan from Van Lanschot Kempen. Please go ahead.
Hi, good morning, all, and thank you for taking my questions. I wanted to ask about consumer. Obviously a weaker quarter than at least we expected. I'm curious on the commentary on the destocking and the sort of detachment from underlying trends. Correct me if I'm wrong, but I would have thought that usually Q3 would be a period where a lot of the retailers were actually building up their inventory ahead of usually what is a strong Q4 in terms of seasonality. Is that not really the case today, or can you provide any more sort of color around how long you expect this destocking or these sort of channel problems to continue?
Yeah. Thanks for the question, Chase, and it is spot on. There is a lot going on. First of all, let me put this in perspective. The performance in consumer, outside of connected, so our Hue proposition is actually being good. Good in lamps, I mentioned it before, but also steady growth in luminaires and in India. That is the good part of it. The challenge is on connected, so our Philips Hue proposition in particular. Now, if I look at markets, what we basically saw in the third quarter is that in the U.S., there is still growth in the category. In Europe, we saw a decline in the category. That tells you something around discretionary spend in Europe in consumer markets. The positive side, though, we outperformed in both regions. And Željko mentioned it before, our year-to-date sellout of Philips Hue year-to-date is about mid-single digit growth.
We are still growing in terms of the number of customers buying our Philips Hue product, which is positive. However, you asked about that sell-in, sell-out dynamic. What we saw is that we have seen the channel stocking up significantly in the end of third and particularly the fourth quarter of 2025. And that also meant that we went with very high stock levels into 2026, and we have felt that year-to-date in our sales. What we are doing is we are now trying to manage that volatility in channel stock levels much more proactively. So obviously we want to stock up the channel also in anticipation of all the festive holidays and events to sufficient levels that we can cater for that increase in sellout in the fourth quarter.
But we do not want to end up in a similar situation where we were last year, where you had too high stocks in the channel. So that is basically the dynamic that we are actively managing on a day-by-day basis. While we are doing that, I mentioned that we are taking the action to invest in acquisitions of new households, to bring new products in, to bring that sellout even more up, and also to take actions on the cost side to increase productivity. So it is really those three things, reducing costs and bringing up productivity, acquisition of households, and actively managing stock levels in the channel. That is our consumer story for the quarter.
Okay. That is very well. And maybe one quick follow-up on consumer as well regarding the margin. So I think excluding the refund impact, the margin fell again quite a bit, basically halved. Just looking forward, if we see a larger volume recovery, do you still expect that business to, let us say, recover margins back to what we were doing historically? Or is there anything structural that has maybe made this business a bit lower margin going forward?
No, we have no reason to believe it's lower margin. Actually, quite the opposite. As we grow it, there's operating leverage, and we see margins returning to that level, if not improving.
Okay, perfect. That was Željko. Thank you very much.
The next question comes from Wim Gille from ABN AMRO – ODDO BHF. Please go ahead.
Yes. A very good morning. This is Wim from ABN AMRO. I have two questions. First on Prof Europe. During the prepared remarks, you said that it didn't deliver to the expectations you had in the last two years. Can you give us a bit of a flavor of how much market share did you lose over the last two years? Also, in which countries you are struggling most in Europe in terms of market share performance, and how long does it take for you to basically claw back that market share and repair the positioning there? The second question would be on the OEM business. Also in the prepared remarks, you mentioned that the OEM did not see any meaningful impact from the U.S. tariffs. Looking at the nature of the business, it sounds a bit counterintuitive to me.
Is this more a reflection of internal transfer price policies, or is this a realization that the OEM business is not active in the U.S.? Thanks.
Thanks, Wim. Željko , maybe I can leave the OEM question to you later, but let me start off with your question on Prof Europe. You make the implicit assumption that we've lost the market share, but let me unpeel the onion a little bit here. If you look at our Prof Europe business, about 30%-35% is stock and flow, so it's traditional distribution and trade. There is the projects. Within projects, we distinguish public projects, so this is street lighting, outdoor applications with indoor manufacturing buildings and so on. If I look at all those three segments, we have seen quite a bit of competitive pricing pressure over many quarters. Therefore, just the peak time skew, we've seen a lot of peak down in stock and flow. Yeah.
I think it's fair to say we've also lost some market share there, particularly on the lower end of the product portfolio. It's actually not where we want to play strategically going forward. We want to play in more the value-add higher end of the portfolio in stock and flow. So that has yielded, of course, some lower sales in stock and flow over many quarters. The price pressure in stock and flow is now flattening. We see it now very close to the zero point. So I'm confident that also going forward, we can work with our distributor partners around upping the competitiveness of our offer across all the stock and flow, and that should then yield into a flat and yet growing again in stock and flow.
On the project side, Europe unfortunately has just been very weak market when it comes to government spending on street lighting. So where we saw huge investments in the past in France, but also in places like Belgium and the Netherlands, we have not seen that in recent quarters. Then, of course, year-on-year comparison, you see that coming down. Is there no market out there? Yes, there is still a market out there. In a country like France, only 60% of the streetlights are on LED, and the same goes for northwest European countries like the Netherlands, let alone the Mediterranean. There is still a lot to go after, yet we currently don't see the public investment into LED.
We are actively engaging with municipalities and governments, but obviously, the first step into a LEDification is a lot easier to make than getting the whole system onto LED. What we also see is for LED replacement. Some of these LEDs have been installed now 8, 10 years ago, and they need replacement. There is clearly a market out there for outdoor and public lighting, yet it has been very weak over recent quarters. Hence, we saw decline. I don't think we've lost market share in that space. The market has just been weak. On the indoor side, it's more competitive space. Their profitability is not to our liking, so we are clearly addressing there around adjusting our cost base. But when it comes to sales in indoor, our market share has been more or less flat.
Up a little bit in one quarter, down a little bit in the other. That is, of course, very project dependent. I would say all in all, Europe, price pressure, stock and flow, lost some share on projects, market has been weak, and all that together has been quarter on quarter decline. What are we doing about it? We are much more right-sizing our organization, take out a significant amount of cost, but more important, bringing back that commercial and partnership power into the key markets. On that, your question then was around to give me a bit of a geography perspective. Actually, Mediterranean is pretty good. Particularly Spain is working really well for us at the moment, where we see a lot more challenges in France. Northwest Europe is somewhere in between. That is the dynamic in terms of geographies.
Thank you.
Željko?
Maybe briefly on the question on OEM. I think the effect or the non-material effect is logical considering that the sourcing of our OEM sales in the U.S. was at the time when the tariffs were implemented, was insulated. Most parts coming from countries in North America. I think the exposure at the time was limited for OEM, so it's quite logical and consistent that the effect of the refunds is in line with that, looking at Q2.
Thank you.
The next question comes from Marc Hesselink from ING. Please go ahead. Your line is now open.
Yes, thank you. My first question is on, you mentioned in the press release that you had some extra investments in your sales incentives and your marketing. If you want to link that to the comparable sales growth, those kind of investments, is it they take a couple of quarters to see the full effects? Or is it a dynamic that if you hadn't done that, then your CSG might have been, or your volumes might have been even a bit lower than what they are today? Is it a bit of a time there when you see the effects on these extra investments?
Yeah, Marc, so you mentioned two things, right? There was the costs related to the incentives, and then there is the marketing investment. Maybe I leave it to you to comment on the incentives, I'll comment on—
Yeah, I think, again, because on the investment it's a bit different, but on the annual incentive, and as we said, which has an unusual effect on the comparability, I think the way it works, it's basically your annual incentive, they are accrued throughout the year, so we reassess every quarter the provisions based on the company's performance and what are the expected payouts. This adjustment can result in either additional accruals or releases. I think the dynamic of that, you can't really relate it to the ROI cycle of a typical investment. Again, as I said, this is just a composition or a piece of our compensation structure. It's less than 5% of the total indirect cost, but the accrual movement in any given quarter can create a bit of volatility. I think that has to be put aside.
Then when you look at the other real investment, a few things that are shown in the additional bridge we've added. I think you have in our indirect costs, the bit of variable components, right? Agent commissions in the U.S. or outbound transportation, that are a direct relation to the volume of sales. So there you would say you see really like a very short cycle kind of investment. It comes with the execution of our sales. Then you have the A&P, and then on A&P, it's a bit more, we have there a very defined ROI model, if you like, to really look at the cycle time of realization of payback of those investments, in particular linked to our consumer business.
Yes. Consumers are much shorter cycle.
Absolutely.
So there, with the TikTok and the online campaigns, you have immediate payback. In some of the investments we do on the Prof side, it has a longer lag effect. Of course, incentives for sales always work, so we have our sales clearly on incentives. And for the organization as a whole, of course, we have a small part is variable pay, and that is on a few key financial metrics to make sure that the interests of the company and the interests of our shareholders are fully aligned.
Okay, that's clear. Thanks. My second question is on the comment of the softening of the U.S. Prof market. I guess that's the larger country where you have a bit more visibility also maybe going into next year. Wondering there, do you have any visibility on if it's very short term or is it maybe a bit longer?
Yeah, there's again a P and a Q answer to this question. On the pricing side in the U.S., I highlighted that normally where we see if bill of material or cost of goods sold go up, then the market typically brings price up accordingly, and that protects gross margin across the sector. We have not seen that same discipline in the U.S. market in the recent quarters. I don't know for sure, but one of the reasons could be that, of course, quite a few players now bank refunds and therefore have different margin profiles than they would normally in a normal situation would have. That might take a bit of time up to the end of this year to normalize if this refund effect disappears, and we need to go back to proactive margin management through pricing.
That's hard to tell, but that is one of the reasons why we think there might not be the pricing discipline in the U.S. that we normally see. Then there is the volume side of things. Clearly there are sectors that are still growing very rapidly. No surprise, data centers. There's also infrastructure projects, although that's a bit slower. Hospitals, that's still strong. The residential sector, however, has been weak, and a large part of our Cooper business, which is one of our positions in the U.S., that's a stock and flow business that also serves that residential and also office segment, and that is where we see weakness, also in the order intakes. Is that going to last for long? Well, we'll see. But I want to be a bit cautious there in terms of the fourth quarter.
Okay, very clear. Thanks.
Ladies and gentlemen, we only have time for one more question, and it comes from Emanuele Sartori from Kepler Cheuvreux. Please go ahead, your line is open.
Hi. Good morning, all. Thanks for the time to squeeze me in. I just have one. I appreciate you touched on the Q4 organic growth. Now expected to be in line or slightly below Q3, and obviously the U.S. project demand also softening. I would be interested if you could share, where do you see the greatest opportunity to protect the margins in Q4? Is it primarily professional or the consumer side with the cost savings measures mentioned? If I can add on this, are these initiatives you mentioned going to add some restructuring cash outflow? I am thinking compared to the $50 million increase compared to last year, or is it more a 2027 question? Thank you.
Okay, well, maybe we make this a joint answer, Željko. I have only warned a little bit about not all top line drops is a big concern. We are very much transforming the company, resetting it. As part of the turnaround, we cut stuff that is not profitable. So there is some self-help there as well that we really focus on where we see the growth, but profitable growth, right? That is performance area by performance area, and of course, we try to invest and grow the parts where we have operating leverage and where we see good future and good profitability. So you will see, and we will highlight that in some of our performance areas, you see some top line decline, but that is by choice. But on the market weakness, the maintaining profitability is true across the board. So we manage that very actively.
Where you can move much faster is of course in the rest of world than in U.S. In Europe, this cost takeout always takes more time because it requires consultation and long change of processes. But we feel confident that despite some of the dynamics that we discussed in this call, that we can keep that margin resilience. It might be a bit up and down quarter to quarter, but I am not afraid of that.
Yeah. It is really on your question how the levers to protect profitability in that context. Number 1, sustaining gross margin, resilience, and discipline. We talked about it earlier with all the different levers we manage, and we will continue to do that. Second, continuing to execute on our cost reduction program. I would say linked to that, continuing to drive the implementation of our execution playbooks. It really means that we are continuing to drive the structural sequential strengthening of our profitability. We do that still in the midst of headwinds from a volume perspective with a bit more support from price. We continue to do that. Of course, Q4 is our highest season, let us say, in terms of sales, so we get also, of course, an element of operating leverage supporting sequential improvement of the profitability.
I think it is continuing on the path that we have engaged to sequentially strengthen, regardless of the dynamics that we see on the top line and keeping the resilience. On your question on cash out, we are in line with what we had indicated. The effect of the restructuring cash out in 2026 that we indicated will be roughly $40 million-$50 million higher than last year. We are totally in line with that. Totally in line in the execution of the plan, in line on the cash out and the, let us say, the payback of the restructuring program is very much in line with what we expected in around one year as we have typically seen.
Very clear. Thank you.
Okay, I think this ends the call. Thank you all. We hand it back to you, Thelke.
Yes. Thank you very much for joining the earnings call today. If you have any additional questions, please reach out to us, the investor relations team. Thank you and enjoy the rest of your day.