PHILIPS : First Quarter Results 2015

First-quarter highlights

• Comparable sales increase was driven by Western Europe and growth geographies

• EBITA amounted to EUR 230 million, or 4.3% of sales, impacted by increased investments, compared to EUR 253 million, or 5.4% of sales, in Q1 2014

• EBITA, excluding restructuring and acquisition-related charges and other items, amounted to EUR 327 million, or 6.1% of sales, compared to EUR 304 million, or 6.5% of sales, in Q1 2014

• Net income amounted to EUR 100 million, compared to EUR 137 million in Q1 2014

• Free cash outflow amounted to EUR 443 million, compared to an outflow of EUR 431 million in Q1 2014

"We are encouraged by the resumption of sales growth in the first quarter of 2015, which was driven by continued strong performance in Consumer Lifestyle and positive comparable sales growth in Healthcare. We saw positive order-intake growth, despite the continued challenging Healthcare market environment.

In line with our strategy to capture a larger portion of the HealthTech opportunities across the health continuum, we stepped up our investments in, among others, healthcare informatics, personal health solutions and our quality systems. We have also substantially improved our position in the growing image-guided therapy market through the acquisition of Volcano. Our investments, coupled with negative currency effects, are the main reasons for the low profitability in Healthcare in the first quarter. We also continued to make good progress in ramping up production and shipments from our Cleveland manufacturing facility, and are on track to deliver on our profit improvement plan for our diagnostic imaging business for the year.

We saw continued strong sales growth and profitability improvement in our LED business, while facing a faster decline in the conventional lighting business and underperformance in our Professional Lighting business in North America. We continue to proactively rationalize our conventional lighting operations and are confident in our conventional lighting business' ability to sustain its attractive cash and profitability profile. We are pleased with the terms of the agreement to sell a majority stake in the combined LED components and Automotive lighting business to a consortium led by GO Scale Capital and expect to close this deal in the third quarter of 2015, subject to regulatory approvals.

For 2015, we expect modest comparable sales growth and we continue to be focused on driving operational performance improvements to increase the EBITA margin. Our 2016 target trajectory as announced in January remains unchanged."

Accelerate! and Separation Update

"Our Accelerate! program continues to drive improvements across the organization, resulting in enhanced customer centricity and service levels, faster time-to-market for our innovations, strengthened quality and compliance systems, and better cost productivity.

In Healthcare, we were able to reduce the Ingenia MRI installation time by 60% and installation cost by 30%, by redesigning and harmonizing the end-to-end processes across the equipment installation value chain. In Consumer Lifestyle, the deployment of Lean allowed the Male Grooming team to reduce the lead-time for development and launch of a new range of shavers by 30%. The team was able to simplify the end-to-end processes and re-use existing technology platforms. In Lighting, thanks to a faster time-to-market, a new range of basic LED lamps with a price point below USD 5.00 was successfully launched for the North American market within only four months.

We are making good progress in setting up two stand-alone, fit-for-purpose companies. We are also working on defining the optimal infrastructure and right perimeter for each business, including tax and legal structures, real estate footprint and IT systems. We have simplified the operating model and strengthened our leadership team, most recently with Rob Cascella joining us to oversee our cluster of imaging businesses. Rob was previously CEO of Hologic and brings a wealth of healthcare experience to Philips."

The transition of the Lighting business into a separate legal structure will take at least until the end of 2015, in order to be ready for the separation, which is currently intended to be effectuated through an IPO in the first half of 2016. At the same time, alternatives will continue to be carefully reviewed. Further updates will be provided over the course of the year. The company continues to estimate that separation costs will be in the range of EUR 300-400 million in 2015.

Overhead cost savings amounted to EUR 19 million in the first quarter. The Design for Excellence (DfX) program generated EUR 47 million of incremental savings in procurement in the quarter. Our End2End productivity program achieved EUR 37 million in productivity improvements.

As of March 31, 2015, Philips had completed 50% of the EUR 1.5 billion share buy-back program.

Q1 2015 Financial and Operational Overview

Healthcare

Healthcare comparable sales grew 1% year-over-year. Excluding restructuring and acquisition-related charges and other items, EBITA margin was 5.4%, down from 8.8% year-on-year, mainly driven by investments and remediation costs. Currency-comparable order intake showed low-single-digit growth, with positive performance in Europe, North America and other growth geographies partially offset by China.

"We were pleased that order intake and sales returned to growth, despite a challenging healthcare environment. Performance at recently acquired Volcano was on track in the first quarter. Our ability to engage with customers on end-to-end solutions across the health continuum is increasingly proving to be a defining competitive advantage. We closed additional multi-year contracts, including a sevenyear agreement with Providence Health & Services in the US and a multi-year agreement with the Kenyan Ministry of Health. We also signed a multi-year collaboration agreement with Janssen Pharmaceutica to develop a new handheld blood test."

Consumer Lifestyle

Consumer Lifestyle comparable sales increased by 10%. EBITA margin, excluding restructuring and acquisition-related charges and other items, was 11.4% of sales, compared to 10.6% of sales in Q1 2014. The increase was largely due to a combination of operational leverage and product mix, which was partially offset by negative currency effects.

"Building on our strategy to deliver locally relevant innovations through strong marketing activation and increased share of online sales, our Consumer Lifestyle business continued to deliver great results and market share gains, with a particularly strong performance from our Health & Wellness portfolio.

For example, Philips is uniquely positioned to develop the Oral Health Care market. We continue to introduce exciting innovations, including the Philips Sonicare for Kids Connected toothbrush, the Sonicare AirFloss Ultra and the Adaptive Clean brush head. By making our products connected, there is future potential for data generation and integration into the cloud-based HealthSuite Digital Platform to ultimately provide total health and well-being solutions."

Lighting

Lighting (excluding the combined businesses of Lumileds and Automotive) comparable sales declined 3% year-on-year. On a nominal basis, sales increased by 9%, mainly due to positive currency effects. LED-lighting sales grew 25%, offset by a decline of 16% in overall conventional lighting sales. LED sales now represent 39% of total Lighting sales, compared to 30% in Q1 2014. EBITA margin, excluding restructuring and acquisition-related charges and other items, amounted to 8.4%, compared to 8.0% in Q1 2014. The increase was mainly driven by improved operational performance of LED and Professional Lighting Solutions, partly offset by the decline in conventional.

"We are pleased with the continued increase in LED margins, while having to manage through a faster-than-expected decline in conventional lighting and unsatisfactory overall performance in China and North America, which we are actively addressing. We are expanding our portfolio of connected lighting products for the home with innovations such as Philips Hue Phoenix, the first luminaire that provides dimmable white light. We also made further inroads with our CityTouch lighting systems, with Los Angeles, for example, adopting an advanced Philips management system that uses mobile and cloud-based technologies to control its street lighting. Philips' CityTouch connected lighting management system is now used in more than 250 cities globally."

Innovation, Group & Services

Sales increased to EUR 169 million in the first quarter of 2015 from EUR 138 million in the first quarter of 2014, mainly due to higher onetime licensing revenue in IP Royalties. EBITA was a net cost of EUR 89 million, compared to a net cost of EUR 103 million in the first quarter of 2014.

"To further strengthen the digital pathology business within our Healthcare Incubator, we entered into a joint development agreement with Mount Sinai Health System in New York to create a state-of-the-art digital pathology database from hundreds of thousands of tissue samples and to develop innovative algorithms to ultimately enable more personalized patient care.

In the first quarter, we completed the de-risking of the Dutch pension plan initiated in 2014, through a final payment of EUR 171 million. Consequently, we will apply defined-contribution pension accounting for the Dutch plan from the second quarter onwards. We intend to pursue further substantial pension de-risking opportunities in other geographies in the coming quarters and will report on our progress later in the year."

Quarterly Report

• Q1 2015 - Quarterly Report

Presentation

• Q1 2015 - Quarterly Results Presentation

Conference call and audio webcast

A conference call with Frans van Houten, CEO, and Ron Wirahadiraksa, CFO, to discuss the results, will start at 10:00AM CET. A live audio webcast of the conference call will be available through the link below.

More information about Frans van Houten and Ron Wirahadiraksa

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