Unlocking Philips full potential Frans van Houten, CEO Royal Philips JP Morgan Cazenove Pan-European Capital Goods CEO Conference, Surrey, UK June 12, 2014
Important information Forward-looking statements This document and the related oral presentation, including responses to questions following the presentation, contain certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items. Examples of forwardlooking statements include statements made about our strategy, estimates of sales growth, future EBITA and future developments in our organic business. By their nature, these statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these statements. These factors include, but are not limited to, domestic and global economic and business conditions, developments within the euro zone, the successful implementation of our strategy and our ability to realize the benefits of this strategy, our ability to develop and market new products, changes in legislation, legal claims, changes in exchange and interest rates, changes in tax rates, pension costs and actuarial assumptions, raw materials and employee costs, our ability to identify and complete successful acquisitions and to integrate those acquisitions into our business, our ability to successfully exit certain businesses or restructure our operations, the rate of technological changes, political, economic and other developments in countries where Philips operates, industry consolidation and competition. As a result, Philips actual future results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. For a discussion of factors that could cause future results to differ from such forward-looking statements, see the Risk management chapter included in our Annual Report 2013. Third-party market share data Statements regarding market share, including those regarding Philips competitive position, contained in this document are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where information is not yet available to Philips, those statements may also be based on estimates and projections prepared by outside sources or management. Rankings are based on sales unless otherwise stated. Use of non-gaap Information In presenting and discussing the Philips Group financial position, operating results and cash flows, management uses certain non-gaap financial measures. These non- GAAP financial measures should not be viewed in isolation as alternatives to the equivalent IFRS measures and should be used in conjunction with the most directly comparable IFRS measures. A reconciliation of such measures to the most directly comparable IFRS measures is contained in our Annual Report 2013. Further information on non-gaap measures can be found in our Annual Report 2013. Use of fair-value measurements In presenting the Philips Group s financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that are deemed to be reliable. Readers are cautioned that these values are subject to changes over time and are only valid at the balance sheet date. When quoted prices or observable market data are not readily available, fair values are estimated using appropriate valuation models and unobservable inputs. Such fair value estimates require management to make significant assumptions with respect to future developments, which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in our Annual Report 2013. Independent valuations may have been obtained to support management s determination of fair values. All amounts in millions of euro s unless otherwise stated; data included are unaudited. Financial reporting is in accordance with the accounting policies as stated in the Annual Report 2013, unless otherwise stated. 2
Agenda 1. We have built a strong foundation to drive profitable growth 2. The Philips Business System is our approach to value creation 3. Our self help is a strong driver of our financial performance 4. Key takeaways 3
A strong diversified technology group with a vision to make the world healthier and more sustainable 40 businesses in 3 sectors 1 Geographies 1 Healthcare Consumer Lifestyle Lighting Western Europe North America Other Mature Geographies Growth Geographies 2 43% 20% 37% 25% 30% 9% 36% Since 1891 23.3 billion sales in 2013, 70% B2B 1/4 of revenues from recurring revenue streams 50% of the portfolio has global leadership positions Adjusted EBITA of 2.5 billion in 2013 1.7 billion R&D spend in 2013 112,000 employees in over 100 countries 4 1 Splits based on sales full year 2013 2 Growth geographies are all geographies excluding USA, Canada, Western Europe, Australia, New Zealand, South Korea, Japan and Israel
Lighting Consumer Lifestyle Healthcare Our business domains benefit from mega trends Our Business Domains Mega Trends Imaging systems for diagnostics and therapy Patient care for hospital and home Clinical Informatics & consulting services Personal health & well-being appliances and services Growing and aging population with more chronic diseases Growing demand for integral value-based healthcare solutions Growth geographies 1 with growing middle class Rising health & well-being consciousness Energy efficient Light sources Lighting applications, systems and services The world needs more light and energy efficient lighting Digitalization driving demand for integrated lighting solutions 5 1 Growth geographies are all geographies excluding USA, Canada, Western Europe, Australia, New Zealand, South Korea, Japan and Israel
Redefining the delivery of care as a solutions partner Partnering with the Stockholm County and Karolinska University Hospital to meet future demands of healthcare Karolinska will develop new care pathways by integrating patient care, clinical research and education Philips will provide access to state-of-the-art imaging systems equipment and services for 14 years for 600-bed new hospital site to be opened in late 2016, at predictable costs Managed equipment services include the procurement, system integration and maintenance, including those of other vendors, to ensure optimal delivery of care Strong focus on innovation, education and collaboration, including establishment of a research and innovation hub 6
Becoming a lighting systems and solutions provider City of Barcelona Stadium Allianz Arena FC Bayern Munich Green Sense Farms (GSF) indoor farming systems Joint effort to increase efficiency and quality of public-lighting installations Combined implementation of LED lighting and control systems including Philips LumiMotion and CityTouch More than 60% energy savings Aims to make Barcelona a frontrunner in the field of Smart Cities Largest arena façade for animated LED light effects in Europe Every single point of light controlled in real-time; palette expanded from 3 to 16 million colors 380.000 LEDs used in the system: 60% more energy efficient, saving 362 tons of CO 2 per year Tailored LED growing lights and vertical hydroponic technology Innovative farming model allows GSF to harvest 20-25 times a year 30-60% energy efficiency compared to fluorescent lighting Eliminates the need for harmful pesticides and fertilizers 7
Agenda 1. We have built a strong foundation to drive profitable growth 2. The Philips Business System is our approach to value creation 3. Our self help is a strong driver of our financial performance 4. Key takeaways 8
The Philips Business System, our repeatable system to unlock and deliver value Philips Group Strategy Manage our portfolio with granular value creation plans and resource allocation Philips Capabilities, Assets and Positions Leverage our unique strengths and assets to drive global scale and local relevance across our portfolio Philips Excellence Be a learning organization that delivers with speed and excellence to our customers, applying a growth and performance culture Philips Path-to-Value Create value to our customers and shareholders in a repeatable manner 9
The Accelerate! transformation program started in 2011 will unlock the full potential of Philips Initiate new growth engines Invest in adjacencies to core Seed emerging business areas Expand global leadership positions Invest to strengthen core Resource allocation to right businesses & geographies Transform to address underperformance ACCELERATE! Turnaround or exit underperforming businesses Productivity & margin improvements Rebuild culture, processes, systems & capabilities implement the Philips Business System 2011 2016 10
Next to fixing our operational excellence, we are also embracing digital & sustainability Embracing Digital Quickly becoming a digital company 13% online sales in Consumer Lifestyle in 2013, +32% compared to 2012 Leveraging big data, creating Healthcare Informatics Solutions & Services business Shaping the future of Digital lighting: new functionalities and services based on the transmission and analysis of data Embracing Sustainability 51% of sales from green products Curbing the Carbon Footprint: decreased CO2 emissions by ~14% since 2009 Transitioning to Circular Economy - Business model innovation: light as a service - Material recovery: refurbishing used medical equipment - Move to renewable energy for lighting 11
Our Path-to-Value is clearly mapped out Initiate new growth engines Invest in adjacencies to core Seed emerging business areas Expand global leadership positions Invest to strengthen core Resource allocation to right businesses & geographies Transform to address underperformance Productivity & margin improvements Turnaround or exit underperforming businesses Rebuild culture, processes, systems & capabilities implement the Philips Business System 2011 2016 12
Agenda 1. We have built a strong foundation to drive profitable growth 2. The Philips Business System is our approach to value creation 3. Our self help is a strong driver of our financial performance 4. Key takeaways 13
Growth Growth Value Growth Accelerate! is changing Philips top to bottom 2011 Performance Box ROIC Laying the foundation to improve performance Executive Committee Growth investments Philips Business System BMC 1 performance management Share buy back TV Joint Venture Improving Lighting performance 2012 Performance Box Good sales growth Improved operating margins Increased cost reduction plan Inventory improvement Share buy back Lumileds and Consumer Luminaires returned to profitability Culture change ROIC Accelerating performance improvement 2013.. Performance Box ROIC Transform Philips through Accelerate! Accelerate! Healthcare Restoring Lighting profitability, leading the LED transformation Closing the Audio, Video, Multimedia and Accessories deal EUR 1.1 billion cost reduction program Cost savings on procurement Value delivery from past acquisitions Next value creation steps beyond 2013 Performance culture 14 1 BMC = Business Market Combination
Growth Growth Value Growth Accelerate! is changing Philips top to bottom 2011 Performance Box 2012 Performance 2011 2013 Accelerating performance Box improvement ROIC ROIC Executive Committee and leadership strengthened Accelerating performance Investments in Laying the foundation to improvement growth stepped-up improve performance BMC 1 performance management implemented Good sales growth EUR 1.1 billion cost reduction program on track 2013.. Performance Box ROIC Transform Philips through Accelerate! Accelerate! Healthcare Restoring Lighting profitability, leading the Executive Committee Improved operating margins LED transformation Growth investments Operating margins Increased & Inventory cost reduction management plan improved Closing the Audio, Video, Multimedia and Accessories deal Philips Business System Television and Audio, Inventory Video, improvement Multimedia & Accessories EUR addressed 1.1 billion cost reduction program BMC 1 performance management Share EUR 2 billion Share buy back completed Cost savings on procurement Share buy back Lumileds and Consumer Luminaires Culture change returned gaining to strong profitability traction Value delivery from past acquisitions TV Joint Venture Philips Business Culture System change being implemented Next value creation steps beyond 2013 Improving Lighting performance Performance culture 15 1 BMC = Business Market Combination
We have made steady progress since 2011, but there is much more to come Adjusted EBITA% 1 Rolling LTM Group Healthcare 7.0 7.1 7.5 8.4 8.8 9.3 10.1 10.7 10.6 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 12.4 12.6 12.8 13.6 13.9 14.2 14.7 14.9 14.6 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 Consumer Lifestyle Lighting 5.5 6.2 7.0 8.2 8.8 9.4 10.1 10.8 10.9 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 4.8 4.8 5.0 6.2 7.1 7.7 8.7 9.3 9.5 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 16 1 Adjusted EBITA is EBITA corrected for incidental charges Note Financial in 2012 revised for discontinued operations, the adoption of IAS19R and for restatements included in the Annual Report 2012 (please refer to the Annual Report section 12.10 Significant Accounting Policies )
Accelerate! delivers growth and profitability improvements supporting 2016 targets and beyond Categories Productivity Investments in productivity Investments in growth Contingency Measures Overhead cost reduction program increased from EUR 1.1 billion to EUR 1.5 billion by 2015 EUR 1 billion through Design for Excellence (DfX) between 2014-2016 contributing to gross margin expansion End2End productivity gains to be achieved by 2016 Additional Productivity Improvements Incremental one-time restructuring costs, investments to upgrade IT systems, and re-engineer end to end processes between 2014-2016 Incremental investments in new (organic) growth in adjacencies with returns after 2016 Contingencies to cater for moderate fluctuations in market growth and price erosion compared to our assumptions Net Improvement in 2016 Reported EBITA Margin Impact 2016 1 >100 bps 100-200 bps >100 bps 300-400 bps - 50 bps - 100 bps - 50 bps 100-200 bps 17 1 Approximate margin impact in 2016 compared to 2013 baseline
The 2014-2016 Path-to-Value in more detail Sales Growth Comparable CAGR 1 2014 to 2016 4 6% Group Reported 2 EBITA margin 11-12% Financial targets 2016 Healthcare 16-17% Consumer Lifestyle 11-13% Lighting 9-11% Group ROIC 3 > 14% Capital allocation Longer term direction Invest in high ROIC organic growth opportunities as well as selected value creating bolt-on acquisitions Maintain our A3 credit rating New share buy back program: EUR 1.5 billion over next 2-3 years Sustained dividend growth (40-50% of continuing net income) Further improvement to sales CAGR and EBITA targets from growth and productivity initiatives Group ROIC of 15-20% 3 18 1 Assuming real GDP growth of 3-4% 2 Including restructuring and acquisition-related charges 3 Excluding M&A impact
Outlook 2014 Q1 performance reflected headwinds from currencies, the Cleveland suspension and softness in selected markets These headwinds continue to weigh on performance in Q2 As also indicated, we expect a stronger H2 driven by resumption of Cleveland shipments, easier currency compare, and further Accelerate! progress While 2014 overall will be a challenging year, we remain very confident about reaching our 2016 mid-term targets 19
Agenda 1. We have built a strong foundation to drive profitable growth 2. The Philips Business System is our approach to value creation 3. Our self help is a strong driver of our financial performance 4. Key takeaways 20
Key takeaways We made good progress on performance improvements in 2013 Accelerate! continues to unlock significant value, with the 2016 targets as the next step on our path to value, and more to come thereafter Our cultural change is making us more customer centric, agile and entrepreneurial, while embedding integrity in everything we do While 2014 is a challenging year, we are making good progress towards reaching our 2016 targets Tenacity and frugality remain key 21