Welcome to the Royal Philips Second Quarter 2016 Results Conference Call on Monday, the 25th of July 2016. During the introduction hosted by Mr. Frans van Houten, CEO, and Mr. Abhijit Bhattacharya, CFO, all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions. Please note that this call will be recorded and is available by webcast on the website of Royal Philips. I'll now hand the conference over to Mr. Robin Jansen, Head of Investor Relations. Please go ahead, sir.

Thank you and good morning, ladies and gentlemen. Welcome to Philips' second quarter fiscal year 2016 results conference call. I'm here with Frans van Houten, CEO, and Abhijit Bhattacharya, CFO. Pim Preesman, who, as we announced earlier this morning, will take over the responsibilities for IR from September 1 onwards, is also joining us today. In a moment, Frans will take you through our strategic and financial highlights for the period. Abhijit will then provide more details on financial performance. After that, we will be happy to take your questions. Our press release and the related information slide deck were published at 7:00 AM CET this morning. Both documents are now available for download from our Investor Relations website. A full transcript of this conference call will be made available by tomorrow on our Investor Relations website. Before I turn over the call to Frans, I would like to remind you of three things. First, Philips Lighting was listed and started trading on Euronext in Amsterdam under the symbol LIGHT on May 27. Philips initially retains a 71.2% stake and, therefore, continues to consolidate Philips Lighting's results. We encourage, if you haven't already, to review Philips Lighting second quarter and semi-annual earning materials, which were published on Friday, July 22. During this call, we will therefore focus our commentary as much as possible on the performance of our HealthTech businesses. Second: following the decision in 2014 to combine our Lumileds and Automotive Lighting businesses into a stand-alone company and to explore strategic options to attract capital from third-party investors, the profit and loss of these combined businesses is reported under discontinued operations, and the net assets for that business in the balance sheet on the line assets held for sale. The cash flow of the combined Lumileds/Automotive business is reported…

Thank you, sir. The first question comes from UBS. Please state your name and withdraw your question. Thank you.

(30:06-30:12) outlook statement, please, and the qualifying commentary there. And why did you not lower the guidance based off what you're seeing politically or is it fair to say that if it wasn't for the macroeconomic uncertainty that you would have upgraded guidance today? And can you put any quantification on how far ahead of your expectations you are in that case? Thanks. François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Hi. Ian. This is Frans. I'm afraid the first half of your question dropped away a bit. Would you mind repeating it quickly, please?

Yeah. Sure. So, in summary, just on your guidance, why did you not lower the guidance? Is it fair to say that if not for the macroeconomic uncertainty, you would've raised your guidance today, given what you've been seeing in the margins? François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Interesting. Let's say, we gave guidance in the beginning of the year or rather we called it the outlook. We said we would end the year around 11% adjusted EBITA and have modest growth. We maintain that outlook. I think it's fair to say that many analysts were doubtful about that outlook. I can tell you that we believe that in the first half of the year, we feel that we are on track to deliver on that outlook. It is true that we still have a lot to do in the second half of the year. We always said we are back-end loaded when it comes to improvement. We are confident that we can deliver that, but when we look outside to the world, a lot of stuff is happening and that concerns us. We need to manage those risks as best we can. Today, those risks are not having a direct negative effect at this time, so we continue to be a case of self-help mostly. We are happy with the 5% growth in our HealthTech portfolio in the second quarter. We see sizable profit expansion in the second quarter that leads us to stay committed to reaching this around 11% outlook.

Okay. So, it's fair to say that the risk of that guidance is now to the downside. François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Yeah. Look, we still have a lot to do. We are confident in our own abilities, and let's first work to achieve our guidance before we even dream about a different guidance.

Okay. Fine. But given the uncertainty that you're seeing today, the risk is to the downside with your guidance. Would you agree with that statement? François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Given the fact that that is external risk, yes, you're right. External risk has increased.

Okay. That's my one question. I'll jump back in the queue. Thank you. François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Okay. Thanks

Our next question comes from Andreas Willi from JPMorgan. Please go ahead. Your line is open.

Yeah. Good morning, everybody. My question is also related to the guidance and the implied second half margin improvement year-on-year. So, if we use the 11%, you would need about 250 bps improvement in H2. You did 80 bps in H1. The Cleveland guidance gives you another 70 bps in the second half. So the 100 bps gap is this a specific division you see that weighted to in terms of your plan if you get to 11% or is this a more broad-based improvement that you see coming to support the 11%? Abhijit Bhattacharya - Chief Financial Officer, Executive Vice President & Director: Hi, Andreas. This is Abhijit. You're right. Cleveland is one factor, but also, if you look at the phasing of our cost savings, including our DfX savings, that is also second half loaded. Like Frans mentioned, we expect stronger growth and, with that, operational leverage in the second half to also drive improvement. And last but not the least, in terms of our royalty income, we have a higher weightage in the second half compared to the first half and also an improvement year-on-year in the second half. So, these are a few things that hopefully will get us across the line and closer to the around 11% that we've talked about.

And the follow-up question on Lumileds/Auto, are you still committed to agreeing a transaction in the second half of this year? You didn't specifically mention that in your speech earlier. And on the Automotive side, given how good the peer results are, I'm still a bit surprised that doesn't offset some of the LED weakness there. Are you losing market share on the Auto side? François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Yeah, hi, Andreas. We remain absolutely committed to trying to do a deal on Lumileds/Automotive in the second half of the year. We are in dialog with various parties. We are also optimistic about the results development of Lumileds, having visibility on the design-ins of the various components with customers. And so we believe also that the dip in performance is largely behind us.

Thank you very much. François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: You're welcome.

Our next question comes from Max Yates from Credit Suisse. Please go ahead. Your line is open. Max R. Yates - Credit Suisse Securities (Europe) Ltd.: Hi. Thank you. Just my first question would be on healthcare orders and specifically in North America. What is it that you're seeing that gives you a lot of confidence in the second half? Is it that signing a couple of orders slipped into the next quarter? Is it just broader conversations with customers? If you could give us a little bit more of a feeling as to why you are confident in the second half picking up and, particularly in North America, where you said it was a timing issue. François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Yeah. We did indeed see a couple of orders slip from Q2 to Q3 that all together had a significant impact on orders. Which, frankly speaking, we had strong order intake in 2015, then first half 2016 was a bit soft and therefore a bit disappointing. But we know, of course, all the orders that we are working on, some slipped into Q3. And we talk about good order intake expectations for the second half year and that includes North America. Max R. Yates - Credit Suisse Securities (Europe) Ltd.: Okay. Just my second question would be on the legacy items. And when I look at the first half impacts from those, it's around minus €50 million on an EBITA. And I'd just like to try and understand how you think about those legacy item costs running into the second half of this year. Is a sort of minus €25 million per quarter run rate what we should expect or will those likely come down in the second half of the year? Abhijit Bhattacharya - Chief Financial Officer, Executive Vice President & Director: Yeah, Max, on a run rate basis, you will see that coming down. So it would probably come down to roughly half of that in the coming two quarters. Max R. Yates - Credit Suisse Securities (Europe) Ltd.: Okay. Half of that per quarter or half of that combined for the second... Abhijit Bhattacharya - Chief Financial Officer, Executive Vice President & Director: Yeah. Yeah, half of that per quarter. So on an adjusted basis, it will be between €12 million and €13 million per quarter in the next two quarters. Max R. Yates - Credit Suisse Securities (Europe) Ltd.: Okay. That's very helpful. Thank you very much.

We will now take our next question from Ben Uglow from Morgan Stanley. Please go ahead. Your line is open. Ben E. Uglow - Morgan Stanley & Co. International Plc: Hello. Yes. Good morning, everyone. A couple of questions, I guess, relating again to the issue, the North American orders. Frans, can you tell us – the double-digit decline in North American orders, is the Diagnosis & Treatment division in line with that? And in terms of these deferrals or push-outs, what I'm trying to understand is, are these large, specific contracts, i.e., if we had signed those contracts in 2Q, would we be close to a zero growth in North American orders? So, I guess, what I'm asking for is how big are these one-off impacts in that North American minus 10% number? The second question is on understanding the margins in Connected Care. The division, as I understand it, is basically majority patient monitoring and then minority Healthcare Informatics. It's an 8% margin right now, which I would've thought, relative to peers even in 2Q, is an extremely low number. Can you give us a sense over the remainder of the year if you are expecting Connected Care to show a significant upward trajectory with similar seasonality to what we've normally seen in Diagnosis & Treatment? Is that part of the big recovery as well that you expect in the second half? François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Hi, Ben. Frans here. Yeah. So, let's take North America a bit in perspective. If I would take you to visualize a rolling 12-month order intake curve, then actually North America shows a healthy 10% level. So, in that sense, we are not concerned about our ability…

Our next question comes from James Moore from Redburn. Please go ahead. Your line is open. James A. Moore - Redburn (Europe) Ltd.: Yes, Good morning, everyone; Frans, Abhijit, Robin. I wonder if I could start with the Diagnosis & Treatment business and, a little bit, the medium term outlook, if I might. You have talked about some of the positive potential in CT given your work at Cleveland, China, Israel, and in IGT from Volcano. But I wondered if you could help us understand the MRI piece, which I believe is lower margin certainly below those of your peers. Could you talk to us a little bit about how you think that business could develop in the next couple of years? And secondly, I wondered if we could touch on Personal Health. The growth there, 9%, very good. You talked about products now for a while. You've kept the growth rate very high, Dream Space (45:53), OneBlade, Platinum, but could you help us understand the growth outlook into the second half and into next year? Do you see a point where we compare unfavorably against some of this good (46:04) growth or do you think it can continue? And you mentioned advertising and promotion impacts inside that. And could you perhaps expand as to whether you're talking about a meaningful margin impact there? François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Okay. Let me give it a try, okay? So our MR business is performing very well in Europe, in Asia with market shares well in the 20%s. In North America, we are a bit lower. We are working very hard to fix that. That comes also with some investments. We also have new product introductions in the…

Our next question comes from Andrew Carter from RBC. Please go ahead. Your line is open.

Good morning, all. Thank you very much for taking the question. The first one, I just wanted to go back to, again, for which I apologize. It's D&T North America and I just wanted to pick up on, I think you said that the sales growth in quarter, I think you said it was down high-single digit. And I wondered if you could just help us understand that a little bit. I think you've explained what's going on in orders quite well, but it does also sound as though the sales performance in North America in the quarter was quite weak. And I guess, if I take into account sort of the idea that the service side of the business should have been, I would've thought, reasonably stable if not growing. It does seem to suggest that the equipment was down quite a long way. And then, the other one, I just wanted to ask perhaps going on from what James asked was just on Domestic Appliances. And it does seem as though we've had a nice acceleration in the quarter there. And I was wondering if there's anything in there that might relate to a prior year comparison or the one-off in anyway. And I wonder if you could just talk a little bit about what's driving it and what the sustainability is. François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Sure, Andrew. Let's first talk about D&T North America. In fact, your comment on comparability is applicable for D&T more so actually than for Personal Health. The year-on-year decline is close to 8%. And you may recall that Q2 2015 was a very good quarter thanks to the recovery of the resumption of production and sales of Cleveland, where we started to deliver against the backlog and that resulted in a sales spike in that quarter. Now, that doesn't justify of course not growing it this year. So, don't get me wrong. But the comparison was certainly not easy. We've also seen that in Image-Guided Therapy, some customer acceptance slip also into Q3, which made revenue recognition a bit more difficult. So, altogether, we believe that Q3 we will see a resumption of the business growth. Then on DA, you talked about DA, but do you mean Personal Health or specifically Domestic Appliances?

I meant Domestic Appliances specifically, because I guess if I look back over the last four quarters or so the growth rate in Domestic Appliances, I think, has been a little bit lower. And so I was just quite interested in the acceleration that we're seeing. François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Okay. That's very perceptive. As you know, Personal has several business groups; many of them have these very strong high profitability franchises. Domestic Appliances is a bit different in the sense that it is a bit more generic. We saw a nice recovery through a new leadership in Domestic Appliances that has enhanced the new product introductions and managing that business. Also, we saw finally the turnaround of coffee coming through, and altogether that has resulted, off the top of my head, in a mid-single digit kind of growth rate for DA, a little bit better even being signaled that therefore DA starts to perform more in growth terms as the other businesses. Of course, that also has a nice fall-through to the bottom line thanks to operational leverage.

Thank you. François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: You're welcome.

Our next question comes from Gaël De Bray from Deutsche Bank. Please go ahead. Your line is open. Gaël De Bray - Deutsche Bank: Yes. Thank you. Good morning, everyone. Looking at the bridge, the price component was higher than in prior quarters. It was about 0.3% higher at 2.4%, and I find it a bit surprising given the slower growth seen in the LED lamps business this quarter. So, do you see some higher price pressure in some parts of healthcare now? So, that's question number one. And the second question is on – perhaps is a bit M&A related. At the latest CMD, you indicated that there was a €37 billion addressable market for adjacent businesses for the Connected Care division. So, could you elaborate perhaps on what you consider are the most attractive sub-segments within these adjacent businesses? Thank you. Abhijit Bhattacharya - Chief Financial Officer, Executive Vice President & Director: Hi, Gaël. This is Abhijit. On the price erosion, it's basically LED and the LED growth was not particularly weak. It was a 25% growth year-on-year on a much bigger volume. So, it's not that we are seeing higher price erosion in HealthTech, so that should not be a concern at this point. We've always guided for 2% to 3% price erosion. We are at the lower end of that range. François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Okay. Then I'll take your M&A question. Let's first talk a bit about Connected Care & Health Informatics, all right? What we do there is basically patient monitoring and patient care both in the hospital, as well as in an ambulatory fashion after discharge and into the home. So, we envisage that we support patient care…

Our next question comes from Philip Scholte from Kempen. Please go ahead. Your line is open. Philip Scholte - Kempen & Co. NV (Broker): Yes. Good morning, everybody. I had a question about the growth you mentioned about actually two areas where I was expecting a bit higher growth, as both in the Image-Guided Therapy segment and within Connected Care in the Population Health Management, which you say was actually in line with. So, can you comment a little bit about why those numbers are a bit low at least compared to my estimates? François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Yeah. In IGT, which is a combination of our systems business and the acquisition of Volcano, we saw a mixed picture. Volcano showed very strong growth for the second quarter in a row and is delivering on its acquisition business case. Quite pleased with the performance there. On the systems side, sales indeed was quite a bit lower, and we saw that being caused by some slippages into Q3. I would like to bring to your recollection that in the first quarter, we actually saw a 10% growth. Now, these larger installations of hospital operating rooms are a bit lumpy, so we had strong sales recognition in Q1, weak sales recognition in Q2, and we expect stronger sales recognition in Q3, all right? That has to do when the customers actually accept and sign off on the installation. Then, on population health, today, this is really still a very small activity compared to the rest of our businesses, and I would not read too much in the commentary on Population Health Management. We are still building that asset and we expect over the coming 24 months to…

Our next question comes from Alok Katre from Société Générale. Please go ahead. Your line is open.

Hi. Alok Katre from SocGen, and thanks for taking my questions. I have a follow-up firstly on the question around Connected Care and the margin improvement that's seen in the second half of the year. If I understood correctly, is it just related to the improvement in the growth that you were expecting in Patient Care & Monitoring and the Informatics business or is it got to do just in the second half of this year with some phasing of costs and revenues? Is it just the phasing or is it a part of the leverage from the growth as well? So that was the follow-up. And then the question that I have from my side is just on Diagnosis & Treatment. And I can appreciate the margins were up 20 basis points year-on-year, but if you strip out the €12 million improvement that you show in Cleveland within the bridge, then the underlying profits were slightly lower year-on-year. So, I just trying to gauge whether there's something else that's going on in that business. Is it the FX? Is it some other investments, et cetera? And then just within the same breath, working capital at that division was up 60 basis points year-on-year, whereas it declined everywhere else. So just wondered what's driving that and how we should read into this. François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Sure. Sure. I think all are quite easily to be explained. Many of these healthcare businesses are having a reasonably high fixed cost component and are dependent on its seasonality in revenue. And the second half of the year is always much stronger than the first half. So, we expect margin expansion in the second half year. And that applies to Connected Care/Health Informatics where the patient monitoring business always is strong in the second half year. That should give us more growth and margin expansion. But also in D&T, we talked about earlier in the call that sales were a bit slow in D&T, and that you immediately see backed by then a negative operational leverage in that business. And we had some push-outs which explain the higher working capital, all right? Because if an installation is being delivered but not yet revenue recognized, it ends up in working capital. So that whole story hangs together. And as we then get to sales recognition in the third quarter of some of these work in progress orders, we will see the trend reverse with an above-average margin expansion and, of course, a commensurate reduction of working capital. Does that answer your questions?

Yeah, kind of. Just on Connected Care, usually that – sorry – in Diagnosis & Treatment, usually that used to be the division with the sizeable FX headwind. So was there none at all or nothing sizeable in Q2 and is that... Abhijit Bhattacharya - Chief Financial Officer, Executive Vice President & Director: No, nothing sizeable in Q2, no.

Okay. And do we expect at the current rates that there will be anything in the second half which we should keep in mind? Abhijit Bhattacharya - Chief Financial Officer, Executive Vice President & Director: No, negligible. In the second half, we expect it to be negligible. And on the working capital, also part of it is due to the intercompany payments. If you take that out, we also have quite a good improvement in working capital also for Diagnosis & Treatment. So we see that coming across the board.

Okay. Thanks.

Our next question comes from Jonathan Mounsey from Exane. Please go ahead. Your line is open.

Yes. Good morning. Thanks for taking the call. So, just going back to D&T and, well, particularly in North America and the weak progress on orders in Q2. Obviously, you're saying you're very confident in a second half pick-up. Can we assume from that that as recently as July, we've booked the orders that slipped from the second quarter into the third quarter? François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: I'm not going to dissect the quarter for you. That goes a bit far. Let us just stay with the confidence that we've spoken about before.

Okay. And just one follow-up then. On the M&A pipeline, obviously, you've done a deal quite recently. As we go into the second half, can we expect much of the proceeds from Lighting to be spent imminently or, basically, how does the pipeline look? François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: Well, thanks for raising that. It gives me an opportunity to maybe a bit broader talk about our capital allocation policy, right? We've always said that we will use some of the proceeds for debt reduction. We had just paid down the Volcano bridge loan. We are planning to retire some of the more expensive debt. We will still do a little bit on pension liability reduction. We are finishing off the share buyback program in the second half year. We aim at dividend stability. And then, finally, yes, we will consider disciplined but more active approach to M&A. So, with the two examples in Q2, I can't promise you that we do that every quarter. We will have our eyes and ears wide open about our selective possibilities, but I would not jump to the conclusion that we are now on a spending spree.

Thank you. And let me just one final follow-up. If I look at the bridge that was given in the Capital Markets Day presentation from last year, the aim to get to 11% adjusted EBIT margins by end of 2016, I think the biggest positive component, the 2% operational improvement, if we look at where you're tracking year-to-date, I think it's probably a little less than 1%. Can we really expect in the final half of the year to make all of that gap up? It feels as if, I think it was already mentioned the risk is to the downside now. Abhijit Bhattacharya - Chief Financial Officer, Executive Vice President & Director: Yeah. I think we'll be just be repeating ourselves. I think Andreas asked that question in the beginning. And as I clarified that the Cleveland opportunity is an improvement over last year. As I mentioned, most of our cost saving, because we have for our enabling functions a plan to get to benchmark levels by the end of this year, so we will get some cost savings there. We, of course, are banking on stronger growth in the second half as we've mentioned right to the call, which gets us better operating leverage and the fact that royalty income gives us a bit of a tailwind in the second half, plus the way we have managed forex, I think, gives us some – gives us good visibility to come around the 11% as we spoke about.

Okay. Thank you.

We will now take our last question from Ian Douglas-Pennant from UBS. Please go ahead.

Oh, yeah. Thanks very much for taking my follow-up question. As you can imagine, most of them have been asked. I've just got a couple of boring ones left. Firstly, on the tax rate, just a semantic, you announced it's going to be about 30%. I have in my notes from the past that it's going to be low 30%. So, can I just confirm that is an improvement? Abhijit Bhattacharya - Chief Financial Officer, Executive Vice President & Director: Yeah. That is.

That is improvement? Okay. Abhijit Bhattacharya - Chief Financial Officer, Executive Vice President & Director: Yeah.

Good news. Thank you. And then the other one is on restructuring. Obviously, this cost was much lower than what you're guiding for the full year divided by four if you see what I'm saying. Are we going to expect a lot of the charges to accumulate in Q4 as they have done in prior years? And if so, why is that trend happening like that? Abhijit Bhattacharya - Chief Financial Officer, Executive Vice President & Director: Yeah. Sorry. Are you done?

Yeah. That was the end of my question. Yeah. Thank you. Abhijit Bhattacharya - Chief Financial Officer, Executive Vice President & Director: Yeah. Q3 and Q4, so Q2 was a bit lower because a couple of Lighting restructurings which were planned in Q2 slipped to Q3. So, you will see, let's say, the lower restructuring in Q2 getting compensated by a higher amount in Q3. And then you will see some in Q4 as we, let's say, put into effect some of the new productivity programs that we will kick-start in the second half of the year to drive our margins up in the coming years. So, that's something we are working on, and once we start implementation of that, you will some more restructuring charges coming in.

Okay, great. And in terms of the tax rate going forward, are there further monetization programs that you've got going on or however the correct way to phrase it, should we expect the tax rate to come down further in the future? Abhijit Bhattacharya - Chief Financial Officer, Executive Vice President & Director: No, I think around the 30% is a fair number to go by. Could go up a tad, but it will be in and around 30%.

Okay. Thank you. François A. van Houten - President, Chief Executive Officer & Chairman of the Board of Management and Executive Committee: All right. I think that concludes our call. And I appreciate everybody's questions and we will continue to work hard on achieving our aims for business results. Thank you very, very much, and have a great summer period.

This concludes the Royal Philips' second quarter 2016 results conference call on Monday, the 25th of July 2016. Thank you for participating. You may now disconnect.