Welcome to the Royal Philips Third Quarter 2016 Results Conference Call on Monday, October 24, 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. [Operator Instructions]. Please note that this call will be recorded and is available by webcast on the website of Royal Philips. I will now hand the conference over to Mr. Pim Preesman, Head of Investor Relations. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. Welcome to Philips' third quarter fiscal year 2016 results conference call. I'm here with Frans van Houten, CEO; and Abhijit Bhattacharya, CFO. On today’s call, Frans will take you through our strategic financial highlights for the period. Abhijit will then provide more detail on financial performance and market dynamics. After that we will take your questions. Our press release and the related information slide deck were published at 7:00 AM 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 the call over to Frans, I would like to remind you of a few things. First, as you know, Philips retains a 71.2% stake in Philips Lighting and therefore continues to consolidate Philips Lighting’s results. However, because Philips Lighting reported its Q3 results on October 20, we will focus our commentary on today’s call as much as possible on the performance of our HealthTech portfolio. We encourage you to review Philip Lighting’s third quarter earnings materials, which are available on their IR website. Second; following the decision in 2014 to combine our Lumileds and Automotive Lighting businesses into one 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 the business in the balance sheet on the line, assets held for sale. The cash flow of the combined Lumileds/Automotive businesses is reported in the cash flow from discontinued operations. Finally, when we refer to adjusted EBITA on this call, this represents EBITA excluding restructuring costs, acquisition-related charges and other charges and gains above €20 million. With that,…

Thanks you, Frans. Good morning to all of you on the call and the webcast. As Frans mentioned, in Q3 we delivered a 5% comparable sales growth in our HealthTech portfolio. Including the 3% declining in comparable sales of Philips Lighting, overall sales increased by 2% on a comparable basis. Let me focus my commentary on the HealthTech portfolio where comparable sales for growth geographies grew by double-digits driven by double-digit growth in China as well as countries like Russia, Indonesia, Argentina and others. Personal Health recorded high-single-digit growth, Diagnosis & Treatment double-digit growth and Connected Care & Health Informatics showed mid-single-digit growth. Comparable sales growth in the mature markets was driven by low-single-digit growth in Western Europe and North America, and stable comparable sales in the other mature geographies. Personal Health recorded mid-single-digits and Diagnosis & Treatment low-single-digit comparable sales growth in mature geographies, while our Connected Care and Health Informatics businesses saw a low-single-digit comparable sales decline. In HealthTech, other sales reflected a €14 million lower royalty income due to the expected expiree of certain licenses, partly offset by strong double-digit growth in emerging businesses. Let's have a look at the order intake. On currency comparable basis, equipment order intake grew by 8% in the quarter. Connected Care & Health Informatics businesses generated a strong double-digit growth; and Diagnosis & Treatment businesses a low single-digit-growth in the third quarter. Geographically, we reported a double-digit growth in comparable orders in our growth geographies, driven by double-digit growth in regions like China, India, ASEAN and Africa. In North America, order intake grew a healthy 6% while Europe posted a low single-digit decline. On currency comparable basis, order intake growth in Q4 last year was 15%, hence we expect Q4 this year to be about flat. Let me now switch to…

Thank you, sir. [Operator Instructions]. The first question comes from Mr. Mark Troman from Merrill Lynch. Please state your question sir.

Yes, thank you very much. Good morning, Frans. Good morning, Abhijit. Just one question please on your - on the profit bridge I think you have on slide 24 in your presentation. I mean, generally we’re seeing the price-wage inflation component be a bigger drag than the COGS improvement driven by the FX typically 60, 70 basis points, so in each quarter, and I noticed that the overhead productivity was pretty low this quarter, I guess, that was due to some investments. But going forward when you look for margin improvement, should we expect bigger overhead productivity or can we close that gap between the price-wage inflation and the COGS in terms of the initiatives you have running? Thank you very much.

Hi Mark. Good morning. Yes, if you have seen for the last couple of years, we have had on operational improvement a bigger amount as well, roughly about 80 basis points or so. I think this quarter is a bit of an aberration. Couple of reasons, I think we had mentioned to you last time that we would do bigger spends in A&P, that has partly, let's say, about 30 bps has gone from that bucket. We also have had lower-than-anticipated growth as we mentioned earlier on patient monitoring, which is a high margin business, so that also has affected for the quarter. And then as I said earlier during my introduction that we had certain expenses which came into this quarter which offset the productivity savings. So the productivity savings at the gross level are still at a very good level. In this quarter, things like our investments in the cyber security program and a couple of other things have, from a timing perspective, made the number look low. But I think overall if you look year-to-date and if you look at the year as a whole, we will still be in the 70 to 80 bps improvement operationally going forward. François van Houten: Yes. Mark, Frans here. Let me just echo that the self-help story at Philips will definitely continue over the next years and more to come at our Capital Markets Day.

Okay. Thanks very much.

Thank you. We will now take our next question from Max Yates, Credit Suisse. Please state your question sir.

Hi, thank you. I just wondered on the benefit more about the Connected Care division. If I look at the patient monitoring part, that it looks like it’s lost between €15 million and €20 million of revenues year-over-year. It was low-single-digit decline, with the EBIT decline on that is around €13 million. If we assume all of the Connected Care EBIT decline was from patient monitoring, but it seems like quite a high drop through. I was just trying to understand whether any of the investments within informatics or population health management had also stepped up year-over-year, and if not, then why that kind of operational leverage on the decline in volumes growth is high as they were on patient monitoring? François van Houten: Yes. Mark, Frans here. The PCMS revenue shortfall, we see that as a blip. It's a timing matter. We expect that revenue to come in, in the fourth quarter. It had to do with customer installations that were just taking a bit more time. It could not be finished in the quarter. As a consequence, you not only have the profit of PCMS missing, which is the most profitable business but you therefore also have a mix change within the CCHI cluster. There is also some cost items that weigh on the quarter. Overall if I give you my perspective on CC&HI, then that segment is on an upward trajectory with regards to profitability, let's say, if you even out the influence of the single quarter, so nothing to worry about.

Okay, thank you. And just one follow-up. When I look at FX for the quarter and the EBIT bridge, it was quite a bit better than I think sort of certainly I expected it. So guidance for the full-year be impacted from FX at current spot rate, what would you expect that to be to at EBIT free [ph]?

We expect it to be flat. I think we had said that also in Q2, we expected for the full-year to be flat, which meant that we would have a recovery in the second half. I think we have seen that. I think Q4 will also be flat, so I think for the whole year you can take around flat impact.

Perfect. Thank you very much.

Thank you. The next question comes from Andreas Willi, JP Morgan Cazenove. Please state your question sir.

Good morning, Frans. Good morning, Abhijit. If I look at the accelerate investments more broadly, you keep - obviously there was key being a headwind for the profitability development. If we look going forward, should these be flat or are they actually going to drop out of the P&L in terms of - are these just kind of one-off investment boost or are these going to stay at the current level? François van Houten: Hi Andreas, Frans here. I think you're referring to the step-up in R&D, especially in emerging businesses and adjacencies. Is that right? Is that what you’re referring to?

Yes. François van Houten: Yes, so over the last two years, we have gradually increased our R&D investments as we are building the health continuum portfolio, putting more effort in health informatics, medical wearables, digital pathology. We expect the overall investment level now to be stable, with revenues gradually going to come in. So if you take R&D investments to be stable and the top line growing, then you would get operational leverage or basically a return on those investments over the coming years.

That was clear. Thank you. And on the earlier question on foreign exchange, it's quite difficult to model from the outside what's going on given - now you basically - that's been a big gain in Q3, you don't expect much in Q4 anymore but we had still headwinds last year in Q4. So why is this jumping around so much and why don't we see a benefit again in Q4, given that some of the rates have continued to improve for you and the year-on-year comparable is still quite easy?

Yes. I think, Andreas, couple of things there. One is we have changed, let's say, our hedging policy in the beginning of the year. The other is the movement of certain other currencies like the yen etcetera, which unfortunately for Q4 doesn't give us the benefit. That's also what we have seen earlier. So I think overall - and last but not least, we have also significantly reduced our cross-currency exposures on the balance sheet, which I think we had also mentioned earlier in terms of redoing some of our contracts and also changing our inter-company payment habits. So all that results, let's say, in one-time gain and then we will not see that coming back in queue for at least based on the current spot rates.

Thank you very much.

Okay.

The next question comes from Ian Douglas from UBS. Please state your question sir.

Yes, thanks very much. So on your guidance for the full-year, I'm just trying to gauge how positive you’re on Q4, because at last quarter you were trying to talk us down for the full-year to get us below that 11% number. I just wanted to get your updated thoughts there. For example, how much of those revenues are you expecting to shift from Q3 to Q4? How much of that strong order book will come in within CCHI and that obviously some of the other divisions you’re looking up as well?

All right, Ian, I'm smiling a little bit because I'm not sure that we were trying to talk you down because the consensus was more like 10.4% or 10.5% and we maintained our around 11% guidance and we maintain that guidance, so we still aim to be around 11% adjusted EBITDA. Did I miss anything in your question there?

Yes. So maybe I framed it slightly wrong. But you were certainly trying to talk us towards the bottom end of that range of say the consensus was correct to be at the bottom end of that range. I wonder whether it might be reasonable to think if we might be closer to 11% or even above 11% given what we've seen this quarter. François van Houten: Okay. Look, we continue to see a positive path, expecting a good fourth quarter. We say we will continue to see profit improvement. Now you all know that we are very dependent on the fourth quarter. We stay committed to that guidance, but I'm not going to be precise about 10 bps here or there. It's important that we, as a management, feel that we are on this trajectory in a good sense with forward momentum.

Fine, so if I could ask a follow-up question there or to reframe the same question I just asked. For Connected Care & Health Informatics, would it be reasonable to keep - if you were doing my job to keep the full-year Connected Care & Health Informatics’ organic growth number unchanged given weakness this quarter, i.e., would you expect to see all of the sales shift from Q3 to Q4? And in terms of the cost savings in Diagnostics & Treatment, you’ve done 200 basis points year-over-year in Q3. Will it be reasonable to assume something similar to that in Q4? I’m just talking about by orders of magnitude, I’m not asking you to guide us on the division exactly.

Yes, I think couple of things. I would not change, let's say - I don't know what is your specific number on year-on-year growth for CCHI but we have - the growth trajectory that we have seen, we don't fear a shift because of the shift between quarters for the full-year. For Diagnosis & Treatment, yes, we will see continued profit improvement into the fourth quarter, so again not to give a specific number on that. I think that is part of the plan which helps us to improve our skew for profitability.

Okay. So CC&HI is on track [indiscernible]. Okay, great. Thank you very much.

We will now take our next question from Ben Uglow from Morgan Stanley. Please state your question sir.

Well, great. Thanks. Good morning, Frans. Good morning, Abhijit. I had questions around the imaging business specifically. Frans, could you just give us - there was a very detailed kind of geographic understanding of the order intake. Can you just give us a sense when you look at the imaging business, what’s happening in MR, CT, ultrasounds? How things are playing out by modality? Second question, I was a little surprised to see the ultrasound sales down in the quarter. Can you give us an idea what may be happening there? And then finally, when I look at your slide 35, it gives you a kind of idea on the sequential evolution of orders. We see Europe trending down and I noted that you seem to be guiding fairly cautiously around 2017 on European orders. Can you just give us a sense of what’s going on there? Are you seeing a change in the market? François van Houten: All right, that's quite a few questions. I will try to answer them as good as we go. Good order growth in the third quarter for our diagnostic imaging. Also good order growth for ultrasound. Within diagnostic imaging, the year-on-year comparison is a bit difficult because 2015 had a very strong order intake for CT, and therefore difficult to immediately replicate this year. This quarter we saw a strong performance in MR, for example, and in general x-ray. Overall we are confident about diagnostic imaging. On ultrasound, the market had shifted a little bit away from the high-end cardiovascular area, where we are the market leader into more point of care ultrasound - let's say the ultrasound machines. We have in the meantime been able to adjust our effort, and as a consequence, we saw good order intake in the third quarter.…

Understood. And one very quick follow-up. To get to flat orders, which you’re guiding to year-over-year in the fourth quarter and we can see obviously from the chart that it’s a very, very tough comp, but without wanting to put too many words into your mouth, we should assume the sequentially things are still improving. Correct? François van Houten: I’m looking to my wise friend on my right hand here.

Yes, sure. I mean, you look also in the overall order book, the position of the order book is the strongest it has been in the last couple of years. So I think the order book is in a fairly good shape.

Okay. Thank you very much.

Thanks Ben.

The next question comes from James Moore from Redburn. Please go ahead.

Yes, good morning everyone. Good morning, Frans, Abhijit. I got one on orders and one on margins. Just on orders, I wonder if you could give us some flavor as to what the percentage growth was in China in the quarter? And when we talk about flat for the fourth quarter, I think if I'm right, the last quarter you talked about the full-year saying 4% growth and I thought you needed something like 9% growth in the second half to achieve that, and after 8% in the third quarter, are you now a little less confident on orders and what’s driven that? That's the first question. Maybe we could touch on that first.

Okay. Yes, James. Well, we don't detail out the exact number in China, but I have said double-digit order intake growth, double-digit revenue growth. And so we feel very confident about the performance path in China. Let's leave it at that. On the orders, in July, we said first half was quite weak and that we expect a stronger second half. That is materializing, 8% in the third quarter. And so we expect a strong fourth quarter. It's just that on the comparable order intake growth number with compared to last year where we had about - we had a very strong increase, mathematically that's more difficult but that doesn't take away from the fact that we do expect a solid order intake quarter in the year.

Okay. And then switching to margin as a follow-up, if I could. I think you need 150, 200 bps year-on-year increase in the fourth quarter without being overly emphasized but I make it 180. I’m just trying to understand, which division we should see as driving that year-on-year change the most?

We will see improvements in all three segments.

Okay. And just on CCHI then. I see that you’ve run at sort of an 8% margin in the last couple of quarters, a little bit down this quarter, a little bit up last quarter. But last fourth quarter, it was 18%. So are you saying you can get back to 18% or above 18% because you’re going to reverse these timing issues in the third quarter?

Yes. James, I'm not going to give a specific number for CCHI but you’ve seen the trends of these businesses. Q4 our big quarters and we expect another big quarter also for CCHI.

And just so I understand, within that CCHI, was it that the HISS and the PHM margins came down, or was it all driven by PCMS?

No. So there were two things which Frans mentioned earlier. One was the PCMS, let's say, revenues going down, which has a big impact because it's one of the higher margin business but also step-ups in investments in PHM as well as the consolidation of Wellcentive, so altogether that had an impact.

Yes, I heard that. My question was more about margins because I guess the revenues are going to be growing in HISS and PHM I assume. So those increased investment mean a net negative picture to the margin?

That was what happened in Q3.

Okay. Thank you very much.

We’re not going forward [ph], Yes. François van Houten: And we all need to remember that it was a big sales quarter ahead of us. The operating leverage in that quarter will be very, very strong.

Very clear. Thank you.

The next question comes from Gael de-Bray from Deutsche Bank. Please go ahead sir.

Yes, thank you very much. Good morning everybody. My first question is on Cleveland. So you - apparently if I understood correctly, you’re now guiding for the contribution from Cleveland to be around €80 million this year. So that would be slightly short of the €100 million guidance you had initially. So you do - do you still expect to re-comp the €20 million shortfall next year, which means that one should see the Cleveland contribution on a year-on-year basis at close to €100 million again in 2017? So that's question number one. And question number two is again on the innovation spending. Can I circle back on this research and development expenses which obviously were very, very high this quarter probably now standing close to more than 100 bps higher than two years ago and it seems you’re currently spending much more on R&D in your HealthTech operations than GE or Siemens, for example. Is there actually any way you could optimize the spending here rather than just to wait for the revenue to come in? Thank you. François van Houten: Yes. Hi Gael. Frans here. Let's first talk about Cleveland. We had a strong contribution in the quarter on Cleveland, and for the full-year, we still expect close to €90 million profit improvement year-over-year. But that's a little bit shy of the €100 million but in the ballpark. Of course next year we expect to continue to improve but I'm not detailing that at this moment. On innovation, the choice to step-up R&D was a very conscious choice as we have pivoted, let's say, from a diversified holding into a focused HealthTech company. We see the market opportunities in the health technology market. We see that customers are asking for more integrated solutions with whereby informatics play a…

Thank you very much, Frans. François van Houten: You’re welcome.

The next question comes from David Vos from Barclays. Please go ahead sir.

Yes. Good morning, Pim, Abhijit, Frans. Thanks for taking my questions. Just one on the service business within Diagnosis & Treatment. I think we haven't discussed that for a while in terms of growth. Could you just comment on that, how that’s ticking along, and then have maybe a follow-up after.

No, I think that is ticking along well not only in the Diagnosis & Treatment business, but also in CC&HI, we have launched a few initiatives to increase penetration there. So I think overall the growth has been good and so also the profitability. So we now look at it as integrated results even internally so that we drive, let's say, both the business and the service side to go to common improvement measures that has helped to take out certain duplication of costs et cetera and drive the business to, let's say, a good growth level as well. François van Houten: Sorry, David. I’m able to add that, we are launching more and more also value-added services such as consulting, design services, lean services, also at the upcoming RSNA we will talk about radiology solutions, all of that helps of course to move gradually the business towards a higher proportion of recurring revenues.

Yes, absolutely. And should we be thinking about something like high-single digits in terms of growth rates there? François van Houten: No, I think mid is still fair. Overall for service, mid-single digit is a good range.

Okay, perfect. And then just one housekeeping question. And I appreciate it might be a little bit too early for it, but we’ll be tying up our models here on our end before the Capital Markets Day. So if you could just comment on what you expect for 2017 in terms of the healthcare other and legacy item lines? That will be very, very helpful.

David, I think we will wait for the end of the year. We always tie it in Q1, or when we talk about the year-end results we guide for next year. I think that's a better time.

Okay, perfect. Understood. Thank you.

The next question comes from Alok Katre from Societe Generale. Please go ahead.

Hi. Thanks for taking my questions. Alok Katre from Soc Gen. Well, one follow-up in terms of the order intake. It seems that the catch-up on Diagnosis & Treatment eased a bit slower than what we would expect given how much there was a bit of a decline in the previous sort of quarters. So maybe you could just explain perhaps what's going on in there. Is there any particular morality that's holding back the sort of catch-up effect? So that was the first question in terms of follow-up. And then just on the cash flow side, if you could probably just give us some sense of working capital obviously being cutting it for several quarters now, just how much more juice is there remaining on the working capital side, and is there any internal sort of target for this over the next few quarters? Thanks. François van Houten: Hi Alok, Frans here. In D&T, we saw a 6% order growth in the quarter, especially driven by IGT and ultrasound. To compare on diagnostic imaging was more difficult, never the less we expect that the D&T order intake growth can continue to be solid, and let's say the effects of Cleveland start to go away - how to say this. It will become more even in the comparison and therefore less concerning to you. We feel strongly that with the innovations in that area and the earlier discussion of ultrasound that we are in a good spot.

We had a tough year-on-year comparison also for Q3 here. We had high-single-digit growth last year in Q3 in Diagnosis and Treatment. So I think overall the order book is in pretty good shape. Your second question on working capital, I think we will - let's say when we talk about longer term, we will probably give you some indication when we are in London next week, but I think overall improvements for the last two years have been pretty substantial but we still believe that there is more efficiency which we can get in our overall working capital, so there is still some more juice left, Alok.

Fair enough. I’ll wait for the CMD then. Thanks.

[Operator Instructions]. The last question comes from Jonathan Mounsey from Exane BNP Paribas. Please go ahead sir.

Yes, good morning. Thanks for taking my questions. So a couple of questions. Just on Diagnostic & Treatment, could you give us an update in terms of the FDA and where you are with them? Are we - is an end in sight in terms of their involvement in Cleveland? And then in terms of Personal Health, obviously from Q2 this year, we had a step-up in organic growth. I’m just wondering, by the time we get to Q2 next year, is basically the last three quarters of next year, they’re very difficult comps and what’s the product pipeline like to what’s sitting there. Can we expect strong mid-single-digit growth next year or is it going to be difficult given the strong it’s been backend of this year? François van Houten: Hi Jonathan, Frans here. Look, with the FDA, I feel that we are making very good progress on the quality and the compliance side. We've had, across the world, many inspections and let's say the rate of observations has improved significantly. In Cleveland, we have not yet seen the FDA come back in. That's understandable because the arrangement was that every quarter we will have a so-called third-party audit doing the work for the FDA, right, so that's a kind of an understanding and that report is then send to the FDA so they know exactly how we are performing in Cleveland and we feel confident about that. Nevertheless the chapter is not yet closed off and I think that was your specific question, right. And we continue to invest quite a bit of money in further making the whole quality management system more robust and also working with our suppliers because that was part of the problem as you’ll recall from the July discussion and we also see suppliers respond very well to our involvement to improve quality and compliance. So overall on the right path I would say. And then on the Personal Health, I see no reason why the growth rate of Personal Health would change on average. We are in a solid mid-to-high single-digit and we see good demand for our innovations. Earlier this morning I was, I think, interviewed by a journalist and I said that the uptake of, for example, oral care products in China is going very, very well. We have worked diligently on supporting dental professionals, the dentists in recommending to consumers to use Philips Sonicare toothbrushes, and as a consequence, we have seen really solid, solid high double-digit growth already for many quarters and we expect that to continue. This falls in the area of geographical adjacencies that I think we talked about earlier at Capital Markets Day. It's a strategy that works very well and we expect that to continue.

And just one more part on that FDA comment then. Is it right to understand then that in terms of the audit process, the third-party audit process coming to an end, is there a set of things you can do that basically means if you meet that, then it ends, or is it entirely up to the FDA to decide when that third-party audit process ends? François van Houten: In the end, it is at the discretion of the FDA to decide when they want to do their own audit, so I cannot predict exactly when that will happen.

Understood. Thank you very much. François van Houten: Okay. Very good.

Thank you, Mr. van Houten, and Mr. Bhattacharya. That was the last question. Please continue. François van Houten: All right. Well, I'd like to thank everybody for attending this conference. Great 10 very good sets of questions which we certainly enjoyed responding to, and we hope that we will see all of you at our Capital Markets Day on November 4 in London. Thanks and have a great day.

This concludes the Royal Philips third quarter 2016 results conference call on Monday, October 24, 2016. Thank you for participating. You may now disconnect.