Welcome to the Royal Philips Third Quarter 2017 Results Conference Call on Monday the 23rd October 2017. 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, and welcome to Philips third quarter 2017 results conference call. I'm here with our CEO, Frans van Houten; and our CFO, Abhijit Bhattacharya. On today's call Frans will take you through our strategic financial highlights for the period. Abhijit will then provide more detail on the 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 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 end of today on our website. Before I turn over the call to Frans, I would like to remind you that Philips shareholding in Philips Lighting is currently still at 41.27% of the issued and outstanding share capital by end of the third quarter and to results continue to be consolidated in the IFRS. Our loss of control is highly probable within one year due to further sell-downs. Philips Lighting is presented as a discontinued operation in the financial statements of Philips as of the second quarter of 2017. Discontinued operations treatment means that the profit and loss of the Lighting business is reported in the discontinued operations. And for the balance sheet, the assets and liabilities of the business are reported on the line assets held for sale and liabilities held for sales respectively. Cash flows are reported in the line cash flow from discontinued operations. Finally as mentioned in the press release, adjusted EBITA is defined as income from operations excluding amortization of acquired intangible assets, impairment of goodwill and other intangible assets, restructuring charges, acquisition-related cost and other significant items. With that I would like to hand over the call to Frans.

Thanks Pim and thank you all for joining us today in this call. Philips performance in the third quarter demonstrates that we continue to deliver on our plan with comparable sales growth 4% driven by double digit growth in our growth geographies most notably in China and 8% growth in our Connected Care & Health Informatics businesses. We delivered an adjusted EBITDA improvement of 140 basis points driven by higher volumes and productivity program savings that are well on track. Moreover we had a solid 5% comparable order intake growth on the back of 8% order intake growth in the third quarter of last year thus maintaining momentum. Let me start with some key points regarding our financial performance in the quarter after which I will share some business highlights as well. For first quarter results demonstrate our progress in creating value. Philips comparable sales growth of 4% was led by our Connected Care & Health Informatics businesses which delivered 8% comparable sales growth. Our Personal Health businesses delivered 5% comparable sales growth and our diagnosis and treatment businesses showed a 2% comparable sales growth. We were able to further expand our backlog with solid comparable order intake growth of 5% mainly driven by a 7% increase in diagnosis and treatment [Technical Difficulty]

Apologies everybody, we are trying to reconnect this one. Okay. Let's continue. Thank you, Frans.

That's unusual in my 27 quarterly calls, never had that. Geographically our 4% sales growth was driven by 15% increase in growth geographies most notably in China, Latin America and India. And this more than offset a 1%% decline in mature geographies. We observed some shifts from September into Q4 both related to orders and revenue especially in mature markets. Moving to profitability, adjusted EBITDA was 12.8% of sales compared with an 11.4% last year, which is a strong 140 basis point improvement. All three segments contributed to this margin increase. The increase in margins was driven by higher volumes and productivity programs. The Connected Care & Health Informatics businesses made a strong recovery this quarter as margins improved by 440 basis points. The improvement in diagnosis and treatment continued as margins improved by 40 basis points. Personal Health delivered 130 basis points of margin improvement. This is a good moment to refer to the change in leadership in this segment. During the quarter we activated our strong internal talent pipeline to promote Egbert van Acht to become the Chief Business Leader of our Personal Health business segment. Egbert's experience with the Personal Health businesses enabled a seamless leadership transition in a very short timeframe. Let me expand now on our strategic journey to leadership in health technology. Our self-help productivity programs continue to be an important contributor to our margin improvement. In the period 2017-2019 we have committed to achieve a cumulative total net productivity saving of EUR1.2 billion. We have made a good start as our programs are well on track to deliver the targeted savings of EUR400 million for 2017 with year-to-date savings already at EUR350 million. We continue to strongly drive the digital transformation to serve our customers better and unlock value for them and Philips.…

Thank you Frans and good morning to all of you on the call as well as on the webcast. Let me start by providing some color on the third quarter growth of 4%. This was largely led by 15% comparable sales increase in the growth geographies which was driven by strong double-digit growth in China, India, Turkey and Argentina. In the growth geographies, each of the three segments recorded double digit growth in the third quarter and diagnosis and treatment grew in the 20s on the back of high-teens growth in Q3 2016. North America sales were flat year-on-year while the mature markets posted 4% comparable sales growth driven mainly by Japan. Sales Western Europe declined by 6% in the quarter following a strong second quarter when comparable sales grew by 8%. Year-to-date sales in Western Europe have grown low-single digit which is in line with our expectations. In health tech, other net sales decreased by EUR 9 million reflecting lower royalty income. Turning to order intake, as Frans mentioned comparable order intake overall grew by 5%. The diagnosis and treatment businesses grew for a second quarter in a row by 7% driven by double-digit growth in ultrasound. The Connected Care & Health Informatics businesses grew by 1% on the back of strong mid-teens comparable growth last year. In the growth geographies order intake on a comparable basis grew high-single digits compared to Q3 2016 mainly driven China and India. We continued our strong growth momentum in China, driven by our innovative consumer healthcare portfolio and focused initiatives to step up market share and customer partnerships. This is also illustrated by the mid-teens growth in diagnostic imaging order intake which was in part driven by the strong traction in the private hospital segment such as a new agreement with one…

The first question comes from Ms. Veronika Dubajova from Goldman Sachs. Please go ahead.

Good morning, gentlemen and thank you for taking my questions. I'll keep it to two to start off. First, can you talk about what drove the slowdown in the personal health growth in the third quarter? It seems to me that both the momentum in health and wellness and grooming decelerated pretty meaningfully in the third quarter. So maybe you can talk about what happened there and how we should be thinking about the growth trajectory for the rest of the year. So that's my first question. And then my second question is more a financial one. Abhijit, looking at your execution versus the 1.2 billion on saving program, it seems to me that you're running slightly ahead of where you had expected to be. Is this a function of timing only or are you also realizing that the savings target that you had communicated is maybe - there are pockets above and beyond what was included in the 1.2 billion, which is allowing you to be progressing so well so far?

Yeah. Hi. Good morning, Veronika. Thanks for your questions. Let me start with the first one. My advice is, let's not look for any trends in the personal health. I relate the health and wellness and personal care entirely to the phasing and timing of campaigns and product introductions. We expect a strong year end, so we don't read anything significant into it. I'm pleased with the handover to Egbert van Acht and I have absolutely confidence in the momentum that we are having in these businesses.

Veronika, on the savings, yes, you're right. We are slightly ahead. I think in general, the 1.2 billion will still remain the 1.2 billion, but we will try to of course see how quickly we can get the savings in, but for the time being, the 1.2 billion remains and I would take the maybe a slight over delivery for this year as a starting point.

Understood. And I noticed that you mentioned in the charges for the quarter that you were looking at some portfolio optimization measures in D&T, is there anything we need to be aware of and that will be my last question. Thank you.

No. Not yet particular. We are taking some significant measures to improve profitability in diagnosis and treatment. We are behind our peer group there and therefore let's say, some of the less profit making business is where we don't see a path forward to value. We are taking some actions to stop those, but it's nothing major.

Thank you. [Operator Instructions] We can now take our next question from Ian Douglas-Pennant from UBS. Please go ahead.

Hi. Thanks very much. This is Ian Douglas-Pennant from UBS. So my one question I guess would be on the healthcare orders. So we've had very strong order growth first nine months of the year, but that hasn't translated into meaningful revenue growth. How should we think about this? Should we think about a very strong Q4? Is there a sustainable increase in the kind of order fulfillment time or how should we think about that?

Yeah. Hi, Ian. Yeah. Some of what you say is right. Orders become a little bit bigger, takes some more time to make it over the finish line. I think we talked about it in July as well on the back of the second quarter. At that time, it was some patient monitoring deals that moved into from a revenue recognition into the third quarter. By the way, that did happen and you saw subsequently a very strong CCHI quarter with patient monitoring performing very well. Again, also in Q3, we saw some deals that didn't make it into the end of September revenue recognition. Otherwise, the quarter could have been even stronger. So now, we're looking at a significantly back-end loaded Q4 where we intend to finish the year well. The order intake also bodes well for the underpinning of next year, because some of these orders actually will only make it into revenue during 2018.

Thanks. Could you also talk about - is there any change in the criteria that would make you book something as an order which maybe you're booking them slightly earlier than you might have done previously, either intentionally or unintentionally?

No. We have no change. In fact, we are quite strict in order recognition, but I look to Abhijit to -

No, no, absolutely - Ian, to your question, we're intentionally not changing anything. So in order intake, nothing happens unintentionally. It's just good to remember that for the large scale projects, we don't recognize the entire project as order intake. So we - for imaging equipment, for example, we go out the next 15 months, depending on the lead time. So actually for the larger scale projects, we recognize only that portion of the order, which is in the delivery horizon, which is probably different from what our competitors do.

Great. Thanks. And sorry, what I hope is a one word answer question. I can't find the size of the tax provision reversal. Sorry, if it's obvious.

Yeah. I think it was - we don't give that amount out because of obvious sensitivity, but it was slightly lower than last year is what I can tell you.

Thank you. We can now take our next question from Andreas Willi from JP Morgan. Please state your question.

Yeah. Good morning, everybody. My first question on Connected Care, the great margin performance, this quarter, big step up, been a bit erratic the last few years. So are you confident you've reached kind of a higher level of performance there or is this still going to be quite volatile in terms of the quarterly margin performance beyond the seasonality? And my follow-up, a second question will be on restructuring. You made some comments earlier, maybe you could elaborate a bit more in terms of increased spending is going and why is it needed? Are you more ambitious now or is something else in the market going against you that you need more spending within the same kind of operating plan to get your targets? Thank you.

Hi, Andreas. Good morning. Well, the CCHI market, margin improvement certainly was helped by a very strong patient motoring business in the quarter. The way I would look at it, it is a combination of structural improvement across the entire CCHI segment as well as an over delivery, thanks to great factory loading and a quarterly high in the patient monitoring revenue. So the seasonal peak may not be the same every quarter, but the structural improvement will of course continue as we see CCHI as a, in the near term, trending towards a mid-teen EBITDA performance.

Yeah. Andreas, regarding the restructuring, there is not something specific going against us in the market. We have a pretty ambitious program which we've classified as self-help over the next three years and whatever we can pull in because from the time you actually start the process, you restructure, you have the cost out and you improve the profitability a reasonable length of time. So the earlier we can get these done, the better we are in terms of delivering our year-on-year improvement. So nothing out of the ordinary, but yes, as we take deeper actions with our global business services and as we move along on our footprint, rationalization, these costs are coming in now and a bit accelerated to your point.

Thank you. We can now take our next question from Mark Troman from Bank of America.

Yes. Thank you very much. Good morning, Frans. Good morning, Abhijit. I've got a question on diagnosis and treatment, the margin up 40 basis points. It looks like ultrasound doing very well, but could you provide a bit more color on the margin performance of how IGT and diagnostic imaging is performing? Thanks very much.

Yeah. Hi, Mark. I think, overall, all our businesses are doing well. You're right. The DI has of course improved, but so as IGT. And IGT is continually improving. In diagnostic imaging, we didn't have so much growth this quarter, so the operational leverage was a bit limited and that's also partly with, as Frans mentioned, some of the revenue recognition issues in the quarter. But I think overall, for the year, we will make a good improvement there as well. So with the revenues moving into Q4, the operating leverage impact will come in Q4 as well.

Okay. Thanks for that Abhijit. And then one follow-up on pricing. I mean, so far this year, you've looked to have been 100 basis points on your group profit bridge, negative 100 basis points or a bit less, in fact earlier in the year and I think your longer term averages about 130. How are you feeling you are doing on pricing? Do you think you can keep slightly ahead of that 130 basis points per year benchmark?

Yeah. Mark. I would think we should be able to maintain this for the time being. We also see that, as we are emphasizing the solutions aspect more and go to more partnership deals that and we sign up for, let's say, helping hospitals drive productivity that the business becomes less of a prize game and much more of a performance game. So we're hoping that we can continue down that path and thereby mitigate and even reduce price pressures.

Thank you. We can now take our next question from Patrick Wood from Citi.

Thank you very much. I have two please if I may. The first is obviously very strong performance in PCMS. I'm trying to get a sense for that, how much of that is, let's say, the deferred orders that are coming through on a sort of one quarter bump versus going forward, should we expect for example Q4 to look a bit more like Q1 or 2 from an organic growth perspective. That will be the first one. And then the second one is, for the deferred revenues that you expect to fall into something like DI in Q4 of this year, do you have a rough sense of roughly how much we should expect from that. Should we expect within the overall D&T business, a step-up in organic sales going to Q4 or similar to Q3? Thanks.

Yeah. Well, Patrick, we're not going into specific guidance for Q4. So it's a bit tricky, how shall I answer you. I mean, Andreas of course asked a similar question, what was - what is attributable to a seasonable peak and what is the structural improvement and I answered that CCHI is trending towards the mid-teens EBITDA performance on a structural bases, we had a very strong sales performance for PCMS in the quarter. Therefore, you need to even it out a little bit and get to a kind of a more normalized incline of the performance improvement, where one quarter you can be a little bit ahead and the next quarter, you'll even it out again. Order growth for CCHI in the second quarter was strong, so we also are sitting on a good order book for CCHI. I have strong confidence in the future sales traction there. D&T, if you recall, we had good order growth in the second quarter, a little bit less in the third quarter, but on a 12-month moving average, we are actually in the range completely supporting the growth plan that we have. I think Abhijit just now already said that we had some business slip into Q4 that also applies to diagnostic imaging and D&T at large. So we are heading towards a good strong finish of the year. And again also for 2018, we already are having an order book that is well filled.

Thank you. We can now take our next question from James Moore from Redburn. Please state your question.

Yeah. Good morning, everybody. My first question is on the strong PCMS growth in the quarter. Can I assume that that's just sensible inventory channel management into the defi ruling and so will it all reverse in the fourth quarter, really trying to understand how much is sustainable and how much we should think about a switch into the fourth quarter? And my second question is on Western Europe. I see you've had a couple of quarters of negative orders and I organic sales growth went from sort of plus 8 to minus 6 and Abhijit, you mentioned the comp and you mentioned year-to-date, you're low single and in line, but just on the minus 6, can you talk a bit about were there any one business or any one country is driving that?

Yeah. Well, James, let me first of all strongly deny the implication of inventory management in this third quarter. We did not, so this is not defibrillated at all. It's strong performance on the side of patient monitoring and specifically, I mean, if I pivot to some of these customer examples, Advocate Health, Lakeland, of course, those are new orders, they are not yet in revenue, but it just underlines the strong traction that we are having on patient monitoring. Then the second question will be taken by Abhijit.

Yeah. I think on Western Europe, it's largely from the Benelux and in the Benelux for the last - in the last quarter, we had fantastic growth, close to 30%. So therefore, it was very lumpy and then of course we had a big decline in this quarter. So I would not read too much into that, James. If you look for the first half of the year, we've had 7% growth. So I think, we are pretty okay, because we had said all along Western Europe would be a low single digit market and we are trending in that direction.

Thank you. We can now take our next question from Ben Uglow from Morgan Stanley. Please go ahead.

Good morning, Frans. Good morning, Abhijit. I had a couple. On the orders, you very kindly gave quite a lot of detail around ultrasound and the overall trend. Without wanting to sort of sound pernickety, is it correct or is it fair for me to assume that when we look at the North America market, in terms of diagnostic imaging, i.e., advanced imaging, CTMR, et cetera that the orders there are still trending down. So triangulating it, backing it out, is that a fair assumption? If so, is there any connection at all between that current trend and what we're seeing on the North American revenues, which are down mid-single digit. So that's question number one. Question number two and it's for Abhijit. Very briefly or very quickly on slice 31 of the presentation, can you just give us some color on the incidentals, is the 22 million incidental in diagnosis and treatment and then 18 million in connected care. I just want to really understand what those are about?

Yeah. Hi, Ben. Good morning. So I'm going to disagree with your assumption, because if I look at the whole year, the DI, diagnostic imaging in North America is on a very good trend. We saw mid to high single digit order intake growth in the first half year. And it's our belief that we are increasing some market share, in particular, for example, MR. So no worries for me in North America. Also when I look at the funnel, let's say, the customers that we are engaged wish where we hope to win orders, there is a lot of activity in the funnel with relation to DI. Q3 just happens to be a little bit lumpy towards DI and I just get a very helpful message from Abhijit that year to date, for DI, in North America, we are mid-teens in order intake growth. So, it's even a bit stronger than I was just representing to you and that's why I get to that sign. So anyway, it's going well and the third quarter happens to be a little bit softer, but nothing to worry about.

Ben, on the incidental, a couple of things. So we had actually guided to most of it, but in diagnosis and treatment, like I said, we took a couple of portfolio decisions, which led to the additional charge of 22 million and in CCHI as well, we did some portfolio rationalizations, which led to a slightly higher then what we guided for. And that, it was more a phasing between the quarters and we were able to pull it in earlier.

Just roughly what are the charges?

These are related to restructuring, inventory write-offs and any other balance sheet write-offs that we need to take when you stop a product like, or a product.

Thank you. We can now take our next question from Max Yates from Credit Suisse. Please go ahead and state your question.

Thank you. Just my first question is around the comments on Cleveland. So you've said kind of as expected, the FDA has done their investigation and you've submitted your response. Is there any color you could give on whether the issues that the FDA raised were kind of in line or less or more than perhaps you would have expected? That's my first question.

Yeah, so the physical investigation was - on site was completed in the course of August. And then, as is customary, you get the draft, 483 findings that you can then react to and then you go into dialog on the outcome. It's current expectations that we will have that dialog only in the next coming months. So there is no immediate urgency behind the situation. So that is, I think, where I would need to leave it at. I mean obviously, there are some findings, otherwise I would have said it's a completely clean investigation. But, I feel that the situation is very well in hand and that we will continue to improve. Also the whole diagnostic imaging set up is very much a global set up with factories in three locations and all products being manufactured from those locations. So we feel comfortable about where we are.

Okay. And just - the follow-up was just around the acquisition pipeline. Obviously, you've done quite a few deals sort of Spectranetics and some smaller ones. Just wondering how you think about the next six months and the pipeline that you see in front of you. I mean are we more in integration mode over the next six months given the deals have been done or are you still very much sort of on the hunt for deals and you see a very healthy sort of in full pipeline in front of you?

I think we already flagged in the second quarter that it is accidental that they all seem to have come in the same period. So there is certainly not going to be that kind of intensity in a single period in the coming year. M&A does play an active role in our strategy, but only when a deal really passes our internal scrutiny, will we do it. Most of our strategy is organic, most of the improvement for our strategic goals is based on the self-help and organic growth of the core business. Therefore, M&A is the icing on the cake rather than a necessity. Right. So we will carefully look at those deals that can really strengthen the portfolio. But we will not go into deals that get us distracted.

Okay. Perhaps just one very quick follow-up on healthcare other. Is there any reason or any kind of clarity you can give us on 2018 in healthcare other and anything you can point us to that would suggest it will be better, it will be less negative than the 80 million this year in 2018.

Yeah. I think, Max, you have to hold your horses till next week. We normally do that in the CMD. So we will do that in our Capital Markets Day.

[Operator Instructions] We can now take our next question from Scott Bardo from Berenberg. Please go ahead. Your line is open.

Thank you very much for taking my questions. Just first question, just following on from Max's question on Cleveland, can you give us a feeling for where we are in the recovery from Cleveland as compared to historic output. So we back at normal historic levels at Cleveland or is there still some way to go in that recovery? And perhaps you can just comment actually on, following on from your comments, in the last update, you mentioned quite a lot of product redesign recertification, have all of those activities now occurred at Cleveland or is there still some more activities to be done there. So that's the first question. I have a follow-up.

Scott, Frans here. In speech language, Cleveland has become synonymous with diagnostic imaging and that's a little bit of an oversimplification. I mean, we have several other sites in diagnostic imaging, like [indiscernible] here in the Netherlands that all play an important role in the future of diagnostic imaging. On the question of Max, I already said that the feel that we have much more de-risked the industrial footprint versus the past with virtually all products being produced in other locations as well. So that's my first statement. The second point is that with regard to production volumes, if I add up the sum of all the factory locations across the world, yes, we are very much at normal levels now and we have completely recovered from a volume basis. Okay. Then on the third, the third comment is on the famous cost side, where we have seen of course heavy investments in improvements in the quality management system and quality management compliance, including the redesign of supplier base because some of the products problems were not our own doing, but actually part of the supplier base. There is still some work ongoing to rationalize the supplier base. Moreover, if I pivot to the profitability of DI from a kind of a mid-single digit EBITDA, we have pledged to go in the near term, in the next three years, to low teens. Now obviously, that can only be done if we tackle the cost of organization also in that - in the diagnostic imaging global footprint. So we have more work to do. Abhijit already said that we have taken some restructuring in order to, let's say, put the business on continued improvement path and this is typically also a topic that I think would come back at the Capital Markets Day where we have both Rob Cascella as well as Kees Wesdorp, who is the diagnostic imaging business group leader present and of course they are completely prepared to be grilled by all of you. So I think we can give more color during that conference on the good track record and a good path that we're on in order to get to decent profitability in that business.

And maybe just a quick follow-up please for Abhijit on to some specific financials, so for the full year, Abhijit, I want to understand that the current range of growth is 4% to 6% growth range that both of those growth boundaries are still possible or do you feel more comfortable with one or the other and that growth guidance? Perhaps, also, you could just give us a bit of a flavor or where you expect free cash for the full year. I understand that that's had some one-time impact, but it would be useful if you could quantify that and just give us a feeling obviously for tax rate as well, how you see that this year and going forward. Thanks very much.

Yeah. I think I'm not going to get more specific on the growth rate. Frans mentioned earlier as well that we're going to be in the range of 4% to 6%. Year to date, we are close to the 4, we are rounded at 4, but just shy of it if you look at the decimal place, if we - based on Q4, we're comfortable that we will be in the 4% to 6% range. Free cash flow, again guidance doesn't change. We said 1 billion to 1.5 billion, we maintain that guidance and the tax rate will probably be in the mid-20s. We had earlier guided to the high-20s. We'd probably be in the mid-20s for the year based on where we are now.

Thank you, Mr. van Houten and Mr. Bhattacharya. There are no further questions. Please continue.

Okay. Well, I think we had our share of questions this morning and it was good. I appreciate very much your attendance. I hope to see everybody during the Capital Markets Conference that we'll be having in New York very soon. And for now, thanks very much for attending and have a great day.

This concludes the Royal Philips third quarter 2017 results conference call on the Monday the 23rd of October 2017. Thank you for your participation. You may now disconnect.