Robin Jansen - Head, IR Frans van Houten - CEO Ron Wirahadiraksa - CFO

Simon Toennessen - Credit Suisse Andreas Willi - JPMorgan Gael De Bray - Societe Generale Martin Wilkie - Deutsche Bank Ben Uglow - Morgan Stanley Daniel Cunliffe - Liberum Capital David Vos - Barclays Olivier Esnou - Exane BNP Paribas Daniela Costa - Goldman Sachs Peter Olofsen - Kepler Cheuvreux

Welcome to the Royal Philips Fourth Quarter and Full Year 2014 Conference Call on Tuesday, 27th of January, 2015. During the introduction hosted by Mr. Frans van Houten, CEO and Mr. Ron Wirahadiraksa, CFO all participants will be in a listen-only mode. [Operator Instructions]. I will now hand the conference over to Mr. Robin Jansen, Head of the Investor Relations. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. And welcome to Philips’ fourth quarter and full year results conference call. I’m here with Frans van Houten, CEO and Ron Wirahadiraksa, CFO. In a moment, Frans will make his opening remarks and will take you through our main strategic and financial highlights for the period. Ron will then provide more details of the financial performance during the quarter. After that, both Frans and Ron will be happy take your questions. Our press release and the related information slide deck were published at 7:00 A.M. CT 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. And before I turn over the call to Frans, I would like to remind you of 2 things. Following the decision in June 2014 to combine our Lumileds a lighting businesses into a standalone company and to explore strategic options to attract capital from third party investors for this business. The profit and loss of this combined businesses is now reported on a discontinued operations and that our 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 on the cash flow from discontinued operations. Therefore all commensurate that will follow in terms of sales and earnings at both the group level as well as the lighting sector level excludes performance related to the Lumileds automotive lighting businesses. Secondly, when we refer to adjusted EBITDA on this call this represents EBITDA excluding restructuring cost, acquisition related charges and other charges and gains above €20 million. With that, I would like to hand over the call to Frans.

Thanks Robin. Earlier today we announced that we generated €6.5 billion of sales in the fourth quarter of 2014 which reflects a 2% year-on-year decline on the comparable basis. Our adjusted EBITDA amounted to €743 million or 11.4% of sales compared to €827 million or 12.9% of sales in Q4, 2013. Our fourth quarter results underscored the 2014 was a challenging year, it goes without saying that we’re not satisfied financial results in 2014 and we’ve been taking clear actions to improve our performance in 2015 and beyond. Throughout 2014 our transformation efforts actually continue to show good results even as we address performance issues including the delays in our remediation efforts in Cleveland, continued softness in markets like China and Russia and stronger than anticipated foreign exchange impact particularly in emerging markets. Notwithstanding these issues, we’re encouraged by the fact that the underlying operational performance in most of our businesses improved throughout the year and in the fourth quarter as we continue to execute on our multi-year accelerate journey. Let me start with healthcare, our healthcare results underperformed our expectations in the fourth quarter largely due to soft end markets and the Cleveland remediation program which I will discuss in a moment. We were however encouraged by another quarter of good order intake growth in Europe and in most growth overseas especially in the Middle-East, Turkey and Africa and we believe we also continue to gain market share in areas like ultra-sound and image guided therapy. Regarding Cleveland, let me start by acknowledging that we have under-estimated how much time and effort it would take to solve this. Progress was delayed at the end of 2014 because it took longer than anticipated to complete the necessary remediation at some of our suppliers and to close final audit certification items. However we are making good progress now. As you know we resume production of iCT and Ingenuity Scanners in Cleveland in Q4 and the updated quality management system recently passed the third party audit and we now have resumed shipments of our brilliance iCT systems to customers. We’re also beginning to ship from our Haifa and Suzhou facilities initially for customers outside of United States with the aim to create a more regionally balanced manufacturing footprint. There is however still significant work to do and we therefore expect our global CT system production and shipment volume to only gradually return to 2013 levels by the end of this year. This has been and continues to be an extremely rigorous and costly process during which we have left and will continue to leave no stone unturned as we refine our processes and ramp up our production and also assure the compliance of the supplier base. We expect these ramp up to have some teething problems which we will diligently deal with to assure the highest quality to our customers and full compliance to the quality system. We have been reporting regularly to the FDA on our progress and are excited about our ability to now build momentum in delivering our strong imaging innovations to our customers once again. As a result we expect Cleveland to only positively contribute to EBITDA from the middle of the year onwards and we expect a full year improvement to results by approximately €100 million. Taking a bigger picture view, our Q4 performance thus also demonstrate the opportunities across the health continuum [ph] and that our strategic direction towards solution is optimally positioning Philips to capitalize on them. In Q4, we signed another six multi-year projects underlying the trend towards partnership, business models with large hospital systems. For example we signed a six year agreement comprising advanced imaging and monitoring equipment and services for multiple hospitals of the AMECO Group in the Kingdom of Saudi Arabia. In the United States we deepened our relationship with the Mayo Clinic by signing patient monitoring and software maintenance agreements for all Mayo Clinic on hospitals. These agreements include hardware, software solutions as well as services. In Kenya, we opened our first community license, this turnkey Philips village health center provides a holistic community support including primary healthcare facilities, medical training, solar lighting, clean water and hygienic facilities. We have partnered with Image Stream Medical on a comprehensive solution that integrates real time information and in and outside the lab. Through this partnership we will be able to offer complete integrated solutions and associated consulting services which complements our offering of live image guided therapy solutions clinical informatics and services. As you all know we announced in December that we signed an agreement to acquire Volcano which will extend our global leadership position in the image guided therapy market, one of the most strategic and promising assets in our healthcare portfolio. Volcano is impressive and unique product portfolio is highly complementary to our strong offering in light image guided solutions creating opportunity to depend customer relationships, gain market share and accelerate the revenue growth of our image guided therapy business. We also see significant scope for immediate cost synergies which we will reinvest substantially back into the promising image guided therapy opportunities that we identified. We continue to expect the transaction to close in the first quarter of 2015 and we expect the seamless integration given the complementary nature of the two businesses. Let me now turn to consumer life style, consumer life style continued to perform very well driven by the continued strong demand for our innovative solutions as well as successful new product launches. Our focused approach continued to drive sales in particular in health and wellness thereby improving the product mix and gross margin by another 80 basis points. Our mother and child care line which supports healthy development of children continue to deliver strong double digit growth driven by new products that reduce colic, preserve nutrients and vitamins in milk and help children in transition to independent drinking. Our beauty, male grooming and oral healthcare products also proved strong through the holiday in gift giving season. We continue to gain market share in the rapidly growing electric toothbrush market as consumers show an increasing interest in their oral healthcare. Philips Sonicare delivered record market share growth and a new Sonicare 2 Series designed to facilitate transition from manual to electric brushing with an easy start feature was very well received by consumers in North America. We also launched BlueControl, the world's first wearable blue led light therapy device to treat the symptoms of psoriasis without any of the side effects associated with traditional treatment options. The UV free blue light, light therapy is enabled by 40 high intensity blue LEDs with state of light setting designed with the patients in mind the battery driven device can be used anytime and anywhere. And that’s a nice bridge to switch to lighting, in lighting we saw continued strong double digit growth and improving gross margins in our LED based portfolio especially in LED lamps despite the strong price erosion. The 20% growth in our LED portfolio partially offset the 40% decline in conventional lightings. Our lighting performance continues to be impacted by challenging dynamics in markets like China and professional lighting solutions North America. As you know we had expected a turnaround of our professional lighting solutions business in North America to deliver profitable growth in the fourth quarter on the back of good order book coverage, however despite sequential improvement in quoting and pipeline activity across segments we were not yet able to return to sustainable growth in Q4 yet as a number of projects shifted out into 2015. We are confident in our strategic direction including a market leading portfolio of LED lighting, innovative connected lighting systems and a multi-channel go to market mobile are in fact correct. But we need to move faster in making the necessary refinements and have therefore take in decisive action to improve performance going forward. As part of that we have appointed Amy Huntington as the new leader for Lighting North America, for Lighting Americas significantly strengthening our North American team to unlock the big potential that we actually see in North America market. Further we continue to make progress turning around consumer luminaires in Europe where we saw a significant profitability improvement. However the overall climate in Europe and the residential construction market in particular need to show improvements to enable this business to start delivering solid higher growth. As the front runner digital lighting solutions for businesses, cities, consumers, that deliver value beyond illumination we signed a contract to provide the City of Madrid with 225,000 connected energy efficient lights. The renewal of the city's entire street lighting system makes it the world's street lighting upgrade to-date. The project will deliver more than 40% in energy savings which will finance the cost of the technology upgrade providing Madrid with the best quality street lighting for a brighter safer and smartest city at no additional cost to its citizens. The new city lighting system benefits from an integrated command center capable of controlling the intensity and duration of lighting across the city according to where it is most needed. In New York we equipped Madison Square Garden with a connected LED lighting system for its facade lighting which can now be adapted to shoot any occasion from celebrating special event to lighting up the arena in a team specific columns [ph]. We also won the single largest LED lamps tender in India in the State of Andhra Pradesh. It involves the supply of 1.5 million LED lamps which will be provided to more than 1 million households and leading to energy savings of 80% to 90% compared to the incandescent lamps that most of these families are still using. By implementing this Andhra Pradesh State will save an estimated 75 to 80 megawatt per year. Let me now provide you with an update of the progress we have made in our multi-year accelerate program. Over the course of 2014 accelerate continue to improve operational excellence across the organization resulting in an increased cost customer centricity, enhanced service levels, fast time to market for all renovations and better cost productivity. In healthcare informatics and systems, services for example, we implemented a new so-called agile software development methodology that quadrupled to the annual number of new software releases. This contributed to a record number of new introductions of clinical informatics solutions in the IntelliSpace family at the radiology society of North America, a show that was held in Chicago recently. And in the consumer lifestyle business our deep understanding of local shopper needs allowed us to successfully launch an optimized range of male grooming products in France making key price points in customer needs. This local irrelevant value proposition resulted in a 2 percentage point market share gain since launch and a record number of product Philips product listings at retailer Carrefour. In professional lighting solutions enhanced its product portfolio for the indirect channel in Europe which drove a 60% sales growth, thanks to a strong price performance ratio locally relevant value proposition and a delivery time commitment of all the five days. Our street productivity programs also continue to deliver strong support for our online [ph] operational performance improvements. Overhead cost savings were €35 million for the quarter bringing the total overhead cost savings for the year to €284 million. Our design for excellence program generated a €123 million of incremental savings in cost of goods sold in quarter resulting in €284 million accidently the same number of the tax savings [ph] for the full year. Our end to end productivity program achieved incrementally savings of €22 million in the quarter which brings the total amount of end to end productivity savings to €79 million for 2014. We’re actively discussing the sale of the combining lumilamps in automotive lighting businesses with potential buyers. We received a number of non-binding bids in December and expect to receive binding bids before the end of Q1. As such we’re confident that we will complete the transaction in the first half of 2015. We’re determined in our plan to separate Philips into two stand-alone companies, each one better positioned to capitalize on the highly attractive opportunities in both HealthTech and Lighting Solutions markets. As indicated already, the separation process is expected to take approximately 12 to 18 months. We have now informed that we currently estimate total separation cost in 2015 to be in the range of €300 million to €400 million. We’re still in the early stages and will therefore provide more information about upcoming milestones, new reporting structures as well as the route to market for lighting solutions and more detail on the separation consolidated this year. In conclusion, ladies and gentlemen I would like to reiterate that we’re not satisfied with our performance in 2014 and we view 2014 as a setback in our performance trajectory. But we have been taking clear actions to drive stronger operational performance across our businesses and we expect sales growth and EBITDA margin improvements in 2015 as well as beyond. Looking ahead we remain cautious regarding the macro-economic outlook and we expect ongoing volatility of some of our end markets. We also anticipate further incidental cost in 2015 and '16 mainly in relation to restructuring and the separation. Due to these factors we’re tracking one percentage point behind on the path to achieving each of our 2016 comparable sales growth, EBITDA and ROIC group targets. We’re convinced that this does not change our longer terms performance potential considering the attractiveness of lighting solutions and HealthTech markets as well as our own competitive position. Late to this year as we progress with the separation of Philips and the reallocation of the overhead cost, the IG&S part of Philips, we will update the market about the integral performance targets for each of the two operating companies. And with that I would like now to turn the call over to Ron to discuss our financial performance and market dynamics in more detail.

Thank you, Frans. I will now provide you with some additional detail about our financial performance. Comparable sales of €6.5 billion were 2% lower than the same period last year. If you take out currency and portfolio changes. Nominally sales increased by 2% and this was driven by positive currency translation effects of 3 percentage points and a 1 percentage point due to changes in scope of consolidation. Comparable sales in Western Europe and North America were stable low single-digit declines in healthcare were offset by mid-single digit sales growth in consumer lifestyle and more or less stable sales in lighting in both Western Europe and North America. Overall sales in the mature geographies declined by 2%. This reflected a tough compared to Q4, 2013 when we received a one-off IP royalty income in IG&S related to patent settlements in our Blu-Ray and TV licensing programs. In our growth geographies comparable sales declined by 2% in the fourth quarter, this was due to mid-single digit sales declines in healthcare and lighting which were partly offset by high single digit sales growth in consumer lifestyle. Country-wise strong contributions from countries like Brazil, India and Mexico and Poland were offset by significant sales decline in China, Russia and Saudi Arabia and this reflected the macro economic developments also. Sales generated by growth geographies represented 36% of total sales in-line with Q4 of last year. Let me now give you some financial details per sector, currency comparable equipment order intake declined by 5% compared to Q4 of 2013 in healthcare excluding the impact of our voluntary production suspension in Cleveland, equipment order intake declined by 1% in the quarter. Order intake in the growth geographies showed a low single digit increase were strong double digit growth in most regions was offset by double digit decline in comparable sales order intake in China. Western Europe achieved mid-single digit growth, with strong growth coming from Spain, Portugal and the Benelux comparable order intake in North America was down double digit. Overall 2014 was a challenging year for Philips healthcare in North America. In addition to the voluntary shutdown of our Cleveland facility we also made changes to our go to market model and this caused a short term disruption in our performance as we implemented these changes. The good news is that we have now resumed shipments from Cleveland again and we’re confident that our strategic direction and go to market models are correct given the customer consolidation that is going on. But the majority of change behind us sales force productivity is now increasing. We expect this optimization to pay off overtime. In the fourth quarter our LED sales increased by 20% year-on-year and now represents 37% of total lighting sales compared to 31% in Q4 2013. As Frans said already, we’re pleased to see the continued improvement in the growth margins of our LED based portfolio and specifically in LED lamps despite the strong price erosion. Sales of our conventional lighting portfolio declined by 14% as you know the conventional lighting decline is an intrinsic dynamic in the lighting industry. Because of our leading position and our proactive stance in rationalizing our conventional lighting manufacturing footprint, we’re very confident that we will keep to reap the maximum benefits from the golden tail. We adjust our remaining conventional manufacturing footprint on a regular basis in-line with a decline in conventional lighting. But we have provided you with some additional detail on the EBITDA development in the fourth quarter, slide 20 and 21 of the presentation material that we posted on our website this morning provides an overview of the main drivers of adjusted EBITDA when compared to the same period of last year. You will see that our underlying operational performance contributed 30 basis points to the margin in the fourth quarter and this was 90 basis points for the full year. This is a demonstration that our accelerate program continues to improve operational performance and drives efficiencies supported by our three productivity programs. The gross overhead savings amounted to €58 million year-on-year but as we showed the savings in this bridge net of increases in non-manufacturing cost the net effects versus last year period is zero as the increase in non-manufacturing cost was equal to the overhead cost savings. Designed for excellence or the effects which is aimed at reducing cost of goods sold delivered €123 million of savings year-over-year. Our end to end productivity program generated €22 million of savings year-over-year. These cost savings were able to more than offset negative pricing effect on 240 basis points as well as wage inflation and additional investments in future growth. The operational improvements was more than offset by the drop of 150 basis points in the adjusted EBITDA margin which was caused by currency headwinds of 60 basis points as the benefit from the strengthening of the U.S. dollar was offset by adverse swings in various emerging market currencies most notably the Russian ruble and the Argentinian peso. The voluntary production suspension at the Cleveland's factory negatively impacted the EBITDA margin by a 100 basis points. Tax charges amounted to €16 million and were significantly lower than the same period last year largely due to lower earnings and application of favorable tax regulation related to R&D investments. For 2015 we expect the effective tax rate to be in the 28% to 30% range. Bottom-line we generated a net income of €434 million in the quarter compared to a net income of €412 million a year ago. This decline is largely explained by €443 million of higher incidental items and lower earnings of €84 million which were partly offset by a lower tax charges and higher results from investments and associates. The return on invested capital was 4.5% excluding the maximum provision in Q3 and the additional provision for ongoing legacy legal matters we took in Q4, the ROSC was 8.4%. In addition it is important to note that as a result of the decision to move to lumileds automotive business to discontinued operations, this business no longer contributes to the returns whereas its assets are still accounted for in a net operating capital of prior periods. This reduces the ROIC by about 140 basis points. Inventory as a percentage of sales increased by a 180 basis points to 15.5% which can largely be explained by currency impacts. Production ramp-up at the Cleveland's factory and the consolidation of the general lighting company GOC that was the acquisition that we did earlier in the year. In the fourth quarter we generated a free cash flow of €559 million including a one-off pension contribution of €49 million as part of the new funding agreement for the Dutch Pension plan under which Philips is no longer liable for future deficits. For the full year we delivered 897 million free cash flow excluding the €400 million one-off pension contribution in the Netherlands. By the end of 2014 we completed 41% of our €1.5 billion share buyback program. We continue to take a disciplined approach to capital allocation that allows us to fund growth while maintaining a solid capital structure. Looking ahead, overall market conditions continue to show a mixed and fragile picture. We expect overall market conditions in 2015 to be similar to or slightly better than the year in 2014. In the U.S. healthcare reform has led to more than 20 million healthcare and release since the Affordable Care Act was signed into law with the 2015 open enrollment period underway and sets to conclude on February 15. Enrollment strength combined with higher procedures volumes have driven only modest growth in the healthcare equipment space but the value based care transition has pushed providers toward delaying new equipment purchases. 2015 CapEx in the U.S. is forecast to remain flat although new hospital construction is expected to grow by mid-single digit. Growth in the Chinese healthcare market decelerated substantially in 2014 as government anti-corruption efforts continued and efforts to pay for domestic innovation hampered premium segment of the market. It is expected that the Chinese healthcare market environment in 2015 will be quite similar. Overall we estimate the global healthcare markets to grow low single digits in 2015. The overall U.S. construction market is expected to grow a high-single digit in 2015 off which non-residential construction is forecasted to grow by 11%. The architecture of billings index continues to point to growth in a non-residential construction market as well. While lower than the 53.7 mark reached in that billing index in October 2014, the 50.9 November level was above the 50 threshold. The Western European construction market is forecasted to grow by 2.4% reflecting a slight improvement versus 2014. Nevertheless overall sentiments and market expectations in Europe remained quite uncertain and vulnerable so we remain cautious. Next to the anticipated €300 million to €400 million of cost related to the separation that Frans referred to earlier in the call, we currently expect restructuring cost in 2015 around €250 million. In addition we expect the costs related to this entanglement of the combined lumileds automotive lighting business to amount to approximately €50 million in the first quarter of 2015. This will be accounted from in discontinued operations. For IG&S we expect report of EBITDA for the full year of 2015 to amount to a net cost of around €900 million. The increase versus last year is mainly driven by additional investments in innovation, higher cost and a decrease in IP and royalty income. In addition, IG&S will absorb for the earlier we mentioned separation cost of €300 million to €400 million as well as about €50 million of restructuring cost and other incidental items. On an adjusted EBITA level, this therefore implies a net cost of around 450 million. Let me briefly summarize before opening the line for questions, market volatility in various regions remains a concern to us in 2015. The euro exchange rate will most likely be more favorable for us but certain developing in market currencies are expected to continue to represent headwinds. Overall we anticipate operational performance improvements in all our businesses which are expected to improve adjusted EBITDA by at least 100 basis points but for overall 2015 performance will be back-end loaded with Q1 expected to show a slow start to the year. With that let me now open the line for your questions which Frans and I will be happy to answer. Thank you.

[Operator Instructions]. We will take our first question now from Simon Toennessen from Credit Suisse. Please go ahead.

My first question is on Cleveland, you obviously said that you’re shipping products again. Can you just in order to just for us to quantify, can you just give us an idea as a percentage of total those shipments account for, i.e. of the product ranges that you usually are shipping how much of the percentage do the current shipments account for versus let's say 2013 levels and the second question is on the contribution impact of Cleveland, I think you said a 100 million from H2 onwards, can you just clarify that again and how much was the Cleveland contribution in the past just maybe to quantify as a percentage - the impact. Thanks very much.

Let me first reiterate that I'm happy that we’re back in business in shipping not only from Cleveland but also from Haifa and Suzhou. We have also flagged that it will take us time - the whole operation robust, we want to be very sure that we now stick to the new quality management system and it also applies to our suppliers. So we will see a gradual ramp-up and we will only at the end of this year be back to capacity on an aggregated level between the three production locations because going forward we will have a distributed regional manufacturing setup and no longer being single sourced out of one location. You asked at what kind of percentage of capacity are you - I don’t want to be too precise because obviously it fluctuates week by week, a rough indication is that we’re currently only at about 10% of the overall capacity that we would like to be reflecting that slow ramp-up as we grow gradually into a higher production mode. We said that 2015 will show an improvement of the EBITDA related to the CT category as produced in Cleveland, Haifa and Suzhou by approximately a 100 million and that debt is backend loaded. In fact the first half of the year still has a year-on-year negative impact and that is caused by the fact that last year even though we were not shipping new machines out of Cleveland the field was still installing production out of 2013 with revenue recognition in the first half of 2014 and therefore there is a trailing effect if you like where we don’t see the year-on-year improvement yet in the first half of 2015 but only in the second half of 2015 or let's say from this summer onwards. So I hope with that Simon I gave you enough color on this whole dossier, we will diligently work to really now get this back to full satisfaction.

Can I just have a very quick follow-up on healthcare? You said I think, one you said that you expect growth in China to be similar to 2014 levels. Can you just say what the overall growth for your healthcare sales in organically in China was in 2014 and whether that was, your comments were referring to the market growth or for you? Thanks very much.

My comments refer to the market growth in China. So we see a similar situation unfold in 2015 I guess we’re saying as you know don’t bank too quickly on China lapsing back to what we have seen before in terms of growth. It's going to be really on the very modest growth side. Now we have also said this is due to the government initiatives, nothing at least by stimulating local innovation and of course we ourselves have to come back from where we left off with Cleveland as Frans just elaborated upon. So the market growth is not going to be very significant. Now if you look at the growth in China for the full year, this year was minus 13%. Now in there of course there is significant part of CTs because China has been always a very important CT market for us so this is what we need to comeback from and nevertheless the growth in China for this year in our healthcare business it will probably be for the reasons mentioned that particularly because the Cleveland comeback gradually over the year higher than market growth, that’s what how I would guide it.

Thank you. The next question comes from Mr. Andreas Willi from JPMorgan. Please state your question.

My question is on your commentary on 2016 and the 1% tracking below your plan. I'm a bit confused about this 2016 commentary and also given that you have the separation ongoing doesn’t make sense at this point in time to comment on that and given you’re going to have new targets anyway. But what exactly do you want to say in terms of when you say you’re tracking 1% below because as you could say I'm tracking below but I'm doing something to catch up or is this just a form of reduction of margin target we should just breakdown into the two new companies when we look at the 2016 potential and what do you include for incidentals in that 2016 number because without knowing that it's very difficult to have a view on what it means. Thank you very much.

So first of all let's example once again what it means that we’re tracking 1% point below on growth and profitability. We want to be transparent to our shareholders of where with current insight we expect to land in 2016 and as such versus the original target that is 1% lower. Obviously that is caused primarily lighting and healthcare and to a degree to IG&S where some of the separation cost land and let's for now say it's about equally split around those three factors. Consumer lifestyle continues to perform very well and it's not causing this adjustment, this trading update. You’re right in observing that it doesn’t make at this time sense to set new targets because we’re in the middle of the separation and it depends of course on the separation parameter on how exactly the assets is allocated and also the balance sheet will pan out and therefore we said in our press release that we prefer to come back later in the year when we’re further progressing on our separation to talk about HealthTech and Lighting Solutions and the performance outlook for that and likely at that time since we’re that very close to 2016 we would like to create even a longer perspective because we strongly believe in the long term opportunity of the HealthTech market and the lighting market where we’re positioning ourselves for success. I must say I was also encouraged by let's say the trends in the United States for value based healthcare, accountable care and outcome based which is exactly aligned to our strategy of being a part to hospital systems to drive better productivity. Okay let me not digress and get back to your question. So we give transparency on where we expect to land in 2016 and the main drivers are healthcare and lighting and IG&S and later this year we plan to more formerly update the targets.

And the follow-up just to clarify on Ron's earlier comment about a 100 basis point improvement, I didn’t quite catch what exactly that relates to in terms - is that the group adjusted EBITDA margin?

So we were proud if you allow me to digress a little bit, we were proud that despite all the headwinds in 2014 we saw the operational result improve by approximately 90 basis points, right? It was improved because of overhead cost reduction, the procurement program and our productivity drive and then it was offset by headwinds like currency and what have you in incidentals. So if you keep that context then between 2015 and 2016 we expect to further improve our operational result of each division, each sector and this is where Ron said that for 2015 that’s going to be approximately 100 basis points or operational results improvement.

For the group underlined?

Yes. So you can also look Andreas at page 57 of the deck where we have basically outlined for 2014 the 7.5% of incidentals as you know we’re not part of most of that but that at least indicate, and then we have showed you 2015, 2016 so it's a bit too early to guide for '16 itself but what I said over '15 was on various points adjusted EBITDA improvement, I also flagged 2015 in 2015 for restructuring and 300 million to 400 million of cost for GEMINI, those are some of the main incidentals that we had--

Thank you. The next question comes from Gael De Bray from Societe Generale. Please state your next question.

Firstly looking at the profit bridge in the slide show and how do you explain that the contribution to profit from other heads and end to end savings was actually much lower in Q4 than in prior quarters, so that’s question number one and then secondly one of your competitors today just indicated that it would likely benefit from a 30 to 40 bps positive impact on margins in '15 related to the FX changes, so using the current currency rates. So I guess I'm curious to hear from you on these as well. And the last question, the final question, is on lighting, it seems that the LED based sales growth was just about 20% in Q4. So I think that’s probably one of the slowest quarterly growth ever achieved by the business. I mean that would be great if you could comment on that. Thanks very much.

All right. Let's divide the work here and have Ron comment on the FX. Let me start with the overhead cost, look, overhead cost reduction is not a linear process for the year, right? We deploy measures to the organization. We encourage them to go as fast as possible within a year and then it comes let's say was up - puts and takes through the year. In fact I’ve here an overview of quarter-by-quarter I think it was 70 million in Q1, 61 million in Q2, 68 million in Q3 and 22 million in Q4. All right? So it comes with puts and takes and that will also happen in 2015. You know that we have announced a raise in the overhead cost savings as the capital markets stayed back in September. The teams are now working very hard on that, we have pass it through let's say our social partners, the works councils, we feel good about our ability to again achieve these productivity improvements to the tune of the 100 let's say over the 100 basis points that rolled flat [ph] across the three programs. Ron, maybe you take the FX?

Yes. So what Frans said is of course correct and overhead savings comes in lumpy, there was some more investments in Q1 and Q4, I think the other thing to look at is that we made more than the committed target for 2014, something we’re proud of and we’re going to get this continuance as we have already flagged in earlier communications. Yes, on the forex, of course you’ve seen 30 million negative, why was that? Well three basically underlying reasons. One, we sold less than anticipated because this is firstly surely a guidance of what we expect this - deposited. So sales was less so that the influences your footprint if you will, your sales footprint. Two is the forex rate change. Of course the U.S. dollar impact was a very positive but then we have these emerging market currencies that offset them and that doesn’t help and unfortunately we had also somewhat larger balance revaluation at the end of Q4 that was in some of the U.S. obligations including the Masimo claim and also some of the emerging market where we saw strong year-end decline. Now if you ask me what is for 2015 on the horizon I think it would be around breakeven for us, we have to bear in mind that we also, it's also that same completive as you mentioned flat, too early to see tailwinds because also of some of the hedging contracts that we did. So I would say output is at this moment around breakeven at prevailing rates. Now the uncertain factor is still the emerging market currencies and of course we’re doing our best not only looking at hedging but also pricing [ph] actions where we can which is tough taking cost out and looking at more to footprint rearranging wherever possible. So there is a lot that we do to manage that but particularly in emerging markets over the past year that has been proven somewhat volatile. Frans do you want to?

Yes let me comment on LED based sales growth, I mean if you look at the last 2 or 3 years then we have seen ups and downs in the growth rate. It is in true that Q4 is the lowest I think in a sequence of about eight quarters. It's of course also the case that the underlying base of LED business is becoming more significant which would cause it to become normal but the sales growth rate becomes a low percentage of the total. I mean 37% of Philips business is LED and that’s already significant. We continue to expect strong sales growth in LED, I would not take that to Q4 is now the new normal. We expect strong uptakes most on the consumer side as value proposition has actually become quite affordable. We’re now in product ranges and price points where consumers will see the opportunity to make switch and in the professional side, of course you will get all the way all the time to talk about the energy efficiency and that’s highly attractive. So let's not consider the 20% normal, we continue to drive this hard and we’re very optimistic about the quality of this business and I'm very pleased that the growth margins in LED continue to edge up despite price erosion.

The next question comes from Martin Wilkie from Deutsche Bank. Please state your question.

A couple of questions related to the portfolio, so the first one is you obviously announced the acquisitions of Volcano back in November, its first sort of larger deal that you’ve done. In the past you’ve said that the company needs to earn the right to do deals after some of the headaches that the company experienced after Genlyte en Respironics and I was just wondering if you can let us know do you feel the company is now at a stage where further deals could happen or was it the Volcano deal something of a one-off opportunistic just so that we can understand what the intentions are on the M&A side particularly given as obviously many things happening inside the company with Cleveland and the split and so forth. And the second question was just on the lighting split, you mentioned about some non-binding bids. There has been some press commentary that the overall lighting business has received bids from private equity as well. I'm not sure if you can comment directly on that but just generally you probably still believe the best way to do this is to sell components first and separately have that capital markets listing for the remaining lighting business at some time in 2016. Thanks.

Well on Volcano, let me underline again that we think it's a highly synergistic business together with our own image guided therapy business that has very high market shares and is also highly profitable with the Volcano smart catheters we give - we combine that with our image guided hybrid operating suite and we really get more closer to cardiologist interventionist every day. So it was a deal that we wanted to engage on. You cannot always choose the moment that an asset like this becomes available and since that process was running last summer and fall we engaged on it. I don’t want to overeat ourselves, we have a lot on our plate, so we will make this deal a bit success, we have put a great team of people on it to do the integration and we expect to close this deal later this quarter and we’re very positive and optimistic about our ability to realize our business plan. Then of course we need to work diligently on the lumileds automotive deal which is expected to close in the first half of 2015 that’s a well-organized process where we feel that we’re on track and so we will not suddenly change our attack to do - so we will take it carefully step by step. Now on your point on lighting and the rumors in the market, and while I can say of course that the rumors underline that this is an attractive business and people see value in it and that pleases me. At the same time rumors should not become runaway rumors, that’s not healthy. It's very early days. We have said that we will first do the separation process and it takes us 12 to 18 months that only then do we know exactly the parameter of the lighting solutions business and I don’t only mean you know sales and profitability including the allocation of IG&S but I also mean separating the balance sheet of Philips including let's say the liabilities and only then when we have clarity on that can you engage in a process where somebody can actually make a bid. So, I consider this as a rumor that states that there is interest of the market but we need to be very clear that there is no bid, right, there cannot be because there is no clear parameter and we have not started any process we’re just preparing ourselves for the separation. And then later this year, let's say in the second half of this year, we expect to be in a better position, as we then know the carve-out perimeter, the separation perimeter, to update the market on the next steps, next steps that will include any option, right? And I've always said a likely option is an IPO, but it is not the only option and I would like to leave it at that. So we should not get ahead of ourselves and we'll just put the statement of interest through the press and on the stack. And I'm happy that people are interested and we'll deal with it in due course.

The next question comes from Mr. Ben Uglow from Morgan Stanley. Please state your question.

I had three questions, one was Frans, could you just give us a little bit of color just kind of market sense on the other parts of the North American particularly the U.S. diagnostic portfolio. How are things going at the moment in ultra-sound, patient care, home healthcare etcetera and what sort of growth are you seeing in those businesses at the moment? Second question is you know you have been very clear in saying that you’re going to have to offer some form of incentives and discounts around Cleveland in CT business in order to get the order book rebuilt. What I was curious to know is that just for CT or is it going to - is there a sort of reputation or a knock on effect across the portfolio i.e. are you going to have to be more aggressive on discounts in other parts of the overall imaging business. And the third question was I guess is a delicate one but it's a follow-up to what Martin just mentioned. Rumors or press reports etcetera I fully appreciate you can't comment on that but thematically what are - I'm curious to understand is if one was a financial or a trade buyer of lighting assets wouldn’t they prefer to automotive lumileds and lighting solutions altogether rather than already broken apart, if that’s an issue that you’re able to comment on I will be very appreciative.

I think we can answer all three questions, let me start with the first one. So for the North America business we have all three sectors there, consumer lifestyle had a very good quarter there we saw strong sales of our oral care business, our personal care business and so I was happy with the performance of consumer in North America. On the lighting side we saw strong performance on the lamps business and we already said in our commentary both Ron and I did that professional lighting solutions, not the old Genlyte did not perform as we wanted to do. We have an increase in the order book but we did not deliver all the details and overall we felt that we had to intervene and we have appointed Amy Huntington as the new leader for lighting for the Americas. In healthcare we actually have - I'm not proud of the whole year but we did see some strengthens in the fourth quarter in ultra-sound and in patient monitoring and that makes me happy because it shows that Brent Shafer, as the CEO of North America and he stepped in the healthcare role in the middle of the year and I also intervened in the overall leadership. That team is coming together. Ultrasound patient monitoring strong that’s pretty good, we also want the Mayo Clinic who will equip all their hospitals with our patient monitoring equipment so actually that looks good. Now on your point we do have to rebuild confidence around the CT portfolio and let's say from a competitive point of view we have seen some activities of bundled deals and then of course if you cannot deliver a CT then also have some effect on the bundle deals. So that’s unfortunate, we expect that we do have to make a good effort in 2015 to regain momentum in that business. Of course we start by delivering against the existing order book but as we have flagged it will take us certainly some efforts and when it comes to combined deals, yes it may have a knock on effect although when you look at the European order intake and this is interesting, we had a solid mid-single digit order intake in Europe and that also was including deals around diagnostic imaging. So it also shows that when we have our act together that actually we’re performing with good order intake also for diagnostic imaging and that I think is a very positive sign. And then on the third part of your question, yes, I would love to talk a little bit about the upstream, downstream equation that you referred to. I mean we strongly believe that the lighting market is undergoing a fundamental change and as you can see the old component was a light bulb and the downstream was the fixture in which you screw in the light bulb. The new component is not the light bulb but it's a packaged LED and the new application is an integrated fixture which controls an LEDs build-in. We believe that the LED business, the component business as a semi-conductor business will benefit from a consolidated scale in the world and overtime packaged LED makers will look for industry consolidation and strive for very high market share in packaged LEDs. Our lumileds and automotive business is very well-positioned as the strongest patent owner in the world and a great high-end position to actively drive and be a platform for growth in packaged LEDs and automotive and lumileds are together because in fact automotive launch [ph] will become the components for automotive lighting. But the profit pool for lighting solutions is in these large scale and integrated solutions doing complete cities, doing complete buildings, having smart home solutions and the value is no longer in the vertical integration but the value is in how you drive integrated systems. And with intimacy with your customer base you start eating into the adjacencies of controls we’re seeing that we replace the labor of the attrition and we capture that value in our integrated solution. I don’t want to make this too long but we now have office lighting system that is low voltage powered over Ethernet, plug and play, easily configurable and actually you don’t need an electrician to install it. So you pay a bit more to Philips but you save on the electrician and the overall building cost and you get the most - you get actually a smart grid lighting solution in your office including office management solution. So very exciting, so lighting solutions need to focus on the application and should allow the components business to participate in this market share game that typifies the semiconductor business. So we think we’ve the right strategy, and we will make the lighting solutions as part of the process later this year when we have defined to carve out the separation perimeter and we’re in a better position to talk about the strategy to give lighting access to the market directly.

The next question comes from Daniel Cunliffe from Liberum Capital. Please state your question.

So just quick question on the U.S. healthcare orders. We've heard from Siemens today, GE on Friday, the U.S. orders were up I guess mid to high single digit versus like Philips talking about double digits decline. So right about 15 point difference. If you can sort of work on how much to do with [ph] Cleveland, I'm assuming 8 points as you said it was a four point headwind for the whole division. So how much for Cleveland I guess eight is probably about right, how much for share loss and also how much for weaker pricing just we will make something of that difference, that’s the first question. The second question again on the U.S. healthcare, going forward as Cleveland recovers do you anticipate to be sort of above or below the market growth which you expect to be flat through the balance of 2015 and that’s the two question. Thank you.

In North America the Cleveland effect is 6% to 8%, so excluding Cleveland we also had a negative order intake. Now it's important to note that we do not book the multi-year orders in our order intake, all right. We only book the near term part of that in our order intake. I don’t know how competitors are doing it but it's good to keep that in mind that when we win a large scale multi-year order that is treated perhaps in a different way from competition. And nevertheless I think it is fair to say that in North America our market shares have suffered a little bit partly due to Cleveland and partly due to the transformation that we’re doing on moving into an enterprise key account management approach which we believe is fundamental in order to capture the future opportunity of these large scale deals and becoming part of the job of helping deliver better outcomes at lower cost for hospital systems and engaging in let's say also care beyond the four walls of the hospital. Now going forward and I think that was the second part of your question, we want of course to recover, we’re totally unsatisfied with 2014. Everybody is excited and geared up to recapture the market share so our ambition level certainly is to grow above realistically speaking, it may still take us half a year to really get back to good performance also on the back of the gradual ramp up in Cleveland and all the work that we need to do.

Perhaps just one follow-up question, in terms of impact of resuming shipments, I know you don’t usually comment on sort of current quarters but I guess it will be quite interesting to understand the impact of Cleveland coming back to shipments in January, has that had any impact certainly on this month in terms of the U.S. orders and the outlook for this quarter? Thank you.

The redemption of the Cleveland shipments have not yet had an effect on orders. I mean we’re first delivering against the existing order book. I’ve already flagged that despite Cleveland we were able in other parts of the world to actually gain orders and even expand market share so that it feels perhaps a little bit like paradigm but in Europe we actually expanded market shares and so it's not an equal situation across the Board. The U.S. situation was partly Cleveland, partly also the transformation of the sales force. The gradual shipment redemption is expected to take let's say the better part of this year. We have flagged that the first half year-on-year still has a negative EBITDA impact this is because last year we were still doing sales recognition of shipments from 2013 sometimes it takes a while before all these large projects are installed and we talk about a 100 million EBITDA improvement in 2015 versus 2014 and you can derive that is basically all in the second half of the year.

Thank you. The next question comes from Mr. David Vos from Barclays. Please state your question, sir.

Two or three questions from my side please, the first one on healthcare, can we just circle back to the Volcano deal and explain in a little bit more detail the rationale behind it, why Philips is a better owner of this asset? I mean if I look at the growth profile of Volcano has been losing some market share, its existing technology has perhaps come under attack a little bit. So in that context are you really looking to use your own sales force to drive improvements in cross selling there or are you depending very much on their new technologies which are to a degree still experimental? That’s question one. And question two on LED pricing, you have mentioned a couple of times that that’s eaten into the margins a little bit although you have managed to contract that through other actions. I was wondering if you could comment on the pricing effects on where that’s coming from in the LED space, is that mainly China? Is it consumer? Do you also see some price erosion in professional if you could have some more color on that, that would be much appreciated. Thank you.

So, of course you’re right to observe that volcano's growth had stalled. From a great startup they have grown into a 400 million company that was an excellent job. Now we have technology in our organization that can help Volcano move into addressing structural heart disease. It's an area where we are strong and where we by integrating this Volcano can expand our offering. So we have technology on the shelf in our research labs that are going to be an injection into Volcano to strengthen their product range and get to higher growth, leveraging the sales channel of Volcano. So that’s one source of benefit. The second source of benefit is the integration of the consoles of Volcano into our image guided equipment in the hybrid operating room causing that the hospitals do not need to look at two monitors but rather than one which is a better deal for the hospitals and it will strengthen our systems integration in the operating room with an integrated offer that our competitors don’t have. Then certainly since the sales force of Volcano is constantly present or at least on the weekly basis in the operating room talking to cardiologist they are in fact much better place than we’re through our sales force in understanding when hospitals want to upgrade to the next minimally invasive LED. We also believe that this Volcano sales force can actually sell better than what we can do, the software applications around heart disease but also eventually other minimally invasive therapies in the brain or around cancer treatment. Software applications that will become a recurring revenue stream for Philips but that doesn’t really fit so well with the traditional CapEx oriented model of selling an operating room every once in 10 year. So I see multiple benefits, and then the last source of important benefit is playing all good cost synergies and Volcano is a listed company. We’re taking it off the market, we can adjust overhead cost as we integrate kind of really relatively fast. So overall it's a very strong business case. We have put our best people on it, our image guided therapy business is not affected by any of the topics that we discussed earlier. It's a strong business and well performing and we’re ready to go at the moment the tender offer is completed and we can expect later this quarter to come to a closing. If I may then I will switch gears to the LED pricing, maybe to give myself a chance to drink a glass of water. I will let Ron answer.

So yes, so if you look at price erosion particularly LED it comes from the LED lamps and that is basically I would say across regions. It is a little bit stronger in Asia where as you know price points are typically lower. So we see strong double digit price erosion in that lamps particularly. So that makes the price erosion of LS&E one of the key business groups into the mid-single digit. If you look at PLS it's more like low single digit and for consumer luminaries, it's somewhat higher because we’re also introducing a lot of new products in there that actually goes quite well, you’ve seen some excitement about our home connected lighting suites, video TV, etcetera. So overall the price erosion for lightings in the mid-single digit, we’re offsetting that by better material, by taking cost out and we did improve particularly in LED lamps and systems, our EBITDA margin in last year compared to 2013 but of course we need still to drive more volume there.

The next question comes from Olivier Esnou from Exane BNP Paribas. Please state your question, sir.

Three questions please. I would like to conduct for lighting component disposal process. As you review the bids are you now purely in a value maximization for 100% of lighting component. Are you still looking at patent sharing and possibly keeping retaining 40% or about 40% of the asset meaning this is part of the adjustment when you review those bids, that’s question number one. Question number two on the lighting separation cost of 300 to 400, I like to have a bit more granularity on that number and possible - it's just like almost a year of EBITDA for lighting now. Is it purely cash or do we have as well write-down of the non-cash adjustment and if you could just maybe say a little bit more about what it relates to? And third question, the U.S. professional Luminaire Development is quite a setback in Q4 in two months ago, you will fulfill a profit year and I just wanted to have your thoughts on to what extent you think after almost trying for two years to come back some really structural issues and beyond - this means in the portfolio or what drives you to believe now you can still come back here. Thank you.

So on the LED component process we’re inviting investors to take a 60% to 80% share of the business and lumileds will continue to be a supplier to us to lighting so there will be a supply agreement and obviously that’s important to us, right? Philips lighting solution is the largest lighting play in the world and we will have a big demand for LEDs and obviously lumileds is a very important part of that and we together do a lot of innovation. I don’t want to let you look inside our deepest thinking around choosing the eventual partner. You will find in due course but we will look at all factors. Then the separation cost, we have done many separations in the past and they typically cost money as we need to separate IT systems, we need to setup new legal entities in countries, we need to shift personnel, we have advisors, we need to setup data rooms. So all of that is cost and mostly its cash related cost. I'm now looking to Ron to see whether I say this correctly.

You said it correctly, Frans. So it's mostly cash, it's exactly for what you just said. It's across many functions, finance, HR, supply chain, IT infrastructure, and real estate, the whole works and if you look outside we’re still trying to look at a bit of relevant benchmark but this certainly not seem to be out of way. So this is for 2015 and we will have to see by 2016 what it would look like probably lower but too early to tell. So initially it's a buildup of couple of bottom up plan and of course as we move along progressively we’re going to update you. I think this is now pretty good estimate.

Let me also underline that we’re trying to setup two lean and agile companies and that we don’t want to have any stranded cost hanging around. So also take the right measures to make sure that we set ourselves up for future success. Yes and then the third question Olivier, Professional Luminaire North America of course is a setback, disappointing. We have taken the measure to appoint Amy Huntington to take the team now the next step forward. However that does not mean that the measure that we have taken were wrong. No, they were right. What we found in the Genlyte acquisition is a multitude of disparate brands, R&D locations and factories. Over the last two years we have taken a lot of action to rationalize that base, to bring products under the Philips brand and the Lightolier brands to move the sales force to be able to do large scale projects and key account management, appoint the new agents representing the consolidated brand portfolio to roll out SAP in that part of the business and so on and so on. So, now we can all of course regret that that wasn’t done years ago but so be it, we took in fact when I was the interim CEO of Lighting, we started this process, we took decisive action to overhaul this business. It has been very painful, we have lost market share primarily to you know one of the North American competitors but we do feel that we have taken the right actions. Now we need to refine those measures and reinvigorate the whole situation and we believe that Amy Huntington that she is absolutely the right leader to do that. I also flagged that in fact we had orders on hand in the first quarter that we were not all able to deliver and yes if we would have had a little bit more luck I think the results would have looked already different. Of course luck doesn’t count, we need to perform and that’s what we’re setup to do. So we expect a gradual improvement during 2015. We should give Amy sometime to get her bearing and to start contributing but I'm convinced that we’re able down the road to regain our market share and I say that with conviction on the back of our product range which in other parts of the world is very strong, is very convincing to professional building owners, to cities, in stadia, and so on. So I don't see any reason why we would not have a positive uptake later on.

The next question comes from Ms. Daniela Costa from Goldman Sachs. Please state your question madam.

My questions are mostly answered but if I can just follow-up on something on Cleveland, out of the 225 million and can you break down or give some color on how important is the component of I guess lost sales versus write-off of stocks and penalties to customers and then more generally how should we think about the time that takes to regain these market shares? So if you’re negotiating a package now and for CT scanners and you just for Siemens or for GE. How long are you locked in? When will you be back in rethinking this in the decade or can this actually be regained quicker? Thank you.

Yes so if you look at the 225 million about 140 million plus is from lost sales. You know that we had a stock write-off in Q3, and then we had - the rest is for consultants and other costs that breaks down the 225 million.

Now then time to regain. We have flagged that it will take us the better part of 2015 to get back to volume that is approximate to the level of 2013. So I think that indicates our current conviction that we are able to repair the situation. I already said we are still getting orders for example, European deals, for example, the Saudi Arabia deal. So it is not that customers have totally stopped ordering. We'll take this account by account. Some of course have - the ones that we’re affected by the delay will remember that more than the customers that we’re not expecting a delivery and basically are prepared to give us the next shot at the delivery. So it's a mixed picture globally. We are committed to repair this situation over the next 12 months.

The final question comes from Peter Olofsen from Kepler Cheuvreux. Please state your question.

On the Lighting business, you mentioned that the performance was impacted negatively by China and conventional lighting. Maybe on China, the declines that you saw there was it just a reflection of weaker end customer demand or were there also some destocking effects? And to what extent was China impacted by customer credit provisions? I recall you had some in Q3, but was that also the case in Q4? And then on conventional lamps, the issues there is it mainly a matter of lower volumes or do you also see some price erosion on that side?

Yes. So on the China Lighting decline, there was some weaker end demand. As you know, in China, construction is not exactly what it was earlier on, so we feel that. Some new construction, some retail construction is lagging behind. That definitely impacts end markets and not only destocking. So the credit provisions in China are below 10 million. We could release some because some people paid us as according to plan and there was at the end some that we had to hold on to. So that impact is abating. Price erosion in conventional in China, yes there is price erosion in conventional. It doesn't take the magnitude of what I earlier said on LED lamps, but conventional China pricing goes a little faster than across the globe on an average. As you also know, the conventional wind-down is now about 13%, so that is a low double digit if you will and in China, that has gone a bit faster. Of course because we had to hold back and didn't want to overstock and certainly not see a repeat of Q4 last year, that definitely also played a role in the China performance. So we're looking forward to the New Year where we're working through this customer payment plans apparently on track apart from a few that I just mentioned and we should see some improvement in 2015.

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

All right. Well, I want to thank everybody for joining this call and giving us a chance to answer your questions and I look forward to meeting you soon again. Thank you. Bye, bye.

That concludes the Royal Philips' fourth quarter and full year 2015 results conference call on Tuesday, January 27, 2015. Thank you for participating. You may now disconnect.