Philips Lighting : Q3 results, October 19 2017

Press release

October 19, 2017

• Sales of EUR 1,684 million, with an increase in comparable sales of 1.3%

• Total LED-based sales growth of 22%, now representing 68% of total sales (Q3 2016: 56%)

• Adjusted EBITA of EUR 176 million (Q3 2016: EUR 175 million)

• Adjusted EBITA margin improvement of 50 basis points to 10.5% (Q3 2016: 10.0%)

• Net income of EUR 110 million (Q3 2016: EUR 51 million)

• Free cash flow of EUR -5 million (Q3 2016: EUR 164 million)

  Eindhoven, the Netherlands - Philips Lighting (Euronext: LIGHT), the world leader in lighting, today announced the company's third quarter results 2017. "In line with our objectives, Philips Lighting returned to comparable sales growth in the quarter. For the first time in our transformation, the growth of LED and connected lighting systems & services more than offset the decline of our conventional business," said CEO Eric Rondolat. "At the same time, we continued to improve our profitability, with LED and connected lighting systems & services being substantial contributors. This demonstrates the successful execution of our strategy as we remain on track to reach our outlook for 2017." Outlook

  Achieving positive comparable sales growth in the third quarter is an important step in the improvement of the growth profile of the company. We are on track to improve our Adjusted EBITA margin by 50-100 basis points for the full year, excluding a EUR 15 million real estate gain in the second quarter. In addition, we expect a strong free cash flow in the fourth quarter based on a substantial reduction in inventories.

  ¹This press release contains certain non-IFRS financial measures and ratios, such as comparable sales growth, EBITA, adjusted EBITA and free cash flow, and related ratios, which are not recognized measures of financial performance or liquidity under IFRS. For a reconciliation of these non-IFRS financial measures to the most directly comparable IFRS financial measures, see appendix B, Reconciliation of non-IFRS financial measures, of this press release.

  Financial review

  Third quarter	First nine months
  2016	2017	change	in € million, except percentages	2016	2017	change
  1,745	1,684	-3.5%	Sales	5,181	5,073	-2.1%
  1.3%	Comparable sales growth	-0.4%
  -3.5%	Effects of currency movements	-0.5%
  -1.3%	Consolidation and other changes	-1.1%
  692	674	-2.7%	Adjusted gross margin	2,019	2,021	0.1%
  39.7%	40.0%	Adj. gross margin (as % of sales)	39.0%	39.8%
  -467	-437	Adj. SG&A expenses	-1,410	-1,386
  -81	-85	Adj. R&D expenses	-254	-254
  -548	-522	4.7%	Adj. indirect costs	-1,664	-1,640	1.4%
  31.4%	31.0%	Adj. indirect costs (as % of sales)	32.1%	32.3%
  175	176	0.7%	Adjusted EBITA	457	492	7.7%
  10.0%	10.5%	Adjusted EBITA margin (%)	8.8%	9.7%
  -55	14	Adjusted items	-114	-40
  120	191	59.0%	EBITA	343	452	31.8%
  93	161	73.0%	Income from operations (EBIT)	260	367	41.0%
  -12	-10	Net financial income/expense	-55	-32
  -30	-42	Income tax expense	-84	-91
  51	110	114.8%	Net income	122	244	99.7%
  164	-5	Free cash flow	146	-30
  0.37	0.80	Basic EPS (€)	0.83	1.74
  34,251	33,422	Employees (FTE)	34,251	33,422

  Third quarter

  Sales amounted to EUR 1,684 million. On a comparable basis, the increase was 1.3%, driven by significant growth in LED, Professional and Home. Europe delivered robust growth, while the Americas continued to experience softer market conditions. Markets in the Middle East & Turkey, most notably Saudi Arabia, continued to be challenging. Solid performance in business groups LED, Professional and Home drove total LED-based sales growth of 22%. Total LED-based sales now represent 68% of total sales compared to 56% in the same quarter last year. As a percentage of sales, the adjusted gross margin improved by 30 basis points to 40.0%, largely driven by procurement savings and increased productivity, partly offset by price erosion. Adjusted indirect costs as a percentage of sales decreased by 40 basis points to 31.0%. Adjusted EBITA increased to EUR 176 million, resulting in a 50 basis point improvement of the Adjusted EBITA margin to 10.5%. Restructuring and incidental items had a positive impact of EUR 14 million. Restructuring costs were EUR 9 million, while incidental items mainly related to a real estate gain of EUR 21 million in Lamps. Net income increased from EUR 51 million to EUR 110 million. Free cash flow amounted to EUR -5 million which included a contribution to the US pension fund of EUR 42 million (USD 50 million) and proceeds related to the sale of real estate of EUR 21 million. Working capital increased as inventories increased in Home in anticipation of the high season, whereas inventories increased in several geographies where sales were softer than anticipated.

  Business highlights for the third quarter
• Professional: Reinforcing our continued leadership in connected lighting systems, we formed an alliance with American Tower Corporation to develop smart light poles, integrating multiple 4G/5G base stations with connected street lights to enable telecommunication services from multiple providers.
• Professional: Demonstrating our continued leadership in architectural lighting systems, we installed numerous projects globally, including the Binhe Yellow River Bridge in China and the Galata Tower in Turkey. Our architectural lighting delivers stunning light shows as well as energy savings of up to 75% in comparison to conventional lighting and reduced operational costs when combined with control systems.
• Professional: CBRE Group in Spain became the first to use the Philips SlimBlend LED luminaire, facilitating energy savings of up to 50% in comparison to conventional lighting and improving employee wellness. This sleek luminaire can be integrated with our connected lighting systems for offices, retail, and hospitality and demonstrates our ability to innovate in LED products.
• Home: We unveiled Philips Hue Entertainment, further strengthening Philips Hue's position as the world's leading connected lighting system for the home. The free software update, available from December, synchronizes lighting with gaming, movies and music to improve the end-user entertainment experience. The introduction follows pilots with The Voice, Syfy and Live Nation.
• Home: We expanded our partnership with Amazon to give consumers a new option to easily set up their connected home lighting systems with Echo Plus, Amazon's new smart home hub. While supplies last, customers who purchase an Echo Plus in introductory markets receive a Philips Hue white bulb that can be switched on and off, dimmed and brightened using Echo Plus's voice commands.
• Home: Philips Hue also further strengthened its position in China, having JD.com join as a 'Friends of Hue' partner, enabling integration between Philips Hue and JD.com's DingDong smart home speaker. We also introduced Philips Hue luminaires designed for the Chinese market to cater to local needs.

Sales amounted to EUR 423 million, a comparable decline of 20.2%, which partly reflects a high base of comparison in the third quarter of 2016. Adjusted EBITA decreased to EUR 85 million, due to the sales decline, partly offset by procurement and productivity savings. The Adjusted EBITA margin remained robust at 20.0%. Reported EBITA included a real estate gain of EUR 21 million in the third quarter.

Sales increased by 14.3% to EUR 416 million, on a comparable basis, driven by significant volume growth, partly offset by lower selling prices and stronger growth in more affordable products. Growth was primarily driven by LED lamps, while growth in LED electronics slowed down. All regions contributed to growth, although countries with high LED penetration rates showed lower growth. The Adjusted EBITA increased to EUR 45 million, driven by operational leverage and procurement savings, offsetting price reductions and mix impact. Adjusted EBITA margin increased by 10 basis points to 10.7%.

Sales amounted to EUR 685 million, an increase of 7.0% on a comparable basis. Europe and the Rest of the World remained strong, while market conditions in the United States continued to be soft, particularly for small- to medium-sized projects. Market conditions in Saudi Arabia continued to be challenging, negatively impacting comparable sales growth by 300 basis points. Adjusted EBITA increased by 64.5% to EUR 69 million. The Adjusted EBITA margin increased by 380 basis points to 10.1%, mainly driven by operational leverage, mix improvements and cost reductions.