EVENT DATE/TIME: DECEMBER 06, 2013 / 11:00AM GMT

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EDITED TRANSCRIPT

PHIA.AS - Koninklijke Philips NV Corporate Conference Call on Financial

Reporting Related Matters

EVENT DATE/TIME: DECEMBER 06, 2013 / 11:00AM GMT

OVERVIEW:

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C O R P O R A T E P A R T I C I P A N T S

Robin Jansen Koninklijke Philips NV - Head of Investor Relations

Emmanuel Delay Koninklijke Philips NV - Group Controller

Ron Wirahadiraksa Koninklijke Philips NV - CFO

Gabriel van de Luitgaarden Koninklijke Philips NV - Head of Financial Risk & Pension Management

C O N F E R E N C E C A L L P A R T I C I P A N T S

Andreas Willi JPMorgan - Analyst

Martin Wilkie Deutsche Bank Research - Analyst

Gael de Bray Societe Generale - Analyst

James Moore Redburn Partners - Analyst

Andrew Carter RBC Capital Markets - Analyst

P R E S E N T A T I O N

Operator

Welcome to the Royal Philips conference call regarding financial reporting-related matters on Friday, December 6, 2013.

During the presentation, hosted by Mr. Ron Wirahadiraksa, CFO, and Mr. Emmanuel Delay, Group Controller, all participants will be in a listen-only mode. (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. Robin Jansen, Head of Investor Relations. Please go ahead, sir.

Robin Jansen - Koninklijke Philips NV - Head of Investor Relations

Thank you. Good afternoon, ladies and gentlemen. Welcome to this conference call where we will give you an update on matters related to financial reporting for Royal Philips. As probably most of you know, we have combined the Lighting and Consumer Lifestyle Capital Markets Days since 2011. And, as a result, we will provide our annual update on matters related to financial reporting through this call.

I would also like to point out that our fourth quarter and full-year earnings announcement will take place on January 28, which is a Tuesday. As such, we will not provide any detail or take any questions that relate to our performance during the fourth quarter of this year.

I'm joined today by Ron Wirahadiraksa, our CFO; Emmanuel Delay, our Group Controller; and Gabriel van de Luitgaarden, who is the Head of Financial Risk and Pension Management.

In a moment, Emmanuel will take you through our presentation. After that, both Emmanuel and Ron will be pleased to take your questions. The related press release and accompanying information slide deck were published this morning. Both documents can be accessed through our Investor Relations website. The transcript of this conference call will be available on our investor relations website by Monday at the latest.

On slide 2 you will see our Safe Harbor statement. It contains important information and I kindly request you to go through it. With that, I will hand over the call to Emmanuel.

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Emmanuel Delay - Koninklijke Philips NV - Group Controller

Thank you, Robin. Good afternoon, and welcome to all of you. Let me quickly take you through the agenda of topics that we would like to address today.

We will start with an update on the review of intangible assets that we've done. We will then inform you about any reporting changes applicable to 2014. This will be followed by an update on pensions that contains our latest 2013 estimates and compares them to what we had indicated in our 2012 annual report. We will also provide you with an estimation of pension costs and cash flows for 2014.

Finally we will provide you with our outlook for the EBITA of Innovation, Group and Services for next year. After that, we will take any questions you might have on any of these subjects.

Turning to slide 4, let's start with the review of intangible assets. During our quarterly procedures we review for goodwill and impairment indicators. Specific cash-generating units with limited headroom, such as Consumer Luminaires and Lumileds, are monitored closely as already stated in our semi-annual report.

With respect to other intangible assets, quarter to date an impairment of EUR23 million has been identified in the Healthcare sector, related to the Mammography business in Imaging Systems. This impairment is due to a change in the business outlook coming from a slower than expected sales ramp up. The related EBITA impact of this impairment is EUR5 million.

Turning to slide 6, the next section, on slide 7, summarizes the reporting changes which will be effective from 2014 onwards.

There are no new accounting changes effective January 1, 2014, that will have a material impact on the financial reporting in 2014. We will, however, make a reclassification change in the area of functional costs. We have concluded that the historical way of allocating costs over the different functional areas could be improved to be more in line with where our activities are in the markets.

This means that some costs that were previously allocated to cost of sales or G&A will now be classified as selling costs instead. As this purely relates to a shift across the various costs per function, there will no impact on EBITA.

The change will be effective from January 1, 2014, and historical periods, starting with 2013, will be restated to ensure comparability. The estimated impact for 2013, based on the past three quarters, has been highlighted at the bottom of slide 7.

Turning to slide 8, let's now move to a more detailed discussion on pensions.

So, to date, 2013 has been favorable for our pension plans, as they've benefited from improved equity markets and higher interest rates. Pension financials are in line with our earlier expectations, as outlined in the annual report of 2012.

Pension cost for 2013 is estimated at EUR416 million, excluding a EUR48 million net one-time gain. This one-time gain relates to the EUR78 million gain from past-service pension costs in the US, booked in Q2 2013; and a EUR31 million settlement loss arising from a lump sum offering to terminated vested participants in our US pension plan, which we booked in Q3 2013.

Cash outflow for pensions in 2013 is forecasted to be slightly higher than our expectations at the start of the year. Net interest cost is estimated to be EUR72 million.

2013 is a year in which Philips has been making significant progress with respect to the de-risking of the defined benefits plan.

First of all, we have reached agreement with the Dutch unions on a new pension plan and funding agreement for our biggest pension plan, the Dutch defined benefits plan. As a result of this, Philips is no longer liable for potential deficits of the Dutch pension plan in the future. However, we will continue to be entitled to potential discounts on contributions in the future.

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In addition, we decided to close the US defined benefits plan to further accrual of benefits from 2016. Furthermore, parts of the liabilities of the US DB plan were settled through a lump sum offering to terminated vested participants. This has resulted in a reduction of pension liabilities, thereby reducing risk.

It is also worthwhile to mention that the trustees of the UK defined benefits plan concluded a GBP500 million buy-in transaction at favorable terms. This transaction de-risks a considerable part of the liabilities of the UK defined benefits plan.

Now let's move to slide 10 where we show an overview of the balance sheet position for pensions based on market data as of October 2013. First of all, I would like to remind everyone that markets will continue to move until the end of December and this, of course, may have an impact on the reported final balance sheet numbers for 2013.

The Dutch pension plan, which is our biggest pension plan, remained relatively stable during 2013. Slightly higher discount rates were favorable for the liabilities, but also had a negative impact on the fixed income investments.

With regard to the other major plans, the UK plan has maintained a stable surplus as it is highly interest rate matched. The deficit in the US plan benefited from a substantial increase of the discount rate and from the deficit funding provided by Philips in 2013. In addition, the unfunded part of the German defined benefit plan benefited from the higher discount rate.

The current IFRS balance sheet position as of October 2013 reflects these movements. The combined funded status of all plans improved by approximately EUR330 million and the balance sheet position, which does not include the unrecognized surpluses in the UK, Netherlands and Brazil, improved by approximately EUR400 million.

Turning to slide 11, you will see an overview of our estimates for pension cost and cash flows in 2013 and 2014.

Let me first start with the forecasted pension cost and cash flow for 2013. For reasons of comparison, we also show the numbers we expected at the beginning of the year as disclosed in the 2012 annual report.

We expect pension costs to be, by and large, stable at EUR416 million compared to what we expected in our annual report 2012. This comparison excludes the EUR48 million net one-time gain that was already discussed earlier in this call.

Net interest costs for 2013 is also close to our expectations at the start of the year at EUR72 million.

Pension cash flow for 2013 is now forecasted at EUR688 million compared to EUR648 million at the time of the publication of our annual report 2012.

Now let's have a look at our expectations for pension cost and cash flow in 2014.

The outlook for pension cost in 2014 is EUR389 million, which is EUR27 million lower than the 2013 number of EUR416 million, which excluded the aforementioned EUR48 million net gain from 2013 related to the freeze of the US pension plan. This is mainly due to higher discount rates and the de-risking of the Netherlands and US defined benefit plans of 2013, as discussed earlier in this call.

Net interest cost is estimated to amount to EUR63 million in 2014. This is lower than the current EUR72 million we estimate for 2013, which can be explained by the improved funded status of the defined benefit plans.

Cash outflow for pensions is estimated to amount to EUR615 million in 2014, which is approximately EUR73 million lower than in 2013. This is due to the new funding agreement in the Netherlands and higher discount rates in the US.

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Let me now provide you with the reported EBITA outlook for Innovation, Group and Services, which is on slide 13. Let's start with the latest view for 2013.

In the Q4 press release of 2012 we guided for a reported EBITA in IG&S of a negative EUR330 million. Mainly due to net positive one-offs during 2013, we indicated during the Q3 analyst call that this number will be around negative EUR290 million this year.

Today we maintain this guidance. For 2014 we currently estimate that the reported EBITA for IG&S will be around negative EUR380 million. The increase of EUR90 million includes the impact of the net positive one-offs that we had in 2013 amounting to EUR40 million, additional restructuring costs and investments associated with our multi-year transformation program, Accelerate.

Also, as indicated before, we continue to see a decline in license income, which reflects lower optical licensing income, partly offset by an increase in brand licensing income.

Before we go to the Q&A session of this call we would like to take you through some important dates of our financial calendar in 2014. On January 28 our fourth quarter and annual results for the year 2013 will be published. Please note this is a Tuesday, while we normally publish our results on a Monday.

On February 25 we will publish our annual report for 2013. On April 22 we will present the first quarter results for 2014, which is also a Tuesday. The annual general meeting of shareholders will be held on May 1.

On July 21 we will publish our second quarter and semi-annual results. We will host our Capital Markets Days for Healthcare, Consumer Lifestyle and Lighting on September 23 and 24. Please note this therefore means that we will have only one Capital Markets Day event in 2014 for the three business sectors combined.

Finally, on October 20 we will publish the third quarter results for 2014. With that, let me now open the line for your questions.

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions). Andreas Willi, JPMorgan.

Andreas Willi - JPMorgan - Analyst

I've two questions, please. The first one on what you assume in your IG&S guidance, what relates to the planned and now failed disposal of Audio Video to Funai in terms of stranded costs which were expected to go down in 2014, which should have benefited corporate expense. And I guess also the license income that is now no longer expected to come in.

If you could just confirm that that's basically the main difference on IG&S, probably relative to what the market had expected.

And the second question, in terms of, I don't know whether you can comment on this, the headlines on the anti-trust investigations into your online sales; whether there's anything you can say there, relative to the raid of the EU authorities at your offices? Thank you.

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Your first question will be addressed by Emmanuel, and then Ron will take your second question.

You're right. As the -- we're now assuming basically no change in this guidance in the way that we account for the AV M&A business, meaning we assume in this guidance that the business would be part of Philips consolidated as discontinued operations in 2014, therefore treated the same way as we have done so far in this year.

Therefore the IG&S line includes some stranded costs, and we do not see in our forecast for 2014 the impact of license income because the company is still part of Philips in our assumption.

Ron Wirahadiraksa - Koninklijke Philips NV - CFO

On the statement that we have been visited, yes, we were visited this week. So the European Commission apparently is doing a round of probes on suspected anti-competitive practices, basically focusing on online sales of consumer electronic products and small domestic appliances, if these have been for some inordinate reason restricted.

I can't comment on this. We will of course fully cooperate. As you know, we condone (sic) any anti-competitive behavior. This doesn't mean that we've been visited, of course, that there is already any indication that something may be the matter, so I'm not going to comment on that. And whatever cooperation we need to give, we will give it.

So from -- we should just assume that stranded costs for 2014 should stay at the level they were running at in Q4 2013 for modeling purposes?

Yes, that would be a good assumption.

Thank you.

Operator

Martin Wilkie, Deutsche Bank.

Martin Wilkie - Deutsche Bank Research - Analyst

Just a couple of questions. Firstly on the one-offs in IG&S, and I remember you calling out the pension settlement differences during the year, but you also mentioned that there was some additional licensing income, which if you could just clarify what that was, in terms of a one-off in 2013; it's not going to repeat.

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And the second question was just to clarify, it sounds like you are going to continue to have the Consumer Electronics business reported in discontinued operations for next year. Is there any risk that that changes? Or are you comfortable that the process can continue such that you're still allowed to have that in discontinued operations, as opposed to re-consolidating? Thanks.

Again, Emmanuel, in this case, will take the first and Ron will take the second question.

With respect to one-offs, when we look at our license income, sometimes we have a steady stream of income and sometimes we have a one-time deal, so to speak.

And when we do this analysis of our license income, we find that in 2013 approximately EUR40 million of license income can be considered to be one-time. We also had about EUR30 million of environmental, let's say, good news that are not supposed to recur.

On the other hand we had the pension hit that we mentioned in the call, about EUR31 million. So the net is about EUR40 million.

On your second question, Martin, on this being asset held for sale and then continued in discontinued operations, so it's not coming back in the portfolio. The accounting criteria are that, as long as we have a credible plan to dispose of this, sell it within the coming 12 months, we can keep it there.

I bear into memory what I said maybe in earlier communications, that the Audio Video multimedia business influence is now completely standalone. So post the deal with Funai not taking place, of course, we have very swiftly taken the last step to make it standalone, and it's now under the name of Woox Innovations, a fully standalone company within Philips.

We have a couple of leads coming back from the first time that we marketed this deal, and we have a few other interesting names. Of course I cannot comment on that. So we are confident that we will dispose this within the coming 12 months.

Martin Wilkie - Deutsche Bank Research - Analyst

Okay. Thank you very much.

Operator

Gael de Bray, Societe Generale.

Gael de Bray - Societe Generale - Analyst

I've got one question on the one-time contribution of EUR600 million in 2014. Could you maybe be a bit more specific in terms of the timing here for this cash outflow to be met during the year?

And, also, how much of that will be eventually non-cash related? And also if you could say exactly what are going to be the non-cash assets you're talking about here.

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Robin Jansen - Koninklijke Philips NV - Head of Investor Relations Gabriel will answer this one.

Gabriel van de Luitgaarden - Koninklijke Philips NV - Head of Financial Risk & Pension Management

On the timing of the contribution, the contribution will be made early in 2014.

Next on your question on the level of cash involved in the EUR600 million, we're in the process of completing the discussions with the trustees of the Dutch plan. The Dutch plan trustees have a fiduciary duty to carefully review and expect and value those assets. That process is still ongoing. We're in the process of completing that.

I can give you some insight in the type of assets that we are offering; and these consist mainly of a number of listed equity stakes, some non-listed equity stakes, some loans that we've provided to third parties. And those are, we believe, solid assets for the pension plan to invest in.

Gael de Bray - Societe Generale - Analyst

Okay. Thank you very much.

Operator

James Moore, Redburn.

James Moore - Redburn Partners - Analyst

My question's sort of been answered, but I wonder if I come at it a different way, and say for the IG&S guidance that you've given for 2014, it's a EUR90 million increase.

Could you allocate that EUR90 million increase across the six pieces; innovation, IP royalties, Group regional costs, Accelerate, pensions, service units? Just trying to understand whether some of those are actually getting better, and that there's some bigger worsening on the other side. What are the effects across those six pieces?

Thank you for the question, because I heard you addressed it to me. So actually it's from EUR330 million, because if you take up the one-off, it goes from EUR330 million to about EUR380 million; that's, I believe, a EUR50 million increase. So that's how you should look at the run rate.

Now, within that, license income, as we've always said, it will over time be progressively a lower license income to be expected. So that is clearly in IP&S, parts of the PGI part of the IG&S, so to speak.

The restructuring costs are ongoing and have a lot to do with the Accelerate transformation program. And there is some more money for Accelerate investments.

I could tell you that we always strive to drive the overhead costs within that, from the Group services departments down, and are also more productive than earlier years.

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James Moore - Redburn Partners - Analyst Thank you very much.

Operator

(Operator Instructions). Andrew Carter, Royal Bank of Canada.

Andrew Carter - RBC Capital Markets - Analyst

Most of my questions have actually been answered, but I was just thinking in terms of the pension and the cash contributions. I was just wondering in terms of the magnitude going forwards, should we be thinking that amount will drop?

And I guess two things occurred to me. One, obviously, you're putting in this EUR600 million. Does that in any way impact future cash contributions that you might have to make?

And then the second one was that you do flag that some of the money is going into deficit funding of the US scheme. And I was wondering whether the fact that you've flagged it means that, in due course, you'd expect that number to fall.

Gabriel will answer it.

Gabriel van de Luitgaarden - Koninklijke Philips NV - Head of Financial Risk & Pension Management

First of all, there is a relation to your question on the EUR600 million one-time contribution and the impact of that on future contributions, we pay, in the future we will pay, continue to pay contributions for our accrual of new benefits only.

So for the Dutch plan there are no further contributions for any potential deficits. Contributions will not go down. We have reached agreement on a fixed contribution for the next five years.

On your question regarding the deficits funding in the US, we apply the minimum deficit funding rules as applicable in the US. These provide --we need to fund the deficit over a period of seven years. We don't see that going down in the near future.

Andrew Carter - RBC Capital Markets - Analyst

Thank you.

Operator

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Thank you very much for being on this call. We hope that this answers to the needs that you have. Also like to thank the team here for their hard work. Thank you and have a good day and a good weekend, and also some good seasons' greetings from my side. Thank you.

Operator

This concludes the Royal Philips conference call regarding financial reporting related matters on Friday December 6, 2013. Thank you for participating. You may now disconnect.

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