Koninklijke Philips N : Philips delivers Q2 sales of EUR 4.2 billion, with 9% comparable sales growth; net income amounts to EUR 153 million and Adjusted EBITA margin improves 280 basis points to 12.6%; company announces EUR

Q2 2021

Quarterly report

Philips delivers Q2 sales of EUR 4.2 billion, with 9% comparable sales growth; net income amounts to EUR 153 million and Adjusted EBITA margin improves 280 basis points to 12.6%; company announces EUR 1.5 billion share buyback program

Amsterdam, July 26, 2021

Second-quarter highlights

• Group sales increased to EUR 4.2 billion, with 9% comparable sales growth
• Comparable order intake decreased 15%, with strong double-digit growth in the Diagnosis & Treatment businesses and a decline in the Connected Care businesses on the back of COVID-19-related 167% growth in Q2 2020
• Income from continuing operations decreased to EUR 65 million due to a EUR 250 million provision related to field actions to address a component quality issue. Income from continuing operations was EUR 195 million in Q2 2020.
• Adjusted EBITA increased to EUR 532 million, or 12.6% of sales, compared to EUR 390 million, or 9.8% of sales, in Q2 2020
• Operating cash flow amounted to EUR 332 million, compared to EUR 446 million in Q2 2020
• Free cash flow was EUR 167 million, compared to EUR 212 million in Q2 2020

Frans van Houten, CEO

"We have mobilized the necessary resources across the company to address the component quality issue in certain of our sleep and respiratory care products. We fully understand the impact that this is having on patients, as their well-being is at the heart of everything we do at Philips. We are in discussions with the relevant regulatory authorities to obtain authorization to start deploying the repair kits and replacement devices that we are producing.

I am pleased with the good performance momentum in all our businesses except the Sleep & Respiratory Care business, as we delivered a strong 9% comparable sales growth and 280 basis points profitability improvement for the Group in the quarter. I am particularly encouraged by the 29% order intake growth in our Diagnosis & Treatment businesses, as well as the strong growth of our Personal Health businesses.

In the quarter, we introduced exciting innovations, such as the new Spectral CT 7500 to help improve disease characterization and reduce rescans and follow-ups. The integration of BioTelemetry and Capsule Technologies is proceeding well, and our customers appreciate the expanded portfolio of end-to-end patient care management solutions from the hospital to the home. We entered 12 new long-term strategic partnerships, building on the strength of our portfolio and demonstrating the trust hospital leaders have in our ability to enhance health outcomes and lower the cost of care, while improving patient and staff experience.

Confident in our strategy and financial trajectory, we are launching a new share buyback program of EUR 1.5 billion in line with our balanced capital allocation policy.

Looking ahead, while we continue to see uncertainty related to the impact of COVID-19 across the world and electronic component shortages, our financial outlook remains within our guided range, with low-to-mid-single-digit comparable sales growth and an Adjusted EBITA margin improvement of 60 basis points expected for the Group in 2021."

Business segment performance

The Diagnosis & Treatment businesses recorded 16% comparable sales growth, with double-digit growth in all businesses. Comparable order intake increased 29%, with strong double-digit growth in Image-Guided Therapy, Ultrasound and Diagnostic Imaging. The Adjusted EBITA margin increased to 13.2%, mainly driven by sales growth and productivity measures.

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Comparable sales in the Connected Care businesses decreased 16%, as mid-single-digit growth in Hospital Patient Monitoring was more than offset by a double-digit decline in Sleep & Respiratory Care. Comparable order intake decreased significantly following the steep COVID-19-related increase in Q2 2020. The Hospital Patient Monitoring business continues to perform well above 2019 levels. The newly acquired BioTelemetry and Capsule Technologies businesses continue to deliver strong sales growth with increasing profitability. The Adjusted EBITA margin amounted to 11.3%, mainly due to the impact in the Sleep & Respiratory Care business.

The Personal Health businesses recorded a strong comparable sales growth of 33%, driven by double-digit growth across all businesses. The Adjusted EBITA margin increased to 17.0%, mainly driven by sales growth and productivity measures, partly offset by investments in advertising & promotion.

Philips' ongoing focus on innovation and partnerships resulted in the following highlights in the quarter:

• In China, Philips signed a contract with Gansu Provincial Maternity and Child Care Hospital to streamline and advance the delivery of critical care across multiple departments of the hospital. Philips will provide its advanced critical care information system, patient monitoring solutions and diagnostic cardiology solutions.
• Building on their successful cooperation in MR-guided adaptive radiation therapy, Philips and Elekta deepened the partnership to advance personalized cancer care through precision oncology solutions to deliver more precise therapy, shorter treatment times, and lower cost of care.
• Philips introduced the Spectral CT 7500 system, which delivers high-quality spectral images for a broad patient base, including cardiac, pediatric and bariatric patients, further expanding the company's comprehensive CT portfolio, which comprises spectral and conventional CT systems, as well as radiation oncology CT systems, and advanced informatics and services.
• Philips launched IntraSight Mobile, which offers users in hospitals and office-based labs the integration, flexibility and affordability of a single mobile system for intravascular imaging, physiology measurements and co-registration for seamless workflows and enhanced patient care. Building on the success of IntraSight, the launch will further reinforce Philips' leading position in image- guided therapy.
• Philips announced progress on several clinical studies including the positive two-year clinical study results for the Tack Endovascular System for dissection repair, the first patient enrollment in the DEFINE GPS multicenter study to further drive the adoption of iFR for percutaneous coronary interventions based on clinical evidence, and the start of the WE-TRUST multicenter stroke study to shorten treatment times by identifying, planning and treating ischemic stroke patients in the interventional suite. Moreover, Philips announced the first structural heart repair procedure at Mayo Clinic using its new 3D intracardiac echocardiography catheter VeriSight Pro.
• Philips introduced its integrated Interventional Hemodynamic System with the portable Patient Monitor IntelliVue X3, providing advanced vital signs measurements at the tableside in the interventional suite and continuous monitoring across care settings. Uninterrupted patient monitoring can help to improve clinical decision making and timely detection of potential adverse events at every stage.
• The global launch of Philips' most advanced electric toothbrush, the Sonicare 9900 Prestige, was well received, with an average 4.7 (out of 5) star rating by consumers. The premium electric toothbrush leverages AI to optimize the user's brushing technique, ensuring full coverage of their teeth, and instills brushing habits that improve oral health.
• Expanding the company's leading male grooming portfolio, Philips introduced the Shaver Series 9000 with SkinIQ technology in China. The premium shaver leverages AI and sensors to offer a personalized shave tailored to each unique skin and hair type. It will also be launched in North America and Europe in the second half of the year.

Cost savings

In the second quarter, productivity savings amounted to EUR 90 million, of which procurement savings amounting to EUR 44 million, and savings of EUR 46 million delivered by overhead and other programs.

Capital allocation

Today, Philips is announcing a new share buyback program for capital reduction purposes for an amount of up to EUR 1.5 billion. At the current share price, the program represents a total of approximately 36.8 million shares, or 4% of total shares outstanding. Philips expects to start the program in the third quarter of 2021 and to complete it within three years. It is expected that the program will be executed through a number of forward purchase transactions with one or more financial institutions and/or open market purchases by an intermediary to allow for transactions during both open and closed periods in accordance with the EU Market Abuse Regulation. Updates on the progress of the program and further details will be made available here, and through press releases as appropriate.

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Under Philips' ongoing EUR 1.5 billion share buyback program for capital reduction purposes, which was initiated in the first quarter of 2019, Philips repurchased shares in the open market and entered into a number of forward transactions. Philips had 2,500,000 shares delivered in June 2021 as part of the program, and under the currently outstanding forward contracts the company expects to have another 17,976,023 shares delivered in the remainder of 2021. These shares will be cancelled by December 31, 2021, resulting in an estimated total number of issued shares of 897 million by that date, compared to 917 million shares at the end of Q2 2021. Further details can be found here.

Domestic Appliances

On March 25, 2021, Philips announced that it had signed an agreement to sell its Domestic Appliances business to global investment firm Hillhouse Capital. As planned, on July 1, 2021 the Domestic Appliances business became a stand-alone entity and the sale is on track for completion in the third quarter of 2021. Since the first quarter of 2021, the Domestic Appliances business (which was previously part of the Personal Health segment) is reported as a discontinued operation. Philips will continue to consolidate Domestic Appliances under International Financial Reporting Standards (IFRS) until the sale is completed.

Regulatory update

On June 14, 2021 Philips initiated a voluntary recall notification in the US/field safety notice outside the US for certain sleep and respiratory care products to address identified potential health risks related to the polyester-based polyurethane (PE-PUR) sound abatement foam in these devices.

Philips has established dedicated call centers and a device registration process to support patients. The company is increasing its production, service and repair capacity and has requested the relevant regulatory clearances for the repair and replacement actions. Subject to these regulatory clearances, Philips is ready to start deploying the repair kits and replacement devices that it is producing. Given the estimated scope of the field actions on the installed base, Philips has taken a provision of EUR 250 million in the second quarter of 2021, in addition to the provision that the company recorded in the first quarter of 2021.

Conference call and audio webcast

Frans van Houten, CEO, and Abhijit Bhattacharya, CFO, will host a conference call for investors and analysts at 10:00 am CET today to discuss the results. A live audio webcast of the conference call will be available on the Philips Investor Relations website and can be accessed here.

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Philips performance

Key data in millions of EUR unless otherwise stated

	Q2 20201)	Q2 2021
Sales	3,974	4,230
Nominal sales growth	(4)%	6%
Comparable sales growth2)	(5)%	9%
Comparable order intake3)	27%	(15)%
Income from operations	205	85
as a % of sales	5.2%	2.0%
Financial income and expenses, net	21	(7)
Investments in associates, net of income taxes	-	(2)
Income tax	(30)	(11)
Income from continuing operations	195	65
Discontinued operations, net of income taxes	14	88
Net income	210	153
Earnings per common share (EPS)
Income from continuing operations attributable
to shareholders4) (in EUR) - diluted	0.21	0.07
Adjusted income from continuing operations
attributable to shareholders4) (in EUR) - diluted2)	0.27	0.40
Net income attributable to shareholders4) (in
EUR) - diluted	0.23	0.16
EBITA2)	364	173
as a % of sales	9.2%	4.1%
Adjusted EBITA2)	390	532
as a % of sales	9.8%	12.6%
Adjusted EBITDA2)	630	762
as a % of sales	15.9%	18.0%

1. Comparative figures in this report have been restated, refer to 'Presentation' in Forward- looking statements and other important information.
2. Non-IFRSfinancial measure. Refer to the Reconciliation of non-IFRSinformation
3. Comparable order intake is presented when discussing the Philips Group's performance. For the definition of this measure, refer to chapter 12.4, Other Key Performance Indicators, of the Annual Report 2020.
4. Shareholders refers to shareholders of Koninklijke Philips N.V.

Sales per geographic cluster in millions of EUR unless otherwise stated

			% change
	Q2 2020	Q2 2021	nominal	comparable1)
Western Europe	817	873	7%	6%
North America	1,593	1,674	5%	6%
Other mature
geographies	416	408	(2)%	4%
Total mature
geographies	2,825	2,955	5%	5%
Growth geographies	1,149	1,275	11%	16%
Philips Group	3,974	4,230	6%	9%

1. Non-IFRSfinancial measure. Refer to the Reconciliation of non-IFRSinformation

Amounts may not add up due to rounding.

• Comparable sales growth was 9%, with double-digit growth in the Personal Health businesses and Diagnosis & Treatment businesses, partly offset by a double-digit decline in the Connected Care businesses.
• Comparable order intake declined by 15%, with double- digit growth in the Diagnosis & Treatment businesses, which was more than offset by a double-digit decline in the Connected Care businesses following the exceptional demand for patient monitors and hospital ventilators in Q2 2020.
• Adjusted EBITA increased by EUR 142 million and the margin increased by 280 basis points compared to Q2 2020, driven by sales growth and productivity measures.
• Restructuring, acquisition-related and other charges amounted to EUR 359 million, compared to EUR 27 million in Q2 2020. Q2 2021 mainly includes a field action provision of EUR 250 million, a loss of EUR 70 million related to a divestment, restructuring and acquisition- related charges of EUR 45 million, and separation costs of EUR 27 million related to the Domestic Appliances business, partly offset by a favorable result in legal matters of EUR 38 million, a benefit from the re-measurement of environmental liabilities of EUR 33 million, and a gain of EUR 32 million related to a minority participation.
• Financial income and expenses resulted in an expense of EUR 7 million, compared to a gain of EUR 21 million in Q2 2020. Q2 2021 includes lower gains on the value of our minority participations compared to Q2 2020.
• Income tax decreased by EUR 19 million year-on year, mainly due to lower net income in Q2 2021.
• Net income from discontinued operations increased by EUR 74 million year-on-year, mainly driven by the Domestic Appliances business, which has been classified as a discontinued operation since Q1 2021.
• Net income decreased by EUR 57 million, as higher operational earnings were more than offset by a EUR 250 million field action provision.
• Sales in growth geographies increased by 16% on a comparable basis, driven by double-digit growth in China, India and Central & Eastern Europe. In mature geographies, sales increased by 5% on a comparable basis, with mid- single-digit growth in North America and Western Europe.

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Cash and cash equivalents balance in millions of EUR

	Q2 2020	Q2 2021
Beginning cash balance	2,143	1,080
Free cash flow1)	212	167
Net cash flows from operating activities	446	332
Net capital expenditures	(234)	(166)
Other cash flows from investing activities	(101)	1
Treasury shares transactions	2	(83)
Changes in debt	(63)	234
Dividend paid to shareholders		(409)
Other cash flow items	(1)	(9)
Net cash flows from discontinued operations	102	38
Ending cash balance	2,294	1,019
of which discontinued operations		16
of which continuing operations		1,003

1. Non-IFRSfinancial measure. Refer to the Reconciliation of non-IFRSinformation

Composition of net debt to group equity1) in millions of EUR unless otherwise stated

	March 31, 2021	June 30, 2021
Long-term debt	5,877	5,882
Short-term debt	1,742	1,949
Total debt	7,619	7,831
Cash and cash equivalents	1,040	1,003
Net debt	6,579	6,827
Shareholders' equity	12,493	11,952
Non-controlling interests	33	34
Group equity	12,526	11,987
Net debt : group equity
ratio1)	34:66	36:64

1. Non-IFRSfinancial measure. Refer to the Reconciliation of non-IFRSinformation

• Net cash flows from operating activities amounted to EUR 332 million, driven by higher operational earnings offset by a phasing-led reduction of accounts payable.
• Treasury shares transactions includes share repurchases for capital reduction purposes and employee stock purchase plans.
• Changes in debt mainly includes the issuance of commercial paper amounting to a total of EUR 300 million.
• Dividend paid to shareholders includes a EUR 409 million cash dividend, whereas in 2020 the dividend was fully distributed in shares.

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