Philips Lighting Annual Report 2017 - signify.com

1 Annual Report20172 Philips Lighting Annual Report 2017 Table of contentsTable of contentsThe big picture 3 1. Performance highlights 4 2. Message from CEO 6 3. Our strategic focus 8 4. Corporate performance 18 5. Three-year overview 27 Governance 28 6. Board of Management 29 7. Supervisory Board 30 8. Supervisory Board Report 32 9. Remuneration Report 37 10. Corporate governance 42 11. Investor relations 49 12. Risk factors and risk management 52 13. Statement of the Board of Management 63 Corporate statements 65 14. Consolidated financial statements 67 15.

2 Philips Lighting financial statements 120 16. Sustainability statements 126 17. Combined independent auditor s Report 148 18. Reconciliation of non-IFRS financial measures 157 19. Definitions and abbreviations 161 20. Forward-looking statements and other information 163 The Binhe Yellow River Bridge in Yinchuan, China is a double-cable suspension bridge that spans the width of the sixth longest river system in the world. It is illuminated by Philips Color Kinetics technology ( ), which provides architectural Lighting effects and up to million statements and risks & uncertaintiesPlease refer to Chapter 20, Forward-looking statements and other information, of this Annual Report , for more information about forward looking statements, market and industry information, fair value information, IFRS basis of presentation, use of non-IFRS financial measures and statutory financial big picture4 Philips Lighting Annual Report 20171.

3 Performance highlights 1. Performance highlightsFinancial performancePhilips LightingComparable sales ( )LED-based sales201765%201655%Adjusted EBITA margin201710% income2017 EUR 281 million2016 EUR 185 millionFree cash flow2017 EUR 403 million2016 EUR 418 millionLampsSalesEUR 1,820 millionNominal sales growth(22%)Comparable sales growth( )EBITA marg EBITA 1,703 millionNominal sales sales marg EBITA 2,755 millionNominal sales sales marg EBITA 684 millionNominal sales sales marg EBITA chapter 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. These measures are further discussed in chapter 4, Corporate performance, of this Annual Report .

4 For a reconciliation of these non-IFRS financial measures to the most directly comparable IFRS financial measures, see chapter 18, Reconciliation of non-IFRS financial measures, of this Annual by geographyGlobal businessesRest of the worldAmericasEuropeEurope33%Americas31%R est ofthe World30%Globalbusinesses6%Business GroupsSales by Business GroupOthersHomeProfessionalLEDL ampsOthersHomeProfessionalLEDL ampsLamps26%Other0%LED24%Professional40% Home10% Philips Lighting Annual Report 201751. Performance highlightsSustainability performanceEnvironmental highlightsSustainable revenues201777%201678%Carbon footprint (net)2017325 kilotonnes2016406 kilotonnesRenewable electricity201780%201667%Total manufacturing waste201743 kilotonnes201640 kilotonnesSocial highlightsEmployees (full-time equivalent)201732,130201634,256 Female executives (% of total)201717%201617%Employee Net Promoter Score20171420168 Supplier sustainability performance201795%201692%Sustainable revenues Operational carbon footprint Health & Safety 15 16 17727877% of total revenues 15 16 17666528560 Kilotonnes CO -equivalent 15 16 recordable case rate6 Philips Lighting Annual Report 20172.

5 Message from CEODear Stakeholder,Looking back at 2017, I am proud of how we served our purpose to unlock the extraordinary potential of light for Brighter Lives and a Better World. The delivery of our one billionth LED lamp as part of the Global Lighting Challenge is just one great illustration of was a good year, marked by the continuous transformation of the company and the achievement of all the commitments we made. Among the many important milestones, Royal Philips reduced its stake in Philips Lighting to under 30% through three sell downs. As part of our promise to repurchase up to EUR 300 million of shares before the end of 2018, we participated in each one, for a net total of EUR 272 strategy is paying offWe executed our strategy with a lot of rigor in 2017, in what was still a challenging global economic environment.

6 We saw the growth of our LED and Systems & Services businesses more than offset the decline of our conventional Lighting businesses. Our conventional business remained very profitable, cash generative, and our market share increased further in a declining market. Our comparable total LED-based sales grew by 19%, representing 65% of our sales in 2017. This was enabled by game-changing innovations including Philips TrueForce LED range and the Philips EasySmart TLED. Systems & Services grew by 51% in the Professional and Home spaces, now amounting to more than EUR 900 million. Important milestones demonstrating our commitment to both customers and innovation included: the 5th anniversary of the Philips Hue connected Lighting system for the home, our 1,000th 2. Message from CEO2017: Returning to growth In 2017, the successful execution of our strategy allowed us to return to growth for the full year and further improve our profitability.

7 Our transformation journey continues and I am particularly pleased with the leadership position we established in LED products and the promising growth trajectory of our connected Lighting systems. Eric Rondolat, CEO Philips LightingPhilips Lighting Annual Report 201772. Message from CEOinstallation of the Philips CityTouch connected street Lighting system, and the 50,000th project of our Philip Color Kinetics professional LED Lighting system. We substantially improved our customer services and further enhanced our customer centricity, resulting in a 14% increase in customer satisfaction. We implemented major plans to further simplify our ways of working to increase our speed and agility and decrease our indirect financial performance is in line with our objectivesIn 2017, we delivered on all our objectives: We returned to growth in the course of 2017 and achieved positive comparable sales growth of for the full year.

8 Our Home business broke even, achieving an adjusted EBITA margin of We improved our operational profitability by 90 basis points to We delivered a solid free cash flow of EUR 403 , these results show continued progress toward achieving our strategic goals and medium-term financial objective to gradually improve our Adjusted EBITA margin to 11%-13%. Our balance sheet is solid and allows us to return money to shareholders, consider value-generating bolt-on acquisitions, and optimize our balance sheet. Again, we felt supported by our shareholders and see in this a sign of trust in our strategy and in the ability of our teams to deliver. For 2017, we have proposed a dividend of EUR per share, which represents a 45% pay-out ratio and a 14% satisfaction of our customers improvesIn 2017, we improved our customer Net Promoter Score and set up the foundations of a major multi-year program, Road to Excellence , aimed at operational excellence to achieve unequalled customer and partnerships drive growthWe stayed at the forefront of innovation in technology, products and system architectures, enabling us to capture new market opportunities.

9 We released wireless connected architectures managed by our InteractOffice software, introduced pioneering offers in home entertainment Lighting , undertook the world s largest LED horticultural Lighting project in Russia, and partnered with American Tower Corporation to jointly deliver street light poles that enable smart telecommunication prioritize our people developmentIn 2017, we ran our Edge programs aimed at further developing our people and decided to revive our Philips Lighting University to provide our employees with a unique platform for them to learn, grow and flourish. We improved our Employee Net Promoter Score with levels of participation above 78% and we started to measure how our values are embedded in the company on a quarterly contribution to sustainability is recognizedSustainability is an intrinsic part of our strategy.

10 We were honored with the Industry Leader position in the Electrical Components and Equipment category of the Dow Jones Sustainability Index, which recognizes the achievements of our Brighter Lives, Better World thanksOn behalf of the Board of Management and the leadership team, I want to thank our talented employees who worked hard to ensure we delivered on our promises in 2017. It is important to be able to count on teams that believe in our purpose and live by our would also like to thank our customers for their continued trust, which motivates us on a daily , I would like to thank our shareholders for their confidence in us and in the exciting opportunities that our strategy 2017, the teams of Philips Lighting unlocked some of the extraordinary potential of light for Brighter Lives and a Better RondolatCEO Philips Lighting8 Philips Lighting Annual Report 20173.