Financial Value Creation

Stewart McCroneCFO Philips LightingCFO Philips Lighting

73

Key takeawaysKey takeaways

We are a stronger company due to• We are a stronger company due to measures taken in the last two years; 2010 expected be a record year for2010 expected be a record year for Lighting

Th Li hti k t i t t• The Lighting market is set to grow, driven by LED. We will are ready to grow sales expand margins creategrow sales, expand margins, create value

7474

Acted fast in the downturn Benefiting from salesActed fast in the downturn. Benefiting from sales rebound /lower cost base. Heading for record yearSales-driven leverage and lower break-even point driving EBITA improvement

Improving profitability, sustainably lower cost

€ Mln

20%

300

200

30%

€ Mln• Sales up 15% first half year

2010

• Last twelve months10%

0%

100

0

• Last twelve months adjusted EBITA running at over 11 % of sales

F ll 2010 fi d t

-20%

-10%

-200

-100

Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1

• Full year 2010: fixed cost savings will lower breakeven point by around 2.5% of EBITA margin

Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1

2008 2009 2010

Adjusted EBITA as % of SalesRestructuring and M&A related charges

75

Comparable sales growthAdjusted EBITA as % of Sales

EBITARestructuring and M&A related charges

Sales recovery despite current weakness in theSales recovery despite current weakness in the luminaires (fixtures) market in mature economiesAround 25% of Philips Lighting sales driven by New Build in Western Europe & North America (WE&NA)

Not yet firing on all cylinders: sales recovery despite soft luminaires market in mature economies

Philips Lighting New Build

Replace-ment Total

30

20

% comparable sales growth

Residential 12% 13% 25%

Commercial 30% 22% 52%

Other 17% 6% 23% 10

10

0

Total 59% 41% 100%

Q4Q3Q2Q1 Q1 Q2

-20

-10

Q4Q3

2008 2009 2010

Professional & Consumer Luminaires

New Build WE&NA ROW Total

Residential 7% 5% 12%

Commercial 18% 12% 30%

76

Total lightingLamps and other businesses Commercial 18% 12% 30%

Total 25% 17% 42%

Portfolio View: all businesses back to growth andPortfolio View: all businesses back to growth and profitability in 2010 Lumileds* 2010*

Adjusted EBITA %

Lamps

Professional Luminaires

Other businesses

Comparable Sales G th %

77

Growth %

Growth vs. profitability for Jan-June 2010; Bubble size represents sales* Lumileds bubble is out of the scale due to large sales growth and hence represented manually in the chart

Lumileds strongly contributing to Philips Lighting valueLumileds strongly contributing to Philips Lighting valueIncreased success in and focus on illumination

Strong sales growth with adjusted EBITA > 20%

Illumination sales growing rapidly

LTM illumination sales indexed LTM sales $ Mln

Illumination design-in wins increasing

Quarterly illumination design-in wins

800

growth1$ y g

indexed growth2

400

600

200

400

Q2 ’10Q2 ’09Q2 ’080

Q2 ’10Q2 ’09Q2 ’08 Q3 09 Q2 10Q1 10Q4 09

781.Q2 2008 as base2.Q3 2009 as base

Streamlining and reducing cost: bold measuresStreamlining and reducing cost: bold measures paying off, significant savings still to come

400 • Restructuring primarily to

Positive and structural impact on our business

Restructuring charges/savings€ Mln

0

200

400 • Restructuring primarily to reduce production capacity, mainly of traditional lighting t h l i h

-200

0 technologies such as incandescent

• 70% of restructuring

-600

-400 charges will translate into future savings

• Significant part of charges -800

Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1

2008 2009 2010

still to be converted to future annual savings

• Restructuring ~1.5% of

79

Cumulative charges

Cumulative savingsChargesSavings

70% of cumulative charges

g %sales in 2010 and 2011

Cash invested in working capital structurallyCash invested in working capital structurally reduced; healthy cash flow to fund future growth

WC % f LTM S lWorking Capital

EBITA % lLTM FCF

€ Mln € Mln

LTM free cash flow1 as % of LTM salesNet working capital as % of LTM sales

25%

20800

1.200

1.000

WC as % of LTM Sales25%2015

900

600

LTM FCF % LTM salesEBITA % sales€ Mln € Mln

5

15

10

800

600

400

200

510

0

600

3005

0

200

0Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1

-5-100

Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1

2008 2009 20102008 2009 2010 008 009 0 0008 009 0 0

• Reductions in working capital are structural, not short term opportunistic term actions• Lower levels of overdue receivables from customers

Better payment terms across the board

80

• Better payment terms across the board

1. Free cash flow is defined as cash flow from operating activities minus net capital expenditures.

M&A in Luminaires & Controls gaining tractionM&A in Luminaires & Controls gaining tractionYr Company Business & Rationale Integration1 Synergies2 Growth3

’07 Color Kinetics Key player in LED technology Done

’08 Genlyte North American presence Done

’09 Ilti Luce LED Architectural Done

Selecon Entertainment Lighting

Dynalite Building Controls

Teletrol Multi site Controls

’10 Luceplan Designer fixtures

Amplex Street Lighting Controlsp g g

Burton Medical fixtures

Professional L minaires 1Integration means whether the integration into Philips Lighting is on trackProfessional Luminaires

Lighting Controls

Consumer Luminaires

1Integration means whether the integration into Philips Lighting is on track2Synergies mean whether synergies are being realized as assumed before acquisition3Growth means whether the acquired companies’ sales develop as assumed before acquisition

81

Key takeawaysKey takeaways

Th Li hti k t iThe Lighting market is set to grow driven byset to grow, driven by LED. We will are ready yto grow sales, expand

i t lmargins, create value

82

Value creation: grow sales expand marginsValue creation: grow sales, expand margins

Grow top-line sales, drive profitability t 12 14% t d EBITA

Global illumination market

€ Bln

to 12-14% reported EBITA

Grow in LED: invest to win

80Grow the Luminaires business

Invest in emerging markets

U d i th h hi h i

20152010

Upgrade mix through higher price realization in LED categories

Optimize the lifecycle of our

Conventional lightingLED lighting

conventional lighting portfolio

Move to next level in pricing and margin management tools

CAGR of 7-9%, assuming

nominal GDP growth of ~4%

83

Source: Philips Lighting global market study 2009, updated for 2010

margin management toolsgrowth of 4%

Innovation spend increasingly focused on LEDGrow sales

Innovation spend increasingly focused on LED products & solutions

W f R&D dR&D d i t 4 5% f l We focus our R&D spend on LED/digital technologies

R&D spend remains at 4-5% of sales; set to increase in absolute value

R&D spend categorized by technologyR&D spend, R&D as % of sales

8% of salesR&D spend

57%65%

75% LED / Digital

7100

5

6

43%35%

25% Conventional

2009 201120104

5

02009200820072006 2010

84

2009 Actual

2011Outlook

2010Outlook

2009200820072006 2010

LED adoption driven by strong total cost ofGrow sales

LED adoption driven by strong total cost of ownership advantage and legislation

E ffi i t l * ( % f t t lT t l C t f O hi (TCO) i

80%Example 1: LED Master for

t il t i SiExample 2: LuxSpacef h t l i E

Energy efficient sales* (as a % of total sales) heading to over 60%

Total Cost of Ownership (TCO) is becoming increasingly attractive

40

80%retail stores in Singapore

263

for hotels in Europe

Savings vs. Conventional

1,000 €

590 Savings vs. Conventional

1000 pcs/ 1,000 €

0201120 1020092008-69%

over 3-years

321

-46%over 5-6 years

• EU: All incandescent lamps to be phased out by end of

81Legislation driving energy efficient lighting sales

payback

1 year

• EU: All incandescent lamps to be phased out by end of 2013.

• US: Incandescent ban in effect from Q1 2011

• Other markets: Incandescent ban effective from Q1 4W Philips

Master (LED)35W

Halogen (Conv )

Fugato (Conv.)

LuxSpace (LED)

85

2011 across Russia and Brazil and Turkey(Conv.)

Energy cost Maintainance costInitial cost * Last 12 months to end of Q2 in year shown

Grow luminaires and controls business through M&AGrow sales

Grow luminaires and controls business through M&ACreate scalable platforms to optimize go-to-market, maximize margin

Continue to acquire in a fragmented luminaires and controls market

Leverage the upturn in mature markets construction when it comes

Use lighting controls to

Customized solutions: tailor made solutions addressing specific

10

W. Europe (Euro construct)

maximize margin and controls market comes

% change

Use lighting controls to intelligently monitor and control street lighting and tie together into a centralized streetlight

addressing specific needs of a customer

Platform for 10

-5

0

5

ResidentialNon Residentialcentralized streetlight

management systemapplications and solutions: platforms that can be rolled out across segments and

-15

-10

03 04 05 06 07 08 09e 10e 11e 12e

Non ResidentialTot. Construction

U.S. Non-residential construction

Use lighting controls in energy management, building automation

ggeographies

Standard products: wide range of

500

600

700

800

01020304050

building automation, architectural lighting, home automation, and residential solutions.

standard products that can be rolled out across segments and geographies

300

400

500

2002 2004 2006 2008 2010 2012-40-30-20-10bn. 2005$ (left)

ann. % ch (right)

Sources: BEA, Global Insight (GI), NEMA/BIS sim. of GI macro model

86

Luminaires and solutions ~70% of the lighting market and share is growing

Sou ces , G oba s g (G ), / S s o G ac o ode

We are investing – and winning – in emergingGrow sales

We are investing and winning in emerging markets

Emerging markets as a % of sales We focus our marketing spend on

42800

€ Mln

g gis growing

g pgrowth areas

38

40

42800

700

60026

34

65

34

36

38500

400

30054

45

30

32

34200

10015 15

30Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1

2008 2009 2010

2010Outlook

2009Actual

87

% of sales in emerging marketsEmerging markets sales

North AmericaEMEA

Asia pacificLatin America

Upgrade mix through higher price realization in LEDExpand margins

Upgrade mix through higher price realization in LED categories

Strong growth in our LED sales across Europe in professional channels

Strong position in large European markets

We are the LED market leader in FranceProfessional LED Lamps sales Europe • We are the LED market leader in France, Germany and Italy2

Professional LED Lamps sales Europe

+348%1

88

Q2 10Q2 09

2 .Based on GfK Professional panel1 .Sales growth YTD Q2 2010 vs YTD Q2 2009

Continue to streamline our organization towards aExpand margins

Continue to streamline our organization towards a less capital-intensive footprint

Further simplification of footprintNumber of sites

• Developments over the last 12 months:− 16 sites closed− 1 site divested− 2 sites added by acquisition of business− Reduction in warehouse infrastructure

underway

Cumulative restructuring savings on track to exceed € 200 Mln in 2010

Future20102009

Conventional

89

2011201020092008Luminaires & LED

Optimize profitability of conventional portfolioExpand margins

Optimize profitability of conventional portfolio businesses

Adjusted EBITA %2009* 2010*

High IntensityLamps

2009 2010

FluorescentTube

p

High CompactFl t

Incandescent/Halogen

CompactFluorescent

High IntensityLamps

Fluorescent

Halogen

FluorescentTube Incandescent/

Halogen

• Optimal management of production capacity and overhead cost• Continual purchasing savings to drive bill of material down

Comparable Sales Growth %

Halogen

90

• Product portfolio management• Smart price and channel management

* Figures for January - June each year, bubble size represents sales value

Move to next level in price and margin managementExpand margins

Move to next level in price and margin management tools

L t ti f i t l F th h i i dLeverage next generation of integral profit & portfolio management tools

Further enhance pricing processes and smart IT solutions

Country Xy

91

Key takeawaysKey takeaways

We are a stronger company due to• We are a stronger company due to measures taken in the last two years; 2010 expected be a record year for2010 expected be a record year for Lighting

Th Li hti k t i t t• The Lighting market is set to grow, driven by LED. We will are ready to grow sales expand margins creategrow sales, expand margins, create value

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