Annual Report 2018 18 Signify Annual Report 2018 Our purpose is to unlock the extraordinary potential of light for brighter lives and a better world Signify is the world leader in lighting. We provide our customers with high-quality, energy-efficient lighting products, systems and services. By turning light sources into data collection points, we can connect more devices, places and people through light, contributing to a safer, more productive and smarter world. 3 Signify Annual Report 2018 We are Signify Table of contents 1 Performance highlights 5 2 CEO message 7 3 Creating value 9 4 Corporate performance 19 5 Three-year overview 28 Governance 6 Board of Management 30 7 Supervisory Board 31 8 Supervisory Board report 33 9 Remuneration report 38 10 Corporate governance 44 11 Investor relations 50 12 Risk factors and risk management 53 13 Statement of the Board of Management 64 Corporate statements 14 Consolidated financial statements 67 15 Signify N.V. financial statements 126 16 Sustainability statements 134 17 Combined independent auditor’s report 160 18 Reconciliation of non-IFRS financial measures 171 19 Definitions and abbreviations 176 20 Forward-looking statements and other information 180 In 2018, Signify leveraged 127 years of leadership in [PICTURE TBD] [PICTURE TBD] Annual Report 2018 lighting to create dynamic, innovative and human- Annual Report 2018 [PICTURE TBD] centric projects. In homes, offices, shops, sports stadiums, cities, greenhouses and factories – as well Forward-looking statements and risks & uncertainties [PICTURE TBD] Please refer to chapter 20, Forward-looking statements and other information, of this Annual Report, 18 as through the Signify Foundation – we’re unlocking for more information about forward looking statements, market and industry information, fair value the extraordinary potential of light for brighter lives information, IFRS basis of presentation, use of non-IFRS financial measures and statutory financial [PICTURE TBD] [PICTURE TBD] 18 statements. and a better world. 4 Signify Annual Report 2018 We are Signify 5 Signify Annual Report 2018 1 Performance highlights 1.1 Financial performance 2017 2018 Comparable sales growth 0.5% (4.4%) Sales by geography LED-based sales 65% 71% Europe Adjusted EBITA margin 1) 9.6% 10.1% Americas Global Businesses Net income 281 261 Rest of the World Rest of World Global businesses Free cash flow 403 306 Americas 1) Prior year has been restated after lowering the threshold for other incidental items. Europe Business Groups LED Professional Home Lamps Sales by Business Group Sales 1,812 2,635 467 1,428 LED Nominal sales growth (4.7 % ) (4.2%) (8.0%) (20.1%) Professional Home Lamps Comparable sales growth 0.4% (0.4%) (3.8%) (16.2%) Home Professional Home Lamps EBITA margin 11.3% 7.9 % (9.2%) 18.9% LED Professional Adjusted EBITA margin 1 1.7 % 9.5% (8.1%) 21.1% Lamps LED This 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. 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 Report. 6 Signify Annual Report 2018 Sustainable revenues of total revenues 1.2 Sustainability performance Environmental highlights 2017 2018 Sustainable revenues 77% 79% 2016 2017 2018 Carbon footprint (net, kilotonnes) 284 146 Operational carbon footprint Renewable electricity 80% 89% (gross) Kilotonnes CO equivalent Manufacturing waste (in kilotonnes) 44 41 Social highlights 2017 2018 Employees (full-time equivalent) 32,130 29,237 2016 2017 2018 Employee Net Promoter Score 14 13 Health & safety Female executives (% of total) 17% 17% Total recordable case rate Supplier sustainability performance 95% 93% 0.8 0.6 0.50 0.4 0.41 0.29 0.2 2016 2017 2018 7 Signify Annual Report 2018 2 CEO message 2018 – A year of structural improvements in a challenging market “I’m extremely proud of our employees for managing the many structural improvements we set in motion in 2018. We changed our name, further increased our leadership in LED innovation, sharpened our focus on systems and services for the Internet of Things (IoT) and continued making strides toward complete carbon neutrality, all while lowering our costs.” – Eric Rondolat, Signify CEO. Dear stakeholder, To help us meet the needs of the fast- Our Adjusted EBITA margin has improved, Looking back on 2018, I’m very pleased with growing urban lighting market in China, free cash flow is strong, and exciting the commitment to creating value for our we acquired LiteMagic Technologies, whose developments in our growth platforms show customers that I’ve seen across our technology was used for the largest that we continue moving in the right businesses, and with the progress of our architectural lighting project in our history, direction. All of this occurred in the most simplification and cost reduction actions. lighting the waterfront, historical and challenging market conditions we’ve seen in They keep our transformation journey on the business districts in Shanghai. some years. right track. In 2018 we increased the focus on our Strategic focus On May 16 2018 we changed our name from growing profit engines (namely our LED, We stayed focused on executing against our Philips Lighting to Signify. This new name is a Professional and Home Business Groups) as strategic priorities, continuously shaping clear expression of our strategic vision and they represent the foundations we’re the transformation of the industry. purpose. strategically building and investing in to • While the decline in conventional lamps is move to LED and connected lighting. In doing ongoing, we continue to increase our On top of the shares we repurchased from so, we have decided to develop new and market share and profitability, benefiting Royal Philips (during its sell down) – it held promising growth platforms around from our ‘last man standing’ strategy. 16.5% at year-end – we also returned EUR connected systems, IoT platform services, The halogen lamps ban in Europe 220 million to our shareholders through our horticulture, solar, and LiFi. particularly benefitted our third-quarter share repurchase program. sales 8 Signify Annual Report 2018 we more than doubled the size of the largest Our commitment to people development “Our cost plan yielded horticulture LED project in the world. In 2018 we launched Learning @ Signify as Russian grower Agro-Invest now has the part of our commitment to foster a learning equivalent of 100 soccer pitches using our culture. As a consequence, and in line with positive results, lighting to improve the growth, quality and our philosophy of promoting from within, yield of its tomatoes. Looking to the future, 75% of executive-level vacancies were filled we launched LiFi, which offers a fast Internet by internal talents. Our Employee Net contributing to a connection through lighting and we’re Promoter Score has increased, moving from piloting this technology in all corners of the 14 in Q4 2017 to 15 in Q4 2018, continuously improving world. with participation levels of 78% throughout the year. We’re implementing the Our commitment to sustainability recommendations from our quarterly bottom line and solid For the second year in a row, we’ve been employee survey to help make Signify one of recognized as the Industry Leader in the the best places in the world to work. Electrical Components and Equipment free cash flow” category of the Dow Jones Sustainability Our thanks Index. This highlights once again how On behalf of our Board of Management and sustainability is at the center of what we do. our leadership team I extend my heartfelt • Comparable LED-based sales increased of 2017, though the business made In addition, thanks to the efforts and thanks to our employees, who daily show by 2.5% and now represent 71% of our significant improvements in the second half collaborations of our teams around the their dedication to innovative, high-quality total sales of the year, reflecting more normalized world, our operations achieved carbon and sustainable offers, serving our purpose: • Professional connected lighting under activity and the ongoing adaptation of our neutrality in Canada and the US, joining to unlock the extraordinary potential of light our Interact brand, together with Philips cost base. Fierce competition in LED from seven other markets and keeping us on for brighter lives and a better world. Hue’s market leadership in connected low-cost manufacturers and competitors is track to be entirely carbon neutral in 2020. home lighting, contributed to us having ongoing. And challenging market conditions I also thank our customers for their trust installed a total of 44 million connected in several geographies resulted in us missing Our commitment to our customers and loyalty, which provides us ample light points globally our sales guidance for the year. Customer first is a core value of our motivation every day. And finally, I thank our • The launch of the Interact Pro system for company. Last year we initiated a major multi- shareholders for their confidence in us and SMEs, the popularity of the T-bulb in India Nonetheless, our cost plan yielded positive year journey, ‘Road to Excellence’, to achieve in our strategy. and helping our customers expand Hue to results, contributing to a continuously unequalled customer satisfaction. As part of their outdoor areas demonstrate our improving bottom line and solid free cash this, we’re improving our capabilities to As we move towards completion of our responsiveness to customer needs flow. deliver on our company performance. We’ll transformation, Signify is uniquely • The transformation within HR, Finance accomplish this by continuously improving positioned to lead the industry in the next and IT is succeeding, as our ongoing Our commitment to innovation our processes and building on our quality phase of lighting for the future.