Koninklijke Philips N.V. (PHIA) Earnings Call Transcript & Summary

[Interpreted] It is 2:00. I'm opening the meeting. Ladies and gentlemen, I hereby open the General Meeting of Shareholders of Royal Philips N.V. Our annual meeting 2020 is taking place under difficult circumstances. The outbreak of the coronavirus, obviously, has an impact on our company and its operations. Frans van Houten will be telling us more about this in a few moments. But the outbreak obviously also has an impact on the way in which we're holding our meeting today. In order to protect health and safety of all those participating in this meeting today, we decided to only allow our shareholders to take part in the meeting virtually. So we are availing ourselves of the temporary legal measures that took effect last week. We very much regret that this precautionary measure needs to take place. And we're looking forward to welcoming you at our next general meeting as soon as the circumstances so allow. We're present here with just a limited number of people. We are here, from left to right, Marnix van Ginneken, our Chief Legal Officer; Frans van Houten, our Chief Executive Officer; and Abhijit Bhattacharya, our Chief Financial Officer. By an audio link, there are 2 other people taking part in today's meeting, being: Christine Poon, Chair of the Remuneration Committee; and David Pyott, Chair of the Audit Committee. The other Supervisory Directors are not attending in person due to the circumstances, and the same applies to the 2 people who we've nominated for appointment of Supervisory Directors, Mr. Sijbesma and Mr. Löscher. Obviously, I'll be discussing their nomination later on in the meeting. We do have Hanneke Overbeek present here today on behalf of our auditor, Ernst & Young. Before I give Frans the floor, to give his speech, his presentation, I would like to make a number of comments with respect to how we will proceed at today's meeting. A number of shareholders have responded to our request to -- should they so wish to submit questions beforehand. We'll be showing you those questions under the relevant items of the agenda. We'll be showing them on the screen, and we'll be answering those questions. The shareholders who have submitted their questions prior to the meeting, we would like to give them the opportunity to, during the meeting, ask follow-up questions. Should they wish to do so, I would request them to submit possible follow-up questions by sending an e-mail, and I'm going to repeat this twice, [email protected], AGM, [email protected]. We will try to answer those questions during the meeting. All questions and answers will be posted on our website after this meeting. And subsequently, they will be included in the summary of the meeting for practical reasons. I'll be showing the voting results for all voting items at the very end of the meeting. And then I will be confirming which resolutions have been passed. Ladies and gentlemen, this brings us to agenda item 1. I would like to invite our CEO, Frans van Houten, to give his speech. Frans will be giving his speech in English. And on the webcast, you will be able to listen to simultaneous Dutch interpretation. Frans, you have the floor.

Welcome to the 2020 Annual General Meeting of Royal Philips. This is obviously not the setting that we are used to, but I'm again honored to update you today on the progress that we are making together with our 80,000 employees to make the world healthier and more sustainable through innovation. The COVID-19 pandemic is having an unprecedented impact on people, on society and the economy. And that makes our mission more relevant than ever. Our employees are highly motivated, and we take great strengths in the work that we are doing to support hospitals, medical staff and the growing number of critically ill patients. This is a top priority for all of us at Philips. Over the next 15 minutes, I would like to outline Philips' transformation and purpose, zoom in on our financial performance, elaborate on the unprecedented impact of the COVID-19 outbreak and discuss the road ahead for Philips. And I will conclude with our capital allocation policy and key takeaways. When we started our transformation in 2011, our aim was to make sure that Philips stayed relevant, that we could apply our tremendous innovation strengths to make a difference to people's lives. In the years that followed, we sharpened our focus on health technology, enabling us to deliver today's portfolio of integrated solutions to help people to stay healthy and prevent disease, to give clinicians the tools to make precision diagnoses, deliver minimally invasive treatments and provide better patient care. But also to deliver care outside of the hospital and help people to live with chronic conditions at home. We have significantly invested in informatics, artificial intelligence and the cloud to help care providers access the right data at the right time for the right patient. It's already allowing care processes to become more personalized, to become seamlessly integrated and hence, drive efficiency and effectiveness. Our EUR 1.9 billion research and development program has been key to these transformational solutions. And to ensure that our innovations have maximum impact, we apply what is called the Quadruple Aim of Healthcare to all our development choices. This performance metric focuses on the simultaneous improvement of patient experience, health outcomes, staff satisfaction while improving the productivity of care. A good example in the field of minimally invasive treatment is the combination of our Azurion interventional imaging platform, coupled with smart devices and software solutions. Together, they help clinicians to decide, guide, perform and confirm the appropriate treatment. In other words, to innovate and optimize their clinical procedures. In Connected Care, our eICU telehealth solution for intensive care units allows teams of intensivists and critical care nurses to centrally monitor patients in the ICU, a solution enabled by audiovisual technologies, data visualization and big data predictive analytics. In Personal Health, our solutions support healthy lifestyles, helping consumers manage their health with actionable insights, coaching and support from care professionals. For example, with our Sonicare toothbrush and app, people can manage their daily oral care habits. We've added the teledentistry service for remote dental assessments by licensed dentists. As a purpose-led company, I would like to point out, we have made sustainability a cornerstone of the way that we do business. We are contributing to the United Nations Sustainable Development Goals, in particular: SDG 3, access to care; SDG 12, sustainable use of materials; and SDG 13, sustainable use of energy. I'm proud to say that we will be carbon neutral in our own operations by the end of this year, with both of our United States and Dutch operations 100% powered by renewable electricity. As a front-runner in this much needed approach to doing business, we were once again recognized in the Dow Jones Sustainability Indices list. Ladies and gentlemen, let me now move on to the 2019 results. We delivered a robust financial performance in 2019, showing resilience in the face of significant headwinds, driven by continued demand for our innovative products and solutions, we were able to grow our company to EUR 19.5 billion in revenues, with 4.5% comparable sales growth. The adjusted EBITDA margin improved by a modest 10 basis points largely due to trade war tariff headwinds and a decline in license income, coupled with investments in growth. We ended the year with a comparable orient -- we ended the year with a comparable order intake that grew a further 3% on the back of a strong 10% growth in 2018, and we delivered a free cash flow of over EUR 1 billion. Last but not least, our share price rose over 40% in the course of 2019 to a 19-year high, outpacing many of our key peers. Our Diagnosis & Treatment businesses performed well, with improved revenue and earnings supported by a strong flow of innovations. In Diagnostic Imaging, we finalized the revamp of our CT and MR portfolios, including the introduction of an industry-first Tube for Life guarantee with our incisive CT imaging platform. In Image-Guided Therapy, we further built on the Philips Azurion success story with the launch of innovations like the FlexArm, which enables optimal 2D and 3D imaging across the whole patient. Our Connected Care businesses had a challenging year despite retaining market share. Although they posted modest growth, profitability actually decreased. The fundamentals, however, remain solid as we have seen in the past 2 quarters where results have already started to improve. In 2019, we introduced several innovations such as the IntelliVue MX750 and MX850 patient monitors, which feature an extensive range of measurements and analytics as well as new cybersecurity features. The Personal Health businesses rebounded strongly from a slower 2018, with higher revenue and earnings driven largely by the performance of our Oral Healthcare and Personal Care businesses. A notable highlight of the year was the further rollout of our new Smart S7000 Shaver series, our first connected shaver as well as the premium model S9000 Prestige, driving market share gains in the premium shaver market. As I said earlier, with the COVID-19 outbreak, our mission to improve people's lives is more relevant than ever. We continue to focus on our triple duty of care, which are: meeting critical customer needs; safeguarding the health and safety of our employees; and ensuring business continuity. We have a broad portfolio of products, services and solutions to help diagnose, treat and monitor COVID-19 patients, including imaging systems, hospital ventilators and patient monitoring solutions, but also hospital telehealth solutions for the intensive care unit and telehealth solutions to connect caregivers with patients at home. We are investing EUR 100 million in the steep ramp-up of production, especially in ICU ventilators and monitors. This production increase enabled us to supply additional ventilators to hospitals in the most affected regions, such as in China, Southern Europe, United States. Moreover, we plan a further fourfold production increase by the third quarter of 2020. At the same time, we have developed a new Philips Respironics E30 ventilator for emergency use when a fully-featured ICU ventilator is not readily available. This ventilator is more suitable for large-scale production, and we are able to produce 15,000 units per week. I'm extremely proud and thankful for the enormous commitment, hard work and resourcefulness of our employees. Even though large parts of the world are on lockdowns and the majority of our employees are working from home, together, we have been able to keep Philips fully functioning. Let me also give you a few examples. Our colleagues in Pennsylvania and California are working around the clock to produce ventilators. Our procurement teams are working at the same pace with our global suppliers for a sufficient and uninterrupted supply of the many different components needed. This is a very challenging and, ultimately, the rate-limiting step for the ramp-up that we need. I'm very proud of the 6,000 field service engineers that go to hospitals across the world to maintain critical imaging and patient monitoring systems, ensuring continuity for hospitals. And of course, we always make sure that our field service engineers have the protective equipment and gear needed to carry out these critical tasks. I would also like to mention our colleagues in the consumer side of the business where activities have obviously slowed down. They keep that part of our company fully functioning as well and are already preparing for a pickup in demand, while also stepping in to help colleagues in the professional health care domain, where we are, as I said, ramping up volume fast. Due to the COVID-19 outbreak, Philips' financial performance was really a tale of two stories in the first quarter. On the one hand, there was increased demand for our professional health care products and solutions with comparable sales and order intake growth for the Connected Care and Diagnosis & Treatment businesses. Comparable order intake grew 23%, most notably in diagnostic imaging, hospital ventilators and patient monitors. On the other hand, at the same time, there was a significant decline in the demand for our personal health portfolio, and we also saw image-guided therapy procedures trending down as the quarter progressed. For the Philips group, this resulted in a 2% comparable sales decrease and an adjusted EBITDA margin of 6%. Assuming that we can convert our existing order book as planned, that elective hospital procedures will normalize and consumer demand gradually improve, we aim to return to growth and improve profitability in the second half of the year. For the full 2020 year, we aim to achieve a modest comparable sales growth overall and an adjusted EBITDA margin improvement. As the ongoing threat of COVID-19 accelerates the adoption of new technologies, health care informatics will play an ever more important role. Our transformation to a health technology company and our significant investments in informatics and data science will enable us to offer more compelling solutions. As part of this ongoing effort, we are now in the process of reviewing ownership options for the domestic appliances business of our company, which, although significantly contributing to Philips, is not a strategic fit for the future of our company. We intend to reinvest the proceeds of this transaction in expanding the company's health technology portfolio. Following the disentanglement of Domestic Appliances, the remaining Personal Health businesses will continue to play an important role in our integrated health continuum approach, particularly with regards to Healthy Living and prevention. We address the associated consumer health and well-being needs with our Oral Healthcare, Personal Care and Mother & Child Care offerings. With this, our 10-year portfolio transformation is nearing completion, allowing us to double down on our efforts in bringing new solutions in Diagnosis & Treatment, Connected Care and Personal Health. Now let me update you on the topic of capital allocation. Philips has a strong balance sheet and robust liquidity position, and in the first quarter, we took action to further protect our liquidity in the view of possible continued impact of COVID-19 on the markets in 2020. We successfully placed EUR 1 billion of notes at very attractive rates. We are keeping the size of our EUR 1.5 billion share buyback program unchanged, but the remainder of the buybacks will be executed through individual forward transactions. This will optimize the number of shares to be repurchased, while maintaining our liquidity position. With regards to dividend, Philips maintains its proposed dividend of EUR 0.85 per common share against the net income of 2019. However, the distribution of this dividend will be in shares only instead of the initially proposed distribution in cash or in shares at the option of the shareholder. We plan to convene an extraordinary General Meeting of Shareholders in June 2020, the agenda of which will include the revised proposal to declare a distribution of EUR 0.85 per common share in shares only. Ladies and gentlemen, looking ahead, I expect 2020s to be another transformational decade for health care technology. And technology and innovation will play an important part in that transformation. We will be focused on applying data science and precision medicine to create new innovation opportunities that address customer, consumer and patient needs. But of course, technology is not the only barrier for change. It's a collective behavior and a collaboration between industry and caregivers and everybody else that will enable that. I'm firmly convinced that COVID-19 will accelerate the broad adoption of the new care models. With the large number of patients involved and the face-to-face risk of infecting other patients and staff, telehealth, sometimes referred to as virtual care, can provide valuable relief to the health care system. And I'm proud that, at Philips, we have been pushing this concept and that we are a front-runner in that transformation. Now let me conclude. I've already thanked our employees, and I also wish to thank our customers, shareholders and other stakeholders for the support that they give to Philips. As I said at the start of this presentation, our mission has never been more relevant. And energized by our purpose, we will continue to build an ever brighter future as a leader in health technology. Thank you for your attention.

[Interpreted] Thank you, Frans. And ladies and gentlemen, this brings us to the annual report 2019. And this is where we will be dealing with agenda items 2.e to 2.f. After some introductory remarks, we'll be proceeding to answer the questions that have been submitted prior to the meeting. Allow me to first make a few remarks on dividend. When we published our quarterly figures on April 20, 2020, we announced that the dividend proposal shall be amended. Instead of an optional dividend, the dividend will be paid out completely in stock, as Frans just pointed out. And that means that the dividend proposal, which initially have been placed on the agenda of this meeting, has been withdrawn. We will shortly be convening an extraordinary shareholders' meeting. This meeting will -- is expected to take place in the second half of June 2020. In that meeting, the agenda will include the amended dividend proposal in order to pay out EUR 0.85 per ordinary share, exclusively in the form of ordinary shares, and this proposal is in line with the reserve and dividend policy that we've been pursuing over the past few years. Now just a few words on the remuneration report, which has been included in the annual report for 2019. Over the past few years, the implementation of remuneration policy was discussed at the annual shareholders' meetings. Since the implementation of the adjusted European Shareholders Right Directive, the law prescribes that there be a vote on the remuneration report. And now it is my pleasure to give the floor to Christine Poon, Chair of the Remuneration Committee, so that she can give a brief presentation on the remuneration report. She'll be speaking to us in English. Christine, over to you.

Thank you. Thank you, Mr. Chairman, and good afternoon. It's my pleasure as Chair of the Remuneration Committee to discuss the 2019 report for the Board of Management and the Supervisory Board. Before we turn to the activities of 2019, as a reminder, Slide 1 illustrates the compensation structure for our CEO and the other members of the Board of Management. This structure was approved at the 2017 shareholder meeting and is comprised of 3 elements: base compensation; an annual incentive; and a long-term incentive grant. For our CEO, an on target payout of his annual incentive is 100% of his base compensation, with a range of 0 payout at low threshold performance and a 200% payout at maximum performance. The LTI grant is measured over a 3- year period, with a target vesting of 200% of our CEO's base compensation, and again, a range of 0 payout below threshold and a maximum vesting of 400%. As you can see, annual incentive and LTI for our CFO and CLO follow the same plans with different target ranges and grant sizes, as you can also see on the slide. Our compensation design supports pay-for-performance, with 75% of our total CEO compensation package being variable, at risk and tied to performance measures. Now turning to our 2019 activities, I will highlight 2 areas: key compensation decisions made by the Supervisory Board in relation to the Board of Management; and the development of remuneration policies for both our Board of Management and Supervisory Board to address compliance with the EU Shareholder Directive. So first, turning to the annual compensation cycle. The annual compensation for the Board of Management was reviewed as part of our regular process. For our CEO and CFO, the annual compensation was included in their renewed services contracts, which were published in advance of the 2019 Annual Shareholder -- Annual General Shareholders Meeting. As a result, the annual compensation of our CEO, CFO and CLO as of April 2019 was increased to EUR 1.325 million, EUR 785,000 and EUR 575,000, respectively. These increases were made to align better with market levels and to address internal relativities. For the 2019 annual incentive payout, 80% of this payout was based on the achievement of 3 financial metrics: comparable sales growth; cash flow; and EBITDA margin. The other 20% of the payout was based on performance against individual targets in the areas of operational excellence, customers, people, sustainability and strategy. The annual incentive payout was below target in 2019, driven by an on-target achievement of comparable sales growth, offset by below-target achievement of cash flow, EBITDA and individual performance. As a result, Slide 2 shows the payouts as a percentage of base compensation of 82.4%, 65.9% and 58.4% for our CEO, CFO and CLO, respectively. Following the COVID crisis, we have decided that this payout will be in shares instead of cash and these shares will be subject to a 5-year holding period. The 2017 performance share LTI grant will vest in May 2020. In early 2020, the committee approved a payout of 122% of target. The payout of this grant was based on an equal weighting of total shareholder return and adjusted EPS performance over the 3-year period 2017 to 2019. The TSR payout was 180% of target based on Philips rank of #7 of 20 peer companies in our performance peer group. And the adjusted EPS of EUR 1.11 resulted in a payout of 64%. The second area I thought appropriate to highlight was the work of the remuneration committee following the implementation in Dutch law of the revised EU Shareholder Rights Directive. This triggered a detailed review of our remuneration policies and disclosures for both the Board of Management and the Supervisory Board. The committee spent a significant amount of time engaged proactively with key shareholders, stakeholders and institutional advisory organizations to solicit their feedback and support for our proposed and revised policies, which you will see under Item 3. This concludes my discussion of the 2019 remuneration report. So back to you, Mr. Chairman.

[Interpreted] Thank you, Christine. The financial statements 2019 have been audited by EY, our auditor. And in the annual reports posted on our website, you'll find the usual opinions of EY. Ladies and gentlemen, with that, I'd like to proceed to answer a number of questions that have been submitted to this meeting prior to the meeting. We received a number of questions from the association of investors, the VEB, the Association of Investors for Sustainable Development, and investment partners, which at this General Meeting of Shareholders is also representing Eumedion. And now I'd like to give the floor to Frans first.

[Interpreted] Thank you, Chairman. Let me start by answering the questions submitted by the VEB, the association of investors. The first question that they submitted is whether something could be said about the impact on the Connected Care division with respect to the demand and competitive position vis-à-vis competitors, such as Dräger and Medtronic, concerning the impact of the global health crisis. Well, my answer to the question is that the Connected Care operations at Philips are strong operations with leading market positions in the field of sleep apnea, ventilators, patient monitoring systems and health care IT. We have a market share of -- in excess of 40% in our patient monitoring systems. At the time, at this time, there's an increasing demand for products and solutions for diagnosing and treating and monitoring COVID-19 patients, which is why we're increasing the production of these products. We expect that the demand of these products will remain high throughout 2020 because of the number of intensive care unit beds for adults worldwide would actually have to double. The second question submitted by the VEB is that there's a concern about the possibility that COVID-19 could have a substantial impact on hospital budgets. And their question is whether we are concerned that, possibly, there could be a negative impact on our Diagnosis & Treatment segment if hospitals would have to cut back on their spending. My answer to this question is that, indeed, we see that hospitals now are focusing on COVID-19 patients. And that procedures that are not urgent, elective procedures, are temporarily postponed also to make sure that health care workers are not overburdened. The fact that these elective procedures are being delayed doesn't mean that they're being called off, and we think that the hospitals will be wanting to resume these elective procedures as quickly as possible, also to be able to attend to these patients. We haven't seen any cancellations of orders. All we've seen is postponements. And I would like to highlight once again that, globally, we will be needing to build more capacity in connection with this pandemic, and there'll be an increased demand for health informatics and telehealth solutions. And the third question submitted by the VEB, these investor association, has to do with the production, manufacturing and procurement of products and spare parts by Asian countries. The question is in which measure are these plants producing these products fully? And are there any shipment problems? And what about the supply chain? My answer to this question is that our worldwide network of production units and suppliers is working extremely well. And the same applies to China. We're conducting the necessary investments, and we're working closely together with our Tier 1 and Tier 2 suppliers in order to make sure that we have sufficient and uninterrupted supply of components. And this requires the cooperation of all countries involved. And by the way, also, it requires cooperation of airlines. Philips continues to cooperate with governments, health authorities and relevant industries in order to secure the manufacturing or the production extension or expansion of materials, components and end products and shipments between countries. And this is fully in line with the request of the International Chamber Of Commerce and the World Health Organization. Fourth question submitted by VEB. Within Personal Health, oral health, the electric toothbrush of Philips, historically, has a very strong sales growth in China. Do we see downward adjustment of the sales growth in China? And what is the impact of the virus here? My answer to this question is that I can give you some data points on the demand for Personal Health in China and how that developed. In February, we saw an all-time low with a sales decline of 60% to 70%. And throughout the quarter -- for the whole quarter, there was a decline in sales of about 30%. In March, however, there were some signs of recovery, particularly in the online channels. We saw growth again by the end of March. And in March, we had about minus 20% overall in China, and it is our expectation that it's going to take 1 or 2 quarters for China to show a net positive growth. But we do see the trend in that direction already. The next question submitted by the VEB Association of Investors concerns the shift from offline to online. And what this shift really means with respect to the margin profile in China if people buy more online? The answer to this question is that China is a high-end market for us, and we sell a lot of oral health products, shaving products, beauty products, less so Domestic Appliances. And we see this shift to the digital -- to the online marketing as something that is quite positive. And we don't really see any significant changes in our product mix nor our profitability as a consequence thereof. Next question submitted by the VEB is about a statement made on the Capital Markets Day in November 2018, that Personal Health could achieve an adjusted EBITDA margin of 17% to 19%. The question is whether Philips is capable of giving an update with respect to this goal. My answer to this question is that after the restructuring of the portfolio in the first quarter 2019, the EBITDA margin target was changed in the range 16% to 18%. And this as a consequence of the relocation of Sleep & Respiratory Care business to Personal Health and Connected Care. In 2019, Personal Health already had an adjusted EBITDA margin of 16.1%, and we're convinced that the negative impact of COVID-19 in 2020 will be of a temperature -- sorry, temporary in nature. In the fourth quarter, at the Capital Markets Day, we will go into further detail with respect to the performance of Personal Health in the medium term. Next question, submitted by the VEB concerns the intended divestment of the business unit, Domestic Appliances. The question is can you assure shareholders that your negotiation position vis-à-vis suppliers, distributors and, for instance, in the advertisement market will not be negatively impacted as a consequence of this divestment? My answer to this question is that the Personal Health operations of Philips, after selling the Domestic Appliances business, will still amount to in excess of EUR 3.5 billion with a strong brand, strong innovation, strong intellectual property positions. And we're not afraid that we have a poor negotiation position vis-à-vis suppliers. Next question submitted by the VEB also has to do with the intended divestment of Domestic Appliances. The question is whether a brand license could lead to devaluation of the very valuable Philips brand? My answer to this question is that we have extensive experience in granting brand licenses, and we're not afraid that there'll be a negative effect. Next question of the VEB is about the portfolio and synergies between Philips' Diagnosis & Treatment and Connected Care business units on the one hand and Personal Health on the other hand. The question is, we find it difficult to understand the strategic fit and synergies. Wouldn't it be better to divest all personal health activities? And my answer to this question is that Philips has a strategy to provide integrated solutions to improve people's health. And this across the entire spectrum. So I'm talking about healthy living, prevention, diagnosis, treatment and home care. We see an increase in consumerization of health care, and that will accelerate even further, and we think that it is extremely strong position for Philips to have the knowledge and expertise for consumers, and that will strengthen our overall position. Well, there are even more questions from the VEB. So I'm just going to continue. There's a question that is this one. Diagnose & Treatment is generally seen as the division with the largest potential for margin expansion, particularly in Diagnostic Imaging. Could you give us an update as to where Philips is now in the competition landscape and talk about market share, et cetera? And this in view of its most important competitor, Siemens Health -- Healthineers and GE Healthcare. Our Diagnose & Treatment business consists of Diagnostic Imaging, Ultrasound, we have a second position in the world. And in Diagnostic Imaging, we have a third position worldwide. There's another question about this. So I'd like to continue with my answer. This comparison of margins and scale should also take into account the scale. After restructuring the portfolio in the first quarter 2019, we're going to focus on an adjusted EBITDA margin of 14% to 16% for Diagnosis & Treatment for the period 2019 to 2020. These targets will remain. And in the next Capital Markets Day, this autumn, we will shed more light on this. And at this point in time, we are absolutely convinced that in the following years, we can improve profitability even further. And then there's yet another question from the VEB, just going to quote, "The state of play Philips, in terms of acquisitions in Healthcare is positive, Spectranetics and Volcano. Given the solid balance sheet position and the ratio with EBITDA 1.4%, are you actively looking for acquisitions now that the conditions may be more favorable?" My question -- my answer is that we continue to maintain a well-balanced capital allocation strategy. Philips has a strong balance sheet, robust liquidity position. And given the impact of COVID-19 pandemic in 2020, Philips wants to preserve cash and keep its liquidity position secure. This is the highest priority but acquisitions continue to be possible. Then the next question of the VEB Shareholder Association. According to estimates by [ an asset ] of the domestic prices market, the value was somewhere between EUR 2 billion to EUR 5 billion, which would substantially reduce the net debt. Do you have a target for these revenues? And looking forward, in which business segment you would like to prefer any acquisition? Well, my answer is that the proceeds of such a transaction will be reinvested in the company in order to further develop our portfolio of products and solutions. And I would like to limit myself to that answer. Then the next question, in the past, Philips would report per segment on the net operational capital. Is Philips willing to share this information with shareholders in order to improve the insight, understanding in your decisions in the field of capital allocation? The answer is that the net operational capital is reported and the group level in the Q4 full year report and also in the Q3 HY -- half year press release. So it's already been reported. Thank you. And the composition of the NOC of Philips, covering the position of the debt of the entire company, we don't think that a breakdown by segment would give -- would have an additional value. We rather indicate the work capital and the stocks per segment in the Investor Relations presentation every quarter. Then we have the next question. In the spearhead letter where VEB called upon companies to give a detailed overview of the risks and opportunities that may result from climate changes, and the way they affect the business model of Philips. As a result of the current crisis, the attention companies give towards this transition may be delayed. And therefore, VEB expect companies to continue giving detailed overviews of the risk and opportunities of climate change and the way they may affect the long-term corporate out views. Also, the association asked the company to give insight in the effects of the current crisis for the commitment to the timing of the targets for climate change action of Philips. Well, I reply that in the annual report 2019, we have a detailed report of sustainability in which we address our commitment to be carbon neutral in 2020 in our operations. We've been publishing for several years report according to the guidelines of the task force on climate-related financial disclosures, where we provide details on the risks and opportunities of climate for Philips. I can assure you that the Philips' strategy is to be sustainable. We see that this resound with our customers, suppliers, investors, governments and geos, and staff. We have an ambitious program in place, which is called Healthy people, sustainable planet, which will expire in 2020 after a 5-year period. For this reason, later in 2020, we will launch the 2025 program in which we further increase, we boost our ambitions in order to be able to deliver according to the 3 Sustainable Development Goals that we are focused on: SDG 3, health; 12, responsible production and consumption; and 13, which is climate action. Therefore, don't be concerned or afraid that we will become less ambitious in this field. Now we turn to the questions of the Association of Investors for Sustainable Development, VBDO. Question number one. Philips is a member of the CDP supply chains where it asks suppliers to report on risks and opportunities of climate. 80% of suppliers have committed to sending climate governance at the management level and 64 also committed to emission targets. Now does Philips also ask for reports relate to the physical effects of climate change? And if so, this would have an adequate overview of the climate risk in critical suppliers. If not, can Philips commit to giving greater attention to this 2020? Well, my answer is that since 2011, Philips has been asking leading suppliers to report on emissions and climate strategy in the CDP supply chain program. We are very proud that we entered the Supplier Engagement leadership board in 2019. We see clear added value through this program, particularly in terms of the physical risks of climate change, and we can report that we have outlined them for our own venues and for critical suppliers working together with experts of our insurance companies. This is part of what we call business continuity management. Now the second question of the VBDO Association. Our association is very happy with the careful approach of Philips within the Supplier Sustainability Performance, SSP, where cooperation, improvement and encouraging suppliers are key features. Philips has outlined different indicators for suppliers. And besides the compliance of suppliers, VBDO would like to learn about the state of the work conditions with suppliers. And we have any quantitative or qualitative indicators of working conditions in the chains such as wages and working hours? Are they part of the reporting? And is willing -- is Philips willing to report on these results as a company of maybe in the light of RBA. Well, my answer, ladies and gentlemen, is that wages, working hours, but also such issues as a safe working environment and collective bargaining are part and parcel of the feedback we asked from our suppliers. In the past, we have already broken down these topics, but we are focusing more and more on the general improvement within our chain, the value chain of these indicators that are related to working conditions, but we also look at improvements in the field of environment, safety and health of staff working in the corporate context. We also look more and more at a number of employees attained in this value chain because that's the key feature of the program. In 2020, we will see once again what are the substantive elements of our SSP program and how we can even better report on them. The next VBDO question. VBDO encourages companies to analyze the possible gender pay gaps and to communicate to stakeholders in order to achieve gender equality. In real-life, women still are in a less beneficial position than men. Would Philips be willing to report in the future about the pay gap between men and women in different layers of the entire organization? My answer is this. In current years, Philips in some countries and some regions, based on local legislation, already looked into the pay inequality and didn't establish main major differences. We will intensify this and harmonize throughout the countries, making sure we will have an even more detailed overview of this very important issue, the equal pay issue. And at the same time, we will then look at the way we report on this. And that concludes my discussion of the questions of the VBDO Association, Chairman, and if I understand correctly, you are going to cover the questions by NN Investment Partners?

[Interpreted] Yes. Thank you, Frans, for these questions and answers. Now we have an investment partners also speaking on behalf of [ you medium ]. Question one, the report of the Audit Committee, in our view, could be much more informative. For instance, there is no reflection of the Audit Committee on the key audit matters by the external auditor. Is it possible for the next report of the Audit Committee to contain such reflection? And would it be possible for the Audit Committee also to reflect in the future on the key matters of the management letter by the auditor. The answer is the following. Every year, we aim for a substantive, the meaningful report by the Supervisory Board and its committees. We will take your wish to heart in compiling the annual report for next year. Now I switch to English. I would like -- sorry, to ask the Chairman of the Audit Committee, David, and I said he's on the phone to answer one of the questions from the VEB. Over to you, David.

Thank you, Mr. Chairman. Let me, first of all, read aloud the question from VEB. It is as follows. The VEB calls for additional transparency during the 2020 midyear reporting comparable to an annual close. This is -- it is suggested would include disclosure and forecasts and insights into financing and goodwill recoverability. The VEB further calls for midyear reporting to be reviewed by an external auditor, leading to the issuance of a formal review opinion. This would also include a statement, a going concern from the external auditor. Our answer is, our external auditor, EY, is already involved in all of our quarterly and midyear external reporting. Regarding the quarterly consolidated information, which is presented in the press releases thereafter, EY inquires with senior management on significant developments as well as performing analytical review procedures. In accordance with the Dutch or the U.S. PCAOB auditing standards, the formal audit to review is not performed on interim reporting. Despite this, EY is involved throughout the year in the audit process of the company and does provide a private report to the Audit Committee covering significant transactions and submits an update on the findings of their audit work performed in the quarter and year-to-date, as appropriate. As a company, we also consider -- carefully consider growing concern issues. Every quarter, the treasury department presents to the Audit Committee the latest cash forecast and credit rating update. Based on all of the above, the Audit Committee of the Supervisory Board believes that the risks underlying the question from the VEB are adequately covered. The Audit Committee does not see value in the additional expense of obtaining an external audit review opinion on our quarterly and interim results. Now back to you, Mr. Chairman.

[Interpreted] Thank you, David. I will answer the last question under this heading. It's also a question by VEB. And the question is this, the current crisis is demanding a lot from the involvement and the role of managers and supervisory directors, the concumulation of additional functions becomes a real impediment. And this is why VEB calls upon managers to reduce their additional jobs to one. Also, there's an appeal by the association to ask supervisory directors to check which of her additional jobs can be canceled as soon as possible. The answer is this. The number of additional jobs of the members of the Supervisory Board and the Board of Management are within the limits of the law and relevant best practices. Obviously, under the current exceptional circumstances, we make sure we can provide this sufficient time and attention to our tasks. This concludes a discussion of agenda Item 2 and as I said before, the voting results will be projected on the screen after all items on the agenda will have been covered. And this brings me to agenda Item 3, ladies and gentlemen, this a number of proposals concerning the remuneration of the Board of Management and the Supervisory Board. And the intention is to make a number of amendments to the current remuneration system. For the Board of management, this concerns a change of the quantum peer group that is used in order to correlate the overall remuneration to the relevant market level, the definition of performance categories for the individual targets of the annual incentive and also the introduction of a sustainability criterion to the long term incentive. The proposals have been aligned with the implementation of the amended EU guidelines, so directives for shareholders' rights. One of the elements of which is that a remuneration must be determined by the Supervisory Board. In the course of the past months, we've had many consultations with shareholders and institutional advisers in order to make sure we had sufficient support for our proposals. Currently, we're going to answer a number of questions that have been submitted prior to this AGM. This will be answered by Christine Poon, as she is the Chair of the Remuneration Committee. Christine, again, over to you.

Thank you, Mr. Chairman. The Association of Retail Investors has submitted a number of questions. But before I address these questions, I note that the VEB has regrettably indicated to us that they will vote against all 3 proposals under agenda item 3. They have also asked us to relay their position on certain remuneration matters, and this is what follows. "While in general, the VEB attaches more importance to the structure of the remuneration policy, and the applicable performance criteria, the VEB view is that Philips remuneration policy allowing for a maximum payout that could reach 6 times the base salary of the CEO is overly aggressive. On the LTI plan, the VEB recognizes that the TSR vesting schedule has been improved by reducing payout at/and around median performance. However, Philips continues to pay out at a below median level, which the VEB does not support. The VEB further believes that the remuneration policy might be further improved by adding our OIC to the LTI plan performance and metrics instead of adjusted EPS. And finally, the VEB is of the opinion that the Supervisory Board members should never benefit financially from a period in which a company is going through hardship. Therefore, Supervisory Board remuneration should be fixed without a variable component, either through shares, options or the proposed establishment of Ad Hoc Committees." So I now turn to the first set of questions from the VEB that relate to the proposed remuneration policy for the Board of Management. The first question asked whether the Supervisory Board will use its discretionary power to reduce the variable pay component for 2020 due to the impact of the pandemic. Our answer is that we will assess the impact of COVID-19 on our 2020 business results as part of our regular business performance review in early 2021. Since our variable remuneration is based on performance, annual incentive payouts over 2020 will be impacted accordingly. The next question acknowledges the inclusion of a number of shareholders/capital return metrics that the Supervisory Board can consider adding to the annual incentive performance measures in the future. VEB understands the inclusion of return on invested capital but questions why we would choose flawed measures such as return on assets or return on equity? Our answer is that the intention of this clause in the remuneration policy is to provide the opportunity to select the best-fitting shareholder capital return measure, if and when the Supervisory Board deems such inclusion to be relevant. We will continue to discuss our annual incentive setup and criteria and our regular engagement with investors and other stakeholders. As prescribed by the proposed remuneration policy, all annual incentive criteria and categories will be disclosed ex ante in the remuneration report. The next question ask to clarify the definition of cash flow used in our annual incentive performance measures. Our answer is that the reported free cash flow performance in the annual report indeed forms the basis of this definition. However, similar to the assessment of our EPS performance for the long-term incentive plan, the Supervisory Board does consider adjustments to the free cash flow numbers for annual incentive plan purposes. The aim of these adjustments is to accurately represent the actual performance of management. So for example, we would adjust out benefits we would see due to tax reform during a given year. The next question ask if we could give more color to the individual criteria, which make up 20% of the annual incentive payout. Our answer is that these performance categories will include a number of underlying objectives that are tied to the area of responsibility of the respective Board of Management member. The performance categories will be disclosed ex ante in the remuneration report, and there will be no retroactive changes. Realized performance against the categories and underlying targets will be assessed by the Supervisory Board and these realizations will be disclosed exposed in the remuneration report. This next question from the VEB relates to the proposed LTI plan for the Board of Management. And the question asked whether we consider using ROIC as one of the performance metrics in the LTI plan instead of adjusted EPS? Yes, the ROIC -- our answer is that, yes, we did consider the ROIC criterion and it was discussed extensively as part of our stakeholder outreach and engagement. Our investors generally were favorable about including such a criterion. They were, however, generally of the opinion that such inclusion should happen once feasible within the strategy of the company. Furthermore, they appreciated the inclusion of a return criteria could be done either through the annual incentive or the long term incentive. We have made the conscious decision to include it in the annual incentive. The final question from the VEB has to do with the remuneration policy for the Supervisory Board. And ask for clarification, surrounding additional fees paid to the members for ad hoc committees and other activities. Our answer is that we do not have variable pay for the Supervisory Board. This language was already part of our previously approved fee structure and levels. And in the sense, it's not new. There is no intention to provide any form of variable compensation to Supervisory Board members. If Supervisory Board should deem it necessary, it can form an ad hoc committee per the policy. We have a track record of being very conservative in using this option. In fact, the only ad hoc committee that has ever been installed was the committee that governed the separation of Philips Lighting. As we cannot predict the future, we cannot provide you with a full list of possible circumstances that would result in the establishment of an ad hoc committee. And now I would like to answer a question from NN Investment Partners. This question is whether the Supervisory Board would consider using its discretion 3 years from now to reduce the number of performance shares that comprise the 2020 LTI grant. This has to do with the exceptional circumstances of the pandemic, its impact on share prices and the resulting number of shares being awarded in this cycle of LTI grants. Our answer is that our remuneration policy is conservative and linked to performance. We do not have the impression that there may be undue advantage gained in these exceptional circumstances. But of course, the Supervisory Board will always look at remuneration decisions holistically and we also intend to do so 3 years from now and use discretion where appropriate. Mr. Chairman, that concludes our answers to the questions.

[Interpreted] Thank you, Christine. This concludes a discussion of Item 3 on the agenda, which brings me to Item 4 on the agenda. Ladies and gentlemen, this item concerns the composition of the Supervisory Board. We have the proposal to reappoint Ms. Dhawan and Mr. Sijbesma and Mr. Löscher as members of the Supervisory Board as of the 30th of April 2020. These proposals have been motivated in the exploratory notes of the agenda and also in the binding nominations by the Supervisory Board. I will give a brief comment on both elements. The proposal is to reappoint Neelam Dhawan for an additional term of 2 years in office. The supervisory boards take stock of the intended profile of the Supervisory Board, including the diversity policy and the expertise and experience the Board wishes to have. Ms. Dhawan has very far fetching deep going knowledge of the IT industry including development of software research and IT technologies. She fulfilled her role as a member of Supervisory Board throughout the preceding terms with great expertise. Feike Sijbesma is a recognized leader in international corporate life, including the topic of sustainability. For 20 years, he was a member of the Executive Board of Royal DSM, including nearly 13 years as CEO. Peter Löscher has a great experience as a leader in the corporate sector. He is the former CEO of Siemens and held a variety of other positions of leadership in the medical, technological and pharmaceutical industry. As I said before, you will have the outcome of the vote in a moment. Ladies and gentlemen, I now turn to Item 5 on the agenda. This is the annual authorization of the Board of Management to issue shares or grant rights to acquire shares and to restrict or to exclude preemption rights. We have 2 voting items that will be voted upon separately. And this annual point returns to the agenda every year because we only grant such authorizations for a period of 18 months. I don't think any further comment is called for. And that brings me to Item 6, which is the authorization of the Board of Management to acquire shares for a period of 18 months, subject to the approval of the Supervisory Board in order to buy back shares. This is the authorization for the acquisition of shares granted annually by the AGM for buying its -- our own shares. Once again, we propose to issue such an authorization within the limitations as laid down in the agenda. And this includes a limitation to 10% of the issued share capital, plus 10%, if it is related to the capital reduction program of the company. Ladies and gentlemen, that brings me to Item 7 on the agenda. This concerns the cancellation of shares. The proposal is to cancel any or common shares in the share company that will be held by the company in the framework of the program mentioned on the Item 6 of the agenda and to reduce the issued common shares. Now any other business is canceled given the setting of today's meeting. We have not received any follow-up questions during the AGM. And that means that I now turn to the formal conclusions and the outcome of the votes. And before sharing them with you, I'm going to share the formal conclusions of the notary public present among us today. The notary public has concluded after preparation that all legal and statutory requirements have been observed, meaning that the current AGM has been convened in a legally efficient way and is [ capable ] and qualify to take legally binding decisions. The notary has counted the capital represented. And the conclusion is that a capital of EUR 117 million is present at this meeting, which leads to the right to 587 million votes. You have the details in the minutes. Given the number of outstanding shares of the company at the registration date, as a result, 66.21% of the issued capital eligible to vote is present or represented at this AGM. And finally, I can inform you that neither the Board of Management nor the Supervisory Board have received any proposals for items for the agenda from shareholders. Now I turn to the announcement of the outcome of the votes that have been cast during this AGM by shareholders or by based on the proxy shares, shared by shareholders. For practical reasons every time, I will only give you the average percentage of the votes. The detailed results of the votes will be published at the corporate website and included in the minutes. Now let me turn to the outcomes of the votes of this meeting to be the proposal to adopt the annual report and the annual accounts. You see that 99.98%, almost 100% have voted in favor. I conclude, therefore, that the motion has been adopted and that the final -- financial statements, the annual concept have been adopted to the approval of the remuneration report 2019. This is an advisory vote and once again, on the screen, you see that 92% have voted in favor of the proposal. And therefore, I conclude that the remuneration report has been adopted. Agenda item 2e, proposal to discharge members of the Board of Management. You see that 96.4% has voted in favor of the proposal. And so I can confirm that the proposal has been carried and that discharge has been granted to the members of the Board of Management. Agenda Item 2f, proposal to grant discharged members of the Supervisory Board. You see that 96.2% has voted in favor of the proposal, and I confirm that the proposal has been carried and that hence, discharge has been granted to the members of the Supervisory Board. Agenda Item 3a, proposal to adopt the remuneration policy for the Board of Management. You see on the screen that 92.6% voted in favor of the proposal. And I confirm that the proposal has been carried and that, hence, the proposed remuneration policy has been adopted. Agenda Item 3b, proposal to approve the long-term incentive plan for the Board of Management. You see that almost 94% has voted in favor of the proposal. And I confirm that the proposal has been carried. And that hence, the proposed long-term incentive plan has been approved. Agenda Item 3c, proposal to adopt the remuneration policy for the Supervisory Board. You see that 97.4% has voted in favor of the proposal. I confirm that the proposal has been carried. And that, hence, the proposed remuneration policy has been adopted. Agenda Item 4a, proposal to reappoint Ms. Dhawan as member of Supervisory Board. You see that 98.9% has voted in favor of the proposal. I confirm that the proposal has been carried, and that Ms. Dhawan, hereby has been appointed. Proposal to appoint Mr. Feike Sijbesma as member of the Supervisory Board. You see that 99.9% has voted in favor of the proposal. I confirm that the proposal has been carried, and that Mr. Sijbesma has hereby been appointed. Agenda Item 4c, proposal to appoint Mr. Löscher as member of Supervisory Board. You see that 99.5% has voted in favor of the proposal. I confirm that the proposal has been carried, and that Mr. Löscher hereby has been appointed. Agenda Item 5a, authorization of the Board of Management to issue shares. You see that 98.3% has voted in favor of the proposal. I confirm that the proposal has been adopted. 5b, proposal to authorize the Board of Management to restrict or exclude a number of preemptive rights given to shareholders. You see that the majority, 92% has voted in favor. And so I confirm that the proposal has been adopted. Agenda Item 6, which is authorization of the Board of Management to acquire shares in the company. You see that 97% has voted in favor. And I confirm that the proposal has been adopted. Agenda Item7, cancellation of the company's own shares. You see that 99.2% has voted in favor. And I see and confirm that the proposal has been adopted. Ladies and gentlemen, with this, we've dealt with all the items of the agenda, and I hereby close the general meeting of shareholders. Thank you very much for your attention and for listening in to the meeting. And the people who are attending the meeting physically, thank you very much for coming, and thank you to all those who've helped prepare the meeting. Thank you. The meeting is closed. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]