Koninklijke Philips N.V.

The stable outlook reflects our expectation that, despite some near-term challenges from the pandemic and product recalls, Philips' resilient business model should continue to support the current rating level. Continued strong FOCF and financial flexibility should allow adjusted leverage to remain at 2x-3x over the next 24 months, below the 3x threshold for the current rating. We could raise the long-term rating on Philips if: We see continued strong improvements in profitability, especially in the diagnosis and treatment and connected care segments, supported by market share gains; or Adjusted leverage is kept sustainably below 2.0x, supported by a financial policy that is compatible with a higher rating, notably regarding debt-financed acquisitions and shareholder distributions. We could lower our ratings on

... to a focused health technology group has been successfully completed now the group has closed its domestic appliances divestment. In September 2021, Philips closed the disposal of its domestic appliances business, with cash proceeds of 3 billion after taxes and transaction costs. This marked the completion of Philips' portfolio streamlining over the past few years, under which it has transformed into a focused and leading health technology group. We positively view the strategy and its execution, since we assume Philips will post more stable cash flows and higher margins, supported by its market position and positive fundamentals in the medical technology market. We view annual sales growth of about 5% over the medium term as achievable for all remaining Philips segments, and forecast an improvement in S&P Global Ratings-adjusted EBITDA margin to about 16%-17% from 2022 after 14.6% in 2019 and 15% in 2020, which was an extraordinary year...

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