Koninklijke Philips Electronics N.V. (PHG) Q4 2010 Earnings Conference Call January 24, 2011 3:15 AM ET Executives Abhijit Bhattacharya – Head, IR Pierre-Jean Sivignon – EVP and CFO Analysts Mark Troman – Bank of America Merrill Lynch Simon Smith – Credit Suisse Andreas Willi – JP Morgan Martin Wilkie – Deutsche Bank Gaël de Bray – SG Ben Uglow – Morgan Stanley Ilan Chaitowitz – Redburn Partner Olivier Esnou – Exane BNP Paribas Martin Prozesky – Sanford Bernstein Christel Monot – UBS Matt Williams – HSBC Marcel Achterberg – Petercam Victor Bareño – SNS Securities Peter Olofsen – Kepler Capital Markets William Mackie – Berenberg Bank Presentation Operator
As usual, our press release and the accompanying information slide deck was published at 7 AM this morning. Both documents are now available for download from our Investor Relations website. We will also make available of full transcript of this conference call on the Investor Relations website by tomorrow morning at the latest.With that, let me hand you over to Pierre-Jean, to run through the results. Pierre-Jean Sivignon Thank you, Abhijit. Good morning to you all. I will first just start by looking at recent developments in some of our end markets. Then, I will walk you through the financial performance for the year 2010. And, finally, I will end with my comments on the fourth quarter. As far as developments in the end markets are concerned, I will start with Healthcare, where in the USA we saw hospitals continuing to focus on lowering their operating cost and managing their work. While those with relatively strong balance sheets saw an easing in the availability of credit. Some uncertainty on Healthcare Reform continues, with reimbursements pressure and healthcare equipment tax on the horizon, as well as many states challenging the Federal mandate to buy insurance. This year also saw the emergence of large strategic and multiyear deals, some pent-up demands was also visible in the quarter. We see strong momentum in emerging markets. And as more investments continue to be directed at these markets, this results in robust demand there. The lighting markets saw reasonable growth in the quarter with demands for LED products leading the way. Given the weak construction markets, we are encouraged by the growth in the professional luminaires market for the second straight quarter. With the forward-looking Architecture Billing Index crossing the growth level of 50 in the last quarter, we expect to see growth in the construction staffs towards the latter half of 2011. We expect growth from tenant’s renovation to give us some early momentum in 2011.
In the automotive sector, we believe the inventory correction has now been completed and supplies are aligned with the production staffs. The consumer business continue to remain subdue. In Q4, we continued to see good market developments in emerging markets. Last but not least, we did see tighter inventory management in the channels, as we had already indicated at the end of the third quarter.In the consumer markets, consumer sentiment in Western Europe and the US remained subdued. In the areas where we mostly invested for growth, we saw markets responding. Personal care, Health & Wellness, and domestic appliances markets continue to grow. Markets in the Asean countries and Central Europe as well showed good growth in the quarter. The Home Audio and DVD markets continued to shrink, while price erosion in the Television market was severe. Let me now move to the Philips Group results. For comparable sales, we grew 4%, actually 4.5%. And excluding TV, we saw 5% of sales growth for the year, when adjusted for currency as well as portfolio changes. Sales in Healthcare for the year grew by 4% for the year in line with our earlier guidance given during the Capital Market Day back in May in 2010. Particularly pleasing for Healthcare was the growth in key emerging markets, which saw a double-digit growth, with China and India, growing at more than 20% for the year. Key emerging market consist of China, India, and Latin America. We see these trends as clearly supporting our investment thesis for these markets. Our lighting business emerged from the crisis with a strong growth of 9% for the year. Our sales growth in LED products which forms an important part of our future plans was very strong, with a year-on-year growth of 78%. Growth in automotive lighting, lighting electronics, and the lamp business as well contributed handsomely to the growth for the whole sector.
The lack of momentum in the constructions business resulted in a subdued performance by our luminaires business. Consumer Lifestyle sales grew by 1% for the year. Our growth engines in Consumer Lifestyle, i.e. Personal Care, Health & Wellness businesses and Domestic Appliances grew in line with our expectations. The decline in the Audio/Video, Multimedia, and DVD markets, specifically in the categories where we are present was largely responsible for upsetting growth in the other categories.In emerging markets, sales for 2010 grew healthy 12% on the comparable basis, and 13% excluding TV. On the nominal basis, sales in these markets increased by 20%. In North America, we saw comparable growth of 1%, while sales in Europe declined by 1%. Reported EBITDA for the year was EUR2.6 billion or 10% of sales, which is a record in the last 10 years, and that is a significant improvement over the 4.5% profitability reported for the year 2009. More impressively, for adjusted EBITDA profitability, that is to say excluding incidental gains and charges significantly exceeded our target of 10% to finish the year at 10.5%, with a strong year-on-year improvements in all three business sectors. Reduction in our cost base, pricing discipline and the success of our supply team in managing the bill of material has contributed to this improved performance. Our continued focus on cash, delivered a free cash flow of EUR1.3 billion in the year. And with that summary on the year, I would now like to take you to get a closer look at our performance in the fourth quarter. Sales in Q4 increased by 2% on the nominal basis, corrected for currency movements and portfolio changes, sales for the quarter declined by 4% compared to the previous year. Excluding Television, this figure was a decline of 2%. On a geographical basis, comparable sales in the emerging markets fell 1% in the fourth quarter. Excluding TV emerging market witnessed a growth of 3%. This was mainly due to execution issues in Brazil. Excluding TV in Brazil, sales in emerging market grew by 7% on the comparable basis. Sales from emerging market now represents a third of Group revenues, actually 33% to be precise, which is an encouraging trend as we continue to see the significance of the emerging markets growing in the coming years.
I would like to highlight that for growing footprint in emerging market is not only limited to the BRIC countries, but to other emerging geographies such as Asean, Ukraine, Central Asia, South Africa, and in the Middle East as well. Revenue performance in the rest of the world was mixed with North America showing a 1% increase in comparable sales, while Western Europe saw a decline of 10%.Read the rest of this transcript for free on seekingalpha.com