Koninklijke Philips Electronics N.V. (PHG)

Q3 2011 Earnings Conference Call

October 17, 2011 4:00 AM EST


Abhijit Bhattacharya – Head, IR

Frans van Houten – CEO

Ron Wirahadiraksa – CFO


Andreas Willi – JPMorgan

Simon Smith – Credit Suisse

Martin Wilkie – Deutsche Bank

Ben Uglow – Morgan Stanley

Gaël de-Bray – Société Générale

Olivier Esnou – Exane BNP Paribas

Sjoerd Ummels – ING

Daniel Cunliffe – RBS

Christel Monot – UBS

Martin Prozesky – Sanford Bernstein

Bill Mackie – Berenberg Bank

Andrew Carter – RBC



Welcome to the Royal Philips Electronics Third Quarter Results 2011 Conference Call on Monday, 17th of October, 2011. During the introduction hosted by Mr. Frans van Houten, CEO; and Mr. Ron Wirahadiraksa, CFO, all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions.

(Operator Instructions)

Please note that this call will be recorded and is available by webcast on the website of Royal Philips Electronics.

I will now hand the conference to Mr. Abhijit Bhattacharya, Head of Investor Relations. Please go ahead.

Abhijit Bhattacharya

Good morning, ladies and gentlemen. Welcome to this conference call on the third quarter results for 2011 for Royal Philips Electronics.

I am here with Philips CEO, Frans van Houten; and our CFO, Ron Wirahadiraksa. In a moment Frans will take you through his introductory remarks and provide an update on our performance. Ron will then shed more light on the details of the financial performance during the quarter. After this, both Frans and Ron will be happy to take your questions.

As usual, our press release and the accompanying information slide decks were published at 7:00 AM CET this morning. Both documents are now available for download from our Investor Relations website. We will also make available a full transcript of this conference call on the Investor Relations website by tomorrow morning at the latest.

With that, let me hand over to Frans to start proceedings for the day.

Frans van Houten

Thank you, Abhijit. Welcome and thank you all for joining us today. Two quarters into my tenure as CEO, I am encouraged that our organization is responding well to our large multiyear change and performance program Accelerate! Our renewed focus on innovation and customer intimacy, supported by a changing culture that embraces entrepreneurship and accountability is driving the organizational changes needed to achieve our goals. We are beginning to see the impact on growth of stepping up the investments to accelerate meaningful innovation and win more customers, while at the same time addressing structural change.

The implementation of the Philips Business System is beginning to improve granular performance management on the basis of which we are initiating corrective actions faster, including management changes in certain businesses and markets. What remains clear, however, is that a significant amount of work still needs to be done to transform Philips to deliver the shareholder value. We believe we can achieve.

As we are in the early stages of change, given the ongoing economic challenges, especially with regard to the unresolved eurozone crisis, and because operational issues and risk continue to impact our business, our financial results do not fully reflect the hard work of our teams yet. The good news, however, is that in the short 90 days or so, since I first outlined for you the initiatives that we are taking on, we are encouraged by the response of our employees and we are making steady progress.

Let me now walk you through a few of the details. Our results for this quarter have been affected by operational issues as well as raw material price increases, which have resulted in lower gross margins than planned, particularly in Lighting. At the same time, we are stepping up innovation and sales related expenses to drive growth. In Healthcare, we are rolling out a number of new products that will better align us with the future of the industry. We are seeing the positive order book and revenue impact from this product launches. And while the investments in selling expenses in speeding up innovation and higher regulatory cost negatively impacted our earnings this quarter, we believe that this is a short-term consequence of our strategy to build our market leadership. Having said that, we are closely monitoring both, the overall economic environment and government policy and the potential impact on the Healthcare business in the medium term.

We continue to reshape our Consumer Lifestyle portfolio for profitable growth by repositioning the business towards the Health and Well-Being domain, and by driving global scale and category leadership. We are reducing our exposure to consumer electronics and we are focusing here on more attractive growing categories.

In our growth businesses, we continue to invest and are seeing this investment correlate to better sales growth. The negotiations with TPV for the creation of the television joint venture are intense and constructive. Although these negotiations are taking longer than expected, we continue to work together to come to definitive agreements soon. For the eventuality that a final agreement can not be reached, Philips will consider its alternative options. The process of disentangling the TV business from the rest of Consumer Lifestyle is progressing well and according to plan.

In Lighting, we have put through price increases to compensate for the affect of the increase in raw material prices, the full effect of which will be visible in Q4. At the same time, we are significantly stepping up innovation initiative in growth areas and more specifically preparing Lighting for the transformation to energy efficient LED lighting solutions and to sustain our global lighting leadership.

In terms of cost cutting, we have scrutinized our processes and overhead cost. By reducing complexity and overhead cost, we will save EUR800 million, which has now been detailed and we are in the process of deploying it across the organization in the countries affected. About 60% of these cost savings are people related and hence will lead to the loss of approximately 4,500 jobs. And I find this regrettable. But this is an inevitable step to improve our operating model to become a lean, agile, entrepreneurial and competitive company. Remaining 40% of the cost relates to other structural cost savings like in real estate, IT cost, et cetera.

Read the rest of this transcript for free on seekingalpha.com

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