Koninklijke Philips Electronics NV Management Discusses Q2 2012 Results - Earnings Call Transcript

Koninklijke Philips Electronics NV (PHG)

Q2 2012 Earnings Call

July 23, 2012 4:00 am ET

Executives

Abhijit Bhattacharya - Executive Vice President of Investor Relations

François Adrianus van Houten - Chairman of The Board of Management, Chief Executive Officer and President

Ron H. Wirahadiraksa - Chief Financial Officer, Executive Vice-President and Member of Board of Management

Analysts

Andreas P. Willi - JP Morgan Chase & Co, Research Division

Mark Troman - BofA Merrill Lynch, Research Division

Martin Wilkie - Deutsche Bank AG, Research Division

Ben Uglow - Morgan Stanley, Research Division

Ludovic Debailleux - Natixis Bleichroeder LLC, Research Division

Gael de Bray - Societe Generale Cross Asset Research

Martin Prozesky - Sanford C. Bernstein & Co., LLC., Research Division

Olivier Esnou - Exane BNP Paribas, Research Division

Michael Hagmann

William Mackie - Berenberg Bank, Research Division

Andrew Carter - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Welcome to the Royal Philips Electronics Second Quarter Result 2012 Conference Call on Monday, 23rd of July, 2012. [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 over to Mr. Abhijit Bhattacharya, Head of Investor Relations. Please go ahead, sir.

Abhijit Bhattacharya

Good morning, ladies and gentlemen. Welcome to this conference call on the second quarter of 2012 for Royal Philips Electronics. I'm 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 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 deck were published at 7 a.m. CET this morning. More 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 the call to Frans to start proceedings for the day.

François Adrianus van Houten

Thanks, Abhijit. Welcome, and thank you all for joining us today for our second quarter 2012 earnings conference call. The improved results in the second quarter are encouraging and important proof that our multiyear change and performance improvement program, Accelerate!, continues to positively impact our business. I am pleased with the response of our people and organization to this major and fundamental transformation of our company.

In a relatively short period of time, we have started a large number of initiatives to redirect resources to those businesses and geographies that have strong growth and profit potential, and we have taken out cost in other areas. We have begun to rebuild our value chain to make it leaner, faster and more effective to speed up time to market, to use less working capital, and above all, to improve customer service.

We are redefining our company culture to make it agile and entrepreneurial, where people take ownership, are eager to win and where they team up across geographies and businesses to excel. We have made significant management changes in the top 200 positions in the company with new leaders from both inside and outside the company, which is positively impacting cultural change.

We continue to attack our cost structure and are ahead of plan with our EUR 800 million cost savings program that we have targeted the overhead structure of the company in areas like IT, finance, HR, real estate and by leaning out management layers and organization structures. The design of this program is different from other programs since it focuses on overhead layers and fundamentally changing our ways of working, which means that when these costs are removed, they will not come back, despite top line growth. We have removed EUR 176 million of cost cumulatively until the end of the second quarter. We have also invested about EUR 34 million in various initiatives that enabled these fundamental cost reductions in the second quarter of 2012.

All of this work is beginning to result in improved operational financial results. In Healthcare, sales and order intake are growing well. The growth businesses in Consumer Lifestyle are performing solidly. And in Lighting, LED-based sales continued its strong growth momentum.

In Healthcare, order intake grew 4% year-on-year and, very importantly, orders were up 13% in growth geographies. As we noted last quarter, we do see headwinds in Europe, where order intake actually declined by 6%. North America order intake declined by 3% in the quarter, as we saw a decrease in order intake for our government business.

Healthcare comparable sales were 7% higher year-on-year, with solid sales increases in all businesses and notably, double-digit growth in Patient Care & Clinical Informatics, high single-digit growth at Imaging Systems and mid single-digit growth in Home Healthcare Solutions. This growth has resulted in improved earnings, with the adjusted EBITA for the quarter being 14.1% of sales compared to 13.2% of sales in the second quarter of last year.

From an operational point of view, we've continued to strengthen the Healthcare industrial footprint in growth geographies, most recently with our strategic development and manufacturing facility in Pune in India starting commercial operations. The site will drive global innovations in imaging and improved access to healthcare for India and other growth markets. This will add to the capabilities of our manufacturing site in Suzhou in China, which produces a portfolio of imaging solutions for China and the rest of the world.

The Consumer Lifestyle business continues to respond positively to the changes that we are making across the organization. On a comparable basis, sales in Consumer Lifestyle increased 3%, driven by a high single-digit revenue increase in our growth categories: Personal Care, Health & Wellness and Domestic Appliances. This has resulted in the adjusted EBITA improving from 3.1% to 7.1%.

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