Philips dims outlook after shock 1.3 bn euro loss

CIOL Bureau
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AMSTERDAM: Philips flagged a grim outlook after a surprise quarterly loss that was driven by write-downs on recent acquisitions to reflect weak consumer demand in Europe and the United States.


Philips - the world's biggest lighting firm, a top three hospital equipment maker, and Europe's biggest consumer electronics producer - has been hit by rising raw material costs, sagging consumer confidence, sluggish construction markets and government budget cuts in the healthcare sector.

On Monday, the Dutch group announced an unexpected 1.4 billion euro write down on healthcare and lighting acquisitions that dragged it to a 1.3 billion euro ($1.8 billion) second-quarter net loss, just weeks after profit warnings at two key divisions.

Philips, which is heavily exposed to the mature European and U.S. markets, has highlighted the need to expand in the fast-growing Asian and emerging economies.


It gave a bleak outlook on Monday for the next two quarters, lowered the profit margin targets for its three core businesses for 2013, and said it would cut costs by 500 million euros.

The measures may help to restore some investor faith in Philips's new management. Frans van Houten, a restructuring expert who took over as chief executive in April, has won mixed reviews from investors, bankers and analysts, as some felt he had not responded fast enough to address Philips' woes.

"This gives me confidence. We have a new management since a few months and they indicate that they have completed the internal review process," said Charles de Kock, asset manager at Delta Lloyd Asset Management, which owns Philips shares, adding that the share buyback and cost-cutting measures were positive.


German engineering conglomerate Siemens, which competes with Philips' medical equipment and lighting products, last month warned of slower growth.

Philips also warned in June of sharply lower second-quarter profits and slowing sales growth at both its lighting business and its toasters-to-shavers consumer division, citing weak consumer demand in Europe.

"We do not expect a material performance improvement in the near term as operational risks and issues remain, and also considering the current uncertain economic environment," Van Houten said in a statement on Monday.


Philips said the 1.4 billion euro writedown reflected the weaker market outlook and lower profitability forecasts at four units. It includes a 450 million euro charge at its Respironics unit, a U.S. sleep therapy products maker that it bought for $5.1 billion in 2007.

Rabobank analyst Hans Slob said the results were "a wider signal that the consumer is not really recovering," adding later in a research note that the impairment charges were an admission that Philips had overpaid for the acquisitions.

Cost Cutting


The 500 million euros cost-savings programme will run into 2014 and address high overheads, but Van Houten said Philips would not shut or sell any of its businesses.

Some bankers and analysts have said that Philips should get out of the entire consumer electronics division because it has struggled to compete with lower-cost Asian makers of consumer electronics.

Philips also announced a 2-billion euro share buyback programme, which will be completed in the next year.


The cost cuts and buyback initially boosted its shares, which opened 2.5 percent higher, analysts said. But the realisation that Philips had reduced its margin forecasts for its three core divisions sent shares down 0.8 percent by midday.

Its shares have fallen 30 percent in the past twelve months, versus a 16.5 percent rise of the STOXX Europe 600 Personal & Household Goods index.

Van Houten, who scrapped Philips' earlier growth targets when he took over as chief executive in April, set new medium-term goals for 2013 on Monday, including sales growth of between 4-6 percent, and earnings before interest, tax and amortisation (EBITA) margins of 10-12 percent for the group.

Philips competes with Samsung and LG Electronics among others in consumer electronics, and with General Electric and Siemens in the hospital and lighting markets.