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Philips' Third Quarter Results 2014

October 20, 2014

  • Comparable sales growth flat, with sales in growth geographies up 2%
  • EBITA, excluding restructuring and acquisition-related charges and other items, amounted to EUR 536 million, or 9.7% of sales, compared to 11.4% in Q3 2013
  • EBITA amounted to a loss of EUR 7 million, primarily impacted by charges related to IP litigation and the voluntary production suspension at the Cleveland facility
  • Net loss of EUR 103 million, compared to net income of EUR 281 million in Q3 2013
  • Currencies negatively impacted sales by 1.7% and EBITA by 0.9 percentage points of sales
  • Free cash flow of EUR 166 million, compared to EUR 122 million in Q3 2013
  • Started the process of creating two market-leading companies focused to capitalize on the HealthTech and Lighting solutions opportunities

 

Frans van Houten, CEO:

 

“The successful execution of our Accelerate! program continues to improve operational performance in most of our businesses. We are very excited by the vast opportunities in the HealthTech and Lighting solutions markets that we will capitalize on with the creation of two dedicated market-leading companies.

 

As we manage through a challenging 2014 and given a number of incidentals, we are not satisfied with our overall performance in the third quarter. We are facing sustained softness in a number of markets such as China and Russia. We were also confronted by an adverse jury verdict with a surprisingly high proposed award in the Masimo litigation, which we will appeal. On a positive note, production at our Cleveland facility is ramping up.

 

In Healthcare, we were pleased to win four multi-year strategic contracts, thereby demonstrating that our integrated solutions are gaining momentum despite a very slow market. In Consumer Lifestyle, our focus on health and wellness products is yielding good results, as demonstrated by the solid performance of Oral Healthcare and Mother & Child Care, despite challenging conditions in some of our bigger markets. In Lighting, we improved the performance of Consumer Luminaires in Europe and achieved double-digit growth and market share gains in Lumileds, which helped to balance the decline in conventional lighting.

 

As a few of the near-term headwinds start to abate and our Accelerate! program continues to improve our operational performance, we expect our adjusted EBITA in the second half of 2014 to be slightly below the adjusted EBITA in the same period last year and we remain committed to our 2016 financial targets.”

 

Q3 financial and operational overview:

Philips' Third Quarter Results 2014

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Healthcare

 

“We are making good progress in the remediation of the quality management system at our Cleveland facility. We have now also resumed production of the iCT and Ingenuity scanners, and production ramp-up will continue through the first quarter of 2015. This will contribute to improved performance in the fourth quarter and into 2015.

 

More broadly, we are seeing good traction with our programs that address government and health system goals of improving population health and delivering quality care more effectively. This is illustrated by our new 15-year contract with the Reinier de Graaf hospital in the Netherlands, the 14-year contract with the Karolinska University Hospital and the Stockholm County Council, and the 10-year contract related to the 700-bed Philippine Orthopedic Centre in the Philippines, where our systems and consultancy will help improve operational performance.”

 

Healthcare comparable sales grew by 1% year-on-year. The EBITA margin, excluding restructuring costs and various charges, was 12%, a decrease of 2.6 percentage points year-on-year. Currency-comparable equipment order intake declined by 1%.

 

Consumer Lifestyle

 

“In Consumer Lifestyle, we are continuing to expand our offering to help consumers make healthier choices every day and drive value from the ‘Internet of Things’. In the third quarter, we introduced a number of digital cloudconnected solutions, including an application to manage chronic pain treatment and an oral healthcare application that helps children to brush their teeth more effectively.”

 

Consumer Lifestyle comparable sales increased by 5%, with mid-single-digit growth in Health & Wellness and Domestic Appliances and low-single-digit growth in Personal Care. The EBITA margin, excluding restructuring and acquisition-related charges and other items, was 10.6%, compared with 11.1% in the same period last year. The margin decline was attributable to country and product mix.

 

The company also launched a series of exciting new products. Philips expanded the geographic reach of its domestic appliances with the NoodleMaker now available in Japan, Australia and North America, and is seeing sustained strong global demand for the Philips Airfryer. Building on its Male Grooming growth strategy to drive loyalty and to create more value among existing users, the flagship Philips Shaver Series 9000 is being launched in 47 countries. Philips’ latest innovations in skincare, the Philips VisaCare and VisaPure, and in hair removal, Philips Lumea, are delivering strong growth in markets around the world.

 

Lighting

 

“In Lighting, we are solving customer needs with exciting energy-efficient LED solutions, and our breakthrough range of Hue Beyond connected luminaires illustrates how well-positioned we are to drive profitable growth through leading LED innovations, connected ecosystems and professional systems and services. We saw encouraging wins, including a partnership in Indonesia to install LED lighting solutions in nearly 1,000 convenience stores and a contract to deliver LED pitch lighting for Chelsea’s Stamford Bridge stadium in London.”

 

Lighting comparable sales declined 1% year-on-year. LED-based sales grew by 28%, offset by a decline of 14% in overall conventional lighting sales. LED sales now represent 40% of total Lighting sales, compared to 30% in Q3 2013. Excluding restructuring charges and costs associated with setting up Automotive and Lumileds as a stand-alone company, the EBITA margin amounted to 9.7%. The EBITA margin was impacted by a combination of factors in China, including a slowing market and tightening liquidity resulting in customer credit provisions.

 

The recovery of Consumer Luminaires in Europe is progressing and the company continues to expect Consumer Luminaires’ adjusted EBITA to break-even for the full year. Philips’ progress in turning around Professional Lighting Solutions in North America also continued as it began to build growth momentum in September and expects to deliver profitable growth in the fourth quarter.

 

Innovation, Group & Services

 

“As part of our commitment to drive leadership positions in emerging business areas, in the third quarter Philips completed the acquisition of Unisensor, a small company offering technology which we plan to leverage for miniaturized, mobile diagnostic solutions. We are also installing Philips GreenPower LED in several horticulture projects in Belgium, Finland, the Netherlands, UK and Canada. Our LED light recipes have been recognized by international growers, as they help to boost crop growth and improve productivity. We’ve also seen encouraging traction in Digital Pathology, where we signed three new contracts in the third quarter.”

 

Excluding restructuring costs, provisions related to various legal matters in the quarter and the pension settlement loss in the third quarter of 2013, EBITA was a net cost of EUR 48 million, compared to a net cost of EUR 28 million in Q3 2013. The decrease was mainly due to higher investments in our emerging business areas and lower IP-related income.

 

Capital Markets Day strategic announcement

 

On September 23, 2014, Philips announced that it will sharpen its strategic focus by establishing two marketleading companies in HealthTech and Lighting solutions. Both companies will continue to leverage the Philips brand and will be optimally positioned to deliver long-term profitable growth. Philips has started the process of transitioning the Lighting solutions business into a separate legal structure. It is expected that the process of separation will take 12-18 months to complete.

 

Update on Accelerate! transformation program

 

Accelerate! continued to drive improvements across the organization, resulting in increased customer centricity, enhanced customer service levels, faster time-to-market for our innovations and higher cost productivity.

 

Professional Lighting Solutions in North America, for example, completed the redesign of its market-to-order processes in the third quarter. With access to new tools and application-specific expertise, customer service levels moved up to 95%. By deploying Lean, the company also achieved significant enhancements to customer service levels, lead times and quality levels, with many of its sites achieving double-digit productivity improvements.

 

Overhead cost savings amounted to EUR 37 million for the quarter, bringing the cumulative annualized overhead cost savings in the first nine months of the year to EUR 264 million. The Design for Excellence (DfX) program generated EUR 17 million of incremental savings in the bill of material in the quarter, resulting in EUR 187 million of cumulative DfX savings to date. The End2End productivity program achieved incremental savings of EUR 18 million in the quarter, which brings the cumulative amount of End2End productivity savings to EUR 50 million.

 

The next phase of productivity improvements will enable additional cost savings across the support functions, resulting in EUR 100 million of additional savings in 2015 and a further EUR 200 million in 2016. Philips expects to incur approximately EUR 50 million of additional annual restructuring costs in the period 2014 to 2016.

 

As of September 30, 2014, Philips had completed 32% of the EUR 1.5 billion share buy-back program.

 

 

Quarterly Report

Q3 2014 - Quarterly Report

 

Presentation

Q3 2014 - Quarterly Results Presentation

 

Conference call and audio webcast

Frans van Houten, CEO, and Ron Wirahadiraksa, CFO, will host a conference call for investors and analysts at 10:00 am CET to discuss the results. A live audio webcast of the conference call will be available through the link below.

Q3 2014 conference call audio webcast

 

More information about Frans van Houten and Ron Wirahadiraksa

Click here for Mr. van Houten's CV and images

Click here for Mr. Wirahadiraksa's CV and images

 

Philips' Third Quarter Results 2014 Infographic

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Philips receives FDA 510(k) clearance for its innovative ultra-mobile VISIQ ultrasound system

In a further advance to make affordable healthcare accessible to wider patient populations, Philipslaunched the VISIQ, an ultra-mobile tablet-based system for quality ultrasound imaging, in India.Philips also received US FDA 510(k) clearance for the VISIQ.
     

Philips’ first clinical applications for its HealthSuite Digital Platform received US FDA 510(k) clearance

 Helping patients’ transition from hospital to home, Philips’ first clinical applications for its HealthSuite Digital Platform, eCareCoordinator and eCareCompanion, received US FDA 510(k) clearance. These applications give clinicians better patient data access and analysis, and help patients manage their health. 

Philips launches latest digital consumer innovations at IFA in Berlin

  Empowering consumers to take control of their own health with digital solutions for healthy living and
disease prevention, Philips launched its latest connected devices and apps at IFA in Berlin.
Highlights included a smart air purifier, an app to manage treatment of chronic pain, and an oral
healthcare app to help kids brush their teeth more effectively.
  

Philips is launching the Philips Shaver Series 9000 in 47 countries around the world

 Delivering on its Male Grooming growth strategy to drive loyalty and create more value among existing
users, Philips is launching the Philips Shaver Series 9000 in 47 countries around the world.
   

Philips introduced Hue Beyond

 Further expanding its Hue ecosystem, Philips introduced Hue Beyond, the first of a range of connected luminaires. Hue Beyond has a dual light source that combines functional, ambient and mood lighting for every space in the home.

Philips delivered LED pitch lighting for Chelsea’s

   Philips delivered LED pitch lighting for Chelsea’s Stamford Bridge stadium – the first top-flight soccer
venue to feature this pioneering lighting system, improving visual conditions for both players and fans.

Philips received top scores in the 2014 Dow Jones

 Philips received top scores in the 2014 Dow Jones Sustainability Index, with highest results for its Best in Class performance on Climate Strategy and Product Stewardship. The ranking underlines Philips’ ongoing commitment to sustainability and its journey toward a Circular Economy.

Philips won a total of eight awards in the Successful

  Philips won a total of eight awards in the Successful Design Awards China 2014 for products and solutions
from its entire portfolio, including the Airfryer XL and the Efficia Defibrillator Monitor.

For further information, please contact:

Joost Akkermans
Philips Group Communications
Tel: +31 20 59 78049
Email: joost.akkermans@philips.com
 
Steve Klink
Philips Group Communications
Tel.: +31 6 10888824
E-mail: steve.klink@philips.com 

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About Royal Philips:

Royal Philips (NYSE: PHG, AEX: PHIA) is a diversified health and well-being company, focused on improving people’s lives through meaningful innovation in the areas of Healthcare, Consumer Lifestyle and Lighting. Headquartered in the Netherlands, Philips posted 2013 sales of EUR 23.3 billion and employs approximately 115,000 employees with sales and services in more than 100 countries. The company is a leader in cardiac care, acute care and home healthcare, energy efficient lighting solutions and new lighting applications, as well as male shaving and grooming and oral healthcare. News from Philips is located at www.philips.com/newscenter.

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Forward-looking statements

This document and the related oral presentation, including responses to questions following the presentation, contain certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items. Examples of forward-looking statements include statements made about the strategy, estimates of sales growth, future EBITA and future developments in Philips’ organic business. By their nature, these statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these statements.

 

These factors include but are not limited to domestic and global economic and business conditions, developments within the euro zone, the successful implementation of Philips’ strategy and the ability to realize the benefits of this strategy, the ability to develop and market new products, changes in legislation, legal claims, changes in exchange and interest rates, changes in tax rates, pension costs and actuarial assumptions, raw materials and employee costs, the ability to identify and complete successful acquisitions and to integrate those acquisitions into the business, the ability to successfully exit certain businesses or restructure operations, the rate of technological changes, political, economic and other developments in countries where Philips operates, industry consolidation and competition. As a result, Philips’ actual future results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. For a discussion of factors that could cause future results to differ from such forward-looking statements, see the Risk management chapter included in the Annual Report 2013.

 

Third-party market share data

Statements regarding market share, including those regarding Philips’ competitive position, contained in this document are based on outside sources such as research institutes, industry and dealer panels in combination with management estimates. Where information is not yet available to Philips, those statements may also be based on estimates and projections prepared by outside sources or management. Rankings are based on sales unless otherwise stated.

 

Use of non-GAAP information

In presenting and discussing the Philips financial position, operating results and cash flows, management uses certain non-GAAP financial measures. These non-GAAP financial measures should not be viewed in isolation as alternatives to the equivalent IFRS measures and should be used in conjunction with the most directly comparable IFRS measures. A reconciliation of these non-GAAP measures to the most directly comparable IFRS measures is contained in this document. Further information on non-GAAP measures can be found in the Annual Report 2013.

 

Use of fair-value measurements

In presenting the Philips financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that are deemed to be reliable. Readers are cautioned that these values are subject to changes over time and are only valid at the balance sheet date. When quoted prices or observable market data are not readily available, fair values are estimated using appropriate valuation models and unobservable inputs. Such fair value estimates require management to make significant assumptions with respect to future developments, which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in the Annual Report 2013. Independent valuations may have been obtained to support management’s determination of fair values.

 

All amounts are in millions of euros unless otherwise stated. All reported data is unaudited. This interim financial report is prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union and the accounting policies are the same as stated in the Annual Report 2013, unless otherwise stated.

 

Prior-period financial statements have been restated to reflect two voluntary accounting policy changes and a change in the divestment of the AVM&A business. For more details see note 1, Significant accounting policies, section Other changes.

 

An overview of the revised 2012 full year and 2013 figures per quarter is available on the Philips website, in the Investor Relations section.

 

 

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