Speech by Gerard Kleisterlee at AGM 2011, 31 March 2011


Spoken word take precedence

March 31, 2011

May I also bid you a warm welcome to this annual general meeting. The past 12 months at Philips were to a large extent a period of transition. Macro-economically, this was a transition from initial recovery after deep recession to a period of moderate growth, albeit still marked by some major uncertainties. At Philips, this was a transition from Vision 2010 to Vision 2015, the strategic program that we shared with you last September. And lastly, the transition at board-room level in our company, where a new team has been preparing itself over the past months, which, with your consent, will direct the next phase of our company’s development. In the past years, under sometimes difficult economic circumstances, we have jointly laid the foundations for a successful future. The deep recession caused by the credit crisis is behind us, and I am convinced that you, our shareholders, as well as our customers, our employees and our society, will now reap the benefits of our recent efforts.

 

The foundations are strong. We have a well-balanced portfolio of businesses in the field of health and well-being that matches fundamental global trends in our society: the need for high-quality affordable healthcare; the growing awareness of the importance of a healthy lifestyle and our environment; the need to be much more energy-efficient without having to make sacrifices in our quality of life.

 

Thanks to organic growth and targeted acquisitions, we at Philips have leading positions in an impressive range of products and services, which helps us to protect and improve our margins. We are a global leader in almost two-thirds of our product/market combinations and have an excellent market position in emerging markets, the growth markets of the future, which now account for one-third of our sales.

 

The strength of the Philips brand means that in many of the activities in our portfolio we have an edge in the tough battle with our competitors. The value of the Philips brand increased last year by 7% to 8.7 billion dollars and is now twice as high as in 2004, when we launched our “sense and simplicity” brand positioning.

 

Our leadership in sustainability is proving more and more to be one of the engines of our growth. The share of Green Products in our overall sales rose to 38% in 2010. We shall invest at least 2 billion euros in Green Innovation by 2015, spread across our three sectors.

 

We have a workforce of just over 119,000 people, who are highly motivated to give our customers the best possible service. Productivity per employee increased by no less than 20% in 2010, while we posted a fantastic score of 75 on our Employee Engagement Index, our highest score ever. And with our strong balance sheet and efficient global infrastructure we enable our market teams to serve their customers at the lowest possible cost.

 

That is our strength, and that represents the foundation for Philips’ next phase.

 

Against this background, our results in 2010 were encouraging.

 

We made good progress towards achieving our strategic goal of becoming a globally leading brand in the field of health and well-being. Comparable sales grew by more than 4% to 25.4 billion euros, and we achieved an underlying profit margin of 10.5%, the best percentage of the past ten years and much higher than the 6.4% of 2009.

 

All three sectors achieved a profit margin in line with Vision 2010, the strategic program that we announced in 2007.

 

At Healthcare, comparable sales grew by 4%, driven mainly by increased sales in our Home Healthcare business and Patient Care and Clinical Informatics. The underlying margin for Healthcare came to a respectable 14.7%. This meant that Healthcare’s total operating income in 2010 passed the one billion euro milestone for the first time.

 

Comparable growth at Consumer Lifestyle in 2010 was 1%. While we saw healthy growth in Health & Wellness and Personal Care, sales were down slightly in our Audio & Video Multimedia business. The underlying margin came to 7.9%. Although this figure matched the target set in Vision 2010, it was depressed by the results in our Television business, which showed a loss for the year as a whole. Sales and margins were particularly disappointing in the second half of the year in this business, partly due to high inventory levels in the retail trade and a deeper-than-expected dip after the FIFA World Cup soccer tournament.

 

Comparable sales growth in our Lighting business was an impressive 9%. Sales of LED-based solutions grew by no less than 79% and accounted for as much as 13% of Lighting’s total sales in 2010. In the automotive sector too, we witnessed a powerful recovery. However, our sales remained under pressure from the continuing downturn in the construction sector. Like Healthcare, Lighting posted double-digit percentage growth in emerging markets. The underlying margin of 12.8% at Lighting was strong, certainly in view of the still difficult conditions in some important markets.

 

As far as our Management Agenda 2010 is concerned, we achieved most of our targets. As you can see in the first column, Drive Performance, we succeeded once again last year in controlling costs and growing our cash flow. We were also able to increase sales, though less than we had intended.

 

The column Accelerate Change relates to customer focus and employee motivation. Regarding our employees, I have already mentioned the good score on the Employee Engagement Index. As for customer focus, we made a lot of progress last year, though we can and must do even better. The Net Promoter Score measures the answer to a simple question: “Would you recommend this product or this company to your friends and colleagues?” Although the number of Philips units with an absolute leadership score showed an increase, the combined score for leadership and co-leadership fell slightly, and so we are not entirely satisfied.

 

We also made good progress in the last column, Implement Strategy. We grew considerably in emerging markets and in the product markets where we have to achieve our future growth, such as Home Healthcare within our Healthcare sector, and Health & Wellness within Consumer Lifestyle. Sustainability also made a good contribution to our growth. We achieved many of the targets in our EcoVision4 program ahead of schedule and have therefore already launched our EcoVision5 program. Progress in Consumer Luminaires, on the other hand, was insufficient. Finally, we did not succeed in making our Television business profitable. Solving this problem is a top priority for management, a priority that has only increased following last Monday’s press release in which we reported a maximum loss of EUR 120 million in TV in the first quarter of this year. In January, at the time of the publication of the fourth-quarter figures, we already reported that inventory levels in the retail channel would create some difficulties for us in the first part of the year. Downward price pressure in the television industry is at an unprecedented level, and this is an industry where competition is already intense.

 

In spite of the slowdown in growth in the second half of the year, 2010 was all in all a satisfactory year with good results. On the basis of these results and our confidence in the future of Philips, we propose that the dividend for 2011 be raised to 75 euro cents per share, 5 cents more than in 2010. If you accept this increase, it means that our dividend will have more than doubled in the past ten years, from 36 to 75 cents.

 

Once again, as every year, we show a slide that compares our Total Shareholder Return for the past three years with that of our peer group. As you can see, in the period 2007-2010 we are in 8th position, just as in the period 2006-2009. It goes without saying that we are not satisfied with this. We were also in 8th position in our peer group in terms of our share price in 2010. There was a noticeable difference between the first and the second half of 2010 – with regard to our results and certainly our share price too. Whereas in the first half of 2010 the share price increased by 15%, putting us in an excellent 1st place in the peer group, the share price fell by 7% in the last six months of the year, due to weaker results during that period, mainly as a result of the decline in the TV business.

 

Ladies and Gentlemen,

 

With Vision 2015, Philips has a strategic vision that clearly points the way to growth. Vision 2015 indicates how we can build on the foundations that we have laid in recent years. Vision 2015 does not, therefore, represent a revolution in relation to Vision 2010, but an evolution, a logical transition now that we have weathered the economic recession.

 

We have clear ambitions. Philips wants to be a world leader in the domain of health and well-being. This means that we have to become the preferred brand in a majority of the markets that we target in this domain. That, accordingly, is one of our priorities. In addition, we want to take full advantage of the possibilities created by the clear portfolio choices we have made in the past years, which see us now operating in markets that are growing faster than the economy as a whole. These are markets, moreover, where we already have various leading positions that we can further expand. We also want to remain leading in the field of sustainability. And, true to the Philips tradition, we consider it very important that we are widely seen as a company that has a positive impact on the life of customers and of society as a whole.

 

These priorities can be translated into a number of financial objectives centered on growth. On a comparable basis we want our sales in the coming five years to grow on average at least 2 percentage points faster per year than real GDP growth. And we want to further increase our reported EBITA margin in the next five years to 10 to 13% of sales.

 

You can see on the right of the slide where growth is to come from in each sector in the coming years. These targets are certainly ambitious, but they are achievable, because we are operating in markets that will show above-average growth. In all our sectors we have identified where, in particular, we can grow, for instance Home Healthcare within Healthcare, Health & Wellness in Consumer Lifestyle, and LEDs in Lighting.

In view of our strength we can look forward with confidence to a future of further growth. That is also the stated aim of our Management Agenda for 2011. An agenda which conveys continuity and consistency and which was drawn up together with the company’s new Board of Management team. I shall not, therefore, dwell on this too long. Achieving faster growth; gaining market share; focusing on emerging markets; operating in an even more customer-driven manner; converting our ideas even faster into products that can conquer the market. You can see that our ambition is also reflected in the Management Agenda for 2011.

 

Ladies and Gentlemen,

 

I will now round off. This is the last time that I am addressing the annual general meeting as Chief Executive Officer of Philips. My long, highly demanding but extremely enjoyable period at Philips has come to an end. This splendid company celebrates its 120th anniversary this year. I am enormously proud to have been given the opportunity to lead this company for the last ten years. There have been many changes in those ten years, but what has remained is Philips’ mission, namely to provide the world with meaningful products and solutions. This mission still stands in 2011. And I hope that Philips, now 120 years young, will hold onto this mission in the future, in the interests of all stakeholders.

 

I would like to take this opportunity to thank all Philips employees for their support and commitment over the past decade. Together, we have transformed Philips in this period. We have become much more customer-driven, and we have a radically different portfolio that is more closely aligned with future growth opportunities. We have made sustainability an integral part of Philips’ business dealings. We have further enhanced the strength of our brand. We have successfully integrated acquisitions into our Philips company. Our financial position is stronger and our profit stream is more stable. In this connection I would also like to express sincere thanks specifically to Pierre-Jean Sivignon, who is sitting with me at this table for the last time today. Pierre-Jean has been instrumental in the change process of the past years. He was a CFO whom I could trust implicitly. Pierre-Jean, it was a pleasure to work with you and I wish you all the best for the future!

 

A new management team will line up after this meeting. Frans van Houten and Ron Wirahadiraksa will take the helm as CEO and CFO respectively. Pieter Nota will join our Board of Management as head of Consumer Lifestyle. I wish Frans and his colleagues every success. I am convinced that, under his leadership and with the new Board of Management, Philips can look forward to a good future.

 

Our Supervisory Board will also have a new chairman in the person of Jeroen van der Veer. He will undoubtedly perform this role with success. My thanks go to Jan Michiel Hessels, who for 12 years has been a capable, thorough and critical supervisory director of our company, for the last three of those years as a chairman who supported us by word and deed.

 

Finally, I would of course like to thank you, our shareholders, for the trust that you have placed in me over the past ten years. Even though we did not always make things easy for you, I know that many of you have supported us through thick and thin. For that I would like to express my sincere thanks and appreciation. I shall miss the regular contact with you as Philips shareholders. Just as I shall miss Philips, our customers and our employees. From tomorrow I shall turn my attention more to other matters, but after 37 years with Philips this company will always hold a special place for me.

 

Thank you for your attention.