Speech by Frans van Houten at AGM 2012, 26 April 2012


Spoken word take precedence

April 26, 2012

1. Introduction

 

Ladies and Gentlemen,

 

Welcome to this General Meeting of Shareholders.

 

It was just over a year ago, during Philips' 120th year, that I took over the helm. At that time I was sure − and I am even more convinced now − that Philips is a fantastic company with enormous potential. We operate globally in three growth markets: healthcare, energy-efficient lighting, and personal care and well-being. And in these markets we distinguish ourselves through innovation and customer-centricity.

 

I see an outstanding future for Philips. There is, however, a lot of work to be done before Philips becomes the agile, entrepreneurial company that it needs to be in order to take on an ever-increasing competition from Asia in the 21st century.

Of course, a lot has happened over the past twelve months, both in the market and in our company. Let me explain a little bit about both.

 

First of all: the market. There has been a great deal of economic uncertainty and adversity, and a substantial part of Europe has ended up in a debt crisis. Meanwhile, the competition from Asia is increasing at an incredible rate. In addition, people of various countries in North Africa and Middle East have made it clear that they want more democracy. The world has certainly not become a more stable place.

 

Secondly: Philips' performance is not yet satisfactory. That is why, in 2011, we launched our Accelerate! program to bring about significant and structural change. We are doing everything to become faster and more entrepreneurial and we want to provide innovative solutions in response to important trends in the world in the area of health, well-being and sustainability.  That is why I have given innovation a more prominent role in the organization, and why we have raised our investments in R&D. Last year, we invested more than 7% of our revenue in R&D.

 

To this end, we have recently tightened our mission and vision. Our aim is to make the world healthier and more sustainable through innovation. And we have set ourselves the target of improving the lives of three billion people a year by 2025.

 

In line with that mission and vision, we are developing solutions for personal care, healthy food, medical diagnostics and patient care, and energy-efficient lighting. The way we contact our business is very important for us as well. We want to do this in a sustainable way. Our Green Products accounted for 39% of sales in 2011.

We want to increase that to 50% by 2015 and we aim to close the loop of the value chain by means of recycling.  That will not only be good for the environment, it will also strengthen our competitive position.

 

Philips has an excellent starting position, thanks to the strategic choices that have been made. We are present in attractive markets in which we are addressing a number of important trends, such as the increasing world population, the increasing number of elderly people, which increases demand for healthcare; rapid urbanization; rising demand for energy-efficient products; and the increasing focus on “quality of life.” These trends are not only visible in the Western world, but increasingly in the rest of the world as well.

 

Our strategy also means that we have to make choices. We are focusing on those activities in which we hold a leading position and we are leaving some activities to other companies. To create value with our TV business we needed to adopt a new business model. Therefore, we decided to transfer our television activities to a joint venture with TPV, which is 70% owned by TPV and 30% by Philips. This new joint venture, called TP Vision, is developing and bringing new Philips televisions to the market. In the joint venture, our Philips brand, our innovative strength and our strong relations with the trade are combined with TPV's scale and production capacity. The aim is, of course, to enable these activities to grow profitably. The joint venture will safeguard the continuity of the Philips brand in the television market and will provide Philips with income through licenses.  Now that this significant and historic deal has been finalized, we are able to focus our attention on further strengthening the Healthcare, Consumer Lifestyle and Lighting sectors.

 

As I already mentioned, innovation has been given a more prominent role at Philips. Let me tell you about some of our ground-breaking innovations in the three sectors, each of which contributes to our growing market share:

 

  • In Healthcare we have launched a new product for use in the home: SimplyGo. This is a portable device that concentrates oxygen from the air and makes life much more enjoyable for COPD sufferers, for example. We have also come up with new applications for Sonalleve − a technology that combines MRI and focused ultrasound − one of which is to provide pain relief for people suffering from bone cancer. This can eliminate the need for surgical intervention. In the future, the technology is hoped to enable more effective treatment of tumors.
  • In Consumer Lifestyle we have managed to increase our share of the market for oral care with Sonicare and AirFloss. When it comes to consumer appliances, we have enjoyed success with the Airfryer, a deep-fryer that works without oil. And here in the Netherlands we have won a major industry award with our new hair removal device, the Lumea. Some members of the jury called it “the best beauty invention of the century”.
  • In Lighting we are further strengthening our leading position in LED lighting - for example, with dynamic LED street lighting projects in more than 10 countries in the world. Thanks to these projects, energy consumption can be reduced by up to 80%. In Turkey we are going to illuminate almost 500 supermarkets with our MASTER LED lamps.

 

Our three sectors are not only active with the right products in the right markets, they also share a number of valuable assets, such as the strong Philips brand, our well-established innovation strengths, our access to customers in more than 100 countries, a strong financial position and, of course, our own talented and passionate employees, who are able to apply their knowledge and experience in different parts of the company. We can create superior value for you by using this portfolio, if we run our operations better.

 

In 2011, the Philips brand was valued at 8.7 billion dollars, the same as in 2010 and twice as much as in 2004. A strong brand is important, because it creates trust, and that is what enables us to attract more customers.

 

2. Accelerate!

 

I have already mentioned that we did not perform well enough in 2011. In my opinion, that was because Philips is only realizing a fraction of its potential. With everything we have at the moment – our market positions, excellent products, innovation strengths, the Philips brand and talented employees – we should be able to achieve more growth and greater profitability. That is possible if we increase the strength and effectiveness of our organization. In 2011 we launched our comprehensive multi-year Accelerate! program in order to foster more growth and profitability. This program is comprised of five initiatives. The main purpose of the program is to change the culture and mindset at Philips. We want all of our employees to feel confident enough to take greater responsibility and to act swiftly. For that, they need to be encouraged to be more entrepreneurial and to take the initiative. At the same time we need to improve collaboration along the customer value chain and to improve our performance. We have now geared our remuneration system towards this.

 

Accelerate! is also about how Philips responds to the specific wishes of customers in local markets. The world is more diverse than what we can perceive from here in Amsterdam. People in India and China prepare their food differently compared to people in the Netherlands or America. That is why we are giving local employees greater scope to make decisions and influence Philips' global product strategy.

 

We are also trying to shorten the time it takes to turn an innovative idea into a product that fulfills the customers' requirements. We need to foster a better collaboration between all functions at Philips. In other words, we need to make the company's entire value chain more effective and implement our strategy more quickly. This can be compared to a relay race, where the athletes do their utmost to pass the baton to each other as quickly as possible so that their baton is the first across the finishing line. In the same way, different functions at Philips, such as R&D, Purchasing, Production, Marketing, Sales and Services need to collaborate better. The better each individual performs his or her tasks, the more successful Philips will be. We need to change from a company organized around functions, which can lead to silos, to a process-driven company, that focuses on customers’ need and can beat the competition.

 

In order to respond effectively to the market, we need employees who are quick to spot change and take action. Doing business means taking calculated risks, and I want to encourage that. Plans need to be specific and relevant for local markets to realize maximum competitive advantages. That is why we have set up 400 so-called Business Market Combinations, which give much better insights into the performance of each of those cells. For example, how LED fixtures in Germany are performing or patient monitors in China. As a result of this, we can quickly adapt our strategy or tactic, if necessary.

 

To make the organization more effective we are also simplifying our way of working. With 5 billion euros in so-called overhead costs we are too slow and expensive and that affects our competitive position. Certain layers in the organization will disappear, thus reducing overhead costs. This will generate annual savings of 800 million euros, with some savings already captured in 2011. We have already announced that this will lead to the loss of 4500 jobs at Philips. This is very regrettable, but cannot be avoided.

 

Lowering the overhead costs improves the profitability and enables us to invest more in innovation and customer support. In addition, we are investing more in markets and products where we see opportunities, what we call “resource to win.”  If we really want to win, we are going to have to persevere, even if that means the results of a business unit come under pressure in the short term. We have to do this to make sure that Philips not only has a proud past but also a great future.

 

It goes without saying that a decisive, innovative, global organization needs a good team of people at the top. This is why we established an Executive Committee in 2011, the members of which represent the various functions, businesses and markets at Philips. This will enable us to direct the company more effectively.

 

A number of leaders sit on the Executive Committee, including Ronald de Jong, Patrick Kung, Jim Andrew and Carole Wainaina. This year, the team has been strengthened by Eric Rondolat, who now leads our Lighting activities, and Deborah DiSanzo, who from May 1 will be the CEO at Healthcare. We now have an Executive Committee made up of two women and people of five different nationalities, who have won their spurs in different markets in various regions around the world and who bring with them a wealth of experience and knowledge from outside Philips. With this team we are going to make Accelerate! and Philips a success. Together we will solve the problems and together we will make the most of the opportunities.

 

In line with Accelerate!, we have also drawn up our priorities for 2012. This year we will be focusing on creating a more entrepreneurial culture, carrying out more innovation and doing so at an accelerated pace, responding more effectively to local customers' needs, and improving our financial performance. All this is expected to speed up growth, increase profitability and further strengthen our strategic positions.


3. Results in 2011

 

Although our sales rose by 4% to 22.6 billion euros in 2011, profitability was disappointing, particularly in the fourth quarter. EBITA (Earnings Before Interest, Taxes and Amortization) declined by a third in 2011 to 1.7 billion euros. Healthcare, Consumer Lifestyle and Lighting all achieved lower earnings. Exceptional charges, such as goodwill write-downs and costs associated with the disentanglement of the Television business, led to a net loss of 1.29 billion euros.

 

The sales growth was based primarily on a 6% rise in sales at Lighting and a 5% rise at Healthcare. Sales at Consumer Lifestyle remained more or less flat. Growth was also primarily due to sales in the growth geographies, which rose by 11%. In 2011, sales in Europe and North America rose by only 1%.

 

Because we have faith in the future of Philips, we propose to maintain the dividend at 75 euro cents per share and to offer this dividend in cash or in shares at the option of the shareholder. This is in line with our commitment to a stable dividend policy with a 40 to 50% pay-out of continuing net income.

4. Q1 and outlook for 2012

 

Although the shareholders' meeting officially only relates to 2011, I would nevertheless like to take a moment to look at the figures for this first quarter, which we published three days ago.

 

In the first quarter, sales on a comparable basis rose by 4%, while reported EBITA increased from 438 million euros to 552million euros. Compared with the first quarter of 2011, EBITA at Healthcare and Consumer Lifestyle rose, whilst EBITA at Lighting climbed from the last three months of last year.

 

I consider these figures to be encouraging and a further step in the right direction for us at Philips on our path to sustainable value creation.

 

Last year we defined our targets for the medium term (2013): 4-6% comparable sales growth, 10-12% EBITA margin, and 12-14% ROIC. We are confident we can achieve these targets. We are on course with our cost-cutting measures. The Accelerate! program is starting to have a positive effect on our performance. Cost-saving initiatives are on track.

 

Having said that, we remain cautious about making statements for the rest of 2012 in view of the uncertainty in Europe. The costs associated with restructuring measures and one-time investments will also affect the results this year. Despite these costs, we expect the underlying profitability in the sectors to improve in the latter part of 2012.

 

5. Conclusion

 

Ladies and Gentlemen,

 

As you have heard in the news each day, the world is facing a number of major macro-economic challenges. However, here at Philips, we do not wish to hide behind external factors. We are determined to follow our own course and, through Accelerate!, to make our company more entrepreneurial and innovative. Where we need to invest, we will invest. And where we need to save, we will save. We will act faster.

 

As I said, we are giving innovation a more prominent place in order to secure the future of the company. This is in line with our mission and vision to make the world healthier and more sustainable through innovation, and to improve the lives of 3 billion people a year by 2025. The development of Green Products is an integral part of that.

 

I am convinced that Philips is in a position to fulfill this mission. Innovation has been the driving force behind the company for 121 years already, and that's the way it will stay. We have every confidence in the future of Philips.

 

Thank you for your attention.