Speech by Frans van Houten at AGM 2013, 3 May 2013


Spoken words count

May 3, 2013

1.   Introduction

 

Ladies and Gentlemen,

 

May I also bid you a warm welcome to this Annual General Meeting.


Philips made good progress in 2012 and the results show that our multi-year transformation program Accelerate! is really gaining momentum. This program will enable us to introduce new innovations faster in key markets throughout the world and realize higher value even more quickly in local markets.


I regard our performance in 2012 as clear evidence that Philips is well on course for an outstanding and successful future. And that is good news, certainly in times of difficult economic conditions in Western Europe and North America. Accelerate! has only been in operation for two years, and there is much more to come.


And why do I believe that Philips has so much potential? We occupy leading positions in healthcare, lighting and consumer well-being. Rapidly growing demand for affordable healthcare, the requirement to be more efficient in our use of energy, the need for personal well-being and other global trends and challenges offer us tremendous opportunities in both mature and growth markets.


And we can compete in these markets on the basis of our strengths, which we call our CAPs: capabilities, assets and positions. Philips has talented and engaged employees, exceptional innovative capability and outstanding knowledge of the markets in Healthcare, Consumer Lifestyle and Lighting. And the Philips brand is incredibly strong. Moreover, we operate in over 100 countries and have a healthy balance sheet.


Accelerate! enables us to bring new innovations into play faster in key markets throughout the world. This is a vital part of how Philips can and must differentiate itself, especially in a world in which competition, notably from the Far East, is cut-throat.


Where we still have to improve is in the area of operational excellence:  acting faster, more efficiently, and more entrepreneurially. We know that. And that is precisely what our transformation program Accelerate! is tackling. That’s why we sometimes refer to ourselves as a case of ‘self-help’, because these are things we are capable of resolving ourselves.


And we do this with a clear objective: our vision is to make the world healthier and more sustainable through innovation. We want to improve the lives of 3 billion people a year by 2025. We find this very inspiring. Especially when I see that in 2012 our innovations already touched the lives of 1.7 billion people. In 2012 we once again achieved our EcoVision targets. And in 2012 we invested a record amount in Green Innovations as well as generating 45% of our sales with Green Products. And in the past five years we have succeeded in reducing our carbon footprint by 25%. Our ongoing efforts in this area were recognized when, for the second consecutive year, we were named ‘Supersector leader’ in the Dow Jones Sustainability Index.

 

2.   Accelerate! is working


As I have said, our Accelerate! program, which we launched in 2011, is gaining momentum. To refresh your memory, Accelerate! consists of five key elements:

1. customer centricity: improving our customer focus


2. resource to win: investing in markets and products that yield profitable growth


3. end-2-end: optimizing our entire value chain from idea to product or service, using methods such as Lean and Six Sigma, and supported by effective real-time IT


4. culture: changing to a high-performance culture


5. operating model: reducing our overhead costs by means of a simpler operating model. With total savings of EUR 471 million in 2012, we are ahead of schedule.

All these projects are aimed at making Philips an innovative company that is more customer-driven, more flexible, more entrepreneurial, and faster. The ultimate goal is to arrive at a business model that creates value in a sustainable fashion, is clearly defined and is easily repeatable, so that we do not have to keep re-investing the wheel and can act faster and more effectively. We call this business model the Philips Business System, or PBS.


There is still a lot to be done to fundamentally change Philips, but I regard change as something positive. And the engagement surveys that we conduct among our employees show that they share this view. I am convinced that, thanks to Accelerate!, we shall make further progress in the coming period if we continue to simplify our value chain and are finally left with only four ‘Lean’ business models.


We are taking targeted measures to improve our gross margins in 2013 and the years thereafter, for instance designing the industrial and distribution capacity of Lighting and Healthcare more efficiently, making our purchasing more effective and promoting value engineering, which will make our products even more competitive. In this connection we achieved a substantial inventory reduction in 2012, something that we shall continue to do this year.


At the same time we are working to create a company culture in which decisions are taken much faster, where we are more entrepreneurial, and where we work each market individually – of course in strict compliance with our General Business Principles. Lastly, we wish to further align our remuneration system with our focus on sustainable growth and value creation.


Philips has a strong management team, including two women and comprising five different nationalities from four continents. I am proud of this particularly diverse team.

3.   Innovation as a driver


Ladies and Gentlemen, Philips became great through enterprise and innovation. Innovation is the DNA of Philips. It is through innovations that we want to differentiate ourselves, create value, be able to grow and generate income, and thus be able to re-invest in more new innovations.


In view of the crucial importance of innovation for Philips’ success, we increased our investments in Research & Development in 2012 from EUR 1.6 billion to EUR 1.8 billion (7.3% of total sales). Of the R&D investments in 2012, nearly EUR 600 million was invested in Green Innovation.


I would like to share with you a number of exciting and ground-breaking examples:


Innovation plays a hugely important role in Healthcare. By knowing what medical experts need in order to be able to treat patients better and faster, we can create a lot of value for hospitals and patients.


Last year, for instance, we launched in Africa the ClearVue ultrasound family, which perfectly matches local needs for solutions that combine high quality with the right functionality and the right price point. And that ensures that local hospitals buy our products and services.


A second example is closer to home and shows how we try to find an answer to the question of how hospitals are organizing themselves around patients, rather than around disciplines, as was standard practice in the past. A ground-breaking Woman-Mother-Child Center was opened last year at the Máxima Medical Center in Veldhoven. This hospital is setting a new standard for the provision of clinical care to mother and child, providing comprehensive family-orientated care to parents and their newborn children, both before and after childbirth, as well as support for breast-feeding and during discharge from hospital. This center is only possible thanks to Philips’ advanced technology, such as patient monitoring equipment for mother and child, ultrasound systems that are used during and after the birth, and solutions that stimulate the development of premature babies.

 

Then we come to Consumer Lifestyle. Our approach to planning, investments and performance management per business-market combination (BMC) has enabled our colleagues in this sector to bring locally relevant products, such as electric toothbrushes, food processors and shavers, to market even more quickly in the various countries around the world.


To give an example: Since 2010 the number of product launches of food processors has increased fourfold. One excellent example is the multicooker in Russia, a product that meets the culinary requirements of Russian households. A second example is the soup-maker that is doing really well in various European countries. Philips innovations thus make it easier for people to prepare healthy food at home. Thanks to this approach to innovation we have been growing by more than 10% for several quarters now in these businesses.

Shavers are another example. When we saw that in China there was a need for new shavers with lower price points, we developed them very quickly and also completely changed our end-to-end value chain in order to market this product competitively. In combination with wider distribution this led to the sale of more than 10 million shavers in China in 2012 in less than one year’s time. This has enabled us to gain a substantial market share in this segment, while we have been able to maintain the high level of profitability.


And then there is Lighting. As world number one in lighting, it is only logical that we are leading the way with innovations here, because that is the oil in the engine for future LED solutions. We are proud, therefore, of the introduction of the Philips Hue, our personal wireless LED lighting system. Perhaps you have already seen the Hue before this meeting, but if not, I would strongly recommend it to you. The Philips Hue really brings atmosphere into the home!


A few weeks ago we announced a new breakthrough in LED lighting. Philips researchers have developed a TLED prototype – to replace fluorescent tube lighting – which produces a record output of no less than 200 lumens per watt of high-quality white light. This prototype TLED lamp is twice as efficient as previous lamps and actually cuts energy consumption by half.


Finally I would like to give you an example of how we engage with customers in seeking innovative solutions. Last month the renovated Rijksmuseum was officially re-opened. As founder and one of the leading partners in the renovation we worked closely together with the museum on the lighting design, with a strong emphasis on how visitors experience the art exhibits and the conservation of the works of art. With a surface area of more than 9,500 square meters and 7,500 illuminated works of art, it is the largest museum area that has ever been lit with LED. A project of which we are tremendously proud! And in the meantime we have been getting telephone calls from all over the world with requests from other museums for information about this innovative and sustainable type of lighting.

 

4.   2012 results 


Where did all these steps lead to in 2012 if we look at our results?


Our comparable sales increased by 4% in 2012, in spite of continuing difficult economic conditions and market weakness, notably in the United States and Europe. Our growth geographies accounted for 35% of sales in 2012, compared with 33% in 2011, thereby again making an appreciable, and increased, contribution to sales growth.


The underlying profitability of our businesses improved thanks to sales growth, higher productivity and lower costs. Reported EBITA was adversely affected by various charges, including those for restructuring. And we considerably improved our return on invested capital.


The Healthcare sector performed well in 2012, with comparable sales growth of 6% and – crucially – improved profitability at Imaging Systems.


Lighting again achieved a very substantial increase in sales of LED products of no less than 41%. The sector made progress in tackling underperforming businesses, with both Lumileds and Consumer Luminaires returning to profitability in the fourth quarter of 2012.


The growth businesses in the Consumer Lifestyle sector (Personal Care, Health & Wellness and Domestic Appliances) achieved solid growth, partly thanks to substantial contributions from companies that we acquired in growth geographies such as China and India in 2011.


The reshaping of the Consumer Lifestyle portfolio is an important step in the transformation of Philips. In 2012, Philips’ Television business became part of a joint venture with TPV. This was followed in the same year by the announcement of a distribution agreement with Funai for the business group Lifestyle Entertainment in North America.


In January 2013 we announced the signing of an agreement with Funai on the transfer of the Audio, Video, Multimedia and Accessories business. This agreement leverages the strengths of both companies in order to obtain a stronger market position for Philips products in the field of Audio/Video Entertainment. In this way we offer our customers continuity but also generate income for Philips from brand licenses. At the same time the focus on the growth cores within Consumer Lifestyle has improved and this is leading to much-improved results.


Having taken these strategic steps in Consumer Lifestyle, it was only logical that we looked at our name, Royal Philips Electronics.  Although we have a proud history in consumer electronics and Philips TVs continue to be on sale, we believe that this is the right time to remove “Electronics” from our name. We therefore wish to propose this to you today. Royal Philips – the innovation leader in the fields of healthcare, energy-efficient lighting and consumer well-being. I am sure you agree that it sounds good.


As a sign of our confidence in Philips’ future, we propose to the Annual General Meeting to maintain the dividend this year at EUR 0.75 per common share, payable in cash or in stock.


In 2012 we continued to execute our EUR 2 billion share buy-back program. By the end of 2012, 73% of this program, which is aimed at creating a more efficient balance sheet, had been completed. And by the end of the first quarter of 2013 the counter for the share buy-back stood at 86%.

 

5.   Q1 results and outlook for 2013


I would now like to turn to the first quarter of 2013 and the outlook for the year.


As we had expected, we began the year with modest comparable growth of 1%. Our operating profit, excluding restructuring and acquisition-related expenses, increased sharply in the past quarter and was 31% higher than in the corresponding quarter of last year. What’s great is that all three sectors contributed to this increased profit.

Growth this quarter was driven mainly by our consumer products, where comparable sales increased by 10%. It is our new kitchen products, new electric toothbrushes and new shavers that have provided this growth. We have also again grown appreciably in what we call the growth geographies, such as China, the Middle East, and Africa too.


Our Healthcare sector is still being affected by the fact that hospitals, notably in the United States and Europe, are very much holding back on new investment. Our Lighting sector is confronted with a weak market where there is little investment in new construction and renovation of existing offices and houses. That is not affecting the growth of our LED sales, however: this quarter we sold 38% more LED-based lighting than in the same quarter of 2012. The Rijksmuseum here in Amsterdam is an example of this, but the Paris metro also has Philips LED lighting.


What does this mean for the outlook for the rest of the year? We still expect the first half of 2013 to show little growth, mainly because of difficult market conditions, particularly in Europe and the United States. But we remain committed to achieving our financial targets.


Two years ago we set targets for the period 2011-2013: 4-6% comparable sales growth, a reported EBITA margin of 10-12%, and a return on invested capital, or ROIC, of 12-14%.


We are convinced that the transformation program Accelerate! is beginning to bear fruit, and despite the present economic conditions we still see a lot more potential to further improve our results. To make this concrete, we shall announce in September this year new targets for the following years.

 

6.  Conclusion

 

Ladies and Gentlemen,


We made substantial progress in 2012, but much work remains to be done in order to realize Philips’ full potential and make our company more competitive, more customer-centric and more entrepreneurial.


We have every confidence that the strategic direction that we have adopted is the right one, and that Accelerate! is the right platform for the execution of our plans. In all three of our sectors we are putting attractive new products and services on the market. And the Philips Business System gives us the business model for effectively creating value for our shareholders. And that will certainly benefit the share price!


Also on behalf of the Executive Committee, I would like to thank all our employees for their efforts and the way in which they are embracing the transformation and new corporate culture. I would also like to thank our customers and other stakeholders, in particular our shareholders, for their continuing support.


We shall continue to work on operational excellence and invest in innovation and sales channels in order to achieve profitable growth. Innovation and entrepreneurship are the drivers of Philips. That was the case when the company started 122 years ago, and it is still the case in 2013.


Please allow me to conclude with the following. Last month I was in Eindhoven to open the Philips Museum, together with Queen, now Princess, Beatrix. As you may know, I am not the type of person to look back sentimentally. I prefer to look forward, to the steps which we can and must take today and which have an impact on the innovations of tomorrow. And the museum does precisely that: it links the past, the present and the future by means of fascinating stories, products and unique pictorial material. I can, therefore, warmly recommend a visit to the museum!  It shows where ambitious entrepreneurship and innovation have taken us and will take us in the future, as does the video I would like to show you in a few moments.

 

Thank you for your attention.