Speech by Frans van Houten at AGM 2014, 1 May 2014


Spoken words count

May 1, 2014

1.   Introduction

 

Ladies and Gentlemen,

 

Welcome to the Annual General Meeting of Royal Philips.

 

This is the third time I address you at this meeting – in the last three years we have worked hard, and together we have experienced many ups and some downs. 

 

In 2013, we again made good progress, and I am convinced that we can continue on this path to unlock Philips’ full potential.

 

The fact that our overall performance in the first quarter of 2014 was disappointing, albeit in a challenging economic environment, doesn’t deter me at all from that belief. If anything, it only underlines that more hard work remains to be done.


In the next 20 minutes or so, I want to share an update on our Accelerate! program and show how innovation is our key driver. After that, I will discuss our 2013 performance, our results in the first quarter and the outlook for 2014.

 

Since becoming CEO in 2011, I have repeatedly said that Philips has massive unlocked potential. And this remains my firm belief.

 

Why? Because Philips is a diversified technology company with leading positions in healthcare, lighting and consumer well-being, and we are very well positioned to benefit from so-called mega trends. 

 

We see the demand for affordable healthcare growing rapidly, driven by an expanding and aging population. This is why we work on technologies that will make healthcare delivery systems more affordable, with better outcomes for patients.

 

The growing demand for more energy-efficient technologies means that our Lighting business focuses on innovations that deliver LED lighting solutions, which will help make the world more sustainable.

 

And the increased focus of people to improve their health and well-being represent great opportunities for our Consumer Lifestyle business.

 

Our current dynamic portfolio has 40 businesses with about 70% of sales coming from business-to-business serving attractive markets with appealing profit pools.

 

In that context, we concluded that we needed a new home for our Audio, Video, Multimedia and Accessories business. We are happy that earlier this week we were able to announce the sale of this business to Gibson Brands.

 

In short, the world needs innovations that will make it healthier and more sustainable. With our portfolio, I see tremendous opportunities in both mature and growth markets.

 

Last year, we refreshed our brand, clearly positioning it around innovation and how it impacts people’s lives. I believe that the brand line Innovation and You is a great reflection of our strategy and positioning. Since the launch late last year in Amsterdam, we have introduced the refreshed brand in the U.S., China, the U.K. and our home market.

 

It is our belief that sustainability is a key enabler of value creation and offers substantial opportunities to innovate and grow, even in challenging circumstances. So it is encouraging to see that in 2013 we already reached our EcoVision Green Product sales target two years ahead of time.

 

 

2.   Accelerate! continues to deliver

 

To build a strong foundation for profitable growth, we started with Accelerate! in 2011. This transformation program is about delivering meaningful innovation to our customers in local markets – and doing this faster and better than the competition.

 

As you know, Accelerate! will help us accomplish the following three things:

First, we fundamentally address underperformance, and embed operational excellence through the Philips Business System, which is our way of working.

 

Secondly, we build out our businesses to attain global leadership positions.

 

Lastly, we are working on seeding new growth opportunities.

 

With Accelerate!, we have put programs and initiatives in place that fundamentally establish operational excellence, enabling us to deliver innovation faster, at lower cost; with better predictability; better customer service; higher local market relevance; and eventually better profitability, and shareholder returns.

 

Strong progress is being made in transforming our customer value chains in four ‘Lean’ business models, for standard products, for systems, for software, and for services that will be enabled and supported by a standardized process framework and an effective real-time IT landscape. But more is to be done.

 

This overhaul of our operating infrastructure is a key driver to reach our 2016 targets. It will also raise our growth potential through increased customer responsiveness, and improve time to market of our innovations.

 

And it will set us up as a digital company, ideally suited for online marketing and sales with cloud-enabled value propositions.

 

At the same time, we are reducing our overhead costs, and through our Design for Excellence program we are building a strong funnel of opportunities to lower our cost of goods sold by an additional EUR 1 billion between now and 2016 to further improve gross margins and enhance competitiveness in the market.

I compare Accelerate! to a marathon and three years in we’re only halfway. It is vital that we see the program through to completion. 

 


3.   Innovation is our driver

 

Operational excellence is one foundational anchor. Innovation is another – it has been our lifeblood since we started 123 years ago, and it has been a part of how we work since Philips Research was established a century ago, in 1914.

 

Philips became a great company by combining entrepreneurship and innovation, embodied by Anton and Gerard.

 

We will continue to invest in innovation that will drive future sales. In 2013, we invested EUR 1.7 billion in Research & Development, which represented 7.4% of our total sales.

 

I would like to share with you a number of recent exciting and ground-breaking examples of our innovation strategy in action:

 

In this digital world, we are gradually shifting from a product to a solutions company as we interconnect our systems and bundle services into meaningful solutions for our customers. We, for example, partner with our healthcare customers to deliver better outcomes over multi-year engagements and leverage new recurring revenue models.

 

In that respect, Philips and MEDSI, Russia’s largest network of private clinics, have signed a memorandum of understanding for a multi-year partnership that will provide MEDSI hospitals with the latest Philips healthcare equipment and technology, hospital management and consultancy services.

 

And we expect to be able to sign more of these types of big deals going forward. Soon we expect to sign another major deal in the Nordic countries.

 

In Consumer Lifestyle, we create and develop meaningful innovations that are subsequently rolled out to local markets, taking into account local tastes, habits and preferences.

 

In China, we are seeing strong sales of Air Purifiers, Kitchen Appliances and Philips AVENT feeding solutions, which are specifically designed for Chinese infants. 

 

Globally, the Philips’ Airfryer product family is now available in more than 100 countries, making Philips the world’s number one low-fat fryer brand. Just to illustrate this, in our home market the Netherlands we sold, in the first quarter, double the amount of Airfryers as in the same period in 2013.

 

In Lighting, our leading position in LED lighting products and systems is based on our continuous investments in intelligent, connected lighting solutions, serving both consumers and the growing professional market for integrated systems and services.

 

Recently, at the Light + Building Show in Frankfurt, we launched a full range of smart connected lighting systems for homes, businesses as well as cities.

 

Our new lighting systems connect people, places and devices in homes, at work and in cities across the world, and through big data applications we can unlock more value for city planners and facility managers. And the feedback from our customers has been fantastic!

 

You may not know this, but Philips is a leader in advanced sports lighting, and we have been lighting sporting events around the world for more than 60 years.

 

It probably won’t surprise you that we will be lighting 9 of 12 stadiums that will be used in the soccer tournament in Brazil this summer, including façade lighting at Maracanã in Rio de Janeiro, South America’s largest stadium. In other stadiums, our ArenaVision pitch lighting will make sure that viewers do not miss one moment.   
 
A final Lighting example is the Hue, the smart connected lighting system that you can control with your smartphone. The Hue is a great success story, and we are working to expand our offering of connected lighting for the home. You may have already “played” with the Hue lamp outside the room and if you haven’t, I would highly recommend it!

 

I would also like to draw your attention to exciting adjacencies that build on our strengths and provide attractive potential for future growth.  Examples of these emerging business areas are: digital pathology, point of care diagnostics, and horticultural and city-farming lighting solutions. 

 

We are stepping up investments in these promising emerging business areas to deliver fast growth in these largely untapped market opportunities where our technologies and expertise provide new solutions to our customers.

 


4a.   2013 results

 

All the hard work in 2013 led to a good set of numbers.

 

Our comparable sales increased by 3% in a challenging economic environment.

Again, our growth geographies made an increased contribution to sales growth, now accounting for 36% of sales in 2013.

 

Our operational results increased by 27%, a very good achievement, helped by improved reported EBITA across all sectors. Net income significantly improved to approximately EUR 1.2 billion.

 

 

4b. 2013 targets

 

I am delighted that in 2013 we passed a major milestone and that we achieved our mid-term financial targets.

 

We delivered comparable compound annual sales growth of 4.5% over 2012 and 2013, against a growth target of 4 to 6%. We achieved this against an average GDP growth that was 1 to 2 percentage points lower than the anticipated real GDP growth of 3 to 4%.

 

We targeted a reported EBITA margin in the range of 10 to 12%. We delivered 10.5%, despite slower market growth, currency headwinds, and changes in pension accounting.

 

Thirdly, we delivered a return on invested capital of over 15%, exceeding the target range of 12 to 14%.


4c. Dividend proposal / Share buy-back program

 

As a sign of our confidence in Philips’ future, we propose to the Annual General Meeting to increase the dividend this year to EUR 0.80 per common share, payable in cash or in stock.

 

In June of last year, we completed the EUR 2 billion share buy-back program we had started in July of 2011. In October, we started a new EUR 1.5 billion share buy-back program, of which we completed 14% by the end of March of this year.


5.   Q1 results and outlook for 2014

 

I would now like to briefly discuss our performance in the first quarter and the outlook for the year.

 

Our first-quarter results, which we announced last week, reflect a challenging start to 2014. We experienced significant currency impacts amounting to a 5% nominal sales decline, and 180 basis points profit impact.

 

Moreover, we noted a slow-down in markets such as China, Russia and the healthcare market in the US. However, on a brighter note, Consumer Lifestyle recorded a brisk 7% comparable sales growth.

 

Of course, we cannot be happy with the temporary suspension of production at our healthcare facility in Cleveland. At the same time, Accelerate! measures were able to partially mitigate these headwinds.

 

Nevertheless all of these factors together led to flat comparable sales growth and a decrease of 130 basis points in our reported EBITA margin.

 

Against this backdrop, we see 2014 as a challenging year. But we remain very confident of achieving our 2016 mid-term financial targets. As you know, these targets are: a comparable compound annual sales growth of 4 to 6% over the period 2014 to 2016, 11 to 12% reported EBITA margin, and return on invested capital of more than 14% in 2016.


6.  Conclusion

 

Ladies and Gentlemen,
We made significant steps in 2013 on our Accelerate! journey.

 

Regardless of current headwinds, Philips remains a self-help story, and you can count on us to work diligently to deliver the full potential of Philips to significantly increase the value of our company.

 

On behalf of the Executive Committee, I would like to thank our customers, of course our employees, and other stakeholders, not in the least our shareholders, for their continuing support.

 

Let me conclude with one more meaningful number:  1.8 billion. That is the number of people that were touched by our innovations in 2013. By 2025, we are targeting to touch and improve the lives of 3 billion people a year through our meaningful innovations. This is a great inspiration for all of us at Philips and surely for you as well.

 

Thank you for your attention.

 

Click here to read the Dutch version of the speech