Speech by Frans van Houten at AGM 2015, 7 May 2015

Spoken word counts

May 7, 2015

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1.    Introduction


Ladies and Gentlemen,


Welcome to the Annual General Meeting of Royal Philips. This year we are meeting in a new and beautiful location and we have a significant agenda for this AGM. You will vote on separating our company into two market-leading independent companies, focused on the vast opportunities in the two attractive markets of HealthTech and Lighting solutions. I recognize that while this is an important business decision, driven by sound strategic choices – it is also quite an emotional decision. I can assure you, it is not one that has been taken lightly.


We are convinced that separation is the right next step on the journey to set up Philips well for the future.

In my speech, I would like to discuss the following topics:

  • Look back at our performance in 2014
    - Cover our performance in the first quarter of 2015 as well as the outlook
  • Provide an update on the Accelerate! transformation
  • … And discuss the separation of Philips into two strong companies


2.  2014 performance


Last year was a difficult and challenging year for Philips. Group sales declined 1% on a comparable basis.


We had to address ongoing softness in markets like China and Russia – and stronger than anticipated foreign exchange impact, particularly in emerging markets. We also tackled structural performance issues like the quality compliance in our Cleveland facility and dealt with certain legacy incidentals, an Intellectual Property claim and pensions.


Despite the significant headwinds, our adjusted EBITA amounted to EUR 1.9 billion, or 9.0% of sales, while net income amounted to EUR 411 million. Our Accelerate! transformation continued to drive improved profitability, speed to market and customer satisfaction.


Overall, 2014 was a challenging year, but it was also a momentous year in which we announced the decision to separate the company. I’ll come back to this shortly.


3.  Dividend proposal / Share buy-back program


As a sign of our confidence in Philips’ future, we propose to the Annual General Meeting to maintain the dividend over 2014 at EUR 0.80 per common share, payable in cash or in stock.


We are continuing to execute on our EUR 1.5 billion share buy-back. As of March 31, we had completed 50%.


4.  Q1 results and outlook for 2015


I would now like to briefly discuss our performance in the first quarter, which we announced last week, and the outlook for the year.


It was encouraging to see that sales growth resumed in the first quarter, by 2% on a comparable basis, which was driven by the continued strong performance in Consumer Lifestyle and positive comparable sales growth in Healthcare. We saw positive order-intake growth, despite the continued challenging Healthcare market environment. In Lighting, we saw ongoing strong sales growth and profitability improvement in our LED business, while facing a faster decline in the conventional lighting business. 


Adjusted EBITA came in at EUR 327 million euros, or 6.1% of sales. Net income amounted to EUR 100 million. For the outlook of 2015 we expect modest comparable sales growth and we continue to be focused on driving operational performance improvements.


5.  2016 targets


As we indicated when we announced our fourth-quarter results, we currently track 1 percentage point behind on the path to achieving each of our earlier stated 2016 comparable sales growth, EBITA and ROIC Group targets.


6.  Update on Accelerate!


I think it is important to describe how Accelerate! continues to drive our ongoing transformation journey to position us for long-term success in the HealthTech and Lighting solutions markets.


First, we fundamentally address root causes of underperformance, and embed operational excellence practices through the Philips Business System -- our standardized, lean way of working. We manage the portfolio of the company and sharpen focus, shifting resources to the most promising businesses. At the same time, we continue to deal with legacy legal and business issues and pension liabilities. This is something that we will manage on an ongoing basis.


Second, we invest and build out the most promising businesses in our portfolio in order to attain global leadership positions. The successful double-digit growth in Consumer Health & Wellbeing, as well as LED Lighting, are good examples of this.


Last, we seed new growth opportunities in strategic adjacencies by investing in innovation and market development, for example in personal health solutions, digital pathology, hand-held diagnostics and health care informatics and hospital transformation services.


We are also shifting into new business models, which embrace sustainability concepts like the circular economy, pay-for-service business models and long- term managed equipment services contracts.


Therefore, while we invest to drive improvements in operational excellence, we are also investing in the seeds of future growth, which we can harvest later, and rebuilding the portfolio to stay relevant in a fast changing world and deliver long-term growth.


As we are transforming the company, sustainability and improving people lives continue to be at the core of everything we do. It is encouraging to see that in 2014 we increased sales of Green Products to 52% of the total and improved the lives of 1.9 billion people with our meaningful innovations. And earlier this year, we started The Philips Foundation to complement our overall company mission and formed global innovation partnerships with UNICEF and the Red Cross.


7.  Setting up two strong companies in HealthTech and Lighting Solutions


With that, let me spend some time on why I firmly believe that setting up two strong, stand-alone and fit-for-purpose companies is right for Royal Philips.


Lighting Solutions

Philips started in lighting in 1891 and we are the global leader in lighting. I am proud of both facts. But I am keen to drive an inspirational motivation from our heritage, rather than a sentimental one. 


As a stand-alone company, the Lighting solutions business and management team will be better positioned to capture growth opportunities, be close to customers, adapt more quickly to evolving customer needs, and enable decisive investments in the future with direct access to capital markets. And the opportunities are enormous, as this large and growing market is estimated to exceed EUR 60 billion.


As value is shifting from individual products to systems and services in the lighting applications industry, our customers are increasingly asking us to be a partner in finding creative solutions for energy challenges.


An example: In December we announced a contract with the Spanish capital Madrid. The city will be provided with 225,000 new energy-efficient lights. The renewal of Madrid’s entire street lighting system is the world’s largest street lighting upgrade to date.


Another great example is the street-lighting contract win in Los Angeles. Based on our CityTouch system, which is now used in more than 250 cities globally, this vast U.S. city will control its street lighting through an advanced Philips management system that uses mobile and cloud-based technologies.


I am equally excited about the health technology market, which we call HealthTech, and is at least EUR 100 billion in size.


We see professional healthcare and consumer markets converging into a single health continuum, enabled by connected health technology. With our combined Healthcare and Consumer Lifestyle portfolios we will be able to capture opportunities from healthy living and prevention, to diagnosis, treatment, recovery and home care by addressing integrally the needs of consumers, patients and healthcare professionals.


And this is vital in our view – health is not just about treating sick people in an acute care setting, it’s also about keeping healthy people healthy, by eating healthy food and by taking good care of themselves preventively. And because people recover faster at home than in a hospital, health is also very much about home care.


We already have strong market positions across the health continuum. We are leaders in hospital rooms such as cath labs. But we are also leaders in consumer health & wellbeing and increasingly provide home healthcare for the chronic patients.


I see major opportunities in HealthTech, because of profound trends in healthcare: a rapidly increasing demand for integrated systems, driven by pressures on health systems to shift to value-based business models in relation to rising costs of care due to an aging population and the increasing number of chronic diseases.


I should add that it’s increasingly critical to compete beyond technology alone. We also use new business models to distinguish ourselves in the market place. For example, instead of asking, “Can you provide a new CT scanner?,” customers might instead drive an outcome-based requirement: “Can you help us redesign how we deliver patient care  to ensure a stroke patient is accurately diagnosed as quickly as possible and in the operating room within 90 minutes of having a stroke?”


To support such a solution, we use a combination of our unique approach to understanding people and their needs, our foresight into upcoming technologies and our collaborative teams who use design thinking to address the issue holistically. Our expert teams do this in co-creation with doctors, nurses, administrators, using field research and analysis.


That’s how we landed a multi-year partnership with Karolinska University Hospital and Stockholm County Council in Sweden. And we are working on several more large deals as we speak.


Another very exciting trend in healthcare is the increase in minimally invasive procedures, which provide significant benefits for healthcare systems and patients, including reduced patient trauma, shorter recovery times and hospital stays -- and lower costs.


To further strengthen our position, we recently acquired Volcano, a U.S. company that is a global leader in catheter-based imaging and measurement solutions for cardiovascular applications.
All in all, in HealthTech we have ample opportunities across the entire health continuum and we are determined to be the leader in this space.


In summary, Lighting and HealthTech are growing, changing markets with highly attractive profit potential. As two stand-alone companies, we will be better able to expand our leadership positions in both.


As we separate, what will continue is our focus on innovation that matters to people. And we’ll continue to use the Philips brand, a highly cherished asset, worth more than USD 10 billion, in both companies.


Therefore, I advise you, later in the meeting, to approve this agenda item as the best value-creating path for shareholders.


8.  Conclusion


Ladies and Gentlemen, while 2014 was a challenging year for Philips, I am convinced that success lies in our own hands, regardless of external headwinds.


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


Thank you for joining me on this momentous day for Royal Philips and thank you for your attention.

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