Philips' : Third Quarter Results 2014

• Comparable sales growth flat, with sales in growth geographies up 2%
• EBITA, excluding restructuring and acquisition-related charges and other items, amounted to EUR 536 million, or 9.7% of sales, compared to 11.4% in Q3 2013
• EBITA amounted to a loss of EUR 7 million, primarily impacted by charges related to IP litigation and the voluntary production suspension at the Cleveland facility
• Net loss of EUR 103 million, compared to net income of EUR 281 million in Q3 2013
• Currencies negatively impacted sales by 1.7% and EBITA by 0.9 percentage points of sales
• Free cash flow of EUR 166 million, compared to EUR 122 million in Q3 2013
• Started the process of creating two market-leading companies focused to capitalize on the HealthTech and Lighting solutions opportunities
  

"The successful execution of our Accelerate! program continues to improve operational performance in most of our businesses. We are very excited by the vast opportunities in the HealthTech and Lighting solutions markets that we will capitalize on with the creation of two dedicated market-leading companies.

As we manage through a challenging 2014 and given a number of incidentals, we are not satisfied with our overall performance in the third quarter. We are facing sustained softness in a number of markets such as China and Russia. We were also confronted by an adverse jury verdict with a surprisingly high proposed award in the Masimo litigation, which we will appeal. On a positive note, production at our Cleveland facility is ramping up.

In Healthcare, we were pleased to win four multi-year strategic contracts, thereby demonstrating that our integrated solutions are gaining momentum despite a very slow market. In Consumer Lifestyle, our focus on health and wellness products is yielding good results, as demonstrated by the solid performance of Oral Healthcare and Mother & Child Care, despite challenging conditions in some of our bigger markets. In Lighting, we improved the performance of Consumer Luminaires in Europe and achieved double-digit growth and market share gains in Lumileds, which helped to balance the decline in conventional lighting.

As a few of the near-term headwinds start to abate and our Accelerate! program continues to improve our operational performance, we expect our adjusted EBITA in the second half of 2014 to be slightly below the adjusted EBITA in the same period last year and we remain committed to our 2016 financial targets."

Q3 financial and operational overview:

"We are making good progress in the remediation of the quality management system at our Cleveland facility. We have now also resumed production of the iCT and Ingenuity scanners, and production ramp-up will continue through the first quarter of 2015. This will contribute to improved performance in the fourth quarter and into 2015.

More broadly, we are seeing good traction with our programs that address government and health system goals of improving population health and delivering quality care more effectively. This is illustrated by our new 15-year contract with the Reinier de Graaf hospital in the Netherlands, the 14-year contract with the Karolinska University Hospital and the Stockholm County Council, and the 10-year contract related to the 700-bed Philippine Orthopedic Centre in the Philippines, where our systems and consultancy will help improve operational performance."

Healthcare comparable sales grew by 1% year-on-year. The EBITA margin, excluding restructuring costs and various charges, was 12%, a decrease of 2.6 percentage points year-on-year. Currency-comparable equipment order intake declined by 1%.

"In Consumer Lifestyle, we are continuing to expand our offering to help consumers make healthier choices every day and drive value from the 'Internet of Things'. In the third quarter, we introduced a number of digital cloudconnected solutions, including an application to manage chronic pain treatment and an oral healthcare application that helps children to brush their teeth more effectively."

Consumer Lifestyle comparable sales increased by 5%, with mid-single-digit growth in Health & Wellness and Domestic Appliances and low-single-digit growth in Personal Care. The EBITA margin, excluding restructuring and acquisition-related charges and other items, was 10.6%, compared with 11.1% in the same period last year. The margin decline was attributable to country and product mix.

The company also launched a series of exciting new products. Philips expanded the geographic reach of its domestic appliances with the NoodleMaker now available in Japan, Australia and North America, and is seeing sustained strong global demand for the Philips Airfryer. Building on its Male Grooming growth strategy to drive loyalty and to create more value among existing users, the flagship Philips Shaver Series 9000 is being launched in 47 countries. Philips' latest innovations in skincare, the Philips VisaCare and VisaPure, and in hair removal, Philips Lumea, are delivering strong growth in markets around the world.

"In Lighting, we are solving customer needs with exciting energy-efficient LED solutions, and our breakthrough range of Hue Beyond connected luminaires illustrates how well-positioned we are to drive profitable growth through leading LED innovations, connected ecosystems and professional systems and services. We saw encouraging wins, including a partnership in Indonesia to install LED lighting solutions in nearly 1,000 convenience stores and a contract to deliver LED pitch lighting for Chelsea's Stamford Bridge stadium in London."

Lighting comparable sales declined 1% year-on-year. LED-based sales grew by 28%, offset by a decline of 14% in overall conventional lighting sales. LED sales now represent 40% of total Lighting sales, compared to 30% in Q3 2013. Excluding restructuring charges and costs associated with setting up Automotive and Lumileds as a stand-alone company, the EBITA margin amounted to 9.7%. The EBITA margin was impacted by a combination of factors in China, including a slowing market and tightening liquidity resulting in customer credit provisions.

The recovery of Consumer Luminaires in Europe is progressing and the company continues to expect Consumer Luminaires' adjusted EBITA to break-even for the full year. Philips' progress in turning around Professional Lighting Solutions in North America also continued as it began to build growth momentum in September and expects to deliver profitable growth in the fourth quarter.

Innovation, Group & Services

"As part of our commitment to drive leadership positions in emerging business areas, in the third quarter Philips completed the acquisition of Unisensor, a small company offering technology which we plan to leverage for miniaturized, mobile diagnostic solutions. We are also installing Philips GreenPower LED in several horticulture projects in Belgium, Finland, the Netherlands, UK and Canada. Our LED light recipes have been recognized by international growers, as they help to boost crop growth and improve productivity. We've also seen encouraging traction in Digital Pathology, where we signed three new contracts in the third quarter."

Excluding restructuring costs, provisions related to various legal matters in the quarter and the pension settlement loss in the third quarter of 2013, EBITA was a net cost of EUR 48 million, compared to a net cost of EUR 28 million in Q3 2013. The decrease was mainly due to higher investments in our emerging business areas and lower IP-related income.

Capital Markets Day strategic announcement

On September 23, 2014, Philips announced that it will sharpen its strategic focus by establishing two marketleading companies in HealthTech and Lighting solutions. Both companies will continue to leverage the Philips brand and will be optimally positioned to deliver long-term profitable growth. Philips has started the process of transitioning the Lighting solutions business into a separate legal structure. It is expected that the process of separation will take 12-18 months to complete.

Update on Accelerate! transformation program

Accelerate! continued to drive improvements across the organization, resulting in increased customer centricity, enhanced customer service levels, faster time-to-market for our innovations and higher cost productivity.

Professional Lighting Solutions in North America, for example, completed the redesign of its market-to-order processes in the third quarter. With access to new tools and application-specific expertise, customer service levels moved up to 95%. By deploying Lean, the company also achieved significant enhancements to customer service levels, lead times and quality levels, with many of its sites achieving double-digit productivity improvements.

Overhead cost savings amounted to EUR 37 million for the quarter, bringing the cumulative annualized overhead cost savings in the first nine months of the year to EUR 264 million. The Design for Excellence (DfX) program generated EUR 17 million of incremental savings in the bill of material in the quarter, resulting in EUR 187 million of cumulative DfX savings to date. The End2End productivity program achieved incremental savings of EUR 18 million in the quarter, which brings the cumulative amount of End2End productivity savings to EUR 50 million.

The next phase of productivity improvements will enable additional cost savings across the support functions, resulting in EUR 100 million of additional savings in 2015 and a further EUR 200 million in 2016. Philips expects to incur approximately EUR 50 million of additional annual restructuring costs in the period 2014 to 2016.

As of September 30, 2014, Philips had completed 32% of the EUR 1.5 billion share buy-back program.

Quarterly Report

Presentation

 Q3 2014 - Quarterly Results Presentation

Conference call and audio webcast

Frans van Houten, CEO, and Ron Wirahadiraksa, CFO, will host a conference call for investors and analysts at 10:00 am CET to discuss the results. A live audio webcast of the conference call will be available through the link below.

More information about Frans van Houten and Ron Wirahadiraksa

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