Koninklijke Philips Electronics NV Earnings Call NUGGETS: Cost Savings, Exercising Caution with U.S. Healthcare

On Monday, Koninklijke Philips Electronics NV ADR (NYSE:PHG) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Cost Savings 

Andreas Willi – JPMorgan Cazenove: My question is on the cost savings that made further good progress in Q2. You seem to be a bit ahead of plan at least of the trajectory I had in my model. Should we expect to see upside to the 400 million or is it just the planned (indiscernible) through quicker?

Ron Wirahadiraksa – EVP and CFO: You are right, it looks slightly better. If you take the €176 by two you will reach to about €340 million, €350 million. So we are on the run rates to achieve the €400 million. These things sometimes come a bit more lumpy, so for now we’ll stay with the €400 million.

Andreas Willi – JPMorgan Cazenove: My follow-up question on foreign exchange, with your business model you are buying a lot of components, a lot of them are probably end products many of them maybe quoted in dollars. With the continued weakness of the dollar maybe you could give us some estimate on how that could impact your profitability going forward when you buy in products and sell them in Europe or other emerging markets where currencies are weak and to what degree you are protected from hedging and for how long and how you can offset that with price increases?

Ron Wirahadiraksa – EVP and CFO: Yes, well, actually you’ve given kind of the answer in a way. So, for this quarter the ForEx impact was slightly positive. Of course, there’s an impact in the sales line, which is offset by cost of sales and then we have the unwind of hedges that we take and that brings me to the point that actually through hedging we have been ongoingly been able to mitigate the impact of ForEx hedges run out. In the meantime, of course, we configure operating base as much as possible to cater for the economic exposure mitigation and then the rest we will have to drive through price increases.

Andreas Willi – JPMorgan Cazenove: Are you getting price increases in places like Europe or Brazil to offset the higher sourcing costs?

Frans van Houten – CEO and Chairman: Andreas, this is Frans. If we look a particular at Consumer Lifestyle then the effect that you described is applicable. Then, yes, we are repositioning some of our products to slightly more elevated price level to compensate for the sourcing cost which are up. In Lighting, the situation is more complex. Yes, the euro is down, but can also expect some raw material benefits to come through in the second quarter, second half of the year. Also on raw materials we take term contracts, which protect us up as well as down on the short-term fluctuations. Overall, we want to continue to work on our gross margin and look for opportunities there.

Exercising Caution with U.S. Healthcare

Mark Troman – Bank of America Merrill Lynch: First question on, main question on Healthcare. It sounds as though, I could be wrong in interpreting this, but it sounds as though you are a little bit more cautious on the U.S., than maybe in prior quarters. We know just orders were down a little bit. Have you seen a change of situation in the U.S. or just highlighting more uncertainties, perhaps a little bit color on what’s going on in U.S. Healthcare?

Frans van Houten – CEO and Chairman: The tonality of how we talk about it on the U.S. is indeed a little bit more cautious. It sounds a bit paradoxical, because we see strong traction in the U.S. in the first half of the year, with 7% growth that’s really great. We also have spoken to hospital directors. They tell us about the need to invest. I guess, for many hospitals the Supreme Court announcement was not really earth shattering. As you know, no matter what the outcome was, the need to take these patients in, was there (anything), but the weaker order intake situation in the U.S. is something to pay attention to, and we cannot – let’s say, the outlook is certainly not secure and we need to be very vigilant.

Mark Troman – Bank of America Merrill Lynch: Just one follow-up. I think during Q3 and Q4 and maybe even Q1 this year, you have the step up call which, correct me if I am wrong, I think were around 200 million. I think what you called step up cost to kind of stimulate growth and I guess catch up the plan that you wanted implement. Do those costs stay in Philips or do they unwind over time? So in other words, is you fixed cost base, assuming has increased by roughly 200 million to help growth, does that 200 million stay there or will that reduce over time?

Frans van Houten – CEO and Chairman: Mark, those costs are invested to accelerate growth and I think some of the benefits we see, was the 5% growth in Q2. If you look across the world and our many focus of growth maybe need to invest in order to realize growth, while at the same time we cut cost elsewhere and so the decision last year to step up the cost was very much in reflection of the opportunities that we see. So you could reason as follows, those costs are there to stay, but as a percentage of sales over time that will normalize, moreover at the same time we cut cost in overhead areas and in markets where we grown less and of course that also provides compensation. I guess I’ll leave it at that.