Koninklijke Philips Electronics Earnings Call Nuggets: Healthcare and Lighting Businesses

On Monday, Koninklijke Philips Electronics NV ADR (NYSE:PHG) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Healthcare Business

Andreas Willi – JPMorgan Cazenove: Question is on the Healthcare business, even if you take into account the push-out which you quantified in the call, it still seems a very strong underlying result in terms of sales growth. Should we expect that pace to be maintained in the near quarters? Also, given that strong sales growth, isn’t profitability still somewhat disappointing of in the year-on-year comparison? It’s the first question. The second question on the old consumer electronics business, maybe you could say how big that by now still is in terms of sales and whether the faster decline in some of the DVD players hopefully could pick up, we should also expect licensing income to fall faster than you previously indicated.

Frans van Houten – CEO and Chairman: Let’s first talk a bit about Healthcare and then maybe Ron can also contribute with some more color. So, yes, we believe we have a strong position in healthcare and that’s on the back of a strong product range and investments in innovations where we can also see that during 2011 we have actually gained market share. With the overall order intake in Healthcare at around 7% and especially very strong in the growth markets, we are obviously pleased with a strengthened order book where we take (courage) than for the future. So, we hope to continue good momentum in the Healthcare business even though, and we flag that, the overall uncertainty in the market remains and with regard to your implied message that the profitability is more good enough, actually we would agree with you that Healthcare on its pass-through value to the mid-term targets still has ways to go in improving profitability and Healthcare will also benefit from the Accelerate! Program in improving cross line bottom-line also the cost of reduction will benefit healthcare. Deborah DiSanzo who is taking overall May 1 has already clearly signaled the ways to accelerate Healthcare further. So, Lifestyle Entertainment, we saw a double-digit decline in Lifestyle Entertainment, despite that fact, I said that the business continues to be profitable. I think, this is exactly how we need to manage that business. We cannot help the fact that consumers buy fewer DVD players and blu-ray players, but we can manage the profitability, and as you know, we have moved the unit to Hong Kong. We have merged accessories and all of your video. We’ve taken lot of cost out and the net, net result is just that despite a significantly lower sales the unit continues to be profitable. The proportion of Lifestyle Entertainment of the total of Philips of CL is approximately 30%, but that of course, is coming down as we had the developments in Q1. Then with regard to licenses, I’d like to lean on Ron to give a good perspective on that.

Ron Wirahadiraksa – EVP and CFO: Yeah. So, as we said last year, we expect license income to come down in about two to four years time to a level of about 130 of income versus the 175 than it was last year, and that is as you rightfully say to indicate the decline in the optical licenses income. Of course from 2013 onwards, we are expecting to receive the brand license from the TP Vision joint venture. A little color maybe Frans, if you are okay on Healthcare. The answer is absolutely yes, (pull on) of course, but please bear in mind that we are at a run rate of expenses. Therefore, investments for growth in Healthcare that was slightly above Q1, 2011 as we starting reducing Q2. We have had the conversation on that to last year. So, other than that, the impact of the sales that it was brought back, which we said in Q4 was a raise of 140 basis points is a little less now, because – yeah 130 basis points was a little bit less now, because not everything coming back. But we’re encouraged by what we see of what has come back and that there has not been a push out to Q2. So that’s a little more color on the Healthcare profitability.

Lighting

Simon Smith – Credit Suisse: Yeah, there’s two topics that interested me, the first was with regard to Healthcare and I mean, we’d obviously seen orders in Europe comedown in the sort of the teens and obviously, you are down 1% in this quarter. I guess, you’re implying that apart from Southern Europe some of the other economies in Europe maybe sort of pulls more aggressively during the crisis and you’ve now started seeing more normal order trend. I was just wondering if you give any greater detail on that. I think as the other point is, there has been a lot of discussion about how competition maybe developing in the Healthcare sector and I guess, Europe being the one area where we’re getting more clear weakness to be the one we would see in March. So just in terms of orders that are going in, in Europe as well as the actual volume of those orders what you’re seeing in terms of pricing? Is there any acceleration of price weakness in any of those areas? The second topic for me of interest was Lighting. I mean obviously on Lighting, nice to see an improvement coming through in profitability and I guess we’ve seen a lot of pressure coming through from raw materials in that area or in I think pricing that been – you’d had some successes in pricing and obviously hope to see more come through. Just wondered how much of that improvement is from pricing and what degree of price increases you further have to go through, how much of cost increase has not been recovered and if you can give us any details on that?

Frans van Houten – CEO and Chairman: First of all, let’s talk about Healthcare. You’re right, we flag Europe to continue to be weak. We actually expected mid single-digit decline in Healthcare in Europe. The order intake trend shows a more benign development was to minus 1 in Q1 after several quarters of double-digit decline, but then that means that we have significantly lowered our order book position there. So that’s still then filtered through in the mid single digit decline in Healthcare as an expectation. Competition development, I’m not sure exactly what you’re (offered) there. We see that we can hold up our competition well with a strong talent of products, both in the imaging diagnostics as well as in the patient monitoring and home healthcare. We relate the European situation much more to the general economic situation rather than our competitive position. Then let’s move to Lighting. Raw materials, we have tried very hard to bring that into the pricing, I think generally speaking, we have succeeded although in the consumer space, the consumer lamps area turned out to be quite hard, especially in the area of CFLi, we saw that private-label brands in the large retail stores were putting a hold to further price increases. So, I think we need to work on our internal fundamentals in Lighting. We’re taking significant cost out of that operation, anticipating that we cannot just count on gross margins to improve due to pricing. The good news is that we see a massive opportunity to improve the operational results in Lighting as we make the unit more competitive. It’s also good to see that the LED’s business in the professional side, we see good gross margins and also in the LED Solutions business, we see healthy gross margins. So that also bodes well for the future mix.

Simon Smith – Credit Suisse: Can I just follow-up on that Healthcare point?

Frans van Houten – CEO and Chairman: Sure. Go ahead.

Simon Smith – Credit Suisse: I mean my question was more – I mean in a very tough environment where there is a lots of – well, there is three particularly strong competitors and the suggestion of new entrants, to keep winning orders in Europe and the orders that you’re putting into the backlog, I mean are they going in the sort of similar margins to what you’re currently reporting or is there now, maybe a greater element of discounting to win orders with some of these governments, which are under a lot more pressure in terms of that budgets?

Frans van Houten – CEO and Chairman: We have not seen in out of the order price erosion in the Healthcare market. So, cannot acknowledge that.

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