Koninklijke Philips Electronics NV ADR Earnings Call Insights: Capital Allocation Policy and Potential Factory Closures

Koninklijke Philips Electronics NV ADR (NYSE:PHG) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Capital Allocation Policy

Andreas Willi – JPMorgan Cazenove: My first question is on your capital allocation going forward. You’re coming towards the end of the buyback. You generated good cash flow. You have made good progress on the operational turnaround. Should we expect Philips to become more active again on M&A? Or is the focus still very much internal as we go into ’13? The second question is on your margin target for 2013. Given that the Consumer Lifestyle – as the Lifestyle and Entertainment business moves into discontinued operations, should you not have lifted the target slightly or is that too small of a difference for you to adjust this?

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

Frans van Houten – CEO, Royal Philips Electronics: On the capital allocation policy, that remains unchanged focus on maintaining our credit rating and being very prudent. We will first complete our share buyback program as it stands. We’re at 73% so we still have a piece to finish in the first half of 2013 and we will continue to be focused on our ACCELERATE! operational improvement program. At this time, I don’t want any distractions in our organization and basically continuing to focus on organic improvement, we can imagine that there are questions out there, about what is afterwards – what is coming beyond 2013? At this point in time we prefer to focus on our improvement program and we can anticipate a further elucidation to the market at the end of 2013. With regard to the margin targets, the group targets are going to be unchanged in relation to the sale of the Audio, Video, Multimedia and Accessory business to Funai. I hope that answers your questions.

Potential Factory Closures

Mark Troman – Bank of America Merrill Lynch: Just in terms of ACCELERATE!, you did I think €470, €471 million or so savings this year, obviously a strong result. I think you are on schedule roughly for about €450 million of incremental savings for 2013, if I look at your schedules give or take. In the last capital markets there I think you talked about potential factory closures and supply chain initiatives as well, are those factory closures and supply chain initiatives – are they going to be undertaken this year and should we expect growth saving in excess of the €450 million?

Ron Wirahadiraksa – EVP and CFO, Royal Philips Electronics: Yes, we are happy to be well on track. You are right, with the overhead cost reductions, we plan cumulative savings for 2013 of €900 million. So very pleased with that. On the industrial footprint rationalization, supply chain rationalization, we did mention at Capital Markets Day that this mainly pertains to Lighting, that we have started to a lesser extent in Healthcare, and that for Lighting for the coming years that will result in €165 million improvement of the results. We left it a bit in the middle on what exactly the timing on that is. It will be in the coming few years. So we have pulled up a number of our plans to rationalize the conventions lamps manufacturing infrastructure, and that explains why we took additional restructuring that we’ve (added due) on December 3.

Mark Troman – Bank of America Merrill Lynch: Just one quick follow-up. The €154 million charge in Q4 for legal matters, et cetera, I guess all I really want to know is there any ongoing risk to 2013 if those sort of charges going ahead or was that just something to clean everything up that is known, maybe a bit more color on that please?

Frans van Houten – CEO, Royal Philips Electronics: Yes, Frans here. We, of course, regularly look at our legal exposures and in that context, we have changed some provisions that is the cause. I mean that’s substantially explaining the €154 million additional charge in the fourth quarter. Details I prefer not to give because it relates to legal matters and that would not be helpful to the Company.