Frans van Houten starts as chief executive officer of Royal Philips Electronics NV today with the challenge of turning around the 3 billion-euro ($4.2 billion) television business, a task that eluded his predecessor.
Van Houten, whose appointment was approved by shareholders yesterday, succeeds Gerard Kleisterlee, who is stepping down after 10 years at the helm. Leaving behind the “unfinished dossier” of fixing the TV unit is “frustrating,” Kleisterlee lamented yesterday at the annual general meeting in Amsterdam.
“It’s what everyone is looking at,” said Jos Versteeg, an analyst at Theodoor Gilissen Bankiers, which has a “buy” rating on Philips. “Van Houten made it very clear that it is the top priority for him.”
In a timely reminder of the job in hand, Philips this week predicted a first-quarter loss from TVs of as much as 120 million euros ($170 million), close to the unit’s entire deficit for all of 2010. TVs are a remnant of the once consumer- orientated electronics company that Philips was before Kleisterlee spent a decade buying and selling businesses to focus on more profitable industries such as medical equipment.
Philips forecast it will likely fail to break even with the business this year, which would mark the fifth consecutive annual loss. The television subsidiary has suffered as Sony Corp. and Panasonic Corp. cut prices to combat local Chinese suppliers.
Philips has lost 5 percent in value over the period of Kleisterlee’s tenure. Kleisterlee sought to make Philips’s earnings more stable by selling assets including the chip business, which van Houten ran before returning last year.
“I started with the TV issue, and I’m ending with the TV issue,” Kleisterlee told shareholders yesterday.
Philips felt investors’ discontent on March 28, when the shares dropped 1.8 percent after the company said the TV business is heading for a loss of 100 million to 120 million euros in the first quarter. Last year, Philips lost 125 million euros from televisions, measured as earnings before interest, taxes and amortization. TVs account for 12 percent of sales.
The company’s stock is little changed so far this year, valuing it at 22 billion euros.
“It’s absolutely necessary for Philips to resolve this issue,” said Victor Bareno, an analyst at SNS Securities, which also has a “buy” rating on the stock.
The appointment of van Houten, who rejoined Philips in October last year for an introduction period, is part of a broader management reshuffle. Chief Financial Officer Pierre- Jean Sivignon was succeeded by Ron Wirahadiraksa, who used to be CFO of the Philips’ health-care unit. Former Royal Dutch Shell Group Plc Chief Executive Officer Jeroen van der Veer was appointed chairman, succeeding Jan-Michiel Hessels.
The new management team looks “very promising” yet it will take “some time” to make significant progress on the main challenges facing Philips, said Bank of America Merrill Lynch analyst Mark Troman in a note on March 29. With the TV business so weak, the strategic options open to van Houten could be limited, the analyst said.
The new executive comes with restructuring credentials. After overseeing the semiconductor unit’s spinoff and eventual sale to private-equity owners, van Houten set up an advisory firm at the end of 2009. Among his services was helping ING Group NV break into banking and insurance companies in 2009.
Philips, which invented the compact disc, now consists of three businesses: health-care, lighting and a consumer lifestyle division that aims to develop electronics that synch with aging population and healthy lifestyle trends. Among Philips’s most recent products is an air-powered dental floss.
Kleisterlee revived earnings from the low point in 2001 and 2002, the first years of his reign, when the company posted losses. With the exception of 2008, the company has been profitable since with margins climbing from near zero. Profitability equaled 8.1 percent of sales in 2010.
Shareholders have yet to reward his efforts. The total annualized return over the past decade was negative. The company has been underperforming peers such as Siemens AG (SIE), which has been more aggressive in divesting loss-making units and focusing on growth. Siemens had a total annualized return of 3.16 percent since 2001.
“The market is not convinced yet after the steps they have taken,” said Christian Vondenbusch, a fund manager at Robeco Hollands Bezit, which oversees about 2 million Philips shares.
No Sweeping Changes?
Philips is unlikely to make sweeping strategy changes or major acquisitions, analysts and investors said after recent meetings with the company where van Houten was present.
In lighting, the new CEO will find the marketplace in flux following a Siemens’ announcement this week that it will carry out an initial public offering of Osram, the world’s No. 2 lighting supplier after Philips. Slicing off a business with sales of 4.68 billion euros and 40,000 workers could change the dynamics of the industry.
“An independently managed Osram that is separately listed may prove to be a fiercer competitor to Philips in the medium to longer term,” said Sjoerd Ummels, an analyst at ING.
Home health care is one of the targeted growth areas for Philips. The division represents about 15 percent of total health care revenue of 8.6 billion euros in 2010. Healthcare Chief Executive Officer Stephen Rusckowski predicted in an interview last week that the market for medical products that can be used at home will grow 7 percent to 9 percent annually.
Philips has in the past been notorious for failing to monetize its inventions, many of which haven’t been successful on a commercial basis, said Egbert van Acht, executive vice president for Philips’s Health & Wellness group.
“What we need to do is first really understand what clients want,” van Acht said. “Van Houten is one of the people coming in who understands that.”
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