Philips Drops as Electronics, Lighting Decline Hurts Profit

Philips Drops as Electricals, Lighting Decline Hurts Profit
A Royal Philips Electronics NV employee touches an organic light-emitting diode (OLED) installation. Philips dropped as much as 12 percent to 15.81 euros, the biggest drop since March 2009. Photographer: Ralph Orlowski/Bloomberg

Royal Philips Electronics NV, the world’s biggest maker of light bulbs, dropped the most in more than two years in Amsterdam trading after saying it needs to deepen cost cuts to combat deteriorating demand for lighting and consumer electronics.

Philips fell 8.8 percent to 16.405 euros, the biggest decline since March 2009. Chief Executive Officer Frans Van Houten has taken control of the lighting unit, which will report “low single-digit” sales growth in the second quarter, the Amsterdam-based company said in a statement.

Van Houten, who became CEO in April, faces the challenge of boosting profit against a backdrop of slowing markets for lighting and traditional electronics in western Europe and stiffening competition from low-cost Asian manufacturers. A construction slump and weak consumer spending hurt sales of lighting and audio, video and multimedia products.

“The new management is digging through the company to see what’s going on,” said James Stettler, an analyst at UniCredit in London. “While they have indicated there are issues, the scope of the problems is still a severe disappointment.”

The Dutch maker of medical equipment, scheduled to report earnings on July 18, has a market value of 16.6 billion euros ($24 billion) after today’s drop. Siemens AG, which is preparing an initial public offering of its Osram lighting unit, the No. 2 behind Philips, declined 0.8 percent. Appliance maker Electrolux AB also fell.

Behind Schedule

Philips will announce further “decisive actions shortly,” including a bigger version of the companywide savings program named “Accelerate,” it said today. Van Houten warned in April that Philips had fallen behind schedule to meet targets set out in its Vision 2015 plan, unveiled in September. New targets will be released later this year that reflect changes such as ceding control of the TV business.

Van Houten is part way through a broad sweep out of managers as he seeks to decentralize decision-making and spur growth. By the end of this year, five of the six management board members will have left the company. Lighting head Rudy Provoost in May announced his intention to move to French electrical retailer Rexel SA in the autumn.

To avoid a “leadership vacuum” at lighting, Van Houten and Chief Financial Officer Ron Wirahadiraksa will assume the day-to-day running operations until new management can be appointed.

Margins Under Pressure

Narrowing margins and lower sales growth will result in earnings before interest, taxes and amortization at the lighting unit of 85 million euros in the second quarter, Philips predicted today. That compares with 210 million euros in the year-earlier period, and a 165 million-euro estimate of analysts at SNS Securities.

Profit at consumer lifestyle will be limited to about 50 million euros as a result of declining licensing revenue and expenses on advertising, Philips said. Profit totaled 173 million euros a year earlier.

The company in September set a 2015 target for the lighting unit of earnings before interest, taxes and amortization of 12 percent to 14 percent of sales.

Philips failed to provide a “credible explanation” for the extent of the shortfall as the challenges, such as weak demand for consumer electronics and lower TV licensing income, have already been flagged by the company earlier, SNS Securities’ Victor Bareno said in a note.

“The fact that Philips reports such a massive shortfall in profits just before the end of the quarter is a blow to the company’s credibility,” Amsterdam-based Bareno said. “We expect the market to take skeptical view on the upcoming update of the financial goals next October.”

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