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Philips Chief Seen Calling Upon KKR Past to Eliminate More Costs

Royal Philips Electronics CEO Frans van Houten
Frans van Houten, chief executive officer of Royal Philips Electronics NV. Photographer: Jock Fistick/Bloomberg

Frans van Houten, 100 days into his job as chief executive officer at Royal Philips Electronics NV, is poised to announce a bigger overhaul of the Dutch maker of lighting and DVD players, drawing on cost-cutting skills honed when working with private equity firms.

Philips may remove management layers and cut office and information technology costs, said FNV Bondgenoten union official Ron van Baden. At least 300 million euros ($430 million) in savings are needed just to offset higher costs, analysts surveyed by Bloomberg said. Philips will announce “decisive action” shortly, spokesman Joost Akkermans said, without being specific.

Van Houten, the former head of NXP Semiconductors, part owned by Kohlberg Kravis Roberts Co, faces the challenge of boosting profit and sales growth against a backdrop of slowing markets for lighting and traditional electronics in Western Europe and competition from low-cost Asian manufacturers. Shares of the Amsterdam-based company dropped 8.8 percent on June 22, when van Houten warned profit from lighting and consumer-electrical goods slumped in the second quarter.

“You would rather think management layers or specific product groups may be cut out,” given the job cuts Philips already made, van Baden said in an interview. He posted on Twitter: “Philips employees now will experience what van Houten learned from KKR.”

Since van Houten became CEO, Philips shares have declined 23 percent, paring the company’s market value to 17.7 billion euros. The company reports earnings on July 18. Fresh cost-cutting goals may not trigger a share rebound, said Peter Olofsen, an analyst at Kepler Capital Markets. Investors may instead wait for third-quarter results, and the release of financial targets reflecting moves such as ceding control of an unprofitable TV operation, he said.

‘Drastic Measures’

“Drastic measures” are needed to ensure Philips doesn’t fall short of targets, said Jos Versteeg, an analyst at Theodoor Gilissen Bankiers.

The company in September outlined a goal for earnings before interest, taxes and amortization of 10 percent to 13 percent of sales through 2015, and it’s vital that Philips doesn’t come up short, Versteeg said. Analysts predict 200 million euros in extra costs stemming from sales and research, and an added 100 million euros in TV spinoff expenses.

Reviewing the workforce will be part of van Houten’s plan to deepen an existing program called Accelerate, Akkermans said. The program is designed to bring products to the market more quickly to push growth. Sales, excluding takeovers, disposals and currency shifts, grew 4 percent last year.

Growth Challenge

“The story of Philips is about accelerating growth given they have lowered their break-even point quite a lot since the downturn,” said Klas Bergelind at RBS. “And in this macro-environment that is a challenge”.

Second-quarter earnings at lighting and consumer lifestyle units dropped 60 percent and 71 percent respectively, Philips predicted. It’s on course to report its worst quarterly result in two years with analysts estimating a 42 percent drop in EBITA to 304 million euros.

Advised by consultants McKinsey & Co., van Houten employed a traffic-light system to warn managers of the company’s 400 business groupings if results are going astray, with those classified as red indicating a need to make adjustments. His strategy is focused on decentralizing decision making.

Worst Over

Van Houten is also partway through a clear out of executives. By the end of this year, five of the six management board members will have left. Van Houten and Chief Financial Officer Ron Wirahadiraksa have temporarily assumed the day-to-day running of lighting operations until management can be appointed.

Philips in 2009 set out to slash 6,000 jobs to bolster profitability to deal with the financial crisis, which lowered demand for products spanning electronic toothbrushes to health scanners.

Measures already taken probably mean that another cull of workers is unlikely, union official van Baden said. Of the 119,001 workers in 2010, about 45 percent worked in lighting, 30 percent in healthcare products, and 15 percent in consumer-goods.

“In every division there are still weak spots,” Theodoor Gilissen analyst Versteeg said. “If you’re a manager underperforming within your division, you have a serious problem.”

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