Philips Chief Makes $2.8 Billion Bet on Overhaul to Meet Goals

Philips Plans Additional Costs Cuts After Loss
A technician, works on a MRI scanner at the Philips Healthcare production facility in Best, Netherlands. Photographer: Jock Fistick/Bloomberg

Royal Philips Electronics NV Chief Executive Officer Frans van Houten said he’ll embark on a 2 billion-euro ($2.8 billion) share buyback program, betting that a companywide overhaul will help the Dutch maker of light bulbs and electrical goods meet new goals for growth.

The maker of Sonicare toothbrushes plans to cut an additional 500 million euros in costs after reporting its biggest loss in almost a decade and predicting no improvement to its performance in the near term. Philips shares were little changed in Amsterdam, where the company is based.

Van Houten, who became CEO in April, said he’s reviewing management layers and staffing as he looks to reduce the complexity of Philips. The savings will help improve efficiency at a time when Philips is battling with low-cost manufacturers in Asia. Van Houten today unveiled a goal to lift margins to 10 percent to 12 percent by 2013, on sales growth of 4 percent to 6 percent.

“The share buyback is a positive surprise, especially the timing of it, and the new targets look achievable”, said Peter Olofsen, an Amsterdam-based analyst at Kepler Capital Markets.

Philips shares have declined more than 20 percent since Van Houten’s arrival, paring the company’s market value to 17.9 billion euros. Siemens AG, which competes with Philips in lighting and healthcare equipment, is little changed in Frankfurt this year.

New Targets

Today’s strategic update reflects van Houten’s determination to accelerate a turnaround of the company after completing his first 100 days at the helm. Analysts had expected new targets, which replace ones set in September, to be released at the third-quarter results’ stage in the fall. The company halted buybacks in January 2009 in a bid to preserve cash.

“The new targets look realistic and are in line with our estimates for 2013, said Victor Bareno, an Amsterdam-based analyst at SNS Securities. He changed his recommendation to hold from reduce.

Philips, which announced 1.6 billion euros in writedowns, reported second-quarter earnings before interest, taxes and amortization of 370 million euros, a two-year low, down from 506 million euros. Analysts in a survey predicted 304 million euros.

The CEO is using cutbacks to offset an additional 200 million euros in expenses related to sales and research and development. The company predicted 30 million euros in restructuring and purchase-related costs in the third quarter.

TV Exit

Philips is bundling its operations making televisions, which it first produced in 1928, into a partnership that will be 70 percent owned by Hong Kong-based TPV Technology Ltd., joining European conglomerates including Siemens scaling back consumer electronics as prices decline. Rival Toshiba Corp. announced the transfer of its LCD TV production site for the North American and Mexican markets to Taiwan’s Compal Electronics last week.

Philips already cut 6,000 jobs to defend margins as the global recession lowered demand for products. The Vision 2015 targets set out last year that are currently on hold included a margin goal of 10 percent to 13 percent. The company didn’t specify in today’s release if the savings plan includes job cuts.

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