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Philips CEO Extends Efficiency Plan to Counter Headwinds

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Sept. 17 (Bloomberg) -- Royal Philips NV Chief Executive Officer Frans Van Houten pledged to extend an efficiency drive to bolster margins as the Dutch company grapples with “ongoing headwinds” for achieving this year’s targets.

Healthcare reform in the U.S. and slow commercial real-estate markets are hampering business and the fourth-quarter performance will be key for reaching financial targets set for the year, Van Houten said on a call. Philips, which today also announced a buyback program totalling 1.5 billion euros ($2 billion), dropped as much as 3.5 percent in Amsterdam trading.

“If it was a walk in the park, we would have talked differently about it,” the CEO said, adding that Philips is committed to reaching the targets.

The 122-year-old company is in the midst of a program called Accelerate!, which includes cutting 6,700 jobs and trimming 1.1 billion euros in costs by 2014. Van Houten is also pushing Philips toward more profitable LED lighting, while phasing out the audio and video devices that are the Amsterdam-based company’s heritage.

The company today set a target for cumulative annual sales growth of 4 percent to 6 percent from 2014 to 2016, with an earnings before interest, taxes and amortization (Ebita) margin of 11 percent to 12 percent. That compares with a previous target of 10 percent to 12 percent.

Portfolio Checks

Shares of the maker of scanners and electric toothbrushes traded 2.3 percent lower at 24.35 euros as of 11:27 a.m. in the Dutch capital.

Philips regularly assesses its portfolio to make sure that all units create value, Van Houten said at a presentation today in London.

“What we will not do is hang on to businesses just to hang on to them,” he said.

As part of his push into higher-margin areas such as lighting products, health-care equipment and wellness offerings, Van Houten has sold consumer assets such as the DVD and music-player businesses for which the company was known in the past.

“The targets are balanced, responsible, and able to deal with some contingencies,” such as fluctuations in market growth and price erosion, said Van Houten, who became CEO in 2011. Three to four percentage points of profitability gains will be balanced by one-time restructuring costs and investments in organic growth, he said.

More to Come

“As we progress towards the mid-term targets, you will challenge us, ask us can we do more, can we go faster,” he said.

Philips targets an Ebita margin of 16 percent to 17 percent at the medical unit which makes hospital scanners and other medical equipment. The consumer unit, which makes electric shavers, coffee machines and rice cookers is expected to have profitability of 11 percent to 13 percent, with lighting generating a margin of 9 percent to 11 percent.

“We expect the near-term reaction to be one of mild disappointment: realistically, a 1-2 percentage point group margin upgrade after all that has occurred, in terms of cost reduction and divestment, seems unduly conservative,” Ben Uglow, an analyst at Morgan Stanley, said in a note. He had estimated an 11 percent to 13 percent range.

To contact the reporter on this story: Patrick Winters in Zurich at pwinters3@bloomberg.net

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net

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