Philips More Cautious For 2014 as Euro Crimps Profit

Royal Philips NV said the strength of the euro will make 2014 a “challenging” year after the world’s biggest lighting manufacturer reported first-quarter earnings that missed analyst estimates. The stock declined the most since June 2011.

“The euro has become stronger,” Chief Executive Officer Frans van Houten said on a conference call today. The effect of currency movements on the Amsterdam-based company was bigger than expected in the first quarter, he said.

Philips joins other companies such as decorative paints maker Akzo Nobel NV and software company SAP AG in saying that the strong euro is weighing on its growth as sales from outside Europe are worth less when brought home. That makes it more difficult for van Houten to revamp Philips and focus the 123-year-old company on more profitable businesses such as LED lighting, health-care equipment and wellness offerings, while selling the DVD and multimedia divisions that are its heritage.

“2014 will be a challenging year, but we remain very confident of achieving our 2016 mid-term financial targets,” Philips said in its statement today. Three months earlier the company had said progress toward 2016 goals for profitability will be “modest” this year.

The new assesment of business this year means that Philips essentially cut its full-year forecast, RBC analyst Andrew Carter said in a note to clients.

Shares Slump

Philips shares dropped as much as 7.6 percent and were down 7 percent as of 11:02 a.m., valuing the company at 22 billion euros ($30.4 billion).

Earnings before interest, taxes, amortization and one-time items fell 13 percent to 368 million euros in the first quarter. The average estimate of analysts surveyed by Bloomberg was for 413 million euros. Sales dropped 5 percent to 5.02 billion euros.

“Philips may be attempting too much in too short a time -- a major headcount reduction program, an overhaul of the group IT system and integration of the North American lighting businesses,” Carter said.

Van Houten, a Philips veteran with a record for turning around underperforming assets, last year pledged to extend his efficiency drive to bolster profitability. The CEO is striving to achieve 2016 goals including a compound annual growth rate for comparable sales of 4 percent to 6 percent, with an Ebita margin of 11 percent to 12 percent.

Deflation Fears

The company competes with Siemens AG and General Electric Co. in the market for health-care equipment such as medical scanners, and with Osram AG in the lighting industry.

According to Philips, currency effects negatively impacted sales by 5 percent and Ebita by 1.8 percentage points.

The euro has risen 5.8 percent in the past 12 months, the second best performer after the pound of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Index. The euro traded at $1.3800 as of 8:37 a.m. London time today, after touching $1.3967 last month, the strongest since October 2011. The currency’s average during the past 10 years is $1.3357.

The president of the European Central Bank, Mario Draghi, suggested this month that the ECB may ease policy to address the euro’s advance and that marked a strengthening of a position he’s been setting out for weeks. Yet the 18-nation currency has shrugged off his repeated comments and climbed since the beginning of March.

The challenge for Draghi is capping euro gains that have slowed inflation to a quarter of the ECB’s 2 percent target and which run the risk of the sluggish growth that blighted Japan in the 1990s.

Russian ‘Double-Whammy’

In China, the company’s lighting business is suffering as the slowdown of the local economy crimps demand, Van Houten said in an interview with Bloomberg TV. At the same time, demand from the country’s consumers is still “strong,” helping Philips’s air purifiers business, he said. In Russia, the company is hit by a “double-whammy” of lower demand and the drop of the ruble against other currencies, the CEO said.

“Due to the volatility of currencies, we also see governments being very careful with big project orders, for example health-care,” he added, referring to markets such as Argentina and Southeast Asia.

On a comparable basis, Philips’ sales dropped 2 percent in the health-care business and rose 7 percent in the consumer lifestyle division.

LED Boom

While sales of light-emitting diode offerings rose 37 percent, total lighting revenue were little changed as sales of traditional light bulbs declined.

“Lighting shows weakness,” Robin van den Broek, an analyst at ING Bank, said by phone. “If you have 37 percent growth in LED sales, it’s not a good sign that comparable sales for the division are flat year-on-year.”

The boom in demand for LEDs -- which are smaller, more energy-efficient and have longer lifespans than traditional light bulbs -- are forcing market leaders Philips and Osram to adapt. The companies now seek long-term contracts to install complex lighting systems to generate additional sales.

Washington’s transit authority in November awarded Philips, which has been selling light bulbs since 1891, a contract to upgrade 13,000 lighting fixtures in parking plots, along with a 10-year maintenance deal. It gives the world’s biggest lighting maker a long-term income stream, and allows Washington to cut energy usage by 68 percent.

Van Houten reiterated today that he’s confident of selling the DVD and multimedia divisions -- which suffered as customers flocked to competitors such as Sony Corp. and Apple Inc. for mobile and music devices -- this year as talks with potential buyers are making progress.

In January, the company announced the sale of its stake in a television joint venture to TP Vision, yet an earlier attempt to sell the DVD operations to Japan’s Funai Electric Co. failed in October, with both parties claiming breach of contract.

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