Koninklijke Philips Electronics Management Discusses Q4 2010 Results - Earnings Call Transcript

Jan.24.11 | About: Koninklijke Philips (PHG)

Koninklijke Philips Electronics N.V. (NYSE:PHG)

Q4 2010 Earnings Conference Call

January 24, 2011 3:15 AM ET

Executives

Abhijit Bhattacharya – Head, IR

Pierre-Jean Sivignon – EVP and CFO

Analysts

Mark Troman – Bank of America Merrill Lynch

Simon Smith – Credit Suisse

Andreas Willi – JP Morgan

Martin Wilkie – Deutsche Bank

Gaël de Bray – SG

Ben Uglow – Morgan Stanley

Ilan Chaitowitz – Redburn Partner

Olivier Esnou – Exane BNP Paribas

Martin Prozesky – Sanford Bernstein

Christel Monot – UBS

Matt Williams – HSBC

Marcel Achterberg – Petercam

Victor Bareño – SNS Securities

Peter Olofsen – Kepler Capital Markets

William Mackie – Berenberg Bank

Operator

Welcome to Royal Philips Electronics Fourth Quarter and Annual Results 2010 Conference Call on Monday, the 24th of January, 2011. During the introduction hosted by Mr. Gerard Kleisterlee, President and CEO; and Mr. Pierre-Jean Sivignon, CFO, all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions. (Operator Instructions).

Please note that this call will be recorded and is available by webcast on the website of Royal Philips Electronics.

I will now hand the conference over to Mr. Abhijit Bhattacharya, the Head of Investor Relations. Please go ahead, sir.

Abhijit Bhattacharya

Ladies and gentlemen, good morning. Let me welcome you to this conference call on the full year as well as the fourth quarter results for 2010, for Royal Philips Electronics.

I am here with Philips’ President and CEO, Mr. Gerard Kleisterlee; and our CFO, Pierre-Jean Sivignon, who will take you through the numbers and his introductory remarks in a few minutes. After this, both Pierre-Jean and Gerard will be happy to take your questions.

As usual, our press release and the accompanying information slide deck was published at 7 AM this morning. Both documents are now available for download from our Investor Relations website. We will also make available of full transcript of this conference call on the Investor Relations website by tomorrow morning at the latest.

With that, let me hand you over to Pierre-Jean, to run through the results.

Pierre-Jean Sivignon

Thank you, Abhijit. Good morning to you all. I will first just start by looking at recent developments in some of our end markets. Then, I will walk you through the financial performance for the year 2010. And, finally, I will end with my comments on the fourth quarter.

As far as developments in the end markets are concerned, I will start with Healthcare, where in the USA we saw hospitals continuing to focus on lowering their operating cost and managing their work. While those with relatively strong balance sheets saw an easing in the availability of credit. Some uncertainty on Healthcare Reform continues, with reimbursements pressure and healthcare equipment tax on the horizon, as well as many states challenging the Federal mandate to buy insurance.

This year also saw the emergence of large strategic and multiyear deals, some pent-up demands was also visible in the quarter. We see strong momentum in emerging markets. And as more investments continue to be directed at these markets, this results in robust demand there.

The lighting markets saw reasonable growth in the quarter with demands for LED products leading the way. Given the weak construction markets, we are encouraged by the growth in the professional luminaires market for the second straight quarter. With the forward-looking Architecture Billing Index crossing the growth level of 50 in the last quarter, we expect to see growth in the construction staffs towards the latter half of 2011. We expect growth from tenant’s renovation to give us some early momentum in 2011.

In the automotive sector, we believe the inventory correction has now been completed and supplies are aligned with the production staffs. The consumer business continue to remain subdue. In Q4, we continued to see good market developments in emerging markets. Last but not least, we did see tighter inventory management in the channels, as we had already indicated at the end of the third quarter.

In the consumer markets, consumer sentiment in Western Europe and the US remained subdued. In the areas where we mostly invested for growth, we saw markets responding. Personal care, Health & Wellness, and domestic appliances markets continue to grow. Markets in the Asean countries and Central Europe as well showed good growth in the quarter. The Home Audio and DVD markets continued to shrink, while price erosion in the Television market was severe.

Let me now move to the Philips Group results. For comparable sales, we grew 4%, actually 4.5%. And excluding TV, we saw 5% of sales growth for the year, when adjusted for currency as well as portfolio changes. Sales in Healthcare for the year grew by 4% for the year in line with our earlier guidance given during the Capital Market Day back in May in 2010.

Particularly pleasing for Healthcare was the growth in key emerging markets, which saw a double-digit growth, with China and India, growing at more than 20% for the year. Key emerging market consist of China, India, and Latin America. We see these trends as clearly supporting our investment thesis for these markets.

Our lighting business emerged from the crisis with a strong growth of 9% for the year. Our sales growth in LED products which forms an important part of our future plans was very strong, with a year-on-year growth of 78%. Growth in automotive lighting, lighting electronics, and the lamp business as well contributed handsomely to the growth for the whole sector.

The lack of momentum in the constructions business resulted in a subdued performance by our luminaires business. Consumer Lifestyle sales grew by 1% for the year. Our growth engines in Consumer Lifestyle, i.e. Personal Care, Health & Wellness businesses and Domestic Appliances grew in line with our expectations. The decline in the Audio/Video, Multimedia, and DVD markets, specifically in the categories where we are present was largely responsible for upsetting growth in the other categories.

In emerging markets, sales for 2010 grew healthy 12% on the comparable basis, and 13% excluding TV. On the nominal basis, sales in these markets increased by 20%. In North America, we saw comparable growth of 1%, while sales in Europe declined by 1%. Reported EBITDA for the year was EUR2.6 billion or 10% of sales, which is a record in the last 10 years, and that is a significant improvement over the 4.5% profitability reported for the year 2009.

More impressively, for adjusted EBITDA profitability, that is to say excluding incidental gains and charges significantly exceeded our target of 10% to finish the year at 10.5%, with a strong year-on-year improvements in all three business sectors. Reduction in our cost base, pricing discipline and the success of our supply team in managing the bill of material has contributed to this improved performance.

Our continued focus on cash, delivered a free cash flow of EUR1.3 billion in the year. And with that summary on the year, I would now like to take you to get a closer look at our performance in the fourth quarter.

Sales in Q4 increased by 2% on the nominal basis, corrected for currency movements and portfolio changes, sales for the quarter declined by 4% compared to the previous year. Excluding Television, this figure was a decline of 2%.

On a geographical basis, comparable sales in the emerging markets fell 1% in the fourth quarter. Excluding TV emerging market witnessed a growth of 3%. This was mainly due to execution issues in Brazil. Excluding TV in Brazil, sales in emerging market grew by 7% on the comparable basis. Sales from emerging market now represents a third of Group revenues, actually 33% to be precise, which is an encouraging trend as we continue to see the significance of the emerging markets growing in the coming years.

I would like to highlight that for growing footprint in emerging market is not only limited to the BRIC countries, but to other emerging geographies such as Asean, Ukraine, Central Asia, South Africa, and in the Middle East as well. Revenue performance in the rest of the world was mixed with North America showing a 1% increase in comparable sales, while Western Europe saw a decline of 10%.

Excluding TV, the sales decline in Western Europe was 7%. But it’s important to point out at this stage that our comparable sales figures do not correct for change in number of working days in the Philips accounting calendar, where in the fourth quarter of 2010, we were particularly disadvantaged with three working days less in the quarter for the particular product categories that I will refer to in a minute, and this is three less working days compared to the fourth quarter of 2009.

As you will remember, we had a corresponding and reverse advantage in the first quarter of 2010, where there we had four extra working days versus the fourth quarter of 2009, and we had already mentioned that at the end of that first quarter 2010. The impact of this on the sales for the quarter is estimated to be up to 4 percentage points of growth.

Reported EBITDA was EUR873 million or 11.8% of sales, improving on the 9.1% profitability reported for the fourth quarter of 2009. The adjusted EBITDA profitability that is to say excluding incidental gains and charges was 11.4% for the quarter, compared to 12.3% for the fourth quarter of ‘09. The lower adjusted EBITDA was due to the loss incurred in the Television business for the year, as well as different seasonality on the IT income. Excluding Television, the adjusted EBITDA for the fourth quarter 2010 was slightly higher in amount at EUR895 million or 13.8% of sales compared to EUR861 million or 13.9% of sales in the previous year.

Our continued efforts on cash delivered a free cash flow of EUR1.3 billion in the quarter. This compares to EUR726 million for the fourth quarter of 2009, which included the EUR485 million net cash payment related to the final asbestos settlement.

With that summary, let me now take a closer look at the performance of each of our business sectors during the fourth quarter, and I will start with Healthcare.

Currency comparable equipment order intake saw a 3% growth in Q4. We saw an encouraging 8% increase in North America, though for geographies outside North America, the order intake remained flat. But there, the momentum in key emerging markets that is India, China, and Lat Am, were sustained with an impressive increase in the order intake of 20% for the quarter. Despite the disadvantage in terms of days which I have referred to early on and I’m talking about working days in the Philips calendar, for healthcare sector had a sales growth of 10% nominally. On the comparable basis, the growth was 2%.

Looking at its business, Home Healthcare Solution and patient care and clinical informatics performed well, by delivering mid-single-digit comparable sales growth. With the addition of new sockets in emerging markets, customer service delivered an impressive growth in the emerging markets of 17%. Our acquisition in China, the [inaudible] Shenzhen Goldway compared spectacularly in the last quarter with a growth of 60% which completed an annual growth of 40%.

Reported fourth quarter EBITDA at Healthcare was EUR522 million. That is to say 19.8% of sales compared to EUR450 million or 18.8% of sales in the same period of 2010. Excluding restructuring and acquisition-related charges, EBITDA was 19.6%, very close to the record level of 20% in the same period of last year.

Consumer Lifestyle sales dropped by 11%; excluding TV, the decline in Consumer Lifestyle was 6%. The sales pattern in Consumer Lifestyle was similar to the previous quarter with personal care and Health & Wellness showing good growth. In domestic appliances, we are pleased that our growth in emerging markets continued with double-digit growth in the fourth quarter. This was upset by market weakness for that particular product category in Western Europe.

Audio/Video Multimedia & Accessories sales declined in the quarter, largely due to decline in markets, as well as portfolio choices for profitability. In Consumer Lifestyle, we did see destocking in the channels in TV. The sellout did not permit to complete the reduction of the channel inventory.

The EBITDA margin at Consumer Lifestyle declined significantly to 5.6% of sales compared to 9.2% in the fourth quarter of 2009. Excluding restructuring charges, the adjusted profitability of the sector was 6.2% in the quarter, unprecedented pricing pressure due to the inventory situation in the channels saw significant price erosion in the Television business as a result of which the business made an adjusted EBITDA loss in the fourth quarter of EUR55 million, which was at the low end of the guidance given on the Capital Market Day in December.

Adjusted EBITDA excludes the restructuring and acquisition-related charges. Basically, there we gave you that number for TV, and it was indeed EUR55 million. This together with the different seasonality for license of this year, this had lower adjusted impact on EBITDA of EUR31 million compared to last year, and those two elements combined were the most significant contributing elements in the Consumer Lifestyle EBITDA. The decline in sale in Audio/Video Multimedia, also contributed to the lower profitability.

At lighting, comparable sales were in line with the level of the fourth quarter of 2009. Sales in India and Asean continued the strong momentum with double-digit growth. North America showed signs of recovery with the mid-single-digit growth in the quarter, subdued consumer confidence in Europe, affected sales where we saw high single-digit decline.

Looking per business, we continue to strong sales for our LED products, with growth of 37% compared to the same quarter of the previous year. Sales of professional luminaires despite a weak construction market showed growth for the second consecutive quarter. Lighting electronics had the robust quarter with high single-digit growth.

The reported EBITDA at lighting more than doubled to EUR198 million or 10% of sales from EUR82 million or 4.4% of sales in the same quarter of last year. Excluding restructuring and acquisition-related charges, the adjusted profitability increased to EUR232 million or 11.7% of sales, well ahead of the EUR185 million and 10% of sales of Q4 last year. The improvement in adjusted profitability was visible across almost all lighting businesses, notably lamps, lumileds and automotive lighting.

EBITDA at GM&S was EUR2 million, mainly due to a EUR83 million pension related change, which was partially offset by EUR5 million restructuring charge. Adjusting for this, the adjusted EBITDA was EUR76 million and we expect the GM&S sector cost to be at the level of EUR280 million for 2011.

Our reported net income improved substantially from EUR260 million in Q4 ‘09 to EUR465 million in the current year. This was driven by an improvement in operating margins and lower charges compared to previous year.

Let me now move to cash and to the balance sheet. And there I am glad to say that we again managed to deliver a very solid cash flow inflow of EUR1.3 billion from our operating activities in the quarter. Compared to the equivalent figure for the fourth quarter of 2009 of EUR726 million which was then negatively impacted by EUR485 million cash one-off settlement related to the final asbestos settlement at the time.

The cash flow from operating activities increased by EUR125 million when adjusted for that settlement, mainly due to higher operating earnings. Our inventory were up compared to last year-end, especially for Televisions. However with an eye towards cash and profitability, we managed our working capital well. And for the Group, if you exclude pension, we have a reduction of that working cap compared to the fourth quarter of last year by 80 basis points as expressed as a percentage of revenue.

On inventories, there were some concern at the end of Q3, but we have reused our inventories since then, but however the job is still not yet fully completed.

I’m pleased with the further strengthening of our liquidity position during the quarter. Our cash balance increased from EUR4.4 billion to EUR5.8 billion at year-end, mainly driven by the free cash flow.

Ladies and gentlemen, let me now sum up. Overall, I can see that we finished a strong year 2010, and we did that on the stable note. We have made a strong start to the year supported by some tailwind in 2010, which had the opposite effect on the second half of the year to make it a little bit more challenging then.

We are pleased by after four months in the healthcare sector, particularly in Home Healthcare, Patient Care, and Clinical Informatics, as well as in customer services. In Lighting, we have done well in almost all across all the board, especially with our LED based products, lamps, lighting electronics, and automotive lighting. In Consumer Lifestyle, Personal Care, Health & Wellness were the standout performers.

The growth and momentum seen in these businesses was rewarding. This enabled us to end the year with an EBITDA adjusted for restructuring and acquisition-related charges of 10.5% which is significantly ahead of the target we had given to ourselves of 10%.

From a geographic perspective, we have improved our balanced sales in emerging markets, growing from 30% to 33%. Our just announced acquisition of Preeti in India will add a further growth momentum to our businesses in that part of the world. However, Television profitability remained a major issue, and we are fully committed to resolve this.

I am pleased with the further progress we made in managing our cost, particularly with the structural savings in fixed cost, which compare to the 2008 baseline where we delivered a EUR741 million which exceeded the target of EUR700 million by EUR41 million.

Finally, something which gives me great personal satisfaction is that, in two years after the biggest acquisition in the history of the company, our return on invested capital was back in value creation territory, i.e., above the WACC of 8.1% after-tax of the company, which means that by the end of the year we were able to come close to our Vision 2010 objective by ending with 11.7% return on invested capital.

2010 will be a year of progress, on our way to achieve the Vision 2015 objectives. Our strong order book provides confidence in our Healthcare business for the year ahead. We see first leading indicators of positive momentum in constructions market, which are expected to benefit lighting sales in the latter part of 2011, supported by the increased adoption of LED products.

We expect emerging markets to continue to support growth in all the three sectors, while consumer sentiment in mature markets remains subdued. We will continue our initiatives to ignite growth in Consumer Lifestyle by a reducing in license income as indicated in our press release as well as the inventory in the channels for Television will provide some headwind during the early part of the year.

In keeping with our dividend policy, and as a sign of our confidence in the future, we propose to increase our dividend to EUR0.75 per share. We will propose that to our shareholders at the upcoming meeting, above the EUR0.70 which was the dividend declared for the last three years.

Based on the positive response we received from shareholders last year, we will again offer an elective dividend, and this is fully in line with our capital allocation priority which we outlined in London, in September during our Capital Markets Day. We are committed to maintain our A ratings, followed by our dividend policy, which with a proposal of EUR0.75 there above the higher end of our dividend payout bandwidth, and we will be doing this actually for the third year in the row.

Based on our cash in hand, even after considering the fact that we are about EUR1 billion of debt to reimburse in the first half of this year, we will still have enough cash available to make investment to ignite growth to take us towards our Vision 2015 objectives.

Finally, if there is still un-deployed cash we will consider to repurchase of shares.

After six very enriching years in Philips, where together with my colleagues on the Board, as well as members of the Philips family, we have been through one of the tough worst economic cycles in history. And I thought this was the appropriate moment for me to hand over responsibility to my successor.

I would like to say that, I take particularly pride in the fact that I leave this fine company in a knowledge that my successor as CFO, Ron Wirahadiraksa, comes from within Philips. It’s a sign of the quality of the team and also a clear sign of continuity. I want to sincerely thank all of you for your support and cooperation during this period.

With that, let me now open the line to your question, with Gerard Kleisterlee and myself, happy to answer your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). The first question comes from Mr. Mark Troman, Bank of America Merrill Lynch. Please go ahead, sir.

Mark Troman – Bank of America Merrill Lynch

Yes, good morning. It’s Mark Troman here from Bank of America.

Two questions or just one question, main question; on the Consumer Lifestyle, what specific actions should we expect from management to deal with, firstly, the clear TV problem which is being around for some time; and secondly, for I guess, the Audio/Visual and Multimedia areas and associated areas which are experiencing price pressure and price and volume pressure. Thank you.

Pierre-Jean Sivignon

Okay. I think the two subjects are of totally different nature, simply because of the bottom line. I think in the particular case of Television, you saw that in the latter part of Q4, we finally closed the deal in China, which is something that we are expected to close earlier in the quarter. This is actually following a deal which had been signed a couple of months before in India.

So I think what you will see in Television is that you’ve seen us moving in a variety of business models, basically changing this business for the better. And I think that we will continue to take actions along the palates of business model which are available to us to indeed come up to the commitments that we’ve taken with a view which is that Television will be a breakeven in 2011. I think that’s what I can say at this particular point of time.

I will precise as well that’s between 2010 and 2009, even though we didn’t deliver our promise to basically come up with a breakeven, we reduced significantly the losses between the two years. And, of course, we can within the guidance, even though it’s the low end of the guidance of the bottom line that we had indicated on the beginning of December.

I think if you look at Audio/Video, the situation is of a different nature, because, yes indeed there was a discussion or reference to growth. And there, there are product category which have shrunk, we have actually grown in other product categories, but this is a business which is contributing to the bottom line of Philips.

And I think it has been the case almost constantly, so there I think we are facing situations which is completely different from the one of Television, because I can tell you that in terms of EBITDA, we’ve been consistently profitable during the whole of 2010, and in the close of the fourth quarter of this particular year, these businesses came up with the mid-single-digit profitability. So I certainly wouldn’t put these two product categories in the same basket.

Mark Troman – Bank of America Merrill Lynch

Okay, thank you very much. And just one follow-up; in terms of the construction markets Pierre-Jean, you were highlighting the improvement in the US. What about European construction? Is that showing improvements too, or do you expect improvements there?

Pierre-Jean Sivignon

Well, I think if you look at professional luminaires, you basically – historically cycles have been that between the restocked in the US and the restocked in Europe, you’ve got an average of six months. Those cycle got a little bit confused in the last downturn. You were all I think well aware of the Architect Index, which is a US index, which did cross the famous threshold of 50, and that threshold was clearly crossed. I think we will have those graphs when we meet you on the road, but they are available on the website of this particular index of reference. And you will see the crossing in December was actually quite visible.

So we expect there a little bit of a tailwind to come normally six months later and hopefully in Europe not shortly thereafter, let’s say couple of months later, we should see if the trends of the past are confirmed, one more plant we should see some action a few months later in Europe. What we are seeing now a little bit up cycle is the emergence of a renovation market actually in the mature world, which is actually rendered possible by the efficiency created in idle businesses – excuse me – in idle buildings which encouraged some owners, I would say up-cycle to do some work in order to make those idle building a little bit more attractive.

Mark Troman – Bank of America Merrill Lynch

Thank you very much.

Operator

Your next question comes from Mr. Simon Smith from Credit Suisse. Please state your question, sir.

Simon Smith – Credit Suisse

Hi, thank you. Yes, I had two questions. The main question really following up on the discussion that Mark was having there. In terms of the consumer business, you’ve now got a TV business which has been a problem, so that’s been sort of 36% of your sales there, and I think the strategy there has been very clear. Now we are sort of talking about the Audio/Video area, as well as the accessories. And, I mean this now accounts for a further 23% of sales of that business. And, though, I know that combined with the DAP businesses have margins which have been profitable and respectable. Clearly, this business I presume is now no longer profitable. Should we be looking for the Audio/Video part of that market to now become a similar story to TV and will we be getting a significant restructuring program coming into deal with that, or is it something that’s more related to timing and we should be less concerned by? That will be first question.

My second question was in terms of emerging market growth, clearly the emerging market trends have been very important for driver of the Philips business. And looking at this course, you’ve got sort of negative 1% growth in emerging markets. And you highlight there is having been operational issues in Brazil as well as the TV business issues that we know about in China. Just wanted if you give us some clarity as to what problems you have faced there.

Pierre-Jean Sivignon

Yes, okay. On the consumer business, now I really want to flag that Audio and Accessories is a different ball game. Actually they are both profitable and have been almost consistently profitable not only this year, but actually the year before. So this is to say that those are businesses which basically not only did well in profitability this year, but they did well in profitability in the year before.

And in a particular case of accessories, which is a business, we’ve said we had given ourselves an objective to have them grow – excuse me – to have them profitability in high single if not low double digits. I can tell you that in the particular fourth quarter, accessories were in double-digit EBITDA percentages. And as I have just mentioned on the previous question in the case of Audio/Video we were at the mid-single. So I want to reiterate that those businesses definitely have a different profile from TV.

And if I add one more thing in the case of accessories, this is a business which had a blend which was essentially in the western world and this is a business that we are currently growing in the emerging markets, which is where it is currently under represented if you compare it to the other product categories of lifestyle. So clearly, please do not amalgamate Audio/Video Accessories with TV. I think on TV, with as you’ve said we’ve answered the question there.

On emerging markets, there is basically indeed a – there was a specific one of Brazil situation, mostly due to IT where we had to change some IT solution there, it’s time that we change our IT solution there. And we had one logistic issue with the unfortunate consolidation of our warehouses at the wrong time of the year. And these actually had an impact on about or I would say on two businesses and maybe or actually I should say even of three businesses were impacted, and this is something which we are working on and which should be sold by the end of the first quarter of 2011. So you can consider the Brazil situation from an execution point of view pretty much as a one-off. Nothing broken there.

Since you mentioned emerging markets, I would like to mention something which is of importance. I said it actually in the call, but I want to mention that the split of our emerging market has changed a little bit in nature in terms of its content versus the year before. If you look at the growths we’ve had in emerging markets for Philips for the full year, it is actually basically 14% for the full year.

But what is actually – obviously it’s carried by almost a similar number for the key emerging markets, which includes, of course, China, India, and Latin America. But I want to flag that we have now other territories, which I flagged in the introduction, Russia, Ukraine, Central Asia, I think Asean as well was the territory which should now represent a very substantial part of our growth. That is to say that our emerging market portfolio is now depending on much more than simply Brazil, India, and China, and that is something which, of course, gives us lots of comfort for the quarters to come.

Simon Smith – Credit Suisse

Pierre-Jean, could I ask a quick follow-up?

Pierre-Jean Sivignon

Sure.

Simon Smith – Credit Suisse

In terms of your comments about the Audio/Video and Accessories division, you gave the margins there is sort of being double digit for accessories and single digit for Audio/Video and that was for Q4. But are those businesses where you would have expected to have bump the margins in Q4? So do they have this sort of very strong Q4 seasonality or are there more sort of evenly distributed in terms of their margin through the year that that don’t have the same profile as TV?

Pierre-Jean Sivignon

No, they are actually – you’re right, they don’t have the same profile as TV story, clear TV has always a very strong Q4. These businesses that you were referring to accessories is a business which is much more, I would say, is something that addresses replacements more, and it’s a much more stable market through the year as far as Audio/Video, as well the seasonalities less severely marked than the one of Television.

So the margin that I actually referred to are margin that we have actually experienced through the year. So I wouldn’t in the case of those two product categories is not the one-off flash in the plant profitability in Q4. As I mentioned in my previous answer, basically the margin of those businesses were profitable all across the year. So it’s really a very different profile.

I’m just checking my numbers in front of me, but I can confirm that, Audio/Video and Accessories were absolutely profitable consistently through the whole of 2010 in the kind of territories which I mentioned for Q4. So no special one-off seasonality for the profitability of those two.

Simon Smith – Credit Suisse

Thank you very much. Thank you for your time.

Operator

Your next question comes from Andreas Willi from JP Morgan. Please state your question.

Andreas Willi – JP Morgan

Good morning, gentlemen. I have a question on the growth in Q4. You talked a lot about the different divisional drivers, maybe we could focus from a geographic perspective a bit on Europe, which maybe across the board, maybe you could give us some more information there on the – for the major countries where was the main issue and also Philips relative to the markets, have you lost market share in some categories or was also kind of how much – how many percentage points did maybe destocking impact your growth relative to the underlying market demand? Just to get a better feel on this European number which looks like one would expect in a recession, but not in the current environment.

Pierre-Jean Sivignon

Yes. Andreas – yes, good morning, first of all. Yes, let me try to do this business-by-business. I think, first of all, the overall context of Q4, what we saw in Q4 was a quarter which was doing actually, I would say, reasonably well until November. And we saw – and when we really looked at that, we saw in December, in particular for the consumer businesses which was a disappointment.

It was a disappointment from two angles. One, because, of course, as I mentioned that is where we missed three work days compared to the year before. So when you basically compare the two quarters QtoQ in terms of comps, obviously the 3% to 4% shortage of revenue coming from these three work days essentially was concentrated on that month of December. So that was one thing. Three work days less, that has a significant impact for us on the numbers.

The second thing was that, as I said the consumer sentiment in particular, in Europe, to some extent as well in the US didn’t obviously help, and there I think you could see that in our numbers.

The third element is that we saw some destocking and there I will give you some numbers. I think I did that at the end of Q3 on lighting and lifestyle, I will do it the same way at the end of this Q4. I have the destocking numbers in front of me. And what I can clearly see is that, in the course of Q4, there was destocking in the lighting channels and talking there about the professional channels.

And the good news was that it was a destocking meaning that of selling out to those – selling in from us for those guys was clearly negative. The good news was that when you look at the selling out of these channels with their own end market, it remained positive. So there was a destocking which impacted us in lighting.

And if you basically look at that as well in the domain of lifestyle, there as well there was some destocking. The number of channel is significantly more important, so it’s hard to be as specific as we are for lighting. But on top of that, I have to say, indeed in lifestyle as well, there was destocking. I think this is as much clarity I can give to you on the revenue lack of growth in particular in the consumer territories in the fourth quarter.

In terms of geographies, I think if you want to be even more granular, the territory which was probably the most impacted, I would say was Europe. North America did actually better, because if you look at America – North America all in despite the number of days announced, we were still slightly positive. And I think as we’ve said, the emerging markets were usually with the exception of Latin America did better. So I think if you add to strictly and solidly focus on geography, I would say probably the disappointing part was essentially Europe. And that was again subdued consumer sentiment in that part of the world.

Andreas Willi – JP Morgan

But any major differences between the different countries in Europe, or was it weak across the board?

Pierre-Jean Sivignon

No, there were – I mean they were countries more disappointing like others a bit, but then there we’re getting very granular. I mean Nordic, Netherlands, Belgium, I mean just to name countries, which were I would say probably more depressed than others. But on the other hand, you had some countries, it’s not – you had some countries which have done positive. And Eastern Europe actually it did bounce back, which after a couple of quarters which had been quite dull from a comp gross point of view. But all-in-all, Europe in total was probably the part which was the slowest from our own perspective in the fourth quarter.

Andreas Willi – JP Morgan

And as a follow-up on the restructuring savings in 2011, is there a ballpark number that you have in terms of what’s still to come from past actions taken?

Pierre-Jean Sivignon

Yes, actually, if you look at, or I think we have our customary document which is on page 34 on the website, where we’ve updated it as usual. And you’ve seen that we finished the year on EUR741 million of savings. And if you go to the appendices, which is slide number 80, you will see that in the fourth quarter, we finished the year with a run rate of EUR233 million, actually in terms of savings. So you can see that in terms of run rate we are actually in access of EUR800 million.

So what you will see in terms of additional savings, we have still in our balance sheet at the end of 2010, some provision which relates to plan which were announced and booked in the year 2010, and which have not been executed yet. So as we had actually promised to you, the two charts I referred to gives you the full analysis of the savings for the year quarter-by-quarter compared of course to the expense basis of 2008, and we have more to come on the basis of what is TV notebooks which I think is slightly short of EUR200 million of the remaining provisions still to be executed on in the quarters to come.

Andreas Willi – JP Morgan

Thank you very much.

Operator

Your next question comes from Mr. Martin Wilkie from Deutsche Bank. Please state your question.

Martin Wilkie – Deutsche Bank

Hi, good morning. It’s Martin Wilkie from Deutsche Bank. A question first on the Healthcare business and you talked about an excellent basis for growth going into 2011. And I think also your comments that the US and emerging markets grow at 2% to 4% is probably upbeat than you were looking at three or six months ago. So if you could just give us a little bit more detail behind what you are seeing in the growth outlook for the Healthcare business?

And then secondly, you referred to early on, cash flow that if there were no M&A opportunities, you might look at a buyback. If you can just give us sort of some sort of sense as to how long you would look for M&A before considering a buyback or just some thesis behind how you might make that decision? Thank you.

Pierre-Jean Sivignon

Yes, I think the Healthcare business – let me give you a bit of a flavor on, because your question was of course on the backlog and – then you zoomed a bit on North America.

I think on North America, we basically the incoming orders for equipment, there we had growth of 9%. So the 3% incoming order growth for equipment for the quarter at Philips level is made actually of 9% for North America.

So now you said –

Abhijit Bhattacharya

8% for North America.

Pierre-Jean Sivignon

Sorry, I’m told that’s – it’s 8%. So I correct the 9%, it’s actually 8%, but it’s still a respectable number. Basically does that make us more bullish on the growth for Healthcare in North America? No, I think the numbers that is mentioned in the tax is the number that we had referred to before.

The one thing which is factual is that the last three quarters of orders in North America have confirmed some pent-up demands. But you don’t want to get this out of proportion, because, of course, this is on the back of very weak comps, and the portfolio really started benefiting from the restart of orders since the second quarter of 2010. So those numbers are good numbers. We like them but they should be taken in the context of course of weak comps, since it’s only as I said in the second quarter of 2010, post the clarifying of the Obama Reform that we saw the market bouncing back.

I think the comfort on Healthcare is more a global one. As I said in the call, we have 9% growth of incoming orders for the whole of Philips, including of usually a very strong performance in the emerging markets, and we have all-in-all a backlog in absolute Euros which is about 10% north of what it was at the end of last year. And since you asked that question, we’ve added, but I’m sure you’ve seen it already the slide in the back where we’ve tried to indicate to you the reason at which this portfolio would actually be delivered. And I will let you take the time to look at that particular slide. I just like it, because it’s a new slide in the traditional pack.

Your other question was the question on the capital reallocation. Well, there we are very, very much sticking to what we’ve said in London. Rating, of course, remains of far more importance especially in these uncertain financial markets. Dividends, as you’ve seen, we come up with a proposal to our shareholders of EUR0.75. If you do your math, you will see that we have decided one more time consciously to exceed the payout policy. It will be north of the 50%, not very much, but still will be north of the 50% policy. As you know the payout policy there is the most generous of our peers, and despite that, we will be exceeding it. So I think total consistency on making dividends the top priority.

Of course, if there is M&A, which makes sense, we will be continuing to look at M&A. We’ve always looked at M&A, there is nothing new there. We will – we are and we’ll continue to look at things. And if there are opportunities, we’ll try to execute on them. And that’s why I flagged that the fact we are now at 11.7% right after basically two years, two years of leftover crisis and a very significant M&A wave which took place in the early part of 2008, that I think that is a proof points of – when we do those moves and we try to make them right.

And, indeed, if none of those – if that doesn’t use up of course, our capacity, we might actually indeed look after buybacks. And that’s totally in the sequencing and the order of the priority of the way we presented it in London, basically three months ago. So complete consistency there.

Martin Wilkie – Deutsche Bank

Okay, thank you.

Operator

The next question comes from Gaël de Bray from SG. Please go ahead.

Gaël de Bray – SG

Yes, thank you very much. Good morning, everyone. My first question is related to the Consumer Lifestyle business, ex-TVs. I mean, given the rather muted growth in consumer markets right now and also the likely negative effect coming from additional portfolio pruning in the Audio/Video sub segment. Do you still expect Consumer Lifestyle ex-TVs to grow positively in 2011, I mean in line with GDP as you referred lately back in September?

And the second question is about the TV business. This time, you said that actions to reduce TV inventories in the channel would be completed in Q1, but the first question is did you still have yourself accept inventory at your end? And the second question obviously is, maybe could you help us on the short-term profit outlook for TVs. Should we – shall we expect similar operating losses in Q4 or maybe even deeper operating losses there?

And the final question is related to Healthcare. You took some restructuring provisions back up again in Q4, you did so already in Q3, does that – what does that mean exactly? Does it mean you saw lower restructuring opportunities than at the beginning of 2010 or does it reflect a greater confidence on the growth outlook now?

Pierre-Jean Sivignon

Okay, that’s a lot of question, I’ll try to take them. I think the first one is, do we see Consumer Lifestyle growing in 2011? Absolutely. Actually one of the things that we haven’t talked about, which I didn’t want to flag, but we have invested significantly in selling expenses in the fourth quarter.

You’ve asked questions actually on the margin in Q4. Basically one of the thing I didn’t mention is that, and I won’t give you that number, but just be aware that in the bottom line of Q4, there were significant investments in selling expenses, and that is obviously not only something which is important for the growth of that business for the quarters to come, but it is as well a sign of confidence that that growth will stay, if not we would not be spending that money. So the answer is yes, we expect lifestyle to grow, and there is absolutely no change in terms of guidance there.

Emerging markets will grow, new product categories will be extended, and you probably saw that we announced a very important acquisition this morning, which is going to actually add to our portfolio in India, in the domain of appliances. And if I may want to add a little bit on this, the other very important announcement this morning is that, we confirmed that the management of that appliance product category would be now done out of Asia. So you can see that there are lots of elements which are basically heading towards the same direction.

The – your next question related to TV and TV inventory, we have reduced TV inventory in the course of the fourth quarter. It was actually a substantial reduction, but not enough to uptake. So we have too much inventory to uptake at the end of Q4. The answer is yes, we do. And our plan as indicated in the outlook paragraph of the lifestyle section of our press release is to take care of it in the early part of that first quarter. Could that mean that the TV business would be in a loss position in the first quarter? The answer is probably, because it’s actually important for us to basically take care of that inventory and we want to be done with this at the end of the first quarter.

To give you a number, I will not, but I think the important thing is to just to make sure that we guide you on the fact that we will continue to take actions there in terms of taking care of that inventory.

Your last question was on the restructuring and I see, if I understand correctly you asked.

Gaël de Bray – SG

Healthcare Positive restructuring.

Pierre-Jean Sivignon

Yes, the – sorry before I go into the overall restructuring you mentioned, positive restructuring in Healthcare. No I think basically those are – there is no change in our plans in terms of restructuring in Healthcare. The restructuring which was meant to be there was quite minor anyway. If I answer more broadly, the restructuring at the group level, we all in all spent less money than we had guided you on. Does that mean that we are more bullish on next year? No, I think our sentiment about next year has not really changed. I think what has happened is that we have some projects that we thought we could execute in the fourth quarter which probably might be delayed by one quarter because in this particular situations you cannot always deliver on projects, exactly the quarter you had planned. So I think on restructuring next year, A, you will continue to see lower numbers year-over-year but B, we will up liking them as such because as you know maybe we will report next year will be on a reported basis and not any more in adjusted basis and that’s the reason why we’ll talk less about restructuring.

So no real change from restructuring point of view and the savings that we had announced and guided you on haven’t changed either. And I’ll detail in the two areas which I’ve referred to already.

Gaël de Bray – SG

OK. Thank you very much.

Operator

Your next question comes from Mr. Ben Uglow from Morgan Stanley. Please state your question with a maximum of one follow-up. This will give more people the opportunity to ask questions. Please go ahead.

Ben Uglow – Morgan Stanley

Yes, good morning. I have two questions. The first was sorry to lay to the point, I know it’s been gone over already, but within Consumer Lifestyle your margin X-Series [ph] has gone from 16% to 12% year-over-year. Of that four percentage points decline is there any part of that relating to DAP, Personal Care, Health & Wellness. So I guess, my question is the impression I have is that this is all interrelated [ph] to audio visual and accessories. Are you saying that in case or is any part related to those other businesses in terms of the margin decline, not the volume. And the second question is just on timing of recovery in Healthcare. You wanted it to some extent to mark this question, but we have four quarters now all the growth 20%, 7%, 7% then 3%. My question is when should we begin to expect this pickup in the revenue? I would like to see the revenues in the first half of this year should be going at a mid-single digit rate. Is that the case?

Pierre-Jean Sivignon

OK. I think on CL, we flagged it, we normally do not disclose the number of licenses, you know the income of licenses. I think we had if you go back to our communication in previous quarters, we had flagged that both Q1 and Q2 had been rich in license income in terms of the mix between the first half and second half. So in order to be even more crystal clear, if you look at the release on page nine for this quarter, you will see that we flagged that we had a EUR31 million lower license income in the fourth quarter of 2010 versus 2009.

And if you can – and I think now you have all the ingredients to back out TV and licenses and you could even recalculate, I gave you some comfort on the margins of Audio/Video and Accessories, you could almost calculate backward the margins of the – what you call the DAP portfolio.

Ben Uglow – Morgan Stanley

Right.

Pierre-Jean Sivignon

And you will see that it’s absolutely business as usual. And that we are clearly on the right track and there is nothing change there. And I would say in a quarter and I insist on this where we’ve invested significantly in setting expenses to prepare for future growth. So the short answer to your question is there is nothing broken at all in the margin model of the categories that you are actually referred to, right. And if I may say in terms there is one category which actually grew up which is appliances, I mean appliances had less growth you could say in that fourth quarter than due to the fact that in mature markets was actually a bit of an offset, with very nice growth we had in appliances in the emerging world. But I can say you that we had nice progression of the margin of appliances in the fourth quarter.

So I think this is to give you comfort on the margin of Lifestyle or in the model of Lifestyle which I think was more of your question.

Ben Uglow – Morgan Stanley

Correct.

Pierre-Jean Sivignon

You’ve asked now a question on Healthcare. Healthcare will see some indeed re-bouncing of its growth. I want to flag on the fourth quarter where that – because of course you might think that the number of work days didn’t have an impact on Healthcare, but I will just give you one extra detail. Our customer service business is built by the days. So when you have three work days less in a particular quarter as it has happened in Q4 2010 versus Q4 ‘09, you can see that that had actually a significant impact on the service business which is representing actually more than 25% of the revenue of Lifestyle. And the fact we had less work days as well, excuse me, in Healthcare and the fact that we had less work days as well did impact as well installation for the rest of the Healthcare business.

We’ve actually added one slide which is in the pack, I have already referred to it but I don’t know which number that is maybe if you’re – which is the page? That is page number, page 53, if you go to page 53 of your books, the appendixes you will see that we’ve tried to help you to model. And this is a slide which hopefully we’ve created it as a result of the repetitive question you just – which is totally justified that you’ve raised on the fact that how come we have so strong orders and why is it that we don’t see it yet in the revenue growth. And I think the answer is that that growth will come back first of all and second of all, the backlog is a bit of a different nature. It’s coming, its benefiting from the fact that we have no more multiyear order that we had before which of course is good news and bad news.

Its good news because it gives much more stability and resilience to our backlog and its bad news because of course it takes a little bit more time as an average to deliver than the backlogs that we had before. I think the first thing I will say which you don’t see on that slide is that in terms of geographic spread, it’s a backlog which is much more evenly spread between U.S., Europe and emerging markets than it was before. So from a geographic exposure point of view, it’s a much more evenly spread portfolio as well to have. And that gives us comfort there as well.

Ben Uglow – Morgan Stanley

But for instance [ph] as you’ll referred, based on that analysis with a 9% order intake last year and based on what you see, do you believe that we should be trending towards the – not necessary the upper end of that but we should certainly be in the mid-single digit rate of growth fairly quickly rather than 2%?

Pierre-Jean Sivignon

I think this is a good number, I think this is a good number to use for the year, and it will I think we will get there progressively. I think the chances are that the year 2011 might be a year a bit reversed from the year 2010, i.e., a bit more back-ended versus very strong front-ended year that we had in 2010. But your run rate for Healthcare, yes I think that you should expect that.

Ben Uglow – Morgan Stanley

Thank you.

Operator

Your next question comes from Ilan Chaitowitz from Redburn Partner. Please state your question with a maximum of one follow-up. Thank you.

Ilan Chaitowitz – Redburn Partner

Good morning. Thanks for taking the questions, just two from me. Firstly, with regard to your healthcare business in the U.S., can you please give us any indication of first impact of meaningful use legislation on your top line and business mix? That’s the first question.

Pierre-Jean Sivignon

Sorry, can you repeat that, I didn’t get it.

Ilan Chaitowitz – Redburn Partner

Yes, I was just hoping you could give us an insight into any first impact of meaningful use legislation in the U.S. on your top line or orders and business mix?

Pierre-Jean Sivignon

Sorry, can you explain what is uses legislation?

Ilan Chaitowitz – Redburn Partner

Meaningful use legislation as I understand it is Obama Healthcare Reform specifically incentivizing IT upgrades of the entire healthcare infrastructure which is at least the indication that (inaudible) is that its driving very robust demand for the software upgrades. And I was wondering if you were starting to see that in your U.S. healthcare business?

Pierre-Jean Sivignon

No, I think what we’ve seen is indeed increasing importance of IT but that as you know not a business which is really – we are very strong in clinical IT and we see that business which will continue to grow. I think as far as IT in terms of ERP and medical file, that’s not businesses that we are really in and we don’t really plan to be in. So I think that’s the best answer I can give to you. Now if you refer to IT and by that you mean efficiency, we see indeed increasing aspiration for efficiency for the clinicians. And we have certain number of solution in our service portfolio which will basically work at improving the efficiency of clinicians, in particular at improving the throughputs of products. And in that domain, yes, we do have in our portfolio certain number of things to offer and that is benefiting indeed our service business. I can’t be much more specific on IT, I am afraid.

Ilan Chaitowitz – Redburn Partner

Thank you. And just a follow-up question was on general healthcare capital equipment pricing. There were indications at the end of last year that pricing was firm. And can you please comment on pricing in the U.S., Europe and emerging markets?

Pierre-Jean Sivignon

No, I think pricing has nothing to report. Basically the pricing, the numbers we’ve used in the past we’ve mentioned 3% to 4% of pricing pressure that’s the number we’ve used for now, the number of years we don’t see any change to this. I think the good news about the RSNA [ph] and certainly as far as affinity is concerned is that we have introduced a number of new products. And we got positive feedbacks on those products. I am not going to go into those details that we have detailed by a couple of in that reports and flagged as real breakthrough in a couple of domains. And we take comforts from that improved portfolio looking at the orders into the quarters forward.

Ilan Chaitowitz – Redburn Partner

Thank you very much.

Operator

Your next question…

Pierre-Jean Sivignon

Yes, if I may add to this because you’re talking about pricing in emerging markets, I think I want to reemphasize what we’ve said on emerging markets in the domain of China where we got some steady growth in the domain of monitoring from the company that we bought in China three years ago. And I gave in my introduction those percentages in terms of comp growth [ph] for that business. So you could see that the growth now is not only coming from mature but it is well coming from the portfolio that we have acquired in the emerging markets.

Operator

Thank you. Your next question comes from the Olivier Esnou from Exane. Please state your question with a maximum of one follow-up.

Olivier Esnou – Exane BNP Paribas

Yes, good morning. Maybe I’d like to come back again on headcount growth. If I look at my notes, I think you were shooting for mid-single digit growth this year in Healthcare and I mean your 3.9%. So it’s slightly maybe on the lower end. I appreciate you said that there are less working days. But is there anything that maybe surprised you in the Q4 performance of Healthcare negatively. And as a part of this question could you disclose the service business growth in Q4 in Healthcare? Maybe the second question is on the consumer business. Can you disclose the sort of pro forma performance of TV, if we actually take into account the licensing deal that you’ve done? What would have been the performance in 2010 if these deals had been done? Thank you.

Pierre-Jean Sivignon

Yes. I think on Healthcare, we had to say around mid-single digit, right. I think we are at four, that’s not too far off. Now you ask me why do we have – did we have anything special in Healthcare in Q4? Yes, I think in Brazil, we missed probably a couple of tens of millions of revenue we would like to have. And that was part of this logistic issue that I referred to. So I mean it’s not big but since you really ask me was there anything on top, we would have liked to get or we should have got actually in Healthcare in Q4, I would say some extra money in Brazil in the fourth quarter.

And that probably would have helped to breath with your – the number you were expecting for the growth, for the comp growth for the sector for the year 2010. In terms of the growth of the service business, I’m afraid I will disappoint you because we normally do not disclose those numbers. What I can tell you is that the service business grew quite nicely through the year. And if anything we continue as you know on the back of new sockets [ph] in the emerging markets, we continued to have very strong growth of services in emerging markets. But I usually do not disclose that number. And I don’t plan to start doing it today. But don’t – no anomalies there. If anything confirmation that the service business continues to grow nicely on the back of the new sockets in the emerging world.

I think your last question was on TV and if I understand correctly your question, you asked what would have been the loss of TV if we had been capable of having all two – actually or three brand licensing agreement fully up and running for the year?

Olivier Esnou – Exane BNP Paribas

Yes.

Pierre-Jean Sivignon

Is that the third question?

Olivier Esnou – Exane BNP Paribas

Yes, that’s the question.

Pierre-Jean Sivignon

Yes. Well I would say that the loss probably would have been cut by almost close to half I would say, a third to a half of the loss of 2010 would have disappeared if we had China and India up and running for the fall of 2010. I think that’s the best answer I can give you.

Olivier Esnou – Exane BNP Paribas

OK, thank you very much.

Pierre-Jean Sivignon

Yes, of course but if maybe a bit better than that because of course I would have to include the incoming license revenue. Yes, I am giving you maybe something a bit conservative because I can’t simulate what would have been the license income coming from the revenue bit difficult. Take this as a bit of a conservative number from that perspective because I can’t simulate from the top of my mind the license income. So it’s probably more half or bit better than half than a third. I think that’s probably a better answer.

Olivier Esnou – Exane BNP Paribas

All right. Thanks.

Operator

Your next question comes from Martin Prozesky from Bernstein. Please state your questions with a maximum of one follow-up.

Martin Prozesky – Sanford Bernstein

Good morning gentlemen, I’ve got a – I want to get back to the healthcare orders please. From the numbers that you’ve provided the 3% organic, very strong U.S., very strong emerging market. It seems like the European orders or Japanese orders were very weak in Q4. Can you just comment on whether that’s related to the seasonal effect or is there something more structural going on there please?

Pierre-Jean Sivignon

Well I think the international I mean, let me try to – emerging we’ve covered, right?

Martin Prozesky – Sanford Bernstein

Yes.

Pierre-Jean Sivignon

I think if you – North America we’ve covered, the rest is usually a long list of countries and there you have a very, very mixed bag. And if you go even more granular, you have if you look back at the year. Yes, some of the countries in Europe were slow. And I think that is something that we have seen as well in the previous quarters. Some other countries were stronger but all in all indeed Europe was actually weak in terms of orders in the fourth quarter. I think that’s a fair comment.

Martin Prozesky – Sanford Bernstein

And is that something that you see changing? Is it just seasonal or do you think there is something else going on there, should and also your [ph] expectations for ‘011?

Pierre-Jean Sivignon

I think it is – you should not say that to trend for two reasons, actually for three reasons. First of all you have to realize that in Europe if you look at it, it’s about half-half, half private, half public. So you have about 50% of the customers would depend on the public Healthcare spending, the other half is private. So that’s one thing we’ve seen and that doesn’t help obviously to plan. The second thing is we’ve seen increasingly it’s been very much the case in particular in Spain for instance. We’ve seen increasingly deals. And if you get – it’s happening as well, now I think increasingly in the Netherlands to take another country where instead of buying by modality you now buy all the modalities together and at times you buy all the modality together for more than one hospital.

That trend is starting to emerge in Europe and that creates real lumpiness in orders. So that is making it of course a bit difficult. As I said the best example of this year in 2010 was certainly Spain. And thirdly, of course there is obviously the impact of innovation, and if you look for instance in a particular case we have introduced some very new products. And I mean it’s a long list I promised that I would not mention it but since you come back to it, I will now mention it. We’ve introduced new monitors which has been absolutely highlighted as absolutely innovative and I’ll send you to a websites, lot of new products including wireless monitors which obviously very, very new things.

And lots of innovation in (inaudible). If you look at there, we’ve come up with new products which I think clearly recognized by the market as state of the art and bringing something new in a category where we were considered until today as being little bit behind the curve. So those obviously products were expected by some of our customers and are now in our portfolio. And we expect that they will have an impact including in Europe on the orders to come for the coming quarters.

Martin Prozesky – Sanford Bernstein

Thank you. And then on my follow-up on lighting and the growth mix there. You commented that consumer segments were pretty week. Is that also a European issue or working days related because it doesn’t seem as if the LED growth and the controls growth offset that weakness? Was that just a – in fact that we’re seeing consumers switching to other lamp types or what else is going in the lighting growth mix?

Pierre-Jean Sivignon

No, I think there obviously lamps you’re really and we saw it – we are really, really – I hate to use that because it sounds like an excuse but we’ve studied it obviously with great attention. This is a business which was really directly impacted by the number of days because when we saw October, November, lighting did very well actually. And all of a sudden in that one particular week of December where we ended up with less work days. We’re clearly see some something there happening. So lighting I think is clearly a work days matter. And this seems to be confirmed by something else I already referred to in that call when I referred to the difference between the selling-in and selling-out. And there I will move more to the professional side of lighting in particular lamps and Luminaires but where we are tracking these very, very carefully on the month to month basis.

And you clearly see that are selling into those channels really went down in December whereas those channel themselves continued to have a selling out which did reasonably well in December. So I would say that lighting for the categories which indeed suffered in Q4, this was very much a December affair on the back of two things, destocking which explained the difference between selling-in and selling-out as well as three working days less which if you do the math counts for literally like-for-like 4% of revenue, that’s four percentage point on the quarter. And if you were to calculate that on the month of December as you can see that’s a pretty significant impact on December standalone.

Operator

Your next question comes from Christel Monot. Please state your question with a maximum of one follow-up from UBS.

Christel Monot – UBS

Yes, hi good morning gentlemen. It’s Christel from UBS. Thank you for taking my questions. So I am coming back to Consumer Lifestyle. Basically you’re saying that the margin was inline, I mean we didn’t there was not a volatility during the year in accessories, I mean Audio/Video. And there was some lower – there was some impact from obviously TV and/or licensees in Q4. But what’s your thinking about DAP and you’re saying it’s no more business there, but I mean just things as must, I end up with a lower margin in DAP than what happened in Q4 last year. So I was wondering you know, you are saying business as usual but I mean surely the margin should have been better there. So I am wondering whether one, this is coming from prices or second, it may come from higher selling expenses and promotion. And if that’s the case, how should we think about next year? Will the higher selling expenses and promotion impact the margin next year basically? So that’s the first question. And second question quickly on licenses, you’re giving the guidance for the licenses that we should see in the first quarter of next year but can you help us have a seeing for what we should expect for the entire of 2011? Thank you.

Pierre-Jean Sivignon

Yes, I think I did the math I would have to maybe do that offline with you so that we make sure we absolutely are true because we need to be. If you look at the margin for each of the other product categories, clearly the numbers are pretty much inline. I think what adds up indeed is that we have spent beyond DAP. We have spent across product categories but in particular in that product categories higher selling expenses. But even including that I don’t think the margin are that different. I will sit down next to you to do those math but I don’t think they are – once you’ve taken care of the TV things and once you’ve taken care of the lower license income, I don’t think the margin are that different but let’s do the math next to each other and because there is no change in the model. There was indeed higher selling expenses but that’s something which is customary to Q4.

There might have been a touch higher in that fourth quarter but certainly no change in the model and no expected change in the model for next year in the profitability of Lifestyle. I think I want to give you comfort there. Your second question if I may was related to licenses. And if I understand correctly it was related to licenses for the Halo [ph] Philips, I think the licenses for the year 2010 were north of the license – we don’t give a number as you know we’ve stopped giving you an overall number. We’ve said that this would edge down. Actually in 2010, we got a number which was lower than 2008 but which was still north of 2009. We expect the number of 2011 in a lumpy way to be south of the number of 2010. So we should see a trend where we continue to edge down. And in terms of seasonality, we’ll try to guide you as much as we can and you’ve seen that in the outlook of Q4 for Lifestyle. We’ve given you a specific guidance there and we’ll try to help you Q-to-Q on as relevant basis as possible for license income.

This being said, that’s for Lifestyle. You will see incoming orders – you’ll see incoming license on two fronts in increase A, on the brand licensing of course of TV and secondly, gradually and slowly on the IP license income at lighting on the back of the solid state lighting of course technology moving in.

Operator

Your next question comes from Matt Williams from HSBC. Please state only question due to the time.

Matt Williams – HSBC

Good morning everybody. It’s Matt Williams from HSBC. Can we please talk about the pricing environment in lighting specifically on LED and what you’re seeing there, and at the same time can you comment on what you see pricing for TV going forward because obviously you mentioned that you expect to reduce TV inventories in the channel by the end of Q1 2011? And what you think the pricing, what kind of pricing measures you’re going to have to take there? So general pricing questions please.

Pierre-Jean Sivignon

Yes, I think on pricing on the lighting, no particular comments to make. Actually if you look at the margin at lighting, you’ll see that we have good progress versus the year before. I think the margin there is a clear indication that the pricing is actually holding. The pricing for TV, I did mentioned indeed in the comment and you will see it in the press release that we will have to continue in the early part of Q1 to take care of the inventories. So there will be pricing pressure in the first quarter. And then you enter the second quarter where new portfolio and new products – new generation of products comes in and hopefully that’s when obviously the pricing pressure, thanks to the newly introduced products can be obviously handled little bit better.

So I would say continued pressure on pricing in the Q1 on the back of the inventory and beyond that new products coming in helping to face that pressure.

Operator

The next question comes from Marcel Achterberg from Petercam. Please state just one question due to the time.

Marcel Achterberg – Petercam

Yes, thanks for taking my question. Just one thing that hasn’t been touched upon which has been mentioned in several conference calls by the retail channel. And reason to be said that most in Q4 when quite a strong impact of the weather conditions in both Europe and in North America. If that’s something that if you could – you’ve seen and can quantify what the impact on the top line growth has been?

Pierre-Jean Sivignon

Yes, I think Marcel, I didn’t want to use that because obviously then you look like you’re using excuses but since you’ve mentioned it I will refer to it. It has had an impact in – we saw it in Europe, definitely on the Lifestyle side when we studied our statistics in the later part of December. We absolutely saw an impact coming from the fact that people simply couldn’t shop. And if you read all the press releases which has been done by retail chain, you will see that the number of them have actually referred to it. But there is another territory where it has impacted us. And I didn’t want to mention it but I will now it’s on Healthcare, I think somebody asked me in an earlier questions could we have seen more growth in Healthcare in the fourth quarter? I did mentioned Brazil but in North America since you have mentioned specifically Healthcare North America but as well in Europe, you probably all remember how difficult the last two weeks of December were which is the most active period for us in terms of installations.

We did indeed have a couple of sites where we simply could not get to the site for weather conditions. So the good news is that of course also sites will be delivered in January but that has impacted indeed to some extent our Healthcare business as well as our Lifestyle businesses in the later part of December.

Operator

Your next question comes from Victor Bareño from SNS Securities. Please only state one question.

Victor Bareño – SNS Securities

Yes, thank you. You earlier talked about market growth of 7% to 9% with the lighting market in the mid-term. Would it also be a reasonable estimate for this year or is it likely to be a bit lower in view of the slowing trend at the end of last year?

Pierre-Jean Sivignon

So we haven’t given any yearly guidance. And I will not give you any. We’ve given a guidance as part of vision 2015 and we will speak to those guidance. I think but I will react to the slowing of the – what you refer as a slowing of the lighting business. I think again two things, the lighting business was severely impacted by the number of work days. You do realized that the significant portion of lighting goes by our channels and those channel were simply available less work days. I will mention as far as the margin of lighting is concerned that if you go back to our press release of Q1, we talked about a EUR15 million over absorption of fixed cost. I didn’t want to mention it but you do realize that in reverse, we add in that fourth quarter a EUR15 million accordingly under absorption of fixed costs. So that is something that you have to take into consideration for the margin of lighting in that fourth quarter.

And last but not least, I think the important thing beyond the number of work days is as far as next year is concerned, do keep in mind that one business is still in very, very low level of territory and that business is Professional Luminaires. Professional Luminaires for two quarters in a row is in low-single digit positive territory but that the steel [ph] business which is significantly lower to its absolute level pre-crisis. And we’ve talked about the Architect [ph] Index in the U.S., I won’t come back to those answers but we expect that activity to bounce back in the later part of 2011. And when that happens obviously this will be a significant addition to the growth rates of lighting. Keep in mind that Prof Lum is a very substantial part of lighting.

Operator

Your next question comes from Peter Olofsen from Kepler Capital Markets. Please limit yourself to one question.

Peter Olofsen – Kepler Capital Markets

Yes, good morning. Question regarding the lighting. You clearly mentioned the impacts of destocking and the number of working days. But when listening to some of your peers in LED last week some disappointing news regarding the situation in China impacted by the (inaudible) in spending on street lighting. And when looking at luminaires and lighting controls, some companies have mentioned difficulty in sourcing components. To what extent have these factors impacted lighting sales in Q4?

Pierre-Jean Sivignon

Yes, I think I gave you in the introduction the growth rates of our LED business. I think there is obviously those percentages were a bit less impressive than in the early part of the year, but it’s simply for the fact that the comps had become during the year increasingly difficult, right, more difficult. And I am talking about the LED business specifically. But we not really seeing a slowing of the interest for LEDs. If anything we see an increase of the interest for LEDs which has been right until today largely an emerging market that far but we start now seeing interest in mature markets and we think that this will play role in the rebound of the Prof Lum business in particular on the side of renovation.

Now you’ve talked about the availability of components that is true, there has been here and there difficultly to supply components which might have an impact. But I wouldn’t say that it was of real significance to the growth of our LED business in the fourth quarter of 2010.

Peter Olofsen – Kepler Capital Markets

OK, thank you.

Operator

Your final question comes from Mr. William Mackie from Berenberg Bank [ph]. Please go ahead.

William MackieBerenberg Bank

Good morning gentlemen. Thank you for taking the questions. Again...

Pierre-Jean Sivignon

Hello?

Operator

Hello, Mr. Mackie, please go ahead.

William MackieBerenberg Bank

Hello, good morning. Can you hear me?

Pierre-Jean Sivignon

Yes, we can hear you now. You got cutoff for whatever reason. We can hear you now.

William MackieBerenberg Bank

Thank you very much for taking the question. It’s Will Mackie at Berenberg. The question relates to lighting, again and specifically with regard to the LED associated sales. First of all, could you give us a little more color on the contribution of lumileds to the 14% of divisional sales in Q4? And the proportion which is LED related professional lighting. And more importantly looking forward for the coming three to five years, will – should we anticipate an improving mix in the profitability as that portion of the business grows, i.e., are you seeing a much better mix coming through from your LED related business as opposed to your traditional lamps activities?

Pierre-Jean Sivignon

Yes. I think the growth of the LED related business I gave you in my introduction, so that number you have. Your second question was the profitability of lumiled. The profitability of lumiled actually in the fourth quarter of this year was basically very good. It was just impacted by one off which was linked to the repricing of options, so there was a technicality I won’t go into which had nothing to do with the business but which was in the bottom line. But excluding that one off lumiled had I would say the regular profitability we expect from lumiled in the fourth quarter. So nothing to report from the profitability and goal as far as lumiled is concerned.

Your next question was, shall I give you the split between general illumination and OEM application from lumiled. No, which nobody has split that we don’t give. I think what we’ve indicated in the past is that we continuously work at improving that mix and I think this is happening by actually trying to get more and more general illumination mix in the revenue of lumiled versus what we call OEM application. But it’s a mix that we’ve referred to in the past at something around 50/50. And we try to be more and more on the right side of the 50/50 for general illumination but we’ve never given that mix quarter but quarter, but we continue to make progress there and I will leave it at that. We don’t disclose that mix on a Q-to-Q basis.

And finally you asked what was lumiled as part of the total LED related sales at Philips. And the answer is 50%.

William MackieBerenberg Bank

Thank you very much.

Operator

Thank you Mr. Sivignon and Mr. Kleisterlee. That was your final question. Please continue with any further points you wish to make.

Pierre-Jean Sivignon

No, I think we would like to thank you Gerard and myself for your time, your attention and your questions. And we will meet a number of you on the road in the coming four days. See you then. Good bye.

Operator

This concludes the Royal Philips Electronics Fourth Quarter and Annual Results 2010 Conference call on Monday the 24th of January 2011. Thank you for participating. You may now disconnect.

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