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

Q2 2011 Earnings Conference Call

July 18, 2011 4:00 AM EST

Executives

Abhijit Bhattacharya – Head, IR

Frans van Houten – President and CEO

Ron Wirahadiraksa – CFO

Analysts

Andreas Willi – JPMorgan

Simon Smith – Credit Suisse

Martin Wilkie – Deutsche Bank

Ben Uglow – Morgan Stanley

Gaël de-Bray – Société Générale

Ilan Chaitowitz – Redburn Partners

Olivier Esnou – Exane BNP Paribas

Sjoerd Ummels – ING

Ludovic Debailleux – Natixis Securities

Christel Monot – UBS

Marcel Achterberg – Petercam

Martin Prozesky – Bernstein

William Mackie – Berenberg Bank

Andrew Carter – RBC

Operator

Welcome to the Royal Philips Electronics Second Quarter Results 2011 Conference Call on Monday, 18th of July, 2011. During the introduction hosted by Mr. Frans van Houten, President and CEO; and Mr. Ron Wirahadiraksa, 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, Head of Investor Relations. Please go ahead, sir.

Abhijit Bhattacharya

Good morning, ladies and gentlemen. Welcome to this conference call on the second quarter results for 2011 for Royal Philips Electronics.

I am here with Philips CEO, Frans van Houten; and our CFO, Ron Wirahadiraksa. In a moment Frans will take you through his introductory remarks and provide an update on our performance. Ron will then shed more light on the details of the financial performance during the quarter. Frans will then return to provide an important insight into our actions to improve our performance and share with you the midterm target that Philips will aim to deliver by 2013. After this, both Frans and Ron will be happy to take your questions.

As usual, our press release and the accompanying information slide decks were published at 7:00 AM CET this morning. Both documents are now available for download from our Investor Relations website. We will also make available a full transcript of this conference call on the Investor Relations website by tomorrow at the latest.

With that, let me hand you over to Frans to start proceedings for the day.

Frans van Houten

Yes, thanks, Abhijit. Good morning to you all and welcome. It has been a quite eventful three months since assuming the CEO position of Philips. I have been working with my team on improving execution and performance across our sectors. We have gone actually deep and been hands-on in our approach. In spite of operational challenges we see in some of our businesses, I am confident that Philips has the potential for profitable growth. We have initiated already several concrete actions to improve our performance, particularly in our Consumer Lifestyle and Lighting businesses. Healthcare is on a good performance path already. Taken together, our actions will put us on a solid growth trajectory over the next two years.

Today, we also announced new midterm targets that we aim to achieve by 2013, as we are determined to hold ourselves accountable to improve execution and get results quickly. We had originally planned to announce these targets in October this year that we have accelerated our review process and are ready to make these announcement now. The midterm targets for the Group are 4% to 6% comparable growth, assuming a real GDP growth of 3% to 4%; 10% to 12% EBITDA margins; and 12% to 14% return on the invested capital. I am convinced that Philips has the potential to deliver on these targets.

As I am sure you have seen in our press release issued earlier this morning, Philips delivered 4% sales growth for the Group and earnings before interest, tax and amortization of EUR370 million. This is was impacted by investments for growth, operational issues, weak market conditions, and of course a significant impairment. Still our sector performance in the second quarter demonstrates the underlying strengths of our businesses. Healthcare achieved robust growth of 8%, exceeding expectations, while sales at Consumer Lifestyle declined 2% on a comparable basis. In fact, all businesses except Lifestyle Entertainment grew in aggregate at a low double-digit rate. Lighting grew 4% over the previous year, with lead based sales up a strong 21%, while traditional lighting was impacted by a shifting mix, raw material price increases and weaker consumer demand.

We posted a loss of EUR1.3 billion in Q2 as a result of a goodwill impairment charge of EUR1.4 billion, which we took following our annual impairment review. We had to take into account a realistic assessment of the future cash flows of our past acquisitions in a sluggish post crisis environment. Also in the second quarter, we launched a comprehensive performance improvement and change management called Accelerate, which we are implementing to speed our trajectory to more profitable growth. One of the key components of this program is a EUR500 million cost reduction, aimed at cutting overhead cost and making our organization faster and more agile.

Overall, we see uncertainty in the near-term economic environment. And, while we are dealing with performance issues in some of our businesses, our portfolio remains strong. The large majority of our businesses have the right fundamentals for a long-term profitable organic growth. We are well positioned in highly attractive markets and geographies with the right business mix to capitalize in global trends. And, in our businesses that are facing difficult market or operational challenges, we are taking immediate action to improve performance and put ourselves on a better trajectory.

Already in the second quarter we have taken concrete actions to improve performance. I will get into more detail on these actions later in the presentation. But we are rolling out now the new Philips Business System, which includes granular performance management, a leaner operating model, and a strengthened executive leadership team. We are launching a share buyback program and have to deliver or inventory reduction programs to address the efficiency of our balance sheet and use our capital in a disciplined way. We have largely mitigated the impact of the Japan tragedy, neutralizing the supply availability and revenue impacts. We are working hard on executing our TV plan, progressing on a tight schedule for signing the deal by the end of Q3 and closing in Q4.

We have also stepped up targeted investments in market penetration and innovation in the second quarter to accelerate growth with about half of the investments included now in the run rate. We have developed a focus plan for increasing value delivery from each acquisition. We launched a specific program to read out complexity in our organization and take out the EUR500 million of unnecessary cost, 50% of those savings coming in 2011-2012, and the rest in the timeframe 2013-2014. We are taking the necessary steps to improve performance at Lighting and Consumer Lifestyle in the short-term, which includes passing on increases in raw material cost to the market, and developing a turnaround plan for Professional Luminaires and Lifestyle Entertainment, and adjusting spending in line with market response.

Now, I know I covered just now a lot of ground relatively quickly. So before I hand you over to Ron, I just want to underline that we know that there are operational issues in our businesses, we have a good handle on these now, and we know exactly what we need to do in order to correct them. As you can see, we have taken a comprehensive approach to improving performance and I am looking forward to giving you more detail on some of these initiatives after Ron talks through our financial performance in the second quarter.

And, with that, Ron, I will turn it over to you.

Ron Wirahadiraksa

Thank you, Frans. Good morning and welcome to all of you on the call. I will begin by giving you some color on the developments in the markets we serve. Let me start with Healthcare, where in the US, we see a continued strong drive from hospitals to reduce operating expenses and become more efficient. A trend we are now seeing in Europe as well. We see the patient monitoring markets capitalizing on this drive as hospitals strive for high efficiency by investing in newer technologies. Hospital construction in the US continues to raise projected at 5% in 2011 and 9% in 2012. As administrators prepare for the influx of newly insured patients and current low interest rates are fueling these infrastructure advancements.

With regard to Healthcare Reform, there is some concern among hospital CEOs on further reimbursement cuts. We also see that large strategic and multiyear deals continue to remain important as we increasing interest. Furthermore, some pent up demand was visible in the quarter. But, in general, uncertainty remains as to the future economic and market development in the US.

In Europe, markets in Southern Europe continued to be weak, given the economic situation prevalent in those geographies, as well as the recently announced austerity measures. The NHS Reform plans which are being revamped in the UK are affecting short-term growth in the UK. In our growth markets, we continue to see momentum as more investments continue to be directed at these markets, resulting in robust demand.

In the Consumer Lifestyle markets, Western Europe and the US demonstrate continued cautious consumer sentiment. In the areas where we invested for growth, we saw markets responding well. Personal care, health and wellness, and domestic appliances markets grew appreciably. Our growth markets showed robust demand in the quarter. The home audio and DVD market continued to shrink.

The Lighting market was flat compared to Q2 last year, although it declined compared to the first quarter of 2011. Growth was strongest in LED product categories and growth markets. Despite a slowing nonresidential construction market in North America in particular, the professional luminaires market continues to show positive growth on the back of homebuilding stabilization in the US. Further, we see moderate growth in DACH and Latam, slight recovery in France, and increasing activity in retail and office segments in China and India.

The supporting trend for positive midterm lighting market development from energy efficiency was further reinforced by the post Japan nuclear sentiment, driving accelerated LED adoption, particularly in Japan. The Consumer business globally continues to be subdued due to some decline in consumer confidence in the US and weakened economic sentiment in EMEA. However, green energy efficient lighting product categories are still growing fastest, especially in growth markets. Automotive production was flat as growth in EMEA, the US and Latam was offset by the decline in the Japanese automotive industry.

Let me now move to the Philips Group results for the second quarter of 2011. At the outset let me clarify that as from last quarter onwards, post the announcement regarding our Television activity, we will report the results of the TV business under discontinued operations and the net operating capital in the balance sheet underlying assets held for sale. The cash flow of the TV business is reported under cash flow for discontinued operations. Therefore, all commentary that will follow in terms of sales and earnings at Philips Group level and Consumer Lifestyle sector level does not include Television related information.

Comparable sales in the quarter grew by 4% when adjusted for currency and portfolio changes. On a geographical basis, comparable sales in our growth geographies grew by 9% in the second quarter. Excluding the effect of a decline of packaged LED sales to these markets, the comparable growth for the quarter is actually 12%. The packaged LED business is an OEM business and the products are shipped to destinations, depending on the production plan of our customers enhance this clarification.

As mentioned during the first quarter conference call, our growth markets are defined as all markets excluding the US, Canada, Western Europe, Australia, New Zealand, South Korea, and Japan. Sales from these growth geographies increased to 33% of Group revenues compared to 32% for Q2 last year. In other mature markets, we also saw a strong comparable sales growth of 12% in the quarter, led by growth in the healthcare business in Japan of 22%. Sales in North America grew by 4% in the quarter on a comparable basis. Western Europe saw a decline in comparable sales of 4% in the quarter, mainly due to the market related weakness I spoke about earlier which affected all of our business.

Reported EBITDA was EUR370 million or 7.1% of sales, which is lower than the EUR506 million or 9.5% of sales reported for Q2 last year. The restructuring and acquisition related charges for the second quarter for this year were lower than the second quarter of last year by EUR66 million. Therefore, adjusted EBITDA which is EBITDA excluding restructuring and acquisition related costs was EUR394 million or 7.6% in the quarter compared to EUR596 million or 11.2% for Q2 2010. The decline in the adjusted EBITDA was due to strong declines in Consumer Lifestyle and Lighting, partly compensated by higher earnings in Healthcare.

Our annual impairment review led to adjustments of pre-recession business cases as the post recession recovery has been slower than anticipated, along with an adjustment in the discount rate for some businesses, leading to a EUR1.4 billion impairment charge in the quarter. Including discontinued operations which had a negative impact of EUR119 million compared to Q2 of last year, the net loss for the quarter was EUR1.3 billion compared to a net income of EUR262 million in Q2 last year.

Our cash flow from operating activities for the quarter was an outflow of EUR39 million compared to an inflow of EUR497 million in Q2 of 2010, resulting in a difference of EUR536 million. The year-on-year decrease was largely due to a higher working capital outflow of EUR310 million related to higher vendor payments, higher CapEx of EUR50 million and lower earnings.

With that summary, let me now take a closer look at the performance of each of our businesses during Q2, starting with Healthcare. Currency comparable equipment order intake grew 4% in Q2 2011 compared to Q2 2010. Order intake was led by a very strong performance in the US, where we registered a 10% increase in the order intake on a year-on-year currency comparable basis.

Our growth markets saw a good increase where equipment order intake grew by 5%. This was led by India, which saw a 30% currency comparable growth in order intake and China of 23%, which was tampered by declines in Latin America due to low order intake from the public sector. Russia and Ukraine saw some tenders moving from Q2 to subsequent quarter’s consequent to a new procurement process announced as parts of its modernization program. On a currency and portfolio comparable basis, our Healthcare business grew strongly with a year-on-year sales increase of 8%, significantly above the 4% growth registered in Q2 2010.

Looking at the business, Home Healthcare showed an uptick in growth by registered a high single-digit growth for the quarter and the Patient Monitor and Clinical Informatics business continued its strong performance delivering high single-digit growth as well. The imaging systems business grew a strong 9% for the quarter. Customer service at a mid single-digit growth, completing a strong growth performance across the sector. North America saw a promising growth of 8% in Q2 2011, while the growth geographies delivered strong sales growth of 22%. This was tampered by a decline in Europe.

Healthcare reported a solid growth in earnings with the second quarter EBITDA of EUR276 million or 13.3% of sales, compared to EUR216 million or 10.5% of sales in the same period of 2010. Excluding restructuring and acquisition related charges, EBITDA was EUR275 million or 13.2% of sales, which is above the EUR262 million or the 12.7% in the same period of last year.

Consumer Lifestyle sales when adjusted for currency and portfolio changes declined by 2% compared to Q2 of last year. This was mainly due to a decline in license revenues as well as a decline in the audio/video, multimedia and accessories business, which is now called Lifestyle Entertainment. The decline in Lifestyle Entertainment was largely due to declining markets, portfolio choices for profitability, as well as the impact of the reorganization of our sales force in preparation for disentanglement of the Television activity. We have seen such an impact when we implemented license deals for the Television activity in China and India as well, and expect it to normalize in the near term.

Excluding the impact of the decline in license revenues, the comparable sales for Consumer Lifestyle registered a year-on-year growth of 1%. We are pleased with the continuing momentum of sales growth in Q2 2011 for the personal care and health and wellness businesses which have demonstrated double-digit growth and the domestic appliances business which has registered a high single digits comparable sales growth.

From a geographic perspective, sales in our growth geographies grew by 7%. This was, however, offset by declines in the mature markets, mainly due to the reduced license income and weak consumer markets. The reported EBITDA at Consumer Lifestyle declined to EUR60 million from EUR168 million in the second quarter of 2011. Due to the lower license income in the quarter compared to last year, investments in advertising and promotion to drive growth and the strong decline in the Lifestyle Entertainment business. Excluding restructuring and acquisition related charges, the adjusted EBITDA of this sector was 5.6% in the quarter.

I would like to spend a couple of minutes to talk about the performance of the Television business, which as explained earlier, is reported as part of discontinued operations. The operating loss for the second quarter was EUR74 million, a significant deterioration compared to Q2 of 2010, when the operating loss was EUR7 million. However, compared to Q1 of 2011, when we had an operating loss of EUR106 million, the loss for the quarter has decreased. This was mainly due to the launch of certain new models which have helped to raise the margins. On page 17 of the press release, we have provided a simple reconciliation to the net income of discontinued operations of a loss of EUR97 million.

Lighting comparable sales grew by 4% in the quarter compared to Q2 of last year. The increase in sales was led by our growth markets where sales grew on a comparable basis by over 11%, excluding the impact of the sales of packaged LEDs as I have explained earlier. On a more granular basis, sales in China, ASEAN and the Middle East, Central Europe and Turkey continued the good momentum with strong double-digit growth. Sales in North America continued to recover with a middle single-digit growth in the growth. After a weak Q4 2010, Europe saw a healthy return to growth, registering a mid single-digit comparable sales growth. When taking a deeper look into each business, we continued to see strong sales for our LED products with growth of 21% compared to same quarter in the previous year.

Sales of Professional Luminaires despite a weak construction market showed growth for the fourth consecutive quarter and registered a double-digit growth, although pricing remained under pressure. Lighting Systems and Controls had a robust quarter with comparable sales growth of double digits. The lamps business registered mid single-digit growth, while automotive grew around 6% in the quarter, hindered mainly by lower automotive production in Japan. Sales in Consumer Luminaires continued to remain weak, registering a low single-digit decline. The consumer markets in Western Europe in particular impacted sales in the quarter.

The reported EBITDA at Lighting declined to EUR101 million from EUR210 million in Q4 2010. It was mainly caused by a drop in gross margins due to lower loading in the factories to control inventories, adverse product mix, additional investments in selling expenses, and research and development expenses to drive growth. Excluding restructuring and acquisition related charges, the adjusted EBITDA profitability was EUR115 million or 6.5% of sales. Reported EBITDA at GM&S was EUR67 million. The lower loss then guided for was due to slightly lower cost formerly reported as part of TV cost, lower research expenses in the quarter, higher license revenues and a gain on the sale of assets.

Our actions to reduce inventories have shown modest results. The inventories as a percentage of MAT sales for the Group at the end of the second quarter are in line with the position at the end of the second quarter of 2010. The working capital as a percentage of MAT sales for the Group at the end of the second quarter is slightly below the position at the end of the second quarter of 2010.

Given our confidence in the portfolio and its potential to accelerate profitable growth, we have launched a share buyback program of EUR2 billion. This was done after thoroughly assessing the capital structure on the various economic scenarios and addressing the financial needs for organic growth, bolt-on acquisitions, and risk mitigation. This decision is consistent with our capital allocation policy, driven by the disciplined use of capital.

As Frans has mentioned earlier, our teams in Japan have been able to significantly mitigate the sales and supplier risk that had been anticipated earlier. And, although we could see some impact in the second half of the year, we do not expect it to be material.

Ladies and gentlemen, let me now sum-up where we stand at this point of time. Our performance in Q2 2011 has seen a decline in our earnings. Apart from the investments we have made to stimulate growth, we have had some operational issues as well as weak markets in certain key geographies. It is our priority to improve execution and improve the results of our operations as well as to accelerate our midterm growth and profitability trajectory.

I will now hand you over to Frans, to talk you through the various actions we are taking to realize our ambitions.

Frans van Houten

Yes, thanks, Ron. Now, as I said earlier, we launched a comprehensive performance improvement and change program called Accelerate, to unlock our full potential and deliver our strategy faster. We are implementing a number of initiatives in several areas. We are rolling out the Philips Business System, which includes granular performance management, a leaner operating model, and a strengthened executive leadership team. We are also taking steps to ensure that our growth initiatives are properly resourced, which are critical to achieving our performance goals.

We are focusing on execution and we will be streamlining the way we deliver value to customers over the next three years, simplifying our complex ways of working, improving customer service levels to over 95%, significantly reducing inventory levels, and speeding up the time to market for new product introductions by 20% to 40%. At the same time, we are also stepping up targeted investments in innovation and market penetration by EUR200 million to achieve market leadership in the majority of our businesses. Finally, we are instilling a more entrepreneurial and accountable culture with a reward system that is aligned to achieve results.

The aim of our performance improvement initiatives is to get Philips on to a better growth trajectory and achieve the midterm targets that we have announced today. In Healthcare, we will continue to accelerate our strategy and performance, driving to a co-leadership position in imaging systems, investing in growth markets, expanding our Home Healthcare business internationally, and focusing on operational excellence to increase margin and time to market, thereby to achieve EBITDA of 15% to 17% in 2013. As mentioned during our Capital Markets Day in Boston, in the markets we operate, we expect Healthcare to grow by 4% to 5% and we aim to grow faster than the market.

In Consumer Lifestyle, we are targeting 8% to 10% EBITDA in 2013, reflecting our continued efforts to reshape our portfolio for growth, particularly in growth markets where we will also leverage fill-in acquisitions to drive regional business. It is important to note that the target for Consumer Lifestyle is excluding the income on license revenues. Overall, we are targeting low-to-mid single-digit growth in Consumer Lifestyle, given our exposure to Lifestyle Entertainment which we will manage for cash.

In Lighting, we have reduced our target range in the midterm since we will need to make investments to ensure that we maintain our position as global leaders of lighting. We also believe that the growth rate of the illumination market will be lower at 2% to 7% per annum compared to the 7% to 9% per annum which we had assumed earlier. We will continue to address our cost base and drive operational improvement across the business to deliver EBITDA of 8% to 10%.

For the overall Philips Group, we are on track to achieve 4% to 6% sales growth and EBITDA of 10% to 12%, supported by our accelerate initiatives and the singular focus of management on the own executing our strategy at a more granular level. This will lead us to deliver a return on invested capital in the range of 12% to 14%.

An essential component of accelerate is a necessary cost reduction program aimed at cutting EUR0.5 billion in overhead and infrastructure cost between now and 2014. This is necessary for us to generate the headroom to allow us to invest in our growth initiatives and improve margin. In the short-term 2011-2012, we will go after the easier to get cost including IT, real estate, and organization cost, including addressing the stranded cost for Television. In the medium-term, we will dig deeper to reengineer our business processes, simplify and streamline our operating model which will free-up resources to invest in growth initiatives. We will remove unnecessary bureaucracy and improve end-to-end execution to become a faster and more agile organization. The results of the savings program are included in our midterm targets.

At the same time, we have strengthened our management team over the last few months at the top by transforming our Board to a new Executive Committee, adding experienced leaders to our senior team. This will get us closer to the market and empower execution of our strategy from the highest through the more granular level. We have also added important diversity to our team, which now includes five nationalities and the first woman ever in the top leadership team. Moreover, China is now directly represented at this highest management level, which reflects our ambition to make China another home market for Philips.

This brings us to our portfolio. Since 2005, we have made great progress, reshaping our portfolio in areas of high growth opportunities underpinned by strong global trends. With aging demographics, there is a raising needs for all kinds of healthcare. Healthcare now accounts for 40% of our portfolio. We are a leader in Home Healthcare, Patient Monitoring and Cardiovascular X-ray. We are the global leader in Lighting and we will be able to answer demands for greater sustainability and environmental concerns with our LED solutions and applications. In Consumer Lifestyle, we are expanding rapidly in growth markets. Above 40% of our sales in the second quarter came from those growth markets. We are a leader in personal care and kitchen appliances, and we see great opportunities to expand our leadership consistently across the globe.

With Accelerate, we are taking actions to improve our performance and speed, to higher growth and better earnings as outlined in our midterm targets. While we know and we have realized that we have operational issues, and I have spent a good deal of time talking about how we are addressing them in this presentation, it is important to remember that the large majority of our businesses actually have the right fundamentals for profitable organic growth. Strong assets underpin our portfolio, innovation is central to our business and new products generated 52% of total sales in 2010, up from 48% before. We have a competitive advantage in technology and know-how, and an extremely strong IP position with 48,000 registered patents.

Our brand is one of the world’s most valuable and really means something to our customers. In terms of customer focus and access, we are consistently ranked among the top global players and in the top 10% in India, China, and Brazil, which speaks to the strong brand equity we have in our growth markets. Our employees engaged which is critical, given the work we have cutout for us, putting ourselves on a better growth and profit trajectory. We are tapping into that assets through Accelerate and powering our employees to own their business targets and deliverables, and reinforcing a cultural of entrepreneurship and accountability across the organization. We have deep expertise in our sectors as the global leader in Lighting, a top three player in Healthcare, and a leader in personal care and kitchen appliances with major consumer lifestyle brands around the world.

We also have a solid balance sheet which is well rated by the rating agencies. Our share buyback and the lines of confidence we have in the organic growth potential of our business and our future. We have unique leadership positions across our sectors in highly attractive markets and geographies. As you can see, we clearly have the right business mix to capitalize on global trends and deliver profitable growth.

That brings me to our past value. With all the actions we are taking to improve performance, exiting TV, buying back our shares, strengthening our executive team, stepping up investments in growth, and managing performance at a granular level, we expect to move from our current performance books to a higher performing books with sales growth of 4% to 6% and return on invested capital of 12% to 14% by 2013.

For the Group, our reported EBITDA margins in the midterm performing books will be 10% to 12%, supported by our cost reduction program and Accelerate activities. In Healthcare, we are targeting margins for 15% to 17%, which we think is achievable due to the acceleration of our portfolio and strategy execution. In Consumer Lifestyle, we are aiming for 8% to 10% EBITDA margins as we continue to reshape our portfolio. And in Lighting we are targeting 8% to 10% EBITDA margins on the restoration of our profits.

We have launched our share buyback program of EUR2 billion based on the strength of our organic growth potential and cash generating ability. This was done after thoroughly assessing the capital structure and the various economic scenarios, addressing the financial needs for the organic growth, bolt-on acquisitions, and risk mitigation, as well as being consistent with our capital allocation policy driven by the disciplined use of capital. This will also result in a more efficient balance sheet.

So in summing up you may ask, “What is different this time?” Well, let me be clear, there are significant differences in our approach to improving performance this time around. While it is not new that we have a strong portfolio, we are continuing to strengthen our position in growth and mature markets, focusing on our core mission of bringing timely innovation to customers around the world. We have identified the operational issues we are facing. We have put in place a granular management system to deal with them effectively and hold people accountable. At the same time, our strengthened management will continue to make necessary investments in people, systems, and markets to succeed, and leverage a culture of entrepreneurship and accountability to own our targets and to ensure that we will remain firmly on our past value in the midterm.

And, with that, let me now open the line to your questions, which Ron and myself, will be happy to answer. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Thank you. Our first question comes from Andreas Willi from JPMorgan. Please go ahead, sir.

Andreas Willi – JPMorgan

Good morning, gentlemen. My main question is on Lighting. Maybe you can give us some more indications of if you compared a new margin target to the old one which areas were cut or where do you see particularly these lower margins due to higher investments. Also on the revised growth target in Lighting, is that because of a change on the view on how quickly LED gets adopted or is that more about on maybe price declines you expect. Maybe you can just give us a bit further breakdown within Lighting and how you come up with the new targets. Thank you.

Frans van Houten

Yes, thank you, Andreas. Let me first make a correction, because I realized that I misspoke. I guided that the Lighting market originally was slated for growth between 7% and 9%, and currently we see that to be 5% to 7%. And I think I inadvertently mentioned 2%, so it should be 5% to 7%.

The lower market outlook on Lighting has to do with the more conservative situation in the global construction markets and consumer sentiment. It doesn’t change the underlying fundamentals of Lighting, but it does make us more cautious about growth opportunities.

And the margin targets, we have set at 8% to 10% EBITDA, reflects the more turbulent near-term environment where we are keen to be the leader in the new LED lighting, in the solutions space, where we will make the necessary investments in innovation and customer phasing activities to solidify our leadership position and not let any competitors come in so to speak.

Let me underline again that this is a midterm target of 2013, and that we will not stop after that.

Andreas Willi – JPMorgan

And my follow-up question is on Healthcare where we have heard from some competitors that price pressure has increased, but you showed a good result in the quarter. But, maybe, you could comment on that, what you also expect going forward, given that you and others talk about more larger orders, more bundled orders, government purchasing in China, what have you assumed in your 15% to 17% margin targets from the competitive side, also now that Samsung seems to want to enter the imaging industry.

Frans van Houten

Yes, Andreas, the margin target of 15% to 17% by 2013, I dare say is in line with what we have flagged before, and we should hold that in the frame of mind that we come from being behind in margin. And so we have a lot of room to improve profitability in Healthcare. And the team in Healthcare is doing that by working on value engineering, bringing new products out faster by shifting activities to China. All of these measures improve our profitability and make us more competitive. And, as such, we are confident about our midterm targets to be achieved.

Ron Wirahadiraksa

Yes. Frans, let me add to that that specifically price erosion we see this moment about 3% to 4%. That’s our near-term outlook. And, actually Andreas, if you look at the gross margin of Healthcare improved by 1 percentage point QonQ for the year, so that we find very encouraging.

Andreas Willi – JPMorgan

Thank you very much.

Operator

Thank you. Our next question comes from Simon Smith of Credit Suisse. Please go ahead with your question.

Simon Smith – Credit Suisse

Hi, thank you. My main question was really again around Lighting. I guess two points. One, in terms of the bridge between profitability, I guess the main element you have talked there is investment and you have had a sort of R&D spend in this area which is sort of oscillated around about 5% of sales. And I just wondered given the very big movement, I mean, should we be looking at 3 points to be added to that to clear that gap hole when you talk about investment is there maybe another side to it which you could expand on?

The second sort of point on the Lighting was that, I think I might have completely misunderstood this, but when you were talking about the emerging market growth, I think you implied you lost 3 percentage points of growth related to any packaged LED sales. So you have lost 3% of growth from a third of your business which still feels like there is sort of 3% of the Lighting business where LED currently accounts for 15%. So given that growth of 21%, I just couldn’t quite understand how you seemingly seem to have lost about 20% of LED sales. But those were the two points on Lighting.

And then, finally just a follow-up in just in terms of cost. I think you are suggesting that half of the run rate of the cost step-up is in this quarter and I had gained the impression that we had already seen probably EUR50 million of cost pushed into this quarter, which implied that you maybe at a 100% of it. I wonder if you could just clarify that point.

Frans van Houten

Okay. Let me start with the Lighting bridge that you talked to, Simon. In the near-term we do see mix changes happening as well as the step-ups in investments, and continued pressure on pricing, while at the same time we see also raw materials of course up. Now we have in the meantime issued price changes in the market which will start filtering in the latter part of this year. Nevertheless over the next two years, given where we are today with much lower profitability of Lighting, the improvement to 8% to 10% is what we are confident that we can achieve. And then, of course, from thereon we have more work to do to improve that further.

And the packaged LED case in China, that this is indeed a little bit confusion. We are actually growing well in China in the domestic market. And the LED sales refers to what Lumiled sales to direct OEM accounts. And there, we ship where our customers want to. And in this case it was less in China which offset the actually strong domestic growth that we had in the emerging economies.

Ron, is there anything else to be added to that?

Ron Wirahadiraksa

No, that’s correct.

Frans van Houten

All right. Now, I think Simon the last – the third question relates to the step-ups in innovation and customer phasing activities. You are right in pointing out that our cost has gone up in the second quarter, but I do not classify all that cost increase as the rewarding cost in innovation and customer phasing activities. And, therefore, we flagged that, we see about half of that step-up to be in our run rate. And we will be very careful of course when it comes to further step-ups, but nevertheless only half is in. We have now announced a EUR500 million cost reduction and we are also tackling discretionary spending to make sure that some of the less rewarding areas of cost are being handled quickly.

Simon Smith – Credit Suisse

Thank you very much.

Frans van Houten

Thanks.

Operator

Thank you. Our next question comes from Martin Wilkie of Deutsche Bank. Please go ahead with your question.

Martin Wilkie – Deutsche Bank

Hi, good morning. It’s Martin Wilkie at Deutsche Bank. A couple of questions; all and could be consumer margin targets. And, obviously, there has been some changes of perimeter with that TV coming out, and also now the target is good in licensing. I was doing some quick back-of-the-envelope math, am I right in thinking that the margin ex-TV, ex-license over the last couple of years has been in the 8% to 9% range? So explicitly this target is saying that once you have recovered the stranded overhead cost and things like that, you are heading back to the same level of profitability you have seen over the last couple of years. That was question number one.

And then, secondly, if we look at the Consumer ex-license and we split into the old DAP business and the Electronics business, DAP historically was up 15% or so margin business, and that’s about 60% of the business excluding licensing. So if I look at your new target, it’s almost saying that the Entertainment business will be sort of breakeven or only just slightly above that level. Is that the right way to think about that margin target inside Consumer? Thanks.

Frans van Houten

Yes, Martin, the CL portfolio has some very strong businesses like personal care, shavers, oral care, kitchen appliances, coffee. What we see in those portfolio is that we are strong in some parts of the world and not strong in other parts of the world. We have internally started to call that sportiness in our core business and we are quite keen to refocus Lifestyle on those strong core businesses, but also then address that sportiness and make sure that we are global leaders. In that light, you can see the acquisition of Preethi in India and Povos in China, so that we can build out global leadership positions.

In the near-term targets to 2013, we do see increased investments in R&D and advertising promotion as we realize that global leadership. There is – as we do that, the profitability of those categories need to edge closer to historically good targets. Again, this is a midterm target and we are very confident that we can do this.

With regard to the total, the Entertainment – Lifestyle Entertainment category is a turnaround situation right now. We are not happy with the performance there. We are shifting the units, as I said before, to Hong Kong. We are merging audio/video and accessories that will also see us take cost out. We are exiting some unprofitable portfolios there. And, therefore over the near-term, that unit will become smaller, brought back to profit.

Ron, is there anything that I have forgotten there?

Ron Wirahadiraksa

No, I think it’s very good. The growth in the domestic appliances will require some investments, so we have somewhat of a lower margin. It’s not that much. But that will drive the growth strategy.

Frans van Houten

And, of course, historically license income was included. And I think as we have flagged before, license income has come down over the last year and that reduces let’s say the overall target versus previously announced targets.

Ron Wirahadiraksa

And, maybe on top of that there is maybe – the guidance for Lifestyle Entertainment for this year, for the whole year it was profitable. It’s our expectations.

Martin Wilkie – Deutsche Bank

Thank you. On the license point, given that the target will be excluding license income, will you be able to give us explicitly the license income by quarter by now on, just so that we can measure the reported numbers against the same perimeter that the target has been set?

Ron Wirahadiraksa

Yes. We have, we will come back to that. We have always guided for license. As you know, for the second half, we have set flat for the last year. This, for 2011 half was two times 50, each quarter down, and we will come back to that.

Martin Wilkie – Deutsche Bank

Thank you.

Operator

Thank you. Our next question comes from Ben Uglow from Morgan Stanley. Please go ahead with your question.

Ben Uglow – Morgan Stanley

Hi. Sort of follow-up to Martin’s question, if licensing income is roughly 50 odd in the quarter, then the underlying margin at the moment is close to 3%. My question is, how – what is the margin performance at the moment like in domestic appliances, health and wellness and personal care? Can you just give us a range or an idea of how those have done in the quarter year-over-year? That was question number one.

Question number two was, in your presentation on slide 49, you have a nice trajectory of Healthcare orders with North America obviously very strong up 10%, but the blend of the other regions now trending down. Could you give us a sense of what you expect from North America and let’s call it “Rest of the World” i.e. Europe plus growth markets in the second half of the year?

Frans van Houten

Okay. Ron, will you take the license question, please?

Ron Wirahadiraksa

On the license question, we will have to come back to you on that. As you know, the license income of Lifestyle, we said, it’s recorded in the top line, right? And the fall through to the bottom-line is about 80%.

Ben Uglow – Morgan Stanley

Okay. So if its 250 for the year, then at around 80%, we are looking at 50 per quarter, or thereabout?

Ron Wirahadiraksa

Yes. That’s right.

Ben Uglow – Morgan Stanley

So if we back out then the underlying margin is what, around 3% in Consumer Lifestyle?

Ron Wirahadiraksa

Yes, yes. And that is a good math. So it does reflect that we have work to do to bring Lifestyle into the trajectory of 8% to 10% that we have set for our midterm to be – that’s actually only 2.5 years away. So we will hurry up and do that. That lower margin in the quarter of CL reflects a couple of things. First of all, our push for growth and geographic expansion, a higher advertising and promotion and R&D expenses in the near-term, and we see in the Entertainment side of the business quite some turmoil in the retail channels as we disentangle our sales force from the Television side of the business, that unrest reflects a bit also in near-term pressure on sales and margin.

Ben Uglow – Morgan Stanley

What I was generally trying to get at is, is that 3% a blend of a very big loss in Lifestyle Entertainment and the rest of the business is okay or are we seeing a big downshift in margin in DAP, health and wellness, and personal care as well?

Ron Wirahadiraksa

Of course, it’s a blend. However, we are making quite some investments in building out our global leader position in the core businesses of Lifestyle and we have the stranded cost that we are dealing with. So there is really multiple factors that in the near-term affect the profitability of Lifestyle, but we are confident that we can bring it to the 8% to 10% in the next two years.

Frans van Houten

And, maybe, can I just a little bit – your math. So the way we see it, we are talking more about mid single digits on your question. That’s the difference. It’s higher than the 5%.

Ben Uglow – Morgan Stanley

Your licensing income, the precise figure is close to 5%, right?

Frans van Houten

Yes. And this is for the full year and the number I said, okay?

Ben Uglow – Morgan Stanley

Okay.

Frans van Houten

And then on your Healthcare question, Ben –

Ben Uglow – Morgan Stanley

Yes.

Frans van Houten

Indeed the quarter show a little bit lower order intake, but we are not directly concerned by it. We see lumpiness in the order intake. We are aware of some orders that were just pushed over to quarter-end, for example in Russia and the Ukraine. Actually the good news that I would like to underline is, is that we see strength in the United States. We now see the fruits of that new product range that we talked about already several times that was launched last year at the RSNA, and that is now being ordered and shipped. We got the FDA approvals in the first half of the year in the United States and those are shipping. And we think that we will gain market share in the United States on the back of that strong Healthcare range.

Now, the – when coming to speak about Europe, the Southern European market is weak. The United Kingdom has literally stopped activities with the NHS being putting investments on hold. And in the emerging economies, in the growth markets, we saw some very strong performance in India and China that gives us confidence. So it is a mixed picture. But, overall, Healthcare looks good, we are on a strong trajectory, and we are confident about that 15% to 17% in the midterm.

Ben Uglow – Morgan Stanley

So there is no reason for us to expect the kind of blended mid single-digit order growth for North America and rest of the world, that shouldn’t be decelerating in the second half of the year. Is that a fair assumption?

Frans van Houten

Yes, right. Thank you. Okay, operator.

Operator

Thank you. Our next question comes from Gaël de-Bray of Société Générale. Please go ahead with your question.

Gaël de-Bray – Société Générale

Hi, thank you. My first question relates to the restructuring results you need to achieve to get to the EUR500 million cost savings and actually when you intend to step-up the level of charges? I noticed that you are guiding for EUR50 million of charges in Q3, so is it a good base to use as a new quote of your run rate, i.e. is EUR200 million annual charges in terms of restructuring a good estimate going forward for the next couple of years?

And, also looking at the GM&S division, what’s the new underlying run rate for GM&S EBITDA, because it seems that the Q2 performance was much better than expected.

And the final question would be on Lighting. Do you have any update on the replacement of – with the Povos?

Frans van Houten

Okay Gaël, I will let Ron answer the first two questions, and I will come back on the third.

Ron Wirahadiraksa

Yes. So on the EUR500 million, of course, the plans for that are being detailed out. Every major operation of that magnitude will of course involve employment job loss, which we are addressing. As I said, more details we will get in the coming – after the coming three months. You asked about a number, of EUR15 million, did you say that that we guided for?

Gaël de-Bray – Société Générale

I think you are guiding for EUR50 million in Q3, if I am not wrong.

Ron Wirahadiraksa

No, no, I think that maybe the stranded cost that you mentioned for TV.

Gaël de-Bray – Société Générale

Five-Zero, I said.

Frans van Houten

Lifestyle restructuring.

Ron Wirahadiraksa

That’s part of the Lifestyle restructuring. It has to be related with – steps related with the TV business. So that is, of course, that is part of restructuring that’s already ongoing as we are executing on this deal and doing the disentanglement, and we are on track with that. But the EUR500 million is a much large program which encompasses also the TV disentanglement cost.

Frans van Houten

So we have not yet given any guidance on the restructuring charges related to the EUR500 million cost savings, but it is likely that the majority will fall in 2012 and 2013, and not yet – only a modest part this year, Gaël.

Gaël de-Bray – Société Générale

Okay.

Frans van Houten

Then the second question was about the EBITDA run rate in GM&S. Ron, can you say something about that?

Ron Wirahadiraksa

Yes. Well, I have explained the GM&S results. We had earlier guided for EUR90 million, so I would keep that as the base. We had a few incidentals in this quarter, but by in large the EUR90 million is the right number in which is included EUR20 million for the stranded cost of TV. Maybe getting back to the number, now I am sorry, I was myself apparently confused a bit. I know now what you are referring to. It’s in the restructuring part, in the miscellaneous of the sectors we indeed talk about some restructuring charges which are EUR20 million for Lifestyle – for Lighting – for Lifestyle sorry, and for Lighting EUR30 million. That’s the total EUR50 million that you are referring to.

Gaël de-Bray – Société Générale

Yes.

Ron Wirahadiraksa

Yes, okay.

Frans van Houten

Okay. And then the third question relates to my interim job as the CEO of Lighting. So both Ron and I have stepped into the Lighting division. I think it gives us an opportunity to really get to know the management team there and to get a handle some of the operational issues that are affecting performance in the near-term. So we have prepared ourselves to do this for a couple of months. And in that part, we are both assessing the internal as well as external candidates available to us for the CEO role, and so cannot yet in the near-term expect an update on that.

Gaël de-Bray – Société Générale

Okay, thank you very much.

Frans van Houten

Thanks.

Operator

Thank you. Our next question comes from Ilan Chaitowitz with Redburn Partners. Please go ahead with your question.

Ilan Chaitowitz – Redburn Partners

Thank you very much. Just a couple of questions on your EU order book crisis in the Healthcare division. You gave quite benign outlook at your Healthcare Investor Day at this year in terms of EU growth, and I was wondering that had changed.

The second question relates to the margin guidance and I mean that’s clearly tied into how GDP growth plays out. And I was wondering does your margin guidance hold or the bottom end of that would that hold if GDP growth over the period was more like 1% to 2%?

And, finally, can you give us some sort of indication how working capital and in particular, I guess DSOs and DSIs will improve if at all as a result to the restructuring?

Ron Wirahadiraksa

Okay. Starting with your first question; so as I reported earlier, markets in Europe are somewhat weakened. Of course, the second quarter last year, Healthcare was very upbeat in the comparable sales growth. So the order portfolio is somewhat slower due to Europe. And, going forward, as Frans said, don’t expect this to be a major change on the go forward. So the order intakes will be in relation to the European market development situation, whereby I note that Southern Europe which is more weakened than Northern Europe. Of course, if the GDP growth comes down, we are not insulated from that. We will at that time of course immediately take the appropriate measures to compensate. But if that would happen, then you would have to expect a slight margin dip as a result of lower GDP growth and thereby what we are suggesting is also weaker markets.

On the working capital, we are on working capital. Apologies that we have not been able to demonstrate to you yet the improvement that we are working on. This is has to do with the somewhat weaker markets and lower sales than expected. Our working capital, however, was slightly better than last year. But on the inventory part, there is some more work to be done in the supply chain and the end-to-end which is incidentally part of our Accelerate program. So we expect to make progress there and this quarter that didn’t show up yet.

Ilan Chaitowitz – Redburn Partners

Thank you very much.

Ron Wirahadiraksa

All right.

Operator

Thank you. Our next question comes from Olivier Esnou from Exane BNP Paribas. Please go ahead with your question.

Olivier Esnou – Exane BNP Paribas

Yes. Hello, good morning. I wanted to come back to the reinvestment into the business. I mean you said so half of it is to the numbers. Is it all cash in the P&L? I am asking that because in Healthcare for example, there is a significant step-up in capitalized R&D, and I was wondering if this is something which is part of it or if it’s something which comes on top? And, if only half of the reinvestment is into the numbers now, should – does it mean that there is another step down in margin sequentially as you run back towards 100% of it? Thanks.

Ron Wirahadiraksa

Okay. You were alluding to the capitalization of R&D. As you know, we had quite an elaborate and dynamic and exciting, and well marketed product at the RSNA. Those products have been introduced. So as these products come off and are distributed, so we of course match expenses, and that was in the first half, still some more capitalization of R&D than in the previous year for Healthcare. So that will come off. We have no policy changes in our capitalization policy, okay?

Olivier Esnou – Exane BNP Paribas

And is that part of the EUR200 million or it’s something on top – that’s different?

Ron Wirahadiraksa

No, that is something different. So we said half. Frans also explained not all the step-ups or not all the increase you see are the rewarded step-ups that we would like to see. And so, going forward, we will continue to step up, but we will gear that of course to the actual development of the profitability situation and the results. However, we are very cautious not to now fall in the old behavior of cutting down on strategic growth initiatives, but will gear it to the actual development of market end results that we are driving.

Olivier Esnou – Exane BNP Paribas

Okay. Maybe, one follow-up. I mean is it possible to have the actual sales and EBIT contribution of AVM in the quarter, please?

Ron Wirahadiraksa

Well, we gave guidance just that AVM or Lifestyle Entertainment is profitable for the year. So I hope that gives you some of an inkling.

Olivier Esnou – Exane BNP Paribas

And for the quarter, is it loss making?

Ron Wirahadiraksa

No, we are not disclosing that. For the year, it will be profitable.

Operator

Thank you. Our next question comes from Sjoerd Ummels from ING. Please go ahead with your question.

Sjoerd Ummels – ING

Good morning, gentlemen. Two questions please from my side. One question actually relates to the cost cutting program. I appreciate that it’s early days that you may not be able to give much detail around the plan, but could you please wherever possible add any further info into where you expect to cut costs, which amount of – one-off restructuring costs could be entailed, anything else that may help us in terms of understanding the measures being taken.

The second question relates to the turnaround plan that you have announced for Consumer Luminaires. I think if memory serves me correct, the Head of Consumer Luminaries has already been replaced and at the same time you mentioned the turnaround plan for Lifestyle Entertainment. Are these new measures? And if so, what kind of measures are you or will you be taking in these two areas, please?

Frans van Houten

Okay. First question about the overhead cost reduction program, so I will be happy to give a little bit more color on that. We are very careful there to go to the fundamentals of what we call complexity in Philips. So this is not addressed at innovation and customer phasing activities but rather at overhead and infrastructure. Now what falls under overhead? Well, actually, things like IT, HR, finance, real estate, these are all areas that where we see – and shared services – these are all areas where we see opportunities to become more efficient, but also more agile as we take out some layers and empowering the people in the field and in the businesses more to do what they need to do and hold them accountable for that.

We will take three months to make the detailing of the cost program. Of course, it affects people in several countries and then we need to discuss that with our social partners. I don’t think it is therefore appropriate to go too deep today. Of course, there will be some one-off restructuring cost associated with it. This will fall primarily in 2012 and 2013. And I am now looking at Ron whether we have a number for that or not.

Ron Wirahadiraksa

I think this year few tens of millions not that much as a general rule would apply 80% to 100% max of the savings amount as a one-off. Yes, as we move along. Yes.

Frans van Houten

Yes. And some of – we in the presentation also allude to the fact that we will have some business process reengineering to do, and that takes some changes in our IT systems, and that’s then also in the second bucket of the savings and not in the first one, because it’s a bit more complex to do that.

Now, then your second question relating to the Consumer Luminaires, in fact this is a turnaround that was already started somewhat earlier. And, yes, we have a new manager there since early part of this year. I visited the Consumer Luminaires activities and gone through the entire program. I think they are well on their way to fix things like supply chain. And the product lineup is now LED based, it looks good. But now we need to restore also the confidence with our customer base and a customer base that is somewhat depressed also by slow economy. Customers in do-it-yourself markets and other channels typically refresh their range twice a year, and therefore it is not at our will to immediately demand the turnaround to have a success while this will take a little bit of time. Nevertheless, I think Consumer Luminaires is fine, is getting a handle on its issues.

The Lifestyle Entertainment turnaround, I think we talked about that in April already that we are unhappy with the performance there and that we lost also a customer in the United States in accessories. So we have moved accessories and AVMA to Hong Kong, close to the supply chain. It is a by-in-large outsourced business model. The merger between the two into Lifestyle Entertainment allows us to take significant cost of operations out in management, and therefore we are confident that over the year – over this year as Ron said Lifestyle Entertainment will be profitable. And I would like to leave it at that short.

Sjoerd Ummels – ING

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Ludovic Debailleux from Natixis Securities. Please go ahead with your question, sir.

Ludovic Debailleux – Natixis Securities

Good morning. It’s Ludovic Debailleux at Natixis. I just have two quick questions. First of all, could you give us an indication on the free cash flow generation expected for 2013 by using, for example, a free cash flow to sales ratio? And then, are we going to keep the same counting of seasonality in terms of free cash flow generation? That was my first question.

Second question; could you let us know if the share buyback program will be done or will be tax free as well? Thanks.

Frans van Houten

Okay. Okay, I am going to look for Ron, for both questions.

Ron Wirahadiraksa

Yes. So free cash flow expectations for 2013, we haven’t made that explicit. But as said we drive the free cash flow by growth and return on invested capital and all the math that goes with that. So generally speaking we have always had about a mid single digit free cash flow to sales as an indication for that, okay?

Ludovic Debailleux – Natixis Securities

Okay, thank you.

Ron Wirahadiraksa

On the share buyback, you asked tax free. About 0.3 of the 1.7 billion will be taxed. So that means 1.7 billion of the share buyback is not taxed.

Frans van Houten

0.3 of the 2 billion.

Ron Wirahadiraksa

Yes, 0.3 of the 2 billion is taxed. I mean, 1.7 billion to 2 billion is not taxed.

Frans van Houten

Exactly.

Ron Wirahadiraksa

Yes.

Ludovic Debailleux – Natixis Securities

Okay, thank you.

Operator

Thank you. Our next question comes from Christel Monot from UBS. Please go ahead with your question.

Christel Monot – UBS

Yes. Hi, good morning, gentlemen. It’s Christel from UBS. One question to come back to the organic growth that we are seeing in the quarter of 4% for the Group, that’s – actually what I was looking for ahead of the warning, and so – and based on the warning you made on the 22nd of June, it looked like May was weaker than you were expecting in June was not improving. So can you try to give us some color about how June developed basically in terms – not in terms of (inaudible), but just give us some understanding on how you come finally with 4% growth, any division or any businesses which finally surprised you on the upside?

Frans van Houten

Yes. Actually thanks for asking that. April and May were indeed pretty weak and June came out stronger than – stronger than we thought in the beginning of the month. So the last couple of weeks of June were good.

Christel Monot – UBS

And in terms of businesses, do you have any color? Was it Lighting in particular?

Ron Wirahadiraksa

Yes. I think in the Lighting business, the last week as Frans said, we saw some uptick in the sales beyond expectation. So that was very encouraging.

Christel Monot – UBS

Right. And if you can give us an indication on July, do you think that’s likely to continue in Q3 and you have been kind of reassured for in terms of outlook, even though you’re still flagging for an uncertain economic environment.

Ron Wirahadiraksa

Yes, exactly. And I think that’s what we should leave it out. We don’t go into the near-term guidance.

Christel Monot – UBS

Okay.

Ron Wirahadiraksa

Thanks.

Christel Monot – UBS

So – thanks very much. And can I come back quickly on Lumiled? You mentioned 11% growth ex-Lumiled, was it – were you referring to emerging market? I am sorry, I completely missed that. And then could you give us some kind of color for the growth in Lumiled itself and what is happening there, because it looks like it is completely stalled compared to its previous half record?

Frans van Houten

Yes, you are right in connecting those two things. That’s absolutely well understood. So the packaged LEDs is indeed the product of Lumileds. It’s – so it did influence the China or the emerging market sales growth. It’s an OEM business as I said. Now, in Lumileds, in the quarterly report we also mentioned that the sales are actually down. And then to dissect I think gives you more color on that. Lumileds serves multiple application segments. Let me just name three. We serve the display market, we serve the flash market for taking photos, and we serve the general illumination market. So – and then finally automotive, so four segments.

The display market was very disappointing to us where we saw a significant lower shipments and that affect the overall Lumiled performance. At the same time, our illumination market was actually growing very strongly, and of course that is the strategic intent behind the reason why we have Lumileds in the first place. We put all our R&D efforts on having a very strong product range in general illumination and in automotive. And, therefore, although we are disappointed that we are performing less in the display market, it does not concern us from a strategic point of view and we don’t see it as structural either. So it is not a good quarter, but structurally, strategically it doesn’t change the picture.

Christel Monot – UBS

Right. And just to give us some indication in terms of the decline you saw in Lumiled –

Frans van Houten

Yes.

Christel Monot – UBS

Some comments on that.

Frans van Houten

Well, we don’t guide on Lumileds. But what we have seen in the quarter is that there was one customer who now is doing some double sourcing, so second sourcing. And, as you know, we were way ahead in the technology, so we have enjoyed for a good while. And there has been some inventory correction. That’s all I would like to say on the Lumiled.

Operator

Thank you. Our next question comes from Marcel Achterberg from Petercam. Please go ahead with your question.

Marcel Achterberg – Petercam

Yes, gentlemen, most of my questions have already been answered. Just one thing to be sure, the new 2013 targets that you gave, does that imply that the old 2015 targets that you gave in September are now completely replaced or is this still something you are aiming for 2015?

Frans van Houten

The midterm targets of 2013 do indeed replace the Vision 2015.

Marcel Achterberg – Petercam

Okay, thank you.

Operator

Thank you. Our next comes from Martin Prozesky from Bernstein. Please go ahead with your question.

Martin Prozesky – Bernstein

Good morning, gentlemen. Just two questions, please. I would like to get back to Healthcare orders. You mentioned obviously that the US was pretty strong. I think growth markets were slightly weak at 5%. Europe being down, how confident are you that that is not structural and that we are going to see this continuing given what’s going on in lots of the Southern European countries, UK, as you mentioned. Why are you confident that this is just going to be a cyclical short-term effect?

And then the second question is on Lighting; Consumer Luminaires being weak in Europe. Again, what gives you confidence there that the market isn’t more structurally challenged than – and you seem to be implying in your comments today.

Frans van Houten

Okay. Maybe Ron you can start with Healthcare and then I will take the Lighting one.

Ron Wirahadiraksa

Yes. So Healthcare, that’s within the guidance that we have given so for – of 4% to 5% on the order intake growth, so we don’t see anything outside that range at the moment. As I said earlier, yes, US was indeed strong. We have some weakening in Europe, particularly in Southern Europe as we indicated.

Martin Prozesky – Bernstein

In your restructuring plan announced, do you have any provision made for addressing growth in Southern European being declining?

Ron Wirahadiraksa

No, we haven’t. As I said, we haven’t detailed out the plans. As Frans indicated, that will be done after three months. We will give you an update for that. So nothing is provided in here.

Frans van Houten

Yes. In any case the EUR500 million is not specifically related to weakness in Southern Europe, but much more overall at tackling the complexity and overhead cost reduction that we want to achieve in Philips.

Your second question related to Lighting, so there are several things going on in Lighting. We talked about consumer weakness affecting lamps and Consumer Luminaires. That market we do not immediately see strengthening. But then your specific question relates to consumer luminaries. In consumer luminaries, the issue there is in my view one largely to our own doing. And the turnaround that we are making there should help us regain market share even in a weak market. And I dare say that the targets that we have set now take into account a certain degree of market weakness. We have taken down the overall growth numbers of Lighting from 7% to 9% to 5% to 7% bandwidth, reflecting a weaker aftermarket.

Martin Prozesky – Bernstein

One follow-up on the Professional Luminaire; can you just give us some color why that was growing well without seeing a construction recovery in the US? What was driving the improvement in Prof Lum in the US?

Frans van Houten

Well, we have in Prof Lum shifted some of our attention to renovation projects, and the total cost of ownership of energy efficient lighting makes it quite attractive for some of the larger customers, B2B customers, to upgrade from traditional lighting to LED lighting. So we have adapted our business model and go-to-market, and this helps us find new growth in a – what’s otherwise a very weak construction market.

Martin Prozesky – Bernstein

Thank you.

Operator

Thank you. Our next question comes from William Mackie from Berenberg Bank. Please go ahead with your question.

William Mackie – Berenberg Bank

Yes, good morning. First of all with regard to capital structure and returns against your objective of A1 minus credit rating and a stable dividend and the investment returns you have highlighted in the restructuring programs and other areas to grow their business, what do you see within your plans in terms of flexibility for M&A or acquisition related spend? And also related to that I noticed you have changed the discount rates on a number of the previous acquisitions. You are also in the process of changing the implied hurdle rate that you will put to future acquisitions as they are considered.

And then my second question is probably more related again to the detail in Lighting, and it comes back to the fact you have highlighted the impact of raw material price increases across the Lighting business and your efforts to improve pricing through the back part of this year. We have seen some very big step-ups in input prices across part of the Lighting portfolio. Can you in anyway quantify how much of that input price effect is compressing operating margins and how you should be able to offset that with pricing in the second half? Thanks.

Ron Wirahadiraksa

Okay. Thank you for the questions. To begin with what you asked about the flexibility we have, we feel that we have adequate flexibility to do the bolt-on acquisitions that we have said we would do. So there is no – nothing really big on the horizon other than that. So bolt-on acquisitions, yes, a lot of flexibility for that.

In terms of the discount rate, yes, we are now for the company at 8.7, and that will also as we apply due scrutiny on hurdle rates and criteria in the M&A processes, this will go also up, so there will be higher hurdles applied to that.

Want to go into Lighting or –?

Frans van Houten

Yes. The – for Lighting we have seen the raw material prices creeping up. To some extent we were insulated for that in the first half due to forward contract and hedging. We see those material prices go up further in the second half year. Since taking on the role in Lighting we have put a lot of effort in deploying price raises throughout the world. Those price raises are different per category, the highest in fluorescent TL. We did the first launch of price increases in June and we have stepped it up in July. And there are typical price increases in the United States of up to 25%, and in Europe it differs by country depending on the competitive situation, but we see broadly across the competitors everybody doing this. Thereby, we hope to offset any impact on the margins. Nevertheless I did flag in my introduction that we do not see a major improvement in the results in Lighting for the remainder of the year.

William Mackie – Berenberg Bank

Great, thank you. Could I follow-up with a quick question? First of all, can you categorize what you describe in terms of size as a bolt-on acquisition? I think that varies considerably depending on the company where you speak to. And, secondly on Lighting, in Lumileds, can you characterize perhaps with regard to the decline in revenues, how much of that was volume versus price and what sort of capacity utilization rates look like at Lumileds today?

Ron Wirahadiraksa

Okay. Well, bolt-on, I think the best examples are just if you look at our last half year, you see them vary in range from small to a couple of hundred million. I think those are a good indications. By any standard, bolt-on acquisitions will likely be less than EUR0.5 billion, but we are not tying ourselves down to an exact amount.

With regard to Lighting and your bolt-on question, well, we do see that factory utilization in some of our lamps businesses and also in Lumileds are less than desirable. In Lumileds we are actually moving to 6-inch wafer size. 6-inch wafer size will make us far more competitive in the future. In the near-term, that means, however that we are upgrading to our facilities from 4 inch to 6 inch. That also explains a little bit why we are having a lower load at the moment. But, overall, we are confident about the future there.

William Mackie – Berenberg Bank

Thank you.

Operator

Thank you. Our next question comes from Andrew Carter of RBC. Please go ahead with your question.

Andrew Carter – RBC

Yes, good morning. It’s Andrew Carter at RBC. Most of my questions have been answered, but I wonder if I could have just a couple of follow-ons? And, firstly, could you talk a little bit about how you see the license revenues developing over the next couple of years? Is there a concern that license revenues are likely full year-on-year next year?

And the second one was just in terms of a sort of another longer-term question. You made the point that in Home Healthcare, one of the reasons for the write-down was a low growth rate assumed. And could you talk to us a little bit about what the new growth rate assumption is and what was previously in there?

And, I guess, just a final one on a clarification, we have seen some signs of deterioration in the Television market, is there any risk that the terms of the deal with CPV change on the back of that?

Frans van Houten

Let me take them in reverse order, giving Ron some time to think about the license revenue question. So first the TV deal. In April, we have announced that we aim for a definitive signing in Q3 and then closing in Q4. In the meantime, the teams have progressed well on the due diligence side, and are working now to that definitive agreement, also taking into account all sorts of other stakeholder interest that we need to consider. Both parties remain very strongly committed to wanting to do the joint venture, and therefore we remain confident that this will happen. The deal will also see some disentanglement cost besides the stranded cost and resolution, and we will update you whenever we can. At this moment, as I said, we remain confident about progress.

In the Home Healthcare area, yes, we have in our annual impairment test looked at the business cases for the future. We continued to see these acquisitions as good businesses, businesses that will see strong growth at least high single-digit growth in most cases. And, therefore, they are continuing to be good businesses. But the economic environment has deteriorated versus the pre-crisis assumptions in the business cases and this has led to the cut of the goodwill.

Then, your first question related to the license revenue development, Ron?

Ron Wirahadiraksa

Yes. So what we have said earlier that is about the decline of about EUR50 million over the next few years. So that will be, if you map it out about EUR15 million per year.

Andrew Carter – RBC

Thank you.

Operator

Thank you. Our final question comes from Andreas Willi from JPMorgan. Please go ahead with your question.

Andreas Willi – JPMorgan

Thank you. I just wanted to follow-up on the answer on the licensing income to make sure I understand it correctly. So you only say it’s declining EUR15 million One-Five-Million per year from the roughly EUR200 million run rate today.

And the second question or the follow-up on acquisitions, your Povos acquisition in China, there was a – in the press it said that you paid 2.3 times sales which looked quite a high multiple. Is that correct? Thank you.

Frans van Houten

Well, Ron, first, another question about license revenues.

Ron Wirahadiraksa

Yes, so this is not an exact science. We have quite strong IP infrastructure, we have been able to drive a lot of license income. But inherently in the Lifestyle portfolio, the optical storage part, the video storage part is declining. So we need to find other license income for that which we are confident that we can produce. But still we guide for a lower license income go forward. At the end, it’s not an exact science, I would say.

Andreas Willi – JPMorgan

All right.

Frans van Houten

Yes. And then with regard to the Povos acquisition that we announced, this is subject to confirmatory due diligence and therefore all that work still needs to be done. And we do not disclose the acquisition price, but I can explain the strategic intent behind it. Several of our domestic appliances businesses are to European and we also feel that we have been too reliant on external sourcing where we cannot put enough of our own innovation in. So the Povos acquisition gives us actually two things.

First, it gives us a strong base in China for regional product creation. We have such a strong brand by plugging in more products under the Philips brand in China. We can penetrate the market much deeper and therefore leveraging Povos at a growth rate that Povos would never have been able to do on their own.

Secondly the Povos development and the manufacturing environment will help us improve the economics of some of our domestic appliances business outside of China as well, thereby making the business case even stronger.

Now all this is early days. As I said, we need to do the confirmatory due diligence. But we think that we are on to something there.

Andreas Willi – JPMorgan

Thank you.

Operator

Thank you. Mr. Van Houten and Mr. Wirahadiraksa, there are no further questions. Please continue.

Frans van Houten

All right. Well, I really appreciate all your good and intense questions, and I hope that with today we have portrayed you a Philips that is with the hands on the steering wheel and dealing with all our operational issues. We are confident that we can bring Philips on an improved trajectory of growth, and more importantly also profitability and getting the right returns to the market. And as we go forward, I am sure that we will meet many of you over the next few days during the road show, to answer any remaining questions that you may have. For now, thank you very much for your confidence.

Operator

This concludes the Royal Philips Electronics second quarter results 2011 conference call on Monday, 18th of July, 2011. Thank you for participating. You may now disconnect.

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