Royal Philips Electronics Q1 2007 Earnings Call Transcript

Apr.16.07 | About: Koninklijke Philips (PHG)
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Royal Philips Electronics (NYSE:PHG)

Q1 2007 Earnings Conference Call

April 16th 2007, 04:00 AM EST

Executives

Pierre-Jean Sivignon, Chief Financial Officer, Executive Vice President

Analysts

Simon Smith - Citigroup

Andreas Willi - JP Morgan

Nicholas Gaudois - Deutsche Bank

Jonathan Crossfield - Merrill Lynch

Simon Schaffer – Goldman

Didier Scemama - ABN AMRO

Julian Mitchell - Credit Suisse

Janardan Menon

Leck Misoma (ph)

Thomas Brenier - Societe Generale

Mart Heldring - Kepler Lens

Martin Vondestader - Bloomberg News

Presentation

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Royal Philips Electronics First Quarter Results 2007 Conference Call on Monday the 16th, April 2007. Here on today’s recording presentation all participants will be in a listen-only-mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulty hearing the conference, please press the “*” key followed by “0” on your telephone for operator assistance. Please note that this call will be recorded and is available by web cast on the website of Royal Philips Electronics. I would now like to hand the conference over to Mr. Pierre-Jean Sivignon., please go ahead sir.

Pierre-Jean Sivignon, Chief Financial Officer, Executive Vice President

Good morning, ladies and gentlemen, let me first welcome you to the conference call for the first quarter results of 2007 for Royal Philips Electronics. I will make a few introduction remarks and then we will open up the call for your questions. The first quarter was another successful step towards achieving many objectives which were designed to raise our profitability. Let me be more specific. The EBITDA in the quarter was € 353 millions or 5.9% of sales and this compares to 4.5% a year ago. This increase is a good first step to achieving our target of above 7.5% for the full year 2007.

The comparable sales growth for the company was 3% with an average of 7% for the three divisions to which we will be reallocating more capital. DAP was 17% and Lighting was 8%. This growth levels supports our annual average target of 5% to 6%. In Medical Systems, the comparable growths were 3% with strong performances in MR, cardiac care, and general X-Ray with declines in CT and Medquist. Equipment order intake showed a minimal decline compared to one year ago mainly due to a softening of the US market. The EBITDA increased in the quarter compared to one year ago after a lowering for Medquist and Intermagnetics related charges.

In DAP the excellent quarter has given us a 17% comparable growth which again more than supports our target of 7% which we expect to exceed this year. This very strong growth came in virtually all product groups and geographical regions. Looking at it another way we can see four main drivers this quarter. Firstly the healthy living scheme, secondly product innovation, thirdly emerging markets, and fourthly the much higher level of sell through than normal in the Christmas period which gave us a flying start to the year. EBIDTA benefited from the effects of scale and good initial progress with the cost synergy at Avent. Sales in consumer electronics on a comparable basis declined by 6%.

The main reasons for these are threefold; firstly, lower mobile phone sales which were influenced by the planned sale of the activity which has now been completed. Secondly, our focus on margin management meaning the rejection of orders, where the margins were just too low and thirdly, last year was positively impacted by steady gain prior to the World Cup. On the product basis, the continuing growth of flat TV which increased in quantities by over 50% was upset by declines in CRT television and in monitors. On a geographical basis, there were declines in the United States and Latin America, particularly the CRT TV market in Brazil. It is important to note that the European sales and consumer electronics of flat TV are driven by US-denominated supply. The downward impact of this is not fully reflected in the Q1 comparable sales of consumer electronics. EBIDTA margin at 1.5% was a little higher than we expected.

The lighting sales growth was 8%, driven by Luminairs specifically and lamps where there is high demand for energy-efficient lamps. We expect this trend to continue and we expect to exceed the annual sales growth target of 6%. The lighting EBIDTA was slightly lower than the first quarter of 2006 due mainly to LCD backlighting, exit related costs, and restructuring charges. The results for innovation and emerging businesses, was in line with our expectations, although slightly lower than one year ago. This was entirely due to a gain on an activity in the first quarter of 2006. In group management and services, we see the first impact of our cost reduction plan but I must point out that Q1 is seasonally a low quarter for expenditures. Pension costs were lower than we expected.

We will continue with our brand investment in 2007, and the amount will be slightly less than the one incurred in 2006. We will complete our € 75 cost reduction, € 75 million cost reduction program this year. The net cash in the quarter was 2 billion compared to 2.2 billion at the end of the fourth quarter, of 2006. This change was due to a number of factors including the seasonally higher working capital. The inventory percentage of 11.6% is 30 basis points lower than 1 year ago. The main area of improvement was consumer electronics, where the inventory was significantly reduced. There continue to be one or two areas where the inventory to staff ratio can be improved, and we are working on those areas. The results from non-consolidated companies, reflects the lower result of LG Philips Ltd.

Based on ongoing discussions with various parties in the Netherlands, we remain positive that the second trading line will allow us to complete the remainder of the current buy-back program during this year which amounts to slightly above € 1.6 billions. We continue to look for acquisitions in the area that we have designated that will add value inline with our guiding principles. I reiterate our intention to have leverage on our balance sheet within 2 to 3 years consistent with our raising objectives. We once again confirm our sales growth target of an annual average comparable growth of 5 to 6% and then EBIDTA margin of above 7.5%. However, DAP and Lighting are expected to exceed their growth targets for the year. Let me now open the call for your questions.

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Question-and-Answer Session

Operator

Thank you, our first question comes from Mr. Simon Smith. Please state your name, company name, followed by your question.

Simon Smith - Citigroup

Hi it’s Simon Smith from Citigroup. First question I had was on the medical business, obviously it was relative to expectation, a bit of a disappointing quarter for medical, I can see within the additional challenges of Medquest which would seem relate to more of one off nature but even allowing for that the EBIDTA margin you would have achieved say underlying basis of 8.3, is sort of slightly at odds with your guidance range of sort of 14 to or 15 for the year, why don’t you give us some color as to what has being going on within the division and maybe particularly give us a little bit more color on the impacts you are seeing on the U.S through sort of, you know, changes in regulation which were alluded to also by GE and how you see that coming out through the year. Also within the medical division, I wondered if you could give us some sort feel as to what we would expect for the full year, in terms of amortization charts (indiscernible) obviously the different or as you defined it the differential between EBIT and EBITD.

My sort of second question really comes on to balance sheet structure and in your AGM statement of a few weeks ago you did elude to the fact that you were actively looking at the balance sheet. Well, you have stated the fact you have share buyback out there, 1.6 billion you will be completing that this year. You have talked about the acquisitions which we know you will continue to make. I just wondered in, what else could be the outcome of that actively looking at the balance sheet will you just give me some more color upon it? Thank you.

Pierre-Jean Sivignon

Okay, first let’s talk about medical. I think if you look at the results of medial in EBITDA terms and I think that’s what we should be looking at because clearly we basically now try to guard you on this. I have no problem to comment on EBIT but as a rule I will try to go to EBITDA in order, you know, to start the process but you have full disclosure on EBIT and certainly you are capable to read full EBIT numbers as well. But let’s try to comment on the EBITDA. So the EBITDA of a medical is actually on consensus pretty much but you are correct to we did have some incidentals one is Intermagnetics, which added up with a special accounting impact and integration cost, which were little bit higher than the guidance. Actually (indiscernible) of that impacted the EBITDA. Why is it higher than the guidance because as, you know, some of those elements you only know once they have been actually evaluated by third parties so we only got those news in the course of Q1 and we disclose information as we, as we have actually have it. So there is €8 million in terms of EBITDA which is coming from there, you eluded to Medquest as well actually in the particular case of Medquest a couple of things basically which happened there.

One was the fact that there was a settlement on the class action suit with shareholders there were some disclosures done by Medquest themselves a couple of weeks ago and you have full details in that extremely explicit press release. So that has cost us some money there and but that is good news because that is something which was actually, certainly having an impact on the future of Medquest and the other thing in Medquest is that as, you know, we are working hard in getting the accounts current a lot of audit work has been done on that back some one of entries were booked as well in this particular quarter. So all that is actually included in the particular list of one-ups that you have referred to, if you exclude those elements, then to your point is the margin of medical for first quarter too low, I would not say, no, it isn’t I think historically the margin of medical is pretty much in that ballpark if you look at last year, we were in those numbers, last year was a bit shy, you could say, but on the other hand, this year include a few incidentals so I think that in terms of our guidance of a 14% to 15% EBITDA for the year, absolutely no change there.

I can only know that is what I could say on the margin. On the orders, yes, you have referred to the fact that GE came up some numbers on Friday talking about no growth, actually they came up, if I understand correctly, flat revenue, we are up 3% it is true, I don’t want to comment too much on GE, I can talk about us. In our particular case, in the orders, we are for equipment and that is equipment only, we had what was a touch negative essentially because of the US; some of it being due indeed to the Budget Deficit Act but we believe that, thanks to the fact, that we will have innovation in the later part of the year as well as the fact that we are global, we are not changing our guidance there for the year. So I cannot comment too much on the GE numbers but I can say that we are not changing our own numbers. The only thing I would say between modalities is that in first quarter, there was one modality which was definitely a bit slower than the rest which was CT. I think that is probably the one point I can emphasize.

To your question now on the difference between the EBIT and the EBITDA I think the full difference for the year should be in the region of €150 millions. I think that is a kind of number you are now are thinking that, the appendices of our press release which guides you on the difference between EBIT and EBITDA but for the year, for Medical it should be in that ballpark. Your last question was related to the balance sheet, you are totally correct. First of all I want to say that we confirm that, and as I just said in the introduction that we are confident that the €1.6 billion buyback line will be met, we have worked actively on getting that line to function and the transaction restarted in the later part of last year and we believe that it will continue early this week. So we are confident that this line will function; we have been working on this and our absolutely confident. In terms of the ultimate balance sheet structure for Philips, we are fully aware that we are not efficient and we will put leverage in place. We have guided you on the criteria we would like to use. We have talked about A-minus down to triple B plus for a potentially large acquisition with good cash flows. In case of an acquisition like this, we would be prepared to go down to that level, accordingly putting in place leverage within a maximum of 2 to 3 years. I think that’s what we have said loud and clear at the general shareholder meeting a couple of weeks ago. In terms of avenues, where the avenues are known, the share buyback will increase the dividends quite recently, and of course we continue to look at acquisition in the particular domains that we have outlined.

Simon Smith - Citigroup

Thank you and just a point of clarification. When you are talking about the 14 to 15 range, that will be what you would expect to be your actual reported rather than underlying say excluding MedQuist or excluding the…?

Pierre-Jean Sivignon

No, no, it is the actual reporting EBITDA.

Simon Smith - Citigroup

Yeah, thank you.

Operator

The next question comes from Mr. Andreas Willi, please state your name, company name, followed by your question. Please ask one question with a maximum of one follow up.

Andreas Willi - JP Morgan

Good morning, it’s Andreas Willi, JP Morgan. I have two questions please. The first one on DAP if you could break down the spectacular sales growth you have there a little bit more into what was the market, maybe also at what rate Avent grew in the quarter, and my follow up question would be on medical again would be you are confident that you will hit the 6% sales growth for this year, are you also confident that you will get in the orders to hit 6% growth next year?

Pierre-Jean Sivignon

Okay, okay, well I think on DAP I would love to split but actually DAP has grown, I would say, in every geographic area and in just about its three particular product divisions, which means appliances, shaving and beauty, and healthcare and wellness so we have grown actually everywhere, geographically everywhere, and it is a mix of things. It is as we have said in the introduction we finished the year extremely strongly, and certainly the fact that we invested in cutting expenses in the fourth quarter, that had an impact on getting into the first quarter that is one reason second, we have continuously introduced new products and the good news is that we will continue to do that in the latter part of this year and thirdly I think what is quite important is that we have gained market share I think there are parts of the world where we have gained market share certainly in particular in shaving and beauty and probably as well in appliances, appliances meaning cooking appliances.

Cooking appliances was supported by a wave of healthy living that is supporting the kind of products we are promoting there is a green wave in lighting and there is a wave of healthy living in the which is helping appliances as far as Avent is concerned I don’t have the figure on Avent, what I can say on Avent is that Avent had a positive impact on the profitability because if anything the integration of Avent in terms of synergy on the expenses in our own channels is proving actually better than we initially thought, so Avent is introducing new products and is having a more positive impact on the cost of the particular division Avent is in DAP. So we told you in the conclusion, we would hope that we will exceed the 7% revenue guidance for the year. At least so far at this point of the year we have 17% stock in Q1.

On medical I think your question is can we make or confirm the 6% growth and when you are talking about revenue growth for the year, with a 3% in Q1 and obviously I would say lower than planned orders in imaging equipment in the first quarter. The answer is yes, we confirm 6% for two reasons, or for three reasons I should say, one is that we could have some innovation coming in the latter part of the year. Two, we believe that the orders in Q2 should be better, I think and 3, because we feel that the backlog we have as at the end of Q1 is strong enough to enable to say that so, we stand by of 6% revenue guidance for the year at medical.

Andreas Willi - JP Morgan

I was more looking at whether you will get enough orders this year not to have to eat into your backlog in terms of growth continuing into '08 then.

Pierre-Jean Sivignon

Well I think oh yeah, well its too early to say I mean I think I can guide you for the, the guidance of the medical 6% has been in our vocabulary a midterm guidance, so as of today I am not answering this in a way that we would plan to empty the backlog. I mean by the way I don’t think that is something which is in our control. As, you know, in the backlog of medical you have actually products with totally different kind of the timing. You have short term products or shorter term products probably in Cardiac and Ultrasound and you have not the note longer term kind of the backlog on Imaging, MR, CT and (indiscernible) that is obviously longer term and of course you have even longer term on services so, you know, I think, emptying the backlog in order to meet a particular objective for a particular year I don’t think that is something which we can really control ourselves.

Operator

Thanks our next question comes from Nicholas Gaudois. Please state your name, company name followed by your question please ask the maximum of one question with one follow up.

Nicholas Gaudois - Deutsche Bank

Pierre-Jean Nicholas Gaudois - Deutsche Bank. First question coming back to medical could you maybe give us bit of (indiscernible) of the drivers you would see in the recovery in Q2 as you mentioned for orders and (indiscernible) I am also particularly interested in CT if and when we will have a new platform released this year which could effectively re-invigorate sales? Second question would be on the share buyback if I look on your website you seem to have done over seven trading line one transaction the 7th, of March for a 100,000 shares yet, you seem confident but you can achieve 1.63 billion program this year so could be help us understand a bit more where this confidence is coming from? Thank you.

Pierre-Jean Sivignon

Yes absolutely right good morning Nicholas so yes on Medical improvement let me answer at two levels. I think on the CT because you mentioned CT actually the market has to digest of course the 64 slices which is a regular I would say workhorse on this particular market. When a new platform will come well, you know, the kind of product we are talking about it’s a bit early to say I wouldn’t disclose anything at this particular point but everybody and I think the market knows that new products are coming, more sophisticated certainly it has to come could it be a reason for the slowing down on CT it’s a bit early to say but certainly today the market is focused on 64, the markets knows that there is more products to come and the market certainly has to digest, probably to some extents the huge introduction of new technologies which has been the characteristic of this particular modality in the last couple of years.

Where do I see improvement in Q2 hopefully I will on CT I think that certainly something will, we are expecting some progress, MR is a territory where we would expect some progresses as well as, you know, we are going to see the impacts of the fresh products including the benefit of having Intermagnetics part of the family, so I would expect on those two particular ones that we see some improvement in the second quarter versus the first quarter in terms of incoming orders. For medicals, as far as share buyback is concerned, you are absolutely correct. We did a transaction in the later part of last week. So you are correct that, you will see that, we expect the pace of buyback to reaccelerate, why we are confident is because we, as you know, we have been constantly discussing and helping shareholders who are interested in selling, in getting comforts from the various competent authorities and we believe that we have made some progress in that particular domain last week. So we are confident that 1.6 plus, and that particular line will be achieved this year.

Nicholas Nicholas Gaudois - Deutsche Bank

Thank you very much.

Operator

Thanks, the next question comes from Mr. Jonathan Crossfield, please state your name, company name followed by your question, please ask one question with a maximum one follow up.

Jonathan Crossfield - Merrill Lynch

Yes, good morning, Jonathan Crossfield from Merrill Lynch. My first question is on DAP where margins are currently running ahead of expectations and direct feeding your grace targets. I think in the past, you have indicated that the division might sacrifice some margin to achieve higher growth. So could you give us a feel for what is going to bring the margins back down towards your guidance levels?

Pierre-Jean Sivignon

That is a dangerous question, isn’t it? Well, I think, we have seen DAP I mean 17 percent, I have to admit is a very strong quarter, I have to say, and I have to admit that is probably a bit more of what we were expecting. We knew DAP would be strong because you remember Q4, Q4 was very strong, and what is happening is that definitely for instance in shaving and beauty, they absolutely confirmed the tests of the new shaving line which was introduced now a year and a half ago is still showing and I think that it is something that clearly is continuing to help us. We did show some discipline in the model actually last year in Q4, we could have gone indeed for a higher margin, we basically accepted to have lower margin on the back of increased setting expenses and obviously the result comes with a growth which is actually above what we expected and certainly what you expected.

So for the model of this year, would we want to modify that model, probably not, I think the 15 to16 is something we would like to stick to, could we be slightly north of that, may be, could we be north of the guidance on the revenue, probably, do we want to modify the model, no, why is it that it doesn’t go up, well the answer is, we continue to invest in innovation, you will see a lot of new products at DAP in the latter part of this year, you will see new products certainly in shaving and beauty, you will see new products in oral healthcare. Those introductions are definitely costing money, but on the back of that there is a chance you will see more growth and of course we will continue to invest in stetting expenses. Are we prepared to modify or to announce the modification of the model of that? No. I think it’s too early to say. , you know, that all year, DAP as in all our consumer businesses. We have gone away from cyclicality, but we still have strong seasonality and I think it’s probably too early to say more than what we have currently disclosed to you in terms of guidance on DAP.

Jonathan Crossfield - Merrill Lynch

Okay, and then just as a quick follow up on lighting. Could you just give us a feel for what proportion of your lighting sales are now energy efficient, and what you would expect the impact of push towards energy efficiency to be in terms of CapEx.

Pierre-Jean Sivignon

Yeah, well, you know, this is actually an excellent question. Believe me, I have worked the whole weekend to try to come up with a percentage because I knew this question would come up, but when you go through the details of the growth of lighting, actually, almost all the businesses of lighting with the exception of one have increased actually in this first quarter. The next question is, what is the portion in each of these businesses which you could call green lighting and the answer is it’s difficult to say because in each of those particular segments of lighting, we have energy-efficient products. So, unfortunately, I am a little bit in difficulty to give you a percentage because in reality all the business units of lighting are actually growing. The one thing I could tell you is we know what you could call green products have probably grown at a rate of twice the overall growth rate of lighting, so the one information I’m prepared to disclose to you is probably that the so called green products have grown at probably something like in excess of 15%. Now, for the quarters to come, because we realize that for you it is quite important, we are trying to come up with a definition of what we could call green products in lighting so that we can give you a better guidance on this, but as of this particular quarter unfortunately, I can’t beside telling you all records I have already been given to you in terms of details on lighting.

Jonathan Crossfield - Merrill Lynch

Okay, thank you very much Pierre-Jean.

Operator

Thanks. The next question is from Mr. Simon Schaffer. Please state your company name, name, followed by your question. Please ask one question with a maximum of one follow-up.

Simon Schaffer – Goldman

Good morning, Pierre-Jean it’s Simon Schaffer with Goldman. I actually have a question, a follow-up question, and it was very helpful to have the amount of leverage would probably take debt rating down to a triple B plus somewhere in that range. I was wondering whether you could perhaps share some targets, what that would mean in terms of net asset equity or net asset EBITDA or some type of metric because we could look at to get a better feel of what would that mean?

Pierre-Jean Sivignon

Yeah it is hard to do that I tried to do that in the past if you remember year and half ago we were guiding you with the particular leverage I have to say I have gone away a little bit from that for one not because I don’t want to guide you its because I have had very lengthy conversation with rating agencies and I realize that in reality what is counting for them now is much more the sustainability of cash flow, so if that is really important for you I can give one more example trying to do some simulation on leverage and come back to you on that. At this point of time, I prefer to stay a little bit away from that because as I said its not totally clear to model that in a precise manner and by the way the two rating agency S&P and Moody’s do not totally agree on that to be totally specific, but I can if you insist on it I will try I will sit down with (inaudible) and I will try to translate in something a little bit more factual than the rating guidance that was given to you. I will come back to you on that. If really that is important for your for the modeling of your projections.

Simon Schaffer – Goldman

Great, yes thank you that would be very helpful I think. And then secondly the biggest acquisition you have made to date, kind of in the last number of years has been roughly a billion for Intermagnetic and of course very helpful to see the slide just on the criteria that, you know, you are looking at it in terms of, when looking at acquisitions, but is a billion Euro the top of threshold that we are looking or just a lot of the capital structure now (indiscernible) what’s going on GSMC are we looking at potentially large kills than that?

Pierre-Jean Sivignon

Well you are correct Intermagnetics was the largest in the recent past I think that second largest being Lumiled in the middle of 2005 is that the biggest we will do, we could do bigger but, you know, I the two questions, I am always uncomfortable to answer is what is the portion of your realization of capital you will give to acquisition I don’t like answering these because I hate to say that we have a budget to acquire and the second question is what is the size of what you are looking at because every projects has to make sense on its merits and to a large extent regardless of its size when we look at a projects it has to make sense in terms of numbers but it has to make sense as well, in our capability to digest it, do we have the management to swallow it and those are the real criteria which we look at, could it be more than 1 billion, yes do we have a chance that its going to be very, very large multibillion (inaudible), the chances of doing that are less than something which is (indiscernible) five, I think that is the best guidance I can give to you. It is very hard to be much more specific, the one thing I can add is that you can always judge a company on what they have done in the past and I think the track record of what we have done in terms of discipline, size, capability to integrate, there are indications at least of what has been our inclinations so far.

Simon Schaffer – Goldman

Absolutely, thank you very much.

Operator

Our next question is from Didier Scemama, please state your name, company name followed by your question, please ask one question with a maximum of one follow up.

Didier Scemama - ABN AMRO

Hi it’s Didier Scemama from ABN AMRO, thanks for taking my questions. I would just like to go back to the medical margins. One of the things that you mentioned obviously about the growth rate at 6% that is ex-currencies, but can we talk about the cost side because you were impacted to a certain degree in the first quarter by the Euro dollar, however we haven’t seen that in the margins and I would suspect it’s a fair amount of your cost are in dollars. So we have the spot at135 and you are today I recon 131 or 132. Would you see the margins straining up more on the, due to the cost than the revenue growth?

Pierre-Jean Sivignon

Good morning, Didier actually, three answers. First of all on the cost, the cost base of the medicals, if you remember in the later part of Q4, we indicated to you that we would take some extra cost to trim down our city organization, you probably remember that, so those costs are actually we have not disclosed them because we think it is part of our regular expenses, so those costs though are included in our Q1 numbers and will certainly come with mileage in the coming quarters, because we have reduced our city expenses in North America. To your second question on the impact of exchange rate, if you look back at the structure cost and in terms of currency and the revenue base in terms of currency of medical, you will see that at Philips, it is pretty, we have a pretty natural hedge because not all our factories are in north America, we have factories as you know, in Europe, we have a joint venture now in Asia and I would say that in terms of currency mix, we probably have a rather balanced hedge between revenue cost across medical.

The one thing which certainly will help us gradually in the quarters to come is the increased supply coming from Asia, there I would say, there will be certainly some help the cost and the other thing which basically will continue to help us will be the leveraging of our City organization you remember that early last year we invested in our city expenses in particular in Asia and those cost on now and going to be considered as fixed and we should be able to leverage that. One more thing on exchange rates the one thing though you could say which still could impact us in medical is the translation exposure because of course when you translate back into Euro the earnings which are generated in dollars there if anything we could have a negative exposure. That probably is the only thing I could mention as for as the impact of currency and the results of medical.

Didier Scemama - ABN AMRO

I struggle a bit to understand how you can grow at 6% the top line with the backlog down Q1 and even if it goes up in Q2. I mean can you explain why?

Pierre-Jean Sivignon

Sure, no, no absolutely first, A. There is the strength of our backlog today for because the backlog we are describing to you is the one of course on equipment. Second is the growth of the other (indiscernible) in particular services. Services had strong growth actually in the first quarter of this year that is helping us as well and thirdly we expect the order income to actually be stronger in the second quarter of 2007. So those three elements together basically are the answer to your question on the 6% guidance for revenue this year.

Didier Scemama - ABN AMRO

Ex currency obviously?

Pierre-Jean Sivignon

Oh yeah, oh, no, no absolutely, always…

Didier Scemama - ABN AMRO

Yeah, yeah I know.

Pierre-Jean Sivignon

Always excluding (indiscernible) currency always excluding (indiscernible) method because of course, you know, if.

Didier Scemama - ABN AMRO

You don’t control that so?

Pierre-Jean Sivignon

Yeah, yeah we don’t control that.

Didier Scemama - ABN AMRO

And just a follow up would be on good management services when you said the 45 million was bit better than expected and, and obviously, it looks like your 280 million sort of guidance for the year is going to be beaten so can you just give us an idea of maybe an adjusted number for the full year, as you can share that with us?

Pierre-Jean Sivignon

I want to share the model I think could we do better we are as, you know, when we told you last year that we would work on that big pocket which was visible, we are doing it. So the guidance of the 50 basis points in terms of a quarter expensive is absolutely (indiscernible) its leading to the 75 million run rate reduction program which is well on its way and we are confident and we confirm that I think we mentioned it in the press release as far as the brand is concern, you know, what we spent, we know what we spent last year. We would south of that this year it’s a bit early to say how much south but we will be south of that amount and we will gradually come down that was in line with the guidance we gave to you in November during the meeting here in Amsterdam and we guided you. The other thing which is coming down is the pension cost and there we guided you in the press release. So, all in all, yeah we will come down to say much more, I think, let’s say it’s on a good trend and a trend we promised you late last year.

Didier Scemama - ABN AMRO

Final question would be, do we share a sort of a new margin base for DAP in Q1 or do you think that I mean I know you have explained that a bit already but I mean it is a spectacular performance you had in Q1, so is that a new base for the business going forward and therefore the sort of back-up over the year should be also higher than the last year?

Pierre-Jean Sivignon

Well, Didier it would be easy to tell yes and it would be, but I think we want to be disciplined. I think (a) we have been disciplined in the business and, you know, the value of DAP can come from two angles. It can come from its margin, but it can come as well from growth and we believe that the value of DAP comes essentially from its growth at high margins, and the discipline of last year is precisely what is enabling us to go at 17% in that first quarter so we are saying that we are shooting for more growth than guided, I mean that’s now our objective, I mean, that’s in the outlook of the press release. To say we want to change the guidance on the margin, it’s too early to say. I mean this is Q1 Didier I think we want to be careful there. I think we have been disciplined there. The discipline has served us well. If there is good news to come, we will give it to you. We will be more than happy to give it to you but at this point of time, discipline, discipline, and strong growth.

Operator

Thanks. The next question comes from Mr. Julian Mitchell. Please state your name, company name, followed by your question. Please ask one question with a maximum of one follow up.

Julian Mitchell - Credit Suisse

Yes, thanks. I’m Julian Mitchell from Credit Suisse. The main question would be just on lighting you know if you could talk a bit more about the restructuring now you talk about 34 million charged in Q1, and 20 more in Q2 coming. Please give a bit more detail about where that is taking place, how much will be left over in terms of the second half of the year, and so on and the second one follow up, you know you’re selling costs year on year in Q1 were up about 130 basis points versus sales, and I guess your sales growth as a whole will accelerate in the second half of the year so that will naturally come down but could you just provide a bit more detail on your selling costs, sort of ambitions across the different businesses?

Pierre-Jean Sivignon

Okay, to your first question on the restructuring, yes, we mentioned 30 plus. What is that 30 plus made of? It is actually made of 3 categories. One was the exit cost of LCD. I mean we told you at the end of Q4 that the backlighting in television is that maybe something which will take place but probably more with LED than with LCD. The good news is that we will represent there as well but on LCD we basically are disengaging from this particular one so there is cost related to that particular element. The second thing was we always have a little bit of restructuring at lighting every quarter and that is impacting us as well in that first quarter. I think it is the regular restructuring we have, we have a large (indiscernible) as you know still in lighting and we are continuously treating it and that is part of this particular thing we do.

And the third element was, in I would say, we have of course the integration cost of PLI which are impacting the EBITDA as well and that is playing a role. So those three categories are essentially the elements which are impacting the first quarter. Now for the second quarter, we mentioned 20 million, and there it is all in including essentially the ongoing restructuring which is taking place in the various parts of lighting. The one thing I want to say on lighting to an earlier question about the margin of lighting, please do not ignore the fact that last year was impacted by 11 million of realistic gain. So when you compare lighting like for like, lighting is clearly up like for like Q1 this year versus Q1 last year, you should take that into consideration as well. On setting expenses, you are correct, the percentage is a bit higher and it has to do with (a) the new acquisitions which are coming in, which have got higher setting expenses, that is something which we need to address but the other thing which obviously is playing a big role is the mix. The activities, with higher setting expenses are the ones which had the larger growth in that first quarter, and that is namely domestic appliances as well as lighting as well. Those two elements played a role in the mix. So I would expect for the year, setting expenses probably to go back down once the mix, I would say, reestablishes to something a bit more normal. What obviously played a role was the fact that it was down 6% on CE, C and by far the lowest percentage of setting expenses than that played a role as well. And we see bouncing back in the mix in the quarters to come and that will help as well putting setting expenses the whole of Philips back to something which would be more normal.

Julian Mitchell - Credit Suisse

Okay, thanks.

Operator

And the next question comes from Mr. Janardan Menon, please state your name, company name, followed by your question, please ask one question with a maximum of one follow up.

Janardan Menon

Just going back to your top line target which is 5 to 6% which we you are reiterating today as well on your outlook statements, I was just wondering, you know, your consumer electronics which is by far the largest part of your revenue Mix is going well below, is going minus 6%effectively year on year and I was just wondering where you are deriving the confidence to reiterate the 5 to 6% top line growth target in light of that even if you do hit the 6% growth in medical is there something that you foresee in the consumer electronics area in the second half of the year, which will help you to get to the target and a short follow-up is just can you give us what your order intake in medical services was for the quarter on a year on year bases?

Pierre-Jean Sivignon

Okay Janardan I think on the year on the 5 to 6 for the year where do we get the confidence first of all CE on this particular quarter the minus 6 if you exclude phones which was disclosed as, you know, you had a separate press release giving you the details of the phone transaction, the minus 6 is really minus 4 and moving forward with the phone being de-consolidated that will go away right from the negative comparison quarter for quarter. Secondly still on CE, if you look back at last year, CE had a steady start of the year. Q1 of CE was up 16% in the first quarter of last year and the second quarter was strong as well on the back of course of the world cup. And if you look back now at the latter part of the year, CE at slower couple of quarters in Q3 –and Q4 which will make of course the comparables in the latter part of the year much simpler so that’s the second part of the answer.

Certainly on CE there will be a new product introduction in the latter part of the year and we take confidence in this new product introduction, we believe that that will help us and beyond television by the way the rest of CE whether it is the whole networks, whether it is peripheral and accessories there we had actually businesses which grew in the first quarter and we take confidence from that and lastly, you know, taking indeed medical at 6% we have guided you implicitly on basically the lighting and DAP which should be, we expect north of the guidance that we had given to you. So when you combine all that basically we have confidence on the 5 to 6. Now to your second question, which is the incoming orders on services as, you know, as a rule we do not disclose our numbers on services we have not done it in the past, we don’t want to start doing it what I can tell you is that the incoming orders, in services were good. They were good this quarter that’s I think I can give you that information they were strong.

Janardan Menon

Okay thank you very much.

Operator

Thanks the next question comes from Mr. Leck Misoma (ph). Please state your name company name followed by your question. Please ask one question with maximum of one follow up.

Leck Misoma (ph)

Yeah hi good morning its Leck Misoma maybe more general question on the cash generation now could you help us maybe to get it clearer view where Philips could land in term of cash from operation after the first quarter and especially would you expect further positive effect from working capital I am talking especially on other current assets which where bit negative last year. Could we expected group 2 to move I will say around €2 billion net free cash from operation and I got a brief that all?

Pierre-Jean Sivignon

Well I think we have worked in terms of cash you remember last year our fourth quarter was that polluted by the impact of the sales of semi-conductors we had a lot of a moving parts in the first quarter. So we certainly plan have a cash flow which is easier to read in that year 2007. In terms of the elements of working capital we disclosed to you that inventory had actually come down by a few basis points largely driven by a drastic improvement at consumer electronics, which is quite important for us. Because its essential that we enter the territory where you go with new products we have actually inventory which are extremely low because that’s when your new products comes up and you want to have very, very low inventory at CE which is exactly where we were at the end of Q1. In terms of receivables we had a good performance at receivables actually our VSO come down in Q1 I can tell you that and payables as well were under control. €2 billion and, you know, I think that’s a too high I think its probably something like €1.5 I think its probably better number to look at €2 billion from the cash flow, no I think that’s as much guidance as I can give to you at this particular point.

Leck Misoma (ph)

Okay and just the brief one on regarding emerging businesses and what remains in terms of cooperate investments any chance that we are going to see further divestment’s to come this year. I mean relevant ones compared to the last (indiscernible)?

Pierre-Jean Sivignon

Excuse me sorry, you talked about divestments in emerging markets?

Leck Misoma (ph)

Yeah exactly, divestments disposals.

Pierre-Jean Sivignon

Oh sorry in the emerging business line, do we see more divestments? Yes. I think we said at the end of last year that we down to 11 actually today its probably around 3. Are we going to see more divestments on that line? Yes. Our objective is to be totally done with that particular portfolio, you know, ideally mid-year and at the very latest Q3, but the objective has not changed. That particular portfolio will be totally divested this year and it will take place.

Leck Misoma (ph)

Thank you very much.

Operator

The next question comes from (indiscernible) Please state your name, company name, followed by your question. Please ask one question with a maximum of one follow up.

(indiscernible)

Yes, good morning. I’m (indiscernible) the question on the lighting division as you mentioned earlier that the 14% to 15% EBITDA margin target for the full year was including setting MedQuist, extra cost. How about the lighting division? or 12% EBITDA margin target? Is that including the 34 million and the 20 million costs you’re expecting in Q2?

Pierre-Jean Sivignon

Yeah, I think the 12% EBITDA guidance is only. I think as we normally do, we always try to guide you with in all targets, so the 12% if only absolutely for lighting.

(indiscernible)

Yeah, thank you very much.

Operator

Thanks. The next question comes from Mr. Thomas Brenier Please state your name, company name, followed by your question. Please ask one question with a maximum of one followup.

Thomas Brenier - Societe Generale

Yes, good morning. I’m Thomas Brenier with Societe Generale. A question on lighting, just a follow-up on what you were saying on the energy-efficient products, Do you count all of Lumiled within that segment, and could you update us on the performance of Lumiled during the quarter in terms of sales growth margin versus your initial expectations.

Pierre-Jean Sivignon

Okay, can we describe Lumiled as a green product? I would say implicitly yes. I think Lumiled is a very high intensity lighting as, you know, with a low consumption, so this is where I go back to the earlier question on this call. Can I give you an overall mix of green products? It is difficult. We are working on that because this question is coming time after time. Could I say do I consider Lumiled to be green? I would say the vast majority as I said if not Philips lighting should be considered as green. As far as the performance of Lumiled, the guidance for the year is basically absolutely maintained. I mean with the 25% margin and the 25% growth for the year what exactly right now as Lumiled is that they are introducing a brand new product range which is called Reddle and we are expecting strong growth from that in the second quarter so the guidance for Lumiled no changing in this part of the agreement. Yes are there new products coming at Lumiled yes and that will continue to be the case.

Thomas Brenier - Societe Generale

Scan and presumably will be has it’s a continued to grow faster than the rest of the division.

Pierre-Jean Sivignon

Yeah oh yeah no, no absolutely I mean Lumiled historically we have considered with I think most of the point I think that usually margin so when we say lighting close at sixth, last year we did eight I think it was almost a point on the back of Lumiled and this year certainly we guiding you on lighting at six but Lumiled is at least the point in there and, if we can as we have indicated bit to six certainly Lumiled will very much being part of it.

Thomas Brenier - Societe Generale

And going forward lets say three five just do you expected margin Lumiled to stay around these levels. Because that would mean basically that at some point it will start to have an impact quite substantial on the on the margin of the whole division?

Pierre-Jean Sivignon

Yeah I think yes I think we expect the margin of Lumiled to continue the only condition to that is absolutely to continue to be the leaders and the undisputed I would say, you know, right in that particular category. I think the reason why I mentioned this reddel product introduction which is another breakthrough is exactly restricting that point so we will in the longer run Lumiled top I think a positive impact on the overall margin of the lighting yes, I think we guided you on that 12% EBITDA for lighting for the year and we said that there was some potential to be bit note of that. Yeah I think that’s what we said at the end of this conference in September last year and we standby that.

Thomas Brenier - Societe Generale

As that do you think that, you could be know for that already in '07 or it was that more?

Pierre-Jean Sivignon

No I don’t want to change it, I don’t want change the guidance I mean if you say much for DAP I think its too early in the year I mean if we are capable of changing guidance we will as, you know, we have giving you always as precise as we can when we can we will. I think its too early in the year for do that, its only the end of Q1.

Thomas Brenier - Societe Generale

Okay very, very short question on pensions you say €25 million for the full year, can give us the exact amount of Q1?

Pierre-Jean Sivignon

I think the Q1 was seven.

Thomas Brenier - Societe Generale

Okay.

Pierre-Jean Sivignon

I think we – I am told around that we have time for a few more questions, and then yeah so…

Thomas Brenier - Societe Generale

Thank you.

Pierre-Jean Sivignon

We can continue.

Operator

Thanks the next question comes from Mr. Mart Heldring please state your name company name followed by question. Please ask one question with the maximum of one Follow-up.

Mart Heldring - Kepler Lens

Good morning, it is Mart Heldring from Kepler Lens (indiscernible). I just want to come back to the Lighting division and the impact of the growth of what you call green products. As you said, the impact from the Lumiled on the margin going forward will be beneficial but will that be the same also for other green products, may be you could talk a bit about the, let’s say mid-term impact on the margin from this whole growth of green products and maybe you could also indicate whether you would expect any substantial uptake in capital expenditures in lighting because of its strength.

Pierre-Jean Sivignon

Again, I think given the number of questions we have on green products this absolutely confirmed that we will come back with a specific definition because I want to be very specific and disciplined here and answer you on the back of a precise definition. That definition today of green products, you know, is not specific enough to elaborate too much but, you know, if on this phone we say that green products is (indiscernible) lighting and some of the technologies like compact fluorescents or halogens or these kinds of energy efficient technologies as well as the Lumiled which include those kind of technologies. Let’s describe green products as that for the time being. Now to your question, are those products having an impact on the margin, yes, I mean, most of those products are high margins basically the good news about green products, that not only they are green but on top of that they are consuming less energy which means that for the buyers, whether those buyers are consumers or whether they are corporations, when they do their math, they are facing a product which consume less energy, and has a duration which is longer.

So that enables these particular customers to pay value for money on the back of something which is interesting for them. So all those products all in all having a positive impact on the margins of lighting, definitely yes. Lumiled, for instance, is a professional Lumiled is a business which drives a good margin for us. Now to your questions on CapEx, we are not expecting a significant change in the pattern of the capital expenditure of lighting. Actually you look at the CapEx for this quarter which is normal, the CapEx of last year and I think we disclosed that in previous press releases includes a 71 million Euro investments we had made in a building for Lumiled at the time we acquired Lumiled last year we needed that building for manufacturing (indiscernible); so that is why CapEx of lighting looked a little bit rich last year but I would say that the Capex for this year is that something which is much more in line with the time of Capex you should have for the year so we are not expecting any big change of Capex for lighting for the quarters to come. So 58 was the CapEx for 1, 52 was the depreciation and we don’t expect any much of change in that kind of trend for lighting.

Operator

And we have a follow-up question from Mr. Nicolas Gaudois, please ask one question maximum.

Nicolas Gaudois - Deutsche Bank

Just to clarify on domestic appliances when you say you could better again so thinking about 6 to 7 % year on year growth for this year or should have another number in mind thank you

Pierre-Jean Sivignon

I think the guidance for the DAP was 7 for the revenue and when we say we could do better. It is to be north of 7, the guidance for lighting was 6 and when we say we could better is to be north of 6 those are the specific numbers for this yearly guidance of revenue.

Nicolas Gaudois - Deutsche Bank

Perfect thank you very much.

Operator

Thanks we have a follow of question from Didier Scemama and please state at least one question.

Didier Scemama - ABN AMRO

Okay thanks for the question. Just going to the DAP margins, it seems like you had a flow through to EBIT in the quarter of about 45% so on the incremental revenues if you want, so I was just wondering I mean what’s underlying reason for this extremely strong performance beyond what you have written in press release Which is Avent and (indiscernible) I cannot really imagine Avent is the only reason that?

Pierre-Jean Sivignon

No it isn’t but Avent the only reason why we disclose Avent is because Avent Q1 was a quarter where we could really integrate the channels of Avent with the channels of DAP and we ended up and that’s why we disclosed in the previous, in the previous point we ended up I think more synergies that on that particular point that we had an initiative (indiscernible) now. Back to your question, why do we have such a strong performance at that, the answer is gross margin. I think when you are the leader in product category when you come up with innovations, you can (indiscernible), and the key driver for the improvement of the DAP was actually improvement of gross margins and I think, you know, the expense of the in (indiscernible) of the setting expenses that’s below the gross margin level and there that’s part of the model to continuously spend in order to have the right position in the right communication, in the right product category that the right store but the key thing the growth engine in terms of the margin in the gross margin and that is where basically we did well in Q1.

Didier Scemama - ABN AMRO

When you say gross margin, did you have a specific impact from the consumable products?

Pierre-Jean Sivignon

All categories, you know, I think it has been, we have been fortunate in Q1, cooking appliances did well, you know, when we say appliances, as you know, we refer to cooking appliances, that did well, shaving and beauty did well, or basically, all our product divisions, you know, and basically all OHC Oral Health Care which I forget to mention, I mentioned it in terms of introduction of new products, oral health care did very well. We are gaining share in oral health care in the particular territories where we are present as you know, UK, North America in particular.

Operator

Thanks, the last question for today comes from Mr. Martin Vondestader, please state your name, company name, followed by your question. Please ask one question with a maximum of one follow up.

Martin Vondestader - Bloomberg News

Good morning, Martin Vondestader from Bloomberg News. I was wondering if you say, you may exceed your target for DAP and lighting and you expect to reach your target from medical, it is fair to say that the overall sales of the company will exceed target or will CE be going down too much to do that?

Pierre-Jean Sivignon

No, no, I mean not at all, I mean, for the group to grow at the five to six even in the topical scenarios you described for the other three, you need CE to do well. You know, that on CE based, CE is 40% on the revenue,, you know, that on CE growth is not our objective because our objective is a business model with profit and the CE has not been profitable consistently for the last three years and we are quite proud of that its actually a very unique model in the CE business and we take some pride of that but CE will grow in 2007 and in order to make 5-6 profit we need CE to grow and CE will grow.

Martin Vondestader - Bloomberg News

Okay but if you say that the, you know, lighting and DAP will exceed target, could you say that the overall group will grow more that 5-6%?

Pierre-Jean Sivignon

No, I think it is too early to say, as you know, I mean, we have gone away from cyclicity, we have not gone away from seasonality we still have a very large chunk of the revenue of Philips which comes on the back of the fourth quarter. It is way too early to talk about that. Now we addressed reconfirming the 5-6 confirming guidance at all levels and I think it is too early much more on this particular point of time.

Martin Vondestader - Bloomberg News

Okay, very last question you say, DAP was manly driven by the growth margin, do you say what the gross margin was in the quarter?

Pierre-Jean Sivignon

No we don’t disclose gross margins I think I was answering the question from I think Didier Scemama I believe to explain why how does a portfolio works it is gross margin driven clearly which means that pricing is good. But we don’t disclose percentages of gross margin no.

Operator

Thank you Pierre we have no further questions at this time. Please continue.

Pierre-Jean Sivignon

Okay if there is no more questions, we thank you for your time, thank you for your attention and we say you good-bye.

Operator

Ladies and gentlemen, this concludes the Royal Philips Electronics first quarter results 2007 conference call. Thank you for participating you may now disconnect.

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