Koninklijke Philips Electronics Q3 2007 Earnings Call Transcript

Koninklijke Philips Electronics NV (PHG)

Q3 2007 Earnings Call

October 15, 2007 4:00 am ET

Executives

Pierre-Jean Sivignon - CFO

Analysts

Simon Smith - Citigroup

Nicolas Gaudois - UBS

Simon Schafer - Goldman Sachs

Julian Mitchell - Credit Suisse

Robert Sanders - Dresdner Kleinwort

Andreas Willi - JP Morgan

Jan-Willem Berghuis - Kempen

Alex Thurler - Merrill Lynch

Luc Mouzon - Exane BNP Paribas

Didier Scemama - ABN Amro

Tim Schultz - Bear Stearns

Marcel van de Hoef - Bloomberg

Harm Lutterhead - Bettern Financial News

Olubunmi Asaolu - Lehman Brothers

Presentation

Operator

Welcome to the Royal Philips Electronics' Third Quarter Results 2007 Conference Call on Monday, the 15th of October, 2007. For the introduction, we have Mr. Pierre-Jean Sivignon, Chief Financial Officer. 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. Pierre-Jean Sivignon. Please go ahead, sir.

Pierre-Jean Sivignon

Thank you. Ladies and gentlemen, let me first welcome you to this conference call for the third quarter results of 2007 for Royal Philips Electronics. As usual, I will make a few introductory remarks and then will open up the calls to your questions.

The third quarter was another encouraging step towards achieving our objectives for the year and strengthening ourselves for our 'Vision 2010'. The EBITA in the quarter was EUR438 million or 6.7% of sales and this compares to 5.3% one year ago after excluding the product liability related charge that we had. This increase is another good step towards achieving our target of above 7.5% for this year.

Comparable sales growth for the company was a robust 7% for the quarter. DAP took prime position with 20% and CE recovered to 8% as we had predicted. We were particularly pleased with our growth across all key emerging markets.

In Medical Systems, the comparable growth was 3% with strong growth outside the United States and the non-imaging business within the United States. Equipment order intake showed a 3% increase compared to one year ago, which again was strong outside the US and in the non-imaging businesses within the United States. We were negatively impacted by our US Imaging Systems business mainly as a result of the DRA impact. The EBITA percentage declined compared to one year ago and this was due to Imaging Systems, but more specifically in CT. If we were to exclude CT then the EBITA percentage would have increased by 70 basis points.

As we mentioned a few months ago, we are currently reviewing our options for our shareholding in MedQuist and will inform you about this as soon as possible. In DAP; the excellent quarter has given us a 20% comparable growth following 17% in Q1 and 14% in the second quarter. This very strong growth came in virtually all product groups and geographical regions.

Once again, we are benefiting from our investments in innovation, emerging markets and brand. We continue to foresee good growth for DAP, however the comparisons start to get tougher. EBITA of 18.8% in the quarter was strong and mainly a function of the higher sales and the managements of our costs.

Sales in Consumer Electronics, on a comparable basis, increased by 8% in line with our predictions. The growth came in all the individual businesses and with good growth in all key emerging markets.

The EBITA margin at 1.4% was a little higher than one year ago. We have seen improvements in all our businesses except connected display where margin pressure is ongoing, particularly in North America.

We continue to see the benefits of our business model which has kept the net operating capital at a minimal level.

The Lighting sales growth was 2%, being impacted by the contracting UHP market and our exit from LCD backlighting. Excluding these two areas the sales growth would have been 7%, being driven by the global demand for energy-efficient lighting solutions and emerging markets. The lighting EBITA percentage was higher than the third quarter of '06, even after allowing for items that we could consider as a one-off nature. The result for innovation and emerging businesses was inline with our expectations.

In Group Management & Services, we see the impact of our cost reduction actions that we announced almost one year ago. The brand expenditure at EUR26 million was a fraction lower than what we originally planned. We'll complete our EUR75 million cost reduction program this year, which will require one-off cost of approximately EUR10 million to be incurred in the fourth quarter of this year.

In OpEx figure, there is a non-cash charge of EUR91 million resulting from the reduction of the corporate tax rate in Germany, which lowered the value of our tax loss claims. This will give us a small positive impact on our global tax rate in the future.

During the quarter, we consumed EUR1.1 billion of cash, but this was for the purchase of Color Kinetics for EUR550 million and EUR789 million for the purchase of our own shares. We didn't consume any cash for working capital purposes.

The inventory percentage of 14.1% is 1.4 percentage points higher than one year ago. This is partly due to the impact of acquisition. We have no special concerns about our inventory position.

Results relating to equity-accounted investees had significantly improved due to the improved performance of LG Philips LCD. There are virtually no other items in this area of our results.

I will reiterate our intention to have leveraged balance sheet at the end of 2009 consistent with our rating objectives.

As you saw a few days ago, we have continued to reduce our stakes. In this case, LG Philips LCD and announced an expansion to our buyback at the particular time, details of which we will give you with the publication of our fourth quarter results on January 21st.

We continue to look for acquisition in the areas that we have designated that would add value inline with our guiding principles. We once again confirm our sales growth target of an annual average comparable growth of 5% to 6% and an EBITA of above 7.5% for 2007.

Let me now open the call for your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Thank you. Our first question comes from Mr. Simon Smith with Citigroup. Please go ahead, sir.

Simon Smith - Citigroup

Hi, yes. I had a couple of questions. One was on the Medical side and one was on the comments with regard to the next stage or next step in the capital return program. In terms of Medical, obviously, we've known for while there was toughness in the market.

I am always slightly curious to know why, sort of given ample opportunity to lower guidance through the year on the lower trends that you had in terms of margin. Why you so waited to this moment to accept the margins becoming that much lower.

Has there been a very sharp deterioration in the market, which caught you as a surprise? And leading on from that, the impact that you had this year, what would you now move your guidance down to and how would that affect the guidance that you've been talking about in 2008?

In terms of the capital return, I guess my question was really along the lines of -- your freight has been the next step in the program of capital return. Now, would I be right in thinking that that's indicating something more beyond just announcing another share buyback program?

Pierre-Jean Sivignon

Okay. To your first question, in terms of guidance on Medical, I think we have said on the back of the DRA, we said at the end of Q1, we talked about 1 point. We said the exposure is 1 points of growth. I think on the back of the Q2 revenue, we talked about 1.5 points. I think what we are saying in essence at the end of this quarter is that it could be 2 points.

I think it's been progressive. When you look really at the detail of the numbers, which we have, basically, what you will find is that we are doing pretty strongly out of the US and that is true across modalities. And we are doing in the US, well in the monitoring as well as ultrasound technologies. And I think that has actually offset to a large extent, the impact of the DRA.

And to be specific, I think if you ask me now for the guidance of revenue, I would say that the 1.5 percentage point that I've talked about at the end of Q2 is probably now more like 2 points.

And we have seen deterioration in the third quarter. I would say that late in the third quarter, we saw probably something a little bit more, I would say, strong than what we had anticipated on CT. And there, when you really trim down, you are a little bit split between, is it basically DRA or is it the fact that in the particular territory of CT, a new technology is expected at RSNA in a few weeks from now.

So, I would say, it has been progressive. The two points of lower progression of the growth is something which has come I would say almost 0.5 points by 0.5 points. And to your point, yeah, there has been may be something a bit worse than we planned late in the first quarter on CT.

Simon Smith - Citigroup

Could you maybe expand that into discussion of margin?

Pierre-Jean Sivignon

In terms of margin, basically the guidance was 14 plus. And in terms of margin for the quarter, we absolutely confirmed the 75 for Philips. And as far as Medical is concerned, we could have reverse the guidance up to 1 point. We could do better than that but at this point of time, and up to 1 point of risk.

Simon Smith - Citigroup

And obviously, I think in 2008 out of the back of the Capital Markets Day, we had the expectation of those margins rising probably up to 15% level. I mean obviously now if you're going to be 13% as a run rate, would that be an overly optimistic step up now?

Pierre-Jean Sivignon

No. I don't want to guide you right now on next year. But I think in terms of progress, first of all, we expect a strong fourth quarter. What I want to make clear is that incoming orders year-to-date are at 4.3%. So, I think that's something to keep in mind. We believe that we are doing better than the competition. We believe as well that there will be innovation coming out of RSNA. And the other thing to keep in mind is that, we are making progress not only in the non-imaging sales -- in orders I am sorry, in the US but we are making progress as well out of the North America.

So, I wouldn't change what we've said in terms of trend for 2008.

Simon Smith - Citigroup

Okay.

Pierre-Jean Sivignon

Yes to your second question. I think, well I think what I can say is actually in the press release, what we mean is what we've said, we have announced as you saw just literally a few days ago and until we could make that move, we were not too sure because we wanted absolutely to optimize and we were capable of selling down to 19.9% of LPL, but had to play very late as you saw last week, was a very successful transaction and I think you don't read more than what we've said, I think the next stage in capital reallocation, two shareholders will be announced at the end of Q4. I mean, we normally do that once a year and I think the next stage will take place at the end of Q4. I don't read more than what is actually in the release there.

Simon Smith - Citigroup

Thank you.

Operator

Thank you. Our next question comes from Mr. Nicolas Gaudois, of UBS. Please go ahead sir.

Nicolas Gaudois - UBS

Yes, hi, good morning Pierre-Jean. My first question would be back on Medical. Just to clarify, when you talk about 32 percentage point of impact for DRA, that respectively imply that your guidance for full year is closer to 4% top-line growth versus 6% initial.

Pierre-Jean Sivignon

Yeah. I think that's up to 2 points, yes Nicolas that's correct.

Nicolas Gaudois - UBS

Okay, kind of, and just as a follow up on Medical, as well, for new product introduction you talked early on about having a new PET/CT platform before year end, is this the long track and could this have an impact on [operating] the growth for rest of the year.

Pierre-Jean Sivignon

No, I think I can't say. Nicolas, I think it's -- I can't comment on any thing, I want to keep all disclosure for the benefit of the RSNA, but I do reiterate that into the questions what happens next year, there will be innovation of RSNA which gives us confidence that we will be able indeed to resume goal. I think I want to leave it as that and for the particular time Nicolas being so close to the RSNA.

Nicolas Gaudois - UBS

Right, fine sort of. Thank you very much.

Operator

Thank you. Our next question comes from Simon Schafer of Goldman Sachs. Please go ahead sir.

Simon Schafer - Goldman Sachs

Yeah, hi thanks so much. So, a question on Medical actually on the domestic appliances side clearly the flip side in terms of margin execution. Now, given what you've just said with the two point impact on Medical margins obviously to get to your overall corporate targets, how much upside should we be assuming in domestic appliances then on a run rate basis, in terms of margins?

Pierre-Jean Sivignon

Sorry, no-no just correction, I didn't say two points of margin on Medical. I said two points of revenue growth and up to one point of margin.

Simon Schafer - Goldman Sachs

Understood.

Pierre-Jean Sivignon

So, just to be absolutely specific. So, yeah, I think the 7.5% EBITA guidance is confirmed then I think in case we do not deliver on Medical, we will have to catch-up here and there in the rest of the portfolio and certainly the DAP is one of the candidates. Yes, I think I don't want to guide you more because, there you have a minimum guidance on the margin. But that is certainly one of the product divisions where we could do little bit better than the guidance in terms of coming up to the 7.5 only for Philips that's for sure.

Simon Schafer - Goldman Sachs

Understood. And then, just on the Consumer Electronic segment, the good amount of revenue upside. I am just wondering, whether revenue upside may have come from clearly not TV. So, where was the upside from in the quarter on the revenue line?

Pierre-Jean Sivignon

No, actually it came from TV, as well. We made progress everywhere including in television. What I said in the call, in the introduction, and I think it's mentioned in the release as well, was that, there were some pricing pressure on television in particular in North America but the growth was there, we had double-digit or shy of double-digit growth across the various business units of Consumer Electronics. So, I don't want you to read that television was a poor performer in terms of revenue. It did deliver growth in the third quarter as expected.

Simon Schafer - Goldman Sachs

Okay, thanks. And my last question is on MedQuist. You said, potentially reviewing your shareholding, what would be the options for you and what type of timeline should we be looking after that?

Pierre-Jean Sivignon

I think in terms of, there is nothing new. I think what is new is that they are now fully current with their filing with the SEC. I think that's a new piece of news where not only they are filed '06 but the first two quarters of '07 have now been filed. So, compared to where we were at the end of Q2, so the new piece of news is that their accounts are fully current. If you look at our press release of Q2, we mentioned about looking at more options. We've just renewed that particular comment on the back of what is now fully current account and that is a new piece of news on that third quarter.

Simon Schafer - Goldman Sachs

All right, thanks so much.

Pierre-Jean Sivignon

All options are open.

Simon Schafer - Goldman Sachs

Thanks guys.

Operator

As a reminder, would you please limit yourself to one question with the maximum of one follow up by this we will give more people the opportunity to ask question. Thank you, our next question comes from Mr. Julian Mitchell of Credit Suisse, please go ahead.

Julian Mitchell - Credit Suisse

Yes. Thanks. The first question was again just on Medical, because in year-to-date, you've done around about an 11% EBITA margin as you said for next year, looking at 15 to 16. So, just in terms of the bridge between the two, are you planning any cost reduction activities in that division or are you relying on price and volume to increase significantly over the next 12 months or so?

And then secondly, just within DAP, there was some sense I thought after the Q2 numbers. That in Q3, you would see a significant boost in SG&A expenses that might limit your margin expansion. Obviously, that hasn't happened. Should we expect a big SG&A boost in Q4 or is it just that the revenue growth is so strong that will offset that? Thank you.

Pierre-Jean Sivignon

Okay. Let's take them one-by-one. On Medical, you are correct. I think the year-to-date Medical EBITA margin is at 10.6%. Now, if you look at the pattern of margin across quarters, you will see that it's not always recognized. But the seasonality of Medical is quite strong.

We always have a very strong fourth quarter. We are expecting a strong fourth quarter again this year. I would say particularly strong this year because obviously, we have a bit of a back-ended situation this year. And the explanation to the numbers you mentioned for next year comes from the fact that we are very back-ended. And this year as well as probably next year, even though we tried to avoid that but that's difficult thing to try to push forward in the year of the deliveries of imaging equipments. But you will see that consistently, we have a very strong fourth quarter which helps you bridge to the kind of numbers you talked about.

Now, to your question on cost cutting, we always have plans and the plans that we have disclosed to you for this year will continue next year. And for reference purposes, those plans are reduction of IT expenses. Secondly, leveraging of selling expenses with a structure we have put in place in particular in Asia. And the third driver is, of course, the increase of the low cost sourcing of both components and sub-assemblies in order to actually help our cost of goods sold. And those initiatives are not one-year initiative. They will help us this year and they will continue to help us next year.

Now, to your question on DAP. Yes, we had guided you on an increase of selling expenses below the line in the fourth quarter and that will indeed take place as it did if you remember last year at the same quarter time. So, we are expecting an increase of the selling expenses. And if you want to compare basically with last year, it should be a notch above what we actually experienced last year. So, no change in our pattern and no change in our business model in DAP. We want of course the growth to continue there. So, there is no reason to change our business model there.

Julian Mitchell - Credit Suisse

Great. Thanks.

Operator

Thank you. The next question comes from Mr. Robert Sanders of Dresdner Kleinwort. As a reminder, please limit yourself to one question.

Robert Sanders - Dresdner Kleinwort

Yeah. Hi, guys. Just was wondering about the introduction of the Luxeon Rebel in lighting in Q4. I was just wondering if that was going to lead to an up tick in margin in the fourth quarter. And then finally, the second question is just on RSNA. You said you are launching a lot of new products like portable ultrasound, et cetera. Just wondering if any of those are going to be contributing to this year's sale or is that more about next year's sale?

Pierre-Jean Sivignon

Okay. I think to your first question, Rebel is absolutely there. It has actually been a bit late in terms of availability and orders consequences. But we've seen a clear pattern being established between actually July and September. In September, it started having an impact. And yes, I think it would certainly contribute on the backlog that we have on Rebel. It will contribute to the margin of lighting in the fourth quarter for lighting to make it number. So, Rebel starts being a player, starts in Q4 absolutely.

Your next question is on RSNA. Well, RSNA, I am mentioning it, because of course I want to send some signal for the growth next year of Medical. But I am really reluctant to say much more. We are very disciplined not to talk ahead of it in terms of specifics.

Will that have an impact on the revenue of this year? I don't think so. I think the revenue of the this year is largely happening out of the orders that we have done this year combined with a strong backlog that we currently have. So, I would say RSNA impact is for next year.

Robert Sanders - Dresdner Kleinwort

Okay. Thanks a lot.

Operator

Thank you. Our next question comes from Mr. Andreas Willi of JP Morgan. Please ensure you limit yourself to one question.

Andreas Willi - JP Morgan

My question is also on Medical in terms of the pricing in the market. You talked about a negative mix effect, the hospital where the customer straight down due to the more difficult market. Could you also talk about the pricing environment? Have you seen less discipline there from your competitors to may be an effort to shift some volumes this year?

And my follow-up question then will be on consumer electronics, where you talked about the good top-line outlook. You're not giving divisional guidance anymore, but are you still on track for the 3% EBITA margin in consumer electronics despite the margin pressure in the US TV business?

Pierre-Jean Sivignon

I think the reference to the pricing pressure is really a reference to a mix pressure in CT. I think it's specific to that particular modality. And there as I just mentioned on the first question it's odd to make the distinction between customers wanting to come down in the mix on the back of the DRA and of course customer expecting what comes up in terms of new technologies post the 64 slices, that was introduced in '05 on the back of, as we've said, in the announcement of RSNA.

So, that modality there was a mix pressure, as mentioned, we translated into a margin pressure. As far as the other modalities are concerned, I can't relate to any lack of discipline, we believe and I'll let you judge that by yourself from the presentation made by competition in the last of days. We believe that we are doing better than competition, we believe that we are gaining share. Basically I am not understanding that this is being done at the expense of margin and discipline in pricing. I think that, I would like to keep it on the particular subject of CT.

To your question on Consumer Electronics, you are correct, we are not guiding for next year, by product division which will now be called a sector, but we certainly have no intention to change the underlying model including in Consumer Electronics and I think that the situation, the pressure on connected display which is being referred to in the introduction of this call, as well as in the release, we have actually to offset it with the performance of the other BUs whether it is entertainment solution, whether it is home networks, or whether it is peripheral accessories as we had actually I think the opportunity to discuss, when we explain to you the strategy behind the consumer lifestyle, territory and the halo-effect of that models on some of the BUs of Consumer Electronics.

Andreas Willi - JP Morgan

So, you are on track to also meet the 3% EBITA margin in Consumer Electronics this year?

Pierre-Jean Sivignon

No-no absolutely, there is no change there.

Operator

Thank you. Our next question comes from Jan-Willem Berghuis of Kempen. Please ensure you limit yourself to one question.

Jan-Willem Berghuis - Kempen

Yes, good morning. My question was on CT again, you mentioned in the press release that without CT you would not have a decline of 70 basis points but actually increase of 80 basis points, I think. Obviously, if you sell less machines, there is some utilization rate effects. But is there also a cost effect related maybe to the introduction of the new machines or any other effect on the cost side of the equation because the impact of the CT margin pressure is quite significant?

Pierre-Jean Sivignon

Well, I think couple of things. We are talking margin now specifically for Q3, besides CT, we had a couple of issues related to supply. I think which are of a lower importance. We had on the X-Ray side and couple of issues on supply. So, I think, I don't want to make it completely and strictly the CT issues, some of the elements which impacted our margin in Q3, we will recover in Q4. So, I wouldn't want that the whole issue of Q3 is made strictly and thoroughly CT. Now, as far as introduction of new CT equipment is concerned. I think we've been in CT now for sometime and I am expecting that if we were to announce the new products on the back of RSNA, we would be able to do that in an efficient manner without any loss of altitude in the early days of the introduction of those products, I think CT is one of our strength. That's referred on the back of the DRA in the last couple of quarters as well as on the back of technologies which is 64 slices which was introduced two years ago, and of course, and that's goes on and new things will have to be introduced and will have to be done in a professional manner and I think that's what we're counting on.

Jan-Willem Berghuis - Kempen

Okay. Thank you.

Operator

Thank you. Our next question comes from Mr. Alex [Thurler] of Merrill Lynch. Please ensure you limit yourself to one question.

Alex Thurler - Merrill Lynch

Good morning. Just one question on Medical. The question is on, you've had about three quarters or so of looking at the behavior of your customers in relation in the United States and relation to the steps as reduction act and it's impact, what is your gut feeling say for 2008, would you expect the demand to pickup as you annualize the impact of the Deficit Reduction Act i.e. some of the purchases were postponed and they will comeback, or will we continue to see this kind of a negative price mix where hospitals are simply trying to keep their profitability therefore for 2008, you wouldn't expect a pickup in volume, but rather just a straight through continuing of sales as it goes now with hospitals looking to go down to lower value add products.

Pierre-Jean Sivignon

Okay. Just to go back to the DRA for one second. I think the DRA is essentially private centers and clinics and so-called private hospitals.

Alex Thurler - Merrill Lynch

Yes.

Pierre-Jean Sivignon

It's not really a hospital. And in terms of modality as far as the portfolio of Philips is concerned it essentially just for the record on CT, on MR and on what we called a nuclear medicine. I think those are the territories which are impacted and that's what we have to talk about. So, as far as the US market is concerned, I think that we have seen good performance, actually better than planned performance in monitoring and ultrasound. So that is clearly helping us and we expect that to continue next year.

As far as, basically X-ray, we expect the market as well which is not as I mentioned impacted by DRA to progress next year. Now for the particular DRA exposed territory, we've been there before. It has normally lasted quarters. It's never really been something which has lasted for years. But I will be cautious because until such time, we really see it bouncing back. It's a bit hard to make comments.

At the end of Q4, if hopefully we can see the market reaction on the back of RSNA introduction, may be that would be a good time to do a bit more of an update on the budget reduction deficit portion of the market which is exposed to that. I think it's probably a bit early to say that today.

There are lots of discussions which are currently going. Some of them are positive. Some of them are negative. So, it's fluid. And I think we need one more quarter to see what could be the impact on next year. But the important thing though is that there will be innovation. As I said ultrasound and monitoring are doing better. Some of the imaging modalities are not exposed and we have to see what happens. And of course rest of the world for us is doing well.

Alex Thurler - Merrill Lynch

Maybe then the follow up question on the RSNA impact, given that those would probably be premium product launches. Are you saying that you expect the markets still to buy those products despite some of the negative price mix in the CT segment we will see on the DRA year-to-date?

Pierre-Jean Sivignon

Well, I think in terms of CT, the market basically is spread. I mean it's really segmented. We have customers who are clearly interested in high-end products. So, they will feel that diversity is a way to attract customers to their business and they will feel that's of valid importance to have the latest technology.

And as that portion of the market is still there, for the customers, for whom, obviously it's less important and it's positioned in the path of the segment which is less, I would say, technology sensitive. There is an interest more than I would say normally at this point of time and that's part of uncertainty. There is probably an increased interest for the lower end of the mix. But we have to wait. I think as I just mentioned, we have to wait until the end of Q4 to see the impact of technology and to see where we will be with DRA at the end of Q4.

Alex Thurler - Merrill Lynch

Thank you.

Operator

Thank you. Our next question comes from Mr. Luc Mouzon of Exane BNP Paribas. Please go ahead.

Luc Mouzon - Exane BNP Paribas

Yeah. Good afternoon. Just a question with regards to the cash flow trends. It's about the second consecutive quarter that we had a bit of negative figures with regards to working capital. And just wondering going forward in the fourth quarter as we should get to normal, let's say, reduction especially on the inventory side and if you could just elaborate a bit on, how the cash flow from operations is likely to move over the fourth quarter? Thanks.

Pierre-Jean Sivignon

There is no change in our cash flow pattern. If you remember, last year, the Q3 numbers were actually a little bit polluted by the impact of the transaction on semiconductor. So, those numbers were corrected actually in the closing working capital and cash flow statements at the [unit control]. So, if you actually extract the elements on that line which is related to the semi conductor transaction as I mentioned in the opening to the call, there was no consumption of working cap in the third quarter despite the 7% growth.

So, no change to the working capital pattern and no change to the pattern of cash generation and a lot of it happening in Q4, and again on the particular subject of Q3, you have to ignore the amounts which would actually put Q3 statement on the back of the semiconductor transaction.

Luc Mouzon - Exane BNP Paribas

Yeah. And one follow-up, if I may? Still about the cash flow, as we have seen the trends of the share buyback is about 1.5 from January to September. Could we anticipate the remaining part to be done on the coming months or would you consider expanding that share buyback program?

Pierre-Jean Sivignon

Yeah. I think on the share buyback, you have to split it in two to be absolutely specific. We have a bit more than 850 million which is part of the initial 1.6 billion on the so-called second trading line. We are expecting more mileage probably -- I mean couple of hundred millions and more. We are pushing hard on that particular one to get as close as possible to the 1.6 billion by year end. So, you will see more activities there.

What we have done is that we announced with the press release of Q2 is we have launched another avenue of buyback, which has amounted to about EUR460 million in the course of the third quarter and there that was buying shares to actually expand the edging mechanism on our long-term intensive plans. So, this is adding up indeed to the amount that you just mentioned. So, on the hedging side, you won't see more activity in the rest of this year. On the second trading line, you will see little bit more on the second trading line still to take place in the fourth quarter.

Luc Mouzon - Exane BNP Paribas

Okay, thank you.

Operator

Thank you, the next question comes from Didier Scemama of ABN Amro, please go ahead.

Didier Scemama - ABN Amro

Good morning, Sciemama Didier from ABN Amro. A quick question on Medical, if I may, and then just a quick follow-up on CE. On Medical, I am just a bit surprised by in fact that the decline in margins given that you said that your exposure to the US CT market that was impacted by the DRA was relatively limited. So, whether can you explain quickly on that? I know you touched on it, but if you could explain a little bit on that. And related to Medical actually, can you talk about the backlog at the end of Q3 versus Q2. The direction it has taken? And on the CE side, given the fantastic performance you had in revenue. Are you a bit disappointed or not, maybe by the margin leverage?

Pierre-Jean Sivignon

Okay. That was on CE your last question?

Didier Scemama - ABN Amro

Yes.

Pierre-Jean Sivignon

Okay, all right. So, if you go back to Medical. Yeah actually, we had a shortage versus expectation, we had a shortage of revenue for the reason you mentioned. And basically on the margin, we were impacted by the reduction of the mix. The other thing which impacted us, as I mentioned was that, we had beyond, the strict DRA related situation, we had a few logistic issues on each way and some issue related as well to customer readiness. So, we didn't have all the revenue we were accounting on in Q3 and that actually related to the impact on the margin. One more thing you should not ignore is that we had at MedQuist as well a reduction of the revenue there of 9% which had a bit of an impact as well on the margin on that particular one. So, the combination of that led to, I would say the impact on the margin that we've just discussed.

On the CE…

Didier Scemama - ABN Amro

Also, can you just talk about the backlog in Q3 please?

Pierre-Jean Sivignon

Yeah. The backlog in Q3, if you look at our incoming orders for the quarter, 3% and that's pretty much in line with the growth of the revenue, actually, quite comparable to the growth of the revenue for the quarter, so the backlog more or less stayed intact and we are starting this fourth quarter with the strong backlog, which is why we've guided you on the strong fourth quarter for Medical.

Didier Scemama - ABN Amro

Okay. So, the backlog was flat Q3 versus Q2, but orders were up year-over-year?

Pierre-Jean Sivignon

Yeah. I think, if you look at our orders you've seen that we are at 3% for the quarter, but we are year-to-date at 4.3%, because you'll remember that we had a particularly strong second quarter at 12%, so we are actually finishing this third quarter with a strong backlog to address the fourth quarter.

Didier Scemama - ABN Amro

Okay. And the margin leverage in CE?

Pierre-Jean Sivignon

The margin leverage in CE as you know, it's in that particular case it's a gain of model where we want to shoot 3% for the year, and we don't basically try to do more than that. We try to deliver consistently the 3%, so, was they disappointed by the leverage? No. I mean especially if you consider that there was some pricing pressure on Connected Display in North America. So, I would say all-in-all for CE it was a good quarter. I think the interesting thing is in CE, what we had alluded to in previous calls and on the back of the 'Vision 2010' communication, we are seeing some of the views of Consumer Electronics again having an halo-effect from the DAP model and we are seeing some progress there. So, I think all-in-all the 3% stand but maybe with some nice progression in some of the other BUs.

Didier Scemama - ABN Amro

Okay. Thanks very much.

Operator

Thank you. Our next question from Mr. [Tim Schultz from Milan] of Bear Stearns. Please go ahead sir.

Tim Schultz - Bear Stearns

Hi morning. Two questions if I may. First just a follow-up on what you just talked on DAP, you talked about halo-effect from DAP to Consumer Electronics. Have you got any examples that you can share with us because as you say I mean that the margins still remained pretty flat and the pricing pressure is still there so?

Pierre-Jean Sivignon

Yeah, I think one element of comparison would certainly be peripheral and accessories. I think we don't like to talk explicitly about margin down to the BU level that's something we don't do and I will not do it around this phone but I can tell you that the margins there are above the average of the Consumer Electronics mix. And the second thing is in terms of model you're very much closer to a DAP model. Why? Because the shelf life of the products is longer, it would be longer than the traditional connected display shelf life which where if counted in months or may be semester, if you are lucky. Peripheral accessories you go with something which is beyond that particular horizon and the product category management, as well, and I would say the design are extremely important elements of the model and those are three criteria which you will find in the DAP model. So, that's what I mean by saying, hollow-effect from the DAP model.

Tim Schultz - Bear Stearns

Okay. But you are not suggesting that it applies to the two-thirds of revenues that is connected displays?

Pierre-Jean Sivignon

I think in connected display, as we've said in the past, we've only recently introduced a Philip design to the display of our connected display. So, there I believe that the full impact, for instance, bringing design is something which is still very new in connected display and the impact of that will have to come in the future.

So, I would say, this is probably the business unit which was the last in the line in introducing a design. As far as shelf life, the nature of connected display is that in the strict consumer electronics industry there, shelf life is as you know quite short and that's not something which is changing.

Tim Schultz - Bear Stearns

Okay. And just a follow up would be just on Intermagnetics. Since you acquired that business in the November of last year, could you just talk about what you've seen in terms of external sales and I'm guessing most specifically, over the last couple of quarters, what have you been seeing there?

Pierre-Jean Sivignon

Well, I think we have discussed this at the end of the last quarter. MR is of course one of the modalities which is impacted by the so-called having our own modality. But I think what's interesting on the MR is -- or market share and the progress we make and we restating that we are regaining a little bit of the mileage on that particular modality. I think it's a modality where have stabilized the situation. We were I would say defensive until last year and the bringing of Intermagnetics is bringing us a new strength, which is still to come. So, I would say that we are feeling better about MR on the back of the Intermagnetics, post the acquisition of Intermagnetics at the end of last year.

Tim Schultz - Bear Stearns

Great. Thank you.

Operator

Thank you. Our next question comes from Mr. (inaudible). Please go ahead, sir.

Unidentified Analyst

Yes. Good morning. Maybe one question, only to (inaudible) business units and maybe what you are forecasting for Q4? How much maybe since has changed compared to the situation at the beginning of the year? So far, is it positive or negative?

Pierre-Jean Sivignon

Yeah. I think when I was quizzed on -- what's happening was the margin of the Medical, I mean that's one reason, I didn't use and maybe I should use it because it's real. We are in terms of translation exposure -- we have some exposure. We do make money in North America usually in Medical and there we are impacted on the translation side.

I wouldn't tell exactly how much, because if I do you could almost immediately calculate our profit in North America in Medical. But we have got some exposure there and it has played a role in the EBITA margin of Q3 and probably will continue a LIFO like comparison in Q4. That's on the translation exposure.

On the transaction exposure, which is of course the one to follow, there we continue to be between I would say the nature of our costs in terms of currency mix as well as combined with our edging strategies, I think we have largely a balanced situation from a transaction exposure point of view.

Unidentified Analyst

For the whole company not only for Medical?

Pierre-Jean Sivignon

For the overall company, absolutely. Not only for Medical. That is correct.

Unidentified Analyst

Okay. And then Consumer Electronics, its positive, the dollar is weak or not?

Pierre-Jean Sivignon

Well, I think on Consumer Electronics where we are punished is essentially on the revenue growth, because as even though we convert dollars into euros and there we take a beating, it is actually an industry which is really driven by the difference between Asian currency and the dollar. And I would say that we take probably more of a beating than proceed on the revenue side. But on the margin side and I am talking their at comparable growth. On the margin side, as much as we can, we try to have our cost located at the center at which where we have revenue. Given that most of our fixed costs are outsourced and we try to locate them as close as we can to the geography of our revenue generation.

Unidentified Analyst

Okay. Thanks a lot.

Operator

Thank you. Our next question comes from Mr. Marcel van de Hoef of Bloomberg. Please go ahead.

Marcel van de Hoef - Bloomberg

Yes. Good morning. Just one question for clarification, the EBITA margin of the Medical unit in 2007, will it be around 13%. And secondly, do you expect to finish the EUR1.6 billion share buyback through the second trading line or did I understand that there is also other ways to get to that amount. And will your Medical performance affect the group's sales growth forecast. Will it be between 5% to 6% this year or will there be a change there?

Pierre-Jean Sivignon

Okay. Let me take them. So, your first question is the guidance on the Medical. I mentioned in the call that we could be up to 1 point short of the guidance on the EBITA margin for the Medical. I think that is your answer there.

Your second question relates to the buyback. Yes, I think we have 1.6 billion on which we are using as so-called second trading line. There we are at 850 plus with still more action to come. And we have combined that with another avenue, which was announced in the course of Q3 which is a change in the hedging, I would say approach to our long-term incentive plans and that has led to an additional EUR450 million of buyback which has already taken place in the course of Q3. So, if you combine the [SDL] and the change of hedging approach to long-term incentive, yeah, we might be in excess of 1.6 billion if you combine those two, yeah.

Your last question is on the guidance on the revenue growth. As you know there, we don't have guidance per year, we have average 5 to 6 our goals and we stick to that.

Marcel van de Hoef - Bloomberg

One short follow-up question. So you said, you might exceed the 1.6 billion share buyback program, because you also, you see other avenue?

Pierre-Jean Sivignon

No. I am saying that the 1.6 billion, which was announced, was using one particular vehicle which is called the SDL. There we're not quite there and we're making progress. Right now, we are slightly north of 850, but what I am saying is that in addition to that program, we announced that we were going to increase or hedging via shares owned by Philips and accordingly, both on the market, so increase our hedging, although a long-term incentive program and that led to an additional EUR450 million worth of Philips shares which were acquired in the course of Q3.

Marcel van de Hoef - Bloomberg

But does that mean you still have EUR750 million to go on the second trading line or will you take the 450 of that amount?

Pierre-Jean Sivignon

No. That means that we will continue to work to get as close as we can get to the 1.6 billion. I mean those are two different vehicles on the second trading line.

Marcel van de Hoef - Bloomberg

Thanks.

Operator

(Operator Instructions). Thank you. The next question comes from Mr. Harm Lutterhead of Bettern Financial News.

Harm Lutterhead - Bettern Financial News

Yeah, hi. Question about the new products, how are they picking up?

Pierre-Jean Sivignon

Basically, I think you have to look at product division by product division. If you look at DAP the 20% growth of this quarter is clearly something which is showing that innovation works. I mean to give you three examples, in DAP we have a new line of shavers which is called Arcitec, which is now being introduced just about everywhere. We have a new line of LC and cooking appliances which is being introduced right now and we have new oral healthcare electric power toothbrushes which are being introduced as well in the market where we propose that product. So, that's called DAP and that's all doing extremely well. In the case of lighting, we have the products which are basically so called growing products which are low energy consumption products. Lot of it around the products which are innovative that has grown by 17% in the course of the third quarter. So, we have good growth there. In Consumer Electronics, you could see that the negative growth of the Q2 has transformed into 8% positive growth in that third quarter. We have new products across all product categories and I think that certainly shows that if I have to designate one Aurea which is a brand new flat panel or LCD television, certainly is helping us to give one example in the domain of Consumer Electronics.

And in Medical besides the issue of DRA, we have innovation which we introduced along the year, which are helping us towards goals, which is certainly above competition on these quarter and which I think has there as well across modality and as I said waiting for whatever will be announced in the RSNA in the few weeks to come.

Harm Lutterhead - Bettern Financial News

Yes but the Aurea you mentioned and the shavers have they made a contribution yet into the third quarter?

Pierre-Jean Sivignon

Yes they have started, shavers have started contributing, will certainly contribute even more in Q4. But shavers, cooking appliances definitely has contributed as far as innovation is concerned, there were other factors to that growth, but that's certainly one of the contributor to that growth in Q3.

Harm Lutterhead - Bettern Financial News

And do you think, those new products will even make it possible for higher margin in the deficient DAP?

Pierre-Jean Sivignon

Well, I think the model hasn't changed, I think, I have said earlier in the call that there is a chance that the margin of DAP would be above guidance for the year. But we've said as well in an earlier question that we will have selling expenses which is started on model in Q4, which will take a bit of a negative affect on the margin of DAP for the year. But yeah, I think clearly as DAP is on a very strong yeah, both in terms of margin as well as in terms of revenue growth.

Harm Lutterhead - Bettern Financial News

And one last question about the Aurea. I have been told by one of your people that it's been sold out for the whole year already. Is that correct?

Pierre-Jean Sivignon

Yeah. This is true. Yes. That's a fact.

Harm Lutterhead - Bettern Financial News

Only for 2007 or also for well a year-to-date?

Pierre-Jean Sivignon

No. I think we don't have it. It's not a business where you have such a long backlog. Aurea was introduced with a relatively small quantity of products, because we wanted to test a marketing concept with price points, which was significantly different from what we were doing on the CT until this day. And the answer is that it is for what we can see, a success. But the impact on Aurea in Q4 and in Q3 will be modest, and to talk about next year is too early, because this is not an industrialist's backlog.

Harm Lutterhead - Bettern Financial News

Could you say anything about numbers regarding the Aurea?

Pierre-Jean Sivignon

Aurea is very insignificant. I won't give you numbers. But it is not significant to the connected display and broadly Consumer Electronics sales.

Harm Lutterhead - Bettern Financial News

Okay. So that has to speed up next year?

Pierre-Jean Sivignon

Yeah. But certainly we plan to extend it and broaden the range of Aurea next year. But that's bit too early to talk about it.

Operator

Thanks. The next question comes from Mr. Olubunmi Asaolu of Lehman Brothers. Please go ahead.

Olubunmi Asaolu - Lehman Brothers

Hi. Good morning. Just one question on your 2010 target and the contribution of CE to that. I know that you said you won't disclose your divisional targets from next year, but also backend with the absolute numbers, if one were to look at these divisions independently. So, since those divisions are on target and fixed with set of groups year-on-year, anyways, can we assume that your sales growth for consumer will be close to 6% as well going forward? And if that's the case in what areas actually that will basically come from? Thanks.

Pierre-Jean Sivignon

Well, first of all, the 6% guidance which was a 7 plus percent guidance on DAP for this year, that guidance did not apply to Consumer Electronics for 2007. Moving forward, you have mentioned that, while the model won't change. The guidance for Philips goes from average 5 to 6 to minimum of 6 and obviously, the models and growth will have to have a little bit of growth from everywhere, I guess, right. I think we haven't guided you there. But we don't expect any major change there even though we won't guide you on it. There is nothing really going to change in the future in our models and in the way we operate.

Olubunmi Asaolu - Lehman Brothers

The reason why I ask is, because CE with the divestments that happened recently, I would assume that the growth really hasn't picked up that much. So, to get to that average 6% if the other divisions are growing grossly around at least 6% to maybe 7% in some of the divisions, then CE will have pick up.

Pierre-Jean Sivignon

Yes. You are correct. But on the other hand, as far as CE is concerned, we will give a priority always to the margin in particular in the domain of connected displays. But the margin of CE right now is rebounding and we believe that over the period of next three years, the portfolio we will have -- we are confident that we will able to deliver the kind of growth we have guided you on.

Olubunmi Asaolu - Lehman Brothers

Thank you.

Operator

Thank you. The final four questions are follow-up questions. Please make sure you limit yourself to one question each. The first question comes from Mr. Simon Smith at Citigroup. Please go ahead. Thank you, Mr. Smith. Your line is open. Please continue.

Simon Smith - Citigroup

Yes. The question I have is with regard to MedQuist. I just wondered if you could give us some clarity as to what financial impact within your number has been from MedQuist and what you'd think that would be going forward?

Pierre-Jean Sivignon

Basically, in this particular quarter, you saw that we have actually disclosed the reduction of revenue of 9%. In terms of impact on the bottom line, it has a few millions, because as you know we are still, and I guess we are coming to the end of this because them being [current] as I mentioned earlier on the call that was the result of quite a lot of work. We are absolutely happy that's now done. So, but that adds still a few million of euros of negative impact on the EBITA of Philips Medical in the third quarter.

Simon Smith - Citigroup

So, a few million negative in Q3 and my timing at that run-rate?

Pierre-Jean Sivignon

Yeah. I think, until everything is basically taken care of, i.e. not only being current but taking caring of your very shoes, it's never gone to be very accretive or very negative, but we are around that kind of number. And if you want to know on which side of the zero it is, it was slightly on the negative side of the zero, all in for Q3 for us.

Simon Smith - Citigroup

Thank you.

Operator

Thank you. Your next question comes from Julian Mitchell of Credit Suisse. Please go ahead.

Julian Mitchell - Credit Suisse

Yes. Thanks. My follow-up was really just on your US market. Overall I think you saw comparable sales in the Q3 down 1%. Obviously lot of that is Medical CT related. You said several times. So I was just wondering if you could comment on the general trends that you are seeing in your US demand sort of across the different businesses. Obviously a lot of concerns about the macro situation and so if could just tell us what you are seeing there?

Pierre-Jean Sivignon

Yeah, I think for the consumer side you can clearly see that DAP is doing well, so there I would say the important element is to continue to deliver some growth on the back of innovation that we are introducing. I think in the US what I want to add is for Medical, we are positive I mean I wouldn't want you to conclude that US was negative growth in Q3, thanks to the performance in the non-DRA impacted modalities, we add positive growth in the US for Medical in the third quarter. I think so these two were actually basically up, where we took a little bit of a negative growth in lighting essentially because of UHP. I think the real lighting in television, as it was disclosed in the release, that market is taking a beating right now and that is impacting us. But we are dealing with difficult comparables year-on-year and looking forward we would be looking at easier comparables and of course with the impact of the growth coming from the new product range of Lumiled that would help us moving forward for lighting North America. And finally on the consumer electronics, there -- we as you know, and we've been very explicit about that, we do very careful category product management in the domain of CE and in particular in connected display. That means that if we don't like the margins that are on the table, we tend to runaway from that particular revenue.

So I would be a bit more prudent on CE, because there as we have said a couple of times in this call what governs is our module. So to summarize the two [period] work which were Medical and DAP. CE, there was driven by careful category management on the back of our module and Lighting was hurt by the particular situation of UHP, was a good news to come on the back of Lumiled and less difficult comparables for UHP for the quarters to come. So that indeed concluded in that the -1% for the US for that Q3.

Julian Mitchell - Credit Suisse

Great. Thanks.

Operator

Thanks. The next question comes from Mr. Nicolas Gaudois of UBS. Please go ahead.

Nicolas Gaudois - UBS

Yes, hi, quick follow-up on the US CE actually. I mean are we back in the situation, now where we were in around breakeven or slight negative or breakeven margins there or are you still maintaining above breakeven?

Pierre-Jean Sivignon

No I think what it depends -- it depends on the product division. Are you talking about?

Nicolas Gaudois - UBS

Consumer electronics business?

Pierre-Jean Sivignon

Consumer electronics. I think in consumer electronics it's probably going to be tough call this year to breakeven. I believe given pricing pressure on connected display. And I think equally on this one, we are doing category management. We're doing good progress, because we are making very nice progress in the other BUs, which I have described, whether its home networks, whether its peripherals or whether its entertainment solution, but pricing pressure on connected display might make that one a tough call consolidated in the US this year.

Nicolas Gaudois - UBS

Okay fair enough and just very briefly on the consumer healthcare solution side, could you just gives an idea of what have been the revenues for the first nine months, just to help us modeling this into Medical for next year?

Pierre-Jean Sivignon

Yes, I think what I can tell you is that it was one of the good news, what I can tell is that we had in terms of EBITA a contribution to what is today in Emerging and Innovation on that particular line, we were in positive EBITA territory for the third quarter, and this will actually continue to make progress next year.

And in terms of revenue, I think that you should be looking at a couple of hundred millions I would say for next year on the full year basis, coming in from that line into coming from Innovation and Emerging businesses in to PMS for next year.

Nicolas Gaudois - UBS

Excellent. Thank you very much.

Operator

Thank you. The next question comes from Mr. Didier Scemama of ABN Amro. Please go ahead.

Didier Scemama - ABN Amro

Yes, thanks for taking my follow-up. My follow-up is on the DAP business. It has been an exceptional performer over the last few years, but I think in your introductory remarks you said that you thought the comparables were getting a bit tougher. And I mean I guess the Innovation will sustain the performance, but how much upside is there really in the margins of that business?

Pierre-Jean Sivignon

Well I think Didier if you go back to last year, you will see that the fourth quarter of last year for DAP was up 13%, I mean this is when I -- I think this a quarter where we started going into double digits and we have been in double digits consistently now for almost a year, if you include that fourth quarter.

The good news though is that a lot of the Innovation we talked about was introduced very late in the year. I think in the domain of the new [personal] care products have just being introduced. So, the mileage from that brand new line is just coming out.

Arcitec, which is a new line of shavers, has just been introduced. And as you probably know, we get the best mileage in terms of growth normally at the end of year one, of a product introduction. So, that means that we normally statistically -- those new innovation as of now, which are quite significant for DAP should give us mileage in particular in the later part of next year when we actually need it.

So, in terms of growth we are entering more difficult quarters, because we are now starting to compare to the double-digit growth quarter, which started with the fourth quarter of '06. But again, we are doing this on the back of strong product innovation and as mentioned probably very strict category management in emerging markets, which for now two quarters, is really helping us on DAP.

To the margin again, it would be very tempting to let the margin go up. But, we will continue to invest. So, I think as far as the margin of DAP is concerned, there is probably a bit of upside, but we will be controlling that upside, so that the growth can continue because we want the growth to continue at the kind of level we had guided you for the year. If you remember it was a seven plus. And to continue to do that on the back of the strong comparables that we now have, we need to be very disciplined with our business models. So, I would not expect the margin to go well above the model and the guidance that we had given you so far. We will try to stick to that.

Didier Scemama - ABN Amro

Great. Whether just can you actually explain quickly on the margin offset in Q3, I know it's normally one of the strongest quarter for DAP, but was there any particular event that drove the significant upside?

Pierre-Jean Sivignon

No. I think -- no, I believe that the volume is quite strong. The mix is obviously, quite, quite strong as well. We've had double-digit growth in all categories with the, except of one. And as you know that the selling expenses are usually stronger in Q4 because that's when you prepare for -- because right now as you are aware, basically, you get ready for the Q4, for the so-called selling season, but you spend quite a bit of money, ironically, late in Q4 in order to make sure that the first quarter continues to be a good quarter. So, I think in Q3, we have a complete homerun in terms of growth, in terms of hitting all the right targets with the right product mix and countries, and in Q4 we will have the usual investments of selling expenses, to not only to make Q4, but more importantly to deliver a strong Q1. So, nothing particular there Didier.

Didier Scemama - ABN Amro

Okay. Thanks very much.

Operator

Thank you. The final question comes from Mr. Tim Schultz from Milan of Bear Stearns. Please go ahead.

Tim Schultz - Bear Stearns

Well, I just had a quick housekeeping one actually. I don't know if I missed it. On the Semiconductor division disposal you have some tax. I think the (inaudible). Can you just remind me what the magnitude and timing of that is?

Pierre-Jean Sivignon

Well this is still -- we have never really disclosed that because we still have discussions currently going. We have said that in the course of this year we would have some tax related -- cash related, sorry some cash related tax payments on the back of the semi-transactions, but those payments have not really taken place yet, and it's not for me to guide you because we want obviously to minimize those and we are having discussion with various tax administrations. So for the sake of keeping as much leverage as we can I would prefer to leave it at that for the time being.

Tim Schultz - Bear Stearns

Not even a sort of double digits, I mean just an order of magnitude?

Pierre-Jean Sivignon

Well, in any case it would be essentially -- it would be a completely a cash element because we believe that in terms of bottom line impact the provision that we have taken are sufficient. So I can give you comforts from a P&L point of view. From a cash point of view we could have a few hundreds of millions related to that in the quarters to come but I can't be much more specific at this particular point of time. But the P&L is not going to be impacted.

Tim Schultz - Bear Stearns

Okay, very helpful. Thank you.

Operator

Thank you, Mr. Sivignon there are no further questions. Please continue with any further points you wish to raise.

Pierre-Jean Sivignon

No, I think we have no particular points. We want to thank you for your questions and good bye to you.

Operator

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.

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