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

Q2 2008 Earnings Call

July 14, 2008 4:00 am EST

Executives

 

Pierre-Jean Sivignon – Chief Financial Officer, Executive Vice President, Member of the Management Board

 

Analysts

Nicolas Gaudois - UBS

Andreas Willi - JP Morgan

Olubunmi Asaolu - Lehman Brothers

Alex [Furlot] - Merrill Lynch

Simon Schafer - Goldman Sachs

Marcel Achterberg - ING

Alexander Peterc - Exane BNP Paribas

Scott Babka - Morgan Stanley

Robert Sanders - Dresdner Kleinwort

Martin Wilkie - Deutsche Bank

Didier Scemama - ABN AMRO

Gaël de Bray - Société Générale

Günther Hollfelder - Uni Credit (NYSE:HVB)

[Didier Bak - Lessa Cobe]

 

Operator

Welcome to the Royal Philips Electronics second quarter results 2008 conference call on Monday the 14 of July 2008. (Operator Instructions) I will now hand the conference over to Mr. Pierre-Jean Sivignon.

Pierre-Jean Sivignon

Welcome to the conference call on the second quarter results of 2008 for Royal Philips Electronics. I will make a few introductory remarks and then we will open up the call to your questions.

Overall we delivered a strong performance in the second quarter especially against the background of deteriorating economic conditions in many of the mature markets. We are particularly pleased with the performance of our lighting and consumer lifestyle businesses both of which grew strongly this quarter.

In healthcare revenue increased significantly due to Respironics and higher sales at clinical care, monitoring and customer service. Healthcare order intake was good especially compared to an exceptionally strong Q2 last year. Comparable sales growth for the company as a whole was 6% driven by 16% growth in emerging markets.

We saw good growth at consumer lifestyle, health and wellness, television and domestic appliances and at lighting where sales of green products increased by 16%. Healthcare sales grew 3% comparably. Strong growth in most businesses was tempered by flat emerging sales in the quarter ahead of what we expect looking at our backlog will be a stronger half of the year.

Let me now look in more details at our healthcare results. As I mentioned sales growth was concentrated in home healthcare, clinical care, patient monitoring, and customer service. As we expected overall margin system sales were flat although we did see some growth in a couple of modalities, notably MR. Healthcare order intake was solid at 4% especially in light of the double-digit order growth in Q2 last year, 12%, and the 9% recorded in the first quarter of 2008. This takes the year-to-date order intake growth to 6%. In the quarter we saw growth in the order book for clinical care, monitoring, and to a lesser extent imaging. International order intake was stronger than in North America.

The EBITDA margin for healthcare was below last year impacted by acquisition related charges and lower margin at imaging systems due to a less favorable product mix ahead of the shipments of new products planned for the second half of the year. Home healthcare, clinical care and healthcare Informatics also improved margins in the quarter. consumer lifestyles delivered strong comparable growth sales of 7% supported by double-digit increase in emerging markets and along the business access by higher sales at health and wellness, television and Domestic Appliance.

The profitability of consumer lifestyle was 3% in the quarter. These results included a gain on the sale of our set top box business as well as the impact of restructuring charges, largely the television business. Excluding these charges the television margin improved both year-on-year as well as compared to Q1 this year. The other consumer lifestyle businesses again delivered double-digit profitability with Shaving & Beauty as well as health & wellness in particular showing resilience in their margins. Importantly we also announced this quarter a further decisive step to improve the profitability of our TV business through a brand license agreement with TPV on PC monitors.

At our light business nominal sales increased by 19% due largely to the addition of Genlyte which also performed well this quarter. On a light-for-light basis sales increased by 6% thanks to 16% growth in energy efficient lighting solutions including strong sales at Luminaires and 18% sales growth in energy markets. EBITDA at lighting was 202 million Euros in the quarter up 41 million Euros off 60 basis points of sales compared to last year supported by the recent acquisitions and the ongoing profitable growth of Green lighting Solutions.

EBITDA at innovation and emerging business was in line with our expectations including some additional investments in healthcare incubation. We expect IN&B to report an average investment of around 40 million Euros per quarter for the rest of 2008 showing then an input EBITDA compared for the first half of 2008. The EBITDA at Group Management Services improved significantly as a result of a gain on the sale of real estate and a shift in the spending pattern of our brand campaign.

As expected our net cash position end of the second quarter lower due to the plan repayment of 1.6 billion of debt that were refinanced earlier in the year via a bond placement in North America and a further 1.8 billion of cash returned to shareholders via payments of our annual dividends almost 600 million Euros and ongoing share buy-back program 1.2 billion for the quarter. We received the cash inflow from the timely sale of a further stake in TSMC and from operating cash flow which we were pleased to see improve this quarter.

Inventory levels increased mainly due to recent acquisitions although we did see above average stock levels in some businesses in lighting and consumer lifestyle that we’ll bring back into line during the coming quarter. Television inventory has come down versus the end of the first quarter.

Year-on-year net income was impacted by lower gains on sales of shares of TSMC, the impairments of NXP following deterioration in market conditions late in the second quarter, and the cessation of a quick year accounting for our stake in LPD. On a recurring basis net income was on par with last year.

With that let me know open the line to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Nicolas Gaudois - UBS.

Nicolas Gaudois - UBS

The first question would be regarding healthcare, could you describe a little bit how you saw the environment evolving in the US and whether your prior comments at the end of this day of the market or for US equipment for you to be largely flat this year still remains in force? And then I’ve got a follow up.

Pierre-Jean Sivignon

I think Nicolas you have to make the distinction for; I am assuming that your question is particularly imaging systems, right?

Nicolas Gaudois - UBS

Yes.

Pierre-Jean Sivignon

I think as far as equipment is concerned let me first go big picture then I will zoom on equipment, excuse me on imaging systems, on equipment 4% for the quarter. You saw that we had high comps last year so that 4% has to be put in that particular perspective when you compare Q2 to Q2. I said that in the introduction. And you probably recall as well that we started the year with a pretty strong number.

So year-to-date 6%, so that’s a number we like to be at. This is usually not including Respironics. That’s not included in the comp. So 6% is where we want to be because that’s the underlying growth we want to see in that particular portfolio.

Now to zoom on emerging systems which is your question, Steve Ruscokowski had talked about flat for the year. I think if I look at basically the order intake for equipment in North America for this quarter after the very strong first quarter we were actually in negative territory for this quarter so year-to-date we are in positive territory so the so-called neutral and the waiting to see what comes up next I think that is still going to be our position for imaging systems North America.

I will add to that Nicolas, and that’s why I think in a quarter from now I might be saying different things, you must have seen the important news which came out last week as far as the [inaudible] themselves, as far as the fee they get on the exempts which of course there was a level of anxiety there if their fees would be cut. There was a position taken in the US that those fees were now frozen for the next 18 months so certainly they will see that as a positive and you probably remember that the second big question mark was as far as reimbursement of procedures by Medicare-Medicaid, what would happen and the position there was no further cuts were actually decided last week.

It’s too early to say what impact this could have in the quarters to come but I would like you to mention that in the spectrum of news we were expecting on the back of that Q2 from the US legislators I would say that those two particular news are probably at the optimistic end of the spectrum than certainly the other way around.

Nicolas Gaudois - UBS

Your comment on mix Pierre-Jean on healthcare where you said you were slightly negatively impacted by mix and you expect this to change, for margins obviously you expect this to change and it’s true, is this on the back of new product launchers]? I would suspect that the main one CT256 slice is probably not going to single-handedly improve a mix by itself so I’ve only [inaudible] to think about and to assume about?

Pierre-Jean Sivignon

Yes. I think the mix was in fact indeed by CT. I think there was a CT mix. There was as well the fact that in North America in particular you still see people buying lower in the mix. You still see people not buying 64 slices but buying actually scanners lower in the offering. So we’ve seen that absolutely what is called in our particular range the Ultra so that we have seen again in Q2. So you could see some nervousness very much true on CT, you could see some nervousness in the market waiting for the news that we’ve just alluded to earlier in these questions.

The 256 slice is actually meeting in terms of orders nice success as we speak. It is part of the incoming orders of Q2 in particularly on the International market so it’s a machine which seems to either, since we still have uncertainty in steel. As I’ve said last week on the US market did make some mileage in terms of orders on International markets and the delivery of that scanner in volume in Q4 definitely will play an impact. So the mix on CT will be important but there are other products which will help us.

If you take now on a particular case of ultrasound, I want to mention that because we were often described as being the player who didn’t have a cut-backed ultrasound solution, we presented it to you at the end of this conference a month and a half ago, and I’m happy to tell you that that machine got certification from the regulator in the US last week. So as far as ultrasound is concerned we’ll get some help there as well because we all know officially present on the compact market as of today.

Operator

Your next question comes from Andreas Willi - JP Morgan.

Andreas Willi - JP Morgan

My first question is on your lighting business, if you could give us a bit more information on how the growth rates break down for your US and European Luminaires business, for just your lamps business, and then your lumileds business as well, where the strength is coming from in the quarter?

Pierre-Jean Sivignon

I think basically as far as lighting is concerned - The Luminaires business, the Professional Luminaires business, did well. Actually I think it grew slightly shy of 10% so the Professional Luminaires business which is something that we had kept under a radar screen on the back of Q1 where we had had a weakfish Europe performance there, we didn’t have a very strong Europe for Professional Luminaires but we got pretty good help from I would say the emerging markets which did, the rest of the world did well.

As far as North America is concerned our Professional Luminaire presence is essentially with Genlyte. Genlyte is not included in the comps and Genlyte saw very small growth. Genlyte did very well in bottom line but saw very small growth in Q2 in North America and it’s essentially a North American play.

As far as lamps now is concerned the lamp business basically grew slightly, I will tell you more precisely about 9% slightly, shy of 9% and it was a nice performance with just one exception which is North America where they as I’m sure you would imagine the consumer, because there we are essentially in the consumer business, the consumer lighting business did suffer. And in reality our lighting business was the only Philips business which was in negative growth in North America in the first quarter, excuse me in the second quarter.

Andreas Willi - JP Morgan

My follow up question is on the margins in consumer excluding TVs, excluding charges, excluding gains, if we just look at the rest of the business it seems to have been down about 200 basis points from Q2 last year. Is this the correct calculation and what is the reason behind the margin decline there?

Pierre-Jean Sivignon

No, we apologize because we are making your life a little bit complex because of the one ups because of course we have the one ups coming from the restructuring which had been disclosed and we have as well the one up coming from the sale of the home network business but if you exclude all that and if you compare the rest of the portfolio you will see a margin which is actually expressed in percentages pretty flat. So there is no deterioration and it’s around I think I disclosed the number earlier on in the call, it’s about 10%. So if you make the math for the rest of the lifestyle portfolio excluding television and excluding the one up you will be flat quarter-to-quarter at around 10%.

Operator

Your next question comes from Olubunmi Asaolu - Lehman Brothers.

Olubunmi Asaolu - Lehman Brothers

I just wanted to confirm first of all that your lighting and healthcare comparable goods that you have in the press release do not contain comparable goods from Genlyte and Respironics.

Pierre-Jean Sivignon

The answer is crystal clear. The 3% of healthcare doesn’t. If you include Genlyte your 3% becomes 11% and the 6% of lighting is excluding Genlyte and if you do it now it’s nominal. If you include Genlyte I think we go up 18%, excuse me 19%.

Olubunmi Asaolu - Lehman Brothers

That’s what leads to your 3% comparable goods for the first half for the group, right?

Pierre-Jean Sivignon

No, the group all in light-for-light is up 6% and the 6% becomes - if you include the impact of acquisitions, right, the nominal growth for the group for the quarter is 14%.

Olubunmi Asaolu - Lehman Brothers

You’re saying the first half comparable growth is 6% or 3%?

Pierre-Jean Sivignon

3%.

Olubunmi Asaolu - Lehman Brothers

Now with that as a back drop, what do you think you might exit 2008 with 3% already down in the first half and where the extra growth may have to come from to come towards your 6%?

Pierre-Jean Sivignon

For the full year we have not guided you, right? I think the 6% we have guided for Vision 2010 is an average of the year 8, 9 and 10. I think that’s the first part of the answer. Now where did we see acceleration between light-for-light? I’m excluding the impact of acquisition. Between Q2 and Q1 you saw an acceleration of lighting; you saw as well an acceleration of lifestyle. Now you asked me about the second half of the year. I would expect an acceleration coming from healthcare.

Olubunmi Asaolu - Lehman Brothers

Just to follow up on your consumer lifestyle, the restructuring process that’s ongoing right now, do you have a view as to what the potential cost savings might be when that process is done and when you’re likely to return to break-even in your tiered business in Europe?

Pierre-Jean Sivignon

We have disclosed to you things as far as television restructuring is concerned we have disclosed to you the 125. You saw basically that we took 66 in Q2, we have guided you on 40 million for Q3 and you can deduct pretty much what the balance should be for Q4 so that’s for the television restructuring. Basically we are doing two things already announced on television [FUNi] will be done in the quarter of Q3 and we’ve announced a second initiative which is the deconsolidation of the display, of the monitor business I should say, which is essentially impacting our Asian business and that will be effective probably sometime in Q4.

And we have a few other things going because some of the restructuring that we are currently taking is not related to [FUNi]. I said last quarter that probably 50% of that restructuring was on the European side of the business so I think somewhere in the course of next year once we’ve swallowed all that I think you will be able to see the television business which is clean and which would be heading back to its profitability.

Operator

Your next question comes from Alex [Furlot] - Merrill Lynch.

Alex [Furlot] - Merrill Lynch

I have two questions that are somewhat broader in nature. The first one is the impact of re-evaluation of Chinese currency on your margins. If you have directionally, what would that impact be and it would help us if you can tell us what’s your percentage of sales that are derived in China out of that 27 billion or so. And then what is the percentage of cogs out of the 17, 18 billion of cogs, what percentage of that is manufactured in China, whether by OEM or by yourself?

Pierre-Jean Sivignon

I’ll start with the end of your, the last part of your question. The sales in China for the portfolio of Philips are 7%, 8%. So that’s the answer to that question. Now what is the impact of the [Reming B] appreciation? I think that we basically have today a hedge which is being put in place so we have financial hedges which are in place. If there were to be a severe, I would say decorrelation between the [Reming B] and the Euro, I think that is something we would have to take a look at.

But we have some elements of flexibility there because we have the possibility, and we do that constantly by the way, to relocate some of our sourcing. So today we are hedged so we are covered. If there were to be a very strong I would say mismatch in particular between the [Reming B] and the Euro, that is something that could have some consequences on our sourcing. But this is something we look at constantly in order to keep a balancing act permanently between obviously the money in which we buy and the money in which we source.

The other thing I want to add is when that doesn’t match as much as it is a case for raw materials, because the other key question of course is the impact of the increase of raw materials, when we look at our core space and when we look at obviously reflecting increases in our selling prices we very much reflect not only what’s happening on raw materials but if we have not kept a bowl of matching currency hedges we reflect that as well in our selling prices.

Alex [Furlot] - Merrill Lynch

And the hedging is for 12 months, 24 months?

Pierre-Jean Sivignon

Well no, it’s more complex than that because we - it’s a simple question with a complex answer. The horizon of our hedges is a function of the backlog which we have in and our backlog is something which is quite different between the various businesses.

Alex [Furlot] - Merrill Lynch

And the follow up question, also more general in nature, you said you were going to focus on execution for the rest of the year. But just given that there’s two assets that perhaps came up for sale recently, GE lighting and Agfa, could you just qualitatively comment on your potential acquisitions strategy for the rest of the year and in particular if you have any comments for those two companies or assets in particular?

Pierre-Jean Sivignon

I think in the case of lighting, before we talk about the GE business, I’d like to talk about the Philips business. We actually grew 6%, I think I mentioned that that growth would be even 19% nominal if I were to move in Genlyte. Our margin is actually up and if you scrutinize, we don’t give you those details but I could tell you that excluding Genlyte the margin of our lighting business is actually up on the pre-existing portfolio.

You saw in the press release as well that we have now stopped engaging in the license strategy on the back of the strong IP portfolio that we have acquired in the last three years, actually two years and a half, and I will add that in this particular quarter Luminaires was back into positive territory which had not been the case for some time because we had a few quality issues at the end of last year. So our lighting business I frankly, we are quite comfortable with it. It is growing very nicely in emerging markets; 16% growth on green products. So I don’t think we want to look at anything else. So I don’t know. I hope that answers your question on the possibility of GE there.

As far as healthcare is concerned in the introduction I mentioned that we had an increase in revenue as well as increase of profitability in our IT healthcare portfolio and this is a portfolio which was built around the acquisition of Stentor two years and a half ago. That business is doing well. It does intellishore coverage including for Europe and at this particular point of time I think we are working along the line of actually pushing that particular portfolio in Europe as well. So the particular company you last week made reference at Philips was not part of the companies they’re looking at Agfa. And the last comment I will make on that is as you probably know we never really comment on our acquisition initiatives anyway or reasons which I’m sure you fully understand.

Operator

Your next question comes from Simon Schafer - Goldman Sachs.

Simon Schafer - Goldman Sachs

I want to ask a high level question as well and that is just looking at the geographic sales mix, you fairly commented that sales per market is relatively lower growth now in what you describe as mature markets and I think in your prepared remarks you also commented that obviously those are very challenging now, but then of course a good amount of the growth is still coming from emerging markets, 16% comparable growth. Just wondering, what are the signals that you’re seeing in those economies and what is the confidence that you’re having in that sales mix right now on a one-year perspective?

Pierre-Jean Sivignon

This is officially a very fundamental question so thank you for bringing it up. Before I go into emerging markets and before we completely write off the mature markets, I want to say that - I’m not saying that this is officially the way it will be in the future but I want to pinpoint that North America was up as you could see in the details that we provided to you, North America was light-for-light excluding the impact of acquisition up 5% and I will say as well that our healthcare business was up in North America and our lifestyle business was actually up 18% in North America in Q2.

So this is to show that before we completely write off those mature markets, it’s going to be for the quarters to come a bumpy road in those mature markets. What protects us of course is green products for lighting and what protects us as well is the fact that in many of those product categories in those mature markets we are leaders and to some extent that protects us as well. But you are right. We do need I think a [inaudible] in those troubled times, we do need the support of the emerging markets. We’ve always said that.

We said that the wind supporting Philips comes from the new acquisitions and it comes as well from a strong position in our existing market but it comes very much from emerging markets. Now what have we seen in Q2? India, Latin still doing very well. There you are in definitely in double-digit territory, I would say in a rather consistent manner. Maybe with one sector still a bit behind which is healthcare because there we will count on the support coming from the acquisition we’ve made recently.

You know the two in Latin, the one in India, one in China. We saw a bit of a blip in China in May. I think as you probably recall China was hurt by a major earthquake, and I am not a specialist of China but definitely had a little bit of a blip and they somewhat recovered in June but China was hurt in the month of May as far as we were concerned. The rest of the portfolio, if I want to be even more precise, in the Asian markets which we normally don’t disclose to you because we have seen a bit of an acceleration of the growth there.

Asian market means countries like Thailand, Indonesia, Vietnam; those are countries which in our categories fold like other emerging. And I think the other emerging markets which has done pretty well, and I want to flag it, is Russia because when we talk about Europe please keep in mind that we do not put Russia in mature. For us it counts as an emerging market and Russia was quite stellar in the second quarter.

Simon Schafer - Goldman Sachs

The other question I would have is now that you obviously still haven’t closed but in times of the [FUNi] agreement and then the recent announcement with TPV, is there anything to say about the intentions perhaps for the European TV business? That’s still the one that’s perhaps is most of the drags. Is there any type of strategic change pending that you’re still working on? Is that something that shareholders should expect?

Pierre-Jean Sivignon

I think on television I think you should look at the sequence of events. In early Q1 we told you that we would make the margin of television a strategic objective and of Q1, that was the end of Q4 and that was Q4 numbers. At the end of Q1 we mentioned the [FUNi] deal and of Q2 we are mentioning the deal with TPV which is an important deal because this is for 600+, between 600 and 700 Euros worth of business which will be deconsolidated in Q4.

We said as well that as part of the 125 million Euros of restructuring that we take on television in 2008, a good chunk of it I mentioned 50% earlier on in this conversation would be related to Europe. So we are working hard as well on improving the Europe business and our objective, and you will see other initiatives in the quarters to come, but the plan is to continue to improve the business, to bring it to what we’ve given ourselves as the 5% type of margin for that business, and I will add as I’ve said many, many times and as Gerard actually said on this phone actually two quarters ago that at the same time we keep our options open.

Operator

Your next question comes from Marcel Achterberg - ING.

Marcel Achterberg - ING

As a bit of a follow up question on Simon’s question on the emerging markets’ growth, are there say reversely areas of weakness in say Europe and the US in the lighting consumer business where you are seeing consumer demands or construction related demands deterioration in Q2 compared to Q1?

Pierre-Jean Sivignon

Yes. I think as far as lighting is concerned, first of all let me, this information actually might surprise you. As I said in an earlier question I mentioned that in the comp we do not include the Genlyte but of course in the Genlyte numbers we do have an exposure now to the constructions in North America.

And if you split between residential and commercial we actually saw a decline in the commercial business of Genlyte but we saw an increase - no excuse me, we saw a decline in the residential business of Genlyte as expected but we still saw an increase in the commercial business of Genlyte in North America in the second quarter. So I think this is obviously an important piece of information for you.

Now in the rest of the world Luminaires, and I’m talking now Professional Luminaires which is always important to watch, Professional Luminaires are actually worldwide excluding Genlyte because again Genlyte is not in the comps Professional Luminaires grew almost 8% in the second quarter and that was on the back of Europe not stellar, we still have some weak spots in Europe as we saw them in Q1 and you remember where they were - Spain, UK. There clearly the Professional business has slowed down but the good thing is some countries of Europe are still doing well and of course the rest of the world, emerging or not, is doing well. So we ended up with Professional Luminaires as I said up 7.7%.

As far as lamps are concerned, lamps I mentioned it grew almost 9% and there it was strong almost all across the board for you. The only bad news for lamps I mentioned it was in North America. There we were down as you would expect but Europe was strong. Europe was at 9%. Latin was very strong and Asia and the rest of the world were really strong. So the lamp business all-in was quite strong for the second quarter.

Operator

Your next question comes from Alexander Peterc - Exane BNP Paribas.

Alexander Peterc - Exane BNP Paribas

I’d like you to come back a little bit on the relative resilience of the TV business. You have a little bit of a negative new slow but then into prices in this business in Europe but also have some negativity reports of your competitors in China. Can you maybe clarify a little bit why you had such strong sales in this segment?

Pierre-Jean Sivignon

We have improved numbers versus Q2 last year, right? And we have improved numbers versus Q1 of this year if you exclude of course the impact of the restructuring. We had good growth. I think the growth was disclosed to you as being up 14%. Now if you want to go by region, we saw actually good improvement of our margin in North America and we saw as well good improvement of our margin in Latin America just to give you a bit of a flavor on what has happened to our television business.

But as far as the growth was concerned I think we saw good growth just across everywhere. I’m scanning through my - Yes, I think in terms of growth Western Europe, North America, emerging markets, Latin was quite strong. So the 14% is translating a gross which was across geographies.

Alexander Peterc - Exane BNP Paribas

We had already a question on the appreciation of the Chinese currency but if you also see a production cost there that increased labor costs in particular, do you see any of your top suppliers trying to push through any price increases and how do you manage with them with concentration?

Pierre-Jean Sivignon

The answer is yes. I think I answered the question of the currency. Now you are asking me, do we see people asking to increase prices? The answer is yes. We are at this point of time capable to contain that. Of course we have the fact that we can increase our prices as well. I answered on an earlier question the mix of revenue we derived from China but there is pricing pressure on the upside in China and this is why it’s very important we keep on tracking that and of course make sure that when we can’t renegotiate it we indeed reflect in our [break in audio].

 

Operator

Your next question comes from Scott Babka - Morgan Stanley.

Scott Babka - Morgan Stanley

Just one question, follow up on the lighting business, you talked about how Genlyte margins had held up very well and that the commercial business remains strong. I was just wondering if you could point a little bit, talk a little bit about the leading indicators you’re looking at for performance on the commercial exposed part of the business in the second half and into 09, and are you confident that margins are sustainable at current levels if we do see a bit of a softening in the commercial side of the business? And I’ll have one follow up.

Pierre-Jean Sivignon

I understand we are specifically talking Genlyte and we are specifically talking about the commercial part of the portfolio of Genlyte. As I said earlier on, in Q2 we saw some increase; actually we saw some nice increase of the commercial business of Genlyte in Q2. We know for a fact that at least that’s remembering the extensive amount of work we did on Genlyte pre-acquisition.

There is at least, if you look at the East, we have a lag of about a year, three quarters to a year between residential slowdown and commercial slowdown. So we are expecting, and I think we should not be surprised; we are expecting a slowdown in Genlyte probably I would say on the commercial side in the quarters to come. We know that. That has happened and historically commercial cycles at Genlyte and in the Professional Luminaires business in the US have lasted about I think two years. I think that’s what we saw and that’s what we factored in our business model when we acquired the company.

Now as far as margin is concerned you are correct. In Q2 the margin of Genlyte held up pretty well. Actually it was north of what we were expecting. We had a pretty good second quarter at Genlyte in terms of margin. To your question, can it hold, so far we’ve been capable of pushing our price increases at Genlyte in the second quarter. That’s very new in the year. We still have two quarters to come. There will be definitely pricing pressure and I think that we should expect that.

But those are things that we knew would come and again we had factored in our modeling when we acquired Genlyte. So there will be pricing pressure I’m sure and there will be as well some pressure later in the year or early next year on the commercial part of the business which we haven’t seen yet.

Scott Babka - Morgan Stanley

Just one quick follow up, in looking at the sales per market cluster we see Western Europe was down 1% on a comparable basis. I was wondering if you could just shed some light on that in terms of where the positives were and what were the drags in the quarter.

Pierre-Jean Sivignon

I think if you look at Europe, basically the - and I will go by sectors - in Europe in comp the healthcare business, and again that excludes Respironics, healthcare was down very marginally. You could call it almost flat. Lighting was well up; lighting was actually up 6%. And lifestyle was marginally up so all-in Europe was basically up 2%. Now this is including the other countries of Europe. If you now zoom on Western Europe, you could see the document that we sent to you and that excludes of course Russia, if you really take the old part of Europe, we were down 1% but you could say that the Russia nearly the same. Good performance at lighting offsetting medium performance at healthcare and lifestyle.

Operator

Your next question comes from Robert Sanders - Dresdner Kleinwort.

Robert Sanders - Dresdner Kleinwort

I just have a quick question on the LCD panel pricing environment. Historically when that has declined quite sharply we’ve seen the retail price of TVs maybe fall faster than the LCD panel price and therefore margins have got compressed. I was just wondering if you thought that you were better positioned in the second half to deal with that potential pressure? That’s actually my first question.

Pierre-Jean Sivignon

I don’t think anything has changed. What you’ve described is correct. When you have pricing pressure, on the panels you do have pricing pressure of course on the steadying prices. What has protected us in that particular territory in the past is that given that we have tremendous amounts of the value share which is outsourced or reaction chained between the price we pay per panel and the reflection on to the selling prices.

In our particular case it’s a very, very close loop so we’ve been historically helped by the fact that in terms of weeks there is a very short period of time between the purchasing price negotiation and the selling price in the channels. So it’s almost a bit of an edge we’ve been able to put in place thanks to these very short business cycles that we have having literally no factories left in that particular business.

Will there be pricing pressure in the second half? I think there will be. Is it planned to be more difficult than in the first half? It’s early to tell. In the first half of this year and certainly in particular in the first quarter there was already quite a bit of pricing pressure on the price of those panels. Is it worsening? Hard to say. I don’t see that industry really significantly different from what it has been as I think Q1 and Q2 were tough quarters.

Robert Sanders - Dresdner Kleinwort

Just as a follow up question, just interpolating what you said about Western Europe that the TV business is up strongly, lighting is up, lifestyle was marginally up; would that mean that the DAP business, the former DAP business, and the CEXTV was down quite considerably? It seems to suggest that.

Pierre-Jean Sivignon

No, I think I answered that question earlier on that I think it was Question 1 or Question 2. Again we apologize for making the life for you a bit complex because we have someone else this quarter but I’m sure that with Stuart or Raymond offline because I don’t want to waste your time right now, we can do the math with you.

But if you exclude the one ups which are related to the 66 or 67 million of restructuring, if you exclude the 56 million of old networks gain, if you recalculate and you can do all that because we even have given to you the television mix right, you can recalculate the rest of the portfolio. And if you do those maths which is a combination of the ex-DAP portfolio and the non-television CE box for you, you will find that the margin is pretty much in line with last year around 10%ish.

Robert Sanders - Dresdner Kleinwort

The question was on the sales line actually. Just whether DAP in Europe and it seems to me that potentially the audio and entertainment part was a bit down.

Pierre-Jean Sivignon

Oh sorry, sorry, I was answering margin and you were asking revenue. I apologize. The revenue growth excluding television was about 2% but now you were asking me between DAP and CE, I hate to go back to those categories but you had basically a pretty good performance. It was very strong at appliances; it was very strong at healthcare and health & wellness; and it was a bit closer to the average for the rest and interestingly enough one of the countries where health & wellness did very well was North America.

Operator

Your next question comes from Martin Wilkie - Deutsche Bank.

Martin Wilkie - Deutsche Bank

A question on the consumer business, you mentioned there was some growth rates for the consumer business in DAP regionally. Could you just give us the details for sales excluding television just what the growth was in each region? And then secondly, what you’re seeing with distributors and retailers for the non-television business?

Are you seeing any signs of destocking in the face of perhaps some weaker consumer trends or are you seeing a change in mix or are consumers trading down towards perhaps some of the cheaper products within your portfolio? Just give it a sense if the apparent weakening of the consumer environment is potentially going to have an effect on your revenue line in the coming quarters?

Pierre-Jean Sivignon

Actually excluding television and on the back of obviously very strong comps because you have to realize that last year second quarter was a very, very strong quarter in terms of growth excluding television as I just mentioned we were up 2%. Now for your next question can I give you that mix by region? No. It’s not that I don’t want to. It’s that I don’t have it.

But I think offline you can call the team and I’m sure we can give you color on that. Of course you would want me to help you as much as possible on regions but it’s a bit complex because besides the fact that emerging markets for lifestyle were in double-digit growth territory, the reality of it you almost have to go by product categories to analyze what has happened in Q2.

What we find is that across product categories and across regions the situation can be vastly different and it depends usually on the strength of the particular product category in that particular region. I mentioned just for reference purposes that health & wellness had an extremely strong quarter in North America in Q2 so it’s a big hard to answer across geographies and across the product categories what went right and what went wrong in the second quarter.

Now to guide you looking forward I think as I mentioned Europe was flattish, US was up, the rest of the world was well up. How can I guide you moving forward? Difficult because I think that the trends that we’ve seen in Q2 besides the particular situation of the month of May in China where clearly there we saw something and I don’t have a better explanation beyond the particular subject of the country which was really hurt by that earthquake, actually that succession of earthquakes I should say.

We don’t see any other signs which I could really describe as trends besides the fact that mature Europe and North America are certainly more difficult. But with exceptions as I mentioned and the exception of this quarter was certainly North America, it’s very hard for me to tell you much more. But offline we will give you the growth of lifestyle excluding television by regions so then hopefully that helps you to answer that question even more.

Martin Wilkie - Deutsche Bank

When you’re speaking to your global key accounts which obviously represent a large percentage of your revenues in the consumer business, are they changing the way they talk to you in terms of what they’re expecting to sell either in terms of price points or mix? Would you expect a change in the portfolio perhaps?

Pierre-Jean Sivignon

What we see is a trend which started in the US in Q2 last year, in second half in Q4 last year I should say, we see in some part of the world customers looking for lower price points and there usually the situation is to be capable of continuing to deliver a product to the particular customer who still wants to buy Philips at lower price points. In a lot of our product categories luckily we are capable of doing this; i.e. to keep a customer who will buy at the lower price points and the good things is that our margin percentages in the lifestyle portfolio are pretty much identical across price points.

So as far as the consumer portfolio is concerned we do see certainly customers in general looking for lower price points but since we are basically present there as well that has not stopped us from continuing to grow and maintaining our margin. I think that’s probably the trend we’ve seen beyond what I’ve just said which is a slowdown in the US as well as a slowdown in old Europe in general again with the exception that I referred to.

You have to realize this is a business in which we don’t have a backlog and I’m officially guiding you on what I’m seeing today. I have to tell you that I will be brutally honest I have to tell you that growing 18% in lifestyle in Q2 was a surprise for me.

Operator

Your next question comes from Didier Scemama - ABN AMRO.

Didier Scemama - ABN AMRO

Just a bit of a housekeeping question on the GMS part of the portfolio, I’d just like to clarify when you said for the full year we’ll have about 40 million euro cost of pension post retirement benefits, does that include also services units and GMS i.e. should we assume about 24 million per quarter in 3Q and 4Q?

Pierre-Jean Sivignon

No, I think the math there is always the 0.5% for the non-brand non-pension part. I think that is a guidance we gave a couple of years ago and that guidance still stands. For the 40 million you are referring to it is indeed what we see as a pension cost for the year and the guidance on the brand I’ve been given earlier on and I think it’s probably going to be in the 70 to 75 territory for the year. I think those are the answers to your three questions.

Didier Scemama - ABN AMRO

And just going back to that because there’s been a lot of questions but I’m not exactly sure what the answer was, you talked about the margins about 10%ish for Consumer lifestyle XCD, so for that specifically can you just give us a bit of color on the underlying performance i.e. comparable sales growth and maybe also if my math is correct you are in the low teens EBITDA margin, is that about right?

Pierre-Jean Sivignon

Yes, I think I can give you a bit of color. I think in the particular case are we talking margin or are we talking sales?

Didier Scemama - ABN AMRO

Both.

Pierre-Jean Sivignon

As far as our stuff we sell, health & wellness very high teens, Appliances around the average of Philips, and Shaving & Beauty was I would say low single digits.

And in terms of margin, we never disclose those margins, but I can tell you that they were pretty much in line with the one of last year.

Didier Scemama - ABN AMRO

In the low teens?

Pierre-Jean Sivignon

I won’t disclose them to you but I can tell you that for each of the three categories I described the margins were in percentage were resilient.

Didier Scemama - ABN AMRO

The last question is on the buy-back. If I look at the first half, you’re a bit behind that meet point of this buy-back. Should we see an acceleration of the buy-back in Q3, Q4 to match 5 billion or is it more backend loaded in Q4?

Pierre-Jean Sivignon

Well actually we never said it would be 2.5 and 2.5. I think we said that the majority of this 5 would be done in 08. So where are we as we speak? If anything, Q2 was an acceleration versus Q1 which is good because of course we are quite [inaudible] as you all are frustrated by the share price but certainly gave us the opportunity to accelerate so we are at 2.2 billion of buy-back at the end of Q2 is 1.2 billion done in the second quarter.

So in reality 1 billion done in Q1, 1.2 billion done in Q2, 2.2 billion at the end of the first half and in the second half I think we’ll continue; sorry, in the third quarter we will continue especially with the share price where it is right now will definitely continue at the speed of Q2 because the current share price we see that as an opportunity.

Operator

Your next question comes from Gaël de Bray - Société Générale.

Gaël de Bray - Société Générale

My first question I related to potential acquisitions. With much lower valuation posted right now in the markets, do you think the timing could be a bit more appropriate to resume a more active acquisition strategy in the coming months or quarters, and in particular could you be interested in some of the consumer and industrial businesses that GE plans to spin off in the coming months, namely their lighting business for example? There were also some talks about Agfa. Would you be interested also in the healthcare business?

Pierre-Jean Sivignon

Actually on acquisitions we said that this year would be a year of integration, so I don’t see us doing major M&A this year because we’ve said in the first place that this is a year where we have to integrate. Now we have done and announced some small M&A. It doesn’t make much headlines but very important tactically for our healthcare business. We’ve announced two acquisitions in Brazil, one in China and we have one which is currently, a couple of projects which are currently [inaudible] in India.

They are not big; certainly not versus what we’ve done but they take a lot of our attention, a lot of our focus because they bring exposure to our healthcare business which is by far the least present in those emerging markets and on top of that they give us immediate access to what we call value products; i.e. products at lower price points which is absolutely essential for our product range in healthcare. Of course looking forward and beyond at some point we will go back into M&A and if there are good multiples all the better, but we will do that using the same principles we’ve used moving to where we are today.

Now you asked specific questions on GE. The question came earlier on this call about lighting. I think I have answered that. You now talk about their consumer business. The answer is we believe our consumer business is a good business so I could almost make the same business I’ve made on lighting so I don’t think we are interested there and as far as Agfa on the healthcare side, I answered that as well. I made reference to the fact that the business we have acquired two years and a half ago which is at the heart of our IT portfolio in Q2 grew and became actually more profitable in the case of the second quarter and I think we are quite comfortable with that particular business.

Gaël de Bray - Société Générale

Can I have a follow up question on the healthcare business? Because the [inaudible] in the emerging markets was at a given 2% in Q2 exactly the same as a year ago. So could you be a bit more specific on what’s happening within healthcare in the emerging markets? Do you feel critical competition from GE maybe or is there something else related to the creation of your GDs and the recent acquisitions?

Pierre-Jean Sivignon

I think in the case of healthcare we basically have some growth but if I were to give you the mix between emerging, in the key emerging markets which is basically described as China, India, Latin America, we had actually nice growth. We had lower growth; you could say negative growth, in the other emerging territories which would be Thailand, Indonesia.

But the reality of it is that those are small numbers and in order to address that we are doing exactly what you said in order to jump start our presence because the presence of Philips healthcare in those emerging markets is really now slightly north of 10% especially now that we have Respironics which has increased the US presence in our healthcare portfolio and in order to accelerate we have actually announced three acquisitions as I mentioned, two in Brazil, one in China and we have a couple of moves coming up in India, so you should look at our growth rate starting next year when those particular acquisitions will have really increased our presence in that domain.

And lastly we have our own joint venture which is NiSoft which is making progress but still representing a virtually small part of the parametrics help in China and I mentioned China did well but it’s not helping us enough in the other emerging markets and to address that particular subject as I said we have done that with tactical M&A which definitely will make a difference next year.

Operator

Your next question comes from Günther Hollfelder - Uni Credit (HVB).

Günther Hollfelder - Uni Credit (HVB)

Actually you mentioned Lumileds as a driver for the strong growth in lighting for energy efficient lighting solutions. Could you provide some more details concerning Lumileds like current growth rates, whether the margin is holding up there; also maybe the pricing going forward in the LED market?

Pierre-Jean Sivignon

I think I mentioned I flagged Lumileds. Lumiled actually grew nicely. It’s actually basically important to notice that because Lumiled during the vast majority of last year and even in the first quarter had been in a negative growth territory. The so-called Rebel product line is now up and running. The quality problems are behind us, the backlog is starting to fill in, and we saw an acceleration of the growth in the course of the second quarter, and we finished with the growth for Lumiled for the quarter which was almost at 10%.

And in terms of margin the trend that we’ve seen on the revenue we stopped seeing as well on the margin was a recovery of the margin because of course that business is very much driven by volume. How to tell you much more? I think in the case of Lumiled the critical thing is a) to obviously sign the large applications which makes a real difference and we are working on a couple of those, how to communicate on that right now and the other important thing for Lumiled is of course to basically make sure they grow as part of our green efforts because Lumiled is a key pillar in the new sources of lighting, solar set lighting and there we clearly saw an acceleration and if I look at the quarters basically I’m looking at the trend.

We certainly see a base coming up between May and June. We had the month of April which I would say were the trajectory of what we had seen in the first quarter but we saw a clear acceleration of shipments in both the month of May as well as the month of June. So I see Lumiled playing an essential part of our Green Lighting sales moving forward as well of course as a nice contribute to the margin of lighting for the quarters to come.

Operator

Your next question comes from Nicolas Gaudois - UBS.

Nicolas Gaudois - UBS

I just wanted to ask where we are with vis-à-vis TSMC? I know you are offsetting in the share buy-back program ongoing and how soon, if we wait a little bit you’ll focus on your [inaudible]?

Pierre-Jean Sivignon

I think Nicolas you saw that we’ve exited more TSMC. We are now down to 1.7%. The reason why we did that is because it was in line with the press release we had done I think two weeks and a half ago where we talked about an acceleration of the program in cooperation with TSMC and what made that officially quite important was that the Taiwanese stock market including TSMC held up extremely well. It was one of the markets which was the least corrected in the last couple of weeks so we used that opportunity to bring our spec into TSMC back to 1.7%.

As far as the other lines are concerned, nothing new. I think for LG Display we will continue to bring that down and we will take the opportunities when - we said the objective is to go either to 0 or to something close to 0 over time and the objective we had given was the Vision 2010. So there is very, very much; it’s difficult to guide you much more on that and I don’t want to do it because I think I would probably collar myself.

And as far as NXP’s concerned there it’s an industry you know well. It’s a matter of opportunity. We think that at some point there will be a strategic restructuring in that industry. It’s hard to say when and I think that restructuring probably will be good for the industry as well as good for us. And then if there is an opportunity we will probably decide to move but very early to give a date at this particular point.

Operator

Your final question comes from Didier Bak - Lessa Cobe.

[Didier Bak - Lessa Cobe]

I was wondering, do you do all the [inaudible] on the American economy as well as world economy? What would be the consequences for the second half of this year for Philips, and which outlook would you have this year?

Pierre-Jean Sivignon

We don’t guide. The only guidance we’ve given you for the year was that we said that the year 08 should be a year of progress versus 07 on our journey to Vision 2010. That’s exactly what we said and we stand by that. To give you; I cannot forecast the economy for the second half. I think clearly we are still doing very well in the emerging markets so I think emerging markets as we had said all along are very important for us. I could argue they don’t play the role for us; they could because we still have a healthcare business which is weak so there is more mileage for us to get in emerging markets starting next year because our healthcare business is still a very young business compared to our largest competitors and we’re not there yet but we’ve made effort to get there.

On the lifestyle portfolio the US is already technically in a recession as many people say. We grew there. I don’t know what will be Q3. It’s hard to read. But we have certainly shown that we have strong product categories which are helping us. Television helped us as well as health & wellness in the particular case of US in Q2 in a country which was already technically in a recession mode, and in Europe you have to make the distinction between the various businesses. I would say that in the second half of the year the healthcare business should improve and on the back of the strong backlog we have in imaging systems. On the lifestyle portfolio it will probably remain difficult. It’s already difficult as it was already stated in the previous questions. And on lighting there we are helped by our green sales.

As mentioned the lighting actually in Europe did well in Q3 carried by the fact that a substantial portion of our portfolio is helping our customer to save money on their electricity bill at the time the cost of energy is going up everywhere. If you ask me, one more comment on the second half, I think we expect as usual a very strong fourth quarter for healthcare. It’s always a strong fourth quarter and that’s where we see it for this year and we expect the second half which enables us with a very strong fourth quarter to deliver the guidance we gave you for the year, which is a year of progress between 07 on our journey to 2010. I think that’s as much as I can tell you.

Operator

We have no further questions at this time.

Pierre-Jean Sivignon

Thank you for all your questions. I think basically we obviously will continue to keep you well informed of all the progress we continue to make on our television business and besides that I want to thank you for your questions and for your time. And I talk to some of you on the road and talk to all of you at the next conference call in three months from now. Thank you very much. Goodbye.

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Source: Koninklijke Philips Electronics N.V. Q2 2008 Earnings Call Transcript
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