Annual Results Press Conference - January 26, 2009

•  2008 - Annual Results Press Conference presentation

Opening remarks by Gerard Kleisterlee, President and CEO, and Pierre-Jean Sivignon, CFO.

Slide 1 – Sense and simplicity

Slide 2 – Staying the course

Slide 3 – Forward looking statement

Slide 4 – Today’s agenda

Slide 5 – Gerard Kleisterlee, highlights and summary 2008

Gerard Kleisterlee

Ladies and Gentlemen, welcome to this presentation of Philips’ results in the fourth quarter and the full year 2008.

It won’t come as a surprise to you that I will start with a reference to the unprecedented global economic deterioration in the last four months, a deterioration that has been unique in its speed and ferocity. Previously, when markets softened, managers would say that they were “facing strong economic headwind”. This time it is different: we are not facing strong headwind: we are in the middle of a hurricane. This storm will continue well into this year and maybe next. All business managers agree: in our lifetime, we have never seen such a dangerous slump develop so quickly.

In this extremely challenging environment, the most important thing our stakeholders can expect from us is to keep the ship afloat and to stay on course. We must manage the sharp recession and minimize its impact on Philips. This is definitely not a time to wait around to see if things might get better by themselves. Nor is it a time to get paralyzed by all the bad news about the wider economy. This is a time when we must actively manage those things we can influence, and that is exactly what we are doing.

Slide 6 – Highlights 2008 

In summarizing 2008, let me state upfront that our results were clearly impacted by the very challenging economic environment. Developments in the economy and financial markets outside our control forced us to take inevitable steps, such as the adjustment of the value of some of our financial participations, the impairment of Lumileds and the accelerated restructuring. We also faced a sharp reduction in demand in some of our markets, in particular at Consumer Lifestyle and in our OEM business in Lighting.

At the same time, we achieved excellent results in Healthcare, with a good growth of like-for-like revenues and improvement of underlying EBITA. We gained market share and extended our global leadership positions in various areas.

As the economic situation worsened, we focused strongly on working capital management in order to secure a strong cash flow. As a result of prudent financial management, our balance sheet and liquidity position are excellent. Until very recently, we were criticized for having an inefficient balance sheet. How quickly perceptions change... Now that ‘Cash is King’, Philips could be Prince Charming. We have the financial strength to weather this storm and that is reassuring.

More relevant to operational management were the actions we could - and did take - to protect our business. Over the last few years, we have always concentrated on cost control, portfolio management and a strong balance sheet. With the start of the economic downturn, we have intensified this focus to ensure we will emerge from the recession in good shape. We accelerated our restructuring and business optimization programs to further reduce costs and protect our margins, staying the course.

I want to be absolutely clear here: Philips remains fully committed to its strategic goal of becoming the leading global brand in Health and Well-being.  I am very confident that we will emerge from this recession in a stronger position. The recession may slow down our progress, but it will not take us off course. We will not let that happen.

Finally, as a clear sign of confidence in the strength of our company, we will propose to our shareholders at the upcoming general shareholders meeting to distribute a dividend of EUR 0.70 per share, similar to the level of last year.

Slide 7 – Full year 2008 – Results of the Philips Group

Full-year results in 2008 were clearly impacted by the developments in the last quarter. Our reported figures for EBITA and net income were also affected by one-off charges and impairments related to measures I have been referring to. The very low figure for our net debt and its ratio to our equity confirm the strength of our financial position. We are particularly pleased with the cash flow figure of almost one and a half billion euro. A great figure in a difficult environment.

Slide 8 – EBITA adjusted for incidentals

To get a clearer picture of our operational performance in 2008, we should adjust EBITA for incidental events, mainly non-recurring charges. When we do so, a much better picture emerges of our capacity to generate recurring EBITA, even in difficult years. This healthy EBITA and cash flow would not have been possible without the transformation of our portfolio. More than half of our sales now come from business-to-business as opposed to business-to-consumer, and a large part of our revenues is concentrated in less volatile activities.

Slide 9 – Pro-actively managing in a deteriorating economic environment

We have acted in a timely fashion against the impact of the credit crunch on our markets. We have protected our business and financials in the past, we are doing so now and we will do so in the future. We do not shy away from taking painful, but necessary measures. Postponing them in the present only leads to taking even more painful measures in the future.

As indicated earlier, we have responded to the worsening economic situation by giving absolute priority to cash flow. This means that at the end of 2008, in particular, we sometimes traded EBITA for cash flow through temporary closure of factories to reduce stock. This has impacted EBITA by EUR 60 million.

We decided in early December to further accelerate our restructuring and change programs, taking additional measures to reduce our cost base and protect margins. Our restructuring plans will lead to a reduction in our fixed costs of approximately 400 million euros on an annualized run rate, the benefits of which we expect to see towards the second half of 2009. In addition to writing down value of assets and accelerating investments in new technologies, we must – with great personal regret – also adapt our workforce.

We expect a total reduction of around 6000 jobs during the course of this year, across all sectors and geographies. At this moment I can't be more concrete as we follow one principle: we first inform and consult works councils and employees before making public announcements on specific programs and details on a case by case basis. But whatever the outcome will be, it is self-evident that we will do our utmost to help those affected find other jobs and to soften the impact through decent social plans.

Another measure we took is to limit salary increases throughout our company for this year. While all collective labour agreements in place will be fully respected we will be very restrictive with respect to further increases. Exceptions will only be made for high potentials and top performers. And let me be clear about one thing: as a Board of Management we will lead by example also in this respect and we have decided to forgo any increase in base salary for 2009.

Finally to this point I want to emphasize that we will keep up our investments in R&D and marketing as we realize that in particular in these times our heritage of introducing meaningful innovations will set us apart in an increasingly competitive and demanding market.

Slide 10 – Implementing our strategy

As part of our ongoing strategy we continued with our portfolio management. We completed various 2007 acquisitions, in particular the two biggest in our recent history, Respironics and Genlyte. Next to that, we made some more acquisitions throughout the year and we divested various non-core businesses, as you can see in this slide.

Slide 11 – Management Agenda 2008

Let me take you quickly through our performance with respect to the 2008 Management Agenda. 

We made good progress with the integration of recent acquisitions, especially Respironics and Genlyte, and the revenues and earnings of these two Philips-companies are on schedule.

As for the unsatisfactory margins in our television business, we took various steps to solve the problem. In North America we entered into a five-year-minimum brand licensing agreement with the Funai Electric Company. We drove further portfolio reductions around the world, for instance in Australia, New Zealand and South Africa. We also signed a letter of intent with TPV Technology Ltd. to enter a brand licensing agreement for our PC monitors business.  Going forward, we will continue to develop a TV business that focuses on innovation and margin, not on volume. We tick this off with a yellow mark for now.

We are not satisfied with our progress on productivity as a driver of margin expansion. External market factors clearly limited progress in 2008, especially during the last quarter. However, productivity remains a key focus point for our management. The business improvement programs across our sectors should put us in a better position to realize this objective going foreward.

While our comparable sales growth in emerging markets in 2008 amounted to 5%, short of 2x GDP, this is  8 percentage points above the figure for the Group and impacted by the slowdown of TV and OEM demand in Lighting. We made a number of acquisitions to strengthen our position in healthcare in these markets. We also strengthened our talent base and redirected our marketing efforts . So overall we have made good progress in strengthening our footprint in our main emerging markets.

As to our goals to increase the innovation focus in support of Philips growth ambition, we can say that the sales of innovative products – that is products introduced within the last year (for B2C products) or three years (for B2B products) – amounted to 58% of total sales. All in all we made good progress on this point, but that did still not give us the amount of new business that we were looking for. That’s why we tick this box with a “yellow” mark.

We are satisfied with our efforts to drive a culture of excellent customer experience and customer-focus amongst our employees. The Net Promoter Score (NPS) is our single key metric of customer experience. NPS measures the answer to one simple question: “How likely is it that you would recommend this company/product to a friend or colleague?” At present, over 50% of our key businesses have industry-leading scores and we aim to increase this figure to 70% by end 2010.

We have made good progress in employee engagement. The results of our 2008 survey exceeded expectations. The overall score leaped from 64% to 69% favorable – two points above our target for the year and close to world class. We are very satisfied by this high score, especially during this difficult time. We know we need the full support and dedication of our employees to weather the economic storm.

Slide 12 – Dividend Pay out
 

Because of our respectable performance in 2008, our solid financial position and confidence in our strength, we propose to maintain the 2009 dividend at the 2008 level, despite the challenging environment.

I will now the floor to Pierre-Jean Sivignon for a more elaborate view on our financial results and management.

Over to you now, Pierre-Jean.

Pierre-Jean Sivignon

Slide 13 – Pierre-Jean Sivignon – Financial performance 2008

Thank you, Gerard.

Slide 14 – Q4 2008 results

Good morning ladies and gentlemen. I would like to take this opportunity to walk you through our financial performance in more detail both for the quarter as well as for the year. Later on in my part of this presentation, I would also like to talk to you about our balance sheet and our strong financial position in general. As you know, it’s crucial for any company to have a solid financial position in these times, and you will see that we have one. But let us start with Q4

Slide 15 – Q4 2008 – Results of the Philips Group

Our total sales for the quarter were down to 7.6 billion euros. This decrease clearly reflects the weakening demand we saw in quite a few markets and that trend got worse as the fourth quarter progressed. The EBITA of 141 million euros was heavily impacted by all the actions we took in the fourth quarter to deal with the effects of the downturn.

Moreover, we had to take in our net income non-cash adjustments for some remaining holdings, as well as a goodwill impairment in Lumileds. In addition we faced year-end EUR 150 million in tax adjustments. We therefore posted a net loss for the quarter of 1.5 billion euros.

Slide 16 – Q4 2008 – sales by sector

If we then go into the sales development per sector for the quarter, you clearly see we were certainly not impacted by the downturn in all businesses. In fact, we posted excellent comparable growth in Healthcare of 9% - with total sales in that sector up to 2.6 billion euros for the quarter. This of course is a very strong performance, and especially so because we saw growth in all our Healthcare businesses.

In Lighting, we saw comparable sales decline by 3% as demand was clearly impacted by the economic situation. But the sales decline was mainly attributable to a selected set of businesses such as automotive and OEM lighting markets. Key businesses such as professional and consumer luminaires continued to grow comparably.

The sector that was hit hardest by the weaker markets was of course Consumer Lifestyle as market demand in key markets went down sharply. It is important to realize, however, that part of the sales decline in Consumer Lifestyle was by design, as we continued to scale back our exposure to some markets like TV, and manage our channels very carefully.

Slide 17 – Q4 2008 results reflect deteriorating external environment

Now, let me analyze EBITA. While the headline number is 141 million euros, you need to look a bit further to get a clear view of the underlying profitability of Philips.

On this slide, you see on the left hand side the actual reported EBITA per sector for the quarter, while on the right hand side, you see how much is included for restructuring and acquisition related charges in that number.

If you look at Lighting, where we posted a 60 million EBITA loss, you see that if you exclude the 203 million euros in one-offs, we actually made 143 million euros profit. In Healthcare, the reported EBITA includes 89 million euros in charges and in Consumer Lifestyle, there were 67 million euros of charges booked.

In total, our EBITA for the quarter contains 390 million of acquisition-related and restructuring charges. If you exclude all those charges, you actually arrive at EBITA of 531 million euros, or 7% of sales – which obviously provides a brighter picture.

Slide 18 – Stringent working capital management is paying off

One specific response we had to the downturn especially in Q4 was to give absolute priority to maximizing our cash flow and very rigorous management of our working capital. Generating a lot of cash means that we are not dependant on external sources of financing to get the money we need to run our business. And as you know that is quite an advantage these days.

We put a lot of effort in driving down inventories and reducing accounts receivable in Q4, and with success. As you see on this slide, the cash we generated from operating activities improved to almost 1.8 billion euros for the quarter, which is almost 23% of sales.

Slide 19 Title slide: Full year 2008 results

Now, let us turn to our performance for the full year 2008.

Slide 20 – Full year 2008 – Results of the Philips Group

Total sales for the year came in at 26.4 billion euros, a little less than 3% down compared to 2007. Our EBITA was at 931 million euros. This was caused by 654 million of restructuring and acquisition related charges we took during 2008. In addition, we took a 241 million euros charge to cover for outstanding asbestos liabilities.

Accordingly, Our net loss for the year of 186 million euros reflects all the operational actions we took as well as the non-cash adjustments to our balance sheet that result from the effects of the recession.

Slide 21 – Sales development in 2008

On this next slide, you see the split of our sales per sector for the year. It gives a similar picture as the sales split for the fourth quarter. Healthcare did extremely well, with sales up 6% to 7.6 billion euros. This is obviously a very strong performance, and you can imagine we are very pleased with the fact we have been building up that sector so consistently for the last 10 years.

In Lighting sales increased by 3%, which is a respectable number if you consider how hard the OEM businesses, in particular Automotive were hit, in the 4th Quarter.

The impact of the downturn on sales was the biggest on Consumer Lifestyle. A big part of the sales decline we saw in 2008 is of course caused by our exposure to the TV market. As Gerard indicated, we took quite a lot of steps already to deal with the margin situation in this business and we will certainly continue stringent management of this business in 2009. Excluding TV, our sales for 2008 would be on par with 2007.

Slide 22 – 2008 EBITA included EUR 895 million charges

EBITA for the full year also provides a mixed picture between the three sectors with Healthcare doing very well, Lighting OK and CL under pressure.

To get a good view on the underlying performance of Philips for the year, you would need to exclude the EUR 895 million in restructuring and acquisition related charges and asbestos charges we took in 2008. If you exclude these charges, this would result in an EBITA for the group of 1.83 billion Euros, or 7% of sales.

Slide 23 – Full year cash flow in line with 2007

As in the fourth quarter, the full year cash flow shows the impact of our drive to maximize cash flow. As I explained, it was very important for us to put a lot of focus on managing our working capital to deal with the effects of the downturn. Despite the reduction in EBITA, our cash flow from operations was at the same level as in 2007.

To illustrate how hard we have been driving this, just take a look at the changes in working capital in 2008.

Slide 24 - Management of balance sheet and liquidity

Let us then take a look at several aspects of the financial position of the group. As you know, it is absolutely crucial for any company to be financially strong in times like these and I would like to demonstrate to you that we are.

Slide 25 – Sale of TSMC and LG Display

During the year, there was also quite some movement with regard to our stakes and their valuations. We were successful with the disposal of our remaining stake in TSMC and part of our stake in LG Display. On those transactions, which we did when the markets were still holding up quite well, we actually made good deals.

But as mentioned before, at the end of last year the deteriorated markets also caused us to take non-cash value adjustments on some of the stakes we still own. On LG Display and NXP, we had to write down a total of almost 1.2 billion.

Slide 26 – Philips proactively refinanced debt early 2008

Let us now take a closer look at our debt. As you know, we have relatively little debt and we have a strong cash position. Equally importantly, none of our debt denominated in bonds is maturing any time soon.

This is because in March 2008, we refinanced our debt.

On this slide you see how our position was as at March 2008 before refinancing and you can see we had the bulk of it maturing in 2008 and 2011. The average interest rate on the debt you see on this slide was 6.1% and the average maturity was 2.9 years.

Slide 27 – First long-term debt maturing now as of 2011

You see here our debt profile after the refinancing, and it looks significantly improved. We now have an average maturity date of 10.9 years, and our average interest rate actually went down to 5.8%. Our first maturity date is now in 2011, and that is only a billion out of total outstanding debt of 3.3 billion euros. Our refinanced debt continues to have no covenants attached to it.

I would consider this debt position as reasonable in a time like this. We clearly had the right timing for our refinancing earlier in the year as subsequently the markets changed dramatically.

Slide 28 – Our total liquidity amounts to EUR 6.1 billion

Lastly, let’s consider what this all means for our financial headroom because at the end of the day, it’s crucial for us to be able to attract and use financial capacity when we need it.

We ended the year with a 3.6 billion euros cash position. In addition, we have an amount of 2.5 billion Euros in unused committed credit lines with banks. Combined, this adds up to a total liquidity of 6.1 billion Euros.

As a conclusion, I believe that our income statement is reflective of our proactive management efforts in a deteriorating environment. Our rigorous management of working capital has secured particularly in the fourth quarter a strong cash flow and has contributed to our overall solid liquidity position at year end.
 
With that, I would like to hand back the floor to Gerard.

Gerard Kleisterlee

Slide 29 – Gerard Kleisterlee – Going forward

Thank you, Pierre-Jean.

Ladies and Gentlemen,

A recession like this offers many challenges, but also opportunities. We think Philips is well-positioned to reap some benefits from the current situation in our markets. Think of selective M&A opportunities or fast-track access to high-growth niche markets.

Slide 30 – Continued shift to higher margin businesses

Our current strength is the result of the transformation we have undertaken over the last decade. We have actively moved towards high-margin, less volatile and more growth-oriented businesses. We have achieved many global leadership positions in a portfolio that is now clearly aligned with our endeavor to be a leading global brand in Health and Well-being. In 2008, we made good progress in our long-term efforts to increase the balance in the distribution of revenues among our three sectors. In the fourth quarter results this effect is even more pronounced, reflecting on one hand the full integration of our acquisitions in Healthcare and Lighting and on the other hand for example our exit from the North American TV market. And of course, it is a reflection of the different impact the current economic situation has on our different markets. Nevertheless the trend is clear, and for 2009 we expect that roughly our sales distribution will be as shown in the right-hand graph. For the first time in our history, Healthcare may well come out as our largest sector from this year on.
 
Slide 31 – Consistent growth of our healthcare business

Our Healthcare sector is a great example of how we have built - and keep building - a more diversified, growth-orientated business with strong leadership positions. With a string of takeovers – displayed in green on the slide - we strengthened our original healthcare activities. With Lifeline, Respironics and a few other acquisitions, we established a global leadership position in Home Healthcare Solutions. Acquisitions and joint ventures in China, India and Brazil helped us to obtain a firm presence in emerging markets and to complement our portfolio with products geared primarily towards these territories.

Slide 32 – Build a strong healthcare sector

In 1999 our healthcare-related activities were only a small part of our total business. Furthermore, sales of imaging equipment made up more than half of our healthcare turnover. Not only have we tripled our sales in healthcare , but we have also diversified our activities by adding new, promising growth businesses where we have clear leadership positions.

Slide 33 – Depth and reach of Philips Healthcare

Along with Home Healthcare Solutions, we now have a great number of global leadership positions in Healthcare, including Patient Monitoring, several essential Imaging applications, Customer Service and specific areas of Clinical Care.

Some people live under the wrong impression that Healthcare within Philips is mainly ‘Imaging in America’. Our Imaging activities in America are a great business, but in fact, the sale of imaging equipment in the US makes up less than 15% of our total turnover in Healthcare.

Slide 34 – Ambient Experience

In order to win in the markets, our products and services have to stand out, and they do. We stand out through our focus on the real needs of patients and caregivers.

To illustrate more vividly what I mean, let me show you a very short clip about the Disney Children’s hospital in Florida.

•  Ambient Experience at the Florida Hospital

Slide 35 – Focus on profitable business in Consumer Lifestyle

In Consumer Lifestyle, we are building a business based on innovative lifestyle solutions for personal well-being. We will continue to make portfolio choices to focus on differentiation and margin management rather than scale. We maximize and build on leadership positions, such as our global leads in Mother & Childcare, Male Shaving and Power Toothbrushes, and regional strengths in categories such as coffee makers and food preparation.

Slide 36 – Consumer Lifestyle, a key player

In the longer term, we see great opportunities for Consumer Lifestyle. We will enter new, higher-margin value spaces with growth potential and with a particular focus on platforms such as healthy living, personal care and home life. Consumer Lifestyle clearly plays a key role in our ambition to build the leading brand in Health and Well-being.

Slide 37 – Further strengthening our global leadership in Lighting

In Lighting, our task is to further strengthen Philips’ global leadership. To that end, we have built up leadership positions in fast-growing areas such as LEDs and Energy Efficient Lighting. As a result, in Lighting, too, we have been able to diversify the portfolio, positioning us for future growth and leadership.

Slide 38 – Three Trends, three opportunities

In Lighting, we have adapted the business to three main trends and opportunities. First, the shift from conventional lighting to LEDs. This is a great growth area for Philips. The presence of LEDs in homes, shops, offices and on the street is increasing rapidly. We are leaders in this space, in both professional and consumer markets. This is just a taste of things to come. LEDs are taking the world by storm and we are right at the front.

The second development is a shift from a focus on components and products to a focus on solutions and applications. Increasingly our role is the development of full lighting solutions and applications, designed around the specific needs and wishes of the customers in these markets.

The final trend is the important role energy efficient lighting can play in society. I mean ‘important’ in two ways: in environmental terms, green lighting is important if we are serious about CO2 reduction; and in commercial terms, green lighting is an important, fast-growing segment of the total lighting market. Philips is, and always has been, at the forefront of this development.

Slide 39 – Building the leading brand Health & Well-being

Ladies and Gentlemen,

Philips’ ambition is to build the leading global brand in Health and Well-being. That’s why we are making a conscious effort to make our trusted brand promise of ‘sense and simplicity’ especially meaningful in the Health and Well-being domain.

Slide 40 – A growing brand in Health and Well-being

An expression of this effort is our recent advertising campaign in media such as the Financial Times, a campaign aimed at professionals and influencers in the Health and Well-being domain. After all, as I mentioned before, over half our sales today are from business-to-business activity.

People are responding to our brand promise. As a result, the value of the Philips brand, as measured by Interbrand, increases rapidly year after year. In 2008, this value reached the respectable sum of 8.3 billion US dollar.

Slide 41 – Strong leadership, highly engaged workforce

In these turbulent times, strong management and engaged employees are essential assets. We need the engagement and effort of our employees on a daily basis to keep this company going. Their response to the current challenges has been excellent. It is particularly gratifying that last year, our annual employee engagement survey showed a big increase in the Employee Engagement Index and we are now very close to our target level of 70.

In difficult times, we also need strong leadership. I can assure you that our top managers are doing a great job, managing our way through the downturn and executing our long-term strategy at the same time. We are on the ball!

Slide 42 – Management Agenda 2009

Before I wrap up, let me take you quickly through our Management Agenda for 2009. Because of the unique character of this downturn and the general uncertainty about how deep it will get and how long it will last, we are not giving guidance on our expected overall results. Our key financial indicators remain the same, but our economies and markets are changing so rapidly at the moment, that it would not be helpful to come out with specific numbers of expected financial performance for the next full year.

Instead, we want to commit ourselves to three broad targets: Drive Performance, Accelerate Change and Implement Strategy.

Driving Performance means prioritizing cash management, aligning cost structures to revenues, increasing productivity and strengthening market positions. This will ensure we get through the recession without any major financial damage, and that we are in good shape when the upswing occurs.

Accelerating Change means increasing customer satisfaction, increasing employee engagement and also the acceleration of our sector transformation programs. Now, more than ever, fast action and flexibility are essential. We will continue to measure customer satisfaction and employee engagement through our two non-financial key indicators: the Net Promoter Score and the Employee Engagement Index.

Our main strategic goal is to become the leading global brand in Health & Well-being. Progress in achieving this goal is therefore the first target of implementing our strategy. Related targets are a re-allocation of resources to growth opportunities and emerging markets, including selective M&A activity, and an increase in the revenues we derive from leadership businesses. Achieving these goals will ensure the long-term health, growth and profitability of our company.

Slide 43 – Summary

In conclusion, it is clear 2008 was a challenging year in which we did a good job in managing our performance in rapidly deteriorating circumstances. Despite all the current challenges, we are very confident that we will come out of this downturn as a stronger company with the right strategies in place to win in the markets.

This confidence is based on the overall strength of our business portfolio. A balanced  portfolio that we have further developed with the integration of our major 2007 acquisitions and the addition of a few new ones. A portfolio, also, with a substantial number of worldwide leadership positions in our businesses.

It is also based on our strong financial position and stringent financial management. As explained, we have focused relentlessly on working capital management, and we will continue to do so. Cash generation is our highest priority and will continue to drive down costs to maintain our profitability and balance sheet position.

During 2009 we will continue to manage our business relative to both the market and competition.

As indicated we will sustain our levels of R&D and marketing investment, as we believe these are our proven strongholds that will give us an edge in the market.

While we are managing the current downturn, neither our strategy nor our ambitions for the longer run will change. We stick to our ambition to build Philips into the leading brand in Health and Well-being. With our strong portfolio, our financial strength, but also with the strength of our brand, the satisfaction of our customers, our capacity to innovate and the engagement of our employees we believe we have all the assets in place to go after that goal. 

We will have challenging times ahead, but we are prepared and ready to deal with them. I am confident that we will be an even stronger company, able to deliver on its targets once the economic conditions recover.

Thank you for your attention.