Ladies and Gentlemen,
[slide 5 – Global company of leading businesses] I would also like to bid you a warm welcome to this annual general meeting. Given that we are now in a severe recession, these are very challenging times for all of us, for the world of business and for Philips too. The financial crisis and its impact on the global economy inevitably lead to a reappraisal of society’s fundamental values and to a shift in the balance of power between the various players. Governments are taking on a larger role, companies are being confronted to an even greater extent with their responsibilities toward society, and the shift in the global economy toward emerging markets is intensifying. For Philips, this will also be the context in which we have to operate. And it is one for which we feel we are well positioned – with our focus on people and their quality of life, our responsible corporate citizenship, our businesses in the domain of health and well-being, and our strong position in emerging markets.
The crisis also offers the unique opportunity to take steps towards a less energy-intensive society, and we – with our lighting solutions – want to contribute to this. The transformation of Philips in recent years has given rise to a company with a more balanced and more robust portfolio of businesses in the domain of health and well-being, and these businesses were again able to further improve their market position in 2008. Thanks in part to the successful integration of Respironics and Genlyte, the two biggest acquisitions in the history of Philips, more than 50% of our global sales are now generated by activities in which we are the world market leader. Emerging markets account for more than 30% of our sales, and our brand value increased once again, this time by 8%. [slide 6 – FY results summary] Nevertheless, 2008 was certainly not the year of further progress by Philips that you and I envisaged when we were here together a year ago. Especially in the last quarter, we, like others, felt the effects of the rapid global economic downturn. While our Healthcare sector continued to perform well up to the end of the year, our Consumer Lifestyle and Lighting sectors were hit particularly hard by an unprecedented fall in demand in the last months of the year. Whether it be GDP growth, industrial production, consumer confidence or activity in the construction and automobile sectors, all the economic indicators showed a sharp downward movement at the end of 2008. This economic downturn made itself felt, and continues to be felt, in all our markets. At Healthcare it is clearly noticeable that American hospitals are having difficulty in obtaining finance and are holding back in their purchases. At Consumer Lifestyle our customers have drastically reduced their inventories, anticipating lower future sales. Lighting is feeling the effect of the contraction of the construction and automobile sectors, two important market segments. Already in the fourth quarter of last year this resulted in a sharp decline in sales at Consumer Lifestyle and Lighting, so that sales for 2008 as a whole fell by 2.7%. [slide 7 – EBITA without charges/benefits] Our EBITA margin suffered from the charges that we had to take, above all for restructuring, and came to 3.5%. Without these non-recurring items we achieved an EBITA of over 1.8 billion euros, or 6.9% of sales. This makes it clear that our underlying EBITA – that is, adjusted for non-recurring charges – has measured up reasonably well over the past three years: 1.7 billion in 2006; 2.1 billion in 2007; 1.8 billion in 2008. [slide 8 – FY results summary (same as 6)] We took restructuring charges totaling 520 million euros in 2008, of which 364 million in the last quarter. Our Lighting and Consumer Lifestyle sectors accounted for the lion’s share of these charges. The restructuring will yield total annual cost savings of approximately 400 million euros. The positive impact on our results will become visible in the second half of this year. Unfortunately, these adjustments to a rapidly worsening economy also mean that we have to shed a number of jobs. This is not something that we take lightly, but it is better to take these painful measures early. Postponing them would only mean greater pain at a later date, especially as it is now becoming increasingly clear how deep and lasting the recession will be. In this connection we have also taken a very prudent stance with regard to increases in our employees’ salaries and have frozen the basic salaries of the top executives. As the first signs of a slowdown of economic growth already became visible at the end of 2007, we decided early in 2008 to give highest priority to maximizing our cash flow. As a result of this policy, we generated cash flow from operating activities of 1.5 billion euros in 2008, which is almost the same as in 2007. In order to give ourselves maximum financial leeway, we made use of facilities for refinancing our medium-term debt on favorable conditions and for a longer repayment period and decided in the second half of the year to suspend our share repurchase program. We concluded 2008 with virtually no net debt. Thanks to this solid financial position we are able to propose to you that the dividend be maintained at 70 euro cents per share, the same amount as last year. [slide 9 – Management agenda 2008] 2008 was clearly a year in which the economic climate worsened. At the same time, it was also one in which we made progress in realizing our strategic objectives. Philips wants to be a leading global brand in health and well-being. These objectives remain unshaken. This means, therefore, that we are not changing our strategy, merely adapting our tactics to the changing circumstances. Our Management Agenda 2008 was all about the execution of this strategy. As the color of the dots on this slide indicates, we were able to achieve many of our objectives, but not all. On the whole, the integration of our acquisitions went better than expected, including their contribution to our sales and earnings. This applied in particular to Respironics and Genlyte, the two largest acquisitions ever made by Philips, which we announced more than a year ago. Respironics gives us a leading position in the treatment of sleep and respiratory disorders, while with Genlyte we have become the US market leader in professional lighting applications. With regard to our TV business, we acted quickly and decisively by concluding a licensing agreement for the US market with Funai, which is now responsible for all Philips’ consumer television activities in the United States. We have withdrawn from various other geographical markets as there was no prospect of making a profit. However, due to the deterioration in market conditions these measures have not yet led to the desired improvement in profitability. This has forced us to take further steps. As a result of the sharp decline in sales in the fourth quarter we did not achieve our productivity target. Therefore we have initiated an extensive restructuring program, also against the background of an expected further decline in sales in 2009. As planned, we considerably expanded our presence in emerging markets in 2008, both by way of investments in organic growth and by means of acquisitions, particularly in the healthcare sector. This enabled us to achieve sales growth in emerging markets of 12% for Healthcare and 8% for Lighting. Emerging markets now already account for 30% of our total group sales. As far as innovation is concerned, 58% of our sales in 2008 came from new products, 2 percentage points higher than in 2007. Innovation is essential to the future of Philips, not least in these difficult times. Sustainability remains a fundamental aspect of Philips’ innovation strategy. The proportion of our sales that derives from Green Products went up by three percentage points in 2008 to 23%. To underline that sustainability is an integral aspect of the way we do business, we combined our financial and our sustainability reports in a single document for the first time this year. We measure customer experience by means of the Net Promoter Score, or NPS, which measures the answer to one simple question: ‘How likely is it that you would recommend this company or this product to a friend or colleague?’ Our score improved in 2008; 55% of our key businesses now have industry-leading scores. It is striking that we are achieving good scores particularly in emerging markets. The value of our brand again increased in 2008, rising by 8% according to Interbrand. The current value of 8.3 billion dollars represents a sizeable increase compared with the value of 4.4 billion dollars in 2004, when we launched our “sense and simplicity” campaign. We are particularly pleased with the results of our annual employee engagement survey. In one year Philips’ overall score went up by no less than 5 percentage points to 69%, close to the high-performance norm of 70%, which is our target for 2009. [slide 10 – TSR peer comparison] If we look at the creation of shareholder value through the lens of Total Shareholder Return and compare ourselves with our present peer group of 12 companies, we find ourselves in eighth place, two places lower than last year. This is unsatisfactory, both for you and for us. The comparison with last year reveals that there have been quite a number of changes and gives an impression of the volatility of this ranking. [slide 11 – Equity per share] Besides TSR, there are other parameters that are relevant in this context, for example equity per share. On this slide we compare, on the vertical axis, the increase in our book value per share from 2005 onwards with that of our peer group. On the horizontal axis is the amount of cash returned to shareholders via dividend and share buyback in this period as a percentage of our market value at the beginning of the period. You can see that here Philips can compete with the best. [slide 12 – Proposed dividend] Our dividend policy can also withstand any comparison with our peers. At the current share price, this year’s proposed dividend of 70 euro cents translates to a dividend yield of more than 5.5%, a high percentage compared with the peer group.
[slide 13 – Our agenda for 2009: not business as usual] From 2008, let’s turn now to 2009. It goes without saying that, now more than ever, we in the Board of Management are keeping our finger on the pulse at all times to check on how our customers and our markets are doing. I would like to be able to report to you that we have already passed the lowest point of the recession, but unfortunately the facts tell us that this is not the case. In all three of our sectors the market showed a further weakening in the first quarter of 2009 compared with the fourth quarter of 2008, not least also at Healthcare. The economic stimulus packages running into billions in many countries have not yet had a noticeable positive effect. It looks as though we could be in an L-shaped recession: a rapid, almost vertical fall to a low level where are stuck for a long time. How long we cannot say. The economic outlook for the rest of the year is uncertain. Nobody has a crystal ball that allows them to predict accurately how the recession is going to pan out. In that sense we are like everyone else. For that reason we have expanded our scenario analysis of economic and market trends to make sure that we are aware, in good time, how possible developments could impact our business. We shall not allow ourselves to be taken by surprise and will quickly take appropriate additional measures as necessary. The dramatic economic reversal and the uncertainty as to when there will be a recovery mean that we now have to concentrate in particular on the task of coming out of this recession in the best possible shape. [slide 14 - Management agenda] We shall do that by once again making stringent cash flow management our highest priority in 2009, and by dynamically adjusting our cost structure to market conditions. We shall continue to invest in R&D and marketing, because these are the pillars on which our future growth is based. Wherever possible, we shall also strengthen our market positions by effectively weighing up opportunities and risks. In our change process we have to make sure that we continue the positive trend in our customer focus and our employee engagement. We still have some way to go, particularly in terms of being organized around markets and customers, rather than products. In addition, we shall continue to resolutely pursue the change processes that align our three sectors even more closely with our strategy of becoming a leading brand in health and well-being. That automatically brings us to the third item on the Management Agenda 2009: our strategy, which we will continue to execute unchanged. We shall further develop the Philips brand name in the health and well-being domain; we shall continue with the reallocation of resources to emerging markets and product/market combinations that offer the best opportunities for growth, including responsible acquisitions; and we shall further increase the proportion of sales derived from leading market positions. We have now become a much more transparent and simpler company. We have three clearly defined sectors and have sold down our various non-core financial holdings; recently we announced the sale of our last tranche of shares in LG Display. In our balanced portfolio each sector now accounts for roughly one-third of our sales. It is quite possible that our most profitable sector, Healthcare, will this year also become the largest sector in terms of sales. [slide 15- The power of healthcare] In Healthcare we have made good progress in increasing sales from products and services that occupy a top position in their market. We are leaders in markets such as ultrasound, patient monitoring and cardiovascular X-ray, as well as in the important US home healthcare market for personal alarm services for elderly people who live on their own. Our Healthcare portfolio is now also more widely spread and balanced than it was some years ago thanks to the growth of our activities in home healthcare, patient monitoring and healthcare IT solutions. [slide 16- The power of consumer lifestyle] In Consumer Lifestyle our focus on health and well-being is also beginning to resonate. In mother-and-child care our Avent subsidiary is the leader in its market segment, not least due to the innovative nature of its products. With our Philips shavers, Sonicare toothbrushes and aluminum Juicers – to name only a few top products – we are also helping to make our customers’ lives more enjoyable and healthier. Here too it can be said that our portfolio has become more balanced in the past few years. [slide 17- The power of lighting] I probably don’t have to tell you any more that Lighting is the global number one – and not only in sales of the lamps that consumers buy in the shops. For our sales in Lighting, business-to-business transactions have long been much more important. Here too we lead the way in many segments, such as professional luminaires and car lamps. For the future of Lighting it is certainly very important that we are also ahead of the field in the markets for the energy-efficient, creative lighting of the future, such as LEDs and OLEDs. We are also making good progress in transforming Lighting from a sector geared to individual products to a sector that can provide customers with complete solutions for specific market segments. And in Lighting too we see a much more balanced portfolio than ten years ago.
Ladies and Gentlemen,
[slide 18 - Philips portfolio leverages a number of critical global trends] Our strategy and policy anticipate long-term trends such as the ageing of the population, the right to affordable healthcare for everyone, consumer and patient empowerment, and the need to protect our environment and make efficient use of our energy sources. That is why in the past years we have invested considerable amounts – also by way of acquisitions – in markets such as healthcare and energy-efficient lighting. Our principal objective is still to make Philips a leading global brand in health and well-being by further strengthening our market position in Healthcare, Lifestyle and Lighting. In that regard, people’s needs remain central to everything we do. [slide 19 – “sense and simplicity”] Ladies and gentlemen, I am almost at the end of my speech. A year ago I expressed to you my confidence that with our current portfolio of businesses we could improve our performance to such a level that this would lead, by 2010, to a doubling of EBITA per share compared with 2007. I did add: “… unless circumstances beyond our control such as a multi-year period of severe economic headwind alter the playing field.” Well, we are now facing not a headwind, but a hurricane of unprecedented magnitude. However, I hope that you, like us, have faith in the resilience and future prospects of Philips. As a company, we are not perfect: there is still too much to be done for that. But we are a company with a strong balance sheet and a good cash position, a portfolio of strong businesses that are becoming increasingly relevant to tomorrow’s world, a strong brand and leading market positions, especially in emerging markets, and a highly motivated team of management and employees. A company that – in the Netherlands in 2008 – was the employer of preference and won the Reputation Award as the best company for the second time in three years. All in all, not a bad starting position from which to weather the coming crisis – and, if possible, to emerge from it even stronger. Thank you for your attention. End
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