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Philips Reports Q3 Profit, but Takes a Hit in Emerging Markets

Frans van Houten, CEO:
Philips delivered improved results for the third quarter of 2015, confirming that our operational performance continues to strengthen, despite deteriorating macro-economic conditions in a number of markets, most notably in China.

“Healthcare comparable sales and order intake increased, driven by North America. Operational results also improved year-on-year, despite the impact of China and foreign exchange headwinds. Consumer Lifestyle again delivered a strong performance, with a significant product mix improvement driven by high growth in Health & Wellness and Personal Care. Lighting continued its trend of year-on-year performance improvement, driven by strong growth in our LED businesses, while we continue to actively manage the conventional lighting market decline.

“For full-year 2015, we continue to expect modest comparable sales growth and an improvement of our operational performance.”

Accelerate! and Separation Update
“Our Accelerate! program continues to drive operational improvements across the organization,” stated Van Houten. In Healthcare, for example, this resulted in reduced manufacturing cycle times and inventory in our Image-Guided Therapy facility in the Netherlands. In Consumer Lifestyle, we simplified the order fulfillment process in Spain, resulting in improved customer service. In Lighting, a new go-to-market model and customized offerings in Indonesia enhanced our business-to-government sales capabilities, resulting in street-lighting orders from five major cities.”

Overhead cost savings amounted to EUR 33 million in the third quarter. The Design for Excellence (DfX) program generated EUR 107 million of incremental procurement savings in the quarter. The End2End improvement program achieved EUR 63 million in productivity gains.

Philips is on schedule to complete the separation of the Lighting business in the first half of 2016. As previously stated, Philips is reviewing all strategic options for Philips Lighting, including an initial public offering and a private sale. The company now expects the related separation costs to come in at the lower end of EUR 200-300 million for 2015 and remain within that range in 2016.

Update on sale of majority stake in Lumileds to GO Scale Capital
In the course of seeking regulatory approvals regarding the sale of an 80.1% interest in Lumileds to a consortium led by GO Scale Capital, the Committee on Foreign Investment in the United States (CFIUS) has expressed certain unforeseen concerns. Philips and GO Scale Capital will continue to engage with CFIUS and will take all reasonable steps to address its concerns, but given these, the closing of the transaction is uncertain.


Q3 2015 Financial and Operational Overview

Healthcare comparable sales grew 3% year-on-year and currency-comparable order intake was up 2%. Excluding restructuring and acquisition-related charges and other items, the EBITA margin increased by 30 basis points to 12.3%, driven largely by cost productivity. This was partly offset by negative currency impact, higher investments for growth initiatives, and increases in Quality & Regulatory spend.

Van Houten stated, “We are encouraged by continued sales growth and the positive order intake across the majority of our markets. Our focus on delivering meaningful innovations that enhance patient care and improve efficiencies continues to pay off, for example with the introduction of HeartModel, an ultrasound tool with anatomical intelligence, designed to enhance diagnosis and planning in cardiology.”

Consumer Lifestyle
Consumer Lifestyle comparable sales increased by 6% year-on-year, with double-digit growth at Health & Wellness and Personal Care. The EBITA margin, excluding restructuring and acquisition-related charges and other items, increased by 190 basis points to 12.5% year-on-year.

“We delivered significant EBITA gains in Consumer Lifestyle, as well as strong growth. This resulted in market share expansion across a number of product categories and geographies. For instance in Oral Healthcare, innovations including the Philips Sonicare DiamondClean Amethyst and Philips Sonicare AirFloss Ultra saw high-double-digit growth,” said Van Houten.

Lighting continued its operational improvement, with the EBITA margin, excluding restructuring and acquisition-related charges and other items, increasing by 40 basis points to 9.5% year-on-year. LED lighting comparable sales grew 24% and LED margins improved. LED sales now represent 44% of total Lighting sales, compared to 36% in Q3 2014. In line with industry trends, conventional lamps sales declined by 15%, resulting in an overall comparable sales decrease of 3% year-on-year.

Van Houten added, “We are pleased with another quarter of strong performance from our LED business, which now represents close to half of Lighting sales. We continue to introduce LED innovations to customers. For example, Philips will outfit 32 Accenture offices with more than 140,000 LED-based products in India. The upgrade will enable significant energy savings and create a more pleasant work environment. Simultaneously, we will continue to proactively manage the conventional lighting market decline, allowing us to deliver improvements to Lighting EBITA margins.”

Innovation, Group & Services
Comparable sales increased by 15%, driven by IP Royalties and very strong growth in Philips’ emerging businesses such as Digital Pathology and Photonics. EBITA was a net cost of EUR 139 million, compared to a net cost of EUR 151 million in the third quarter of 2014.

“We are driving leadership positions in emerging business areas such as digital pathology,” stated Van Houten. In Europe and Asia Pacific, leading health institutions such as Germany’s largest telemedicine platform and Singapore General Hospital digitize their pathology workflows with Philips’ IntelliSite Pathology Solutions to enhance disease diagnosis, underpinning our leadership in this field.”


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