Philips CEO: We're off target for 2016

Things are not getting easier for lighting and electronics conglomerate Royal Philips: No sooner did the company report a plunge in profits than CEO Frans van Houten stated that it is slipping behind its financial goals for the next two years.

'We are tracking 1 percentage point behind on the path to achieving each of our 2016 comparable sales growth, EBITA and ROIC Group targets,' said van Houten, whose current employment contract expires in May.

Van Houten made his remarks in a press release announcing that net income plummeted by two thirds both for 2014 - to €411 million from €1.2 billion in 2013 – and for the quarter ended Dec. 31 – to €134 million from €412 million. Comparable sales for the year slipped by 1 percent to €21.4 billion, and for the quarter dropped by 2 percent to €6.5 billion.

The numbers reflect all of Philips businesses – lighting as well as healthcare electronics and and 'consumer lifestyle' including products such as coffee makers, shavers and electric toothbrushes.

In lighting, Philips' conventional business continued to handicap its move into the modern LED era. Overall lighting sales fell by 3 percent for the year, to €6.9 billion. Although LED sales grew by 20 percent and now represent 37 percent of division sales (up from 31 percent a year earlier) conventional lighting declined by 14 percent.

On the positive side, van Houten said that Philips 'expanded its margins in LED despite strong price erosion' (long standing vendors like Philips are struggling to keep pace with lower prices offered by newer LED-only players who do not carry the albatross of a conventional lighting business).

Overall lighting performance was, 'negatively impacted by results in China, Professional Lighting Solutions North America and conventional lighting,' van Houten said, noting that, 'Our performance in North America was unsatisfactory and our business in China was affected by deteriorating market conditions. We have taken further steps, including the appointment of a new head of our Americas Lighting business, to significantly strengthen our ability to deliver new levels of business value.'

He added that Philips also 'took action to further restructure our manufacturing footprint in conventional lighting.'

Lighting results no longer include the company's LED chip business – Lumileds – or its automotive lighting business, both of which Philips is selling.

Philips is also splitting up, as it seeks 'independence' and what it calls 'alternative ownership' for its lighting group, which could result in different scenarios including an outright sale of the division.

Reports have surfaced recently that private equity firms KKR and CVC might might make a joint bid for the division.

Bloomberg's website reported that, 'No bids have yet been received for the solutions business, van Houten told Bloomberg TV, adding that he’ll give a progress report on that disposal later this year.'

One possibility is that Philips might find investors from the internet industry looking to leverage the company's LED lighting into an 'Internet of Things' strategy in which digital lighting becomes a key part of information networks. Another is that Philips will float the division in a public stock offering. 

While Philips is seeking an outright buyer for its LED components and automotive lighting group, it says it is treating the sale of its 'lighting solutions' differently as it explores 'alternative ownership.' A Philips spokesman told Lux that whereas the components and automotive business are driven by cost and scale, lighting solutions 'is very customer-intimate, very close, locally relevant in the market, integrating systems through the various needs of outdoor, indoor, office and other applications.'

One source told Lux that Philips will not make any sort of sale of lighting solutions until it legally separates the division from the company, in 2016.

The diffiuclt transtion to lighting's digital present and future is enough to make one wonder how much longer van Houten might stay on the job. The same type of market trauma led to the departure this month of the CEO of Osram, another longtime lighting player. Osram replaced former CEO Wolfgang Dehen with industry outsider Olaf Berlien.

Reuters reported that van Houten will 'seek reappointment' as Philips' CEO, a position he has held for nearly four years. A Philips spokesperson told Lux that van Houten's contract expires at the end of May.

'There is a standard process in place for the reappointment of members of the board of management and Philips’ Supervisory Board plays an important role in this,' the spokesperson said.

Philips plans to provide a public update on the process when it announces the agenda for its Annual General Meeting scheduled for May 15.

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Photo is from Philips via Flickr