January 27, 2015 Philips reports Q4 sales of EUR 6.5 billion and operational results of EUR 743 million
Group Financials have been restated as of the fourth quarter of 2014 and for prior periods to show the results of the combined businesses of Lumileds and Automotive as discontinued operations in connection with the process of attracting third-party investors.
Fourth-quarter highlights
• Comparable sales declined 2%
• EBITA, excluding restructuring and acquisition-related charges and other items, amounted to EUR 743 million, or 11.4% of sales, compared to 12.9% in Q4 2013
• EBITA amounted to EUR 262 million, impacted by restructuring costs and other items, compared to EUR 789 million in Q4 2013
• Net income amounted to EUR 134 million, compared to EUR 412 million in Q4 2013
• Free cash flow improved to EUR 559 million, compared to EUR 481 million in Q4 2013

Full-year highlights
• Comparable sales declined 1% to EUR 21.4 billion
• EBITA, excluding restructuring and acquisition-related charges and other items, amounted to EUR 1.9 billion, or 9.0% of sales, compared to EUR 2.3 billion, or 10.5% of sales, in 2013
• EBITA amounted to EUR 821 million, or 3.8% of sales, compared to EUR 2.3 billion, or 10.4% of sales, in 2013
• Net income amounted to EUR 411 million, compared to EUR 1.2 billion in 2013
• Free cash flow improved to EUR 497 million, compared to EUR 82 million in 2013
• Return on invested capital was 4.5%, compared to 13.9% in 2013
• Proposal to maintain dividend at EUR 0.80 per share

Frans van Houten, CEO:
“The fourth quarter underscored a challenging 2014 for Philips. Our transformation efforts continued to show good results, even as we addressed performance issues, ongoing softness in end-markets like China and Russia, and stronger than anticipated foreign exchange impacts, particularly in emerging markets.
Healthcare was down overall, mainly caused by operational issues and soft markets. We were encouraged by market share gains in image-guided therapy and recorded strong orders in Europe and the Middle East, where we signed four multi-year solution deals. Our Cleveland factory resumed shipments to customers in January, marking an important milestone. Consumer Lifestyle performed very well in the quarter, continuing its three-year market-outperformance trend. Our Health & Wellness business delivered double-digit growth and we saw overall strong growth in EBITA.
Lighting recorded 20% sales growth in LED and expanded its margins in LED despite strong price erosion. Performance was, however, negatively impacted by results in China, Professional Lighting Solutions North America and conventional lighting. We took action to further restructure our manufacturing footprint in conventional lighting.”
Update on Financial Targets
“Overall, 2014 was a setback in our performance trajectory. We have been taking clear actions to drive stronger operational performance across our businesses and expect sales growth and EBITA margin improvements in 2015 and beyond. However, looking ahead, we remain cautious regarding the macroeconomic outlook and expect ongoing volatility of some of our end-markets. We also anticipate further incidental costs in 2015 and 2016, mainly in relation to restructuring and the separation.
Due to these factors, we are tracking 1 percentage point behind on the path to achieving each of our 2016 comparable sales growth, EBITA and ROIC Group targets. We are convinced that this does not change our longer-term performance potential, considering the attractiveness of the Lighting Solutions and HealthTech markets and our competitive position. Later this year, as we progress with the separation of Philips and reallocation of IG&S, we will update the market about the integral performance targets for each of the two operating companies.”
Accelerate! and Separation Update
“Accelerate! continues to drive improvements across the organization, resulting in increased customer centricity, enhanced customer service levels, faster time-to-market for our innovations and better cost productivity.
In Healthcare Informatics, Solutions & Services (HISS ), a new Agile software development methodology was implemented that increases the number of new software releases by four times over the year, enabling us to introduce a record number of new clinical informatics solutions in the IntelliSpace family at the Radiology Society of North America (RSNA) trade show. In Consumer Lifestyle, our deep understanding of local shopper needs allowed us to successfully launch an optimized range of male grooming products in France, meeting key price points and customer needs. This locally relevant value proposition resulted in a 2 percentage-point market share gain since launch and a record number of Philips product listings at retailer Carrefour. In Lighting, Professional Lighting Solutions enhanced its product portfolio for the indirect channel in Europe, which drove more than 60% sales growth as a result of its strong price-performance ratio, locally relevant value proposition and delivery time commitment of 5 days.”
Overhead cost savings amounted to EUR 35 million for the quarter, bringing the total overhead cost savings in 2014 to EUR 284 million. The Design for Excellence (DfX) program generated EUR 123 million of incremental savings in procurement in the fourth quarter, bringing total DfX savings for 2014 to EUR 284 million. The End2End productivity program achieved incremental savings of EUR 22 million in the quarter, which brings the total End2End productivity savings to EUR 79 million for full-year 2014. Philips expects restructuring costs in 2015 of approximately EUR 250 million.
In September of last year, Philips announced its plan to separate into two standalone companies, positioning each one to better capitalize on the highly attractive HealthTech and Lighting solutions opportunities. Philips is confident in its ability to deliver additional growth and create more value through enhanced focus and agility. As indicated previously, the separation process will take approximately 12-18 months and further updates will be provided over the course of the year. The company currently estimates separation costs to be in the range of EUR 300-400 million in 2015.
The company is in discussion with external investors for the combined Lumileds and Automotive lighting businesses and expects to complete a transaction in the first half of 2015.
As of December 31, 2014, Philips had completed 41% of the EUR 1.5 billion share buy-back program.
Q4 overview
Healthcare
Healthcare comparable sales were 3% lower. The EBITA margin, excluding restructuring and acquisition-related charges and other items, was 14.8%, down from 19.0% year-on-year. Currency-comparable equipment order intake showed a mid-single-digit decline, although it improved in Western Europe. The impact of Cleveland on sales and order intake was approximately 4 percentage points, which will also impact growth performance in 2015.
“In Healthcare, our strategic focus on large-scale and multi-year partnerships continues to gain traction. Furthermore, our pending acquisition of Volcano, announced in December, will enable us to deepen customer relationships, gain share and accelerate revenue growth for Philips’ leading image-guided therapy business.
The updated quality management system at our Cleveland facility recently passed the third-party audit and we have now resumed shipments of our Brilliance iCT systems. Due to the slower than anticipated ramp-up of production and shipments, the impact on 2014 EBITA was larger than previously anticipated. Passing the thirdparty audit for the production of the Brilliance iCT systems is an important milestone that enables us to focus on building further momentum as we deliver imaging innovations to our customers. We are also ramping up the production of CT systems in our facilities in Haifa and Suzhou, initially for customers outside of the United States. Our remediation work will continue to weigh on 2015 and we expect our global CT system production and shipment volume to only gradually return to 2013 levels by the end of the year.”
Consumer Lifestyle
Consumer Lifestyle comparable sales increased by 6%. The EBITA margin, excluding restructuring charges and other items, improved 260 basis points to 16.0%. The margin increase was largely attributable to higher volumes and improved gross margins.
“In Consumer Lifestyle, we were pleased to see that our focused approach continued to deliver strong results, resulting in an improved product mix and strong sales, in particular in Health & Wellness. Our Mother & Child Care line continued to deliver strong double-digit growth, through innovations supporting the healthy development of children. Notably, the new Philips Avent Classic+ bottle is clinically proven to reduce colic and over-eating by allowing newborns to control the milk flow. Our Beauty, Male Grooming, and Oral Healthcare products were successful through the holiday and gift-giving season, including the ‘Double 11’ shopping event in China.”
Lighting
Lighting (excluding the combined businesses of Lumileds and Automotive) comparable sales declined 3% yearon- year. LED-based sales grew 20%, offset by a decline of 14% in overall conventional lighting sales. LED sales now represent 37% of total Lighting sales, compared to 31% in Q4 2013. The EBITA margin, excluding restructuring and acquisition-related charges and other items, amounted to 9.0%, compared to 8.8% in the fourth quarter of 2013.
“As one of the leaders in providing lighting solutions for businesses, cities and consumers that deliver value beyond illumination, we signed a contract to provide the city of Madrid with what is the world’s largest street lighting upgrade to date, involving the replacement of 225,000 luminaires. 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. We’ve also launched exciting new offerings, such as the SlimSurface LED downlight, the thinnest luminaire on the market, which will prove very effective for commercial real-estate customers.”
Innovation, Group & Services
EBITA was a net cost of EUR 339 million, including a EUR 201 million provision for ongoing legal matters. Sales decreased from EUR 224 million in Q4 2013 to EUR 184 million in Q4 2014, mainly due to higher one-time settlements in IP royalties in Q4 2013.
“We were pleased to receive the CE mark for diagnostic use of our Philips Digital Pathology system and software in the fourth quarter. Pathologists will now be able to use the full digital solution as an aid in diagnosis for routine pathology, which will improve workflows and collaboration and, in turn, increase efficiency and productivity. In the quarter, it is exciting to see that sales in the Healthcare Incubator almost tripled. We also opened a new healthcare imaging systems refurbishment facility in the Netherlands, which marks the next step in bringing the financial and environmental benefits of ‘circular economy’ to the healthcare industry.”