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UPDATE 2-Price pressure weighs on Philips as lighting split looms
October 20, 2014 / 8:37 AM / 3 years ago

UPDATE 2-Price pressure weighs on Philips as lighting split looms

* Currency effects, one-off charges hit results

* Company expects improvements, but margin pressures remain

* Lighting spin-off on track (Adds details, analyst comment)

By Thomas Escritt

AMSTERDAM, Oct 20 (Reuters) - Philips slid to a net loss in the third quarter, weighed down by one-off charges and weak demand in Russia and China -- a setback for the Dutch healthcare-to-bulbs group as it pushes ahead with a radical plan to spin off its lighting arm.

Shares in the group fell almost 4 percent in morning trade on Monday, as investors fretted over price pressure in key markets and an uncertain short-term outlook. Sales in China, for example, were flat on last year.

Philips -- which is trying to revive its fortunes by focusing on higher-margin healthcare and tapping emerging economies -- warned investors that soggy demand in Russia and China meant second-half operating earnings could be lower than last year.

But it saw a better 2015 and stuck to 2016 targets for sales growth and margin improvement.

Philips is targeting an improvement in its earnings before interest tax and amortisation (EBITA) margin to 11 to 12 percent by 2016. That compares to 8.5 percent for the year to date.

Chief Executive Frans van Houten said the group was also pressing ahead with plans to spin off the lighting business which helped make Philips a global brand.

“Separation will take 12 to 18 months, and that’s when we’ll determine the right way to access the capital markets... By that time both companies will stand on their own feet and will be in excellent state,” he said.

Van Houten added an initial public offering was likely.

RED QUARTER

Philips swung to a net loss of 103 million euros ($131 million) on sales of 5.5 billion euros in the third quarter, compared to a net profit of 281 million euros on sales of 5.6 billion euros a year earlier.

That was roughly in line with analyst forecasts as the company was hit by several one-off charges, including a 366 million euro fine relating to a lost U.S. patent lawsuit against medical equipment manufacturer Masimo. Philips is appealing.

There were also 49 million euros in writedowns, mainly in inventory, after an earlier production suspension at its Cleveland, Ohio, factory.

“Margins have continued to fall,” said Nick Wilson, analyst at Espirito Santo. “You’ve got ongoing price pressure in their three end markets, and you’ve still got the underproduction of the Cleveland medical plant.”

The company’s adjusted EBITA margin excluding most one-off charges slipped to 8.5 percent for the year to date, compared to 9.6 percent for the previous year.

“The key question is what changes in 2015. Hopefully, Cleveland comes back on line. But my view is that pricing will remain pretty tough,” Wilson added.

At 1130 GMT the shares were down 4.12 percent.

Van Houten, though, pointed to one-off hits in the quarter.

“Barring all this, though, we are confident our operational result is improving. Currency headwinds are abating,” he told Reuters Insider. “We think 2015 will show much better results.”

The company, for decades a world-leading consumer electronics company, has reinvented itself in recent years, selling off its lower-margin television business in 2012.

It is now poised to take the dramatic step of splitting the group to focus on its healthcare and consumer lifestyle divisions, which make hospital equipment and personal care products, with which it is targeting growth in emerging markets. (Reporting By Thomas Escritt; Editing by David Goodman and Clara Ferreira Marques)

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