By Robin van Daalen
AMSTERDAM-- Philips NV sounded a cautious tone about the
remainder of the year in light of the strong euro and weaker demand
in China and Russia, as the Dutch electronics maker reported a 14%
drop in first-quarter net profit on Tuesday.
Net profit for the period ended March 31 was EUR138 million
($190.5 million), compared with EUR161 million a year earlier.
Sales slipped 4.5% to EUR5.02 billion, from EUR5.26 billion in
the first quarter of 2013. Stripping out currency effects, sales
were flat on an annual basis. Sales increased in consumer
electronics but were flat in the company's lighting business and
declined in health care.
"Our first-quarter financial results reflect a challenging start
to the year," Chief Executive Frans van Houten said.
Philips, whose products range from kitchen appliances to
hospital scanners, said in January that it expected to take a
modest step this year toward reaching its financial targets for
2016. But on Tuesday the company said that improving its
performance would be difficult.
Mr. van Houten blamed the performance on the euro's strength
against a number of emerging-market currencies, the slowdown of the
Chinese economy and rising tension between the West and Russia
following Moscow's decision to annex the Ukrainian region of
Crimea. "The conflict with Russia has strongly affected demand in
all three of our businesses, " Mr. van Houten said.
Philips expects operating profit for its lighting and consumer
electronics units to rise in 2014, but its health-care business
faces a more challenging outlook, Mr. van Houten said. The
health-care operations, which account for around 40% of sales,
booked a 2% drop in revenue during the first quarter due to falling
sales of imaging systems such as CT and X-ray scanners.
Operating profit will be hurt to the tune of EUR60 million to
EUR70 million this year by the suspension of production at
Philips's health-care facility in Cleveland, Ohio, where it is
improving its quality-management system, the company said.
In the global market for hospital scanners, Philips, General
Electric Co. of the U.S. and German conglomerate Siemens AG each
had about a 20% share of the market in 2012, according to research
firm IHS Inc. Last week, GE also posted a 2% drop in health-care
sales.
But competition is heating up and much of the growth is expected
to come from emerging markets such as China in coming years.
Hitachi Ltd. recently said it wants to nearly double its
health-care revenue. Other Asian technology firms such as South
Korea's Samsung Electronics Co. and Japan's Sony Corp. have also
increased investment in medical-related industries in recent
years.
Despite the grim outlook, Philips said it remains confident of
achieving its 2016 financial targets.
The company aims to reduce costs by EUR1.5 billion by the end of
next year as part of a restructuring and cost-cutting program it
started in the third quarter of 2011, shortly after Mr. van Houten
took the helm. Changes to Philips's purchases of raw materials and
parts for production are expected to drive down costs by a further
EUR1 billion.
Philips wants to increase its margins to 11% to 12% for the
period until the end of 2016 on average annual sales growth of 4%
to 6%. In 2013, Philips's margin stood at 10.5%.
Write to Robin van Daalen at Robin.VanDaalen@wsj.com
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