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Philips profits nearly triple as turnaround bears fruit

The logo of Philips is seen at the company's entrance in Brussels September 11, 2012. REUTERS/Francois Lenoir

By Sara Webb

AMSTERDAM (Reuters) - Philips (PHIA.AS) reported a near-tripling in third-quarter net profit, beating forecasts and pushing its shares to their highest since mid-2010 after two years of cutting costs, selling weak businesses and targeting new products at emerging markets.

The Dutch firm once known for its audio and video products has shifted its focus towards the fast-growing healthcare equipment and energy-efficient lighting sectors, bowing to competition from a plethora of Asian companies as consumer entertainment evolved to mobile internet devices.

It has also launched a slew of new and updated products in the profitable consumer appliances market - selling electric toothbrushes and shavers in Japan and China and air purifiers in China and Singapore where air quality is a concern.

In the process Philips has boosted profits and, via a tight handle on costs, insulated itself from currency volatility and slowing economic growth that have recently rattled other big firms, like Unilever (ULVR.L), present in India and Indonesia.

Unilever issued a surprise sales warning at the end of September, fuelling worry that a slowdown in emerging markets would affect other consumer companies. Countries like India, Brazil and Indonesia have seen stock markets and currencies fall because of concern about when the U.S. Federal Reserve would rein in policies that have underpinned its weak economy.

"Seventy-five percent of our revenues is in either dollars, or yen or Asian currencies, (so) we are very much affected by the decline and the weakening of those currencies," Frans van Houten, chief executive of Philips, told Reuters Insider TV.

"But we have been able to offset that by innovations with higher gross margins and cost productivity".

Philips has made 856 million euros in total gross savings to date as part of its overhead cost reduction plan, of which 183 million euros was realized in the third quarter.

Third-quarter net profit climbed to 281 million euros from 105 million euros a year ago, while sales rose 3 percent on a comparable basis to 5.62 billion euros. Analysts in a Reuters poll had forecast a net profit of 209 million euros on sales of 5.74 billion euros.


Van Houten said Philips was committed to achieving its financial targets this year: Sales growth between 4 and 6 percent, a margin on earnings before interest, tax and amortization (EBITA) of 10 to 12 percent and a return on invested capital of 12 to 14 percent.

But he warned the company was still at risk from turbulence in the United States over healthcare reforms because of the impact this has on hospitals placing orders for medical equipment.

Philips healthcare division sells equipment ranging from easy-to-use mobile scanners to more expensive ultrasound equipment used in hospital emergency rooms or for detecting cancer.

Last month, Philips raised most of its financial targets, aiming for a margin of 11-12 percent on EBITA for 2014-2016, and a return on invested capital of at least 14 percent, while keeping its sales growth target of 4-6 percent unchanged.

EBITA for the consumer business rose nearly 50 percent to 116 million euros in the third quarter, from 78 million a year ago, while for the lighting division, EBITA surged more than five times to 177 million euros, from 32 million euros. Philips recently launched "Hue", a home lighting system controlled via a smartphone app, to upgrade its range of consumer lighting products.

In healthcare, the rise was less dramatic, up 8 percent to 329 million euros.

Philips' rival in healthcare, General Electric (GE.N), reported third-quarter results on Friday showing a 7 percent rise in profit at its healthcare division on flat revenue.

Philips shares jumped more than 6 percent to hit 26.08 euros on Monday, the highest level since mid-2010.

The stock is up about a quarter since the since of the year and trades at 14.6 times forecast earnings, a 12 percent premium to the average of its peers including Electrolux (ELUXb.ST) and Alstom (ALSO.PA), according to StarMine SmartEstimates, but below Osram Licht (OSRn.DE) at 15.8 times.

Philips also said its 1.5 billion-euro share buyback, announced last month, would start on Monday.

(Reporting by Sara Webb; Editing by Sophie Walker)