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Page: 1UNDER EMBARGO UNTIL MARCH 25, 2004, 14.00 HOURS
SPOKEN WORD COUNTS
English translation of speech by Gerard Kleisterlee,
Chairman of the Board of Management
Royal Philips Electronics
General Meeting of Shareholders
Amsterdam, March 25, 2004
Ladies and Gentlemen,
I too would like to welcome you to this Meeting.
2003 was a year in which we made progress on our journey to make Philips a stronger, more effective and more responsive company.
You will be pleased, as we were, that we were able to close the year with a respectable positive result.
However, our endeavors to build a better Philips, a different Philips, continue undiminished. On too many occasions in the past we have slackened the reins too early. Despite all the progress we have made in our efforts to transform Philips into a truly marketing-driven company, we still have a long way to go. The challenges of the markets, the constant change, the dynamism of the global economy – all of these factors call for greater flexibility, an even stronger focus on the customer, increased product innovation, a faster response to growth opportunities, and – last but not least – ongoing cost control. We are working hard to adapt our organization to address these challenges. Our company is also changing in response to the calls from society around the world for greater transparency, integrity and accountability.
As you have come to expect from me, I will first briefly review our results. After that, I would like to talk about our Group strategy, the direction of which is becoming increasingly apparent, both inside and outside the company. And finally, I would like to take this opportunity to comment on a number of aspects of the changing international economic order and the issues that these raise for us as a company in relation to our stakeholders.
Let me begin with the last slide that I showed you during last year’s Meeting.
The shareholders we spoke to after the publication of our annual results particularly appreciated the way we kept our promises over the past year. For the years 2002 and 2003 we had set ourselves the target of achieving cost savings totaling 1 billion euros. In reality we exceeded this figure by 100 million euros.
We also achieved the other four objectives on our management agenda. Semiconductors returned to profitability in the fourth quarter of 2003, Consumer Electronics ceased to be loss-making in the United States, Medical Systems is right on track to achieve an EBITA of 14% in 2004, and we made good progress in our efforts to make Philips a truly market-driven organization.
In addition, we can pride ourselves on solid performances by Lighting and DAP, improvements to our supply chain, the lowering of Consumer Electronics’ risk profile and a successful reallocation of our capital towards activities offering better margins and greater opportunities.
All of this contributed significantly to Philips achieving – after a difficult period – net income of 695 million euros and a cash flow from operating activities of almost 2 billion euros in 2003.
In 2003 income from operations increased from 420 million euros to 488 million euros. This performance was much better than the figures suggest, as the figure for 2003 includes negative special items totaling 431 million euros, compared with a mere 40 million euros in 2002.
Expressed in euros, our sales fell slightly as a result of the depreciation of the US dollar. On a comparable basis, sales grew by 4% in 2003. In the fourth quarter of 2003 sales on a comparable basis grew by 10% year-on-year.
It is very encouraging that we performed particularly well in the last quarter of 2003, when we generated net income of 598 million euros. More importantly, for the first time in a long while, all five product divisions contributed to income, which was accordingly much higher than in the corresponding quarter of 2002.
I would now like to take a brief look at the performance of each product division. Lighting again achieved an excellent income from operations and succeeded in strengthening its market position.
This product division also succeeded in generating strong growth in new categories. New technologies and applications in the fields of LED, Xenon-Automotive and UHP lamps are good examples.
Consumer Electronics delivered a pleasant surprise with a strong fourth quarter. The division recognized in time that a wave of new players is making it even harder to compete in this market and reacted quickly, taking the necessary steps to remain competitive.
Consumer Electronics can achieve further cost savings of 400 million euros within two years. Our aim is still to win market share – with a market-oriented, flexible and streamlined organization – by playing a leadership role in new key categories such as high-end flat TV screens and DVD+RW.
DAP again improved its gross margin and achieved a solid income from operations.
This product division stands out through product innovation and pioneering cooperation with other companies. After Cool Skin and Senseo Crema, it is now the turn of the Perfective ironing system, and there is more in the pipeline. DAP also devoted a lot of effort to geographic expansion, with the emphasis on China.
Although Semiconductors’ income from operations for the whole of 2003 was still negative, in the fourth quarter the division again made a profit, on the back of our restructuring and a recovering market, particularly for mobile telephony.
In view of the success of our Nexperia chips with a number of our key customers and our strong position in Radio Frequency Identification, or RFID, we are confident about the coming year for Semiconductors.
In Europe and the United States, Medical Systems is indeed having to contend with cutbacks in healthcare, but, as I have already said, it is on track to achieve a gross operating margin of 14% in 2004.
The division is steadily increasing its market share with a series of successful product innovations. Both our approach – which is centered on the patient, and not the equipment – and our cooperation with other companies, such as the US corporation EPIC and the Chinese company Neusoft, contribute to the strength of this product division.
At Miscellaneous and Unconsolidated the results were mixed. We succeeded in dramatically improving the situation at Optical Storage, NavTech is showing great promise, and – last but not least – we achieved excellent growth and results at our LG.Philips LCD joint venture for flat displays. On the downside, the strong demand for flat displays meant that conventional picture tubes lost ground. For that reason, our LG.Philips Displays joint venture had to undergo a substantial restructuring, which adversely affected our income.
I would like to stress at this point that we are continuing to invest in new technologies. At the end of 2003 Philips passed the milestone of 100,000 patent rights. Together with Research and the product divisions, our Philips Intellectual Property & Standards business unit ensures that we extract more and more value from our impressive patent portfolio.
Measured over a period of three years, Philips came in eleventh in our defined peer group of 24 companies. Philips’ Total Return to Shareholders in 2003 amounted to 40%.
The recognition, by our shareholders, of the progress we have made translated into a strong performance by our share.
Ladies and Gentleman,
“Things are going well for Philips” is a comment we have heard from many customers in recent weeks. My answer was always: “Things aren’t going well yet, but they are going much better”. The results achieved last year are a source of energy and motivation for our employees, and that makes us cautiously optimistic for 2004. We hope that we can maintain the upward trend this year, by building upon the hard repair work which was required over the last few years, and which demanded major sacrifices in many areas.
I have been able to give this message to many of our shareholders over the past few weeks. As usual, my colleague Jan Hommen and I held meetings with our largest shareholders following the publication of our annual results. We visited investors throughout the world, who, collectively, represent 30 to 35% of our share capital. Regular contact with our shareholders – not only after the annual results – is essential for us: it provides us with extremely valuable feedback about Philips’ strategy and policy.
I am delighted that a large majority of our shareholders are making it increasingly clear that they appreciate our policy, our actions and – certainly as far as the fourth quarter is concerned – our results. We say what we’re going to do, and we do it. The solid performance of Lighting and Domestic Appliances and Personal Care, Semiconductors’ asset-light strategy, the progress being made in making a success of our Nexperia chip platform, the better-than-expected income performance and reduced risk profile at Consumer Electronics, our cost reduction, the improved supply chain management, the increased operating margins at Medical Systems, the reallocation of capital towards activities that offer a higher rate of return, and our transparent reporting – investors are telling us: “More of the same, please.”
There is also growing understanding and wider endorsement of our ‘One Philips’ strategy and our focus on Healthcare, Lifestyle and Technology.
Among our shareholders, customers and employees we are sensing an awareness that Philips is now at a turning point. After a long period of repairs, an era of building, of generating stable, profitable growth, is dawning. I will come back to this later in my speech.
Ladies and Gentlemen,
Our ‘Towards One Philips’ program is much more than a mere cost-cutting exercise. Financial discipline is an important element of our strategy, but the program also serves as a springboard for a true transformation of our company. A more balanced portfolio; greater market focus; more efficient product innovation; closer cooperation, both internally and externally – these are all aspects of ‘One Philips’.
This transformation of Philips is in full flow. This brings me back to the question of whether Philips is indeed at a turning point. If I look at the fundamental changes inside the organization, then my answer to that question is a categorical ‘yes’. Because these fundamental changes represent the most important precondition for the very thing to which we can now assign priority once again: growth.
Philips has to grow again. We can and must now shift the emphasis from repairing to building, from regrouping to expansion. The conditions for this are now in place. For instance, we now have a much better balanced portfolio, with more weight being attached to the engine of future growth, Medical Systems.
Talking of balance and Medical Systems, we are working on achieving greater balance in our sales in the various regions. I will discuss Europe and Asia in more depth later on, but I would like to take a brief look at the United States at this point. This region represents the largest healthcare market. Accordingly, that region also represents the focal point of our Medical Systems business.
Finally, the increase in productivity achieved over the past few years is a springboard for growth. True, fewer people work at Philips today than did so five years ago, but our employees now create more value, because we are concentrating more on high-value-added activities in technology, high-value-added manufacturing and marketing, which form the basis for our competitiveness.
Ladies and Gentlemen,
Productivity and value creation are also key to the economic future of Western Europe. These factors largely determine a company’s competitiveness in its geographic context.
I am concerned by the fact that, in a rapidly and radically changing world, Western Europe seems to be more preoccupied with maintaining the existing economic order than building another future. Many people in this part of the world still seem unable to grasp the full implications of the dramatic rise of dynamic growth economies in Asia, such as China and India.
We live in an age of globalization, free trade and open markets. The consequences are: low prices for consumers, increased competition between manufacturers. In order to remain competitive, companies are shifting jobs from the West to Asia. Initially in manufacturing, but increasingly also in support functions in services and R&D.
There are many reasons why employment has shifted rapidly to countries outside Western Europe in recent years. Labor costs are lower, there are fewer restrictions on trade, the infrastructure for foreign investors is better, governments provide active assistance, local markets are growing very quickly, and global digitalization has removed communication barriers.
Take a look at the following example: productivity per hour worked in the West is significantly higher than in China or India, but productivity per dollar labor cost in China is more than five times higher than in Germany: in India it is more than three times higher.
Consequently, China is now very strong in the manufacture of, for instance, electronics products that we consumers also like to buy here at low prices. The country is quickly becoming the ‘electronics factory of the world’. Increasingly, however, it is also becoming a base for research and development, driven by the availability of a vast number of highly educated engineers and scientists.
But it is not just China. That country is merely one link, albeit a formidable one, in the long chain of countries outside Europe that have developed an export-driven industrial base since 1950.
Ladies and Gentlemen,
For many years, Philips too has found itself in the midst of these dynamic developments, and this has gradually been changing the nature and scale of our presence in Western Europe.
Philips still has a strong presence in Europe, but the rate of growth is steadily declining.
Consequently, in Western Europe the emphasis is shifting for Philips; it will be more on knowledge-intensive activities and less on labor-intensive ones. I won’t attempt to deny that this process of industrial transformation in Western Europe is often painful. When a manufacturing plant has been a significant factor in a local community, sometimes for decades, the loss of jobs understandably comes as a severe blow. Unfortunately, the end of this process is not yet in sight.
On the other hand, there are no grounds to fear that Philips will turn its back on Europe. We are big here, and we will remain big here, though as I have just said, the nature and scale of our presence will change. We do not need to look far to see an example of this. The triangle Eindhoven – Leuven – Aachen constitutes a region in which we are seeing the emergence of synergetic centers of economic growth based around microelectronics, medical technology and advanced lighting applications. Such regions of concentrated technological development, based on advanced R&D, are also to be found elsewhere in Europe, and this is where we have to leverage our competitive strength.
Thus far, the factory closures and streamlining measures have often dominated the newspaper headlines, although I would wish to point out that in many cases it has been a question of outsourcing our activities to a third party, as a result of which jobs have been maintained.
However, we are fully aware of the consequences of restructuring and closures and do not take such decisions lightly. In such cases, we make every effort to ensure that the measures are implemented with due care, and we attach great importance to constructive consultation with all parties concerned. In addition, Philips does a lot to help employees to find another job and to reconfigure production facilities for alternative activities – we recognize that we have a responsibility to help cushion the impact of the industrial transformation.
To a certain extent industrial restructuring is part and parcel of large companies; if something is at the end of its life cycle, it disappears from the economic chain to make way for new activity. One of the reasons why reorganizations have become such a dominant theme at Philips is that – due to a lack of growth – less new activity has been generated to replace the old, and that has to change.
Ladies and Gentlemen,
I sincerely hope that my comments today will encourage Western European societies to focus their thinking and actions more on the future. This should be at the top of the political, social and industrial agendas. However painful it may be, we have to break free of the divisions and fragmentation that are so widespread in our continent. Let’s stop clinging on to outdated standpoints and address issues such as the flexibilization of labor with an open mind. Ironically, last year we closed more factories in Asia than in Europe. You see, the costs connected with closures here are tremendous. But that’s not good news: a company will think long and hard before starting up a new activity in Europe.
Finally, let’s act together to promote innovation and new economic growth. Boosting innovation should improve European competitiveness and thus create new jobs. That is our only prospect of creating a strong Europe in which we can maintain our prosperity.