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Thursday, March 31, 2005
Philips CFO set to leave more stable company


The time for drastic overhauls at Philips Electronics is over, with a long-term future envisaged for all five divisions including consumer electronics, said its outgoing finance director. Jan Hommen, who is scheduled to retire on May 1 after eight years at the Dutch electronics group, helped chop back the sprawling conglomerate's 13 divisions -- ranging from music publishing to video retail -- to a more manageable five.

The world's biggest lighting maker now wants to be known as a global top-three supplier of medical equipment, where it plans most of its revenue growth. But even its volatile chip unit, and its low-margin consumer electronics arm, Europe's No. 1 and No. 3 respectively, should be secure now, Hommen said.

"If you use the right business model, you can be successful, even in semiconductors, and that's a very tough business."

Hommen averaged almost one buy and one divestment a month, shifting some 33 billion euros ($42.71 billion) in the process.

A record profit of 9.66 billion euros in 2000 and a record loss in 2002 of 3.2 billion euros -- both partly due to non-cash revaluations of investments -- have not hurt his reputation as a man who made the notoriously volatile Philips more predictable.

"Investors and analysts appreciate his reliability and competence. He has helped turn Philips into a much more stable company," said analyst Ewald Walraven at ING.

In the last few years, Consumer Electronics cut its capital requirement to zero by outsourcing a lot of manufacturing and is on track to achieve a low but sustainable operating margin of 2 to 2.5 percent by the end of the fourth quarter of 2005, he said.

"There has been some margin pressure, but cost reductions have been so successful that we think the model is sustainable. And this way we can continue our position in consumer electronics for a very long time," Hommen said in an interview.

The semiconductor division has followed a similar strategy to become less capital-intensive, and Hommen believes the unit poses less of a risk to earnings now. He was one of the board members who suggested spinning off the unit when it was hemorrhaging cash, but said that goes with the role of CFO.

"As the CFO you're always in that position. You're always looking for ways to do things better or differently."

Rivals, such as Motorola, have spun off their semiconductor units in recent years.

The expansion of Medical Systems became possible in 1998 when Philips sold its 75 percent stake in music publisher PolyGram for almost 5 billion euros, which it used to acquire five medical systems at a time when they were still affordable.

It needed the acquisitions to become big enough to compete with main rivals General Electric and Siemens. "In 1998, Hans Barella, the man in charge of medical, had a list of targets he wanted. We've done them all, and in the order of his list," Hommen said.

Further growth in the medical unit will come from acquisitions, but Philips will spend its money prudently, despite being well-financed after selling billions of euros of non-core investments, he said.

"We're very careful with our capital. We know it's expensive now and we always ask ourselves: 'Does it create value?' If we conclude it's too expensive and doesn't add value, we say no."

"We know some of our rivals reduce their cost of capital to do strategically important acquisitions. But we won't do that."


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