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Wednesday, June 15, 2005
Philips Warns on Full-year Growth

Philips Electronics said Wednesday that it expects weaker demand in consumer markets in the second quarter, which may hit full-year growth targets.

"Economic indicators around the world point to reduced growth rates. Europe in particular is suffering from a weakened consumer retail environment in the second quarter, hampering our growth ambitions in the short term," Philips CEO Gerard Kleisterlee said in a statement.

The three main divisions that will be hit in the second quarter are Consumer Electronics, Domestic Appliances and Other Activities, which generate about half of total sales.

Philips has a full-year revenue growth target of 5 to 6 percent, which analysts reckon will be tough to meet now.

The profit margin at Domestic Appliances, which in recent years achieved strong results on the back of the Senseo budget espresso machine and its global dominance in electric shavers, will be hit. But the thin margins at Consumer Electronics will not be eroded further, Philips said.

"We're sticking to our IFO (income from operations) margin target for Consumer Electronics," a Philips spokesman said, adding its focus on expensive flat TVs and its business model of outsourcing manufacturing gave the unit some profit protection.

Margins under pressure
Domestic Appliances has an operating margin target of 15 percent of sales, which it has met over the last years. The fiercely competitive DVD, TV and Hi-Fi markets leaves Consumer Electronics with a much more modest target of 2 to 2.5 percent, plus an additional 2 percent from royalties on products like the CD and DVD, which it has helped to invent.

Europe's top consumer electronics producer and the region's No. 3 in semiconductors has an overall goal to achieve an operating profit margin of 7 to 10 percent by next year.

In an update ahead of an analyst meeting for its Medical Systems unit, Philips also said it was looking for further growth of that division, which it wants to grow in importance.

"As we explore areas for further expansion -- either through acquisitions or alliances -- we'll be looking for market, technology and clinical synergies with our existing activities to build an even stronger healthcare business," said Jouko Karvinen, the chief executive of the medical systems business.

He expected to increase the profitability of his unit during coming years, from the already healthy 12 percent it achieved last year.

"We expect operational efficiency, innovation and customer support will provide us with additional margin points in a few years," Karvinen said.

Philips is also the world's biggest lighting manufacturer and a Top 3 hospital equipment manufacturer.

Despite the weakened market conditions, Philips still plans to spend 75 million ($91 million) in the current quarter on its branding campaign.

Chief Executive Kleisterlee said his company also expects deteriorating performance at its "Other Activities" segment, which combines non-core assets.

"Philips will continue to pursue measures to boost the efficiency of its core operations, while continuing to dispose of non-core activities to achieve its medium-term goals."

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