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Philips Warns of Weak Demand
Jun 15, 2005
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Dutch consumer electronics maker Royal Philips Electronics announce that it expects weak demand in consumer markets in the second quarter, which may dampen its 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.

Philips said its divisions in appliances, consumer electronics, and other activities will be hit in the second quarter.

Philips has a full-year revenue growth target of 5 to 6 percent, which analysts reckon will be tough to meet now. "It's evident they won't grow sales by 5 to 6 percent this year," said Victor Bareno at SNS Securities in Amsterdam.

The profit margin at the domestic appliances division, 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. Philips' appliances division has an operating margin target of 15 percent of sales, which it has met over the last years

However, Philips said the thin margins at consumer electronics will not be eroded further. "We're sticking to our IFO (income from operations) margin target for consumer electronics," a Philips spokesman said, adding its focus on flat TVs and its business model of outsourcing manufacturing gave the unit some profit protection.

Sales of the latest technology products, such as flat TVs, held up well. "But the more mature products are hit. There's a lot of deflation and no volumes to compensate for it," said British retail analyst Iain McDonald at Numis Securities. He could not see a recovery in the third quarter without an interest rate cut or tax relief in the key British market.

The fiercely competitive DVD, TV and Hi-Fi markets leave the company's consumer electronics division with a modest target of 2 to 2.5 percent.

In an update ahead of an analysts' meeting for its Medical Systems unit, Philips also said it was looking for further growth of that division, which it wants to make more important.

"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, CEO of the medical systems business.

He expected to increase the profitability of his unit over coming years, from the already healthy 12 percent it achieved last year, while outpacing the 4 to 5 percent market growth.

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

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