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Philips Slammed by Europe, Inventory Woes

{complink 4267|Royal Philips Electronics N.V.} won't hit its sales and profit targets for the fourth quarter. This clearly confirms that Europe's economic malaise will hurt its leading electronics makers and possibly the entire industry.

The Amsterdam company, which has extended interests in the consumer lighting, healthcare equipment, and domestic appliance markets, said in a press release today that it would report only “mid single-digit” sales growth for the recently ended quarter from a year earlier.

Philips is a bellwether for Europe's electronics companies and perhaps also for North American ones. Other leading OEMs and component suppliers will probably report similarly weak fourth-quarter performance. And the causes are likely to be the same. Philips CEO Frans van Houten said inventory in its consumer lighting business grew, essentially because demand stalled in Europe. Furthermore:

Our expected fourth quarter financial results have been affected by the weakness in Europe, which has impacted our healthcare business, as well as pricing in our consumer lighting business. We have taken measures to address our inventory situation in the lighting business, which also had an impact on earnings for the quarter…
While we are disappointed with the results, we are confident that by continuing to execute on our change plans, and delivering our cost reduction plans, we will improve the operations of the company and achieve our 2013 mid-term financial targets of 4-6% sales growth, 10-12% reported EBITA, and 12-14% ROIC.

The inventory problem reported by Philips should be carefully monitored across the industry as fourth-quarter numbers are reported. Balance sheets will confirm not just how well the industry performed, but also what we should expect for the first half of 2012. If inventories rose a lot more than expected, the industry will go into lockdown mode again as companies try to drain the excess.

Electronics manufacturers learned an important lesson from the 2001 downturn, which left massive inventories in its wake. Companies like {complink 1131|Cisco Systems Inc.} wrote off billions in unused inventories and swore not to let this happen again. They have largely been successful at this. At the first signs of a sales decline, electronics OEMs have been swift to cut back on component orders and implement a freeze at contract manufacturers. If sales didn't rise as expected in the last quarter, we can expect cost-cutting actions and manufacturing slowdowns, depending on the size of the leftover inventory.

We'll know more when Philips announces its full results Jan. 30. The European chip vendor {complink 5218|STMicroelectronics NV} is scheduled to announce results Jan. 23. That report will offer a glimpse into what we can expect from both Philips and the rest of the market.

A sales slowdown is certainly on tap for this quarter, but its extent will be known only as companies reveal their fourth-quarter performance.

6 comments on “Philips Slammed by Europe, Inventory Woes

  1. Barbara Jorgensen
    January 10, 2012

    Helpful information and significant for the industry. When inventory is still being held at the supplier level, rather than in the channel or at EMS companies, you can pretty much count on a slowdown in chip production until things start to pick up. Suppliers try to sell as much inventory to distributors as possible–especially at year-end–to help suppliers' inventory position look better. If distributors aren't taking new shipments, it's a bad sign.

  2. Taimoor Zubar
    January 11, 2012

    Certainly not a good picture for Philips. I wonder if other European electronic giants are undergoing the same situation. Barbara, how much do you think is the role of consumer and industry demand in this case?

  3. Eldredge
    January 11, 2012

    I think it is very likely that they are having similar problems to Philips, at least at some degree.

  4. Barbara Jorgensen
    January 11, 2012

    @Taimoor: That's a good question. I'm not sure how much of the inventory is in finished goods or in chips. If it's chips, it's probably refelctive of weakness throughout the market. In finished goods, the problem is geographic. More companies are manufacturing closer to their end markets, so if Philips follows suit, then the problem is the uncertainty in the EU.

  5. bolaji ojo
    January 11, 2012

    Correct, Barbara. Philips' problem in the fourth quarter as far as inventory was restricted to the consumer business — I think it's in lighting. And, it was Europe specific but this could also be because Philips has such a large exposure to the continent. When Europe recovers we can expect the inventory to drain off quickly although how long this will take is unknown.

    The positive step the company is taking to streamline operations and further its reorganization activities should help. Philips isn't unique in this situation, though. All companies with a large exposure to Europe will be impacted through the next two quarters.

  6. jbond
    January 12, 2012

    One thing Philips should be looking at is that they still had growth. It might be below expectations and only single digit, but it was still on the black side of the ledger. Philips needs to focus on the areas of loss or less than expected growth and make sure they stay on the positive side of earnings.

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