Koninklijke Philips NV (PHG) 2002 Q2 法說會逐字稿

Welcome to the Royal Philips second quarter analyst call on July 16, 2002. For the introduction by Mr. Hommen chief financial officer of Royal Philips all participants will be in a listen only mode. After the presentation there will be an opportunity to ask questions. If any participant has difficulty hearing the conference at any time, please press the star followed by the zero on your telephone for operator assistance. I will now hand the conference over to Mr. Hommen please go ahead.

Thank you. Ladies and gentlemen, good afternoon. First, before we start the meeting, I need to make a comment on the press release statement of cash flow. Due to a printing error in the PDF file in the second quarter earnings, they were published this morning one line was missing in the cash flow statement. That's on page 14. In the English version only. The amounts of net gain on sale of investments were missing. However, the totals remain unchanged. Let me read the amount to make sure you have them. The amounts should read again on the line net gain on sale of investments, for the year 2002, second quarter, minus 149. For the year 2001, second quarter, 2002. Minus. For the year the year 2002, January to June, 329. And the last one, 306. All numbers are minus. We apologize. The file has been adjusted in the meantime and we apologize for this inconvenience. Let me now start with the meeting here. First I'll give you a short overview of the main aspects affecting our results in the second quarter. I'll leave a substantial amount of time for your questions. For those who have seen a copy of the press release that we issued at 7:00 this morning you can find it on our investor relations web site. The main item that we like to cover first in the quarter have been, first, we have taken an impairment charge involving three equity stakes for a total amount of one billion 561 million. But virtually entirely relating to our shareholdings in (inaudible) universal we've done this by strictly applying U.S. GAAP accounting rules. The comparable sales growth was positive. Both sequentially year over year and as the first year over year gross since the first quarter of year 2000. Cash flow from operations was a positive 496 million. And cash flow before financing was a positive 371 million Euro. Production program created savings of 132 million in the first six months. We had record low inventories held by a low U.S. dollar. And we had very good results relating to consolidated companies, especially the LCD venture versus LCD and good results of (inaudible). Let me briefly look at each of the sectors. I'll begin this with lighting the sales in the quarter were six percent lower than the second quarter of 2001. One percent relates to having a battery of activity. Generally markets were soft for specific weakness in America and Luminaires, our operating margin seasonally weak second quarter excluding special items was 11.7. Focus on innovation, cost management and asset management. We have completed to reduce our inventories as percent of sales. While at the same time increasing our delivery reliability. After taking 14 million Euro of restructuring in the quarter, we expect limited amounts for the second half of the year. Cash flow of course is positive. (Inaudible) mainstream activity became profitable for the second quarter to a level of 30 million Euro compared to a loss of seven million in the first quarter. We have achieved this partly by continuing to work on our cost of margin and asset management. We've also seen a slight reduction in the overall price erosion to 7.6 percent, resulting from management and as well as improvement in the performance in the United States. We have growing confidence that our action plan in the United States is going to be successful. We have made further progress reducing the net operating cap at that moment and the inventory has reduced to 8.5 percent of moving annual total sales. We think there's still further improvement possible here. Domestic appliances and personal care, DAP have another excellent quarter which is a record for our second quarter. There has been a two percent comparable sales margin in spite of a weak market in Latin America. Our recent product launches have been successful. And there will be more product launches in the second half of the year in all main product categories which make it domestic for the second half of the year. The record results are based on innovation and high margin products on strict cost and asset control and the impact of the (inaudible) rationalization we look forward to continuing our margins and strong cash flow here. Let me go to (inaudible) there's been a four percent sequential increase in the quarterly sales primarily due to mobile display systems, with the initial deliveries as well as screens took place. We expect to see a build-up of these deliveries during the second quarter. Optical storage has been negative actively impacted in the slow down in PCs particularly (inaudible) and we are not expecting a quick recovery. Also price erosion in this area is heavy. Our results continue to be impacted by continuing - (inaudible) and L cost EV where we believe there's significant erosion opportunities. Semi liquids. Our revenues in the quarter showed a deep sequential growth of 9.6 percent in Euros and 10.5 percent in U.S. dollars. With the increase coming mainly in the area of communication amongst other display drivers and identification and a small improvement in the automotive sectors. The book of the bill in the quarter was one which reflects a degree of hesitancy in the market and customers continuing to order as late as possible. (Inaudible) our sales for the year as a whole are likely to be broadly the same as in 2001. Which takes into account the impact of the low U.S. dollar. The (inaudible) utilization rate in the quarter rose to 60 percent and we are continuing with low level of outsourcing. The operating result improved compared to the first quarter to a loss of 64 million, which includes a 20 million for (inaudible) currency exposures. Cap ex during the year was 61 million and expectation for the full year is between 450 and 500 million. Medical systems, the development of the market appears to be good as we have seen a comparable sales growth of eight percent. In order intake and excess of our plan. The operating income in the quarter including or excluding special items increased from 49 million in Q-1 to 88 million in Q-2. We are expecting to see further increase in Q-3 to be followed by normally seasonally high Q-4. The acquisition related charges in the coming two quarters should average approximately 40 million per quarter, which is slightly higher than we originally expected due to the complexity of the (inaudible) IT systems and HP. We're in the middle of the complicated integration process which is currently on track and maintain our plan to reduce costs by 350 million by the end of 2003. The savings will become more visible when Agilent systems conversions have been completed. We also are expected EBITDA margin of 14 percent in 2004 be expected to exceed our plan in turn over in 2004 of eight billion. Miscellaneous, the results of miscellaneous have been impacted by gain on the sales of some businesses by about 38 million. By 130 million related to an earn out clause in the JDS uniface sale agreement and a gain of six million Euro for selling fixed assets. And the restructuring charge of 12 million. Excluding these amounts, the result was lower. It was a lower loss than in the first quarter. Further this (inaudible) from this group will take place in the coming months or even weeks. Divestment program is very much on track. In allocated the results were negatively impacted by pension amounts compared to the second quarter of last year to the tune of about 125 million. However, the corporate and regional overheads have been reduced from 105 to 86 million, which reflects part of our overhead prevention program. Cost reductions on the announced 300 million overhead cost reduction we have already achieved 132 million in the first six months of this year, with a single biggest item being IT. Contributions from the 350 million cost reduction in medical systems were starting again in the second half of this year and are expected to be completed by the end of 2003. Consolidated companies. The reported results in the quarter are profit of 92 million. However, this includes 56 million of restructuring in LG Philips display which is in accordance with the guidance that we have given you three months ago. In addition, there were other special items of 37 million of which 25 was for an impairment charge for our tele medicine joint venture. Excluding these amounts the results was a profit of 185 million, which is significant, a significant increase over the 72 million for the first quarter of this year. The main contributor to this good result was LG Philips LCD. Our share of the profit was 127 million, compared to 37 million in Q-1. This excellent performance was made possible due to higher selling prices, higher level of utilization of manufacturing facilities and our rapid build up of production in the quarter after the new generation facility. If you want to more fully understand the joint venture, we have published the results in detail on our web site. This is to further help you understanding our company and to improve the disclosure and that's part of our policy to increase our transparency. The other line results of LG Philips display was a loss in our 50 percent share in the loss came to 21 million which was slightly higher than the amount for the first quarter due to an adjustment for financing costs in the first quarter. Allowing for this, the underlying result for the joint venture was close to break even. QMC made a good contribution. Inventories, we have continued to make progress our inventories which came to 13.4 percent of our moving total annual sales and this is a record low for the second quarter. The reductions from 14 percent from Q-1 was made possible by currency movements, mainly the low U.S. dollar. However, our efforts to improve our supply chain management are meeting with success. We will continue to focus on this subject as we believe that over time this percentage can go down further and thereby improving operations and reducing risk in our inventories and improving cash flow at the same time. The cash flow in the quarter before financing was a positive 371 million and here you can see that our focus on cash flow is now being carried by the whole company at large. Our balance sheet, we continue to maintain a strong balance sheet, even though the equity rate is slightly deteriorated during the quarter to 3070. The equity was impacted by impairment charge, of course. Mostly because of (inaudible) and by about 7million of translation differences mainly as a result of the reduced value of the U.S. dollar and the impact of that on the equity of our overseas subsidiaries. That goes without saying we will continue to focus on keeping our balance sheet strong. So far this year we have announced the divestitures of nine businesses. With an approximate value of 200 million. And we expect to announce that in the coming months or even weeks. On the 5th of July Philips announced it had closed a three and a half billion revolving credit facility. Replacing the existing two and a half billion facility which had been in place since July 1996 and has never been drawn upon. The facility now represents assured access to liquidity and giving us additional flexibility. And there are no plans to draw upon this facility. Pension costs I mentioned earlier that we have higher pension costs than in 2001. And this is partly due to making even more conservative assumptions with regard to the future performance of our pension plans. We are calculating now as an expected return on the front for 2002 and on wards of six percent annually which is low when you compare that to what other companies use and we also use a discount rate of 3.41 percent. Let me get to special charges in Q-3. As far as we are aware at this moment, charges that we plan to take in Q-3 are: Lighting, about five million. SEC about 45 million. Medical, about 40 million, that is related to the acquisition still and LG Philips display approximately 10 million. That is our share. I believe that I've touched the main aspects affecting our results in the quarter so let me now ask you for your questions

Thank you, sir. If any participant would like to ask a question press the star followed by the 1 on your telephone. If you wish to cancel this request, please press the star followed by the 2. Your questions will be polled in the order they're received. If you're using speaker equipment today, please lift the hand set before making your selections. There will be a short pause while participants register for questions. The first question comes from John (Duju) from Credit Suisse. Press state your question, sir.

Can you hear me?

I can.

Good afternoon. I have two quick questions for reducing on the Q-3 outlook in (inaudible) for CDs. In (inaudible) are you expecting an increase in sales in Q three sequentially given the orders if I'm calculating well given the book to bid of 1 orders were down sequentially due compared to Q-1. Do you see plan for rising in Q-3. Are you concerned about the losses still remain and recovery seems to be delayed. Then the second question on the LCD front Q-2 was excellent. Are there any reasons regarding the new fab or capacity but to a lessening of performance in Q-3 other than the (inaudible) in prices.

Let me start with (inaudible). We had a very good quarter in semis. We had a sequential increase of 9.6 percent in Euros and ten and a half percent in dollars. And that's part of a turn we have seen in the first half of the year. But at the end of the quarter we saw things getting a little bit weaker, which we relate to the fact that people have their part lines well filled. People can order at very short notice. Delivery times are very quick and very short. And so there's a bit of a pause. It may be also related to the summertime. We foresee a dip let's say small single digit in Q-3. But then we expect based on the bookings we have and the other book for Q-4 already a pick up again in Q-4, which gives us a total for the year basically flat compared with last year. That is the visibility we have in our semiconductor business. The losses - you will see that the losses will get less in the second half because with the operating right now at much higher levels. We are a little between 60 and 62 percent. That is giving us a little better coverage of our fixed cost in the second half than we had in the first half. And we are confident with that, with the upturn we see in Q-4 that we will pass the break-even point somewhere during Q-4. In fact, when I look at our numbers in this quarter, Q-2, we were really approaching break even already in the months of June. Although that's a (inaudible) weeks months as you know in our accounting. But we are, we should be getting fluid again with break even during the second half in our semi conductor business. LCD was strong. The market is strong. We see strong demand. The demand for flat screens is outpacing the expectations of many people in the industry. As a result, we have tight capacity. We were lucky that we had an extension of our facility flat four that we were able to run during the second quarter. That had a bit of an impact. It will have more impact in Q-3. And so we are quite optimistic on the outlook we have for the remainder of this year for our business year. We don't see until sometime next year that supply demand might get better in balance. Of course, there were some issues related to foreign exchange. And I think I need to mention, first of all, one in our semi conductor business. I mentioned it already. Semis had a 20 million foreign exchange loss. If you exclude that, you see that my comment that June was getting close to break even. It's not that really realistic and of course we have currency gains in LCD, because the (inaudible) they have done in U.S. dollars they use as an offset against their exposure on the revenue side in U.S. dollars. Sort of decline in the value of the U.S. dollar had an impact for them on the value of the line.

Thank you.

The next question comes from Mr. (Brum) Cornelius from Merrill Lynch. Please state your question.

Hi guys. Two things please one can you comment on the license income which seemed to be very low and the margin there obviously seemed to be very low particularly given the fact that the CD basis I think was expired last year. My second question is it seems in the last two quarters you've reduced your net operating capital in the semi business by about two billion. I know you didn't spend much on cap ex. And you reduced your inventory but it seems a very large reduction. So could you maybe give me a bit of color on what you've done to reduce it that much. Thanks.

Thank you. On license income, you need when you compare this, let's say the previous year, there's a bit of an anomaly in there, because in the previous year we had a gain of about, what is it, 19 million, I think, in foreign exchange. That was included in Q-2 last year. And that gave us a very high number, let's say something like 68 million. When you compare it with what we have this year it's only 38 million. But in there is a currency - (inaudible). Currency movement the other way. It brings it a little bit better into perspective. But in general I would say you should plan for a license income this year at about 40 to 45 million a quarter then you see it next year probably going back up again when we get further income from the (inaudible) and other type of exposures we have. That's also the reason why the margin was lower on the licensed income. But you compare the semi conductor nook to the capital that is lower, don't underestimate the impact that the U.S. dollar has on our balance sheet, the asset side of our balance sheet because we have quite a number of U.S. assets that get devalued by this devaluation of the U.S. dollar. That's one reason. The other one is we have indeed a low investment program this year and a depreciation charges in semiconductors are higher than the investments we have thus far.

Thank you very much.

The next question comes from Mr. Nate (Sheriff) from (inaudible) CitiGroup. Please state your question.

Good afternoon. I'm Nate (Sheriff) from Citigroup. Just two things. One follow-up question on the semi conductors and another thing on consumer electronics on semiconductors you said there's a tail involved of activity coming into June. Would you be able to shed any further light as to which end market segment that's been dictated by. EG mobile com. Or displays and the second thing with regard to consumer electronics I believe you do a lot of your shelf space in negotiation in the U.S. retail market from July to June. Could you comment on how that has progressed for the upcoming 12 months? Thank you.

Yeah. I don't have the full details yet of the discussions enough on the U.S.. but I can give you a little bit of color there. First question related to semi conductors, had to do with I didn't follow it exactly, by the way.

It was which end market, if any, did you see a greater tailing off in terms of (inaudible).

Okay. The end markets that we're tailing off were, let's see, the communication market as such it had to do with some cancellations we had, not necessarily a reason that the market itself was failing down. It had to do with product development. It had to do with the timing of the product introduction. The other one we saw was related to a little bit in the automotive market that was weaker at the end of Q-2. And a little bit weaker in the standards (inaudible). Those were the main markets where we saw it pale at the end of the second quarter. With respect to consumer products, we have seen consumer electronics in the U.S. that we have a much better sales organization. We have been able to get further shelf space. The new one I don't know yet. But I know that we have wide end our shelf space with a lot of new distribution channels. We've grown more regional as well, in addition to going national. And by going regional, I think we become a more interesting player in a less crowded market, often. We have improved our whole supply chain management, asset management, on time performance, delivery, reliability, all these things are a little better. Our product is better. And the way that we present our product to the customer with better salespeople I think has improved dramatically. That has given us a much better result in Q-2 as sales in the U.S. were up by 18 percent in consumer electronics. And if I look at the results, there were between 25 or 30 million negative, which is a significant improvement compared with where we were last year. So this looks like we are on track in consumer electronics in the U.S. to reach the break-even point or get close to it by the end of Q-4.

Thank you very much, Jan.

The next question comes from Mrs. (Swanzee) Conrad from JP Morgan. Please state your question.

Good afternoon. I have two questions. The first maybe I just follow on on the consumer electronics discussion. If I got the number right, you're planning for 40 million restructuring charges in Q-3. Could you just walk us through what the reasoning there is, if you're quite pleased with the performance. And secondly, I just wanted to double-check on these semi conductor guidance you had given. With respect to Q-3, you were talking modest sequential decline? Because it looks like there's no sequential sales growth necessary in the Q-3 and Q-4 in order to get to flat revenues. And I also wanted to confirm that I think previously you have been saying you expect the semi conductor business to be break even for the full year whereas now you seem to be saying it should be break even in the fourth quarter. Did I understand that correctly?

Yes, I think, first of all, the 40 million is an indication. I cannot be specific. I'm just trying to help so that you folks are not getting a surprise when we make an announcement. But I cannot be more specific than that.

Is that for mainstream or is that for digital networks?

For consumer electronics (inaudible). This has to do with we need to digs close it to people that may be involved before we can disclose it to the financial market. So I'm trying to walk a fine line between what I can and cannot say.

I appreciate that.

So it's 40 million and it's in consumer electronics. With respect to semi conductors, we are saying that we expect for the full year to see a flat year compared with last year. More or less flat. Maybe a small increase at the end. But if it is, it's a - it could be. Which means we see a small decline in Q-3. We see an up tick again in Q-4. And when you calculate it out you can basically lead to those numbers.

And with respect to profits, it is difficult to see at this point in time how you will have the business for the full year break even.

Yeah, I think what we say is if the third quarter had been firmer, we could have made it in Q-3. It doesn't look like Q-3 will be break even. Although I think here we'll get close at the end but we definitely will be on the close side in Q-4.

Thank you.

The next question comes from Mr. Nicholas (Godwau) from Deutsche Banc. Please state your question, sir. Mr. (Godwau) has taken back his question

The next question comes from Mr. Chris (Pasher) from JP Morgan. Please state your question.

Couple of questions first is on the component side if you can perhaps give us some indication of by how much the display components grew within that and if you say you expect those to be in full volume production Q-3 Q-4 what the sequential improvement might be that we're likely to see. And also on the medical side, just wanted to know if you have completed the migration of the HP systems platform so there's no - so you won't have a penalty to pay.

The components question relates to our joint venture I think with LG.

No it's the mobile.

The mobile display components we have seen very good growth in mobile display in this quarter. Let me take my numbers there so that I give you the right facts. We - let's see. Mobile display - yeah, we were compared with the year over year we had a significant increase almost by 30 percent - by 30 percent. And sequentially we grew by about 14 percent compared with the Q-1. What we see is the beginning of shipments in core and we anticipate in Q-3 core shipments will significantly improve. And that is also an interesting feature because the margins on those are of course a little better than they are on the Mono chrome. With respect to the other question -

Does that mean in the second quarter you will be break even in components and we can also expect a continued sequential improvement for the rest of the year?

No, I don't think I can say that in components we will be break even. We will be close to that or at that level for mobile display. We will be better than that in mobile display but we've not made that for optical storage. We still have some issues in optical storage. Many on the data side, where we see quite heavy losses related to the, first of all, the very difficult environment, pricing, but also because of the led product introductions that we have. We're addressing that issue. I cannot say more on that right now. But that issue is being addressed. Your question with respect to medical. The converging of the IT systems from Agilent and HP is happening right now. It should be completed by late September. When that's the case you will see significant reduction in IT costs in our medical operations.

Didn't you have a clause you have to finish that migration by the end of July or else pay 10 million in penalties a month?

No, we need to finish this by the end of September.

Okay.

And if it's not finished by that time there will be penalty clauses, indeed. At the same time, we need to get a little support from Agilent in order to do that converging.

Thank you.

The next question comes from Mr. DJ (Semau) from ABN. Please state your question.

Just on this question, the numbers you've given on mobile display, is that sales or is that shipments, volumes?

They were sales.

Okay. Great. Just a question on the market. I think one year ago I asked you the question about valuation of semi conductor stocks and related obviously to acquisition. You said these stocks are (inaudible) valued and what do you think the valuation are looking at now and would you consider making maybe a move at this time.

At least we have that one right.

Yeah.

We have been looking at of course we continuously evaluate opportunities to strengthen our business. One side I'm careful because of our balance sheet and our cash. I don't want to spend it for the wrong reason. Secondly, we are willing to spend it and we do have some ability to generate cash, as you know, for the right reason. But then it really needs to be the right reason. We are doing a lot of valuations of companies. And I think we're getting to valuations now that are very difficult to pass by. We're not looking at big companies. We're looking at relatively small companies. We're looking at companies that can help us and really give us some technology that we may be missing or some R and D where if we have to do it ourselves we're behind and we can make a big jump in where we are are right now acquiring IT. Those are the type of acquisitions in semiconductors we're looking for. Not big bets. Not at all. So it's technology. It's market position. It's customer position. Those are the - one area particularly we're looking at is the smaller companies that don't have access to capital markets that are getting squeezed of funding, because the venture capital market has (inaudible). There are some very interesting small companies there that have excellent technology. And that's an interesting and relatively cheap way to get into those technologies as well.

Okay. And any specific applications or always consumer wireless connectivity, connectivity you're looking at?

I think that hasn't changed. We're still interested in (inaudible) video and connectivity and communication are still the same.

Can I ask you a question about lighting. Revenues went down six percent during the year in the first quarter. But you didn't have - you didn't seem to have any impact from the stronger Euro. Where do you see the lighting revenue sequentially maybe year on year in terms of growth going into the second half of the year remaining at current levels?

The lighting division was down for a number of reasons. One is there are no more batteries anymore in lighting and that's one percent. Then the lighting business was impacted in the Luminair activities by a very weak building and construction market, in Europe in particular. And then you have markets in the U.S.. and in Latin America that were weak. Weak for lighting electronics and gear as well. The U.S. market I think is temporarily - the Latin America market of course was Argentina and the impact those had on the rest of Latin America that is a very shaky area right now. So it does have an impact. But if I look at it and compare it with what the competition has done we look extremely well. When you look at our performance in EBIT. 11.7 percent, I think is quite a spectacular number. We believe that going forward, even with the dollar and the Euro at levels they're at now we'll have a little bit of impact on lighting because the sales we make in the U.S. translated back in income here will have lower Euro income. But I don't think at the same time I need to say that we still have opportunities to reduce costs to make our processes better so we should be able to find ways to at least for a large degree (inaudible).

That's great. Thank you very much.

Next question comes from Ms. Angela Dean from Morgan Stanley. Please state your question.

Could you tell us a little bit about the reduction in overhead costs that you're making? Perhaps just give us an idea what your annualized run rate is at the end of the second quarter and what I think you mentioned most of this came from IT so far. Perhaps you could mention what's left to do for the rest of the year.

Angela, this is an interesting question and a complicated one, because if you look at all the activities, all the plans that we have, specified action plans that are very detailed, it takes us probably two hours to go through that. But let me tell you what we have done so far. By the way, you have seen that we have reached the 132 million level in the first half year. That is mainly IT, because in some cases you can quickly decide to do things not or to do things differently there. We're getting to the point that we need to reorganize in many ways or restructure. And then it becomes more difficult to get very quick cost savings but we're very determined to get it on the table here. And I'm talking IT. In other areas we need to look for mostly you end up with people savings, about 70 percent most of the time of your overhead expense is related to people. And yes we can still cut a little more in the easy stuff like consultants and (inaudible) product cost but we're getting to the bottom of the organization now and that's not an easy task. And it is a complicated one. I have to admit that. But again here we're very determined to get the 300 million which we have to find by tend of the year that on a run rate basis by the end of the year we should be able to get to that 300 million.

Okay. Thanks.

The next question comes from Mr. (Yonk Phillip) from (Dexia). Please state your question.

I have a question about your divestments you said you already sold nine businesses for about 200 million. Can you tell me by the end of the year how much you said I think this morning in the conference call you sell around five or six businesses more this year. Can you tell me how much that will gain for the full year compared to the 200 million you already gained right now?

The gain is not really a gain. It's more the cash that will be generated.

Right. Okay.

Then there's the one billion, by the way. I think we have a lot of things coming in the next two quarters. In fact, a lot will be announced in the next quarter, maybe the next few weeks. When we add it all up I think we're getting close to five, 600 million, in addition to what we have done for the end of this year.

So at the end of the year, around 700 million of the one billion?

Yeah, I think about that level. Yeah, 700 million.

Second question. On the medical division, the 14 percent EBITDA margin is still a target for 2004. Can you give any indication of your target for this year, if you exclude the restructuring charge and look at EBITDA margins?

Yes, I can. But then I need to look at - if you give us a few minutes we can find that, what that would be. It's not going to be 14 percent this year. Right now so far this year, if I exclude the numbers, we get to 5. If I add in what we - let me quickly look at the forecast now - what we expect for the full year, then. We're doing a calculation here. Just one second.

Okay.

EBITDA will be about seven percent. That includes special items.

Includes also the two times 40 million?

Yes.

Okay. Great. Thanks.

The next question comes from Mr. David (Fenhouse) from Julius Baird.

I have a question about the semi conductor business. The fact that you don't see any strength in CE or IE, I guess, the weakness there, could you specify a bit why that is? It seems that those markets are pretty strong there. Would it be a product mix issue or is that just a general market condition that the CE business is not very strong?

Boy, I don't think I have said CE business is not strong. We see our CE business in Europe doing pretty well despite the marketplace especially Germany and France is not that very strong but our business has done very well. We have sold a good number of television sets at the higher price ranges, fortunately. We have done well with DVD. (Inaudible) we have not done so well but that's a general trend. I think the TV and DVD in fact are doing extremely well, also in the U.S.. and the DVD recordable is really doing well.

I apologize. Apparently there's something wrong with my phone. I actually meant the semi's business. Not the CE department. But this information is very helpful, by the way.

The semi conductor business, as I said we have seen a good up tick in the market in the first half. The market was fairly strong. At the end of the first half of the markets fell a bit touch weaker. We relate that to filling up pipelines and people just waiting to see what happens to their business. The indications we're getting is that the market will pick up again at the end of the third quarter and into the first quarter.

Is that true for the CE part of your business as well or - because what strikes me is that the ad markets there seem pretty strong however you don't mention the CE part of your semi's business as particularly strong, when you talk about the same business in general. So is there a product mix issue there or is it general CE semi conductor business or markets less than you expected?

No, the CE business has really participated in the increase we have seen in the first half of the - showing the same pattern that I mentioned at the end of the quarter when things start to slow down a little bit. And it was also impacting the CE business, in particular the German and French CE business.

Maybe on the next question I'll ask that in a clearer way. The effect that Mr. Kleisterlee has joined the business, should we draw any conclusions about your intentions with the stake you still hold there? Does it mean that intend to hold onto that stake a bit longer than you initially might have thought or is there really no connections between the two.

No, I think what we have seen is that we think that when we look at and do the analysis that the (inaudible) shares are extremely undervalued at this moment. We believe that the underlying businesses are doing quite well. Mr. Kleisterlee has joined at the request of the board and has done that because given our exposure we have an interest together with (inaudible) to see the full value being appreciated by the financial markets which it isn't doing today we think. (Inaudible) it doesn't make Vivendi a poor activity of Philips. We have said we can do business with Vivendi. We would like to. But in the long run and certainly at the right price these shares are not a core activity for us.

Thank you.

The next question comes from Mrs. Jane Pearce from Lehman Brothers.

Jane Pearce from Lehman. My question is back on the semi conductor business. Regarding your cap ex budget on semi conductors you stated you spent 61 million of the total and you still reiterating that total guidance of 450 to 500 million. I was just wondering how confident you were that you would spend that total amount and where we would see that going, and also how dependent it is on that recovery coming through in the fourth quarter.

Okay. The spending of the remainder is mainly related to our participation in call. That's the joint venture we have together with SP and Motorola and (inaudible) MC. Most of the spending the big part of that will go to that facility. I think that four, 500 million will be met. Probably like more like 40050 million more than 500. It makes for a total spending in the company of about 1.2, one.3 this year. And one more comment on semiconductors cap ex. We think with the existing facilities we have, and of course you need to maintain them and from time to time upgrade them and debottleneck them, that we do have enough capacity to not have to invest too much, we have an asset line strategy in semi conductors. We have had it out for a while. Yes use outsourcing quite a lot. At this moment we're low in outsourcing, of course, because you bring in as much of your business in-house. But we can expend it quickly. So the need to invest in our semi conductor business in order to grow at least for let's say this year, next year, is not there.

Okay. That's very clear. Thank you. I wonder if I could ask another follow-up question on consumer electronics business. Just wondering if you did see any significant world cup coming through your business particularly in the TV sales.

We have seen in TV sales that the smaller sizes are not selling that well. So we have seen a volume decline. But it was made up by a value increase. So we're selling less TVs but selling the more expensive models.

Would you give us a percentage of that in terms of what the percentage volume decline has been sequentially?

That was about - I need to look now. That was about - let me see if I can find that quickly. I think the volume decline was in the low single digit numbers, like four or five percent.

Okay. Great. Thank you very much.

Okay.

The next question comes from Mrs. Marissa (Baldow) from (inaudible) securities.

I'd like to come back on LGCD. Looking into the detailed P and L figures for the second quarter (inaudible) there were at least two lines where you have pretty big (inaudible) other income and expenses and the net interest income, which is positive in Q-2 compared to negative figures in Q-1. Is it fair to assume based on that that the contribution in Q-3 could be lower than the number you've reached which was really high in the second quarter?

That could indeed be the case. It depends on, as I mentioned earlier, this company has a dollar loan and the dollar loan is hedged by the revenues that come in U.S. dollars. And so what you see is a bit of currency gains that, depending on what the dollar does in the quarter may be there or may not be there.

Okay. Then could I ask a question that regarding normalized level of EBIT margins where each division could reach?

Well, yes that's interesting because the EBIT margins whether the business started in 2000 were like - let me have a look, 35 percent EBIT margins we've seen that come down. At this moment EBIT is at the level of - let me take a look - about 25 percent. I think that's an EBIT margin that's not surprising, I would say, for the type of market and the type of product that we see. It could go a little bit higher, as I said earlier. We have seen it higher in the year 2000. With the dollar high at this time I would not want to make a prediction. There are some - even though the demand side of the business is extremely strong, there is a potential that new capacity might be coming in in let's say the next six to nine months and that could have an impact on margins. But the question is how quickly that can happen.

Again on semi conductors, you stated that you were looking for sales to be flat for full year 2002. Q-3 should be down mildly sequentially. If we assume minus three percent in Q-3, then we would have to be at double digit in sequentially in Q-4. What gives you confidence regarding the uptick in Q-4, is it simply the seasonality are you confident in pickup in end demand?

It's based on discussions we have had with our customers who are indicating the type of pattern and also a little bit the seasonality of course that's part of that as well. But this is mostly - first of all, our auto book, because the auto book for Q-4 has already been built, to some degree. It's based on the fact that discussions with customers.

Okay. Last question, if I may. On consumer, could you give us a comment on the environment regarding (inaudible) we heard pretty negative comments from (inaudible) the last couple of weeks. What sort of environment do you see. Do you have any target intent of coming back to break even in digital network?

Yes, digital networks is a business where we have two activities, one is (inaudible) and the other one is we provide software for all type of applications. If you separate out the software business and only look at the (inaudible) books, that basically 95 percent of the revenues in that business is, in software books is - but half of the losses relate to the software books whereas on the other half to the software side. We see a market today with a lot of weak players. The cable companies are weak. Financially. Development is weak. The consumer is not really buying a lot of these products at this point in time. So you see a pretty weak market. We have scaled back our activities on purpose will a year ago because we're not willing to finance the weak operators in this business, which other people were willing to do. We have never done that. The other task of course the business has been for some time we have kept our nose clean from all type of problems with customers. But the market in general is not a very strong one and you may have seen a recent deal that one of our competitors did. If you have to do deals like that I don't know what type of business you want to be in.

Okay. And do you have any intent to come back to break even. You said it's related to boxes (inaudible).

We should be break even certainly later this year and next year we should do - we cannot accept a loss.

Thank you very much.

Next question comes from Mr. Luke (inaudible) from (inaudible). Please state your question.

Hi. Good afternoon. Just quite simple questions. I wanted to know in the component business, it seems as you still have some worries on the optical storage part of the business. The question there is what size node are the optical storage within the component business, to identify that on the on set displays, you're pushing up now. And assuming the drop and the losses on the operating level in components business, is there a big difference between uptick of direction and displays at this stage?

Yeah, there was a big difference. The optical storage is about half of the - a little bit less than half of the total components group in Q-2. And basically they take care of, let's say, about 75 percent of the loss.

And any plan for restructuring as far as you're concerned?

Yeah, we're looking very hard at what the best way is to make it a business and the model that will work for us. As we told you we're not very happy at this time. We're taking a very hard look at it.

And last question is, this year (inaudible) business with LG, will extend their restructuring action to the third quarter. When do you expect integration process between LG and CB to be (inaudible) shares.

There's integration on purchasing. There's integration on systems. But the restructuring is still taking place because we are still moving from high cost countries to low cost countries. That should be completed by the end of this year. But in the meantime we will have spent quite a lot of money in order to get that restructuring completed.

Okay. Thank you very much.

The next question comes from Mr. (Gunn) Miller from Goldman Sachs. Please state your question.

Thank you. Quick question on the outlook for Q-3. How much of the expectation for the sequential decline is the result of pricing and how much units, if you can break that out?

Yeah. That's a good question. But I would say pricing, we are at about 11 percent level. Price erosion. And we see the market I think volume part is probably, I would say it's fifty/fifty, decline is fifty/fifty.

If I could ask a quick follow-up. On the capital spending expectations that you appear to have trimmed for the year, does currency play any role whatsoever in swings in your capital spending budget?

I'm sorry?

Does currency play a role? In other words if the Euro strengthens against the dollar and you're doing more dollar spending for equipment, does that mean you can reduce your capital spending or is the budget independent of currency swings or hedged?

The budget is not hedged. And I think we will adjust when needed based on what the currency will do. But at this moment there are no plans to make big adjustments here. In fact, our capital spending program is quite modest for this year.

Thank you very much.

By the way, I mentioned the 11 percent. I want to make sure no misunderstanding. That's an annualized number sequentially. Not a seep consequently an annual number. The 11 percent price erosion.

Understood.

The next question comes from Mr. Ian Robertson from HSBC. Please state your question.

I'm just trying to find out a little bit more about the monitor's business in consumer electronics you said the pricing pressure especially for the owe. EMs is very tough what's the pricing structure and as we look at the LCDCRT joint ventures they seem to perform very well. So to square the circle as it were I want to find out how can that be. How can one being quite well and one being quite out of it.

The LCD business is doing extremely well, because that's a product in very tight supply demand. That is not necessarily the same in the monitor business. So there are two different type of businesses with two different types of models. And it's supply demand really determines the pricing for the LCD. Very tight markets. No capacity and an overwhelming demand. And the monitor business, you have a lot of capacity to make monitors. And you're not just making LCD or flat monitors, you're also making the (inaudible) other models as well. So that's a different market determined by different type of supply demand characteristics.

You don't appear to suffer too badly in the CRT joint venture with LG in terms of the market. I'm just trying to get my mind around where it comes between the two. Are you making profits in the monitors business?

We're making a very small loss on the monitor business.

Would that be a significantly greater loss on OEMs and a small profit on the branded?

Probably the other way around.

You're making a loss on branded?

Yes.

All right. Thanks. That's been very useful.

The next question comes from Mr. Steve Wolff from Commerce Bank. Please state your question.

Steve Wolff here from commerce Bank Securities. A question on inventory. Could you possibly provide a breakdown of inventory sort of roughly by sector on your books at the moment?

We normally don't do that. If you look at our information that's available, when you look at our (inaudible) that we provide for the different businesses you get an indication. The biggest inventories are - the big part of inventories are medical. Medical systems, number one. And then you get, (inaudible) to lighting and semi conductors number two and then the rest follows.

Thank you very much.

The next question comes from Roland Pitts from HB. Please state your question.

Quick questions. Can you give us a total value of your unhedged proficients. The third one is you mentioned you're calculating the five million restructuring in lighting. Can you elaborate a little bit more. And the last one would be regarding your color in mobile displays. What is your estimation for the total market for this year and then perhaps can you give us your shipped volume unit in the second quarter. Thanks.

In principal, we hedge all of our transaction exposures in principal. We have seen that in the semi conductor (inaudible) not do that. And that's not being regarded very pleasantly. So that's why there was a loss of 20 million there. I mentioned earlier that LCD has a lot of hedge because they do have a natural hedge relative to the revenues that they produce. So in principal everyone has their natural hedge or their treasury organization and we don't take any type of currency risk. Our business has enough risk already. With respect to lighting, we are taking five million. That's a small number. I think it's an overflow from some of the earlier restructurings we had announced. It's a very small number. And the CMD market, total color monitor display, I must admit I don't know that number here today. I have not a good feel for that right now. But if you call Alan Cathcart later after the meeting he can give you an answer.

Perfect. Thanks.

The next question comes from Mr. Andrew Goldberg from Banc of America Securities. Please state your question, sir.

There are two quick questions regarding the MRI industry. I've just joined the call I apologize this might have been covered. But first I was hoping that you could give me a percentage growth rate for MRI sales excluding the effect of the Marconi acquisition. And then second I was wondering if your strength in that in MR is market share gains, as the entry as a whole both?

Our MRI, I cannot give you the numbers any longer because we have it totally integrated. Marconi is already integrated in our system. So it's part of the total. I cannot separate it out.

Okay.

And the strength in MRI, I think Philips has developed some very good technology here that when you listen to the people, the medical folks, they love to work with that equipment. They call it the best there is on the marketplace. And I believe them.

So you say share gains as well as the strength of the MR industry?

I think we have certainly in the early part of the year we had booked a lot of business and I think we have gained market share in MRI. But the business itself has been strong as well.

Great. One last question. I know the comparable sales for the whole medical division growth was I guess eight percent. Is it fair to say that MR comparable sales was above that eight, near that eight, below that eight? Or can you give me that detail?

Let me see what we have available. We combined this with CT. And it's very difficult, because it doesn't make sense anymore. If you compare now what we have done, we have more than almost doubled compared with a year ago, which is - we picked up the Marconi activities as well. So it's very difficult to see that now.

Okay. Thanks very much.

I'm sorry I can't help you.

No. That's great. Thank you very much.

The next question comes from Mr. Nicholas (Godwau) from Deutsche Banc. Please state your question, sir.

Two quick questions if I may. First, what has been impacted the (inaudible) in Latin America given the lighting I think was mentioned in the press release. And secondly if you extract the 20 million excess loss of semis your EBIT margin was three (inaudible) five percent with (inaudible) what do you see (inaudible) rates to come to income pricing environment to actually record a profit?

The first one is the question related to Latin America. We see in our business, Latin America was the growth rate in Latin America is the lowest of all our regions. We saw very strong growth in Asia. Bigger growth in North America. Weaker in Europe. The lowest one is in the Latin America region. The impact on the lighting business we have mentioned. The impact on the consumer on the lighting business so far is not visible. In fact we had great sales of consumer products and especially in TV in Brazil in the last quarter. In Argentina, of course, our sales have declined rapidly. And we are now basically at a level of just holding on and making sure that we keep our market share. But we're very careful in how we sell and how we get paid. We're not taking any additional risk. The region is profitable and it's making money. One of the things we're doing there is reducing our cost. We've aggressively reduced costs so far this year and continue to do more. Your earlier question related to the semi conductor business. We have indeed a four X loss of 20 and I was saying if you look at the results in June, which you don't have but I do, you only have the quarter, then looking at the results in June, we were approaching that break even level. But I have to admit quickly that June has five weeks in our system and the normal month only has four weeks.

Thank you.

The last question comes from Mr. Richard Walker from DRKW. Please state your question, sir.

Hi. I also joined the call late so I apologize if this question has been asked already. Could you just talk a bit about the semi conductors in terms of demand and pricing as we went through the quarter. Particularly interested in where you saw any pickup in volumes towards the end of the quarter in pickup in demand. Also could you say whether Bluetooth is being implemented in a big way? And lastly perhaps you could mention a bit about your wireless systems solutions and how the sales are going there, particularly with reference to the Asian markets.

It's sometimes easier to ask a question than to get all the answers.

I'm sorry I asked too many questions.

But I'll do my best. The wireless activity, we have seen in many ways we see the Bluetooth is picking up. In particular in the Intel business as well as in the personal assistance. We see it also in - we think we will see fit more in other type of applications. At least we have the capability to apply that. (Inaudible) we see some increase. Although again here we're very well positioned technologywise and IT to go into the business market. We have seen a bit of an increase at the end of the quarter. And there are some businesses by some of our big customers that makes them commitments to us not just here but also in the component market. Wireless connectivity. So we have seen a little bit more activity at the end of the quarter.

Was that in wireless semi conductors in general?

That was in wireless semi conductors in general, yes.

And just lastly on the wireless systems solutions. Any (inaudible) on that.

I'm not an expert on technology. But if I can help, I'll try. But what is it you want to know?

Just whether - I noticed you got the linger bird contract. I was wondering if you were seeing any more demand from local Asian producers for your wireless solutions.

Okay. That's in China?

Yeah.

Yeah, I think we have a contract. And I cannot give you more details on that. I need to check it for you. But I'm happy to do so with our semi conductor guys.

Okay. That's great. Thank you.

You need to call us then.

Will do.

Okay.

Thank you, Mr. Hommen, there are no further questions.

Thank you all, good day.

This concludes the Royal Philips second quarter 2002 analyst call on July 16, 2002. Thank you for participating. You may now disconnect.