Koninklijke Philips NV (PHG) 2002 Q3 法說會逐字稿

Welcome to the Royal Philips third quarter results 2002 analyst conference on October 15, 2002. For the introduction by Mr. Jan Hommen chief financial officer of relationships all participants will be in a listen-only mode. After the presentation there thereby 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 like to hand the conference over to Mr. Jan Hommen please go ahead, sir.

Thank you, very much. Ladies and gentlemen, good afternoon. Let me give you first a short overview of the main aspect of our results in the third quarter and then there will be substantial time left for your questions. For those who have not seen a copy of the earnings release that was issued this morning at 7:00, I refer you to the Philips.com web site. The main items I would like to mention are, third quarter comparable sales growth was positive 2% year-over-year and this is the second successive global year-over-year gross. Cash flow from operations was positive as 344 million. And cash before financing was a positive 265 million. Net debt has been reduced by 216 million and our stance at 6.9 billion Euro. Our cost reduction program generated savings so far this year of 176 million. There's quite a lot more to come and still in the pipeline. Record low inventories for the fiscal executive quarter and results related to consolidated companies. The tier rate compared to the second quarter partly due to the LCD joint venture with LT electronics. This joint venture there were no currency gains and the results as we had in Q2. Pedal (ph) Prices declined in Q3, though. Let me briefly now review the sectors we have. Lighting, our sales in the quarter were one percent higher than the third quarter of 2001. In spite of weak markets in Latin America and for Luminaires. Our operating margin in the seasonally weak third quarter was 12.4 percent which reflects our good innovation, cost and asset management and an improved product mix. We have continued to reduce our inventories as a percent of sales, while at the same time increasing our delivery reliability. Cash flow is of course positive and we expect this performance to continue. Q4 will include some limited up front costs associated with reasonably announced large and exclusive Home Depot contract. Consumer electronics. Our mainstream activity was profitable for the third quarter to a level of nine million Euro compared to 13 (ph) million in the second quarter and a loss a year ago. We are seeing an ongoing underlying performance improvement here. This was achieved by working on our costs, by improving margins and by tight asset management. That way offsetting an increase in the overall price erosion of 12 percent. Price erosion was particularly aggressive in the second months. The negative results in the United States are getting less negative and were half of what they were the year before. We have made further progress reducing the net operating capital which we're now turning over 20 times per year. We have gained market share by excellent product introductions in TV and DVD and European operations are turning in a very good performance. Domestic appliance and personal care. DAP (ph) has had another excellent quarter which is a record for third quarter. There has been a 12 percent comparable sales growth in spite of a weak market in Latin America. The record results are based on innovation and high margin products. Strict cost and asset control measures and the impact of the product range (ph) rationalization we've done particularly well with the Sony care sales (ph) and shares from products (ph). And we look forward to continuing high margins and strong cash flow. Components. There has been a sequential increase in the quarterly sales of mobile display systems where the initial deliveries of color screens have been building up. We expect that to continue in Q4. Optical storage has been negatively impacted by increased price erosion. Our results continue to be impacted by continuing up front expense and investments in new product areas like connectivity, LCD TV and L cost TV. We believe there are significant new opportunities for growth. Last week we announced measures to remove the losses that we currently experience. In particular, in pause (ph). Implementation of certain parts of this plan has already started, however. For other parts I'm unable to add anything at this moment to what we said last week. Semiconductors are revenues in the quarter show a sequential decline of 11.8 percent in Euros and about two percent in U.S. dollars. There's a decrease coming mainly in the areas of discrete mobile communication, networking and display solutions. The book-to-bill at the end of the quarter was .74, which reflects the extremely short over lead times that are persisting in the industry at this moment. As a result we're seeing that it's prudent to now indicate that for the first quarter we estimate zero to a small sequential revenue growth. The average fab utilization rate in the quarter was 58 percent and we're continuing with a low level of outsourcing. The R&D expenditure in the quarter was approximately 25 percent of revenues and it's higher than we wanted it to be. The price erosion in the quarter was 14 percent, which is slightly higher than for the second quarter and relates in particular to standard products. Cap ex during the quarter was 172 million, of which approximately 100 million related to our share in the investment in kraul (ph). Our expectation for the full year is between 400 and 450 million. Medical systems we've seen a comparable growth in sales of two percent to which we could add another two percent due to a minor delay in invoicing resulting from the IT change overprogram. The order intake is a six percent comparable growth from last year. Operating income in the quarter excluding special items was 18 million. However, if we exclude other incidental items, it could give a corrected EBITDA in the quarter of about 8.4 percent. We're expecting to realize the normal seasonally high first quarter. The acquisition related charges in the first quarter are expected to be approximately four to 14 million. We are in the middle of the complicated integration process which is currently on track and maintain our plan to reduce cost by 350 million by the end of 2003. These savings will become more visible and in the results of Q4. We also reiterate our expected EBITDA margin of 14 percent in 2004. Miscellaneous. The results of miscellaneous have been impacted by a gain in the sales of some businesses to the extent of over 130 million of release of restructuring provisions of 18 million, which will offset by eight million for other special items. Excluding all these amounts, the results was a lower loss in the second quarter which itself was a lower loss than in Q1. Further disposals from this group will take place in the coming months. A divestment program is very much on track. Allocated. The results have been negatively affected by pension amounts compared to the third quarter of last year to the tune of about 125 million. However, corporate and regional overheads in the quarter have been reduced by 36 percent compared to the same period last year. Cost reductions. Of the announced 300 million overall (ph) cost reduction program we have achieved already 76 million in the first nine months of the year. It was the biggest single item being IT. Already we have announced the closure of components will give a further overhead saving and there are more savings in the pipeline, which will be communicated in the near future. The consolidated companies. The reported results in the quarter are a loss of four million. However, this includes a special item of seven million in LZ Philips display which is in accordance with our guidance we gave you three months ago. Excluding this amount, the result was a profit of three million which is a significant reduction of the 185 million for the second quarter this year. The main contributor to this result was LZ Philips LCD, where our share of the results was a profit of 28 million compared to 127 in the second quarter. This reduced performance was due to lower selling prices and affected the second quarter include significant currency gains. If you want to understand more fully this joint venture, we have published a detailed results on our web site. Underlying results of LG Philips display was profits and our 50 percent share came to four million which was better than the 21 million loss for the second quarter. Inventories, we have continued to make progress with our inventories which came to 14.1 percent of moving annual total sales. And this is a record low for the third quarter. The increase from 13.4 from Q2 was due to currency movements, mainly the U.S. dollar. And our efforts to improve supply chain management are meeting with success. We will continue to focus on this issue as we believe that over time this percentage can go down furthered. Thereby improving operations while reducing risk in our inventories and improving the cash flow at the same time. Cash flow. The cash flow in Q3, before financing was a positive 265 million. And here you can see that our focus on cash is really carried by the company at large. Balance sheet, we continue to maintain a strong balance sheet. A debt equity ratio of 30/70 which is at the same as it was at the end of June in spite of impairment charges taken in the quarter. Equity was impacted by an impairment of 333 -- 339 million for 600 (ph) Universal and 302 for fair value adjustments, both items being on cash. That goes without saying that we will keep focusing on maintaining our balance sheet healthy. So far this year we have announced divestitures with an approximate value of 825 million Euro. And we expect to announce more divestitures in the coming months. Pension costs, I mentioned earlier, that we have less pension credits in 2002 compared to 2001 by about 480 million. And this is partly due to the very conservative assumptions we have made around the future expected performance of financial markets. Also, we are calculating with a discount rate that's lower than anyone else we have seen. As of the end of the quarter our pension funds and aggregates remain 100 percent funded, although there's no cash with every funds (ph). Only by the year-end will we determine whether we have any further consequences here. Improvements in financial markets as we saw by the end of last week are certainly welcome and they will help. Special charges for the first quarter as far as we are aware at the present time the charges we plan to take in Q4 have all been communicated. And I believe that we have touched so far on all the main aspects that are impacting our results for the third quarter. And so let me ask for your questions now.

Thank you, sir. If any participant would like to ask a question, please 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 handset before making your selections. There will be a short pause while participants register for a question. The first question comes from Mr. Did you know Dunner Miller (ph). State your company and your question.

Dunner Miller (ph): Goldman Sachs. I have a question on the associates line. First of all, it's been my understanding that the ados (ph) origin net you take 44 percent of that one quarter in arrears; is that correct.

Correct.

Dunner Miller (ph): Then if we plug in the rest with LG Philips, LCD and display and SSMC. I'm interested in two things. What's the composition in the 16 million loss in the other line. And number two, can we be reading anything potentially extraordinary in the TSMC number because if that's the plug it would have to be I think a lot worse than most expectations.

No, I think what we see is first of all you cannot always compare our numbers in TSMC with what TSMC reports. Because we have U.S. GAAP. You need to totally understand the way we report that. That's number one. Number two, we have made some special provisions for some items in there that may be more particular to Philips than to anybody else. So don't derive any conclusions with respect to TSMC. In other is also a write off of a venturing activity that we have of about ten million. So that also is included in the other category.

Dunner Miller (ph): And can we have any sort of color on what those provisions may be related to, is it previously announced restructuring?

The provisions, what provision?

Dunner Miller (ph): You had mentioned that you made some special provisions that are included in the associate item and is there anything we can relate those to?

No, I don't think so. I think that's typical at this moment for Philips. I would like you to wait for TSMC to publish their numbers ask then I think it will be very clear to you but these are things that they should report and we should not report. But it's certainly not a reason for getting all type of wild speculations. It's more Philips than I think it is TSMC.

Dunner Miller (ph): An if I can follow-up. On the medical EPO decline (ph). Outside the one time invoicing issue were there any other issues perhaps that related to the Agilent flip over or something like that?

Yeah, the situation was Agilent of course, we have been working through this change over in IT which is a real major event. I don't know anyone has ever done an implementation of SIP. But taking data from a company that you don't have a direct relationship with through a company that doesn't want, has other things to do from a - to a company that needs to settle up is all pretty complicated. And especially data feed is not always perfect, which we have seen and that has created a little bit of delay. We think we can all manage this but it will take us a few months probably to get through. That's number one. We'll have some additional cost, unfortunately. That's two. Certainly what we have seen in medical is the added cost of course in IT. We have seen the impairment charge we are taking on HCP that we are selling. And there were some special adjustments to the opening balance sheets that were made of the acquisitions. You have about a year to finish those type of adjustments. And I think we are complete now with some inventory adjustments that we call incidental and I think all together we're 21 million. So, when I make the calculation, we get to 80 million which is excluding special items and LIFO if you want to add into there you can add another 21 million incidental, 28, I'm sorry. Plus, you can add in there the sales we did not book that have an IFO between 15 and 20 million. And they know as much as I do.

Dunner Miller (ph): Thank you very much.

The next question comes from Mr. Braum Corneilson (ph).

Braum Corneilson (ph): It's Merrill Lynch. I have two questions. The first thing is you didn't specifically reiterate in this release your eight billion plus revenue target for medical in '04. Given the fact that you're now disposing of Marconi health cap products group and the organic revenue growth that you've shown there, how confident are you that you can still get there and what's actually going to get you there if you're still confident. That's my first question.

I think I haven't looked in detail, Braum (ph), at the revenues for the coming two years, 2003, 2004. One of the things that we had in our plan was that the HEP business always was part of being divested so we never really included it in our plan. Secondly, when I look at the plan, just recalling the plan now, we had in there that we would gain some market share based on the new modalities that we had which we could not offer before. So I would say the eight billion in principal is still a valid number.

Braum Corneilson (ph): If I look at it in 2003 you're not going to have much revenue growth compared to 02 because of six hundred million (ph) of HP sales will fall out. That means effectively you have to have like 14 percent in 2004, which seems a lot given your four percent comparable growth for the third quarter?

If I want to impress you, I don't take comparable numbers, I take normal numbers and then we grow with 31 percent quarter over quarter. That's not a way to show it, we think. So we show you comparable. But it means that we only show you based on what we have.

Braum Corneilson (ph): You're not assuming any further acquisitions to get to the eight billion, let me ask it like that?

There were some small acquisitions included in there, mainly in the service area. But we anticipated that our business will grow quite significantly in the area of service, more than let's say the normal five or six percent.

Braum Corneilson (ph): One more question, maybe, if I can. The fact you're not seeing any seasonality in your semi conductor business is there anything we should read into that in how well consumer electronics will be doing in the fourth quarter?

Not really. I think our seasonality in semi conductors, it could still come. It isn't over yet, the season. So I wouldn't read anything more in there than we have seen the sales level in Q3 being a little bit better than we had anticipated at the meeting on September 12th and that we're now saying because we see that in Q3 let's take that away from Q4 and forecast a flat Q4. I think we're a little conservative here.

Braum Corneilson (ph): Thank you very much.

The next question comes from Mr. John Dunjou (ph).

John Dunjou (ph): This is John Dunjou (ph) from PSSB (ph). I had two questions one on medical the other one on consumer electronics There are rumors at the moment of supply chain of inventories in Europe on the color TV market in the wake of a WorldCom. Would you be comfortable expecting a strong Christmas season in Europe at this stage?

I'm not aware of any buildup of inventory. We're not seeing it. And in fact quite the opposite. We missed sales in Q3 because we could have sold a lot more. If we had all the supply capability perfectly lined up, and I can assure you we have not built any inventory because what we've built is going out. Not only building up in Philips, I can assure you also that the trade is not building it, because in fact we had a board meeting this morning. One of the directors was complaining he wanted to buy a television set from Philips but he couldn't find the one he wanted. Because this one was in short supply. So I don't see any type of inventory buildup in consumer -- not in Europe.

John Dunjou (ph): Okay. Then on medical, if I look at growth in revenues in comparable terms over the last three quarters, there's a clear trend toward a significant consideration. Because I think we have 10 percent Q1. Eight percent Q2 and two percent Q3. Is that a sign of this market disintegrating?

Let's see. You have -

John Dunjou (ph): I'm looking at revenue growth.

I see it. That's a comparable growth number. No, I don't know. I think what you have seen maybe is that we have seen a bit of a slower CT market in Europe. And we do have a product changeover coming in ultrasound that in that particular market I think customers are waiting for the change. We're going to 3-D, real life 3-D ultrasound that's coming effect on the market right now. It's being introduced. Plus we had some changes in our product mix to make it a little bit more economical in ultrasound. But those are the two markets we've seen some hesitation. Not in the other markets.

John Dunjou (ph): Thank you very much.

The next question comes from Mr. Deje Sesema (ph).

Deje Sesema (ph): Just a question on mobile displace. You're talking about very strong volume growth. In fact they're doubled from last year. I can understand Q3 over Q1 was pretty bad for everybody. Can you tell is it only market share on gains or do you see real end to men strength (ph), second of all, could you give us some color on your mobile headset business in semi conductors, why is it down two percent sequentially. I guess your business is mostly driven by wireless. When I see this EBITDA from July and August (ph) and I plug in some very modest growth in September we should see something like six or seven percent sequential growth. Can you maybe reconcile the growth components and less solid growth you see in semi conductors for the wireless business.

I think the latter one is probably more related to our own handset success. But we had anticipated a little more success than what we had in the handsets. Can you see the sales in consumer electronics, which were impacted by lower sales in the handset business. By the way, can you still hear me?

Deje Sesema (ph): Yes, I can.

I heard an echo here. The NDS business is really going stronger and stronger. In fact, at the end of Q3 of our shipments, about 25 percent was in color. And we are picking up market share but I think we're also seeing that there's more of the handset people are shifting to color. So not necessarily do we see more handsets. I think we're seeing more penetration of color and we're seeing Philips picking up market share.

Deje Sesema (ph): Then what is your semi conductor business weakened in wireless than -

As I mentioned. The semi conductor business in wireless had probably the business of our handset, our own handset business, which had lower sales, which was reflected in the consumer electronics sector. The lower sales in our own handset had an impact on our semi conductor business.

Deje Sesema (ph): The design win you've announced in September with Siemens (ph) and the further design win with Samsung, should we see that next year already.

I don't know the answer to that question. I cannot help you. We can answer the question with the semi conductor but to have the answer I don't have it here.

Deje Sesema (ph): Thank you very much.

The next question comes from Mrs. Angela Dean. Please state your company name followed by your question.

Morgan Stanley. A couple of questions. First, on the overhead cost reduction. Can you just talk us through where you are, because I think the 300 million target I think was meant to be an annualized run rate. So can you just tell us how close you are to that and whether you see yourselves actually going beyond that with the changes now in components. That's the first question. The second one is just a more general one which we've touched on a little bit. Can you just explain why you are confident of the usual seasonal improvement given that obviously this is a difficult year, what you think you see in (ph) the same extent of fourth quarter pickup of normal -

First of all, overhead, Angela, we have done so far 176 million. That's year-to-date. Our 300 million program is based on run rate year-ends. So we are not there yet. But we do have a number of things that are pretty close to being announced. You have seen already components that are not totally sure whether telecom fully in 2002, but it certainly will be there very quickly thereafter. We're looking at some big, big cost reductions in Latin America that are beginning to drop in now. We have programs, and this is a very detailed program, because this time we built the cost reduction program. There's no escape. It's totally fenced. And we have it defined by project, by name, date, by division, by function, by everything so we know exactly where it is. And what the target is. So far we have projects not even having finished ahead of this year plus the European activities where we expect a lot of savings. We have significant savings. If I put them all together and there's these projects running over a number of years that could go up to close to 400, 400 million. So I'm very confident that a lot is to come and then not counting yet what we can get from medical because they're doing their own thing.

What is your current run rate, then, on an annualized basis?

It's not yet at the 300 million.

Are we getting close?

I hope to get close, Angela. I'm not totally sure whether we can make it at the end of this year at 300 million. It's not because we haven't tried. Because everybody is working on it, I can assure you.

Okay.

And then your other question on the usual improvements. Well, let me check the expected sales that we see in our various divisions. We see in most of them the pickup that we always see in Q4, consumer electronics, domestic appliances. We see it in medical. Those are the most important ones. We see it again this year now. To the extent it will all happen, these are forecasts. I have good hopes that we will see it again this year. But of course only at the end of the year can we tell for sure.

Thanks.

The next question comes from Luke Muzano (ph). Please state your company name and question.

Luke Muzano (ph): Calling from B and P Power (ph). I have two quick simple questions. On the restructuring charges and refocusing action of the components business, do you expect the year (ph) occasion of losses already to come from the fourth quarter in restructuring costs or do you expect that to come in 2003? And in your previous press release you're talking about demerging part of these activities and getting it spread across the other activities. Could you give us maybe a bit more details about this point? My second question is also it's about the medical and the way you calculate your 8.4 percent and your explanation about incidental items. I just wanted it to be clear on the fourth quarter there will be no more incidental items, means that EBIT - are (ph) margins could be clearly on the line you gave for your recalculation of the EBITDA margin for the third quarter.

Yeah. Let me take the last one. The 8.4 is 80 million plus we added to that 28. And we added to that the 20 million that we would have had if we had had the additional sales. That's how we get -- I'm sorry, the amortization that's normally included of the intangible assets. That's 22 million. We did not add the 20 million that was related to the sales we did not pickup. So that's how you get to the 8.4. Now I do anticipate, and I mentioned that in the preview that we will have charges in Q4 of about 40 million. Okay. So you don't see that number net in the statement. You still have to take that 40 million into account. There's still IT charges. We have told our medical division that we don't want to see these charges from now on for us they are part of normal operations. So get your costs down. With respect to restructuring the component division, the following (ph), we're planning to do the following. We plan to move our mobile display business and our speaker system business to semi conductors. And then we plan to move to CE, consumer electronics -- our display. These are the video displays, our LCD TV, the pronto, plus our connectivity business. Then we plan to have our -- let's say our mature analog business going to the corporate investments as we call them. It's about 400 million. And that is already at some point to produce some M&A activities risk. Then they're planning to put a portion of the, what we call the pause (ph) The data system and the audio play back systems temporarily in miscellaneous for further study. We haven't totally decided yet what to do with pause (ph). But we hope to make a more clear statement by the end of the year. And then there also will be a new technology activities like Alkos (ph) and Ponylab (ph). These are innovation parts. We want to give them more focus more attention than they were getting in this complicated structure because we expect this could be either very attractive markets or we need to decide whether we want to continue with them, yes or no. So that's the way we have structured that. Also then the head office will be closed in Sunnyvale. There's no need for maintaining that, because we will bring it into Toronto (ph).

Luke Muzano (ph): Thank you.

Next question comes from Mr. Nab Sharif (ph).

Nab Sharif (ph): Hi, calling from Citigroup. I just wanted to ask you questions on the electronics business in the U.S. and one thing on mobile displays. At the end of Q2 you said there's a potential chance of break even in the U.S. E business by the end of Q4. I just want to check whether that's still on line and also what type of material implications have you seen from the increased shelf space in the U.S., it's my belief as that gets negotiated from a July to June year. On the color screen side, what percentage of color screens is a percentage of total from your mobile displays do you envision fourth quarter this year? Thank you.

Okay. We are not -- well, although I think our division is still trying as hard as they can to get to what we call close to break even, I don't think it will be that good in the U.S. in Q4. I would still anticipate a loss in the U.S. and maybe a little bit better than we had in Q3 but not too much better. The shelf space, yes, we have a lot better shelf space. In fact, when I look at the folks that -- there's better replacements. We have good guys, price, we are magnolia hi-fi (ph), Nebraska furniture Mart. We have Glass Appliance (ph) at ABT at ultimate electronics. A lot of stores I've never heard of them and I spent 20 years in the U.S. We're at PC Richards, at Tweeter, at J and R Music World, at Brinsmart (ph), at BOSE. So we really have expanded our coverage compared to where we were some time ago, in addition to the big national stores like Circuit City and Best Buy, of course. So there was a lot better placement. There was a lot better supply management. There was a lot more focus now on cost as well. There could be a little bit better but that's the CFO talking, of course. The other thing is that I think our product range has improved dramatically. We're coming to the market with much better products. So yes the U.S. is doing a lot better. I think there was some hesitation in the marketplace in the U.S. we have seen consumer confidence declining. That is I think also reflected in our expectation for Q4 here. With respect to color screens, as I said, we're 24 percent by the end of Q3. And it's growing very rapidly. I don't want to make a prediction, but it could go between 40 plus percent in my opinion by the end of Q4.

Nab Sharif (ph): Just a quick follow-up. Is your profitability likely to increase as your percentage of color screens increases in that --

Yes, we had a very good month in September in that business. And so you would certainly think so, yeah.

Nab Sharif (ph): Thank you.

The next question comes from Mr. Nicholas Goodward (ph). Please state your company name followed by your question.

Nicholas Goodward (ph): Deutsche Banc. My first question would be on the competence business. Previously you indicated what was the potential revenues in I four coming (ph) from the optical business, could you give us an update on this presentation in Q3, please.

Let me take a quick look at the information here. You want to have sales, revenues?

Nicholas Goodward (ph): Yes.

Q3, we had optical storage at about almost 40 percent of the total sales of components, of the 576. We had mobile display at a little bit less than 40 percent. And then we had what we call E square S, which is our connectivity at about 20 percent.

Nicholas Goodward (ph): The second question, quickly on the - you mentioned -- price erosion in mainstream CE in overall in the U.S., in particular. And specifically in monitors, can you give us an idea how this pricing pressure, I think for the CE business mentioning 12 percent versus 7.6 in Q3 or by the situation in monitors in particular.

We had significant increases in pricing and price erosion in the DVD sector. But we're gaining very rapid market share but that's a new product but it has quite a high level of price erosion. We have seen some of that in television as well. We saw some price erosion in television, but it was the less current type of models. We have seen an increase in the VCR parts.

Nicholas Goodward (ph): Thank you.

The next question comes from Mr. Janard Deminol (ph).

Janard Deminol (ph): I'm from Gerald Mcclenon (ph) at Wasserstein (ph). I have a question on your components division where you say 50 percent of the losses comes from optical storage. I was wondering given the utilizations at the MDS division are high, is that division profitable in the third quarter? And if so, are the losses coming from the speaker division or from where is that coming, the other losses, then I've got a follow-up?

Mobile display business was profitable in September. It was not profitable in August and in July. The losses are basically indeed in optical storage. But it's in optical storage it's from the data part of optical, because the automotive play back modules and the audio video parts are making money. And then we do have a number of activities in components like L cost (ph), Ponylab (ph), LCD TV, development projects that are really investments in future product and future capability that are not making any money yet. And also our connectivity business, although it's growing fairly rapidly now, still is not at the break even level. So Pose (ph) is not the only one. Of course when it's making 50 percent, the rest are taking care of the other 50 percent.

Janard Deminol (ph): What's happening in terms of price pressure on the mobile display side? Because while volumes are going very fast there's a lot of capacity coming on in both in Asia and competition from Korea and Japanese. And Taiwanese are quite strong. Do you see that division making a significant profit in the fourth quarter or how do you see that happening?

Yeah, the division, you know, it depends basically how well the sights (ph) will take place for, the shipments will do through the telephone, the handset business. But as I said we see more penetration of color in Q4. Let me take a look at the price erosion, if I can find it quickly. Price erosion -- no, I don't see specific price erosion mentioned here. But you would assume indeed, if you get high penetration of volumes, it normally means you can make it for a cheaper price so you get some price erosion here.

Janard Deminol (ph): Just one small question on digital networking. There was a report in the press that you might be selling that off to an Israeli company and the division has been making consistent losses and there doesn't seem to be much signs of improvement in this set top box market is that a valid assumption that you're looking to sell that business off?

No, I think that's not correct. In digital networks we have a number of activities. The first one is set top boxes that one if you eliminate special items, it was basically at break even in Q3. And that's a good business. So we also for the long run, because it's really the gateway to the home. The home that we think Philips would like to play a very significant role in. These are our consumer products. And certainly it's the part for entertainment in which we want to excel. But our activities, soft works, impact for conditional access systems, these are software type of activities that basically are investments in future revenue that are not creating a lot of revenue yet. And those are creating losses. And we are looking at ways to deal with that. But we haven't decided that that will be sold. We're looking at options here. One thing we have said is that apart of digital networks in the past was DTS, digital transmission systems, that a portion of that business we will maintain. Another portion we will indeed look for selling. And that's dealing with the headings (ph). It may be that you are confused with that one because when we look at our business in set top boxes that's the core part, the heading (ph). For us outside the scope of the business because we focus on the center (ph) box.

Janard Deminol (ph): Okay. Thank you.

The next question comes from Mr. Wolfgang Sicus (ph). Please state your name followed by your question.

Wolfgang Sicus (ph): Yes good afternoon, Wolfgang Sicus (ph) from West W Panua (ph), with a quick question on the LG Philips LCD joint venture. As is evident inventories are continuing to build up. Now how quick do you think you can build down the inventories with a strong Q4, where do we need to expect the prices to go and when is the whole situation more balanced in the LCD market in terms of the inventories which are on the market and the prices which come down? So which quarter would you look at for some stabilization.

Let me give you the picture then we can decide whether we can selectively decide which quarter this will happen. The picture is that we have seen that there has been some rapid build of capacity in the LCD panel business. Taiwan niece capacity. We have built some capacity, Samsung is building capacity and it's coming on stream. We also have seen that there were some of our competitors who really started some pricing battles and that has quickly generated a decline in price. In fact, very significant in the quarter almost 20 percent price decline in some areas. That then has created more demand but not that much more demand than was absorbing through demand in the monitor business. So more supply, but not really the end demand and that created an intermediate supply situation that now needs to be worked off and is by itself a dangerous thing because it will have an impact on price. We anticipate that stabilization will take a little bit of time and probably not until sometime in 2004 will you see this thing turn again. By turning I mean that you get supply and demand being totally in balance again and prices could then try to take a different type of turn. Now, that doesn't mean you could not see price stabilization sometime earlier than that. Our people are now saying that they see that happening sometime in the second half next year.

Wolfgang Sicus (ph): Okay. So we should then wait for the second half of 2003 or 2004 for profitability situation LCD LG (ph) Philips to improve sustainably.

Well we still have Q4 to come where I'm not sure that we will dip into the negative territory. But we'll get close at least. And then probably, yes, next year for a few quarters and then picking it back up again.

Wolfgang Sicus (ph): Then on the consumer business, you saw strength in you PN TV (ph) business was that in the large and very large screen area?

Yes, device and large screen in particular. And the pixel plus are a new product that's really selling like hotcakes.

Wolfgang Sicus (ph): You foresee that to continue in the next quarter?

Big demand for the product, yes.

Wolfgang Sicus (ph): Thank you.

The next question comes from Mr. Adrian Hopkins (ph). Please state your company name followed by your question.

Adrian Hopkins (ph): Good afternoon, also from Wasserstein (ph). Just a quick point on the geographical distribution of sales. If we take the January to September period, the growth rates in China do not seem to have been as high as previously. Or have I -- is there some particular element of the business which is doing well in the Far East and some others which are not doing so well?

No, I think our China business, we compare China together with Hong Kong. Our China business is really showing still positive growth. In fact, very significant positive growth. I think you look at Asia Pacific in total, you see the past come down in Q3.

Adrian Hopkins (ph): We don't have quite as much detail as that.

Asia Pacific in total has come to a level now of about the increase in 2002 so far and last year has been nine percent on a comparable basis, which is still the highest growth we have anywhere in the region. But it has been higher. It has come down in Q3 to a lower level. That is correct. And I think what you see here is basically that supply and sales in the region and from the region is beginning to slow down. Maybe also impacted by the end customers being the U.S. customers.

Adrian Hopkins (ph): Right. And is there any particular division which you would highlight as being particularly successful in the Asia Pacific area at the moment?

Yes. We have our components are pretty successful in semi conductors, they're picking up sales this year in the Asian region. Lighting is doing very well. Those are the main ones, yes. Also, I can tell you that China, including Hong Kong, so far this year on a comparable basis as we eliminate the in terms of the nation (ph) changes was up by 40 percent. So China itself was significantly higher. And that is a result of course the fact that we have invested quite heavily in China in the last few years.

Adrian Hopkins (ph): That is for the group overall, is it?

Correct.

Adrian Hopkins (ph): Thank you very much.

The next question comes from Mr. Cynthia Conrad (ph). Please state your company name followed by your question.

Cynthia Conrad (ph): From JP Morgan. I want to rephrase a question that was asked earlier on the components restructuring. I wonder whether you could discuss in a little bit more what is the objective of the restructuring, because clearly at the moment it just looks to us as if you're moving around the subject (ph) into various other divisions which clearly cannot be the objective. So overall, in particular on your inventory side, are you trying to strengthen your market position, technology position just to reduce losses? Could you talk a little bit more about that?

I think that's a fair question --

Cynthia Conrad (ph): Just one financial question. With respect to the Utters (ph) Origin write down, you were highlighting for possibly in Q4, can you just confirm whether that's already reflected in the exiting or not?

No. The last one is not in the equity reflected, no.

Cynthia Conrad (ph): You haven't mark-to-market that?

No. With respect to components performing, we have said we are going to dissolve the components division, which means that we are reducing costs to add further costs plus we're becoming more efficient in that we can use the same type of R&D. Where today we have R&D in components and we have some R&D in consumer electronics. They're working on the same product development projects. So by combining them, we gain efficiencies. We also want to first and foremost make our optical storage business a business that can make money again. That is the major reason for the restructuring and the main part in optical storage is the data part that we need to deal with. Now, we haven't said exactly yet how because there are some issues that we need to follow. As you know, we have some certain paths we need to follow before we can make certain announcements. Plus we are still evaluating a number of options here. But that does not become available to you let's say sometime in the summer. The other thing we do is that we are taking a number of businesses, analog businesses, that are fairly mature, are going to sell or merge them. That might be a good business for somebody else but we think we're moving more to the digital part so we're cleaning up our portfolio. And secondly, and certainly by moving a normal businesses into our semi conductor area, you can make that a solutions business, because we see more silicon going on glass and together with speaker systems and the screens, you see more and more, let's say, the speaker part being built into the screen as well. So now we can offer to our telecom customers a one shop stop which helps them, helps us and it makes us more efficient. So that's behind the restructuring of components.

Cynthia Conrad (ph): So when I look at the optical business, would you say that the balance of probability is that this is just purely internal measures and therefore because of some restrictions you have mentioned you can't tell us what you use the restructuring charge for or could it involve a third party as well?

It could be a number of things. That option is still open. It could be a number of things. And as I said, we cannot tell you yet but we will tell you in the beginning of December.

Cynthia Conrad (ph): Thank you.

The next question comes from Mr. John Quily (ph).

John Quily (ph): Adams Harkness and Hill (ph). Within the medical systems division could you please provide sales growth and order intake growth for the MRI related products. And lastly would you comment on your expectations for the MRI market moving forward, please?

Philips has been incredibly successful with a new MRI product that we brought on the market late last year that has really been a very big success. And I think we have gained market share as a result of this new product introduction. Let's see. The order intake in that business was very favorable in the U.S. a little bit slower in Europe but very strong in -- wait a minute. A little bit slower in Europe, yes. And we have seen that the export to Latin America, in particular Argentina, because of the financing situation in that country, has been slower than it was the year before. But again, here, MR, we have gained market share. We have picked up additional business compared with a year ago. And I see the growth compared to a year ago and order intake, we had last year so far this year 500 units, I think and this year we have 890 units. So we have had a significant increase in our order intake.

John Quily (ph): Thank you very much.

The next question comes from Mr. Ian Robertson. Please state your company name followed by your question.

It's Ian Robertson from HSBC. A few tidy up questions, I'm afraid. First of all on digital networks, what exactly have been the business risks that you've had to provide for? Within the optical storage business, my understanding would be that you'd be making better money on the DVD rewrite product for the data market than you would be on the CD products for the data market. Can you just confirm whether that is the case? And can you give some detail with regard to the LG LCD joint venture how much of the output is of 17-inch panel and above?

Digital networks, your question on the business risk -- well, the business itself is a risky business because of the participants in the business. And we have provided for that. Then we -- again we cannot disclose because we're not disclosing our customers here. Then we have in optical, you said that DVD re-writable and data part more profitable than CD. That's not the way -- I think you're looking at the consumer product.

No. I was trying to say well -

But you're looking at the DVD recorder?

I'm looking at the DVD recording drive I would put into the PC.

Yeah. That's where in principle you can make a little money but we have not. And you should be able to make more money but we have not. And there your question on LG. I don't know the answer about the 17 inch. I have no clue how much that is.

You've got no idea whether it be -- you can't give a figure around 15 inch or eighteen-inch plus or minus.

I've read it somewhere but I can't recall it off the top of my head.

I can come back to Allen on that at some point?

Absolutely.

Thank you so much indeed.

The next question comes from Mr. Jung Vivenverhein (ph). Please state your company name followed by your question, sir.

Jung Vivenverhein (ph): Good afternoon. It's Deutsche (ph) here. First a question on your guidance to make it very clear. Your guidance is excluding special items. That is, charges gains and impairments. Or is it the guidance of a positive net income and EBIT excluding the impairments but including the charges in gains?

We exclude everything positive and negative, because that's the easiest thing to remember then.

Jung Vivenverhein (ph): Okay. And second question is on we mentioned digital networks and components in the previous questions. Considering your answers, is it likely that in Q4 we will arrive at the similar loss for those two parts of your business?

Digital networks we have taken some charges in this quarter. That looks to me -- just quickly comparing. Yeah digital networks looks a little bit better in Q4 than in Q3. And the other one was?

Jung Vivenverhein (ph): Components.

Yeah, components will have a charge. We have announced we is will have a charge of about 175 million. So when you eliminate that charge, the number will be a little bit better but not too much better.

Jung Vivenverhein (ph): And might be a final question on your components appreciation (ph). You mentioned 400 million is for merger or for sale. Considering also your one billion disposal program, are you willing to give a new target because you're already ahead of schedule in your one billion disposable program, are you willing to give a target for total sale of non-core divisions, including maybe the components 400 million sales?

I would want to wait just a few months to make sure that we get as reorganization of restructuring well under way. Plus we need to evaluate what it is we want to do and how we want to do it. I can't imagine that there might be some real interesting M and A opportunities here and so I don't want to give you sales numbers that later are not sales numbers. We need a little bit more time to put it all together.

Jung Vivenverhein (ph): Thank you very much.

The next question comes from Mr. Jason Sunderburg (ph).

Jason Sunderburg (ph): PT Securities (ph). Couple questions on the balance sheet. In the non-current.

Can you speak up a little bit.

Jason Sunderburg (ph): In the non-current receivables, mainly composed of pension provisions and taxes (ph). Could you give us a breakdown of your different tax assets. Whether there are tax losses or other items -

We have a -- in the division -- it's mainly pension. There are some deferred tax positions in there that we have increased but it's mainly pensions. I think the deferred tax is about -- I need to take a quick look here at our balance sheet. I don't have it here on hand. But there was an increase in the deferred tax.

Jason Sunderburg (ph): These are mainly tax losses carrying forward or other items?

No, mainly tax losses carry forward.

Jason Sunderburg (ph): And what did you consider in being able to carry forward these losses in the coming -- what's the time frame for these types of tax losses.

As far as our concern, as quick as possible. Then they have the highest value. And it's also the best guarantee you're making money. Those things realistically, it depends where they are. In this case I think most of the increase is in the U.S. and we do have some significant tax loss carry forward in the U.S. I would say we will take four years or so to really absorb all of that.

Jason Sunderburg (ph): Okay. Then on the pension, you mentioned a coverage of 100 percent of your pension funds. Is that an exact number? And could you disclose the discount factor you used?

We used in the Netherlands we have a discount rate of 3.41 percent which is extremely low. We use higher numbers in other places. We also have a return on asset assumption here of about six percent. So we're extremely conservative in the way that this is valued. When we look at the Netherlands and we use the assumptions that the Slencam (ph), which is the regulator here in the Netherlands wants us to use, we're way over 100 percent. In some places in the U.S. and in the UK, calculating fast FASB 87 we have some minor underfunding in the U.S. and UK, but together we're 100 percent plus as a company.

Jason Sunderburg (ph): The final question on the goodwill on LG Philips displays, in the press conference this morning you disclosed a goodwill for that unit. Can you repeat that.

That number was a little bit more than 900 million. And that's the goodwill in that unit. And I mentioned that we're taking a look at it because we did it at the beginning of the year and we came to the conclusion that everything was fine. But because of the rapid decline in pricing that we see in the LCD market in the display market in general, we wanted to do another test by the end of the year.

Jason Sunderburg (ph): Okay. Thank you.

The next question comes from Mr. Jim Fontanelli (ph) please state your company name followed by your question.

Jim Fontanelli (ph): Afternoon. Arate (ph). Just a couple questions. Is the current level of group of cap ex at sustainable run rate and what would typical normal cap ex level be for the group X semis?

I think semis today is taking half of our cap ex. This year we plan to be at about a billion for cap ex, for semis between 400 and 450 million. And it could be that the billion might be a little bit lower. Next year I would say the same. Not too much more with semis more or less at the same level.

Jim Fontanelli (ph): So you would say the billion is comfortably above maintenance level run rate for group cap ex? How close are you to maintenance? How much more room is it to squeeze from the cap ex budget?

If we had to squeeze we could squeeze a little bit more.

Jim Fontanelli (ph): And then the second question was is it fair to say that by moving the components or X component revenue stream into semis (ph) you will lower the semis group retain rate following the (ph) Psycho lead (ph) or do you expect that revenue stream in mobile display to be able to generate at some point the same kind of margins we see in semis (ph) at recycle?

If mobile brings in the returns they were making in September, they will add to the results of semi (ph) conductors. Our speaker systems are doing a positive business, is making positive return. Over the cycle I would say that probably average the semi conductor margins.

Jim Fontanelli (ph): And the average you're using for that would be 15 cents?

A little bit less. For the MDS and for speaker it would be a little bit less it would be more like around 10 percent.

Jim Fontanelli (ph): Great, thanks.

The next question comes from Mr. Arnaud de Shafonsen (ph). Please state your company name followed by the question.

Arnaud de Shafonsen (ph): Are you thinking about reducing the weight of your impairment charges short-term or immediate yes, ma'am term by selling shares in eight or --

I would say that we have in the past we have sold a lot of our shares at very interesting prices. And fortunately we didn't do it all. So we have some that are still for sale. But we're not planning to sell them at the wrong time. And I think that selling them now would not be the most opportune timing. We can be patient and we will be patient. And for those that we don't need to keep because of core activities, we certainly will sell them at the most appropriate time.

Arnaud de Shafonsen (ph): Thank you very much.

The next question comes from Mr. Baird de Blens (ph), please state your company name followed by your question.

Baird de Blens (ph): Good afternoon. S and S securities (ph). I have a couple of questions. First on LG. Perhaps Jan you can help me with the currency gain in Q2. I can't seem to find it.

It was about 70 million, about one-third of the total income.

Baird de Blens (ph): Okay. And then in semis, can you tell me how much Euros did inventories increase during the third quarter?

Two seconds. There was an increase of 16 million.

Baird de Blens (ph): It seemed to me the results were given lower revenues, results held up pretty well. Of course there were have been cost reductions but are there other factors, for instance currency gains in the results that can be an explanation for this reasonably strong results for semis.

No. No currency gains in there, no. Quite the opposite, in fact.

Baird de Blens (ph): Currency losses?

No. The currency -- I see the currency was more or less neutral in Q3.

Baird de Blens (ph): On the cap ex side, did you -- it was a previous question. Did you give us somewhat different range for cap ex for next year for semi conductors than you did in September.

No, I think semiconductors we're seeing at about 500 million. In September 500 million. I said basically at the same level they are right now.

Baird de Blens (ph): Then in lighting, it seems very encouraging that the margin in lighting was finally showing no rebound. What has really changed compared to previous quarters? And what will be the impact or is the impact of Home Depot and can you also explain about the run of costs you're expecting for Home Depot in the fourth quarter?

Home Depot is not included in there yet. Except the normal activities we have but not the increase in sales. That will happen more next year than this year and there will be some costs in Q4 which we cannot give you any specifications on. But there won't be that excessive. What happened in lighting is I think simply very good management. And I mean by that very good product introduction, innovation, good margin management. Tight cost management, good supply chain management, all these things together. Good IT. So a very good performance by a company really in control.

Baird de Blens (ph): Has (ph) also brings the impact of Latin America lessened.

Latin America is a difficult place and it's not getting better, I would say. But there have been able to deliver it and they have scaled down their cost level dramatically in Latin America. As I told you earlier, we are looking at not just lighting but the company in general to take some more costs out and make the organization much more effective and efficient with the sales level that we have in Latin America and that we expect by the way as well.

Baird de Blens (ph): Then in medical, a small question, the delay in invoicing we saw in the third quarter is this going to happen again in the fourth quarter or what is really a one-off thing?

I think it's one off it's the introduction that we had at the September 1 change over date and we knew that it would be a battle and a strung GEL to get it all organized and then in the September months.

Baird de Blens (ph): Because are not some accounting issues delays of bookings and so on, that's not an issue in this division? , something like SAP 101 or something like -

SAP this is exactly what we're -- we're converting Agilent and Marconi but Marconi was relatively simple but Agilent due to Philips SIP system (ph). That conversion is not so simple and it takes time. It takes some very high IT costs that we would like to see come down as quickly as possible. And anyone who has done implementations of SIP T costs that we would like to see come down as quickly as possible. And anyone who has done implementations of SIP it takes you just a couple of months to get everything right. So that will happen here as well.

Baird de Blens (ph): A final question on CE. I really hoped to get some evidence that you're making progress in the U.S. can you help us perhaps with some real details, marketing data to say substantiate your progress, particularly that you're making with the Philips brand in North America, in terms of customer awareness. It seems that Magnavox is almost fazed out but seems still in some shelves. What's actually going O I have this feeling what we're hearing now is not that much different from what we heard say 12 months ago. So perhaps you can really give us some more evidence.

I don't think so. We're a little bit further ahead than we were 12 months ago. We're now at 77 percent of our product sales in consumer in the Philips brand. And we're fading out the, we had some combined branding between Magnavox and Philips. But that's gone we have that brand for a special product of products and special category of stores. We plan to have in November, on November 19, another analyst meeting where we will invite our CE people to explain what they're doing and particularly our North American folks will be here to make a presentation to you. So they will have firsthand opportunity to ask questions on what they're doing. But I hope in the meantime that you believe this is a difficult environment from a consumer perspective right now. The U.S. is not the a SHAN market with the consumer being quite nervous. We see that reflected in our business. While they're doing a AI lot of good things that are making them a better business when the market is turning here. So we see that the fundamentals have improved on their business but we don't like the fact that they have not brought it down to the bottom line to the extent we are now.

Baird de Blens (ph): Okay. Thank you.

The final question comes from Mr. John Dunjou (ph). Please state your question, sir.

John Dunjou (ph): I have a quick one on the optical storage, does it make sense for exposure (ph). One from consumer electronics the other one is on the data side of things. Does it make sense to still be under two because of scale effect in terms of impact on the market and manufacturing or could the two vary independently.

That's one of the questions we'll have to address. We're not totally done with our optical storage redesign. That is still in a discretion phase and I cannot help you. But I need to repeat that we will come forward with that within the next eight weeks. But I hear your point and it's certainly one of the elements that's being considered.

John Dunjou (ph): Thanks.

Okay. No more questions.

There are no further questions at this time.

Excellent. Thank you very much.

Ladies and gentlemen, this concludes the Royal Philips electronics third quarter results 2002 analyst conference call on October 15, 2002. Thank you for participating.