Koninklijke Philips NV (PHG) 2002 Q4 法說會逐字稿

Ladies and gentlemen, good afternoon and welcome to the Annual Results Conference of Royal Philips Electronics. I also welcome the listeners on our conference call service. Good afternoon and good morning to the United States. With us we have President and CEO, Gerard Kleisterlee; and Vice Chairman and Chief Financial Officer, Jon Hommen. Gerard will finish the proceedings with a look at 2003. Jon will take the part looking back to 2002. And first of all can I invite Gerard Kleisterlee to start of the meeting with a quick overview. Thank you.

Thank you. Welcome to all of you. Wherever you are listening here in the audience or anywhere around the world. Welcome to the presentation of our annual results for 2002. 2002 was another year where Philips had to operate in very difficult economic circumstances. With the year-on-year sales virtually flat at the level of 32b, income from operations improved substantially from a level of a loss of nearly 1.4b in 2001 to a profit of 420m in 2002. Net income, however, resulted in a loss of EUR 3.2b, driven by non-cash impairment charges for Vivendi Universal, Atos Origin, and LG Philips Displays. Cash flow from operations at EUR 2.2b was particularly strong, allowing us to reduce our net debt by over 1.7b to a level of EUR 5.2b, keeping our debt- to-equity ratio at 27-73.

Looking at our product divisions. Our domestic appliances division had another record year both in top and bottom line, driven by amongst of a strong growth of our Oral Healthcare activity. We are also delivering on our promise to turnaround consumer electronics that boasted a record fourth quarter in Europe and shows progress according to plan in the U.S.A.

Medical Systems is well on track in its integration process and gaining market share with a range of new product introductions, while lighting continues to outpace competition with strong margins and market share gains. We addressed our problems in components by dissolving the division and repositioning the individual businesses within the portfolio, changing business models where necessary to create more value.

Our biggest operating challenge remains at semiconductors. And, we have taken steps to reduce to breakeven point there. However, we still will have to do more. Gradually, we are starting to see how often more than a decade of restructuring, refocusing, and renewing a different Philips is emerging. The transformation process is ongoing, but the outline of what we are creating is already shown through.

Just take a look at the sales split now compared to 1998. It illustrates that we have created a much more focused portfolio with a different balance of activities. This can also be seen when we look at where our people are employed, and there is a story behind these numbers, a story of a company, which has changed. But there is more focus on marketing and R&D and less on manufacturing and manufacturing has a different geographical spreads.

Most impressively, you see a different Philips when you look at the change on how capital is allocated. In particular, you can see the massive shift in our consumer businesses for managing assets to driving product and market innovation. The improved results reflect the kind of year that 2002 was, a year of hard work to do whatever was in our power to offset adverse economic conditions. The year, in which we have simplified the company, we’ve driven down our costs, we have improved the quality and speed of our processes, we have brought our inventories to record low levels, and we have a much reduced debt level to document our progress.

Now, Jon, please will you lead us through the details of our Q4 results.

Thank you, Gerard. Ladies and gentlemen, good afternoon. For the next 10-15 minutes, I will take as through the results of the year 2002, and I start with the fourth quarter.

We reported income from operations in Q4 of 47m, which included 254m of special items. Excluding these items, income from operations would have been 301m. We also reported a net loss of 1.53 million, including non-cash impairment charges of 1.34b. And other special items are 248m. Excluding these items we would have recorded a net income of 58m. Impairment charges includes 921m for reducing the book value over shares of Atos origin to the market value on December 31 and 275m for impairing the value of the goodwill for LG Philips display.

Sales in the quarter, in Euros, were 4% lower than a year ago, but the comparable change was showing a 5% increase. It is encouraging to note that this is the third quarter in a row of positive comparable sales growth. In addition, there was an improvement in the pricing environment compared to a year ago, and a significant increase in net volumes of 12%. The reported income from operations is a profit of 47m, but if we exclude the special items it would be 301m. This figure compares with a profit after similar adjustments of 39m a year ago. When you compare these figures, please keep in mind that we had a 150m higher pension cost in Q4, this year, but also 51m less amortization goodwill.

The main items in income from operations for the quarter are. Lightings income from operations was 14.1% of the sales, an all time high for the first quarter. Consumer Electronics had an outstanding performance in Europe and continued to reduce the losses in the United States, which came to a loss of 23m in Q4. Special Items reflect a gain from selling PCMS, Philips Contract Manufacturing Services to Jabil and the researching cost that are part of that transactions. Domestic appliances record it's 14th globally sequential record profits on the year-over-year basis. This is 24% of sales.

Components Results were in line with our expectations and reflect weak results in optical storage. Mobile display systems significantly increased volumes with the introduction of color screens. And special items on this line include restructuring of optical storage, the closing in the solution of the division, and vacating one office building in California.

The Semiconductor results were affected by a low level of factory utilization at 52%, partly because some orders were supplied out of inventory which was produced in the quarter. R&D expenditure has continued at a high level of 26% of revenues. The charges of 169m include the closure of the Albuquerque plant, lost 70m of accelerated depreciation charges as moved to the year 2003.

The Medical Systems results reflect a usually strong first quarter. EBITDA for the full year 2002, excluding special items, and incidental items as well as now disposed HCP business was 9.9% for the year and over 15% for the first quarter. Bearing in mind, that further cost reductions will take place of approximately 180m in 2003, we are able to reconfirm our 14% EBITDA target for 2004.

Miscellaneous results, excluding the special items, was a negative 121 and included a charge of 29m to an increase of environmental provision of which 20m was for asbestos claims. Also included in special items are gains from divestiture sales. And allocated showed a 19% reduction of the corporate and regional overheads amounting to 24m. And in total, IFO, excluding special items and amortization of goodwill, increased to 301m from 90m a year ago in a very demanding marketplace.

During the quarter, we generated positive cash flow before financing of 1.580b of which 1.16b came from a reduction of working capital. In addition, the deprecation and amortization were low but below the capital expenditure level thereby effectively contributing approximately 300m to the net cash flow. We will continue to focus on net cash flow as the end to further reducing our net debts in 2003.

Results for unconsolidated companies before the special items was a profit of 11m in the quarter, including special items of 1.26b for impairment charges, and a 142m for other special charges, the reported loss was a total of 1.39b. Impairment charges primarily were the 921 for Atos Origin and the 275m for LG Philips displays.

The movement of currencies has affected us in a variety of places. Firstly, our sales were negatively impacted by 7% in the quarter to one year ago. While IFO was only marginally affected, due to the fact that our transaction exposures are always hedged as a matter of policy. Although our foreign currency revenues are now better mixed because of our foreign currency costs, we still have more revenues than costs in, for instance, US dollars. This exposure is hedged by each division for a number of months, going forward.

The equity was reduced in the quarter by a 369m, resulting from the translation of the equity and foreign subsidiaries debt into Euros. In yearly terms, our debt has been reduced due to part of our debt being denominated in US dollars, as well as part of our debt having been swapped into US dollar debts. As a result of all this, our debt to equity ratio has hardly been affected by currency movements.

And now I will say a few words about the year as a whole. We reported income from operations of 420m, which would have been 460m if we eliminate the special items. However, in 2002, we missed the pension credits we had in 2001, which made a difference of 541m, compensated in part by lower good will amortization of 180m.

We reported the net loss of 3.2b, but if you would exclude the special items and the impairments, there would be a small profit of 208m. This is a significant improvement on the loss of 779m in 2001.

The major items in the results from 2001 to 2002 relate to the higher level of special items, including impairments. As mentioned earlier, there has been a negative string relating to pension cost of 541m. In addition, there has been as good will amortization in IFO and in consolidated companies to the extent of 413m. Then, of course, we achieved large cost savings. The remaining difference refers to a variety of improvements in divisions, as well as in consolidated companies. It also reflects the savings that we obtained from previous restructurings.

For your understanding of our results, it is usual to see the movement in the pension costs. The swing from 2001 to 2002 is a negative of 541m. And for 2003 it will be a further increase in costs of 340m, of which approximately 50% will appear in the sector unallocated. We estimate that the added cash impact on pensions in the year 2003 will be less than a 100m.

On a divisional basis for the year, there is a similar picture here as for the first quarter. Lighting had a good year. Consumer electronics was much improved. DOP had an excellent deal with record profits. Components were heavily affected by the difficult market circumstances, particularly in optical storage, which is now being resolved. Restructuring charges were high as a result of restructuring optical storage and dissolving the component division.

Semiconductors yield was characterized by having excess capacity and high investments in R&D to develop products for the future. Also, restructuring charges were significant, reflecting the announced closing of the Albuquerque plant. And on allocated, we had lower overhead cost to the extent of 97m. But this was offset by increased pension cost of 288m.

Cash flow for the whole year was a large positive before financing a 1.980b, which is the main reason for the reduction of the net debt during the year of 1.725b. The working capital was reduced by 815m and CAPEX was lower than depreciation and amortization to the extent of 1.24b. We will continue to focus on cash flow in 2003.

Let's compare 2002 as the last 2 years for our investments and financial assets. For the year as a whole, the impairments net of gains was a negative but the cash impact was a positive 72. It appears for Vivendi partly and for Atos Origin fully that we are writing off the good gains that we took in the year 2000. And over these 3 years the cash generated from investments has been very positive.

Our headcounts in 2002 was reduced by an excess of 18,000 people, half of which was due to the sale of business. The remaining reduction results from our drive to the lower costs and a more effective company.

Over the last 3 years, we continued to track our performance against a peer group of companies in terms of total return to shareholders. Over the last 3 years all the companies had negative returns and we were in the seventh place out of a total of 24 companies. And on a 12 month basis, we are in 13th place out of the same 24 and noted how close the numbers 9 to 13 are in this charts.

Let me now turn to the balance sheets. Our equity has decreased during the year from 19.4b to 14.1b. The main causes being 3.3b from non-cash impairment charges, 946m from non-cash translation differences mostly from the decline the U.S. dollar, and 459m for a dividend that we paid in April of 2002. In spite of this, the debt equity ratio has only marginally changed and this is due to the successful cash generation that has taken place and the swapping of a Euro debt into U.S. dollar debt.

Our quarter investments and the market value on December 31 of 6.290b and a book value of 3.37b leaving unrecorded book gains of 2.92b. If we were to add this 2.92b to our equity then the equity ratio will improve to 24-76.

A year ago, we said we would be selling 27 businesses which would generate proceeds of 1b by the middle of 2003. We have, in fact, announced the sale of 16 businesses with expected proceeds of 809m of which 770m was received in the year 2002. In addition, we have sold surplus property, plants, and equipments with proceeds of 370m. We are not in a hurry to sell more, only when the price is right.

In relation to working capital we have continued to reduce our inventories and again have a record low of 11.1% of sales. Currency movements have helped this percentage, but the underline trend has been clearly downwards. Also we reduced our receivables from 1.5 to 1.3 months of sales and in addition we have standardized the credit terms we get from suppliers.

The division that has been most successful in reducing net operating capital is our consumer electronics division, which has almost eliminated it altogether and is running a cash conversion cycle of 0 days. Our capital investments during the year was less than half of that of 2001 and 2003 may only see a small increase.

Now you can see also the portion that relates to our semiconductors capital expenditures. Of the 410m for the year 2002, 183 m was for our joint venture with ST Micro and Motorola. Consequently, the amounts spent on our own facilities was very limited. When looking at CAPEX to depreciation you can clearly see that we have a source of cash generation here and if needed, we can continue this for a few more years.

We have made significant progress with our cost reduction program and let me take you through these three major elements. First, the 300m overhead reduction actually realized 257m in the year and on a run basis at the end of the year we were running at 324m. So we met our targets here. We have identified this part of our top program over 600 projects with a total savings of over 500m.

In medical systems, we have already realized a 173m in the year and all the projects are in place to add the 180m in 2003 to fully achieve the planned savings of 350m. And then for the remaining 350m, we have many projects in R&D, real estate, and one public related purchasing in marketing and sales in place to reach the targets. So, we believe we will achieve and probably overachieve the 1b plan that we have set.

And let me now hand it back to Gerard who will look forward into 2003.

Thank you Jon. I'd like to continue by telling you a little bit more about the way we are and what direction we are taking the company. In 2002, we have looked to create a simpler, faster, and more cost effective organization. We identified specific synergies that exist between certain of our activities and as a consequence integrated some of the previous component businesses into consumer electronics and semiconductors eliminating the components organization as a result.

We also looked at the three specific areas of synergies that we have at our availability as a company -- operational, financial, and strategic. One Philips has become an overwriting theme – a means exploiting the synergies to its full. First, operational synergies, fundamental change in our way of working has come from the program towards One Philips. A program designed to streamline support functions by standardizing processes and for using a shared way of working in IT, HRM, finance, and purchasing.

As a next step, we will establish shared service centers concentrating support functions in few locations. And you already heard from Jon that we are confident that these programs will deliver more than the 1b costs savings that we have targeted. Necessary as they are, these savings, however, are not the main objective, but for us it is a vehicle for fundamental and lasting change and the way we operate. The establishment of shared service has left to common and best in class business support that allows businesses to focus on the real value drivers. Technology, design, marketing, and customer income.

As part of the financial synergies, we are providing Philips Group Companies with more competitive financing and a good example here is the financing joint ventures that we've established for Philips Medical Systems. They also give them excess to best in class, asset and cash management skills.

And finally strategic synergies, the DNA that binds our businesses together. Our technology core competences, that we have defined in display on activity, storage, and digital video our brand and channel management, and our potential for new business development as we focus on close division of opportunities where we can have a competitive advantage by working together matching our strength.

We now see a company emerge with activities that from the market prospective fit into three broad categories, healthcare, lifestyle, and their related enabling technologies. And as we go on, these categories will enable us to serve as a filter to give focus to everything we do. That is how we want our stakeholders to understand Philips. By taking the outside in-view ourselves, we move away from the traditional inward looking organization of the past.

The rapid progress made in 2002 towards building One Philips is a reflection of the simple logic of our strategy and a clear desire to work as a single unified company. One Philips has required the culture of shift in the company. A shift that has demanded a change in the traditional approach and mindset of all our employees, from the factory floor to top management. The change has been embraced throughout the company at a pace that I did not think possible. An extremely welcome surprise.

And to maintain the momentum, we will continue to change our way of working and adapt to our organization and management structures accordingly. The effects of all of that are already showing through in some of the parameters of our business. The fourth quarter was the sixth consecutive quarter where we delivered an increase in sales volumes with an impressive 12% growth. All of that driven by a strong product line-up that I want to take you through.

As One Philips in 2002, we applied the principals of our well establishes management framework to all our businesses and we have witnessed improvements in all areas. Supported by a strong balance sheet, we start to have a more effective organization, and we do have a clearer, more focused portfolio.

This year, we will again be introducing a range of new and innovative products and technologies. And most importantly, much improved customer intimacy. Across the organization, we really have started to take the outside in perspective. And our customers are noticing the change and appreciating it. They find that Philips is an easier company to deal with. And as we become a more market driven company, the perception of what Philips really is and what we can offer will continue to drive improvements, both in terms of financials. Both top-line and bottom-line. The exclusive supply of lighting products to Home Depot’s 1,400 stores across America is a good example of what our customer intimacy combined with innovative marketing approach can pay off.

And our continued product and technology momentum offers more opportunities to come. They support our mission to enhance the quality of life for all our customers by providing them with meaningful, technological innovations at the right time.

Let me share a few that I am particularly proud of. You can't get much more intimate with the customer than this. Philips is the first company to produce a live 3D ultrasound image of a moving, beating heart. In the healthcare domain, our products continue to push the envelope from ultrasound and portable defibrillators to open MRI and CT.

In the consumer space, the Senseo coffee machine continues to break all record for any product introduction in the industry. And we’ll soon see the 1 millionth product sold in the Netherlands, and more than 2 m overall. The Sensortech shaver recently featured in the latest James Bond movie and the Sonic Care toothbrush is the number power toothbrush in the U.S. and our fastest growing category.

Our new CE range has been getting rave reviews in the trade press and at CES where we claimed a record 19 innovation awards. The desk-scrape detachable monitor and the Alco’s projection TV are great examples as our new Eye pronto and the Emotive micro hi-fi system. And soon to come, a personal infotainment range, featuring a new audio and video jukebox and a key ring digital cameras.

These are products which complement each other through the connective home, more of which we will unveil in March. Technologies for 2003 include seeing a lot more from our systems on-chip solutions, Philips state lighting through a luminous joint venture. And further developments with our flexible displays.

Our outlook for 2002 has been stated in our press release. And for the records I will read it to you. Through operational and marketing excellence, we expect that DAP and lighting divisions will again outperform their industries. In 2003, while CE is continuing to improve its overall performance especially in the U.S. through a marketing focused approach and an innovative product mix. Integration of our medical systems division is well on track to achieve the targeted 350m savings by yearend. And in semi-conductors, we will lower the break-even point, as a result of capacity reductions and restructuring savings.

The restructuring programs undertaken by Philips during the past two years will start to pay off with more profitable, efficient, and less capital-intensive operations. The company will continue cost reduction initiatives, including the reductions in overhead cost, which is on track, and ongoing supply chain management where we have reached best in class in a number of our businesses, in particularly, in CE.

The continued weakness of the U.S. dollar would negatively impact sales and to a lesser extent net income, whereas volatile stock markets can significantly impact pension expense and the value of the financial assets of the company. On the basis of the current economic and political uncertainties, Philips does not anticipate any short-term improvement in economic conditions.

So, as we look ahead to 2003, we will remain focused on what we control-- cost, capital spending, working capital and employment, and maintaining a strong balance sheet. Most importantly, we will further increase our customer and market focus and of course, should there be any economic upturn, we will be ready for it.

Our agenda for 2003 is crystal clear. We will achieve our cost savings target of 1b. We will bring semiconductors back on the path to profitability. We are establishing a profitable consumer electronic business in the U.S. from the fourth quarter on.

We are completing the integration process at Medical Systems and position it to meet its 14% EBITDA target for 2004. And we will continue to transform Philips into a truly market driven company. 2002 has seen good progress. 2003 will see us continue our drive towards one Philips, directing our efforts towards cash flow generation and economic profit.

Thank you for your attention. And we are now ready to take questions from the room and from our audiences around the world.

It’s Johan Berhard from Kempman and Co. [ph] I have question on the pension fund. What are the assumptions behind the increase in pension cost? For example, what is the coverage ratio of the pension fund right now? And also, can you explain why you only would report less than 100m in cash? Thank you.

Pension is a very complicated issue. There is an extensive page or two pages in the annual report that I suggest you read. And if you totally understand it, you will be the first people that do, but it is quite complicated and you need some from time to time here as well. But let me explain what happens here.

First, we have had some time where companies were making and pension funds were doing extremely well. Making more than they had to make in order to add to the liabilities of additional pension obligations that they had over the year. That time has come to an abrupt hold and what we are seeing now is that companies are making notes of pension funds -- don’t make the return needed to offset the liabilities that they add every year as an additional slice to that their pension obligation.

There are various ways to calculate this. One way is the PBO, the Projected Benefit Obligation. If you looked at debt loan, then you see in the annual report that we have a difference between the asset values of PBO of 1.8b. Now, immediately, know that there was a 800m in normal provided pension provisions in the company -- not from the benefit plans, but the provision is made was on the company. So, you need to separate that one. Then if you would look at the ABO, the Accumulated Benefit Obligation, these are benefit obligations that you have as of today. Then you see that’s we have a surplus in our pension fund.

So, it’s only the projected benefit obligation, projected all the way through retirement that shows a deficit. Now, in U.S. GAAP, we have many, many years to composite for that because pension accounting on the long run is designed to let people see what happens, but at the same time give the time, over, let's say, 10-15 years to amortize these types of differences. So, that’s what we will do in our pension accounting as well.

Your specific question to, I think the Netherlands, and let me then tell you, in addition to that, before I talk about the Netherlands. Our assumptions are extremely conservative. When you look at our return on asset assumption for going forward unlimitedly, is 6%. In fact, it varies between 3.8% and I think 7% depending upon the country in which we are. The highest one is the Brazil because of its high inflation rates.

Then various assumptions had been assumed as well at the level of about 3.5%. You need to make all type actuarial assumptions on how old will people get and when will you, not you particular, but you know, somebody die and that’s all calculated and also a date for the latest facts.

Now, they have that calculation done; then you have an impression on a conservative way how this looks on a very conservative type of estimates, back to the Netherlands. In the Netherlands, we have -- our assumptions are more conservative than the payhayka here. So we have a pension funding that is much better on the payhayka basis, what you see in our annual reports. We are over funded today; the way that we calculate it. But we are well funded compared to the payhayka. So there is no need this year for cash payments into our pension front in the Netherlands.

The RSN pension funds around the world that may require some cash payments. We have made, I think, all the calculations, but we need to be a little bit careful because financial markets may be volatile again, but the best we can calculate is an amount that is less than 100m more than that we paid in the year 2002. Loan also, but it’s a complicated loan.

I think, for a single person like myself whose bottom line is, I think, we have around the world, of course, several pension schemes. Only three of them are still defined benefit plants that is the Netherlands, the U.K. and the U.S. All those are have defined contribution plans; so there you don’t have all this complicated actuarial accounting. And as Hommen explained, we are extremely conservative in our assumptions. The biggest pension fronts are in Netherlands and there we are, compared to many other pension fronts, in relatively good shape.

Nicholas Goodwrath from Deutsche Bank. Couple of questions on consumer electronics and vendor for consumers, if I may. On fees you guided before I think, to a high single digit in Europe for margins in Q4. Could you give us what has been achieved in terms of the profitability? And also in Digital Networks whether you achieved profitability for hardware in Q4? And what happened to software? Whether the loss has been transferred to mix in the quarter?

I think that in consumer electronics, we have said that consumer electronics in Europe had a record fourth quarter both in top and in bottom line. The bottom line is high single digit. I don’t want to give anything more specific. I think we can continue for able to write down on details. This should be good enough.

In Europe, we had one of the best Consumer Electronic operations that anyone has in the world. And we are very pleased with that. And Digital Networks was loss giving in the fourth quarter. Close to breakeven on set-top boxes and then we have the smaller ongoing investments on the software side. I could say to you that, shortly before Christmas, we closed, finally, our licensing deal with GemStar.

We have been taken conservative as we are proficient in our set-top box results for potential license payments both to Pegasus and to GemStar. We came to a good conclusion with GemStar, which significantly improves our competitive position as we go forward and that makes us pretty confident that this year set-top boxes for us will be a profitable operation. And I think we have strengthened our position significantly in the U.S. as a consequence of the failure of the EcoStar DirectTV merger, where DirectTV is reducing its numbers of suppliers and we are at the top of their list.

Software, we have taken the route that we consider MHP software basically as something that we need for Digital Interactive TV.

So, we will find that back in 2003 in the numbers of Consumer Electronics and what we have kept apart there is our encryption which we are folding into the joint venture in China. At least we have our discussions ongoing there and the digital right management software activities, where we have started to bundle our efforts together with Sony, where there is a consequence to combine acquisition of Intotrust and that we will use as a platform to help establish an open standard digital rights management system across the industry.

I think that as we go forward you will hear less about these individual activities. And I think that here also we can relatively confidently say that we also have solved the digital networks loss of situation, and turned that into a profit.

Thank you. And on semis, could you give us an idea of your initial CAPEX plans for 2003? And also your investment, if any, into SSMC? It seems like you are under spent vis-à-vis plans in '02 and invested around 69m. There doesn't seems to be any provision in your accounts for any '03 plans. Could you give us a bit more clarity on that, please?

In general, we expect CAPEX levels in 2003 slightly above 2002 levels. A significant part of that will be for the completion of the activities incurred and 12 inch facility that we built together with Motorola and SP Micro Electronics. I don't think that there is a situation where we under spent in SSMC. SSMC has been completed; it is running; it meets load.

Thank you.

Jerome Minom for Dresdner Kleinwort Wasserstein [ph]. Couple of questions actually across multiple areas. One is just going back to the semis, can you just tell us which area you saw the lack of order pickup? For instance, we were lead to believe that you were getting some strong orders from the wireless side, especially from far eastern customers. And would that be an area, which did not come up to the level that you wanted to?

The second thing is since you produced, I mean, sold out of inventory and that lead to your capacity utilization fall in the fourth quarter, would capacity utilization go up by the same 5% or 6% in the first quarter of 2003? And your margins be back to where they were? Because for the same sale you saw that amount of fall or a reasonable fall in operating margin. If you are going to shut down another FAB when will you make that decision effectively and what does it take for you to come to that decision? What do you want to see? I have a couple of follow-up questions as well in another areas.

I think that semiconductors field is the area, where we still have most work to do. We were not pleased with development in particular at the top line in 2002. Design wins in with Asian suppliers of the cellular phones have come through. I think that you will see this year that 1 in 10 cell phones contains a complete soft silicon solution from Philips, where we supply everything from radio to base band, based on the chip family of our Experia platform.

We have seen enormous price pressure, especially and particularly on commodity ICs, multi market ICs as we call them, soft order books, strong price pressure. We have seen a soft market in general in consumer, which was basically flat. There were reasonable sales in consumer. Consumers continued to buy, fortunately, their TVs and their DVDs, but there were no massive growth rates. We have seen slow pickup of digital TV that is an area -- digital interactive TV -- that is developing much slower than everybody had expected a few years ago.

So, there are a number of areas of soft markets, in particular an area where we had gained strong market share and a strong position in identification is an area that has strongly reduced as a market, while we still are increasing our position, but in a smaller market. That is a cross section of activities.

Occupancy rate in our FABS, the way we calculate, in the fourth quarter, as you see in the report has been down to 52%. It was 58% in the third quarter. We do have expect even with inventories down to get that back to 58% immediately in the first quarter because normally the first quarter is a weak quarter and you will see quarter-on-quarter decline in the market and therefore also in our sales.

What you will see, however, is that as the restructuring programs are completed and we have now completed the closure of a lining term by last August the closure of the first line in Albuquerque by last December, and we will see the closure of the second plan in Albuquerque in the third quarter of next year.

As that has come true, in total, we have taken out 15% of our capacity and that will then help to bring up the utilization rates, but good utilization rates that get us in the area of where we can expect to be break-even of better will only occur in the second half of the year.

Thanks. Just a couple of quick questions. In your cash flow statement, you took a write back of provisions of 219m Euro. It doesn't have any operational implication for your margin and any division at all or is that just an accounting sort of thing? Has the margin now gone up in any division because of that?

No. I don't think that is related to the accounting, not related to the margins in our businesses.

And this whole business of asbestos, where your number of claims has gone from 20 to 500 in the span of 1 year, can you give us a comment on how much you would expect to see in terms of -- you took a 20m charge in last quarter? Do you have an estimate for what the charge would be in the current year? And my last question is do you have the book value of LG Philips display and do you think its worth your while to try and sell that business at whatever cost to somebody or the other if you can find a buyer because otherwise its just going to bleed you both in terms of asset impairment as well as restructuring costs?

With respect to asbestos, obviously with the low amount of claims, it was a minor issue. U.S. has gone asbestos crazy as we have seen in last half year. Fortunately we see now that Congress is making noises to step up and take action because like half of all the companies listed on the New York Stock Exchange have asbestos claims because they won all the way, touched somewhere in their life asbestos. We have a smaller company that we owned somewhere till the early 70s I think that also touched asbestos somewhere. We prefer to say as little as possible about that because the more we say the more the litigation lawyers in the U.S. would jump on it and find their way and find people who are willing file more claims. It’s madness and has to stop.

With respect to LPD I think that we will not sell that at any price to somebody. We have taken an impairment charge that we found justified looking at the business plan as we see it develop going forward. The whole focus in LG Philips displays is on the generation of cash. We have them late in the cycle probably in hindsight with relocating some of our factories to low cost locations that has cost some cash and some restructuring cost that the company found difficult to bear in times where they move in particularly monotonous from CET to LCD but much faster than we had anticipated 4-5 years ago. As we go forward, we are confident that the company will generate positive cash flow. We are looking forward to bring it to that situation. Then we will see where we take it from there.

A question on the mobile displays, it has grown 59% in the fourth quarter, could you tell first of all how much it represents of your component sales? And second could you tell something more about the profitability, I think at the analyst meeting it was mentioned mid single-digit at the second half of 2003 for mobile?

Yes it’s a business of around 1b. The growth was a result of our excellent work with basically all of the leading handset providers where we are the largest supplier of color displays and to move from monochrome to color is what cost the increase in the sales. The business has been giving largely throughout last year. It has termed to generate a small operating profit and that will improve as we go forward.

So, it was profitable in the fourth quarter already?

In the fourth quarter, it was not exactly profitable.

Thank you. Just briefly on the asbestos claim, without going into discussing the odds of the case, but could you explain what the actual technical claim is? Is it related to a consumer products or is it related to something more industrial, any detail would be most welcome?

License is not related to products, it is not related to the industry. Apparently the company that we have as part of its activity traded in asbestos material. Jon, I think you will have more detail on that company.

Yes, it was the company that terminated activities in 1981, 1991 and then also sold the assets related to that company. It was active in trading nothing else so it was not making it, manufacturing it, it was buying and selling and that is I think at this moment as much as we have. We have made a provision for 20m.

We have insurance of course. On situations like this we have not met it -- the number that you see against insurance. So, this is a gross number that still needs to be claimed. Of course, we are working with some good number of people including lawyers, inside and outside, to make sure that we protect the interest of the company in the best possible way and we go do our utmost to make this as small as possible an exposure to the company.

That really has nothing to do with any product of Philips, any manufacturers at any time.

Yes, just follow-up. Your performance in medical was extremely strong and congratulations for getting into that level of profitability. How do we model that going forward? Earlier you had said that there would be a charge of 14m which doesn't seem to have been taken at all, given some seasonality in the first quarter, how do you think those other margins sustainable, given that on the one hand there is seasonality, on the other hand there is increasing cost savings likely to come through in the next couple of quarters? How do you model the gross margin of that business?

Yes, you should not take the first quarter and then extrapolate it into next year, because then you make a mistake. This business still is heavily a first quarter type of business. We'll like to change that as much as we can into a more gradual and more equal business all for the year but it is still as heavily a first quarter business. The margin was 15%, that's not what we are going to make the EBITDA in Q4, that's not what we are going to do in the next quarters, but we are building it up.

I mentioned that we have 180m of savings, that will come into play in year 2003, so you can add that to the bottom line at least and then we should do a little bit better because we do have the capability as Gerald was mentioning in his speech of new products that are extremely of interest to the medical community and are beginning to sell this quarter. So, we tried to get market share. Our plan is to make -- to add more market share in 2003 than we had in 2002. And the ultimate goal is to be 14% EBITDA Company by the year 2004 and we are well on our way to do so.

But, on the market share basis, you still seem to be loosing market share because both GE and Siemens on a comparable basis did better than you in terms of year-on-year growth rate?

Yes, watch out because you look at translated dollars back into euros. Most of our business, almost 60% - 65% of our medical business today is in the U.S. and so you get dollars translated into euros and that has impact on our sales. All the intake in Q4 was over 13.5% growth. Okay, so we are outpacing most of the others in the industry.

So on the Euro -- on a dollar basis can you give us a figure for your sales and income?

On a dollar basis, we have plans. I think when we are about a year and a half ago. When we unfolded the plans for the acquisitions that we have done. And we have the analyst meeting where we put our plans together, and showed you what we were trying to accomplish, that number was 8b, I think, for the year 2004, that number is scaled back to 7.2b, only because of the U.S. dollar impact, okay. So, that’s about the size of the impact of that.

And just a follow up question on Philips Medical. If GE succeeds to take over . And if Siemens Medical succeeds to find a joint venture with , how does that change the competitive positioning of Philips Medical?

Well, that’s a hypothetical question. The question is whether that will happen. Because as you know, the anti-trust sureties Europe are still looking at these transactions. Philips is very well positioned in the patient monitoring business. There is the acquisition that we did, the Agilent acquisition. And yes, we will then have GE in a stronger position than they were before in the same business. But that’s I think, all that there is it doesn’t mean that they have -- certainly going to look at the price that they have -- an easy, lets say we doing business here. The prices that we have paid for the acquisitions and we have done in a relationship to sales and relationship to earnings seem to be a little bit more favorable than what they have done.

And, we have to be careful that we don’t get into a game here of who’s biggest by buying anything in the healthcare space. There are a lot of things that do add up, there also are a lot of things that do not add up, and the jury on some of that is still out. If you look at Philips, GE, and Siemens, then you see that around the core of medical diagnostic imaging equipment, they all have slightly different additions to their portfolio. Particularly, GE has , Siemens has bought a large IP service provider -- a hospital IP service provider, we have our medical transcription business, and it still remains to be seen to what extent these portfolios really generate synergy and added value. I think that we are still at the early development of a number of fields here. And buying companies at random is certainly not what we are after.

One quick question at the cash flow. For 2003, you are very optimistic and generated 1b in cost savings. What’s the amount of net working capital you think you can continue to squeeze out of your business given the very good performance as recently showed in the first question?

As you could see from the graph that I showed on the inventory, there is another one-time one-quarter event. This has been a very carefully crafted program. Where, first of all by implementing the EOP systems -- archive systems and later by adding supply chain management systems to that, Philips is really taking this as a continuing activity.

So, have we found the end to it yet? I don’t think so. I think we still have opportunities to go. If I only look at medical, what we can do in a medical division, we are just starting to look at it. So, there are plenty of opportunities left to continue on this path. And even the people that are leading today, I don’t think they have seen the end of that chain yet. There is still opportunity here to further reduce our inventory, to further manage our receivables, and I think we’ll still do better in managing our payables.

So another 700m - 800m interest is not excluded?

You make the calculations and I make them too and at the end of the next year, we see who was right.

Okay and then. The question on the U.S. satellite separate box marketing, you mentioned that you after the failure of the Echo-Direct merger, you mentioned you will gain significant business events on the DirectTV platform. Could you shed some more light on that question as other players like Samsung make significant progress on that platform, is there are any number attached to that or something of that kind?

DirectTV is looking to reduce it number of shuttle box supplies and Philips and Samsung are the biggest contenders to take the majority of their needs.

Thank you. Just another question on semiconductors, the utilization rates have been fairly low. Is this going forward due to too much non-leading as capacity or is it that you are trying to fill up your foundry capacity and related to that is your strategy going forward, basically, building down your own facilities and expanding more into foundries? And are you thinking of acquiring more stakes in, possibly Chinese foundries or are you sort of withdrawing as you mentioned manufacturing would be less important? Are you trying to withdraw from manufacturing activities all together, also including building new FABs, possibly in joint ventures?

That one is a long question and thus we will give a long answer. Let me first say something about our utilization rate. We report in the way we calculate in the third quarter 58% and then in the fourth quarter 52%. And for the year, we report 54%. That is a low figure if you compare -- that’s the utilization rate and I think, we have said that on earlier occasion that we calculate slightly different, out of stake the theoretical maximum capacity.

So, how many wafer starts could you have and we take an effective utilization rate and yield? There is a difference of about 10%. So, our 54% divided by 0.9, and it gets you to 60% comparable utilization rates. We need to get that into the direction of our 70%, and if we take 15% capacity out, we are getting a good way in that direction. You can not count the full 15% because as I have said, we have stopped headcount in August, Albuquerque first line December. Albuquerque second line in the third quarter of the next year. You also cannot look only at do we have enough leading at capacity or not?

We have a number of very specific capacity sources. We make discretes, we make standard ICs, we make standard CMOS, and we have sophisticated mixed signal ICs. And the utilization rates in all these categories differ. The category where we do most of our outsourcing is what we call plain Vanilla CMOS whether that is 8 inch or 12 inch, doesn’t matter. If it’s plain Vanilla CMOS, it can be outsourced. And we have said, in CMOS, we may drive that to the area of 80%.

However, where we have the best margins, is in mixed signals. Because mixed signal is a specialty, and it is a specialty that not everybody masters and therefore, in that specialty there you need to have your own capacity. So, while we will be extremely light in some areas of capacity, we will do everything needed to have that specific capacity available.

In general, we have for quiet some time, no need for additional capacity and we also are of the opinion that getting access to capacity does not always require an equity investment. We are shareholder in TSMC and it has done well for us overtime, but most of the customers of TSMC are not equity shareholders in TSMC, nor is that the case for UMC. So, we will work at different relationships, once it comes to the point that we would need additional CMOS capacity.

For the moment we think we have sufficient access to that, and also for other areas of capacity, I think, we will have, for quiet some time what we need the capacity accrual is gradually being build up and for the foreseeable future. Also in leading as capacity that will give us what we require, and then we will take it from there.

So, you might use the accrual facility when it’s fully ramped up as a sort of foundry?

The goal facility will be for the shareholders in that joint venture. Their place where they startup their leading as technology products.

Thank you and maybe as add on question, if possible, the TSMC relationship over time has been quite strong between the two companies, I think you subscribed to preferred issue a while ago as well, and given your own asset life strategies in issue do you still have book value of 1.85b related to a TSMC stake, and also giving the growth of foundry outside the Taiwanese market also having the difficulties of TSMC building a new factory in China because of Taiwanese government basically wants to have this factory inside their own territory. Is there any change in your stake in TSMC to the current level above the 20%?

Well, the thing that will happen of course in the second quarter is that these redeemable preferential shares will be redeemed and that will have an impact on our shareholding. For the rest, we will continue to develop a good working relationship with TSMC. I don’t think that the issue that you signal off their desire to build a factory in mainland China and the political views in Taiwan on that perhaps will have any impact on our relationship and our view on TSMC.

By the way, I think that the current government is not trying to prevent or to block that kind of investments in any case. They have taken it as a fact of technology also goes to China as long as there is enough technology in Taiwan, they are pretty happy with that. So that will not influence our relationship. We will continue to work with TSMC on the basis that we've always done before and the only thing that is certain is that the preferentials will be redeemed.

We talked about hedging a little bit earlier. Can you tell me how much percentage of your business is hedged first of all and how many months you hedged?

The percentage of our business varies of course. But we hedge basically all transaction exposures that we have from the different type of divisions and currencies that are not the normal currency. We try to look at natural hedges first, so if you can have you will cost in the same currency as your revenues that’s an ideal hedge. And to a large degree we have been successful and our divisions have been looking for opportunities to move to places where they do have the natural hedge.

We do and it is all reported in the annual report, you can read it, including the sensitivity analysis, I think we have like 4b, or so, outstanding in hedges. A lot of that is related to our debt because we -- any other company that we have let say as in the U.S. we hedge internally so that -- we hedge outside so that we don’t have the translation losses back in our numbers here. And this has really helped as well because it has given us the ability to really match that equity ratio without any impact of the U.S. dollar decline that I think it is a very important step. But basically all our divisions in on our terms action basis always hedge and reduce between 3-6 months to hedge forward.

And a follow up on the semi side, we talked about breakeven in 2003 or making a profitability, can you give us some guidance as to what your breakeven point is going to be?

The breakeven points of course depends on all the other circumstances, the loading factor of our FAB's, it is the strength or weakness of the U.S. dollar and whatever is going to happen in the Middle East. If we look at a normal year, without extraordinary events like we have last year, than on current circumstances we would say we see semi-conductors return to profitability in the second half of the year based on normal seasonal strength.

Thank you. Can you tell us what is the status on optical storage is right now and what likely will be the plans going forward?

Yes, on optical storage we have taken a restructuring provision in the fourth quarter to largely the optical storage activities in particularly, in Belgium. We have a positive audio-video activity that we run from Singapore. We have a strong automotive activity in optical storage that continues to grow and increase to profitability. The issue in optical storage was in the data drive activities. We have entered into a corporation agreement there in the earlier part of last year with B&Q, the former ace peripheral group. And we are currently in the process of expanding that collaboration so that we can continue to participate in the data storage market pretty much in a similar model that we have followed for our mobile phone activity.

And when can we expect a decision on where that division will go finally, or will it be -- I presume it’s not going to remaining in miscellaneous?

It's not going to remain in miscellaneous. We first need to complete the finalization of our business model design around data drives. That will happen pretty soon and then we will see how we best can position further on in year that activity within one of the existing divisions.

In some there were small… Your LCD business, the accelerated move that from CRT to LCD is clearly happening. On the other hand, as the other guy is building capacity and it's very roughly building especially in Asia. I know it's difficult to say but how do you see that market shaping up? Will we ever see that numbers you have reported in, I think, Q2 of 2002? This is really sort of very rapidly going the CRT way -- the LCD business?

Well, if we would go to CRT, I would be quite happy because we have enjoyed many, many years of good profitability in CRT industry. The fear that we would have is that it would roughly go the other way. And the way we look at it is that LCD is a strong growth market. We don't share the view as everybody is building capacity. And there are few leading players that are LG Philips, Samsung, AU Optronics in Taiwan, and to some extent Sharp. But Sharp specifically for TV applications -- that are building capacity. Because of the competitiveness of that industry already, now we see consolidation and shake out.

So, there are also competitors following by the way side. And basically the creation of AU Optronics was a fist sign of death. So what we see is as an industry that even more rapidly then CRT did throughout its lifecycle could develop into an oligopoly, which is not a bad industry structure. However, it is industry that also will have some characteristics of another industry; and therefore, you need to be the leader. You need to cutting edge. You need to have very, very efficient processes. Unfortunately, our joint venture in that respect gets the best ratings in the industry.

So, we will continue to build that business. Increased demand continues to come from the shift in monitors to LCD, but now also TV is starting. We are bringing a full range of LCD TVs to the market; so do others. And as you are fortunate, as you see, TV screen tend to be big then the monitors we have on our desk and so a large size white screen TV takes about 10 times of the volume of the average LCD monitor and that is good for whoever is there in that industry.

There is a quick follow up on actually the pension issue. I might be completely wrong, but I just want to ask the question. According to my knowledge, if the accumulative deficit is more than 10% of the projected benefit obligation then you can start -- you have to amortize? Now, I just would like to know whether, as you start to amortize of the 10 years, whether we can draw any conclusions for the years post 2003 on any pension charges? Is there anything you can say on that?

I can try. But the trouble is that you need to know what financial markets will do as well. And that is not so easy, as you know. When the ABO, the Accumulated Benefit Obligation, is lower than the fair market value, then you need to make an adjustment to your equity. And that is what we have done in two cases, in the US as well as in the UK. And those are in our numbers as we have presented them for the year 2002. And they had the time , 10-15 years to restore that. Anytime you finally restore that, it can happen because of financial markets help you with that. Then it goes back and you are back into normal situation again.

But the financial markets wouldn't rebound quickly as they in 2003. So it would probably be another -- I mean quite naturally another pension charge in 2004?

Because what you do is, you calculate -- there's an assumed rate of return of 6%. If you are not making that 6%, then you need to relook again at the end of the year at the assumptions you make at point in time, part of which will be what is the rate of return assumption that you will make. So, that you have constant adjustments at the end of the year as you progress.

Would nobody like to ask the last question or the third last question? Well, if there are no more questions, thank you for coming. To our listeners, thank you for listening in and no doubt you may have some questions, which will find our way. We will answer them for you. Thank you.

Thank you.