Koninklijke Philips NV (PHG) 2013 Q4 法說會逐字稿

Good morning and good afternoon. In the meantime, ladies and gentlemen, thank you for joining the media briefing at our headquarters to discuss our fourth quarter in 2013 results.

As you can see I'm here with our CEO, Frans van Houten; our CFO, Ron Wirahadiraksa. After some introductory remarks from Frans, you can ask your questions. And with that, I give the floor to Franc.

Thanks, Andre. Welcome all. I'd like to spend some time on the following topics, performance in the fourth quarter, our 2013 financial targets, our progress on the transformation Program Accelerate! and what we are doing going forward with this program that will be with us for quite some time more.

Of course, our focus on innovation and investments for future growth and as many people have already asked us today, the outlook for 2014.

Let's start with the Q4 in 2013 performance. We are quite pleased with the continued improvement in the operation of performance in the fourth quarter and of course over the whole year 2013. As you know Philips started with Accelerate! in 2011 to reshape the company top to bottom and with great pleasure I can tell you that we have achieved our targets that we set for ourselves back then.

It's the result of hard work by our employees. We have seen significant improvements specifically on the fourth quarter results, group sales increased by 7% on a comparable basis which is a very good achievement especially in the light of a challenging economic circumstances and thanks to the improvements that were driven by the Accelerate! program.

Our operational results improved across all the three sectors. As a result of both increased sales and gross margin expansion and cost reduction. EBITDA excluding restructuring and other charged increased 20% to $950 million.

Net income in the quarter amounted to $412 to reshape the company top to bottom and with great pleasure I can tell you that we have achieved our targets that we set for ourselves back then.

It's the result of hard work by our employees. We have seen significant improvements specifically on the fourth quarter results, group sales increased by 7% on a comparable basis which is a very good achievement especially in the light of a challenging economic circumstances and thanks to the improvements that were driven by the Accelerate! program.

Our operational results improved across all the three sectors. As a result of both increased sales and gross margin expansion and cost reduction. EBITDA excluding restructuring and other charged increased 20% to EUR950 million.

Net income in the quarter amounted to EUR412 million from a year-earlier lost. This was due to better operational results, lower restructuring cost and absence of significant one offs in the year-earlier quarter.

With regard to the growth geographies, performance in the growth geographies was very solid. We saw sales climbed by 15% on a comparable basis and they now account for 37% of total group revenue. The performance improvements are supported by many great innovations that are successes across the world. One example is the air purifier portfolio that was developed in record time in order to meet the fast-growing demand in Asia in light of the air pollution that is prevalent in that part of the world.

Another example comes from our lighting sector where we are shifting from a product or if you like a light bulb company to a solution's company. Just to illustrate this, in Buenos Aires, the city government selected Philips to replace the majority of 125,000 street lights with the Philips CityTouch connected LED lighting system. It was this system the city can generate energy savings of more than 50% while improving the city's livability.

Let me now zoom in on the performance of each sector in the fourth quarter. Starting with healthcare, we posted comparable sales growth of 4%. In the growth geographies comparable sales improved by double digit year-on-year which was especially pleasing. On the currency comparable order intake declined by 1% year-on-year and the EBITDA margin excluding restructuring and acquisition of labor charges increased by 100 basis points year-on-year to 19% which again is very good.

Healthcare introduced the EPIQ ultrasound system which is available in both the US market as well as other markets in the world at the RSNA in Chicago. We also introduced the Vereos digital PET/CT system and the IQon spectral CT system both of which held greatly in cancer diagnostics and treatment. And we expect that these innovations will have a very nice impact on the future orders.

In consumer lifestyle, comparable sales increased by 8% in the [growth] geography's double-digit increase, EBITDA margin excluding restructuring acquisition related charges increased to 13.4% which year-on-year is an improvement of 2.1 percentage points against strong performance of lifestyle.

Driven by portfolio of what we call locally relevant innovations where we experience strong growth in China and in Europe, driven by high demand of, for example, kitchen appliances, rice cookers, noodle makers, shavers, in China, reaffirming our global leadership in mail grooming, we celebrated the sales the 10 millions Philips SensoTouch shaver on the day which is called Double 11, China's biggest day for online shopping where we sold on a single day 200,000 shavers.

When I move to lighting, we saw their comparable sales growth of 8%. I'm quite happy with that. [Lead-based] sales even grew a whopping 48% and now represents 34% of our overall lighting sales. In growth geographies, double-digit comparable sales increase, EBITDA margin excluding restructuring of charges as 10.4% which is year-on-year improvement of 2.5 percentage points. Again a huge improvement and just imagine where we come from in 2011, it's a massive step forward.

Proof points in lighting include especially the professional lighting and solution side where we won also a 10-year contract to deliver a service integrated digital lighting for 13,000 light points in parking garages in Washington DC where we sell now light as a service.

This is a new business model that very well fits the circular economy in a much more sustainable environment and it helps reduce on the demand side the energy consumption. I'm quite passionate about it because I think it's the way to go for the future.

Of course, we need to evaluate targets. We like to discuss that briefly. We believe that 2013 represents solid improvements, comparable sales increase by 3% which is more than the GDP growth in the world, operational results improved 27%, net income for the year improved to EUR1.2 billion. All of the hard work in the quarter in the year culminated in us achieving the so called mid-term targets for 2013 which we set out in 2011.

For me and for Ron, not a surprise because we have a rock solid belief in the unlock potential that Philips has, but admittedly it took a lot of effort. Everybody worked very hard. I'd like to acknowledge the contribution of our employees. By the employee engagement has gone up over the last two years and we now really have a very excited and engaged workforce that believes in the future. Also the trust of our customers is very, very pleasing and I believe that we can see more traction going forward.

There is however more work to do to fully unlock the potential of Philips and therefore for us, meeting the 2013 targets is merely a validation of that past that we are on, just a moment on a multi-year journey.

As you can see we delivered a compound annual growth rate of 4.9% over the period of 2012-2013. That compares to the original target of 4% to 6% but in a lower GDP growth environment originally foreseen. Reported EBITDA came to 10.5% that was within the target range of 10% to 12%. And that is despite setbacks that you also hear many other companies talk about such as the adverse currency rates and the changed pension accounting.

And then we significantly improved return on invested capital to 15.3% which is well above the range that we set for ourselves.

Of course that brings me to Accelerate!. Accelerate! bears fruit. We are now in the third year of our program. We have achieved many things to improve the performance, but the journey is not yet over. We will continue. It's my belief that many companies stop too early in making changes, changes that in order to become permanent you need to stay at it with relentless effort and focus.

We need to continue to drive operational excellence. It will enable us to deliver innovation faster at lower cost with more predictability, higher customer service and more local market developments, higher growth and profitability.

Of course underlying that change is the culture of the company. We are striving to implement a growth of performance culture which is centered around entrepreneurship, teamwork, operational excellence and accountability and we see that having increasing traction.

Accelerate! will continue for the years to come. As we announced at the Capital Markets Day, we see this program going beyond 2016. We see possibilities to further boost margins by 300 to 400 basis points primarily driven by productivity measures and especially also the DfX program as we are able to unlock in the design process of our product further value enhancement.

These improvements are partially offset by extra investments. I very much believe that a good entrepreneur invest with one hand and cuts with the other one, drives productivity with the other one. That's what we will do. So over the period, we aim to invest more in innovation. We invest in the transformation of our IT landscape and operational excellence and that means that net-net, we plan to improve profitability by 2016 by another 100 to 200 basis points.

We continue to invest in innovation as I've just said because that will drive sales growth. We are focusing on innovations that mattered to people who can very much at the main trends in the world of an aging population, more chronic disease, the need to energy efficiency and a large growing middle class that looks for a good life.

Our technologies will help healthcare delivery systems to become more affordable. Our energy efficiency, that lighting solutions will reduce electricity consumptions will make the world more sustainable. By the way, in that context you're just adopting a CO2 reduction of 30% by 2030. Well the only way to make that is really start working on energy demand and not just on energy supply. And our solutions play right into that scheme.

And we will continue to invest in more locally relevant consumer appliances and services. So in 2014, we continue to invest between 7% and 8% or revenue in research and development in line with our strategic focus on innovation.

Apart from strengthening leadership in existing businesses, boosting our presence and market penetration in growth markets, we are also starting up new businesses. I think this is pretty exciting. You probably have seen our announcement of last week where we informed the world that we have started in healthcare a new business group around informatics solutions and services.

This will enable us to deliver to hospitals and health systems, integrated clinical programs, advanced data analytics, interoperable cloud base platforms that will help treat more patients faster and at lower cost. Of course this is the challenge that the world faces and we believe that by being an integral solutions provider, we can do a better job.

This new business group of healthcare informatics will be led by Jeroen Tas who previously was our Chief Information Officer and I think this is a major growth opportunity going forward.

In consumer lifestyle, we also recognize opportunities in business adjacencies and specifically around personal health and well being. Here we have set up a new business group reporting to [Peter Nolta] called Personal Health Solutions.

And then maybe also quite interesting to draw your attention to is that innovation and group services IG&S we hope now several startups that have great promise. Although they will be EBITDA negative for the near term as we do massive investments, they have a lot of growth potential.

A few examples in this area, digital pathology, point-of-care diagnostics and horticultural or city farming solutions where technology can make food production go a lot faster with less water, less electricity usage and less long supply chains, so quite attractive and in the longer term an important solution.

As mentioned, we will also drive for expansion in growth markets especially I could mention Africa. They are since the last two years, we are making focused effort to penetrate the markets. We have set up local offices in several countries and we now see increasing traction in all three sectors.

Another focus area is the revamp of our brand, one of Philips' greatest assets across the globe. In November we announced the new brand positioning. Several of you were there. Thank you for that. We believe that the new brand positioning better reflects our mission to improve people's lives through meaningful innovation. It is our commitment to deliver innovation that will drive growth and that matters to people.

I can talk much more about the brand, but let me just show you now a commercial that is part of the campaign, that started a few weeks ago in the Netherlands and that it will also be rolled out in other parts of the world. In about two weeks, we will launch this new brand positioning also in the United States. There's a dedicated event in Washington, DC also of course recognizing that we want to do more business with the government over there. So let's watch this commercial, please.

(VIDEO PLAYING)

More to come in that front. We get very good reactions by the way on the new brand positioning. As all these initiatives are put in motion, we are quite confident that we are well positioned to achieve our 2016 targets as elucidated last year at the Capital Markets Day.

We are confident in our ability to further improve performance. We will continue Accelerate! as a means to do that. Looking at 2014, we are cautious because of ongoing macroeconomic uncertainties, currency headwinds and the softer order intake that we saw in the fourth quarter of 2013.

Nevertheless, we expect that 2014 will be another step, a modest step towards achieving 2016 targets. Also in recognition of the extra investments that we are doing in 2014 in restructuring to drive productivity and investments in the new growth initiatives or the stepped-up growth initiatives that I've talked about.

In conclusion, we are an innovation company. We have a long heritage in innovation. This year Philips' research is celebrating its 100th anniversary that we have seen a slate and a steady stream of innovations all over the years. Moreover, Philips' research has generated 165,000 patents up until now. It is these patents also that protect us on the one hand and helps us generate income on the other hand.

All of the exciting growth initiatives combined with the productivity enhancements that we will continue to focus on gives us great confidence for the future. And I'm convinced that Philips will be the technology company that matters, the technology company that improves people's lives in this fast-changing world.

And with that, I would like to open up and see what questions you have for either Ron or myself of course.

And of course we don't know all of you, I've seen some new faces, please state your name and the publication that you represent so that makes it a bit easier for us. There's a question in the back.

Hi. [Albert Croney] of Bloomberg News, I've heard you mentioned the shift towards solution from products several times. I was wondering what do you eye by that or what do you have in mind? Is it acquisition driven? Is it going to be partnership driven because I take that you don't have all the software in-house to drive this shift.

Great question. It is primarily an organic change, so we do need to make the shift. For example from selling light bulbs to selling lighting solutions. Already for the last few years, we have started to change the profile of our core competencies. There are far more ICT people now working in Philips than ever before in that context, yes. Software is something that we do. We have thousands of software engineers now in Philips in Eindhoven, in Bangalore, in some other locations in the world. And this is important to us.

So doing systems integration, making connected lighting solutions is something that we can do on our own, although we welcome partners very much. I'll give you maybe two examples, the U-Lamp is an internet connected lamp. You can change the lighting through your smartphone and so on. It leverages of course the Wi-Fi networks and the infrastructure in your home. But they have realized that they can never make all the compelling applications that maybe consumers would like to have.

So what we did is we made a software development kit available to the open market and now we see many companies make apps on our platform that creates more demand for our platform and drives more sales for you. So it's a great example where yes, we are a [systems] company, but also open up to the world for open innovation learning from Silicon Valley companies who have long been doing that.

The clinical informatics or the healthcare informatics is another area where we are the systems integrator for a hospital contrasting that to maybe companies that do the administrative side, the accounting, that's not where we will go as our informatics. We've specifically focused on the medical side of the provisioning of care. We believe that using big data in hospitals helping the radiologist talk to the cardiologist, to talk to the anesthetist and so on.

And then monitoring patients are they get out of the intensive care and eventually going home, all of that can be enhanced using software and sensors and the cloud and doing a massive number crunching in order to help doctors and there are not even enough doctors and nurses in the world to help the exploding demand for healthcare in order to do that.

So yes, Philips is rapidly moving and the profile of our people changes. Do we require acquisitions for this? Maybe, you know, we don't exclude bolt-on acquisitions as we have said before, but it is not the main focus of our strategy.

Just use the microphone because otherwise others can't hear you.

(Inaudible), Financial Daily. How big can the business become when you talk about revenue?

Partly, it is the imbedding of digital in our existing value propositions for example, equipping and air purifier was an internet connection so that you can switch it on and off remotely. Imagine the air quality through your smartphone, that is in a way of replacement, right? That's new functionality to originally an offline product. And partly it is new business. So the area of healthcare informatics solutions and services is a big growth opportunity for Philips and that is an adjacency that we now increasingly will get into and it is a new growth factor.

Doing digital pathology which I think is looking at cells through computer algorithms and sharing it through the cloud so that doctors can interpret what is in the tumor in a better way. That's a new business for us. So as we apply our medical know how and combine it with software know how, we can open up a new business growth.

(Inaudible question - microphone inaccessible).

We have said that we will aim to grow Philips by 4% to 6% over the next two years, we do not split out specifically individual business groups and as is it early days with this new initiative. The moment we have major customer wins, we're going to tell you about it.

There's a question here.

(Inaudible). I have a question about your audio, video about (inaudible) after the agreement that failed to set up a separate company called WOOX. Why did you do that? And if in the future I buy a gadget, will it be labeled Philips or will it be labeled WOOX?

And I was wondering how much do you earn with agreements like the one you have with -- you'll have with Funai with the industry and with key positions?

Well we informed the market that we were keen on externalizing the audio and video and not the media and the accessories business and handing it over to a partner in order that we can focus on the areas of business that we find attractive. The deal with Funai didn't go through unfortunately. But we continued to set the business standalone.

So of course in a company, it needs to have a name and since it didn't become Funai, we gave it our own, a name of our own which is WOOX Innovations. So WOOX Innovations is now a standalone company that is help -- still owned by Philips but held at arm's length. We have restarted the process of finding buyers for it and there's quite some interest, but this process will take some time, but we feel confident that somewhere during this year, we can come back to you and announce that we have a new home for this business.

Now, why do we use these constructions? Because we have a belief that there is a demand for this product. The Philips brand will continue on this product and therefore there is a license agreement between Philips and WOOX Innovations. And if eventually another company buys it, then you have a brand license agreement between Philips and that company like we also have with TPG on the Philips TV business.

Your question on how much is a typical brand license fee, this varies a little bit and it depends on the underlying business. So a highly profitable business will get a higher brand license than a little bit more marginal business. The TPV case is published, I think off the top of my head, it is 2.2% off sales and then for other businesses, it could be a different percentage which we don't specifically disclose.

(Inaudible question - microphone inaccessible)

You're buying a Philips product that is sold by WOOX.

(Inaudible question - microphone inaccessible)

Philips as long as they pay us the brand license fee, of course.

(Inaudible), you have a question as well and then [TJ] in the back.

My name is (Inaudible) with Elsevier. You qualify Western Europe as a weak market in the results. And we've seen a fair share of reasonably good news lately. Is that something Philips notices already?

Well I'd first like to give a bit of commentary on what constitute good news. If you remove from minus half percent growth to plus a half percent growth, that's an improvement. But it would not be good if we leave it at that. So we cannot consider half a percent growth in Europe as the end point. And I would wish that the ambition level of all of us in Europe is to reach a higher growth. Because anything less than a 1.5% growth, it will not sustain the state of wealth for all the people in the region.

So Europe needs to be more ambitious and therefore we are not yet out of the crisis. And I certainly hope that together we all, with policy makers and governments and so on and then the ECB continue to drive further improvement in Europe.

Philips in Europe, we saw a mix picture. We saw good growth in the consumer side, but this is very much related to all of the innovations that we bring out. We saw good progress in lighting because of the energy efficient lighting which helps people save energy and that's very compelling. Typically, payback times on energy efficient LED lighting is two to three years, so who wouldn't want to have that.

Now since municipalities find it difficult to make the upfront investment, Philips has gone with a new business model into the market where you can buy light as a service which also reinforces the notion of a circular economy which is less polluting to the world, so we will go more in that direction. And that helps us find growth in a flat market.

And then in healthcare, we see continued austerity especially driven by governments that are trying to find savings. And this in the near term is certainly still a headwind for the business in Europe. Of course Philips will not leave it at that. We will drive and look for opportunities elsewhere as we have always done.

Do you see a picking up with the pace or is it still more or less the same as say one year ago?

It is still more or less the same situation.

And if I have one follow-up question, another market, China, well on top of these press releases, the growth geographies, it's going very well there. But conversely, there's been some rather negative news about specifically China. Is that something that Philips notices already?

There should be some effects of the new policies in China on the business. There's austerity measures in China for example on gifting. The governments have become much more careful in that area. We feel that. But on the whole, we continue to be positive about China and whether the growth is 7% or 7.5% of whatever, it's still growth, right? And that is what matters.

China will continue to invest in healthcare, infrastructure. We believe that energy efficient lighting will continue to be in demand. What we do see in China is to shift away from retail to online. Online commerce has very well, rapidly developed in China. And we see fewer new store openings in China. And since we were also -- we were selling lighting in the stores, let's say fewer store openings is affecting us to a degree.

But overall, we continue to have confidence in our ability to grow in China and in emerging markets, but we do flag a higher volatility in the market. So there will be more ups and downs maybe even with the higher frequency that we need to be aware of. Think about currency fluctuations or even to a degree social unrest such as we are now seeing in Turkey and in the Ukraine that we need to reckon with.

Mike.

Yes, (Inaudible). I had a question about your healthcare division, the new products that you introduced in Chicago in December, do you already see -- do you already mention much demand for the product?

Yes. In Chicago, we launched several new products such as the ultrasound but also CT and PET/CT. Ultrasound typically has a shorter cycle to go from order to sales. And in the latter part of Q4, we saw that starting to pick up and the product was introduced relatively late in the quarter, so yes, a good pick up on the ultrasound product.

On the CT and the PET/CT, this typically has a bit longer cycles. Moreover, the FDA clearance on the IQon spectral CT has not yet been received yet. The introduction of that product was in that sense an advanced introduction.

The line up of clients that are interested to learn more about it is very promising, so we do expect that in the course of this year that we can come back to you and report further on it. But in terms of sales in fact, we should count more towards the latter part of this year than the first part of this year.

So when do you expect the approval from the FDA?

We will see how that develops. It is not always predictable.

In the back, TJ, you raised your hand already, or [Rum] would like to have a question.

Good morning, (Inaudible). I was wondering, according to you, you said a good entrepreneur must invest on one hand and cut on the other one. Could you specify what you're going to cut in the next few months? And what you will invest as well apart from the 80% in R&D. Thank you.

At our Capital Markets Day in September, we laid out the roadmap for Accelerate! till 2016. We have there identified that there's more room for productivity enhancement, overhead cost reduction. We have achieved so far EUR1 billion of savings versus a plan of EUR1.5 billion. That means there is EUR500 million more to come.

We've also identified the DfX program that we aim to take EUR1 billion cost out of the cost of goods sold. That means that we can find savings in the bill of material, in the physical cost of the product by redesigning products in a smarter way. This is very encouraging. I think this is an area that perhaps we have overlooked historically that we're now stepping out and therefore we can catch up.

And then at the same time, as I laid out in my introduction, we set up new business groups and healthcare and new business group in the consumer area. We step up investments in startups inside of Philips and we are investing in new IT systems that makes us a real-time company instead of yes, a more old fashioned bench process company that at the end of the month, we need to figure out what we earned.

What we need to know is everyday how the business is going, but then we need complete new systems. The cost of rolling out such a new infrastructure is not to be underestimated. We are talking massive investments. This has been elucidated in the -- in the deck for our analysts, but we have already been investing more than 100 basis points for quite some while in order to roll this out.

I'm a bit lost with concerned the (inaudible) commission because on page 19 of your press release, you said that you paid EUR313 million in 2012, but next page you said as well that you paid part of another fine in the Q1 of 2013. So what's the total?

So this is my opportunity I guess. Thank you. So we were fined an unfortunate EUR509 million in Q4 of 2012. And we took that in our balance sheet of course as a payroll. Now the fine is split in two parts, it's EUR313 million that pertains to the period where we had the joint venture with LG Philips displaced, so that's below the EBITDA line part, EUR313 million would go to the line of investments and associates. And when it went above to the line part that was for the period before that, that was EUR119.6 million.

So those put together are still EUR509 million. And we took that in our balance sheet as payable so we did pay it out but we took it in our P&L, in these two areas. And we paid it in Q1 of the next year.

(Inaudible).

EUR509 million, so taken as a payable to the P&L in Q4 2012, paid out in Q1 2013.

Can we move to the Jon here in front.

(Inaudible). Ron, I was wondering if you could talk a bit about the other divestment TV division because it has been -- it become a bit more costly recently. And we were just wondering what the total cost has been up until now?

Well, we have divested TV already earlier on and we took quite significant money to do that and some financing support. So it helped in the line investments and associates because we are still holding 30% in the joint venture called TP Vision, the 70% is held by the other company called TPV. Sometimes it's a bit confusing.

The 30% we have now signed in agreement with, a term sheet, that that will go into TPV fully including the loans. Now, the development of the TV joint venture, as we have read TV is not always an easy business. So to that effect, we have to relook that investment and the loans that we have had outstanding. So we took EUR37 million as a provision in the fourth quarter in 2013. That's again below the EBITDA line, in the line of investments and associates.

And then we have also set in the agreement that we will pay EUR50 million to have the business transferred to TPV. Then we're basically fully out of the business. And we will not be reporting it anymore in any of the operational results that was already gone that part.

(Inaudible) back then in the 2011, I believe?

Yes. Correct.

So we have to say it's 270 plus, 50 plus or 185 for the marketing cost. Is that a total bill for Philips?

Yes. There is indeed marketing support that we have agreed at a time when we divested to support that business. And there was quite a significant upfront thing on that money. And indeed we have the disentanglement cost that we have to make which is not insignificant and then we indeed have to add the EUR50 million that we're going to pay when we are concluding or closing let's say the now signed deal.

At 270 plus grant support plus, that's not correct.

So the 185 is included (Inaudible).

So in 2012, if you look at the discontinued operations, we basically took out (inaudible) EUR270 million and EUR185 million is part of that, so the EUR50 million, yes.

(Inaudible) because there is a (sum) in the filings, well it can be in the future, I believe it's $375 million. Do you still think that it is possible to sell it with (inaudible)?

Time will tell, yes.

Time will tell.

So we haven't emphasized on what we call the divert consideration that would come overtime to our choosing. And we would see anything as we get from that as an outsider. It's not something that we have really still in -- we need to have so much out of this business.

The rule, if you want to double check the numbers, maybe we'll do that after the meeting because I think if you want to write something about it, it better be correct.

Yes. We were just wondering also Frans if how you look back on these divestments, are you still satisfied on the good results?

It is important. It was and is important to Philips that we focus on where we can make a different. We are technology group that focus on innovation and we need to apply the know how and competence on those markets where we can make an impact. And we need to focus on blue oceans, right, where there is profits to be made.

And so I believe that the company needs to constantly look at its portfolio and adjust the portfolio as you go forward in order to stay relevant. So in the Philips business system, we do that where we look at 40 businesses that we now and for every business have a positive value and make judgment whether we are the right owner and whether we can add value to that business and bring it to global leadership and scale. If we cannot, then why should we be in that business?

So we are far more granular in judging all the constituent parts of the Philips portfolio. We also look at the so called S curve. Where is the business on its maturity curve? If many of the businesses are in the mature phase, the growth of a company will slow down.

So when I said earlier this after that we are investing in startups, it's to have new growth kernels at the beginning of that S curve so that in five years from now or in 10 years from now when somebody else sits here, that person can say Philips was seeding new growth kernels timely and they are not then at that time going to have the benefits from it.

So dynamic portfolio management is very important. In that light, we felt that audio, video and television was no longer going to give us an upside and it was better to be placed in the hands of, for example TPV who has a different business model and can add value to that business in that phase of the life cycle of the portfolio.

(Inaudible question - microphone inaccessible)

Yes, so cannot be satisfied with a cancelled deal.

(Inaudible question - microphone inaccessible)

I think it was a good move to do. TP Vision has not had an easy time. They have worked very hard in approving the results. At this stage they feel that transferring the remaining 30% shares to TPV is a better solution because it allows for the full integration of TP Vision in TPV and thereby creating even higher efficiency and effectiveness of a merged operation.

So reversely then you can say that additional step is necessary in order to get success in the TV business.

(Inaudible). Concerning the startups, you mentioned three, are these examples or are these the key startups you are working with now? What do you mean with investment in the startups and can you elaborate a little bit more about what city farming is in if it's going to agriculture?

We have more initiatives than the three that I've mentioned. Some you can say are cold startup, others are cold in initiative. For example, the carpets that you saw is a small venture that I don't call a startup, but we do incubate ventures, in this case, it was a collaboration with Desso. You put it standalone for a moment so that it gets focused. And then when it becomes -- when the baby is born, then you can bring it back to the normal business. And that distinguishes a small venture from a startup.

I don't think I used the word massive investments but I did flag that we are increasing the investments in new growth. And that covers both the startups as well as the new business growth for healthcare informatics solutions and services and personal health and consumer lifestyle. So along that whole pallet, we are stepping up the investments. And we flagged that that's about eventually going to be 50 basis points.

There was one more aspect to your question, oh yes, the horticulture. So Philips is already in horticulture and they are in that business through our LED lighting. And they see a growing traction in that line of business where especially vegetable and farmers like us to partner with them to drive higher output of crops.

We have special light recipes to do that. We have discovered that if you have the right light below the leaf and above the leaf and through the life cycle from seed to plant to fruit you change that, that you can have much better output of the whole growth process.

You can even do it on a water bed in a fully automated fashion. And then you put a seed in it at the beginning and the lettuce comes out at the end. That is called city farming. So if you put that into a building and here in Amsterdam vesture, a plenty of empty buildings, you could put multiple of these lines in a vertical stacked manner and you could supply Amsterdam with fresh vegetables. Now Albert Heijn would point out that in the Netherlands that may not be necessary because we have free slump around the corner. In the clay, you can grow lettuce.

But I was in Russia not so long ago and the supply lines to Irkutsk are very long, eight days, and vegetables don't survive that and you actually could have a city farm, you know, in Irkutsk. I mean this is of course is hypothetical example, but I think it goes to paint the future where in this more industrialized food production environments, you will use less water, less electricity, you get a more predictable crop and you have shorter supply lines. So we think that this is going to evolve and therefore we have taken the horticultural lighting and place it into a dedicated startup in order to give this more momentum.

A question in the back.

(Inaudible) you will spend about EUR1.8 billion to research this year. I was wondering what's the percentage of the spent in the growth geographies?

And my second question concerns North America, your sales were up in Western Europe or whatever and I think actually declining in North America. And North America is growing a lot faster than Europe, so can you give an explanation please?

Yes. Well, we actually said R&D will be 7% to 8% at sales. That was the guidance that we gave. A large portion of that is in the Netherlands, at the top of my head around EUR720 million and then we have R&D centers in the United States, in Germany, in France, in Bangalore, in Shanghai. I don't think we have ever published the exact details.

In money terms, I do think that we have disclosed it in terms of amount of people. So roughly we have 1,500 people in India in R&D and well over 2,000 in China. But I don't think we have ever monetized that in R&D amounts per region. Maybe we should do that eventually.

The question on sales in North America, we have two comments to make there. First of all in lighting North America, we are changing the setup of our professional lighting solutions. This gives us the short term lower growth and that has been apparent in the overall number. Secondly through the Accountable Care Act or in popular terms, ObamaCare, the transformation of healthcare in North America is affecting the entire industry. And that's not so much a Philips issue but an industry issue where hospitals are consolidating. They are emerging at an increasing rate.

And of course as most people are emerging, they have their focus on that aspect of doing business and not so much on expanding equipment. We also see that the procedure volumes and so the amount of patients being held in hospitals is actually a little bit down. So contrary to what a lot of people thought that Obama Care would bring more patients into the system and drive more volume, that has not really happened. And so the healthcare market basically is quite flat in the United States and that of course affects us as well.

Two more questions of which Sara will be the first one and then I see already TJ raising his hand. So Sara.

[Sara Webb] from Reuters. I just wanted to ask a bit more about the emerging market issue, correct me if I'm wrong. I think you said on one of the calls that you think it's getting worst now with all the turmoil and that the impact will be greater. And I wondered if you could say that's correct or if I understood that correctly and perhaps elaborate on that.

Also you mentioned Turkey, Indonesia and Argentina. Are there any other developing emerging markets where you're quite concerned about the financial impact and impact one customer's purchasing [practice]?

Yes. Well, I wish I could be very explicit, but we see increased volatility. The United States has started their tapering in the summer of last year, tapering calls the huge impact on emerging markets. And then everybody hastily retreated from it.

We now again see a little of uncertainty in capital outflow out of emerging markets. This unavoidably will have impact on the investment plans that emerging market countries will have, for example, on infrastructure and so on.

It remains to be seen what effect that has on sectors like healthcare and consumer and lighting, but we flag that we are concern about it. And that in the near term, both currency as well as these macroeconomic issues, I mean tapering under the macroeconomic umbrella is that this will have an impact.

TJ?

You didn't say much this morning about cutting cost. So I was wondering what will happen in year and whether jobs are going to disappear again?

Yes, but we have announced all the plans last year with the -- and have given the update in the Capital Markets Day. There are no new announcements to be made on jobs, just to your point.

That was one very short question and a very short answer and then we'll have one final on the right and then we'll close.

Thank you. (Inaudible) [AMP]. You said earlier that you would wish for some more ambition with specially politicians in economic growth especially Western Europe. Could you be more specific on what is needed and what is not being done right now?

Well as an ambition, I think we need to say that -- we need to do everything that will allow future generations to live at least a good a life as we have today. That means that from an economic point of view the region needs to grow at least 1.5% and ideally we would strive for 3%. Then people will live longer, all of that requires value creation. And that is why I make the message I do believe that leaders including ourselves we need to be clear about that.

What needs to be done is not just what governments need to do, it's also what everybody, every citizen needs to do. For example in this country, there's plenty of wealth, but there's a reluctance to take risk and become more entrepreneurial. In that sense, there is -- we are hunkering down rather than becoming a bit more entrepreneurial.

I think good news is that we do see some more startups starting. I think one of the issues that's still holding back the region is the fact the lack of financing for small and medium enterprises. And that is something that needs to be addressed in the Netherlands, but in whole of Europe.

In the (inaudible), that was also the topic of high energy cost that is affecting the region versus for example United States where energy is a lot cheaper. And that is preventing investments to happen. Of course, this is mainly about Philips but I can -- as Andre knows I can never refrain from having some views on the larger European situation.

Andre if I may, if otherwise, it doesn't sound very satisfactory, so the EUR270 million you refer to, it was the number that we disclosed over Q4 2011, that was the part that we took. Now, there's also this brand support EUR185 million that was indeed part of that. Earlier, we took some cost already before Q4 which we also reflect, so this comes on top of that, so the EUR270 million plus the EUR50 million since 2011 Q4, I just wanted to clarify that for you.

Thanks, Ron. I think that's the final question and answer, so let's close the meeting. And we can follow up things here in the room. And [when] I talk to you and if you have additional questions Joost and Steve are in the back to answer all of your questions. And let's stay in contact until next time here in the building (inaudible). Thank you very much for joining us today.