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. Last Updated: 07/27/2016

Philips Profit Woes Signal More Change

AMSTERDAM -- A warning from Philips Electronics on Monday that operating profits were unlikely to rise in the second half of this year prompted speculation that more reorganization might be needed at Europe's biggest consumer electronics firm.


The Dutch giant said preliminary information for the third quarter made it "most unlikely" that there would be an improvement in operating profit in the second half, causing its shares to dive.


On a broadly-mixed Amsterdam exchange, Philips stock dropped more than 5.5 percent to 61.20 guilders after the news, with volume at a brisker-than-usual 4.5 million shares.


"Things are deteriorating even faster than they expected so far," said ING analyst Steven Vrolijk. "That's the only thing we can say now. The big problems are at the consumer products unit."


Analysts said Philips, like its competitors, was trading in tough conditions and, until markets pick up, one way to keep earnings ticking is through tight business controls.


"What they could do is go over every division again," said Vrolijk. "In our opinion it's not only the consumer products division, but there are also problems at the professional and systems division, which is not making money."


"They've got to just keep cutting [costs] everywhere they can. Eventually that will mean fewer jobs in Europe and probably also in the United States."


Marc Langeveld at Kempen & Co. said the profit warning would turn the focus sharply back onto reorganization maneuvers heading into Philips' third-quarter results announcement Oct. 24, the first such figures to be published since Cor Boonstra took over as chairman Oct. 1.


"I believe there will be further restructurings," said Langeveld. "But that's only normal with Boonstra taking up office. He would have done that anyway. It's best to do those things when you just start your new job."


In July, Philips announced job cuts of 6,000 over 18 months from its Sound & Vision unit, which is struggling with price pressures and disappointing demand for its products. At the time, Philips said out-sourcing to lower-cost countries would be a key part of restructuring. London-based Morgan Stanley analyst Angela Dean said Philips would have to grit its teeth and concentrate again on controlling inventories and working capital."There are group-wide things [Philips could concentrate on] like control of inventories and working capital," she said. "These seemed to be just going their way in the second quarter, but maybe it's gone the wrong way again in the third quarter."


Analysts said Philips was not alone in facing sluggish markets and price erosion.


"It's the old story: price pressure and manufacturers fighting for market share, everything we've seen quite a few times before," said ING's Vrolijk.