Philips Lighting 2011

Company AnalysisPhilips LightingEY Knowledge

January 2011

January 2011 Philips Lighting AnalysisPage 2

“The lighting market is extremely dynamic. We see the global shift to energy efficient lighting solutions and the rapid adoption of LED accelerating our growth. Emerging market expansion continues and we expect to capitalize on the positive long-term trends in those markets. Against this backdrop, we are strongly positioned to solidify our global leadership through delivering unique customer segment applications and solutions while leveraging our strong position in conventional lighting.”Rudy Provoost, CEO Philips Lighting.

The lighting market stands at the beginning of the LED revolution, leading to tremendous technical changes and related changes to lighting’s business model.

Through innovation and acquisitions, Philips has positioned itself to embrace the new lighting revolution. Philips has taken steps up the value chain into luminaires, since luminaires play an important role in the new “LED lighting value chain”.

The next step to create more added value, is for Philips to develop new lighting solutions. To be able to offer solutions, Philips has to develop new service offerings and new ways of financing these.

The other growth engines in lighting are the key growth markets. Philips needs large investments, mainly in sales and distribution, but also in new product development to grow sales in these markets.

To support margins, Philips is restructuring its traditional lighting value chain with facility closures and other cost savings on the one hand, and pricing strategies on the other hand.

The main challenge for Philips is to remain on top of all new developments and manage all investments, while keeping profitability on acceptable levels during the economic cycle.

Executive Summary


Sales Lighting sales have seen a dip from the recession,

that has mainly been caused by a dip in the industrial markets: automotive and construction markets.

Recent sales growth has mainly come from new energy efficient lighting solutions and from the key growth markets.

Lighting Margins have improved considerably

Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q4100

500

1,000

1,500

2,000

Se-ries1

-10%

-5%

0%

5%

10%

15%

Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q4100

200400600800

1,0001,2001,400

Lighting Working Capital in mln euro

Sales in mln euro

Margins In order to improve its margins throughout the cycle,

Philips has taken measures: Cost reductions, eliminating fixed costs at a run

rate of 3% per quarter. Restructuring of traditional light source

manufacturing facilities. The result can be seen in 2010, with the EBITA

margin coming in over 10%.

Lighting Margin

Working Capital Philips Lighting is working hard to reduce working

capital. Measures include: Lower levels of overdue receivables from

customers. Better payment terms across the board.


(mln €) 2010 2009 2008Sales 7.552 6.546 7.362EBITA 869 145 480EBITA margin 11,5% 2,2% 6,5%

Employees 53.888 51.653 57.367

Philips Lighting is dedicated to introducing innovative end-user-driven and energy-efficient solutions and applications for lighting, based on a thorough understanding of the customer needs, both in public and private context.

“Simply enhancing life with light”

Lighting Overview

Lighting operates in eight businesse areas: Lamps. From traditional incandescent lightbulbs to modern energy efficient lighting. Lighting Electronics. Controls for the lighting solutions. Professional Luminaires. Complete lighting fixtures for businesses. Consumer Luminaires. Complete lighting fixtures for consumers. Automotive. Solid State Modules. Lumileds. Special Lighting Applications.

Lamps & Electronics

51%

Prof Lu-minaires

28%

Cons Lu-minaires

6%

Automotive8%

Packaged LEDs7%

Divsional Segmentation 2010

Europe Africa40%

N-America26%

Asia Pac28%

Latin Amer-ica6%

Philips Lighting maintains sales and service organizations in over 60 countries and runs manufacturing operations in some 25 countries over the world, including the Netherlands, Belgium, France, Germany, the UK, Poland, the USA, Mexico, Brazil, India, Indonesia, Thailand, China and South Korea.

Philips serves businesses (automotive, office lighting, etcetera) and consumer homes.

Geographic Segmentation sales 12 months June 2010


Lighting Organisational Structure

CEORudy Provoost

Lighting ElectronicsHans de Jong

Prof. LuminairesMarc de Jong

General Legal CounselJaap van den Bergh

Cons. LuminairesAllard Bijlsma

Automotive LightingDominiek Plancke

Chief Supply Officer

Chief Financial OfficerStewart McCrone

Chief Information Officer

LampsRené van Schooten

CMO/ Strategy

Per 07-05-09,Including recent changes

Chief HR Officer

Chief Technology Officer

Chief Design OfficerRogier van der Heide

Businesses Functions Customer Segments

IndiaRajeev Chopra

North AmericaZia Eftekhar

MexicoSergio Villalón

Latin America

ChinaLin Liangqi

EY Geographies

Japan

See appendix for country org charts

LumiledsMike Holt

Special Lighting Appl.


Appendix


Lighting Key Products

Traditional Lightbulb Compact Fluorescent Light Automotive Lighting

Lighting Ballasts

Professional Luminaires

LED components

Consumer Luminaires

LED city beautification


Vision 2015 viewPhilips wants to be a global leader in health and well-being, becoming the

preferred brand in the majority of our chosen markets. We believe Philips is uniquely positioned for growth through its ability to simply make a difference to people’s lives with meaningful, sustainable innovations.

Lighting Portfolio View

Vision 2015 Portfolio Strategy

Manage for Cash Optimize Position Drive Growth Invest for Long Term Growth

Lighting •Automotive•Conventional Lighting

•LED Lamps•Professional Luminaires•Consumer Luminaires

•Smart Lighting Solutions•Service Extensions

The Lighting market is set to grow, driven by LED. We will are ready to grow sales, expand margins, create value.

Financial TargetsHalf of all Philips’ future growth will come from Lighting.Grow top-line sales, drive profitability to 12-14% reported EBITA


Lighting Market Shares

Philips estimated the total lighting market to be 50-55 billion euro. The professional channel is the largest, and within the professional channel Home, Office and Outdoor are the most important for Philips.


Lighting Acquisitions

Lighting

2006 Lumileds, US – LumiledsBodine, US – Lighting Electronics

2007 TIR, Canada – Solid State LightingPLI, Belgium – Consumer LuminairesLTI, US – Special LightingColor Kinetics, US – Professional Luminaires

2008 Genlyte, US – Professional Luminaires

2009 Ilti Luce, Italy – Prof. LuminairesSelecon, New Zealand – Prof. LuminairesDynalite, Australia – Lighting ElectronicsTeletrol, US – Lighting Electronics

2010 Luceplan, Italy – Consumer LuminairesAmplex, Denmark – Lighting ElectronicsBurton, US – Professional Luminaires

2011 Optimum Lighting, US – Prof Luminaires

After the large acquisition of Genlyte in 2008, Philips has done several bolt-on acquisitions in the area of luminaires and controls to acquire new technologies and new customers to develop new services.

Philips has acquired Burton Medical Products from the Norwegian industrial group Glamox. Burton is a healthcare lighting manufacturer engaged in the business of designing, manufacturing and distributing high quality exam, diagnostic and minor surgery lighting equipment. Since its inception in 1928, Burton has been known for superior quality, exceptional value, and long-lasting solutions to complex lighting issues facing physicians and healthcare professionals. Terms of the acquisition were not disLosed.

Philips has acquired the street lighting controls activities of Amplex, a Denmark-based provider of energy-efficient solutions. Amplex delivers lighting controls systems used to manage millions of streetlights on a daily basis across many different countries around the world. Amplex’s lighting controls system is an automated management system that puts intelligent monitoring and control in every streetlight cabinet and ties them all together into a centralized streetlight management system. Upon Losing of this transaction during the third quarter of 2010, the acquired business will become part of the Lighting Electronics business within the Philips Lighting sector. Financial details of this agreement were not disLosed.

Philips has acquired Italy-based Luceplan, a leading consumer luminaires company in the lighting design segment in Europe. Luceplan’s luminaires portfolio includes table, suspension, wall and ceiling products for residential applications, which are also used in some professional applications. The company was founded in 1978 and is headquartered in Milan, Italy where it employs about 110 employees. Upon Losing of this transaction in the second quarter of 2010, which is subject to certain conditions, Luceplan will become part of the Consumer Luminaires business in the Philips Lighting sector. Financial details of the agreement were not disclosed.

Founded in 2005, Optimum Lighting manufactures a full range of lighting fixtures designed to meet the needs of the growing demand for energy-efficient products. The company excels in the rapid design, building and engineering of customized energy-efficient lighting solutions and the delivery of associated services for the professional market. Optimum Lighting is headquartered in North Carolina, USA, with approximately 70 employees. Financial details of the acquisition were not disclosed.


Lighting Manufacturing Base

Philips has manufacturing facilities in some 25 countries worldwide, including:

BelgiumFranceGermanyNetherlandsPolandUK

BrazilColombiaMexicoUS

ChinaIndiaIndonesiaMalaysiaSingaporeSouth KoreaThailand

Lesotho


Country Overviews


Lighting Relations

US Zia Eftekhar CEO Lighting

Mexico Sergio Villalón CEO Lighting

Mexico Jorge Avila CEO Luminaires


Lighting North America

Philips Lighting in North America had revenues of € 1,8 bln in 2009 (28% of total North American revenues). Sales in Lighting in North America are under pressure, especially since the construction and the automotive

segments have been hit very hard during the recession. In nominal terms, revenues decreased 11%.Government stimulus is starting to have an impact from the third quarter of 2009 onwards, especially in the

Energy efficient lighting projects. Especially the LED based lighting markets show strong growth.The US market for lighting (excluding LED lighting) is estimated to be between USD 4 and 5 billion. The market is

divided between GE, Siemens and Philips, accounting for a total combined market share of over 75%. Growth is projected to be 2% anually and the market suffers from price pressure. The price pressure derives from the ongoing growing of imports from low wage countries (esp. Mexico) and because of the market power of the big retail chains (Walmart, Costco, etcetera).

In the third quarter of 2009 Philips claimed to have a number one position in Lighting in 5 out of its 8 main market segments.

Due to the market shifts, the demand for complete lighting solutions will become more important. Philips has done many acquisitions in North America in luminaires or lighting electronics to position itself better in lighting solutions.

TIR, LTI, Color Kinetics, Genlyte, Teletrol, BurtonWith these acquisitions, Philips, solutions portfolio has grown

significantly. In its future strategy, Philips intends to offer these solutions, supported

by a relevant service offering. The services Philips aims for, are:Diagnosis servicesImplementation servicesFinancial services


Lighting Latin America

Lighting accounts for less than a quarter of total Philips Latin America Sales. Philips is the market leader in the segments of automotive lighting, ballasts and lamps. In Brazil, Philips has three Lighting manufacturing facilities; in Recife, Varginha and Sao Paolo/ Capuava, although Philips is in the

process of closing the Capuava facility.


Lighting China

Energy efficient lighting presents a tremendous opportunity for Philips. Lighting accounts for an estimated 12% of China's total electricity consumption. The Chinese Government has undertaken 10 major energy-saving programs during the 11th Five-year Program (2006-2010). Priority will be given to the use of energy-saving lights in public utilities, hotels, office buildings, shopping malls, stadiums as well as homes.

Philips has opened 80 Philips-branded lighting stores that uniquely address customer demand for energy-efficient, value-added lighting solutions for the home. The interior layout is based on rooms in the home rather than product categories. Philips also has 800 Home Lighting Centers within multi branded lighting shops, extending distribution even further. Both formats will be further rolled out in 2010.


Lighting India

Philips managed single digit growth in 2009 with increased attention for consumer retail in the tier 2 and tier 3 cities. Philips estimates it has a 30% market share overall.

Philips India plans to increase the number of its exclusive touch points, a combination of shop-in-shops and light lounges, to 450 from the present 185 by the year-end 2010.

Philips is linking up with government departments to push LED bulb sales in the country. The company has launched new LED street lighting solutions that save power and require less maintenance. Some municipalities like New Delhi Municipal Corporation have already implemented these.

Philips is doubling compact fluorescent (CFL) manufacturing capacity at its Mohali plant in Punjab. During the course of this year, Philips India has already doubled the annual CFL capacity at the Mohali plant to 40 million units, and is all set to double it again over the next six to nine months.

In 2008, Philips established a global R&D center for lighting electronics in India. The facility which is situated in Noida will not only cater to the needs of the Indian market but also the Asia-Pacific, Europe and North America.


Lighting Japan

Japan is a bit of a black hole for Philips Lighting. Domestic players are market leaders, with Philips not even in the top three.

In LED one of the global leaders is Nichia.


Lighting Mexico

Philips has several lighting manufacturing facilities in Mexico, that mainly produce for the North American market. The facilities are mainly maquiladores and employ approximately 3,5 thousand people.


January 2011

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