Philips shares plunge after Q2 profit warning

Visitors watch 3D TV at the stand of Philips at the Internationale Funkausstellung (IFA) consumer electronics fair at ''Messe Berlin'' exhibition centre in Berlin, September 3, 2010.

AMSTERDAM (Reuters) - Philips Electronics (PHG.AS) warned of sharply lower profits at its lighting division and toasters-to-shavers consumer business, due to weak demand in Europe.

The profit warning, which wiped 13.5 percent off the shares, caps a string of disappointments from Philips and suggests consumer demand in Europe is likely to remain fragile against a backdrop of economic uncertainty, particularly in the peripheral euro zone countries.

The Dutch group, which ranks as the world's biggest lighting maker, Europe's largest consumer electronics producer and a top-three maker of hospital equipment, said it would cut costs as part of its wider restructuring.

Philips has struggled to compete with lower-cost Asian makers of consumer electronics, while tepid consumer confidence and economic growth in Europe and the U.S. have hit demand for products ranging from televisions to electric toothbrushes, as well as its street and home lighting systems.

The profit warning "shows that consumers in mature markets are in dire straits," said Sjoerd Ummels, an analyst at ING who covers Philips.

"High unemployment, low real wage growth and low consumer confidence have dented sales performance. This is a very trying time for companies geared to mature-market consumers."

Further evidence of weak consumer demand came from Kesa (KESA.L), Europe's third-biggest electricals retailer, which earlier on Wednesday said it was considering the sale of its loss-making Comet chain in the UK after trade across the group worsened in its new financial year.

UK consumer electronics sales have been hit hard as shoppers cut back on discretionary purchases in the face of rising prices and government austerity measures. Kesa said that sales of televisions had proved particularly poor.

Corne van Zeijl, an asset manager at SNS Asset Management which owns shares in Philips, said the company is likely to put pressure on its suppliers to reduce costs and to cut staff. But he said Philips should not sell its consumer business.

"Selling consumer lifestyle is like (leaving) Philips with no arms. So I think that's not the right way to go," Van Zeijl said in an email to Reuters. "But it's not an easy fix. They need improving end-markets and I don't see these."

SHAKE-UP

For many years, Philips was considered a leading innovator -- its wake-up lights are a staple of many a Dutch household in the winter months -- but it is now under intense pressure to shake up its myriad business lines and improve profitability.

Restructuring specialist Frans van Houten, who took over as chief executive in April, has promised a review of all the businesses and a dramatic overhaul to lift profit growth.

Several senior Philips executives have quit in recent months, since Van Houten joined as chief executive-in-waiting.

Van Houten moved quickly to hive off the group's loss-making TV business to a 30/70 joint venture with Hong-Kong based monitor maker TPV (0903.HK), with the option to sell out.

But some analysts said the latest profit warning was a blow to Philips' credibility and could dent investor confidence, as well as potentially hurting investor sentiment in the initial public offering for Osram, Siemens' lightbulb unit.

"While it is tempting to see the decline as a buying opportunity, we believe today's profit warning will undermine investors' faith in the new management, precluding a swift rebound," said S&P Equity Research in a note to clients.

Philips's 13.5 percent slide wiped 2.44 billion euros ($3.5 billion) off its market cap and pushed it near a two-year low, in heavy volume. It was by far the biggest loser on the broad STOXX 600 index .STOXX.

Philips said on Wednesday its lighting division, whose products include energy-saving lamps used in the Eiffel Tower, would report "low single-digit comparable sales growth" in the second quarter because of weak consumer demand and stagnant construction markets in Europe.

It said second-quarter earnings before interest, tax and amortization (EBITA) for the lighting division would be about 85 million euros, down 60 percent from the year-ago figure of 210 million.

The consumer electronics division will show a "low single-digit" sales decline in the April-June period, and EBITA of about 50 million euros, a drop of 71 percent from the year-ago 173 million.

The Dutch group competes with Samsung (005930.KS) and LG Electronics (066570.KS) among others in consumer electronics, and with General Electric (GE.N) and Siemens (SIEGn.DE) in the hospital and lighting markets.

"We fear future market share losses for Philips' lighting as there will be more companies wanting to get a piece of the LED pie," said Rabobank analysts Hans Slob and Philip Scholte in a note, pointing to competition from Samsung and from Chinese players in the field of power-efficient LED lighting.

(Additional reporting by Blaise Robinson and Aaron Gray-Block; Writing by Sara Webb; Editing by David Hulmes and Jon Loades-Carter)