UPDATE 2-Philips to step up overhaul of lighting unit

Mon Jul 21, 2014 8:34am EDT

* Blames price erosion, sales drop in traditional bulbs

* Says EBITA ex-items to rise in H2 from last year

* Says still expects 2014 to be a challenging year

* Shares drop 1.5 pct, underperforming main index (Rewrites, adds CEO comment, background, shares)

By Harro Ten Wolde

AMSTERDAM, July 21 (Reuters) - Philips is speeding up the transformation of its lighting unit as more customers switch to its energy efficient LED products at the cost of traditional light bulbs, the Dutch group said on Monday.

As a result Philips will increase the amount it expects to spend on the overhaul, which may include scaling back production or even closing factories making traditional lightbulbs, to 170 million euros ($229.96 million) in the second half of the year from 100 million.

The move comes weeks after the company, which has recently undergone a major revamp to put healthcare at its core along with lighting, announced plans to combine its light-emitting diode (LED) and automotive lighting businesses in a stand-alone company.

The Dutch group blamed falling prices for LEDs and a drop in sales of traditional light bulbs during the second quarter.

Philips' LED sales rose 43 percent in the second quarter and represented 36 percent of total lighting sales, up from 25 percent last year. Sales of traditional lighting dropped by a mid-single digit percentage.

The market for LEDs is booming as the world switches from incandescent light bulbs - banned in most countries - to more efficient and durable lights.

But a price war for LED bulbs is eating into its profit, leaving Philips and German rival Osram - spun off from its parent company Siemens last July - scrambling to develop new technology and seek out new markets.

Philips said it is too early to announce what this phase of the overhaul will entail, but in the past the Amsterdam-based company has sold or closed factories making incandescent bulbs.

Analyst Nick Wilson at Espirito Santo Investment Bank said the decline in Philips' traditional business remained high and that he would stick to his "neutral" recommendation on the stock until the fall would "abate to manageable levels".

Philips shares were down 1.5 percent by 1200 GMT, underperforming a 0.4 percent weaker Dutch blue chip index .

HEALTH IMPROVEMENT

Philips, which warned on July 8 that its healthcare business would miss forecast earnings, said it expects the division to show an improvement towards the end of the year into 2015.

The unit, which accounts for 40 percent of company sales, is set to benefit from rising demand for its scanners and nuclear medicine products from emerging markets, Van Houten said.

Philips reported second-quarter earnings before interest, tax and amortization (EBITA) of 415 million euros ($562 million) and net profit of 243 million on sales of 5.3 billion.

Analysts in a poll commissioned by Reuters had forecast net profit of 164 million euros and EBITA of 400 million on sales of 5.4 billion.

The company said it expects EBITA excluding special items to rise in the second half of the year after cost-cutting measures, but said the rise would be not enough for a full-year increase.

"We are on the right track," Van Houten said on a conference call. "But overall we expect 2014 EBITA to be lower than in the previous year."

Analysts polled by Reuters on average expect a drop of 6 percent in EBITA excluding special items, to 2.4 billion euros.

Van Houten repeated that 2014 would be made challenging by the Ukraine crisis, which deepened after the crash of a Malaysia Airlines plane killing all 298 people on board, including 193 Dutch passengers.

He said that two Philips employees and their families were on board the plane. Philips, which has been doing business with Russia for more than a century, said it would follow any government measures but also called for a cautious approach.

($1 = 0.7393 Euros) (Editing by David Holmes and Louise Heavens)