April 22, 2014 / 6:11 AM / 4 years ago

UPDATE 3-Philips warns of tough 2014 as strong euro wipes out Q1 growth

* CEO - difficult to post 2014 earnings improvement

* CEO - still expects to reach medium-term goals by 2016

* Q1 hit by weaker Russia, China, currency effects

* Shares fall 7 percent in early trade (Recasts, adds CEO comments, analyst comment, live share price)

By Maria Sheahan and Anthony Deutsch

FRANKFURT, April 22 (Reuters) - Philips warned on Tuesday it would struggle to post a rise in operating profit for 2014 after slowing demand in China and Russia, combined with the impact of a strong euro, wiped out its first-quarter sales growth.

The Dutch healthcare, lighting and consumer appliances group reported a 22 percent drop in earnings before interest, tax and amortisation (EBITA) to 314 million euros ($433.4 million) in the three months to end-March - missing consensus for 341 million in a Reuters poll - and group sales down 4.5 percent.

Chief Executive Frans van Houten said he was still confident that Philips would hit its operating profit margin target of 11-12 percent by 2016, though progress this year towards that goal would be hard.

“We have modified (our outlook) by saying it’s a challenging year and thereby implying that an improvement this year will be difficult,” he told journalists during a conference call.

Shares in the company, which have gained more than 80 percent during an extensive two-year restructuring, dropped 7 percent in early trade.

“Almost everything was disappointing,” said analyst Gael De-Bray at Societe Generale. “Organic growth should have been around 3 percent and it was flat. Also the free cash flow was negative. There is nothing positive in the message today.”

Van Houten, who drove Philips’ reinvention by cutting costs and targeting new areas of growth, said slowing economic growth in China and the accompanying weakness in construction markets were especially hurting the lighting business, which accounts for more than a third of group sales.

The conflict with Ukraine over Crimea was hurting demand in Russia, he added.

“We don’t know how exactly this will pan out. The underlying demand to improve healthcare in Russia and to bring energy-efficient lighting will not go away, but certainly this will be a very challenging year for our business in Russia,” he said.

The strengthening of the euro against other currencies such as the Japanese yen, the Russian rouble and Argentina’s peso shaved 5 percentage points off revenues.

Analysts acknowledged currency fluctuations have affected many companies, but pointed out that Philips had badly missed their expectations for higher underlying growth of 3.4 percent.

Net income was down 15 percent at 137 million euros but beat consensus for 119 million.

By 0844 GMT shares in Philips were down 6.8 percent to 23.23 euros. The STOXX Europe 600 Industrial Goods & Services index was meanwhile 0.6 percent higher.

$1 = 0.7244 Euros Editing by Sophie Walker

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