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Emerging market turmoil deals setback for Philips

A stack of Philips DVD recorders are displayed in a household items store in Utrecht December 10, 2013. REUTERS/Michael Kooren
A stack of Philips DVD recorders are displayed in a household items store in Utrecht December 10, 2013. REUTERS/Michael Kooren

By Sara Webb

AMSTERDAM (Reuters) - Philips forecast a slow start to 2014 as it grapples with currency volatility in Turkey, Argentina, Indonesia and other emerging markets and weak orders for healthcare equipment.

The turmoil in developing economies is a setback for the Dutch healthcare, lighting and consumer appliances company, which has reinvented itself since Frans van Houten took over as chief executive in April 2011.

Philips had suffered from its exposure to stagnant or austerity-hit markets in Europe and the United States, while its TV, audio and video business had struggled for years to compete with low-cost Asian rivals.

Van Houten has cut costs, sold weak businesses and targeted new products at emerging markets, sending Philips shares up nearly 60 percent in two years.

The stock was down more than 3 percent at one point on Tuesday, but some investors were unfazed by van Houten's cautious guidance, hoping for further performance improvements under his management.

"They were generally solid figures, except for a couple of small setbacks, including the currency issues," said Hans Slob, a Rabobank analyst who still rates Philips shares a "buy".

"It is becoming a more agile ship, headed in the right direction. That makes for a good investment case in the long term."

Philips shares, which touched 28.31 euros this month, their highest since early 2008, were down 1 percent at 25.715 euros by 1500 GMT.

Van Houten said the turnaround was not over for the world's biggest lighting maker. The company has met its 2013 full-year targets and already set out slightly more ambitious financial goals for 2016.

It is now targeting a 2014-2016 margin for earnings before interest, tax and amortization (EBITA) of 11-12 percent, return on invested capital of at least 14 percent and sales growth of 4-6 percent.

The CEO warned that this year would see only a modest step towards achieving those goals.

"What worries me are the currency fluctuations and the unrest in some of the countries, for example Turkey, or the peso in Argentina and the rupiah in Indonesia," van Houten told Reuters Insider in an interview.

"These are of course facts of life that we have to live with," he said. "I am cautiously optimistic for the long-term economic development. It's just that in the near term we do see several headwinds."

The currency turbulence has forced Philips to look at ways of staggering payments for orders, for example with customers paying for lighting systems out of their energy savings, said van Houten.

CORE PROFIT BEATS EXPECTATIONS

Philips has shifted its focus to fast-growing healthcare equipment and energy-efficient lighting as part of its broad restructuring. After a big push into countries such as China, India, and Russia over the past couple of years, more than a third of its sales now come from developing world economies.

"Philips' outlook indicates that margins will not show a strong further recovery in 2014," ING analyst Robin van den Broek said in a note to clients.

Philips reported better than expected fourth-quarter EBITA thanks to improvements at all its businesses.

It has launched new and updated products, from electric toothbrushes and air purifiers to ultrasound equipment used in hospital emergency rooms.

Healthcare, now the biggest of Philips' three businesses, reported a 1 percent dip in order intake in the quarter because of weak demand in its main markets, reflecting uncertainty over healthcare reforms in the United States and austerity measures in Europe.

Fourth-quarter EBITA for the group was 884 million euros ($1.2 billion), compared with a loss of 50 million euros a year ago. The company turned to a quarterly net profit of 412 million euros from a loss of 420 million euros a year earlier. Sales rose 7 percent on a comparable basis to 6.8 billion euros.

Analysts in a poll commissioned by Reuters had forecast net profit of 455 million euros and EBITA of 839 million euros on sales of 6.8 billion euros.

(Additional reporting by Anthony Deutsch; editing by Tom Pfeiffer)

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