Gerard Kleisterlee wants his company to be known as more than a maker of DVD players and big-screen TVs. Since becoming CEO of Royal Philips Electronics in 2001, the 59-year-old has been reorienting the company toward more stable, if less sexy, businesses such as lamps and ultrasound machines. In the past year, Philips has spent $1.3 billion to acquire two U.S. providers of health care technology, Stentor and Lifeline Systems, underscoring Kleisterlee’s belief that health care will drive the company’s growth. Last year medical systems, personal care appliances and lighting accounted for 41 percent of sales and nearly two thirds of operating profits. Consumer electronics brought in just one third of sales and 20 percent of profits.
Overall, revenue at the maker of such popular products as Norelco shavers and Sonicare toothbrushes edged up 4 percent last year, to E30.4 billion ($38.6 billion). Net income rose just 1 percent, to E2.87 billion. The outlook improved in the first quarter as semiconductors and lighting powered a 14 percent rise in sales and a 37 percent jump in profits. The company’s shares, which are listed on Euronext and the New York Stock Exchange, have climbed 19 percent in the past year.
Kleisterlee is targeting health care technology that can be used by patients at home -- an area where Philips can distinguish itself from rivals General Electric Co. and Siemens, which are stronger in medical systems sold to health professionals. Last month the company launched a system called Motiva, which provides patients with devices to monitor various vital signs and transmit the data through TV set-top boxes to doctors and nurses.
Once a sprawling collection of seemingly unrelated electronics businesses, Philips has tried to simplify over the years, casting off telecommunications and defense units, among others. The company is currently separating its semiconductor unit, which makes chips for the consumer electronics, mobile telephone and automotive industries, as a likely precursor to merging it with a rival to gain scale.
Simplicity is a Kleisterlee objective in other areas as well. Two years ago the CEO, a straight-talking German who was raised in the Netherlands, laid down a rule for presentations to the board, which used to drag on for hours: “If someone can’t explain what he wants from us in less than ten PowerPoint slides, then he shouldn’t bother coming to see us.” Kleisterlee recently chatted about Philips over breakfast in New York with Institutional Investor Senior Editor Justin Schack.
Institutional Investor: Why are you separating the semiconductor unit?
Kleisterlee: In semiconductors it is important to be a top-three player -- or even better -- in the markets you serve, because the business requires significant research and development investment. And in many parts of the business, we are not at that level. So we’re having a number of discussions with others in the industry to see whether one plus one could make two and a half or three, instead of just two.
Is an IPO an option for that business?
That would create a currency for them to pursue strategic options, but it would still be the same semiconductor business with the same strengths, but also the same issues. Doing an IPO can delay you from reaching your objective, because for a period of time, you’re focused on getting the company together and prepared.
Philips is so well-known in consumer electronics. Why deemphasize that business in favor of others where your brand is less established?
Over the past five years, we’ve deverticalized consumer electronics. We outsource manufacturing to the Flextronics of the world and focus on brand and channel management. The business is important to us, but we have been driving the group in the direction of investing in more-stable, steady-growth activities. Consumer electronics can be high-growth, but it also can be volatile. We have strong positions in more-stable businesses like medical systems and lighting, but these attract a different class of investor. We need to make the distinction clearer.
So why not spin off the consumer electronics unit?
It is strategically important to us. From a distribution standpoint, the more products that we can put on the shelves of retailers like Wal-Mart Stores and Costco, the more valuable we become to them. It doesn’t matter whether that’s a lightbulb, an energy-saving lamp, a shaver, a toothbrush or a DVD player. To them it is all product they get from a large supplier that has a global network, just like they have. We’ve found that by focusing on these large retailers -- last year, for example, we were Wal-Mart’s international supplier of the year -- we can grow our consumer business significantly. The key is to take the volatility out. We have done that by focusing on product creation and brand management and relying on outside manufacturers.
What opportunities do you see in medical technology?
We don’t want to try to be another GE or another Siemens. We want to build on our strength, which is understanding the consumer. When we look at the demographics, we see people getting older and wanting to continue to live independently rather than be sent off to a senior citizen home. We also see people ultimately relying less on the almighty physician and taking more responsibility for their own health. Technology can support both of those trends. I think we are uniquely positioned because we understand health care, as a company that sells technology to hospitals, but we also understand consumers.
What kinds of products are we talking about here?
Our Motiva project is one. We modified set-top boxes that enable television sets to serve as an interface between doctors and patients. We have devices that allow people to monitor their blood pressure and heart rate, wirelessly transmit the data through the set-top box to the physician and then get a message back with any instructions or comments. Soon we will develop devices for other conditions like glucose levels and blood coagulation factors. It’s less of a nuisance to use a simple device to measure something than to have to go see your physician to keep track of it. Our first trials involved people who had been hospitalized for bypass surgery or heart conditions. The earlier you send them home, the better they recover and the cheaper it is for them and their insurance companies. As long as you can still professionally monitor patients, having them recover at home is a better outcome for everyone.
How many people are using these devices now?
The first two projects, in Germany and in Philadelphia, are a couple hundred patients each. But we’re launching projects in Europe that will involve several thousand patients each. It will become widespread. The issue is that you need a local health care system, a local insurance company and a local telecommunications provider. It’s not like mass-marketing a DVD player through Wal-Mart all around the world.
Which parts of the world right now are most attractive for Philips?
We’ve made most of our acquisitions in the U.S. since the late 1990s, and in the coming months there’s likely to be more. Europe is growing slowly, but in the first quarter we managed to grow by almost 10 percent there. We have the most brand awareness there and strong market positions. My biggest issue in Europe is whether governments support policies that stimulate the economy.
Are you satisfied that they do?
No. It’s too little and too slow. But in a number of countries, you see steps in the right direction. I think Germany is starting to move that way.
What about Asia?
In the major markets there, governments by and large are focused primarily on developing the economy and raising poverty levels. I don’t see much more risk there than in the U.S. or Europe. The risks are different. China has a risk of stability and how it will manage its currency and intellectual property rights. But here in the U.S., we have a country that has the rule of law and it is one of the most litigious societies on Earth. That poses some risks that are difficult to calculate.
Only 10 percent of your share volume occurs on the NYSE, yet the U.S. listing requires that you comply with Sarbanes-Oxley. Why keep it?
I would be happy to deal less with Sarbanes-Oxley. This year it’s going to cost us at least $40 million to comply. I’m not so sure that helps shareholders. But a U.S. listing does give some investors comfort, so we keep it despite the lower volume of trading there.
