Philips squares up to competitors: The Dutch electronics firm, fighting fit after a painful restructuring, is switched on for growth

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The Independent Online
FOR ALMOST as long as anyone can remember, Philips, the Dutch electronics company, has been a punch-bag for the big Japanese electronics companies and other rivals.

But there are growing signs of a dramatic change with the group being transformed under new management. It is possible that we are seeing the beginnings of a comeback as remarkable as that achieved by the US car companies in the face of similar pressures. They have been the darlings of Wall Street over the last couple of years with Chrysler shares up six- fold since the beginning of 1992. Philips may be about to pull off a European version of the same trick.

Something certainly had to be done. In 1990, years of decline culminated in the group making a loss of 7.5 per cent on its near pounds 20bn annual turnover. Allied to borrowings standing at around 150 per cent of shareholders' funds, real disaster loomed. But as so often, out of crisis came salvation. The president resigned and his successor, Jan Timmer, took the group by the scruff of the neck. In an economy where redundancies were not supposed to happen he cut 50,000 employees (20 per cent) in a year and set about changing the entire culture of the business.

Already he is starting to reap his reward. In the teeth of a record downturn and widespread price erosion in the European markets, heavy losses have been replaced by sharply rising profits. Observers talk of more being achieved at Philips in the last three years than in the previous 100 years of its 103- year existence. Profits are still tiny in relation to sales and capital employed but after such a turnaround the question now is what will the group do when it enjoys a following wind from recovery in its important European markets? Investors should buy at 547 8 guilders ( pounds 19.60) before that happens.

Andrew Haskins, analyst at stockbroker James Capel, singles out three remarkable statistics from the recently reported figures for 1993. Despite recession, including an unprecedented 11 per cent- plus decline in the continental European market for consumer electronics, income from operations excluding restructuring has risen from 2,486m guilders to 2,944m guilders. Even more remarkably, the financing surplus has risen from 131m guilders to 6,612m guilders helped by some 3,000m guilders raised from the sale of a stake in a subsidiary to Matsushita. This has dropped borrowings as a percentage of shareholders' funds from an alarming 138 per cent to 66 per cent. Much of the credit for this success goes to Dudley Eustace, the finance director who came from British Aerospace in 1992. His appointment itself is a tribute to the culture change wrought by Mr Timmer. A formerly all-Dutch board now includes nationals from a string of European countries.

The restructuring and culture-changing process is known internally as the centurion programme. This may have its origins in an idea of producing in managers and employees the sense of purpose and leadership of the centurion-led Roman legions. Others joke that it is more because of Mr Timmer, who physically and metaphorically takes on problems with the unstoppable force of a Centurion tank. In any event the company has produced some impressive statistics to show what has been achieved under the programme between 1990 and 1993. Sales have risen 5 per cent despite an 8 per cent fall in prices. Profit margins have improved by 20 per cent to a still modest 5 per cent from 4.2 per cent. Net debt has dropped by 42 per cent with stocks as a percentage of sales down from 20.7 per cent to 16.5 per cent. The total labour force has dropped by 59,000 from 297,000 to 238,000.

There is much more to Philips than Europe and consumer electronics. Close to half total sales go to the Americas, Asia, Australia and New Zealand. In product terms, consumer products are a little over half the total with strong positions also in lighting, medical equipment, communications equipment, components and semiconductors. Recovery potential comes from the fact that last year two German-based businesses, Grundig and a telephone equipment business, PKI, probably cost the group in the order of 800m guilders - a performance that Mr Timmer has made clear he regards as unacceptable.

The shares have recovered strongly from a low point around 20 guilders, but on Mr Haskins's forecast of earnings per share, net of extraordinary items, rising to 4 guilders (139p) in 1994 the prospective p/e is 13.3, which looks attractive at what could be an early stage in a sustained recovery by the business. On the sort of margins achieved by many other manufacturing businesses earnings per share could easily be more like 10 guilders (347p) in a few years' time, which really would bring the p/e down. There are some exciting technologies within the group such as CD-I (compact disks for storing and manipulating data and images on computers and televisions), wide-screen television and digital audio cassettes. There is also a 75 per cent stake in the booming Polygram business, which is developing from its base as a significant owner of music rights into a multimedia giant. The best looks still to come for Philips shares.