Philips shows three percent rise in comparable sales growth for Q4 2019

January 28, 2020
by John R. Fischer, Senior Reporter
Healthcare tech giant Philips finished off fourth-quarter sales in 2019 with more than $6.6 billion (€6 billion), demonstrating a 3 percent rise in sales growth compared to the fourth quarter of 2018.

Income from continuing operations brought in more than $605 million (€550 million), and adjusted EBITA margin increased by 50 basis points to 17.9 percent, a rise from 17.4 percent of sales in Q4 2018. Comparable order intake increased by 3 percent, while adjusted EPS from continuing operations (diluted) increased by 9 percent compared to the same time in 2018. All business segments — which include Diagnosis & Treatment, Connected Care and Personal Health — experienced growth and increased profitability.

“Customers are keen to engage with us, and we see a strong interest in our innovative solutions, but also in the way we contract together in long-term, strategic partnerships,” CEO Frans van Houten told HCB News during a roundtable conference call on the results, adding that “the order book that we start 2020 off with is strong and underpins the momentum for 2020 in a good way.”

While mostly positive, fourth quarter results were hampered by income from operations which amounted to over $800 million (€730 million), down from over $845 million (€769 million) in Q4 2018. Operating cash flow also decreased, as did free cash flow from over $1.1 billion to just above $1 billion. van Houten attributed these negatives partially to flat markets, supply chain challenges, and the trade war between the U.S. and China.

“We were able to mitigate some of it, but it still had a net impact of €70 million (over $75 million), which is then close to 50 basis points in the results. It’s not small,” he said. “We have worked hard to change supply chains, but it has required more effort and sometimes it is not easily possible.”

The impact on the full year was a 4 percent increase in sales to over $21 billion (€19.5 billion), compared with 2018. Comparable order intake increased by three percent, though income from continuing operations dropped from above $1.4 billion (over €1.3 billion) to above $1.2 billion (over €1.1 billion) million, and income from operations dropped from over $1.8 billion (over €1.7 billion) to more than $1.7 billion (over €1.6 billion).

Adjusted EBITA margin rose 10 basis points to 13.2 percent for sales, one percent higher than that of 2018, while EPS from continuing operations (diluted) amounted to €1.30, and adjusted EPS from continuing operations increased by 15 percent, compared to 2018, to €2.02. Operating cash flow was over $2.4 billion (more than €2.2 billion), up from more than $1.8 billion (over €1.7 billion), and free cash flow was more than $1.1 billion (more than €1 billion), an increase from just over one billion (€984 million) in 2018. The proposed dividend was €0.85 per share.

van Housten warned that while Philips' financial status was strong going into 2020, tariffs from the trade war between the U.S. and China, as well as suspicions of growing trade tensions between the U.S. and Europe may pose as challenges during the year. He also said the healthcare sector is beginning to feel the effects of the Coronavirus, especially in China, where not just Philips' facilities but ones across the country have shut down due to the government mandating that people remain in their homes to avoid contracting the disease.

"China is 50 percent of our overall global revenue," he said. "It has been a very strong market for us over the last few years. Now we’re seeing the Coronavirus bringing public lives to a standstill. We already can see that retail sales are dropping. Hospital sales are focused on keeping the machines running, so supplies, maintenance and tubes are all in demand. Our support staff are supporting all these hospitals to do the best they can to allow for 24/7 diagnostic services."

In addition to Philips’ 2019 earnings, van Houten discussed a number of reformations to take place within the Dutch-headquartered enterprise, including creating a separate legal structure for its domestic appliances business.

“We feel that we need to focus more on our healthcare technology strategy,” he said. “By externalizing domestic appliances, it will also then free up the capital for potential reinvestment in the portfolio and thereby accelerate our progress in the health technology space… I do feel we have come to a point where making that step around the focus of health technology is a good move.”

That process is expected to take 12-18 months to complete. Another change is one in leadership, with Roy Jakobs, who currently is chief business leader of the Personal Health businesses, immediately taking over as the new chief business leader of Connected Care businesses. He succeeds Carla Kriwet, who will leave the company. van Houten will head the personal health businesses on an interim basis.

van Houten also discussed the focus of the company, saying that it would continue to execute mergers and acquisitions that strengthen its portfolio, particularly in informatics and data science. He also mentioned a number of changes he expects to see for healthcare more generally in the 2020s.

“I think it will be the decade where the business model in healthcare is going to tilt toward a much better measurement of a value in healthcare,” he said. “In other words, we will see real-world evidence of healthcare’s impact on populations and individual patients and a much better transparency of cost. This may differ from country to country but when I speak to ministers of health, everybody is going in this direction.”