Philips' Third Quarter Results 2017

Third-quarter highlights

• Sales increased to EUR 4.1 billion, with comparable sales growth of 4%
• Comparable order intake increased 5% compared to Q3 2016
• Net income from continuing operations increased to EUR 263 million, compared to EUR 214 million in Q3 2016
• Adjusted EBITA margin improved by 140 basis points to 12.8% of sales, compared to 11.4% of sales, in Q3 2016
• Income from operations (EBIT) amounted to EUR 299 million, or 7.2% of sales, compared to EUR 381 million, or 9.2% of sales, in Q3 2016
• Operating cash flow totaled EUR 295 million, which included a EUR 219 million outflow related to pension liability de-risking. In Q3 2016, operating cash flow amounted to EUR 259 million, which included a pension liability de-risking outflow of EUR 63 million

Frans van Houten, CEO:

“Philips’ performance in the third quarter demonstrates that we continue to deliver on our plan, with comparable sales growth of 4% driven by double-digit growth in our growth geographies, most notably in China, and 8% growth in our Connected Care & Health Informatics businesses. We delivered an Adjusted EBITA improvement of 140 basis points driven by higher volumes and productivity program savings that are well on track. Moreover, we had a solid 5% comparable order intake growth on the back of 8% order intake growth in the third quarter of last year, maintaining momentum.

We have completed the Spectranetics acquisition, made a strong start with the integration process, and launched Stellarex in the US after receiving FDA approval. Stellarex is the next-generation drug-coated balloon (DCB) to treat patients with peripheral arterial disease. The latest results from the ongoing ILLUMENATE European randomized clinical trial revealed that Stellarex is the first low-dose DCB* to demonstrate a lasting treatment effect two years after the treatment, compared to the current endovascular standard of care in the US.

We are committed to delivering high-quality, innovative products and solutions, and have made significant investments and progress to enhance our Quality Management System Regulation compliance. Although the recent consent decree, which arose from past inspections in and before 2015 focusing primarily on Philips’ defibrillator manufacturing in the US, is disappointing, we will confidently continue on our improvement path.

As further acknowledgement of our transformation into a focused health technology leader, MSCI, a leading provider of research-based indexes and analytics, has reclassified Philips’ stock to the Health Care sector from the Industrials sector. This follows the reclassification of Philips’ shares to Health Care by FTSE Group’s Industry Classification Benchmark, and the change in sector classification for the STOXX Europe 600 Index to Health Care.

Despite ongoing global uncertainties, our outlook for 2017 remains unchanged. Supported by our 5% year-to-date comparable order intake growth, we are on track to deliver 4-6% comparable sales growth and an improvement in Adjusted EBITA margin of around 100 basis points this year.”

* Low-dose DCBs are those that deliver a dose of only 2 micrograms of the drug paclitaxel per square millimeter, which is lower than some other DCBs on the market.

Business segments

In the third quarter, all business segments delivered growth and improved profitability. In the Connected Care & Health Informatics businesses, comparable sales increased by 8%, driven by double-digit growth in Patient Care & Monitoring Solutions. The Adjusted EBITA margin was 440 basis points higher than in the same period last year, mainly driven by higher volume in Patient Care & Monitoring Solutions and productivity savings. Comparable order intake increased by 1%, reflecting the unevenness of the order-intake dynamics. The 5% comparable sales growth of the Personal Health businesses was driven by high-single-digit growth in Sleep & Respiratory Care and mid-single-digit growth in Domestic Appliances; the Adjusted EBITA margin improved by 130 basis points. In the Diagnosis & Treatment businesses, comparable order intake increased by 7%, driven by Ultrasound and Image-Guided Therapy. Sales grew 2% on a comparable basis, while the Adjusted EBITA margin improved by 40 basis points.

Philips’ ongoing innovation drive resulted in the following highlights in the quarter:

• In line with Philips’ focus on solutions selling, the company signed several multi-year agreements. For example, in Italy Philips signed a long-term strategic partnership agreement with the San Giovanni Calibita Fatebenefratelli Hospital in Rome to provide medical technologies, clinical informatics and services for state-of-the-art mother and child care. In the US, Philips expanded its relationship with Advocate Health Care, the largest health system in Illinois, to assist them in standardizing their clinical IT and patient monitoring solutions across the enterprise for improved patient outcomes and predictable costs. Furthermore, Philips signed an agreement with Lakeland Health in the US for advanced monitoring of patients in the hospital’s general ward with the Philips IntelliVue Guardian Solution with Early Warning Scoring.
• Philips continued its strong growth momentum in China, driven by its innovative consumer health and professional healthcare portfolio, focused initiatives to step up market share and customer partnerships. This is illustrated by the double-digit growth in Diagnostic Imaging order intake, which was in part driven by the strong traction in the private hospital segment, such as the new strategic partnership with Health 100, the largest health examination organization in China.
• Driving its expansion in the fast-growing Obstetrics and Gynecology segment, Philips introduced new OB/GYN ultrasound innovations that are designed to support earlier, easier and more confident diagnoses. Highlighted features include anatomical-intelligence clinical decision support and workflow enhancements such as fingertip control and enhanced imaging versatility.
• Highlighting Philips’ leadership in digital pathology, the Pathology Institute in Hall (Austria) and the Pathology Institute at Tirol Kliniken Innsbruck (Austria) fully digitized their diagnostic process with Philips’ comprehensive IntelliSite Pathology Solution.
• Philips’ Sleep & Respiratory Care business continues to grow in respiratory care, with strong acceptance of its market-leading home ventilation offerings. This portfolio was further extended with the launch of the connected Trilogy ventilator in North America, linking it to Philips’ unique patient management solution Care Orchestrator. In sleep care, continued mask share gains were driven by strong traction of the DreamWear family of masks, including the recently introduced DreamWear Pillow mask.
• Building on the company’s market-leading propositions in healthy eating, Philips launched the latest generation of the Philips Airfryer, which features an innovative technology to prepare tasty, healthier food with little to no oil. As a leader in this category, Philips has sold more than 8 million Airfryers globally to date.
• In the 2017 Interbrand annual ranking of the world’s most valuable brands, Philips ranked #41 with an increased estimated brand value of USD 11.5 billion.

Cost savings

Philips’ productivity programs are well on track to deliver annual savings of EUR 400 million, with year-to-date savings of EUR 350 million. In the quarter, procurement savings amounted to EUR 77 million, led by the DfX program, while other productivity programs generated savings of EUR 69 million.

Capital Allocation

Philips started the EUR 1.5 billion share buyback program in the third quarter of 2017 and intends to complete it in two years. As the program was initiated for capital reduction purposes, Philips intends to cancel all of the shares acquired under the program. Details about the transactions can be found here.

Philips successfully placed EUR 500 million floating-rate notes due 2019 and EUR 500 million fixed-rate notes due 2023. The net proceeds of the offering were used for the refinancing of the EUR 1.0 billion loan which was entered into for the purpose of financing the acquisition of Spectranetics and for general purposes.

Regulatory update

This month, Philips reached agreement with the US government on a consent decree focusing primarily on its defibrillator manufacturing in the US. Philips is fully prepared to fulfill the terms of the decree. As expected, the FDA conducted an inspection of Philips’ Cleveland facility in the quarter. In accordance with normal practice, Philips submitted its response to the inspectional findings for review by the FDA.

Philips Lighting

As of September 30, 2017, Philips’ shareholding in Philips Lighting was 41.27% of the issued and outstanding share capital. Philips continues to consolidate Philips Lighting. As loss of control is highly probable within one year due to further sell-downs, Philips Lighting is presented as a discontinued operation in the financial statements of Philips as of the second quarter of 2017. Full details about the financial performance of Philips Lighting in the third quarter were published on October 19, 2017. The related report can be accessed here.

Quarterly Report

Third Quarter Results 2017 - Quarterly Report

Presentation

Third Quarter Results 2017 - Quarterly Results Presentation

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