Philips' Second Quarter Results 2018

Second-quarter highlights

• Sales in the quarter were EUR 4.3 billion, with comparable sales growth of 4%
• Comparable order intake increased 9% compared to Q2 2017
• Net income from continuing operations was EUR 186 million, compared to EUR 161 million in Q2 2017
• Adjusted EBITA margin improved by 100 basis points to 11.2% of sales, compared to 10.2% of sales in Q2 2017
• Income from operations (EBIT) increased to EUR 298 million, compared to EUR 252 million in Q2 2017
• Operating cash flow totaled EUR 130 million, compared to EUR 73 million in Q2 2017

Frans van Houten, CEO:

“In the second quarter, we delivered 4% comparable sales growth, a strong 9% order intake growth and a solid 100 basis points improvement in operational performance driven by our growth and productivity programs.

I am pleased with the continued strong performance improvement of the Diagnosis & Treatment businesses, driven by the breadth of our innovative product portfolio, which resulted in 8% comparable sales growth and double-digit order intake growth. At the same time, I am encouraged by the mid-single-digit order intake growth of the Connected Care & Health Informatics businesses. After a slow start, the Personal Health businesses gained momentum in the quarter, and we expect this to continue in the second half of the year.

Demonstrating our ongoing success in building our solutions business, we signed seven long-term strategic partnership agreements in the quarter. In Germany, Philips announced two multi-year agreements with Clinics of Cologne and Munich Municipal Hospital to deliver medical imaging solutions to support precision diagnosis and therapy, innovation and productivity improvements. We also signed a seven-year agreement with the governments of the Netherlands and Ethiopia to design, build and equip Ethiopia’s first specialized Cardiac Care Center for state-of-the-art diagnosis and treatment of cardiac diseases.

Looking ahead, we reiterate our targets for the 2017–2020 period of 4-6% comparable sales growth and an average annual 100 basis points improvement in Adjusted EBITA margin.”

Business segments

The Diagnosis & Treatment businesses recorded a double-digit increase in comparable order intake, driven by strong double-digit growth in China and North America. Comparable sales increased by 8%, with double-digit growth in Image-Guided Therapy and high-single-digit growth in Ultrasound. The Adjusted EBITA margin was 180 basis points higher than in the same period last year, mainly due to growth and operational improvements.

The Connected Care & Health Informatics businesses delivered a mid-single-digit increase in comparable order intake, driven by double-digit order intake growth for Healthcare Informatics. Comparable sales growth increased 2% year-on-year, reflecting high-single-digit growth in Healthcare Informatics and low-single-digit growth in Monitoring & Analytics. The Adjusted EBITA margin improved by 40 basis points year-on-year.

In the Personal Health businesses, comparable sales growth was 2%, with high-single-digit growth in Sleep & Respiratory Care and low-single-digit growth in Personal Care. The growth of the Personal Health businesses was impacted by a high-single-digit comparable sales decline in China, mainly due to an inventory alignment at our distributors and lower demand in the Air purification market. The Adjusted EBITA margin increased by 80 basis points, driven by operational improvements.

Philips’ ongoing focus on innovation resulted in the following highlights in the quarter:

• To further strengthen Philips’ businesses through targeted acquisitions, the company acquired EPD Solutions*, an innovator that has developed a breakthrough technology for image-guided treatments for cardiac arrhythmia. Philips also acquired Remote Diagnostic Technologies, a leading provider of advanced monitoring, cardiac therapy and data management solutions for the pre-hospital market. RDT’s portfolio will complement Philips’ Therapeutic Care business and strengthen its leadership position in the EUR 1.4 billion resuscitation and emergency care market.
• Driven by recently introduced innovations such as an advanced transducer optimized for OB/GYN and General Imaging applications and the telehealth capabilities of its Lumify app-based ultrasound solution, Philips continued its strong growth across the Cardiology, OB/GYN, General Imaging and Point-of-Care clinical segments.
• Philips and Jackson Health System – one of the largest public health systems in the US – entered into an agreement involving an industry-first ‘enterprise patient monitoring as a service’ business model. This will enable Jackson to standardize patient monitoring at all acuity levels for each care setting across its network for a per-patient fee.
• Partnering with Showa University, Philips launched the first tele-intensive care eICU program in Japan. This delivers near realtime remote patient monitoring and early intervention through predictive analytics and advanced audio-visual technology. It has already been successfully implemented in the US, the UK, Australia and the Middle East.
• Philips partnered with the Dana-Farber Cancer Institute to deploy best practices in cancer care. The incorporation of the Institute’s Clinical Pathways in Philips’ IntelliSpace Oncology Platform will help oncologists reach the most appropriate cancer treatments for patients, based on a unified view of the patient across diagnostic modalities and the embedded knowledge of both partners.
• As the only provider of a digital pathology solution for primary diagnostic use in the US, Philips teamed up with life sciences leader LabCorp to fully digitize pathology workflows for LabCorp’s clinical laboratory and drug development services. 
• Following the successful launch of the DreamWear Full Face mask in the US at the end of the first quarter, the roll-out of this new mask in additional markets resulted in strong growth for Philips in the largest mask segment. Moreover, to further drive growth in the emerging sleep therapy market in China, Philips launched the connected Dream Family solution.

* Philips announced the agreement to acquire EPD Solutions on June 5, 2018. The transaction was completed on July 9, 2018.

Cost savings

In the second quarter, procurement savings amounted to EUR 67 million. Overhead and other productivity programs resulted in savings of EUR 38 million. Philips is on track to deliver annual savings of EUR 400 million in 2018.

Capital structure

As part of the actions to reduce interest expenses and extend maturities, Philips completed the early redemption of the outstanding 3.750% Notes due 2022 with a principal amount of USD 1 billion (as announced in Q1 2018), resulting in a cash outflow of EUR 832 million excluding accrued interest. Furthermore, Philips entered into transactions with bondholders to redeem an aggregate principal amount of USD 72 million of the outstanding 6.875% Notes due 2038, resulting in a cash outflow of EUR 80 million excluding accrued interest. To finance the above, Philips successfully placed an aggregate principal amount of EUR 1.0 billion of Notes due 2024 and 2028.

Details of Philips’ current EUR 1.5 billion share buyback program, which was initiated in the third quarter of 2017 for capital reduction purposes, can be found here.

Discontinued operations

In the second quarter, Discontinued operations included a net EUR 177 million negative impact related to a value adjustment of Philips’ remaining interest in Signify (formerly Philips Lighting), which was partially offset by a positive impact related to the dividends received on Signify shares.

Regulatory update

Philips continues to make progress in line with the terms of the consent decree, which is primarily focused on the defibrillator manufacturing in the US; this included inspections by independent auditors and continued shipments of its FRx and FR3 AEDs to markets outside of the US.

Quarterly Report