A fine performance
Philips posted net earnings of 452 million euros in the second quarter, 6 times the 2022 figure for the same period. Comparable sales rose by 2%, above forecasts of 0.7%. Adjusted EBITDA rose by 9.3%, giving a margin of 11.1%, compared with an estimated 9.8%. This performance is attributable to insurance income from Respironics product claims amounting to 538 million euros, and operating cost savings of 195 million euros, including job cuts.
Background: Philips was forced to recall 15 million devices from its Respironics subsidiary worldwide. They were suspected of causing inhalation of toxic foam, which could lead to headaches, irritation and even cancer. This affair has cost the Group dearly in terms of profitability, with return on equity (ROE) down 15 points to 9% between 2021 and 2023, and debt-to-EBITDA leverage up 1.8 points to x2.8 between 2020 and 2022.
In addition, for the first time in 2 years, the Group recorded a positive order intake, up 9%. This result can be attributed to good contractual momentum in North America, offsetting the downturn in China, following the entry into force of the anti-corruption law in March, which slowed the execution of hospital orders. The Group is hoping for a return to normal in the country in the second half of the year. The net debt/EBITDA ratio fell from 2.8x to 2.2x year-on-year.
The downside was cash generation (FCF), which showed a deficit of 64 million euros due to payments of 415 million euros in connection with the settlement of Respironics' economic losses in the United States.
Results by segment
The Diagnosis & Treatment division (47% of sales), which specializes in medical imaging, cancer treatment equipment and cardiology, reported a 4% increase in sales, boosted by improved sales in image-guided therapies and precision diagnostics. Adjusted EBITDA margin improved to 12.2%.
The "Connected Care" division (27% of sales), which specializes in remote monitoring software solutions for chronic illnesses and care coordination, and in medical equipment for homecare (oxygenators, nebulizers, etc.), reported a 2% increase in sales, with EBITDA margin up to 8.8%.
The "Personal Health" division (19% of sales), which specializes in consumer health and wellness products (electric shavers, connected watches, hair dryers, electric toothbrushes, etc.), recorded a similar increase in sales.), recorded a similar increase in sales to the previous year, driven by growth in sales outside China. Adjusted EBITDA margin improved to 16.9%, mainly thanks to higher productivity.
Medium-term outlook
The Group's full-year growth forecasts are in the 3 to 5% range, with an adjusted EBITDA margin of 11 to 11.5% and a free cash flow surplus of 0.9 to 1.1 billion euros. An encouraging forecast, given the company's maturity. It is reinforced by a portfolio expansion planned for the medium term: launch of a new-generation cardiovascular ultrasound platform with integrated AI, launch of the first implant of the venous stent system, designed to treat venous disease.The launch of the first Philips Lumea 8000 series pulsed-light hair-removal appliance with cooling technology, and the launch of themed shavers.
However, it should be noted that forecasts up to 2026 are still far from offsetting pre-2021 profitability. Indeed, the financial and operational consequences of Respironics will continue to weigh on the company for many years to come. On the other hand, it's not easy to overlook quality shortcomings in the healthcare sector, especially in the most sensitive areas. This situation jeopardizes Philips' long restructuring efforts under former CEO Frans van Houten to focus on higher value-added sectors. This can also be interpreted as a lack of preparation and know-how.
This is also reflected in the company's valuation. Its PER has been halved between 2020 and 2026, from x33 to x16, and its EV/EBITDA ratio is the lowest in its sector, indicating further market penalization and a heavily discounted value in a buoyant sector.
The stock's 12% rise in one day could be seen as a sign of hope for the market. But is it sustainable?
To confirm this, Philips will have to combine its innovation efforts with increased vigilance over the quality of its products.
