Philips delivers Q3 sales of EUR 4.2 billion, with a 7.6% comparable sales decline due to headwinds; income from continuing operations increases to EUR 442 million, and Adjusted EBITA margin amounts to 12.3%
10/18/2021 | 01:01am EST
Philips sees continued strong demand driving double-digit order intake growth in Q3
October 18, 2021
Group sales totaled EUR 4.2 billion, reflecting a 7.6% comparable sales decline due to headwinds caused by global supply chain challenges and Sleep & Respiratory Care recall consequences
Comparable order intake increased 47%; order intake increased 17% excluding the impact of a partial ventilator order cancellation in Q3 2020
Income from continuing operations increased to EUR 442 million, compared to EUR 279 million in Q3 2020
Adjusted EBITA of EUR 512 million, or 12.3% of sales, compared to EUR 684 million, or 15.5% of sales, in Q3 2020
Operating cash flow of EUR 256 million, compared to EUR 575 million in Q3 2020
Domestic Appliances divestment was completed as planned, resulting in a EUR 2.5 billion gain after tax and transaction-related costs; reported in Discontinued Operations
Frans van Houten, CEO:
“I am pleased with the strong double-digit comparable order intake growth in the third quarter, driven by both the Diagnosis & Treatment businesses and Connected Care businesses. Our strategy and portfolio are highly relevant to our customers, as we help them transform the delivery of care along the health continuum. Building on this strength, we have signed an additional 19 long-term strategic partnerships with hospitals across the world, including a 10-year partnership with Baptist Health in the US to provide patient monitoring solutions and standardize care across the network.
We recorded EUR 4.2 billion sales in the quarter, with a 7.6% comparable sales decline on the back of 10% comparable sales growth last year. This quarter’s sales were impacted unfavorably by intensified global supply chain issues, such as the shortage of electronic components, and the anticipated revenue consequences of the sleep recall, as we are prioritizing the remediation of affected devices in use by patients. The Adjusted EBITA margin was 12.3%.
The repair and replacement program related to the sleep recall notification is under way in the US and several other markets. I am conscious of the impact this is having on patients and care givers, and we are doing everything we can to deliver a solution as fast as possible.
We successfully completed the sale of the Domestic Appliances business, resulting in a gain of EUR 2.5 billion. With this, we concluded our major divestments, allowing us to focus fully on extending our leadership in health technology and continuing our transformation into a solutions company.
Looking ahead, we continue to see uncertainty related to COVID-19. Supply chain volatility has intensified globally, which already led to longer lead times to convert our strong order book to revenue in the third quarter, and we expect this headwind to continue in the fourth quarter. Therefore, we now expect to deliver low-single-digit comparable sales growth with a modest Adjusted EBITA margin improvement for the full year 2021. Based on our strong customer demand and growing order book, we expect to resume our growth and margin expansion trajectory in 2022 as we work through the headwinds.”
Business segment performance
The Diagnosis & Treatment businesses recorded 10% comparable sales growth, with double-digit growth in Image-Guided Therapy and high-single-digit growth in Diagnostic Imaging and Ultrasound. Comparable order intake increased 15%, with double-digit growth across Image-Guided Therapy, Diagnostic Imaging and Ultrasound, reflecting Philips’ very competitive portfolio and positive market conditions. The Adjusted EBITA margin increased to 14.2%, mainly driven by sales growth and productivity measures.
The Connected Care businesses’ comparable sales decreased 39%, following the high COVID-19-generated demand in Q3 2020 and a double-digit decline in Sleep & Respiratory Care in Q3 2021 due to the sleep recall notification. Comparable order intake increased 21%, excluding the impact of a partial ventilator order cancellation in Q3 2020. Hospital Patient Monitoring orders grew 20% in Q3 2021, building on 22% order intake growth last year, driven by a structural increase in adoption of patient care management solutions in both high- and low-acuity care settings in the hospital. The Adjusted EBITA margin amounted to 6.2%, mainly due to the decline in sales.
The Personal Health businesses’ comparable sales were in line with Q3 2020, as sales across the businesses were impacted by phasing, with 33% comparable sales growth in the previous quarter. The underlying customer demand for the new product introductions in Personal Care, Oral Healthcare and Mother & Child Care remains robust. The Adjusted EBITA margin increased to 15.9%, mainly driven by productivity measures.
In Other, sales increased by EUR 74 million and Adjusted EBITA increased to EUR 13 million, mainly driven by phasing of IP royalty settlements.
Philips’ ongoing focus on innovation and partnerships resulted in the following highlights in the quarter:
Philips provided the Yili Chuanxin Oncology hospital in Xinjiang, a newly established top-tier private hospital in China, with an Oncology solution to address the hospital’s clinical needs in screening, precision diagnosis, targeted treatment and rehabilitation of cancer patients. The solution includes IntelliSpace Digital Pathology and the Ingenia 3.0T MR, IQon Spectral CT, Incisive CT and CT Big Bore imaging systems, combined with IntelliSpace Portal for advanced visualization and analysis.
As part of Philips’ 10-year partnership with Rutherford Health to open multiple Community Diagnostic Centers in England, the first center was opened in Taunton, for which Philips provided innovative diagnostic imaging systems, including Ingenia Ambition MR combined with Ambient Experience, which allows patients to control and personalize the imaging environment.
As a pioneer in spectral CT diagnostics, Philips has enabled its customers to benefit from a reduction in follow-up scans, increased certainty in lesion characterization, and reduced time to diagnosis. Building on many years of experience with IQon Spectral CT, Philips’ new Spectral CT 7500 is attracting strong customer demand. For example, the University Medical Center Utrecht in the Netherlands installed two Spectral CT systems, with the aim of providing greater confidence in mainstream clinical diagnosis – for all patients and in all exams.
Underlining the company’s leading role in digital pathology, Philips partnered with Healius Pathology, one of Australia's leading providers of private medical laboratory and pathology services, to deploy a multi-site digital pathology solution across Healius’ National Pathology Network using Philips' industry-leading IntelliSite Pathology Solution.
Building on Philips’ leadership in image-guided therapy solutions in cardiology, the company is further strengthening its position in fast- growing adjacencies such as neurology and oncology. For example, US-based Piedmont Health equipped its neurosurgical operating rooms with a specialized version of Philips Azurion for the treatment of stroke. Philips also announced positive results of a clinical study aimed at setting a new standard of safety and accuracy in the diagnosis of small peripheral lung lesions using Philips Lung suite.
Underlining Philips’ strategy to deliver locally relevant solutions, the company launched several oral healthcare innovations targeting multiple price points in China, including two new electric toothbrushes. In addition, Philips launched its professional teeth whitening offering Zoom in China through a local partnership with LinkedCare, one of the largest dental solution providers in the Chinese dental market.
Philips launched two new HealthSuite informatics solutions which are scalable across the enterprise, to support its customers in achieving the Quadruple Aim of healthcare: Patient Flow Capacity Suite, a solution that helps hospitals manage the complete patient journey, and Acute Care Telehealth, which builds on Philips’ successful Tele-ICU solutions.
Philips’ recently acquired Capsule business continued to add new device drivers to its Medical Device Information Platform, which will be integrated with HealthSuite. With more than 1,000 unique types of medical devices capable of integrating with the platform, customers can connect more devices to advance health systems’ digital transformation with intelligent, vendor-agnostic tools that turn complex data streams into actionable insights.
Sleep and respiratory care field action update
On June 14, 2021, Philips initiated a voluntary recall notification in the US/field safety notice outside the US for certain sleep and respiratory care products to address identified potential health risks related to the polyester-based polyurethane (PE-PUR) sound abatement foam in these devices. Following the substantial ramp-up of its production, service and repair capacity, the repair and replacement program in the US and several other markets is under way. To date, Philips has produced a total of approximately 750,000 repair kits and replacement devices, of which more than 250,000 have reached customers.
As disclosed in its Q2 2021 report, Philips is a defendant in a number of consumer class action lawsuits from users of the affected devices and a number of individual personal injury claims. Given the uncertain nature and timing of the relevant events and potential associated liabilities, if any, the company is unable to reliably estimate the financial effect of these matters.
In the third quarter, productivity savings amounted to EUR 73 million, of which procurement savings amounting to EUR 34 million, and savings of EUR 39 million delivered by overhead and other programs.
Philips is currently executing two share buyback programs of EUR 1.5 billion each for capital reduction purposes. The program that was initiated in the first quarter of 2019 is nearing completion and is expected to result in the cancellation of approximately 20 million shares in December 2021. Under the share buyback program that was announced on July 26, 2021, Philips entered into a number of forward transactions in the third quarter, covering approximately half of the program, with settlement dates in 2022, 2023 and 2024. The remainder of the program will be executed through open market purchases by an intermediary, with a significant part taking place in Q4 2021. Further details on both programs can be found here.
Royal Philips (NYSE: PHG, AEX: PHIA) is a leading health technology company focused on improving people's health and well-being, and enabling better outcomes across the health continuum – from healthy living and prevention, to diagnosis, treatment and home care. Philips leverages advanced technology and deep clinical and consumer insights to deliver integrated solutions. Headquartered in the Netherlands, the company is a leader in diagnostic imaging, image-guided therapy, patient monitoring and health informatics, as well as in consumer health and home care. Philips generated 2020 sales of EUR 19.5 billion and employs approximately 78,000 employees with sales and services in more than 100 countries. News about Philips can be found at www.philips.com/newscenter.
Forward-looking statements and other important information
This document and the related oral presentation, including responses to questions following the presentation, contain certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items. Examples of forward-looking statements include: statements made about our strategy; estimates of sales growth; future Adjusted EBITA; future restructuring and acquisition- related charges and other costs; future developments in Philips’ organic business; and the completion of acquisitions and divestments. By their nature, these statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these statements.
These factors include but are not limited to: changes in industry or market circumstances; economic, political and societal changes; Philips’ increasing focus on health technology and solutions; the successful completion of divestments; the realization of Philips' objectives in growth geographies; business plans and integration of acquisitions; securing and maintaining Philips’ intellectual property rights, and unauthorized use of third-party intellectual property rights; COVID-19 and other pandemics; breaches of cybersecurity; IT system changes or failures; the effectiveness of our supply chain; challenges to drive operational excellence, productivity and speed in bringing innovations to market; attracting and retaining personnel; future trade arrangements following Brexit; compliance with regulations and standards, including quality, product safety and data privacy; compliance with business conduct rules and regulations; treasury risks and other financial risks; tax risks; costs of defined-benefit pension plans and other post-retirement plans; reliability of internal controls, financial reporting and management process. As a result, Philips’ actual future results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. For a discussion of factors that could cause future results to differ from such forward-looking statements, see also the Risk management chapter included in the Annual Report 2020.
Philips has recognized a provision related to the voluntary recall notification in the US/field safety notice outside the US for certain sleep and respiratory care products, based on Philips’ best estimate for the expected field actions. The future developments are subject to significant uncertainties, which require management to make estimates and assumptions about items such as quantities, costs to repair or replace, and duration. Actual outcomes in future periods may differ from these estimates and affect the company's results of operations, financial position and cash flows.
Third-party market share data
Statements regarding market share, contained in this document, including those regarding Philips’ competitive position, are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where information is not yet available to Philips, market share statements may also be based on estimates and projections prepared by management and/or based on outside sources of information. Management's estimates of rankings are based on order intake or sales, depending on the business.
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Use of non-IFRS information
In presenting and discussing the Philips Group’s financial position, operating results and cash flows, management uses certain non-IFRS financial measures. These non-IFRS financial measures should not be viewed in isolation as alternatives to the equivalent IFRS measure and should be used in conjunction with the most directly comparable IFRS measures. Non-IFRS financial measures do not have standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other issuers. A reconciliation of these non-IFRS measures to the most directly comparable IFRS measures is contained in this document. Further information on non-IFRS measures can be found in the Annual Report 2020.
Use of fair value information
In presenting the Philips Group’s financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that are deemed to be reliable. Readers are cautioned that these values are subject to changes over time and are only valid at the balance sheet date. When quoted prices or observable market data are not readily available, fair values are estimated using appropriate valuation models and unobservable inputs. Such fair value estimates require management to make significant assumptions with respect to future developments, which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in the Annual Report 2020. In certain cases independent valuations are obtained to support management’s determination of fair values.
All amounts are in millions of euros unless otherwise stated. Due to rounding, amounts may not add up precisely to totals provided. All reported data is unaudited. Financial reporting is in accordance with the accounting policies as stated in the Annual Report 2020 except for the adoption of new standards and amendments to standards which are also expected to be reflected in the company's consolidated IFRS financial statements as at and for the year ending December 31, 2021.
In 2020, Philips revised the definition of net finance expenses used in the calculation of Adjusted income from continuing operations attributable to shareholders, to exclude fair value movements of limited life fund investments recognized at fair value through profit and loss. This change leads to more relevant information as the fair value movements are not indicative of Philips’ performance. The fair value movements do not represent cash items. Philips believes making this change is helpful for investors to evaluate Philips’ performance.
On September 1, 2021, Philips completed the sale of the Domestic Appliances business. The results of this transaction, which Philips announced on March 25, 2021, are presented under Discontinued Operations in this report. Comparative results have been restated to reflect the treatment of the Domestic Appliances business as a discontinued operation since Q1. Further details of the restatement have been published on the Philips Investor Relations website and can be accessed here.
Prior-period amounts have been reclassified to conform to the current-period presentation; this includes immaterial organizational changes.