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Philips' (PHG) Q3 Earnings Up Y/Y on Connected Care Growth

Koninklijke Philips N.V. PHG reported third-quarter 2020 adjusted earnings of €0.60 per share, up 30.4% year over year.

COVID-19 impacted sales as well as adjusted EBITDA by 5 percentage points and 170 basis points (bps), respectively.

Sales increased 6% on a year-over-year basis at €4.98 billion. Comparable sales (includes adjustments for consolidation charges & currency effects) increased 10% year over year, primarily owing to double-digit comparable sales growth in the Connected Care business and mid-single-digit growth in the Personal Health business, partially offset by a low-single-digit decline in the Diagnosis & Treatment business.

The company’s comparable order intake fell 18% year over year. Excluding the partial termination of the ventilator contract with HHS, comparable order intake grew 3%.

Sales increased 6% on a comparable basis in growth geographies, driven by double-digit growth in Latin America, the Middle East & Turkey and Russia & Central Asia, partially offset by a decline in China. Comparable order intake declined mid-single digit.
 

Koninklijke Philips N.V. Price, Consensus and EPS Surprise

Koninklijke Philips N.V. Price, Consensus and EPS Surprise

Koninklijke Philips N.V. price-consensus-eps-surprise-chart | Koninklijke Philips N.V. Quote

Sales in mature geographies were up 12% year over year on a comparable basis. Both Western Europe and North America witnessed double-digit growth.

Markedly, Philips’ shares have returned 1.5% to date against the Zacks Electronics- Miscellaneous Products industry’s decline of 4.7%.

Segmental Update

Diagnosis & Treatment revenues decreased 7% from the year-ago quarter to €1.97 billion. Comparable sales fell 3% year over year. Coronavirus-led postponement of installations and elective procedures hurt sales. Both Diagnostic Imaging and Image-Guided Therapy revenues declined low-single digit while Ultrasound witnessed double-digit decline.

Comparable sales in growth geographies showed mid-single-digit growth, driven by double-digit growth in Russia & Central Asia and mid-single-digit growth in China.

Mature geographies declined at a high-single-digit rate, reflecting a high-single-digit decline in North America. Western Europe witnessed low-single-digit growth.

Connected Care business revenues grew 36% to €1.56 billion. Comparable sales increased 42%, primarily driven by COVID-19-generated demand with double-digit growth in both Sleep & Respiratory Care and Monitoring & Analytics.

Mature geographies grew in double digits, primarily on double-digit growth in Western Europe and North America.

Growth geographies showed double-digit growth, driven by double-digit growth in Latin America and the Middle East & Turkey.

Personal Health sales increased 1% year over year to €1.38 billion. Comparable sales were up 6% with high-single-digit growth in Personal Care and Domestic Appliances and low-single-digit growth in Oral Healthcare.

Growth geographies declined in high-single digits, primarily due to China. Mature geographies posted a double-digit sales growth, driven by Western Europe and North America.

Other segment sales dropped 6% to €77 million, primarily due to lower royalty income.

Operating Details

Gross margin contracted 90 basis points (bps) on a year-over-year basis to 44.9% in the reported quarter.

General & administrative and research & development expenses decreased 30 bps and 10 bps, respectively. However, selling expenses decreased 170 bps.

In the reported quarter, procurement cost savings totaled €62 million. Savings from overhead and other productivity programs were €58 million.

Philips’ adjusted earnings before interest, taxes and amortization (“EBITA”) — the company’s preferred measure of operational performance — were €769 million, up 31.9% from the year-ago quarter.

Adjusted EBITA margin expanded 300 bps on a year-over-year basis to 15.4%.

Diagnosis & Treatment EBITA margins contracted 430 bps on a year-over-year basis. Connected Care adjusted EBITA margin was 27.1% compared with 11.3% in the year-ago quarter.

However, Personal Health adjusted EBITA margins contracted 20 bps.

Balance Sheet & Other Details

As of Sep 30, 2020, Philips’ cash and cash equivalents were €2.49 billion and total debt was €7.23 billion. This compares with cash and cash equivalents of €2.29 billion and total debt of €7.30 billion as of Jun 30.

Meanwhile, net cash flow generated from operating activities came in at €770 million, up 116.3% year over year. Free cash flow was €543 million compared with €126 million in the year-ago quarter.

Guidance

For the fourth quarter of 2020, Philips expects to deliver growth and improved profitability.

For 2020, the company anticipates to report modest comparable sales growth and an adjusted EBITA margin in line with the same metrics in 2019.

Philips expects the net tariff impact to be nearly €40 million in 2020. This is €30 million lower than the net impact witnessed in 2019.

For 2021-2025, Philips targets average annual comparable sales growth in the 5-6% range.

For 2021, it expects comparable sales growth to be in low-single digit, driven by solid growth in Diagnosis & Treatment, and Personal Health, partly offset by lower Connected Care sales.

Adjusted EBITA margin is expected to expand 60-80 bps, on average, annually from 2021, reaching the high teens by 2025.

Moreover, free cash flow is expected to be more than €2 billion by 2025.

Zacks Rank and Stocks to Consider

Phillips currently carries a Zacks Rank #4 (Sell).

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Moreover, all three stocks are set to report their quarterly results on Oct 28.

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