Philips Health-Care Profitability Drops in Prelude to Split


Royal Philips NV, the Dutch company which is splitting off its lighting unit to focus on consumer health-care, reported a profitability drop at its future main business amid sluggish demand from hospitals and higher investments.
First-quarter adjusted earnings before interest, taxes and amortisation was 5.4 percent of sales at the health-care unit, compared with 8.8 percent a year earlier. The division’s revenue gained 1 percent in the quarter, while Philips’ consumer-lifestyle sales rose 10 percent. The stock fell the most in three months.
The profitability drop doesn’t make it easier for Chief Executive Officer Frans van Houten to convince investors that betting the future of the 124-year-old company on the $125 billion consumer health-care market is the right thing to do. Van Houten predicts booming demand for data offerings that help hospitals monitor and analyze patients’ health, reduce unnecessary visits and increase the efficiency of operations and medical procedures.
“The market for medical equipment in the United States is flat,” Van Houten said on a conference call with reporters. Many U.S. hospitals are currently focused on merging their operations to cut costs, rather than on increasing spending on equipment or services, the CEO said.
‘Fragile Recovery’
In China, the company faces an economic slow down, while the markets in Latin America and the Middle East are still very volatile, he said, adding that Europe is only at the beginning of a “fragile recovery.” Investments in new technologies and products also crimped health-care earnings, he said.
Philips shares dropped as much as 3.4 percent, the most since Jan. 27, and were down 3.3 percent as of 10:40 a.m. in Amsterdam trading. Before today, the stock had risen 14 percent since the start of the year, valuing the company at 25.9 billion euros.
While Philips’ health-care business faces a difficult market environment, it will eventually benefit from the digital investments by many hospitals, according to ING Bank NV analyst Robin van den Broek.
“Hospitals are currently investing in the IT-infrastructure needed to make the transition, and less in imaging systems,” he said. “That hurts now, but longer term Philips can reap the benefits of that.”
Apart from the lower health-care profitability, shares also declined because of a bigger-than-expected 16 percent sales drop in the conventional lighting business, said Rabobank Group analyst Hans Slob.
Separation Vote
Shareholders will vote on the separation of the lighting unit on May 7, and the company plans to carry out an initial public offering of that business in the first half of next year.
The deal marks a turning point for Philips, which has sold lighting products since its founding in 1891. The separation of the unit, the world’s biggest maker of lamps and bulbs, mirrors Munich-based Siemens AG’s move in mid-2013 to spin off Osram Licht AG as an industrywide shift toward more-efficient light-emitting diodes intensified competition.
The company’s earnings have no impact on the separation plans, Van Houten said today.
Total revenue reached 5.34 billion euros ($5.8 billion) in the first quarter. Analysts surveyed by Bloomberg had forecast 5.08 billion euros. Earnings before interest, taxes and amortization dropped 9 percent to 230 million euros. The company predicts “modest” comparable sales growth for 2015.
“Philips is a self-help story and the plan to IPO or sell the Lighting Solutions business in the first half of 2016 suggest the possibility of value crystallisation in due course,” RBC Capital Markets analysts Andrew Carter and Wasi Rizvi said in a note. “Overall, the health-care turnaround still appears a work in progress and we don’t see first-quarter results marking a turn in investor sentiment towards Philips.”