Image credit: Philips Healthcare RSNA 2019, Philips News Center
On the 20th April, Philips Healthcare published its financial results for Q1 2020 which show that Group sales revenue grew marginally during the first quarter. The overall sales revenue reached €4.16 billion, compared with €4.15 billion in Q1 2019, a marginal increase of +0.2% year-on-year. When adjusting this sales performance for portfolio changes and currency movements, comparable sales revenue was approximately -2% lower year-on-year.
The sales result during the first quarter was driven by higher revenue from the D&T and Connected Care segments, offset by lower revenue from the Personal Health segment. The COVID-19 pandemic had a significant impact on sales performance. The Group estimates that sales revenue was approximately -5% lower due to negative effects from the Coronavirus. Despite lower revenue, the company reported that comparable order intake was approximately +23% higher year-on-year, reflecting some increased demand for various products and services supporting the diagnosis and treatment of acute respiratory disease.
The Diagnosis and Treatment Segment
The D&T segment encompasses the Group’s portfolio of medical imaging platforms, image-guided therapy solutions as well as healthcare informatics. During Q1 2020, sales revenue from the D&T business reached €1.83 billion, compared with €1.72 billion in Q1 2019, an increase of approximately +6% year-on-year. When adjusting this sales performance for portfolio changes and currency movements, comparable sales revenue was approximately +2% higher year-on-year. This sales result was driven by higher revenue from diagnostic imaging solutions, partially offset by lower revenue from image-guided therapy solutions, ultrasound imaging solutions as well as diagnostic informatics.
The Diagnostic Imaging Segment
During the first quarter, comparable sales revenue growth was a positive mid-single-digit (e.g. +5%), relative to Q1 2019. Along with higher sales revenue, new order intake increased by a number in the high-teens (e.g. +18%), driven by strong demand for X-ray and CT scanners, as well as continued order strength for MR solutions. During the Q1 earnings call, CFO Abhijit Bhattacharya commented that “we had very robust order intake growth” and “high-single-digit sales growth” with respect to CT scanners. Abhijit also noted that despite a short-term peak in demand for CT solutions, Philips has sufficient capacity to meet increased customer demand and deliver on orders. Philips has recently completed a “refresh” of it’s CT product portfolio which includes the launch of the CT 6000 iCT and the CT 5000 ingenuity platforms. In addition, Philips launched an industry-first ‘tube for life guarantee‘, which not only benefits customers but also helps Philips meet its sustainability goals which include achieving completely closed-loops for all of its major medical systems by 2025.
The Image-Guided Therapy (IGT) Segment
During the first quarter, comparable sales revenue growth was a negative low-single-digit (e.g. -1%), relative to Q1 2019. Along with lower sales revenue, new order intake declined but at a steeper pace by a low-double-digit (e.g. -11%). The decline in sales revenue was driven by a strong decline from the devices business, as hospitals postponed elective, non-urgent procedures as well as pushed-out installations which were originally scheduled during the first quarter. During the Q1 earnings call, CEO Frans van Houten commented that “the decline in elective procedures is really steep” and indicated that the revenue from IGT devices is likely to be substantially lower during the second quarter also. He also indicated that he anticipates the demand for IGT devices to “quickly restore” during the third quarter along with new installations (assuming that hospital operations return to normal). The IGT portfolio encompasses the companies range of interventional x-ray imaging systems, including the Zenition series of mobile c-arm systems as well as the Allura series of surgical x-ray systems. The portfolio also represents the recent acquisitions of Volcano and EPD solutions. These acquisitions added specialist catheters for intravascular ultrasound (IVUS) and fractional flow reserve (FFR) to the product line-up as well as a proprietary cardiac imaging and navigation system; a diagnostic and treatment tool for cardiac arrhythmias.
The Ultrasound Imaging Segment
During the first quarter, comparable sales revenue growth was a negative low-single-digit (e.g. -1%), relative to Q1 2019. Although sales revenue was lower, new order intake increased and grew by a mid-single-digit (e.g. +5%). The decline in sales revenue was predominately driven by the inability to install against orders, particularly within China, as hospitals were battling with Coronavirus pandemic and chose to focus on other priorities. The increased order intake was predominately driven by increased demand for hand-held and portable solutions which could be easily placed within reach of COVID-19 patients. In particular, orders for the Philips Lumify and CX50 products were strong. These systems are well suited to be used at a patient’s bedside within an emergency and ICU situation for the rapid assessment of heart and lung conditions.
During the first quarter, comparable sales revenue was lower relative to Q1 2019 and new order intake declined by a mid-single-digit (e.g. -5%). Frans commented that some hospitals have postponed certain services, for example, a major overhaul of an informatics installation due to the Coronavirus pandemic. This has resulted in lower sales revenue.
D&T sales results by geography
From a geographical perspective, sales results during the first quarter varied significantly by region. The comparable sales growth figures by major geographies can be summarised as:
- Growth geographies: low-single-digit sales growth e.g. (+2%)
- China: mid-single-digit sales growth e.g. (+5%)
- Mature geographies: low-single-digit sales growth e.g. (+1%)
- North America: mid-single-digit sales growth e.g. (+5%)
- Western Europe: low-single-digit sales growth e.g. (+1%)
- Other mature geographies: mid-single-digit sales decline e.g. (-5%)
Growth geographies include markets such as China, Latin America and Russia. Other mature markets include Japan. Comparable sales growth from China was significantly lower when compared with the medium-term trend. The D&T business has achieved double-digit growth e.g. (+15%) from health systems in China for several years now, driven predominately by the demand from hospitals for premium solutions.
US-China trade tariffs
The impact of the US-China trade tariffs has somewhat eased, in part, due to the tariff reliefs granted for medical devices used in the treatment of chronic respiratory disease. While these reliefs help support the global battle against Coronavirus, the trade tariffs applicable to the Philips business remain significant. For the full-year 2020, the gross impact of tariffs is anticipated to be approximately €100m, reducing to €70m after applying compensating actions. Although the gross impact remains similar, the company now expects the net tariff impact to be approximately €40m in 2020, €30m lower than the net impact seen during 2019. While it is unclear what the exact impact of tariffs have been on Philips sales growth, it is clear that the ongoing US-China trade tensions are anticipated to continue to dampen profit margins.
During the first quarter adjusted EBITA for the Group was €244m or 5.9% of sales, compared with €364m or 8.8% of sales during Q1 2019. The company estimated that the overall negative impact of COVID-19 on profit margin was approximately -3%, indicating that lower profitability was almost exclusively due to Coronavirus. Its negative effects include lost margin on lower sales activity, factory coverage due to lower production as well as other direct costs. When looking at the D&T segment, this business delivered an adjusted EBITDA of €116m or 6.3% of sales, compared with €107m or 6.2% of sales during Q1 2019, reflecting a marginal improvement in margin. The positive impact of sales growth and improved productivity was partially offset by unfavourable product mix, driven by lower growth from the IGT and cardiac ultrasound portfolios.
Forward guidance for the remainder of 2020
The full impact of the Coronavirus pandemic remains difficult to predict as well as how a higher backlog of orders will develop into increased sales revenue. That said, during the Q1 earnings call, Abhijit commented that the short-term impact (for Q2 2020) is likely to cause a steep revenue decline for the Personal Health business, a significant high single-digit decline (e.g. -8%) for the D&T business, partially offset by a significant increase in revenue for the Connected Care business. The full-year 2020, the Group is aiming to achieve modest comparable sales growth and an adjusted EBITDA margin improvement. Give the current uncertainty and volatility, the company is not providing any more specific guidance for 2020 at this time. Frans wrapped up the Q1 call by reiterating that despite the impact of Coronavirus, the overall growth profile and growth potential of Philips Healthcare remains in-tact post-pandemic and; that the ambition remains to move toward the higher-end of a 4-6% annualised sales growth target.
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