Philips Healthcare, Diagnosis & Treatment, Q2 2020, Sales Results

Image credit: Philips Healthcare RSNA 2019, Philips News Center

On the 20th July, Philips Healthcare published its financial results for Q2 2020. These show that both Group sales revenue growth and profitability developed negatively during the quarter although new orders continued to increase following strong order growth during Q1. The Group sales revenue reached €4.39 billion during Q2 2020, compared with €4.67 billion in Q2 2019, a decreased of approximately -6% year-on-year. This took H1 2020 sales revenue to €8.55 billion, compared with €8.82 billion during H1 2019, a decrease of approximately -3% year-on-year. When adjusting this sales revenue for portfolio changes and currency movements, H1 2020 comparable sales revenue was approximately -4% lower year-on-year (calculated by PMI).

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Q2 2020 Financial Summary Table: Philips Investor Presentation

The result during the second quarter was driven by higher sales revenue from the Connected Care segment which was more than offset by lower sales revenue from the D&T and Personal Health segments, resulting in the year-on-year decrease of -6%.

The COVID-19 pandemic continued to have a significant overall negative impact on sales performance due to weaker consumer demand for personal health products as well as the postponement of installations and elective procedures utilising D&T solutions. The company estimated that Group comparable sales revenue was approximately -10% lower during the second-quarter due to the negative effects from the Coronavirus. PMI estimates that the COVID-19 pandemic has negatively impacted the Groups comparable sales revenue by approximately -12% year-to-date.

At Group level, COVID-19 has been driving lower sales performance but higher orders

Philips has not reported a significant cancellation of orders due to the pandemic, instead, orders have significantly increased although the ability to convert these orders into revenue has slowed due to the external environment. The company reported that comparable equipment order intake was approximately +27% higher during Q2 2020, relative to the prior year. The reflects the increased demand for various products and services supporting the diagnosis and treatment of acute respiratory disease, mainly patient monitoring, ventilators, computed tomography and portable ultrasound.

The Diagnosis and Treatment Segment

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The D&T segment encompasses the Group’s portfolio of medical imaging platforms, image-guided therapy solutions (IGT) as well as healthcare informatics. During the second quarter sales revenue from the D&T business reached €1.91 billion, compared with €2.06 billion in Q2 2019, a decrease of approximately -7% year-on-year. This took H1 2020 sales revenue to €3.74 billion, compared with €3.78 billion during H1 2019, a decrease of approximately -1% year-on-year. When adjusting this sales revenue for portfolio changes and currency movements, H1 comparable sales revenue was approximately -2.7% lower year-on-year. This sales result was driven by lower equipment sales revenue, although service sales trended lower also. The recurring revenue streams from services represent around 35% of the total sales from the D&T business which declined by approximately -1% during the second quarter. Comparable order intake declined by approximately -20% during the second quarter driven by higher orders for computed tomography and mobile X-ray solutions which were more than offset by steep declines in other areas of portfolio.

2020 v. 2019 growth / declineQ1Q2Q3Q4Cum. YTD
Nominal sales revenue+6.1%-7%TBCTBC-1.0%
Comparable sales revenue+2%*-8.5%TBCTBC-2.7%*
Comparable order intake0%-20%TBCTBC-2.7%*
* = calculated by Prerequisite Market Intelligence

From a geographical perspective, sales results during the second quarter varied significantly by region. Sales performance was driven by a combination of higher sales from China and “growth geographies” such as Latin America and Russia, which were more than offset by lower sales from North America, Western Europe and other mature markets. The D&T business has achieved double-digit growth from health systems in China for several years now and Q2 marked a return toward this growth trend.

2020 v. 2019 sales growth / declineQ1Q2Q3Q4FY
Growth geographieslow-single (+)mid-single (+)
Chinamid-single (+)double-digit (+)
Mature geographieslow-single (+)double-digit (-)
North Americamid-single (+)double-digit (-)
Western Europelow single (+)double-digit (-)
Other mature geographiesmid-single (-)Flat (-)
Comparable sales growth by region as reported by Philips Healthcare

The Diagnostic Imaging Segment

During the second quarter, comparable sales revenue was flat relative to Q2 2019. While sales revenue remained stable, new order intake continued to expand, driven predominately by CT and mobile X-ray solutions. During the Q2 earnings call, CFO Abhijit Bhattacharya commented that “we are actually expanding the order book primarily driven by CT”“also mobile X-ray” “those are the two lines where we see an increase”. The surge in demand during Q2 is a continuation of the trend observed during Q1. From a product perspective, Philips is trading on it’s “refreshed” CT product portfolio which includes the CT 6000 iCT and the CT 5000 ingenuity platforms. During the quarter, Philips introduced a modular diagnostic imaging cabin, initially within the Philippines, which can be rapidly deployed with a CT or diagnostic X-ray system. This has been designed to meet the need for flexible hospital infrastructure in order to support the response to public health emergencies, such as the COVID-19 pandemic.

The Image-Guided Therapy (IGT) Segment

During the second quarter, comparable sales revenue growth was a negative double-digit (e.g. -12%), relative to Q2 2019. Along with lower sales revenue, new order intake continued to trend lower. The decline in 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. This result was in-line with expectations as during the Q1 earnings call, CEO Frans van Houten indicated that the revenue from IGT devices would be substantially lower during Q2 as elective procedure volumes were up to 50% lower in some areas. During the Q2 earnings call, Frans commented that “elective procedures have a direct correlation with our IGT device volume and obviously consumer demand can be influenced if the pandemic resurges”“we see elective procedures recovering very nicely, depends a bit on the territory and it correlates of course with where the hotspots are”. Alongside Frans, CFO Abhijit Bhattacharya commented that “the volume of elective procedures rebounded to around 10% below pre COVID-19 levels in recent weeks compared to a more than 50% decline at the start of the quarter” and that elective procedures are returning quicker were movement restrictions were relaxed… “DACH, Germany, Austria, Switzerland, we have seen, let’s say, reasonable growth”. The expectation is that demand will gradually normalise during the second half of 2020, assuming that hospital operations return to normal and the COVID-19 pandemic doesn’t worsen.

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 second quarter, comparable sales revenue growth was a negative mid-single-digit (e.g. -5%), relative to Q2 2019. The decline in sales revenue was predominately driven by the inability to install against orders, particularly for cardiac systems. Despite overall declines for the ultrasound portfolio, strong demand was reported 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. The company also received an industry first 510(k) clearance from the FDA to market a wide range of ultrasound solutions including the CX50 and the Lumify for the management of COVID-19 related lung and cardiac complications. Portable ultrasound solutions have become valuable tools for clinicians treating COVID-19 patients within ED and ICU settings due to their imaging capabilities, portability as well as ease of disinfection.

US-China trade tariffs

The impact of the US-China trade tariffs somewhat eased, in part, due to the tariff reliefs granted to help support the global battle against Coronavirus pandemic. That said, 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 €70m, reducing to €40m after applying compensating actions. This is approximately €30m lower than the net impact reported during 2019. While the impact of tariffs on top-line sales growth remains somewhat opaque, it is clear that ongoing US-China trade tensions are anticipated to dampen profit margins.

Profitability development

During the second quarter, adjusted EBITDA for the Group was EUR418 million or 9.5% of sales compared to 11.8% in the second quarter of 2019. Philips estimated that the overall negative impact of the COVID-1D pandemic was approximately -3%. Its negative effects include lost margin on lower sales activity, factory coverage due to lower production as well as other direct incremental costs. In Diagnosis & Treatment, the adjusted EBITDA decreased to 8.6% of sales. This was a result of the decline in sales and unfavorable product mix driven by lower growth of IGT and cardiac ultrasound portfolios, only partly offset by the positive impact from productivity measures.

Forward guidance for the remainder of 2020

For the full-year 2020, the Group maintain it’s prior outlook of modest comparable sales growth and adjusted EBITDA margin improvement. Abhijit commented: “we continue to expect to return to growth and improved profitability for the Group in the second half of the year starting with the third quarter and further improving in Q4, assuming we can convert our existing order book for Diagnosis & Treatment and Connected Care businesses, elective procedures normalize and consumer demand gradually improves.” The impact of the Coronavirus pandemic continues to increase uncertainty and volatility, therefore there is no specific guidance for 2020 right now. In the prior Q1 call, Frans 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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