Image credit: Philips Healthcare RSNA 2019, Philips News Center
Earlier today, Philips Healthcare published its financial results for Q3 2020. These show that Group sales returned to growth and profitability materially strengthened during the quarter, a positive result following a challenging start to the year. The group sales revenue reached €4.98 billion, compared with €4.70 billion in Q3 2019, an increase of approximately 6% year-on-year. When adjusting this sales performance for portfolio changes and currency movements, comparable sales increased by approximately 10% year-on-year. This took cumulative 2020 sales revenue to €13.53 billion, compared with €13.52 billion during 2019, a marginal increase of +0.1% year-on-year. PMI estimates that cumulative comparable sales revenue is approximately +0.8% higher year-on-year.
The results during the third quarter were carried by the Connected Care segment which reported +36% sales growth year-on-year. This was supported by a return to growth for the Personal Health segment, partially offset by continued revenue declines from the D&T segment, resulting in a year-on-year increase of +6%.
COVID-19 has been driving lower sales performance but higher orders
The COVID-19 pandemic continued to have a significant overall negative impact on sales performance during the quarter. This was 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 estimates that Group comparable sales revenue was approximately -5% lower during Q3 due to the negative effects of the Coronavirus. PMI estimates that the COVID-19 pandemic has negatively impacted the Groups comparable sales revenue by approximately -7% year-to-date.
Although sales performance has been lower, Philips has not reported a significant cancellation of orders due to the pandemic. Instead, orders materially increased during the first nine months of 2020, relative to 2019. Comparable order intake increased by +3% during the third quarter and are trending higher on a rolling 12-months basis. The increased order book is reflecting the increased demand for products and services supporting the diagnosis and treatment of acute respiratory disease, mainly, patient monitoring, ventilators, computed tomography and portable ultrasound. An increase in order backlog is also reflective of the reduced ability to convert orders into revenues due to disruptions to hospital operations, travel restrictions and social distancing measures.
The Diagnosis and Treatment Segment
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 third quarter sales revenue from the D&T business reached €1.97 billion, compared with €2.11 billion in Q3 2019, a decrease of approximately -7% year-on-year. When adjusting this sales performance for portfolio changes and currency movements, comparable sales revenue was approximately -3% lower year-on-year. Overall, this took cumulative 2020 sales revenue to €5.72 billion, compared with €5.90 billion during 2019, a decrease of approximately -3% year-on-year. PMI estimates that cumulative comparable sales are approximately -3.5% lower year-on-year.
The Q3 sales result was driven by lower revenue from equipment sales, partially offset by marginal growth from service revenues. The recurring revenue streams from services represent around 35% of the total sales from the D&T business and have had somewhat of a stabilising effect where equipment demand has dropped off. Comparable order intake improved to a decline of -5% in Q3, compared to a -20% decline in Q2. This was driven by higher orders for computed tomography, mobile x-ray solutions and point-of-care ultrasound. These gains were more than offset by declines in other areas of the portfolio.
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, Western Europe and “growth geographies” such as Russia and central Asia. This growth was more than offset by lower sales from North America and other mature markets.
|2020 v. 2019 sales growth||Q1||Q2||Q3||Q4||FY|
|Growth geographies||low-single (+)||mid-single (+)||mid-single (+)|
|China||mid-single (+)||double-digit (+)||mid-single (+)|
|Mature geographies||low-single (+)||double-digit (-)||high-single (-)|
|North America||mid-single (+)||double-digit (-)||high-single (-)|
|Western Europe||low single (+)||double-digit (-)||low-single (+)|
|Other mature geographies||mid-single (-)||Flat (-)||Not reported|
The Diagnostic Imaging Segment
During Q3, comparable sales revenue growth was a negative low-single-digit (e.g. -2%), relative to Q3 2019. This was driven by growth from computed tomography and diagnostic x-ray systems, which was more than offset by lower installation volumes of MR systems. 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 second 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 Q3, comparable sales revenue growth was a negative low-single-digit (e.g. -2%), relative to Q3 2019. This was driven by a combination of lower revenue from IGT systems, partially offset by marginal growth from the devices business, which saw some recovery relative to prior quarters. Declines in revenue from IGT systems were driven by hospitals pushing out installations, whereas elective procedures continued to recover. During the Q3 earnings call, Abhijit commented that “the volume of elective procedures continued to recover to almost pre-COVID levels at the end of the quarter”, indicating a sharp recovery as elective procedure volumes were lower by 50% in some areas due to the pandemic. Abhijit also noted in previous investor discussions that elective procedures returned quicker were movement restrictions were relaxed… “DACH, Germany, Austria, Switzerland”. Frans has previously reiterated that elective procedures have a direct correlation with the Philips device business and therefore demand is still vulnerable to any resurgence of COVID-19. The expectation is that demand will gradually continue to normalise for the remainder of 2020, assuming that the 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.
During the quarter, Philips launched it’s next-generation Aziron IGT platform which is an iteration of its existing platform which has been used in over 2m procedures globally. During the Q3 earnings call, Frans commented that [the new Aziron platform] “is several years ahead of the competition according to our customers, and the feedback that we are getting“. This was in response to being pressed by Healthcare Analyst, Scott Bardo regarding new product launches.
The Ultrasound Imaging Segment
During Q3, comparable sales revenue growth was a negative double-digit (e.g. -15%), relative to Q3 2019. The decline in sales revenue was driven by strong demand for point-of-care (POC) devices which was more than offset by lower revenue from other parts of the portfolio, particularly cardiac systems. Philips ability to install against orders has been significantly impaired due to global public health measures and travel restrictions. The strong demand for POC devices included Philips hand-held and portable solutions which can be easily placed within reach of COVID-19 patients. In particular, orders for the Philips Lumify and CX50 products were strong. During the prior quarter, the company 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.
US-China trade tariffs
The US-China trade tensions continue to have a significant impact on the Philips business, although these have somewhat eased thanks to tariff reliefs related to supporting the global battle against Coronavirus as well as mitigating actions taken by Philips. For the full-year 2020, the gross impact of tariffs is anticipated to be approximately €70m, which will be reduced 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 continue to dampen profit margins.
At Group level, profitability materially improved with adjusted EBITA reaching €769 million or 15.4% of sales compared to 12.4% in Q3 2019. In the D&T business, profitability deteriorated and adjusted EBITA decreased to 9.7% of sales, compared to 14% in Q3 2019. This was driven by a lost margin on lower sales activity, factory coverage due to lower production as well as a shift to a more unfavourable product mix i.e. lower growth from the cardiac ultrasound and IGT portfolios.
Forward guidance for the remainder of 2020
For the full-year 2020, the Group maintained the prior outlook of modest comparable sales growth and adjusted EBITDA margin comparable to 2019. In previous investor discussions Frans has reiterated 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.