October 10, 2019 / 6:56 AM / 5 days ago

Tariffs take toll on Philips margin goal in blow to shares

AMSTERDAM (Reuters) - Philips (PHG.AS) warned it will miss its 2019 profit margin target on Thursday due to trade tariffs and poor results at its Connected Care arm, wiping around 3 billion euros ($3.3 billion)off the Dutch healthcare technology group’s market value.

FILE PHOTO: Dutch technology company Philips. logo is seen at company headquarters in Amsterdam, Netherlands, January 29, 2019. REUTERS/Eva Plevier/File Photo

The trade war between the United States and China has forced Philips to shift production and to seek other suppliers for components in recent months to avoid punitive tariffs.

But this has proved harder to achieve than earlier expected, while tariffs rose faster than previously announced, Chief Executive Frans van Houten told reporters.

“Tariffs have gone up, definitions have become clearer”, Van Houten said, adding: “The impact has gone up, while mitigating actions have been delayed.”

Philips shares were down 8% at 0820 GMT after the warning.

Earlier this year, Philips said the trade war between Washington and Beijing was forcing it to move hundreds of millions of euros worth of production from the U.S. to China, and vice versa, to avoid tariffs.

These mainly hurt Philips’ connected care business, which specialises in remote patient monitoring, for instance through software platforms and devices that allow doctors to share patient information.

Sales of connected care were 3 billion euros ($3.3 billion) last year, on total group revenues of 18.1 billion euros.

The connected care arm is more exposed to trade tariffs than Philips’ two larger businesses, which make hospital equipment such as medical scanners and personal health products such as toothbrushes, as it offers many more and smaller products.

“This means we need a lot of small actions, which all add up”, Van Houten said.

“In diagnosis & treatment we have fewer products, while in personal health the volumes are higher, so a single action there has greater effect on the whole.”

MARGIN GOAL MISS

Margins at the struggling Connected Care division not only dropped in the third quarter as tariffs hit, but also because factories lowered production to get rid of high inventories.

Philips has repeatedly said rising life expectancy and associated chronic diseases would lead to growing demand for devices that allow patients to stay at home, while their data is monitored.

But Van Houten last year also said demand for such products would remain modest in 2019.

Philips now expects its adjusted EBITA margin to only improve by 10 to 20 basis points this year, well off its previous 100 basis point goal.

“Based on this profit warning we expect 2019 adjusted EBITA to come down by low-to-mid-single digit”, ING analyst Marc Hesselink said.

Philips did stick to its target of improving comparable sales by 4% to 6% this year, as Van Houten said he continued to see good growth in all his businesses.

Preliminary third quarter results, also released on Thursday, showed sales are expected to have increased 6% in the quarter to 4.7 billion euros, while adjusted earnings before tax, interest and amortisation (EBITA) increased 3% to 583 million euros.

A 78 million euros impairment on connected care pushed net profit down around 30% to 210 million euros.

Reporting by Bart Meijer; Editing by Muralikumar Anantharaman and Alexander Smith

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