April 22, 2013 / 11:07 AM / 5 years ago

Philips sees tough European, U.S. healthcare markets

AMSTERDAM (Reuters) - Philips forecast a slow first half of the year due to the weak European economy and a tough outlook for healthcare spending in the United States, sending its shares to a four-month low.

The Dutch electronics company reported higher-than-expected quarterly earnings, but weak sales underscored the challenges it faces as it restructures to cope with stagnant economic growth, fragile consumer spending and government budget cuts in several markets.

Shares in Philips, the world’s biggest lighting maker and a top-three maker of hospital equipment, fell to their lowest level since January, down 3.9 percent by 1250 GMT against a broadly higher European blue chip market.

“The biggest concern in the market is healthcare,” said Daniel Cunliffe, analyst at Nomura. “Put very simply, healthcare is the biggest division, and the biggest margin-driver, so the issue is will healthcare recover in the U.S.”

Chief Executive Frans van Houten, who has driven Philips’ restructuring over the past two years, said the outlook for healthcare is particularly tough in the United States, where executives in the sector are cautious about spending plans ahead of the implementation of planned healthcare reforms.

Healthcare equipment orders fell 5 percent on a comparable currency basis, with a double-digit decline in North America and a high-single-digit decline in western Europe, where several economies are in crisis.

President Barack Obama’s healthcare law, which takes full effect in 2014, aims to extend insurance cover to over 30 million Americans, but requires insurance companies to bear costs including preventive health services and also introduces a new tax on medical devices.

In the past week, medical testing companies such as Quest Diagnostics and device makers Johnson & Johnson and Abbott Laboratories have cited a slowdown in use of medical services in the run-up to the reform’s implementation.


Fabian Smeets, analyst at ING, said that while Philips’ net result was above consensus, investors were concerned by the weak first-half outlook and modest sales growth of 4 percent in emerging markets, considered the main driver for the group’s growth after its overhaul.

Philips has sold off much of its consumer electronics business - including its television, audio, and video operations - in a drive to improve profitability.

The company said it was on track to achieve its end-2013 targets of sales growth of between 4 and 6 percent, a margin on EBITA (earnings before interest, tax and amortization) of 10 to 12 percent and a return on invested capital of 12 to 14 percent.

Van Houten said he would update investors on his new financial targets and strategy for coming years on September 17.

Some analysts expect Philips to shift away from share buybacks and to return more cash to its investors through higher dividends or special dividends in future.

“We are not a serial share buyback company,” van Houten told reporters on a conference call, adding Philips will complete its 2 billion euro ($2.6 billion) buyback in the second quarter.

The company reported first-quarter net profit of 162 million euros ($211.9 million), down from 183 million a year ago when its results were lifted by a net gain of 119 million euros from the divestment of its stake in the Senseo coffee brand and the sale of its office campus in the Netherlands.

Quarterly EBITA improved in all three businesses, once year-ago one-off gains and other charges were excluded.

Sales rose 1 percent on a comparable basis to 5.26 billion euros. Analysts in a poll commissioned by Reuters had forecast net profit of 153 million euros on sales of 5.41 billion.

($1 = 0.7644 euros)

Editing by David Holmes and Louise Heavens

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