Philips recouped 186 million euros (about $212 million) of previously paid tariffs in the second quarter after largely completing the refund process.
President Donald Trump’s tariffs on U.S. imports of medical devices made in China hurt Philips last year. Philips initially predicted a net impact of up to 300 million euros, before cutting its forecast to up to 200 million euros after the U.S. struck deals with China and the European Union. Later, the company worked to recoup payments after the Supreme Court struck down many of the Trump administration’s tariffs.
Philips “largely completed the U.S. tariff refund process” in the second quarter, CEO Roy Jakobs said on an earnings call with investors Tuesday. Jakobs said the pace of the refund process shows “the agility of our teams in a changing environment.”
The challenges of the changing environment include cost inflation, currency effects and ongoing tariffs, all of which dragged on Philips’ profit margins in the second quarter. Philips’ cost inflation forecast “has ticked up slightly” from its previous high-single-digit prediction, and the company is upping its mitigation actions in response, CFO Charlotte Hanneman said on the earnings call.
Prices of “e-components” have increased significantly, Hanneman said, and Philips lacks hedges for those cost rises. Meanwhile, freight costs are increasing significantly as a result of the Middle East tensions, the CFO added.
Hanneman named rising energy costs as a third inflationary force, although she called that driver small and noted that Philips has hedges in place to curb the impact.
Offsetting China challenges
Philips is managing global cost inflation while contending with divergent commercial performance in different parts of the world. The company expects third-quarter comparable sales growth to hit the lower end of its full-year range, partly because of ongoing challenges in China.
The expansion of China’s centralized procurement policy has created “turmoil in the market because people are learning what this new process is,” resulting in delays, Jakobs said. The CEO added that other consequences of the policy include margin pressures for undifferentiated technologies. The policy has led Philips to adopt “a very selective go-to-market approach” focused on innovative products, Jakobs said.
Philips is looking to other markets to offset the pressures it faces in China. The company’s performance in North America and Europe is “accelerating probably even a bit faster than we expected,” Jakobs said, and India is “really picking up.”
Underlying demand in North America continues to be strong, Jakobs said. The region accounted for a 1% decline in order intake in the second quarter, but Jakobs attributed the dip to a few deals that were delayed to the third quarter, not to a slowdown in demand.
Europe is “investing more,” leading to “a step up versus last year,” the CEO said. Jakobs highlighted deals in the Nordic region and strengthening momentum in Central Europe as positive trends in Europe. The U.K. healthcare system is going through a challenging period but is investing to boost service delivery, “especially digitally,” Jakobs said.
The resurgence of the European market is happening alongside the emergence of India, which Jakobs said made a double-digit contribution to the company. India is “a really exciting growth prospect that actually we have only started to untap,” he said. Philips is talking to the Indian government about the role its devices, including artificial intelligence systems, can play in hospitals and other settings, Jakobs said.
