- Headwinds from tariffs are hurting profits in Philips' connected care businesses, executives said in a financial update to investors Thursday, weeks ahead of its scheduled third quarter earnings call.
- Margin improvements in the conglomerate's personal health and diagnosis & treatment divisions were "more than offset" by a 4.5-point drop in adjusted margin in the third-largest of Philips' four divisions, which includes its monitoring & analytics and sleep & respiratory businesses. "This was due to increasing headwinds from tariffs and a delay in the impact of the mitigating actions, factory under-coverage as production levels were lowered to reduce inventory, and an adverse product mix impact," CEO Frans van Houten said in a statement.
- van Houten added Philips will continue to work on mitigating actions, and anticipates full-year margin improvements for the group to amount to 10 to 20 basis points, taking into account "the overall significant headwinds and the underperformance" of the connected care businesses. The company will report full third quarter financial results Oct. 28.
The adverse effect of tariffs should not come as a total surprise to investors, given Philips executives' acknowledgment of the headwind's impact on the connected care division's second quarter profits. But, on the most recent earnings call in July, executives suggested efforts to offset pains would turn things around in the second half of the year. Thursday's report indicates the rebound is taking longer than expected.
van Houten said on the company's second quarter earnings call the connected care division is "lumpy" but "has a lot of promise," and predicted a stronger second half of the year for the unit. CFO Abhijit Bhattacharya elaborated, telling investors July 22 the group's businesses were "continuing on the uneven pattern of order intake that we witnessed during the last quarters." But comparable sales growth for the first half of the year exceeded 4%, he said.
"I would like to reiterate that productivity measures are in place and will start contributing more significantly to margin improvement during the second half of the year," Bhattacharya said in July. The same "mix, tariffs, and [adverse currency impact]" called out going into the third quarter still appear to be dogging the company.
The connected care businesses are especially vulnerable because much of the production is based in the U.S. and sold in China. Bhattacharya said Philips had moved some production of sleep and respiratory masks away from China in reaction to the trade war.
The medical technology industry has closely watched the ongoing tariff developments between the U.S. and China, given the U.S. supplies more than 30% of China's medical device and diagnostics imports. The sector has recently experienced small victories in the form of exemptions for certain medical products including for some X-ray and MRI components, anesthesia masks and otoscopes.
In pre-reported financial results disclosed Thursday, Philips projected €4.7 billion in total sales for the third quarter, which it said would represent 6% comparable growth and flat orders.
The company said its balance sheet for the quarter will include a €78 million ($86 million) charge related to goodwill impairment in the connected care division.