Philips slashes guidance as China lockdowns hit Q2 sales

Dutch technology conglomerate Philips reported a 7% fall in comparable group sales in its second quarter on Monday, to €4.2bn (£3.57bn), mainly caused by continued supply shortages and prolonged lockdowns in China, as it also cut its guidance for the year.

The Amsterdam-listed company had reported comparable sales growth of 9% in the same period of 2021.

It said its order book remained “strong”, as its comparable order intake increased 1%, including a five percentage point negative impact related to China.

Income from operations totalled €11m, falling from €85m year-on-year, while adjusted EBITA slid to €216m, or 5.2% of sales, from €532m, or 12.6% of sales, a year ago.

Operating cash flow was an outflow of €306m, mainly due to temporarily higher inventories, compared to an inflow of €332m in the second quarter of 2021.

The board said “comprehensive measures” were in place to improve supply chain resilience and pricing, with the company’s productivity programme increased to €500m per year through 2025.

Philips revised its full-year 2022 outlook to comparable sales growth of between 1% and 3%, and an adjusted EBITA margin of around 10%, driven by comparable sales growth of 6% to 9% in the second half.

For the 2023 to 2025 period, Philips also provided a revised performance improvement trajectory of 4% to 6% average annual comparable sales growth, and an adjusted EBITA margin of 14% to 15%, as well as a free cash flow of around €2bn by 2025.

“Across our businesses, we have stepped up our actions on productivity, pricing, and strengthening supply chain resilience to mitigate the ongoing headwinds and associated risks,” said chief executive officer Frans van Houten.

“The positive impact of these actions, together with the strength of our order book and improving component supplies, give me confidence that we will resume growth from the third quarter onwards, resulting in 6% to 9% comparable sales growth and improved profitability in the second half of the year.”

“Our performance in the second quarter was impacted by global, industry-wide challenges including supply shortages, Covid lockdown measures in China, inflationary pressures and the Russia-Ukraine war, resulting in a comparable sales decline of 7%, with an adjusted EBITA margin of 5.2%.”

Van Houten said the impact of the Covid lockdowns “significantly affected” the business in China, where comparable sales and order intake declined almost 30% in the quarter.

Production in several of its factories, as well as those of its suppliers in China, was suspended for two months, exacerbating the firm’s global supply chain and cost challenges.

“The China lockdowns directly impacted the adjusted EBITA margin of the group by 120 basis points due to lower sales and a further 110 basis points because of factory under-utilisation,” the CEO said.

“Global inflation and cost headwinds had an additional impact of around 290 basis points on group profitability in the quarter.”

Frans van Houten said Philips Respironics was making “solid progress” with the repair and replacement programme for the CPAP, BiPAP and mechanical ventilator devices affected by the June 2021 field safety notice, and published “encouraging results” related to its test and research programme to assess possible health risks.

“We know how important the affected devices are to patients and are working very hard to get a resolution to them as fast as we can.

“Looking ahead to 2023 and beyond, while we continue to see risks and a challenging macro-environment, we expect our supply chain measures to take full effect, resulting in a significant improvement in the conversion of our order book to revenue.

“Our pricing and increased productivity measures will expand margins.”

At 1044 CEST (0944 BST), shares in Koninklijke Philips were down 10.93% in Amsterdam at €19.37.

Reporting by Josh White at Sharecast.com.