Philips' Fourth Quarter and Annual Results 2015

Philips reports Q4 comparable sales growth of 2% to EUR 7.1 billion and a 13% improvement in Adjusted EBITA to EUR 842 million

Fourth-quarter highlights

 

• Comparable sales up 2%, driven by 4% growth in the HealthTech portfolio
• Currency-comparable order intake up 15%, driven by North America, China and Western Europe
• Adjusted EBITA¹⁾ improved 50 basis points to 11.9% of sales and amounted to EUR 842 million
• EBITA amounted to EUR 263 million, or 3.7% of sales• Net loss of EUR 39 million, impacted by one-time charges including previously announced pension de-risking, compared to net income of EUR 134 million in Q4
  2014
• Free cash flow of EUR 740 million, compared to EUR 559 million in Q4 2014
• Philips Lighting separation process on track

 

Full-year highlights

 

• Comparable sales up 2% to EUR 24.2 billion, driven by above 4% growth in the HealthTech portfolio
• Currency-comparable order intake up 5%, driven by North America and Western Europe
• Adjusted EBITA improved 20 basis points to 9.2% of sales and amounted to EUR 2.2 billion
• EBITA totaled EUR 1.4 billion, or 5.7% of sales, compared to EUR 821 million, or 3.8% of sales, in 2014
• Net income amounted to EUR 659 million, compared to EUR 411 million in 2014
• Free cash flow of EUR 325 million, compared to EUR 497 million in 2014
• Return on invested capital increased to 7.0%, compared to 4.5% in 2014
• Proposal to maintain dividend at EUR 0.80 per share
  

 

Frans van Houten, CEO:

 

“The fourth quarter of 2015 was another quarter in which Philips delivered year-on-year operational improvements. We increased Adjusted EBITA across all three sectors and generated close to EUR 1 billion of cash from operations.

 

In the fourth quarter, we saw continued sales growth and strong 15% currency-comparable order intake growth in Healthcare, with margins also improving year-on-year. Consumer Lifestyle showed continued robust growth across all businesses, most notably Health & Wellness, while productivity and product mix improvements resulted in significantly higher margins. Lighting again delivered year-on-year performance improvements, driven by sustained comparable sales and margin growth in the LED business and our effective management of the market decline in conventional lamps.

 

Overall, 2015 was a solid year for Philips, as illustrated by consistent performance improvements in the face of ongoing challenging macroeconomic circumstances. Lighting showed another year of operational improvements, and our HealthTech portfolio, which combines the Healthcare and Consumer Lifestyle businesses, delivered promising comparable sales growth of more than 4% overall for the year, demonstrating our progress in capitalizing on opportunities in this large and growing market. Order intake growth of 5% in Healthcare was encouraging.

 

For 2016, we continue to expect modest comparable sales growth and we will build on our 2015 operational performance improvement. Taking into account ongoing macro-economic headwinds and the phasing of costs and sales, we expect improvements in the year to be back-end loaded.”

 

Accelerate! and Separation Update

 

“Our Accelerate! program continues to drive strong operational improvements across the organization. In Healthcare, for example, we increased sales of ClarityIQ upgrades for interventional X-ray systems by 50% in 2015 compared to 2013, by automating our system upgrade sales process. In Consumer Lifestyle, we virtually doubled sales on ‘Double 11’ day in China compared to 2014, by customizing our propositions and leveraging our digital capabilities. In Lighting, we delivered solid sales growth for Consumer Luminaires in the Benelux and Iberia by adapting the portfolio of this business to locally relevant value propositions.”

 

Philips’ three cost savings programs all delivered ahead of plan in 2015. The company achieved EUR 290 million of gross savings in overhead costs, EUR 379 million of gross savings in procurement, and EUR 187 million of productivity savings from the End2End process improvement program.

 

Philips is on schedule to be able to complete the separation of the Lighting business in the first half of this year. As previously stated, Philips isreviewing all strategic options for Philips Lighting, including an initial public offering and a private sale. Costs related to the separation amounted to EUR 183 million in 2015. For 2016, the company continues to expect separation costs to be in the range of EUR 200-300 million.

 

Q4 2015 Financial and Operational Overview

 

Healthcare

 

Healthcare comparable sales grew 3% year-on-year and currency-comparable order intake grew by 15%. The Adjusted EBITA margin increased by 100 basis points to 15.8%, driven by cost productivity improvements and positive currency impacts.

 

“We are encouraged by 15% order intake growth in Healthcare, which was driven by strong growth in North America, Western Europe and a substantial rebound in China. Our focus on multi-year strategic partnerships continued to pay off, as illustrated by three new partnerships based on a managed services model to optimize the delivery of care: with Mackenzie Health in Canada, Granada’s Clinical Hospital in Spain, and Hospices Civils de Lyon in France.”

 

Consumer Lifestyle

 

Consumer Lifestyle comparable sales increased by 6% year-on-year, driven by double-digit growth in Health & Wellness and low-single-digit growth in Personal Care and Domestic Appliances. The Adjusted EBITA margin increased by 180 basis points to 17.8% year-on-year.

 

“Consumer Lifestyle once again delivered a strong top and bottom-line performance, with double-digit growth in growth geographies. In India, for instance, strong sales of the Philips Airfryer, juicers, soup makers and mixer grinders drove double-digit growth. Oral Healthcare continued its strong trajectory, with a very solid performance in North America, China, and Germany, Austria & Switzerland.”

 

Lighting

 

Lighting again improved its operational results, with the Adjusted EBITA margin increasing by 150 basis points to 10.5% year-on-year. LED lighting comparable sales grew 26% and LED margins continued to improve. LED sales now represent 48% of total Lighting sales, compared to 37% in Q4 2014. Conventional lamps sales decreased by 16%, in line with industry trends, resulting in an overall comparable sales decline of 2% year-on-year.

 

“The sustained strong performance of our LED business was encouraging, with both sales and margin increasing simultaneously despite significant technology-driven price erosion. In the quarter, Lighting showcased its leadership in connected lighting by teaming up with companies including Cisco and SAP to address opportunities in the office and street lighting markets respectively. We aim to further improve Lighting margins by driving growth and margin expansion in LED and maintaining high profitability in the declining conventional lamps market.”

 

Innovation, Group & Services

 

Strong comparable sales growth from emerging businesses was more than offset by lower revenue from IP Royalties and as a result of the divestment of the OEM remote controls business in 2014, resulting in an overall IG&S sales decline of EUR 48 million. Adjusted EBITA was a net cost of EUR 183 million, compared to a net cost of EUR 100 million in the fourth quarter of 2014.

 

“We continued to drive leadership positions in emerging business areas such as digital pathology and handheld diagnostics. For example, Philips and Banyan Biomarkers entered into a joint development agreement to develop and commercialize a new handheld blood test to rapidly detect traumatic brain injury, such as concussion. The partnership will broaden the application of Philips’ handheld diagnostics system and will strengthen its competitive position in point-of-care diagnostics for acute care settings, a new growth market for Philips.”

 

¹⁾ Adjusted EBITA is defined as Income from operations (EBIT) excluding amortization of acquired intangible assets, impairment of goodwill and other intangible assets, restructuring charges, acquisition-related costs and other significant items.

A reconciliation of Adjusted EBITA to EBIT is provided in the section ‘Reconciliation of non-GAAP performance measures‘ of this release.

Forward-looking statements

This document and the related oral presentation, including responses to questions following the presentation, contain certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items. Examples of forward-looking statements include statements made about the strategy, estimates of sales growth, future EBITA, future developments in Philips’ organic business and the completion of acquisitions and divestments. By their nature, these statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these statements.

 

These factors include but are not limited to domestic and global economic and business conditions, developments within the euro zone, the successful implementation of Philips’ strategy and the ability to realize the benefits of this strategy, the ability to develop and market new products, changes in legislation, legal claims, changes in exchange and interest rates, changes in tax rates, pension costs and actuarial assumptions, raw materials and employee costs, the ability to identify and complete successful acquisitions, including Volcano, and to integrate those acquisitions into the business, the ability to successfully exit certain businesses or restructure the operations, the rate of technological changes, political, economic and other developments in countries where Philips operates, industry consolidation and competition. As a result, Philips’ actual future results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. For a discussion of factors that could cause future results to differ from such forward-looking statements, see the Risk management chapter included in the Annual Report 2014 and the “Risk and uncertainties” section in the semi-annual financial report for the six months ended June 30, 2015.

 

Third-party market share data

 

Statements regarding market share, including those regarding Philips’ competitive position, contained in this document are based on outside sources such as research institutes, industry and dealer panels in combination with management estimates. Where information is not yet available to Philips, those statements may also be based on estimates and projections prepared by outside sources or management. Rankings are based on sales unless otherwise stated.

 

Use of non-GAAP information

 

In presenting and discussing the Philips Group financial position, operating results and cash flows, management uses certain non-GAAP financial measures. These non-GAAP financial measures should not be viewed in isolation as alternatives to the equivalent IFRS measures and should be used in conjunction with the most directly comparable IFRS measures. Non-GAAP financial measures do not have standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other issuers. A reconciliation of these non-GAAP measures to the most directly comparable IFRS measures is contained in this document. Further information on non-GAAP measures can be found in the Annual Report 2014.

 

Use of fair-value measurements

 

In presenting the Philips Group financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that are deemed to be reliable. Readers are cautioned that these values are subject to changes over time and are only valid at the balance sheet date. When quoted prices or observable market data are not readily available, fair values are estimated using appropriate valuation models and unobservable inputs. Such fair value estimates require management to make significant assumptions with respect to future developments, which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in the Annual Report 2014. Independent valuations may have been obtained to support management’s determination of fair values.

 

Presentation

 

All amounts are in millions of euros unless otherwise stated. All reported data is unaudited. Financial reporting is in accordance with the accounting policies as stated in the Annual Report 2014, unless otherwise stated. The presentation of certain prior-year information has been reclassified to conform to the current-year presentation.

 

In 2014, we announced plans to establish two standalone companies focused on the HealthTech and Lighting opportunities. The proposed separation of the Lighting business impacts all businesses and markets as well as all supporting functions and all assets and liabilities of the Group. Philips expects to complete the separation of the Lighting business in the first half of 2016. We expect to continue reporting in the existing structure until the changes in the way we allocate resources and analyze performance in the new structure have been completed.