Philips Set To Hit Profitability Target As Margins Get Better

Philips is on course to hit its 2016 profitability target as it reinvents itself as a pure healthcare company, with strong growth in medical technology partially offset by the costs of heavy research and development investments.

The company’s first results since spinning off the lower-margin Philips Lighting business, in which it still owns a 70% stake, hit consensus forecasts as higher volumes and tight cost control improved margins.

Adjusted earnings before interest, tax and amortisation of 544 million euros ($597 million) compared with 534 million euros forecast by analysts.

Sales rose 3% to 5.9 billion euros, led by growth of 5% at its health technology businesses, in line with expectations, and its adjusted EBITA margin improved to 9.3%, against 6.8% in the first quarter.

Margin improvement was partially offset by investments of “tens of millions” in connected systems and healthcare informatics, chief executive Frans van Houten said in an interview.

Philips, which is targeting a margin of 11% for the full year, has said margin improvements will be “backloaded” toward the second half of the year.

Volcano, a catheter company Philips acquired last year, was showing double digit growth, van Houten said, partly as a result of combining the two companies’ different sales channels.

“Cross-selling into each other’s customer base is generating extra growth,” he said. The company was open to further focused acquisitions, he said, with systems for processing patient data and diagnostics of particular interest.

In the personal care business, which contributes 30% of revenues, new connected devices were establishing closer relationships between Philips and customers, he said, citing an oxygen mask for patients with sleep problems that allowed Philips to offer them coaching through cloud computing.

He said Philips was committed to Britain, where it has a factory and is also conducting clinical trials and research and development activities, despite the country’s vote last month to leave the European Union.

“We are all a bit concerned about what Brexit will involve,” he said, listing presidential elections in the US and the global security situation as other risk factors.

Philips shares were up 2.8% at 24.44 euros at 1108 GMT, outperforming Amsterdam’s large-cap AEX index, which was up 0.49%.