Philips warns of challenging year after first quarter profit decline

Philips reported a bigger-than-expected decline in quarterly operating profit and warned of a challenging 2014 amid unfavourable exchange rates and slowing demand for medical equipment in China and Russia.

The company said on Tuesday that earnings before interest, tax and amortisation (Ebita) dropped 22 per cent to €314 million in the first quarter through the end of March, missing consensus for €341 million in a Reuters poll.

“Our first-quarter financial results reflect a challenging start to the year,” chief executive Frans van Houten said in a statement. He expressed confidence that Philips will meet medium-term 2016 financial targets, but said 2014 will remain “challenging.”

The Dutch healthcare, lighting and consumer appliances group has reinvented itself since Mr Van Houten took over as chief executive in April 2011. It has cut costs, sold weak businesses and targeted new growth segments, which has sent Philips shares up more than 80 per cent in the past two years.

But group sales declined by 4.5 per cent in the first quarter, weighed down by slowing demand from China and Russia, currency effects and the suspension of CT scanner production at a factory in Cleveland. Unfavourable exchange rates alone shaved 5 percentage points off quarterly sales.

Philips still targets a 2014-2016 Ebita margin of 11-12 per cent, return on invested capital of at least 14 per cent and sales growth of 4-6 per cent, though it has warned that this year would see only a modest step towards achieving those goals.

In the first quarter, the Ebita margin narrowed to 6.3 per cent from 7.6 per cent.

Reuters