A surprising downturn in China during Q3 significantly impacted Philips (PHG, Financial), leading to a sharp reduction in its FY24 comparable sales growth outlook. Previously, Philips was optimistic about stabilizing its business in China, which accounts for about 10% of its revenue. However, instead of contributing to order growth, the region's conditions worsened, causing a substantial sell-off.
- Philips missed Q3 earnings estimates by a few pennies, a common occurrence. Despite this, a strong adjusted EBITA margin increase of 160 bps year-over-year to 11.8% helped maintain investor confidence. This margin improvement is due to continuous productivity enhancements and higher royalty income, supporting the high end of Philips' FY24 margin outlook at around 11.5%.
- However, these margins couldn't offset the declining demand in China, where both consumer and hospital demand decreased. Personal Health comparable sales saw a double-digit decline year-over-year in the region, leading to flat overall comparable sales. Orders also fell by a similar margin, contributing to a 2% decline in overall orders for the quarter.
- Challenges in China stem from ongoing issues since Q2, such as anti-corruption measures and delays from the National Renewal Program affecting order and lead times. Unlike previous optimism, Philips now expresses uncertainty regarding China's future order growth.
- Despite solid performance in other key markets with positive comparable sales growth, the issues in China have led Philips to revise its FY24 sales growth guidance to +0.5-1.5%, down from +3.0-5.0%. However, Philips still expects +3.0-5.0% growth outside of China.
Excluding China, Philips showed strong Q3 results with significant progress in productivity actions. Yet, China's challenges remain a major concern, as it is crucial for Philips' long-term growth. Without a clear timeline for stabilization or recovery, investor discomfort is evident.
Philips' issues in China serve as a warning for peers like GE HealthCare (GEHC, Financial), which reports on October 30 and derives even more revenue from China than Philips.
