Philips CEO warns of deteriorating market conditions in emerging markets, namely China

Frans van Houten

Philips ($PHG) CEO Frans van Houten downplayed expectations during the company's Capital Markets Day in London, saying that due to increasing macroeconomic risks in China and other emerging markets, he expects "moderate" sales growth in 2016.

During the previous Q2 earnings call, the company said that "growth geographies" posted a double-digit decline in order intake, mainly due to poor performance in China and Latin America, reflecting "deteriorating market conditions." The company hasn't brightened its outlook since July, though it expects profit margins to remain unchanged in the face of headwinds.

"We continue to expect modest sales growth for 2015 and are focused on improving the adjusted EBITA margin, underpinned by better operational performance, despite a less favorable foreign exchange environment and deteriorating market conditions in certain emerging markets, most notably China," van Houten said during its Capital Markets Day, held at the Morgan Stanley Global Healthcare Conference, according to a company release. "The underlying strength of our businesses is enabling us to deliver further improvements, and we expect an adjusted EBITA margin in 2016 of around 11%. At the same time, macro-economic risks are increasing and, as a result, we expect modest sales growth in 2016."

The company is budgeting on China's economy growing at less than 7% annually, the CEO said, according to Bloomberg. (The Chinese government's goal is at least 7% economic growth, and it officially just managed to hit the target, although many economists believe the actual growth rate is lower.)

Meanwhile Chief Financial Officer Ron Wirahadiraksa said the lower economic growth rate in China calls for a shift of emphasis. "In China we have to learn to work with a much lower growth rate and focus on a lower cost base and greater operational efficiency," he said according to Bloomberg. "We will do that."

Weakness in Russia and Brazil are also contributing to the poor outlook for emerging markets, company officials said.

Phillips is trying to compensate for the weakness by signing long-term service and maintenance contracts with hospitals. Last quarter, the company agreed to a multi-year, $500 million deal with Westchester Medical Center Health Network that covers 3 million patients, and extended its agreement with Netherland's Sint Maartenskliniek to provide ultrasound, radiology and healthcare IT by 5 years.

Philips Watch--Courtesy of Philips

In addition, van Houten said the company is launching a program in Germany to track vital signs data via the smart Philips Watch and share it with doctors, according to Bloomberg.

Finally, the CEO said the company's plan make its lighting division an independent company is on track. The company is exploring strategic options for the division, Bloomberg reports. Next year, the company will report quarterly sales and profits at the lighting unit, as well as four subsegments of its healthcare unit, dubbed HealthTech, according to a release.

The Capital Markets Day comes on the heels of a number of new product debuts, such as the HeartMode A.I. ultrasound device, IntelliSpace Cardiovascular system for image and information management, the Philips Watch and a suite of devices for collecting data that is wirelessly integrated in the cloud. The connected device include a upper arm blood pressure cuff, a wrist-worn blood pressure and heart rate monitor for continuous use and a body analysis scale that measures weight and estimates levels of body fat.

- read the release
- here's Bloomberg's take

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