(Reuters) – Philips (NYSE:PHG) slid to a net loss in the 3rd quarter, weighed down by 1-off charges and weak demand in Russia and China – a setback for the Dutch healthcare-to-bulbs group as it pushes ahead with a radical plan to spin off its lighting arm.
Shares in the group fell almost 4% in morning trade today, as investors fretted over price pressure in key markets and an uncertain short-term outlook. Sales in China, for example, were flat on last year.
Philips – which is trying to revive its fortunes by focusing on higher-margin healthcare and tapping emerging economies – warned investors that soggy demand in Russia and China meant 2nd-half operating earnings could be lower than last year.
But it saw a better 2015 and stuck to 2016 targets for sales growth and margin improvement. Philips Healthcare posted a -19.1% EBITA slide to €267 million ($341.4 million) on a sales decline of 1.1%, to €2.23 billion ($2.86 billion).
Philips is targeting an improvement in its earnings before interest tax and amortization margin to 11% to 12% by 2016. That compares to 8.5% for the year to date.
CEO Frans van Houten said the group was also pressing ahead with plans to spin off the lighting business which helped make Philips a global brand.
"Separation will take 12 to 18 months, and that’s when we’ll determine the right way to access the capital markets," van Houten said. "By that time both companies will stand on their own feet and will be in excellent state."
Van Houten added an initial public offering was likely.
Philips swung to a net loss of €103 million ($131 million) on sales of €5.5 billion in the 3rd quarter, compared to a net profit of €281 million on sales of €5.6 billion a year earlier.
That was roughly in line with analyst forecasts as the company was hit by several 1-off charges, including a €366 million fine relating to a lost U.S. patent lawsuit against medical equipment manufacturer Masimo (NSDQ:MASI). Philips is appealing.
There were also €49 million in writedowns, mainly in inventory, after an earlier production suspension at its Cleveland, Ohio, factory.
"Margins have continued to fall," said Nick Wilson, analyst at Espirito Santo. "You’ve got ongoing price pressure in their 3 end markets, and you’ve still got the underproduction of the Cleveland medical plant."
The company’s adjusted EBITA margin excluding most 1-off charges slipped to 8.5% for the year to date, compared to 9.6% for the previous year.
"The key question is what changes in 2015. Hopefully, Cleveland comes back on line. But my view is that pricing will remain pretty tough," Wilson added.
At 7.30 a.m. EDT the shares were down 4.12%.
Van Houten, though, pointed to 1-off hits in the quarter.
"Barring all this, though, we are confident our operational result is improving. Currency headwinds are abating," he told Reuters Insider. "We think 2015 will show much better results."
The company, for decades a world-leading consumer electronics company, has reinvented itself in recent years, selling off its lower-margin television business in 2012.
It is now poised to take the dramatic step of splitting the group to focus on its healthcare and consumer lifestyle divisions, which make hospital equipment and personal care products, with which it is targeting growth in emerging markets.