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Philips Sees Better Second Half as CEO Extends Cost Savings

Faced with stiffer competition from China, Philips has drastically restructured and lowered costs. The results: adjusted EBITDA jumped 8.6% last quarter, shares increased 2.1% and cost savings have topped $300 million this calendar year.

Royal Philips NV said earnings will improve in the second half of the year after the Dutch healthcare equipment maker’s profit in the latest quarter beat forecasts on cost savings.

Adjusted earnings before interest, taxes and amortization jumped 8.6% to 544 million euros ($597.01 million), the Amsterdam-based company said in a statement Monday. That beat the 519 million euro ($569.58 million) average estimate of analysts surveyed by Bloomberg.

“We continue to expect earnings improvements in the second half of the year, but we are concerned about increased risk due to volatility in a number of markets,” CEO Frans van Houten said in the statement. In an interview with Bloomberg TV, he said the U.K.’s decision to leave the European Union could hurt spending power and the country’s health-care budget.

“At this time, the impact is very limited, but that could change,” he said, adding that Philips has no plans to alter its manufacturing operations there.

Faced with stiffer competition from China, Philips has sought to lower costs, add contracts for services and incorporate more technology into its medical products, which include heart monitors and scanners. The company spun off its lighting division in May to sharpen focus on health care and is trying to sell a unit called Lumileds after a $2.8 billion deal with a consortium led by Go Scale Capital of China was blocked by the U.S.

Philips is expecting to sell Lumileds in the second half of this year, Van Houten said, reiterating a previous goal and pledging improved profits in the business. The CEO also said overall growth and improvement in profit in the latest quarter was driven in part by an efficiency program.

“Philips still continues to be a case of self-help,” he said. Cost savings have reached about 300 million euros ($329.24 million) since the start of the year compared with a plan for 2016 for 630 million euros ($691.39 million), according to a presentation. The company is on track to reach the full-year savings target, Chief Financial Officer Abhijit Bhattacharya told analysts during a conference call.

Shares rose 2.1% to 24.28 euros ($26.65) at 12:08 p.m. in Amsterdam. They have gained 3% since the start of the year, valuing the company at 23 billion euros ($25.24 billion).

Philips expects good order intake in the second half of the year even as contracts for medical equipment fell by 1% in the latest quarter, according to the statement. The company kept its full-year financial outlook.

Comparable sales rose 3% to 5.9 billion euros ($6.47 billion) during the quarter with 4% growth in western Europe, no change in North America and low-single-digit growth in China. The U.S. and European health markets are expected to see flat to low-single-digit growth during the rest of the year, the CFO said, adding that China may realize modest growth.

“Overall comparable sales growth was good, mostly in personal health,” ABN Amro Bank analyst Marc Hesselink said. “The strength of the personal health division is becoming a trend.”

Sales of toothbrushes and shavers at that division were offset by lower demand at hospitals for the company’s medical scanners and imaging equipment, he said.

By Elco van Groningen

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