Headwinds Still Hurt Philips in Q2, and We Take Guidance With a Grain of Salt; Reducing FVE

Narrow-moat Philips' second-quarter results were weak. The company had already highlighted expected supply chain constraints and inflationary issues three months ago, but the hit was harder than expected. Sales declined 7% organically, with China the main detractor from performance, as prolonged lockdowns made sales and order intake decline 30% year over year. Some Philips factories in China had to suspend production for two months because of component shortages. Management reduced its 2022 outlook to 1%-3% organic sales growth and around a 10% adjusted EBITA margin. Our forecasts already assumed 2.2% organic sales growth in 2022 (more conservative than management’s previous guidance of 3%-5%) and an EBITA margin below 10%. Management also moderated its midterm guidance, which it set in November 2020, from 5%-6% annual sales growth to 4%-6% until 2025.