PHG - Philips outlook cut to negative by Moody's on risk of prolonged weak credit metrics

Moody's Investors Service changed the outlook on Royal Philips ( NYSE: PHG ) to negative from stable on the risk that credit metrics will remain weak for a prolonged period unless the company improves its operating performance or if there are additional financial payouts due to the ongoing Respironics recall program.

The rating agency affirmed Philips' Baa1 long-term issuer rating.

Moody's said the the risk of the credit metrics remaining weak for a prolonged period would be in the case that the company is not able to execute on its order book, restore growth in sales and achieve sustainable margin improvements.

The outlook change also reflects the risk of added financial payouts linked with the ongoing recall of the company's respiratory devices, for instance added costs coming from the field action and consent decree or potential lawsuits, Moody's added.

In the past 18 months, Philips' rating moved from well to weakly positioned and since H1 2021, quality issues in certain respiratory systems triggered costly remediation measures as costs to repair and replace the defective devices as part of the recall program were €1B to date, the rating agency added.

There is also loss of revenue, as generally generated by these products (~€600M per year) and a hit to the company's image in terms of quality, noted Moody's. Philips also saw four consecutive quarters of decline in sales due to supply chain challenges causing a fall in margin.

Moody's noted that main challenges for the company over the next quarters were managing disruptions in supply chain  so that it can convert order backlog into sales and finish the Respironics field action. Structurally, a main challenge is for the Netherlands-based company to sustainably improve its track record in terms of quality and patient safety.

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