Tariffs will cost Philips Healthcare up to $340M
While Philips Healthcare reported a profitable first quarter for 2025, the impact of tariffs and mitigation efforts dominated the conversation in its Q1 earnings call May 6.
The Amsterdam-based manufacturer estimates U.S.-China tariffs will have a $226 million to $340 million net impact on its bottom line in 2025. This will occur even after "substantial" mitigation efforts that will cost the company hundreds of millions of dollars, including moving manufacturing and supply chains.
"I know tariffs are top of mind," said Roy Jakobs, executive director of Philips Healthcare. "In an uncertain market environment that has intensified due to the potential impact of tariffs, we are driving positive growth and we are focusing on what we can control. We are taking decisive cost actions, improving our supply chain agility to better serve our customers across the globe. But, we delivered a better than expected start to the year."
Q1 group sales amounted to $466 billion, reflecting a 2% decline in sales growth, mainly due to double-digit sales declines in China. But Jakobs said new orders grew by 2%, exceeding the market outlook the company issued in February. Order declines in China were offset by double-digit growth in North America, with much of this coming from the diagnosis and treatment, and hospital patient-monitoring, segments.
"We anticipate that tariffs will have a more pronounced impact in the second half of the year," explained Charlotte Hanneman, chief financial officer for Philips Healthcare.
Jakobs said sales growth projections for the rest of 2025 remain the same at 1%–3% growth, even when factoring in U.S.-China tariffs. But tariffs are impacting Philip's outlook for 2025, with the company reducing its projected earnings before interest, taxes and amortization (EBITA) by a negative 100 basis points. The previous 2025 projection was 11.8%–12.3% and it has now been backed off to 10.8%–11.3%.
In North America, Philips is seeing continued hospital demand for its products and has not observed any major shifts in orders yet. "That said, we are closely monitoring the environment," Jakobs said.
Tariff mitigation efforts
In the current economic environment, Philips is undertaking short- and long-term tariff mitigation efforts. This includes accelerating regionalization and localization of its supply chain where possible to produce or source components in countries where the products are sold. Jakobs said this was already taking place in China well ahead for the new trade war. About 90% of its Chinese products now source components and production within China, Jakobs said. He was in China last month and the local government officials he met with reiterated that they want continued foreign investment in the republic.
A similar localization of supply chain and manufacturing is now being accelerated in the U.S. under the new tariffs. Jakobs said the company already has 46 production locations in the States, including for ultrasound, patient monitoring, and other imaging equipment.
"We plan to bring more of that into the U.S. We announced a multimillion dollar investment in Minnesota for cardiac devices and we are leveraging existing footprint to expand," Jakobs said. However, moving production from one country to another takes time, so impacts of these tariff mitigation efforts may not be seen until 2026.
"Over the past couple years, we have done a lot to de-risk our U.S. and China supply chain flows, but there are still component flows," Hanneman said. "Given the very high tariffs of 125% and 145%, that just increases that impact tremendously."
She said the majority of the $226 million to $340 million in added tariffs costs are coming from the U.S. and China supply flows. Europe is also factor, but because the tariffs are so much lower, the impact is less relevant to the company at this stage.
She said the tariff impact Philips is projecting includes hundred of millions of additional tariff-mitigation measures to reduce the overall costs the company is forecasting for the rest of 2025.
Philips is pursuing tariff exemptions and leveraging speciality programs to reclaim duties. Jakobs said the company also will be actively advocating to lawmakers in all countries for open markets and for the free flow of medical products and manufacturing components.
Philips also is looking at select pricing actions to deal with increasing costs from the tariffs.
The company is taking a serious look at ways to contain its own costs through supply chain optimization, inventory management and finding new ways to increase productivity. Cost cutting measures helped save Philips $166 million in Q1, and the company is on track to save about $916 million by the end of 2025, Hanneman explained. She said these cost cutting measures included eliminating corporate research projects, reducing discretionary spending, simplifying supply chains, eliminating duplications, increased use of automation, and reduced warehousing, transport and consulting costs.
"We see these actions as necessary to maintain our competitiveness, protect margins, and secure long-term growth," Jakobs said. "We are razor focused on what we can control, applying strong cost discipline as we tightly manage discretionary spending, while staying committed to our long-term innovation priorities. Our focus remains on the levers within our control to protect margins and cash flow."
Growth in sales continues, despite tariffs
Jakobs said image-guided therapy has been a big driver in North America with its Azurion angiography platform and its recent addition of an artificial intelligence (AI) driven biplane neuro solution. In diagnosis, Philips saw strong growth in computed tomography (CT) systems, particularly its newest AI driven CT 5300 and spectral CT systems.
"We also saw group momentum in MRI, driven by our BlueSeal helium-free systems," Jakobs said. He added that customers also like the AI features of the system, which help to simplify operations.
Health IT systems also performed well, which Jakobs attributed partly to the company's partnership with AWS, which has helped integrate generative AI into its imaging platform. He said this will form the basis for future releases of the Philips imaging IT systems, which will include AI to auto-summarize prior studies, autogenerate conclusions, and perform real-time quality checks.
"By automating these tasks, we allow radiologists to focus on strengthening care quality and improving throughput," Jakobs explained.
AI and increased automation are seen as key to helping offset the expected economic impacts caused by tariffs and the new trade war.
"I have been in the U.S. talking to customers. Of course they are looking for productivity measures, because they want to offset what they also expect to see in inflationary impact that will hit the hospitals," Jakobs explained.
Patient monitoring solutions also performed well, which he said was due to good interoperability and new cybersecurity measures added to the systems.
Q1 results reflect a continued trend in order growth seen since Q1 2024, which Jakobs attributes to newer technology innovations released by Philips. He said 50% of sales were related to AI innovations, including AI built into CT to improve image quality and lower radiation doses, ultrasound for intuitive workflows, accelerated AI MRI image reconstruction and easier workflow, and a visual patient avatar on the patient monitor in operating rooms.
"Today, more than 50% of our sales are fueled by AI-driven innovations integrated into products launched over the past three years," he said. "Innovations are a key driver, as reflected in a significant gross margin we delivered in Q1."
Dave Fornell has covered healthcare for more than 17 years, with a focus in cardiology and radiology. Fornell is a 5-time winner of a Jesse H. Neal Award, the most prestigious editorial honors in the field of specialized journalism. The wins included best technical content, best use of social media and best COVID-19 coverage. Fornell was also a three-time Neal finalist for best range of work by a single author. He produces more than 100 editorial videos each year, most of them interviews with key opinion leaders in medicine. He also writes technical articles, covers key trends, conducts video hospital site visits, and is very involved with social media. E-mail: [email protected]