Philips : Q3 2022 webcast transcript

Koninklijke Philips Q3

2022 Results

Monday, 24th October 2022

Koninklijke Philips Q3 2022 Results

Monday, 24th October 2022

Operator: Welcome to the Royal Philips Third Quarter 2022 Results Conference Call on Monday, October 24th 2022. During the call, hosted by Mr Roy Jakobs, CEO, and Mr Abhijit Bhattacharya, CFO, all participants will be in a listen-only mode. After the introduction, there'll be an opportunity to ask questions. Please note that this call will be recorded and the replay will be available on the investor relations website of Royal Philips.

I will now hand the conference over to Mr Leandro Mazzoni, Head of Investor Relations. Please go ahead, sir.

Introduction

Leandro Mazzoni

Head of Investor Relations, Koninklijke Philips N.V.

Hi everyone. Welcome to the Philips Third Quarter 2022 Results Call. I'm here with our new CEO, Roy Jakobs, who took charge recently on October 15th - that is nine days ago - and our CFO, Abhijit Bhattacharya. Roy and Abhijit will take you through the third quarter results and our performance improvement actions. After that, there will be an opportunity for Q&A.

The press release and Q3 slide deck were published at 7.00am CET on our Investor Relations website. We also published an updated deck and frequently asked questions on the Respironics recall this morning. The full transcript of this call will be made available on the website later today.

Before we start, I want to draw your attention to our Safe Harbour Statement on screen. With that, I'll hand over to Roy.

Company Overview

Roy Jakobs

Chief Executive Officer, Koninklijke Philips N.V.

Thanks Leandro and thanks everyone for joining us this morning. As this is my first earnings call as CEO of the company, I would want to welcome you on this call and like to start by saying that I'm honoured to have been given the responsibility to lead Philips. I look forward and commit to a transparent and constructive engagement with our investors, analysts and other stakeholders about our ambition to create value for shareholders and all other stakeholders.

We Operate in a Large, Structurally Growing and Resilient HealthTech Market

Philips is a great company with a strong brand, leading innovation and portfolio, strong customer base and talented employees, operating in an attractive HealthTech market. Our strategy and solutions resonate with our customers. But we do face multiple challenges and have not lived up to their, and your expectations, in recent years. The current macroeconomic environment and external and internal supply chain disruptions presented further challenges, and our disappointing Q3 and 2022 performance reflects this.

We are taking actions to turn things around urgently and realise our potential as a responsible leader in health technology solutions; we will be laser-focused on this. My immediate priority

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is to improve execution. We will do that by, first, further strengthening our patient safety and quality management and continuing to address the Respironics recall and regulatory and legal processes connected to this. Second, urgently improving our supply chain operations so that we restore supply, deliver on our strong order book and deliver better results. And, third, simplifying our organisation and the way we work to drive clear accountability and improve productivity and agility.

Moreover, we're taking immediate steps to reduce the costs involved in running the company. This includes the difficult but necessary decision to immediately reduce our workforce by around 4,000 roles globally, subject to consultation with the relevant workers' councils and social partners; a decision we do not take lightly and which we will implement with respect towards impacted colleagues, but one that is needed to cope with our current challenges. We expect that we can recognise the expected associated costs and see the connected savings in the coming quarters.

Three Strategic Imperatives to Drive Growth & Profitability

In addition, we will continue to review areas to further improve our supply operations; invest in quality and simplified way of working, and remove organisational complexity. This is expected to result in additional restructuring and associated costs in 2023. We will elaborate on progress on this, the 2023 plan and the detailed plans to further strengthen Philips' operations and drive shareholder value creation, at our fourth quarter and annual results publication in January 2023. Our strong order book shows the strength of our solutions and portfolio for our customers, and we're going to stop at nothing to regain our upward performance trajectory and drive sustainable value creation.

Continued Focus on Innovation and Customer Partnerships

Our continued focus on innovation and customer partnerships will further strengthen our businesses and results. For example, in the third quarter we signed a 10-year agreement with a large university hospital in Japan for the expansion of its eICU programme. We expanded our leading ultrasound portfolio with the FDA's market clearance for our new Ultrasound 5000 Compact system, and in Connected Care we continued to successfully expand ambulatory care solutions, as supported by newly published research on the Philips Mobile Cardiac Outpatient Telemetry.

Respironics Recall Update

Before I give the floor to Abhijit, I would like to provide an update on the Respironics recall. I want to emphasise again that patient safety is our absolute number-one priority. We know how important these sleep apnoea devices are to patients and how they improve their lives, and, as such, I do apologise for any inconvenience caused. We continue with a comprehensive outreach to engage with patients, clinicians and regulators. We know that patients are waiting and we're doing everything we can to get the devices to them as soon as possible.

Increased Production Capacity

We have significantly further increased our production capacity, reaching four times pre-recall levels. As of today, we have produced approximately four million devices and expect to produce and ship around 90% of the registered affected devices by end of 2022. Further

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biocompatibility testing and assessment of PE-PUR foam is ongoing to fully assess potential patient risk and to complement earlier released test data showing encouraging results.

On the regulatory front, while we do understand that you would like to know more about the proposed consent decree, we are still in discussions with the DOJ and therefore cannot provide details related to the possible financial and operational impact at this time. In Q3, we recognised a non-cash charge for the impairment of goodwill of the Sleep and Respiratory Care business, which Abhijit will further elucidate. Philips Respironics will continue to provide updates when and as appropriate.

As Leandro mentioned, we have published FAQs and a presentation on the recall to provide details and clarification on the progress. There are some areas, particularly related to litigation, where we are not able to provide further details at this time. We will share information in an open and timely manner as the situation evolves.

I realise that I've provided you with a lot of information in this first update from my side, on results and on the issues to address in quality, supply chain and organisation complexity. I do this so that you know what you can expect from Philips and from myself as CEO.

With that, I would like to hand over to Abhijit.

Financial Performance in the Quarter and Full-Year Outlook

Abhijit Bhattacharya

Chief Financial Officer, Koninklijke Philips N.V.

Q3 2022 Performance Summary

Thank you, Roy, and good morning everyone. Our performance in the third quarter was impacted by operational and supply challenges, inflationary pressures, the COVID situation in China and the Russia/Ukraine war. Comparable sales declined 5% in the quarter and adjusted EBITA was 4.8% as pre-announced on 12th October. We are seeing a gradual improvement in the supply chain situation and continue to take action to strengthen our supply chain resilience. However, the progress has been slower than expected. We have been able to mitigate most of the supply chain issues in our Personal Health businesses. In the health systems businesses, it takes longer to see the impact of our actions, given the regulated nature of the business and the installation-related risks from the customer side. All of this is expected to continue to gradually ease in the coming year.

It is important to note that these are not lost sales. The orders remain in our order book for future revenue recognition when we can fully deliver and install the equipment. Lower sales has an impact of 740 basis points in our adjusted EBITA margin compared to third quarter of 2021. Global inflation and cost headwinds also had significant impact, which was offset by the productivity and pricing actions we have taken and which will gradually contribute further.

Income from operations was impacted by the non-cash charge for the impairment of goodwill of the Sleep and Respiratory Care business reported earlier this month. This is due to revisions to the financial forecast of this business, resulting from the current assumptions regarding the estimated impact of the proposed consent decree and changes to the pre-tax discount rate. As disclosed, Philips Respironics is subject to an investigation by the US

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Department of Justice, is a defendant in several class action lawsuits and individual personal injury claims, and is in ongoing discussions with the FDA regarding the consent decree.

Given the uncertain nature and timing of the related events and of their potential impact and associated obligations, if any, the company has not made a provision in the accounts for these matters. Operating cash flow was an outflow of €180 million, mainly due to lower cash earnings, temporarily higher inventories and cash costs related to the Respironics field action.

Business Highlights Q3 2022

Diagnosis & Treatment

Let us now look at the performance per business. Diagnosis & Treatment comparable sales declined 2% on the back of 10% growth in Q3 2021. Low single-digit growth in image-guided therapy was more than offset by a decline in ultrasound and diagnostic imaging due to specific electronic component shortages. Adjusted EBITA margin was 9.1%, impacted by the decline in sales, the change in mix and cost inflation.

Connected Care

The comparable sales for Connected Care declined 15% in the quarter, driven mainly by a substantial decline in the Sleep and Respiratory Care business due to the recall, the operational challenges and by supply chain headwinds in patient monitoring. Adjusted EBITA amounted to a loss of 9.5%, mainly due to the decline in sales and cost inflation.

Personal Health

The Personal Health business's comparable sales grew by 4%, with high single-digit growth in Oral Healthcare and Mother & Child Care and low single-digit growth in Personal Care. North America grew 7%, while Western Europe grew double digits. The adjusted EBITA margin amounted to 14.1%.

Solid Order Growth and All-Time High Order Book

Now on orders. On the back of a strong 47% comparable order intake growth last year, order intake declined approximately 6% in the third quarter. The book-to-bill ratio remained strong at around 1.2 and the equipment order book grew further in the quarter. These order book metrics are depicted on page 15 of our investor relations deck.

Diagnosis & Treatment

In our Diagnosis & Treatment business, orders were up 3% on the back of a 15% increase in Q3 2021. Enterprise diagnostic informatics and image-guided therapy orders grew high single digit, diagnostic imaging grew mid-single digit, with another very strong quarter in magnetic resonance imaging.

Connected Care

Connected Care orders declined 24% in the quarter, on the back of over 260% growth in Q3 last year; you will remember this was caused by the cancellation of the ventilator order for the US government. The average order growth over the last three years was 8% in Connected Care as we continue to experience good demand in the hospital patient monitoring business.

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