Philips : Q4 2022 webcast transcript

Koninklijke Philips NV -

Philips International

FY 22 Results

Monday, 30th January 2023

Koninklijke Philips NV - Philips International FY 22 Results

Monday, 30th January 2023

Introduction

Leandro Mazzoni

Head of Investor Relations, Philips

Hi everyone, welcome to the Philips Fourth Quarter and Full-Year 2022 Results Webcast. I am here with our CEO, Roy Jakobs; and our CFO, Abhijit Bhattacharya. We're also joined today by Shez Partovi, Chief Strategy & Innovation Officer; Wim Appelo, Chief Operations Officer; and Francis Kim, Head of Quality.

Agenda

I would like to first go through the agenda for today's webcast. We will start with a discussion of our fourth quarter and full-year 2022 results. We will then talk about how we will create value with sustainable impact with presentations about our focused organic growth and scalable innovation strategy and our three execution priorities: patient safety and quality; supply chain; and operating model simplification. We will wrap up with our value creation trajectory. We will have a session of around 70 minutes, followed by Q&A.

The press release, slide deck, and frequently asked questions on the Respironics recall were published on our Investor Relations website this morning. The replay and full transcript of this webcast will be made available on the website as well.

Safe Harbour

Before we start, I want to draw your attention to our safe harbour statement onscreen. You will also find the statement in the presentation published on our Investor Relations website.

With that, I will hand over to Abhijit.

Q4 and FY 2022 Results

Abhijit Bhattacharya

CFO, Philips

Q4 2022 performance summary

Thanks, Leandro. Good morning and welcome, everyone. Let me start with our Group performance and profitability in the quarter.

Comparable sales growth was just over 3%, driven by improved component supplies, in particular in Hospital Patient Monitoring, Image-Guided Therapy, and Ultrasound. We delivered growth of 5% for Diagnosis & Treatment and Connected Care businesses on a comparable basis, which is partly offset by a decline in Personal Health due to China and Russia. Although the component supply situation is improving, the situation remains challenging, as we anticipate gradual improvements during the year.

Adjusted margin was 12%. We continue to see a significant component and wage inflation which had a 370 basis points impact on our margin. This was in part offset by our pricing and productivity actions, which contributed a further 260 basis points. As I've explained before, the positive impacts - positive pricing impacts on our Health System businesses - that is

2

Koninklijke Philips NV - Philips International FY 22 Results

Monday, 30th January 2023

Diagnosis & Treatment and Connected Care - will be reflected in the profit and loss account during the second half of 2023.

The adjusted EBITDA margin was 11.3% in Diagnosis & Treatment, 12.6% in Connected Care, and 17% in Personal Health in the fourth quarter. In the quarter, our operating cash flow was €540 million and free cash flow was €301 million. Accounts receivables increased in the quarter, driven by the strong sales in the month of December, which we expect to convert to cash in 2023.

We won a further 35 new long-term strategic partnerships across our regions, bringing the total to close to 100 in 2022. This is a core part of our growth strategy and improves the quality of our recurring revenues.

Business highlights Q4 2022

Now, moving on to the segment highlights from this quarter.

In Diagnosis & Treatment, comparable sales increased 5% in the quarter, driven by high- single-digit growth in Ultrasound and Image-Guided Therapy. Order intake declined by 7%, on the back of double-digit growth in 2021. The decline was due to the cancellation of a few orders with lower margins in order to improve our order book margin profile.

In Connected Care, comparable sales increased by 5%, driven by strong double-digit growth in Hospital Patient Monitoring. Order intake fell 10%, due to the normalisation of demand for COVID-19-related acute care products, but continue to run above pre-COVID levels. We see a fundamental demand shift in adoption of our Patient Care Management solutions and expanding market shares in Connected Care Informatics and in the Patient Monitoring business.

Finally, in Personal Health comparable, sales declined by 4% with double-digit growth in North America and Western Europe, more than offset by double-digit decline in China and Russia. The impact of the COVID crisis significantly affected our sales in China in the quarter.

Order book and order book coverage improving

Now, moving to our order book. Our order book coverage is significantly higher than in 2020 and 2021, in particular, in Magnetic Resonance Imaging, which is 30% higher, and in Image- Guided Therapy and Monitoring, where coverage is around 20% higher. And in absolute terms, at the end of 2022, the order book was 30% higher than the end of 2020, and with the improving margin profile, as we proactively cancelled some low-margin orders that I just told you about.

Q4 2022 adjusted EBITA margin impacted by cost headwinds, partly offset by pricing and productivity

Turning to our performance for the full-year 2022. In 2022, results were impacted by operational and supply challenges, inflationary pressures, the COVID situation in China, and the Russia-Ukraine war. As a result of these ongoing headwinds, comparable sales for the Group declined by 3%, and our adjusted EBITDA margin decreased 7.4%. Component and wage inflation had a significant negative impact of 300 basis points, which our pricing and productivity measures only partly offset. We also saw a negative 390 basis point impact from the lower volume during the year.

3

Koninklijke Philips NV - Philips International FY 22 Results

Monday, 30th January 2023

For the full year, Diagnosis & Treatment sales declined 1%, with an adjusted EBITDA margin of 8.4%. Connected Care sales was down 11%, mainly due to strong double-digit decline in Sleep & Respiratory Care. The margin for Connected Care was 2.1%, as it was impacted by Sleep & Respiratory Care. Excluding this impact, the margin for the year was 8.3%.

Personal Health sales were flat with a margin of 14.8%. Excluding the impact of Russia, Personal Health sales grew by around 3% in 2022.

We recorded a loss in our income from operations of €1.5 billion, largely due to the previously disclosed €1.5 billion non-cash goodwill impairment for the Sleep & Respiratory Care business and the R&D impairment charges. In the full year, we had a free cash outflow of €961 million as a result of lower earnings, higher inventories, and cash costs related to the Respironics recall. We will talk more about our actions to drive higher cash flow generation later in the presentation.

We will submit a proposal to the Annual General Meeting of shareholders to maintain the dividend of 85 euro cents per share to be distributed in shares.

Gradual improvement trajectory in 2023

Now, looking ahead, we expect to deliver mid-single-digit growth in Diagnosis & Treatment and Connected Care in 2023, supported by our strong order book. Slow consumer demand is expected to result in low-single-digit growth in Personal Health. Our guidance of low-single- digit growth at Group level in the year reflects uncertainties in the external environment. Adjusted EBITDA margin is expected to improve to high single-digits this year, driven by productivity and pricing actions across businesses, partly offset by a 3% impact from component and cost inflation, as well as additional investments in Patient Safety & Quality and supply chain improvements.

We anticipate a slow start to the year, as solid growth in Diagnosis & Treatment and Connected Care is offset by a decline in Personal Health in the first quarter. I would like to remind you that Personal Health grew 8% in Q1 2022, and we had the sales in Russia in the first quarter of last year.

We aim to deliver a free cash inflow between €700-900 million this year, driven by improved earnings and the lower inventory, partially offset by cash out related to restructuring charges resulting from the further reduction of workforce announced this morning, which we will explain in more detail in a few moments.

Please note that the 2023 guidance excludes the impact of the ongoing discussion on proposed consent decree beyond current assumptions, as well as ongoing litigation and the investigation by the US Department of Justice related to the Respironics field action. The current guidance assumes a compound sales growth rate of 10% for the Sleep & Respiratory Care business comparable sales for the period 2023 to 2025.

Restructuring, acquisition-related charges and other items in 2023

Restructuring charges are expected to be around 300 basis points, driven by further workforce reduction that I just mentioned and the right-sizing of our Sleep & Respiratory Care businesses in 2023. Acquisition-related costs are expected to be around 50 basis points, and Respironics field action running remediation cost between 50 and 70 basis points for the year. Financial income and expenses are expected to be a net cost of €270 million in 2023,

4

Koninklijke Philips NV - Philips International FY 22 Results

Monday, 30th January 2023

excluding incidentals, if any. This is €70 million higher than in 2022, due to higher debt and interest rates as well as a fair value gain on the value of Philips minority participation of €30 million in 2022. We expect an adjusted EBITDA loss of around €70 million in the segment Other in 2023. At EBITDA level, we expect a net cost of around €200 million for the full year in this segment.

For Q1, we expect a net cost of around €45 million at the adjusted EBITDA level and around €80 million at the EBITDA level.

With that, we will now move to our next section after a short video, when Roy will present our plans on creating value with sustainable impact.

[VIDEO]

Health - the beating heart of your everyday. It's in every step of our journey through the ups and the downs, the smooth and the bumpy. But no matter where your journey takes you, we are there with you. Because caring for your health is at the heart of everything we do, whether you are in need of treatment, caring for yourself, or a loved one. We collaborate with scientists, researchers and hospitals to support doctors, surgeons, nurses, and caregivers across the world to give you the best possible solutions to improve your health - now and in the future. Together, we are re-imagining healthcare, and through innovation, we're setting its destination - a place where there's care for everyone with less waste and more hope. Innovation and you - Philips.

Creating Value with Sustainable Impact

Roy Jakobs

Chief Executive Officer, Philips

Thank you, Abhijit, and thanks, everyone, for joining us this morning. I'm Roy Jakobs, and as you know, I was appointed as President and CEO of Philips last October. I'm honoured to have been given the responsibility to lead Philips, and I look forward and commit to a transparent and constructive engagement with you and all our stakeholders.

Creating value with sustainable impact

Markets

There is no denying 2022 was a tough year, here at Philips, and that is also reflected in the financial performance that Abhijit just presented. As you all get to know me better, you will see a few things. First, I'm a realist and right now, it's very important to lead with realism. I'm also a great believer in knowing where I want to go and having a clear plan to get there - a plan that people can understand and have confidence in. Right now, Philips needs a clear strategy and a clear plan, focused on execution. And thirdly, you will see I like to take on a challenge. Right now, I could not be more excited about the future of this company, as we not only face down the tough challenges but also face up to the enormous opportunities for all of us at Philips.

And I'm very passionate about working in a company that serves patients and people. Like many of you, I've been a patient. For several years, at a young age, I experienced first-hand

5