Philips : Q1 2023 report

Q1 2023

Quarterly report

Philips delivers solid operational performance as supply chain improves and actions to enhance execution start to take effect

Amsterdam, April 24, 2023

First-quarter highlights

• Group sales increased to EUR 4.2 billion, with 6% comparable sales growth
• Comparable order intake growth was flat, with double-digit growth in the Diagnosis & Treatment businesses, offset by a decline in the Connected Care businesses
• Income from operations amounted to a loss of EUR 583 million, mainly due to provisions for accelerated restructuring and an important step in litigation
• EUR 575 million litigation provision is related to the anticipated resolution of the Respironics recall-related economic loss class action in the US
• Adjusted EBITA increased to EUR 359 million, or 8.6% of sales, compared to EUR 243 million, or 6.2% of sales, in Q1 2022
• Operating cash flow improved to EUR 202 million, compared to an outflow of EUR 227 million in Q1 2022
• Simplification of operating model and restructuring plans on track

Roy Jakobs, CEO of Royal Philips:

"I am encouraged that we delivered a solid start to the year, with sales, profitability and operating cash flow improvements in the quarter, a first step to drive progressive value creation. We are executing on our three priorities to enhance patient safety and quality, strengthen our supply chain reliability, and establish a simplified, more agile operating model.

Resolving the Philips Respironics recall for patients remains our highest priority. In the first quarter, we have recorded a provision in anticipation of a resolution of the economic loss class action in the US. This is an important step in addressing the litigation related to the recall.

Our supply chain improvements enabled good growth across the Diagnosis & Treatment businesses and in Hospital Patient Monitoring. Supported by significant change management efforts, we have reduced the workforce by approximately 5,400 roles out of the planned reduction of 10,000 roles globally.

I realize that we are asking a lot from our employees to work through the necessary changes and deeply appreciate their tremendous efforts and ongoing commitment to deliver on our company purpose. I would also like to thank our customers and partners for their continued trust and support. I have met many of them in the last few months, and it is clear that Philips remains a preferred innovation partner.

Looking ahead, based on our solid performance in the quarter, our order book, and the ongoing actions to further improve execution, we are confident in our plan for the year 2023, acknowledging that uncertainties remain."

Group and business segment performance

Sales for the Group increased to EUR 4.2 billion, with 6% comparable sales growth, mainly driven by the Diagnosis & Treatment businesses. Additionally, sales in the quarter were supported by the good momentum for the Diagnosis & Treatment and Connected Care businesses in China. Adjusted EBITA for the Group increased to EUR 359 million, or 8.6% of sales, mainly due to increased sales and productivity measures, partly offset by cost inflation. Philips' order book remains strong and is 10% higher than one year ago despite flat order intake growth.

Quarterly Report 2023 - Q1

1

The Diagnosis & Treatment businesses' comparable sales increased by a strong 15% in the quarter, with double-digit growth in Ultrasound and Image-Guided Therapy, and mid-single-digit growth in Diagnostic Imaging, driven by continued supply chain improvements. Comparable order intake grew double-digit, with double-digit growth in Image-Guided Therapy and Enterprise Diagnostic Informatics and mid-single-digit growth in Diagnostic Imaging. The Adjusted EBITA margin increased to 11.3%, which was mainly due to increased sales and productivity measures, partly offset by cost inflation.

The Connected Care businesses' comparable sales increased 3% in the quarter, driven by double-digit growth in Hospital Patient Monitoring, largely offset by a decline in Sleep & Respiratory Care. Comparable order intake declined double-digit after strong growth in the period between 2020 and 2022. The Adjusted EBITA margin increased to 2.4%, driven by the improved Adjusted EBITA margin of the Connected Care businesses excluding Sleep & Respiratory Care.

The Personal Health businesses' comparable sales decreased by 6% in the quarter due to the anticipated lower consumer demand, on the back of 8% growth in Q1 2022. The Adjusted EBITA margin amounted to 13.2%. Sales and Adjusted EBITA were both significantly impacted by portfolio decisions related to Russia in 2022.

Productivity

In the first quarter, operating model productivity savings amounted to EUR 94 million, procurement savings amounted to EUR 32 million, and other productivity programs delivered savings of EUR 64 million, resulting in total savings of EUR 190 million.

Customer and innovation highlights

• In the quarter, the company announced multiple new partnerships, demonstrating the confidence hospital leaders have in Philips' innovative portfolio. These include an agreement with Grupo Angeles, the largest private hospital group in Mexico, to provide informatics, diagnostic imaging and image-guided therapy solutions to advance patient care in cardiology, oncology and radiology.
• Highlighting the strength of its comprehensive patient monitoring offering, Philips announced a multi-year partnership with Northwell Health to standardize and centralize patient monitoring across the hospital, allowing caregivers to see what is happening at each bedside.
• Leveraging its leading expertise in sustainable healthcare operations, Philips announced a multi-year agreement with Champalimaud Foundation in Portugal aimed at halving its diagnostic imaging carbon footprint by 2028. The partnership will help drive quality and efficiency, while reducing environmental impact.
• Philips further expanded its industry-leading ultrasound portfolio with the launch of Ultrasound Compact 5500 CV, which enables first- time-right ultrasound exams for cardiology and vascular patients at the bedside.
• To improve oral care habits among children, Philips introduced Sonicare for Kids 'Design a Pet Edition' with an entry price point designed to give more parents access to an electric toothbrush for their children.
• Philips took a top ranking in medical technology patent filings at the European Patent Office and was included on the Clarivate Top 100 Global Innovator list for the 10th year in a row.

Philips Respironics field action for specific sleep therapy and ventilator devices

To date, more than 95% of the new replacement devices and repair kits required for the remediation of the registered devices have been produced. The vast majority of the produced sleep therapy devices have been sent to patients and home care providers. The remaining 5% of the registered devices are primarily ventilators, for which Philips Respironics is fully focused on working towards a solution.

In Q2 2023, Philips Respironics expects to report on the VOC testing of ozone-induced foam degradation in the first-generation DreamStation devices, and on the complete set of testing results for the SystemOne and DreamStation Go sleep therapy devices.

As previously disclosed, Philips is a defendant in several class-action lawsuits and individual personal injury claims. In the US, an economic loss class action, a medical monitoring class action and personal injury claims have been filed. This quarter, Philips Respironics recorded a EUR 575 million provision in connection with the anticipated resolution of the economic loss class action, an important step in addressing the litigation related to the recall.

Philips Respironics is subject to an investigation by the US Department of Justice and remains in ongoing discussions with the FDA regarding a proposed consent decree. Given the uncertain nature of the relevant events, and of their potential financial and operational impact and associated obligations, if any, the company has not made any provisions in the accounts for these matters.

Conference call and audio webcast

Roy Jakobs, CEO, and Abhijit Bhattacharya, CFO, will host a conference call for investors and analysts at 10:00 am CET today to discuss the results and Philips' plan to create value with sustainable impact. A live webcast of the conference call will be available on the Philips Investor Relations website and can be accessed here.

Quarterly Report 2023 - Q1

2

Philips performance

Key data in millions of EUR unless otherwise stated
	Q1 2022	Q1 2023
Sales	3,918	4,167
Nominal sales growth	2%	6%
Comparable sales growth1)	(4)%	6%
Comparable order intake2)	5%	0%
Income from operations	(181)	(583)
as a % of sales	(4.6)%	(14.0)%
Financial expenses, net	(27)	(79)
Investments in associates, net of income taxes	(11)	(16)
Income tax (expense) benefit	67	15
Income from continuing operations	(152)	(663)
Discontinued operations, net of income taxes	-	(3)
Net income	(151)	(665)
Earnings per common share (EPS)
Income from continuing operations	(0.17)	(0.75)
attributable to shareholders3) (in EUR) -
diluted
Adjusted income from continuing	0.15	0.22
operations attributable to shareholders3) (in
EUR) - diluted1)
Net income attributable to shareholders3)	(0.17)	(0.75)
(in EUR) - diluted
EBITA1)	(107)	(510)
as a % of sales	(2.7)%	(12.2)%
Adjusted EBITA1)	243	359
as a % of sales	6.2%	8.6%
Adjusted EBITDA1)	488	575
as a % of sales	12.5%	13.8%

1. Non-IFRSfinancial measure. Refer to Reconciliation of non-IFRSinformation.
2. Comparable order intake is presented when discussing the Philips Group's performance. For the definition of this measure, refer to chapter 12.4, Other Key Performance Indicators, of theAnnual Report 2022.
3. Shareholders refers to shareholders of Koninklijke Philips N.V.

Sales per geographic cluster in millions of EUR unless otherwise stated

	Q1 2022	Q1 2023	% change
	nominal	comparable1)
Western Europe	785	801	2%	4%
North America	1,650	1,779	8%	3%
Other mature	410	416	1%	9%
geographies
Total mature	2,846	2,996	5%	4%
geographies
Growth	1,072	1,171	9%	10%
geographies
Philips Group	3,918	4,167	6%	6%

1. Non-IFRSfinancial measure. Refer to Reconciliation of non-IFRSinformation.

• Comparable sales increased by 6%, driven by continued supply chain improvements. The Diagnosis & Treatment businesses recorded double-digit growth and the Connected Care businesses low-single-digit growth, while the Personal Health businesses posted a mid-single-digit decline.
• Comparable order intake was flat, with double-digit growth in the Diagnosis & Treatment businesses, which was offset by a decline in the Connected Care businesses in the quarter on the back of the expansion and renewal of the patient monitoring installed base during the period 2020 through 2022.
• Adjusted EBITA improved to EUR 359 million and the margin increased to 8.6%, mainly due to increased sales and productivity measures, partly offset by cost inflation.
• Restructuring, acquisition-related and other charges amounted to EUR 868 million, compared to EUR 350 million in Q1 2022. Q1 2023 includes a EUR 575 million provision in connection with an anticipated resolution of the economic loss class action in the US related to the Respironics recall, EUR 150 million restructuring charges related workforce reduction, and EUR 54 million Respironics field-action running remediation costs.
• Financial income and expenses resulted in a net expense of EUR 79 million, compared to a net expense of EUR 27 million in Q1 2022. Q1 2023 includes higher interest expense, primarily due to bonds issued in April 2022 and a term loan entered into in October 2022, as well as fair value losses on the value of Philips' minority participations.
• The income tax benefit of EUR 15 million in Q1 2023 is due to negative income.
• Net income in Q1 2023 decreased compared to Q1 2022, due to the factors outlined above.
• Comparable sales in mature geographies increased by 4%, with low-single-digit growth in North America and mid-single-digit growth in Western Europe. In growth geographies, sales increased by 10% on a comparable basis, with strong contributions from China, Middle East & Turkey, Latin America and Central & Eastern Europe.

Quarterly Report 2023 - Q1

3

Cash and cash equivalents balance in millions of EUR
	Q1 2022	Q1 2023
Beginning cash balance	2,303	1,172
Free cash flow1)	(402)	117
Net cash flows from operating activities	(227)	202
Net capital expenditures	(175)	(85)
Other cash flows from investing activities	(347)	(104)
Treasury shares transactions	(39)	(22)
Changes in debt	(40)
Other cash flow items	14	(31)
Net cash flows from discontinued operations	(44)	(4)
Ending cash balance	1,445	1,128

1. Non-IFRSfinancial measure. Refer to Reconciliation of non-IFRSinformation.

Composition of net debt to group equity1) in millions of EUR unless otherwise stated

	December 31, 2022	March 31, 2023
Long-term debt	7,270	7,141
Short-term debt	931	1,034
Total debt	8,201	8,175
Cash and cash equivalents	1,172	1,128
Net debt	7,028	7,048
Shareholders' equity	13,249	12,332
Non-controlling interests	34	33
Group equity	13,283	12,366
Net debt : group equity	35:65	36:64
ratio1)

1. Non-IFRSfinancial measure. Refer to Reconciliation of non-IFRSinformation.

• Net cash flows from operating activities increased, mainly as a result of higher customer receipts, higher cash earnings and lower income tax payments.
• Other cash flows from investing activities mainly includes a cash payment with respect to foreign exchange derivative contracts, whereas Q1 2022 mainly included the acquisitions of Vesper Medical and Cardiologs.
• Net capital expenditures includes cash proceeds from the sale of real estate.

Amounts may not add up due to rounding.

Quarterly Report 2023 - Q1

4

Performance per segment

Diagnosis & Treatment businesses

Key data in millions of EUR unless otherwise stated
	Q1 2022	Q1 2023
Sales	1,911	2,204
Sales growth		15%
Nominal sales growth	3%
Comparable sales growth1)	(2)%	15%
Income from operations	88	157
as a % of sales	4.6%	7.1%
EBITA1)	114	181
as a % of sales	6.0%	8.2%
Adjusted EBITA1)	113	250
as a % of sales	5.9%	11.3%
Adjusted EBITDA1)	181	308
as a % of sales	9.5%	14.0%

1. Non-IFRSfinancial measure. Refer to Reconciliation of non-IFRSinformation.

• Comparable sales increased by 15%, driven by double-digit growth in Ultrasound and Image-Guided Therapy and mid- single-digit growth in Diagnostic Imaging, due to continued supply chain improvements.
• Comparable sales in mature and growth geographies showed double-digit growth, with strong contributions from North America, Western Europe and China.
• Adjusted EBITA improved to EUR 250 million and the margin increased to 11.3%, mainly due to increased sales and productivity measures, partly offset by cost inflation.
• Restructuring, acquisition-related and other charges amounted to EUR 68 million, compared to a net gain of EUR 1 million in Q1 2022. Q1 2023 includes EUR 31 million restructuring costs related to workforce reduction. In Q2 2023, restructuring, acquisition- related and other charges are expected to total approximately EUR 35 million.

Connected Care businesses

Key data in millions of EUR unless otherwise stated
	Q1 2022	Q1 2023
Sales	993	1,033
Sales growth		4%
Nominal sales growth	(14)%
Comparable sales growth1)	(21)%	3%
Income from operations	(378)	(710)
as a % of sales	(38.1)%	(68.7)%
EBITA1)	(334)	(667)
as a % of sales	(33.6)%	(64.6)%
Adjusted EBITA1)	4	25
as a % of sales	0.4%	2.4%
Adjusted EBITDA1)	60	72
as a % of sales	6.0%	7.0%

1. Non-IFRSfinancial measure. Refer to Reconciliation of non-IFRSinformation.

• Comparable sales increased by 3%, driven by double-digit growth in Hospital Patient Monitoring, largely offset by a decline in Sleep & Respiratory Care.
• Comparable sales in growth geographies showed double-digit growth, driven by double-digit growth in China. Mature geographies recorded a low-single-digit decline, mainly due to flat sales in North America and a decline in Western Europe.
• Adjusted EBITA improved to EUR 25 million and the Adjusted EBITA margin increased to 2.4%, driven by the improved Adjusted EBITA margin of the Connected Care businesses excluding Sleep & Respiratory Care.
• Restructuring, acquisition-related and other charges were EUR 691 million, compared to EUR 339 million in Q1 2022. Q1 2023 includes a EUR 575 million provision in connection with an anticipated resolution of the economic loss class action in the US related to the Respironics recall, EUR 54 million Respironics field- action running remediation costs, and EUR 30 million restructuring costs related to workforce reduction. In Q2 2023, restructuring, acquisition-related and other charges are expected to total approximately EUR 75 million. This excludes the impact of the ongoing discussion on the proposed consent decree, as well as ongoing litigation and the investigation by the US Department of Justice related to the Respironics field action.

Quarterly Report 2023 - Q1

5