Philips : Q2 2022 webcast transcript

Royal Philips Second

Quarter 2022 Results &

2025 Performance

Trajectory

Monday, 25th July 2022

Royal Philips Second Quarter 2022 Results & 2025 Performance Trajectory

Monday, 25th July 2022

Introduction

Leandro Mazzoni

Head of Investor Relations, Royal Philips

Welcome

Hi, everyone. Welcome to Philips' Second Quarter 2022 Results Webcast. I'm here with our CEO, Frans van Houten, and our CFO, Abhijit Bhattacharya. Frans and Abhijit will take you through the second quarter results and our performance road map for the full year and through 2025.

We're also joined today by Roy Jakobs, Chief Business Leader, Connected Care; and Francis Kim, Chief Quality and Regulatory Officer, as they will provide an update on Respironics recall and quality, respectively. After the presentation, there will be an opportunity for a Q&A which will be chaired by Frans. The press release, slide deck, and frequently asked questions on the Respironics recall were published at 7.00 CET on our Investor Relations website. The replay and full transcripts of this webcast will be made available on the website as well.

Before we start, I want to draw your attention to our Safe Harbour statement on screen. You will also find this statement in the presentation published on our Investor Relations website.

With that, I'll hand over to Frans.

Opening Remarks

Frans van Houten

CEO, Royal Philips

Agenda

Thanks, Leandro, and thanks, everyone, for joining us this morning. I would like to first go through the agenda for today. We have a lot to update you on, so we decided to host a webcast instead of a call. We will also have a slightly longer session of around 70 minutes, followed by Q&A.

We will start with the discussion of our second quarter results and full-year outlook. We will then talk about the actions we are taking across different areas to drive performance improvement. This will include presentations by Roy Jakobs, who will provide an update on the Respironics recall; and Francis Kim, who will talk about our progress and continued efforts around quality. After that, I will talk about how we are driving, and will continue to drive, growth through innovative solutions and customer partnerships. And we will wrap up with our performance trajectory through 2025.

Before I hand over to Abhijit to update you on the results of the second quarter and our outlook for the full year, I would like to go over the key messages that we will cover during these presentations.

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Royal Philips Second Quarter 2022 Results & 2025 Performance Trajectory

Monday, 25th July 2022

Key Messages

Our performance in the quarter was impacted by headwinds. Order book strength and improving component supplies are expected to deliver growth and profitability improvement from the second half of 2022 onwards. Comparable sales declined 7% in the second quarter, mainly driven by global supply shortages and, of course, the lockdown in China.

Adjusted EBITA was impacted by lower volumes and inflation. We expect 6% to 9% sales growth and year-on-year margin improvement in the second half of the year resulting in a 1% to 3% sales growth for the full year with an adjusted EBITA margin of around 10%. This year's margin is impacted by supplies, mix and inflation, partly offset by our pricing and productivity actions.

We are making progress on our strategic imperatives and we are stepping up actions on pricing, productivity and supply chain resilience. We will complete 90% of total Respironics recalls this year and rebuild the business gradually. We will address regulatory requirements and, of course, manage litigation. We accelerated patient safety and quality, bolstering leadership teams, and fundamental improvements are already driving better outcomes.

We are driving growth through six innovative customer-centric suites of solutions. Accordingly, for the period 2023 to 2025, we expect to deliver 4% to 6% average comparable sales growth with an adjusted EBITA margin reaching 14% to 15% by 2025, recognising the lower starting point from 2022 and the macro environment. The longer term margin potential which we communicated before, remains intact but will take longer to achieve.

And with that, I'd like to hand over to Abhijit.

Financial Performance in the Quarter and Full-Year Outlook

Abhijit Bhattacharya

CFO, Philips

Q2 2022 Performance Summary

Thank you, Frans. Good day all and welcome to this webcast. Our performance in the second quarter was impacted by global challenges, including supply chain shortages, COVID lockdown measures in China, inflationary pressures and the Russia-Ukraine war. Due to these factors and the 9% comparable sales growth in the second quarter of 2021, comparable sales declined 7% in the quarter. Adjusted EBITA was 5.2%.

The impact of global supply chain disruptions is relevant across all modalities, but particularly strong on higher volume and high margin businesses like Patient Monitoring, Ultrasound and Image Guided Therapy systems and devices. The impact of the COVID lockdown significantly affected our business in China, where comparable sales and order intake declined almost 30%.

Production in several of our factories, as well as those of our suppliers in China, was suspended for two months, which exacerbated the global supply chain and cost challenges. The China lockdowns directly impacted the adjusted EBITA margin of the Group by 120 basis points due to lower sales, and a further 110 basis points because of factory underutilisation.

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Royal Philips Second Quarter 2022 Results & 2025 Performance Trajectory

Monday, 25th July 2022

In addition, global inflation and cost headwinds were higher than anticipated and had an additional net impact of around 290 basis points on our profitability. These impacts were partly offset by 320 basis points from substantial productivity and pricing actions which we have taken, and will contribute to further margin improvement in the second half of the year.

The operating cash flow was an outflow of €306 million, mainly due to temporarily higher inventories.

Business Highlights Q2 2022

Let's now look at the performance per business. In Diagnosis & Treatment, the comparable sales declined 4% on the back of 16% growth in Q2 2021. High single-digit growth in Enterprise Diagnostic Imaging and mid-single-digit growth in Image Guided Therapy was more than offset by a decline in Ultrasound and Diagnostic Imaging due to specific component shortages. Adjusted EBITA margin was 6.2% impacted by the decline in sales, cost inflation, and an unfavourable mix, partly offset by productivity measures.

The comparable sales for Connected Care declined 13%, driven mainly by a substantial decrease in Sleep and Respiratory Care as Q2 last year still included sleep therapy system sales and by supply chain headwinds in Patient Monitoring. The adjusted EBITA margin amounted to 1.1%, mainly due to the decline in sales and cost inflation, partly offset by productivity measures.

The Personal Health businesses' comparable sales decreased by 5% on the back of 33% comparable sales growth in Q2 2021. North America continued to remain strong with double- digit growth. However, this was offset by significant double-digit declines in China and Russia. The adjusted EBITA margin amounted to 12.4%, mainly due to the decline in sales, cost inflation and currency impacts.

We continue to experience solid demand for our products and solutions, which confirms the relevance of our strategy and portfolio of our innovations to our customers. During the second quarter, we partnered with 19 more hospitals across the world to help them in the transformation of delivery of care and boost staff productivity.

In our Diagnosis & Treatment businesses, demand remained strong as orders went were up 3% on the back of 29% growth in the second quarter of last year, with growth across all businesses. Diagnostic Imaging, Ultrasound and Image-Guided Therapy orders grew low single-digit and Enterprise Diagnostic Informatics grew double digit.

Excluding China, orders grew 9% in Diagnosis & Treatment, driven by strong growth in Western Europe and in other growth geographies. We continue to see solid demand in North America where Diagnosis & Treatment orders declined 6%, but on the back of over 70% growth in Q2 of last year.

Although Connected Care orders declined 2% in the quarter, demand remained strong with an average growth of 7% over the last three years. We continue to experience good order momentum in Connected Care Informatics and in hospital monitoring business where we see fundamental demand shift in the adoption of our patient care management solutions and expanding market shares. Order volumes are running significantly above pre-COVID levels in hospital patient monitoring.

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Royal Philips Second Quarter 2022 Results & 2025 Performance Trajectory

Monday, 25th July 2022

Solid Order Growth and All-Time High Order Book

Our comparable order intake for the Group grew 1% in the quarter and importantly, 6% excluding China. Despite the challenging environment, we are confident in the strength of our all-time high order book. Order intake has been consistent throughout this more challenging period, resulting in an all-time high equipment order book for Philips.

Our book-to-bill is also increasing and up to 1.17, and order book coverage of the expected equipment sales in the next 12 months is trending up.

Now I would like to take you through what we expect for the rest of the year in more detail. The first half of 2022 was obviously very challenging. Our sales declined 5% on the back of 9% growth in the first half of 2021. Although this is in line with our guidance for the first half of the year of a mid-single-digit decline, we had to weather additional headwinds from the China lockdown and the Russia-Ukraine war.

Our teams are fully focused on everyday execution, delivering on the customer demand and addressing the supply chain risks. We are seeing component supplies gradually improving, although issues do pop up, and have taken action to strengthen our supply chain resilience. This gives us the confidence that we will resume growth from the third quarter onwards, which is expected to result in a 6% to 9% comparable sales growth in the second half of the year on the back of a 9% decline last year.

Q2 2022 Adjusted EBITA margin Impacted by Lower Volumes and Cost, Partly Offset by Pricing and Productivity

We further expect to deliver 1% to 3% growth in the full year, which includes approximately €500 million impact from the lower sales in China, Russia and the supply shortage compared to our January guidance after mitigation, as well as significant cost inflation. Across our businesses, we have also stepped up actions on productivity and pricing, which, together with the sales growth, are expected to drive improved profitability in the second half of the year. For the full year 2022, we expect to deliver around 10% adjusted EBITA margin.

Actions on Productivity, Pricing and Supply Chain Resilience Expected to Deliver Growth and Profit Improvement in H2 2022

Before I hand back to Frans, I would like to provide guidance for some areas of our business. We continue to expect an adjusted EBITA loss of around €80 million in the segment Other in 2022. At the EBITA level, we now expect a net cost of around €170 million for the full year 2022, which is an increase of €30 million due to higher restructuring costs resulting from the step up of our productivity initiatives.

Overall, the higher restructuring cost will be more than offset by lower acquisition-related cost that we had communicated earlier this year. Financial income and expenses are expected to be a net cost of around €190 million in 2022, excluding incidentals, if any. This is €30 million higher than what we communicated earlier due to a one-time higher interest cost resulting from the liability management transactions taken in the second quarter. These transactions extend the debt maturity profile of the company and has a neutral impact on the amount of debt outstanding.

Free cash flow is expected to be around €250 million in 2022. This is lower than in 2021 due to approximately €400 million cash flow related to the field recall action provision taken last year.

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