Philips : Q2 2023 report

Q2 2023

Quarterly report

Philips delivers improved operational performance driven by sales growth and focus on execution

Amsterdam, July 24, 2023

Second-quarter highlights

• Group sales increased to EUR 4.5 billion, with 9% comparable sales growth
• Income from operations amounted to EUR 221 million, compared to EUR 11 million in Q2 2022
• Adjusted EBITA increased to EUR 453 million, or 10.1% of sales, compared to EUR 216 million, or 5.2% of sales, in Q2 2022
• Order book continued to grow year-on-year, while comparable order intake declined following a high order intake in Q2 2022
• Operating cash flow improved to EUR 135 million, compared to an outflow of EUR 306 million in Q2 2022
• Simplification of the operating model and restructuring plans on track
• Outlook for full year 2023 raised to mid-single-digit comparable sales growth and an Adjusted EBITA margin at the upper end of the high-single-digit range

Roy Jakobs, CEO of Royal Philips:

"We are progressing to plan on our three priorities to enhance patient safety and quality, strengthen supply chain reliability, and simplify how we work, and I am pleased with our improved operational performance across all segments and geographies in the quarter.

We delivered 9% comparable sales growth, increased profitability and improved cash flow, against a backdrop of ongoing macroeconomic and geopolitical challenges. Our order book increased year-on-year and will continue to support growth in the coming quarters.

Completing the Philips Respironics field action remains our highest priority. The vast majority of the sleep therapy devices are now with patients and home care providers, and we are fully focused on the remediation of the affected ventilators.

Looking ahead, we are confident in the execution of our plan and have raised our outlook for the full year 2023, acknowledging that uncertainties remain.

I am grateful for the dedication and commitment of all my Philips colleagues to deliver these results whilst working through the changes to create a more focused and agile organization."

Group and segment performance

Sales for the Group increased to EUR 4.5 billion, with 9% comparable sales growth, driven by growth across all segments and geographies. Adjusted EBITA for the Group increased to EUR 453 million, or 10.1% of sales, mainly driven by increased sales, royalty income and productivity measures, partly offset by cost inflation.

Philips' order book grew 3% compared with Q2 last year, including the good order-book-to-sales conversion in the last three quarters. Following a high order intake in Q2 2022, comparable order intake declined 8% (-4% excluding Russia).

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Diagnosis & Treatment comparable sales increased 12% in the quarter, with double-digit growth in Ultrasound and Image-Guided Therapy, and mid-single-digit growth in Diagnostic Imaging. Following a high order intake in Q2 2022, comparable order intake showed a high-single-digit decrease (low-single-digit decline excluding Russia). The Adjusted EBITA margin increased to 10.6%, mainly driven by increased sales, favorable mix, and productivity measures, partly offset by cost inflation.

Connected Care comparable sales increased 6% in the quarter, with double-digit growth in Monitoring, partly offset by a decline in Sleep & Respiratory Care. Comparable order intake showed a high-single-digit decline due to normalization of demand after the strong growth in the period between 2020 and 2022. Order intake remains significantly higher than pre-COVID. The Adjusted EBITA margin increased to 7.5%, mainly driven by productivity measures and improved profitability in Monitoring.

Personal Health returned to growth as comparable sales increased by 3%, driven by mid-single-digit growth in Personal Care. The Adjusted EBITA margin increased to 13.4%, due to pricing and productivity measures.

Productivity

Supported by significant change management efforts, to date Philips has reduced the workforce by approximately 6,600 roles out of the planned reduction of 7,000 roles by 2023 and 10,000 roles in total by 2025. Operating model productivity savings amounted to EUR 112 million in the quarter. Procurement savings amounted to EUR 57 million, and other productivity programs delivered savings of EUR 68 million, resulting in total savings of EUR 237 million in the quarter.

Outlook

Based on Philips' improved performance in the first half of the year, solid order book, and the ongoing actions to improve execution, the company now expects to deliver mid-single-digit comparable sales growth and an Adjusted EBITA margin at the upper end of the high-single-digit range for the full year 2023, while uncertainties remain.

The outlook excludes the impact of the ongoing discussion on a 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.

Customer, innovation and ESG highlights

• Signed a 10-year agreement with University of California Irvine Health to provide enterprise monitoring as a service combined with informatics, enabling the health system to standardize, integrate and scale patient monitoring in order to deliver better care and reduce the technology burden on staff.
• Five top hospitals in Shanghai, with a total of more than 10,000 beds, installed Philips' advanced Spectral CT 7500 imaging systems, helping physicians deliver first-time-right diagnosis through fast, low-doseX-ray scans.
• Expanded the image-guided therapy portfolio with the launch of Philips Zenition 10, which provides a cost-effective imaging solution to guide high-volume routine surgery, as well as complex orthopedic and trauma procedures.
• Introduced the cloud-based Philips HealthSuite Imaging PACS on Amazon Web Services. This cloud-based enterprise imaging solution, which includes advanced AI-enabled applications, has been designed to enhance image access speed, reliability, and data orchestration for clinicians across the imaging workflow, while reducing costs for healthcare organizations.
• In partnership with JD.com, launched the premium 7 Series Shaver in China, debuting as the #1 shaver on this major online shopping channel. Additionally, Philips' DiamondClean 9000 premium electric toothbrush has become the best-sellinghigh-end oral healthcare product on Alibaba.
• As part of the company's carbon emission reduction efforts, Philips and a consortium of companies committed to contracting renewable electricity from a recently completed wind farm in Finland. The 10-year agreement will deliver the equivalent electricity needed to power 40,000 households.

Philips Respironics field action for specific sleep therapy and ventilator devices

To date, approximately 99% of the new replacement devices and repair kits required for the remediation of the registered affected devices have been produced. The vast majority of the produced sleep therapy devices have been provided to patients and home care providers, while the remediation of the affected ventilators is ongoing.

Philips Respironics completed testing and analyses for the first-generation DreamStation, System One and DreamStation Go sleep therapy devices. The analyses indicate that the volatile organic compounds and particulate matter emissions related to foam degradation are within the applicable safety limits and are unlikely to result in appreciable harm to health in patients.*) Testing and analysis related to the affected ventilators is ongoing.

The previously disclosed litigation and investigation by the US Department of Justice related to the Respironics field action are ongoing, as well as the discussions on a proposed consent decree.

Conference call and video 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.

*) Philips Respironics has provided a summary of the test results and analyses available to date to the FDA and other competent

authorities. The FDA is still considering the data and analyses that Philips Respironics has provided and may reach a differentQuarterly Report 2023 - Q2 2 conclusion.

Philips performance

Key data in millions of EUR unless otherwise stated
	Q2 2022	Q2 2023
Sales	4,177	4,470
Nominal sales growth	(1)%	7%
Comparable sales growth1)	(7)%	9%
Comparable order intake2)	1%	(8)%
Income from operations	11	221
as a % of sales	0.3%	4.9%
Financial income (expenses), net	(48)	(68)
Investments in associates, net of income taxes	4	(37)
Income tax benefit (expense)	10	(42)
Income from continuing operations	(24)	74
Discontinued operations, net of income taxes	4	-
Net income	(20)	74
Earnings per common share (EPS)
Income from continuing operations	(0.03)	0.08
attributable to shareholders3) (in EUR) -
diluted
Adjusted income from continuing	0.14	0.28
operations attributable to shareholders3) (in
EUR) - diluted1)
Net income attributable to shareholders3)	(0.02)	0.08
(in EUR) - diluted
EBITA1)	92	292
as a % of sales	2.2%	6.5%
Adjusted EBITA1)	216	453
as a % of sales	5.2%	10.1%
Adjusted EBITDA1)	461	681
as a % of sales	11.0%	15.2%

1. Non-IFRSfinancial measure. Refer to the 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. Per share calculations have been adjusted retrospectively for all periods presented to reflect the issuance of shares for the share dividend in respect of 2022.

• Comparable sales increased by 9%, driven by growth across the business segments. The Diagnosis & Treatment segment recorded double-digit growth, the Connected Care segment mid-single-digit growth, and the Personal Health segment low- single-digit growth.
• Following a high order intake in Q2 2022, comparable order intake declined 8% (-4% excluding Russia). The Diagnosis & Treatment and Connected Care segments recorded a high- single-digit decline.
• Adjusted EBITA increased to EUR 453 million and the margin improved to 10.1%, mainly driven by increased sales, royalty income and productivity measures, partly offset by cost inflation.
• Restructuring, acquisition-related and other charges amounted to EUR 161 million, compared to EUR 125 million in Q2 2022. Q2 2023 includes EUR 46 million restructuring charges, mainly related to workforce reduction, EUR 51 million Respironics field- action running remediation costs, and EUR 28 million quality action-related charges in Connected Care.
• Financial income and expenses resulted in a net expense of EUR 68 million, compared to a net expense of EUR 48 million in Q2 2022. Q2 2023 includes higher interest expense, primarily due to a term loan entered into in October 2022. Q2 2022 included fair value gains on Philips' minority participations.
• Income tax expense increased by EUR 52 million year-on-year, mainly due to higher income in Q2 2023.
• Net income increased compared to Q2 2022, driven by higher earnings, partly offset by tax expenses and results from investments in associates.

Sales1) per geographic cluster in millions of EUR unless otherwise stated

	Q2 2022	Q2 2023	% change
	nominal	comparable2)
Western Europe	818	913	12%	10%
North America	1,856	1,924	4%	5%
Other mature	388	428	10%	18%
geographies
Total mature	3,062	3,265	7%	8%
geographies
Growth	1,115	1,205	8%	15%
geographies
Philips Group	4,177	4,470	7%	9%

1. Sales per geographic cluster is reported based on country of destination.
2. Non-IFRSfinancial measure. Refer to the Reconciliation of non-IFRSinformation

Amounts may not add up due to rounding.

• Comparable sales in mature geographies increased by 8%, with strong contributions from all geographies. In growth geographies, sales increased by 15% on a comparable basis, with strong contributions from China, Middle East & Turkey and Latin America.

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Cash and cash equivalents balance in millions of EUR
	Q2 2022	Q2 2023
Beginning cash balance	1,445	1,128
Free cash flow1)	(488)	5
Net cash flows from operating activities	(306)	135
Net capital expenditures	(182)	(131)
Other cash flows from investing activities	(173)	(39)
Treasury shares transactions	4	(89)
Changes in debt	775	(54)
Dividend paid to shareholders	(350)	(1)
Other cash flow items	59	(17)
Net cash flows from discontinued operations	(14)	27
Ending cash balance	1,258	960

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

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

	March 31, 2023	June 30, 2023
Long-term debt	7,141	7,177
Short-term debt	1,034	1,039
Total debt	8,175	8,216
Cash and cash equivalents	1,128	960
Net debt	7,048	7,257
Shareholders' equity	12,332	12,126
Non-controlling interests	33	34
Group equity	12,366	12,160
Net debt : group equity	36:64	37:63
ratio1)

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

• Net cash flows from operating activities increased, mainly driven by higher earnings and lower working capital outflows.
• Other cash flows from investing activities mainly includes a cash payment related to an acquisition, whereas Q2 2022 mainly included milestone payments related to the acquisitions of Cardiologs and Intact Vascular.
• Treasury shares transactions includes share repurchases as part of the EUR 1.5 billion share repurchase program for capital reduction purposes that was announced on July 26, 2021, as well as related withholding tax.
• Changes in debt in Q2 2022 mainly included new bonds issued of EUR 2 billion, partly offset by bond repayments of EUR 1.2 billion.
• The 2022 dividend was distributed in May 2023 fully in common shares.

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Performance per segment

Diagnosis & Treatment

Key data in millions of EUR unless otherwise stated
	Q2 2022	Q2 2023
Sales	1,940	2,112
Sales growth		9%
Nominal sales growth	1%
Comparable sales growth1)	(5)%	12%
Income from operations	115	163
as a % of sales	5.9%	7.7%
EBITA1)	142	185
as a % of sales	7.3%	8.8%
Adjusted EBITA1)	132	224
as a % of sales	6.8%	10.6%
Adjusted EBITDA1)	183	280
as a % of sales	9.4%	13.3%

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

• Comparable sales increased by 12%, 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 growth geographies showed double-digit growth, driven by China and Middle East & Turkey. Mature geographies recorded high-single-digit growth, with strong contributions from Western Europe and North America.
• Adjusted EBITA increased to EUR 224 million and the margin improved to 10.6%, mainly driven by increased sales, favorable mix and productivity measures, partly offset by cost inflation.
• Restructuring, acquisition-related and other charges amounted to EUR 40 million, compared to a net gain of EUR 9 million in Q2 2022. Q2 2023 includes EUR 19 million restructuring costs related to workforce reduction and EUR 10 million acquisition-related costs. In Q3 2023, restructuring, acquisition-related and other charges are expected to total approximately EUR 15 million.

Connected Care

Key data in millions of EUR unless otherwise stated
	Q2 2022	Q2 2023
Sales	1,273	1,327
Sales growth		4%
Nominal sales growth	(7)%
Comparable sales growth1)	(11)%	6%
Income from operations	(144)	(39)
as a % of sales	(11.3)%	(2.9)%
EBITA1)	(95)	6
as a % of sales	(7.5)%	0.5%
Adjusted EBITA1)	23	100
as a % of sales	1.8%	7.5%
Adjusted EBITDA1)	98	160
as a % of sales	7.7%	12.1%

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

• Comparable sales increased by 6%, driven by double-digit growth in Monitoring, partly offset by a decline in Sleep & Respiratory Care.
• Comparable sales in growth geographies showed double-digit growth, driven by China. Mature geographies recorded mid- single-digit growth, driven by high-single-digit growth in North America.
• Adjusted EBITA increased to EUR 100 million and the margin improved to 7.5%, driven by productivity measures and improved profitability in Monitoring.
• Restructuring, acquisition-related and other charges were EUR 95 million, compared to EUR 117 million in Q2 2022. Q2 2023 includes EUR 51 million Respironics field-action running remediation costs and EUR 28 million quality action-related charges in Connected Care. In Q3 2023, restructuring, acquisition-related and other charges are expected to total approximately EUR 80 million. This excludes the impact of the ongoing discussion on a proposed consent decree, as well as ongoing litigation and the investigation by the US Department of Justice related to the Respironics field action.

Personal Health

Key data in millions of EUR unless otherwise stated
	Q2 2022	Q2 2023
Sales	831	836
Sales growth		1%
Nominal sales growth	0%
Comparable sales growth1)	(5)%	3%
Income from operations	98	107
as a % of sales	11.8%	12.8%
EBITA1)	102	109
as a % of sales	12.3%	13.0%
Adjusted EBITA1)	103	112
as a % of sales	12.4%	13.4%
Adjusted EBITDA1)	130	135
as a % of sales	15.6%	16.1%

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

• Comparable sales increased by 3%, driven by mid-single-digit growth in Personal Care.
• Comparable sales in growth geographies showed high-single- digit growth, driven by double-digit growth in China. Mature geographies recorded low-single-digit growth, driven by double-digit growth in Western Europe, partly offset by a high- single-digit decline in North America.
• Adjusted EBITA increased to EUR 112 million and the margin improved to 13.4%, driven by price and productivity measures.
• Restructuring charges amounted to EUR 2 million and related to workforce reduction.

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