Koninklijke Philips N.V. NY Registry Shares

Good morning, ladies and gentlemen. Welcome to Philips' first quarter results conference call. I am here with our CEO, Fran Van Houten, and our CFO, Abhijit Bhattacharya. On today's call, Fran will take you through our strategic and financial highlights for the period. Abhijit will then provide more detail on the financial performance. After that, we'll take your questions. Our press release and the related information slide deck were published at 7 a.m. CET this morning. Both documents are available on our Investor Relations website. A full transcript of the conference call should be made available by end of today on the website. As mentioned in the press release, adjusted EBITDA is defined as income from operations excluding amortization of acquired intangible assets, impairment of goodwill and other intangible assets, restructuring charges, acquisition-related costs, and other significant items. For avoidance of doubt, the impact of COVID-19 on our results is not treated as an adjusting item. Finally, comparable growth for sales and orders are adjusted for currency and portfolio changes. With that, I would like to hand over to Frans.

Thanks, Leandro, and good morning to all of you on the call and the webcast. I hope that you and your families are keeping safe and well during these extraordinary times. With the COVID-19 outbreak, Our mission to improve lives is more relevant than ever. I take great strength in the work we are doing to support healthcare providers, medical staff and a growing number of critically ill patients. This is a top priority for all of us at Philips and I'd like to update you on how we are responding to the constantly evolving situation and delivering against our triple duty of care, meeting critical customer needs, We have mobilized our resources since January to address this unprecedented challenge. In line with our business continuity system, we have implemented the relevant safety protocols and we have been able to continue our operations around the world. Our workforce is getting used to new ways of working and our commercial processes are working well. as reflected in the robust order intake result in the quarter. Our service teams are following stringent safety protocols and continue to deliver and install critical equipment and provide maintenance services. Our global supply chain is fully functional with sites in the Americas, Europe and Asia including several in China where we are back at normal capacity utilization rates. We are making the necessary investments and closely collaborating with our suppliers and partners to steeply increase production where there is increased demand, especially ventilators and monitors. We have also created COVID-19 crisis-oriented solutions propositions to rapidly respond to customer needs. On employee health and safety, We have implemented personal hygiene measures and safety protocols throughout the organization. Moreover, we have a global working from home protocol for employees whose roles can be carried out remotely. This also helps maintain a safe working environment for activities that need to be performed at Philips locations, such as production, supply chain, and certain R&D activities. I'd like to point out that the Philips Foundation continues to play a terrific role In providing COVID-19 medical aid and relief, helping to boost humanitarian efforts and protect the vulnerable. The Philips Foundation is actively driving an impressive range of multidisciplinary projects to aid regions across the world that need it most, working with several partners. Let me now move on to the first quarter financial highlights. COVID-19 has significantly impacted our results in the quarter. Demand for our professional healthcare products and solutions increased strongly with comparable sales and order intake growth for the connected care and diagnosis and treatment businesses. At the same time, there was a significant decline in demand for our personal health portfolio and we saw image-guided therapy procedures trending down as the quarter progressed. This resulted in a comparable sales decline of 2% for the group in the quarter. Adjusted EBITDA margin was 5.9% of sales compared to 8.8% in the first quarter of 2019. Free cash improved to an outflow of 57 million euros in the quarter compared to an outflow of 206 million euros in the first quarter of 2019. Comparable equipment order intake grew a robust 23% in the first quarter I would like to provide some color on some of our initiatives to respond to customer needs and support healthcare professionals. Earlier this month, we announced a contract with the United States government to supply 43,000 acute care hospital ventilators for invasive and non-invasive use. This builds on the initial We are working on a four-fold in production increase by the third quarter. We are rolling out our new Philips Respironix E30 ventilator, a versatile and easy to use ventilator for emergency use where there is limited access to a fully featured critical care ventilator. The E30 has been designed for large scale production and will scale to 15,000 units per week in April. With the strong demand to expand ICU bed capacity, we are also working to significantly increase the production volume of patient monitors. Related to the COVID-19 diagnosis, we see increased demand for X-ray, CT scanners, point-of-care ultrasound, clinical informatics, and interoperability applications. We see increased interest in telehealth solutions like EICU, teleradiology, telepathology, which can help remote working of care professionals, as well as move care into the community to relieve the tremendous pressure on the physical constraints of the hospitals. Building on this theme, to support care providers and protect scarce critical care capacity, we have launched a COVID-19 screening and dedicated scalable telehealth solution that facilitates the use of online patient screening and monitoring supported by external call centers. The solution aims to prevent unnecessary visits to general practitioners and hospitals by remotely monitoring the vast majority of COVID-19 patients that are quarantined at home. Patients infected can be remotely monitored via smart questionnaires about their situation and state of health, identifying if intervention is needed. This solution is already being used by hospitals and general practitioners in the Netherlands and will be rolled out to other countries. Our eICU solution is also a key enabler for more COVID-19 patients to receive care. With this solution, a co-located team of intensivists and critical care nurses can remotely monitor patients in the ICU regardless of location, supported by high definition cameras, telemetry, predictive analytics, data visualization, and advanced reporting capabilities. Algorithms alert to the signs of patient deterioration or improvement, helping care teams to proactively intervene at an earlier stage or to decide which patients have stabilized and can be transferred, allowing scarce ICU beds to be allocated to more acute patients. We are currently helping several hospitals to expand their eICU capacity or reach into other settings. Overall, I observe that our strategy to transform care along the continuum, leveraging informatics, is already validated during this crisis, and we expect post-crisis a further step up of connected care in the broadest sense. We continue to drive market share in our core businesses through deeper, more comprehensive customer partnerships. During the first quarter, we signed several new agreements. For example, we entered into an eight-year partnership with Paracelsus Clinics in Germany, offering solutions that maximize availability of imaging systems, leveraging digitalization and process optimization to realize quality and efficiency improvements. As you are aware, There has been a significant decline in consumer activity as a result of which our personal health business has been impacted. We currently expect that our personal health businesses will be steeply impacted across all geographies in the second quarter despite witnessing the first signs of gradual improvement in China more recently. We have a strong grip on performance management and are taking actions to manage inventory and manufacturing capacity accordingly. We are also driving reduction of discretionary spending due to phasing the effect of these actions will kick in in the second quarter. We are safeguarding innovation and keeping NPI's new product introductions on track to be fully prepared to capitalize on recovery opportunities. While reducing advertising and promotion spend, we continue to accelerate digital channels, With a focus on adaptive digital marketing to grow engagement as consumers get more health conscious than ever. We have endured consumer demand crisis before, though of a different nature and scale, and I am confident that we will come out of this stronger. Let me now give you an update on the current situation of the divestment of the domestic appliances business. As mentioned before, the business has solid financial performance and market positions. We are still in the early stages of the carve-out process and on track to complete it within the indicated 12 to 18 months. The preparations with regards to the deal itself are also in their early stages. We expect to start engaging with interested parties only after the summer and make a call on timing of the divestment based on value as well as the liquidity situation of the potential buyers. A progress update then on regulatory matters. We continue to address the follow-up requests of the U.S. Food and Drug Administration as part of the efforts to fulfill our obligations under the consent decree. We remain in dialogue with the FDA. However, given the nature of the process, we still cannot provide a definitive timeline for the expected lifting of the injunction. We are also making good progress with EU MDR certifications. Also important, while we have a strong balance sheet and robust liquidity position, in view of the possible continued impact of COVID-19, we have taken measures to further protect the liquidity position of the company, which will be detailed out by Abhijit in a moment. As part of those initiatives, we announced this morning that we maintain the proposed dividend of 85 euro cents per common share against the net income of 2019. The distribution of this dividend will be in shares only instead of the currently proposed distribution in cash or in shares at the option of the shareholder. To that effect, we will withdraw the dividend proposal that was already submitted to the annual general meeting of shareholders to be held on April 30th. We plan to convene an extraordinary general meeting of shareholders in the second half of June The agenda of which will include the revised proposal to declare a distribution of 85 euro cents per common share in shares only. The increase in issued share capital is to be expected to be more than offset by our share buyback program. On changes in our management team, I'm happy to inform you that Rob Casella, who most recently led our precision diagnosis business, and was jointly responsible for the diagnosis and treatment segment together with Bert van Meurs, will take on the role of Philips Strategic Business Development. I want to express my gratitude for Rob's considerable contribution to the company since he joined us in 2015. And Rob will remain a member of the Executive Committee. Kees Westdorp, currently General Manager of Diagnostic Imaging, will succeed Rob in his current roles as of May 1. He joins the executive committee with a strong record of accomplishment, having led the significant transformation in diagnostic imaging by increasing customer and employee engagement and reviewing the product and solutions portfolio. Let me conclude. Looking ahead, we remain focused on innovating with purpose, driving operational excellence and delivering on our transformations. We are also managing the headwinds from COVID-19 in some of our businesses, while at the same time capturing the upsides as we support healthcare providers to expand critical care capacity to fight the pandemic. The outbreak will continue to have a negative impact on the second quarter of financials. Assuming that we can convert our existing order book for the diagnosis and treatment and connected care businesses as planned, Elective procedures will normalize and consumer demand will gradually improve. We aim to return to growth and improve profitability for the group in the second half of the year. Consequently, for the full year 2020, we aim to achieve a modest comparable sales growth and adjusted EBITDA margin improvement. Given the current uncertainty and volatility, we will not provide more specific guidance for 2020 at this time. While we have a great deal of hard work ahead of us, I'm satisfied with the way Philips is able to handle the crisis. I'm proud of the commitment, hard work and resourcefulness of our employees to keep the company fully functioning and want to thank everyone who has worked so hard to mobilize our resources in this way. And with that, ladies and gentlemen, I'll turn the call to Abhijit.

Thank you Frans and thank you all for joining today. I hope you are staying safe. Let me provide some color on the first quarter comparable sales for the group. As mentioned by Franz, we saw a strong increase in demand for our professional healthcare portfolio and a significant decline in demand for the consumer products in the quarter. The sales for the connected care businesses grew 7%, sleep and respiratory diseases Care sales grew double digit primarily due to strong shipments of respiratory devices. Monitoring and analytic sales grew low single digit in Q1. Our diagnosis and treatment businesses delivered 2% comparable sales growth in the quarter led by a solid mid single digit growth in diagnostic imaging. Comparable sales in image guided therapy and ultrasound declined low single digit. The decline in image guided therapy was caused by a strong decline in our devices business as hospitals postponed elective procedures as well as a push out of installations from the first quarter. For the ultrasound business we were unable to install against orders in China as hospitals were battling the crisis and chose other priorities. Comparable sales declined 13% in the personal health business for the quarter. Lockdown and social distancing measures impacted demand for our consumer product portfolio initially in China and Asia Pacific starting late January and subsequently in the rest of the world from March onwards. This led to high single-digit comparable sales decline in the oral healthcare business and a double-digit decline in male grooming and domestic appliances. Consumer sales through digital channels declined significantly less M.D. M.D. M.D. M.D. M.D. Sales in growth geographies decreased by 12% on a comparable basis due to a double-digit decline in personal health sales in China and certain Asia-Pacific countries as a result of COVID-19. To round off on sales, we estimate an overall negative impact of COVID-19 on group comparable sales was around 5 percentage points in the first quarter. Moving on to orders, comparable order intake in connected care grew by 80% driven by strong demand for patient monitors and hospital ventilators. The agreement to deliver 43,000 ventilator units to the US that we mentioned earlier in the call was signed in April and is therefore not included in the number reported in the first quarter. Diagnosis and treatment comparable products Order intake was in line with Q1 of last year. Diagnostic imaging delivered high teams order intake growth driven by strong demand for X-ray and CT scanners as well as the continued strong performance of our MR portfolio. Ultrasound order intake grew mid-single digit in the quarter as customers selected products they could easily place within reach of COVID-19 patients. Our handheld and portable solutions namely the Lumify and the CX50 are critical bedside tools for rapid assessment of patients with heart and lung distress in both the emergency department as well as the intensive care unit. Our handheld ultrasound solution Lumify is a valuable tool for clinicians during COVID-19 as the portability and Easy disinfection and remote integrated tele-ultrasound capabilities allow for clinical collaboration within challenging conditions. Similarly, the CX50 provides the big system class performance for lung and cardiac imaging while travelling easily and safely to disaster sites and compromised patients. This was offset by a low double-digit order intake decline in image-guided therapy, Due to delays of elective non-urgent procedures and a mid-single-digit decline in enterprise diagnostic informatics. It is important to note that we have not seen any cancellation of orders due to the COVID-19 outbreak. We also expect to have continued increasing market share in the professional healthcare market. On reporting matters, I would like to mention that effective Q1 2020 results We have simplified our order intake policy by aligning the order book criteria for all equipment modalities to an 18-month time horizon from order to revenue. At the same time, we have also aligned our order book criteria for software contracts to the same 18-month horizon compared to the full contract value that was recognized under the previous policy. This change aims at eliminating reported order intake growth variances caused by different lengths of software contracts and better reflects near-term expected revenues from orders recognized in the reporting period. Even though we previously used different horizons per modality, this realignment has not resulted in any material impact to comparable order intake in the first quarter of this year. Let me now turn to the profitability development in the first quarter. Adjusted EBITDA for the group was 244 million euro or 5.9% of sales compared to 8.8% in the first quarter of 2019. We estimate that the overall negative impact of the COVID-19 outbreak on our profit was around 3 percentage points. This was primarily due to lost margin on lower sales Ph.D. Ph.D. Ph.D. The positive impact from growth and productivity was offset by unfavorable product mix driven by lower growth of the image-guided therapy and cardiac ultrasound portfolios. In personal health, adjusted EBITDA decreased to €81 million or 7.1% of sales due to the impact of lower sales. As mentioned by France, we are taking actions to manage manufacturing capacity and drive reduction of all discretionary spending. Due to phasing, the effect of these actions will start kicking in in the second quarter and will partly offset margin headwinds from lower sales in the segment in the period. Adjusted EBITDA for the group was also impacted by a decrease of license income in the segment other in the first quarter in line with our prior guidance. Income tax expense decreased by 88 million euros in Q1 mainly due to lower income and a non-cash benefit from lower tax liabilities. Net income amounted to 39 million euros in the quarter including charges of 31 million euros Related to a value adjustment of capitalized development costs resulting from actions we have taken to address parts of the portfolio and performance in diagnosis and treatment. The adjusted diluted EPX from continuing operations was €18 in the first quarter compared to €29 in Q1 2019. Net cash flow from operating activities increased by 129 million euros compared to the first quarter of 2019, mainly due to lower cash outflows from working capital and lower payment of taxes. Free cash flow was an outflow of 57 million euros compared to an outflow of 206 million euros in Q1 2019. We have not seen A material impact of COVID-19 in our working capital or cash flow generation in the first quarters. While we expect to face accounts receivable delays in the near term due to the impact of COVID-19 on our customers, this is not expected to impact our total free cash flow generation over the next 12 to 18 months time horizon. We remain well on track for our overall 2017-2020 productivity savings target of 1.8 billion euros and our productivity program delivered 95 million euros net savings in the first quarter. More specifically, procurement savings in part driven by our design for excellence program delivered 36 million euros of bill of material savings year on year. Net non-manufacturing cost reduction amounted to 30 million euros and the manufacturing productivity program contributed 29 million euros in the quarter. As mentioned by France, Philips has a strong balance sheet and robust liquidity position and in the first quarter, we took action to further protect our liquidity in view of the possible continued impact of COVID-19 on markets in 2020. We successfully placed 500 million euros fixed sustainability innovation notes due in 2025 and 500 million euros fixed rate notes due in 2030, both at very attractive rates. With that, we ended the first quarter with a net net position of 4.7 billion euros or 1.4 times adjusted EBITDA, well within our target range. Our debt has no financial covenants and a long-term maturity profile with an average tenor of long-term debt of more than 9 years. As of the end of the first quarter, we have completed 50.3% of our 1.5 billion euro share buyback program for capital reduction purposes that was announced on January 2019. This was done through repurchases by an intermediary to allow for purchases in the open market during both open and closed periods. In March, we announced that the remainder of the program will be executed through individual forward transactions to be entered into in the course of 2020 with the majority of the settlement dates expected in the second half of 2021. The size of the share buyback program up to an amount of 1.5 billion euros remains unchanged. By using forward transactions, we aim to optimize the number of shares to be repurchased under the program while maintaining our current liquidity position. With regards to dividend, as mentioned by Franz, we maintain our proposal to make a dividend distribution of 85 euro cents per common share against the net income for 2019. However, the proposed dividend will consist of shares only. To arrange for the change distribution method, the dividend topic will be withdrawn from the AGM agenda and an extraordinary general shareholder meeting will be called to approve the adjusted dividend distribution of 85 cents in shares. Let me provide some guidance for certain areas of our business. Based on the announcements made so far, including the recent ruling on tariff reliefs on medical devices that can be used to treat chronic respiratory disorders, the full-year gross impact of tariffs is now expected to be around 70 million euros, including mitigating actions. We expect the net tariff impact to be around 40 million euros in 2020. This is 30 million euros lower than the net impact seen in 2019. In the segment other, we expect a net cost of around 60 million euros at the adjusted EBITDA level and around 70 million euros at the EBITDA level for Q2. In line with our previous guidance, restructuring charges are expected to be 90 to 100 basis points and acquisition related costs are expected to be around 40 basis points for 2020. We expect one-time EU MDR investments of around 50 million euros in the year and consent decree related costs to be around 10 million euros a quarter similar to the quarterly run rate of 2019 until any change in status with the MDA. Taking our full COVID-19 diagnostic and connected care portfolio into account, we are investing more than 100 million euros to meet urgent demand from our customers for ventilators, patient monitors and certain diagnostic modalities. Part of this capex is capex and part of this is additional cost. Despite this, we expect our net capex as a percentage of sales to remain broadly in line with last year's Due to expenditure decreases and reprioritization in other parts of the portfolio. While the impact of COVID-19 gradually increased in the course of the first quarter, the outbreak is expected to cause a steep revenue decline for our personal health businesses and a sizable high single-digit decline of the diagnosis and treatment business in the second quarter, partly offset by a significant increase in revenue in connected gears. Assuming we can convert our existing order book for the diagnosis and treatment and connected care businesses as planned, elective procedures normalize and consumer demand gradually improves, we aim to return to growth and improve profitability for the group in the second half of the year. Consequently, for the full year 2020, we aim to achieve a modest comparable sales growth and an adjusted EBITDA margin improvement. Given the current uncertainty and volatility, we will not provide more specific guidance for 2020 at this time. To conclude, I also want to thank our employees for their incredible resourcefulness to keep the company fully functioning and especially our finance colleagues and auditors who timely close the first quarter books while working fully remotely. With that, we will now open the line for your questions. Thank you.