Koninklijke Philips N.V. NY Registry Shares

Welcome to the Royal Philips Third Quarter 2020 Results Conference Call on Monday 19 October 2020. During the call hosted by Mr. Frans Van Houten and Mr. Abhichit Bhattacharya , all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions. If any participant has difficulty hearing the conference at any time, Please press the star followed by the zero on your telephone for operator assistance. Please note this call will be recorded and replay will be available on the Investor Relations website of Royal Philips. I will now hand the conference over to Mr. Leandro Mazzoni, Head of Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen. Welcome to Philips' third quarter results conference call. I'm here with our CEO, Franz Van Houten, and our CFO, Abhijit Bhattacharya. On today's call, Franz will take you through our strategic and financial highlights for the quarter, as well as the targets for accelerated growth, higher profitability, and improved cash flow for the 2021-2025 period. Abhijit will then provide more detail on the Q3 financials. After that, we will 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 this conference call will be made available by end of the day on our 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. The impact of COVID-19 on our results is not treated as an adjusting item. Comparable growth for sales and orders are adjusted for currency and portfolio changes. Finally, also as mentioned in the press release, the new targets exclude the domestic appliances business. With that, I would like to hand over to Frans.

Thanks, Leandro. And good morning to all of you on the call and webcast. I hope that you and your families are keeping safe and well. It's clear that the COVID-19 pandemic is far from over. And I'm pleased with how we are performing under challenging circumstances as our teams are focused on delivering what we call our triple duty of care, meeting critical customer needs, safeguarding the health and safety of our employees, and ensuring business continuity. The work that we are doing to support healthcare providers, medical staff, patients, and consumers alike remains a top priority for all of us at Philips. In close collaboration with our suppliers and partners, we have ramped up the production volumes of products and solutions to help diagnose, treat, monitor and manage COVID-19 patients. We have also continued to create important COVID-19-oriented propositions to rapidly respond to customer needs. Moving on to the Q3 financial highlights, we delivered strong growth and improved profitability in the quarter. Overall comparable sales growth was 10% as we successfully converted our connected care order book, so consumer demand rebounding and elective procedures gradually normalizing. Connected care grew a very strong 42% in the quarter, driven by the high volume of shipments to fulfill the orders for patient monitors and respiratory care. Sales for personal health grew 6%. Our diagnosis and treatment businesses delivered encouraging sequential improvement, but still declined 3% in the quarter versus 2019. Comparable equipment order intake grew 3% in the quarter, excluding the impact from the unexpected partial termination of the April 2020 contract with HHS, which was communicated in August. Order intake growth was driven by the demand for patient monitors, hospital ventilators, computer tomography, and portable ultrasound systems. Customer response to our innovative products and solutions remains very positive, and we expect to have continued increasing market share in the professional healthcare market. Adjusted EBITDA margin was 15.4% in the third quarter, 300 basis points higher than in Q3 2019. Free cash flow increased strongly to €543 million. Looking ahead, We continue to see uncertainty and volatility related to the impact of COVID-19 across the world. But our order book is solid and we continue to expect to deliver modest comparable sales growth with an adjusted EBITDA margin of around the level of last year for the full year 2020. Now I would like to provide some color on initiatives to respond to customer needs and support healthcare professionals. In the quarter, we introduced several new solutions for the intensive care unit, the general ward, and the home that feature virtual monitoring capabilities. These include our new rapid equipment deployment kit for ICU ramp-ups, allowing hospital staff to quickly deploy critical care patient monitoring capabilities where and when additional care capacity is needed. The kit is a fully configured and ready to deploy ICU patient monitoring solution which includes 20 ICU monitors, 20 measurement servers, and a central management monitoring station. Building on our leadership in defibrillators, we launched a new solution for emergency care in the United States consisting of a remote portable vital signs patient monitor and professional defibrillator. This is called the Tempus ALS. It's a complete end-to-end system that combines innovative hardware and advanced software for emergency responders. Also exciting, we launched major extensions to our industry-leading Azureon platform, comprising a new range of configurations, addressing more therapeutic areas and more price points, and further integrating therapeutic devices and imaging. With the new Azureon, Clinicians can easily and seamlessly switch between imaging, physiology, hemodynamics, and informatics applications, including state-of-the-art SmartCT 3D imaging and Intrasight, a comprehensive suite of clinically proven IFR, FFR, IVUS, and co-registration modalities. We also expanded our image-guided therapy devices portfolio through the acquisition of Intact Vascular, Adding an industry-first implantable device to treat peripheral artery disease. Moreover, we launched QuickClear, an all-in-one thrombectomy system for the removal of blood clots from the vessels of the peripheral arterial and venous systems, and OmniWire, a solid core pressure wire, another industry-first, to guide coronary artery procedures. We continue to drive market share in our core businesses through deeper, more comprehensive customer partnerships to enhance patient care and improve care provider productivity. During the third quarter, we signed 11 new long-term strategic partnerships with hospitals in the United States, Europe, and Asia. We announced a multi-year partnership with Tampa General Hospital, one of the largest hospitals in the United States, to replace all of the hospital's patient monitors and upgrade key imaging technologies into cath labs and interventional radiology rooms. We also provide unique workflow solutions and operational performance management services. In personal health, we continue to invest in innovation and new product introductions to capitalize on recovery opportunities. In the third quarter, we broadened our leading portfolio of power toothbrushes, with the exciting launch of the Philips One by Sonicare in the United States. This is a battery operated power toothbrush which is a step up for consumers that switch from manual brushing and an entry level proposition thereby allowing us to expand in new consumer segments. The Philips One starts at US dollar $24.99 and also offers users a subscription service that seamlessly delivers a new brush head and Replacement Battery right to their door every three months. The automatic refill helps keep oral health routines on track and ensures optimal efficacy of brush heads. While we have been working hard on managing our business during these uncertain times, we continue to progress on our strategic and performance roadmap for the coming years. Our journey to health tech leadership continues as we innovate to drive growth, Improved operational excellence and deliver on our transformation. Our strategy to transform care along the health continuum strongly resonates with customers and has been further validated during the COVID-19 crisis. Moreover, we see increased interest in telehealth solutions like tele-ICU, teleradiology, telepathology, which can help virtual working of care professionals as well as move care into the community. We are glad to announce our targets for accelerated growth, higher profitability and improved cash flow for the 2021-2025 period ahead of our upcoming Capital Markets Day that will be held virtually in November. We play in attractive market segments with solid growth fundamentals and with long-term trends that align with our strategy. We expect these markets to grow around 4% per year Assuming that the world economy returns to growth next year. Building on our transformation and investments over the last few years, we anticipate an acceleration of our average annual comparable sales growth to 5-6% with all business segments in that range. This is underpinned by our strategic imperatives to further improve customer and operational excellence, boost growth in our core businesses, Through innovation, geographical expansion and more customer partnerships, and of course winning with innovative solutions along the health continuum. For 2021, our current view is that group-comparable sales will deliver low single-digit growth, driven by solid growth in diagnosis and treatment and personal health, but partly offset by lower connected care sales, as demand in these businesses normalize from the spike in COVID-19 generated demand in 2020. We aim for an average adjusted EBITDA margin improvement of 60 to 80 basis points annually starting in 2021 and reaching high teens by 2025. Looking at the business segments, we expect diagnosis and treatment to reach 15 to 17% adjusted EBITDA margin Connected Care to reach 17-19% and Personal Health to reach 19-20%. This profitability step-up is driven by above-mentioned growth, delivering operating leverage, increasing return of investments in growth businesses like telehealth and informatics, and a further step-up in the profitability of diagnostic imaging, as well as operational excellence resulting in further sizable productivity savings over the next years. Next to this, cash generation will step up to above 2 billion euros of free cash flow and organic ROIC will improve to mid to high teens by 2025. We will discuss the strategic and overall performance roadmap in more detail during our Capital Markets Day on November 6th, but we did not want to keep the suspense until then so that investors can reflect on it in the meantime. We look forward to a very engaging dialogue during the Capital Markets Day. I'm also very proud to share with you that we are reinforcing our commitments as a purpose-driven company with a fully integrated approach to doing business responsibly and sustainably. Our leadership in environmental responsibility is recognized by our stakeholders and we have been consistently raising the bar. For example, earlier this month Philips ranked number two Over 5,500 publicly traded companies on the Wall Street Journal list of the 100 most sustainably managed companies in the world. We expect to deliver on all targets set out in our 2016-2020 Healthy People Sustainable Planet program by the end of this year. And in September, we announced a comprehensive new set of commitments and targets across the entire spectrum of our environmental, social and corporate governance activities that will guide the execution of our company's strategy. We are enhancing our ambitions to reduce CO2 emissions in line with a 1.5 degree Celsius global warming scenario set out by the Paris Agreement. By 2025, Philips will be 75% powered by renewable energy. All our products and services will be designed in line With eco-design requirements. And where we cannot completely eliminate our CO2 emissions, we will offset them via investments in health benefiting environmental projects. When it comes to social responsibility, we commit to improving the lives of 2 billion people a year by 2025, including 300 million in underserved communities. We have also set a new goal of 30% gender diversity In senior leadership positions by the end of 2025, up from 25% in 2020. And when it comes to good governance, we commit to being transparent in the tax contributions we make in all countries we operate in. Bringing together all these aspects of responsible and sustainable business into a single framework will not only help us improve lives throughout the world, but it will also reinforce Our purpose and strengthen our power of innovation. Ladies and gentlemen, let me also give you an update on the current status of the divestment of the domestic appliances businesses. Separation process is on track and expected to be completed in the third quarter of 2021. As planned, we started to engage with interested parties and continue to see good interest for the asset. Domestic appliances is a solid business and has returned to robust growth with increasing margins in the third quarter based on a strong portfolio of innovations with market leading positions. To round off, I'm pleased that we are delivering to plan and very thankful to our employees. I'm also convinced that Philips is well positioned to serve the current and future needs of hospitals and health systems next to supporting consumer health and that the growth and margin profile of our company is well underpinned. And with that, I'd like to turn the call to Abhijit.