Koninklijke Philips N.V. NY Registry Shares

Good morning, ladies and gentlemen. Welcome to Philips' fourth quarter and full year 2020 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 period. Abhijit will then provide more detail on the financial performance. And 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 are available on our investor relations website. A full transcript of this conference call will also be made available 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. Comparable growth for sales and orders are adjusted for currency and portfolio changes. Finally, forward-looking projections exclude the domestic appliances business. With that, I would like to hand over to Frans.

Thanks, Leandro. Hi, everybody. Good morning to you. I hope that you and your families are keeping safe and well. It's clear that COVID-19 pandemic is far from over, and my thoughts go out to the caregivers and patients as we battle the virus all together. In this environment, we at Philips are proud of our role to support care providers and patients. I'm pleased with how we have performed under these challenging circumstances, as our teams remain focused on delivering against what we call the triple duty of care, meeting critical customer needs, safeguarding the health and safety of our employees, and ensuring business continuity. The work we are doing to support healthcare providers, medical staff, patients and consumers has our top priority. 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 throughout 2020. We have also rapidly responded to the increased demand for telehealth solutions Like tele-ICU, teleradiology, telepathology, teledentistry services, which aid virtual working among care professionals, as well as move care into the community. Very important, we have continued to deepen our engagement and relationships with customers through consultative partnerships, strategic partnerships, leading to a higher degree of recurring revenues, superior service, and stronger customer loyalty. As a result of these efforts, I am pleased that we have recorded comparable sales growth of 7% in Q4. Connected care grew a very strong 24%, driven by the demand for patient monitors and respiratory care. Our diagnosis and treatment businesses delivered encouraging sequential improvement and returned to growth with a 1% comparable sales increase. Sales for personal health Comparable equipment order intake grew 7% in Q4 with double-digit growth in connected care and 3% growth in diagnosis and treatment. This was driven by strong demand for patient monitors, hospital ventilators, radiology informatics, computer tomography, x-ray and ultrasound systems. Customer response to our innovative products and solutions remains very positive, resulting in market share gains and strong year-end order book in both connected care and diagnosis and treatment. Adjusted EBITDA margin was 19% in the fourth quarter, which is 110 basis points higher than in 2019, and free cash flow increased to over 1 billion euro. As a result of our strong performance in the second half of the year, For the full year 2020, we delivered 3% comparable sales growth and an adjusted EBITDA margin of 13.2%. Quarter intake grew a further 9% in 2020. Moreover, we achieved a free cash flow of almost 1.9 billion euro in the year, ahead of our target of 1.5 billion. Looking ahead, We continue to see uncertainty related to the impact of COVID-19 across the world. For 2021, as guided at CMD, we plan to deliver overall low single-digit sales 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 diminishes. will normalize from the spike in COVID-19 generated demand in 2020. We also aim to deliver an adjusted EBITDA margin improvement of 60 to 80 basis points in 2021. Now I would like to provide some color on some of our initiatives to respond to customer needs and support healthcare professionals and consumers. In the quarter, we expanded our range of patient-centric solutions for the home with the launch of the BiPAP A40 non-invasive ventilator. With this introduction, we extend our respiratory care solutions with a new ventilation therapy feature to treat COPD patients with Expiratory Flow Limitation, or EFL. Our unique Xpera Flow technology Detects EFL more accurately and automatically optimizes ventilation to the individual needs of the patient. This enables more effective treatment of patients at home and ultimately avoids hospital readmissions. Highlighting our strength in enterprise imaging informatics solutions, we created a single cloud-accessible system for all 12 hospitals of the region of Southern Denmark, for storing, retrieving, and viewing radiology and nuclear medicine images and data. The unified imaging informatics ecosystem, which comprises Philips' vendor-neutral archive and universal viewer, aims to improve collaboration and enhance patient care for a population of over 1.2 million people. At the RSNA annual meeting in December, We also launched an industry's first vendor-neutral, multimodality and AI-supported radiology operations command center to enable real-time remote collaboration between radiologists, technologists, and imaging operation teams across multiple sites. This with the aim to increase radiology productivity, minimize issues with image quality, and expand access to MR and CT based diagnosis. We also expanded our image guided therapy portfolio through the launch of major extensions to our industry leading Azurion platform, as well as new diagnostic and therapeutic devices. As we are excited that later today, we are also excited that later today, the five year illuminate EU RCT and pivotal study Results of the Philips Stellarex drug-coated balloon will be presented. Stellarex with its low dose and unique drug-coating composition is an important treatment choice for healthcare providers treating patients with peripheral arterial disease and we have a lot of confidence in its potential. That's enhanced by the study that I just referred to. Very important, 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 fourth quarter, we signed 25 new long-term strategic partnerships with hospitals in the US, Europe and Asia with the aim of helping them achieve their clinical and operational goals. For example, we signed a five-year technology and innovation partnership with the Rennes University Hospital, one of the top hospitals in France with four sites and more than 1,800 beds. Philips will deliver integrated solutions to support precision diagnosis, image-guided therapies, and patient monitoring and management. The partnership also includes consultancy services, informatics solutions and visualization and analysis tools to drive quality and efficiency improvements, and enhanced diagnostic confidence. Moreover, I am encouraged that our strategy to win with solutions continues to work very well. When we set out to increase focus on solutions in 2015, it represented about a quarter of the company. We ended 2020 around 37% and expect solution sales to continue to grow double-digit and represent slightly less than half the company by 2025. In personal health, we continue to invest in innovation and new product introductions to capitalize on recovery opportunities. In the fourth quarter, we broadened our leading male grooming portfolio with an exciting launch of the Philips Shaver Series 1000 in China, a proposition that is customized to specifically address the personal care needs of young men Gen Z. Mendt Also exciting, we took important steps in our strategy to become a leading solutions provider with the acquisitions of BioTelemetry Incorporated and Capsule Technologies in Q4. BioTelemetry has a market-leading cardiac diagnostics and monitoring solution comprised of wearable connected heart monitors, AI-based data analytics, and state-of-the-art monitoring and services centers. The combination of our own leading patient monitoring position in the hospital with biotelemetries leading cardiac diagnostics and monitoring outside of the hospital will result in a global leader in patient care management solutions with much potential for further expansion. Capsule is a leading provider of medical device integration and data technologies for hospitals and healthcare organizations. Device Integration, Vital Signs Monitoring, and Clinical Surveillance Services. And it connects almost all medical devices to EMRs in the hospitals through a vendor-neutral system that captures streaming clinical data and transforms it into actionable information to enhance patient care management. These acquisitions will further broaden, enrich, and scale Philips patient care management solutions. Both acquisitions will be accretive to sales growth and adjusted EBITDA margin in 2021. Upon completion of the transactions, which is expected to happen in the first quarter of 2021, biotelemetry and capsule employees will become part of our connected care business segment. I'm also proud, very proud, that we've delivered on all targets set out in our 2016-2020 Healthy People Sustainable Planet program. and that our products and solutions improve the lives of 1.75 billion people in 2020, including 207 million people in underserved communities. As shared with you last quarter, we also reinforced our commitments as a purpose-driven company with a comprehensive new set of initiatives and 2025 targets across the entire spectrum of environmental, social and corporate governance activities. Let me give you an update on the current status of the divestment of the domestic appliances business. The separation process is on track and expected to be completed in the third quarter of 2021. As planned, we have sent the information memorandum and started to engage with interested parties in the fall of 2020. Domestic appliances is a strong business and has returned to robust growth with increasing margins in the second half of 2020. Based on a strong portfolio with market leading positions. We continue to see good interest for the asset and remain open to different divestment options to deliver the best value for the company. To round off, I'm pleased with the way that we have handled the crisis. I'm very grateful to our employees and proud of the resourcefulness and hard work that they and we all together have been able to put in to deliver to the plan in 2020. While we have been working hard on managing the business, 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, improve operational excellence, and become a leading health tech solutions company. We have a clear strategy to help transform care along the health continuum Combining Smart Systems, Devices, Informatics, Data and Services. This strategy strongly resonates with customers and has been further validated during the COVID-19 crisis. And I'm convinced that the growth and the margin profile of our company is well underpinned. And with that, I'll turn the call to Abhijit.

Thank you, Franz, and thank you all for joining us today. Let me start with providing some color on the fourth quarter comparable sales. Comparable sales for diagnosis and treatment businesses grew 1% in the quarter. Diagnostic imaging sales grew high single digit driven by double digit growth in computed tomography and diagnostic x-ray. Enterprise diagnostic informatics sales also grew double digit in the fourth quarter as we continue to successfully roll out our world-class enterprise imaging platform Resulting from our R&D programs and the integration of the care stream business. Ultrasound and image guided therapy sales declined mid single digit in the quarter, mainly due to push outs of installations in the U.S. The volume of elective procedures was close to pre-COVID-19 levels in October and November, but went down to around 80% of pre-COVID levels in December, mainly driven by the U.S., We expect the elective procedure volumes to gradually recover in the course of the first quarter. Services sales for our diagnosis and treatment businesses grew a solid mid single digit compared to the same period in 2019. Let me remind you that recurring revenues from solutions and services represent more than 45% of the total sales of diagnosis and treatment. For the full year 2020, sales for diagnosis and treatment businesses declined 2% on the back of 5% growth in 2019. The sales for connected care businesses grew a strong 24% in Q4, driven by patient monitoring and respiratory care solutions. We were also pleased to see double-digit growth in our therapeutic care business and a solid sequential improvement in the sleep business In the full year, comparable sales for connected care grew 22% with double-digit growth in both monitoring and analytics and sleep and respiratory care. Order intake for connected care grew strong double digits in the full year. For personal health, we saw solid demand in the quarter with a comparable sales Domestic appliances grew double digit and personal care grew mid-single digit. Oral health care comparable sales declined low single digit on the back of mid-teens growth in Q4 2019 mainly in China. In the full year 2020, personal health sales declined 4% compared to 2019. Consumer sales through digital channels grew double-digit in Q4 and represent 39% of total sales of personal health. Our shift to digital and adoption of new business models of direct-to-consumer resonate very well. Important to note that our current online market share is even higher than that in the traditional offline channels. Moving to orders, as mentioned by Farns, Order intake grew by 7% in the fourth quarter. This builds on double-digit growth seen in the first three quarters of the year, resulting in 9% growth in the year and a strong order book as depicted in page 33 of the presentation. Diagnosis and treatment comparable order intake grew 3% in the fourth quarter, showing solid sequential improvement. Diagnostic imaging orders grew mid-single-digit, Ultrasound orders grew high single digit and enterprise digital informatics orders grew double digit in the quarter. This was partly offset by a mid single digit decline in image guided therapy. Order intake for diagnosis and treatment grew mid single digit in growth geographies driven by double digit growth in China and was in line with Q4 2019 in mature geographies with overall slow momentum in North America. Comparable order intake in connected care grew by 17% in Q4 and particularly encouraged by another strong quarter in monitoring and analytics and in our therapeutic care businesses. Let me now turn to the profitability development in the fourth quarter. Adjusted EBITDA for the group increased 110 basis points to 19% of sales. In the full year, the adjusted EBITDA margin was 13.2% in line with our guidance. Looking at the business segments, Connected Care delivered an adjusted EBITDA margin of 27.2% of sales compared to 19.4% in the fourth quarter of 2019. This was mainly due to operating leverage and the productivity programs. In diagnosis and treatment we adjusted EBITDA decreased to 14% of sales. This was mainly a result of unfavorable product mix driven by lower growth of cardiac ultrasound and image guided therapy portfolios. In personal health adjusted EBITDA was 20% in line with Q4 2019. Sales growth and cost savings were offset by planned higher investments in advertising. Adjusted EBITDA in the fourth quarter was impacted by lower license income in the segment other of around 30 million. We continue to relentlessly focus on driving productivity and delivered close to 450 million euros savings in 2020 and over 1.9 billion savings for the overall 2017 to 2020 period, exceeding our target of 1.8 billion. At our Capital Markets Day, we provided the details around the productivity initiatives that will deliver additional cumulative net savings of €2 billion by 2025 through procurement programs, supply chain productivity and overhead cost reduction. Net income increased by 9% to €607 million in the quarter and includes a charge of €144 million Related to an impairment of goodwill mainly due to revisions to the financial forecast of our personal emergency response system business due to lower demand. Financial income and expenses resulted in an expense of 20 million euros compared to 57 million in Q4 2019. This decrease is mainly due to the increase in value of one of our minority participations. The adjusted diluted EPS from continuing operations increased by 13% in the fourth quarter and was in line with 2019 for the full year. Free cash flow was an inflow of 1 billion euros compared to 959 million in Q4 2019. In the full year 2020, our free cash flow generation was 1,852,000,000 euros as a result of strong working capital performance, notably in accounts receivable. This was driven by a significant reduction of overdue receivables and a shorter collection cycle in the connected care businesses due to the shift in product mix. Further, in the second half of the year, we saw a higher than normal proportion of sales in Q3 compared to Q4. Ph.D. Ph.D. Ph.D. Ph.D. Ph.D. Ph.D. Ph.D. We expect a net cost of around 65 million euro at the adjusted EBITDA level, broadly in line with Q1 2020 and around 100 million at the EBITDA level. Restructuring charges are expected to be 70 to 80 basis points and acquisition related costs to be around 100 basis points in 2021. We expect one-time EU MDR and consent decree related costs of around Ph.D. Ph.D. Ph.D. As of the end of 2020, we have completed over 50% of our 1.5 billion euro share buyback program for capital reduction purposes that was announced in January 2019. The remaining 50% will be completed during the course of 2021. To conclude, after a challenging second quarter due to the impact of COVID-19, our performance continued to improve through the second half of the year. and we delivered a Q4 with 7% sales growth, 7% order intake growth, 110 basis points adjusted EBITDA margin improvement and a free cash flow of over 1 billion euros. For the full year, we delivered 3% comparable sales growth, 13.2% adjusted EBITDA margin, a strong cash flow of 1.9 billion euros, Moreover, driven by a 9% comparable order intake growth, we continued to gain market share in our healthcare businesses in 2020 and ended the year with a strong order book. We will submit a proposal for dividend of €0.85 per share against the net income of 2019 in cash or shares at the option of shareholders. This is within the targeted payout ratio of 40-50% of continuing net income. In 2021, we continue to see uncertainty related to COVID-19. We plan to deliver low single-digit comparable sales growth and an adjusted EBITDA margin improvement of 60-80 basis points in this year, in line with the guidance given at the Capital Markets Day. Thank you. Thank you.