Koninklijke Philips N.V. NY Registry Shares

Welcome to the Royal Philips Second Quarter and Semi-Annual 2021 Results Conference Call on Monday, July 26, 2021. During the call, hosted by Mr. Franz Van Houten, CEO, and Mr. Abhichit Bhattacharya, CFO, 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 that this call will be recorded and a 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 and welcome to Philips' second quarter 2021 results conference call. Joining me today are our CEO, Frans Van Houten, and our CFO, Abhijit Bhattacharya. Frantz and Abhijit will take you through our strategic and financial highlights for the period and after that we will take your questions. Our press release and the related information slides act were published at 7 a.m. CET this morning. Both are available on our investor relations website. A full transcript of this 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 Significant One-Off Items. Comparable growth for sales and orders are adjusted for currency and portfolio changes. As of Q1 2021, the domestic appliances business is reported as discontinued operations. Sales and results from this business are no longer included in the results of continuing operations and relevant assets and liabilities are reported under assets and liabilities held for sale. All forward-looking projections exclude the domestic appliances business. Over to you, Frans.

Yeah, thanks. Hey, hello everyone and thank you for joining us today. I hope that you and your families are keeping safe and well. Let me upfront mention the upcoming field actions related to the component quality issue in our Sleep Apnoe Therapy Devices that we announced back in June. I tell you to talk about that first, as you understand, because of the impact that it is having on patients as well as their well-being, which is at the heart of everything we do at Philips. I want you to know that we have mobilized the necessary resources across the company to address this issue effectively. and I will come back later in this call with more details. Zooming out, the COVID-19 pandemic is clearly not over and our teams are very focused on delivering against what we call the triple duty of care of meeting customer needs, safeguarding the health and safety of employees, ensuring business continuity. Despite the impact of COVID, we delivered actually strong performance momentum in all our businesses, except for the sleep and respiratory care business. This resulted in 9% comparable sales growth, an adjusted EBITDA margin increase of almost 300 basis points, and a free cash flow of €167 million for the group in the second quarter. We are very encouraged by the close to 30% comparable order intake growth for the diagnosis and treatment business, with all major markets contributing, driven by the improvement of hospital CAPEX and elective procedures, and a very positive customer response to our innovative products and solutions. Order intake for the connected care businesses decreased, of course, following the exceptional growth of last year, as well as the headwinds in the sleep and respiratory care business. Personal health delivered strong 33% revenue growth in the quarter. Now I would like to provide some color on some of our initiatives to respond to the needs of today's hospital leaders across the globe as they plan for the future. Highlighting our strength in smart diagnostic systems, In the second quarter, we introduced the Spectral CT7500. Let me spend a minute on this innovation, as it is quite impactful. With the launch of the Icon in 2016, we established the category of detector-based spectral computer tomography. The Spectral CT7500 is an important expansion to our portfolio, and it delivers high-quality spectral images For the broadest patient base of any company, including cardiac, pediatric, and bariatric patients. It is the only system that makes spectral data available on 100% of the scans, allowing clinicians to adapt their protocols for different patients, thus eliminating the need of special workflows or multiple re-scans. It is also the only system that provides spectral imaging for interventional procedures. The Spectral CT7500 was extremely well received by customers and further expands our comprehensive CT portfolio which is continuing its double-digit growth trajectory from last year. We also launched Intrasight Mobile, a fully mobile interventional suite system to assist with coronary and peripheral artery disease procedures. Intrasight Mobile offers users in hospitals and office-based labs The integration, flexibility, and affordability for intravascular imaging, physiology measurements, and co-registration for seamless workflows and enhanced patient care. Our image-guided therapy devices portfolio continues to gain significant traction as we announce this series of important achievements in this business in the quarter. For example, the first structural heart repair procedure using our Ph.D. Ph.D. Ph.D. Ph.D. Ph.D. Ph.D. to derive the adoption of IFR for percutaneous coronary interventions based on clinical evidence and the start of the We Trust multicenter stroke study to shorten treatment times by identifying, planning, and treating ischemic stroke patients in the interventional suite. Importantly, we continue to grow market share in our core businesses through deeper, more comprehensive customer partnerships. During the second quarter, we signed several new long-term strategic partnerships in countries ranging from North America, Europe, Latin America, and the Middle East. This builds on the strengths of our portfolio and demonstrates the trust that hospital leaders have in our ability to enhance health outcomes, lower the cost of care, and improve patient and staff experience. In personal health, we introduced the SonyCare 9900 Prestige globally, which leverages AI to optimize users' brushing technique, ensuring full coverage of the mouth and instill brushing habits that improve oral health. We also expanded our leading male grooming portfolio with the introduction of the Shaver Series 9000 with Skin IQ technology in China that leverages AI and sensors to offer a personalized shave tailored to each unique skin and hair type and it will be launched in North America and in Europe in the second half of this year. The integrations of the recently acquired biotelemetry and capsule businesses are progressing very well. Reactions from customers to the expanded portfolio of end-to-end patient care management solutions from the hospital all the way to the home have been very positive. We already see strong joint customer wins and funnel including Several major integrated delivery networks adopting these in the United States. We are also in the process of aligning assets, capabilities, and product roadmaps, which is a step towards joint R&D activity and platform development. On a different angle, in line with our plans, on July 1, the domestic appliances business became a standalone entity, and we are on track to complete the sale of this business to Hill House Capital in the third quarter of course subject to customary conditions. Also important, today we announced a new share buyback program for capital reduction purposes for an amount of up to 1.5 billion euros and Abhijit will later on cover that in more detail. Let me now speak about the planned field actions in sleep and respiratory care. This is of course a major correction and we take it very seriously. As mentioned, we have mobilized the necessary resources across the company to address the issue. This is done due to possible risk of degradation of the sound abatement foam embedded in the devices. At the same time, we realize that the field action itself has temporarily also a significant impact to patients. We are fully prepared to start with comprehensive repair and replacement actions for the affected units. We are still in discussions with the relevant regulatory authorities to obtain authorization to start deploying the repair kits and replacement devices that we are producing. For example, we have submitted the relevant applications to the FDA in June. We've already increased the overall production of DreamStation 1 and DreamStation 2 devices, as well as repair kits from 30,000 units per week to 55,000 units per week. As of the start of the third quarter, and we expect to reach 80,000 units per week in the fourth quarter, which underpins our expectation to address all devices in scope within 12 months of regulatory approval. As a consequence of the prioritization of the repair or replace actions, we are currently not taking new orders for sleep therapy systems, while masks and other consumables, of course, continue to be sold. As a reference, before COVID-19, the annual revenue in our sleep business was close to 1.1 billion, with approximately 60% from systems and 40% from masks and consumables. In the longer term, we do not expect this issue to have a substantial impact on the fundamentals of our sleep and respiratory care business, nor on the gross dynamics of this market. We have a market-leading, innovative product portfolio in these businesses, and continue to work closely and transparently with physicians, customers and patients to ensure that we address this issue as quickly as possible. Following our voluntary field safety notice, for which we have assumed a worst case scenario, we are still conducting research and further tests to get insights so that we are better able to scope possible patient risk. To be clear, we do not have data at this point such as preclinical or clinical study results indicating that exposure to the particulates or emitted chemicals related to the sound abatement foam will lead to disease, while at this point we cannot exclude it either. The various regulators around the world have made their own interpretation of the field safety notice in the data also weighing the patient risks and benefits. As a result, we are seeing some variance in what regulators are advising patients in this matter. I would like to point you to the table in the investor presentation. As I know this is on your mind, I can say that some civil complaints and personal injury claims have been filed in courts against Philips. It is, however, far too early to draw any conclusion to talk about the merits of the claims or speculate about Philips' exposure. In due course, we will be able to assess the merits of any claim and we intend to defend our position vigorously, supported by the further test data that we are gathering. Obviously, the timelines that may apply to the handling of claims is not yet clear. I also want to talk about the broader context of quality across Philips. In the last few years, we have made strong progress in our quality culture and approach, improved design controls, improved post-market surveillance, and improvements in the way that we handle corrective and preventative actions. The effective products were designed and have been in full compliance with appropriate standards At the time of release and commercialization and the component issue was identified through our own post-market surveillance processes. Overall, the robustness of our processes has increased a lot. That doesn't mean, of course, that we are done. This journey remains a top priority for all of us at Philips. I want again to reiterate that patient well-being is at the heart of everything we do. To round off, looking ahead, while we continue to see uncertainty related to the impact of COVID across the world and the impact of electronic component shortages, our overall financial guidance remains within the earlier guided rates. I'm pleased with the progress that we are making on the strategic roadmap, as well as the strong performance momentum in all our businesses except for sleep and respiratory care. We are working hard on the field action, and our journey to health tech leadership continues. We are executing on a clear strategy to help transform healthcare along the health continuum, combining smart systems, devices, informatics, data and services. And I am convinced, and I want to repeat that, that the growth and the margin profile of our company remains very well underpinned. And with that, I will turn the call to Abhijit.