Koninklijke Philips N.V. NY Registry Shares

Welcome to the Royal Philips Q4 and Fall Year 2022 Results and Creating Value with Sustainable Impact Conference Call on Monday 30th January 2023. During the call, hosted by Mr Roy Jakobs, CEO, and Mr Abhijit Bhattacharya, CFO, all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions. Please note that this call will be recorded and replay will be available on the investor relations website of Royal Philips. Please stand by, the webcast will start shortly. Ph.D. Ph.D. Ph.D.

Hi, everyone. Welcome to the Philips' fourth quarter and full year 2022 results webcast. I am here with our CEO, Roy Jakobs, and our CFO, Abhijit Bhattacharya. We're also joined today by Shes Partovi, Chief Strategy and Innovation Officer, Wim Appelo, Chief Operations Officer, and Francis Kim, Head of Quality. I would like to first go through the agenda for today's webcast. We will start with the discussion of our fourth quarter and full year 2022 results. We will then talk about how we will create value with sustainable impact, with presentations about our focused organic growth and scalable innovation strategy and our three execution priorities, patient safety and quality, supply chain and operating model simplification. We will wrap up with our value creation trajectory. We will have a session of around 70 minutes, followed by Q&A. The press release, slide deck, and frequently asked questions on the Respironics Recall were published on our Investor Relations website this morning. The replay and full transcript of this webcast will be made available on the website as well. Before we start, I want to draw your attention to our safe harbor statement on screen. You will also find the statement in the presentation published on our Investor Relations website. With that, I'll hand over to Abhijit.

Thanks Leandro, good morning and welcome everyone. Let me start with our group performance and profitability in the quarter. Comparable sales growth was just over 3% driven by improved component supplies in particular in hospital patient monitoring, image guided therapy and ultrasound. We delivered growth of 5% for diagnosis and treatment and connected care businesses on a comparable basis, which was partly offset by a decline in personal health due to China and Russia. Although the component supply situation is improving, the situation remains challenging as we anticipate gradual improvements during the year. Adjusted margin was 12%. We continue to see a significant component in wage inflation, which had a 370 basis points impact on our margin. This was in part offset by our pricing and productivity actions, which contributed a further 260 basis points. As I have explained before, the positive impacts Positive pricing impacts on our health system businesses, i.e. diagnosis and treatment and connected care, will be reflected in the profit and loss account during the second half of 2023. The adjusted EBITDA margin was 11.3% in diagnosis and treatment, 12.6% in connected care, and 17% in personal health in the fourth quarter. In the quarter, our operating cash flow was 540 million euros and free cash flow was 301 million euros. Accounts receivables increased in the quarter driven by the strong sales in the month of December, which we expect to convert to cash in 2023. We won a further 35 new long-term strategic partnerships across our regions, bringing the total to close to 100 in 2022. This is a core part of our growth strategy and improves the quality of our recurring revenues. Moving on to the segment highlights from this quarter. In diagnosis and treatment, comparable sales increased 5% in the quarter, driven by high single-digit growth in ultrasound and image-guided therapy. Order intake declined by 7% on the back of double-digit growth in 2021. The decline was due to the cancellation of a few orders with lower margins in order to improve our order book margin profile. In connected care, comparable sales increased by 5%, driven by strong double-digit growth in hospital patient monitoring. Order intake fell 10% due to the normalization of demand for COVID-19-related acute care products, but continued to run above pre-COVID levels. We see a fundamental demand shift in adoption of our patient-patient Care Management Solutions and expanding market shares in connected care informatics and in the patient monitoring business. Finally, in personal health, comparable sales declined by 4% with double-digit growth in North America and Western Europe, more than offset by double-digit decline in China and Russia. The impact of the COVID-19 Chrisis significantly affected our sales in China in the quarter. Now moving to our order book, our order book coverage is significantly higher than in 2020 and 2021, in particular in magnetic resonance imaging, which is 30% higher and in image guided therapy and monitoring where coverage is around 20% higher. and in absolute terms at the end of 2022, the order book was 30% higher than the end of 2020 and with the improving margin profile as we proactively cancelled some low margin orders that I just told you about. Turning to our performance for the full year 2022. In 2022, results were impacted by operational and supply challenges, inflationary pressures, the COVID situation in China, and the Russia-Ukraine war. As a result of these ongoing headwinds, comparable sales for the group declined by 3% and our adjusted EBITDA margin decreased to 7.4%. Component and wage inflation had a significant negative impact of 300 basis points, which our pricing and productivity measures only partly offset. We also saw a negative 390 basis point impact from the lower volume during the year. For the full year, diagnosis and treatment sales declined 1% with an adjusted EBITDA margin of 8.4%. Connected care sales was down 11% mainly due to strong double-digit decline in sleep and respiratory care. The margin for connected care was 2.1% as it was impacted by sleep and respiratory care. Excluding this impact, the margin for the year was 8.3%. Personal health sales were flat with a margin of 14.8%. Excluding the impact of Russia, personal health sales grew by around 3% in 2022. We recorded a loss in our income from operations of 1.5 billion euros largely due to the previous disclosed 1.5 billion euro non-cash goodwill impairment for the sleep and respiratory care business and the R&D impairment charges. In the full year, we had a free cash outflow of €961 million as a result of lower earnings, higher inventories and cash costs related to the Respironics recall. We will talk more about our actions to drive higher cash flow generation later in the presentation. We will submit a proposal to the Annual General Meeting of Shareholders to maintain the dividend of 85 Euro cents per share to be distributed in shares. Now, looking ahead, we expect to deliver mid-single-digit growth in diagnosis and treatment and connected care in 2023, supported by our strong order book. Slow consumer demand is expected to result in low single-digit growth in personal health. Our guidance of low single-digit growth at group level in the year reflects uncertainties in the external environment. Adjusted EBITDA margin is expected to improve to high single digits this year, driven by productivity and pricing actions across businesses, partly offset by a 3% impact from component and cost inflation, as well as additional investments in patient safety and quality and supply chain improvements. We anticipate a slow start to the year as solid growth in diagnosis and treatment and connected care is offset by a decline in personal health in the first quarter. I would like to remind you that personal health grew 8% in Q1 2022 and we had the sales in Russia in the first quarter of last year. We aim to deliver a free cash inflow between 700 to 900 million euros this year, driven by improved earnings and a lower inventory, partially offset by cash out related to restructuring charges resulting from the further reduction of workforce announced this morning, which we will explain in more detail in a few moments. Please note that the 2023 guidance excludes the impact of the ongoing discussion on the proposed consent decree beyond current assumptions, as well as ongoing litigation and the investigation by the U.S. Department of Justice related to the respiratory field action. The current guidance assumes a compound sales growth rate of 10% for the sleep and respiratory care business comparable sales for the period 2023 to 2025. Restructuring charges are expected to be around 300 basis points driven by further workforce reduction that I just mentioned and the right sizing of our sleep and respiratory care businesses in 2023. Acquisition related costs are expected to be around 50 basis points and Respironics field action running remediation cost between the 50 and 70 basis points for the year. Financial income and expenses are expected to be a net cost of 270 million euros in 2023, excluding incidentals if any. This is 70 million higher than in 2022 due to higher debt and interest rates as well as a fair value gain on the value of Philips' minority participation of 30 million in 2022. We expect an adjusted EBITDA loss of around 70 million euros in the segment Other in 2023. At EBITDA level, we expect a net cost of around 200 million for the full year in this segment. For Q1, we expect a net cost of around 45 million euro at the adjusted EBITDA level and around 80 million euro at the EBITDA level. With that, we will now move to our next section after a short video when Roy will present our plans on creating value with sustainable impact.