Koninklijke Philips N.V. NY Registry Shares

Hi everyone, welcome to Philips first quarter 2023 results webcast. I have here with me our CEO Roy Jacobs and our CFO Abhijit Bhattacharya. The first quarter press release and slide deck as well as the frequently asked questions and deck on the Respironics recall were published on our investor relations website this morning. The replay and full transcript of the 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. In today's call, we will discuss our first quarter results as well as the progress on the actions we're taking across different areas to drive performance improvement. With that, I would like to hand over to Roy.

Thanks, Leandro. Good morning, everyone, and welcome. It's good to be with you again. I want to start with giving you the key highlights for this quarter. First, we delivered a solid start to the year, with 6% comparable sales growth and improvements in profitability and operating cash flow in Q1, as our actions to strengthen execution and to deliver shareholder value started to take effect. Secondly, we are making good progress in executing our plan and on our three priorities, enhancing patient safety and quality, strengthening our supply chain reliability, which has helped our improved performance in Q4 last year and the first quarter this year, and establish a simplified, more agile operating model. Thirdly, resolving the Respironics recall for patients remains our highest priority. This quarter, Respironics recorded a $575 million provision in connection with the anticipated resolution of the economic loss class action in the U.S., Looking ahead, based on our solid performance in the quarter, our order book, and the ongoing actions to further improve execution, we are confident in our plan for 2023, acknowledging that uncertainties remain. Now, onto some key financials in the quarter. We had a solid 6% comparable sales growth, with strong growth of 15% in diagnosis and treatment, and 3% growth in connected care. Partly offset by 6% decline in personal health. Comparable order intake grew double-digit in the diagnosis and treatment businesses, offset by connected care. Sales in the quarter were supported by the group momentum for diagnosis, treatment, and connected care businesses in China as well. We see continuing strength of our order book, which is 10% higher than a year ago, despite strong revenue conversion in the last two quarters and a flat order intake in the quarter itself. Adjusted EBITDA margin was 8.6%, an improvement of 240 basis points compared to Q1 2022. Operating cash was an inflow of €202 million, a step up of €429 million versus Q1 2022. As you already know, Philips is a defendant in several class action lawsuits and individual personal injury claims. This quarter, Respironics recorded a €575 million provision in connection with the anticipated resolution of the economic class action in the US. Abhijit will provide more details around it. The anticipated resolution of the economic loss class action is an important step in addressing the litigation related to the recall. Visibility on potential outcomes on the medical monitoring class action and personal injury claims is not expected before 2024. I've met many of our customers and partners in the last few months. And it's absolutely clear that Philips remains a preferred innovation partner to help hospitals worldwide addressing their staffing shortages, enhancing productivity, and improve patient and staff experience. This has again been exemplified at events during the quarter. Philips Enterprise Informatics Solutions resonated very strongly with customers at recent VIVE and HIMSS global healthcare events, which I attended. We also had some key customer innovation achievements in the first quarter. We signed a multi-year agreement with Northwell Health in the US to standardize and centralize monitoring across the hospital. And we signed a multi-vendor services agreement with Prisma Health, also in the US, to become their sole source vendor for biomedical and clinical engineering services. We expanded our leading ultrasound portfolio with the launch of the ultrasound compact 5,500 CV, which facilitates first-time-ride ultrasound exams for cardiology and vascular patients at the bedside. In personal health, we introduced Sonicare for Kids, designed a pet edition to improve oral care habits among children. And we again achieved top ranking in medical technology patent findings at the European Patent Office and were included on the Clarivate Top 100 Global Innovator List. I'm very confident that our focused organic growth and scalable innovation strategy will further strengthen our businesses and results going forward. With that, I would like to give the floor to Abhijit to take us through Q1 in more detail, after which I will come back on the progress on our execution priorities.

Abhijit, please. Thanks, Roy. Good morning, everyone. I want to start with our order book development in Q1, which ended 10% higher compared to last year, as Roy mentioned, given by image-guided therapy, ultrasound, MRI, monitoring, and enterprise diagnostic informatics. Importantly, the margin profile in the order book reflects the price increases that we have been executing since last year and will start running through our P&L from Q3 onwards. Moving to segment highlights from the quarter, In diagnosis and treatment, comparable sales increased by 15% driven by strong double digit growth in ultrasound and image guided therapy and mid single digit growth in diagnostic imaging. Sales grew double digit across mature and growth geographies with strong performance in North America, Western Europe and China. Order intake grew double digit on the back of 7% growth in 2022. This was driven by strong double-digit order intake growth in image-guided therapy and computer tomography, where our spectral CT7500 continues to perform very well in the market. Orders in growth geography grew by double-digit, driven by strong growth in China and Latin America. Orders in mature geographies grew by 3%, driven by 10% growth in North America. Adjusted EBITDA margin increased to 11.3%, mainly driven by operational leverage, a better mix, as well as productivity measures. Connected care comparable sales increased 3%, driven by strong double digit growth in hospital patient monitoring, largely offset by sleep and respiratory care. Order intake declined double digit, due to tough comps in hospital patient monitoring on the back of the expansion and renewal of the installed base during the period 2020 to 2022. For context, hospital patient monitoring continues to run above pre-COVID levels driven by the fundamental demand shift in adoption of our patient care management solutions and expanding market shares. AI-powered patient monitoring is increasingly critical to care delivery. Our IntelliView patient monitoring solutions are based upon superior hardware and predictive AI-based software that together monitor patients throughout their hospital stay. Adjusted EBITDA margin increased to 2.4% driven by an improvement of more than 500 basis points of the connected care businesses excluding sleep and respiratory care. Finally, in personal health, comparable sales declined 6% on the back of 8% growth in Q1 2022. This was due to a 4 percentage point impact from portfolio decisions related to Russia in 2022 and the lower consumer demand globally. Sales grew low single digit in China, where we see improving sell-out trends. Adjusted EBITDA margin was 13.2%, mainly due to the lost sales related to Russia. Adjusted EBITDA margin for the group increased by 240 basis points to 8.6%. Wage and component price inflation came in at around 300 basis points. However, this was more than offset by 120 basis points of operating leverage and by our productivity and pricing actions which contributed a further 520 basis points. The pricing impacts on our health system businesses that is diagnosis and treatment and connected care will be further reflected in the P&L during the second half of 2023 as we gradually convert more orders at new and better prices. Our productivity initiatives are on track These actions delivered savings of 190 million euros in the first quarter. Operating model productivity savings amounted to 94 million. Procurement savings amounted to 32 million and other productivity programs delivered savings of 64 million. Adjusting items in the quarter included 150 million of charges related to the accelerated execution of the workforce reduction plan. where we are ahead of the plan with 5,400 roll reductions to date. The full year outlook for restructuring and acquisition related and other charges remain in line with the guidance provided in January, except for the impact of the economic loss provision booked in Q1. Let me provide you some more color on that provision. The provision was booked as Phillips Respironics expects to submit a negotiated settlement agreement to the court for preliminary approval in the second quarter of 2023. While I cannot go into much detail of the provision at this moment, it's important to note that the economic loss resolution is being negotiated with the assistance of a court-appointed mediator as a potential class action settlement. That will resolve the economic claim loss claims of all device users, hospitals, and private insurers in the U.S., whether they have filed a lawsuit or not. Subject to final court approval, payments to class members under the settlement are not expected to begin until the first quarter of 2024 at the earliest. With that, I'd like to hand you back to Roy.