Koninklijke Philips N.V. NY Registry Shares

Hi, everyone. Welcome to Philips' third quarter 2024 results webcast. I'm here with our CEO, Roy Jacobs, and our CFO, Charlotte Hahnemann. The press release and investor deck were published on our investor relations website this morning. The replay and full transcript of this webcast will be made available on the website after the call 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. I will now hand it over to Roy.

Thank you, Leandro. Good morning, everyone, and welcome to the call. I want to start with the key highlights of this morning's release. We delivered strong improvement in profitability in the quarter, while sales were flat and orders slightly decreased as demand from hospitals and consumers in China further deteriorated. We expect impact from China to continue. Therefore, we have lowered our full year sales outlook. At the same time, we expect the adjusted EBITDA margin to be at around 11.5%, the upper end of the current outlook range. Within an ongoing challenging macro environment, we remain focused on successfully executing our three-year plan to fully capture growth and margin expansion opportunities. With patient safety as our number one priority, we are committed to delivering better care for more people. Onto the key financial and performance highlights. Group comparable sales were flat on the back of 11% growth in Q3 2023 and further deteriorated demand in China. On the back of growth last year, we recorded a strong sales and order decline in China, driven by a further decline in consumer and hospital demand. This was beyond our China scenario from July, where we assumed stabilization of China whilst timing of improvement was uncertain. We continue to deliver solid sales growth outside of China. Orders decreased 2% also due to the decline in China. In the quarter, diagnosis and treatment orders remained solid outside of China, driven by, in particular, North America. Also year-to-date, our orders grew 1%, including China, and we still expect order growth in the full year, including China, driven by the strength of the rest of the world, while there is certain uncertainty in China that remains. We delivered a strong adjusted EBITDA margin improvement of 160 basis points, driven by our continued progress on our execution priorities, improved gross margins from our industry-leading innovations, and higher royalty income. Our free cash flow was €22 million, driven by higher earnings and offset by working capital outflows, mainly due to seasonal phasing. We remain confident in our ability to drive further operational improvement. while the uncertainty signaled in the earlier quarters have intensified in China, and these are expected to continue. Focusing on China, in personal health, we saw a strong double-digit decline in sell-out to consumers in the quarter, based on low consumer confidence and lack of big shopping festival sales. Adjusting to the new sell-out run rate led to a substantial reduction in our sell-in volumes. we expect overall consumer sentiment to remain subdued in China, while solid in the US and international markets. In China hospitals, the industry-wide anti-corruption measures and lack of impact of the national renewal program continue to significantly affect order and lead times. This also impacted modalities with shorter lead times, like ultrasound, and therefore had an immediate impact on sales growth in the quarter. visibility around the continued impact of the anti-corruption measures and timing of the government program remains limited. While the market conditions are expected to remain uncertain in China, it's a fundamentally attractive growth market for Philips, with strong underlying demand. Our order funnel is active in the country, and our commitment to a local for local approach, combined with our industry leading innovations, focus on execution with excellence, deep understanding of consumers, and strong brand places us well to respond to demand as it returns. Given the uncertain market conditions in China, we updated our outlook for the full year to a range of 0.5% to 1.5% comparable sales growth for the group. Sales growth outside of China remains within the guided range of 3% to 5%. We expected our adjusted EBITDA margin to be at around 11.5% at the upper end of the current range, reflecting stronger margins from our industry-leading innovations, our financial discipline and focus on productivity. We expect free cash flow to be around 0.9 billion euros at the lower end of the current range. Within an ongoing challenging macro environment, we are fully focused on successfully executing our three-year plan to drive value And to date, we remain ahead of that plan. I'm confident that our innovative portfolio is well positioned to help hospitals worldwide addressing their staffing shortages, enhance productivity, and improve patient and staff experience. As I got recently also confirmed in my customer visits in Asia, Canada, and the US, our leading innovations are providing superior care for patients and consumers. Let me now provide you with some of the customer innovation milestones during the quarter. Carilion Clinic in the US will expand cardiac care access through 11 specialized Philips interventional suites, allowing physicians to treat patients with complex cardiovascular conditions closer to home. We expanded our next generation cardiovascular ultrasound platform with FDA clearance of two important AR algorithms, to enhance structural heart disease examinations as part of the global rollout of this technology. Demonstrating our innovation leadership in minimally invasive treatments, we secured FDA approval for the new LumiGuide navigation wire, which uses fiber optic technology to reduce radiation for both patients and physicians during minimally invasive surgery. In personal health, we launched our AI-powered event premium connected baby monitor which offers CRY translation and SenseIQ technology to track sleep, breathing, and movements, giving parents peace of mind. And finally, last month, we welcomed investors and analysts for a show-and-tell event here in the Netherlands, followed by a focused ESG site visit. The event provided a comprehensive update on the fundamentals of our businesses and of our exciting innovations, and included in-depth discussions and engagement with our leadership team. I want to thank again the investors who made the effort to spend a day and a half with us. Your engagement was incredibly valuable. I would like to continue with the progress we have made on our execution priorities. On patient safety and quality. As part of strengthening our culture, early this month, together with all employees, we spent a full day reflecting on the importance of patient safety and quality, the progress made, and the journey ahead of us to continuously deliver meaningful results. We continue to see a substantial reduction in the total number of CAPAs and improvements in our complaint management process in the quarter. We, including myself personally, have had multiple engagements with the FDA in the quarter to discuss progress made and what is more to do. Philips remains committed to patient safety and quality and will continue to engage with FDA and other regulators on the shared mission to assure delivery of safe and effective care for patients. With respect to our supply chain, our lead times are back to normal across all modalities. As mentioned before, service levels continue to increase. Going forward, we continue to focus on supply reliability and on improving the flexibility of our network and supply base, including further regionalization and localization. Finally, our simplified operating model focused on a leaner organization and that is resulting in faster and more agile decision making, with productivity improvements of over 1.5 billion euros to date, also on the back of a reduction of almost 10,000 roles. At the same time, we continue the journey to drive our culture of impact with care, building the right team with health tech capabilities. The last 12 months, our engagement score went up significantly, and we see growing confidence from our employees and other stakeholders. Now over to Charlotte to take us through the Q3 financials and outlook in more detail.

Thank you, Roy. And good morning, everyone. And thank you for joining us today. I'm very pleased to be speaking with you for the first time as Philips CFO. Before we dive into the financial results, I'd like to take a moment to introduce myself and share a bit about my background for those of you who I didn't meet at our recent show and tell. I took over the reins as CFO earlier this month after over 20 years working in various financial leadership roles across the medtech and pharmaceutical industry, with a focus on supporting strategic growth initiatives, driving operational efficiency, and managing large-scale transformations. I joined Philips because I believe in the company's mission of delivering better care for more people and see significant opportunities ahead. I look forward to working closely with Roy and the entire executive committee to successfully execute our plan to create value with sustainable impact and drive financial disciplines. Continuing with our third quarter financial performance. Our comparable sales were flat in the quarter and orders decreased 2%, both due to a decline in China. Year to date, order intake was 1% despite a double digit decline in China. We still expect order growth in the full year, driven by strength in the rest of the world, while the certainty remains in China. As a reminder, orders and order book account for around 40% of our revenue. The remaining 60% comes from recurring revenue streams, such as services and consumables, from book-to-bill business and from personal health. Now I'll provide some highlights around our quarterly segment performance. Diagnosis and treatment comparable sales decreased 1% on the back of 14% growth in Q3 2023. We delivered solid growth outside of China with both image-guided therapy and precision diagnosis businesses contributing. The adjusted EBITDA margin of 12.6% was in line with last year, despite lower sales, driven by improved operational performance, pricing, and productivity measures. Connected care comparable sales were flat, Growth in enterprise informatics, notably in North America, and growth in sleep and respiratory care were offset by a low single-digit decline in monitoring on the back of high teens growth in Q3 2023. Connected care adjusted EBITDA margin increased by 360 basis points to 7.3%, with improvements across all businesses, including an encouraging step up in sleep and respiratory care. Personal health comparable sales decreased 5%, due to a double-digit decline in China, outweighing robust performance elsewhere. Adjusted EBITDA margin decreased year-on-year to 16.5% as operational performance improvements only partially offset the impact of lower sales. Year-to-date, the adjusted EBITDA margin improved by over 100 basis points. Sales in segment other were 41 million euros higher than in the third quarter of 2023, driven by royalty revenues. Turning to operating highlights in the quarter. Adjusted EBITDA margin for the group improved substantially with 160 basis points in the quarter to 11.8%, driven by stronger gross margins from our industry-leading innovations, continued financial discipline, higher royalty income, and our productivity measures. Adjusted EBITDA margin improved 80 basis points in the segments, with higher royalties in segment other contributing another 80 basis points. Our productivity initiatives delivered savings of €188 million in the quarter, of which operating model savings were €54 million, procurement savings were €58 million, and other productivity programs delivered €76 million, partially offsetting wage and component price inflation. Since the start of the plan in January 2023, we delivered over €1.5 billion and are on track to achieve savings of €2 billion earlier than anticipated. The effective tax rate was 24% in the quarter. Net income tax expense increased by 33 million euros year on year, mainly due to lower tax benefits and higher income before tax. Financial income and expenses were a net expense of 69 million, 6 million lower than last year, driven by higher interest income. On page 18 of our slide deck, you will also find the full year outlook for these items. Moving on to the balance sheet, we ended the quarter with approximately 1.5 billion euros of cash and net debt of about 6.5 billion. Our leverage ratio improved from 2.5 times to 2.2 times compared to Q3 2023 on a net debt to adjusted EBITDA basis. Adjusted diluted EPS from continued operations were 32 euro cents in the third quarter and increased 9% year-to-date, mainly driven by higher earnings. Free cash flow in the quarter was 22 million euros, driven by higher earnings offset by working capital outflows due to seasonal phasing. Based on our year-to-date performance and the deterioration of demand we are seeing in China, we now expect full year 2024 comparable sales growth in the range of 0.5% to 1.5% for the group, as mentioned by Roy. At a business level, we expect connected care sales growth at the lower end of the range of 3% to 5%, a slight growth in diagnosis and treatment, and flat to slight decline in personal health. Structuring charges and other items are expected to be in line with the outlook provided earlier this year. Given our continued execution and financial discipline, we expect full year adjusted EBITDA to be around 11.5% of sales, which is a 90 basis points year-on-year expansion. We expect full year free cash flow of around €0.9 billion at the lower end of the range as a result of lower sales outlook whilst continuing to drive working capital improvements. As mentioned earlier this year, our free cash flow outlook includes the agreed receipt of €540 million from insurers to cover Respironics recall related product liability claims of which the majority is expected to come in the fourth quarter. The remaining payment related to the economic loss settlement in the US made earlier this year is also included in this outlook. With that, I would like to hand it back to Roy for his closing remarks.