Philips sees some improvement in Q4 2022 and takes firm actions to address operational challenges in an uncertain environment

January 30, 2023

Fourth-quarter highlights

• Group sales amounted to EUR 5.4 billion, with 3% comparable sales growth driven by component supply improvements, while Philips' supply chain conditions remain challenging
• Comparable order intake decreased 8%, due to lower demand for COVID-19-related products compared to 2021 and company actions to improve the order book margin profile
• Income from operations amounted to EUR 171 million, compared to EUR 162 million in Q4 2021
• Adjusted EBITA of EUR 651 million, or 12.0% of sales, compared to EUR 647 million, or 13.1% of sales, in Q4 2021
• Operating cash flow was EUR 540 million, compared to EUR 720 million in Q4 2021

Full-year highlights

• Group sales amounted to EUR 17.8 billion, with a 3% comparable sales decline due to operational and supply challenges, lower sales in China, the consequences of the Respironics field action, and the Russia-Ukraine war
• Comparable order intake decreased 3% compared to 4% growth in 2021
• Income from operations amounted to a loss of EUR 1,529 million, largely due to the previously disclosed EUR 1.5 billion non-cash goodwill and R&D impairment charges, compared to income of EUR 553 million in 2021
• Adjusted EBITA of EUR 1,318 million, or 7.4% of sales, compared to EUR 2,054 million, or 12.0% of sales, in 2021
• Operating cash outflow of EUR 173 million, compared to an inflow of EUR 1,629 million in 2021
• Proposed dividend maintained at EUR 0.85 per share, to be distributed in shares

Roy Jakobs, CEO of Royal Philips:

"2022 has been a very difficult year for Philips and our stakeholders, and we are taking firm actions to improve our execution and step up performance with urgency. When I took over as CEO in October 2022, I said that our priorities are first to further strengthen our patient safety and quality management and address the Philips Respironics recall; second, to improve our supply chain reliability to convert our order book to sales and improve performance; and third, to simplify how we work to increase agility and productivity. This is a step-by-step improvement journey supported by our leading market positions, extended customer base, meaningful innovations, ecosystem partnerships, strong brand, and talented employees.

As we are working through the operational challenges, we progressed on our execution priorities in the fourth quarter. We provided an important and encouraging update on the complete set of test results for the first-generation DreamStation sleep therapy devices and have completed around 90% of the production for the remediation. We were able to secure more components to convert our order book into sales, although the supply chain situation remains challenging. Our order book remains strong, despite the comparable order intake decline in the quarter. The previously announced workforce reduction by 4,000 roles globally and other actions are being implemented as planned.

Today, we will present Philips' plan to create value with sustainable impact, which is based on focused organic growth to deliver patient- and people-driven innovation at scale with improved execution as key value driver, prioritizing patient safety and quality, supply chain reliability and a simplified operating model. We are confident that these measures will enable us to deliver on our purpose to improve people's health and well-being through meaningful innovation and create value for all our stakeholders."

Group and business segment performance

Sales for the Group in the quarter were EUR 5.4 billion, with 3% comparable sales growth, which was driven by improved component supplies, for example in hospital patient monitoring, image-guided therapy, and ultrasound. However, Philips' supply chain situation remains challenging, and the company anticipates further improvements to be gradual. The combined Diagnosis & Treatment and Connected Care businesses grew 5% on a comparable basis. Adjusted EBITA for the Group was EUR 651 million, or 12% of sales, due to cost inflation, partly offset by pricing and productivity measures. Philips' comparable order intake declined 8% due to lower demand for COVID-19-related acute care products compared to 2021 and company actions to improve the order book margin profile. For the full year 2022, Philips' performance was impacted by operational and supply challenges, inflationary pressures, the COVID situation in China, the consequences of the Respironics field action, and the Russia-Ukraine war. As a result, comparable sales declined 3%, and the Adjusted EBITA margin decreased to 7.4%.

The Diagnosis & Treatment businesses' comparable sales increased 5% in the quarter, driven by high-single-digit growth in Ultrasound and Image-Guided Therapy. Comparable order intake decreased 7% due to company actions to improve the order book margin profile, and on the back of 10% growth in Q4 2021. The Adjusted EBITA margin was 11.3%, which was mainly due to cost inflation, partly offset by increased sales. For the full year, the Diagnosis & Treatment businesses recorded a 1% comparable sales decline and an Adjusted EBITA margin of 8.4%.

The Connected Care businesses' comparable sales increased 5% in the quarter, driven by strong double-digit growth in Hospital Patient Monitoring. Comparable order intake decreased by 10%, mainly due to lower demand for COVID-19-related acute care products compared to 2021. The Adjusted EBITA margin increased to 12.6%, mainly due to increased sales and productivity measures, partly offset by cost inflation. For the full year, the Connected Care businesses recorded an 11% comparable sales decline, mainly due to a strong double-digit decline in Sleep & Respiratory Care, and an Adjusted EBITA margin of 2.2%.

The Personal Health businesses' comparable sales decreased by 4% in the quarter, with double-digit growth in North America more than offset by a strong double-digit decline in China. The Adjusted EBITA margin amounted to 17.0%. For the full year, comparable sales growth for the Personal Health businesses was flat, including a 2 percentage-point impact from the Russia-Ukraine war, and the Adjusted EBITA margin amounted to 14.8%.

Highlights of Philips' ongoing focus on innovation and customer partnerships in the quarter:

• Demonstrating the trust hospital leaders have in Philips' strategy and solutions to help them improve health outcomes and productivity, and deliver care that is more convenient and sustainable, Philips signed around 100 new long-term strategic partnerships with hospitals and health systems across the world in 2022.
  
  
• Philips ranked as the number 1 brand in the personal health category on E-commerce platforms JD and Ali during the ‘Double 11' shopping festival in China. Philips was the highest-ranked male grooming and oral healthcare brand on the key online shopping channels.
  
  
• In 2022, Philips' products and solutions improved the lives of 1.8 billion people, including 200 million people in underserved communities. In addition, Philips was again recognized with the prestigious ‘A' score for its climate action leadership by global environmental non-profit CDP (Carbon Disclosure Project).
• Philips launched the Ultrasound Compact 5000, which is designed for portability and versatility with premium image quality and performance, to facilitate first-time-right ultrasound exams for more patients.
• In 2022, Philips' Image-Guided Therapy business reached sales of over EUR 3 billion and further expanded its market leadership position leveraging the unique strengths of its successful interventional imaging systems, such as Philips Azurion, and rich portfolio of diagnostic and therapeutic devices, such as its IVUS (intravascular ultrasound) catheters. To further drive the use of these systems and devices based on clinical evidence, more than 110 clinical studies are ongoing, including the research studies conducted by the Smith Center for Outcomes Research at Beth Israel Deaconess Medical Center with recent results that further underpinned the outcome benefits of Philips' IVUS devices.
• At RSNA 2022, one of the largest radiology meetings globally, Philips featured its latest AI-powered diagnostic systems and multi-vendor workflow solutions that help reduce clinical complexity and enhance operational efficiency. This included the MR 5300 with its unique BlueSeal magnet for helium-free operations and sustainable imaging with premium image quality and lower site costs. Philips also featured its vendor-neutral, multi-modality Radiology Operations Command Center, which is a multi-site telepresence solution that provides advanced tele-acquisition capabilities and seamlessly connects imaging experts at a command center with technologists at scanning locations across an organization.

Philips Respironics field action for specific sleep therapy and ventilator devices

In December 2022, Philips provided an update on the completed set of test results for first-generation DreamStation sleep therapy devices. Around 90% of the production required for the delivery of replacement devices to patients has been completed. In order to expedite the completion of the recall, Philips Respironics will increase the proportion of new replacement devices, resulting in an increase in the field action provision by EUR 85 million.

As previously disclosed, Philips Respironics is subject to an investigation by the US Department of Justice, is a defendant in several class-action lawsuits and individual personal injury claims, and is in ongoing discussions with the FDA regarding the proposed consent decree. Given the uncertain nature of the relevant events, and of their potential financial and operational impact and associated obligations, if any, the company has not made any provisions in the accounts for these matters.

Outlook

Looking ahead, Philips expects to deliver low-single-digit comparable sales growth and high-single-digit Adjusted EBITA margin in 2023. Considering the slowing of consumer demand and a gradual improvement of the order book conversion during 2023, Philips anticipates a slow start to the year, with improvements throughout the year supported by the ongoing productivity, pricing and other actions.

This guidance excludes the impact of the ongoing discussion on the proposed consent decree beyond current assumptions (Sleep & Respiratory Care/Respironics CSGR 2023-2025 of 10%), as well as ongoing litigation and the investigation by the US Department of Justice related to the Respironics field action.

Dividend

Philips intends to submit to the 2023 Annual General Meeting of Shareholders a proposal to declare a dividend of EUR 0.85 per common share, and to distribute such dividend in shares.

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For further information, please contact:





Ben Zwirs

Philips Global Press Office

Tel.: +31 6 1521 3446

E-mail: [email protected]



Derya Guzel

Philips Investor Relations

Tel.: +31 20 59 77055

E-mail: [email protected]





About Royal Philips

Royal Philips (NYSE:PHG, AEX: PHIA))) is a leading health technology company focused on improving people's health and well-being, and enabling better outcomes across the health continuum – from healthy living and prevention, to diagnosis, treatment and home care. Philips leverages advanced technology and deep clinical and consumer insights to deliver integrated solutions. Headquartered in the Netherlands, the company is a leader in diagnostic imaging, image-guided therapy, patient monitoring and health informatics, as well as in consumer health and home care. Philips generated 2022 sales of EUR 17.8 billion and employs approximately 77,000 employees with sales and services in more than 100 countries. News about Philips can be found at www.philips.com/newscenter.

Forward-looking statements and other important information



Forward-looking statements



This document and the related oral presentation, including responses to questions following the presentation, contain certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items. Examples of forward-looking statements include statements made about our strategy, estimates of sales growth, future Adjusted EBITA*), future restructuring and acquisition- related charges and other costs, future developments in Philips' organic business and the completion of acquisitions and divestments. Forward-looking statements can be identified generally as those containing words such as "anticipates", "assumes", "believes", "estimates", "expects", "should", "will", "will likely result", "forecast", "outlook", "projects", "may" or similar expressions. By their nature, these statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these statements.



These factors include but are not limited to: Philips' ability to gain leadership in health informatics in response to developments in the health technology industry; Philips' ability to transform its business model to health technology solutions and services; macroeconomic and geopolitical changes; integration of acquisitions and their delivery on business plans and value creation expectations; securing and maintaining Philips' intellectual property rights, and unauthorized use of third-party intellectual property rights; Philips' ability to meet expectations with respect to ESG-related matters; failure of products and services to meet quality or security standards, adversely affecting patient safety and customer operations; breaches of cybersecurity; Philips' ability to execute and deliver on programs on business transformation and IT system changes and continuity; the effectiveness of our supply chain; attracting and retaining personnel; COVID and other pandemics; challenges to drive operational excellence and speed in bringing innovations to market; compliance with regulations and standards including quality, product safety and (cyber) security; compliance with business conduct rules and regulations; treasury and financing risks; tax risks; reliability of internal controls, financial reporting and management process. For a discussion of factors that could cause future results to differ from such forward-looking statements, see also the Risk management chapter included in the Annual Report 2021. Reference is also made to Risk management in the Philips semi-annual report 2022.



Philips has recognized a provision related to the voluntary recall notification in the US/field safety notice outside the US for certain sleep and respiratory care products, based on Philips' best estimate for the expected field actions. Future developments are subject to significant uncertainties, which require management to make estimates and assumptions about items such as quantities and the portion to be replaced or repaired. Actual outcomes in future periods may differ from these estimates and affect the company's results of operations, financial position and cash flows. In Q3 2022 there was a goodwill impairment charge of EUR 1.3 billion related to the Sleep & Respiratory Care cash-generating unit (CGU). As a result of this impairment and related uncertainties, the valuation of the CGU remains sensitive to changes in key assumptions.

Adverse changes to these assumptions would cause a material impairment loss to be recognized. Furthermore, Philips Respironics is subject to an investigation by the US Department of Justice, is a defendant in several class-action lawsuits and individual personal injury claims, and is in ongoing discussions with the FDA regarding a proposed consent decree. Given the uncertain nature of the relevant events, and of their potential financial and operational impact and associated obligations, if any, the company has not made any provisions in the accounts for these matters.



Third-party market share data



Statements regarding market share, contained in this document, including those regarding Philips' competitive position, are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where information is not yet available to Philips, market share statements may also be based on estimates and projections prepared by management and/or based on outside sources of information. Management's estimates of rankings are based on order intake or sales, depending on the business.



Market Abuse Regulation



This press release contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation. This press release was distributed at 07:00 am CET on January 30, 2023.



Use of non-IFRS information



In presenting and discussing the Philips Group's financial position, operating results and cash flows, management uses certain non-IFRS financial measures. These non-IFRS financial measures should not be viewed in isolation as alternatives to the equivalent IFRS measure and should be used in conjunction with the most directly comparable IFRS measures. Non-IFRS financial measures do not have standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other issuers. A reconciliation of these non-IFRS measures to the most directly comparable IFRS measures is contained in this document. Further information on non-IFRS measures can be found in the Annual Report 2021.



Use of fair value information



In presenting the Philips Group's financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that are deemed to be reliable. Readers are cautioned that these values are subject to changes over time and are only valid at the balance sheet date. When quoted prices or observable market data are not readily available, fair values are estimated using appropriate valuation models and unobservable inputs.



Such fair value estimates require management to make significant assumptions with respect to future developments, which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in the Annual Report 2021. In certain cases independent valuations are obtained to support management's determination of fair values.



Presentation



All amounts are in millions of euros unless otherwise stated. Due to rounding, amounts may not add up precisely to the totals provided. All reported data is unaudited. Financial reporting is in accordance with the accounting policies as stated in the Annual Report 2021 except for the adoption of new standards and amendments to standards which are also expected to be reflected in the company's consolidated financial statements for the year ending December 31, 2022.



Prior-period amounts have been reclassified to conform to the current-period presentation due to immaterial organizational changes.



*) Non-IFRS financial measure. Refer to the Reconciliation of non-IFRS information