Day: January 30, 2023

January 30, 2023

Amsterdam, the Netherlands – Royal Philips (NYSE: PHG; AEX: PHIA), a global leader in health technology, today presents its plan to create value with sustainable impact based on focused organic growth and scalable innovation, with improved execution as the key value driver. Starting at 10:00 am CET, the company will host a webcast with Philips CEO Roy Jakobs, CFO Abhijit Bhattacharya, and other Philips leaders. The presentation slide decks have been published here. Today, Philips also published its fourth quarter and full year 2022 results, including the 2023 outlook, that can be found here.

Creating value with sustainable impact
Philips operates in fundamentally attractive health technology market segments that grow 3-6% annually and have mid-to-high-teens margins. These are driven by global trends, such as aging populations driving the demand for care and the need to improve productivity in healthcare. The company has leading market positions in consumer and professional health, enabled by a strong portfolio, high customer intimacy, a strong brand and purpose, and clear ESG commitments. However, Philips is not capitalizing on the full potential of these strong market positions as it faces a number of significant operational challenges as reflected in its 2022 performance.

The company will address the challenges, improve performance, and drive progressive value creation through a strategy of focused organic growth and pivoting its innovation model to increase the impact of patient- and people-centric innovation at scale. Improved execution across three priorities will be the key value driver: 1) patient safety and quality, 2) supply chain reliability, and 3) a simplified, more agile operating model. This will be supported by a reinvigorated culture of accountability, and strong health technology talent and capabilities.

By delivering its strategy, Philips will drive performance improvements over time, first addressing the challenges and laying down a strong foundation in 2023 and accelerating profitable growth thereafter, to deliver on the full potential of its business segments, supported by a balanced capital allocation. Philips aims to improve its performance to mid-single-digit comparable sales growth with a low-teens Adjusted EBITA margin by 2025, and to mid-single-digit comparable sales growth and mid-to-high-teens Adjusted EBITA margin beyond 2025.*

Focused organic growth and patient- and people-centric, scalable innovation
In recent years, Philips has transformed its portfolio to become a health technology company. Philips will now focus on extracting the full value of its strong portfolio through a strategy of focused organic growth and by improving its execution to expand its leadership positions in its Image Guided Therapy, Monitoring, Ultrasound and Personal Health business segments, scaling its Enterprise Informatics business segment, improving the Imaging business, and restoring the Sleep & Respiratory Care business segment.

To win in these segments, Philips will pivot its innovation model to yield higher impact and better returns. To ensure that innovation is done closer to its customers, Philips will concentrate a higher proportion of its R&D resources in the businesses (90% compared to 70% in 2022). As a result, part of Philips’ corporate innovation activities will move into the businesses. Additionally, the company will focus on fewer, better resourced, and more impactful projects, with patient safety, quality, and customer need at the heart of innovation design. Going forward, Philips will continue to invest an industry-leading 9% of sales in R&D (more than EUR 1.7 billion), compared with 10.5% of sales in 2022.

Patient safety and quality
Strengthening patient safety and quality is Philips’ highest priority. This includes completing the Respironics recall and test program in 2023 and managing the impact of the proposed consent decree, as well as the ongoing investigation by the US Department of Justice and the litigation related to the Respironics recall. Across the company, Philips will ensure patient safety and quality is at the core of its innovation approach to avoid future issues. Moreover, the company will step up accountability for patient safety and quality, including giving all employees dedicated patient safety and quality objectives, deploying an expanded compliance and awareness program, and simplifying processes.

End-to-end supply chain reliability and agility
Philips is changing its supply chain to a dedicated end-to-end set-up by business to better manage and improve supply chain reliability and agility. Furthermore, the company is pruning its portfolio, redesigning products and components, and stepping up its strategic supplier management to materially de-risk supplies and delivery, and enhance conversion of the orderbook to sales, leading to more robust and predictable financial results.

Simplified operating model
Philips will change its operating model to end-to-end businesses with single accountability. They will be supported by lean central functions and strong customer facing organizations in the countries and regions. To this end, the company will right size the central functions, which will include organizational delayering and reallocating part of its corporate innovation activities to the businesses.

In addition to the reduction of its workforce by 4,000 roles announced in October 2022, which is being implemented as planned, Philips will reduce its workforce by an additional 6,000 roles globally by 2025, of which 3,000 will be implemented in 2023 in line with the relevant local regulations and processes. The simplified operating model will make Philips more agile and competitive, enabling the company to deliver more impactful innovations for customers, patients and consumers, guided by a clear, but reduced number of KPIs. Equally important, Philips’ leaner and more focused organization will have a significantly reduced cost structure.

Executive Committee
Philips’ strong brand and compelling purpose continue to appeal to and attract talent. Philips has therefore continued to strengthen the organization with new health technology talent, including seasoned leaders with deep expertise.

Reflecting Philips’ priorities, Philips has elevated the patient safety and quality function to the Executive Committee. Effective February 6, 2023, Steve C. de Baca (American, 1968) has been appointed as Chief Patient Safety & Quality Officer and member of Philips’ Executive Committee reporting to CEO Roy Jakobs. He will bring more than 30 years of quality and regulatory affairs experience in the medical technology industry.

Additionally, Jeff DiLullo (American, 1969) has been promoted as the new Chief Market Leader of Philips North America. Jeff brings more than 20 years of experience in sales, services and solutions delivery to drive growth in this very important region. Effective February 6, 2023, Jeff DiLullo will succeed Vitor Rocha, who has decided to leave Philips. Philips expects to announce the new leaders for its Precision Diagnosis business segment,** previously led by Kees Wesdorp, who decided to leave Philips, as well as for its Connected Care business segment, in early 2023. Philips would like to thank Vitor Rocha and Kees Wesdorp for their important respective contributions in driving growth in North America and renewing the Precision Diagnosis businesses’ portfolio.

These changes will result in renewal of the Executive Committee of 25% in early 2023.

Roy Jakobs, CEO of Royal Philips:
“Philips operates in attractive health technology market segments with good growth and margins. The company has built leading market positions based on meaningful innovations and high customer intimacy, further supported by a compelling purpose, a strong brand, and clear ESG commitments. However, given our significant operational challenges, we are not fully extracting the full value of our businesses, as also reflected in our 2022 results.

During my first 100 days, I have worked with our team on the urgent interventions needed to improve our execution and performance. This includes bolstering our culture with enhanced accountability and strengthening our health technology talent and capabilities.

Our strategy will focus on organic growth through patient and people-centric innovation at scale, with a strong improvement in execution as key value driver. This will be enabled by strengthening our patient safety and quality management and completing the Respironics recall. We will also urgently enhance the supply chain reliability to improve performance and simplify our way of working to improve our agility and productivity. This includes the difficult, but necessary further reduction of our workforce by around 6,000 roles globally by 2025. I am confident that these comprehensive actions will put Philips on a progressive path to value creation with sustainable impact to achieve mid-single-digit comparable sales growth and a low-teens Adjusted EBITA margin by 2025, further expanding to a mid-to-high-teens margin beyond 2025*.”

*       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.
**     The leader of the Precision Diagnosis business segment will also be responsible for the Diagnosis & Treatment reporting segment jointly with the leader of the Image-Guided Therapy business segment.

For additional information, please contact:

Ben Zwirs
Philips Global Press Office
Tel.: +31 6 15213446
E-mail: ben.zwirs@philips.com

Derya Guzel
Philips Investor Relations
Tel: +31 20 59 77055
E-mail: derya.guzel@philips.com

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
This statement contains 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 the strategy, estimates of sales growth, future EBITA, future developments in Philips’ organic business and the completion of acquisitions and divestments. 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.

This press release contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation.

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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.

Click here to view the release online

For further information, please contact:

Ben Zwirs
Philips Global Press Office
Tel.: +31 6 1521 3446
E-mail: ben.zwirs@philips.com

Derya Guzel
Philips Investor Relations
Tel.: +31 20 59 77055
E-mail: derya.guzel@philips.com

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

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