Philips : Q2 2023 webcast transcript

Q2 2023 Results

Monday, 24th July 2023

Q2 2023 Results

Monday, 24th July 2023

Operator: Welcome to the Royal Philips Second Quarter and Semi-Annual 2023 Results Conference Call on Monday, 24th July 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'll 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 Philips - of Royal Philips. I will now hand the call over to Mr Leandro Mazzoni, Head of Investor Relations. Please go ahead, sir.

Preamble

Leandro Mazzoni

Head of Investor Relations, Royal Philips

Hi, everyone. Welcome to Philips second quarter and half-year 2023 results webcast. I have here with me our CEO, Roy Jakobs, and our CFO, Abhijit Bhattacharya. The second quarter and half-year 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 this webcast will be made available on the website as well.

Before we start, I want to draw your attention to our safe harbour 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 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.

Second Quarter Highlights

Roy Jakobs

Chief Executive Officer, Royal Philips

Thank you, Leandro. Good morning, everyone, and welcome. It's good to be with you.

Key takeaways

I want to start with the five - or with the key highlights for this quarter. First, we delivered an improved operational performance, with 9% comparable sales growth and improvements in profitability and operating cash flow. The improvements were across the company, with all business segments and all regions contributing. These positive results are results from our ongoing actions to strengthen our execution.

Secondly, we are making progress in executing our plan and all our three priorities: enhancing patient safety & quality; strengthening our supply chain reliability, which supported our performance in Q4 last year and the first half this year; and establishing a simplified, more agile operating model, supporting our productivity.

Thirdly, resolving the Respironics recall for patients remains our highest priority. The vast majority of the sleep therapy devices are now within the hands of patients and care providers,

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and the complete testing and analysis for sleep devices affected by the recall showed positive and reassuring results for patients.

Looking ahead, based on our strong performance in the first half of the year, our order book and the ongoing actions to improve execution, we have raised the outlook for the full year 2023. Whilst acknowledging that uncertainties remain, we now expect mid-single-digit comparable sales growth and adjusted EBITA margin at the upper end of the high single-digit range.

Improved operational performance driven by sales growth and focus on execution, order book supporting growth for next quarters

Now, on to the key financial highlights in the quarter. We had a strong comparable 9% sales growth. Diagnosis and Treatment grew 12%, Connected Care grew 6%, and I'm encouraged by the return to growth in Personal Health.

Our adjusted EBITA margin was 10.1%, a strong improvement of 490[?] basis points compared to Q2 2022. Operating cash saw an inflow of €135 million, a step-up of €440 million versus last year. Our order book increased 3% year-on-year, even after strong order-book-to-sales conversion of the last three quarters. I'm confident that this order book will continue to support sales growth in the coming quarters.

On the back of the high order intake in Q2 2022 and Q1 2023, comparable order intake declined 8% in the quarter. Excluding Russia, this would have been 4%. This confirms our earlier view that orders would be lumpy as we work hard to deliver order intake growth in the second half of the year. This is founded upon strong fundamentals of the markets in which we operate, as they remain strong, and I'm very confident that our innovation portfolio is well positioned to help hospitals worldwide address their staffing shortages, enhance productivity and improve patient and staff experience. The order funnel remains healthy, and we see signs of improvement in cost inflation and staff shortages in hospitals compared to 2022, but we also continue to expect hospitals and healthcare systems in the US and other mature geographies to exhibit cautious buying behaviour in the short term, given the global macroeconomic conditions.

Enterprise Monitoring as a Service agreement with University of California Irvine Health

During the second quarter, we achieved some key customer and innovation milestones. We signed a multiyear agreement with University of California Irvine Health to provide, to provide enterprise monitoring as a service, including informatic solutions to standardise, centralise, and scale monitoring across the health system.

Highlights by business segment in Q2 2023

Five top hospitals in Shanghai, with more than 10,000 beds, installed the Spectral CT 7500. We also expanded our leading Image-Guided Therapy portfolio with the launch of Zenition 10, a cost-effective mobile imaging system to guide high-volume routine surgery as well as complex orthopaedic and trauma procedures.

We introduced the cloud-based Philips Health Suite Imaging PACS on Amazon Web Services, designed to enhance image access speed, reliability, and data orchestration for clinicians across the imaging workflow.

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In Personal Health, we launched a premium 7 Series shaver in China, in partnership with JD.com, which debuted as the number-one shaver on this online channel.

With that, I would like to give the floor to Abhijit to take us through Q2 in more detail, after which I will come back on the progress on our execution priorities. Abhijit, please.

Financial Performance

Abhijit Bhattacharya

Chief Executive Officer, Royal Philips

Thanks, Roy. Good morning, everyone.

Diagnosis & Treatment

Let's begin by looking at the segment highlights from the quarter. In Diagnosis & Treatment, comparable sales increased by 12%, driven by strong double-digit growth in Ultrasound and Image-Guided Therapy and mid-single-digit growth in Diagnostic Imaging. Adjusted EBITA margin was 10.6%, an increase of 380 basis points over last year, mainly driven by operational leverage, a favourable mix, and productivity measures. The profitability sequentially was impacted by mix and cost phasing. In the first half of the year, adjusted EBITA margin was 11.8% for Diagnosis & Treatment, an increase of 460 basis points compared to the same period last year. This, together with our productivity, pricing actions, and order books, gives us confidence for the coming quarters.

Connected Care

Connected Care comparable sales increased by 6%, driven by double-digit growth in Monitoring, partly offset by Sleep & Respiratory Care. Adjusted EBITA margin was 7.5%, an increase of 570 basis points, driven by productivity measures and a significant improvement in the profitability of monitoring.

Personal Health

Personal Health returned to growth with 3% comparable sales increase, which is encouraging. Consumer demand remains subdued globally, as we expected, but there is evidence of gradually improving sellout trends. Adjusted EBITA margin was 13.4%, an increase of 100 basis points, driven by pricing and productivity measures.

Adj. EBITA margin improvement driven by increased sales, royalty income and productivity measures, partly offset by cost inflation

Adjusted EBITA margin for the group increased by 490 basis points to 10.1%. Wage and component price inflation came in at 260 basis points. However, this was more than offset by 150 basis points on operating leverage and by our productivity and pricing actions, which contributed a further 580 basis points. Additionally, the Q2 adjusted EBITA included a positive impact from phasing of royalty income, in line with the guidance we provided for the segment 'Other' for the quarter. We continue to improve our cash flow, with a significant year-on-year improvement. This has delivered an improvement of the leverage from 3.6% to 3.1 - sorry, from 3.6x to 3.1x adjusted EBITA in the first six months of the year.

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Productivity initiatives delivered €237 million in the quarter and €427 million year to date

Our productivity initiatives are on track and delivered savings of €237 million in the second quarter. Operating model productivity savings amounts to €112 million; procurement savings was €57 million, and other productivity programmes delivered €68 million of savings. Adjusted items in the quarter included €161 million of charges, mainly related to accelerated execution of the workforce reduction plan, with 6,600 role reductions to date out of the planned reductions of 7,000 roles for the year and 10,000 roles to 2025.

Strength of our order book to fuel growth in next quarters

Moving to our order book, which ended the second quarter 3% higher compared to last year, it's worth noting that this is significantly higher compared to the period before the global supply chain constraints, even after the strong order-book-to-sales conversion over the last three quarters. Orders and order books are an important leading indicator for around 40% of our revenue. The remaining 60% comes from recurring revenue such as services and consumables from book-to-bill business and from Personal Health. As you can see at the bottom of the page, the absolute levels of order intake remain healthy, but we see a steep increase in sales levels, year-to-date, due to enhanced order-book-to-sales conversion following supply chain and execution improvements.

Order intake decline on the back of high comparison base and Russia; strong effort in place to reverse the trend in second half of the year

In Diagnosis & Treatment, comparable order intake declined 8%, or -2% excluding Russia. This follows the double-digit comparable order intake growth in Q1 2023 and the high order intake in Q2 of 2021 and 2022. Overall order intake in Diagnosis & Treatment was mid- single-digit up, excluding Russia, following a mid-single-digit order intake growth in the first half of 2022. The Russia impact is due to longer lead times because of initial export control procedures in place since this quarter.

Order intake declined 7% in Connected Care in the second quarter due to the tough comps in hospital patient monitoring after the expansion and renewal of the installed base during the period 2020 to 2022. For context, Connected Care orders continue to run at levels double digits higher than pre-COVID, driven by fundamental demand shift in adoption of our patient care management solutions and expanding market shares.

Raised outlook for FY 2023 driven by confidence in the execution of our plan, while uncertainties remain

As Roy mentioned, we have raised the outlook for the full year 2023. Whilst acknowledging that uncertainties remain, we now expect mid-single-digit comparable sales growth and an adjusted EBITA margin at the upper end of the high-single-digit range. We expect to carry the positive momentum into the second half of the year while facing tougher comparison base in the fourth quarter.

Restructuring, acquisition-related charges and other items in 2023

The full-year outlook for restructuring, acquisition-related, and other charges remain in line with the guidance provided in January, despite some shifts between the different cost buckets based on year-to-date results.

With that, I'd like to hand it back to Roy.

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