Philips : Q4 2021 webcast transcript

Q4 2021 Results

Monday, 24th January 2022

Q4 2021 Results

Monday, 24th January 2022

Operator's preamble

Welcome to the Royal Philips fourth quarter and full year 2021 results conference call on Monday, 24th January 2022. During this call, hosted by Mr Frans van Houten, CEO, and Mr Abhijit Bhattacharya, CFO, all participants will be in a listen-only mode. After the introduction there will be an opportunity to ask questions. If any participant has difficulty hearing the conference at any time, please press the star followed by the zero on your telephone for operator assistance. Please note that this call will be recorded, and replay will be available on the investor relation website of Royal Philips. I will now hand the conference to Mr Leandro Mazzoni, Head of Investor Relations. Please go-ahead sir.

Introduction

Leandro Mazzoni

Head of Investor Relations

Hi everyone, welcome to Philips' fourth quarter and full year 2021 results call. I'm here with our CEO, Frans van Houten, and our CFO, Abhijit Bhattacharya. Frans and Abhijit will take you through our operational and financial highlights for the period and after that, we will take your questions. Our press release, the related information slide deck, as well as frequently asked questions on the Respironics recall, were published at 7am CET this morning on our investor relations website. The full transcript of this call will also be made available today on the website. As mentioned in the press release, adjusted EBITA is defined as the income from operations excluding amortisation of acquired intangible assets, impairment of goodwill and other intangible assets, restructuring charges, acquisition-related costs and significant one-off items. Comparable growth for sales and orders are adjusted for currency and portfolio changes. Over to you, Frans.

Operational highlights

Frans van Houten

CEO, Royal Philips

Hello everyone and thank you for joining us today. As the disruption caused by the COVID-19 pandemic intensified in the fourth quarter, our teams remained focused on delivering against what we call the triple duty of care of meeting customer needs, safeguarding the health and safety of our employees, and ensuring business continuity. We remained fully focused on driving the necessary actions to deliver on our strategic performance roadmap while working through the global supply chain issues as well as doing everything we can to deliver a solution to patients and caregivers affected by the Respironics recall.

In the fourth quarter, we recorded €4.9 billion of sales, reflecting a 10% comparable decline with an adjusted EBITA of 13.1% of sales. As we announced on 12th January, sales were impacted by several headwinds, namely supply chain challenges, postponement of equipment

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installations in hospitals related to COVID-19, and the consequences of the Respironics field action.

For the full year, we recorded €17.2 billion sales, reflecting a 1% comparable decline. The aforementioned headwinds had a combined impact of 5 percentage points on the group full-year comparable sales. Adjusted EBITA was €2.1 billion in the full year, or 12% of sales. Comparable sales growth was 8% in Diagnosis and Treatment, and 9% in Personal Health in 2021, despite supply chain headwinds in the second half of the year. Connected Care sales declined 23% in 2021 following the high COVID-19 generated demand in 2020 and a decline in Sleep and Respiratory Care due to the recall.

Our strategy and portfolio continue to resonate very well with customers and consumers, generating solid demand for our products and solutions throughout the year. Order intake grew a further 4% in the year, driven by 16% in the Diagnosis and Treatment business and strength in hospital patient monitoring. This further builds on the high single-digit group comparable order intake growth in 2020, resulting in an all-time high equipment order book for Philips, which in fact is 18% higher than at the end of 2020, as shown on page 30 of our presentation.

During 2021, we also signed 80 long-term strategic partnerships across the world, of which 35 were signed in the fourth quarter, demonstrating the trust hospital leaders have in our ability to help them enhance health outcomes, lower the cost of care, and improve patient and staff experience.

Supply chain issues

As I mentioned, 2021 sales were impacted by the intensified global supply volatility and issues, so let me now elaborate further on this topic. We face stronger than anticipated supply chain disruptions across our businesses, which was primarily related to the shortage of electronic components, shipping times and COVID also affecting our suppliers. We have been working through the global supply chain headwinds for some time now, but earlier in the year our ability to mitigate supply risks was higher. We were increasingly challenged with suppliers that are unable to give visibility on e-component availability and shipping times, or even de-commit orders on short notice.

During the first half of the year, inventory started depleting due to our strong growth and then global supply challenges intensified, making the inventory situation very tight. As a consequence, the risk in our plan increased, which was exacerbated with short-termde-commitments and delays from some of the semiconductor suppliers. This impacted our ability to deliver on part of the revenue upside that in fact we had planned to mitigate the shortfall from Respironics.

In addition to that, we saw customers struggle with the impact of COVID on hospital staff and operations in December, which also delayed site readiness, partly caused by local material and labour shortages. Our supply chain teams remain fully focused on further driving the mitigation actions we started in 2021, but we expect the headwinds to continue in 2022, especially in the first half of this year. To address these challenges, we have already expanded the long-term orders with our suppliers, we have increased spot buying when it is expedient to do so, we have partially moved to alternate modes of transport to bypass reliance on ocean freight and port congestion.

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Our R&D teams are working on developing alternate parts as well as adjusting product designs to diversify sourcing of components. Moreover, we are calling on suppliers and governments at senior levels to prioritise healthcare products in the supply of components.

Respironics recall

Let me now speak about the Respironics recall. The repair and replacement programme is underway globally and we have substantially ramped up our production, service, and repair capacity. To date we have produced over 1.5 million repair kits and replacement devices, of which more than half have reached customers. We aim to complete the remediation programme in Q4 2022.

As announced on 12th January, following a comprehensive customer and patient outreach programme, Philips Respironics increased the field action provision by €220 million, mainly due to the higher volume of registered devices eligible for repair or replace, and increased supply and communication cost. As we said at the time, this was done in alignment with competent authorities in the interest of patients.

In December we provided an update on the positive VOC test results to date for the first generation of the DreamStation devices, which indicated that VOCs are within the limits of safe exposure specified in the applicable safety standard, e.g. ISO standard 18562. Comprehensive particulate testing and analysis are expected to be completed in the second quarter of 2022. We will continue to provide timely updates on the results from these and other assessments.

I would like to reiterate that we have a strong programme management in place to ensure the corrective actions related to the recall are completed as fast as possible. We have a competent team of over 1,000 people working under the leadership of Roy Jakobs, who is a member of our executive committee. We've also made organisational changes throughout 2021, which include onboarding new top management in the Sleep and Respiratory Care business and further strengthening our quality and regulatory affairs leadership for the group, the Connected Care and the Sleep and Respiratory Care businesses. Moreover, we have added resources to crosscheck learnings from the Sleep recall, their relevant and strengthened capabilities around post-market surveillance, medical affairs, biocompatibility, and toxicology within Philips. Our experts as well as certified labs and qualified third-party experts are closely working with the Respironics teams.

Importantly, we have submitted a comprehensive response to the November 2021 form 483 as well as a detailed action plan to the FDA. Philips Respironics continues to engage with the FDA, and we will work closely with the agency to clarify and follow up on the inspectional findings and its requests.

As I have already referred to, as part of our focus on quality and following the Respironics recall, we have reinforced the awareness and focus on patient safety across the company. We have further stepped-up scrutiny and raised the bar around this topic and see the organisation responding to this. In that respect, in Q4 we recorded a provision of around €70 million in the Connected Care businesses in relation to other quality actions. As we are currently still in process of informing stakeholders, I cannot provide details right now. While the provision is sizeable, we believe the mitigation of these issues is well understood. The business that it relates to are small business lines in the Connected Care portfolio. These

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efforts are ongoing and continue improvement of our quality culture and approach is top priority for management and for everyone at Philips.

As you know, Philips Respironics is a defendant in several class action lawsuits and individual personal injury claims. However, it is too early to draw any conclusions about the merits and the timelines to handle the claims at this stage. Right now, we are focusing on the patients and the corrective actions required as well as the completion of testing that I referred to.

As Leandro mentioned, we have published frequently asked questions, FAQs, on the recall to provide details and clarification on the progress. There are some areas, particularly related to litigation, where we are not able to provide further details at this time. We will share additional information in a transparent and timely manner as the situation evolves.

Supporting hospital leaders' plans worldwide

Now I would like to provide some colour on how we are supporting the needs of today's hospital leaders across the globe as they plan for the future. At the RSNA annual meeting in December, we launched a slate of smart connected imaging solutions, featuring AI and workflow automation, to aid clinicians in providing early, definitive diagnosis and treatment.

We introduced our MR 5300 system, continuing the advancement of our unique helium-free operating portfolio. Powered by AI, the MR 5300 simplifies and automates complex clinical and operational tasks for outpatient clinical use and MR departments to help increase access to affordable quality care.

Further expanding our comprehensive CT portfolio, we have introduced the new CT 5100 Incisive, with CT Smart Workflow, a suite of AI-enabled capabilities, designed to accelerate workflows, enhance diagnostic confidence, and maximise equipment uptime. CT Smart Workflow is the latest in a continuous programme of performance enhancement for Philips's market-leading Incisive CT system.

We also introduced the world's first spectral detector Angio CT, combining our unique spectral CT 7500 system and industry-leading Azurion platform with flex arm in a single interventional suite solution. The spectral detector CT imaging brings valuable additional information in minimally invasive procedures for areas such as oncology, stroke and trauma care, and the integrated solution provides interventionists with immediate table-side access to these two key imaging modalities.

In the quarter we further expanded our leading image-guided therapy portfolio through the acquisition of Vesper Medical, adding a venous stenting solution to address the root cause of chronic deep venous disease. And complementing the ambulatory cardiac diagnostics and monitoring solutions that we already offer with biotelemetry, we now acquired Cardiologs, which is adding a vendor-neutral heart disorder screener and ECG analysis application based on machine learning algorithms. Cardiologs technology will accelerate diagnostic reporting and streamline clinician workflow and patient care.

In Personal Health, we continue to invest in new product introductions, and successfully completed the rollout of the Sonicare 9900 Prestige in North America, China, Europe, and the Middle East. This premium electric toothbrush finished number one in the Stiftung warentest, Europe's leading consumer organisation. Moreover, we further expanded the oral healthcare

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