Philips : Q4 2022 report

Q4 2022

Quarterly report

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

Amsterdam, 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.

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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.

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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.

Conference call and audio webcast

Roy Jakobs, CEO, and Abhijit Bhattacharya, CFO, will host a conference call for investors and analysts at 10:00 am CET today to discuss the results and Philips' plan to create value with sustainable impact. A live webcast of the conference call will be available on the Philips Investor Relations website and can be accessed here.

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Fourth-quarter highlights

Philips performance

Key data in millions of EUR unless otherwise stated
		Q4 2021	Q4 2022
Sales		4,944	5,422
Nominal sales growth		(6)%	10%
Comparable sales growth1)		(10)%	3%
Comparable order intake2)		4%	(8)%
Income from operations		162	171
as a % of sales		3.3%	3.2%
Financial expenses, net		(21)	(78)
Investments in associates, net of income taxes	(8)	(86)
Income tax (expense) benefit		6	(120)
Income from continuing operations		139	(113)
Discontinued operations, net of income taxes	12	8
Net income		151	(105)
Earnings per common share (EPS)
Income from continuing operations		0.16	(0.13)
attributable to shareholders3) (in EUR) -
diluted
Adjusted income from continuing	(in	0.57	0.41
operations attributable to shareholders3)
EUR) - diluted1)
Net income attributable to shareholders3)		0.18	(0.12)
(in EUR) - diluted
EBITA1)		230	301
as a % of sales		4.6%	5.5%
Adjusted EBITA1)		647	651
as a % of sales		13.1%	12.0%
Adjusted EBITDA1)		905	891
as a % of sales		18.3%	16.4%

1. Non-IFRSfinancial measure. Refer to Reconciliation of non-IFRSinformation.
2. Comparable order intake is presented when discussing the Philips Group's performance. For the definition of this measure, refer to chapter 12.4, Other Key Performance Indicators, of theAnnual Report 2021.
3. Shareholders refers to shareholders of Koninklijke Philips N.V.

Sales per geographic cluster in millions of EUR unless otherwise stated

% change

Q4 2021 Q4 2022 nominal comparable1)

• Comparable sales increased by 3%, driven by improved

component supplies. The Connected Care and Diagnosis &

Treatment businesses recorded mid-single-digit growth, while

the Personal Health businesses posted a mid-single-digit decline.

• Comparable order intake decreased by 8%, with a double-digit

decline in the Connected Care businesses, due to lower demand

for COVID-19-related acute care products compared to 2021, and

a high-single-digit decline in the Diagnosis & Treatment

businesses, mainly due to actions to improve the order book

margin profile.

• Adjusted EBITA was EUR 651 million and the margin amounted

to 12.0%, mainly due to cost inflation, partly offset by pricing

and productivity measures.

• Restructuring, acquisition-related and other charges amounted

to EUR 350 million, compared to EUR 417 million in Q4 2021. Q4

2022 includes EUR 103 million restructuring charges, EUR 85

million for the Respironics field-action provision, EUR 63 million

Respironics field-action running remediation costs, and a EUR 60

million provision for a legal matter.

• Financial income and expenses resulted in a net expense of EUR

78 million, compared to a net expense of EUR 21 million in Q4

2021. Q4 2022 includes lower gains on the value of Philips'

minority participations and higher interest expense, primarily

due to bonds issued in April 2022, compared to Q4 2021.

• Investments in associates mainly includes an impairment of EUR

66 million.

• Income tax expense increased by EUR 126 million year-on-year,

mainly due to lower tax benefits in Q4 2022.

• Net income in Q4 2022 decreased compared to Q4 2021, mainly

due to the factors highlighted above and impairments of

goodwill and technology assets of in total EUR 49 million.

• Sales in mature geographies increased by 6%, driven by mid-

single-digit growth in North America and Western Europe and

double-digit growth in other mature geographies. In growth

Western Europe	1,111
North America	1,903
Other mature	449
geographies
Total mature	3,463
geographies
Growth	1,481
geographies
Philips Group	4,944

1,144	3%	4%
2,283	20%	5%
471	5%	10%
3,898	13%	6%
1,524	3%	(2)%
5,422	10%	3%

geographies, sales decreased by 2% on a comparable basis,

mainly due to China.

1. Non-IFRSfinancial measure. Refer to Reconciliation of non-IFRSinformation.

Amounts may not add up due to rounding

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Cash and cash equivalents balance in millions of EUR unless otherwise stated

	Q4 2021	Q4 2022
Beginning cash balance	3,827	776
Free cash flow1)	519	303
Net cash flows from operating activities	720	540
Net capital expenditures	(201)	(237)
Other cash flows from investing activities	(13)	25
Treasury shares transactions	(1,449)	(140)
Changes in debt	(33)	240
Other cash flow items	16	(60)
Net cash flows from discontinued operations	(564)	28
Ending cash balance	2,303	1,172

1. Non-IFRSfinancial measure. Refer to Reconciliation of non-IFRSinformation.

Composition of net debt to group equity1) in millions of EUR unless otherwise stated

	September 30, 2022	December 31, 2022
Long-term debt	6,910	7,270
Short-term debt	1,397	931
Total debt	8,307	8,201
Cash and cash equivalents	776	1,172
Net debt	7,531	7,028
Shareholders' equity	14,437	13,249
Non-controlling interests	43	34
Group equity	14,479	13,283
Net debt : group equity	34:66	35:65
ratio1)

1. Non-IFRSfinancial measure. Refer to Reconciliation of non-IFRSinformation.

• Net cash flows from operating activities decreased, mainly due to increased working capital and cash costs related to provisions.
• Treasury shares transactions mainly includes share repurchases for capital reduction and for Long-Term Incentive purposes, whereas Q4 2021 mainly included share repurchases for capital reduction purposes.
• Changes in debt in Q4 2022 includes the draw-down of EUR 500 million under the new EUR 1 billion credit facility that was announced in October 2022, partly offset by a commercial paper repayment of EUR 200 million.
• Net cash flows from discontinued operations in Q4 2021 included the tax payments on the sale of the Domestic Appliances business.

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