Philips' performance impacted by headwinds, order book strength and improving component supplies expected to deliver growth

July 25, 2022
July 25, 2022 -- Highlights

Group sales amounted to EUR 4.2 billion, with a 7% comparable sales decline mainly caused by continued supply shortages and prolonged lockdowns in China, on the back of 9% comparable sales growth in Q2 2021
Order book remains strong; comparable order intake increased 1% and includes a 5 percentage-points negative impact related to China
Income from operations amounted to EUR 11 million, compared to EUR 85 million in Q2 2021
Adjusted EBITA of EUR 216 million, or 5.2% of sales, compared to EUR 532 million, or 12.6% of sales, in Q2 2021
Operating cash flow was an outflow of EUR 306 million, mainly due to temporarily higher inventories, compared to an inflow of EUR 332 million in Q2 2021
In connection with the field action for specific CPAP, BiPAP and mechanical ventilator devices, Philips Respironics has produced 3 million replacement devices and repair kits to date, and published encouraging test results for the first-generation DreamStation devices
Comprehensive measures in place to improve supply chain resilience and pricing; productivity program increased to EUR 500 million per year through 2025
Company has revised full-year 2022 outlook to 1-3% comparable sales growth and around 10% Adjusted EBITA margin, driven by 6-9% comparable sales growth in the second half of 2022
For the 2023-2025 period, Philips has provided a revised performance improvement trajectory of 4-6% average annual comparable sales growth, and an Adjusted EBITA margin of 14-15%, as well as a free cash flow of around EUR 2 billion by 2025
Frans van Houten, CEO of Royal Philips:

"Across our businesses, we have stepped up our actions on productivity, pricing, and strengthening supply chain resilience to mitigate the ongoing headwinds and associated risks. The positive impact of these actions, together with the strength of our order book and improving component supplies, give me confidence that we will resume growth from the third quarter onwards, resulting in 6-9% comparable sales growth and improved profitability in the second half of the year. For the full-year 2022, we expect to deliver 1-3% comparable sales growth and around 10% Adjusted EBITA margin.

Our products remain in good demand, as evidenced by the further growth of our already strong order book, confirming the relevance of our strategy and portfolio of innovations to our customers. In the second quarter, comparable order intake increased 1% and includes a 5 percentage-points negative impact related to China. We partnered with 19 more hospital groups to help them transform the delivery of care and boost staff productivity. In our Personal Health businesses, we delivered a second consecutive quarter of double-digit comparable sales growth in North America.

Our performance in the second quarter was impacted by global, industry-wide challenges including supply shortages, COVID lockdown measures in China, inflationary pressures and the Russia-Ukraine war, resulting in a comparable sales decline of 7%, with an Adjusted EBITA margin of 5.2%. The impact of the COVID lockdowns significantly affected our business in China, where comparable sales and order intake declined almost 30% in the quarter. Production in several of our factories, as well as those of our suppliers in China, was suspended for two months, which exacerbated the global supply chain and cost challenges. The China lockdowns directly impacted the Adjusted EBITA margin of the Group by 120 basis points due to lower sales and a further 110 basis points because of factory under-utilization. Global inflation and cost headwinds had an additional impact of around 290 basis points on Group profitability in the quarter.

Philips Respironics continues to make solid progress with the repair and replacement program for the CPAP, BiPAP and mechanical ventilator devices affected by the June 2021 field safety notice, and published encouraging results related to the comprehensive test and research program to assess the possible health risks. We know how important the affected devices are to patients and are working very hard to get a resolution to them as fast as we can.

Looking ahead to 2023 and beyond, while we continue to see risks and a challenging macro-environment, we expect our supply chain measures to take full effect, resulting in a significant improvement in the conversion of our order book to revenue. Our pricing and increased productivity measures will expand margins. Based on these actions, the strong fundamentals of our businesses, and taking our 2022 outlook into account, we now expect to deliver comparable sales growth of 4-6% and an Adjusted EBITA margin of 14-15% by 2025, with further improvement thereafter."

Business segment performance

The Diagnosis & Treatment businesses' comparable sales decreased 4% on the back of 16% comparable sales growth in Q2 2021. High-single-digit growth in Enterprise Diagnostic Informatics and mid-single-digit growth in Image-Guided Therapy was more than offset by a decline in Ultrasound and Diagnostic Imaging, due to specific electronic component shortages. Comparable order intake increased 3% on the back of 29% comparable order intake growth in Q2 2021, with growth across all businesses, reflecting ongoing solid demand for Philips' portfolio. The Adjusted EBITA margin was 6.2%, mainly due to the decline in sales, cost inflation and an unfavorable mix impact, partly offset by productivity measures.

The Connected Care businesses' comparable sales decreased 13%, mainly due to the consequences of the Respironics field action and the impact of supply chain headwinds. Comparable order intake showed a 2% decrease, while demand for Hospital Patient Monitoring and Connected Care Informatics remains robust. The Adjusted EBITA margin amounted to 1.1%, mainly due to the decline in sales and cost inflation, partly offset by productivity measures.

The Personal Health businesses' comparable sales decreased by 5% on the back of 33% comparable sales growth in Q2 2021. Double-digit growth in North America was more than offset by double-digit declines in China and Russia. The Adjusted EBITA margin amounted to 12.4%, mainly due to the decline in sales and cost inflation.

Philips' ongoing focus on innovation and customer partnerships resulted in the following key developments in the quarter:

Philips signed 19 new long-term strategic partnerships with hospitals in Europe, Asia, and North America, including a 10-year patient monitoring agreement with a large hospital in Germany. Through Philips' advanced enterprise monitoring offering, the hospital will transition from stand-alone devices towards a scalable enterprise-wide patient monitoring solution that keeps care teams connected and informed for enhanced patient care management.

Philips received FDA clearance to market its new 7700 3.0T MR system, featuring an enhanced gradient system for Philips' highest image quality to support a precision diagnosis. Philips also received FDA clearance for its SmartSpeed MR acceleration software, adding AI data collection algorithms to Philips' existing Compressed SENSE MR engine for higher image resolution with three times faster scan times and virtually no loss in image quality.

Philips received clearance from the Chinese National Medical Products Association (NMPA) to launch its helium-free operations MR Ingenia Ambition, which is produced in China for the Chinese market. Philips is joining forces with B-Soft, a Chinese healthcare informatics company, to develop a healthcare informatics solution tailored to the needs of Chinese hospitals. This highlights the continued progress of Philips' strategy in China to drive market-relevant offerings through its local footprint as well as partnerships with the local innovation ecosystem.

Demonstrating the clinical benefits of Philips' minimally invasive therapy options, the company announced positive results from its Tack Optimized Balloon Angioplasty below-the-knee clinical trial. The results show that the Tack endovascular system provides a sustained treatment effect for patients with critical limb ischemia, a severe stage of peripheral arterial disease.

Building on Philips' leadership in interventional cardiology solutions, the company launched the latest version of its EchoNavigator image-guidance tool, which seamlessly integrates live ultrasound, interventional X-ray imaging and advanced 3D heart models to help interventional teams treat structural heart disease with greater ease and efficiency.

Philips signed a long-term agreement with the Rijnstate hospital in the Netherlands to deliver a wide range of advanced ultrasound devices for 17 different departments at multiple locations of the hospital. The agreement involves ultrasound devices and services for cardiological, vascular or radiological examinations, OB/GYN, as well as mobile devices for the emergency department.

Building on the successful strengthening of the company's innovative power toothbrushes portfolio, ranging from entry-level to premium propositions, as well as targeted advertising and promotion campaigns, Philips Oral Healthcare recorded continued strong double-digit comparable sales growth and market share gains in North America in the quarter.

Philips Respironics field action related to specific CPAP, BiPAP and mechanical ventilators

Philips Respironics continued to make solid progress with the repair and replacement program for the CPAP, BiPAP and mechanical ventilator devices affected by the June 2021 field safety notice, as well as the comprehensive test and research program to assess the possible health risks. To date, 3 million replacement devices and repair kits have been produced. Philips Respironics aims to further increase capacity and complete around 90% of the production and shipments to customers in 2022. The test results to date for the first-generation DreamStation devices, which represent the majority of the registered affected devices, are very encouraging. They show a very low prevalence of visible foam degradation, and new and used first-generation DreamStation devices passed volatile organic compound and respirable particulate emission testing.

Following the FDA's inspection of certain of Philips Respironics' facilities in the US in 2021 and the subsequent inspectional observations, the US Department of Justice, acting on behalf of the FDA, recently began discussions with Philips regarding the terms of a proposed consent decree to resolve the identified issues.

Capital allocation

In the second quarter, Philips issued EUR 750 million fixed-rate notes due 2027, EUR 650 million Green Innovation Notes due 2029 and EUR 600 million Sustainability Innovation Notes due 2033 under its Euro Medium Term Note program, and entered into a series of transactions to extend and optimize the company's debt maturity profile.

Following the issuance of 14,174,568 new shares related to the share dividend, and the cancellation of 8,758,455 shares that were acquired as part of the EUR 1.5 billion share repurchase program for capital reduction purposes, Philips' current issued share capital amounts to 889,315,082 common shares. As communicated earlier, Philips intends to have 19,571,218 shares delivered through the early settlement of forward contracts (entered into as part of the same share repurchase program) and to cancel those as well, which would result in 869,743,864 issued common shares at year-end 2022 (2021: 883,898,969).