Koninklijke Philips N.V. (PHIA) Earnings Call Transcript & Summary

Welcome to Royal Philips Third Quarter 2022 Financial Update Conference Call on Wednesday, October 12, 2022. During the call hosted by Mr. Frans van Houten, CEO; Mr. Abhijit Bhattacharya, CFO; and Mr. Roy Jakobs, CEO, Elect. [Operator Instructions] Please note that this call will be recorded, and a replay will be available on the Investor Relations website of Royal Philips. I'll now hand the conference over to Mr. Leandro Mazzoni, Head of Investor Relations. Please go ahead, sir.

Good morning, everyone. Thanks for joining our third quarter 2022 update call a short notice. I am here with our CEO, Frans van Houten; our CFO, Abhijit Bhattacharya; and our incoming CEO, Roy Jakobs. Frans, Abhijit and Roy will make brief opening remarks, and after that, there will be an opportunity for Q&A. The third quarter 2022 financial results will be reported in full on October 24. So during today's call, we ask you to focus your questions on the information contained in the press release. Over to you, Frans.

Yes. Hello, everyone, and thank you for joining us today. We would like to provide some further background on the financial performance update announced this morning. Our financial performance in the third quarter was largely impacted by continued supply chain challenges that were more significant than anticipated, impacting deliveries and customer installations. While we see sequential improvement in the global supply chain situation, our progress has been slower than expected. Sales are expected to be approximately EUR 4.3 billion in the quarter, with a comparable decline of approximately 5%. As a consequence of the lower sales, adjusted EBITA for the quarter is expected to be approximately EUR 210 million or 5% of sales. We will record a EUR 1.3 billion noncash charge in the third quarter for the impairment of goodwill of Sleep & Respiratory Care due to revisions to the financial forecast of this business. In addition, as a consequence of the previously announced initiatives to enhance productivity in R&D, we will record a noncash charge of approximately EUR 165 million in the quarter. I would like now to give the floor to Abhijit to go over the drivers of the financial performance in the quarter and these items in more detail. And then everybody, as this is my last analyst call with you after 12 years, I have asked my successor Roy Jakobs to join us and also share a few thoughts with you. And after that, Abhijit and I will answer your questions.

Thanks, Frans. Good morning, everyone. As mentioned, while we were -- while we are seeing gradual improvement in the supply chain situation and continue to take action to strengthen our supply chain resilience, the environment remains very challenging with continued disruption, component shortages and low visibility. This impacted our sales compared to our earlier expectation for the quarter, notably in Diagnosis & Treatment and Hospital Patient Monitoring. Our Diagnosis & Treatment businesses are expected to show a low single-digit comparable sales decline and the Connected Care businesses, mid-teens declined in the quarter. The Personal Health businesses are expected to show mid-single-digit comparable sales growth. On the back of a strong 47% comparable order intake growth last year, order intake declined approximately 6% in the quarter. The book-to-bill ratio remains strong around 1.2, and the equipment order book grew further in the quarter. Orders were up around 3% for Diagnosis & Treatment businesses on the back of 16% growth in Q3 2021, driven by good performance in magnetic resonance imaging, image-guided therapy and enterprise informatics. Orders for the Connected Care businesses declined double digit on the back of over 260% growth in Q3 last year. As some of you may remember, this was due to the partial cancellation of the ventilator order from the HHS in the U.S. in Q3 2020. To look at this in context, the 3-year CAGR is high single digit as we continue to experience strong demand for our Patient Monitoring Solutions. As a result of the lower sales, adjusted EBITA margin is expected to be 5% of sales in the third quarter. The impact of global supply chain disruptions is relevant across all modalities, but particularly strong on higher volume and high-margin businesses like patient monitoring and ultrasound. Our teams remain fully focused on everyday execution, delivering on customer demand and addressing the supply chain risks. As previously communicated, we are further accelerating productivity initiatives and other actions to mitigate the ongoing headwinds. We plan to provide further detail on that at the Q3 results later this month. As a consequence of the earlier announced initiative to enhance productivity in R&D, we are shifting the focus to fewer and better resource projects in the innovation pipeline. This has resulted in a noncash charge of approximately EUR 165 million that Frans mentioned. In addition, the EUR 1.3 billion noncash charge for the impairment of goodwill of the Sleep & Respiratory Care business is due to revisions of the financial forecast of this business. The drivers for the revised forecast include the current assumptions regarding the estimated impact of the consent decree and changes to the pretax discount rate. While we understand you may like to know more about the proposed consent decree, we are in discussions with the DOJ and cannot speculate on the outcome, content or the timing of any agreement. Philips Respironics will continue to provide updates as and when appropriate. In terms of the recall, we have significantly increased our production capacity and will increase further in Q4, reaching 4x pre-recall levels. As of today, we have produced 3.8 million devices and expect to produce and ship around 90% of the registered affected devices by the end of 2022. Now back to our financial performance. We still expect a better second half of the year compared to the first half of 2022. However, we do see prolonged supply chain disruptions and a worsening macroeconomic environment. Consequently, we now expect a mid-single-digit comparable sales decline for the fourth quarter of 2022 with a high single to double-digit adjusted EBITA margin. With that, I'd like to hand over to Roy for a few comments.

Thank you, Abhijit. Good morning all. While our goal to improve people's lives with meaningful innovations remains unchanged, I am becoming CEO at a time when we faced significant challenges. Improving execution is clearly my immediate near-term focus. In particular, restoring supplies to deliver on the order book and customer demand, addressing the Respironics safety notification, and further strengthening our quality processes. Improving business performance in a turbulent world, impacted by supply chain disruptions and geopolitical issues, as well as further simplifying our organization. Looking ahead, I'm fully convinced of our ability to drive sustainable value creation. I will further work on my plans in the next 2 to 3 months and intend to update you on them more specifically with Q4 results in January 2023. While there is a lot to do, our priorities are clear and I'm laser-focused on improving execution together with my broader leadership team. Our strong order book shows the relevance of our solutions for customers and we're going to stop at nothing to regain our upward performance trajectory. We must, can and will improve. Thank you very much.

Yes. Thank you, Roy. And with that, we now open the line for your questions.

[Operator Instructions] Your first question comes from the line of David Adlington from JPMorgan Cazenove.

Just 1 question then. So given your difficulties with supply, I just wondered if you're seeing customers become more cautious on making new orders or potentially even canceling current orders?

Yes. David, this is Abhijit. We are seeing customers becoming more cautious in placing orders, not so much due to supply chain more due to the macroeconomic conditions as you see something that you guys hear all the time. But -- and we have not really seen any cancellations because of the delay because, let's say, almost all suppliers are affected by this. We were seeing an improvement in the situation in Q2, which led us to believe that there would be further improvements going in the second half of the year. And I think that's where those improvements have not come through as much as we had expected. Plus the buffer in the supply chains are very, very low. So the moment you have 1 disruption with the supplier, you just get a push out and there is no buffer inventory to take care of it. So that's why we kind of have this -- yes, this short-term volatility that we see. Overall, our funnel remains strong. But yes, in terms of the order intake, we have seen a bit of caution with customers.

Next question comes from the line of James Vane-Tempest from Jefferies.

James Vane-Tempest from Jefferies. A follow-up really just in terms of the customers. Can you talk a little bit about the increased cost to customers now, which is obviously a different headwind for them in considering the broader macro drop. So firstly, how you are looking at your own pricing? And secondly, although this isn't something the company does directly, but can you talk about the financing for them? How much of is it -- are they typically having to pay now versus a year ago as well?

Yes, a couple of things. So yes, input prices, whether it is our equipment or site construction, site readiness, all of those costs have gone up. Now we have explained before and maybe good to reiterate now. The orders that we are supplying for now have come -- have been part of the order intake pre price increase. So we are -- of course, now booking orders at increased prices and they will come to revenue next year. So the impact on the P&L now that you see is coming from increased input cost, but not yet the benefit that we expect to see from pricing. Regarding customer financing, yes, the interest rates have gone up. So therefore, customer financing rates have also gone up. It's still in the low to mid-single-digit range. But depending on the geography, but our penetration, especially from Philips Capital remains pretty good. So we are not seeing customers walking away from taking financial support from Philips Capital as they place orders.

Our next question comes from the line of Sezgi Oezener from HSBC.

My question relates to the additional -- to the goodwill impairment. I appreciate that you also mentioned that in the goodwill impairment and the provision you take into account, the consent decree or which you cannot reveal the details. But can you maybe give a color of whether you expect this to be the full impairment and provisions that you will be recording on this? Or do you expect this to go over the EUR 1.2 billion that you shared with us today?

Yes. Thanks. This is Frans. Details of the consent decree have not been fully negotiated at this time. And therefore, we are to our best of our abilities, looking at the future with an impact of a combination of margins and sales, it's very early days. There's really not much more detail that we give -- can give today other than this is our reasonable estimate. And I would leave it to a future update to come back on your question. But this time, this is it.

[Operator Instructions] Our next question comes from Veronika Dubajova from Citi.

Can you hear me okay?

Yes.

Yes.