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

I'm David Adlington. I head up the European research team for JPMorgan in London. It's my pleasure to introduce Roy Jakobs, CEO of Philips. There will be a 20-minute-ish presentation followed by Q&A in this room. But Roy, thank you very much for coming, and over to you.

Thank you, David. Thank you all for joining. Welcome to the session about Philips. As you know, Philips, an innovation powerhouse, 133 years old, has done many different sectors, more recently focused for 80% of its business on serving the health care sector, 20% still active in consumer and a few segments here as well. So that's the Philips that we will be talking about today. Important to stress that we are on a journey where actually we have made a lot of progress, since I started in 2022, in supporting health care with exciting innovations that we have within our stock. When we looked at the plan that we launched early '22, it was very much about stabilizing the ship, strengthening the fundamentals and making it ready to play to win in the market. And as I will show you during the presentation, we have made significant progress amongst our strategy, the innovations, but also the strengthening of our execution. And as such, we feel ready for 2025, which will be, I'm sure, another exciting year in the world, but also a very important year for health care, because we still see the health care crisis very strongly. And the crisis that I allude to is the increasing gap between a fast increasing demand and not enough supply to serve the patients, supply in terms of people in particular, and funds next to that. What I want to leave you with after this presentation is the clarity on which businesses we have to serve our health care customers and our consumer customers, the leading positions that we have built over time that are the platforms that we can offer to the market, the standard setting innovations that we have been launching, including the latest launches of 2024, and of course, I will talk about the culture in Philips that we are changing, but also the people that are delivering the services, because that's what makes us win. Let me start off with what really drives all of the team Philips and that we have a very strong purpose that we want to improve people's health and well-being through meaningful innovation. And we have translated that in a very tangible and actionable vision, where if we look to what the world needs in health care, it's about 2 things. One, patients and people want better care, better quality care, better outcomes of care. And secondly, and probably the bigger challenge even, is there needs to be care for more people. Because the demand side is very strong, people expect more care, they are more chronic patients, and actually, we are struggling to provide the access to care that is needed. I've also been driving that with a culture which has impact with care at heart, impact in all that we do, but also doing it the right way. If you look at where we play, our market, the addressable market is around EUR 90 billion in 2025 expected. So it's a sizable market and has strong underlying fundamentals. Also in terms of growth profile, over time, the health care market varies at attractive growth rates of between 3% to 6%. We see some of the fundamental drivers of the market, whether it's aging population, complex diseases, staff shortages, and the requirement to provide better access to care. But what we have also seen that in some moments, and we saw that in last year, when we see specific macroeconomic trends like China hitting, that some of this growth could be a bit lower, and we also expect some of that to continue in 2025 given the sheer size of China. But fundamentally, it's a very attractive market in need of technology innovation to keep doing what it needs to be doing. If I go a bit deeper into different trends from a market perspective that we see across the globe, let me start from North America, a very strong market where we see sustained growth. North American customers in health care have been coming out of COVID with a negative P&L in 2022. It started to get positive in '23, it further strengthened in '24, and we expect that to continue in 2025. In Europe, we have seen slow growth. And actually, we don't expect that to change on the back of the heartland of Europe that is struggling, France, Germany, U.K., not in a strong economic shape and therefore, not able to fund disproportionately the health care segment. But we do also see some attractive areas in Europe, but more at the outskirts. The Nordics are growing faster, Spain, Italy, Greece and the Eastern European countries. And Greater China is struggling, as we know; has been struggling already since a while, came out of a 3-year lockdown of COVID with slower growth and has not been able to turn that growth yet into the growth that we have been used to see in China. There are 2 different dynamics at play. One is the health care dynamics, where we have seen anticorruption measures actually put a cautious and caution into buying behavior into the market. And secondly, last year, a stimulus program was started that actually caused more confusion than contribution in 2024, because it was not clear whether this was a loan, whether this was a subsidy, how the fundamentals of the program would work. So that's something that actually has severely impeded the growth in China in 2024. Also on the consumer side, we have seen a low point in consumer sentiment. And actually, we expect that consumer, based on the macroeconomic trend of China, will continue to be subdued in 2025. And then Rest of World, we see some distinct pockets that offer growth opportunities. Like, for example, we were positively surprised in '24 by Brazil, Argentina. We also saw that in the Asian markets, Indonesia is heavily investing behind health care. India as well. But at the same time, we saw a very mature market like Korea, that traditionally has been very strong investing behind innovation in health care, struggling because the doctors were on strike almost all year. And then in the Middle East, we see Saudi to continue to invest behind health care and, of course, also having the funds for it. So in summary, fundamentally attractive, but different short-term dynamics and still an impact of China that has an impact on the overall market given its sheer size. So then how does Philips play in these markets? We have built over time very strong platforms that we offer our services from towards our customers. Starts from the home, where we are still active in Personal Health. We have Oral Health Care, Mother & Childcare, and Personal Care. We have leading positions in that. That's a self-care business that actually has been contributing strongly over time to Philips. In the healthcare segment, we have 3 big ones. One is measurements & insights. which is all about monitoring real-time data of patients in hospital, more and more also outside of the hospital, in ambulatory sites and in the home. Then we have the diagnosis business, very strong imaging platform, where we have a combination of the diagnostic imaging business as well as ultrasound with leading positions. And we have a very strong interventional business, where we provide treatment solutions, both in terms of systems and devices. And one element that's truly unique for Philips is that we have the biggest Health Care Informatics business stand-alone as part of Philips that offers multi-vendor solutions to our customers. And especially with the upcoming AI revolution in health care, it's extremely important to support the digitization of our customers and actually, through AI, close that gap between supply and demand. And the beauty of AI in health care is that actually no single product of Philips does not have AI as we speak. And actually, the contribution of it can be made very tangible, whether you look across prediction in monitoring, better scanning or faster scanning in imaging, or actually image fusion in interventional. To give you a bit more specificity about what these platforms contain. The Diagnosis & Treatment segment is 50% of our sales in health systems. We are #1 in Image-Guided Therapy, very strong position in cardiac. We launched a new neuro platform where we're also going for the #1 position now. We're #1 in cardiovascular ultrasound, and we are in the top 3 of diagnostic imaging, depending on the country where we play. And in Connected Care, the second pillar, we are #1 in hospital and ambulatory monitoring globally. In Enterprise Informatics, we are a very strong PACS player and an interoperability player. Interoperability meaning we actually collect, through capsule, from more than 1,200 medical devices, the data and integrate them in one database. And then we are #2 in Sleep & Respiratory Care. And on the Personal Health side, 20% of our total sales -- as I said, we are #1 in Grooming, #2 in Oral Health Care, and #2 in Mother & Childcare. What's also important is that we are known as being an end-to-end cardiac player. Whether you want to measure cardiac rhythm failures in the home with patients through our ePatch, whether you want to make the most and best diagnosis through our leading ultrasound platform or cardiac MR, or whether you need the best minimally invasive cardiac procedure, we all support with the leading platforms for that. We are also active in neuro, in onco and in respiratory, of course. 70% of our businesses are in leading positions, #1 and #2; 30% have a margin potential, that I will come back to later on, to grow from. And how have we been driving and steering Philips? So when I came into play in 2022, you might recall that we were at a pretty challenging position. We were not growing, cash bleeding, we had a recall at hand. So we put out a very strong compass, which I call our plan to create value with sustainable impact that had 3 distinct pillars: a strategy of focus and innovation, where we turn to people-driven innovation out of the businesses, less driven out of corporate, and then a very strong focus on improving our execution with the first priority on patient safety and quality; secondly, on creating a reliable supply chain; and thirdly, a simplified operating model, underlined by changing culture and with an injection of HealthTech talent and capabilities. That has been the plan of record that we have been working against every quarter since, with tangible improvements both in the financial and nonfinancial KPIs that we set against it. What is very important is that the plan can only come to life if you have the right talent and the right culture. So I've been putting a lot of effort in driving an impact culture and that has 4 pillars: clarity and simplicity, focus on execution and performance, focus on accountability and empowerment, and focus on learning and collaboration. And at the heart, delivering our solutions with the highest focus on how we do that well for patients, people and planet with quality and integrity at heart. I've been intervening as well strongly on strengthening the quality of our team. 70% of my executive team by now has been renewed. You might have seen that we added 2 latest additions to the team last week, very strong ones, a new precision diagnosis leader and a new leader for the international regions. 75% of the executive hires, not only at the executive level, but also in top 300, have a very strong HealthTech domain background and/or a clinical background. And we have been driving a lot of change, because when we talk about the simplification of the organization, we put the accountability to the businesses. So we created end-to-end accountability for the businesses, supported by functions and markets, where we said we are going to reduce 10,000 roles since the start of the plan to become leaner and more agile, which we actually achieved since and we had a very strong productivity plan to also drive EUR 2 billion of productivity in the 3 years of plan of record. What was as important is that we got the engagement up in the organization, so that you not only have the right team, but also a very energized and engaged team. And I was super proud to see that actually in Q4 measurement, we stepped up our engagement score by 11 points versus last year to 78% versus 80% high-performance norm. And within that, actually, the patient safety and quality metrics scored even higher. So we are moving on our culture with the right team and the right people. Now I spoke about our strategy and that we have a very focused strategy. So in our strategy, we divided the portfolio of assets that we have in 2 buckets. The first bucket is the 70% of businesses that are in leading positions and in high-growth, high-margin businesses. Those are Image-Guided Therapy, EUR 3.5 billion; Ultrasound, EUR 2 billion; Monitoring, EUR 3 billion; Personal Health, EUR 3.5 billion. Then on the right-hand side, 30% of the business is having a margin expansion priority. That is Enterprise Informatics, Diagnostic Imaging and Sleep & Respiratory Care, where we are coming and working through the recall. This combination drives both growth and margin expansion, because we leverage the margin businesses to also propel the growth at a higher profitable rate. And at the same time, we have a disproportionate margin expansion opportunity on the right-hand side. So what you've seen also throughout the plan, and we'll come back to it later, that we have been consistently focusing and delivering on strong margin expansion across the plan period. At the heart of Philips is we are an innovation company. And when you think of Philips' innovation, you will also and always see 3 core elements that drive it. We think of the design, make it as intuitive, make it people and patient-centric, make it sustainable, and sustainable not only from an environmental perspective, also from a business model perspective, and make it scalable. So we have been refocusing on our innovation efforts to really drive scalability and innovation. We spent EUR 1.7 billion on R&D on a yearly basis. More 50% of that spend goes into Informatics, because we believe that there's a disproportionate contribution of Informatics into supporting health care towards the future, especially also with AI coming. And as I said, every single product of Philips has AI in it. Also, we are multi-vendor and an open ecosystem of innovation. So we assume that we have to collaborate with others, and it has to be easy to plug in our solutions into others' solutions, whether it's EMR on one hand or whether it's other devices that are being used in an ICU or in a Cath lab on the other hand. When we drive innovation, we want to drive standard setting innovation. What I mean with standard setting is shifting direction in certain segments. And I'll give you a few examples. In imaging, we have introduced BlueSeal MR. That's a helium-free MR system, which will be the new standard in MR. What it allows you to do is actually have access to MR in many more locations than traditionally the basement of the hospital. So we have set MR free. But not only that, we also, by the addition of AI, really made it more productive, because MR is the Rolls-Royce of imaging, the best imaging quality you can get out of the MR, but it is relatively slow. So you cannot do many patients in an hour. So we really have introduced, for example, smart speed algorithm that doubles the productivity, so you can double the amount of patients per hour. We are the only one currently having the 1.5T helium-free 70 centimeter bore that you need to play in the U.S. We are working on the 3T, and together that will be 80% of the market. Second platform, market-leading standard setting is Azurion. In IGT, we are the #1, and Azurion has led the way in really providing a platform that you can expand different procedures for. Started as a cardiac-driven kind of platform, but actually it's supporting across the different interventions, whether it's neuro, onco. We introduced in 2024, the next neuro platform, because we want to take on the #1 position in neuro as well. The third one is in our Monitoring business. In every second hospital of the U.S., you will see Philips Monitoring. We are the standard and the biggest platform in monitoring. And that's on the back of the informatics system that we have built on top of our monitors, because it's not about the monitor that measures, it's about what you do with the data and the insights you get from it. And then on the right-hand side, you see OneBlade, which in the Personal Health space has been creating a new category of hybrid shaving with more than 100 million blades and 50 million handles already sold since we introduced this. We're also a leader in Health Care Informatics and AI across the portfolio. That's embedded across these platforms that I just showed, but we also have a stand-alone Enterprise Informatics offering, where on one hand, it's about how can you set data free. Secondly, how can you draw insights out of those data? And thirdly, how can you also work with these data in the tele way, meaning remote. We do that across Imaging, Monitoring, more and more also in digitizing Pathology, for example, which is the next frontier. In the U.S., only 10% of pathology is digitized. And actually, with the revolution coming and the shortage of pathologists, we need to get that to the 100%. What is the progress we made with our plan? So the summary of the metrics. So as I said, when I started in 2022, we had declining CSG, EBITDA margin of 7.4%, negative free cash flow and capital allocation, net debt to adjusted EBITDA of 3.0, the leverage. We have been working on the plan very diligently. What we promised was we would take the growth from low to mid-single digit over the plan period. We would drive our EBITDA margin from high single to low teens margin. Our free cash flow would be delivering in those years, until the end of 2025, around EUR 3.6 billion in total, and we would deleverage to 1.5. Where are we if we take Q3 results and our predicted ending of the year that we guided for at that time. We will have a growth that will hover between the EUR 3.2 billion to EUR 3.7 billion with a very strong start, and we see, on the back of the China decline, some slower growth in the recent years, which is in line with market. EBITDA margin expansion from 7.4% to 11.5% around that we guided for, for the ending of this year. Free cash flow generation of EUR 2.5 billion, and we deleverage to 2. Next to that, we made very important progress of addressing the recall. The recall was a big overhang on Philips when I started. We have resolved the patient issues. We got to a conclusion on the consent decree in 2024, and we settled the big litigation, the personal injury litigation. We still have DOJ and SEC to go, but we made already a lot of progress. And then where we will take it next, we will stay the course on the compass that we put out, focus rigorously on a focused strategy of 70 and 30, innovation that will make the difference for our customers, and a very strong view and perspective on driving better execution. And as I said, we do that in a fundamentally attractive market, where we currently see a China that is having a depressing element of growth into the mix, but where we continue our margin expansion despite and we are well positioned to capture the growth in the segments when and where it will happen. Let me pause here and then open up for questions.

Perfect. Thanks, Roy. Maybe before we open up to the floor, I'll open up with a couple of questions. So a big picture one to start off with a lot of change in the last couple of years. You came in and took out a lot of cost, so it helped you on the margins. Not being helped by market conditions, but growth has not been probably quite where you would have hoped it to be. How are you feeling in terms of the decisions you made a couple of years ago with respect to the costs? And do you see any areas that will require some investment going forward to try and help the top line?

Yes. I think the productivity program that we launched, I think, had 2 objectives. One is to simplify the organization, make us more agile and lean, as well as also free up cost. Now part of that cost we reinvested also during the plan period in strengthening quality, strengthening supply chain, but also making sure we could invest behind the strategy part of 70%, where you see that we want to disproportionately allocate resources to grow faster. But of course, that growth then also needs to kind of be there in the market. I think it's fair to say that indeed, when we started in '22, we didn't expect China to be such a headwind in the plan period. We also expect China to come back over time. It's a question when China will strengthen, because the underlying demand is still there. We have been focusing a lot of our investment, as I also alluded to, in innovation, especially on Informatics and on AI, because we believe that will be a disproportionate value driver for customers in terms of solving their problems. And in platforming our different businesses, where the platform is not only supporting consolidation that we see in the market, also enabling to play with others in an enterprise multi-vendor manner, but also is a more robust platform from safety, quality and supply chain perspective.

Perfect. And you and I have talked quite a lot about this, but you talked in your presentation about changing the culture, which I think is one of the most difficult things to change in an organization. How have you gone about doing that? And how do you think the progress is going? And I suppose most importantly, how do you measure it?

Yes. I think change in culture indeed is difficult on one hand. On the other hand, it's also maybe not that difficult, because I always -- when I talk about culture in the company, I say culture is what you do every day. That is how you show up at work. Culture is kind of the simplicity in which you can explain, the clarity in which you can direct. So we have been working from day 1 very much, and I've been working very much on a plan that is clearly understood by the team that actually has very specific targets, and the simplification was something that we heard back from the organization. So it responds and plays to what they want us to do. But also it needs to have an impact on what they see customers going through and what they need in terms of delivering on the purpose. And when you then say kind of how do you measure it, the engagement score is one way of measuring it. Are you able to attract best talent is another way of measuring it. The engagement score, as I said, went up 11 points since last year. So that's a significant step-up. If you look at the attraction of talent, we have been able to attract talent from the best in the industry to come to join our team, because they see the opportunity. You see an increase in response rate and agility in terms of what we can deliver to market. So I think we are looking at various metrics. But for me, at heart, it's kind of is the team energized? Do you have the ability to attract, but also to retain talent?

Perfect. And then we're not going to be able to avoid talking about China. And I think really, there's 2 elements to China for me. It's first on the Personal Health side and just the general macro environment. And it'd be great to get your latest views on that. But then also on Imaging slightly separately and, to be fair, the rest of the business as well, just in terms of the anticorruption, how that's played out? That's taking longer than I think most people were expecting. Frankly, you were one of the most cautious companies out there. You have proven not to be quite cautious enough than was required. But with respect to China, are you seeing any green shoots on the hospital side that might mean we see a little bit of a rebound this year?

So what we said in Q3, and I think that still holds true, is that if you look at China momentum, it has been a declining market, both on the health system side as well as on the consumer side. Now what happened in the second half of '24 was on the consumer side, we saw that consumer sentiment dipped to an ultimate low. After that, we have seen 11/11 as a big event in China that did not really show improvement from there. So I think it's fair to assume, and it's also what we said earlier that actually the first half of 2025, we expect a continued momentum as the second half in consumer. And then if you think beyond that, it will indeed depend on how China economy will rebound. Now we don't want to speculate on that. So actually, that's where we say we will be cautious on it for 2025. First half, for sure, we expect it to continue as was in second half '24. Then let's see, in due course, how after Chinese New Year, the China economy will pick up, if that actually offers us opportunity to grow faster. Then on health systems, indeed, going through the second half, we initially expected that the stimulus program that was launched by the Chinese government would have to come into effect, because they hinted, at least I heard in Q2, that they would stop the program at the end of the year, and that would drive, therefore, activity in the second half. That actually did not happen until only some of activity that we saw really coming in, in December. So we have seen 11 months where actually activity was seriously subdued, then we saw some green shoots in December. But we also know that tender activity still needs to turn into orders, then needs to turn into sales. And we have now 2 years of double-digit decline in China -- not we, but the market, and with the market, we as well. So we also expect that, that will, for sure, take into the first half. And then I think we could look into what it means for the second half, depending on the momentum also from Chinese New Year. I think fundamentally, and that's what we have been saying, there is really strong underlying demand. We've also earlier seen if China comes back into the game, it's material and meaningful. We saw that after COVID, because there is pent-up demand. But we have also seen that the anticorruption measures still are playing in the market. We still see our customers being audited. We still see oversight being put in, red tape is there. So I think there is still a China kind of slowness that we need to kind of be counting on, and that's also what we take into 2025.

Perfect. I met with one of the other players in the sort of wider space this morning, and they were talking about China slowed down much quicker than people expected, but also they see potential for it to come out of it much more quickly as well. Is that something you see as potential you've got this pent-up demand, you've got potential from stimulus? Is that something you're crossing your fingers for?

Yes, we don't speculate on it, to be honest. But we have seen, of course, and that's what I just meant, if it's kind of -- if the China market comes into the normalization, I think then it will offer good opportunity for growth and acceleration. We do and expect also that the red tape that has been introduced with the anticorruption will have an impact on that. So I think it will not be just kind of taking off at that very fast speed, because there will be certain slowness that we'll need to work through in the processing. But it's too hard to speculate. That's why we said we, on the China note, say, look into the first half that we are remaining very cautious on. That will also mean that we need to be cautious for the full year of 2025. And then if you turn to the rest of the world, and I think even for 2024, we saw really 2 clock speed world. So if you look to the guidance that we gave for '24, yes, we had to kind of adjust back for the full year on the back of China, but we had double-digit decline in China, and we have growth in the range of the 3% to 5% that we guided for outside of China. And we saw that in orders, and we saw that in sales. And you saw that in health systems and you saw that in Personal Health. So that also means that once the tap comes off China, it would really help us all in terms of getting back to the market growth that you would expect for the segments that we play in. And that's something that we need to be preparing for. So that's the other side of the equation. We have been making sure that with the innovations that we have launched, for example, in the second half of 2024, whether it was the neuro platform of Azurion, whether it was the new helium-free, whether it was the CT 5300, whether it was our new ultrasound platform, VM11, we have great innovations that actually are ready to take and serve the market when the opportunity arises. And the other piece is we have seen that despite lower growth, we stay very strongly on our margin expansion trajectory. So we said we take sales growth back for the year, but actually, we stick to the higher end of the guidance for 2024 of our profitability step-up in '24, and that's something that we also want to continue on in '25.