Philips Delivers Solid Operational Performance As Supply Chain Improves And Actions To Enhance Execution Start To Take Effect

First-quarter highlights

• Group sales increased to EUR 4.2 billion, with 6% comparable sales growth
• Comparable order intake growth was flat, with double-digit growth in the Diagnosis & Treatment businesses, offset by a decline in the Connected Care businesses
• Income from operations amounted to a loss of EUR 583 million, mainly due to provisions for accelerated restructuring and an important step in litigation
• EUR 575 million litigation provision is related to the anticipated resolution of the Respironics recall-related economic loss class action in the US
• Adjusted EBITA increased to EUR 359 million, or 8.6% of sales, compared to EUR 243 million, or 6.2% of sales, in Q1 2022
• Operating cash flow improved to EUR 202 million, compared to an outflow of EUR 227 million in Q1 2022
• Simplification of operating model and restructuring plans on track

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Roy Jakobs, CEO of Royal Philips:
“I am encouraged that we delivered a solid start to the year, with sales, profitability and operating cash flow improvements in the quarter, a first step to drive progressive value creation. We are executing on our three priorities to enhance patient safety and quality, strengthen our supply chain reliability, and establish a simplified, more agile operating model.

Resolving the Philips Respironics recall for patients remains our highest priority. In the first quarter, we have recorded a provision in anticipation of a resolution of the economic loss class action in the US. This is an important step in addressing the litigation related to the recall.

Our supply chain improvements enabled good growth across the Diagnosis & Treatment businesses and in Hospital Patient Monitoring. Supported by significant change management efforts, we have reduced the workforce by approximately 5,400 roles out of the planned reduction of 10,000 roles globally.

I realize that we are asking a lot from our employees to work through the necessary changes and deeply appreciate their tremendous efforts and ongoing commitment to deliver on our company purpose. I would also like to thank our customers and partners for their continued trust and support. I have met many of them in the last few months, and it is clear that Philips remains a preferred innovation partner.

Looking ahead, based on our solid performance in the quarter, our order book, and the ongoing actions to further improve execution, we are confident in our plan for the year 2023, acknowledging that uncertainties remain.”

Group and business segment performance
Sales for the Group increased to EUR 4.2 billion, with 6% comparable sales growth, mainly driven by the Diagnosis & Treatment businesses. Additionally, sales in the quarter were supported by the good momentum for the Diagnosis & Treatment and Connected Care businesses in China. Adjusted EBITA for the Group increased to EUR 359 million, or 8.6% of sales, mainly due to increased sales and productivity measures, partly offset by cost inflation. Philips’ order book remains strong and is 10% higher than one year ago despite flat order intake growth.

The Diagnosis & Treatment businesses’ comparable sales increased by a strong 15% in the quarter, with double-digit growth in Ultrasound and Image-Guided Therapy, and mid-single-digit growth in Diagnostic Imaging, driven by continued supply chain improvements. Comparable order intake grew double-digit, with double-digit growth in Image-Guided Therapy and Enterprise Diagnostic Informatics and mid-single-digit growth in Diagnostic Imaging. The Adjusted EBITA margin increased to 11.3%, which was mainly due to increased sales and productivity measures, partly offset by cost inflation.

The Connected Care businesses’ comparable sales increased 3% in the quarter, driven by double-digit growth in Hospital Patient Monitoring, largely offset by a decline in Sleep & Respiratory Care. Comparable order intake declined double-digit after strong growth in the period between 2020 and 2022. The Adjusted EBITA margin increased to 2.4%, driven by the improved Adjusted EBITA margin of the Connected Care businesses excluding Sleep & Respiratory Care.

The Personal Health businesses’ comparable sales decreased by 6% in the quarter due to the anticipated lower consumer demand, on the back of 8% growth in Q1 2022. The Adjusted EBITA margin amounted to 13.2%. Sales and Adjusted EBITA were both significantly impacted by portfolio decisions related to Russia in 2022.

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Productivity

In the first quarter, operating model productivity savings amounted to EUR 94 million, procurement savings amounted to EUR 32 million, and other productivity programs delivered savings of EUR 64 million, resulting in total savings of EUR 190 million.

Customer and innovation highlights

• In the quarter, the company announced multiple new partnerships, demonstrating the confidence hospital leaders have in Philips’ innovative portfolio. These include an agreement with Grupo Angeles, the largest private hospital group in Mexico, to provide informatics, diagnostic imaging and image-guided therapy solutions to advance patient care in cardiology, oncology and radiology.
• Highlighting the strength of its comprehensive patient monitoring offering, Philips announced a multi-year partnership with Northwell Health to standardize and centralize patient monitoring across the hospital, allowing caregivers to see what is happening at each bedside.
• Leveraging its leading expertise in sustainable healthcare operations, Philips announced a multi-year agreement with Champalimaud Foundation in Portugal aimed at halving its diagnostic imaging carbon footprint by 2028. The partnership will help drive quality and efficiency, while reducing environmental impact.
• Philips further expanded its industry-leading ultrasound portfolio with the launch of Ultrasound Compact 5500 CV, which enables first-time-right ultrasound exams for cardiology and vascular patients at the bedside.
• To improve oral care habits among children, Philips introduced Sonicare for Kids ‘Design a Pet Edition’ with an entry price point designed to give more parents access to an electric toothbrush for their children.
• Philips took a top ranking in medical technology patent filings at the European Patent Office and was included on the Clarivate Top 100 Global Innovator list for the 10th year in a row.

Philips Respironics field action for specific sleep therapy and ventilator devices
To date, more than 95% of the new replacement devices and repair kits required for the remediation of the registered devices have been produced. The vast majority of the produced sleep therapy devices have been sent to patients and home care providers. The remaining 5% of the registered devices are primarily ventilators, for which Philips Respironics is fully focused on working towards a solution.

In Q2 2023, Philips Respironics expects to report on the VOC testing of ozone-induced foam degradation in the first-generation DreamStation devices, and on the complete set of testing results for the SystemOne and DreamStation Go sleep therapy devices.

As previously disclosed, Philips is a defendant in several class-action lawsuits and individual personal injury claims. In the US, an economic loss class action, a medical monitoring class action and personal injury claims have been filed. This quarter, Philips Respironics recorded a EUR 575 million provision in connection with the anticipated resolution of the economic loss class action, an important step in addressing the litigation related to the recall.

Philips Respironics is subject to an investigation by the US Department of Justice and remains in ongoing discussions with the FDA regarding a 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.

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