Philips' Third-Quarter Results 2022 - Philips’ Q3 performance impacted by operational and supply challenges; company is taking immediate actions to restore performance

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Highlights

• Group sales amounted to EUR 4.3 billion, with a 5% comparable sales decline, in line with the update provided on October 12, 2022

• Comparable order intake decreased 6% on the back of 47% growth in Q3 2021

• Income from operations amounted to a loss of EUR 1.5 billion, mainly due to the previously disclosed EUR 1.5 billion non-cash goodwill and R&D impairment, compared to an income of EUR 358 million in Q3 2021

• Adjusted EBITA of EUR 209 million, or 4.8% of sales, compared to EUR 512 million, or 12.3% of sales, in Q3 2021

• Immediate restructuring actions initiated, with approximately EUR 300 million charges expected in the coming quarters

• Operating cash flow was an outflow of EUR 180 million, compared to an inflow of EUR 256 million in Q3 2021

• Roy Jakobs appointed as President and CEO of Royal #philips per October 15, 2022

 Roy Jakobs, CEO of Royal #philips:

“I am honored to have been given the responsibility to lead #philips, a great company with a strong brand, leading product portfolio, strong customer base and talented employees. However, we face multiple challenges and our Q3 2022 performance reflects this. Although Philips’ strategy and solutions resonate with our stakeholders, we have not lived up to their expectations in recent years.
My immediate priority is therefore to improve execution so that we can start rebuilding the trust of patients, consumers and customers, as well as shareholders and our other stakeholders. We will do this by first further strengthening our patient safety and quality management and addressing the various facets of the #philips Respironics recall; second, by urgently improving our supply chain operations so that we can deliver on our strong order book and improve performance; and third, by simplifying our way of working to improve productivity and increase agility. This includes the difficult, but necessary decision to immediately reduce our workforce by around 4,000 roles globally, which we do not take lightly and will implement with respect towards impacted colleagues. These initial actions are needed to start turning the company around in order to realize Philips’ profitable growth potential and create value for all our stakeholders.
While there is a lot to do in a fast-changing environment, our priorities are clear, and I am fully focused, together with our leadership team, on improving execution. I am committed to open and transparent communications with our stakeholders. We will elaborate further on our plans for #philips at our fourth quarter and annual results publication in January 2023.”

Group and business segment performance
Philips’ performance in the quarter was impacted by operational and supply challenges, inflationary pressures, the COVID situation in #china and the Russia-Ukraine war, resulting in Group sales of EUR 4.3 billion, reflecting a 5% comparable sales decline, and an Adjusted EBITA of EUR 209 million, or 4.8% of sales. Operating cash flow was an outflow of EUR 180 million, mainly due to lower cash earnings, increased inventories and higher consumption of provisions. Comparable order intake declined 6% on the back of strong 47% growth in Q3 2021. The book-to-bill ratio was 1.18, and the equipment order book grew further in the quarter.
The Diagnosis & Treatment businesses’ comparable sales decreased 2% on the back of 10% growth in Q3 2021. Comparable order intake increased 3% on the back of 15% growth in Q3 2021. The Adjusted EBITA margin was 9.1%, mainly due to the decline in sales and cost inflation.
The Connected Care businesses’ comparable sales decreased 15%, mainly due to operational and supply challenges. Comparable order intake showed a 24% decrease, on the back of over 260% comparable order intake growth in Q3 2021. The Adjusted EBITA margin amounted to -9.5%, mainly due to the decline in sales and cost inflation.
The Personal #health businesses’ comparable sales increased by 4%, with good growth in North #america and Western #europe. The Adjusted EBITA margin amounted to 14.1%.

Highlights of Philips’ ongoing focus on innovation and customer partnerships in the quarter:
 

• Demonstrating the trust hospital leaders have in Philips’ ability to help them enhance #health outcomes, lower the cost of care and improve patient and staff experience, the company signed multiple new long-term strategic partnerships across the world. This included a 10-year agreement with a large university hospital in #japan for the expansion of its eICU program for centralized, remote surveillance of high-risk ICU patients.
  
  
• Philips signed several agreements in #china, including with private hospitals Suzhou Kowloon Hospital and Wuhan Asia Heart Hospital to provide advanced diagnostic imaging and image-guided therapy systems to advance patient care.
  
  
• Philips expanded its leading ultrasound portfolio with the FDA market clearance for its new Ultrasound 5000 Compact system to deliver cart-based premium image quality in compact form for point-of-care, cardiology, general imaging, and obstetrics and gynecology applications.
  
  
• Philips continues to successfully expand into ambulatory care. Newly published research validated that #philips Mobile Cardiac Outpatient Telemetry (MCOT) is crucial in detecting arrhythmias and providing data that allows care teams to intervene quickly and decisively to provide the optimal patient treatment.
  
  
• Building on its successful OneBlade platform, #philips introduced in #europe the new OneBlade 360, which leverages a new blade that adjusts to the curves of the face to enhance shaving comfort.

Philips Respironics field action for specific sleep therapy and ventilator devices

Philips Respironics continued to make progress with the repair and replacement program and the comprehensive test and research program for the CPAP, BiPAP and mechanical ventilator devices affected by the June 2021 field safety notice. To date, approximately 4 million replacement devices and repair kits have been produced. #philips Respironics aims to complete around 90% of the production and shipments to customers in 2022.
As previously communicated, 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, began discussions with #philips in July 2022 regarding the terms of a proposed consent decree to resolve the identified issues.
Due to revisions to the financial forecast of #philips Respironics driven by current assumptions regarding the estimated impact of the proposed consent decree and changes to the pre-tax discount rate, #philips is recording a EUR 1.3 billion non-cash charge in the third quarter for the impairment of goodwill of this business.
As 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 and timing 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.

Productivity initiatives and other actions to improve performance

Philips has initiated general productivity actions, including simplifying the organization to streamline the way of working and reduce operating expenses. This includes an immediate reduction of around 4,000 positions globally across the organization, subject to consultation with the relevant workers councils and social partners, with severance and termination-related costs expected to be approximately EUR 300 million in the coming quarters. The associated cost savings are expected to amount to annualized savings of approximately EUR 300 million. #philips will continue to review areas to further improve its supply operations, invest in quality, simplify the way of working and remove organizational complexity, which is expected to result in additional restructuring and associated costs in 2023.
Additionally, #philips is urgently implementing several actions to enhance performance and productivity in the supply chain (e.g. dual sourcing, supplier consolidation, warehouse footprint rationalization), R&D (e.g. shifting the focus to fewer, high-impact projects in the innovation pipeline) and quality (e.g. enhancing processes, increasing capabilities and product management). In connection with the previously announced initiative to enhance productivity in R&D, #philips recorded a non-cash charge in the third quarter of EUR 168 million.

Outlook

Looking ahead, the company sees prolonged operational and supply challenges, a worsening macro-economic environment and continued uncertainty related to COVID-19 measures in #china, which will be partly offset by Philips’ productivity and pricing actions. Consequently, #philips now expects a mid-single-digit comparable sales decline for the fourth quarter of 2022, with a high-single-to-double-digit Adjusted EBITA margin range.

Capital allocation

In light of recent developments and market volatility, #philips is taking the following measures – in addition to its measures to manage cash – to further strengthen its liquidity position:

• Securing a EUR 1 billion credit facility.
• Executing the settlement of the forward contracts – entered into as part of the share repurchase program announced on July 26, 2021 – at the original settlement dates in 2023 and 2024, instead of in 2022 as earlier announced.