Koninklijke Philips Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2023

There are 12 speakers on the call.

Operator

Welcome to the Royal Philips Second Quarter and Semi Annual 2023 Results Conference Call on Monday, July 24, 2023. During the call, hosted by Mr. Roy Jacobs, CEO and Mr. Abhijit Bhattacharya, CFO, all participants will be in a listen only mode. After the introduction, there will be an opportunity to ask questions.

Operator

Please note that this call will be recorded and replay will be available on the Investor Relations website of Royal Philips. I will now hand the conference over to Mr. Leandro Mazzoni, Head of Investor Relations. Please go ahead, sir.

Speaker 1

Hi, everyone. Welcome to Philips' 2nd quarter and half year twenty twenty three results webcast. I have here with me our CEO, Roy Jacobs and our CFO, Abhijit Bhattacharya. The 2nd quarter and half year press release and slide deck as well as the frequently asked questions and deck on the Respironics recall were published on our Investor Relations website this morning. The replay and full transcript of this webcast will be made available on the website as well.

Speaker 1

Before we start, I want to draw your attention to our Safe Harbor statement on screen. You will also find the statement in the presentation published on our Investor Relations website. In today's call, we will discuss our results as well as the progress on the actions we're taking across different areas to drive performance improvement. With that, I would like to hand over to Roy.

Speaker 2

Thank you, Leandro. Good morning, everyone, and welcome. It's good to be with you. I want to start with the 5 with the key highlights for this quarter. First, we delivered an improved operational performance with 9% comparable sales growth and improvements in profitability and operating cash flow.

Speaker 2

The improvements were across the company with all business segments and all regions contributing. These positive results are results from our ongoing actions to strengthen our execution. Secondly, we are making progress in executing our plan and on our three priorities, enhancing patient safety and quality, strengthening our supply chain reliability, which supported our performance in Q4 last year and the first half of this year and establishing a simplified, more agile operating model, supporting our productivity. Thirdly, resolving the Respironics recall for patients remains our highest priority. The vast majority of the Sleep therapy devices are now within the hands of patients and care providers and the complete testing and analysis for sleep devices affected by the recall showed positive and reassuring results for patients.

Speaker 2

Looking ahead, based on our strong performance in the first half of the year, Our order book and the ongoing actions to improve execution, we have raised the outlook for the full year 2023. Whilst acknowledging that uncertainties remain, we now expect mid single digit comparable sales growth and adjusted EBITDA margin at the upper end of the high single digit range. Now on to the key financial highlights in the quarter. We had a strong comparable 9% sales growth. Diagnosis and Treatment grew 12%, Connected Care grew 6% And I'm encouraged by the return to growth in Personal Health.

Speaker 2

Our adjusted EBITDA margin was 10.1%, a strong improvement of 4.90 basis points compared to Q2 2022. Operating cash saw an inflow of €135,000,000 a step up of €440,000,000 versus last year. Our order book increased 3% year on year, even after strong order book to sales conversion of the last three quarters. I'm confident that this order book will continue to on the back of the high order intake in Q2 2022 and Q1 2023, Comparable order intake declined 8% in the quarter. Excluding Russia, this would have been 4%.

Speaker 2

This confirms our earlier view that orders will be lumpy as we work hard to deliver order intake growth in the second half of the year. This is founded upon strong fundamentals of the markets in which we operate as they remain strong. And I'm very confident that our innovation portfolio is well positioned to help hospitals worldwide address their staffing shortages, enhance productivity and improve patient and staff experience. The order funnel remains healthy and we see signs of improvement in cost inflation and staff shortages in hospitals compared to 2022. But we also continue to expect hospitals and healthcare systems in the U.

Speaker 2

S. And other mature geographies to exhibit cautious buying behavior in the short term, given the global macroeconomic conditions. During the Q2, we achieved some key customer and innovation milestones. We signed a multiyear agreement with University of California Urban Health to provide enterprise monitoring as a service, including informatics solutions to standardize, centralize and scale monitoring across the health system. 5 top hospitals in Shanghai with more than 10,000 beds installed the Spectral CT 7,500.

Speaker 2

We also expanded our leading image guided therapy portfolio with the launch of SINETION-ten, cost effective mobile imaging system to guide High volume routine surgery as well as complex orthopedic and trauma procedures. We introduced the cloud based Philips HealthSuite Imaging packs on Amazon Web Services, designed to enhance image access speed, Reliability and data orchestration for clinicians across the imaging workflow. And in Personal Health, we launched the Premium 7 Series shaver in China in partnership with jd.com, which debuted as the number one shaver on this online channel. With that, I would like to give the floor to Abhijit to take us through Q2 in more detail, after which I will come back on the progress on our execution priorities. Abhijit, please.

Speaker 3

Thanks, Roy. Good morning, everyone. Let's begin by looking at the segment highlights from the quarter. In Diagnosis and Treatment, comparable sales increased by 12% driven by strong double digit growth in ultrasound and image guided therapy and mid single digit growth in diagnostic imaging. Adjusted EBITA margin was 10.6%, an increase of 380 basis points over last year, mainly driven by operational leverage, a favorable mix and productivity measures.

Speaker 3

The profitably sequentially The profitability sequentially was impacted by mix and cost phasing. In the first half of the year, adjusted EBITA margin was 11.8 percent for Diagnosis and Treatment, an increase of 460 basis points compared to the same period last year. This, together with our productivity, pricing actions and order books, gives us confidence for the coming quarters. Connected Care comparable sales increased by 6%, driven by double digit growth in monitoring, partly offset by Sleep and Respiratory Care. Adjusted EBITDA margin was 7.5 percent, an increase of 5.70 basis points driven by productivity measures and a significant improvement in the profitability of monitoring.

Speaker 3

Personal Health returned to growth with 3% comparable sales increase, which is encouraging. Consumer demand remains subdued globally as we expected, but there is evidence of gradually improving sellout trends. Adjusted EBITDA margin was 13.4%, an increase of 100 basis points driven by pricing and productivity measures. Adjusted EBITA margin for the group increased by 490 basis points to 10.1%. Wage and component price inflation came in at 2 basis points.

Speaker 3

However, this was more than offset by 150 basis points from operating leverage and by our productivity and pricing actions, which contributed a further 580 basis points. Additionally, the Q2 adjusted EBITDA included a positive impact from phasing of royalty income in line with the guidance we provided for the segment Other for the quarter. We continue to improve our cash flow with a Significant year on year improvement. This has delivered an improvement of the leverage from 3.6% to 3.1 sorry, from 3.6 times to 3.1 times adjusted EBITDA in the 1st 6 months of the year. Our productivity initiatives are on track and delivered savings of €237,000,000 in the 2nd quarter.

Speaker 3

Operating model productivity savings amounted to CHF112 1,000,000 Procurement savings were CHF 57 1,000,000 and other Productivity programs delivered CHF 68,000,000 of savings. Adjusting items in the quarter included CHF 161,000,000 of charges mainly related to accelerated execution of the workforce reduction plan with 6,600 roll reductions to date out of the planned reductions of 7,000 rolls for the year and 10,000 rolls till 2025. Moving to our order book, which ended the 2nd quarter 3% higher compared to last year. It's worth noting that this is significantly higher compared to the period before the global supply chain constraints even after the strong order book to sales conversion over the last three quarters. Orders and Order book are an important leading indicator for around 40% of our revenue.

Speaker 3

The remaining 60% comes from recurring revenues such as services and consumables from book to bill business and from Personal Health. As you can see at the bottom of the page, The absolute levels of order intake remain healthy, but we see a steep increase in sales levels year to date due to enhanced order book to sales conversion following supply chain and execution improvements. In Diagnosis and Treatment, comparable order intake declined 8% or minus 2% excluding Russia. This follows the double digit comparable order intake growth in Q1 2023 and a high order intake in Q2 of 2021 2022. Overall, order intake in Diagnosis and Treatment was mid single digit up excluding Russia, following a mid single digit order intake growth in the first half of twenty twenty two.

Speaker 3

The Russia impact is due to longer lead time Order intake declined 7% in Connected Care in the 2nd quarter due to the tough comps in hospital patient monitoring after the expansion and renewal of the installed base during the period 2020 to 2022. For context, Connected Care orders continue to run at levels double digit higher than pre COVID driven by fundamental demand shift in adoption of our patient care management solutions and expanding market shares. As Roy mentioned, we have raised the outlook for the full year 2023. While acknowledging that uncertainties remain, we now expect mid single digit comparable sales growth and an adjusted EBITDA margin at the upper end of the high single digit range. We expect to carry the Positive momentum into the second half of the year, while facing tougher comparison base in the 4th quarter.

Speaker 3

The full year outlook for restructuring, acquisition related and other charges remain in line with the guidance provided in January despite some shifts between the different cost buckets based on year to date results. With that, I'd like to hand it back to Roy.

Speaker 2

Thanks, Abhijit. I would like to continue on the topic of the Respironics recall, which has been and remains our highest priority. To date, around 99% of the new replacement devices and repair kits have been produced. Over 4,500,000 of the produced sleep devices are now in the hands of patients and home care providers, while the remediation of the affected ventilators is ongoing. Regarding the test and research program, Respironics has published complete testing and analysis for DreamStation 1, DreamStation Go and System 1 sleep therapy devices in Q2, which showed positive and reassuring results for patients.

Speaker 2

We continue to work through the testing for ventilators. As previously discussed, the litigation investigation by the U. S. DOJ related to the Respironics field action as well as the discussions on the proposed consent decree are ongoing. We are also in continued dialogue with regulators across our key markets on how to service new patients going forward.

Speaker 2

I'm confident that our focused growth strategy for scalable innovation will further strengthen our businesses and results going forward. I would like to highlight some of the progress we have made in the quarter on our execution priorities. First on Patient Safety and Quality. Our new Patient Safety Advisory Board went live in the quarter, driving deeper engagement with patients, Healthcare Professionals and Industry Exports. We continue to add significant capabilities and talents across the businesses.

Speaker 2

For example, we appointed strong regulatory affairs and quality leaders to the newly formed Enterprise Informatics Business. Patient safety quality reviews are fully embedded in the new performance management cadence and we remain on track to deliver 45 production in a number of quality management system this year, building on a 30% reduction by the end of last year. With respect to supply chain, as of the second quarter, We have moved to customer centric and to end teams closely aligned to the different businesses we operate. We continue to make progress to reduce materials and component risks, although challenges remain. For example, we have accelerated the redesigns of components by completing 160 printed circuit boards compared to 56 as of the end of Q4.

Speaker 2

And we are on track to meet our target to derisk all our high risk components by year end. As you have seen in the results we have presented today, I'm pleased to see that actions we have taken continue to positively impact our sales as well as our service levels. Finally, we are simplifying our operating model by putting prime accountability into the businesses, supported by strong regions and lean functions. This also included a difficult but necessary reduction of our workforce by 10,000 roles globally by 2025. To date, we have reduced 6,600 rolls as mentioned by Brigitte.

Speaker 2

I want to express my gratitude to all my Philips colleagues for the dedication and commitment to deliver results as we create a more focused and agile organization. We are also strengthening our teams with new health tech talent, adding seasoned leaders with deep domain expertise across businesses, regions and functions. Year to date, close to 300 talents with a health tech background joined our organization. Let me close out by repeating the key messages of the quarter. We delivered strong operational performance in Q2 with 9% comparable sales growth and improvements in profitability and operating cash flow.

Speaker 2

We are making progress in executing our plan and on our three priorities: Enhance patient safety and quality, strengthen our supply chain reliability and establish simplified more agile operating model. Resolving the Responics recall for patients remains our highest priority. And looking ahead, Based on our strong performance in the first half of the year, our order book and the ongoing actions to improve execution, We have raised the outlook for the full year 2023 acknowledging that uncertainties remain. I would like to thank you for joining the call And we will now take your questions.

Operator

Thank you, while participants register for questions. And it comes from the line of Hassan Al Waqihl from Barclays. Please go ahead.

Speaker 4

Good morning. Thank you for taking My questions, I have 3 please. Firstly, on the guidance upgrade, can we read anything into your consent decree assumptions that you've embedded into guidance and whether they've changed at all over the last 2 to 3 months. Is the delay driving any meaningful guidance benefit? And is it Fair to assume that your central case is not a Respironics wide injunction?

Speaker 4

Secondly and also on guidance, your new guidance implies a step down in growth in the second half and no real improvement in margins sequentially despite productivity and pricing benefits as well as higher absolute revenues in the second half. So what's driving Your caution here. And then finally, could you talk about your return to market in CPAP outside of the U. S. And whether you're in discussions with regulators and what the side of the U.

Speaker 4

S. And whether you're in discussions with regulators and what the process is here, do you expect to return to other markets in the second half of this year? Thank you.

Speaker 2

Thank you, Hassan. Let me Start with taking your first question. So in terms of the guidance and whether there's anything to read into To the CD. So actually we have not adjusted any CD assumptions as we are still in discussion on the CD. And as we don't want to speculate on any outcome, we also have not touched any of the underlying CD assumptions.

Speaker 2

What we have looked at is The underlying improvement of our business and as you have seen based on a strong Q1, strong Q2 and also the Fact that the actions we are taking are yielding their results in terms of getting more supply to convert our order book That is strong as well as driving productivity. That has been the reason why we kind of have upped the race for the full year and of the guidance. We also said that uncertainties remain. That's something that we have been saying from the beginning of the year. We are still living Quite a kind of dynamic macroeconomic environment.

Speaker 2

So that's something that we keep on the back of our minds so that we kind of Also are ready to kind of address any of those dynamics that could happen also in the second half. But we, of course, remain fully focused to carry the good momentum through into the second half, but also do have some tougher comps that will kick in especially in Q4 That's the moment that we turned back into growth last year and that we have, of course, been able to pull through in Q1 and Q2. And that's in essence combining, I would say, the answers in your first and second question. Then in return to market out of So we are indeed in discussion with regulators as we are also now completing, especially on the sleep side, the recall In many markets, we have made great progress there, and that then also leads to the subsequent discussions on how and when to return to growth. So that's something that we will see probably materialize further into second half, and we'll keep you updated the moment that we have any further news there.

Speaker 4

That's helpful. Roy, I guess if I can just follow-up on the CD. I mean, you state that you're in advanced discussions and you have received drafts even in the recent months. Have your discussions with the FDA changed at all? And is it fair to assume that your central case, which you embed within guidance, is not a Respironics wide injunction?

Speaker 2

As we said earlier, we do not speculate on the outcome of TCD as many variations are possible. I can continue to stress that we are in active dialogue with the FDA. That remains ongoing. There's also no specific reason kind of for kind of further timeline on that. We want to get it, of course, resolved As soon as possible as does the FDA with the patient interest in mind.

Speaker 2

But it also is fair to say that these are Important and detailed discussions that are happening, and that's why kind of we continue to progress on those.

Speaker 4

Perfect. And sorry, a final one, just to follow-up on the margin commentary. Just given the strength in Q2 and the impact from workforce reduction, how far are we through that in terms of the realization of benefits? And what should we expect for the remainder of the year? Thank you.

Speaker 3

Hassan, this is Abhijin. Good morning. We've been moving at a pretty good pace in terms of our reduction of Headcount, so we just said that we've done about 6,600 of the 7,000 planned for the year. So that should give us a benefit going into the second half. The original plan was roughly we had 3,000 last year, plan was 4,000 this year, evenly split through the quarter.

Speaker 3

So we are slightly ahead And are confident of making that plan. So I think That's where I would leave it.

Operator

Thank you. We will now go to your next question. And your next question comes from the line of Veronika Dobedova from Citi. Please go ahead.

Speaker 5

Hi. Roy, hi, Avikit, Hollyandra. Thanks so much for taking my questions. I have 2, please. The first one is just going back to the guidance.

Speaker 5

I mean, if I just look at the mid single digit growth guidance that you've given for the year against the delivery in the first half, it does imply pretty significant deceleration in growth into sort of flat to low single digit range. Just want to understand, is there anything that you're seeing at the moment that makes that a likely outcome? Or are you just embedding a degree of conservatism? And then if you can maybe talk through, I don't know, I know July is barely started, but just maybe comment on what you're seeing in the quarter to date against that guide? That would be helpful.

Speaker 5

And then my second question is on the Order book momentum and clearly pretty significant deceleration here versus what you delivered the prior quarter. I appreciate there are some Difficult comparisons in there, but just maybe curious to get your thoughts where I mean, if I look across your performance and your peers' We are clearly seeing some slowdown in order growth this year. Just kind of Put it into context for us because at the outset of the year, I think everyone was pretty excited about China. That's growing pretty healthily from what we understand. So is this a problem in the U.

Speaker 5

S? Is this a problem in Europe? Is this a problem somewhere else? And kind of what gives you the confidence that this can improve as you move into back half of the year and that it can support that sort of mid single digit growth in the D and T and Connected Care businesses that most of us expect for 2024. I know there's a lot of moving parts there, but if you can just Give us a little bit of that, that would be helpful.

Speaker 5

Thank you.

Speaker 3

Hi, Veronika. Let me take the first part of the question. I think if you look To take a step back, we had planned for actually a back end loaded year. We Ultimately saw that the supply chain improvements came in earlier. And therefore, we have had a strong start to the year.

Speaker 3

As you've seen in the Q2, our growth was a bit flattered also because of our royalty income. So if you take that into account and look at the second half, we see good momentum going into the 3rd quarter, but also you should remember that the 4th Quarter, we are battling tougher comps. If you remember, last year in Q4, Health Systems businesses grew mid single digit. So of course, therefore, the growth will be, let's say, the year on year growth in the Q4 would not be as strong as it has been for the 1st 2 quarters this year. So that's the color I can give you on how we expect growth to Play out for the remainder of the year.

Speaker 3

It's not that there is a specific issue or something that we want to signal at all. We need to just get through quarter by quarter. The supply chain improvements have happened, but it's not over. So we are still Working these through and as we get through every quarter, hopefully, we are able to deliver in line with the commitment. Coming to a second question, maybe I hand it over to Roy.

Speaker 2

Yes. I think, Veronika, thank you for the question. And on the order book, indeed, I think important a few parts to take together. First of all, as we highlighted, we have still been growing versus last year. So it's really important to Recognize the strength of the order book that we have and actually we are still challenged to burn it down faster.

Speaker 2

So actually that is one area that we also want to work through and that's This remaining focus on getting more supplies to be able to deliver more of the products actually will help us to deliver also better to customers and then also take more orders Into our order book. Secondly, there is indeed a certain lumpiness. I started the year with saying that This is not a business as usual year. Now I've been talking to many customers. I've been a few weeks ago, I went to China.

Speaker 2

China actually is coming back Very strong as you have seen. That started already Q1. It continued in Q2. We actually see it continuing in Q3 and Q4. So We can expect, I think, a double digit contribution out of China for this year, and that's great to see China coming back.

Speaker 2

We also saw now in Q2 that Personal Health came back into growth. That's also important momentum that we will continue into 3rd Q4. But I also went to The U. S. And actually I was there even last week.

Speaker 2

I've been talking to customers also there. And I must say that I've been encouraged by some of the signs that I'm seeing when talking to customers that there Is some stabilization coming in and focus on challenges? So whilst they are still challenged on it, actually they seem to be finding resolutions. We're also helping them with that, with our technology and innovations, that's what we're also talking about. And also they're combating the inflation, I think, more effectively.

Speaker 2

So That's what I would also take into the second half, where actually I would expect that the order intake would see Growth coming back into play and that will then not only be growth of the absolute order book but also in order intake. And we will work hard for that Across the globe. And that's maybe the last piece. I think what I was also happy about is that kind of you saw that Our contribution into the growth delivery in this quarter came from all businesses and all regions, Which also means that there is no specific kind of part that is laying back or kind of Yes, it's behind. So Personal Health was the one that was still not as strong as we hoped for in the first kind of half.

Speaker 2

We knew it. We expected that. So now we hope to continue the growth momentum across all segments into the second half. So there is no, I would say, specific reason for caution or for kind of concern. But we remain at the same time realistic that this is not a business as usual year and that our customers and also the world is working through the current Inflation, the interest and the challenges that there are in the labor market.

Speaker 5

And can I just ask a quick follow on or just on the consent decree? I think Before you had talked about you had hoped to get it resolved and settled in the first half of the year. I might have missed it, but I didn't see a comment on the updated timeline in the press release Do you have any thoughts on when we might see a resolution there?

Speaker 2

No. I have not. So that's also why we did not put a time line in. So And I also don't want to further speculate on it. I think it's important to stress that also there is no specific reason that I would call out or any Specific concern that this is indicating something.

Speaker 2

I think it only indicates that this is being worked through very diligently. And at the same time, as I said earlier, there's a lot happening Across the plate of both the FDA, but also on our side. So I think on both parties, we are putting all our efforts into it to bring this to the best possible conclusion. Not at the moment we will get any update on timing or conclusion. Of course, we will come forward with it.

Speaker 2

But it's hard to put a specific timeline on it. Also when I said early in the year, I would hope for first half indeed that was my hope, but I also said it's not in our control as there's a lot to be worked True. And that's kind of what, yes, we have seen materializing now.

Speaker 5

Understood. Thank you guys so much.

Operator

Thank you. We will now move to our next question. And the question comes from the line of Richard Felton from Goldman Sachs. Please go ahead.

Speaker 6

Good morning. Thanks for taking my questions. My first one is on Connected Care. So look, strong performance on the margin which drove the beat at group level in Q2. But could you provide a little bit more color on the margin drivers within the division, please?

Speaker 6

Specifically, Interested to know the impact from monitoring versus sleep and respiratory care. And then were there any one offs which drove strong performance in the quarter for monitoring. That's my first one. And then my follow-up also on Connected Care. Look, it looks like Sleep and Respiratory Care still had a fairly material revenue decline in Q2.

Speaker 6

Given the System sales were, I think, already 0 last year. Could you provide a little bit of color on where those incremental declines are coming from, please? Thank you.

Speaker 3

Yes. So hi, Richard. This is Abhijit. On Connected Care, as we mentioned also in the Commentary upfront is coming mainly from monitoring. We have had a it's a very profitable business.

Speaker 3

And monitoring, as you would remember, last year was Really hit by the component situation. I think we have had a 20 plus percent growth in the second Quarter and then when you get operating leverage, of course, you get a big impact. Besides that, in Sleep and Respiratory Care also, we had started in Q1 taking cost actions, so therefore, there the profitability starts to improve. So I think overall, It's pretty much organic, so there are no real one offs.

Speaker 2

Maybe I can take the second one on the SRC side. So if you look to the SRC mix, actually you see that the ventilation side Was where we saw the decline. We're also still working through the remediation on that. So actually that is connected. But at the same time, if I look to masks, Actually, we have seen masks coming back stronger, and that was a positive development in the quarter.

Speaker 2

So it's a mix issue where the ventilation is Driving the decline, while mask is offsetting some of that, whilst we, of course, have the ongoing effect of the sleep remediation in the Sleep devices part of the business.

Speaker 6

Great. Thanks very much.

Operator

Thank you. We will now go to our next question. And your next question comes from the line of David Adlington from JPMorgan. Please go ahead.

Speaker 7

Good morning, guys. Thanks for the questions. Firstly, just on orders. You said you faced a tough comp, but I think it was only 1% last year and the year before that was Down 15. So I just wanted to get some further call, these were either by no weakness, either by product category or by region.

Speaker 7

Secondly, just on your one off charges, it looks like you've shifted 100 basis points from restructuring to other quality related charges in Connected Care. I just wondered what the reason for that change was, please.

Speaker 3

Yes. Hi, David. Maybe let me answer the first question. I mentioned that There were tough comps on 20212022. So we had actually a 36% increase In comparable order intake in diagnosis and treatment in Q2 2021, and we followed that by another 2% increase last year.

Speaker 3

So I think that's where the tough comps come because it's already on a high order intake number. And you see that also in the IR deck. We have shown that on Page 14. The second thing is, of course, We mentioned earlier that it's lumpy, right? So Q1, we had strong growth.

Speaker 3

We had a double digit growth in Q1. And therefore, this lumpiness will continue. And that's why we say also that we have confidence in order intake growth in the second half of the year Because the funnel remains strong. The one off charges sorry, I missed the second part of the question. The one off Charges is for what?

Speaker 3

Could you just repeat that, David, your second part of your question?

Speaker 7

Yes. Your guidance on the one off charges, 100 basis points seems to have shifted from restructuring. That's gone down by 100 basis points. But your quality related charges with respect to Connected Care has gone up by 100 bps. So just wondered if we should read anything into

Speaker 3

Yes. No, not really. It's basically, as we have been going through the restructuring, we have found that there has been also some attrition. So that cost Has gone down and in the second half of the year, we are continuing with the remediation of the $483,000,000 that we had. So that is Leading to some cost as well as legal costs related to sleep and respiratory.

Speaker 3

So again, overall, the guidance remains the same, but it's just a shift In line.

Speaker 7

Okay. And maybe just a cheeky follow-up. Just in terms of foreign exchange impact, I just wonder where you're expecting that to be at current rates for the rest of the year? Thanks.

Speaker 3

Yes. Look, typically, the way we manage our ForEx, it fluctuates between plus to minus 10 to 20 bps In a year, so it should be within that range. It's not something big that we expect.

Speaker 4

Thanks.

Operator

Thank you. We will now go to your next question. And your next question comes from the line of Robert Davies from Morgan Stanley. Please go ahead.

Speaker 8

Yes, thanks for taking my questions. My first one was just around the cash guide. I noticed was no change in the free cash flow guidance for the year even though you had some notable improvement year on year and I think in the working capital metrics January to June And also the CapEx is running lower. So just be kind of interested why you didn't revise the free cash flow guidance even though the EBIT The sales and margin guidance have been updated. That was my first question.

Speaker 8

My second question was just on trajectory of margins, I guess, in Personal Health. I'd just be curious what your thought process there going into back half of the year. I noticed you're obviously back into positive growth territory, but the margins haven't really kind of kicked through. Is there a Level we should think about where margins could kick in. And I know there's quite a seasonal heavy 4Q trajectory there.

Speaker 8

I just wondered if there's anything To think about heading into the back half of this year that might change that. And then the last one was just within the D and T business. Obviously, you had a few questions already about order Just be curious in terms of modality of product within that business, if you're seeing anything to particularly call out as strong or weak in the quarter? Thank you.

Speaker 3

No. So let me it's a good point on cash guidance. Look, we had given a range of €700,000,000 to €900,000,000 which was, let's say, quite a broad range. We will have improvements in earnings. As you've seen, we have upped the guidance there to the higher end of the range.

Speaker 3

I expect that it will take a bit longer for us to get our inventories down as much as we would have Like this year because, let's say, to get all the matching inventories and flow through to customers will probably take till middle of next year. So again, we would probably be at the higher end of that guidance, but not at this stage to raise that guidance amount by a small amount. So we are Confident of being the range, we have started well, and we will continue down that track. Regarding margins in pH, We have already got into the I think it was 100 basis points already in this quarter. Growth will continue in Q3 and Q4, so you should see also margin improvements coming in Q3 and Q4.

Speaker 3

So there's nothing that I would signal in terms of yes, of course, Given where we are in demand, we are going to need to invest in advertising and promotion to kind of stimulate some demand to drive that growth, but Not really much different. Then your last question was on the Order intake and in the modality, there's not really something significant To call out there, I think most of the lumpiness we see across the portfolio. So we had, Let's say, good order intake across modalities in Q1. And we see, let's say, the mirror impact in Q2. And as we work down the backlog in MR, which currently is long, we hope to, Let's just start getting more and more order intake there because currently given the lead times, we are a bit hindered there.

Speaker 3

But There's not any specific modality, which is, let's say, hugely different in terms of the pattern that we see.

Speaker 8

That's great. Thank you very much.

Operator

Thank you. We will now go to our next question. And your next question comes from the line of Graham Doyle from UBS. Please go ahead. Your line is open.

Speaker 2

Good

Speaker 9

Just one on D and T, I want to look at the consent decree. The margin was obviously down sequentially strong, but down Sequentially in D and T in Q2. And I think at the start of the year, we were kind of still talking about relatively normal phasing in that. Typically, each quarter goes by, you generate more revenue, you generate a better margin. How should we think about Q3 and Q4?

Speaker 9

So when we think about that mix effect Eflagged, how do we think about that going through the next couple of quarters? And then just a sort of broader question on the consent decree, which isn't the specifics of timing. It's just we think about the process, it's been going on for a year now. Is it presumably that, that is a sort of negotiation and there are things that you want that you are trying to push forward and vice versa. But is it feasible that we just don't get an agreement on a consent decree and what happens there?

Speaker 9

Thank you very much.

Speaker 3

Yes. So on D and T, I don't like I mentioned in the speech, right, there is a shift of Phasing of cost as well as mix between Q1 and Q2, I would not read that too much as structure. Yes, We will have a stronger Q2 second half in terms of margin in Diagnosis and Treatment. So I think if I remember right in 2020 or 2019, we were at the 12.7 percent, we make a kind of good recovery towards that. So there will be strong improvement year on year.

Speaker 3

And again, Between 1 quarter and the next, I would not read too much into it. We had also a higher mix, if I recall correctly, of ultrasound in Q1 and a slightly stronger mix of DI in Q2 that affected a bit and a certain phasing of service cost between Q1 and Q2. So I would not read too much into that at this stage. We will continue improving as the year goes by.

Speaker 2

On the second one, maybe on the CD. So starting with your last part of the question, I think We will get towards constant decree. So that's just it is a matter of time. So I don't think it's there's no scenario that we will not get there It was initiated, so it will be concluded. I think if you look at the time line, actually, we are now kind of in a year after it started.

Speaker 2

But If we look to a comparable own experience we had with the AED, which was of much smaller size and complexity, it also was over a year discussion to get to kind of a constant degree. So I would not read also too much into the fact that we are now passing the 1 year mark. And also if you look to other constant Discussions with other parties, you would see that these time lines are not kind of out of the normal. This needs to be done diligently. And as we said before, Yes.

Speaker 2

This is a significant one given that the sleep and respiratory recall was a sizable affair. So I think that is what we are working through together, and that's also what we will bring to conclusion

Speaker 9

at the right time. Okay, great. That's really clear. Thanks a lot guys.

Operator

Thank you. We will now go to your next question. And your question comes from the line of Seske Baez Ozerne from HSBC. Please go ahead. Your line is open.

Speaker 10

Hi, thanks for taking my questions. Just 2, please. First of all, on the change that you had, the transfer of From Epharmatex from PNT to CC, we can see how the margins of that business was So far, but going forward, can you give some color on the projected outlook of that business in terms of growth and margins? And What kind of market you're seeing there? And second of all, on free cash flow, it was we mentioned, of course, The fact that the guidance remained the same despite higher guidance and also even though the second quarter tends to be a lot stronger from a cash flow perspective.

Speaker 10

Was the fact that Some of the liabilities are not certain yet a factor in that. And do you see any downside risk to that guide of given the first half free cash flow stood much lower. Thank you.

Speaker 2

So maybe let me take the first one. Indeed, I think we put Enterprise Informatics to Connect Care. I think the importance was that we really put it as a separate vertical where we combine the different Informatics assets Actually to ensure that the capabilities to run that in an end to end manner actually yield its effect. And I can say that actually we do see the impact coming into play. We have mentioned that the growth we expect should be double of what we grow at Philips.

Speaker 2

And also we have seen strong growth in that. On order intake, we also said that kind of we would be a bit cautious because we really want to fulfill well. And the delivery of these installations are Important. So we're working hard on adequate delivery and the margins are increasing. We have made certain choices for Scaling the bigger platforms that we have and that is healing effect.

Speaker 2

And also we expect with further growth acceleration that, that will scale further. So actually we have seen the first impact, which is positive. There's a lot of momentum. As you can understand, there's a lot of demand For workflow improvement, AI is very hot and a big topic to see kind of how we can help the current customers With generative and analytical AI in their workflow and to drive patient outcomes, so we're also applying that. And we have multi vendor solutions that actually can help across imaging, monitoring and also in providing care across care settings.

Speaker 2

So There is a part where it actually is generating a lot of interest and we're having the dialogues with customers as we speak.

Speaker 3

Yes. Selji, maybe to understand your question on cash flow, is it that because we have a stronger second half, You're questioning the guidance whether it should go up, I'm not very clear, sorry. Could you just ask that again?

Speaker 10

Actually, the question It's more like do you see the risk to the current guidance, which was not updated to the downside or up Given that your second half tends to be much stronger, but you had a guidance upgrade in other metrics, but not in free cash flow And the first half guidance first half actual free cash flow is it shows significant improvement year on year, but compared to guidance is on the weaker side.

Speaker 3

Yes. I would not say that the first half guidance is on the weaker side. If you look typically, like you mentioned, our second half cash flow is much stronger. We are actually, Our cash flow is much stronger. We are actually pretty happy with where we are with the first half of the year.

Speaker 3

So I don't see any risk to the guidance. In fact, as I just mentioned, we will probably be at the upper end of the current guidance.

Speaker 10

Okay. That's very helpful. Thanks a lot.

Operator

Thank you. We will now go to your next question. And your next question comes from the line of Falko Friedrich from Deutsche Bank. Please go ahead.

Speaker 11

Thank you and good morning. I have two questions left please both on D and T. And the first one on this mid single digit growth in diagnostic imaging. Can you provide some kind of a split into MRI and CT? And then secondly, what was driving this continued strong growth in your ultrasound business?

Speaker 11

Thank you.

Speaker 3

Yes. Falko, we provide a lot of color now going into every modality and the specific becomes maybe even too much color. But yes, Across the board, we have we continue to grow. So both MR and CT were actually nicely up. And the growth in ultrasound comes from the fact that the order book is very, very strong.

Speaker 3

And last year, we had Component issues in ultrasound in Q3 and Q4. And once that is resolved, we are just going through the order book. So that Continues good momentum, and our shares are also trending well. So I think overall, Yes. You see growth across the board and ultrasound is largely due to the order book that we were carrying.

Speaker 11

Perfect. Thank you.

Operator

Thank you. Gentlemen, that was the last question. Please continue.

Speaker 2

Thank you all for joining our call. As I said at the beginning, I'm pleased with the progress that we are making as we see that The measures that we have been taking at the beginning of the year are yielding effect. And as a result, we delivered strong operational performance with 9% comparable sales growth, improvement in profitability, operating cash flow. And that was coming from all businesses and all regions. We also expect to carry that into the second half that positive momentum based upon further progress on the 3 priorities that we're executing against And that actually led us to raise our guidance for the full year.

Speaker 2

So whilst uncertainties, especially also in our environment remain, We remain confident in our plan, the execution of it, and we'll stay the course to kind of come back quarter over quarter, showing an improvement part for Philips on the long term value creation trajectory. So thank you for listening in. Looking forward to connect With you and wish you further great day.

Operator

Thank you. This concludes the Royal Philips 2nd quarter and semiannual 2023 results

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Earnings Conference Call
Koninklijke Philips Q2 2023
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