PHIA Koninklijke Philips NV

Philips delivers strong full-year results; agrees with FDA on terms of consent decree focused on Philips Respironics in the US

   

January 29, 2024

• Delivers strong sales growth, improved profitability, and strong cash flow in 2023 through solid execution of first year of 2023-2025 plan
• Agrees with FDA on terms of consent decree focused on Philips Respironics in the US, providing clarity and a roadmap to demonstrate compliance and to restore the business
• Reiterates confidence in delivering the 2023-2025 plan; further performance improvement in 2024

FY and Q4 Group performance highlights

• Group sales amounted to EUR 18.2 billion in 2023; EUR 5.1 billion in Q4
• Comparable sales growth of 7% in 2023; 3% in Q4, excluding provisions charged to sales, mainly connected with the Respironics consent decree*
• Comparable order intake was -5% in 2023; -3% in Q4; absolute order book remains strong
• Income from operations was EUR -115 million in 2023; EUR 24 million in Q4, including charges of EUR 363 million connected with the Respironics consent decree
• Adjusted EBITA margin increased to 10.5% of sales in 2023; 12.5% in Q4, excluding provisions charged to sales, mainly connected with the Respironics consent decree*
• Free cash flow increased to EUR 1,582 million in 2023; increased to EUR 1,128 million in Q4
• Restructuring and productivity plan on track, with savings of EUR 956 million in 2023; EUR 271 million in Q4
• Proposed dividend maintained at EUR 0.85 per share, to be distributed in shares
• Philips expects to deliver 3-5% comparable sales growth and Adjusted EBITA margin of 11-11.5% in 2024

* See table below

Metrics affected by provisions charged to sales	FY 2023	Q4 2023
Sales - as reported in millions of EUR	18,169	5,062
Comparable sales growth - excluding provisions charged to sales1)	7%	3%
Comparable sales growth	6%	(1)%
Adjusted EBITA margin - excluding provisions charged to sales 1)	10.5%	12.5%
Adjusted EBITA margin	10.6%	12.9%

1) Excluding provisions charged to sales of EUR 174 million in Q4 2023 mainly in connection with the Respironics consent decree.

Roy Jakobs, CEO of Royal Philips:“Our strong results in 2023 were driven by solid execution of the first year of our three-year plan to create value with sustainable impact. While there is more work to be done, the progress we achieved in a volatile world lays a solid foundation for sustained performance.

Patient safety and quality remain Philips’ highest priority across the company. Resolving the consequences of the Respironics recall for our patients and customers is a key focus area and I acknowledge and apologize for the distress and concern caused. We are fully committed to complying with the consent decree, which is an important step and provides a clear path forward.

We saw strong growth throughout the year based on the actions we have taken to improve supply chain reliability and simplify our organization. Our order book is strong, and we are focused on improving order intake. Our new operating model enabled more effective ways of working across the company, and drove significant productivity improvements.

We continue to partner with many healthcare systems around the world, supporting them to become more efficient, and addressing their resourcing and productivity challenges with our AI-powered innovations. This includes our newly launched next-generation ultrasound systems, and our unique mobile MRI system with helium-free operations.

We are confident in our plan to help consumers lead healthy lives and healthcare providers deliver efficient, high-quality care to patients in a sustainable way. Based on our ongoing actions to enhance execution, we expect further performance improvement in 2024.”

Philips Respironics consent decree

• Philips agrees on the terms of a consent decree with the US Department of Justice (DOJ), representing the US Food and Drug Administration (FDA). The consent decree primarily focuses on Philips Respironics’ business operations in the US.
• The consent decree is being finalized and will be submitted to the relevant US court for approval. The decree will provide Philips Respironics with a roadmap of defined actions, milestones, and deliverables to demonstrate compliance with regulatory requirements and to restore the business.
• In the US, Philips Respironics will continue to service sleep and respiratory care devices already with healthcare providers and patients, and supply accessories (including patient interfaces), consumables (including patient circuits), and replacement parts (including repair kits). Until the relevant requirements of the consent decree are met, Philips Respironics will not sell new CPAP or BiPAP sleep therapy devices or other respiratory care devices in the US.
• Outside the US, Philips Respironics will continue to provide new sleep and respiratory care devices, accessories (including patient interfaces), consumables (including patient circuits), replacement parts (including repair kits) and services, subject to certain requirements.
• As a consequence of addressing this consent decree, which is a multi-year plan, Philips recorded a provision of EUR 363 million in Q4 2023 that relates to remediation activities, inventory write-downs and onerous contract provisions. In 2024, Philips expects around 100 basis points of costs that relate to remediation activities and disgorgement payments for Philips Respironics sales in the US.
• Further details will become available once the consent decree has been finalized and submitted to the relevant US court for approval.

Outlook Philips reiterates confidence in delivering the plan for 2023-2025, acknowledging that uncertainties remain. For full-year 2024, Philips expects to deliver 3-5% comparable sales growth and an Adjusted EBITA margin of 11-11.5%. The free cash flow from Philips' businesses is expected to amount to EUR 0.8-1 billion. This only excludes the remaining cash-out related to the previously announced resolution of the economic loss class action in the US.

The previously stated 2023-2025 Group financial outlook of mid-single-digit comparable sales growth, low-teens Adjusted EBITA margin, and EUR 1.4-1.6 billion free cash flow now takes the consent decree into account and remains unchanged. It excludes the investigation by the US DOJ related to the Respironics field action and the impact of the ongoing litigation.

Segment performance Diagnosis & Treatment comparable sales increased by 11% in 2023, with double-digit growth in Image Guided Therapy and Precision Diagnosis. The Adjusted EBITA margin improved to 11.6%, compared to 9.5% in 2022, driven by increased sales and pricing & productivity measures, partly offset by cost inflation. In Q4, Diagnosis & Treatment segment comparable sales increased 5%, with high-single-digit growth in Image Guided Therapy. The Adjusted EBITA margin was 10.4%, compared to 12.2% in Q4 2022, due to an unfavorable mix and phasing of production and costs.

Connected Care comparable sales increased by 5%*) in 2023, driven by double-digit growth in Monitoring. The Adjusted EBITA margin increased to 6.9%*), compared to 2.1% in 2022, driven by increased sales and productivity measures, partly offset by cost inflation. In Q4, comparable sales were flat*), with high-single-digit growth in Enterprise Informatics. The Adjusted EBITA margin was 13.3%*), compared to 11.6% in 2022, mainly driven by pricing & productivity measures, partly offset by cost inflation.

Personal Health comparable sales growth was 3% in 2023, strongly driven by Personal Care. The Adjusted EBITA margin improved to 16.6%, compared to 14.8% in 2022, as a result of increased sales and pricing & productivity measures. In Q4, comparable sales increased by 7%, mainly driven by Personal Care. The Adjusted EBITA margin increased to 19.9%, compared to 17.0% in Q4 2022, mainly driven by increased sales and pricing & productivity measures.

*) Excluding provisions charged to sales of EUR 174 million in Q4 2023 mainly in connection with the Respironics consent decree. Productivity

Supported by significant change management efforts, to date Philips has reduced the workforce by around 8,000 roles, out of 10,000 roles in total planned by 2025. For the full year, total savings amounted to EUR 956 million. In Q4, operating model productivity savings amounted to EUR 149 million. Procurement savings amounted to EUR 64 million, and other productivity programs delivered savings of EUR 58 million, resulting in total savings of EUR 271 million.

Customer, innovation and ESG highlights

• In 2023, Philips’ products and solutions improved the lives of 1.9 billion people, including 222 million people in underserved communities. In addition, Philips was again recognized with a prestigious ‘A’ score for its climate action leadership by global environmental non-profit CDP (formerly Carbon Disclosure Project).
• Philips was recognized as one of the top health technology companies for its sustainability performance in the global 2023 Dow Jones Sustainability Indices (DJSI) list.
• As part of its program to expand access to maternal health, Philips is developing an AI-powered ultrasound solution that aims to address the shortage of healthcare workers by putting a diagnostic tool previously reserved for expert technicians in the hands of midwives. The program received total funding of USD 60 million from the Bill & Melinda Gates Foundation.
• Philips’ 8-year, USD 115 million partnership with NYU Langone Health in the US is aimed at advancing patient safety, quality and outcomes through innovation. Philips will provide AI-enabled solutions, including its latest hospital patient monitoring, diagnostic imaging, digital pathology and enterprise informatics solutions.
• Philips and Norwegian Vestre Viken Health Trust deployed AI-enabled clinical care providing access to an AI-based bone fracture radiology application that will help radiologists serve the needs of around half a million people across 22 Norwegian municipalities.
• Philips introduced Philips HealthSuite Imaging, a cloud-based next generation of Philips Vue PACS that offers AI-enabled workflow orchestration, high-speed remote access for diagnostic reading, and integrated reporting to enable healthcare facilities across the world to improve operational efficiency and enhance patient care.
• Philips launched the premium S9000 shavers with close-shave blade technology. These shavers are available in the US, Western Europe, and China, where they have earned the JD S+ Brand award.

Capital allocation Philips intends to submit to the 2024 Annual General Meeting of Shareholders a proposal to declare a dividend of EUR 0.85 per common share and to distribute such dividend in shares.

In the fourth quarter, Philips completed the cancellation of 15,134,054 of its shares, resulting in 906,403,156 outstanding shares as of December 31, 2023. The cancelled shares were acquired as part of the EUR 1.5 billion share repurchase program for capital reduction purposes that was announced on July 26, 2021. Philips will complete the share repurchase program in April 2024, which is expected to result in a further cancellation of 4.4 million shares in Q2 2024. Click here to view the release online

For further information, please contact: Elco van Groningen Philips Global Press Office Tel.: +31 6 8103 9584 E-mail: elco.van.groningen@philips.com Ben Zwirs Philips Global Press Office Tel.: +31 6 1521 3446 E-mail: ben.zwirs@philips.com Dorin Danu Philips Investor Relations Tel.: +31 20 59 77055 E-mail: dorin.danu@philips.com About Royal Philips Royal Philips (NYSE: PHG, AEX: PHIA) is a leading health technology company focused on improving people's health and well-being through meaningful innovation. Philips’ patient- and people-centric innovation leverages advanced technology and deep clinical and consumer insights to deliver personal health solutions for consumers and professional health solutions for healthcare providers and their patients in the hospital and the home. Headquartered in the Netherlands, the company is a leader in diagnostic imaging, ultrasound, image-guided therapy, monitoring and enterprise informatics, as well as in personal health. Philips generated 2023 sales of EUR 18.2 billion and employs approximately 69,700 employees with sales and services in more than 100 countries. News about Philips can be found at www.philips.com/newscenter.

Forward-looking statements and other important information Forward-looking statements This document and the related oral presentation, including responses to questions following the presentation, contain certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items. Examples of forward-looking statements include statements made about our strategy, estimates of sales growth, future Adjusted EBITA *), future restructuring and acquisition related charges and other costs, future developments in Philips’ organic business and the completion of acquisitions and divestments. Forward-looking statements can be identified generally as those containing words such as “anticipates”, “assumes”, “believes”, “estimates”, “expects”, “should”, “will”, “will likely result”, “forecast”, “outlook”, “projects”, “may” or similar expressions. By their nature, these statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these statements. These factors include but are not limited to: Philips’ ability to gain leadership in health informatics in response to developments in the health technology industry; Philips’ ability to transform its business model to health technology solutions and services; macroeconomic and geopolitical changes; integration of acquisitions and their delivery on business plans and value creation expectations; securing and maintaining Philips’ intellectual property rights, and unauthorized use of third-party intellectual property rights; Philips’ ability to meet expectations with respect to ESG-related matters; failure of products and services to meet quality or security standards, adversely affecting patient safety and customer operations; breaches of cybersecurity; challenges in connection with Philips’ strategy to improve execution and other business performance initiatives; the resilience of our supply chain; attracting and retaining personnel; challenges to drive operational excellence and speed in bringing innovations to market; compliance with regulations and standards including quality, product safety and (cyber) security; compliance with business conduct rules and regulations including privacy and upcoming ESG disclosure and due diligence requirements; treasury and financing risks; tax risks; reliability of internal controls, financial reporting and management process; global inflation. As a result, Philips’ actual future results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. For a discussion of factors that could cause future results to differ from such forward- looking statements, see also the Risk management chapter included in the Annual Report 2022. Reference is also made to section Risk management in the Philips semi-annual report 2023. Israel The risk factors discussed in Philips’ Annual Report 2022 (section 6.3) include the strategic risk that the company’s global operations are exposed to geopolitical and macroeconomic changes. The current situation in Israel further increases economic and political uncertainty and may affect the company’s results of operations, financial position and cash flows. Philips is present in Israel with several subsidiaries, mainly in Diagnosis & Treatment and Connected Care, that are primarily involved in manufacturing and research and development (R&D) activities. Please refer to our 2022 Country Activity and Tax Report (p. 37) for further information on our activities in Israel. Respironics Philips has recognized a provision related to the voluntary recall notification in the US/field safety notice outside the US for certain sleep and respiratory care products, based on Philips’ best estimate for the expected field actions. Future developments are subject to uncertainties, which require management to make estimates and assumptions. Actual outcomes in future periods may differ from these estimates and affect the company’s results of operations, financial position and cash flows. Furthermore, Philips is a defendant in several class-action lawsuits and individual personal injury claims, and is in the process of finalizing a consent decree with the FDA. 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 legal provisions in the accounts for these matters, except for the following. In the first quarter of 2023, Philips Respironics recorded a provision in connection with an anticipated resolution of the economic loss class action pending in the US. The provision is subject to final court approval of the negotiated settlement agreement and is based on Philips’ best estimate for the expected settlement amounts, which is, in part, based on the expected number of claims ultimately filed pursuant the settlement once it is approved. Actual outcomes in future periods of the above matters may differ from these estimates and affect the company’s results of operations, financial positions and cash flows. Third-party market share data Statements regarding market share, contained in this document, including those regarding Philips’ competitive position, are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where information is not yet available to Philips, market share statements may also be based on estimates and projections prepared by management and/or based on outside sources of information. Management’s estimates of rankings are based on order intake or sales, depending on the business. Market Abuse Regulation This press release contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation. Use of non-IFRS information In presenting and discussing the Philips Group’s financial position, operating results and cash flows, management uses certain non-IFRS financial measures. These non-IFRS financial measures should not be viewed in isolation as alternatives to the equivalent IFRS measure and should be used in conjunction with the most directly comparable IFRS measures. Non-IFRS financial measures do not have standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other issuers. A reconciliation of these non-IFRS measures to the most directly comparable IFRS measures is contained in this document. Further information on non-IFRS measures can be found in the Annual Report 2022. Presentation All amounts are in millions of euros unless otherwise stated. Due to rounding, amounts may not add up precisely to totals provided. All reported data is unaudited. Financial reporting is in accordance with the accounting policies as stated in the Annual Report 2022. Prior-period amounts have been reclassified to conform to the current-period presentation. Philips has realigned the composition of its reporting segments effective from April 1, 2023. The most notable change is the shift of the previous Enterprise Diagnostic Informatics business from the Diagnosis & Treatment segment to the Connected Care segment. This business, together with other informatics solutions in the Connected Care segment, now forms the Enterprise Informatics business. Accordingly, the comparative figures for the affected segments have been restated. The restatement has been published on the Philips Investor Relations website and can be accessed here. Per share calculations have been adjusted retrospectively for all periods presented to reflect the issuance of shares for the share dividend in respect of 2022.

*) Non-IFRS financial measure. Refer to Reconciliation of non-IFRS information.