Philips' First Quarter Results 2020

First-quarter highlights

• Sales amounted to EUR 4.2 billion, with a 2% comparable sales decrease
• Comparable order intake increased 23%
• Income from continuing operations was EUR 42 million, compared to EUR 171 million in Q1 2019
• Adjusted EBITA margin was 5.9% of sales, compared to 8.8% of sales in Q1 2019
• Income from operations amounted to EUR 43 million, compared to EUR 245 million in Q1 2019
• EPS from continuing operations (diluted) amounted to EUR 0.05; Adjusted EPS amounted to EUR 0.18, compared to EUR 0.29 in Q1 2019
• Operating cash flow amounted to EUR 143 million, compared to EUR 14 million in Q1 2019
• Free cash outflow was EUR 57 million, compared to an outflow of EUR 206 million in Q1 2019

Frans van Houten, CEO:

“The start of 2020 was marked by the COVID-19 outbreak, and we have mobilized our resources since January to address this unprecedented challenge. At Philips, we are focused on our triple duty of care: meeting critical customer needs, safeguarding the health and safety of our employees, and ensuring business continuity. I am very proud of the commitment, hard work and resourcefulness of our employees to keep Philips fully functioning, and I would like to thank them for that.

COVID-19 significantly affected our results in this quarter. There was increased demand for our professional healthcare products and solutions, with comparable sales and order intake growth for the Connected Care and Diagnosis & Treatment businesses. Comparable order intake grew 23%, most notably in diagnostic imaging, hospital ventilators, and patient monitors. We are investing more than EUR 100 million to steeply ramp up our production volumes, in close collaboration with our suppliers and partners. At the same time, there was a significant decline in demand for our Personal Health portfolio and we saw Image-Guided Therapy procedures trending down as the quarter progressed. This resulted in a 2% comparable sales decrease and an Adjusted EBITA margin of 5.9% for the Group.

The impact of COVID-19 gradually increased in the course of the first quarter, initially affecting our businesses in China and Asia Pacific starting late January, and subsequently affecting our businesses in the rest of the world from March onwards. On that basis, we expect that all our geographies will be impacted throughout the second quarter. This is expected to result in a steep revenue decline for our Personal Health businesses and a sizable high-single-digit decline for our Diagnosis & Treatment businesses, partly offset by a significant increase in revenue of our Connected Care businesses.

Assuming we can convert our existing order book for the Diagnosis & Treatment and Connected Care businesses as planned, elective procedures normalize, and consumer demand gradually improves, we aim to return to growth and improved profitability for the Group in the second half of the year. Consequently, for the full year 2020 we aim to achieve a modest comparable sales growth and Adjusted EBITA margin improvement. Given the current uncertainty and volatility, we will not provide more specific guidance for 2020 at this time.”

Business segment performance

The Diagnosis & Treatment businesses recorded 2% comparable sales growth, led by mid-single-digit growth in Diagnostic Imaging, partly offset by a low-single-digit decline for Image-Guided Therapy due to the postponement of elective procedures. Comparable order intake was in line with Q1 2019, with double-digit growth for Diagnostic Imaging offset by a double-digit decline for Image- Guided Therapy. The Adjusted EBITA margin increased to 6.3%, as growth and productivity were partly offset by an unfavorable mix.

Comparable sales in the Connected Care businesses increased 7%, with double-digit growth in Sleep & Respiratory Care. Comparable order intake showed a very strong double-digit increase, driven by strong demand for patient monitors and hospital ventilators. The Adjusted EBITA margin increased to 9.8%, mainly due to growth and productivity.

The Personal Health businesses recorded a comparable sales decline of 13%, with all businesses declining due to significantly decreased consumer demand, resulting in an Adjusted EBITA margin of 7.1%.

Philips’ ongoing focus on innovation and strategic partnerships resulted in the following key events in the quarter:

• Building on Philips’ initial increase in hospital ventilator production in the first quarter, which already enabled the supply of additional ventilators to hospitals in the most affected regions in China, southern Europe and the US, Philips plans a further fourfold production increase by the third quarter of 2020. This plan will enable Philips to deliver 43,000 fully featured, critical care ventilators to the US government in 2020, while simultaneously delivering such ventilators to the rest of the world.
• To further address the unprecedented demand for ventilators, Philips introduced the Philips Respironics E30 ventilator for emergency use when a fully featured critical care ventilator is not available. Philips is targeting a production of the new ventilator - which has been designed for large-scale production - of 15,000 units per week in April.
• Philips introduced several dedicated telehealth solutions to help relieve the tremendous pressure placed on scarce resources by the growing number of COVID-19 patients. Based on its proven Patient Reported Outcomes Management solution, which is being used by more than 100 healthcare institutions globally, Philips enabled Dutch hospitals and GPs to remotely screen and monitor patients with COVID-19.
• In connection with the COVID-19 emergency, the US FDA has granted a temporary waiver for the use of consumer monitors with the Philips IntelliSite Pathology Solution, providing extra flexibility for US pathologists to work from home. For example, a leading health system in New York has expanded the Philips IntelliSite Pathology solution installed at its hospitals with additional scanners, enabling pathologists to remotely access an increased volume of digital images of patient tissue, thereby supporting real-time pathology interpretations in critical cases and improved patient outcomes.
• Continuing its success in forging long-term strategic partnerships, Philips signed several new agreements. For example, Philips entered into an 8-year strategic partnership with Paracelsus Clinics in Germany, offering solutions that maximize the availability of imaging systems and leverage digitalization and process optimization to realize quality and efficiency improvements.
• Demonstrating the efficiency of Philips’ Enterprise Monitoring-as-a-Service model, US-based Jackson Memorial Hospital estimates it will save more than 13,000 staff hours from workflow improvement and automation of manual tasks using Philips’ monitoring solutions. Moreover, nursing staff gave the new patient monitoring solution a 90% satisfaction rating, up from 8% prior to the new system and software.

Cost savings

In the first quarter, procurement savings amounted to EUR 36 million. Overhead and other productivity programs delivered savings of EUR 59 million.

Executive Committee update

Rob Cascella, currently Chief Business Leader of the Precision Diagnosis businesses and member of the Executive Committee, jointly responsible for the Diagnosis & Treatment segment together with Bert van Meurs, will take on the role of Philips’ strategic business development per May 1, 2020. He will remain a member of the Executive Committee. Kees Wesdorp, currently General Manager of Diagnostic Imaging, will succeed Rob Cascella in his current roles and become a member of the Executive Committee reporting to Philips CEO Frans van Houten.

Frans van Houten: “I would like to express my gratitude for Rob’s considerable contribution to Philips since he joined the company in 2015. Under his leadership, the Diagnosis & Treatment businesses have achieved a major step-up on the quality front and pivoted to outcomes-driven solutions. Most recently, Rob established and led our Precision Diagnosis businesses and was jointly responsible for the Diagnosis & Treatment segment. I am pleased that Rob will lead Philips’ strategic business development, and that Kees will be his successor. Kees will join the Executive Committee with a strong accomplishment record, having led the transformation of the Diagnostic Imaging business by increasing customer and employee engagement, renewing the product and solutions portfolio, and improving profitability. I am confident that he will further build out the Precision Diagnosis businesses through the transformation to solutions, continuing to drive robust growth and increased profitability. Kees and Rob will be working closely to ensure a seamless transition, with formal handover on May 1 of this year.”

Capital allocation

Philips has a strong balance sheet and robust liquidity position. In view of the possible continued impact of the COVID-19 pandemic in 2020, Philips has taken the following measures to further enhance its liquidity position:

Share buyback program

As of the end of the first quarter of 2020, Philips has completed 50.3% of its EUR 1.5 billion share buyback program for capital reduction purposes that was announced on January 29, 2019. On March 23, 2020, Philips announced that the second half of the program will be executed through individual forward transactions, to be entered into in the course of 2020, with the settlement dates extending into the second half of 2021. Further details can be found here.

Euro Medium-Term Note

In the first quarter, Philips successfully placed EUR 500 million fixed-rate Sustainability Innovation notes due 2025 and EUR 500 million fixed-rate notes due 2030.

Dividend

Philips maintains its proposed dividend of EUR 0.85 per common share against the net income of 2019. The distribution of this dividend will be in shares only, instead of the currently proposed distribution in cash or in shares at the option of the shareholder. To that effect, Philips withdraws the dividend proposal that was already submitted to the Annual General Meeting of Shareholders to be held on April 30, 2020. Philips plans to convene an Extraordinary General Meeting of Shareholders expected to take place in the second half of June 2020, the agenda of which will include the revised proposal to declare a distribution of EUR 0.85 per common share, in shares only. The increase in issued share capital is expected to be offset by the share buyback program mentioned above.

In line with the measures described above, the Supervisory Board and the members of the Board of Management have agreed that the 2019 Annual Incentive for the Board of Management will be paid out in shares instead of cash. More information on the realization of the 2019 Annual Incentive can be found in the Remuneration Report, as included in the 2019 Annual Report (p 70-71).

Regulatory update

Philips Philips continues to fulfill its obligations under the Consent Decree [1] and remains in dialogue with the US FDA. In connection with the COVID-19 pandemic, Philips is working with the FDA’s Emergency Response and Product Evaluation teams to provide them with relevant information, such as Philips’ production ramp-up plans for critical products and solutions to combat COVID-19. Philips is actively seeking and has obtained authorizations through the FDA’s Emergency Use Authorization (EUA) process for the expanded use of several of its devices during the COVID-19 public health emergency, including for the Philips Respironics E30 ventilator, which received authorization on April 8, 2020.

[1] Under the Consent Decree, Philips continues to export its range of AED devices and manufacture and distribute its HS1/OnSite/Home automated external defibrillator (AED) model in the US. The company may also continue to service the AEDs and defibrillator/monitors provided that certain conditions are met and provide consumables and the relevant accessories.

Report

First Quarter Results 2020 - Report

Presentation

First Quarter Results 2020 - Results Presentation