Yahoo Finance Koninklijke Philips N.V. (NYSE:PHG) Q1 2024 Earnings Call Transcript
Koninklijke Philips N.V. (NYSE:PHG) Q1 2024 Earnings Call Transcript April 29, 2024
Koninklijke Philips N.V. beats earnings expectations. Reported EPS is $0.28, expectations were $0.26. Koninklijke Philips N.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Royal Philips First Quarter 2024 Results Conference Call, on Monday, April 29, 2024. During the call, hosted by Mr. Roy Jakobs, CEO; and Mr. Abhijit Bhattacharya, CFO. All participants will be in a listen-only mode. After the introduction there'll be an opportunity to ask questions. Please note that this call will be recorded, and a 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.
Leandro Mazzoni: Hi, everyone. Welcome to Philips' first quarter 2024 results webcast. I'm here with our CEO, Roy Jakobs, and our CFO, Abhijit Bhattacharya. The press release, investor deck and the frequently asked questions on the Respironics field action were published on our Investor Relations website this morning. The replay and full transcript of this webcast will be made available on the website after the call. Before we start, I want to draw your attention to our safe harbor statement on screen. You will also find a statement in the presentation published on the website. Roy, over to you.
Roy Jakobs: Good morning, everyone and warm welcome. Great to be with you today. I want to start with the key highlights of this morning's release. We delivered results in line with our performance improvement plan with 2.4% comparable sales growth and strong margin improvement in the quarter and order intake growth turning positive outside of China, especially in North America. This was a result of continued strong focus and progress on our three execution priorities. Secondly, we have taken several very important steps in resolving the consequences of the Respironics recall. The consent decree was signed and approved in court. We received final court approval for the previously announced economic loss settlement. We reached an agreement to resolve the personal injury and medical monitoring litigation in U.S. And we also concluded an agreement with insurers to cover Respironics recall related product liability claims.
Following the remediation of sleep therapy devices, and reassuring test results to-date, these are very important milestones to provide further clarity on the way forward for Philips. Supported by key innovation launches and our ongoing actions to enhance its execution, we are confident in our performance improvement plan for 2024. Onto the key financial highlights. Comparable sales growth was 2.4% in the quarter, driven by 3% growth in the Diagnosis & Treatment and Personal Health segments, partly offset by a 1% decline in Connected Care against very tough comps in monitoring. Group sales grew 2% in mature geographies. Growth geographies sales grew 3% despite a decline in China. The adjusted EBITDA margin improved significantly to 9.4% in the quarter.
Free cash flow was an outflow of EUR 336 million, in line with normal quarterly phasing. Order intake in the quarter declined, as anticipated, due to situation in China, this was driven by the impact of the entry-wide anticorruption measures and the comparison against an exceptionally high order intake base from last year. Importantly, order intake grew outside of China with encouraging performance in North America. We remain focused on implementing the necessary actions to strengthen quality delivery, reduce lead times, leverage our enhanced operating model and market our AI-driven innovations to improve order intake. Overall, based on the gradually improving market environment in the U.S. as well as expected improvement of the situation in China, our exciting innovation launches and our ongoing actions we continue to expect positive order intake growth in the full-year 2024.
In China, the government imposed anticorruption measures continue to impact short-term decision-making by hospitals, but we do not expect it to impact the fundamental demand as China remains an attractive market. Our order funnel is very active in the country, and we expect order growth to resume in China in the second half of 2024, also supported by the newly launched government program for medical equipment upgrades. It's important to note that our order book, which accounts for around 40% of group sales remains strong and is further being built down to expected normalized levels. I've met many of our customers and partners in the last few months. And it's absolutely clear that we are a preferred strategic and innovation partner to provide imaging, therapy, and monitoring solutions, supported by strong enterprise informatics and AI suite.
This has been, again, amplified by how strongly our solutions resonated with customers at the recent ViVE, ECR, and HIMSS global health care events, which I attended during this quarter. Let me you with some of the recent customer innovation milestones during the quarter. We launched the new Azurion Image-Guided Therapy system and advanced informatics as well as the new AI-enabled CT 5300 designed for more accurate and reliable imaging results, while enhancing productivity using up to 80% lower radiation dose. We were also recognized as a Clarivate Top 100 Global Innovator for the 11th consecutive year and ranked as a top medical technology patent applicant at the European Patent Office in 2023. We continue to see strong customer pull for solutions and signed several long-term agreements across the world in the quarter.
For example, we signed a 10-year agreement with the Nicklaus Children's Health System in the U.S. to provide AI-enabled technologies such as helium-free MRI, ultrasound and monitoring solutions for deeper clinical insights and improved workflow and productivity. Now on Respironics. As I said, we have taken very important steps in resolving the consequences of the Respironics recall in the quarter. As said before, we do regret that patients -- that concern that patients may have experienced. Let me call out the milestones reached. First, Philips and Plaintiffs leadership supported by a court-appointed mediator, have reached an agreement that resolves the personal injury litigation at a medical monitoring class action in the U.S. This settlement ends the uncertainty associated with litigation in the U.S. It should be noted that Philips and Philips Respironics do not admit any fault or liability or that any injuries were caused by Respironics devices.
Philips Respironics has agreed to pay a total cap amount of $1.1 billion. The related payments are expected in 2025 and to be fully funded from Philips cash flow generation. You will find more details of the agreement in the Respironics field action deck published on our Investor Relations website this morning, which underscores the high degree of confidence from all parties in achieving closure and finality with the settlement. Also important, earlier this month, the Philips Respironics consent decree was approved by U.S. court. As communicated before, the decree primarily focuses on Respironics business operations in U.S. And we now have made the road map to demonstrate compliance with regulatory requirements in order to restore the business in U.S. and grow outside of U.S. Moreover, Philips Respironics obtained the final court approval for the previously announced economic loss settlement in U.S., for which a provision was recognized in Q1 2023.
We continue to work on order of Philips Respironics related legal proceedings, including the investigation by the U.S. Department of Justice. And we also concluded an agreement with insurers to pay Phillips in relation to Philips Respironics recall related product liability claims. Therefore, following the remediation of sleep therapy devices and the reassuring test results to date, these important milestones on litigation, consent decree and insurance provide Philips with a clear path forward for sustainable value creation. Looking ahead, we remain confident in our plan and financial outlook. In 2024, we expect to deliver 3% to 5% comparable sales growth, building on a strong comparison base of last year and an adjusted EBITDA margin of 11% to 11.5%.
The free cash flow expectation is now increased to EUR 0.9 billion to EUR 1.1 billion in 2024. Factor and the receipt from insurers that I just mentioned and the remaining payments related to the economic loss settlement. I will now hand it over to Abhijit to take us through the financials in more detail. After which, I will come back on our execution priorities.
Abhijit Bhattacharya: Thanks, Roy. Good morning, everyone. Let me start with our performance by segment. In Diagnosis & Treatment comparable sales increased by 3%, driven by growth in precision diagnosis and image-guided therapy. And this was against strong double-digit growth in Q1 2023. The adjusted EBITDA margin was 9.2%, including an impact of 100 basis points from an accounts receivable provision. The adjusted EBITDA margin was lower than last year, mainly due to the normalization of the product mix as anticipated. To remind you, the increase in profitability in Q1 last year was around 600 basis points due to the easing of supply chain constraints on our most profitable modalities of ultrasound and image-guided therapy systems.
Connected Care comparable sales declined by 1% as high-single digit growth in Enterprise Informatics was offset by negative sales growth in monitoring on the back of around mid-teens growth in Q1 2023. We saw strong growth in sleep systems and patient interface driven by performance outside of the U.S., while ventilator sales were lower. Connected Care adjusted EBITDA margin improved significantly to 6.4%, driven by solid performance in monitoring and an improvement in Sleep and Respiratory Care. Personal Health delivered a 3% comparable sales increase driven by strength in the Personal Care business. The adjusted EBITDA margin for the segment improved to 15.2% this quarter, mainly due to operational leverage and productivity. Geographically, sales in Personal Health was driven by mature geographies, while growth geographies were flat mainly due to China.
Overall, consumer sentiment remains subdued, but is expected to improve in the course of 2024. Segment other sales increased by EUR 25 million in the first quarter mainly from higher royalty income due to phasing. We have been very disciplined in cost management, and our productivity initiatives delivered savings of EUR 151 million in the quarter, of which operating model savings were EUR 55 million, procurement savings were EUR 40 million and other productivity programs delivered EUR 56 million. The adjusted EBITDA margin for the group increased by 80 basis points to 9.4% in the quarter as our productivity and pricing actions more than offset inflation. Free cash was an outflow of EUR 336 million in the quarter due to the normalization of working capital phasing, partly offset by higher cash earnings.
On capital allocation, in April, we completed the EUR 1.5 billion share buyback program for capital reduction purposes announced on July 26, 2021. In the second quarter, we intend to cancel the 4.4 million shares acquired this year. Moving to orders. It's important to note that the absolute order intake levels remain healthy although lower than the exceptionally high comparison base of the last two to three years. Order intake grew outside China with an encouraging performance in North America and general improvement in market dynamics, which is expected to continue in the coming quarters. Our funnel of opportunities remain strong. The order book is significantly higher than the period before the global supply chain crisis. As a reminder, orders and order book accounts for around 40% of our revenue.
The remaining 60% comes mainly from recurring revenue streams, such as services and consumables from book-to-bill business and from personal health. As mentioned in our previous earnings call, we anticipate sales growth to be back-end loaded in 2024 due to the tougher comparison base in the first half of the year resulting mainly from the strong China performance in the first half of 2023 and the anticorruption measures ongoing in the first half of this year. Our expectation for sales growth in the second quarter remains soft as a result of this difficult comparison base as Q2 2023 grew by 9.4% as well as the impact of the phasing of royalty revenues. We expect sales in segment others to be around EUR 120 million in the second quarter; EUR 75 million lower than in the second quarter of 2023 due to a large royalty deal recorded last year and the impact of royalty revenue phasing between the first and second quarter of 2024, that I just mentioned.
This difference in royalty sales alone results in a negative impact of around 170 basis points on the growth of the group in the second quarter. Note that there is no change to full-year outlook of segment other provided in January, both in terms of sales and adjusted EBITDA. Based on our order book, improving order intake and the ongoing actions to enhance its execution, we expect to deliver 3% to 5% comparable sales growth and an adjusted EBITDA margin between 11% and 11.5% for the full-year. As Roy mentioned, under the settlement to resolve the personal injury and medical monitoring litigation in the U.S. Philips litigation -- Philips Respironics has agreed to pay a total of $1.1 billion. The related payments are expected in 2025 and to be funded from Philips' cash flow generation.
Moreover, we received the final court approval for the previously announced economic loss settlement in the U.S., at the time we announced the settlement in Q1, we recognized a provision of EUR 575 million based on assumptions about the number of claimants that we expected to participate. Now a year later, based on the actual claims that we are seeing, these assumptions turn out to be accurate and we fully expect the settlement to stay within the amount provided for. This month, we also concluded an agreement with the insurers to pay us EUR 540 million to cover Respironics recall related product liability claims. This income is expected to be recognized in Q2 2024 and payment is expected during 2024. As a result, we have increased our free cash flow outlook for this year to EUR 0.9 billion to EUR 1.1 billion, now including the payment from insurers as well as the cash out of around EUR 430 million related to the remaining payment of the economic loss settlement.
With that, I'd like to hand it back to Roy.
Roy Jakobs: Thanks, Abhijit. I would like to continue with the progress we have made on our execution priorities. On patient safety and quality, we saw substantial improvement in CAPA closures in the quarter, driven by stronger processes, capabilities and governance around it. We also continue to drive significant simplification of the way we work and we further reduced the number of quality management systems. We are well on track to achieve our target of 65% reduction in 2024. And we continue to invest in quality improvement across the portfolio, acting fast on post-market surveillance signals. With respect to supply chain, we have now redesigned more than 80% of the planned PCBs and further reduced materials and component risks in the quarter.
We will continue leveraging and regionalizing our end-to-end supply chain to further reduce lead times and strengthen first-time-right deliveries. Finally, our new operating model with prime accountability in the businesses has been live for a year now, resulting in significant productivity improvements. We have reduced over 8,500 roles to-date. At the same time, we continue the culture journey to drive impact with care and attracted over 300 talents with HealthTech backgrounds this quarter alone. Let me close out by repeating the key messages of today's announcement. First, we delivered results in line with our performance improvement plan as a result of continued strong focus and progress on our three execution priorities. Secondly, we have taken very important steps in resolving the vast majority of the consequences of the Respironics recall.
And in this quarter alone, we had major milestones on litigation, consent decree and insurance, providing further clarity on the way forward for Philips. Thirdly, the progress we are making reinforces our confidence to deliver further performance improvements in 2024 and we are on track with the plan for 2025. I would like to thank you for joining the call, and we will now take your questions.
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