Philips delivers Q2 sales of EUR 4.4 billion, with 6% comparable sales decrease; income from continuing operations of EUR 213 million, Adjusted EBITA margin of 9.5% and operating cash flow of EUR 558 million

Amsterdam, July 20, 2020

Second-quarter highlights

• Sales amounted to EUR 4.4 billion, with a 6% comparable sales decrease
• Comparable order intake increased 27%
• Income from continuing operations was EUR 213 million, compared to EUR 260 million in Q2 2019
• Adjusted EBITA margin was 9.5% of sales, compared to 11.8% of sales in Q2 2019
• Income from operations amounted to EUR 229 million, compared to EUR 350 million in Q2 2019
• EPS from continuing operations (diluted) amounted to EUR 0.23; Adjusted EPS amounted to EUR 0.35, compared to EUR 0.42 in Q2 2019
• Operating cash flow improved to EUR 558 million, compared to EUR 390 million in Q2 2019
• Free cash flow increased to EUR 311 million, compared to EUR 174 million in Q2 2019

Frans van Houten, CEO

“As the global societal and economic impact of the COVID-19 outbreak intensified in the second quarter of 2020, we continued to focus on our triple duty of care: meeting critical customer needs, safeguarding the health and safety of our employees, and ensuring business continuity. In close collaboration with our suppliers and partners, we have steeply ramped up the production volumes of acute care products and solutions to help diagnose, treat, monitor and manage COVID-19 patients. Our field service engineers have been supporting healthcare providers around the world throughout these testing times. Under the circumstances, I am pleased at the way we have performed and I am grateful and proud of how all our employees have stepped up.

In the quarter, Philips' sales declined 6% on a comparable basis and we delivered an Adjusted EBITA margin of 9.5%. Comparable order intake grew a further 27% on the back of double-digit growth in the previous quarter, driven by CT imaging systems, hospital ventilators and patient monitors. As anticipated, COVID-19 caused a steep decrease in consumer demand and postponement of installations in hospitals, as well as elective procedures, resulting in a 19% comparable sales decrease for our Personal Health businesses and a 9% decline for our Diagnosis & Treatment businesses. This was partly offset by a strong 14% comparable sales growth for our Connected Care businesses.

We expect to return to growth and improved profitability for the Group in the second half of the year, assuming we can convert our existing order book for the Diagnosis & Treatment and Connected Care businesses, elective procedures normalize, and consumer demand gradually improves. Consequently, for the full year 2020 we continue to aim for a modest comparable sales growth and Adjusted EBITA margin improvement.

Looking ahead, our mission is more relevant than ever. Our strategy to transform the delivery of care along the health continuum, leveraging informatics and remote care capabilities, along with our innovative systems and services, has been validated during this crisis. I am convinced that Philips is well positioned to serve the current and future needs of hospitals and health systems.”

Business segment performance

The Diagnosis & Treatment businesses recorded a 9% comparable sales decline due to the postponement of installations and elective procedures. Although Diagnostic Imaging sales were in line with Q2 2019, Ultrasound showed a mid-single-digit decrease, and Image-Guided Therapy a double-digit decline. Comparable order intake showed a double-digit decrease. The Adjusted EBITA margin decreased to 8.6%, mainly due to the sales decline.

Comparable sales in the Connected Care businesses increased 14%, with double-digit growth in Sleep & Respiratory Care and mid-single-digit growth in Monitoring & Analytics. Comparable order intake more than doubled, driven by strong demand for patient monitors and hospital ventilators. The Adjusted EBITA margin increased to 17.8%, as additional investments to ramp up production were more than offset by operating leverage.

The Personal Health businesses recorded a comparable sales decline of 19%, with all businesses declining due to significantly decreased consumer demand. The Adjusted EBITA margin declined to 5.6%, due to the sales decline, partly offset by cost savings.

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

• Highlighting its strength in strategic partnerships to enhance patient care and improve care provider productivity, Philips signed 14 new agreements in the quarter. For example, Philips and the US Department of Veterans Affairs entered a 10-year agreement to expand their tele-critical care program, creating the world’s largest system to provide veterans with remote access to intensive care expertise, regardless of their location. In the Netherlands, Philips and Flevo Hospital signed a 10-year strategic partnership agreement to support precision diagnosis and optimize workflows and patient pathways, while driving efficiencies and cost optimization.
• In collaboration with its partners and suppliers, Philips tripled the production of its hospital ventilators in the quarter and is on track to achieve the planned four-fold increase to 4,000 units per week in July 2020, supporting the treatment of COVID-19 patients in the most affected regions around the world.
• Philips launched several new monitoring solutions for the Intensive Care Unit (ICU), the general ward and the home that feature remote monitoring capabilities and advanced analytics. These include Philips’ IntelliVue Patient Monitors MX750/MX850 for the ICU, Philips’ Biosensor BX100 for early patient deterioration detection in the general ward, and in collaboration with BioIntelliSense, the BioSticker medical device to help monitor at-risk patients from the hospital to the home.
• University of Kentucky HealthCare teamed up with Philips to implement the company’s tele-ICU technology to enhance patient care and improve utilization and patient flows across 160 ICU beds at the academic medical center’s two hospitals. Leveraging Philips’ acute telehealth platform, eCareManager, UK HealthCare is implementing the state’s first centralized virtual care model to help nurses detect risk of patient deterioration, so they can intervene earlier and help improve care outcomes.
• Philips received an industry-first 510(k) clearance from the FDA to market a wide range of its ultrasound solutions – including CX50 and Lumify – for the management of COVID-19-related lung and cardiac complications. Portable ultrasound solutions in particular have become valuable tools for clinicians treating COVID-19 patients, due to their imaging capabilities, portability and ease of disinfection.
• Supporting the increased demand for flexible ICU capacity, Philips introduced its new mobile ICUs in India. The ICUs can be furnished with a range of medical equipment, including ventilators, defibrillators, and patient monitoring. In the Philippines, Philips introduced a modular diagnostic imaging cabin with a CT or diagnostic X-ray system for rapid deployment.
• Complementing Philips Sonicare’s existing teledentistry services for patients, Philips and dental technology company Toothpic announced a new teledentistry platform for dental professionals. The multi-service platform provides a tool to build direct patient engagement, acquisition and retention while improving office efficiency, in-chair time and remote care.

Cost savings

In the second quarter, procurement savings amounted to EUR 57 million. Overhead and other productivity programs delivered savings of EUR 51 million. As a result, Philips is on track to deliver over EUR 400 million productivity savings for 2020 and EUR 1.8 billion productivity savings for the Group for the 2017-2020 period.

Executive Committee update

On July 16, Philips announced the appointment of Deeptha Khanna as the Chief Business Leader of the Personal Health businesses, effective July 20, 2020, and the appointment of Edwin Paalvast as Chief of International Markets, effective August 1, 2020. Ms. Khanna and Mr. Paalvast will become members of Philips’ Executive Committee, reporting to Philips CEO Frans van Houten.

Ms. Khanna joins Philips from Johnson & Johnson to lead its Personal Health businesses, which were temporarily led by Frans van Houten. Mr. Paalvast joins Philips from Cisco Systems, and will succeed current Chief of International Markets Henk de Jong, who has been appointed as CEO of Philips’ EUR 2.3 billion Domestic Appliances business, effective August 1, 2020. As announced in January 2020, the Domestic Appliances business is being separated from Philips, a process that is expected to be completed in the third quarter of 2021. Mr. de Jong will continue to report to Frans van Houten and remain a member of the Executive Committee.

Capital allocation

Share buyback program

At the end of the first quarter of 2020, Philips had completed 50.3% of its EUR 1.5 billion share buyback program for capital reduction purposes that was announced on January 29, 2019. In line with the company’s announcement on March 23, 2020, Philips has executed the second half of the program through individual forward transactions with settlement dates extending into the second half of 2021. Further details can be found here.

Share cancellation

In June 2020, Philips completed the cancellation of 3,809,675 shares that were acquired as part of the share buyback program mentioned above.

Dividend

In July 2020, Philips issued a total number of 18,080,198 new common shares for settlement of the 2019 dividend. After deduction of treasury shares, this results in a total number of outstanding shares of 909,395,209, compared to 909,194,188 shares in 2019 following the settlement of the 2018 dividend.

Regulatory update

Philips’ Emergency Care and Resuscitation (ECR) business resumed manufacturing and shipping of external defibrillators for the US, following notification from the FDA that the injunction prohibiting those activities has been lifted. Philips continues to comply with the terms of the Consent Decree, which remains in effect, and includes ongoing regulatory compliance monitoring and facility inspections of the ECR business and of Philips’ other patient care businesses by the FDA. In connection with the ECR portfolio, Philips received FDA pre-market approval (PMA) for the HeartStart FR3¹⁾ and HeartStart FRx²⁾ automated external defibrillators (AEDs), and their supporting accessories, including batteries and pads.

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 and availability of acute care products and solutions to combat COVID-19. Philips 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 IntelliVue Patient Monitors MX750/MX850 and its IntelliVue Active Displays AD75/AD85. Moreover, Philips has received FDA 510(k) clearances to market its Biosensor BX100 for early patient deterioration detection in the general ward, and to market a wide range of its ultrasound solutions for the management of COVID-19-related lung and cardiac complications.

Conference call and audio webcast

Frans van Houten, CEO, and Abhijit Bhattacharya, CFO, will host a conference call for investors and analysts at 10:00 am CET today to discuss the results. A live audio webcast of the conference call will be available on the Philips Investor Relations website and can be accessed here.

• COVID-19 significantly affected our results in Q2 2020. Comparable sales declined by 6%. It is estimated that COVID-19 had a negative impact of around 10 percentage points. Comparable sales for the Connected Care businesses showed double-digit growth, which was more than offset by a high-single-digit decline in the Diagnosis & Treatment businesses and a double-digit decline in the Personal Health businesses.
• Comparable order intake showed 27% growth, as the Connected Care businesses more than doubled their order intake, partly offset by a double-digit decline in the Diagnosis & Treatment businesses.
• Adjusted EBITA decreased by EUR 131 million and the margin decreased by 230 basis points compared to Q2 2019. COVID-19 negatively impacted the Adjusted EBITA margin by around 3 percentage points.
• COVID-19 impacts represent management estimates including incremental direct costs, direct cost savings, lost gross margin, lower factory coverage and various cost mitigation efforts; none of these were treated as adjusting items in determining Adjusted EBITA.
• Amortization of acquired intangibles includes an impairment of EUR 92 million related to technology assets.
  
• Restructuring, acquisition-related and other charges amounted to EUR 30 million, compared to EUR 110 million in Q2 2019. Q2 2020 includes a EUR 101 million gain related to the release of a contingent consideration liability, non-recurring inventory valuation charges of EUR 26 million resulting from a change in methodology enabled by the implementation of the integrated IT landscape, and separation costs of EUR 9 million related to the Domestic Appliances business.
• Financial income and expenses resulted in an income of EUR 20 million, compared to an expense of EUR 19 million in Q2 2019. Q2 2020 includes higher gains related to value adjustments of financial assets. This mainly represents the increase in value of one of our minority participations following the initial public offering of an underlying investment.
• Income taxes decreased by EUR 38 million, mainly driven by lower income and higher non-taxable results from participations.
  
• Net income decreased by EUR 36 million compared to Q2 2019, resulting from lower earnings, partly offset by lower tax expense and lower net financial expenses.

Amounts may not add up due to rounding.

• Sales in growth geographies decreased by 6% on a comparable basis, with a mid-single-digit decline in China and a double-digit decline in India. Sales in mature geographies decreased by 6%, with low-single-digit growth in Western Europe, which was more than offset by a mid-single-digit decline in other mature geographies and a double-digit decline in North America.
• Comparable order intake in growth geographies showed double-digit growth, driven by double-digit growth in Russia & Central Asia and Latin America. Mature geographies recorded double-digit growth, with double-digit growth in North America and Western Europe, partly offset by a high-single-digit decline in other mature geographies.

• Net cash flows from operating activities increased by EUR 168 million, mainly due to higher cash inflows from working capital and lower tax paid.
• Other cash flows from investing activities mainly includes transactions related to acquisitions and minority investments.
  
• Treasury shares transactions relates to Long-Term Incentive and employee stock purchase plans.
  
• Changes in debt in 2019 included the net proceeds from bonds issued.
  
• The 2019 dividend, adopted during the June 26, 2020 Extraordinary General Meeting of Shareholders, was distributed in July 2020 fully in shares.
  

• The increase in debt is mainly attributable to forward contracts in relation to Philips' share buyback program.
• The decrease in shareholders' equity mainly relates to the declared stock dividend and forward contracts.

Diagnosis & Treatment businesses

• Comparable sales declined by 9%, due to the postponement of installations and elective procedures resulting from the COVID-19 outbreak. Diagnostic Imaging sales were in line with Q2 2019, while Ultrasound showed a mid-single-digit decrease, and Image-Guided Therapy a double-digit decline.
• Comparable sales in growth geographies showed mid-single-digit growth, driven by double-digit growth in China. Mature geographies recorded a double-digit decline, with flat sales in other mature geographies and a double-digit decline in both Western Europe and North America.
• Adjusted EBITA decreased by EUR 89 million, resulting in a margin of 8.6%, due to the decline in sales and an unfavorable mix.
• Amortization of acquired intangibles includes an impairment of EUR 92 million related to technology assets.
  
• Restructuring, acquisition-related and other charges to improve productivity resulted in income of EUR 59 million, compared to charges of EUR 41 million in Q2 2019. Q2 2020 includes a EUR 101 million gain related to the release of a contingent consideration liability.
• In Q3 2020, restructuring, acquisition-related and other charges are expected to total approximately EUR 45 million.

Connected Care businesses

• Comparable sales growth was 14%, mainly driven by COVID-19-generated demand, with double-digit growth in Sleep & Respiratory Care and mid-single-digit growth in Monitoring & Analytics.
• Comparable sales in growth geographies showed double-digit growth, driven by double-digit growth in Latin America and Middle East & Turkey. Mature geographies recorded double-digit growth, with double-digit growth in Western Europe, mid-single-digit growth in other mature geographies and low-single-digit growth in North America.
• Adjusted EBITA increased by EUR 94 million, resulting in a margin of 17.8%, as additional investments to ramp up production were more than offset by operating leverage.
• Restructuring, acquisition-related and other charges amounted to EUR 31 million, which is in line with Q2 2019. In Q3 2020, restructuring, acquisition-related and other charges are expected to total approximately EUR 30 million.

Personal Health businesses

• Comparable sales declined by 19% due to the COVID-19 outbreak, with a double-digit decline in Personal Care, Domestic Appliances and Oral Healthcare.
• Comparable sales in growth geographies showed a double-digit decline. Mature geographies recorded a double-digit decline, with a low-single-digit decline in Western Europe and a double-digit decline in both North America and other mature geographies.
• Adjusted EBITA decreased by EUR 121 million compared with Q2 2019, resulting in a margin of 5.6%, due to the decline in sales, partly offset by cost savings.
• Restructuring, acquisition-related and other charges amounted to EUR 39 million, compared to EUR 7 million in Q2 2019. Q2 2020 includes non-recurring inventory valuation charges of EUR 26 million resulting from a change in methodology enabled by the implementation of the integrated IT landscape. In Q3 2020, restructuring, acquisition-related and other charges are expected to total approximately EUR 5 million.

Other

• Sales decreased by EUR 12 million, mainly due to lower royalty income.
• Restructuring, acquisition-related and other charges amounted to EUR 19 million, compared to EUR 29 million in Q2 2019. Q2 2020 includes EUR 9 million of separation costs related to the Domestic Appliances business. In Q3 2020, restructuring, acquisition-related and other charges are expected to total approximately EUR 45 million; this includes separation costs of approximately EUR 20 million related to the Domestic Appliances business.

Introduction

This report contains the semi-annual report of Koninklijke Philips N.V. (‘the Company’ or ‘Philips’), a company with limited liability, headquartered in Amsterdam, the Netherlands. The principal activities of the Company and its group companies (‘the Group’) are described in the Annual Report 2019. The semi-annual report for the six months ended June 30, 2020 consists of the semi-annual condensed consolidated financial statements, the semi-annual management report and responsibility statement by the Company’s Board of Management. The information in this semi-annual report is unaudited.

Responsibility statement

The Board of Management of the Company hereby declares that to the best of their knowledge, the semi-annual condensed consolidated financial statements for the six-month period ended June 30, 2020, which have been prepared in accordance with IAS 34 Interim Financial Reporting as endorsed by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole, and that the semi-annual management report for the six-month period ended June 30, 2020 gives a fair view of the information required pursuant to article 5:25d paragraph 8 and 9 of the Dutch Financial Markets Supervision Act (Wet op het Financieel toezicht).

Amsterdam, July 20, 2020

Board of Management

Frans van Houten

Abhijit Bhattacharya

Marnix van Ginneken

Amounts may not add up due to rounding.

• COVID-19 significantly affected Philips' results in the first half of 2020. Comparable sales declined by 4%. It is estimated that COVID-19 had a negative impact of around 8 percentage points. The Connected Care businesses recorded double-digit growth, which was more than offset by a mid-single-digit decline in the Diagnosis & Treatment businesses and a double-digit decline in the Personal Health businesses. Comparable sales in growth geographies showed a high-single-digit decline, with a double-digit decline in China and India. Mature geographies recorded a low-single-digit decline, with low-single-digit growth in Western Europe, which was more than offset by a low-single-digit decline in North America and a mid-single-digit decline in other mature geographies.
• Comparable order intake showed 26% growth, as the Connected Care businesses more than doubled their order intake, partly offset by a double-digit decline in the Diagnosis & Treatment businesses. On a geographic basis, growth geographies achieved double-digit growth, with double-digit growth in Russia & Central Asia and high-single-digit growth in China. Mature geographies recorded double-digit growth, with double-digit growth in North America, Western Europe and other mature geographies.
• Adjusted EBITA decreased by EUR 252 million and the margin decreased by 270 basis points compared to the first half of 2019. COVID-19 negatively impacted the Adjusted EBITA margin by around 3 percentage points.
• COVID-19 impacts represent management estimates including incremental direct costs, direct cost savings, lost gross margin, lower factory coverage and various cost mitigation efforts; none of these were treated as adjusting items in determining Adjusted EBITA.
  
• Amortization of acquired intangibles includes an impairment of EUR 92 million related to technology assets.
  
• Restructuring, acquisition-related and other charges amounted to EUR 146 million, compared to EUR 160 million in the first half of 2019. The first half of 2020 includes a EUR 101 million gain related to the release of a contingent consideration liability, charges of EUR 31 million related to a value adjustment of capitalized development costs, non-recurring inventory valuation charges of EUR 26 million resulting from a change in methodology enabled by the implementation of the integrated IT landscape, and EUR 9 million of separation costs related to the Domestic Appliances business. The first half of 2019 also included a gain related to the sale of the Photonics business in Germany and a charge related to a litigation provision.
  
• Financial income and expenses resulted in an income of EUR 2 million, compared to an expense of EUR 28 million in the first half of 2019. The first half of 2020 includes higher gains related to value adjustments of financial assets. This mainly represents the increase in value of one of our minority participations following the initial public offering of an underlying investment.
• Income taxes decreased by EUR 127 million year-on-year, mainly due to lower income in 2020, one-off non-cash benefits from a decrease in tax liabilities, and higher non-taxable results from participations.
• Net income decreased by EUR 160 million compared to the first half of 2019, resulting from lower earnings, partly offset by lower tax expense and lower net financial expenses.
  

• Net cash flows from operating activities increased by EUR 297 million, mainly due to lower cash outflows from working capital and lower tax paid.
• Other cash flows from investing activities mainly includes transactions related to acquisitions, divestments and minority investments. The first half of 2019 included the proceeds related to the sale of the Photonics business.
• Treasury shares transactions includes share repurchases for capital reduction purposes and for Long-Term Incentive and employee stock purchase plans.
  
• Changes in debt mainly includes the net proceeds related to bonds issued.
• The 2019 dividend, adopted during the June 26, 2020 Extraordinary General Meeting of Shareholders, was distributed in July 2020 fully in shares.
  

• The increase in debt is mainly attributable to the issuance of bonds and forward contracts in relation to Philips' share buyback program..
• The decrease in shareholders' equity mainly relates to the declared stock dividend and forward contracts.

• Comparable sales declined by 4%, due to the postponement of installations and elective procedures resulting from the COVID-19 outbreak. Diagnostic Imaging recorded low-single-digit sales growth, which was more than offset by a mid-single-digit decline in Ultrasound and a double-digit decline in Image-Guided Therapy.
• Comparable sales in growth geographies showed mid-single-digit growth, driven by double-digit growth in China. Mature geographies recorded a high-single-digit decline, with a low-single-digit decline in other mature geographies, a mid-single-digit decline in Western Europe and a high-single-digit decline in North America.
• Adjusted EBITA decreased by EUR 80 million, resulting in a margin of 7.5%, due to the decline in sales and an unfavorable mix.
• Amortization of acquired intangibles includes an impairment of EUR 92 million related to technology assets.
  
• Restructuring, acquisition-related and other charges to improve productivity were EUR 17 million, compared to EUR 70 million in the first half of 2019. The first half of 2020 includes a EUR 101 million gain related to the release of a contingent consideration liability and charges of EUR 31 million related to a value adjustment of capitalized development costs.

• Comparable sales growth was 11%, mainly driven by COVID-19-generated demand, with double-digit growth in Sleep & Respiratory Care and mid-single-digit growth in Monitoring & Analytics.
• Comparable sales in growth geographies showed double-digit growth, driven by double-digit growth in Latin America and China. Mature geographies recorded high-single-digit growth, with double-digit growth in Western Europe, mid-single-digit growth in other mature geographies and low-single-digit growth in North America.
• Adjusted EBITA increased by EUR 117 million, resulting in a margin of 14.1%, as additional investments to ramp up production were more than offset by operating leverage.
• Restructuring, acquisition-related and other charges were EUR 62 million, compared to EUR 61 million in the first half of 2019.

• Comparable sales declined by 16%, due to the COVID-19 outbreak, with a double-digit decline in Domestic Appliances, Personal Care and Oral Healthcare.
• Comparable sales in growth geographies showed a double-digit decline, with a double-digit decline in China. Mature geographies recorded a high-single-digit decline, with a mid-single-digit decline in Western Europe, a high-single-digit decline in North America and a double-digit decline in other mature geographies.
• Adjusted EBITA decreased by EUR 230 million, resulting in a margin of 6.4%, due to the decline in sales, partly offset by cost savings.
• Restructuring, acquisition-related and other charges were EUR 47 million, compared to EUR 23 million in the first half of 2019. The first half of 2020 includes non-recurring inventory valuation charges of EUR 26 million resulting from a change in methodology enabled by the implementation of the integrated IT landscape.

• Sales decreased by EUR 42 million, mainly due to lower royalty income and the loss of revenue from the Photonics business following its divestment at the end of Q1 2019.
• Restructuring, acquisition-related and other charges were EUR 20 million, compared to EUR 4 million in the first half of 2019. The first half of 2020 also includes EUR 9 million of separation costs related to the Domestic Appliances business. The first half of 2019 also included a gain related to the sale of the Photonics business in Germany and a charge related to a litigation provision.