Koninklijke Philips NV Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Profitability and Cash Flow: Delivered strong profitability improvement and cash flow in Q4 and full year 2024. Comparable order and sales grew low single digit despite double-digit declines in China, partly offset by growth in the rest of the world.
• Respironics Recall Progress: Made significant steps to address the Respironics recall, with final approval for medical monitoring and personal injury settlements. End-to-end supply chain operates at industry-standard lead times and service levels.
• Supply Chain and Geopolitics: Monitoring volatile geopolitical context, working on regionalizing supply chains, diversifying suppliers, dual sourcing, and network flexibility.
• Leaner Operating Model: Leaner operating model contributed to productivity savings of over EUR1.7 billion in the last two years. Building a renewed team with strong health tech capabilities.
• Innovation: AI-driven innovation setting industry standards, with over 50% of sales from new and upgraded products launched in the last three years. Signed long-term partnerships and expanded collaborations, e.g., with Amazon Web Services.

Segment Performance

• Diagnosis & Treatment: Comparable sales decreased 1% in the fourth quarter and increased 1% in the full year. Adjusted EBITA margin improved by 170 basis points in Q4 to 12.1% and was stable at 11.6% in the full year, offset by lower sales in China but aided by positive product mix, pricing, and productivity measures.
• Connected Care: Comparable sales increased 7% in Q4 due to a low comparison base from 2023 Respironics recall provisions, and 2% for the full year. Adjusted EBITA margin was 15% in Q4 and 9.6% for the full year, with both Enterprise Informatics and Sleep & Respiratory Care businesses achieving positive adjusted EBITA margin in 2024.
• Personal Health: Comparable sales decreased 2% in the quarter and 1% in the full year, with strong growth in the rest of the world offset by a double-digit decline in China. The adjusted EBITA margin was 18% in Q4 and 16.7% for the year, driven by strong cost management and productivity initiatives.

Guidance

• Sales and Margin: Expect 1%-3% comparable sales growth in 2025, with growth in the rest of the world partly offset by mid- to high single-digit decline in China. Adjusted EBITA margin expected to increase by 30-80 basis points to 11.8%-12.3% in 2025, driven by focused growth strategy, productivity savings, and innovation.
• Productivity Savings: Increased productivity savings target from EUR2 billion to EUR2.5 billion for 2023-2025 period, with expected savings of EUR800 million in 2025.
• Free Cash Flow: Expect free cash flow at the lower end of EUR1.4 billion to EUR1.6 billion plan range, excluding impact of US settlements and ongoing legal proceedings.

Risks

• Geopolitical Volatility: Volatile geopolitical context could impact supply chain and operations; working on regionalizing supply chains to mitigate risks.
• China Market Challenges: Consumer demand in China remains subdued, and hospital demand impacted by anticorruption and slow National Renewal Program implementation in first half of 2025.
• Respironics Settlement Impacts: Potential impact of US settlements and ongoing legal proceedings on cash flow and financials.
• Tariff Uncertainties: Impact of potential future tariff policies on manufacturing and supply chain, with no speculation on future tariff impacts.

Question and Answer

Q: Richard Felton from Goldman Sachs asked about top line guidance and additional cost savings.

A: Roy Jakobs responded that assumptions for the rest of the world are realistic considering CapEx environment and innovation momentum, while productivity savings include cost activities, role reduction, procurement savings, and safeguarding innovation spend.

Q: David Adlington from JPMorgan inquired about market share in D&T in China and DOJ timing.

A: Roy Jakobs noted that in China, MR and ultrasound segments are gaining momentum, and on DOJ timing, no specific updates as still in collaboration with DOJ with no indicated timing.

Q: Hassan Al-Wakeel from Barclays asked about order growth in D&T and margin bridge.

A: Roy Jakobs commented on high-single digit order growth in D&T driven by IGT, MR, and ultrasound, while Charlotte Hanneman explained margin expansion from high-margin businesses, improvement in lower-margin businesses, productivity savings, and back-end loaded margin uplift due to sales dynamics.

Q: Julien Dormois from Jefferies asked about China sales divergence and long-term plan.

A: Roy Jakobs explained consumer side having higher double-digit impact in China, while Charlotte Hanneman mentioned Capital Markets Day later in the year to update on longer-term margin plans.

Q: Lisa Clive from Bernstein asked about patient monitoring trends and Connected Care performance.

A: Roy Jakobs stated monitoring business has positive order intake growth and gaining share, while in Connected Care, S&RC business is regaining momentum with return to markets and new mask launches.

Q: Robert Davies from Morgan Stanley asked about D&T margins and restructuring costs.

A: Charlotte Hanneman explained D&T margin step-up in Q4 due to mix, productivity, and pricing, while restructuring costs related to operating model simplification and Respironics recall resolution, tapering off over time.

Q: Graham Doyle from UBS asked about China caution and consent decree.

A: Roy Jakobs noted caution on China due to lack of inflection point, while Charlotte Hanneman explained consent decree charges tapering off over time and commitment to resolving Respironics recall.

Q: Hugo Solvet from BNP Paribas Exane asked about tariffs and dividend.

A: Roy Jakobs discussed global manufacturing footprint and regionalization to mitigate tariff impacts, while Charlotte Hanneman explained dividend option as balance between dividend commitment and cash demand from Respironics settlements.

Q: Giang Nguyen from Citi asked about growth phasing and margins.

A: Charlotte Hanneman explained back-end loaded sales growth and margin improvement due to China impact, royalty phasing, and comparable base effects, with productivity savings back-end loaded.

Q: Julien Ouaddour from Bank of America asked about China decline difference and US healthcare budget.

A: Roy Jakobs explained PH business driving China decline, and US hospital CapEx expected to continue strong due to underlying demand for procedures and imaging.

Q: Wim Gille from ABN AMRO ODDO asked about D&T incidents and quality actions.

A: Charlotte Hanneman explained incidents related to quality actions and operating model simplification, with no specific modalities called out for quality actions at this point.