Welcome to the Royal Philips conference call on Wednesday, January 12th, 2022. During the call hosted by Mr. Frans van Houten, Chief Executive Officer, and Mr. Abhijit Bhattacharya, Chief Financial Officer, all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions. If any participant has difficulty hearing the conference at any time, please press the star followed by the zero on your telephone for operator assistance. Please note that this call will be recorded. I will now hand the conference over to Mr. Leandro Mazzoni, Head of Investor Relations.
Good morning, everyone. Thanks for joining our fourth quarter and full year 2021 update call at short notice. I'm here with our Chief Executive Officer, Frans van Houten, and our Chief Financial Officer, Abhijit Bhattacharya. Frans will make brief opening remarks, and after that, there will be an opportunity for Q&A. The fourth quarter and full year 2021 financial results will be reported on January 24th, 2022. During today's call, we ask you to focus your questions on the information contained in this morning's press release. Over to you, Frans.
Yeah, hello, everyone, and thank you for joining us today. I would like to provide some further background on the update on financial performance in the fourth quarter that was published at 7:00 A.M. this morning. In the quarter, we faced intensified global supply chain volatility and challenges across our businesses, primarily related to the shortage of electronic components and shipping times. In addition to that, we saw customers push out equipment installations in hospitals as they struggled with site readiness and the impact of COVID on their people and operations in December. While we flagged these risks to you in October at our third quarter results publication, the rapid re-emergence of COVID created a larger impact than we had anticipated at that time.
This constrained our ability to fully convert our strong order book to revenue, which in turn led to an additional impact of around EUR 350 million on our sales compared to our earlier expectations for the quarter. Comparable sales are expected to decline approximately 10% in the quarter, mainly due to these effects and including the impact of the earlier announced Respironics recall. Sales for the full year 2021 are expected to be approximately EUR 17.2 billion, which is a 1% comparable decline. Supply chain headwind, combined with the impact related to the recall, amounted to approximately 5 percentage points for the full year. I am very encouraged to see that our end markets remain very healthy and the competitive momentum of our solutions is strong.
Comparable order intake growth has remained robust with 4% growth in the quarter, driven by double-digit growth in the Diagnosis & Treatment businesses, resulting in a 4% growth for the full year 2021. This order intake growth further builds on the high single-digit growth in Q4 and full year 2020, resulting in an all-time high order book for Philips. We signed 35 long-term strategic partnerships across the world in the fourth quarter. Adjusted EBITDA for the quarter is expected to be approximately EUR 650 million or 13% of sales, impacted primarily by the lower sales. Adjusted EBITDA was also impacted by higher supply costs, including extraordinarily high pricing on spot buys and an expected push out of an IP deal.
Adjusted EBITDA for the full year is expected to be around EUR 2.1 billion or 12% of sales. Group restructuring, acquisition-related and other charges are expected to amount to EUR 420 million in the fourth quarter. This is EUR 350 million above the previously guided charges, primarily due to a EUR 225 million increase of the provision related to the recall, which I will explain in a minute, as well as a provision for other quality actions in Connected Care, an increase of the provision for the onerous ventilator contract from 2020, and a legal provision which are not related to the recall. The repair and replacement program related to the sleep recall is underway globally, and we have substantially ramped up our production, service, and repair capacity.
Following a comprehensive patient and customer outreach program, Philips Respironics expanded the eligibility of certain older devices in the interest of patients and in alignment with the relevant competent authorities. Consequently, Philips Respironics now expects to remediate a total of around 5.2 million registered devices globally and is increasing the field service provision by around EUR 225 million, mainly due to this higher volume of units now requiring remediation and increased supply cost to do that. Patient well-being is at the heart of everything we do at Philips, and we aim to get a solution to the patients as fast as possible. To date, we have produced a total of approximately 1.5 million repair kits and replacement devices, of which approximately 700,000 have reached customers.
We expect to complete the remediation program and to be able to serve new sleep and respiratory care customers in the fourth quarter of 2022. I'm also encouraged by the VOC test results to date for the first generation DreamStation devices, which we published in December 2021. The results indicate that VOCs do not exceed safe exposure thresholds specified in the applicable safety standards. Using conservative health protective exposure thresholds, the additional testing suggests no increased risk for adverse health effects in the general patient population, nor the higher-risk patient population as a result of VOC exposure. As we announced in December, it's important to note that the tested DreamStation devices were not exposed to ozone cleaning in accordance with the instructions for use. Further health risk assessments are ongoing.
Comprehensive particulate testing and analysis are expected to be completed in the second quarter of 2022, as testing protocols in compliance with the full extent of the relevant ISO standards for all affected product platforms require long lead times. We will continue to provide timely updates on findings from these assessments. Let me conclude now. We remain focused on working through the headwinds from global supply chain issues and on closely working with suppliers and governments to address the impact of this in healthcare and ensure that they recognize the importance of prioritizing life-saving medical equipment. We are also doing everything we can to deliver a solution to patients and caregivers affected by the sleep recall as fast as possible. Our strategy and portfolio resonate very well with customers, and I remain confident in the medium-term growth and profit expansion potential of our company.
Based on strong customer demand and our growing order book, we expect to resume our growth and margin expansion trajectory in 2022 as we work through the headwinds. We will provide more color on that later this month when we publish the Q4 and full year 2021 results. With that, we will now open the line for your questions. Thank you.
Thank you, sir. If any participant would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press the star followed by the two. Please limit yourself to one question with a maximum of one follow-up. This will give more people the opportunity to ask questions. If you are using speaker equipment today, please lift the handset before making your selections. There will be a short pause while participants register for a question. Our first question today comes from Veronika Dubajova from Goldman Sachs. Please state your question.
Hi, Frans van Houten, thanks for the call this morning. I just would love to get your thoughts on how you're thinking about 2022. Obviously, helpful to hear from you that you expect to drive growth and margin improvement. I think you've previously talked about 2022 being consistent with the midterm guidance that you've provided for the business. What's your current thinking around that, you know, in light of what you're seeing in the environment out there in the market?
Yeah. Hi, Veronika. Good morning. As I just said, we see the discussion around 2022 more suited for the 24th of January, you know, when we have longer time, and we would like to focus today on the results announced. Now, what I can say to you is that order growth was strong, in fact, better. We have a very strong order book. So that bodes very well to the underpinning of next year or 2022. At the same time, I think we need to be realistic that supply chain issues will also still affect 2022, which we also said, right? We said it will at least till the summer, we said it in October. Then we need to reckon with the effects of COVID, right?
There are many moving pieces that we are currently constructing, and of course, then link it back to the lower ending point of 2021. I hope that you can accept that we then talk about it on the 24th of January.
Okay. Understood. Thanks, Frans. I guess maybe just give us a little bit of flavor in terms of the revenues that you've lost this quarter against the original plan, what proportion of that is in businesses where you are unlikely to recover those revenues versus what proportion is in the businesses where you think this is just a delay to revenue recognition?
Yeah. There was also a miss in Personal Health. Typically, the Personal Health demand is more fungible than health systems. Health systems orders shift into 2022. We have had no customers, let's say, canceling. They are struggling to reschedule, and sometimes also they pushed it out, right, as we said. I look at Abhijit whether we can-
Yeah.
Take a proportion.
Yeah. I think about 85% is health systems. The PH miss was relatively less. If you take 85 as health systems, then you know most of it will come back during the course of coming quarters.
That's helpful. Thank you. I think if I can just quick follow-up on the respiratory recall, I think, You are quoted, Frans, in the press today as saying you might need to take a legal provision as well. I'm just kind of curious. I don't think that's a new statement per se, but just curious. When you think you might be able to give us color on that legal provision-
Yeah
your thinking on that legal liability risk now that you have the VOC count?
That was a Bloomberg journalist this morning, and the discussion was, you know, the legal provision expansion is for the field recall action. And then he said, "So that does not include legal?" I said, "No, that does not include legal." All right? Now, it's too early to say anything about it. And frankly speaking, we need all that testing result to provide let's say, the ammunition to also give confidence in the market that the risk to the patients is much lower than a lot of people think, right? Now, the VOC testing is of course a great outcome, all right? Where there is no VOC risk to the patients, as I've also covered in my introductory remarks.
Now, there's a lot more testing to be done, also in a way that stands up and is accepted by the regulators. This is also why it takes more time, all right? Because I know that there's frustration out there that it takes so much time. I share that. We need to do these tests in a very comprehensive manner and according to very strict protocols, in multiple test houses, and that just takes time. By the way, there is a capacity constraint in these test houses as well. That doesn't make it any easier. We are on the right path there. Once we have all that data, I think we are in a much better position to make statements that are credible.
Thank you, guys.
Thank you. The next question comes from Hassan Al-Wakeel from Barclays. Please state your question.
Thank you. Good morning. Are the component shortages, component shortage issues more localized in Personal Health or is this widespread across the businesses? Do you see any signs at all in relative easing on the semiconductor side towards the end of the quarter or indeed into the start of this year? What is your base case on the duration of this impact in 2022, please?
Yeah. Good morning, Hassan. The supply chain constraints are across the board, affecting multiple of our businesses. Abhijit just mentioned PH, but in Connected Care, patient monitoring was affected. Precision Diagnosis is significantly affected. The shortages intensified during the quarter. As we said in October, we expect this at least to last till the middle of 2022.
Perfect. On the Omicron impact as it relates to staff absenteeism in hospitals, you know, where do you see elective procedures exiting the fourth quarter? You know, how is this impacting your Image-guided Therapy business?
Yeah. Elective procedures are affected, probably more so in January than in December, because in the U.S., the impact started to come full-fledged through, I think, quite late in December. I think the first two or three weeks or the first months of this year, we will see stronger impact on electives. I also worry about absenteeism, transport and shipping issues. I don't think that we as a society, I mean, the company, but also broader, have fully grasped the potential impact of Omicron, as people may not get very sick, but they all need to quarantine, and it leads to absenteeism and partly in Philips, but more so I think with shipping companies and handling and drivers.
We've also seen that part of the supply issues that we talked about were related to shipping delays, port constraints, all right? If something is 2 weeks longer in transit, actually it's hundreds of millions EUR for us, all right? That also is part of the explanation of what happened in Q4. I think we got quite a lot of questions also on visibility. The semiconductor industry gives us very short visibility. Even though we have long-term orders out there, the visibility is not great. Sorry, I deviated from your question, Hassan.
No, that's super helpful. If I can squeeze one more in on the recall, and particularly the extended timeline, as you've increased the remit. What does that mean for financial performance in Connected Care? You know, do you still expect that business to grow in 2022?
Well, that's, I think, more a 24th of January question. In any case, you need to realize that Q1 of last year still had sleep business recorded. Therefore, the year-on-year comparison in Q1 will be quite tough. When we talked to you previously, we also said the recall would take 12 months after the regulators would approve the recall plan. And while the first approval came in August, September of last year, there were also many that came in later, so the 12-month horizon to execute the recall is still about intact, right? Which brings us to late Q3, and for the purpose of this call, we have said, you know, the resumption or the completion and the resumption of sales in Q4, right? We are not going to be materially different in our statements.
Let's promise to come back on this on the twenty-fourth, Hassan.
Thank you.
Thank you. The next question comes from David Adlington from J.P. Morgan. Please state your question. Mr. Adlington, please ensure you're unmuted now.
Maybe just on the hospital access point. I just wondered if there's any particular?
Can't hear you.
Hello, can you hear me?
Yeah, now I can.
Hello?
Yes, go ahead.
Can you hear me?
I can hear you, but please go ahead.
Sorry, guys. Yeah, just in terms of, most of my questions have been answered, but maybe just on the hospital access point. On the hospital access point, are there any particular regions that have been impacted more heavily by, access to hospitals and what's really impacting that? Thank you.
Well, I think we all know, for example, the New York region, but a lot of hospitals are quite loaded with their COVID emergency care. Some of the delays are perhaps COVID-related, but other parts are site readiness delay related, as the contractors of hospitals also struggled with their availability and their parts, construction delayed, and that made the sites not ready for reception. As we now see hospitals rescheduling that delayed installation, some of them skip Q1 because they say, "Well, you know what? We didn't make it in Q4, but we don't want you in Q1," and therefore, there will be delays from Q1 to Q2 or from Q4 to Q2.
It's a complex puzzle, and as we just answered on the question from Hassan on electives, the impact of COVID will actually be more severe in January than in December, right? We saw that coming in December, but we will see that continue in Q1 of this year.
Great. Thank you.
Thank you. The next question comes from Lisa Clive of Bernstein. Please go ahead.
Hi. Thanks for the time this morning. Just two questions. One, on the VOC testing results on the polyester foam that you announced on December twenty-third. Obviously, it was nice to see a relatively clean bill of health on that. Did you originally anticipate that the particulate testing would take a lot longer? Because from your prior commentary, it seemed like we would get all the information in one go. Is there just. If you could just explain why there's now two different timelines, that would be helpful. Then my second question is on the testing that the FDA requested on the silicone foam. Is that just going to be on VOCs, or will you also have to do particulate testing?
Is that timeline going to track the polyester timeline, or will it be a faster process?
Yeah. Hi, Lisa. Great questions. Indeed, originally, we were more on a faster track also on the particulates testing. In dialogue with the regulator, the scope of testing on also particulates has been extended. Let's say a broader test with more ISO standards, as if a particulate is an implanted device. Of course, that sounds a bit strange, but if a particle would remain in the body, then what's the consequence of that? That is a longer test protocol, for which we have said in December that we expect that to be completed in the second quarter.
Now on the silicone, I want to emphasize that the silicone foam is safe. You can also derive from the fact that the FDA said, you know, the recall and the replacement can continue, and we continue to support these products that they concur with that. They have asked for a comprehensive suite of tests around silicone that is underway. It takes time. The FDA has all sorts of requirements as to the protocols and the procedures. I have all confidence in that. I think it also relates to a desire to have a strong rigor around this, but I want to emphasize that all our own tests and products show that the silicone is safe.
Okay, thanks. Just, are you aware of what the other manufacturers in the industry are doing at this point in time? ResMed, through our correspondence with their IR, indicated that the FDA has indeed requested information from them, which they have supplied to the FDA. I assume that would be on the foam, you know, the silicone foam that they use. Then there's also polyether. You know, you are investigating polyester and silicone fairly extensively.
Have you heard anything about the FDA requesting any other manufacturers to do sort of similar analyses of polyether, which my understanding is you don't use any polyether, but I'm just trying to understand whether this is a sort of more industry-wide concern, you know, particularly per your comments just now that, you know, the FDA is sort of requesting that you look at particulates as if they were implanted. You know, this could happen with foam breakdown of any type. Just curious what else is going on in the industry.
Yeah. Look, I don't have, of course, information on competitors. You would have to ask them. It is my impression that there is a broader interest from regulators around VOCs in general, and then foam, but not restricted to foam. I think VOCs in general is a broader topic of interest. We use the same silicone foam as some of our competitors, right? As I said, we feel confident about the silicone foam being safe. I can't answer your question on the other PE polyether foam.
Okay, fair enough. Thank you.
Thank you. We're now moving to a question from James Vane-Tempest of Jefferies. Please state your question.
Yes. Hi, thanks for taking my question. Firstly, just on the provision, you state in the release it's more to do with the affected devices, but I also noticed there's a provision for quality actions and other matters in Connected Care. I just wonder if you can elaborate a little bit more on the quantum of that, and specifically what they relate to, please.
Yeah. The quality actions that we are taking in Connected Care, but also in the whole company following the sleep issue mean that we take proactive action also in some other product areas. We have also in conjunction with the Form 483 a broad commitment and response to quality and patient safety. There are, let's say, some actions that require a provision for which we have taken that some other products in Connected Care that at this time we cannot identify, let's say publicly, but we wanted to make sure that we do everything that is right in relation to our commitment to the FDA that we have made.
Thank you. As a follow-up, just on the VOC testing, I mean, you state these studies weren't conducted using ozone cleaning techniques. I'm just curious if this will be done as part of follow-ups, as this seems to be one of the key points of concern. Can you comment also whether any other regulators outside the U.S. have expressed concerns with the ongoing repair or replace in the U.S.? Thank you.
Well, the favorable or positive results from VOC testing is when the product is used according to the instructions for use and therefore not using ozone cleaning. We are doing some testing to understand what ozone does to the product, but that is at this time not available or not finished, and therefore we cannot share that with you. The other regulators in the world follow closely the news around testing. They have very much interest in understanding that.
For example, the VOC testing was very favorably received across the world because it basically means that the judgment of doctors that patients can continue to use the machine while waiting for a repair is now substantiated as the VOC testing comes out showing no health hazards. That is very much very important. There's general concern around, let's say, the speed of the repair and replace actions. Regulators want this to happen as fast as possible, and so do we, and we are sparing no effort to do this as fast as possible. The extension for older units is something that very much came up also in the United States but certainly not exclusively so.
Just a quick clarification.
I have to say, you know, the relationship with the regulators across the world is good. There is intensive collaboration, and weekly contact. There is a real collaboration going on.
Thank you, and just a quick clarification on your comments, if I can. You mentioned about the expansion to 5.2 million units. The driver behind that, was that requested by FDA or was that something which you decided with the data that you had, just in terms of the thought process to expand the scope of the repair recall procedures?
It's difficult to deny a patient with an older unit a repair if they are still using it. Sometimes patients have two units that they use alternately. We felt it was difficult to say no on an arbitrary five-year limit, even though we know that in the U.S., patients are entitled to new reimbursement, right? The fact that there is new reimbursement does not mean that they should stop using the old product, right? We felt that we had to be more lenient on accepting the registrations that were coming through in our database on older units.
When we checked in with the regulators, we were supported in that conclusion.
Thank you. Unfortunately, we have only time left for two more questions. Our next question comes from Falko Friedrichs from Deutsche Bank. Please state your question.
Thank you. Good morning. I have one question left, actually. It's on China. To what extent did potentially lower demand in China play a role in these lower results in the fourth quarter, especially in the Personal Health segment?
Abhijit, you want to take that?
Yeah, no. The demand, I think Frans has mentioned that demand is in general not been the issue. We have also in PH had good demand, and whatever we are able to supply, we have been able to sell. We don't see a demand-related issue in China.
Okay, thank you.
Thank you. Our last question today comes from Sezgi Ozener from HSBC. Please state your question.
Hi. Thanks for saving the last question for me. Thanks, Frans and Abhijit, and for the presentation. Just one very quick question. If we were to quantify this 5% decline in comparable sales growth, which is attributable to the combination of the supply chain factors as well as the recall, how would you divide that? After you take out, like, the recall impact, how would you divide the supply chain issue impact on the three segments?
There are two ways in which we can answer it. One is if you look at the overall decline, about 3% comes from supply chain issues and 2% related to the sleep recall. If you look on the full year sales where we have a decline of 1%, if you would take the supply chain and the recall numbers that I just gave you of 5%, let's say excluding these two, the sales growth would have been about 4% for the year.
Yeah.
Yeah, the supply chain is 3%, like I said, and the recall is 2%. Supply chain is a little bit more than the recall impact. Yeah.
Very well. Thank you. In that case, if we were to add that back, that would bring us to 4%, which would be slightly under your 5%-6% comparable sales growth guidance for the midterm. I would be inclined to say we can expect some of that to come back once the supply chain issues are hopefully resolved sometime.
Actually, when we had talked earlier in the year, we had said that the first year, this was post-COVID. Now that, of course, in hindsight, it's not post-COVID year, but last year we had the huge demand on ventilators and other stuff. Therefore, we had said that the first year would be between 4-5, and then we would move into the 5-6. Actually, we are in that range that we had planned, apart from these two headwinds. Regarding next year, as Frans said, we will talk, of course, more on the 24th.
It's a good point to end the call on and to say that our ambition has not changed. I want to stress that our ambition has not changed. I really. Yeah, it's a tough announcement today, but you know, look at our order growth, look at our competitiveness of the products. We will work through these issues on supply. Then I think we will be in a much better, and we'll deal with the recall, of course. We will be in a much better space. I'd like to end with that optimism. Thank you very much, and we'll talk to each other on the twenty-fourth.
Thanks a lot.
Thank you. This concludes the Royal Philips conference call on Wednesday, the 12th of January, 2022. Thank you for participating. You may now disconnect.