Welcome to Royal Philips Q3 2022 financial update conference call on Wednesday, October 12, 2022. During the call hosted by Mr. Frans van Houten, CEO, Mr. Abhijit Bhattacharya, CFO, and Mr. Roy Jakobs, CEO-elect, all participants will be in a listen-only mode. After the introduction, there will be opportunity to ask questions. Please note that this call will be recorded and replay will be available on the investor relations website of Royal Philips. I'll now hand the conference over to Mr. Leandro Mazzoni, Head of Investor Relations. Please go ahead, sir.
Good morning, everyone. Thanks for joining our Q3 2022 update call at short notice. I am here with our CEO, Frans van Houten, our CFO, Abhijit Bhattacharya, and our incoming CEO, Roy Jakobs. Frans, Abhijit and Roy will make brief opening remarks, and after that there will be an opportunity for Q&A. The Q3 2022 financial results will be reported in full on October 24. During today's call, we ask you to focus your questions on the information contained in the press release. Over to you, Frans.
Yeah, hello everyone, and thank you for joining us today. We would like to provide some further background on the financial performance update announced this morning. Our financial performance in the Q3 was largely impacted by continued supply chain challenges that were more significant than anticipated, impacting deliveries and customer installations. While we see sequential improvement in the global supply chain situation, our progress has been slower than expected. Sales are expected to be approximately EUR 4.3 billion in the quarter, with a comparable decline of approximately 5%. As a consequence of the lower sales, adjusted EBITA for the quarter is expected to be approximately EUR 210 million or 5% of sales.
We will record a EUR 1.3 billion non-cash charge in the Q3 for the impairment of goodwill of sleep and respiratory care due to revisions to the financial forecast of this business. In addition, as a consequence of the previously announced initiative to enhance productivity in R&D, we will record a non-cash charge of approximately EUR 165 million in the quarter. I would like now to give the floor to Abhijit to go over the drivers of the financial performance in the quarter and these items in more detail. Everybody, as this is my last analyst call with you after 12 years, I have asked my successor, Roy Jakobs, to join us and also share a few thoughts with you. After that, Abhijit and I will answer your questions.
Thanks, Frans. Good morning, everyone. As mentioned, while we are seeing gradual improvement in the supply chain situation and continue to take action to strengthen our supply chain resilience, the environment remains very challenging with continued disruption, component shortages and low visibility. This impacted our sales compared to our earlier expectation for the quarter, notably in Diagnosis & Treatment and hospital Patient Monitoring. Our Diagnosis & Treatment businesses are expected to show a low single-digit comparable sales decline and the Connected Care businesses mid-teens decline in the quarter. The Personal Health businesses are expected to show mid-single-digit comparable sales growth. On the back of a strong 47% comparable order intake growth last year, order intake declined approximately 6% in the quarter. The book-to-bill ratio remains strong around $1.2, and the equipment order book grew further in the quarter.
Orders were up around 3% for Diagnosis & Treatment businesses on the back of 16% growth in Q3 2021, driven by good performance in magnetic resonance imaging, image-guided therapy and enterprise informatics. Orders for the Connected Care businesses declined double digit on the back of over 260% growth in Q3 last year. As some of you may remember, this was due to the partial cancellation of the ventilator order from the HHS in the U.S. in Q3 2020. To look at this in context, the three year CAGR is high single digit as we continue to experience strong demand for our patient monitoring solutions. As a result of the lower sales, adjusted EBITA margin is expected to be 5% of sales in the Q3.
The impact of global supply chain disruptions is relevant across all modalities, but particularly strong on higher volume and high margin businesses like patient monitoring and ultrasound. Our teams remain fully focused on everyday execution, delivering on customer demand and addressing the supply chain risks. As previously communicated, we are further accelerating productivity initiatives and other actions to mitigate the ongoing headwinds. We plan to provide further detail on that at the Q3 results later this month. As a consequence of the earlier announced initiative to enhance productivity in R&D, we are shifting the focus to fewer and better resource projects in the innovation pipeline. This has resulted in a non-cash charge of approximately EUR 165 million that Frans mentioned.
In addition, the EUR 1.3 billion non-cash charge for the impairment of goodwill of the sleep and respiratory care business is due to revisions of the financial forecast of this business. The drivers for the revised forecast include the current assumptions regarding the estimated impact of the consent decree and changes to the pre-tax discount rate. While we understand you may like to know more about the proposed consent decree, we are in discussions with the DOJ and cannot speculate on the outcome, content, or the timing of any agreement. Philips Respironics will continue to provide updates as and when appropriate. In terms of the recall, we have significantly increased our production capacity and will increase further in Q4, reaching four times pre-recall levels.
As of today, we have produced 3.8 million devices and expect to produce and ship around 90% of the registered affected devices by the end of 2022. Now back to our financial performance. We still expect a better H2 of the year compared to the H1 of 2022. However, we do see prolonged supply chain disruptions and a worsening macroeconomic environment. Consequently, we now expect a mid-single-digit comparable sales decline for the Q4 of 2022 with a high single- to double-digit adjusted EBITA margin. With that, I'd like to hand over to Roy for a few comments.
Thank you, Abhijit. Good morning, all. While our goal to improve people's lives with meaningful innovations remains unchanged, I am becoming CEO at a time when we face significant challenges. Improving execution is clearly my immediate near-term focus. In particular, restoring supplies to deliver on the order book and customer demand. Addressing the Respironics safety notification and further strengthening our quality processes. Improving business performance in a turbulent world impacted by supply chain disruptions and geopolitical issues, as well as further simplifying our organization. Looking ahead, I am fully convinced of our ability to drive sustainable value creation. I will further work on my plans in the next two - three months and intend to update you on them more specifically with Q4 results in January 2023.
While there is a lot to do, our priorities are clear, and I'm laser-focused on improving execution together with my broader leadership team. Our strong order book shows the relevance of our solutions for customers, and we are going to stop at nothing to regain our upward performance trajectory. We must, can, and will improve. Thank you very much.
Yeah, thank you, Roy. With that, we now open the line for your questions.
Thank you, sir. If any participant would like to ask a question, please press the star followed two times one on your telephone. Due to time, please limit yourselves to one question. This will give people the opportunity to ask questions. There will be a short pause while participants register for question. Your first question comes from the line of David Adlington from JP Morgan Cazenove. Please ask your question.
Good morning. Thanks, guys. Just one question then. Given your difficulties with supply, I just wondered if you are seeing customers become more cautious on making new orders or potentially even canceling current orders. Thanks.
Yeah. Hi, David. Good morning. This is Abhijit. We are seeing customers becoming more cautious in placing orders, not so much due to supply chain, more due to the macroeconomic conditions as you see something that you guys hear all the time. But we have not really seen any cancellations because of the delay, because let's say almost all suppliers are affected by this. We were seeing an improvement in the situation in Q2, which led us to believe that, you know, there will be further improvements going in the H2 of the year. I think that's where those improvements have not come through as much as we had expected. Plus, the buffer in the supply chains are very, very low.
The moment you have one disruption with the supplier, you just get a push-out, and there is no buffer inventory to take care of it. That's why we kind of have this short-term volatility that we see. Overall, our funnel remains strong. Yes, in terms of the order intake, we have seen a bit of caution with the customers.
Thank you. Our next question comes from the line of James Vane-Tempest from Jefferies. Please state your question, sir.
Yes. Hi. Thanks for taking my question. James Vane-Tempest from Jefferies. A follow-up, really, just in terms of the customers. Can you talk a little bit about the increased cost to customers now, which is obviously a different headwind for them in considering the broader macro drop. Firstly, you know, how you are looking at your own pricing. Secondly, although this isn't something the company does directly, but can you talk about the financing for them? How much of it is it, you know, are they typically, you know, having to pay now versus a year ago as well? Thank you.
Yeah. A couple of things. Yes, input prices, whether it is our equipment or, you know, site construction, site readiness, all of those costs have gone up. We have explained before, and it may be good to reiterate now, the orders that we are supplying for now have been part of the order intake pre-price increase. We are, of course, now booking orders at increased prices, and they will come to revenue next year. The impact on the PNL now that you see is coming from increased input cost, but not yet the benefit that we expect to see from pricing. Regarding customer financing, yes, you know, the interest rates have gone up, so therefore, customer financing rates have also gone up.
It's still in the low to mid-single digit range, but depending on the geography. Our penetration, especially from Philips Capital, remains pretty good. We are not seeing customers walking away from taking financial support from Philips Capital as they place orders.
Thank you. Our next question comes from the line of Sezgi Oezener from HSBC. Please ask your question, sir.
Hi. Thanks for taking my question. My question relates to the additional to the goodwill impairment. I appreciate that you also mentioned that in the goodwill impairment and the provisions you take into account the consent decree, on which you cannot reveal the details. Can you maybe give a color of whether you expect this to be the full impairment and provisions that you will be recording on this? Or do you expect this to go over the EUR 1.2 billion that you shared with us today?
Yeah. Thanks. This is Frans van Houten. Details of the consent decree have not been fully negotiated at this time. Therefore, we are, to the best of our abilities, looking at the future with an impact of a combination of margins, sales. It's very early days. There's really not much more detail that we can give today, other than this is our reasonable estimate. I would leave it to a future update to come back on your question. This time, this is it.
Thank you. As a reminder, to ask a question, please press star, then one. Our next question comes from Veronika Dubajova from Citi. Please ask your question. Veronika, your line is open. Please ask your question.
Hi, guys. Good morning. Can you hear me okay?
Yes.
Excellent. Sorry. Some problem on my end. First, Frans, all the best for whatever comes next. As far as my questions are concerned, this is probably more appropriate for Abhijit and Roy. Just curious, as we've been in this disrupted supply chain environment for quite some time, and I think, you know, I'm asking you to predict something that's quite difficult. Just would love to hear your preliminary thoughts as to where you think you end the Q4 in terms of the supply chain and how quickly, as we transition into 2023, would you expect to return to a more normal operating environment from a supply chain perspective?
Hi, Veronika. Good to have you back. Regarding Q4, we still see disruptions likely to continue, right? Therefore, we have signaled the mid-single digit decline. It's not because we don't have the orders. It's just the ability to fulfill those orders is just still a big challenge. That's why we've talked about the decline in Q4. We expect this to, of course, ease next year. At this time, it would be a bit premature to say whether it's Q1, Q2, or Q3. You know, with the overall economic situation, there will be easing of especially semiconductor supplies in the coming year.
We don't expect this to continue all of next year, but whether it's the first or second or Q3 is something we'll probably have a better view toward, more towards the end of this year or early next year. Like you said, you know, it's difficult to project, so we are trying to be just careful on that. We continue with our actions, you know, to mitigate whatever we can, also in terms of dual sourcing and all the rest. Being in the healthcare industry, it just takes time. If you see for our Personal Health business, we have been able to mitigate most of the supply chain issues, but the Health Systems takes a bit longer and with the installation-related risks, also from our customer side, right?
Because their supply chain also has to get whether it's electrical fitting, switchgear, which is a huge shortage today in the market. All of this adds up to just delays, which hopefully should ease in the coming year.
Thank you. As a final reminder to ask question, please press the star followed by 21. Next question comes from the line of Delphine Le Louët from Société Générale. Please ask your question. Good question, Delphine.
Problem with the line of Delphine. Is there anybody else, operator with a question?
Yeah, I am there. Sorry, I was so noisy on the line. Yeah, good morning, everyone. I had a question regarding the restructuring charges, and I was wondering if, on the R&D side, is this part of the new plan that Roy decided to implement? Is it just what we see on the top of the iceberg and we open up a box here? How do you see this envelope of EUR 165 going forward, and what can we expect? Thank you.
Actually, Delphine, this is something we had said earlier in the year, even in Q2, where we said we are going to re-look at our total innovation funnel and focus on fewer but bigger, sorry, better projects and bigger, so that the ones that really are scalable are properly funded and resourced. This has happened over an extensive review over a three-four month period of all our R&D programs that are running. It's a few projects where we decided to stop so that we can, let's say, resource the bigger projects which are in the pipelines to get us to success quicker. It's not something that has just happened overnight. It's something that was in the plan mentioned, and this is the logical conclusion.
Our next follow-up question comes from the line of Veronika Dubajova from Citi. Please state your question, Veronika.
Thank you guys for squeezing me in for a follow-up. It was actually related to my question earlier. I just would love to understand, Abhijit, if you can, kinda, what you think sort of the guidance assumes in terms of lost revenues for the Q4. Like, what's the, you know, approximate amount that you expect to be shored off, if I can use that term, and how that compares to Q3, what you've seen in Q3 and in Q2?
I'm not clear about the question, Veronika. Maybe.
Yeah, I think in the past, you've kinda helped us quantify. You said, "Look, you know, there was half a billion of lost revenues because of the supply chain." I'm just curious if you can help, you know, give us a number, what you think this would have been in the Q3 and what you're assuming in the Q4?
Yeah.
It's not lost.
Yeah, it's not lost sales. This is largely postponed sales. In the Q3, let's say we lost compared to our estimates, maybe around EUR 200 million of sales, of which EUR 150 million was supply related. In Q4, it is significantly more. Because, you know, we have, let's say a much larger revenue in Q4. For the time being, we have assumed a significantly higher number, more closer to the half a billion or so.
Thank you. Our last question is a follow-up question from the line of Sezgi Oezener from HSBC. Please state your question.
Thanks very much. My last question will relate to, of course, I appreciate that you had changed your midterm guidance and were guiding for 4%-6%. The changes and the impairments and the consent decree pose a question mark. Can you give maybe a color on whether you now expect to reach the 14%-15% margin by 2025 or whether you expect a more constant, back-loaded or equally distributed trends towards that? Thank you.
Yeah. Sezgi, this is Frans. I of course understand your question. We have agreed that Roy will actually talk to markets and analysts in the January timeframe about, let's say, how he sees that future, giving him a few months to assess and of course distinguish the near-term disruptions and headwinds from the fantastic potential that the company has. Therefore, I'm going to duck your question here today and give Roy the chance to do that in January. Sorry about that.
Thank you. Thank you, gentlemen. That was the last question. Please continue.
Yeah. I guess my closing words here. I would have wished this final analyst call to be under different circumstances. It is what it is. I express a deep conviction about the potential that the company has. We will come back to the path of performance. I know that Roy and the executive committee is entirely committed to do that, and they know what to do, and they're working on it. It just takes some time. Thank you very much, and perhaps we'll see each other in different circumstances. Goodbye.
All right. Thank you. This concludes the Royal Philips analyst conference call on Wednesday, October 12, 2022. Thank you for participating. You may now disconnect.