Koninklijke Philips Q4 2024 Earnings Call Transcript

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February 19, 2025
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Operator

Welcome to the Royal Thirds Fourth Quarter and Full Year twenty twenty four Results Conference Call on Wednesday, 02/19/2025. During the call hosted by Mr. Roy Jacobs, CEO and Ms. Charlotte Hanneman, CFO, all participants will be in a listen only mode. After the introduction, there will be opportunity to ask questions.

Operator

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.

Leandro Mazzoni
Leandro Mazzoni
Head Of Investor Relations at Koninklijke Philips

Hi, everyone. Welcome to Philips' fourth quarter and full year twenty twenty four results webcast. I'm here with our CEO, Roy Jacobs and our CFO, Charlotte Hanneman. The press release and the investor deck 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 as well.

Leandro Mazzoni
Leandro Mazzoni
Head Of Investor Relations at Koninklijke Philips

Before we start, I want to draw your attention to our Safe Harbor statement on screen. You will also find the statement in the presentation published on our Investor Relations website. I will now hand it over to Roy.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Good morning, everyone, and welcome to the call. I want to start with the key highlights of this morning's release. We delivered strong profitability improvement and cash flow in Q4 and for the full year 2024. Comparable order and sales grew low single digit in the quarter and the year, despite double digit declines in Consumer and Health Systems demand in China, partly offsetting solid growth in the rest of the world. We continue to make solid progress on our plan, enhance execution and reach significant milestones to resolve the Responderoni's recall.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

With our strong balance sheet, we are pleased to offer shareholders the option to receive a dividend in shares or cash. We are confident in our long term plan. We expect to continue to improve performance in 2025, grow sales and orders within a challenging macroeconomic environment and drive margin expansion and cash flow generation by building further on a fundamental progress in execution, our innovations and by leveraging those to the best extent. Turning to the progress on our execution priorities and our key performance highlights. Patient safety and quality remains our highest priority.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We have strengthened our culture of impact with care and fully embedded in our businesses and in our patient centric innovation. We took significant steps to address the consequences of the Respironics recall. We know there's more to do and are very focused on driving further improvements. More recently, Philips Respironics obtained final approval for the medical monitoring settlement and the personal injury settlement. They became final after the required participation threshold was met.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

These very important milestones provide further clarity on the way forward for Philips. Our end to end supply chain now operates at lead times and service levels in line with industry standards, which increases our competitiveness. We are on top off and monitoring the volatile geopolitical context to act if and when appropriate. And we will continue to work on regionalizing supply chains, diversifying suppliers, dual sourcing and network flexibility. Our leaner operating model drives accountability and agility and contributed to productivity savings of over EUR 1,700,000,000.0 in the last two years.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We are building a renewed team with strong health tech capabilities across the company. We also had recent leadership announcements for the Precision Diagnosis business and our international region. Now on to the financial highlights. Comparable sales grew 1% in the quarter, in line with our expectations, with 5% growth in the rest of the world, largely offset by double digit decline in China. Orders grew 2%, driven by strong growth in The U.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

S. And in growth regions, again offset by double digit decline in China. Diagnosis and treatment orders grew high single digits in the quarter. Connected care faced the inherent unevenness of order growth by quarter, while demand for our hospital patient monitoring solutions remained very healthy. In the full year, comparable sales and orders grew 1%, with both 4% up in the rest of the world, partly offset by lower China.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

And we were pleased to see double digit order growth in The U. S. The adjusted EBITDA margin was 13.5% in the quarter and 11.5% in the full year, resulting in a strong improvement of 90 basis points versus 2023. We delivered strong free cash flow in 2024 and continued to strengthen our balance sheet. High restructuring and other charges were a result of our continued focus on resolving the consequences of the Respironics recall and important changes we have been making across the company as part of our plan.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

In light of the progress made, based on the strength of our balance sheet, I'm pleased to say that we propose a dividend of per share payable and shares of cash at the option of the shareholder with a maximum of 50% in the total dividend available in cash. Let me turn to the progress we have been making in our businesses. We are setting industry standards across segments with our AI driven innovation. This is a major factor why more than 50% of our sales stem from new and upgraded products launched in the last three years. At RSNA, we expanded our computer tomography offering with FDA clearance for the CT5300.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We also introduced the next generation industry only worldwide helium free MR scanner. Both leverage AI systems at every step of the workflow. As evidence of the continued proof of innovation, we signed several long term partnerships with customers across regions in the quarter. This included strategic partnerships for imaging and health informatics platforms with the Hospital of Foundation Rothschild in Paris, the Erasmus Medical Center in Rotterdam. Additionally, we signed an expansion of our strategic collaboration with Amazon Web Services to offer an integrated diagnostics portfolio in the cloud, including radiology, digital pathology and cardiology.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

In Personal Health, we rolled out a renewed mid range Sonicare Series 5,000, seven thousand in Europe, giving users choice of features at different price points. Looking ahead, the fundamentals of the markets we serve remain strong, but the short term dynamics differ per region. Outside of China, we expect generally solid consumer sentiment as well as a solid hospital CapEx environment in 2025. In China, we expect consumer demand to remain subdued. We expect demand from hospitals to continue to be impacted by the consequences of the anti corruption and the slow implementation of the national renewal program, at least into the first half of the year.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Stimulus activity is increasing and our funnel is progressing. However, despite some increases in hospital tenders, we have not yet seen a trigger that would significantly change the situation for the first half of twenty twenty five. We are focused on executing our plan to deliver continued performance improvement in 2025. We expect 1% to 3% comparable sales growth this year with growth in the rest of the world partly offset by mid to high single digit decline in China coming from the Consumer and Health System businesses. We remain laser focused on capturing margin expansion opportunities and expect adjusted EBITDA margin to increase by 30 to 80 basis points to 11.8 to 12.3 in 2025.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

This will be driven by our focused growth strategy, additional productivity savings and continued strong investment in our innovations. Now over to Charlotte to take us through the financials and outlook in more detail.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

Thank you, Roy. Good morning, everyone, and thank you for joining us on the call. Let me start by expanding on our financial performance. In Diagnosis and Treatment, comparable sales decreased 1% in the fourth quarter and increased 1% in the full year. This was on the back of strong growth in 2023.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

Solid growth in Rest of the World was offset by China. Adjusted EBITA margin improved by 170 basis points in Q4 to 12.1. In the full year, adjusted EBITA margin was stable at 11.6%, driven by positive product mix, pricing and productivity measures, offset by the lower sales in China. Moving to Connected Care. Comparable sales increased 7% in Q4 on the back of a low comparison base due to the impact of a provision against sales taken in 2023 related to the Respironics recall remediation.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

Connected Care comparable sales increased by 2% in the year. In Q4, the adjusted EBITA margin was 15%. In the full year, the adjusted EBITA margin improved two forty basis points to 9.6%, mainly driven by continued operational improvement. Importantly, both Enterprise Informatics and Sleep and Respiratory Care businesses delivered positive adjusted EBITA margin in 2024. Personal Health comparable sales decreased by 2% in the quarter and by 1% in the full year with strong growth in rest of world, including double digit increases in other growth markets, offset by double digit decline in China.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

The adjusted EBITDA margin was a strong 18% in the quarter and 16.7% in the year. We have been very disciplined in cost management and productivity initiatives delivered savings of $752,000,000 in the year and $1,700,000,000 planned to date. Turning to our group results. In the quarter, sales increased 1%, orders grew 2% and the adjusted EBITDA margin increased by 60 basis points to 13.5%. For the full year, sales and orders grew 1% and the adjusted EBITA margin increased by 90 basis points to 11.5%.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

Operational improvements, productivity savings and previous pricing actions more than offset volume loss in China, wage and component cost inflation. Net income decreased by $371,000,000 in the quarter, mainly due to higher tax expenses, the write down of an intangible asset and restructuring charges. Tax expenses increased by $581,000,000 in the quarter due to higher derecognition of deferred tax assets in The U. S. And higher taxable income in 2024.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

Adjusted diluted EPS from continued operations increased a strong 35% in the fourth quarter and 17% in the full year. We delivered a free cash flow of $1,300,000,000 in the quarter and $900,000,000 for the full year, in line with guidance. Full year free cash flow included the remaining payment of roughly $430,000,000 related to the economic loss settlement and receipt of approximately $540,000,000 from insurers for the Respironics claim. Our leverage ratio was down to 1.8x on a net debt to adjusted EBITDA basis. As Roy mentioned, following the strong deleveraging and in line with our balanced capital allocation policy, we will submit a proposal to maintain the dividend at per share in shares or cash at the option of the shareholder.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

The decision to pay up to 50% of the total dividend in cash balances our commitment to dividend with the demand on cash given the expected payments related to the Respironics settlements in The U. S. Turning to the outlook. We will continue to drive improved performance in 2025. We were pleased to see the return to order intake growth in 2024, supported by the many recent innovations which are performing well.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

However, we expect sales growth and margin expansion in 2025 to be back end loaded due to the continued impact of China into the first half of the year and comparison days effect. We expect China sales to decline mid to high single digit with double digit decline in the first half of the year, partially offset by growth in the second half mainly due to the easing of the comparison base. In the first quarter, more specifically, we expect mid single digit decline in comparable sales and accordingly lower adjusted EBITA margin, driven by the double digit sales decline in China, royalty spacing and a high comparison base in Diagnosis and Treatment. We expect margin expansion of 30 to 80 basis points in the year to be driven by a combination of higher growth in attractive leadership segments, improvements in businesses with lower margins and additional productivity and innovation. Focusing on what we can control, we are increasing the productivity savings targets for the 2023 to 2025 period from EUR 2,000,000,000 to EUR 2,500,000,000.0, driven by higher savings to date, further simplification of our operating model and cost efficiencies.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

This leads to expected savings of EUR 800,000,000 in 2025. We expect to deliver sales growth within the outlook range and adjusted EBITDA margin improvement across all our businesses. Restructuring costs are expected to be 100 basis points in 2025, driven by continued efforts to simplify our operating model, further verticalize and optimize our supply chain and reduce complexity and functional costs. Other charges are expected to be around 200 basis points and include mainly Respironics field action activity and other quality action related charges. We acknowledge adjusted items are still high in 2025 and are diligently working to reduce them going forward.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

We expect free cash flow at the lower end of the EUR 1,400,000,000.0 to EUR 1,600,000,000.0 plan range. This outlook excludes the 1,100,000,000.0 payment of the medical monitoring and personal injury settlements in The U. S. In the first half of the year as well as the potential impact of other ongoing Philips Respironics related legal proceedings. The outlook we provided today includes the impact of the recently announced U.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

S.-China tariffs. With many possible scenarios, we will not speculate on the impact of potential future tariff policies. With that, I would like to hand it back to Roy for his closing remarks.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Thanks, Charlotte. I would like to repeat the key messages of today. 2023 and 2024 have been years of strong fundamental progress. Our plan is robust despite the impact from the challenging macro conditions and is delivering underlying performance improvement. We delivered margin and cash ahead of plan to date and returned to solid quarter growth in and outside of China in 2024.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We made significant progress on our execution priorities, addressing challenges, strengthening fundamentals, deleveraging the balance sheet and providing further clarity on the rest of our knowledge way forward. We also renewed our culture and team. Our innovation is gaining momentum as shown by success of our many products launched and effect that 50% of sales is coming from recent innovation and a return to positive order intake growth. Before I wrap up, I would like to welcome Durga Dorezami as Head of Investor Relations effective April 1. I also want to thank Leandro, who's taking a new position within our finance leadership team for his partnership and strong impact in the last five years.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

The two are already preparing for the handover and will be joining the upcoming roadshows and investor activities together. We will now take your questions.

Operator

Thank you, sir. We will now take our first question from the line of Richard Fulton from Goldman Sachs. Please state your question.

Richard Felton
Richard Felton
Equity Research Analyst at Goldman Sachs

Hi, good morning. Thanks very much for taking the question. My first one is on your top line guidance. I understand very clear assumptions on China, but could you perhaps comment on what you are embedding in your assumptions for the rest of the world? Looking at the midpoint, my math implies that your guide points to a modest deceleration for Phillips outside of China in 2025 versus 2024.

Richard Felton
Richard Felton
Equity Research Analyst at Goldman Sachs

Is there any specific market where you have a more cautious view or is there just general conservatism baked into that guidance? That's the first question. Second question is on the additional cost savings. Is there any incremental color you can share on where those cost savings are coming from? And how should we think about the balance between reinvestments of those cost savings and how much is going to drop down to the bottom line?

Richard Felton
Richard Felton
Equity Research Analyst at Goldman Sachs

Thank you.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Thank you, Richard. In terms of the assumptions for the rest of the world, I think as we are looking at 2025, we still see quite a level of uncertainty surrounding the world. Now we have seen strengthening of the CapEx environments outside of China and we also expect that actually to continue and that would also drive our orders and growth. And as you know, there is also a lag time between the dialed off order momentum that will pull through. So that's something that we will continue to build on also as kind of some of the innovations that we launched in 2024 will be really gaining momentum in 2025.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Now on China, as I said, we have the first half continuing as we have seen in the second half of twenty twenty four. We don't want to get ahead of ourselves in terms of what the second half would look like. I do say that we don't count in the outlook on a strong rebound of China to delivered outlook that you have seen. So I think we have gone in with a realistic outlook for China as well as for the rest of the world. Then on the savings, yes, we are expanding the productivity plan and that's an important part of how we counter some of also what we see around us in the world, including the tariffs impact that you have seen.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We are adding million to the plan. That's a combination of cost activity, so it's partly role reduction, but actually also really stopping activities, scaling innovations that we have to get better leverage, procurement savings. And we do that at the same time to keep our innovation spend at the level that we have been in recent years, because you have seen that we keep spending behind innovations, especially also now more and more on AI. So the billion of spend is also safeguarded because we cut out any and other areas. So we cut to support margin, but for sure also to protect our innovation engine and that's also what you have seen in terms of the innovations that we have been putting into the market.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

And that by now 50% of our sales is coming from the most recent innovations and upgrades that we have. So you also see that they are getting the uptake in the market.

Richard Felton
Richard Felton
Equity Research Analyst at Goldman Sachs

Thank you very much.

Operator

Thank you. Next we'll take our question from David Atlington from JPMorgan. Please state your question, David.

David Adlington
David Adlington
Analyst at J.P. Morgan

Good morning, guys. Yes, just following up on the order growth. I think you pulled out in your opening comments that actually imaging was high single digit, but maybe you just comment in terms of how you're feeling about market share in D and T, particularly with respect to China where local competition, I think, is probably taking a little bit of share of some players and thoughts about your positioning within D and T in China? And then secondly, just did you have any updates on the DOJ timing, please?

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Yes. So on the China momentum, I think what we have seen in China is that actually all players, of course, are facing challenges with slower procurement. And we if you look to the kind of the strongholds that we built on, we saw actually MR and with the relaunch of our Helium III actually really gaining good momentum. And we believe that actually will help us to build on share that kind of we have had in the recent years. CT, we just launched our new 5,300, so that needs to gain momentum.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

And then on ultrasound, actually, we were very encouraged because you might know that we launched our VM11 suite with the latest AI from the DIA acquisition. And Q4 for ultrasound was very strong. And also in China, actually, we saw a good uptake within a further kind of more depressed environment, but actually we saw that engine coming back into play after it's having been pressured for a bit also by the local players. So I'm encouraged by how we are responding to the renewed activity there and also what we are being able to take out of the market. On the DOJ timing, there's really nothing to say.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We are still, as we said before, in strong collaboration with them, but they have not indicated any timing. And as you can imagine, even with the current turmoil in The U. S, it has not become clearer, but I cannot further comment on that.

David Adlington
David Adlington
Analyst at J.P. Morgan

Thanks so much.

Operator

Thank you. Next, we'll take questions from the line of Hassan Alwakil from Barclays. Please state your question.

Hassan Al-Wakeel
Director at Barclays Investment Bank

Thank you and good morning. A couple from me. Firstly, can we talk about the drivers for the high single digit growth in orders for Q4, any particular modalities driving this? And what was order growth excluding China in D and T? And then secondly, can you walk us through the margin bridge from 11.5% to over 12% at the midpoint in 2025.

Hassan Al-Wakeel
Director at Barclays Investment Bank

EI, DI and S and RC, obviously, key components of your expansion more broadly in terms of margin. Could you provide us an update on where the margins for these businesses landed in 2024? Thank you.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

So let me maybe take the first one in terms of the orders in D and T. So as said, we saw indeed double digit ex China. That is a mix of strong drivers in ITT, where also you know we kind of launched a newer biplane and that actually is generating good traction, but also the overall uptake and increase in procedures drive more catap orders. Then we have the MR. As I mentioned, the relaunch with the new AI driven Helium III is really gaining good momentum.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

And then ultrasound, that's kind of where we had the cardiac engine really firing in Q4, in particular also in North America, but across the world. And that actually contributes to that momentum of D and T. DXR already relaunched their portfolio earlier. So actually that has been continuing, but we saw some additional really good uptake in the businesses that I just mentioned.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

Yes. Thank you, Roy. And Hassan, I'll take your second question on margin. So as you can see from our guidance, we're very focused on margin expansion in 2025, and we expect that to come from improvement from all of our businesses driven by a few different things. First of all, we continue to see higher growth of our high margin businesses, which as a reminder is 70% of our revenue.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

So that will lift up the whole fill ups. We also continue to see improvement in our businesses with margin upside potential. So that is DI, Enterprise Informatics and S and RC. And we're actually very pleased to see both and S and RC come back into profitability in 2024. As Roy already mentioned, we are increasing our productivity savings program from $2,000,000,000 to $2,500,000,000 of which $800,000,000 is in 2025.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

So that will be significantly helping our margin uplift as well. And then, and Roy spoke about some of the innovations, recent innovations already, we continue to see some gross margin step up from that. You already called out the VM11 ultrasound innovation and there are many others as well also in IGT that are giving us a great uplift. Now having said that, we do expect the margin uplift to be back end loading loaded following the sales dynamics that we see, particularly also in Q1 related to China and also the comps and royalties.

Hassan Al-Wakeel
Director at Barclays Investment Bank

If I can just follow-up on China. Roy, when we met at RSNA, you mentioned some improvement in tender activity in Health Systems. How has this trended since? And maybe to follow-up on an earlier question, I mean, just on share dynamics in China, some of your competition have been talking about your share losses losses specifically, so it would be great

Hassan Al-Wakeel
Director at Barclays Investment Bank

to get your thoughts here.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Yes. So on the green shoots that indeed we saw, I think what I mentioned is that we need to see those actually continuing after China's New Year. That period just started. So actually it's hard to call whether that's now a really renewed consistent trend.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

That's also where we are still cautious and as we call it, especially the first half of the year. And then we need to see how that evolves. I think there's not been a kind of consistency that kind of we have been pulling through on that would give that confidence that first half already will be materially different than second half that we saw last year. Now then in the businesses in China, I can talk to the customer momentum that we have, where you see especially in IGT and ultrasound in China. We have stepped up significantly.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

The MR lounge already spoke to with the relaunch of the Helium three. And actually, we see that the Helium three is now leading in the world in China and uptake. So actually, we are going after that innovation strongly. So we see that we are very competitive also with the localized products. And also with new leadership in place in China with Ling and team that are really very much out and in the market to ensure that we get our fair share and more when the market rebounces.

Hassan Al-Wakeel
Director at Barclays Investment Bank

Excellent. Thank you, both.

Operator

Thank you. Our next question comes from the line of Julien Dumouard from Jefferies. Please state your question Julien.

Julien Dormois
Julien Dormois
MD - European MedTech & Equity Research at Jefferies

Hi, good morning, Charlotte. Good morning, Roy. Thanks for taking my questions. I have two. The first one relates to the guidance you have provided for China this year, so the mid to high single digit decline in sales.

Julien Dormois
Julien Dormois
MD - European MedTech & Equity Research at Jefferies

But you could please elaborate on how you see things possibly diverging between consumer and equipment, whether there is one area where you would expect more weakness than the other? That would be helpful. And the second relates to the long term plan that you guys had in place for, let's say, beyond 2025. It was calling for a margin target in the mid to high teens. So wondering whether that would still be valid under which horizon and whether maybe you plan to have a capital markets there or anything like this to update us on what could be the next three or five year view for the business?

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Yes. Thank you, Giulia. And I think it's a good question on the first part because indeed given our portfolio, we have some specific dynamics in China that take part, where actually the consumer side is having the highest double digit impact in China. We said and explained already earlier with the decline in sell out, you see adjustments in sell out but also sell in, so stock levels adjustments. That has happened in the second half, but still continues to into the first half as well.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

And that actually is a significant drag on the China performance, actually the bigger part of it. Now then we see also Health Systems still having a negative impact, but as we also said, we see some improvement there. So actually that is the balance of the two elements. Now we see good growth of PH outside of China. So actually that engine is really picking up strongly.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We saw the 4% for the total group for the full year outside of China. We see even more in Personal Health coming in, but they have to combat a stronger decline in China. So that's a bit of the dynamics in China in particular, where the consumer subdued demand is just playing big part to us and all other players in the industry.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

Yes. And Giulia, I think your second question, thank you for that. So about our longer term margin expansion plans, we will talk about it later this year at the Capital Markets Day. But I can assure you that the plan is robust and we're laser focused on successful execution of the plan and to drive operational improvements and also create value. And if you think about our portfolio with 70% of our revenue in leadership positions at higher margins, which again will lift overall of Phillips and the rest of the 30% business in Diagnostic Imaging, in Enterprise Informatics and in S and RC really providing good margin upside potential.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

And on top of that, our productivity improvements, we remain confident in the potential to improve our margins also beyond 2025. And we'll talk about that later in the year at the Capital Markets Day.

Julien Dormois
Julien Dormois
MD - European MedTech & Equity Research at Jefferies

Great. Thank you very much.

Operator

Thank you. We will now take our next question from the line of Lisa Clive from Bernstein. Please state your question, Lisa.

Lisa Clive
Senior Research Analyst at Bernstein

Hi. First question on patient monitoring. Could you just give us the latest trends in your business there in terms of working through the sort of COVID buildup also just generally potential increased demand in the monitoring market as it expands beyond the acute care settings? And then second on Connected Care, the Respironics performance outside of The U. S, you've been back for several quarters now.

Lisa Clive
Senior Research Analyst at Bernstein

Can you talk about, in particular, the competitive dynamics? I know it's mainly duopoly between you and ResMed, but I think there are some players outside The U. S. How is your market share evolving? And sort of how much of the lost ground do you think you'll be able to regain in the next two to three years?

Lisa Clive
Senior Research Analyst at Bernstein

Thank you.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Yes. Thank you, Lisa, for the questions. Let's talk monitoring. Of course, very important business. What we have seen, yes, there was kind of some after effect from COVID, but actually demand has been there.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We also have positive order intake growth in monitoring. We also have seen that you see some bigger technology deals really coming in. Now that makes that there is more lumpiness coming into monitoring. And part of this because you go to technology service partnerships that are bigger size of a prolonged period and also of a bit more complex nature. But at the same time, they're more attractive because they give good service margin.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

They kind of give you good protection for renewal and we are gaining share in monitoring. So I think we have seen that in many of the places that we are active. And we also have launched a new PM6000 monitor range that actually is doing nicely and well. And as you know, we also have the informatics on top that is important for the current data and AI play. So actually monitoring remains a strong business, but you do see that lumpiness in the conversion and also plays a bit part in terms of kind of when we see it coming to conversion and to sales.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Margin has been holding up strong as well. And if you then make the bridge to of course, total Connected Care margin has been going up very significantly, two forty basis points. Now that was still with monitoring at a strong margin level. But then in particular, we got EI and SRC back. And if you talk about SRC, there indeed the momentum is coming into that business again, one driven by the return to the market outside of The U.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

S. We're now also the last market came fully into play, which is France. So we can now sell in all markets out of The U. S. Again.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We got that news yesterday, so that's great. We also see that we are competitive there. We have been launching new masks. We got two new FDA approvals. I already spoke that the mask range is doing really well.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We are kind of trending at a level when we had actually The U. S. Device sales still included including the first set of sales of those. And volume wise, we have kind of now outgrown that in 2024. And that also brought EsaSeq in good profitability in 2024, because of course, it has been dilutive for now few years.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We brought it back. We did the rightsizing of the portfolio and also the kind of the footprint. But most importantly, we also see the momentum coming back into that business.

Operator

All right. Thank you. We'll now take our next question from the line of Robert Davis from Morgan Stanley. Please state your question, Robert.

Robert Davies
Robert Davies
Executive Director at Morgan Stanley

Good morning. Thanks for taking my question. My first one was just around the margins in D and T in the quarter. Just give us a little bit more color. I realize they came in a bit lower than consensus expectations.

Robert Davies
Robert Davies
Executive Director at Morgan Stanley

Just wanted to talk about the different dynamics between product mix, maybe China, just give us a little bit more color on that one. And then the second one was just on the slide you put in on restructuring costs out through 2025. Perhaps you could just set the scene in terms of what's actually left to do in terms of sort of the different spend where the buckets are going? Is there any more sort of headcount coming out within that restructuring cost element? And as we look even beyond 2025, is '25 basically clearing most of the decks for that spend?

Robert Davies
Robert Davies
Executive Director at Morgan Stanley

Or should we expect more to keep going in '26? Thank you.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

Thank you very much, Robert. And I'll take your questions, and I'll start with the margin D and T one. And first thing a few things I want to say about that. First of all, we had a strong step up in Q4 of 160 basis points in margin in D and T. And this was despite a lower China, which as Roy mentioned is high profitability for us.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

So that strong step up was driven by a few different things. We saw positive mix. We continue to see strong productivity and also saw some positive pricing as the higher prices in the order book continue to flow through. So if you then take a step back and look at our outlook, our longer term outlook, we already reached our low teens margin outlook already in 2023, where we increased our margin expansion by 200 basis points. So for 2025, again, we expect the margin improvements across all business segments, including D and T.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

So again, we're going to play that mix because in the D and T segment, we have some of our higher margin businesses like IGT, where we have market leading positions and continued innovations like the Azorian biplane. We have ultrasound, and Roy already spoke about the very exciting innovations in VM11 and Transcend, which will continue to drive margins up. And we have additional productivity, as you also mentioned, which will also help the diagnosis and treatment margins as well. Ultimately, we are very, very pleased with our order intake, which was high single digit in Q4. And that coupled with our innovations and the momentum that we're seeing in Q4 will help deliver on our margin expectations in 2025.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

Now moving on to your next question on restructuring and incidentals. So as I said in my prepared remarks, we are diligently working to reduce the incidentals as we absolutely acknowledge they are high, and it is a priority for me to reduce them going forward. And if you then take a step back and think about our one offs, they can be divided in two different categories. On the one hand, we're still working to resolve the Respironics recall. So we have consent degree charges and some litigation charges.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

And that will diligently be working to reduce that over time, and it will reduce over time. And the other component is related to the execution of our plan, And we are making sure we focus on growing our business, making our supply chain leaner and more agile and ultimately reducing complexity over time. And with that, we have some restructuring charges as a result of that. So if you then think about 2025, the restructuring 100 basis points that we called out is really related to further operating model simplification and manufacturing and R and D footprint changes as well as platform optimization as we become to a more focused business.

Robert Davies
Robert Davies
Executive Director at Morgan Stanley

Understood. Sorry. Was there any headcount reduction in those numbers as well or that's ex headcount?

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

So as we're continuing to become a more a leaner company and a more focused company, we will also look at headcount, although that will not be the biggest part of it. We will continue to look at becoming a simpler company to do business with, which will ultimately also result in some headcount reductions.

Robert Davies
Robert Davies
Executive Director at Morgan Stanley

Understood. Thank you very much.

Operator

Thank you. We will now take our next question from Graham Doyle from UBS. Please state your question.

Graham Doyle
Graham Doyle
Executive Director, Equity Research at UBS Group

Good morning guys. Thanks for taking my questions. Just two for me. One on China to plug that horse again. But when I look at the way you're guiding for it and sort of the language you talked around the sort of pre Chinese New Year step up.

Graham Doyle
Graham Doyle
Executive Director, Equity Research at UBS Group

It seems quite cautious. So when we look at some of the data we're seeing elsewhere, we think about how local companies are guiding and the relative strength even in our consistency in market shares. Is it an effect that you guys are assuming that the recent tick off basically just stops and does not persist through the year and that's the degree of caution? So that would just be question number one. And then just question two, in terms of these consent decree, the extra 200 basis points of incidentals, when do you see that sort of tailing down or reducing?

Graham Doyle
Graham Doyle
Executive Director, Equity Research at UBS Group

And then also, could you maybe give us an update in terms of the consent decree and the timings just theoretically in terms of how separate the ability to return to sale in The U. S. Of sleep systems is versus the actual sort of end of the consent decree just to get a sense of that as well? Thanks a lot.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Yes. Thank you, Graeme. And on the so on China, so we are cautious on China. And I think it's also diligent because we have seen not an inflection point that would kind of give us the data to say, okay, the recent few months turn into a structural trend, right? We have seen green shoots.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We have seen tender activity. We are also very active in the market, so it's not that we're not chasing it and going after it. But we just find it too early to call for changed momentum. And that's why we take that kind of caution into the plan and also especially into first half. That's also what we call because we also know that disability in China is not very long.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

So it could change, but we just don't want to preempt that, Right? That's I think a fair description of what we've seen. At the same time, we also have kept saying it's a one question, so China will come back and we also believe we are very well positioned to come back. Our brand is very strong. We have strong customer penetration and connections.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

And also when the consumer market comes back with our strong innovations, we will be ready to kind of play that demand. So that's the China story. Then on the consent decree, that's 200 basis points. Yes, that was also as kind of shall offset that will taper off over time. Yes, we are working now at the height of the consent decree.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We got it just one year, right? So there's a lot of activity going on to fulfill the needs. And also we're putting a lot of effort in going through that the best possible that we can, so we can come back to the market in the speediest possible time. But on that time, again, we said before, we cannot speculate because that is up back to the approval of the FDA. What we did say before and I will repeat is that an average CD has a five year window, but an injunction can be lifted earlier.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

And we saw that in our Immersive Care business that was after three years. But that doesn't mean that in this case it's the same because it's a very different case. So we are committed to the SRC business as that we are seeing momentum coming back. So actually it's contributing already to the plan. And I think it will contribute of course even more if we get through the timing of the constant degree.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

So I think and the other thing that we said early in the plan is that we don't count ourselves rich when it comes back, right? So we can do the step up in margins, the step up in growth without that baked into current plan. So we're not dependent on it and we will focus on getting through it whilst we grow the rest of the business where we have a lot of opportunity.

Graham Doyle
Graham Doyle
Executive Director, Equity Research at UBS Group

That's super helpful understanding that caution. It makes a lot of sense. Thank you.

Operator

Thank you. We will now take our next question from the line of Hugo Solve from BNP Paribas Exane. Please go ahead, Hugo.

Hugo Solvet
Equity Research Analyst at BNP Paribas

Hello. Thank you for taking my questions. I have two, please. First on tariffs. I appreciate the color on U.

Hugo Solvet
Equity Research Analyst at BNP Paribas

S, China and the fact that you cannot really guide yet for any ex China tariffs. But could you briefly remind us of the manufacturing footprint here? And as we think about Mexico, Canada, is there anything that we should have in mind? And how prepared do you feel with regards to a potential rollout of tariffs to Europe? And Second, on dividend, you're moving to a mix of cash and shares.

Hugo Solvet
Equity Research Analyst at BNP Paribas

Should we see this as a transition to be back to a cash dividend next year maybe? Thank you.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Yes. So on the tariffs, so what we said is we included what we know, right? So and that is for now the China U. S. Tariffs.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We also over time actually reduced quite significantly our export from China to The U. S. So we are working that in various ways. And then I think it's good to know that we have no direct manufacturing in Mexico and Canada. We do have some suppliers there, but no own manufacturing sites.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We do have manufacturing sites in Europe, but also in other parts of Asia. So we're playing a global footprint. We are regionalizing before. And as I said, it's hard to speculate on what will happen next. We are in very active dialogue on many fronts with the EU, with The U.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

S, in China to also advocate the importance of reliable supply chain for patients, so that disruption is minimized. We have seen with COVID what it means if supply chain in health tech and in med tech is disrupted. So we are working our own plan with regionalizing supply chain. We are kind of lobbying to see how we can best maneuver through this. And the current footprint that we have, I think, is one that we build on and that we further regionalize.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

Yes. And then Hugo, on your question on dividends, we are very pleased that we are proposing to offer shareholders the option to receive dividend in either shares or cash as it just is an important signal that we've made significant progress in deleveraging the company, currently at 1.8% 1.8x leverage. We've really put a lot of focus on strengthening the balance sheet. At the same time, we're recognizing that there will be a $1,100,000,000 cash out related to the restaurant settlement in The U. S.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

That we'll be paying out in the first half of the year. So we're balancing those, but you should really see this as a next big step on our journey. So we're very pleased about that.

Hugo Solvet
Equity Research Analyst at BNP Paribas

Thank you very much.

Operator

Thank you. We will now take our next question from the line of Zhiyong Lin from Citi. Please state your question, Sien.

Giang Nguyen
Giang Nguyen
Vice President - Equity Research at Citi

Hi. Thank you for taking my questions. My first question is on the growth phasing that you guys are expecting to see through the rest of the year. I appreciate that you have provided us with the outlook for Q1 already of mid single digit decline. And also, what's your degree of confidence at this point in time in delivering of both the midpoint of the guide for the full year?

Giang Nguyen
Giang Nguyen
Vice President - Equity Research at Citi

And I guess the follow-up to this question is, what is the implication for margins as a result of this? And with this incremental cost savings, can we see margin for every quarter to be within the guidance range even when top line may not be? Thank you.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

Yes. So from a phasing perspective, thanks for the question. So we see this as a realistic outlook for the year. And if you then think about the phasing, both from a sales growth as from a margin perspective, we expect this to be back end loaded due to a few different things and mainly the China impact, where we see China double digit decline in the first half of twenty twenty five as well as phasing of royalties. And you know that royalty phasing is at a high margin for us, so that really has a significant impact as well.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

And the third component is really the comparable base, particularly in D and T, where in Q1 of twenty twenty four, we still saw supply chain normalizing from an MRR perspective particularly. And so for China, we don't foresee a rebound in the second half of the year, but what we do see is comparable easings in the second half of the year, which will really have an impact on us. So what I'm as a result, what we're seeing is that both sales growth as well as margin growth will be back end loaded towards the latter half of the year. And maybe as a last follow-up, we are continuing to focus on what we control. That increase of our productivity savings from

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

EUR 2,000,000,000 to EUR

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

2,500,000,000.0 will also be back end loaded as we're putting the programs in place to drive that productivity going forward. So we will see a gradual improvement on both sales as well as EBITDA margin.

Giang Nguyen
Giang Nguyen
Vice President - Equity Research at Citi

Thank you.

Operator

Thank you. Our next question comes from the line of Julien Audeur from Bank of America. Please state your question Julien.

Julien Ouaddour
Julien Ouaddour
Vice President - Equity Research at Bank of America Merrill Lynch

Thank you very much. Good morning everyone. So I have a couple as well. The first one, and just I mean, sorry to come back again on China. I think it's more follow-up on all the comments you made today.

Julien Ouaddour
Julien Ouaddour
Vice President - Equity Research at Bank of America Merrill Lynch

But is it fair to explain the main difference from your mid to high single digit decline versus the low single digit decline from peers coming mainly from the PH business? And let's say like in other terms, do you see the DNT business being roughly down low single digits and maybe PH like even more than that to get to the let's say, overall mid to high single digit decline. So thanks for that. And the second question is that there are some concerns in The U. S.

Julien Ouaddour
Julien Ouaddour
Vice President - Equity Research at Bank of America Merrill Lynch

About cut to health care budgets. Do you see it as a risk for hospital budgets? I mean, today, we see a pretty strong CapEx environment, but maybe for like 2026 or beyond?

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Yes. Thank you, Julia. On China, so indeed, pH is the one that actually causes the mid to high single digit. It has a double digit impact still in the first half of the year. So that actually is weighing into the phasing into the year and also kind of the impact from China that goes with that.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

In D and T, we see kind of a continuation of trend that we have taken into account. That's also what we mentioned, right? So we have seen some green shoots, but not a true inflection that actually would cause us to kind of significantly up that expectation. So we kind of look at that as the time progresses in the year to see how the tender momentum and the order momentum in the market grows. And that's what we also see as across the industry.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

So that's not for us. That's I think just the market in itself. So that's I think on the China assumption. The second question, yes, the hospital CapEx in The U. S, we actually expect that The U.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

S. Will continue in its strong form. Remember, I called out we had double digit order intake growth in North America in 2024. So we have strong momentum. Actually, we expect that to continue because the demand underlying is really strong.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We see procedure growth still increasing. We still see the weight lines for imaging and monitoring, as we said, kind of we see continued solid demand. And with the share we have, we benefit from that. So you see kind of good momentum. We saw the ultrasound also really picking up, as I mentioned.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

That was a bit weaker in the recent periods. And that's actually picking up, which shows that kind of that market, in my view, is in a good position and will continue to be.

Julien Ouaddour
Julien Ouaddour
Vice President - Equity Research at Bank of America Merrill Lynch

Thanks a lot, Roy. Just I mean like for the second question, I was more like mentioning in case we have some cut in budgets, I mean like for Medicare, like for Medicaid, etcetera. Is it something which can have an impact on procedural level or just like wholesale budget, maybe not at the moment, but more like in the future?

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

No. Again, hard to speculate on what could happen if policies change. I think we have, of course, had more policy change in recent times. We look at the underlying demand that is strong and also the engagement with the customers now. Then there's always things that can change and that we have to address then when they happen.

Julien Ouaddour
Julien Ouaddour
Vice President - Equity Research at Bank of America Merrill Lynch

Perfect. Thank you.

Operator

Thank you. Due to the time, the last question comes from Wim Gila of ABN AMROE Auto. Please state your question, Wim.

Wim Gille
CFO & Head Of Equity Research at ABN AMRO – ODDO BHF BV

Yes. Very good morning. Want to zoom in a little bit on the incidentals in D and T. It was $136,000,000 which was a bit higher than expected, of which $100,000,000 related to restructuring and $40,000,000 of quality actions. Can you give us a bit more feeling on what kind of restructuring you're doing there?

Wim Gille
CFO & Head Of Equity Research at ABN AMRO – ODDO BHF BV

Is that a headcount? Is it footprint optimization? What are you doing there? And on the quality actions, are there any modalities specifically that we should look into?

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

Yes. Wim, thank you for your questions. Indeed, the incidentals in D and T were a bit higher than expected. We acknowledge that, and we're working diligently to reduce those over time. If you then look into the details a little bit more, there are two things that were in those numbers.

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

On the one hand, we're actively going after quality and resolving all the quality issues that we see. That was part of the plan. And when we see it, we address it, and that leads to some quality charges as part of our incidentals. And the other side of it is that as we continue to become a simpler and a less complex company, we're also working through footprint changes, and that has particularly played out in diagnosis and treatment as we're becoming a leaner supply chain organization and a more focused organization in general. So those are the two key items driving that.

Wim Gille
CFO & Head Of Equity Research at ABN AMRO – ODDO BHF BV

And then

Wim Gille
CFO & Head Of Equity Research at ABN AMRO – ODDO BHF BV

which modalities do we look for quality actions?

Charlotte Hanneman
Charlotte Hanneman
Executive VP, CFO & Member of Board of Management at Koninklijke Philips

Yes. We won't go into that level of detail, Wim, at this point. There's nothing specific to call out there.

Wim Gille
CFO & Head Of Equity Research at ABN AMRO – ODDO BHF BV

All right. Thank you.

Operator

Thank

Operator

you. That was the last question. Mr. Jacobs, please continue.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Yes. Thank you for the call and your questions. Let me summarize it. I think what you have seen in our Q4 and full year 2024 print is that we closed in line with our expectations and really building strongly on the fundamentals of the last two years. We came back into positive order intake growth with a strong momentum outside of China held back by China.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

We are realistic in our plan for 2025. We have taken a cautious view on China, where we expect the similar pattern of the second half to continue, at least in the first half, where we have the consumer slowdown to be catered for. But we continue at the same time strong margin expansion, strong balance sheet strengthening. As a result, we also returned to dividend in cash, and we continue to be razor focused on that also supported by productivity enhancement in 2025. So thank you for your attention.

Roy Jakobs
Roy Jakobs
CEO at Koninklijke Philips

Looking forward to further engagement and seeing some of you very soon. Thank you so much.

Operator

This concludes the Royal Philips fourth quarter and full year twenty twenty four results conference call on Wednesday, 02/19/2025. Thank you for participating. You may now disconnect.

Executives
    • Leandro Mazzoni
      Leandro Mazzoni
      Head Of Investor Relations
    • Roy Jakobs
      Roy Jakobs
      CEO
    • Charlotte Hanneman
      Charlotte Hanneman
      Executive VP, CFO & Member of Board of Management
Analysts
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Koninklijke Philips Q4 2024
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