Koninklijke Philips NV Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Order Intake: Excluding a double-digit decline in China, comparable order intake increased by 4% in Q1 with strong growth in Diagnosis & Treatment and double-digit growth in North America. Diagnosis & Treatment orders grew mid single-digits globally.
• Innovation: Over 50% of sales are fueled by AI-driven innovations from new and upgraded products launched in the last three years. Examples include the Azurion platform with AI-driven neuro solution, CT-5300 with AI-enabled workflow, and helium-free MRI with AI engines.
• Execution Priorities: Simplifying quality management systems (on track to reduce by 70% this year), improving supply chain lead times and service levels, simplifying platforms/SKUs, and driving a lean organization with €42 million of productivity in Q1.
• Tariff Mitigation: Accelerating regionalization of supply chain, optimizing network flexibility, effective inventory management, pursuing exemptions, selective pricing, and engaging with governments to mitigate tariff impacts.

Segment Performance

• Diagnosis & Treatment: Comparable sales decreased 4% in Q1, with Image-Guided Therapy showing strong performance and Precision Diagnosis down mainly due to China and high comparison bases. Adjusted EBITA margin improved by 30 basis points to 9.5% despite lower sales.
• Connected Care: Comparable sales were broadly flat; Hospital patient monitoring sales increased, but adjusted EBITA margin declined to 3.5% due to unfavorable mix and cost phasing.
• Personal Health: Sales returned to growth with 1% comparable growth, seeing double-digit growth in Europe and growth markets excluding China, and slight growth in the US. Adjusted EBITA margin was 15.2%.
• Segment Other: Totaled €140 million, €17 million lower than Q1 2024, above the outlook range due to royalty phasing effects.

Guidance

• Sales outlook for 2025 remains comparable growth between 1% and 3%.
• Adjusted EBITA margin expected to range between 10.8% and 11.3%, a 100 bps adjustment due to tariffs net of mitigations.
• Free cash flow projected to be slightly positive, including a €1 billion outflow related to the Respironics settlement paid in Q1.
• Q2 expected to modestly improve compared to Q1, excluding wider economic impacts and ongoing Respironics proceedings.

Risks

• Tariffs: Net cost impact of tariffs is estimated at €250 million to €300 million, with US and China tariffs having the most significant impact.
• Macro Uncertainty: Volatile macro environment affecting market dynamics globally.
• Rare Earth Export Restrictions: Currently no impact on supply chain but monitored closely.
• FDA Disruptions: Potential delays in approval cycles for innovations due to FDA proceedings.

Question and Answer

Q: On tariff mitigation efforts, can you elaborate more on supply chain network optimization and execution speed?

A: Accelerating regionalization of supply chain, localizing in the US while leveraging existing footprints. Actions are underway, though structural strengthening will take time.

Q: Impact of China VBP on ultrasound business?

A: Monitoring the situation, but no major impact yet; innovations like the VM platform are gaining traction in China.

Q: How should we think about the annualized impact of tariffs in 2026?

A: Mitigation actions are ongoing, with a large part related to inventory management and exemptions, but specifics for 2026 are early to predict.

Q: Any pull forward of sales in Personal Health due to tariffs?

A: No significant pull forward; Personal Health growth in international regions excluding China is continuing, with China impact reducing as destocking ends.