Barely one week into his tenure as president and CEO of Philips, Roy Jakobs is already being put to the test.
As the devicemaker reported lower-than-expected third-quarter sales on Monday—confirming numbers that the company had previewed for investors earlier this month—Jakobs outlined his first major hurdle as CEO: leading a restructuring effort that will start by eliminating thousands of jobs around the world.
“We are taking immediate steps to the reduce the costs involved in running the company,” Jakobs said during a call with investors Monday. “This includes the difficult but necessary decision to immediately reduce our workforce by around 4,000 roles globally, subject to consultations with the relevant workers’ councils and social partners.”
He continued, “It is a decision we do not take lightly and which we will implement with respect toward impacted colleagues, but one that is needed to cope with our current challenges.”
The chief executive said the job cuts will come from all across the company, on a largely proportionate basis, so the highest number of layoffs will occur in Philips’ biggest employee bases, which are located in the U.S., the Netherlands, India and China, in descending order. Philips counted more than 78,000 employees around the world in its 2021 annual report (PDF).
Abhijit Bhattacharya, Philips’ chief financial officer, said on Monday’s call that the reduction is expected to generate “severance and termination-related costs of approximately 300 million [euros] in the coming quarters,” about half of which will show up in the company’s fourth-quarter earnings. Ultimately, he said, the cuts are estimated to result in annualized savings of the same amount, 300 million euros.
When asked on the call how Philips plans to “do more with less,” Jakobs expressed optimism that by narrowing the company’s focus to areas where it has “strong innovation potential, but also skill potential,” it’ll see “better returns for the investments we’re making.”
“I do believe that we have room to improve our efficiency and effectiveness of innovation,” he said.
In addition to sifting through Philips’ portfolio to find those projects with the greatest potential impact, Jakobs said the company is aiming to slim down even further, with an expanded restructuring plan expected to be announced alongside its full-year 2022 financial report at the beginning of next year.
“We will continue to review areas to further improve our supply operations, invest in quality and simplify the way of working and remove organizational complexity,” he said. “This is expected to result in additional restructuring and associated costs in 2023.”
The job cuts and other restructuring efforts on the horizon are all part of Philips’ plan to cut costs—which so far this year has also included raising prices, consolidating supply chain resources, improving product quality and narrowing its R&D focus, Bhattacharya said on the call.
Even so, Philips still reported a loss of 1.5 billion euros for the third quarter, compared to a positive income of 358 million euros during the same period last year. Its operating cash flow, meanwhile, clocked in at an outflow of 180 million euros, about a 170% drop from the 256 million euro inflow it registered in 2021.
Philips attributed its operating loss largely to a pair of non-cash charges totaling 1.5 billion euros: a 1.3 billion euro goodwill impairment charge linked to a worse-than-expected financial forecast for its troubled Respironics division and another 165 million euros incurred as it narrows its R&D focus.