Koninklijke Philips NV Q1 FY2023 Earnings Call

Hi, everyone. Welcome to Philips' First Quarter 2023 Results Webcast. I have here with me our CEO, Roy Jakobs, and our CFO, Abhijit Bhattacharya. The first quarter press release and slide deck as well as the frequently asked questions and deck on the Respironics recall were published on our Investor Relations website this morning. The replay and full transcript of the webcast will be made available on the website as well. 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. In today's call, we will discuss our first quarter results as well as the progress on the actions we're taking across different areas to drive performance improvement. With that, I would like to hand over to Roy.

Thanks, Leandro. Good morning, everyone, and welcome. It's good to be with you again. I want to start with giving you the key highlights for this quarter. First, we delivered a solid start to the year with 6% comparable sales growth and improvements in profitability and operating cash flow in Q1 as our actions to strengthen execution and deliver shareholder value started to take effect. Secondly, we are making good progress in executing our plan and on our three priorities: enhancing patient safety and quality, strengthening our supply chain reliability, which has helped our improved performance in Q4 last year and the first quarter this year and establishing a simplified, more agile operating model. Thirdly, resolving the Respironics recall for patients remains our highest priority. This quarter, Respironics recorded a €575 million provision in connection with the anticipated resolution of the economic loss class action in the U.S. Looking ahead, based on our solid performance in the quarter, our order book, and the ongoing actions to further improve execution, we are confident in our plan for 2023, acknowledging that uncertainties remain. Now on to some key financials in the quarter. We had a solid 6% comparable sales growth, with strong growth of 15% in Diagnosis & Treatment and 3% growth in Connected Care, partly offset by a 6% decline in Personal Health. Comparable order intake grew double-digit in the Diagnosis & Treatment businesses, offset by Connected Care. Sales in the quarter were supported by the good momentum for diagnosis treatment and Connected Care businesses in China as well. We see continued strength of our order book, which is 10% higher than a year ago, despite strong revenue conversion in the last two quarters and a flat order intake in the quarter itself. Adjusted EBITA margin was 8.6%, an improvement of 240 basis points compared to Q1 2022. Operating cash was an inflow of €202 million, a step-up of €429 million versus Q1 2022. As you already know, Philips is a defendant in several class action lawsuits and individual personal injury claims. This quarter, Respironics recorded a €575 million provision in connection with the anticipated resolution of the economic class action in the U.S. Abhijit will provide more details around it. The anticipated resolution of economic loss class action is an important step in addressing the litigation related to the recall. Visibility on potential outcomes on the medical monitoring class action and personal injury claims is not expected before 2024. I've met many of our customers and partners in the last few months, and it's absolutely clear that Philips remains a preferred innovation partner to help hospitals worldwide address their staffing shortages, enhance productivity, and improve patient and staff experience. This has again been exemplified at events during the quarter. Philips Enterprise Informatics solutions resonated very strongly with customers at recent ViVE and HIMSS global healthcare events, which I attended. We also had some key customer innovation achievements in the first quarter. We signed a multiyear agreement with Northwell Health in the U.S. to standardize and centralize monitoring across the hospital. And we signed a multivendor services agreement with Prisma Health also in the U.S. to become their sole source vendor for biomedical and clinical engineering services. We expanded our leading ultrasound portfolio with the launch of the Ultrasound Compact 5,500 CV, which facilitates first-time-right ultrasound exams for cardiology and vascular patients at the bedside. In Personal Health, we introduced Sonicare for Kids 'Design a Pet Edition' to improve oral care habits among children. And we again achieved top ranking in medical technology patent filings at the European Patent Office and were included on the Clarivate Top 100 Global Innovator list. I'm very confident that our focused organic growth and scalable innovation strategy will further strengthen our businesses and results going forward. With that, I would like to give the floor to Abhijit to take us through Q1 in more detail. After which, I will come back on the progress on our execution priorities. Abhijit, please?

Thanks, Roy. Good morning, everyone. I want to start with our order book development in Q1, which ended 10% higher compared to last year, as Roy mentioned, driven by image-guided therapy, ultrasound MRI, monitoring, and Enterprise Diagnostic Informatics. Importantly, the margin profile in the order book reflects the price increases that we have been executing since last year and will start running through our P&L from Q3 onwards. Moving to segment highlights from the quarter. In Diagnosis & Treatment, comparable sales increased by 15%, driven by strong double-digit growth in Ultrasound and Image-Guided Therapy and mid-single-digit growth in Diagnostic Imaging. Sales grew double digits across mature and growth geographies with strong performance in North America, Western Europe, and China. Order intake grew double digits on the back of 7% growth in 2022. This was driven by strong double-digit order intake growth in Image-Guided Therapy and computed tomography, where our Spectral CT 7500 continues to perform very well in the market. Orders in growth geographies grew by double digits driven by strong growth in China and Latin America. Orders in mature geographies grew by 3%, driven by 10% growth in North America. Adjusted EBITA margin increased to 11.3%, mainly driven by operational leverage, a better mix, and productivity measures. Connected Care comparable sales increased 3%, driven by strong double-digit growth in hospital patient monitoring, largely offset by sleep and respiratory care. Order intake declined double digits due to tough comps in hospital patient monitoring on the back of the expansion and renewal of the installed base during the period of 2020 to 2022. For context, hospital patient monitoring continues to run above pre-COVID levels, driven by the fundamental demand shift in the adoption of our patient care management solutions and expanding market shares. AI-powered patient monitoring is increasingly critical to care delivery. Our IntelliVue patient monitoring solutions are based upon superior hardware and predictive AI-based software that together monitor patients throughout their hospital state. Adjusted EBITA margin increased to 2.4%, driven by an improvement of more than 500 basis points of the Connected Care businesses, excluding Sleep & Respiratory Care. Finally, in Personal Health, comparable sales declined 6% on the back of 8% growth in Q1 2022. This was due to a 4 percentage point impact from portfolio decisions related to Russia in 2022 and the lower consumer demand globally. Sales grew low single digit in China where we see improving sellout trends. Adjusted EBITA margin was 13.2%, mainly due to the lost sales related to Russia. Adjusted EBITA margin for the group increased by 240 basis points to 8.6%, which in component price inflation came in at around 300 basis points; however, this was more than offset by 120 basis points of operating leverage and by our productivity and pricing actions, which contributed a further 520 basis points. The pricing impact on our health systems businesses, that is Diagnosis & Treatment and Connected Care, will be further reflected in the P&L during the second half of 2023 as we gradually convert more orders at new and better prices. Our productivity initiatives are on track. These actions delivered savings of €190 million in the first quarter. Operating model productivity savings amounted to €94 million. Procurement savings amounted to €32 million, and other productivity programs delivered savings of €64 million. Adjusting items in the quarter included €150 million of charges related to the accelerated execution of the workforce reduction plan, where we are ahead of the plan with 5,400 role reductions to date. The full-year outlook for restructuring, acquisition-related, and other charges remains in line with the guidance provided in January, except for the impact of the economic loss provision booked in Q1. Let me provide you some more color on that provision. The provision was booked as Philips Respironics expects to submit a negotiated settlement agreement to the court for preliminary approval in the second quarter of 2023. While I cannot go into much detail of the provision at this moment, it's important to note that the economic loss resolution is being negotiated with the assistance of a court-appointed mediator as a potential class action settlement. That will resolve the economic claim loss claims of all device users, hospitals, and private insurers in the U.S., whether they filed a lawsuit or not. Subject to final court approval, payments to class members under the settlement are not expected to begin until the first quarter of 2024 at the earliest. With that, I'd like to hand you back to Roy.

Thanks, Abhijit. I would like to continue on the topic of the Respironics recall. We understand how important the sleep therapy devices and ventilators are for patients and how they improve their lives every day at night. Resolving this has been and remains our highest priority. It's a complex task, but we are making progress with some ups and downs. To date, more than 95% of the new replacement device and repair kits have been produced and are ready to serve patients. The other 5% of the registered devices are primarily ventilators, for which Respironics is fully focused on working towards a solution. The vast majority of the produced lead devices have been sent to patients and home care providers, and we are getting the remaining devices to patients as soon as possible. Regarding the test and research program, Respironics continues to expect to publish the toxicological risk assessment of the VOC emissions resulting from ozone-induced foam degradation in the DreamStation 1 devices and to complete testing for System 1 and DreamStation go sleep therapy devices in Q2. We are optimistic about what this news will mean for patients while we continue to work through the testing for ventilators. To conclude, I would like to highlight some of the progress we have made in the quarter on our execution priorities. First, on patient safety and quality. To strengthen the voice of the patient, we established a new Patient Safety Advisory Board, which will be operational in the second quarter. To improve product quality, we added significant design control capabilities and talent in systems engineering and software design teams. And we are on track to deliver 45 production in a number of quality management systems this year, building on a 30% reduction by the end of last year. If you look at corrective and preventive action systems, we continue to proactively identify issues and are increasing the number of investigations by design. This allows us to find and address them early. We are, of course, focused on this number to improve it significantly as we fully implement our plan. With respect to the supply chain, as of this month, we have moved to customer-centric end-to-end supply chain teams, closely aligned to the different businesses we operate in and which we expect to further enhance the efficiency in delivering to customers. Several new dedicated leaders have already been announced for each business in the first quarter. We continue to make progress to reduce materials and component risks. For example, we have accelerated the redesigns of components by completing 126 printed circuit boards, compared to 56 as of the end of Q4. And we are on track to meet our targets to derisk all our high-risk components by year-end. As you have seen in the results we have presented today, I'm pleased to see that these actions we have taken are already positively impacting our sales conversion rates. Finally, we are simplifying our operating model by putting prime accountability into the businesses, supported by strong regions and lean functions. As of this month, we have moved to end-to-end P&L accountable businesses. Our goal is to remove complexity and become more focused on strategy and innovation execution. This also includes the difficult but necessary reduction of our workforce by 10,000 roles globally by 2025. To date, we have reduced 5,400 roles, and we are ahead of plan. This is accompanied by significant change effort, and I want to thank and acknowledge the efforts of our employees and thank them for their strong ongoing commitment to our purpose. A leaner organization will help Philips become more agile and ultimately result in better outcomes for customers, consumers, and patients. This will also result in a simpler, more productive, and more engaging workplace for employees, who are motivated and attracted by our purpose. Moreover, since Q1, we are managing performance through a reduced number of key operational metrics. We brought it down from 30 to 12 addressing customers, quality, ESG, people, and financial performance. This focus allows us to make an impact in a vital view. We are also strengthening our teams with new health talent by adding seasoned leaders with deep domain expertise, including to our executive committee. In addition to the changes announced in January, earlier this quarter, we announced the appointment of Julia Strandberg as a Chief Business Leader of the Connected Care businesses effective today. Julia brings deep, multidisciplinary expertise, including informatics and monitoring and in improving the healthcare experience for patients and providers across care settings. Let me close out by repeating the key messages of the quarter. We delivered a solid start to the year with 6% comparable sales growth and improvements in profitability and operating cash flow in Q1 as our actions to strengthen execution and deliver shareholder value started to take effect. We are making good progress in executing our plan and on our three priorities: enhancing patient safety and quality, strengthening our supply chain reliability, which has helped improve performance in Q4 last year and the first quarter this year, and establishing a simplified, more agile operating model. Resolving the Respironics recall for patients remains our highest priority. This quarter, we continued to make progress on the remediation and Respironics recorded a provision in connection with the anticipated resolution of the economic loss class action. Looking ahead, based on our solid performance in the quarter, our order book, and the ongoing actions to further improve execution, we are confident in our plan for 2023, acknowledging that uncertainties remain. I would like to thank you all for joining this call, and we will now take your questions.

The first question comes from Hasan Al-Wakeel from Barclays. Please go ahead with your question.

Thank you for taking my question. I have a couple, please. So firstly, can you talk about guidance and why after a very strong Q1, you've decided to keep guidance unchanged? How should we be thinking about the phasing of growth going forward, given that the guidance implies some slowdown sequentially? Is this more caution rather than any real anticipation of a slowdown going forward? And then secondly, you've noted that you've produced and shipped more than 95% of recall devices. Given the recent release by the FDA, which highlighted concerns that devices in the hands of patients were considerably less. Could you talk about the deviation here, the expected time to get to patients as well as the broader relationship with the FDA?

Thank you, Hassan. Regarding our guidance for 2023, we are confident based on two key factors. First, we have had a strong start to the year, demonstrating growth, profitability, and improved operating cash flow, alongside effective execution of our plan. However, since we are still early in the year, we prefer not to adjust our guidance quarterly. We also recognize ongoing uncertainties, including macroeconomic and geopolitical factors, as well as an upcoming consent decree. This is why we are maintaining our confidence in the plan without making further adjustments to the guidance. Concerning the recall, we are committed to finalizing the process and have now completed 95% of the produced remediation devices, with most of them already distributed to patients. There is, however, a gap between production and patient delivery. Currently, over 4 million devices are in the hands of patients, and we are working on the remainder both in the U.S. and globally. This requires our efforts and those of the patients, as some still need to respond to our outreach. Finalizing the remediation is crucial, and we are also focusing on the respiratory care aspect, which accounts for the remaining 5% of the total remediation volume. In our relationship with the FDA, we maintain strong engagement on various fronts, including the remediation process and the consent decree, where we have made progress but are not yet able to provide a status update due to pending agreements. We have also made good strides in testing and plan to share results soon, along with feedback from the FDA.

That's helpful. And just in terms of the phasing of growth going forward, how should we be thinking about that? And you talked about mid-single-digit expectations for D&T and Connected Care with low single digit in PH. I wonder if that's changed at all.

Yes, this is Abhijit. At the beginning of the year, we anticipated that the growth would be more prominent in the second half. However, based on our current performance, we expect a steadier growth pattern throughout the entire year. Thus, we do not foresee a stronger second half as we previously indicated. Looking at our guidance for Connected Care and Personal Health, we have no reason to adjust our expectations for D&T. The positive start for D&T increases our confidence that we will stay on track with our plans for it.

The next question comes from the line of Veronika Dubajova from Citi. Please state your question, madam.

I would like to begin by discussing the D&T margin profile opportunity. I'm interested in understanding if there were any unusual factors contributing to the double-digit margin you reported this quarter and if there were specific advantages related to pricing. I'm trying to gauge how indicative this margin is of the overall business and its sustainability for the rest of the year. Additionally, I would like to follow up on the FDA matters, not the litigation questions that Hassan raised. Are you still anticipating the consent decree resolution this quarter? What are your thoughts on the potential outcomes and how they may have evolved as you continue these discussions?

Hi, Veronika, good morning. On the D&T margin, there were no special one-off positives in the margin in the first quarter. With the growth that we have, you get good operating leverage. Important, as you saw in the last couple of years, our high-margin businesses were the ones that were impacted, namely IGT and Ultrasound. We have had very good growth in IGT and Ultrasound. So that gives additional, let's say, that’s why I put mix. Of course, the productivity savings that we have running across the company, D&T gets its fair share. And then regarding pricing, we do not see in Q1 and Q2 any significant pricing impact from better orders that will come in the second half of the year.

And let me take the second one on the FDA and the consent decree. As I said earlier, we're in active dialogue on that. We have also next meetings planned. I would still hope for a quick resolution. I said earlier that, that could be Q2. Now that's still something we definitely want to work towards. But as I also said earlier, we are not in control of that timeline. And that's something, of course, that works together with the FDA. At the moment we have clarity; we will come forward. But I can assure you that we continue to work on that with great efforts.

Understood. And Rory, any sort of change in your confidence in terms of the 2025 guidance and whether that's still consistent with your conversations you're having?

No. I think there's no change in that perspective. I think based upon the start of the year, we are very confident on the 2023 year plan both on the execution as well as kind of what we see going through for the supply chain that allows us to say that kind of we have this confidence that has been growing in the quarter based on the solid start of the year. The consent decree is still one that we need to work through, but has not changed that perspective, the outlook for the year.

Thank you. The next question comes from David Adlington from JPMorgan. Please state your question, sir.

Firstly, regarding the D&T margin, historically, the Q1 margin has been in the low to mid-single digits, but this year, it has been over double that. Can you help us understand how to anticipate the margin movement for the rest of the year? Specifically, could you clarify how much of this improvement stems from cost savings compared to the drop-through? Additionally, about the balance sheet, considering today's provision and upcoming costs related to the consent decree and personal litigation, do you feel there is a need to strengthen the balance sheet?

Yes. David, as I mentioned to Veronika, there are no unusual one-time factors contributing to the D&T margin improvement. Looking back over multiple years, the IGT share within the overall D&T mix has significantly increased. We are now well above €3 billion in high-margin IGT businesses. As you noted, we are seeing productivity initiatives reduce costs. We aimed to reach the 14% to 16% margin range for D&T, but we faced some setbacks over the past couple of years due to supply chain issues. Now that we are getting back on track, we expect to achieve our targeted ranges by 2025. Regarding the balance sheet, per the assessments of the leading rating agencies, we remain a few notches above investment grade and see no need for further strengthening at this moment. Our cash generation is off to a strong start this year, and we are confident in its sustainability. Additionally, once the settlement of the class action for economic loss occurs, we anticipate receiving insurance funds that will help offset those costs. Therefore, we do not see a need for further balance sheet strengthening at this time.

Thank you. The next question comes from Delphine Le Louet from Societe Generale. Please go ahead. Your line is open.

I was willing to go back on the Chinese dynamic as well as the North America dynamic. Can you give us a bit more granularity in this market and especially regarding PH to better understand, what are the segments that are going fine? We had a lot of oral care last year. Can we have a comment on this one for PH and Chinese more local about the trends and the take-up that you've seen plus North America business, please?

Thank you, Delphine. Let me start by addressing China. We have seen a strong contribution from China this quarter, particularly on the professional health systems side. The consumer side remains subdued, but we anticipate it will strengthen from Q2 onwards, which aligns with our previous expectations. Our outlook for the year is coming to fruition, and we expect China to make a significant contribution this year. We are pleased to see China recovering, especially in health systems, and we expect to see improvements in the consumer segment in the upcoming quarters. Regarding North America, demand on the consumer side has also been subdued, which we anticipated given the high inflationary environment. Volume levels are not what they were earlier in the market, but we are maintaining our market share and do not believe we are losing traction with consumers. There is still strong interest in our innovations, although overall demand is lower. Pricing on the consumer side is helping us maintain our position, but the challenges are evident, and this is reflected in our Personal Health segment. On the health systems side in North America, the D&T sector has shown strong performance, which is encouraging. We are noticing customers making strategic choices to re-engage with both the IGT and imaging segments, reflecting some pent-up demand following COVID. As our supply chain improves, we are better able to meet this demand. That's the update I can provide. Abhijit, would you like to add anything?

Yes. It's important to note that in China, as we increase our local manufacturing, we are better positioned to receive more orders. Regarding your question about Personal Health in North America, we had significant growth in the first two quarters of last year due to a resurgence in post-COVID demand, making year-over-year comparisons challenging. The market is not strong because of factors like inflation, which contributes to a decline in comparisons. However, we are pleased to report a return to growth in China during the first quarter, and the robust sellout we are observing boosts our confidence in maintaining growth in that region, particularly in personal health.

Okay. Can we have a quantification of the Chinese uptake in growth? How big was that for the whole?

For Philips? Or for...

Yes.

We had I think double...

If you can go for PH share specifically would be fine.

For PH, I mentioned first quarter was low single-digit. And then in the coming quarters, we will keep moving upwards. So because we see the sellout being good, that means, of course, the distribution network will start restocking and therefore, we expect that the growth will further accelerate during the year.

Yes. So, I think we had good double-digit growth in the first quarter. It's about 15% of sales. So there you can make your estimate.

Thank you. The next question comes from the line of Robert Davies from Morgan Stanley. Please state your question, sir.

My first one was just if you could give us a little bit more color on the order dynamics within the Diagnostics & Treatment business. Obviously, we're seeing very strong sales growth just to be curious, given the current discussion around hospital CapEx, etc., which I know you've provided in previous, I guess, slightly more cautious comments than some of your peers. I'd just be kind of curious to get your thoughts on what's going on there from an order perspective.

Yes. Thank you, Robert. And just to provide more color also building on what we said earlier, of course, in the D&T space, as Abhijit outlined, we have the IGT and the imaging businesses. We see IGT in particular really starting extremely strong, and we expect that also to continue. In imaging, it's a more diverse picture. We highlighted earlier that on MR, we still have more supply challenges. So we see that also being worked. So we are improving on supply, but still, we are not there. And therefore, we also see some effect on the orders from that, whilst CT actually had a very strong start in the year. So the Spectral CT, as also was outlined by Abhijit, is really making headway into the market. It's getting a lot of traction based on its improved imaging quality, but also the ease of use and integrating it into the workflow. So that's kind of, I would say, a bit of a mixed picture that we see across D&T. But overall, a very strong performance across the board.

And then just the other one I wanted to follow up on your comments you made earlier on the phasing of growth as you go through the year. I guess given your backlog or your sort of order book coverage, I think, has sort of gone up again. What's the prospects for accelerating growth even more than you've seen in this quarter? Or have you kind of maxed out in this quarter, is this the sort of fastest you can get stuff out of the door? Just trying to get a sense of how constrained Philips still is from just on the delivery side of things?

Yes, I think it's fair to say that this gives confidence that also actually the supply strengthening will continue. So I think you will see an overflow of this in Q2. So we were a bit more cautious in the outlook earlier, where Abhijit also mentioned that kind of we guided towards a slower start and a stronger second half. I think now as we were able to get better supply, and also we have the outlook on a continued stronger supply, I think you see that more evenly across the year. This is something that, of course, depends on us; better supply gives us the ability to install. At the same time, we also need to work closely with our customers to get it installed and to get it planned for. And as I shared earlier, of course, the climate is still pressured in the hospital environment, not only from a CapEx environment but also just in terms of the staffing that they have to operate the system. And it also means that there needs to be very careful planning with them to work through the orders that we can convert.

Maybe just one final one. Just in terms of the profitability of the Connected Care business for this year, what are your sort of latest store process? Are you still sort of assuming breakeven, low single-digit? Or given that it sort of started already, I think it was up 2.4 in the first quarter. Is there potential for that to get better as sort of sales accelerate over the year?

Yes. Look, typically, our Q1 profitability is our lowest. So typically, we will see Connected Care profitability increase during the year. The good news is that earlier where we were struggling with getting parts for patient monitoring, which is why we were impacted on profitability. That is now in a much better situation. So we start improving. Also in Sleep & Respiratory Care as we keep putting in the cost actions, you will see that we have guided to breakeven for the year. So during the course of the year, that will increase. So yes, overall, you will see Connected Care profitability improving throughout the year quarter by quarter.

Thank you. The next question comes from Graham Doyle, UBS. Please state your question, sir.

I have a question about the consent decree, recall, and the FDA. We haven't received any clear information regarding the FDA's communication from ten days ago about the language on the website and the recall. Could you provide your thoughts on the situation and the differences between your perspective and that of the FDA? Additionally, should we view this as a factor affecting the ongoing consent decree, or is it more of a separate issue? Also, it would be interesting to hear your insights on the order book as we progress through this year. We hope to see improvement and growth in the order book, which would indicate revenue growth for 2024 and 2025. When do you anticipate seeing that change?

So maybe on the first, in terms of the FDA mentioned or asked to further clarify, I think what happened there is that we published on our website, the amount of units that we produced. And as we are all focused and in particular, of course, the FDA to know how many are with patients, they asked us to clarify how many were with patients. And at the moment that they published it, we had on the website, for example, that we were at a production level of 2.5 million, which was the end of January number, but it was not clear enough on how many patients did receive in the U.S. already their devices, which we, in the meanwhile, updated on the website, so we are clear on saying that actually, by now, we have produced 2.8 million devices for the U.S., of which 2.2 million are in the hands of the patients, and we are working through the remainder to get them in the hands of the patients in this quarter. So, 95% of the total recall units have been produced. Out of that 95%, 4 million are with patients. So, we're making good headway there and depend per country, what the percentages are. But what the call-out was from the FDA is to be very explicit on how many are with patients and that's what we clarified in dialogue with them as well on the website.

Yes, I think it's important to note that not all of our sales are included in the order book. Approximately 40% of our sales come from recurring revenue, and there are elements not captured in the order book. As Roy mentioned, the timing depends on when customers are ready to proceed and when their sites are prepared. The positive news is that the order book remains strong, and supply conditions are improving. As we navigate through the year, we will update you on our progress. We have identified three uncertainties: macroeconomic factors, including the banking situation in Q1 and ongoing inflationary pressures; geopolitical developments that introduce significant uncertainty; and the impact of the consent decree. Until we gain more clarity on these issues, we maintain an increased level of confidence.

Great. Just one quick follow-up on the factors that led you guys to have a sort of confidence that we will get a Q2 consent decree finalization. And have those factors changed? Is it a little less comp? Or is it just a case of time has passed, and so there's just less time to the end of Q2. So naturally, you've got to be a little more cautious.

I believe it's the latter, Graham. We are making progress on this matter. As I mentioned, our goal is to achieve clarity. However, we have previously indicated that this is a thorough process we are engaged in. Specifically, there are no additional changes to report at this time.

Thank you. The next question comes from the line of Falko Friedrichs, Deutsche Bank. Please state your question, sir.

My first question is on the D&T business and specifically on the organic sales growth in the first quarter. Could you quantify the volume and the price component for us? Then secondly, on litigation, can you provide a bit of a roadmap for us in terms of the medical monitoring class action? And then the personal injury claims, just in terms of what we can expect here going forward in terms of the timelines? And then thirdly, there were a couple of questions on that, but maybe you can summarize your thoughts on this hospital CapEx environment in the U.S. given that you sound a bit more cautious going into the year, printed very good Q1 results now. So what is your latest thinking regarding the outlook for the remainder of this year?

Let me take the first one and then, Roy, maybe the next two. So on Diagnosis & Treatment, it's simple. I think the first quarter growth is primarily volume. Pricing is kind of negligible. As we said, pricing will flow more in the second half of the year. So you should see that primarily as volume growth.

Regarding the litigation, as previously mentioned, our focus on resolving potential claims related to economic loss is progressing, and we anticipate this will be addressed in 2023. However, clarity on personal injury and medical monitoring is expected to emerge in 2024 at the earliest. These matters are at earlier stages compared to economic loss, and discussions regarding a threshold value are ongoing, but there is no change in our timeline for these issues. On the capital expenditure in North American hospitals, I would like to highlight two points. First, I continue to exercise caution as the North American market presents challenges for our customers, including staff shortages and a high inflation environment affecting operational costs, which is causing significant losses. Nevertheless, we observe that they are making clearer decisions. The portfolio plays a critical role here, particularly with the D&T sector facing reduced activity during COVID and challenges in addressing patient needs, which indicates a push for modernization. Additionally, we are witnessing a decline in monitoring after two strong years, prompting a reassessment of that business's current state. While we expect continued growth, we also note the emergence of new models that capitalize on our strong market position in North America, giving us confidence that we are capturing available market share. Our engagement with clients, demonstrated through our participation in major events like HIMSS and ViVE, underscores our commitment to assisting hospitals with workflow solutions. Our distinct enterprise informatics position, with exceptional offerings in both imaging and monitoring, enhances our capabilities in interoperability and remote care, which is a significant strength. We also recently announced a partnership with Northwell, a prestigious institution in the U.S., and are actively engaging with more clients, including some who visited us in the Netherlands to discuss long-term partnerships. Despite maintaining a cautious overall outlook, we are actively engaging with our North American customer base and remain confident in our future prospects and positioning in the North American market.

Thank you. The next question comes from Sezgi Bice Ozener from HSBC. Please state your question, madam.

I have a couple of questions. First, can you explain the difference between the regular recall provisions and the remediation provisions that you have set aside? Secondly, could you clarify the amount of cash inflow from the real estate sale and its impact on the panel? Lastly, regarding the remaining 5% of ventilators, you mentioned you are still working on a solution. Can you share how this solution will differ from the others?

Yes. I'm unsure about the question regarding the difference between the recall provision and the remediation, but let me try to clarify. There are two actions involved. The first is the overall remediation effort, which includes the repair and replace program for the sleep apnea machines and ventilators that needed to be addressed. This is what we provisioned for over the last couple of years. The second pertains to the economic loss litigation provision, which is tied to the class action lawsuit filed against us. This amount reflects our best estimate of what we might need to settle. So, the distinction lies in the fact that one provision is related to repair and remediation costs, while the other concerns payments to plaintiffs. Regarding real estate, although it's not a substantial figure, it did contribute, but not significantly. We will not disclose specific transaction amounts, but it overall wasn't a large impact. As for the remaining 5% of ventilators, when I mentioned we are still working on a solution, I can share more about how that solution might differ from the others.

So, what we mean by solution is that we are working on different types of ventilators, addressing each one individually. You might have noticed we encountered a setback with the Trilogy 100 and 200 models. We are actively resolving that and will introduce a new solution, similar to what we are doing for the A series. This is what we mean by working through the appropriate solutions for the ventilators.

Thank you. The next question comes from the line of Wim Gille, ABN AMRO ODDO. Please state your question, sir.

Yes. Wim Gille from ABM ODDO. I have two questions. First, regarding your outlook for the year with high single-digit margins, I noticed that your margin in the first quarter exceeded the average margin from the last decade for that quarter. Additionally, the positive pricing impact has yet to be realized, and your most profitable division, PH, is expected to show improvement as the year progresses. What prevents you from providing margin expectations at this time? My second question pertains to the local press reports in the Netherlands about the works council planning to contest the layoffs concerning the central R&D teams. This seems unusual, so could you provide some clarity on this situation?

Yes. Wim, so on the outlook, yes, I think we have said that we are actually glad with the strong start to the year, but Roy also mentioned a couple of times and so did I that we have uncertainties as well. And until we have more certainty around a few things, we are not going to be changing our guidance every quarter. If there is a particular event that happens that allows us to get more certainty around the uncertainties we have flagged, we would change our guidance. But without that frequent revision of guidance is something we are not going to do at this stage. So let me leave it at that and then maybe Roy, you will take the workers' council question.

Yes, regarding the workers' council, it's important to understand that we are diligently working with various councils as we navigate the reorganization, as these changes are significant. One specific council focused on innovation has submitted a request for validation of our proposal. This can be viewed as a procedural right they possess. It's worth noting that they are not actively pursuing this matter at the moment; although they have submitted their request, they have not asked the judge to investigate it further yet. This preserves their rights and is part of their process. Most importantly, we are collaborating closely with them to reach an agreement. I also want to emphasize that I recognize how significant the changes to the innovation model are for the affected employees, especially those who have invested considerable effort in corporate research over the years and have contributed positively to Philips. However, it is essential that we modernize our innovation model, and the steps we are taking to align it more closely with customer needs and increase the pace of innovation are the right approach, which we will continue to pursue in partnership with the workers' councils.

Thank you. The next question comes from Julien Ouaddour from Bank of America. Please state your question, sir.

So just one for me. Over the past quarter only, we've seen the number of personal injury claims going from 20,000 to 40,000 as more people joined the census registry. Just what are your projections in terms of the number of claims going forward? And does the higher number of claims imply higher potential settlement amounts for you?

To clarify, we currently have 400 claims and 40,000 individuals registered in the census registry who have not yet filed any claims. These individuals have the right to file a claim as part of the registry. The number of registered individuals has only seen a slight increase in recent periods. While we are monitoring this situation, it has not raised any significant concerns for us. Our main focus is on finalizing the testing, particularly for the sleep ozone testing, which we expect to present results on in Q2 to meet our organizational goals. This testing will contribute to completing the overall sleep testing and will also assist in these claims. To reiterate, the 40,000 individuals in the registry and the 400 claims that have been filed for personal injury do not represent a material development.

Okay. I had just in mind that you had 20 people like in January. So, that's why I thought like the number has doubled over the last three months.

No, no, no. So actually, there's not a significant increase on that number. We already had earlier we were above the 30,000 number. So that's something that was not a significant uptake in this quarter.

Thank you. Gentlemen, that was the last question. Please continue.

Thank you for all your questions. I believe this year has had an encouraging start, as we have demonstrated solid growth, improved profitability, and enhanced cash flow. We are also making good progress in our execution, and I think the most significant update is that we have accounted for an economic loss class action. Additionally, we are successfully increasing supply to support our goals for the year while ensuring that we achieve productivity savings through our cost-reduction measures, including workforce reductions. This gives us confidence in our plans for the remainder of the year. Thank you for your attention, and I look forward to talking to you soon.