Welcome to the Royal Philips Second Quarter and Semi-annual 2023 Results Conference Call on Monday, July 24, 2023. During the call, hosted by Mr. Roy Jakobs, CEO, and Mr. Abhijit Bhattacharya, CFO, all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions. Please note that this call will be recorded and a replay will be available on the Investor Relations website of Royal Philips. I will now hand the conference over to Mr. Leandro Mazzoni, Head of Investor Relations. Please go ahead, sir.

Hi everyone. Welcome to Philips’ second quarter and half year 2023 results webcast. I have here with me our CEO, Roy Jakobs and our CFO, Abhijit Bhattacharya. The second quarter and half year 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 this 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 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.

Thank you, Leandro. Good morning, everyone, and welcome. It's good to be with you. I want to start with the key highlights for this quarter. First, we delivered an improved operational performance with 9% comparable sales growth and improvements in profitability and operating cash flow. The improvements were across the company with all business segments and all regions contributing. These positive results stem from our ongoing actions to strengthen our execution. Secondly, we are making progress in executing our plan and on our three priorities; enhancing patient safety and quality, strengthening our supply chain reliability which supported our performance in Q4 last year and the first half of this year, and establishing a simplified, more agile operating model supporting our productivity. Thirdly, resolving the Respironics recall for patients remains our highest priority. The vast majority of the sleep therapy devices are now in the hands of patients and care providers and the complete testing and analysis for sleep devices affected by the recall showed positive and reassuring results for patients. Looking ahead, based on our strong performance in the first half of the year, our order book, and the ongoing actions to improve execution, we have raised the outlook for the full year 2023. While acknowledging that uncertainties remain, we now expect mid-single digit comparable sales growth and adjusted EBITDA margin at the upper end of the high single digit range. Now, on to the key financial highlights in the quarter. We had a strong comparable 9% sales growth. Diagnosis & Treatment grew 12%, Connected Care grew 6% and I'm encouraged by the return to growth in Personal Health. Our adjusted EBITDA margin was 10.1%, a strong improvement of 490 basis points compared to Q2 2022. Operating cash saw an inflow of EUR135 million, a step up of EUR440 million versus last year. Our order book increased 3% year-on-year, even after strong order book to sales conversion over the last three quarters. I'm confident that this order book will continue to support sales growth in the coming quarters. On the back of the high order intake in Q2 2022 and Q1 2023, comparable order intake declined 8% in the quarter. Excluding Russia, this would have been 4%. This confirms our earlier view that orders will be lumpy as we work hard to deliver order intake growth in the second half of the year. This is founded upon the strong fundamentals of the markets in which we operate as they remain robust, and I'm very confident that our innovation portfolio is well positioned to help hospitals worldwide address their staffing shortages, enhance productivity, and improve patient and staff experience. The order funnel remains healthy and we see signs of improvement in cost inflation and staff shortages in hospitals compared to 2022. However, we also expect hospitals and healthcare systems in the U.S. and other mature geographies to exhibit cautious buying behavior in the short term given the global macroeconomic conditions. During the second quarter, we achieved some key customer and innovation milestones. We signed a multi-year agreement with University of California Irvine Health to provide enterprise monitoring as a service, including informatics solutions to standardize, centralize, and scale monitoring across the health system. Five top hospitals in Shanghai with more than 10,000 beds installed the Spectral CT 7500. We also expanded our leading Image Guided Therapy portfolio with the launch of Zenition 10, a cost-effective mobile imaging system to guide high-volume routine surgery as well as complex orthopedic and trauma procedures. We introduced the cloud-based Philips HealthSuite Imaging PACS on Amazon Web Services designed to enhance image access speed, reliability, and data orchestration for clinicians across the imaging workflow. In Personal Health, we launched the premium 7 Series shaver in China, in partnership with JD.com, which debuted as the number one shaver on this online channel. With that, I would like to give the floor to Abhijit to take us through Q2 in more detail, after which, I will come back on the progress on our execution priorities. Abhijit, please.

Thanks, Roy. Good morning, everyone. Let's begin by looking at the segment highlights from the quarter. In Diagnosis & Treatment, comparable sales increased by 12% driven by strong double-digit growth in Ultrasound and Image Guided Therapy, and mid-single digit growth in Diagnostic Imaging. Adjusted EBITDA margin was 10.6%, an increase of 380 basis points over last year, mainly driven by operational leverage, a favorable mix, and productivity measures. The profitability was sequentially impacted by mix and cost raising. In the first half of the year, our adjusted EBITDA margin was 11.8% for Diagnosis & Treatment, an increase of 460 basis points compared to the same period last year. This, together with our productivity, pricing actions, and order books, gives us confidence for the coming quarters. Connected Care comparable sales increased by 6% driven by double-digit growth in monitoring, partly offset by sleep and respiratory care. Adjusted EBITDA margin was 7.5%, an increase of 570 basis points driven by productivity measures and a significant improvement in the profitability of monitoring. Personal Health returned to growth with a 3% comparable sales increase, which is encouraging. Consumer demand remains subdued globally as we expected, but there is evidence of gradually improving sellout trends. Adjusted EBITDA margin was 13.4%, an increase of 100 basis points driven by pricing and productivity measures. Adjusted EBITDA margin for the Group increased by 490 basis points to 10.1%. Wage and component price inflation came in at 260 basis points. However, this was more than offset by 150 basis points from operating leverage and by our productivity and pricing actions, which contributed a further 580 basis points. Additionally, the Q2 adjusted EBITDA included a positive impact from the phasing of royalty income in line with the guidance we provided for the segment Other for the quarter. We continue to improve our cash flow with a significant year-on-year improvement. This has delivered an improvement of the leverage from 3.6 times to 3.1 times adjusted EBITDA in the first six months of the year. Our productivity initiatives are on track and delivered savings of EUR237 million in the second quarter. Operating model productivity savings amounted to EUR112 million, procurement savings were EUR57 million, and other productivity programs delivered EUR68 million of savings. Adjusting items in the quarter included EUR161 million of charges, mainly related to the accelerated execution of the workforce reduction plan with 6,600 role reductions to date out of the planned reductions of 7,000 roles for the year and 10,000 roles till 2025. Moving to our order book, which ended the second quarter 3% higher compared to last year. It's worth noting that this is significantly higher compared to the period before the global supply chain constraints even after the strong order book to sales conversion over the last three quarters. Orders and order book are important leading indicators for around 40% of our revenue. The remaining 60% comes from recurring revenues such as services and consumables from the book-to-bill business and from Personal Health. As you can see at the bottom of the page, the absolute levels of order intake remain healthy, but we see a steep increase in sales level year-to-date due to enhanced order book to sales conversion following supply chain and execution improvements. In Diagnosis & Treatment, comparable order intake declined 8% or minus 2% excluding Russia. This follows the double-digit comparable order intake growth in Q1 2023 and a high order intake in Q2 of 2021 and 2022. Overall, order intake in Diagnosis & Treatment was mid-single digit up excluding Russia following a mid-single digit order intake growth in the first half of 2022. The Russia impact is due to longer lead time because of additional export control procedures in place since this quarter. Order intake declined 7% in Connected Care in the second quarter due to the difficult comparisons in hospital patient monitoring after the expansion and renewal of the installed base during the period 2020 to 2022. For context, Connected Care orders continue to run at levels double-digit higher than pre-COVID driven by a fundamental demand shift in the adoption of our patient care management solutions and expanding market shares. As Roy mentioned, we have raised the outlook for the full year 2023. While acknowledging that uncertainties remain, we now expect mid-single digit comparable sales growth and an adjusted EBITDA margin at the upper end of the high single digit range. We expect to carry the positive momentum into the second half of the year while facing tougher comparison bases in the fourth quarter. The full year outlook for restructuring, acquisition-related, and other charges remain in line with the guidance provided in January despite some shifts between the different cost buckets based on year-to-date results. With that, I'd like to hand it back to Roy.

Thanks, Abhijit. I would like to continue on the topic of the Respironics recall, which has been and remains our highest priority. To date, around 99% of the new replacement devices and repair kits have been produced. Over 4.5 million of the produced sleep devices are now in the hands of patients and home care providers, while the remediation of the affected ventilators is ongoing. Regarding the test and research program, Respironics has published complete testing and analysis for DreamStation 1, DreamStation Go, and System One sleep therapy devices in Q2, which showed positive and reassuring results for patients. We continue to work through the testing for ventilators. As previously discussed, the litigation and investigation by the U.S. DOJ related to the Respironics field action as well as the discussions on the proposed consent decree are ongoing. We are also in continued dialogue with regulators across our key markets on how to service new patients going forward. I'm confident that our focused growth strategy for scalable innovation will further strengthen our businesses and results going forward. 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. Our new Patient Safety Advisory Board went live in the quarter, driving deeper engagement with patients, healthcare professionals, and industry experts. We continue to add significant capabilities and talents across the businesses. For example, we appointed strong regulatory affairs and quality leaders to the newly formed Enterprise Informatics business. Patient safety quality reviews are fully embedded in the new performance management cadence. And we remain on track to deliver a 45% reduction in the number of quality management systems this year, building on a 30% reduction by the end of last year. With respect to the supply chain, as of the second quarter, we have moved to customer-centric end-to-end teams, closely aligned to the different businesses we operate. We continue to make progress to reduce materials and component risks, although challenges remain. For example, we have accelerated the redesigns of components by completing 160 printed circuit boards compared to 56 as of the end of Q4. We are on track to meet our target to de-risk 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 the actions we have taken continue to positively impact our sales as well as our service levels. Finally, we are simplifying our operating model by putting prime accountability into the businesses, supported by strong regions and lean functions. This also included the difficult but necessary reduction of our workforce by 10,000 roles globally by 2025. To date, we have reduced 6,600 roles as mentioned by Abhijit. I want to express my gratitude to all my fellow colleagues for the dedication and commitment to deliver results as we create a more focused and agile organization. We are also strengthening our teams with new health tech talent, adding seasoned leaders with deep domain expertise across businesses, regions, and functions. Year to date, close to 300 talents with a health tech background joined our organization. Let me close out by repeating the key messages of the quarter. We delivered strong operational performance in Q2 with 9% comparable sales growth and improvements in profitability and operating cash flow. We are making progress in executing our plan and on our three priorities: enhance patient safety and quality, strengthen our supply chain reliability, and establish a simplified, more agile operating model. Resolving the Respironics recall for patients remains our highest priority. And looking ahead, based on our strong performance in the first half of the year, our order book, and the ongoing actions to improve execution, we have raised our outlook for the full year 2023, acknowledging that uncertainties remain. I would like to thank you for joining the call and we will now take your questions.

We will now go to your first question, which comes from Hassan Al-Wakeel from Barclays. Please go ahead.

Good morning. Thank you for taking my questions. I have three, please. Firstly, on the guidance upgrade, can we read anything into your consent decree assumptions that you've embedded into guidance, and whether they've changed at all over the last two to three months? Is the delay driving any meaningful guidance benefit? And is it fair to assume that your central case is not a Respironics wide injunction? Secondly, and also on guidance, your new guidance implies a step-down in growth in the second half and no real improvement in margins sequentially despite productivity and pricing benefits as well as higher absolute revenues in the second half. So what's driving your caution here? And then finally, could you talk about your return to market in CPAP outside of the U.S., and whether you're in discussions with regulators and what the process is here? Do you expect to return to other markets in the second half of this year? Thank you.

Thank you, Hassan. Let me start with taking your first question. So in terms of the guidance, and what it is, anything to read into the consent decree. So actually we have not adjusted any consent decree assumptions as we are still in discussion on the consent decree. And as we don't want to speculate on any outcome, we also have not touched any of the underlying consent decree assumptions. What we have looked at is the underlying improvement of our business. And as you have seen, based on a strong Q1, strong Q2 and also the fact that the actions we are taking are yielding their results in terms of getting more supply to convert our order book that is strong, as well as driving productivity; that has been the reason why we have increased the guidance for the full year. We have also said that uncertainties remain. That's something that we have been saying from the beginning of the year. We are still dealing with quite a dynamic macroeconomic environment. So that's something that we keep on the back of our minds, so that we kind of also need to be ready to address any of those dynamics that could happen in the second half. But we, of course, remain fully focused to carry the good momentum through into the second half whilst also recognizing some tougher comps that will kick in especially in Q4 as that is the moment we turned back into growth last year, and we have been able to pull through in Q1 and Q2. That's in essence combining, I would say, the answers to your first and second questions. Then on the return to market outside of the U.S., we are indeed in discussions with regulators as we are also now completing especially on the sleep side, the recall in many markets. We have made great progress there and that then also leads to the subsequent discussions on how and when to return to growth. So that's something that we will see probably materialize further into the second half, and we'll keep you updated the moment that we have any further news there.

That's helpful. Roy, I guess if I can just follow up on the consent decree, I mean you state that you're in advanced discussions and you have received drafts even in the recent months. Have your discussions with the FDA changed at all? And is it fair to assume that your central case which you embed within guidance is not a Respironics wide injunction?

Hassan, as I said earlier, we do not speculate on the outcome of the consent decree as many variations are possible. I can continue to stress that we are in active dialogue with the FDA that remains ongoing. There's also no specific reason for further timeline on that. We want to get it, of course, resolved as soon as possible, as does the FDA, with the patient's interests in mind. But it is also fair to say that these are important and detailed discussions that are happening and that is why we continue to progress on those.

Perfect. And sorry, final one, just to follow up on the margin commentary. Just given the strength in Q2 and the impact from workforce reduction, how far are we through that in terms of the realization of benefits and what should we expect for the remainder of the year? Thank you.

Hi, Hassan. This is Abhijit. Good morning. We've been moving at a pretty good pace in terms of our reduction of headcount. So we just said that we've done about 6,600 of the 7,000 planned for the year. So that should give us a benefit going into the second half. The original plan was roughly we had 3,000 last year, plan was 4,000 this year, evenly split through the quarter. So we are slightly ahead and are confident of making that plan. So I think that's where I would leave it.

Thank you. We will now go to your next question. And your next question comes from the line of Veronika Dubajova from Citi. Please go ahead.

Hi, Roy. Hi, Abhijit. Thanks so much for taking my questions. I have two, please. The first one is just going back to the guidance. I mean, if I just look at the mid-single digit growth guidance that you've given for the year against the delivery in the first half, it does imply pretty significant deceleration in growth into sort of flat to low single-digit range. Just want to understand, is there anything that you're seeing at the moment that makes that a likely outcome or are you just embedding a degree of conservatism? And then, if you can maybe talk through, I don't know, I know July has barely started, but just maybe comment on what you are seeing in the quarter-to-date against that guide, that would be helpful. And then my second question is on the order book momentum, and clearly pretty significant deceleration here versus what you delivered in the prior quarter. I appreciate there are some difficult comparisons in there. But I’m just curious to get your thoughts for, I mean, if I look at across your performance and your peers’ performance, we are clearly seeing some slowdown in order growth this year. Just kind of put it into context for us because at the outset of the year, I think everyone was pretty excited about China, that's growing pretty healthily from what we understand. So is this a problem in the U.S.? Is this a problem in Europe? Is this a problem somewhere else? And what gives you the confidence that this can improve as you move into the back half of the year and that it can support that sort of mid-single digit growth in the D&T and Connected Care businesses that most of us expect for 2024? I know there's a lot of moving parts there, but if you can just give us a little bit of that, that would be helpful. Thank you.

Hi, Veronika. Let me take the first part of the question. I think if you take a step back, we had planned for actually a back-end loaded year. We ultimately saw that the supply chain improvements came in earlier. And therefore, we have had a strong start to the year. As you've seen in the second quarter, our good growth was a bit flattered also because of our royalty income. So if you take that into account and look at the second half, we see good momentum going into the third quarter, but also you should remember that the fourth quarter, we are battling tougher comps. If you remember last year in the fourth quarter, health systems businesses grew mid-single digit. So of course, therefore the growth will be, let's say, the year-on-year growth in the fourth quarter would not be as strong as it has been for the first two quarters this year. So that's the color I can give you on how we expect growth to play out for the remainder of the year. It's not that there is a specific issue or something that we want to signal at all. We need to just get through quarter by quarter. The supply chain improvements have happened, but it's not over. So we are still working through these. As we get through every quarter, hopefully we are able to deliver in line with the commitment. Coming to the second question, maybe I hand it over to Roy?

Thank you for the question, Veronika. Regarding the order book, it's important to consider a few aspects. Firstly, we have continued to grow compared to last year, which signifies the strength of our order book. However, we face challenges in depleting it more quickly. Improving supply will enable us to meet customer demands better and take on more orders. Additionally, there is some variability in order patterns. I mentioned at the start of the year that this wouldn't be a typical year. I've spoken with many customers, including a recent trip to China where the market is bouncing back strongly, as demonstrated in Q1 and Q2, and this trend is expected to continue in Q3 and Q4. We anticipate a double-digit contribution from China this year, which is promising. In Q2, we also saw Personal Health returning to growth, adding positive momentum that we expect to carry into the latter half of the year. I visited the U.S. last week and felt encouraged by the stabilization I observed among customers, who, while still facing challenges, appear to be finding solutions. We are supporting them with our technology and innovations, and they seem to be managing inflation effectively. I anticipate growth returning in order intake during the second half, leading to increases in the overall order book as well. I'm pleased to note that our growth contributions this quarter came from all businesses and regions, indicating no specific lagging areas. Personal Health performed below our hopes in the first half, which we anticipated, but we are optimistic about maintaining growth momentum across all segments moving forward. While there are no particular reasons for concern, we must remain realistic that this is an unusual year, and our customers are navigating challenges related to inflation, interest rates, and the labor market.

Can I ask about the status of the consent decree? Previously, you mentioned hoping to have it resolved in the first half of the year. I didn't see an updated timeline in the press release this morning. Do you have any insights on when we might expect a resolution?

No, I haven't. That's also why we didn't put a timeline in place, and I don't want to speculate further on it. It's important to emphasize that there’s no specific reason or concern indicating anything negative. It simply shows that we are diligently working through the process. As I mentioned earlier, there is a lot happening both with the FDA and on our side. We are fully committed to bringing this to the best possible conclusion. As soon as we receive any updates regarding timing or resolution, we will share them. However, it's challenging to establish a specific timeline. Earlier this year, I expressed hope for the first half, and that was indeed my hope, but I also acknowledged that it’s not entirely in our control. There’s a lot that needs to be addressed, and that’s what we are currently observing.

Understood. Thank you guys so much.

Thank you. We will now move to our next question, and the question comes from the line of Richard Felton from Goldman Sachs. Please go ahead.

Good morning. Thanks for taking my questions. My first one is on Connected Care. So the strong performance on the margin which drove the beat at group level in Q2. But could you provide a little bit more color on the margin drivers within the division please? Specifically interested to know the impact from monitoring versus sleep and respiratory care. And then were there any one-offs which drove strong performance in the quarter for monitoring? That's my first one. And then my follow-up also on Connected Care. Look, it looks like sleep and respiratory care still had a fairly material revenue decline in Q2 given the system sales were, I think, already zero last year. Could you provide a little bit of color on where those incremental declines are coming from, please? Thank you.

Hi Richard, this is Abhijit. Regarding Connected Care, as we noted earlier, the growth is primarily attributed to monitoring. It's a very profitable segment, although it faced challenges due to component shortages. We achieved over 20 percent growth in the second quarter, which, combined with operating leverage, significantly boosted our results. Additionally, in sleep and respiratory care, we began taking cost-containment measures in the first quarter, contributing to improved profitability. Overall, the growth has been mainly organic with no significant one-time events affecting the results.

Maybe I can take the second one on the sleep and respiratory care side. So if you look to the sleep and respiratory care mix, actually you see that the ventilation side was where we saw the decline. We're also still working through remediation on that. So actually that is connected. But at the same time if I look to masks, actually we have seen masks coming back stronger, and that was a positive development in the quarter. So it is a mix issue where the ventilation is actually driving the decline while the mask is offsetting some of that, whilst we, of course, have the ongoing effect of sleep remediation in the sleep devices part of the business.

Thank you. We will now go to our next question. And your next question comes from the line of David Adlington from JPMorgan. Please go ahead.

Good morning, guys. Thanks for the questions. Firstly, just on orders. You said you face a tough comp, but I think it was only 1% last year and the year before that was down 15%. So I just want to clarify, these were either by notable weakness either by product category or by region. Secondly, just on your one-off charges, it looks like you've shifted 100 basis points from restructuring to other quality-related charges in Connected Care. I just wonder what the reason for that change was, please?

Yeah. Hi, David. Maybe let me answer the first question. I mentioned that there were tough comps in 2021 and 2022. So we had actually a 36% increase in comparable order intake in Diagnosis and Treatment in Q2 2021. And we followed that by another 2% increase last year. So I think that's where the tough comps come because it's already on a high order intake number, and you see that also in the IR deck, we have shown that on Page 14. The second thing is, of course, we mentioned earlier that it's lumpy, right? So Q1, we had strong growth. We had a double-digit growth in Q1. And therefore, this lumpiness will continue, and that's why we say also that we have confidence in order intake growth in the second half of the year because the funnel remains strong. The one-off charges, sorry, I missed the second part of the question. The one-off charges is for what? Could you just repeat that, David, your second part of your question?

Yeah. Your guidance on the one-off charges, 100 basis points seems to have shifted from restructuring. That's gone down by 100 basis points, but your quality-related charges with respect to Connected Care has gone up by 100 basis points. So just wondered if we should read into that?

Yeah, no, not really. Basically, as we have been going through the restructuring, we have found that there has been also some attrition so that cost has gone down. And in the second half of the year, we are continuing with the remediation of the 483 that we had. So that is leading to some costs as well as legal costs related to sleep and respiratory. So again, overall, the guidance remains the same, but it's just a shift in line.

Okay. And maybe just a cheeky follow-up. Just into the foreign exchange impact, just on where you're expecting that to be at current rates for the rest of the year? Thanks.

Yeah, look, typically, the way we manage our forex, it fluctuates between plus to minus 10 bps to 20 bps in a year. So it should be within that range. It's not something big that we expect.

Thank you. We will now go to your next question. And your next question comes from the line of Robert Davies from Morgan Stanley. Please go ahead.

Thank you for taking my questions. My first question is about the cash guidance. I noticed there hasn't been any change in the free cash flow guidance for the year, despite significant year-on-year improvements and better working capital metrics from January to June. Additionally, CapEx is running lower, so I’m curious why the free cash flow guidance was not revised, especially since the sales and margin guidance has been updated. My second question pertains to the margin trends in Personal Health. I would like to know your thoughts as we look towards the second half of the year. While you've returned to positive growth, the margins still haven't improved significantly. Is there a particular level we should consider for when margins might start to improve? I understand there is a strong seasonal impact in the fourth quarter, but I'm wondering if there are any factors to consider for the latter half of the year that could influence this. Lastly, regarding the D&T business, you've already addressed some questions about the order trajectory. I'm interested in whether you've noticed any specific product modalities that are particularly strong or weak this quarter. Thank you.

It's a good point regarding cash guidance. We previously provided a range of EUR0.7 billion to EUR0.9 billion, which is relatively broad. We anticipate improvements in earnings, and we have raised the guidance toward the higher end of that range. However, it may take longer to reduce our inventories to the desired level this year, likely until the middle of next year, due to the need to align inventories and ensure they flow through to customers. While we expect to be at the higher end of our guidance, we are not yet ready to make a minor increase in the guidance amount. We are confident in surpassing the range since we have started well and will maintain this momentum. Regarding margins in PH, we have already achieved approximately 100 basis points this quarter, with growth expected to continue into Q3 and Q4, indicating margin improvements in those quarters as well. Given current demand, we will need to invest in advertising and promotions to stimulate demand for growth, but there are no significant changes expected. Regarding order intake and modality, there is not much significant to highlight. We've experienced positive order intake across modalities in Q1 and a similar impact in Q2. As we work through the current backlog in MR, which is extensive, we hope to see an increase in order intake; however, lead times are currently a challenge. There isn't any specific modality showing a markedly different pattern.

That's great. Thank you very much.

Thank you. We will now go to our next question. And your next question comes from the line of Graham Doyle from UBS. Please go ahead. Your line is open.

Good morning, everyone. Thank you for taking my questions. I have one regarding D&T and another about the consent decree. The margin in D&T for Q2 was down sequentially, even though it looked strong overall. At the beginning of the year, we expected a normal trend where each quarter would show increased revenue and improved margins. How should we approach Q3 and Q4, considering the mix effect you mentioned, Abhijit? How should we view that in the upcoming quarters? Also, on a broader note regarding the consent decree, it's been ongoing for a year. Can you discuss the negotiation process? Is it possible that we might not reach an agreement on the consent decree? Thank you very much.

Regarding Diagnosis and Treatment, there is a shift in the timing of costs and the mix between the first and second quarters, but I wouldn't interpret that as a fundamental change. We anticipate a stronger second half in terms of margins for Diagnosis and Treatment. If I recall correctly, back in 2020 or 2019, our margin was at 12.7%, and we expect to make a solid recovery toward that level. There will be significant year-on-year improvement. Additionally, I think there's no need to read too much into the differences between quarters. We also had a higher proportion of Ultrasound in the first quarter and a slightly stronger proportion of DI in the second quarter, which impacts this and is also related to the timing of service costs. Therefore, I wouldn't be overly concerned about that at this point. We will keep improving as the year progresses.

Regarding the consent decree, I believe we will reach that point; it's just a matter of time. I don't foresee a scenario where we won't complete it since it has already been initiated. If we examine the timeline, we are about a year into it. Considering a previous experience with the AED, which was much smaller and less complex, it also took over a year to reach a consent decree. Therefore, I wouldn’t overly concern myself with crossing the one-year mark. In fact, when looking at other consent decree discussions with different parties, these timelines are quite normal. This process requires careful attention, especially since the sleep and respiratory recall was significant. We are currently navigating this together, and we will reach a conclusion at the appropriate time.

Okay, great. That's really clear. Thanks a lot, guys.

Thank you. So we will now go to your next question. And your question comes from the line of Sezgi Bice Ozener from HSBC. Please go ahead. Your line is open.

Hi. Thanks for taking my questions. Just two please. First of all, on the change that you had, the transfer of Enterprise Informatics from D&T to CC, we can see how the margins of that business was so far. But going forward, can you give some color on the projected outlook of that business in terms of growth and margins and what kind of markets you're seeing there? And second of all, on free cash flow, it was shortly mentioned, of course, the fact that the guidance you made same despite higher guidance and also even though the second quarter tends to be a lot stronger from a cash flow perspective, was the fact that some of the liabilities are not certain yet a factor in that? And do you see any downside risk to that guide given the first half free cash flow stood much lower? Thank you.

So maybe let me take the first one. Indeed, I think we put Enterprise Informatics to Connect Care. I think the importance was that we really put it as a separate vertical where we combined the different informatics assets to ensure that the capabilities to run that in an end-to-end manner yield its effect. And I can say that actually we do see the impact coming into play. We have mentioned that the growth we expect should be double that of what we grow at Philips. We have seen strong growth in that. On order intake, we also said that we will be a bit cautious because we really want to fulfill well. The delivery of these installations are important; so we're working hard on adequate delivery. The margins are increasing. We have made certain choices for scaling the bigger platforms that we have. That is yielding effect and also we expect with further growth acceleration that that will scale further. We have seen the first impact, which is positive. There is a lot of momentum as you can understand; there’s a lot of demand for workflow improvement. AI is a very hot and big topic to see how we can help the current customers with generative and analytical AI in their workflow and to drive patient outcomes. We are also applying that, and we have multi-vendor solutions that actually can help across imaging, monitoring, and providing care across care settings. This is a part that actually is generating a lot of interest and we are having the dialogues with customers as we speak.

Yeah, Sezgi, maybe to understand your question on cash flow. Is it that because we have a stronger second half you're questioning the guidance whether it should go up? I am not very clear, sorry. Could you just ask that again?

Actually, the question is more about whether you see any risks to the current guidance, which hasn’t been updated either downward or upward, considering that your second half usually performs much better. You did receive a guidance upgrade in other metrics, but not for free cash flow. The actual free cash flow for the first half shows significant year-on-year improvement, but when compared to the guidance, it appears weaker.

Yeah, I would not say that the first half guidance is on the weaker side. If you look, typically, our second half’s cash flow is much stronger. We are actually pretty happy with where we are with the first half of the year. So I don't see any risk to the guidance. In fact, as I just mentioned, we would probably be at the upper end of the current guidance.

Thank you. We will now go to your next question. Your next question comes from Falko Friedrichs from Deutsche Bank. Please go ahead.

Perfect. Thank you and good morning. I have two questions left, please, both on D&T. The first one on this mid-single digit growth in Diagnostic Imaging. Can you provide some kind of a split into MRI and CT? And then secondly, what was driving this continued strong growth in your Ultrasound business? Thank you.

Yeah, Falco, we provide a lot of color. Now going into every modality and the specifics becomes maybe even too much color. But yes, across the board we have continued to grow. So both MR and CT were actually nicely up. The growth in Ultrasound comes from the fact that the order book is very strong. Last year we had component issues in Ultrasound in Q3 and Q4, and once that is resolved, we are just going through the order book. So that continues with good momentum and our shares are also trending well. Overall, yeah, you see growth across the board, and Ultrasound is largely due to the order book that we were carrying.

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

Thank you all for joining our call. As I said at the beginning, I'm pleased with the progress that we are making as we see that the measures that we have been taking at the beginning of the year are really yielding effect. As a result, we delivered strong operational performance with 9% comparable sales growth, improvement in profitability, and operating cash flow. That came from all businesses and all regions. We also expect to carry that into the second half, that positive momentum, based on further progress on the three priorities that we're executing against, and that has led us to raise our guidance for the full year. So while uncertainties, especially also in our environment remain, we remain confident in our plan, the execution of it, and will stay the course to come back quarter-over-quarter with improvements for Philips on the long-term value creation trajectory. Thank you for listening in. Looking forward to connect with you and wish you a further great day.

Thank you. This concludes the Royal Philips second quarter and semi-annual 2023 results conference call on Monday, July 24, 2023. Thank you for participating. You may now disconnect.