Koninklijke Philips NV Q3 FY2023 Earnings Call

Hi, everyone. Welcome to Philips's third quarter 2023 results webcast. I have here with me, our CEO, Roy Jakobs; and our CFO, Abhijit Bhattacharya. The press release and slide deck as well as the 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. I would like to hand over to Roy.

Good morning, everyone, and welcome to the webcast. Before we go into the numbers, I want to say that our hearts go out to everyone affected by the terrible events ongoing in the Middle East. As of today, I'm thankful to report that all our colleagues based in the region are currently safe. Now starting the key highlights for Q3. We delivered another quarter of improved operational performance with strong 11% sales growth, doubling our profitability and strong cash flow. The improvements were across all business segments and all regions and the result of our ongoing actions to strengthen execution. We are making progress on all our three priorities: enhancing patient safety and quality; strengthening supply chain reliability; and establishing a simplified more agile operating model, supporting our productivity and our margins. Completing the Respironics recall remains our highest priority with the remediation of the sleep therapy devices almost complete. We are in discussions with the FDA on the details of further testing. The litigation investigation by the US Department of Justice as well as the discussions on the proposed consent decree are ongoing without further updates to share. Based upon our improved performance, we are further raising the outlook for both sales and profitability for the full year 2023, although recognizing uncertainties remain in an increasingly volatile geopolitical environment. Our improved performance reinforces the confidence we have in delivering also the next two years of our three years plan to create value with sustainable impact. On to the financial highlights. The strong comparable sales growth of 11% was driven by 14% growth in Diagnosis and Treatment, 10% growth in Connected Care, and 7% in Personal Health. Our adjusted EBITDA margin was 10.2%, a strong improvement of 540 basis points versus a year ago. Operating cash saw an inflow of EUR489 million, an increase of approximately EUR670 million versus last year. Order intake, which accounts for around 40% of group sales was lower in the quarter, mainly due to the comparison base related to the exceptionally high orders in 2021 and 2022, substantially lower China, and longer order-to-delivery lead times. We continue to see hospital healthcare systems in the US and other mature geographies exhibit cautious buying behavior in the short term, and China is heavily impacted by the government-initiated anti-corruption measures. But I look at the future with confidence. Our order book remains strong. The fundamentals of the markets in which we operate, as well as our order funnel are healthy, and our innovation portfolio is strategically positioned to help hospitals address their staffing shortages, enhance productivity, and improve patient outcomes. Let me clarify what I mean with a strong order book. The order book remains around 20% higher than in Q3 2021, when the global supply chain crisis started, and will continue to support revenue growth. At the same time, we are implementing the necessary actions to improve order intake by reducing lead times from order to delivery and leveraging our operating model change and our innovations. Based on the flow of orders that are in the pipeline and the visibility we have as of now, we expect to see sequential improvement in order intake in Q4, while there remain the uncertainty and the geopolitical volatility we have outlined. Let me provide you with some of the key customer and innovation milestones during the quarter. We signed a 10-year over EUR100 million Enterprise Monitoring as a Service and Informatics agreement with one of the largest health systems in the US, covering 20 hospitals with over 3,000 beds. We expanded our leading Image Guided Therapy portfolio with the launch of the Mobile C-arm System 3000, which contains workflow-enhancing features to help alleviate staff shortages faced by many hospitals. We introduced our ambulatory monitoring offering in Japan, combining Philips ePatch Holter monitors with ECG analysis through AI and advanced algorithms. And in Personal Health, we launched Sonicare DiamondClean 7900 Series in China which debuted as the number one high-end toothbrush on Alibaba's Tmall. We celebrated 100 years of successful presence and collaboration in China, where we are known as Philipu, and have a leading position, a strong local team of over 7,000 employees, and an extensive footprint covering manufacturing, innovation, sales, and services. And with that, I would like to give the floor to Abhijit to take us through Q3 in more detail, after which I will come back with the progress on our execution priorities.

Thanks, Roy. Good morning, everyone. Let's begin by looking at the segment highlights for the quarter. In Diagnosis and Treatment, comparable sales increased 14% driven by double-digit growth across Diagnostic Imaging, Ultrasound, and Image Guided Therapy. Adjusted EBITA margin was 12.7%, an increase of 230 basis points, mainly driven by operational leverage, pricing, and productivity measures. Year-to-date adjusted EBITA margin for Diagnosis and Treatment was 12.1%, an increase of 380 basis points compared to the same period last year. Connected Care comparable sales increased by 10% driven by double-digit growth in Monitoring and mid-single-digit growth in Enterprise Informatics. Sleep and respiratory care sales were flat. In the quarter, we started gradually to serve new sleep therapy patients in several countries outside the US. Connected Care adjusted EBITA margin was 3.7%, over 1,100 basis points improvement from last year, mainly driven by increased sales and productivity measures. Personal Health delivered a 7% comparable sales increase. This was driven by high single-digit growth in Personal Care and Oral Healthcare and included the positive impact of price increases. Comparable sales grew high single-digit in North America and in Growth geographies, mid-single digit in Western Europe, and low single digit in China. Overall, consumer sentiment remained subdued. Adjusted EBITA margin for Personal Health was 18.7%, an increase of 460 basis points, driven by operational leverage, pricing, and productivity measures. The adjusted EBITA margin for the Group increased by 540 basis points to 10.2%. Wage and component price inflation came in at 250 basis points slightly better than a year ago. However, this was more than offset by 240 basis points from operational leverage and by our productivity and pricing actions, which contributed a further 540 basis points. We delivered significant improvement in cash flow with a free cash flow of EUR333 million in the quarter. This was driven by higher earnings and improved working capital management. We saw a sequential reduction in inventory volumes in the third quarter and we will see continued improvement in the coming quarter as well. Year-to-date free cash was an inflow of EUR454 million. This resulted in an improvement of our leverage from 3.6 times to 2.9 times on an adjusted EBITA to gross debt basis compared to the start of the year. We've been very disciplined in cost management and our productivity initiatives have delivered savings of EUR258 million in the quarter. Operating model productivity savings were EUR142 million, procurement savings were EUR59 million, and other productivity programs delivered EUR57 million. Year-to-date, our productivity initiatives have delivered savings of EUR685 million. Moving to our order book, as Roy mentioned, it remains significantly higher than the period before the supply chain constraints kicked in. We expect the order book to remain strong and continue to support sales growth in the coming quarters. It's very important to note that orders and order book account for around 40% of our revenue. The remaining 60% come from recurring revenue streams, such as services and consumables and book-to-bill businesses, and from the Personal Health business. As you can see on the page on the screen, absolute levels of order intake remain healthy, but we see a steep increase in sales level year-to-date due to the enhanced order book to sales conversion following supply chain and execution improvements. Also important to note, order intake growth in Q3 2021 was 47%, which is why the comparison base is highly elevated. At the same time, as Roy just said, we continue to implement the necessary actions to improve order intake by reducing lead times and leveraging our innovations. In Diagnosis and Treatment comparable order intake declined low double-digit following high order intake in Q3 2022, significantly lower orders in China and Russia, as well as longer order-to-delivery lead times. In China, the lower orders are due to the impact of the recent government-imposed anti-corruption measures. We have seen similar initiatives before which we support. This impacted short-term decision-making by hospitals as they work through the government measures, resulting in a substantially lower order intake year-on-year. Based on our previous experience, this is not expected to impact fundamental demand in the China market and our order funnel remains very active in the country. As explained in the last quarter, the Russia impact is due to the longer order lead time because of additional export control procedures that have been put in place recently. Order intake was mid-single digit lower year-on-year in Connected Care due to the tough comparisons in hospital patient monitoring after the expansion and renewal of the installed base in the last few years. For context, Connected Care orders continue to run at absolute levels, double-digit higher than pre-COVID levels. Moving to capital allocation, in the third quarter, we issued EUR500 million of fixed-rate notes due in 2031, which were used to pay off the short-term debt. This has a debt-neutral effect, while further strengthening our debt maturity profile. During the quarter, we settled a number of forward purchase transactions entered into under the EUR1.5 billion share buyback program announced in 2021. Following further settlements in Q4 2023, we plan to cancel more than 15 million shares in December, which will result in a reduction of over 1.5% of the outstanding shares. As Roy mentioned, we have raised the full-year outlook to 6% to 7% comparable sales growth and an adjusted EBITA margin between 10% and 11% for the Group, while recognizing uncertainties remain in an increasingly volatile geopolitical environment. As we had mentioned earlier, Q4 will have a tougher comparison base as we delivered over 6% growth in Diagnosis and Treatment businesses and over 20% growth in hospital patient monitoring in Q4 of last year. Personal Health will continue to have healthy growth as well. This just reiterates how we saw the second half of the year unfolding. And I want to be clear that we're not seeing, not flagging any different dynamics than what we've said before for the fourth quarter. As we had said before, the improvements in the supply chain front-end loaded growth for the year. With that, I would like to hand back to Roy.

Thanks, Abhijit. I would like to continue with the topic of the Respironics recall. Globally, over 99% of the sleep therapy devices registrations that are complete and actionable have been remediated. The remediation of ventilators is ongoing. Based on the test results to date, Philips Respironics and third-party experts concluded that use of our sleep therapy devices is not expected to result in appreciable harm to health in patients. Following ongoing communications with the FDA, Philips Respironics has agreed to implement additional testing to supplement current testing data on PE-PUR foam. The FDA acknowledged that current testing is extensive and conducted with independent parties and expressed no concerns with its validity or objectivity. They did ask for more testing to supplement it. Philips Respironics is in discussions with the FDA on the details of the further testing. Earlier this month, we received preliminary court approval for a settlement agreement to resolve all economic loss claims in the US MDL, for which we have recorded a provision of EUR575 million in the first quarter of this year. The litigation and investigation by the US Department of Justice related to the Respironics field action, as well as the discussions on the proposed consent decree are ongoing without further updates to share. Now, 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. As part of strengthening our patient safety and quality culture, two weeks ago, we kicked off our company-wide timeout for the topic, where we spent a full day talking to all 70,000 employees worldwide about how we are moving forward with patient safety and quality, the progress we've made to date, and how we take it further. Patient safety and quality reviews are fully integrated in the new business performance management cadence and we opened one of the largest Electromagnetic Compatibility labs in Europe, specialized in testing health technology. With respect to supply chain, we continue to make progress to reduce materials and component risks. For example, we have now completed around 70% of the redesigns of printed circuit boards. We are on track to meet our target, de-risk all our high-risk components by year-end. And as you've seen in the results today, I'm pleased to see that the actions we have been taking to date continue to have a positive impact on our sales, as well as our service levels. We're monitoring the situation in Israel closely as we have manufacturing and R&D activities in the country, but currently, business continuity is guaranteed. Finally, our new operating model with prime accountability in the businesses went live in April this year and we have completed the realignment of the workforce roles and reporting lines. This included also the difficult, but necessary reduction of 7,500 roles to date out of the planned reduction of 10,000 roles by 2025. Let me close out by repeating the key messages of the quarter. We delivered another quarter of improved operational performance with strong sales growth, better profitability, and better cash flow. We are making progress on our three priorities. Enhance patient safety and quality, strengthen our supply chain reliability, and establish a simplified more agile operating model. Completing the Respironics recall for patients remains our highest priority. And looking ahead, we have further raised the full-year outlook for both sales and profitability. Although recognizing that uncertainties remain in an increasingly volatile geopolitical environment. The progress we are making reinforces our confidence in delivering the next two years of our three years plan to create value with sustainable impact. I would like to thank you for joining the call, and we will now take your questions.

Thank you. The first question comes from Hassan Al-Wakeel from Barclays. Please go ahead.

Hi. Good morning, and thank you for taking my questions. I have three, please. Firstly, can I start on orders given Q3 is down 9% and year-to-date orders are down 6%? How are you thinking about the current order backlog substantiating growth next year? Do you think you can still achieve mid-single-digit growth in 2024, in line with your mid-term growth guidance? And is end market demand changing at all? Secondly, can you talk about the strong profitability in D&T and your expectations for Q4, given this is typically a higher volume quarter? You already said that your 2025 target of low teens in terms of profitability and I wonder how you're thinking about upside to the current 12% margin that you've done year-to-date over the next two years. And then finally, can you talk about the FDA's update on your testing and whether this to your mind changes the scope of the consent decree potentially, or drives any further delays here? What extra tests do you need to do, and how long will this take? And do you think this has any impact in terms of timing on the litigation process? Thank you.

Thank you, Hassan. Let me take the first one to start off. So, on the orders, you saw that we have presented the minus 9% in the quarter. I want to put that in context. So, as said by Abhijit, first of all, we have still a very strong order book, which is 20% higher than two years ago. That also is fueling our strong sales performance to date and four quarters of improved sales growth. Secondly, we have an improvement where we see that the order intake as we also mentioned earlier will come off in Q4, and also we expect that to continue in 2024, as the underlying fundamentals of the market and our positioning have not changed. But we're coming off a very high comparable growth in Q3 this year, where we had 47% growth two years ago. So, the comparable base also played part. And then on top, we are kind of taking actions to continue to work on improved order intake. Therefore, I also mentioned that actually we are ahead of the first year of our three-year plan, and actually this has given us further confidence in also executing the second and third year of the plan that I presented in January. And as you know, we presented a plan in which we started with low-single-digit growth in year one, mid-single-digit growth in year two, and onwards. That's where we also stick to as part of the execution of our plan. Last point I think to mention, which is important that the order intake as we report is impacting 40% of our total business, and that's maybe a bit of a different profile that we have with some other companies, because we have 20% of our total business coming from PH, which you saw coming back to strong growth. Secondly, 40% tied to services, but also software subscription revenue, and then the remaining 40% is on the CapEx business where this kind of effects here the current profile. So, that's kind of what I would say about order intake. And then maybe Abhijit can take the D&T question on profitability.

Yeah. Hi, Hassan. I think, as you rightly pointed out, we are pretty pleased with the progress we've made on margins in D&T. That has been something that we have been constantly working on and, in fact, even challenged on. Now the good news is that you see it back in the numbers. Of course, Q4, we expect sequential improvement because that's, let's say, our biggest quarter. Regarding the overall guidance, I think we are just into the first year. We have given a range. So, there is still the upside of the range to go to. So, we will look at that as we progress through the period. It's a bit too early now to change anything on guidance.

Let me take the third question on testing and how that relates to kind of the consent decree. So, let me be outright in saying that the testing track and the consent decree track are two separate tracks. So, they are not correlated. As I said, we are in continuous dialogue on the consent decree, there is no further update to share. At the moment we have it, we will come forward. On testing, we are currently in active discussions with the FDA to kind of finalize what exact testing needs to be done. So, that actually we can supplement the current testing that we have and also there the moment we have that finalized, we can come forward with further news, we will bring that of course to you as we have always been doing.

That's very helpful. Roy, if I could just follow up, do you expect to see orders flat or an increase in Q4? And how should we view 2024?

Yes. Hassan, let me take that. You know, we've said we expect sequential improvement. Now we also talked about the uncertainty, especially what you see in China, right? So, therefore, we don't want to be very specific, but we are fairly confident to see good improvement in the fourth quarter.

Very helpful. Thank you.

Thank you.

Thank you. The next question comes from the line of David Adlington from JP Morgan. Please go ahead.

Good morning, guys. Thanks for the questions. Maybe just firstly on orders, again. Obviously, China, I just wondered if we could get your thoughts in terms of when we might be through the anti-corruption slowdown and when we might be through the other side, getting various different bits of commentary in terms of when we might be through that. And then secondly just on Personal Health, just wondered how much of that 7% growth was due to price and maybe get your thoughts on pricing going forward from here, please.

Okay. Thank you, David. Let me take the first question on China. So, we had a very strong start of the year in China, as you have seen, right? We grew orders and revenue double-digit, and that was good momentum that we saw because of pan demand and also strong progress we made on our local for local portfolio. We also expect that to continue. Now, then indeed, there is this current short-term slowdown as hospitals work through the anti-corruption measures. It is a phasing issue, right? We don't see any cancellations coming through. It's hard to predict exactly when it will be fully worked through. We have seen this earlier as well. It took a few quarters. So, I think there will be some ongoing activity in the next few quarters that's to be expected. It's hard to say how exactly it will pan out, but we are very confident on the Chinese market and that it will resume and that we will also be able to then resume our trajectory that we had in China, as it's fundamentally very attractive and we see great prospects. And as I said, we celebrated our 100 years, we will continue to work on that because we see also another 100 years in China up for us. So, let's work to capture the full opportunity. Also the consumer side of China is important. We also saw that coming back to growth in Q3. So that's also I think an important part of the China opportunity and we will continue to work both sides of it.

Hey. On the question, it was a bit distorted the line at that time. Let me just be sure that your question is, how much of the 7% comes from pricing, is that your question, David?

That's right, Abhijit. Yeah.

Yes. So, I would say a couple of percent came from pricing. The rest came from volumes, that's how we would look at it.

And your thoughts on pricing from here?

I think we are not planning to implement significant price increases right now. We have also stabilized our raw material costs. If we can maintain our current pricing levels, we are positioned well for our margins. Therefore, I do not anticipate any additional price increases.

Perfect. Thank you.

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

Thank you. Good morning. Just to follow up on your lead times. So are you able to comment on which modality's lead time is still an issue? And how much visibility or control do you have to drive further improvement from here? Any sense of how long the process might take to return your lead times to standard in line with peers would be very helpful. That's my first one. My second one is a follow-up on D&T margin. You called out pricing as one of the drivers for margin progression in the quarter. Is there any color you can share on the size of the pricing impact? And then also, how should we think about pricing as a driver for D&T margin in coming quarters? Thank you.

Thank you, Richard. Let me take the first one on lead times. So, I think when I started, I said supply chain improvement is very important for us, and I'm very happy to see also that supply chain improvements have been materializing and that actually is driving the 11% sales growth realization in the quarter. So, we have been making a lot of strides. I also shared that actually we were working on high-risk components because what we were facing is that, because of the misses of some components, we could not complete and then not deliver. Now actually we reworked 70% of the high-risk components already year-to-date and we expect to complete the program by year-end towards 100% of the high-risk components. That also means that you will see, therefore, that further improvement of the lead times. Actually, if you look to lead times of many of our businesses, they are already fully in line with market. The single biggest one that we called out earlier that we need to work through to fully get in line with market is MR. That's the one where we have been working it further. The good news there is that, on the grading coal issues that we had, we also now resolved that. So, we are making progress, and we will get back to the lead time improvement there also towards year-end. Overall, what we see also from demand in the market and discussions with customers is that we are well positioned to capture demand. You saw the deal, for example, that we took in Monitoring, which is a great show, EUR100 million, 10 years deal, taking our full platform including AI to deliver productivity gains also with a flexible CapEx and OpEx model. We're also having significant discussions with other big systems on major deals. So, we are well positioned with growth. But, yes, we will continue to work on our supply chain to get that fully back on track.

Yes. Richard, on D&T pricing, we have been saying all along that the pricing was coming in the order book, and it would start coming into the P&L from the third quarter. That's exactly what has happened, right? So, we see the first signs of it coming into the P&L, maybe give or take 100 basis points in Q3. And as we go into the coming quarters, you will see that increasing. So, we'll probably get to somewhere between 2% to 2.5% over time.

Thank you. We will now go to the next question. And the next question comes from the line of Lisa Clive from Alliance Bernstein. Please go ahead.

Hi, just wanted to ask what the order intake in D&T would have looked like excluding China. And then also on your comments on long lead times impacting order intake, is it simply you losing orders to competitors who can deliver faster? I just want to make sure I'm not missing anything in terms of what this actually implies.

Yes. If you exclude D&T and China, there is still a decline this year in the third quarter. However, it's important to recognize the order intake momentum throughout the year. Looking at the total amount of order intake, we had stronger quarterly performance because the comparisons create a clearer picture based on previous year's results. Q2 was better than Q1, and Q3 matched Q2 when excluding China. Overall, the order intake momentum remains positive, which is evident by our order book being 20% larger than two years ago. It's crucial to note that 40% of our sales are influenced by the order book. There is a distinction between order intake growth and sales growth. We continue to achieve strong sales growth despite the year-on-year decline, and the overall order intake has shown reasonable momentum this year. Regarding lead times, you're correct. If we can provide an MR in a year but a competitor can do it faster and the hospital needs a quicker solution, it hampers our chances of securing the order. Most of our modalities are now available again, except for MR, which we are currently addressing.

Very clear. Thank you.

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

Yes, good morning. Thanks for taking my questions. My first one was just around the evolution of the order book. I think you'd cited in your presentation pack the order book being 20% higher than 3Q of 2021. And that was going to kind of cover you despite the sort of negative trajectory in orders at the moment. My question is, as we look into sort of 2024, are you expecting that order book to kind of normalize back down to sort of pre-disruption levels through the end of the year, i.e., is that sort of negative run rate on orders going to get canceled out by the end of the year, and we're sort of exiting 2024 at a sort of normalized order book level? That was the first question around declining order books. The second one was just around the testing and whether in terms of the feedback from the FDA, as they told you exactly what they want in terms of additional testing and have you made any initial estimate for how long that additional testing will take to get the answers to? And then the final one was just in terms of where you've returned to market in the sleep business outside the US, just be curious what you are doing in terms of pricing of those products versus some of the peers in the sort of non-US markets. Thank you.

Thank you, Robert. Let me start with the order book. So, I think, as you indeed call out, it's important to recognize that we are still working through a kind of normalization of the order book where on one hand we have this higher percentage of order book that kind of we are building down as we dial up our sales. Whilst, in the meanwhile, we also kind of improve our order intake. And then in that mix you see that kind of we will in 2024 indeed cross the line where we will kind of normalize and build down that order book to a rate where we want it to be. Because in some way it is kind of strange that, yes, you have too high order book and that holds you back in certain elements to kind of capture the full opportunity in the market. So, that's kind of something that we are forecasting that, in 2024, we will get fully back on track with. Then on the testing, in terms of the feedback, we're working through that exactly as we speak. That's also what I mentioned, we are in active dialogue. I think it's positive that we have that dialogue because the moment we can clarify, we can then test, we can also satisfy their needs. And that's what we're all focused on. We both have the same objective. We want to get to an outcome here. So far we have a strong testing program executed, really also acknowledge that this was extensive, this was with third-party independent test houses. Now they have formulated that there are some more testing that they want to be done. We will agree with them on that and then we will, of course, pursue that and conduct it in the best possible and fastest manner, but taking the patient interest first and foremost. The third one on the return to market, what we do see actually, I would say, is encouraging. Firstly, we see customers really welcoming us back and that also means that welcoming does not go with significant pricing differences versus what we had seen before. There is still significant demand. They welcome actually competition in the market and therefore, there is no special program of discounts or anything like that happening or needed for us to get back in play. Of course, we will work our way back into these markets in a gradual way as we have been out for some time, but the first steps back into the market, I would say, are encouraging.

Thank you. Maybe just one sort of follow-up. Just on the size of the liability for the medical injury claims, what's the timeline there in terms of having a number, do you think, that you can come to market with? Is that still the first half of 2024? Is that likely to be the second half? Thank you.

We have said it's going to be the second half of next year. That's what we estimate. It's not a figure carved in stone. So, I don't want it to be the next target that we are hunting. Just to be clear, we expect it around the second half and then we will see how it goes.

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

Hi, Roy. Hi, Abhijit, and hello, Leandro as well. Thank you all for addressing my questions. I have three. First, regarding the fourth quarter, there's still about a EUR200 million difference in the adjusted EBITA guidance for Q4. Abhijit, could you share your insights on the main sources of risk and whether you feel more confident about reaching the upper or lower end of that estimate? That would be very helpful. My second question pertains to the FDA's motives for the testing. If it's not linked to the consent decree, could you elaborate on what the FDA aims to learn from the testing? Are they evaluating your readiness to return to market with DS1, or is it related to the classification of the recall? I'd appreciate any clarification on what they hope to achieve with the testing data, even if you can't specify what the testing involves. Lastly, more broadly, considering the market share losses in D&T, aside from lead times returning to normal, what other strategies can you employ to regain momentum as we head into 2024? Are there any product launches we should anticipate around RSNA or thereafter? What additional options do you have to foster better growth in 2024? Thank you.

Thank you, Veronika. I'll start with the second question and then Abhijit can take the first one. Regarding the FDA's motivation for testing, they are seeking clarification on the testing data to support our conclusions of no appreciable harm. We have conducted extensive testing with independent labs which confirmed that no appreciable harm was done to patients, which is a crucial outcome. The FDA is reviewing the data and has already been monitoring it. They have now raised some additional questions and are defining exactly what they need to ensure they can supplement the data to hopefully reach the same conclusions. We share the same objective, which is to ensure that everything available is safe for patients. This goal is what drives the FDA, our efforts, and the testing program, and we will continue to work on addressing any outstanding questions related to this.

Yes. Veronika, let me take the first question because I was wondering, this EUR200 million, you take that 1% of our sales. And I guess that's how you come to that and that's exactly why we've given a range. Q4 is a big quarter. There are also a lot of uncertainties out there, as we have highlighted. So therefore, giving now a specific amount or a specific number where the upper-end or middle is maybe too early. But we are comfortable in this range of 10% to 11%.

Let me address the third question regarding our expectations for D&T. It's important to note that within our D&T businesses, we hold strong market positions in several areas, notably IGT and Ultrasound, where we are not only performing well but also continuing to see growth this year. While we are experiencing challenges with MR lead times, we are making improvements. In markets facing significant pressures, like China in Q3, we recorded a robust order intake in MR and CT during the first half, reflecting the popularity of our BlueSeal and Spectral products. Furthermore, the localized availability of our EPIQ Ultrasound has led to a substantial increase in orders from China. We are seeing a resurgence in momentum. The upcoming RSNA event presents an exciting opportunity to showcase our innovations, though I won't reveal all the details just yet. However, we will focus on how our innovations can enhance productivity in today's challenged healthcare environment, particularly through improved workflows and our AI software solutions, which stand out in the market. We offer capabilities that integrate hardware and software across various vendors, including our radiology operations command center, tele-ICU, tele-radiology, and digital pathology. These innovations complement our core offerings effectively. Additionally, we recently launched our new C-arm, which aligns perfectly with clinical workflows, and we are having engaging discussions with our customers about this. I look forward to continuing these conversations at RSNA, where we will share specific news, and I invite everyone to join us for an impressive Philips showcase.

Great. Look forward to hearing more about that. Thanks, guys.

Thank you. We will now go to the next question. And the next question comes from Hugo Solvet from BNP Paribas. Please go ahead.

Hi, thank you for taking my questions. I have a few. First, regarding China, when do you anticipate a recovery in demand there? How confident are you in seeing some pent-up demand? Additionally, do you think local competition will become more intense following the anti-corruption campaign? Secondly, on Respironics, I'd like to follow up on an earlier question. As you start serving new sleep patients outside the US, could you clarify the manufacturing process? Are the devices for international patients produced outside the US or primarily sourced from the US? Lastly, we've had numerous discussions with investors recently about GLP-1. I would like to hear your thoughts on the potential impact of this drug class on the sleep apnea market. Thank you.

Thank you, Hugo. Let me start off with your first question on China. So, as I said earlier, we did see very strong momentum and actually pent-up demand from even the COVID period. Now, we actually haven't satisfied that in full and we see that now actually adding to the backlog in China that we will step into once they work through this anti-corruption measures that they currently have deployed. We do expect that that will improve in the current quarters, but it's hard to predict exactly what it is, but the confidence level that we have in China is high. We also saw it materializing. At the moment it was an open market and we were there with our local relevant solutions, we had a very significant uptake. We also actually have orders waiting to be signed. So, also we are looking into our funnel. We have confidence in the China market moving forward, and also our specific innovations that I called out like the Spectral, like the helium-free really have a lot of traction there. And also IGT is something that has pent-up demand. So, yes, we are working through with the local team. We have a strong presence there with also a strong government relations. Last point on that. I think actually this can also benefit companies like us, because from a compliance perspective, of course, we have very strong standards on compliance and integrity. So, that's also something we use in these kind of circumstances.

Then on the recall, we indeed do produce the devices outside of the US also to be used in the rest of the world. So, we have a manufacturing base which is diversified. We have in the US, but we also have outside of the US, and we also use that actively as we speak for the markets outside of the US.

Regarding the impact of GLP-1 on the CPAP market, we currently do not view it as having a major effect. We believe it complements the therapy. As mentioned earlier, we believe it will benefit certain patient groups, but there remains a significant number of undiagnosed patients in the sleep sector, indicating a strong need for our therapy and sleep devices. It's essential to highlight that when we reference accuracy at Philips, it represents 1 billion out of 19 billion. As demonstrated in the third quarter and in the announcement of our three-year value creation plan, it is crucial for us to enhance overall performance at Philips, focusing on increasing profits and growth. We will also capitalize on any opportunities that arise in the sleep business, but we are not reliant solely on it, as we are committed to expanding other areas of our business as well.

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.

Good morning, everyone. Thank you for the questions. I have one regarding the consent decree and another about testing. Regarding the consent decree, about two months ago, you provided some updates on the process where the FDA reaches out monthly with questions on new topics and updates the draft consent decree. I would like to know the current status of that process. Are we still engaged in a cycle of questions and answers leading to further updates, or have we moved beyond that? As for testing, I find it notable that you continue to mention the data shows no significant harm to patients. It seems there's a discrepancy between that and the FDA's statement about the need for more tests to thoroughly assess the risk to users. Is there a disconnect between your positions, or am I misunderstanding the situation? Thank you.

Hi, Graham. Let me take the first one. The speculation regarding the timing and progress of the CD is creating a lot of unnecessary concern, which is why we've stated that we do not control the timeline and will provide updates as soon as the CD is completed. We would like to keep it at that. Once the CD is signed and finalized, we will share all the details regarding its impact on us. In the meantime, we prefer not to provide further updates to avoid adding to the speculation.

Yes. Maybe I will take the second one, on the testing. So, I think what's important is that the FDA did not disqualify our testing to date, right? They acknowledge it's extensive, it's done with third parties and actually, they have also been looking into the data in great detail. The fact that they have some additional questions to be answered, actually, I see as very positive because actually if we can satisfy those, we can come to the same conclusions hopefully. And that's in the interest of the patient and patient safety and kind of underwriting then the outcomes that we also have been presenting today. So, we are very confident in that because we put all the efforts in. We have a very scientific rigorous process followed to come to those tests, that there are additional questions, we are happy to address those. We will do that in full collaboration and we also see actually this as a positive development because the clearer we can get on what is still outstanding to be answered, actually that helps us to take those questions off the table. And we of course remain at full disposal to do so.

Okay, super. Just one quick question on medical monitoring. I think again it's sort of flagged as a 2024 potential update around that and that always seemed a bit more procedural to me. Is that progressing as you'd expect and is that a H1 event or is that more H2 as well?

I think it's progressing as we expected. The judge is taking steps and things are moving forward. However, it's not very helpful to speculate on precise timing since it's difficult to determine. What we've said is that we hope to provide some updates in 2024 regarding this part of the recall follow-up, and it's best to leave it at that. We will share any news as soon as we have it.

Okay. No, I appreciate that. Thanks a lot, guys.

Thank you. We will now go to the next question. And the next question comes from Sezgi Bice Ozener from HSBC Germany. Please go ahead.

Hi. Thank you for answering my questions. I have two, please. First, regarding Connected Care, you incurred additional remediation and quality costs this quarter. Could you clarify what these costs are specifically related to? My second question is about the D&T sector; I'm interested in the improvements you've experienced this quarter, especially in light of the situation in China. Could you provide details on which specific areas were leading this change, as you've mentioned lead times are increasing in MR? It seems to me that Image Guided Therapy and possibly Ultrasound are involved. Additionally, I would appreciate details on the pricing impact related to this growth. Thank you.

The remediation cost was slightly higher this quarter, primarily due to certain smaller product lines that we chose not to remediate because the cost of remediation would outweigh the benefits. This led to some inventory write-offs, resulting in a slightly increased cost. Regarding D&T in China, I believe we're confusing a few points. The issue lies with order intake; there are no problems accessing hospitals to fulfill the existing order book, which is why D&T in China performed well this quarter. The concern we highlighted is around order intake due to new procedures in place that extend the time it takes to affect our order intake. As Roy mentioned, the sales funnel remains strong. Did I address your question, Sezgi, or is there something I missed?

Actually, the D&T part was about the pricing impact.

Yes. Sorry, I mentioned that earlier, the pricing impact in the third quarter was about 1% or so. And that will pick up. This is the first time we see that the pricing from the order book starts coming into the P&L, and we will see that coming, let's say, in further quarters a little bit more. Yeah. Thanks, Sezgi.

Thank you. We will now take our last question for today. And the last question comes from the line of Falko Friedrichs from Deutsche Bank. Please go ahead.

Thank you very much. Good morning. A few follow-ups, please. Firstly, Abhijit, did I understand your comment on order intake correct that Q4 should still be negative but less negative than in Q3? Then secondly, could you update us on the number of patients in the census register, those people that could potentially sue you, and how many of those have found themselves a lawyer at this point? And then the third question, could you just give us a few examples of the countries where you have returned to the market with your sleep and respiratory care products? Thank you.

Yeah. So, on Q4, we have said it's going to be a significant improvement on the minus 9%. Now whether that is going to be negative or positive, given all the uncertainties, we are not speculating on that at the moment, but it will be a substantial improvement on the minus 9% that we had in Q3.

Currently, we have 54,000 people registered on the census registry, but only 670 of them are actively engaged with a judge and a lawyer regarding claims. These figures are the most recent updates. As for our market re-entry, we are expanding globally, with Japan being a key market where we have a strong presence and a comprehensive product range. We are also re-entering China and are active in Australia, Latin America, and the EU. We are navigating the regulatory processes worldwide and receiving positive support in several markets, which is encouraging for our return.

Okay, thank you.

Thank you. That was the final question. Mr. Jakobs, please continue with any points you would like to raise.

Yeah, thank you all for great questioning and the dialog we had around it. So, just to close. So what you have heard us discuss is a very strong performance and a strong performance improvement this year so far. We had a strong third quarter where we delivered 11% growth doubling our profit and strong cash flow. It was a fourth quarter of growth that you have seen, and that actually really increases our confidence to also increase the guidance second time this year towards a strong close of this year, which would bring us ahead of the first-year plan that we announced in January. It also gives us confidence in the execution of the second and third year of our plan, as we see the actions we are taking really having an impact both on supporting strong sales, supporting also margin improvement, and productivity, you see dialing back into our profitability step up. So, that, with the actions on order intake, will give us a lot of confidence in continuing to work on our trajectory to bring Philips back where it belongs. Thank you so much for your attention and looking forward to connect with you soon.

Thank you. This concludes the Royal Philips Third Quarter 2023 Results Conference Call on Monday, October 23, 2023. Thank you for participating. You may now disconnect.