Hi, everyone. Welcome to Philips' Fourth Quarter and Full Year 2023 Results Webcast. I'm here today with our CEO, Roy Jakobs; and our CFO, Abhijit Bhattacharya. The press release, investor decks and the frequently asked questions on the Respironics field action were published on our Investor Relations website this morning. The replay and full transcript of this webcast will be made available on the website after the call. 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 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. Welcome. Great to be with you today. I want to start with the key highlights of this morning's release. We delivered a year of strong sales growth, improved profitability, and very strong cash flow. The improved operational performance is a result of the solid execution of our plan to create value with sustainable impact. We are making progress on all our three priorities: enhancing patient safety and quality; strengthening supply chain reliability; and simplifying our operating model, supporting significant productivity and margins. Patient safety and quality remain our highest priority across the company. We agree with the FDA on the terms of a consent decree focused on Philips Respironics in the US, which provides clarity and a roadmap for us to demonstrate compliance and restore the business. We are confident in delivering the previously stated plan for 2023 to 2025, which now takes the consent decree into account and remains unchanged, although recognizing uncertainties remain in a volatile geopolitical environment. Based upon our ongoing actions to enhance execution, we expect further performance improvement in 2024. On to the key financial highlights. Comparable sales growth was 7% in the full year, excluding the impact of provisions charged to sales mainly in connection with the Respironics consent decree, which we will explain later in the call. Sales growth was 11% in D&T, 5% in Connected Care, and 3% in Personal Health. Group comparable sales growth, including the impact of the provisions mainly in connection with the Respironics consent decree was 6% for the full year. The adjusted EBITA margin was 10.5% in the full year, excluding the impact of the provisions mainly in connection with the Respironics consent decree. This is a strong improvement of 310 basis points versus 2022. Adjusted EBITA margin, including the impact of those provisions was 10.6%. Free cash flow saw a strong inflow of €1.6 billion in 2023 and we significantly strengthened our balance sheet in the year. Restructuring and other charges were high in 2023. This was a result of our focus on resolving the consequences of the Respironics recall, the consent decree, and the important interventions we are making in the company as part of our plan to create value with sustainable impact. Order intake was lower in 2023 due to the exceptionally high comparison base in the last two to three years, lower China and Russia, and lower order to delivery lead times. We saw sequential improvement in Q4 as anticipated and we remain focused on implementing the necessary actions to reduce lead times and leverage our enhanced operating model and our AI-driven innovations to improve order intake. It's important to note that our order book, which accounts for 40% of group sales, is 15% higher than when the global supply chain crisis started, and we will continue to support revenues with that order book as planned for 2024. This morning, we announced that Philips agrees with the FDA on the terms of a consent decree, which is now being finalized and will be submitted to the relevant US court for approval. The decree is mainly focused on Philips Respironics in the US and will provide a roll-up of defined actions, milestones, and deliverables to demonstrate compliance with regulatory requirements and to restore the business. In the US, Philips Respironics will continue to service Sleep & Respiratory Care devices already with health care providers and patients and supply accessories, patient interfaces, consumables, and replacement parts. Philips Respironics will not sell new CPAP or BiPAP apnea devices or other respiratory care devices in the US until meeting the relevant requirements of the consent decree. Outside of the US, Philips Respironics will continue to provide new sleep and respiratory care devices, accessories, patient interfaces, consumables, replacement parts, and services subject to certain requirements. Further details will become available once the consent decree has been finalized and submitted to the relevant US court for approval, and we're not able to provide more information on the consent decree at this time. Looking ahead, we remain confident in our plan and in the financial outlook. The previously stated 2023 to 2025 group financial outlook of mid-single-digit sales growth, low teens adjusted EBITA, and €1.4 billion to €1.6 billion free cash flow in 2025 now takes the consent decree fully into account, and the plan remains unchanged. This outlook excludes the impact of ongoing litigation and investigation by the US DOJ related to the Respironics field action. In 2024, we expect to deliver further performance improvement with 3% to 5% comparable sales growth, building on a strong 2023 comparison base and an adjusted EBITA margin of 11% to 11.5%. We expect free cash flow of between €0.8 billion to €1 billion. This excludes the expected remaining cash out related to the previously announced resolution of the economic loss class action in the US. While we continue to see hospitals and health care systems exhibit some cautious buying behavior, we expect this to develop positively in the course of 2024 driven by improving hospital financials and more procedures. In China, the government-imposed anticorruption measures continue to impact short-term decision-making by hospitals, but this is not expected to impact fundamental demand. Our order funnel remains very active in the country, and we expect order growth to resume in China in the second half of 2024 following a very difficult comparison base in the first half of this year. Overall, based on the gradually improving market environment and our ongoing actions to improve order intake, we expect to see positive order intake growth in the full year 2024. Let me now provide you with some of the recent customer and innovation milestones during the quarter. We signed an eight-year, $150 million agreement with NYU Langone Health in the US to provide patient monitoring, AI-enabled diagnostic imaging, digital pathology, and enterprise informatics solutions to its latest hospital. Our program to expand access to maternal health through AI-powered ultrasound aims to address the shortage of health care workers by putting a diagnostic tool, previously reserved for expert technicians in the hands of midwives. This program also received funding of $60 million from the Bill & Melinda Gates Foundation. Our innovations are focused on empowering clinicians with artificial intelligence for deeper clinical insights, improved workflow, and productivity. For example, we recently launched Philips HealthSuite Imaging, a cloud-based next-generation of Philips Vue PACS that offers AI-enabled workflow orchestration, high-speed remote access for diagnostic reading, and integrated reporting. In Personal Health, we launched premium S9000 shavers with breakthrough close-shave technology in the US, Western Europe, and China. In 2023, we were again recognized with a prestigious A score for our climate action leadership by a global environment non-profit and as one of the top health technology companies in the Dow Jones Sustainability Indices list. I will now hand it over to Abhijit to take us through the financials in more detail, after which I will come back on our execution priorities.

Thanks, Roy. Good morning everyone, and thank you for joining us on the call. Let me start by providing you some clarification on the charges we took in the fourth quarter connected with the consent decree and explaining its accounting consequences as well. In the fourth quarter, we recognized €363 million in charges connected to the consent decree. This includes provisions charged to sales for field action activities, mainly related to the ongoing remediation of ventilators, and provisions charged to costs for the remediation activities, inventory write-downs, and onerous contract provisions. Technically this had a negative impact of around 100 basis points on the comparable sales growth for the full year and 350 basis points for the fourth quarter. It also resulted in the positive impact of 10 basis points on adjusted EBITA margin for the full year and 40 basis points for the fourth quarter as the same absolute adjusted EBITA was divided by a lower sales figure. I understand there can be some confusion about our operational performance due to these impacts and I've noticed some headlines mentioning a miss compared to our outlook. I want to make clear that we came at the top end of our upgraded comparable sales growth outlook of 6% to 7% and at the midpoint of the upgraded adjusted EBITA margin outlook of 10% to 11% provided in October, and free cash flow was significantly above our outlook. I hope the above-mentioned explanation helps to clarify. For comparison purposes during this call, I will refer to figures excluding the impact of these provisions as it will help to compare operational performance against the outlook provided earlier last year. In this morning's press release as well, as the slide deck, you will find the reconciliation between the metrics including and excluding the impact of these charges. Let me now move on to our performance by segment. In Diagnosis & Treatment comparable sales increased 11% in the full year driven by double-digit growth in Image Guided Therapy and Ultrasound. In the fourth quarter comparable sales growth was a solid 5% on the back of tough comps in the previous year. Full year adjusted EBITA margin for Diagnosis and Treatment was 11.6%, an increase of 210 basis points compared to 2022, driven by higher sales, pricing, and productivity measures, partly offset by cost inflation. In Q4, the adjusted EBITA margin was 10.4%, impacted by an unfavorable mix and phasing of production as we reduced inventory as well as the phasing of costs. This follows the strong adjusted EBITA margin in the first half that was driven by strong Ultrasound and Image Guided Therapy sales. Connected Care comparable sales increased 5% in the year, driven by double-digit growth in Monitoring. Q4 comparable sales were flat as high single-digit growth in Enterprise Informatics was offset by negative sales growth in Monitoring on the back of around 20% growth in the fourth quarter of last year. Sleep & Respiratory Care sales grew low single-digit in the quarter, driven by growth in sleep systems and patient interface, partly offset by lower ventilator sales. Additionally, a few days ago, we communicated to customers our decision to discontinue the manufacture and sale of certain product lines in the US, primarily within Respiratory Care. Full year adjusted EBITA margin for Connected Care improved 480 basis points to 6.9%, mainly driven by higher sales and productivity measures. In Q4, the adjusted EBITA margin improved 170 basis points to 13.3%, driven by a strong performance in Monitoring and improvement in Sleep & Respiratory Care. Personal Health delivered a 3% comparable sales increase in the full year and a strong 7% in the fourth quarter, driven by strength in the Personal Care business. Geographically, growth in Q4 was driven by China, Western Europe, and other growth geographies. Overall, consumer sentiment remains subdued but is expected to improve in the course of 2024. Full year adjusted EBITA margin for Personal Health improved by 180 basis points to 16.6%, mainly driven by higher sales, pricing, and productivity measures. In Q4, the adjusted EBITA margin improved 290 basis points to 19.9%. We have been very disciplined in cost management, and our productivity initiatives delivered savings of €956 million in the year of which the operating model savings were €496 million, procurement savings were €219 million, and other productivity programs delivered €241 million. Productivity savings in the fourth quarter amounted to €271 million. The adjusted EBITA margin for the group increased by 310 basis points to 10.5% in the year. Wage and component price inflation was more than offset by operational leverage and by our productivity programs and pricing actions. In the quarter, the adjusted EBITA margin for the group increased 50 basis points to 12.5%. We delivered significant cash flow improvement with a free cash inflow of €1.1 billion in the fourth quarter and €1.6 billion for the full year. This included a cash outflow of around €150 million related to the resolution of the economic loss class action in the US in Q4. Excluding this, the operational free cash flow was very strong with €1.75 billion in 2023. The strong free cash flow was driven by higher earnings and improved working capital. We saw a further sequential reduction of inventory in the fourth quarter and accounts receivables were significantly lower due to a strong performance in collections and favorable sales phasing throughout the year. This resulted in an improvement in our leverage from 3 times to 2 times on a net debt to adjusted EBITA basis compared to the start of the year. On capital allocation, we canceled more than 15 million shares in the fourth quarter of 2023 from the share buyback program started in 2021, which resulted in a total reduction of 1.5% of the outstanding shares in the quarter. We will submit a proposal to maintain the dividend at €0.85 per share, to be distributed in shares as part of our measures to further shore up our liquidity position. Moving to our order book. As mentioned by Roy, it is significantly higher than the period before the global supply chain constraints, and we expect it to continue to support the sales growth in the coming quarters. It is important to note that orders and order book account for around 40% of our revenue. The remaining 60% comes mainly from recurring revenue streams such as services and consumables, and from the book and bill businesses and from Personal Health. As you can see on the slide, absolute levels of order intake remain healthy, but we see a steep increase in sales level in 2023 due to the enhanced order book to sales conversion following the supply chain and execution improvements. Based on the strong order book, improving order intake, and the ongoing actions to enhance execution, we expect to deliver further performance improvement in 2024, with a 3% to 5% comparable sales growth and an adjusted EBITA margin between 11% and 11.5%, recognizing that uncertainties remain. We expect to see this growth of 3% to 5% and adjusted EBITA margin improvement across all our businesses. We anticipate order intake and sales growth to be slightly back-end loaded in 2024, due to the tougher comparison base in the first half of the year resulting mainly from the strong China performance both on orders and sales, favorable diagnosis and treatment product mix, and high royalty income in the first half of 2023. We also see consumer spending increasing gradually through the year. Operationally, we aim to deliver a free cash inflow between €800 million to €1 billion this year with higher earnings partly offset by higher working capital due to growth and consent decree costs. This excludes the expected remaining cash out related to the previously announced resolution of the economic loss class action in the US, as well as ongoing litigation and the investigation by the US Department of Justice related to the Respironics field action. Restructuring charges are expected to be 100 basis points in 2024 driven by overall workforce reduction program, as well as the sleep and respiratory care business. Acquisition-related costs are expected to be around 30 basis points. Other costs are expected to be around 200 basis points and include 100 basis points of charges connected to the consent decree remediation activities and disgorgement payments and 100 basis points Respironics field action running costs and other quality-related charges. Financial income and expenses are expected to be a net cost of around €290 million in 2024. The effective tax rate is expected to be within our midterm range of 24% to 26%. We expect sales of €550 million to €580 million in segment other in 2024 with a loss of about €50 million at the adjusted EBITA levels, which is €20 million better than in 2023 and €100 million at an EBITA level, which is €80 million better than in 2023. With that let me hand it back to Roy.

Thanks, Abhijit. I would like to continue with some of the progress we have made on our execution priorities and focus areas for the year ahead. First, we're taking the learnings of the Respironics field action to raise patient safety and quality to the highest standards across Philips. A year ago, we elevated patient safety and quality to the Executive Committee by creating a new leadership position to drive this priority across the company. We drove significant simplification of the way we work by further reducing the number of quality management systems, which is already 50% down since the inception of the program against our target of reducing them by 65%. We added significant capabilities and talent across the businesses and continue to invest in our systems capabilities and in training and education. We also improved our capital closures by strengthening processes, capabilities, and governance around it. Looking ahead, we will remain focused on driving the cultural shift to deliver the highest quality innovations and put safety and quality at the center of everything we do with a greater level of accountability within the businesses. With respect to the supply chain in 2023, we reshaped our setup and moved to customer-centric end-to-end teams aligned to our businesses. We significantly reduced materials and component risks resulting in a 20% increase in service levels, reduced lead times, and improved sales conversion rates. For example, we redesigned more than 75% of the planned PCBs and derisked all high-risk components identified at the end of 2022. We will continue leveraging and regionalizing our end-to-end supply chain and further reduce lead times in 2024 enhancing reliability and service levels. Finally, our new operating model with prime accountability in the businesses has been live for nine months now and we have fully completed the realignment of the workforce roles and reporting lines. This enabled more effective ways of working across the company, resulting in significant productivity improvements. It also included the difficult but necessary reduction of over 8,000 roles to date out of a planned reduction of 10,000 roles by 2025 versus a plan of 7,000 roles in 2023. At the same time, we started a cultural journey to drive impact with care and attracted over 900 talents with a HealthTech background this past year. As you have seen in the results we presented today, I am pleased to see that the actions we have taken continue to positively impact our performance. We are very focused on our priorities and on executing with excellence to keep improving when needed to deliver our AI field innovations to our consumers and customers. We remain confident that our focused growth strategy for scalable innovation will further strengthen our business and results going forward, and we see huge potential to make a difference, helping more health care providers, help more patients in an efficient and sustainable way and making it easier for more people to take care of their health and well-being. Let me close out by repeating the key messages of today's announcement. We delivered a strong year of improved operational performance as a result of the solid execution of our plan to create value with sustainable impact. We are making progress on all three priorities: enhancing patient safety and quality, strengthening supply chain reliability, and simplifying our operating model. Patient safety and quality remain our highest priority across the company, and the consent decree provides clarity and a roadmap for us to demonstrate compliance and restore the business. Looking ahead, we are fully on track with the plan for '23 to '25, although recognizing uncertainties remain. The progress we are making reinforces our confidence to deliver further performance improvement in 2024. 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. Thank you for taking my questions. I have three please, if we can take them in turn. Firstly, can you talk about the portfolio pruning in Connected Care and why you've chosen to exit some of these businesses in the US? Was this directed by the FDA? And what is the combined revenue from these devices? And how should we think about 2024 revenue growth in Connected Care on a clean basis?

Thank you, Hassan. Let me take that question. So, we have been starting to prune our portfolio on an ongoing basis. And we did that across the portfolio of Philips, which we have seen in various products, but also businesses. We also did that in Sleep & Respiratory Care. What is important to understand is that actually, these prunings are aimed to accelerate our performance. And so far, as you have seen also in 2023, that is actually what they do. So also for the Sleep & Respiratory Care business and also what you've seen in terms of the pruning that we take there, it's aiming at the same objective. We see that Sleep & Respiratory Care bottomed in terms of the €1 billion of revenues. With the clarity that we have now with the consent decree and the roadmap to get to compliance and to restore the business, actually we are able to build from there. And actually that is also why we were happy to announce that actually we could now confirm that we remain on our plan, including any consent decree implication for 2023 to 2025. I think, as you remember when we started last year with the plan and we said that we have a three-year trajectory there were questions around what consent decree could still mean. Now we can take that unclarity of the table and we remain very committed. And based upon the first year, where we actually over-delivered first, the first year plan because I mean also remember, where we started we said low single-digit growth where we did 7% growth. We said, we would do high single-digit EBITA. We did 10.5% EBITA and we committed to €700 million to €900 million of cash. We did €1.6 billion cash. That actually was excluding inside of the consent decree. Now we continue including the consent decree and we remain fully committed to the plan as we have.

And sorry, just the combined revenue from these devices and the expectation for connected growth in 2024?

So it's really immaterial, that's also why we would not disclose. We remain very committed to the 3% to 5% growth for 2024 and that includes any impact of any pruning that we did in 2023. And that was not only in SOC. We also did it in D&T. We also got some pruning in Personal Health. So actually, we have been pruning across the portfolios. But actually what we do is to focus our efforts on the innovations that we can scale faster and better, right? So that we have less fragmented portfolio and the portfolio that we have does make a better impact and also that helps us to drive better margins because we said, also, if you kind of consolidate your portfolio more you will be able to get more leverage and that will support your margin trajectory as well.

Perfect. And then secondly, so another on the consent decree. Could you help us understand the timeline of your return to market in the US, given you talk about a multiyear process and the duration of profit disgorgement and whether you see any risks to selling OUS?

We cannot provide a specific timeline at this moment. However, we are dedicated to addressing the consent decree as quickly as we can and have assembled a team to manage this effort. Once the court approves the details of the consent decree, we will share more information on its implications. Regardless of the timeline, we are committed to executing our plan. We have taken charge of Philips, which generates €18 billion in revenue, including €1 billion from SOC. We will ensure that all of Philips meets our commitments, and we will work through the compliance process as necessary without affecting our overall delivery trajectory. In 2023, we've begun to re-enter the market outside the US, having received the necessary regulatory approvals. We are already selling new CPAP and BiPAP devices and have been servicing the market for patient interfaces, which have also shown positive performance. Looking at Philips as a whole in 2023, we have experienced growth across all segments—D&T, Connected Care, and Personal Health—along with progress in various regions including China, Europe, and the Americas. We aim to maintain this momentum through 2024, supported by the strong cash performance demonstrated in Q4 and for the entire year. This positions us well for continued investment in the business, while also preparing for any potential challenges. The margin improvement of 310 basis points in 2023 remains a priority, and we are targeting a margin of 11% to 11.5%. This goal is bolstered by our growth momentum as well as productivity efforts, through which we achieved nearly €1 billion in productivity improvements in 2023. In 2024, we plan to eliminate another 1,000 roles and will continue to pursue broader productivity enhancements. We anticipate that easing market conditions, particularly in procurement, will further support our margin growth.

Very helpful. And then finally, on guidance, can you help us understand the breakdown and the rationale for 3% to 5% growth given the provision had an additional one percentage point drag in 2023? Is there anything driving caution here? Or are you trying to retain your more conservative approach to guidance? And then on the margins, how should we think about the 50 to 100 basis point margin levers by business segment?

Hi, Hassan. Good morning. This is Abhijit. No. Yes, while there is a bit of benefit because of the provision that went against sales this year, but we also over-delivered. So we came at the top end of our guidance for 2023. So if you net the two, it's a few tens of basis points and given the wide range of 3% to 5%, I think there was no need to further change that range. That's one. I think on the profit improvement you will see that across businesses, like you've seen that this year. So we will continue to drive margins up in Diagnosis & Treatment of course, Connected Care as well but also Personal Health. And yeah, I think we'll leave it at that.

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

Hey guys. Hope you can hear me okay. So first question really is just on the consent decree, I know it's a bit difficult had you still taking the call decision. But maybe beyond this year, just wondered if the ongoing costs particularly related to profit disgorgement will still be recognized below the line. I'm just trying to get an idea of how much the headwind we're going to see below the line in terms of the wages costs beyond this year. And then secondly, you put towards productivity initiative savings of about €960 million so far this year, but your overall EBITA is only up €600 million, so just wondering if you could put towards the underlying headwinds please. Thank you.

Hi David, a couple of points. Regarding the guidance, we mentioned that the 100 basis points will be accounted for below the line this year for the entire remediation, including the profit disgorgement. We will provide details on how much is allocated to each component once we have the signed court order. To address the second part of your question, we did deliver on the €1 billion productivity initiative as promised, but we also faced inflation in costs such as wages. The net effect of this is reflected in our profit and loss statement, and you'll see that in our bridge as well.

Okay. Thanks for the details. Just to follow-up on consent decree, should we expect some below-the-line items in 2025 and beyond?

Yes, we will provide more clarity later as we gather more information. It’s important to note that the 100 basis points we discussed, along with the additional costs, are all included in the cash outlook for 2024 and 2025. Therefore, we are not changing the cash outlook for those years, as it is all accounted for.

Thank you. The next question comes from the line of Richard Felton from Goldman Sachs. Please go ahead.

Thanks. Good morning. Two questions from me please. First one is on D&T margin in Q4. So can you provide maybe a little bit of color around the mix impact in the quarter? I know strong growth in Ultrasound had been a tailwind through the year which I don't think was the case in Q4. But can you maybe help us quantify that impact please? Then the other driver that you called out in D&T margin for Q4 was the phasing of production and costs. Can you maybe explain what the phasing actually was related to and quantify the impact? Just trying to get a sense of the underlying margin trajectory for that part of the business. Then my second question is a little bit more of a medium-term one on Sleep & Respiratory Care margins. Look now that you have a little bit more visibility on the consent decree and I see more detail on what remediation activities are going to look like, what level of profitability do you think is achievable for that part of business in the medium-term? Thank you.

Yes, Richard, I will address the first question regarding the Q4 impact on Diagnostic Imaging. There are several factors to consider. First, the mix is not solely related to Ultrasound; it encompasses a combination of elements. We experienced a decrease in Ultrasound sales due to clearing last year's backlog, along with a geographic shift where we sold more outside the U.S. and China this year. Additionally, the mix between equipment and services slightly impacted margins negatively compared to last year, as we had strong sales in MR and other equipment, which typically yield lower margins. In terms of production phasing, we significantly reduced inventory, which necessitated tapering off production to ensure we begin the next year with a healthy but not excessive inventory level. This adjustment has resulted in lower factory cost coverage, affecting margins in the fourth quarter. There was also a fluctuation in costs throughout the year, particularly in 2022. Annual incentive payments were minimal or absent due to underperformance, which has now created a cost implication this year. These three main factors contributed to the margin impact in the fourth quarter. Regarding your second question on SRC outlook, we are confident we will return to profitability, but we are not providing specific guidance for each business segment. However, you can expect a substantial improvement in overall Connected Care profitability as indicated in our guidance, which includes enhancements in Sleep & Respiratory Care.

Thank you.

Thank you. The next question comes from the line of Veronika Dubajova from Citi. Please go ahead.

Hi. Good morning. Roy, Abhijit, Leandro. And thank you so much for taking my question. I will keep it to two please. One would just love to get your take on China and your current expectations as far as your installations in China are concerned, and what's embedded in the guidance for D&T both from a sales and a profitability perspective? Obviously, China is a very important and highly margin accretive market. So I'm just curious how you're thinking about the anticorruption activity and how that plays out in terms of the China revenue impact this year. Your commentary in order has been very clear. I'm really just curious about the P&L and what you've kind of factored it in there. And then I'll have a follow-up after that, if that's okay, but let's get this out of the way first.

Thank you, Veronika, for your question about China. China has always been a significant part of our business and will continue to be so. It’s important to acknowledge that China is experiencing a challenging economic phase, with growth rates around 3% to 5%. This economic situation affects both consumer behavior and the healthcare sector. We have observed the impact of anticorruption measures as well, which are being addressed through a state-by-state program. In 2023, we noted that significant progress has been made in this initiative, and we anticipate it will extend into 2024. Consequently, we expect China’s contributions to be more prominent later in 2024. We are seeing gradual improvements, which will contribute to our overall plans and align with our growth guidance of 3% to 5%. It’s worth noting that China represents only 5% of our global sales, mainly in D&T. On the consumer side, we have started to see growth return, and we expect it to gradually improve. Our expectation is that China will strengthen throughout the year as the government wraps up its ongoing initiatives.

Okay. That's helpful. And Roy, would you expect China for D&T to be flat to grow or to be down for the full year?

No, it should grow. So we expect...

It should grow. Okay.

Yeah, yeah. It should grow.

Okay. That's great. My second question relates to the geopolitical risks you mentioned in your prepared remarks, specifically regarding shipping and freight costs. You have some localized manufacturing in the Middle East for the CT business, so I'm curious about how much of your legal room you have included to address those risks when providing the 2024 guidance. Also, what do you consider to be your single most significant area of concern? It would be great if Abhijit could also share insights on the freight side of things. Thank you.

We recognize the uncertainty in the current environment, which remains volatile. We are confident in our guidance of 3% to 5% growth, thanks to the execution improvements we've implemented in 2023, which have provided us with greater agility. This has also enhanced our productivity, allowing us to manage potential cost increases. While there are challenges like developments in the Red Sea, the overall freight costs we expect will have a minimal impact. We may face some delivery time challenges, but we're actively addressing these issues through preemptive measures and full mitigation efforts. We are closely monitoring global developments, particularly in the Middle East, but the larger concern is the need for a strong global economy with contributions from all regions. The strengthening of China is welcomed, and we are optimistic about growth in 2024 from other parts of the world, including a potentially stronger North America, and focusing on growth opportunities in Asia with countries like Indonesia and Japan, as well as positive prospects in Saudi Arabia. We are carefully watching global conditions and have made our operating model more agile to adapt to any changes while managing known issues within our guidance.

Thanks guys.

The next question comes on the line of Lisa Clive from Bernstein. Please go ahead.

Hi, thanks very much. Just a question on your order book and the match-up of inflation and cost increases, I know fairly early on as inflation picked up, you did manage to put through price increases. And just wondering if you could just remind us roughly what quarter that started and when that started coming through your backlog and after that initial round of price increases have you been able to continue moving prices up as inflation has not yet abated?

I believe we saw a slight increase in Q3 and a bit more in Q4, but most of the price increases will occur in 2024 as planned. We don’t anticipate further strengthening of prices, and our margins remain strong. We are focused on improving productivity to reduce costs. In certain areas of health systems, we are continuing with the price increases, but we are also noticing a decrease in component pricing and other factors. We will incorporate these changes into our pricing strategy for 2024.

Okay. And then just a question on your sleep apnea business. Novo Nordisk will have a readout from an OSA trial for their GLP-1. And clearly ODC is a major contributor to sleep apnea, although Omni on the other hand is a very under-diagnosed condition. So just thinking about how the world seemingly has changed in the last few months around GLP-1s and the potential for even better drugs the potential for eventually generics to help lower the price point. Does that change your long-term view on the sleep apnea business particularly in light of the fact that you're actually just even going to be out of the market for a year or two as well at least in the US. Obviously you're able to sell OUS but the US has historically been your biggest market?

Yeah. Thank you, Lisa. I think we don't see changing structurally the market opportunity. We believe that there is a significant patient base out there as you say that's undiagnosed. Yes, I think there will be a medication that will help address some of the causes of sleep apnea. We also note that on average a sleep apnea patient has five comorbidities, obesity is one of those. So this will help, but will not take the root causes away. We also know that CPAP BiPAP is by far the most effective therapy that is preferred and also in use and in demand. So we are committed to that segment. We also see the opportunity strong. We're fully focused on working through now the clarified roadmap for the US. And outside of US, of course, we are already coming back into play. So we believe that there is a strong road ahead that we will work through based on the improved clarity that we now have.

Okay. Thanks for that.

Thank you. One moment please. We will now go to the next question. The next question comes from Sezgi Oezener from HSBC. Please go ahead.

Hello, Sezgi your line's on mute. Due to no response, I will go to the next question. And your next question comes from the line of Graham Doyle from UBS. Please go ahead.

Good morning. I appreciate the opportunity to ask my questions. I have two areas to address. First, regarding the adjustments and the restructuring charge; could you provide more details on the €81 million of D&T remediations for Q4 2023? For 2024, it appears that approximately 100 basis points of the anticipated adjustments to EBIT will be associated with the recall, which seems significant considering you mentioned that over 99% of the sleep recall has been completed. Can you clarify when these adjustments are expected to conclude? Secondly, concerning the consent decree, is there any impact on your 2025 projections for Sleep & Respiratory sales in the US? I understand you cannot discuss specific products withdrawn on Friday, but given the scale and the past revenue breakdown from these products, it appears to pose a substantial challenge, particularly in the first few quarters of the next year when we may not see the same revenue supports. How should we interpret the weighting in H2 for 2024 that Abhijit mentioned? Thank you.

Yes. Let me take the first one. On the €81 million in charge that we took. So as I said, when we start to plan patient safety and quality is an important focus area for us and we will put in new efforts to actually improve quality across the portfolio. That actually is where these charges reside from because we are also taking action across all our businesses. And in this case, it was in the D&T area that we took the quality action and that is part of the improvement of quality. We also signaled that as part of the plan. We would invest behind that. These are some of these charges that you currently see coming through.

Regarding the adjustment of 100 bps, so let me clarify there are two parts. One is related to the consent decree where we have running costs of the remediation. The second that we mentioned is regarding overall remediation in Respiratory Care, but also for the rest of the company. Now part of that is the legal costs that will continue. There are some testing costs that will continue. So yes, we are at 99% on the remediation of sleep. There is a very small portion that is left. We still have to do the ventilators for which we have a provision now. But let's say the last part of the legal costs and testing and other related costs will continue into next year. Your last question was on, yeah, the sizable headwinds. I also saw it in your note you talked about €400 million of headwinds. I think Roy has clarified that the €1 billion is the bottom that we see that was the revenue for 2023 and that is the bottom. So we don't see any further headwinds to that revenue number going forward. And in our outlook, all of this is taken into consideration.

Okay. That's really helpful. Regarding the last point about the €1 billion in Sleep & Respiratory, you've provided us with ample information in the past that allows us to reasonably estimate the mask revenue. This indicates around €700 million for all other non-mask, non-sleep revenue in this division. When I check the US website, I notice that nearly all products have been removed aside from the BiPAPs, which you're no longer selling. It appears to be a significant figure. Even if we consider half of that amount, or half again, it's still substantial. I'm curious if there's something we might be overlooking regarding sales from another area within Sleep & Respiratory that hasn't been accounted for by analysts. It would be helpful to understand this as it may clarify the gap.

Yeah. Maybe, Graham, so first let me start from what Abhijit said, right? So the €1 billion that's the number that we built back from. When we talk about digital role to compliance, we saw business that's where we start from. What you see, of course, is there are mix shifts underneath. We already stopped selling a lot in US, right? So, actually we are building there from already a base that actually was out there, right? We continue with patient interface which was the biggest part which already was in the forecast including consumables and accessories. Furthermore, as you know, we are building back outside of the US, right? So that's something that comes actually on top of what we're doing because that was not in the earlier guidance. So, I think, yes, we have published a list of pruning products, but that's not part of kind of lowering guidance. No. Actually, we have taken that into the guidance, and we will be building back from here. So, I think that's where we just really want to be clear that, a, we have taken all in the guidance. So, actually, we delivered 3% to 5% including the pruning that we did in SRC, but also the pruning that we did in other businesses, b, that we have reached the bottom and we will build back. So we will make sure we comply as well as that we further restore the business, and what we also said Koninklijke as we will Koninklijke have not included this as part of our guidance and the plan 2023, 2025. We will not go into the specific breakdowns per product line of a business, because that's what we don't do in any business. And it should also not be of your concern as actually reiterated that we have a strong outlook right, and that we are committed to deliver that 3% to 5% growth that profit further step up to 11% to 11.5% and the cash which is a really important focus area. You saw that we are very much focused on that. We had a very strong close on cash and we will continue that cash discipline moving forward. That totality of Philips that actually we see strengthening and we will after a strong first year where we over-delivered on our plan significantly versus what we came out with in January, we want to continue that performance trajectory in 2024.

I’m sorry. Abhijit go ahead.

The cost of repetition, Roy mentioned earlier pruning parts of our portfolio is something that we have been doing for a while also to focus on our high-growth drivers and to get our innovations out there and put scale behind our winning products. So, maybe there is a heightened sense of sensitivity around the pruning in Sleep & Respiratory but just look at it as part of stuff that we do across the portfolio, across the company.

No. That's really helpful. I follow-up for just to make sure I haven't misunderstood. Thanks a lot guys.

Sure. Thank you.

Thank you. The next question comes from the line of Sezgi Ozener from HSBC. Please go ahead.

I apologize for the brief interruption earlier. I hope you can hear me clearly now. I have two questions, and I appreciate your taking them. The first question is about the Respiratory Care portfolio. You mentioned the continuation of sales for these products. In the past, you stated that to address the recall, you had significantly increased CPAP and PPAP production capacity. Can you clarify how much of that capacity has been established? Additionally, how much of it will be utilized for OUS sales or in other products? Regarding the long-term profitability of Connected Care, I was under the impression that Sleep & Respiratory Care offered higher profitability compared to patient monitoring. How does that affect your long-term margins for these segments? My second question pertains to the much lower inventory levels reported across all segments at year-end. Do you anticipate further reductions, or are these inventory levels sustainable? Should we expect some increase moving forward?

Yes. I think on the capacity what we have done the additional capacity that we put in was flex capacity with co-makers. So they were kind of not in our own plants but we did it with co-makers. Those have been wound down as we have progressed with the remediation. So that's not something that will remain as an overhang. In terms of SRC profitability, we’ll say, it was never higher than monitoring. Monitoring, of course, is a very highly profitable business. SRC in the past was mid to high-teens profitability business. It will probably not get back there but we will improve profitability over the period so that we get into the guided range for Connected Care as we have given for 2025. Regarding the inventory, yes, we have done a big reduction last year. There are still a couple of areas that we would want to reduce this year. So yes, we will have a couple of hundred million reduction this year as well on inventory, so that we get our supply chain then working at an optimal level.

Thanks very much.

Thank you. The next question is a follow-up question and comes from the line of Veronika Dubajova from Citi. Please go ahead.

Hi, guys. Thank you so much for squeezing in my follow-up. I'm going to go back to the topic that I think a bunch of people have asked. Just maybe for clarification we can close the circle. But I think when you gave the guidance back last year, the mid-term guidance, you had assumed a 10% CAGR for S&RC sales. I just want to confirm whether that still stands. Or should our working assumption be different? And maybe just to confirm that S&RC sales went from €1.3 billion to €1 billion to 2023? Just so we have the right starting point that would be great. Thank you.

Yes, I think the €1 billion sales for 2023 is what we have said now multiple times in this call. So, it's confirmed and reconfirmed again Veronika. Regarding the growth rate for Sleep & Respiratory, we are not giving a separate guidance at this point of time. We have the overall guidance for Connected Care. And within that, we will manage the Sleep & Respiratory, Monitoring, Enterprise Informatics and all of the businesses to get to the target that we have set for ourselves. And you see there's quite a big step up in profitability from where we are now, and we have high confidence of getting there in the next two years.

That’s very clear. Thank you, Abhijit. And the €1 billion, are you able to give us a flavor for US versus OUS in terms of the breakdown of that?

€1 billion is €1 billion and then we build from there.

But let me ask you differently. It's fair to assume it's more OUS than US at this stage, correct?

Yes. Veronika, I appreciate you asking differently, but let me answer in the same way: the €1 billion retains the €1 billion, right? So, we don't want to give more because it gets into a level of so much detail that it creates more confusion than clarity. So, I think if we take this as a starting base, I think your models will be simpler and easier to get through.

Understood. Had to try. Thanks guys.

10 months for trying, Veronika. Well done.

Thank you. We will now go to our last question for today. And the question comes from the line of Julien Dormois from Jefferies. Please go ahead.

HI, good morning Roy, good morning Abhijit. Thanks for squeezing me in. I'm left with three questions if that's okay, but they should be fairly short. The first one and sorry if you've provided it, but I was just wondering whether you could provide us with the split on the order book between D&T and CC? Second question relates to the Imaging or to the D&T business, sorry and given the normalization in the backlog in that division, do you see anything that could prevent you from returning to the same sort of margins that you exhibited in full year 2019 which was a margin of let's say between 12% and 13%? And more specifically into this if you could give us a sense of where your Imaging business currently sits, are we now in the double-digit range for that segment? And the last question is for the consent decree. I was wondering whether you could give us any sense of when you expect the terms of the consent decree to be formally signed off? Are we talking about a few days, weeks, or could these be months? Thank you very much.

Yes. Thank you. Regarding the split, in terms of the...

Yes, regarding the split between D&T and Connected Care, they are quite similar. Connected Care is starting with a strong order book in Monitoring, which gives us confidence for growth in 2025. For D&T, we ended at 11.6%, which is very close to the 12% to 13% range. With this year’s profit improvement, we are set to reach the peak levels seen in 2019, as you noted. As for the consent decree, we don’t have a specific signing date, as that is part of a court process.

Depending on the FDA and the court. So that is a due process, so we cannot give you a date on that. So that's something that is running. Of course, people will try to expedite to make sure that this gets clarified and closed. But I think there's no date that we could give you here.

Okay. Thank you very much. Just for the sake of clarity on the order intake that was down 3% in the first quarter that number would be pretty similar between D&T and CC. Did I get it right?

Yes. Perfect. And important to know right, Julien and you probably know that in terms of the order book it supports 40% of the sales that we have, right? And we have 60%, which is in services and consumables, recurring revenue, and Personal Health. And actually, we also saw good growth there. You saw it in the Personal Health growth but also in the services and software growth. So of course, we all want to improve the number. That's our target. We have the actions in place but I think it's also important to kind of put it into perspective of total €18 billion and what this supports. Furthermore, as said, 15% higher order book. So actually, if you look to the ratio of conversion going into 2024, we are still actually higher and above the supply chain and COVID crisis numbers in terms of our underpinning of the sales by the ratio of the order book. So that also gives us the confidence going into the year for the 3% to 5%.

Crystal clear. Thanks.

Thank you.

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

Okay. Thank you all for your questions. Think reiterating, I think the key messages of today. We came out with our full year results, where if you compare to where we started the year and the guidance of the plan, we had a strong beat on sales where we did 7% versus a guidance of low single-digit, where we had a profit improvement of 310 bps, which actually was high single-digit target and we delivered 10.5 and we had a cash flow target of €700 million to €900 million, where we did €1.6 billion. That was on the back of strong execution of our plan, where we focus on patient safety and quality, supply chain, and the operating model. Now we continue to execute that plan. That also gives us the confidence into 2024, where we said that actually we give you a range of 3% to 5% of sales growth as our target then 11% to 11.5% profit improvement. So we continue our trajectory as well on profit and then a strong cash generation of €800 million to €1 billion. We also provide you with clarity on the consent decree, which I think is a very important milestone that we have all been longing for. And also what the important message there is on one hand we have now a roadmap to comply tools to restore the business. But most importantly that actually we stay fully committed to the plan that we have and the financial guidance that we put out there that now includes the full consequences of the consent decree. And actually therefore, we are kind of now building from that in terms of further delivery of the plan. So we're looking forward to further dialogue around how we progress. We will remain focused on executing our plan and delivering continuous improvement. Thank you so much for dialing in and looking forward to talking to you soon.