Koninklijke Philips NV Q1 FY2024 Earnings Call

Welcome to the Royal Philips First Quarter 2024 Results Conference Call, on Monday, April 29, 2024. During the call, hosted by Mr. Roy Jakobs, CEO; and Mr. Abhijit Bhattacharya, CFO. All participants will be in a listen-only mode. After the introduction there'll be an opportunity to ask questions. Please note that this call will be recorded, and a replay will be available on the Investor Relations website of Royal Philips. I will now hand the conference over to Mr. Leandro Mazzoni, Head of Investor Relations. Please go ahead, sir.

Hi, everyone. Welcome to Philips' first quarter 2024 results webcast. I'm here with our CEO, Roy Jakobs, and our CFO, Abhijit Bhattacharya. The press release, investor deck 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 a statement in the presentation published on the website. Roy, over to you.

Good morning, everyone, and welcome. It's great to be with you today. I want to begin by highlighting the key points from this morning's release. We achieved results that align with our performance improvement plan, showing 2.4% comparable sales growth and significant margin improvement in the quarter, along with positive order intake growth outside of China, particularly in North America. This progress stemmed from our persistent focus on our three execution priorities. Additionally, we have taken crucial steps to address the outcomes of the Respironics recall. The consent decree has been signed and approved in court, and we have received final court approval for the previously announced economic loss settlement. We have also reached an agreement to resolve the personal injury and medical monitoring litigation in the U.S., as well as an agreement with insurers to cover product liability claims related to the Respironics recall. Following the remediation of sleep therapy devices and positive test results to date, we view these milestones as significant in providing clarity on the way forward for Philips. With our key innovation launches and ongoing efforts to enhance execution, we are confident in our performance improvement plan for 2024. Now, for the financial highlights: comparable sales growth was 2.4% this quarter, driven by 3% growth in the Diagnosis & Treatment and Personal Health segments, partially offset by a 1% decline in Connected Care due to challenging comparisons in the monitoring sector. Group sales increased by 2% in mature regions while sales in growth markets rose by 3%, despite a decline in China. The adjusted EBITDA margin saw a considerable increase to 9.4%. Free cash flow showed an outflow of EUR 336 million, consistent with typical quarterly patterns. We anticipated a decline in order intake this quarter, largely due to the situation in China, which was influenced by anticorruption measures and the comparison with an exceptionally high order intake from the previous year. However, order intake outside of China grew, with promising performance seen in North America. Our focus remains on implementing necessary actions to strengthen quality delivery, reduce lead times, leverage our enhanced operating model, and market our AI-driven innovations to bolster order intake. Overall, given the gradually improving market conditions in the U.S., the anticipated betterment of the situation in China, our exciting product launches, and ongoing initiatives, we expect positive order intake growth for the full year 2024. In China, while the government's anticorruption measures are currently impacting short-term decision-making by hospitals, we do not expect this to affect the overall demand, as China continues to be a compelling market. Our order funnel in the country remains very active, and we anticipate order growth to resume in the latter half of 2024, supported by a newly launched government program for medical equipment upgrades. Notably, our order book, which comprises about 40% of group sales, remains robust and is being gradually adjusted to expected normalized levels. Having met with many of our customers and partners recently, it's clear that we are viewed as a preferred strategic and innovation partner for imaging, therapy, and monitoring solutions, bolstered by a strong enterprise informatics and AI suite. This was further highlighted by the positive reception of our solutions at recent global health care events that I attended during this quarter. Let me share some of the recent innovation milestones from the quarter. We launched the new Azurion Image-Guided Therapy system along with advanced informatics and the AI-enabled CT 5300, which offers more accurate and reliable imaging results while using up to 80% less radiation. We've also been recognized as a Clarivate Top 100 Global Innovator for the 11th consecutive year and ranked as a leading medical technology patent applicant at the European Patent Office in 2023. We are witnessing strong demand for our solutions and signed numerous long-term agreements globally during this quarter. For instance, we entered into a 10-year agreement with the Nicklaus Children's Health System in the U.S. to provide AI-enabled technologies like helium-free MRI, ultrasound, and monitoring solutions to enhance clinical insights and improve workflow and productivity. Regarding Respironics, we made significant progress in addressing the ramifications of the recall during the quarter. We genuinely regret any concerns experienced by patients. Here are the key milestones achieved: Philips and the leadership of the plaintiffs, with assistance from a court-appointed mediator, have come to an agreement that resolves the personal injury litigation and medical monitoring class action in the U.S. This settlement eliminates uncertainties surrounding the litigation. It’s important to note that Philips and Philips Respironics do not admit any fault, liability, or that any injuries were caused by Respironics devices. Philips Respironics will pay a total capped amount of $1.1 billion, with these payments anticipated in 2025, funded entirely through Philips' cash flow. More details about this agreement can be found in the Respironics field action deck available on our Investor Relations website, which emphasizes the collective confidence in achieving closure with the settlement. Additionally, earlier this month, the U.S. court approved the Philips Respironics consent decree, which primarily addresses the company’s business operations in the U.S. We have established a roadmap for demonstrating compliance with regulatory requirements to restore and grow the business in the U.S. Furthermore, we obtained final court approval for the previously mentioned economic loss settlement in the U.S., for which a provision was recognized in the first quarter of 2023. We continue to address various ongoing legal proceedings related to Philips Respironics, including the investigation by the U.S. Department of Justice. We have also concluded an agreement with insurers pertaining to product liability claims related to the Respironics recall. Thus, following the remediation of sleep therapy devices and the reassuring test results to date, these crucial milestones regarding litigation, the consent decree, and insurance pave a clear path forward for sustainable value creation. Looking ahead, we remain optimistic about our plans and financial outlook. In 2024, we anticipate delivering 3% to 5% comparable sales growth, building on a strong comparison base from the previous year, along with an adjusted EBITDA margin of 11% to 11.5%. We have increased our free cash flow expectation to between EUR 0.9 billion and EUR 1.1 billion in 2024, factoring in the receipts from insurers that I just mentioned and remaining payments related to the economic loss settlement. I will now hand it over to Abhijit to provide more detailed financial insights, after which I will return to discuss our execution priorities.

Thanks, Roy. Good morning, everyone. Let me start with our performance by segment. In Diagnosis & Treatment comparable sales increased by 3%, driven by growth in precision diagnosis and image-guided therapy. And this was against strong double-digit growth in Q1 2023. The adjusted EBITDA margin was 9.2%, including an impact of 100 basis points from an accounts receivable provision. The adjusted EBITDA margin was lower than last year, mainly due to the normalization of the product mix as anticipated. To remind you, the increase in profitability in Q1 last year was around 600 basis points due to the easing of supply chain constraints on our most profitable modalities of ultrasound and image-guided therapy systems. Connected Care comparable sales declined by 1% as high-single digit growth in Enterprise Informatics was offset by negative sales growth in monitoring on the back of around mid-teens growth in Q1 2023. We saw strong growth in sleep systems and patient interface driven by performance outside of the U.S., while ventilator sales were lower. Connected Care adjusted EBITDA margin improved significantly to 6.4%, driven by solid performance in monitoring and an improvement in Sleep and Respiratory Care. Personal Health delivered a 3% comparable sales increase driven by strength in the Personal Care business. The adjusted EBITDA margin for the segment improved to 15.2% this quarter, mainly due to operational leverage and productivity. Geographically, sales in Personal Health was driven by mature geographies, while growth geographies were flat mainly due to China. Overall, consumer sentiment remains subdued, but is expected to improve in the course of 2024. Segment other sales increased by EUR 25 million in the first quarter mainly from higher royalty income due to phasing. We have been very disciplined in cost management, and our productivity initiatives delivered savings of EUR 151 million in the quarter, of which operating model savings were EUR 55 million, procurement savings were EUR 40 million and other productivity programs delivered EUR 56 million. The adjusted EBITDA margin for the group increased by 80 basis points to 9.4% in the quarter as our productivity and pricing actions more than offset inflation. Free cash was an outflow of EUR 336 million in the quarter due to the normalization of working capital phasing, partly offset by higher cash earnings. On capital allocation, in April, we completed the EUR 1.5 billion share buyback program for capital reduction purposes announced on July 26, 2021. In the second quarter, we intend to cancel the 4.4 million shares acquired this year. Moving to orders. It's important to note that the absolute order intake levels remain healthy although lower than the exceptionally high comparison base of the last two to three years. Order intake grew outside China with an encouraging performance in North America and general improvement in market dynamics, which is expected to continue in the coming quarters. Our funnel of opportunities remain strong. The order book is significantly higher than the period before the global supply chain crisis. As a reminder, orders and order book accounts for around 40% of our revenue. The remaining 60% comes mainly from recurring revenue streams, such as services and consumables from book-to-bill business and from personal health. As mentioned in our previous earnings call, we anticipate sales growth to be 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 in the first half of 2023 and the anticorruption measures ongoing in the first half of this year. Our expectation for sales growth in the second quarter remains soft as a result of this difficult comparison base as Q2 2023 grew by 9.4% as well as the impact of the phasing of royalty revenues. We expect sales in segment others to be around EUR 120 million in the second quarter; EUR 75 million lower than in the second quarter of 2023 due to a large royalty deal recorded last year and the impact of royalty revenue phasing between the first and second quarter of 2024, that I just mentioned. This difference in royalty sales alone results in a negative impact of around 170 basis points on the growth of the group in the second quarter. Note that there is no change to full-year outlook of segment other provided in January, both in terms of sales and adjusted EBITDA. Based on our order book, improving order intake and the ongoing actions to enhance its execution, we expect to deliver 3% to 5% comparable sales growth and an adjusted EBITDA margin between 11% and 11.5% for the full-year. As Roy mentioned, under the settlement to resolve the personal injury and medical monitoring litigation in the U.S., Philips Respironics has agreed to pay a total of $1.1 billion. The related payments are expected in 2025 and to be funded from Philips' cash flow generation. Moreover, we received the final court approval for the previously announced economic loss settlement in the U.S., at the time we announced the settlement in Q1, we recognized a provision of EUR 575 million based on assumptions about the number of claimants that we expected to participate. Now a year later, based on the actual claims that we are seeing, these assumptions turn out to be accurate and we fully expect the settlement to stay within the amount provided for. This month, we also concluded an agreement with the insurers to pay us EUR 540 million to cover Respironics recall related product liability claims. This income is expected to be recognized in Q2 2024 and payment is expected during 2024. As a result, we have increased our free cash flow outlook for this year to EUR 0.9 billion to EUR 1.1 billion, now including the payment from insurers as well as the cash out of around EUR 430 million related to the remaining payment of the economic loss settlement. With that, I'd like to hand it back to Roy.

Thanks, Abhijit. I would like to continue with the progress we have made on our execution priorities. On patient safety and quality, we saw substantial improvement in CAPA closures in the quarter, driven by stronger processes, capabilities and governance around it. We also continue to drive significant simplification of the way we work and we further reduced the number of quality management systems. We are well on track to achieve our target of 65% reduction in 2024. And we continue to invest in quality improvement across the portfolio, acting fast on post-market surveillance signals. With respect to supply chain, we have now redesigned more than 80% of the planned PCBs and further reduced materials and component risks in the quarter. We will continue leveraging and regionalizing our end-to-end supply chain to further reduce lead times and strengthen first-time-right deliveries. Finally, our new operating model with prime accountability in the businesses has been live for a year now, resulting in significant productivity improvements. We have reduced over 8,500 roles to-date. At the same time, we continue the culture journey to drive impact with care and attracted over 300 talents with HealthTech backgrounds this quarter alone. Let me close out by repeating the key messages of today's announcement. First, we delivered results in line with our performance improvement plan as a result of continued strong focus and progress on our three execution priorities. Secondly, we have taken very important steps in resolving the vast majority of the consequences of the Respironics recall. And in this quarter alone, we had major milestones on litigation, consent decree and insurance, providing further clarity on the way forward for Philips. Thirdly, the progress we are making reinforces our confidence to deliver further performance improvements in 2024 and we are on track with the plan for 2025. I would like to thank you for joining the call, and we will now take your questions.

Thank you, sir. We will now go to our first question. The first question comes from Richard Felton at Goldman Sachs. Please go ahead.

Hi, good morning. And congratulations on reaching the settlement. I've got two questions both on fundamental margins, if that's okay. My first one is a question on precision diagnostics. So I understand last year that you're still facing some supply chain constraints on certain modalities. I think MRI in particular, have been facing some challenges. So are there any supply chain challenges normalizing for precision diagnostics and what does that mean for your margins or outlook for that subdivision this year? Second question on Sleep and Respiratory. Look, I understand that Sleep and Respiratory was still loss making in 2023. Now that you've got visibility on consent decree and I think better visibility on the outlook of the environment in which that business can operate moving forward. How quickly can you do the right sizing necessary to bring that business back to breakeven and then positive margin territory? Thank you.

Good morning, Richard. This is Abhijit. Regarding the margins for PD, we experienced a significant increase last year of 600 basis points due to the supply of our more profitable modalities in the first two quarters. Most supply chain constraints have been resolved, with only MR experiencing slightly longer lead times, which is currently impacting order intake but should improve in the second half of the year. We expect to grow margins for diagnosis and treatment this year, with improvements evident in the second half compared to last year. For Sleep and Respiratory Care, as we previously mentioned, we will implement cost actions once we have clarity on the consent decree to ensure profitability. Even with EUR 1 billion in revenue, we are already profitable in this segment as of Q1. We have taken significant cost actions, and further measures are planned, which is why we are seeing improvements in connected care margins.

Great. Thanks very much.

Thank you. We will now go to the next question. And your next question comes from the line of Hassan Al-Wakeel from Barclays. Please go ahead.

Hi, thanks for taking my questions. And it's great to see today's clarity on litigation. Firstly, can you talk about the remediation needed as part of the consent decree as well as the remediation that you have been doing over the last couple of years? What do you think is a realistic timeline for your return to the U.S. market? Secondly, given clarity on litigation, could we see a return to bolt-on M&A in the next year or two? And if so, in which areas do you see the most opportunities? Or are you squarely focused on resolving and remediating quality issues at the company? And then finally, can you break out order growth in China and ex-China? How did things end the quarter? And how are you viewing this quarter both in China and outside of China? And I wonder if you expect orders to be positive in Q2 for the group, but also in China? Thank you.

Thank you, Hassan. Let me take the first question. So remediation part of the CD. So I think as we said, we are very happy that we now have clarity. In essence, we have a very clear roadmap in terms of what we need to do to get back into the U.S. market. As you know, we already providing patients in the U.S. with patient interfaces and also some of the respiratory device. So it's not that we are fully out of that market. But to get fully back, of course, we need to comply with the remediation requirements as set in the CD, including the recall plan. Now we haven't put a timeline out. We also will not speculate on that. We will, of course, work very hard to get there. We also are not starting now. We have indeed been actioning already on that earlier. As Abhijit said, if you look to the totality of SoC, we are growing outside of U.S. And also we have been bringing it back into profitability. So the Sleep and Respiratory Care business will show an improvement and contribution trajectory into Philips, which we are very positive about. But we will not put any specific timeline on any injunction because that also is, of course, collaboration with the FDA that we need to achieve that. Secondly, on your question on the clarity that we get now also on cash and cash profile and bolt-on M&A. As part of the plan that we started last year, I've been very clear how important cash generation is. Now we were very happy with the EUR 1.6 billion cash flow last year. Now we see that also this year, we will have a strong cash flow profile of EUR 1 billion. We opted-based upon the clarity we now have on the economic loss payments we need to do, but also the insurance inflow we have in the year. And the litigation settlement we have today, we can actually pay in full out of our operational cash flow. That also means that we will indeed be able to do bolt-on acquisitions. Of course, those need to be the right ones, and we do kind of need to look at our own priorities first, which meaning extracting value out of the current portfolio of assets that we have because we have a lot of potential there. But that doesn't mean that if we see the right target, we could do that and we will remain active. And of course, if we then think of which areas, those will be areas where we are strong either whether it's IGT-domain, which we kind of see potential, but it could also be in monitoring or what we said did as bolt-on acquisition in ultrasound, where we had portfolio of AI solutions that we added there that actually will be coming to market as part of the innovation lounge in ultrasound actually mid this year. So that will also bolster our profile and our portfolio towards the market. Maybe order intake, Abhijit, you can take.

Yes, we experienced a decline in China in the first quarter, which was anticipated. The decline was in the high double digits, following last year's growth of around 30%. That growth was driven by incentives related to COVID, whereas this year we faced a slowdown due to anticorruption measures. On a positive note, as mentioned by Roy, we have returned to growth outside of China, particularly in North America, which performed well for us in the quarter. We are not providing specific numbers at this moment, as that information is not typically disclosed by our competitors. However, we are pleased with the momentum in North America, which gives us confidence for the remainder of the year. We also expect China to contribute in the second half, especially since Roy was recently in China and the government plans to introduce new incentives that should provide a strong boost. Overall, our perspective on China remains unchanged; it is still an appealing market. In the short term, consumer sentiment is low, but we anticipate improvement as the year progresses. Hospitals will continue to navigate through the industry-wide anticorruption measures, and we expect to see more orders coming from hospitals. Therefore, we anticipate contributions from China in the second half, and we have started the year according to our plans.

Thank you very much.

Thank you. Your next question comes from the line of David Adlington from JPMorgan. Please go ahead.

Hey guys. Thanks for taking the questions. So first one, Abhijit in your prepared remarks, you mentioned that there was a 100 basis point hit to the D&T margin, I think from provision. Just wondered if you get some more color around that, please? And then secondly, just in terms of the cost savings, you delivered EUR 151 million, I think in the first quarter year-on-year, but your adjusted EBITDA was only up EUR 30 million. I just wondered where you're reinvesting some of those savings or whether if they are being eaten up by headwinds elsewhere? And then the final one is just now you've got more clarity on the cash. Just wondered if you have a plan to reinstate the cash dividends? Thanks.

Yes. I believe there are a couple of points to note. The 100 basis points I mentioned was related to a provision for receivables involving certain customers. This is not tied to operational performance or cost structure adjustments; it's specifically about a provision for a receivable with a particular customer. From an overall productivity standpoint, we are offsetting our cost inflation. On Slide 13 of the presentation, you will see that 2% is attributed to cost inflation, which is a negative factor. Consequently, you don't recover the entire amount, but a significant portion is visible. Additionally, the 100 basis points on D&T have an overall effect on Philips as well. Regarding cash dividends, I think it's premature to comment right now. We need to navigate through this year first, and by the end of the year, we will determine how to approach our dividends for the next year. However, as Roy noted, the good news is that we can manage our cash obligations related to litigation through our operating cash flow. This positions us very close to our targeted leverage for next year, which would represent a strong performance after settling all fines.

Thanks guys.

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

Good morning, and thank you for allowing me to ask my questions. I have two questions. First, Abhijit, you mentioned the margin progression expected in D&T throughout the year. Could you elaborate on how we should approach that? I recall you suggesting a potential margin improvement of 50 basis points or more for the full year. Do you still anticipate margins declining in the second quarter? Additionally, will the improvement be more significant in the second half of the year, particularly in Q3 compared to Q4, given that last year was quite atypical? It would be helpful if you could also comment on growth in D&T. My second question pertains to the settlement announced this morning. I'd appreciate if you could clarify the scope of this settlement. Is it comprehensive? Does it address situations such as death and injury? Also, what kinds of cases might still lead to separate litigation outside this settlement? Finally, what are the remaining steps to finalize the settlement regarding court proceedings and discussions with plaintiffs? When can we consider this matter resolved? Any insights on this would be greatly appreciated. Thank you.

Hi, Veronika. Good morning. I'll address the first question and then hand it over to Roy for the second one. In the first two quarters of last year, we saw significant improvements in the margins of D&T. If I recall correctly, the first quarter saw an increase of 600 basis points, and the first half of the year showed an increase of 500 basis points. We mentioned at that time that this was an atypical pattern. Therefore, for this year, you should expect that we will see improvements in the second half while the first half, including Q2, will be lower than last year's figures. However, in Q3 and Q4, you will notice improvements, leading to overall progress for the full year. It's important to highlight that our guidance for 2025 is in the low teens, and we are currently within that range. We will continue to make strides within the range this year and further next year as well. We are on the right path with D&T. Now, Roy, would you like to add something regarding the litigation?

Yes, thank you, Veronika. This is a crucial question about finality. We are very firm in our belief that for the U.S., this is as final as it can get. The settlement addresses all 60,000 known claimants listed in the Census registry, including the 700 active filed cases. We do not anticipate a significant number of plaintiffs will come forward. This is also the perspective of the plaintiffs. If they do come forward, they will be subject to a Lone Pine order, which requires them to present their entire case at once, or it will be dismissed, as all evidence collected during this process will no longer be available. There is a six-month period during which individuals can still come forward; after that period, the entire class action or MDL will cease to exist. This is why it was important for the settlement to be court approved, or at least have a court mediator involved in the process who has been very supportive of this deal. You saw that in our announcement, and she will ensure the process moves through the court. While we don't know the exact timeline, we don't expect it to take long. We are quite confident this will bring a conclusion to these matters. This is significant because once we resolve economic loss, personal injury, and medical monitoring, we can put the vast majority of these cases behind us with finality and clarity. This allows us to focus on operating and growing Philips and bringing the company back to where it belongs.

That's very clear. Thank you. And can I just ask a follow-up on the DOJ? And I guess if you have any updates on where you're there with the process and when we might expect similar finality of discussions with them?

Yes. No, DOJ, I think there's not a lot we can say. This is still ongoing. We are in full collaboration have been providing them documents. So actually, I cannot further comment on that process. We will come forward once we have any further clarity on that. I cannot say more than this is currently still in process.

Thank you. Your next question comes from the line of Hugo Solvet from Exane BNP Paribas. Please go ahead.

Hi, hello. Thanks for taking my questions. I hope that's okay. First on D&T. Can you maybe Abhijit elaborate a bit more on the region and the modality from that customer having and the provision paths for D&T that is having a 100 basis point impact on the margin that would be helpful. And on the warning letter in your City China plan, could this impact the rollout of your new instrument? Second, on China, does the stimulus plan in China has already reflected into the guide for 2024 for D&T? And lastly, maybe, Roy, a follow-up on Veronika's question earlier. Can you update us on settlement, possible settlement ex-U.S. litigations outside of the U.S.? Thank you.

Okay. Regarding the provision, we cannot share specific details publicly as that is confidential information between us and our customers. For privacy reasons, we cannot disclose that. As for China, it's fairly straightforward; that is included in our guidance. We had expected a recovery in China, and the stimulus supports that expectation, so it is incorporated into our overall guidance for the year.

Regarding the question about the China warning letter, we are currently addressing the follow-up actions with the FDA. We do not anticipate any operational impact from this matter, and we take it very seriously, just as we do with any findings from site visits. There were two findings, both related to process compliance, and there were no reports of patient harm. It’s crucial to highlight this, and we believe there will be no impact as a result. Concerning settlements outside the U.S., this quarter's breakthrough is significant, as the vast majority of cases are indeed related to the U.S. Importantly, we do not admit any guilt in these settlements, whether towards patients or specific diseases, and prior testing indicates no harm was done. We remain confident that any cases outside the U.S. will also conclude favorably, but it’s essential to note that most cases are in the U.S. The U.S. legal system has its own complexities, making it vital for us to resolve uncertainties and establish clarity moving forward by reaching a settlement in this particular case in the U.S.

Okay, thank you.

Thank you. Your next question comes from the line of Graham Doyle, UBS. Please go ahead.

Good morning guys. Hopefully, you can hear me. Thanks for taking these questions. Just two for me. First, obviously, congratulations on the settlement. I think that's a lot of clarity that probably clearly soon people were expecting. Just one sort of regulation to that, Roy, when you look at the P&L for the last few years, and I suspect even the next couple of years, there's obviously a lot of adjustments and cash charges and things like that. Is that the next focus once we get through the next year or two to sort of square that, so that you reported and adjusted EBIT won't be so different going forward and kind of lift that, that cash generation obviously going forward. That's just question number one. And then question number two, you actually gave us a really good insight in terms of like explaining how the unlock or the improvement in China was occurring as these investigations progressed, and you had the sort of regional committee set up. And could you give us another update as to how you're seeing that? And is everything still tracking as you'd expect? And what does that mean in terms of order flow, even sequentially, say Q1 versus Q4, just to get a sense of how well things are moving in China? Thank you.

Thank you, Graham. Those are good questions. Firstly, I want to acknowledge that we did experience a significant impact on our P&L due to adjusted items. The clarity we have today allows us to offer better guidance on those adjusted items moving forward. Many of the adjusted items from previous years were unfortunately related to the recall, which has had a major impact. With the majority of Regal behind us and the remediation of the sleep therapy devices completed, we have clarity on the settlements, enabling us to bring that number down significantly. We've also taken steps for restructuring to improve productivity, which is reflected in our margin improvement. You may have noticed our progress in reducing 8,500 roles, though we still have some restructuring ahead. We're focused on optimizing our operations, but future restructuring will not have the same scale as the larger issues we've faced. Regarding China, I recently visited and spoke with many customers and government officials. I observed two key factors: ongoing impacts from government anticorruption measures, which are still being implemented regionally, and the anticipated improvements expected in the second half of the year. It's too early to rely on significant changes in the first half of the year, which we also saw reflected in the first quarter results. A positive development is the new stimulus program, which aims to provide subsidies to hospitals for upgrading outdated equipment. Requests from customers have already started to come in. It will take time to process these requests, but we believe this will enhance the mid- to long-term market attractiveness by accelerating replacement orders as the market becomes more open.

Great, that's very clear. Thanks a lot guys.

Thank you. Your next question comes from the line of Julien Dormois from Jefferies. Please go ahead.

Good morning, Roy. Good morning, Abhijit. Thank you for taking my questions, and congratulations on the settlement. My first question concerns the midterm outlook. I did not see any confirmation of it in your materials, unless I missed it. Does this suggest you might be currently reviewing it? With more clarity on Respironics, could this possibly lead to an upgrade in that area? My second question is more about housekeeping regarding the order book. Can you clarify the split between D&T and CC in the first quarter? Last year, the trends were quite different, so I’m trying to determine if we might see a double-digit decline in D&T and some growth in CC for the first quarter of 2024. Lastly, I noticed there was zero growth in the U.S. this quarter. Could you help me understand which division was most affected and how we should view the U.S. market in the remaining quarters of 2024? Thank you very much.

Yes, Julien, regarding the midterm outlook, I believe you overlooked it. It's included in our outlook, as stated in the first sentence of our press release where we reaffirm our confidence in achieving our 2025 plan. This is also reflected in the company deck. We have confirmed our outlook for 2025. Regarding your question on whether there will be an upgrade following the litigation, it’s important to note that we excluded litigation-related charges when we provided our guidance. So, we have not only confirmed our midterm plan outlook but also our outlook for this year. We have also increased our cash flow guidance for the year. As for the order book, it was somewhat balanced, but I prefer not to detail regional and other differences; the main impact primarily came from China. Rather than breaking it down by modalities, it's key to understand that China had a significant influence. The majority of business there lies in D&T, which is why the impact on D&T is slightly greater than on CC. In the U.S. market, the main factor affecting sales was the comparison to last year, as we experienced substantial growth in Q1 last year, making it challenging for this year's comparisons. This growth was largely driven by Ultrasound and ITT.

Okay, thanks.

Thank you. We will now get to the next question. And your next question comes from the line of Julien Ouaddour from Bank of America. Please go ahead.

Good morning. Thanks, Philip for taking my questions. So the first one, I just want to, let's say, like come back on the settlement. What's the likelihood of new claims surface after the six-months period for the plaintiffs to sign up for the settlement? And just maybe if you can explain us how difficult it might be for them to get a compensation? And if we need basically to add a sort of margin of safety on top of the €1.1 billion for these cases. Then the second question on orders. So you seem to be pretty pleased with the momentum in the U.S. And I think at the beginning of the year, you said that, I mean orders will be strong in the U.S. because like financing conditions would become a bit more easy for the year with interest rate cuts. Seems we are more going in a situation where like interest rate cuts are not going to happen before the end of the year? Could it impact the demand at some point in the U.S.? And the final question is about China. So like the comment that you made. Do you have any sort of color about the installed base age in China? Because it seems that the sort of like installed base has been upgraded like in the recent years. So the overall hedge is like a bit like lower today? And if you can just give us a bit more color, but the real benefit from the stimulus that you think could happen? Thanks.

Yes. Thank you, Julien. Those are good questions. Let me start with the first one, regarding the settlement. I think it's important to note that we believe the likelihood of new claims arising after six months is relatively low.

No, no, no. Are you on the call?

You are now live, you are back. Thank you.

I'm not sure if you heard me completely, so let me summarize. First, we believe we are nearing resolution regarding the ongoing case, and this sentiment is shared by the plaintiffs' leadership. They've been promoting this case for three years, indicating they believe that most individuals who are aware of the situation, including those in the Census Registry, totaling 60,000, as well as about 700 claimants, have had the opportunity to come forward. They have an additional six months to do so; after that, the case will be closed, and all the groundwork laid by the plaintiff lawyers will no longer be relevant. Any future claims will need to meet certain criteria, known as a Lone Pine order, which means they won’t have access to the previous expert reports and must establish their own cases. We have already invested millions in testing that has proven no harmful breach occurred and we maintain our stance of no admission of guilt. Furthermore, there are time limits due to statute of limitations that began with the recall in 2021, generally set at two to three years. Looking at the Census registry trends, we’ve observed stability without significant new information affecting it. Overall, we are very confident that we have managed the existing cases effectively, which should conclude personal injury, medical monitoring claims, and economic loss settlements in the U.S. We believe the provision we made is adequate even after a year and expect the same outcome now. Regarding order intake momentum in the U.S., while interest may not shift as we anticipated, the system is improving in patient throughput and revenue generation, which has strengthened investment levels. Our innovations, including the CT 5300 AI suite and the new IGT Azurion stroke solution, have generated excitement in the market, and we remain confident in sustained strength throughout the year. In China, there's a backlog in upgrades due to the prolonged COVID situation. However, with the easing of COVID in 2023, we saw significant investment, particularly in Q1 last year, and expect this trend to continue as the market opens further. The Chinese government is also supporting these investments, which will help address patient needs and expand operations.

Thanks, Roy. Any idea about just like the age of the installed base in China at the moment?

I cannot provide a specific number. However, I do know that it generally qualifies for equipment that is six to eight years old. Those are the conditions outlined by the government, and that aligns with what our customers are currently presenting.

Perfect, thank you very much. Great, helpful.

Thank you. Your next question comes from the line of Robert Davies from Morgan Stanley. Please go ahead.

Good morning. Thank you for taking my questions. Most of them have been addressed, but I have a few remaining. You mentioned the normalization of the order book, which remains elevated compared to pre-COVID levels. How do you expect the delivery timeline to progress? Will the accelerated delivery of the order book in the second half contribute to your confidence in the numbers for that period? Should we expect a normal run rate for the order book by year-end? For my second question, regarding the EBITDA bridge you shared, which addresses the cost challenges against productivity and pricing improvements, I’m curious about the extent to which headcount reductions contributed to those productivity and pricing measures. Have the headcount reductions slowed down, or do you still anticipate a net benefit from cost versus productivity moving forward? Lastly, could you provide more details on the regional trends within the Personal Health business? I know you mentioned consumer weakness in China, but I'm interested in the situation in other markets as well. Thank you.

Yes. Robert, regarding the normalization of order book, I think you're right, the confidence in the second half comes from the fact that we expect deliveries to take place in the second half. And therefore, that normalization should happen by the end of the year. Maybe we will still be a tad higher at the end of the year, but not as high as we are now. So that should kind of be through the second half. From the headcount reduction, I mentioned in the speech that operating model savings were, I think €55 million in the quarter. So it's still significant, because we had just started, let's say, last year in Q1 with the reduction. So there is still quite some more to come throughout the year. And then...

I can take on the age. So if you look to the globe, I think what we've seen is that China indeed subdued. We see actually quite strong rebounds in Europe. So actually, we saw some strengthening in Europe. We also think that's on the back of some of the wage increases that have been put out there. So you see consumer have more to spend, and we have been benefiting from that also in the growth markets. I think the other market that is not yet as strong as we would like is North America. We do see the sellout strengthening, but not yet fully kind of the sell-in. We also know that actually customers have been reducing their inventory levels. So they are pretty tight on their cash management as well. So therefore, actually, it makes shorter lines. So in sum, I would say globally, we expect that consumer will strengthen throughout the year. And also in terms of that towards the guidance, we expect they will be also towards that guidance of 3% to 5% and now starting with 3%, that should actually through the year increase. But that will also be on the back of China, which second half will have the most, I think contribution into that.

That's great. Thank you.

Thank you. We will now take your next question. And your next question comes from the line of Sezgi Ozener from HSBC. Please go ahead.

Thank you for the presentation and for answering my questions. Congratulations on the settlements. I have a question regarding the insurance claims. Can you explain how these insurances work and whether your premiums are expected to rise following the payout? Also, do you have the same type of product liability insurance across all your products? My second question pertains to Connected Care moving forward. You mentioned significant growth in Japan, which usually has lower margins, but indicated that the leasing model enhances its appeal. Are there any other factors that could influence the margin outlook for Connected Care in the future? Thank you.

Regarding insurance claims, it's uncertain whether they will increase, and we will find out more in the next round since this is the first time we are claiming such significant amounts. We don't have an extensive history of claims, so we will see how discussions progress. Additionally, the measures we are implementing to enhance quality will be part of these conversations. Concerning Connected Care in Japan, it is not a low-margin market, and I want to clarify that. Our Sleep and Respiratory Care business operates on a recurring revenue model, which also contributes to margins. Overall, the core of the underlying business in Japan remains very strong.

Perfect, thanks very much. As a follow-up, may I ask like usually what's the term of insurances like do you conclude insurance agreement on a yearly premium? Or are we looking more on a multiyear basis?

Yes. Each policy is different, so it would be too detailed to explain everything. There are policies with three-year terms, one-year terms, and so on. Each one varies.

But I think it's important we have these insurances for all our products. So it's actually ongoing and common business. So I think that's also how this will be seen. This is part of a long-term kind of insurance trajectory that we have out there.

Thank you. Your next question comes from the line of Falko Friedrichs, Deutsche Bank. Please go ahead.

Thank you. Good morning. I have two clarification questions regarding the finality of the settlement agreement. Can you confirm that there is no possibility of a court trial now? Essentially, can anyone from the Census registry still bring their case to court, or is that now essentially impossible under the agreement? Additionally, regarding the additional testing programs you are conducting as per FDA requests, are they proceeding as planned? If those additional tests yield unfavorable results and indicate potential harm to patients, could that endanger the framework you have established or potentially create new opportunities for plaintiff lawyers? A bit more clarification on this would be helpful. Thank you.

Yes. Falko, thank you to clarify further. So in terms of the court trial, so the MDL will not be pursued. So the Census registry and the MDL will be terminated. So they cannot kind of pursue further trials out of the current MDL or Census registry. What could happen is that people individually would like to come forward and still go on an individual case. But as we said, even for those, there will be very high barriers to do so, because it will be standalone that will need to adhere to the Lone Pine order, they will need to come up with their own expert reports, gone to show whatever focality, they want to show and we have our own testing, as you know, that shows no appreciable harm and there is time limitations towards the time that they can do this. That's why we are very confident on the finality as we said before. I think also what is important on the testing, there is no coordination at all between the testing and finality of this case. So any further outcome in testing will not have any impact on the current settlement. Settlement is as is, the amount is kept and final, and there will be no testing related to this.

Thank you. Your next question comes from the line of Wim Gille from ABN AMRO - ODDO BHF. Please go ahead.

Good morning. This is Wim Gille from ABN AMRO. I have two questions. First, regarding the €540 million we expect to receive from the insurers for the Respironics claims, can you clarify which part of the recall this pertains to? Is it related to the physical recall costs, the economic losses, personal injuries, or the overall issue? Additionally, are there any ongoing discussions related to other insurance matters? My second question is about the legal situation with SoClean. Could you provide some insight into the expected timelines and the range of possible outcomes? Thank you.

Yes. So the insurance is not for the recall cost, but everything outside of that. So the whole list you gave. So it does not cover the recall cost, but of course, the product liabilities, the personal injury monitoring and all of that. The second question you had was on SoClean?

Yes, I can address that. Unfortunately, we cannot provide a timeline at this point as it's still in process. It's too early to offer a range of outcomes for the SoClean case. This matter is ongoing, and we'll keep you updated on any developments that may arise from it. That's about all we can share for now.

And you've asked whether there are other insurance things that we are pursuing. The answer is no. This is the only one. We had indicated that last year we've been exactly in line with the estimates and now that has ended up in a signed deal and now the cash will flow this year.

Perfect. As a follow-up on the SoClean matter, could you provide updates on whether anything has emerged from the MDL you mentioned, or is there no development at this time?

No, it's a separate MDL. So there's currently no impact from that.

Thank you. Due to the time, the last question comes from the line of Ed Ridley-Day of Redburn Atlantic. Your line is open. Please go ahead.

Thank you very much. My congratulations to the execution of the settlement. Just a few follow-ups. On the patient monitoring. Clearly, you had strong comps for a number of quarters from last year. Should we see patient monitoring growing in fiscal '24? Is that possible? And if you could provide some color on that, that would be helpful. And if you could also provide any color on the ultrasound business growth within the quarter and how that relates to market growth. That would also be helpful.

Yes, we do anticipate growth in monitoring this year. We are not concerned about it; Q1 presented challenges due to tough comparisons from last year. In ultrasound, we experienced over 30% growth in Q1 last year. While there is a slight decline this Q1, the good news is that we have significant innovations in ultrasound launching now. We expect to build on last year's strong performance and continue this momentum throughout the year. We will keep gaining market share in this area.

Thank you for that.

Thank you. Gentlemen, that was the last question. I will now hand back to Mr. Jakobs for any points you may still like to raise.

Yes. Thank you all for your questions. Much appreciated. And let me close out by just repeating once more the key messages of today's announcement. First of all, we delivered results in line with our performance improvement plan for the first quarter as a result of strong continued focus on our execution. Secondly, very important steps taken in resolving the consequences of the Respironics recall in the quarter with major milestones on litigation, on consent decree, and on insurance, which provides clarity on the way forward for Philips. And thirdly, the progress we are making reinforces our confidence to deliver further performance improvement in 2024 and we are on track with the plan for 2025. Thank you all for listening. Have a great day.

Thank you. This concludes the Royal Philips' first quarter 2024 results conference call on Monday, the 29th of April 2024. Thank you for participating. You may now disconnect.