Welcome to The Royal Philips' First Quarter 2025 Results Conference Call on Tuesday, May 6, 2025. During the call hosted by Mr. Roy Jakobs, CEO; and Ms. Charlotte Hanneman, CFO, all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions. Please note that this call will be recorded and replay will be available on the investor relations website of Royal Phillips. I will now hand the conference over to Ms. Durga Doraisamy, Head of Investor Relations. Thank you. Please go ahead, ma'am.

Hello, everyone. Welcome to Philips results webcast for the first quarter of 2025. I'm here with our CEO, Roy Jakobs; and our CFO, Charlotte Hanneman. The press release and the investor presentation 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 this call. Before we start, I want to draw your attention to our safe harbor statement on the screen. You will also find the statement in the presentation published on our Investor Relations website. I will now hand it over to Roy.

Good morning, everyone. Thank you for joining our results call for the first quarter of 2025. I will walk you through our Q1 performance and the macro trends shaping our 2025 outlook. I know tariffs are top of mind and we will address them shortly. Our CFO, Charlotte Hanneman, will then provide more detail on the quarter and full year guidance and we will close with Q&A. I want to start with the key highlights of this morning's press release. Order intake grew despite the double-digit decline in China driven by double-digit order intake growth in North America and strength in Diagnosis & Treatment. We exited the quarter with momentum even against the backdrop of increasing macro uncertainty. Sales performance exceeded the outlook we provided in February driven by Personal Health growth and royalty phasing. Our innovations and productivity measures drove a step-up in gross margin and adjusted EBITA margin delivery was resilient despite lower sales. The Respironics US settlement around €1 billion was paid, which completes the US personal injury and medical monitoring settlement. I would now like to discuss our full year outlook for 2025. It incorporates our encouraging Q1 performance and the impact of announced tariffs net of the comprehensive and significant mitigation actions we are deploying. Our sales outlook for 2025 remains the same, comparable growth between 1% and 3%. Adjusted EBITA margin is now expected to range between 10.8% and 11.3%, a 100 bps adjustment reflecting the impact of tariffs net of substantial mitigations, and free cash flow is projected to be slightly positive. Let's now look at the operational and strategic drivers behind our Q1 performance. Let's dive into orders first. Strong customer demand for our innovations along with improved operational execution sustained the momentum we built last year through Q1 as we enter Q2. Excluding a double-digit decline in China, comparable order intake increased by 4% in Q1 with strong growth in Diagnosis & Treatment. Like last year, we saw continued double-digit order intake growth in North America. This number excludes service order intake, which was also very positive in the quarter. At the group level, Diagnosis & Treatment orders grew mid single-digits globally with order intake growth in both Image-Guided Therapy and Precision Diagnosis. In Image-Guided Therapy, we continue to see strong demand for our competitive Azurion platform which now also has the AI-driven neuro solution. In Precision Diagnosis, we saw strong order growth in computed tomography driven by CT-5300, our productivity workhorse with AI-enabled workflow and our clinically practical Spectral CT7500 systems. We also saw good momentum in MRI driven by our industry-first helium-free system, which is supported by our AI engines increasing access to MR technology. We expect this positive order intake momentum in Diagnosis & Treatment to continue into Q2. In Connected Care, hospital patient monitoring delivered solid growth, particularly in North America, fueled by customer partnerships and our strong PIC iX platform offering including cybersecurity and interoperability. Enterprise Informatics Order Funnel remained healthy, underpinned by partnerships including AWS, which we expect to drive strong order intake growth in the second half of the year. Orders and order book account for around 40% of our revenue. Importantly, our order book has steadily increased with an improved margin profile in recent quarters. Innovation is a key driver as reflected in the significant gross margin improvement we delivered in Q1 building on the 2024 step-up. Our customers rely on our innovations as critical enablers of their ability to drive efficiency and productivity. Today, more than 50% of our sales are fueled by AI-driven innovations from new and upgraded products launched in the last three years. This progress showcases the power of our innovation strategy and our partnerships. A great example is our work with AWS. We are bringing cutting-edge generative AI into our HealthSuite Imaging platform. Our future AI innovations will automatically summarize prior studies, auto-generate conclusions, and even perform real-time quality checks. By automating these tasks, we enable radiologists to focus on strengthening care quality and improving throughput, which ultimately drives sustainable growth for Philips. To further strengthen AI leadership in MRI, in February we announced the launch of SmartSpeed Precise with dual AI engines, which advances image quality while accelerating scan time at the same time. It also extends AI-driven efficiency across the entire Philips MR portfolio. This includes our full portfolio of helium-free MRI scanners, both installed base and new systems, so all customers can benefit from the speed and improved image quality next to the access and total cost of ownership advantages that it brings. These are just two further examples of how our innovation pipeline is working and building a stronger, more competitive future for both our business and our customers. In parallel, we're making strong progress on our execution priorities with continued progress in patient safety and quality supply chain resilience and simplification across our operating model and portfolio. Here are a few highlights. Through simplification, we are on track to reduce the number of quality management systems by 70% this year. Supply chain lead times and service levels continue to improve and we are now at par with industry standards while we are at the same time adjusting in real time to new tariff realities unfolding, which I will touch upon shortly. We are simplifying our platforms and number of SKUs across our businesses, now focusing on hospital patient monitoring and CT after strong results in image-guided therapy, ultrasound, and MR. Finally, we continue to remove complexity and build a lean organization through our simplified operating model. Together with our strength in performance management, this is driving accountability, agility, and enhanced focus on growth, and it delivered €42 million of productivity in Q1. We are well positioned to adapt decisively as the macro environment evolves ensuring we stay ahead and deliver with focus. I'm deeply proud of our teams around the world, who are driving to advance our operational priorities and the result it delivers by focusing on what we can control amid such a dynamic environment. Looking ahead, the fundamentals of the markets we serve remain strong but the dynamics are different by region. Starting with North America. Similar to last year, we are still seeing steady fundamental hospital demand. We are well positioned as seen in the strong double-digit order intake and have not observed major shifts in CapEx plans. That said, we are closely monitoring the environment. In China, while stimulus activity is picking up and our funnel is progressing, we have not yet seen a trigger that would significantly change the market dynamics in line with our expectations going into the year. Generally, hospital CapEx remains solid across the rest of the world with increasing demand in Europe. Personal Health delivered strong growth across Europe and other growth markets excluding China in Q1, and momentum continued in those markets as we exited the quarter. In China, the consumer environment remains subdued as we anticipated. We are closely monitoring consumer dynamics and sentiment globally particularly in the US where they currently remain stable. Looking to the rest of 2025, we remain vigilant about the macro environment we operate in, and the progress we have made on our execution priorities puts us in a strong position to navigate change with speed and agility. For several years now, we have taken proactive steps to build a more resilient supply chain, including diversifying and regionalizing key operations, especially in China well ahead of recent developments. You have seen this in our improved supply chain metrics and our performance in recent periods. In the current environment, we are further accelerating those efforts especially, towards the US. Also, we are going beyond shifting geographies. Our mitigation actions include supply network and manufacturing optimization, holding the right levels of inventory, pursuing exemptions, selective pricing, and building greater operational agility and resilience. We view these as necessary to maintain our competitiveness, protect margins, and secure long-term growth. We have cross-functional teams actively working across our supply chain and business to further mitigate the impact of tariffs, both in the near term, but also looking ahead to 2026. In parallel, we are razor-focused on what we can control, applying strong cost discipline, as we tightly manage discretionary and overhead spending, while staying committed to our long-term innovation priorities. Our focus remains on the levers within our control to protect margins and cash flow. On a net basis, we expect the impact of tariffs, as announced and net of substantial mitigations to range between €250 million to €300 million. We are also intensifying our engagement with governments and regulatory bodies worldwide, advocating for open markets and the free flow of medical goods and manufacturing essentials to ensure patient access to critical medtech supplies and our innovations. Charlotte will now discuss our first quarter performance and outlook for 2025.

Thanks, Roy. In Diagnosis & Treatment, comparable sales decreased 4% in the quarter, reflecting a double-digit decline in China as expected and on the back of a high two-year comparison base. Image-Guided therapy continued its strong performance, reinforcing its leadership position in minimally invasive therapy. Precision Diagnosis declined, mainly due to China and a particularly high comparison base in magnetic resonance, which had benefited from prior year supply chain improvements. Adjusted EBITA margin improved by 30 basis points to 9.5%, despite lower sales driven by productivity measures, favorable mix effects, and innovation. Improvement was partially offset by lower fixed cost absorption given lower sales. Moving to Connected Care. Comparable sales were broadly flat across businesses. Hospital patient monitoring sales increased, driven by higher installations in both North America and Europe. We continue to see healthy demand in this business, driven by the ongoing shift toward an as-a-service model and large standardized monitoring partnerships with integrated delivery networks and health systems. Adjusted EBITA margin declined to 3.5%, mainly due to the impact of unfavorable mix and cost phasing, partially offset by productivity measures and innovation. We were very pleased to see Personal Health sales return to growth in Q1 with 1% on a comparable basis. We saw double-digit growth across Europe and growth markets excluding China and slight growth in the US. This was largely offset by a double-digit decline in China as expected. Consumer sentiment remains strong across Europe and growth markets, China excluded, with robust sell-out trends. China remained subdued as anticipated. Adjusted EBITA margin was in line with the prior year at 15.2%. Sales in segment other totaled €140 million, which was €17 million lower than the first quarter of 2024. This was above our Q1 outlook range of €100 million to €120 million due to royalty phasing effects. Turning to our group results and operating highlights in the quarter. Sales performance exceeded our expectation of mid-single-digit decline, mostly driven by the strong performance of Personal Health and further supported by royalty phasing in segment Other. Group comparable sales decreased 2%, reflecting double-digit declines across all our segments in China and on the back of a high two-year comparison base in Diagnosis & Treatment globally. Comparable sales increased slightly outside of China, mainly driven by the strength of Personal Health across the International region. Adjusted EBITA margin decreased 80 basis points to 8.6%, remaining resilient despite the decline in sales. This was partially offset by higher gross margin from innovation value and productivity measures. We have been very disciplined in cost management and productivity initiatives which delivered savings of €147 million in the quarter. We are on track to deliver on €800 million productivity savings in 2025, with the bulk of savings from the programs underway expected in the latter half of the year. Restructuring acquisition-related and other items totaled €143 million in line with our expectations. Net income increased by €1.1 billion in the quarter to €72 million. As mentioned, Q1 2024 included €982 million for the Respironics litigation provision. Income tax expense decreased by €78 million compared to Q1 2024, mainly due to the tax effect on the Respironics litigation provision in Q1 2024, partially offset by the tax impact of higher income in this quarter. Financial income and expenses decreased by €22 million. This was mainly driven by higher interest income on cash balances and lower losses on non-current financial assets. Our full year outlook is now expected to be €260 million compared to €275 million as communicated in February. Adjusted diluted EPS from continuing operations was €0.25 and remained in line with last year despite lower sales. Moving to cash flow and balance sheet. Free cash flow was an outflow of €1.1 billion, primarily due to a €1 billion payment related to the Respironics recall-related settlements in the US. Excluding this payment, the free cash flow increased by €270 million year-on-year, primarily driven by higher earnings and lower working capital outflows. The payment was fully funded by cash-on-hand and our leverage ratio remained in line with Q1 2024 at 2.2 times on a net debt-to-adjusted EBITA basis, reflecting our continued focus on deleveraging. Now, turning to the outlook. Our full year 2025 outlook factors in Q1 performance relative to our expectations and the impact of tariffs as announced and net of substantial mitigation actions. Our comparable sales growth outlook remains unchanged at 1% to 3% back-end loaded as we previously expected. Adjusted EBITA margin percentage with the impact of the announced tariffs net of mitigations is expected to be 10.8% to 11.3%, a 100 basis points adjustment compared to our previous outlook of 11.8% to 12.3%. Our free cash flow is expected to be slightly positive and includes a €1 billion outflow related to the Respironics settlement which was paid in Q1. Our approach to estimating the impact of tariffs is based on the announced measures including the bilateral US-China tariffs, rest of world tariffs, and the resumption of the post US tariffs on July 9. We estimate an annual net cost impact of €250 million to €300 million after substantial mitigation. US and China tariffs account for most of the impact, reflecting the elevated levels applied in those markets. We anticipate that tariffs will have a more pronounced effect in the second half of the year, reflecting the natural lag between inventory cost increases and their recognition in the profit and loss statement. As Roy mentioned, we have significant actions underway, including optimizing network flexibility, effective inventory management, pursuing exceptions, selective pricing, and leveraging our disciplined cost management and productivity program. We continue to monitor the tariff situation closely and will update the market as developments unfold. In line with the outlook we provided in February, we continue to expect sales and adjusted EBITA in Q2 to modestly improve compared to Q1. This is due to a double-digit sales decline in China, mainly driven by Personal Health as the impact of inventory destocking we previously highlighted concludes in the quarter. Our Q2 and full year 2025 outlook excludes potential wider economic impacts and the ongoing Philips Respironics related proceedings including the investigation by the Department of Justice. With that, I would like to hand it back to Roy for his closing remarks.

In an uncertain macro environment that has intensified due to the potential impact of tariffs, we are driving profitable growth and we are focusing on what we can control. Our proven ability to navigate change, disruption, and uncertainty underscores our capacity to lead decisively, adapt rapidly, and perform effectively under pressure. We are taking decisive cost actions and improving our supply chain agility to serve our customers and consumers across the globe. We delivered a better-than-expected start to the year driven by strong execution, growing demand for our hospital solutions, and Personal Health returning to growth. Our innovation is helping hospitals solve staffing shortages, boost productivity and improve outcomes. And sustained order growth shows that we are making real impact. As our teams deliver against a robust order book they are also expanding margins to fuel long-term sustainable growth and enable better care for more people now and into the future. The strength of our business fundamentals, our innovation capability combined with our customer-first mindset gives us confidence in our ability to navigate change and deliver on long-term value. Let me open for Q&A.

Thank you, sir. The first question comes from Mr. Richard Felton from Goldman Sachs. Please state your question.

Thanks very much. Just two questions from me please. The first one is on the tariff mitigation efforts. Can you perhaps elaborate a little more on what you're trying to do with your supply chain as it relates to network optimization? I'd be very interested to know what you're trying to move and to where? And then within your guidance how quickly do you assume that you're able to execute on those plans? That's the first question. The second one is on China and it's specifically on ultrasound. During the quarter, we've heard a few reports about VBP being implemented by certain provinces. Have you seen any impact on that on your business during this quarter? Or any thoughts to contextualize that as a factor going forward? Thank you.

Thank you, Richard for your questions. Let me start with the first one. So in terms of the network mitigation, this actually builds on the program that we have been running for the last two years where we are further regionalizing our footprint. You have heard me speak since 2022 that in building supply chain resilience, we are strengthening our footprints in Asia for Asia, China for China in particular where we are 90% now localized, Europe for Europe, and Americas for America. But the current situation asks for is that we accelerate in particular the localization into the US, which builds on an already strong footprint that we have. We have 46 locations in the US. We have billions of spend into the US every year and we produce, as you know, part of our ultrasound and monitoring, and also our imaging equipment in the US, but we plan to bring more of that. We also already announced multimillion investments in Minnesota for cardiac devices and we also leverage existing footprint to expand. So regarding your timing, there are already actions that we are implementing as we speak. Now we also know that if you want to add more structurally strengthening, this will take some time. So this will be a phased-in advantage that will come to bear in terms of our current footprint strengthening, but it builds on what we have already been doing. Then on China VBP let me...

Maybe I just had a comment...

Yeah.

...on the first one Richard. Maybe in addition if you think about our mitigation actions and it's worth several hundreds of million euros. And if I then just give you a sense of what it really includes roughly half of that is really related to inventory management that we're doing and also the exemptions we are pursuing including the Nairobi protocol and including duty drawbacks. So that gives you a sense of how we're thinking about the mitigation actions in 2025.

Yes. And then maybe going to the China VBP. So I was again in China a month ago, spoke to government customers and also indeed engage around what we see happening around the procurement environment. And if you talk about the VBP, we actually see it more as a centralized procurement initiative than a pure value-based procurement that is heading more towards kind of standardized high-volume purchases and a lot of pricing pressure. As we have been sharing, we have seen China moving towards the central procurement offices for some time. And the procurement model is evolving towards a more balanced consideration between price and quality. Actually, if you zoom in on ultrasound, we were actually happy to see that ultrasound in Q1 did actually well in China in orders. That also was built on the new innovation that we launched with the new VM platform where the AI solution is really getting traction and build on our global leadership position in the cardiovascular ultrasound space, where it's much more difficult to standardize compared to general imaging. If you then look at also what happened in the quarter, the Chinese government issued a 2025 action plan to stabilize foreign investment. And also, when I was speaking to them, they clearly affirm that they want to have foreign investment continue to flow into the company. They want us to continue to operate in China, and they will also support in fighting unfair practices in procurement. So that actually was encouraging from what I heard from Vice President Han personally. Of course, we will continue to work on our innovations to be as relevant as possible in China to support a strong market which we know fundamentally has huge patient demand and we also expect to strengthen over time. And we also found it reassuring that the first quarter came in, in line with our expectations. And it's now the second quarter that actually it has been predictable and delivering in line with our plan and also in line with expectations. So that's something that also strengthens our confidence in the rest of the year outlook for China, which we expect to unfold in line with what we earlier guided towards.

Great. Thanks very much.

Thank you. Our next question comes from the line of Mr. David Adlington from JPMorgan. Please state your question.

So, the first one is again just on tariffs. The €250 million to €300 million impact for this year, I'm just wondering how we should be thinking about that as an annualized impact on inventory. And I was wondering if you saw any restocking of inventory ahead of the tariffs coming in, in the first quarter. Thirdly, Personal Health care, you talked about modest growth in North. I just wonder what the trends were like through the quarter, did they deteriorate towards the end of the quarter. And then finally, just also on Personal Health, I just wonder how much price contributed to that? Thank you.

David, it's very hard to hear. You're breaking up.

Your questions didn't come through. So maybe try to repeat the question so that we fully understand what you were asking.

Yes. Sorry. Is that better?

Yes. Slightly better, yes.

Right. Okay. But regarding tariffs, the impact this year is estimated to be between €250 million and €300 million. I was curious about the annualized impact we should expect in 2026. Additionally, did you notice any pre-purchasing of inventory in the first quarter in anticipation of the tariffs? Thank you.

Yes. Thanks David. I think we got your questions now. So first of all, on the tariff impact and the net impact. So what I would say is actually two things. Maybe start with our assumptions again what we assumed. So we assume that our bilateral US and China impact of €145 million and €125 million, we assume that to remain that in at current levels. The US and the rest of the world at 10% and then we revert to the pre-pause levels after 90 days. And we have significant mitigations in place, several hundreds of millions. We're continuing to work on those mitigations as we speak. And we also expect that going forward those mitigation actions will increase in size. So again, drilling down on the type of mitigation actions that we're looking at, some are related to inventory management, as I referred to earlier. Quite a big chunk is related to duty drawbacks and things like the Nairobi protocol, which is particularly relevant for S&RC business. And then we continue also with our very disciplined cost management and productivity actions and are also looking into selective pricing actions obviously taking the competitive environment into account there.

And maybe on your inventory question, David. So maybe a few comments. So one, we did see some orders coming in on the back end of Q1, where I do think that kind of people are preempting some of potential pricing impact. At the same time, actually if you see our sellout momentum, you see actually that we are really strong in Personal Health and because this was in Personal Health, where we have very strong double-digit momentum in the global markets, that actually supports this outlook for the full year where we actually feel that the Personal Health coming back to growth and building up momentum is really strong. And as we also mentioned, actually in China on the other end of the spectrum, we finalized the impact of destocking of inventory that was of course significantly having an impact on our results. So as we see Personal Health going into the year, we are very happy to see them coming back into growth, and we believe that's fundamental because the growth momentum also exiting the quarter into the second is strong. Of course, we keep remaining monitoring the wider macroeconomic environment as well. But what we see in terms of demand for our innovations, actually we are very encouraged by what we saw happening in Personal Health in Q1.

In Q1, our inventory compared to the same period last year decreased. We are actively pursuing inventory reductions as part of our strict working capital management. While there was a slight increase compared to Q4, this is typical for our business. As mentioned, we have some inventory management strategies in place as part of our mitigation efforts, but the impact is not overly significant as we remain focused on reducing our inventory levels over time.

Thank you. Your next question comes from the line of Ms. Veronika Dubajova from Citi. Please state your questions ma'am.

Hi. Good morning, Roy and Charlotte. And thank you for taking my questions. I hope you can hear me okay. I'll keep it to two please. My first one is on the tariff guidance that you've given today. And I'd love to understand what the gross versus the net numbers that you have in mind, just how much work you guys are putting in to offset this? And related to that, if you can give us a little bit of color here in terms of the geographies that are driving that €250 million to €300 million. I'm asking this just in case we end up in a situation where the world looks a little bit different and we don't have 145% tariff on China or we don't go back to the liberation day tariffs. If you can give us a little bit of a roadmap for how to think about Europe versus China and what's driving that impact. So that's my first question. My second question is just on the competitive dynamics that you're seeing in your hospital CapEx businesses. Looking at the order growth, obviously you've called out really strong performance in the US. But if I look at the kind of comparative growth for you versus your peers you are still underperforming overall in order growth. So just curious what are the areas of softness that you're seeing in competitive pressures, obviously China aside that are leaving you still at a gap versus what we might see from some of your peers? Thanks.

Thank you, Veronika. And maybe I'll start with your question on the tariff guidance. So I'd say a few things. So if we think about our 2025 net cost impact, it's around €250 million to €300 million. And the majority of that impact comes from our US-China flows. So maybe I'll unpack that a little bit more because over the last few years, we've done a lot to derisk our US and China flows but there are still flows. There's still component flows. There's still other flows. Now given the very high level of tariffs 125% and 145% that just increases that impact tremendously. And that's what we're seeing and that's what we're seeing that the majority of that net €250 million to €300 million impact is actually coming from the US and China flows. Of course, Europe is also a relevant factor in it, but it's because the tariffs are so much lower that impact is less relevant for us at this point in time based on our current assumptions. And then, if you ask us to break it down a little bit more on gross versus net, I would say that we have hundreds of millions of mitigations including in this net number of €250 million to €300 million. Again, a large part is the inventory management, also the duty drawbacks, the Nairobi protocol. In addition to that, we continue to look at selective pricing actions and also productivity which we already started and are continuing to do. And a lot of these mitigation actions are already in effect and are already ongoing and we're executing on those very successfully.

And then maybe on the competitive situation and maybe some compare. So, as you felt kind of we are very encouraged and you heard kind of very encouraged by what we see happening both in the first quarter as order momentum. But also what we see as order funnel and order gone up trajectory into the year. Now, what does that build upon? And I think that's just to give a few data points. We shared that we have double-digit growth in North America. That follows the double-digit growth that we had in 2024. So North America remains very strong. We had mid-single-digit D&T order intake growth. And this excludes because different companies have different ways how they calculate their orders. We exclude service orders that were also double digit for us in the quarter. So, I would say on a competitive direct compare, we feel that actually we have good momentum. We also saw that in some preliminary market share numbers for Q1. So actually, we are driving the innovations that we have been launching hard. We see this 50% of our sales now coming from new innovations really also showing the uptake of our latest launches. We shared that kind of CT is doing really well based upon the latest launch which also is clearly playing to the current need for productivity because I've been also in the US talking to customers. Of course, they are looking for productivity measures to offset what they also expect as inflationary impact that will hit their hospital. So, we are with our kind of monitoring platform with our imaging platform and interventional platform really looking at kind of how we can help them do more procedures, but also work at the cost and making it efficient. So that's what kind of gives us also kind of a real good look into the year that therefore led to this reconfirmation of our sales outlook, because that's where kind of ultimately this will result into.

The next question comes from Mr. Hassan Al-Wakeel from Barclays. Please state your question, sir.

Hi, good morning. Thank you for taking my questions. I have three please. So following up on tariffs. Can you help us understand how the net impact splits by business division please? Is the bulk in Personal Health? And what are you embedding in for exemptions? And what is the percentage of US Personal Health sales derived from China? Secondly, you talked about modest improvement in Q2 relative to Q1. Is flat growth a realistic assumption for the second quarter? And if not, have your assumptions changed meaningfully around business performance for Q2 since full year results? And then finally, on PH specifically, are you seeing any pull forward of sales because of tariffs? And how are you thinking about price as part of mitigation? Just really trying to understand your confidence in the PH improvement over the course of the year, particularly given the intensifying macro uncertainty. Thank you.

Thank you, Hassan, for your questions. Let me begin by discussing the net impact by business. Overall, the net cost impact is between €250 million to €300 million, and when we break it down by business segment, the Diagnosis & Treatment and Personal Health segments are most affected due to the heightened US-China trade issues. Connected Care is somewhat less impacted because there is less trade with China, and our Connected Care business has less exposure to China initially. This provides a clearer view from a business perspective. Regarding your second question about Q2 and the modest improvement, I’d say that nothing has significantly changed since we started the year and provided guidance in February. We're still on track with everything as we anticipated, aside from the tariffs. There's nothing else noteworthy to highlight at this moment. Concerning your third question about Personal Health and potential sales pull forward, if we look closely at our Personal Health business, we see much of the strength is coming from international regions, excluding China, where we experienced high single-digit growth in Q1. Last year, those regions showed strong momentum in both Q3 and Q4, and that trend is continuing into Q1. The only notable change in Personal Health is that the significant impact from China has decreased as we near the end of destocking in Personal Health, which Roy mentioned. Currently, we do not see any significant pull-in. We are closely monitoring the economic situation as it stands today.

Maybe on the pricing, Hassan. So, of course, we watch what this is right to do. At the moment, we are actually more inclined to spend more in A&P because we see the demand increasing and therefore the activation of successful innovations is a priority versus kind of clawing it back through price because we want to remain competitive and also we see kind of margin resilience. So in that sense kind of that's how we play it out. But of course we also look at pricing as a measure where it makes sense. But that said we prioritize currently how we drive growth still profitable growth. And you have seen that the PH margin has shown very strong resilience at the same time. So we know how to play that game. And especially if growth comes in that will be a big support for the whole group.

Thank you. Your next question comes from the line of Mr. Graham Doyle from UBS. Please state your question, sir.

Good morning. Thanks, guys. Just one question on tariffs again and one on Personal Health. Just on tariffs if we just take the €250 million to €300 million that's for 2025. In case I've missed it just for 2026, do we just annualize that up? Or do we assume that the mitigation efforts basically mean we just take the €250 million to €300 million and assume that for 2026 earnings? And then on Personal Health would you be able to give us a little bit more color on the China destock? So how soon do you think you are to seeing that basically complete within Q2 and therefore obviously see a return to growth? That would be super helpful. Thanks, guys.

Thank you, Graham. Regarding the tariff impact in 2026, you can expect the benefits from our mitigation efforts to grow over time. We are currently focusing on a comprehensive range of mitigations that we've discussed. It is too early to provide a specific outlook for 2026 as we are dedicated to implementing these efforts. Concerning the destocking in Personal Health in China, we anticipate that the effects will be fully realized by the end of Q2. Therefore, we still expect a decline in Personal Health in China in Q2 as we complete the assessment of that destocking. In the second half of the year, the comparison will become easier, and there should be a noticeable increase in sales for Personal Health in China. To clarify, consumer sentiment in China remains unchanged from our expectations; it continues to be subdued and has not shifted. Everything is progressing as we had anticipated.

Thank you. The next question comes from the line of Ms. Lisa Clive from Bernstein. Please state your question, ma’am.

Hi. Just a question on China profitability. My understanding is that it's a fairly high-margin market for you for D&T. Is this due to business mix perhaps more ultrasound and IGT? I'm just wondering what the levers are there and also the fact that profitability has held up nicely despite China declining? And then second question there's a lot of disruption at the FDA going on right now. Just wondering if that's had any effect on your interactions with them relating to the Respironics consent decree? Thanks.

Thank you, Lisa. Let me address your question regarding profitability in China. You are correct that China has consistently been a profitable market for us. We have experienced solid margins over time, along with a highly profitable product mix, particularly in Diagnosis & Treatment, as well as in Personal Health. In China, we see a strong willingness among consumers, customers, and health systems to invest in quality innovation. Some of the significant innovations we have introduced in the Chinese market include the ultrasound, as mentioned by Roy, the VM11 and VM12 platforms, as well as the MR BlueSeal and CT platforms. We've observed a notable increase in our performance in China, especially in the first quarter.

And maybe let me then take the FDA one. So, FDA is indeed having as we all read and also we have in constant engagement with them there quite some impact as well from what's happening. Actually we don't see that yet impacting our engagement on the consent decree. What we are more concerned about would be longer-term approval cycles that could prolong on new innovations. So, that's also what we stay tight on with them to see kind of that we keep them abreast of what we're developing. But on the consent decree mitigation, we are in very active dialogue. As we shared earlier, we are making good progress. We are fully in line with what we said we would do until now and that has continued, including a very frequent engagement with the FDA on this as well as with the third party that's engaged.

Thank you. The next question comes from the line of Mr. Julien Dormois from Jefferies. Please state your question sir.

Hi, good morning Roy, good morning Charlotte. Thank you for taking my questions. My first question is a follow-up to Hassan's inquiry about the modest improvement in Q2 compared to Q1. I am wondering if we should still anticipate organic sales growth to remain in negative territory in the second quarter, with margins potentially being flat or slightly declining. Is that a reasonable assumption to align our expectations for the second quarter? My second question pertains to D&T. While you reported a 4% organic sales decline in the first quarter, you mentioned that IGT experienced growth during that period. Can we assume that the rest of the business, particularly Imaging, saw a decline in the high single-digit to low double-digit range? I would also like to understand the reasons behind this market decline, especially outside of China.

Yes. Thank you, Julien, for your questions. Let me address them. I think your characterization of Q2 in relation to Q1 is accurate. We are seeing a modest improvement, consistent with how we anticipated the year would begin. As we mentioned, our sales outlook appears to be back-ended. In Q1, we surpassed our expectations, and we are focusing on refining that timing. For Q2, we expect a modest sequential improvement compared to Q1, so your assumptions are in line with what we're seeing. Regarding your next question about the 4% decline in D&T and its effect on Precision Diagnosis, this aligns with what we anticipated. We did foresee a decline in Precision Diagnosis primarily due to challenges in China. Additionally, there was a significant year-over-year comparison in MR, which saw double-digit growth in Q1 2024 as our supply chain began to improve, leading to notable enhancements. I don't have anything new to add beyond what I shared in February. Everything is progressing as expected. In fact, we're observing increased demand stemming from innovation, which is evident in our order intake and the mid-single-digit growth in orders. This ties into our gross margin as well, and from a D&T standpoint, we've achieved a 30 basis point improvement in EBITA margin. This highlights the sustainable fundamental progress in our execution that we've discussed extensively, particularly fueled by the increase in gross margin. We recognize the value of innovation, as Roy mentioned with the CT5300, the Spectral CT, MR BlueSeal, and the Azurion Biplane. We are also experiencing continuous operational improvements and enhancements in productivity.

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

Thank you for taking my questions. I have three. First, I'm interested in the outlook for the US hospital CapEx environment. While you've mentioned ongoing strength, I would like to know what customers are saying about the current situation. Are there any signs of changes in consumables or spending intentions and ordering activity? My second question is about the order book growth you mentioned in one of your slides. How should we view the phasing for the rest of the year, especially since we started with a decline of 2% in the quarter and you're anticipating positive results for the year? Are you expecting a particularly strong fourth quarter? Finally, regarding the increase in production manufacturing in the US, will you be opening new sites or starting construction, or will this be more about enhancing production in existing facilities? Thank you.

Davies, let me start with the hospital capital expenditures. I was recently in the US meeting with several customers. What I'm hearing is that underlying demand remains very strong. Patient volumes are robust, procedures are continuing to rise, and there are still waitlists. This is evident in the order intake in the US, where people are making investments to meet the demand. They are also keeping a close eye on the environment to understand potential changes. However, their primary focus is on fulfilling current demand and expanding capacity. We are well-positioned in this regard, as they are seeking partners to enhance productivity. Our innovations across various platforms help them provide care more efficiently and are gaining traction. This reflects the current trend, and I believe that's the best way to describe the situation at this time. North America has started off strong, and we anticipate this strength will continue. We are monitoring the situation closely, and as for order growth in the quarter?

Yes, I'll take that question. Thank you. So if we think about the phasing of our order intake growth, we feel very good about our order intake and the momentum that we're seeing. If you think about Q2, two things I'd call out. We expect momentum to continue into Q2. We see strong growth in our D&T segment. Our Connected Care business, we feel good about the momentum but it's impacted by a very high comparison base in Q2 2024, because we saw a very big order that we included at that point in time. But otherwise, we see strong momentum and we expect that momentum to continue in Q3 and Q4 as well.

There was a follow-up question regarding manufacturing in the US, and I can address that. We are indeed utilizing our existing footprint to expand, which is the quickest way to mitigate challenges due to approval cycles and regulatory processes, as we have the quality management systems ready. We have already taken steps in this direction, and we are also investing in additional expansion facilities, with Minnesota being a key example. We will have a mix of strategies, but our strong footprint will be leveraged to ensure we can operate swiftly, with lower costs and capital requirements. This is our approach moving forward.

Thank you. Your next question comes from the line of Mr. Hugo Solvet from BNP Paribas Exane. Please ask your question.

Hello. Thanks for taking my question. I have three, please. First on tariff or second derivative of tariff. Can you please discuss the sourcing of rare earth and minerals and your exposure to China, please and how that impacts your supply chain? Second, obviously with tariff and volatility and consumer trend, you're pulling forward a lot of the efficiency measures. Can you help us understand how we should think about margin expansion going forward and excluding any operating leverage what's left to extract? And lastly on hospital CapEx, I think Roy you called out slight improvement in Europe. Can you maybe discuss the modalities and the countries driving this trend? Thank you.

Okay. Let me start – thank you for the questions, Hugo. Let me start with rare earth export restrictions. So there has been a stance taken by the Chinese government but they also kind of have been talking about where they want to exclude the impact. When we have been looking at the newly implemented export controls, we understand – and we are working to understand better what it exactly means. Currently, we don't have an impact or we don't see disruptions to our supply chain. And also we engage with our suppliers and they are well kind of sourced for any need that would kind of potentially have an impact on our production or products. So for the moment, we have no impact from rare earth metal export restrictions.

Yes. And then on your second question, if you go on the margin expansion going forward in the context of tariffs. I think what I'd say there is that fundamentally there continues to be a margin improvement opportunity. So that has not changed. The fundamentals haven't changed. And then the way we go after that are a few different things. We continue to go after those mitigations that we spoke about earlier today. So some of it is short-term, some of it is a little bit more long-term, if you also think about supplier footprint. And then thirdly, the productivity component is going to be there. You remember in February, we increased our three-year productivity plan from €2 billion to €2.5 billion, as we are confident that there's more to go after, more simplification to go after and more just operational leverage to go after that we will continue to double down on. We've done so in Q1. There are a lot of programs in place that will deliver in the remainder of the year. And then last of course, as I said earlier, as well innovation will continue to be a big contributor to margin expansion as well, as we're seeing that the innovations that we've recently launched are already contributing to our gross margin and our gross margin expansion.

And maybe the last point there to add. As you know we are driving our strategy of the 70-30. We have 70% of our businesses that are already in higher margin territory there. We're driving both their growth up as well as the margin expansion that it drives for the group. And we have specific areas where we are driving also margin expansion accelerated rate of the group. For example, SOC we have called out before of course dipped significantly in margin. We already got back into profitability last year. We continue to expand that margin to actually bring it back to where we have seen it before. So actually we see both the underlying improvement happening in the year as we speak but also we see the leeway ahead of us that was earlier tied to what we also put out as a longer-term perspective for Philips. And we haven't seen that change through some of the dynamics that currently are ongoing in the market because the fundamentals of the demand as well as how we are kind of supplying our innovations actually show that we can robustly perform in there.

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

Yes, hi, very good morning. This is Wim Gille from ABN ODDO. I've got two questions. The first one is for Charlotte. You basically said during one of the questions that nothing changed compared to the February call. And I'd like to challenge that. So if I look at the impact of the tariffs, the net impact of €250 million to €300 million this is a range of 1.3% to 1.5% of sales, where you are lowering the guidance by 1% only. So that means that there's an underlying increase of 40 basis points. In addition to that, if I look at your February comments on PH, look at the results in PH and the comments that you make today, I cannot help but basically argue that that PH is actually doing much better than what you anticipated in February. And also your order intake momentum is clearly gaining strength and you have good margins in the order book. So is it fair to say that you're actually getting more bullish as we progress throughout the year, if we exclude any impacts from the tariffs? The second question is related to the PH business. Can you give us a bit of a feeling on where the exit rates were per region at the end of Q4 and at the end of Q1? And if you can quantify the impact of any forward buying that might have happened at the end of Q1? Thanks.

Thank you, Wim. And I'll take your first question on nothing changed versus the February call. So if you look at our guidance and as I also called out in my prepared remarks, there are really two drivers of our changed guidance. One is tariffs which is the €250 million to €300 million net impact that we discussed. The other one is our Q1 performance versus our expectations. Those are the two drivers that drive the change in our guidance. So that is what I would say about that. So if you talk about PH and saying it's better than anticipated, we are very pleased with our Q1 in Personal Health. That's absolutely true. We saw double-digit growth across the international region. We had great results in Europe, in Latin America, in India. We saw the momentum really pick up. For instance, in some parts of the world we have put in new innovations to market. We did more on A&P and more influencers that we hired which have been working well. Having said all of that it is early days. It's only at the end of Q1. We're only at the end of Q1. So it's really difficult to at this point in time look forward and take that as sustainable momentum. So that's what I would say around your questions there. And then you had a second question on the exit rates for Personal Health, Q4 versus Q1. So again, maybe a few things I'd say there. In China, no real change in consumer demand. Consumer demand remains subdued. I was also in China a month or so ago. And we see no meaningful change to what we were expecting or what we have been seeing. And we expect that momentum in China between Q1 and Q2 to remain fairly similar. Also, the momentum in the international region outside of China as I just discussed is very, very strong. And then in the U.S., we've seen some slight growth in the U.S. We see so far that consumer sentiment is stable, but we're obviously monitoring that very, very closely. But just to be very explicit on that that has not been the major growth driver for us. That has really been the international regions.

Thank you. Your next question comes from the line of Mr. Julien Ouaddour from Bank of America. Please state your question sir.

Good morning. Thank you very much for squeezing me in. So I'm slightly going in the opposite direction of the previous question and just sorry to pressing on that point, but it's clear that you need a pretty strong acceleration in sales and profit in 2H just to make even the lower end of the guidance. Could you just remind me what are the main drivers? What gives you confidence in such very uncertain macro situation especially given I think you talked about being vigilant during the opening remarks? And I mean you mentioned slight improvement to date quite early. So that's the first question. The second one it seems that you're also cutting the free cash flow guidance by more or less €400 million for this year. Can you just tell me what part of the cut is tariff? I mean, is it 100%? And does it differ from the P&L impact of the €250 million to €300 million? Thank you.

Yeah. Thank you, Julien for your questions. First of all, on the acceleration of the year and the back-end loaded outlook and maybe take you back to what happened in Q3 2024. What we saw was obviously some challenges in China. And if you now think about the phasing in this year, in the second half of the year, the comparable becomes much easier, both in Personal Health in China, as well as in Health Systems in China. So that's almost mechanical that we get an uplift in sales growth. Roy already said it, we are taking a cautious view of the market environment in China. We've taken that in our previous outlook. We're confirming that today. So we don't see any change there, but we will just because of the comparables see an uplift in our numbers in the second half of the year.

Maybe to add to how I summarize it. So if you look kind of through the year and that's also when we kind of where the year is actually in the fundamentals really playing out as we predicted in terms of how we came into Q1 actually slightly better. Then we have a better filled order book. I think that is fair to say. And that momentum we also feel continues. So that actually kind of gives reassurance also for second half, still also building on the comment that it's still early days, but that gives us of course an early indicator that actually we have the underpinning coming next to PH, where also we of course are happy with the growth coming back into the business, but we also still know that there it's early days. And we know that we have the second half mechanical effect that will kind of kick in to kind of support that. But that's in line with the plan. So I think therefore also you've seen us sticking to our sales guidance because that is really where we believe we have firm underpinning for at what we currently know. We have then also taken the tariffs on what we currently know also acknowledging that this is still fluid, so it can change, but we have taken very substantial measures on the kind of announced tariffs on the 2nd of April. And kind of we will work hard to kind of have those also kind of kicking in as soon as possible and that will kind of dial up throughout the year. And that's then also the kind of totality of how we look into the year unfolding. So it's the two stories of the fundamentals are really playing out well, both in terms of market as well as how we deliver on that with great innovations and also our cost productivity measures to kind of manage the year what is in our own control, whilst we need to remain vigilant on the things that are beyond our control, where we need to just take the realities as known into account which are tariffs and then we need to monitor the wider economy closely as we keep doing.

Yes, I'll address your question about free cash flow. Our revised outlook indicates that free cash flow will be slightly positive following the completion of the €1 billion Respironics settlement in Q1, as opposed to the earlier estimate of between €0.4 billion and €0.6 billion. The change in our outlook is mainly due to tariffs, which affect our cash flow before impacting our profit and loss. This happens because we pay duty fees upfront. Some of the timing impacts are related to the year, and we also capitalize a portion of these duties, which we then recognize in our profit and loss over inventory cycles, causing a delay. It’s crucial to note that we remain focused on effective working capital management. We've made significant reductions in inventory year-over-year and are also improving other aspects of working capital, with overdue accounts decreasing. The settlement with Respironics has alleviated a significant burden. Additionally, I’d like to remind you that we are offering dividends in cash or shares, with a cap of 50% for cash, which marks a return to at least partially cash dividends. This is encouraging as it reflects our return to stability and the strong fundamentals that support it.

Thank you. Your next question comes from the line of Ms. Sezgi Oezener from HSBC. Please state your questions.

Hi. Thank you for taking my questions. I have three, please. First, regarding the 70%, 30% division, how would that look if we focused only on the Health Systems segment, excluding Personal Health? Second, you mentioned the gross impact and net impact of tariffs being around €250 million to €300 million. Can you clarify what the gross impact would be? What should we anticipate if the tariffs, like the ones from China, were to be removed? Lastly, I appreciate the guidance on the restructuring costs and other items for Q2. Could you provide more details on the Connected Care restructuring costs, which are nearing €95 million to €100 million? What are the main drivers behind these costs, and can we expect a reduction in restructuring and other costs in the latter half of the year?

Sure, I’ll address the first question. Personnel represents 20% of our business, so that’s essentially the figure to consider. This leads us to a 60-40 percentage mix in terms of translation. Regarding the potential effects of tariffs, a reversal would certainly be advantageous. However, we are accounting for the current situation, and while negotiations are ongoing, it is challenging to foresee their outcomes. Hence, we based our decisions on the information we have. The main impact, as noted earlier, comes from US-China tariffs, which are crucial to monitor moving forward. We've also taken a proactive approach by addressing the April tariffs based on what we know, and we’ll adjust as necessary as the year progresses. We will keep you updated on these developments.

We are currently addressing the adjusted items for Q2, particularly concerning Connected Care, where most costs arise from our consent decree. We signed this decree in April 2024 and have been making steady progress, although it's too early to determine when it will be finalized. The restructuring costs in Q1 aligned with our guidance and expectations. In the Connected Care area, we are committed to ensuring patient safety and quality, and we are diligently working through all the required steps related to the consent decree.

We acknowledge that incidentals have been at elevated levels, contributing significantly to our SOC impact. However, we are making progress in addressing these issues across all our businesses. We have also dealt with restructuring costs and have worked through most of those. Excluding content costs, we are focused on reducing expenses over time while also improving productivity. The €1.9 billion we have achieved so far is a major contributor, and we will keep enhancing our productivity efforts.

Thank you. The last question comes from the line of Falko Friedrichs from Deutsche Bank.

Thank you. I have a few quick ones left. Firstly, you mentioned that you saw preliminary Q1 market share data. Can you confirm that you didn't lose any share in medical imaging, so excluding IGT? Secondly, what's your updated thinking on growth in China for the full year? And has that thinking changed after Q1? And then last but not least, can you be a little bit more specific in terms of which products and components are flowing between China and the US? Thank you.

Thank you, Falko. I can confirm that we are expecting an increase in our share of the Medical Imaging market. We are seeing strong momentum in ultrasound, as well as in CT and NMR. We have discussed mid-single-digit growth, which includes significant contributions from China. We are very optimistic about the market share momentum we have observed in Medical Imaging.

Yes. Regarding growth in China for the full year, our expectations remain unchanged since February. We still anticipate a mid single-digit to high single-digit decline, mainly due to the double-digit drop in the first half of the year. This decline is largely attributed to the Personal Health segment, where we are experiencing both subdued consumer demand and destocking effects, which will conclude by the end of Q2. To clarify, we are not counting on a rebound in China during the second half of the year and maintain a cautious outlook for the Chinese market for the rest of the year. However, as the comparison basis improves, we will see a mathematical increase in the growth rate. Regarding your question about product flows between China and the US, the Personal Health and Diagnosis & Treatment segments are the most affected by tariffs, primarily due to the US-China trade dynamics in these areas. It's important to factor this into your models for these two business segments. We have made significant progress in managing our China-US flows since the onset of the tariff wars, but with tariffs currently at levels of 125% and 145%, the financial impact remains considerable.

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

Yes. Thank you for your questions. As you heard us say in an uncertain macroeconomic environment that has intensified due to the potential impact of tariffs, we continue to drive profitable growth focusing on what we can control. And for that part we really feel strong for the year and we reiterated our sales guidance to 1% to 3% based upon strong order book momentum as well as Personal Health coming back to growth. We are taking the current realities of tariffs into account, driving substantial mitigation and we'll continue to do so for the rest of the year. But most importantly we remain razor-focused on supporting our patients, our customers, and consumers because actually the situation in healthcare has not changed and has not improved. The pressure is still very high on the healthcare system itself and we need to support with our innovations. And we see also consumers really kind of appreciating our innovations. So we remain focused on driving impactful innovations to deliver better and more care to the people worldwide. Thank you so much. Talk soon.

This concludes the Royal Philips' first quarter 2025 results conference call on Tuesday, May 6, 2025. Thank you for participating. You may now disconnect.