Koninklijke Philips Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 29, 2024

There are 16 speakers on the call.

Operator

Welcome to the Royal Philips First Quarter 2020 4 Results Conference Call on Monday, April 29, 2024. During the call, hosted by Mr. Roy Jacobs, CEO and Mr. Abhijit Bhattacharya, CFO, all participants will be in a listen only mode. After the introduction, there will be an opportunity to ask questions.

Operator

Please note that this call will be recorded and replay will be available on the Investor Relations website of Royal Philips. I will now hand the conference over to Mr. Leandro Mazzini, Head of Investor Relations. Please go ahead, sir.

Speaker 1

Hi, everyone. Welcome to Philips' Q1 2024 results webcast. I'm here with our CEO, Roy Jacobs 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.

Speaker 1

Before we start, I want to draw your attention to our Safe Harbor statement on screen. You will also find the statement in the presentation published on the website. Roy, over to you.

Speaker 2

Good morning, everyone, and warm welcome. Great to be with you today. I want to start with the key highlights of this morning's release. We delivered results in line with our performance improvement plan with 2.4% comparable sales growth and strong margin improvement in the quarter and order intake growth turning positive outside of China, especially in North America. This was a result of continued strong focus and progress on our 3 execution priorities.

Speaker 2

Secondly, we have taken several very important steps in resolving the consequences of the restaurant's recall. The consent decree was signed and approved in court. We received final court approval for the previously announced economic loss settlement. We reached an agreement to resolve the personal injury and medical monitoring litigation in the U. S.

Speaker 2

And we also concluded an agreement with insurers to cover Respironics recall related product liability claims. Following the remediation of sleep therapy devices and the reassuring test results to date, these are very important milestones to provide further clarity on the way forward for Philips. Supported by key innovation launches and our ongoing actions to enhance its execution, we are confident in our performance improvement plan for 2024. Onto the key financial highlights. Comparable sales growth was 2.4% in the quarter, driven by 3% growth in the Diagnosis and Treatment and Personal Health segments, partly offset by a 1% decline in Connected Care against very tough comps in monitoring.

Speaker 2

Group sales grew 2% in mature geographies. Growth geographies sales grew 3% despite a decline in China. The adjusted EBITDA margin improved significantly to 9.4% in the quarter. Free cash flow was an outflow of €336,000,000 in line with normal quarterly phasing. Order intake in the quarter declined as anticipated due to the situation in China.

Speaker 2

This was driven by the impact of the industry wide anti corruption measures and the comparison against an exceptionally high order intake base from last year. Importantly, order intake grew outside of China with encouraging performance in North America. We remain focused on implementing the necessary actions to strengthen quality delivery, reduce lead times, leverage our enhanced operating model and market our AI driven innovations to improve order intake. Overall, based on the gradually improving market environment in the U. S.

Speaker 2

As well as expected improvement of the situation in China, our exciting innovation launches and our ongoing actions, we continue to expect positive order intake growth in the full year 2024. In China, the government imposed anti corruption measures continue to impact short term decision making by hospitals. But we do not expect it to impact the fundamental demand as China remains an attractive market. Our order funnel is very active in the country and we expect order growth to resume in China in the second half of twenty twenty four, also supported by the newly launched government program for medical equipment upgrades. It's important to note that our order book, which accounts for around 40% of group sales, remains strong and is further being built down to expected normalized levels.

Speaker 2

I've met many of our customers and partners in the last few months, and it's absolutely clear that we are a preferred strategic and innovation partner to provide imaging, therapy and monitoring solutions, supported by a strong enterprise informatics and AI suite. This has been again amplified by how strongly our solutions resonated with customers at the recent Vive, ECR and HIMSS Global Healthcare events, which I attended during this quarter. Let me now provide you with some of the recent customer innovation milestones during the quarter. We launched the new Azurion Image Guided Therapy System and advanced informatics as well as the new AI enabled CT-five thousand three hundred designed for more accurate and reliable imaging results while enhancing productivity using up to 80% lower radiation dose. We were also recognized as Clarivate Top 100 Global Innovator for the 11th consecutive year and ranked as a top medical technology patent applicant at the European Patent Office in 2023.

Speaker 2

We continue to see strong customer pool for our solutions and signed several long term agreements across the world in the quarter. For example, we signed a 10 year agreement with the Nicholas Children's Health System in U. S. To provide AI enabled technologies such as helium free, MR, ultrasound and monitoring solutions for deep clinical insights and improved workflow and productivity. Now on Respironics.

Speaker 2

As I said, we have taken very important steps in resolving the consequences of the Respironics recall in the quarter. As said before, we do regret that patients the concern that patients may have experienced. Let me call out the milestones reached. First, Philips and plaintiffs leadership supported by court appointed mediator have reached an agreement that resolves the personal injury litigation at a medical monitoring class action in the U. S.

Speaker 2

This settlement and uncertainty associated with litigation in the U. S. It should be noted that Philips and Philips Respironics do not admit any fault or liability or that any injuries were caused by Respironics devices. Philips Respironics has agreed to pay a total kept amount of $1,100,000,000 The related payments are expected in 2025 and to be fully funded from Philips cash flow generation. You will find more details of the agreement in the Respironics field action deck published on our Investor Relations website this morning, which underscores the high degree of confidence from all parties in achieving closure and finality with the settlement.

Speaker 2

Also important, earlier this month, the Philips Respironics consent decree was approved by U. S. Court. As communicated before, the decree primarily focuses on Respironics business operations in the U. S.

Speaker 2

And we now have made a roadmap to demonstrate compliance with regulatory requirements in order to restore the business in the U. S. And grow outside of the U. S. Moreover, Philips Respironics obtained the final court approval for the previously announced economic less settlement in the U.

Speaker 2

S, for which a provision was recognized in Q1 2023. We continue to work on other federal response related legal proceedings, including the investigation by the U. S. Department of Justice. And we also concluded an agreement with insurers to pay Philips in relation to Philips Respironics recall related product liability claims.

Speaker 2

Therefore, following the remediation of sleep therapy devices and the reassuring test results to date, these important milestones on litigation, consent decree and insurance provide Philips with a clear path forward for sustainable value creation. Looking ahead, we remain confident in our plan and financial outlook. In 2024, we expect to deliver 3% to 5% comparable sales growth, building on a strong comparison base of last year and an adjusted EBITDA margin of 11% to 11.5%. The free cash flow expectation is now increased to €900,000,000 to €1,100,000,000 in 2024. Factor in the receipt from insurers that I just mentioned and the remaining payments related to the economic loss settlement.

Speaker 2

I will now hand it over to Abhijit to take us through the financials in more detail. After which, I will come back on our execution priorities.

Speaker 3

Thanks Roy. Good morning everyone. Let me start with our performance by segment. In Diagnosis and 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.

Speaker 3

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.

Speaker 3

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.

Speaker 3

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 $25,000,000 in the 1st quarter mainly from higher royalty income due to phasing. We have been very disciplined in cost management, and our productivity initiatives delivered savings of $151,000,000 in the quarter, of which operating model savings were $55,000,000 dollars procurement savings were $40,000,000 and other productivity programs delivered $56,000,000 dollars 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 $336,000,000 in the quarter due to the normalization of working capital phasing, partly offset by higher cash earnings.

Speaker 3

On capital allocation, in April, we completed the 1,500,000,000 share buyback program for capital reduction purposes announced on July 26, 2021. In the Q2, we intend to cancel the 4,400,000 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 2 to 3 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 remains strong.

Speaker 3

The order book is significantly higher than the period before the global supply chain crisis. As a reminder, orders and order book account for around 40% of our revenue. The remaining 60% comes mainly from recurring revenue streams such as services and consumables 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 twenty twenty three and the anti corruption 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.

Speaker 3

We expect sales in segment Others to be around €120,000,000 in the 2nd quarter, €75,000,000 lower than in the Q2 of 2023 due to a large royalty deal recorded last year and the impact of royalty revenue phasing between the 1st 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 2nd 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 execution, we expect to deliver 3% to 5% comparable sales growth and an adjusted EBITA 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.

Speaker 3

S, Philips litigation Philips Esperonics has agreed to pay a total of $1,100,000,000 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 €575,000,000 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.

Speaker 3

This month, we also concluded an agreement with the insurers to pay us €540,000,000 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 €900,000,000 to €1,100,000,000 now including the payment from insurers as well as the cash out of around €430,000,000 related to the remaining payment of the economic loss settlement. With that, I'd like to hand it back to Roy.

Speaker 2

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.

Speaker 2

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.

Speaker 2

At the same time, we continued 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 3 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.

Speaker 2

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.

Operator

Thank you, And your first question comes from the line of Richard Felton, Goldman Sachs. Please go ahead.

Speaker 4

Hi, good morning. Congratulations on reaching the settlement. I've got 2 questions, both on fundamentals and margins, if that's okay. My first one is a question on Precision Diagnostics. So I understand last year that you were still facing some supply chain constraints on certain modalities.

Speaker 4

I think MRI in particular had been facing some challenges. So are there supply chain challenges normalizing for Precision Diagnostics? And what does that mean for your margins 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.

Speaker 4

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 rightsizing necessary to bring that business back to breakeven and then positive margin territory? Thank you.

Speaker 3

Richard, good morning. This is Abhijit. On the PD margins or maybe because we give Diagnosis and Treatment margins, last year, we had a big increase, as I mentioned just now in the speech as well of 600 basis points. That was because we supplied in the 1st two quarters of last year a lot of our high more profitable modalities. The supply chain constraints are now mostly gone.

Speaker 3

The last part that is left is on MRs, where we still have slightly longer lead times than we would like. That doesn't mean a lot for the margins. It just hampers order intake a little bit for the time being. And in the second half of the year, we should go past that. As far as the margins for D and T this year are concerned, we have said that we are going to grow margins this year, and that will the phasing between the first half and second half is distorted because of last year.

Speaker 3

So we will grow margins for the year, and you will see improvements coming in the second half over last year for Diagnosis and Treatment. For Sleep and Respiratory Care, you're right. That's what we've always said that once we get clarity on the CD, we will take cost actions to make this business a profitable business even at a €1,000,000,000 revenue. I think the good news is that we are already profitable. So we have taken most of those cost actions, further actions to come.

Speaker 3

But already in Q1, we are profitable in Sleep and Respiratory Care, which is why also you see the turnaround and the increase in Connected Care margins.

Speaker 4

Great. Thanks very much.

Speaker 3

Thank you.

Operator

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

Speaker 5

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 time line for your return to the U.

Speaker 5

S. Market? Secondly, given clarity on litigation, could we see a return to bolt on M and A in the next year or 2? 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?

Speaker 5

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.

Speaker 2

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 road map in terms of what we need to do to get back into the U.

Speaker 2

S. Market. As you know, we are already providing patients in the U. S. With patient interfaces and also some of the respiratory device.

Speaker 2

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 time line out. We also will not speculate on that. We will, of course, work very hard to get there.

Speaker 2

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 the U. S. And also we have been bringing it back into profitability.

Speaker 2

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 in, 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 both on M and 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 CHF 1,600,000,000 cash flow last year.

Speaker 2

Now we see that also this year we will have a strong cash flow profile of €1,000,000,000 We upped it 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.

Speaker 2

And of course, if we then think of which areas, those will be areas where we are strong, either whether it's in the 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. And we had AI, a 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.

Speaker 3

Yes. So I think, yes, we had a decline in China in Q1, and that is what we expected. It was in the high double digits because last year, we had a growth of in the mid-30s last year, right? So you had mid-30s growth last year. That was with the incentives coming out of COVID.

Speaker 3

And then you had really the counterbalancing this year with the anti corruption measures, which of course slowed things down. The good news, as Roy mentioned, outside of China, we have returned to growth and most positively that North America grew nicely for us in the quarter. We are not going to, at this stage, give specific numbers there because, let's say, that's not something that is even shared by our competitors. But I think we are pleased with the momentum in North America, and that also gives us the confidence for the remaining part of the year. We expect also China, as we said, to contribute in the second half of the year.

Speaker 3

Roy was in China recently. And with the new incentives that the government is planning to give, that should give, let's say, good impetus. So overall, I think there's no change in our view on China. It fundamentally remains an attractive market. For the short term, consumer sentiment is subdued.

Speaker 3

We expect that to improve through the year. Hospitals will continue to work through the industry wide anticorruption measures. And then we will we expect to see more hospitals putting in orders. And yes, so therefore, that the second half we expect China to contribute. And so far we've kind of started the year on plan.

Speaker 2

Perfect. Thank you very much.

Speaker 6

Thanks, Hassan.

Operator

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

Speaker 3

Hey guys, thanks for taking

Speaker 6

the questions. So first one, Abhijit, in your prepared remarks, you mentioned that there was a 100 basis point hit to the D and T margin, I think, from a provision. Just wondered if you can get some more color around that, please. And then secondly, just in terms of the cost savings, you delivered €151,000,000 I think in the Q1 year on year, but your adjusted EBITDA was only up €30,000,000 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 would plan to reinstate the cash dividends?

Speaker 6

Thanks.

Speaker 3

Yes. So I think a couple of things. So let's say the 100 basis points I talked about was that was a provision for a receivable where a certain with a certain customer. So there's no it's not an operational performance in a factory or anything to do with the cost structure of the business, but just a part provision on a receivable with the particular customers. I think if you look at the overall productivity, of course, in that productivity is compensating for our cost inflation.

Speaker 3

So you will see that we have a bridge in the deck on Slide 13 where you see 2% is going towards cost inflation but you see a significant portion. And then the part that I mentioned, the 100 bps on D and T, of course, has an overall impact on Phillips as well. On cash dividend, I think it's a bit too early to comment now. So let's first get through this year. And then at the end of the year, we will decide on how we will deal with our dividend for next year.

Speaker 3

But as Roy mentioned, the good news is that we can deal with our cash obligations with regard to the litigation from our operating cash flow. And that also gets us, let's say, to our very close to our targeted leverage next year, which would be actually a very good performance after paying off all the fines. Got it. Thanks guys. Thank you.

Operator

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

Speaker 7

Hi, guys. Good morning and thank you for taking my questions. I have 2 please, if I can. The first one is just, Abhijit, you sort of alluded to this, but the margin progression that you expect in D and T in particular through the year, if you could outline a little bit sort of how we should be thinking about that? I think you've talked about the sort of maybe 50 basis points or more margin improvement for the full year.

Speaker 7

Do you still expect margins to be down in the second quarter? And then I guess, is the improvement in the back half of the year particularly pronounced in Q3 versus Q4? Just because last year was such an unusual year. If you could help us understand that and maybe just a comment on growth as well for GMP. And then I have a separate question on the settlement announced this morning.

Speaker 7

And just to maybe give us all reassurance, I guess, we'd love to understand, to what extent they're kind of exception. So is this all encompassing? Does it include situations like death as well as injury? Just if you can talk to sort of what are some of the instances where you could see separate litigation that is outside of the scope of the settlement? And then to finalize the settlement, what are the steps that are remaining both in terms of the courts and discussions with the plaintiffs?

Speaker 7

And when can we sort of consider this completely done invested? That would be some color around that would be very helpful. Thank you, guys.

Speaker 3

Hi, Veronica. Good morning. Let me take the first question and then I pass it on to Roy for the second one. So the first two quarters of last year, we had very strong improvement in the margins of B and T. If I remember right, quarter 1 was 6 100 basis points.

Speaker 3

First half of the year was 500 basis points. And we said at that time itself that, that's a bit of an unusual pattern. So for this year, the way you should read it is that we will improve in the first in the second half. And the first half will be lower, so including Q2 will be lower than last year. But then Q3, Q4, you will see the improvements and then you see the guided range for 2025 is low teens.

Speaker 3

We are already in that range. So we will make further progress into the range this year and then progress in the range next year as well. So we are on a good track with BNT. On the litigation, maybe Rohenka.

Speaker 2

Yes. Let me take that one, Rohenka. Thank you. I think important question on indeed this finality. I think we are very firm that we believe that for the U.

Speaker 2

S. This is as final as it can get. The settlement addresses all the 60 1,000 known claimants as part of the census registry, including the 700 filed cases that were active. We do not believe that there is a meaningful number of plaintiffs out there that will still come forward. That's also the view of the plaintiffs themselves.

Speaker 2

And if they do, they will be subject to a so called Lone Pine order, which requires them to bring forward a full case at once or else they will be dismissed. And also they will need to kind of come forward with all their individual evidence as everything that was gathered as part of this process now will cease to exist. There are 6 months that actually people can still come forward. After the 6 months, actually the whole class action or the whole MDL ceased to exist. And that's also why it was important that this was court approved and or not yet court approved, but there was a mediator from the court that actually was part of this whole process.

Speaker 2

She has been very, I think, affirmative of this deal. You also saw that in our announcement. She will also make sure that this will be going through the court proceedings. We don't know exactly when that will be, but we don't expect that will take too long. And so we are actually very confident that this will really put an end to this.

Speaker 2

And that's very important because then with ending economic loss, economic personal injury and medical monitoring, we really have put the vast majority of these cases behind us with finality and clarity. And therefore, this provides us with a way forward in which we can focus on really running the business and growing Phillips and bring it back to where it belongs.

Speaker 7

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

Speaker 2

Yes. No, D UJ, 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.

Speaker 2

We will come forward once we have any further clarity on that. I cannot say more than this is currently still in process.

Speaker 7

Excellent. Great. Thanks guys so much.

Operator

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

Speaker 8

Hi, hello. Thanks for taking my questions. I hope that's okay. First on D and T, can you maybe, Abhijit, elaborate a bit more on the region and the modality from that customer having and the provision passed for D and 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 instruments?

Speaker 8

2nd, on China, does the stimulus plan in China is already reflected into the guide for 2024 for D and T? And lastly, maybe, Roy, a follow-up on Veronika's question earlier. Can you update us on settlement, possible settlement in ex U. S. Litigations outside of the U.

Speaker 8

S? Thank you.

Speaker 3

Maybe, Hugo, could you repeat your question on China, please?

Speaker 8

On China, the possible impacts from the stimulus, is it reflected already in your guidance or in your expectations for D and T and the acceleration for the rest of the year?

Speaker 3

Okay. So first, on the provision, yes, we cannot give, of course, details in public. That's between us and the customer. So even for privacy reasons, we cannot disclose that. I think on China, you can make it reasonably simple.

Speaker 3

Yes, we that is part of our guidance. So we had anticipated that there would be a recovery in China. The stimulus only substantiates that expectation. So it is part of that of our overall guidance for the year.

Speaker 2

Maybe I'll take maybe so the question on the China warning letter, I think you also referred to that. I think we are working fully through the kind of follow-up actions with the FDA on it. We don't expect any current operational impact from that is process remediation. Of course, we take it very serious like we take any finding that comes out of any site visit. There are both there were 2 findings both related to process compliance.

Speaker 2

There were no reports of patient harm. So I think it's important to also mention that and we do not see any kind of impact from it. In terms of settlement ex U. S, I think it's important that that's also why this is such a breakthrough this quarter that actually this is by far the vast majority of cases. Secondly, what is very important that we do not admit any guilt as part of the settlement, neither towards patients or diseases.

Speaker 2

Also we refer to CARFA, the earlier testing that showed that no appreciable harm was done. So also we look at full confidence to any cases outside of the U. S. That still might happen and that we bring that to good conclusion. But as said before, the most important is that vast majority of cases was in U.

Speaker 2

S. And also as we all know, the U. S. Legal system is in a particular way and that's why it was so important to end this certainty or end the uncertainty and create clarity on the way forward by getting a settlement on this specific case in U. S.

Speaker 2

Okay. Thank you.

Operator

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

Speaker 9

Good morning guys. Hope you can hear me. Thanks for taking these questions. Just 2 for me. First, obviously, congratulations on the settlement.

Speaker 9

I think that's a lot of clarity that probably clearly sooner than people were expecting. And just one on sort of vague relation to that, Roy. When you look at the P and L for the last few years and I suspect even the next couple of years, there's obviously a lot of adjustments and cash charge and things like that. Is that the next focus once we get through the next year or 2 to sort of square that so that your reported and adjusted EBIT won't be so different going forward and kind of lift that cash generation up as we go forward? That's just question number 1.

Speaker 9

And then question number 2, you actually gave us 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 these sort of regional committees 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 flows, even sequentially, say Q1 versus Q4, just to get a sense of how well things are moving in China? Thank you.

Speaker 2

Yes. Thank you, Graeme. I think good questions. So on the first, I think we for sure recognize that, of course, we had significant hits into the P and L that went into headlines towards adjusted items. Now also the clarity of today helps to actually further provide guidance around the adjusted items going forward.

Speaker 2

We had many of the adjusted items in the last years that were unfortunately tied to the recall as you know. So that has been really significantly impacting it. Now as we have the vast majority of recall now behind us, we remediated the sleep therapy devices. We have kind of clarity on the settlements as we now have been providing for. That really will allow us to kind of really bring that number substantially down.

Speaker 2

We also, of course, took restructuring to get productivity in. You also have seen that contribution into our margin improvement. But also there, as you have seen, we are well on track with the 8,500 rolls that we reduced by now. That does mean that we still have 1,500 approximately remaining. So there will be some restructuring that will come with that.

Speaker 2

And we also, as Abhijit said, keep working as our seat to get that into the best possible shape. So there's still some of that to come, but it will be of different dimensions than unfortunate big numbers you have seen. So that is for sure a focus. And secondly, in terms of China, I was actually in China a month ago. I've been talking to the Vice President myself, of course, talking to a lot of customers and looking at the situation on the ground.

Speaker 2

So and I saw 2 parts of the story. 1 is was a continued impact from these anti corruption industry measures that were taken by the government. And as I said before, they are working through this. They're doing that region by region, but it is not done yet. And that we said already when we came into the year, we still see that also therefore impacting as we speak.

Speaker 2

Our expectation is unchanged that actually we do expect that towards the second half of the year we will see real improvement coming in. But it's too early actually in the first half to really count on that. And that's also something that we, of course, saw happening in the Q1. Now I think the positive for me was this new stimulus program because that indeed was not yet there. And I also learned more about that.

Speaker 2

They're specifically targeting to give subsidy to hospitals that can't come forward to upgrade their installed base that is aged. And we also have seen customers putting in their requests. Of course, it will take time before they have kind of worked through those lists, approve it and the market will benefit from it. That's also why we say, yes, it's kind of this will benefit the mid- to long term attractiveness of the market because it will just help accelerate some of the replacement orders that will come into play when the market opens up more. Great.

Speaker 2

That's very clear. Thanks a lot guys.

Operator

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

Speaker 10

Hi, good morning Roy, good morning Abhijit. Thanks for taking my questions and congrats on the settlement. The first one relates to the midterm outlook. There was no confirmation of the midterm outlook in your material unless I missed it. So is this an indication that maybe you are currently reviewing it?

Speaker 10

And especially now that you have more clarity on Respironics that maybe that could get to an upgrade on that side? My second question is more of a housekeeping one on the order book, just to better understand what was the split in the order book between D and T and CCE in the Q1? I mean, last year, obviously, there was a very diverging trend. So just trying to understand whether we're talking about maybe a double digit decline in D and T and some growth in CC in the Q1 of 2024. And my last question sorry, last question is on the growth in the U.

Speaker 10

S. In the quarter, you basically had 0% growth in the U. S. So just trying to better understand which division was the most impacted and how we should think about the U. S.

Speaker 10

Into the remaining quarters of 2024? Thank you very much.

Speaker 3

Yes. Hi, Julian. Regarding the midterm outlook, I think you missed it. So it is in the outlook. If you look at our press release and the first sentence in the outlook says we reiterate our confidence in delivering the 2025 plan.

Speaker 3

So that is already there, and it's already there also in the company deck, etcetera. So we have reconfirmed our outlook for 2025. And you said whether there's an upgrade postal litigation. If you remember, when we gave the guidance, we had excluded litigation related charges. So we have not only confirmed the outlook for the midterm plan but also for this year, right?

Speaker 3

So both of them have been done. And we have upped our cash flow guidance for the year. Your second question on the order book, I think, yes, it was, I guess, split between both of them. So I don't want to go into all regional and other differences, but this was, let's say, overall impacted mainly by China. So rather than modalities, I think the big thing to realize is that the impact was really from China.

Speaker 3

And China's bulk of the business is in D and T. So therefore, the impact on D and T is slightly higher than CC. And for the U. S, in terms of sales, I think the main reason there is the comps compared to last year because we went out of the blocks with a huge growth last year in Q1. And that's what makes it difficult in terms of the comps for this year.

Speaker 3

And that was largely, as I mentioned earlier, ultrasound and IGT.

Speaker 10

Okay. Thanks.

Operator

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

Speaker 11

Good morning. Thanks a lot for taking my question. So the first one, I just want to take like come back on the settlement. What's the likelihood of new claims surface after the 6 months period for the plaintiffs to sign up for the settlement?

Speaker 12

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 €1,100,000,000 for these cases?

Speaker 13

Then

Speaker 12

the second question on orders. So you seem to be like pretty pleased with like the momentum in the U. S. I think at the beginning of the year, you said that, I mean, orders will be strong in the U. S.

Speaker 12

Because like financing conditions become a bit more easy throughout the year with interest rate cuts. It 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.

Speaker 12

So a follow-up from 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 edge is like a bit like lower today. And if you can just give us a bit more color about the real benefit from the stimulus that you think could happen?

Speaker 12

Thanks.

Speaker 2

Yes. Thank you, Julien. Good questions. Let me start with the first one, settlement. So the likelihood of new claims coming after 6 months.

Speaker 2

So I think it's important as we said that actually we believe that

Operator

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

Speaker 2

Okay. I'm not sure whether you heard me in full, but so let me kind of repeat the essence. So firstly, we said kind of we believe really disputes finality to what is out there. That is also not only our opinion, but also of the plaintiffs' leadership. They actually advertise for 3 years the case.

Speaker 2

So actually they believe that the majority of people that know the case was there actually have stepped forward are in the census registry, the 60,000 as you know, but then also 700 kind of claimants. Then they have another 6 months they can come forward. Thereafter, the whole case still exists. So the MDL will be closed. Also all the preparatory work that was done by all the kind of plaintiff lawyers will cease to exist.

Speaker 2

Therefore, any individual that comes thereafter will have to come on individual terms. They will be subject to a loan pine order. Loan pine order means that there are certain criteria that you need to fulfill before it even can be taken into the case, you will not have access to any of the expert reports that was made or were made. So you need to do it yourself. And as you know, kind of only for the testing, we spent 1,000,000 of dollars to get to our outcome, which showed that no appreciable harm was done.

Speaker 2

And that's also still standing as we have not admitted any guilt. And they are also subject to time restrictions because there's a statute of limitations and that actually is from the starting of the recall, so from 2021 onwards. And normally these are periods of 2 to 3 years. And finally, if you look to the trending of the census registry, it has been stable for months already. So actually, we have seen that there was no significant inflow already coming lately.

Speaker 2

So taking all this together, yes, there's a very strong confidence that we have that actually we have been dealing with the cases out there. And this truly will put an end to the personal injury and the medical monitoring claims in the U. S. And also the economic loss settlement. As you have seen before, we reiterated actually the provision we took was enough even now after a year.

Speaker 2

So that was also, I think, well counted for and we expect the same with this one. Then on the order intake, momentum in the U. S, it's I think you're fair to say that maybe interest will not kind of move as we expected earlier. But at the same time, we have seen that the system itself is strengthening in terms of the patient throughput and therefore the income they are generating. And that also has been strengthening their investments.

Speaker 2

As we said also in our order intake, that's something where we see that our innovations that we have been putting out to the market and have been out there at HIMSS at Vyfe, A lot of excitement about what we are offering in terms of our workflow solutions. We announced the CT 5,300 AI suite that actually putting out to the market the new IGT Azure and solution for stroke. So we are confident that actually the U. S. Market will show continued strength throughout the year and that is unchanged.

Speaker 2

Now then on the installed base age in China, I think it's fair to say that they have the backlog in upgrades also especially in a prolonged period of COVID. That's why we did see actually 2023 when they came off COVID a lot of investments coming into play. That's what's spurring last year's very strong Q1 order growth. And we expect that also will therefore continue once the market opens up more. Now even further now kind of encouraged by the Chinese government that also want to, I think, support the investments to get the installed base to be placed, but also for them as an expansion program as they also need to take care of more patients.

Speaker 2

So it's a combination that we expect to come into play later into China.

Speaker 12

Thanks a lot, Roy. Like any idea about just like the age of the installed base in China at the moment?

Speaker 2

No. I would not be able to give a specific number. What I do know is the kind of that it qualifies for equivalent of 6 8 year of age. So that's kind of the conditions that they have put out the government And that's kind of where they have the current what the customers are currently putting forward.

Speaker 11

Perfect. Thank you very much. Very helpful.

Operator

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

Speaker 11

Yes, good morning, both. Thanks for taking my questions. Most of them being covered. I have a few left. One was just on you mentioned obviously the normalization of the order book overall, but it's still elevated I think versus pre COVID levels.

Speaker 11

Just how do you think about that sort of delivery timeline? How quickly is that going to catch up? Is that a part of your kind of confidence in the second half numbers is a kind of accelerated delivery of that order book through H2? And should we be at a kind of normal run rate on the order book by the end of the year? That was my first question.

Speaker 11

My second question was on the EBITDA bridge you provided with the cost headwinds against productivity and pricing measures, which were obviously net positive. Just be curious, within those productivity and pricing measures, how much of that came from headcount reductions? I guess my question is really, has the headcount reductions tail off, are you still confident to get net a net benefit of cost versus productivity going forward? And then finally, just if you could flash out in a little bit more detail some of the different regional trends you're seeing across the Personal Health business. Just I know you called out consumer weakness in China, but perhaps across some of the other markets, I'd be interested.

Speaker 11

Thank you.

Speaker 3

Yes. Hi, 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.

Speaker 3

Maybe we would still be a tad higher at the end of the year, but not as high as we are now. So that should kind of beat through the second half. From the headcount reduction, I mentioned in the speech that operating model savings were, I think, €55,000,000 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.

Speaker 2

And then I can take on the pH. 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. 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.

Speaker 2

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.

Speaker 2

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 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.

Speaker 11

That's great. Thank you.

Operator

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

Speaker 14

Hi. Thanks for the presentation and taking my questions and congrats on the settlement. One thing one question on the insurance claims. Can you give us a color on how your premiums for insurance are likely to go up after the your premiums for insurance are likely to go up after the payout? And do you have the same kind of insurance on product liability in all of your products?

Speaker 14

And my second question relates to Connected Care going forward. You mentioned you're growing quite a bit in Japan, which is normally a lower margin market. But in this case, you mentioned that the leasing model makes it more attractive. Do you have any other factors that will create a different margin outlook for Connected Care going forward? Thanks.

Speaker 3

No. So regarding insurance claims, yes, it's a bit of speculation now whether it will go up or not. So that's something we will see in the next round because it's the first time we are claiming such large amount. It's not that we have a long history of claims. So we will have to see how those discussions go, but also the actions that we are taking to improve quality, etcetera, should have will be part of those discussions.

Speaker 3

Regarding Connected Care in Japan, it is not a low margin market, so I just want to correct that. And we have a very strong sleep and respiratory care business that operates on a recurring revenue basis. So that also drives margin. So as far as Japan is concerned, let's say, the core of the underlying business still remains very strong.

Speaker 14

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

Speaker 3

It depends on each policy differs. So I think that would be too much of detail to put. But there are policies which you have 3 year terms, 1 year terms, etcetera. So each one of them differs.

Speaker 2

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 transaction that we have out there.

Speaker 14

Perfect. Thanks very much.

Operator

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

Speaker 13

Thank you. Good morning. I have 2 clarification questions on the finality of the settlement agreement here. Firstly, can you confirm that there is no chance of a court trial now? So essentially, can anyone in the census registry, can anyone still bring their case to court?

Speaker 13

Or is that essentially impossible now under the agreement? And then secondly, on these additional testing programs you're running according to the FDA requests, First of all, are they going as planned? And then in case those additional tests go against you, right, and let's just say they show a potential harm to patients, could that put anything with this framework you put in place at risk? Or could that open up a new avenue for plaintiff lawyers? A little bit more clarification there would also be helpful.

Speaker 13

Thank you.

Speaker 2

Yes. Falko, thank you. To clarify further. So in terms of the core trial, so the MDL will not be pursued. So the Sensus Vazlu and the MDL will be terminated.

Speaker 2

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 dose, there will be very high barriers to do so because it will be stand alone. They will need to adhere to the Lone Pine order. They will need to come up with their own export reports, kind of to show whatever causality they want to show.

Speaker 2

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 correlation 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.

Speaker 2

Settlement is as is. The amount is capped and final, and there will be no testing related

Speaker 13

to this. Okay. Thank you.

Operator

Thank you. Your next question comes from the line of Wim Gill from ABN Almirall ODDO BHF. Please go ahead.

Speaker 15

Yes, very good morning. This is Wim Pfelder from ABN ODDO. Two questions from my end. First, on the €540,000,000 to be received from the insurers for the rest of products claims, to which part of the recall is this exactly related? Is this the physical recall cost?

Speaker 15

Is it the economic loss part? Is it the personal injury part? Or is it the total issue? And are any other insurance related discussions ongoing? And then the second question will be on the legal saber battling that you have with SoClean.

Speaker 15

Can you give us a bit indication what the expected time lines are and what the range of outcomes is, if any? Thanks.

Speaker 3

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, all of that. The second question you had was on SOKLIM?

Speaker 2

Yes. SOKLIM maybe I can take it. So I think so there's no time line that we can give to that. Of course, that is still in process. Therefore, so it's kind of too preliminary to give a range of outcome for the SoClean case.

Speaker 2

So I think this is something that is ongoing, and we will keep you posted on any contribution that might flow from there. And that's I think as much as we can say now.

Speaker 3

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

Speaker 15

Perfect. And maybe as a follow-up on the SoClean thing, because if memory serves me well, SoClean was also included in the it was not a class action, but the let's say, the MDL that you have today. So did anything come

Speaker 3

out of

Speaker 15

that? Or is there nothing that really touched them at this point in

Speaker 2

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

Speaker 1

All right. Thank you very much.

Operator

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

Speaker 11

Thank you very much. And I'd add my congratulations to the execution 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 2024?

Speaker 11

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. Thank you.

Speaker 3

Yes. So to be on monitoring, we do see growth this year. So there is no let's say, we have no doubts. Like I said, Q1, we had tough comps last year. So therefore and in terms of ultrasound, also we had, I think, if I remember from top of my head, in the 30s growth in the 30% plus growth in Q1.

Speaker 3

So therefore, Q1 this year is, of course, a slight decline but very slight. And the good news is that we have quite some innovation coming in ultrasound, which is launching as we speak. So we really expect to gain good momentum on top of a very strong last year to continue that momentum this year as well. So we will continue to gain share there.

Speaker 11

Thank you for that. Thank

Operator

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

Speaker 2

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 Q1 as a result of strong continued focus on our execution.

Speaker 2

Secondly, very important steps taken in resolving the consequences of the Respironics recall in the quarter with major milestones on litigation, on points and decree and on insurance, which provides clarity on the way forward for Phillips. 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.

Operator

Thank you. This concludes the Royal Philips First Quarter 2024 Results Conference Call on Monday 29 April 2024. Thank you for participating. You may now disconnect.

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Koninklijke Philips Q1 2024
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